Latest / Bloomberg Intelligence / U.S. Economy Has Peaked So Don't Expect Fast Growth, Ramos Says

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U.S. Economy Has Peaked So Don't Expect Fast Growth, Ramos 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
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  Speaker 1: bring you the most important, noteworthy, and useful interviews for
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  Speaker 1: you and your money, whether you're at the grocery store
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  Speaker 1: or the trading floor. Find the Bloomberg p m L
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  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. We
• 0:32
  Speaker 1: hear a lot about the U s stock market and
• 0:34
  Speaker 1: whether it's overvalued, and we hear a lot of people saying, well,
• 0:37
  Speaker 1: you know, honestly, there is momentum underneath the US growth
• 0:41
  Speaker 1: rate and we are going to see better earnings continue.
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  Speaker 1: But here to dash that two bits is Ernesto Ramos,
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  Speaker 1: head of Equities at BEMO Global Asset Management, which overseas
• 0:51
  Speaker 1: two thirty three billion dollars and new joints. Joins me
• 0:54
  Speaker 1: here in the Bloomberg eleven three oh studios. I was
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  Speaker 1: looking at your recent note and you basically said, the
• 1:00
  Speaker 1: US economy has peaked. We've seen it. It's as good
• 1:03
  Speaker 1: as it's going to get. Well, yes, and I think
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  Speaker 1: it can continue at this relatively modest space for a
• 1:09
  Speaker 1: little bit, but certainly not going to get to the
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  Speaker 1: three percent growth that that the administration has told us
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  Speaker 1: we're going to get, and there's several factors behind it.
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  Speaker 1: But if you just look at the data, car sales
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  Speaker 1: are slowing down. The yield curve is telling you something.
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  Speaker 1: It's it's flattened quite a bit, uh, And we just
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  Speaker 1: don't see where combining the productivity that we have in
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  Speaker 1: the current economy, which is about one and a half
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  Speaker 1: percent plus zero point three percent of expansion of the
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  Speaker 1: labor force, you're gonna get to three. So we think
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  Speaker 1: we we were gonna stay around these levels and maybe
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  Speaker 1: start declining from here, and the Fed might just uh
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  Speaker 1: compound the problem a little bit more by by raising
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  Speaker 1: interest rate. So we just don't see this three percent scenario.
• 1:52
  Speaker 1: We see. We see us stuck here and maybe declining
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  Speaker 1: from here going forward. Do you think that current valuations
• 1:58
  Speaker 1: in equities right now are baking in a growth rate
• 2:02
  Speaker 1: that's higher than we currently are seeing and that people
• 2:05
  Speaker 1: are going to have to ratchet back their expectations and
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  Speaker 1: possibly suffer some losses as people right size their expectations. Well,
• 2:13
  Speaker 1: the economic growth rate is not what drives the stock market.
• 2:17
  Speaker 1: What drives the stock market is earnings growth, and there
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  Speaker 1: we saw a pretty strong number. Uh, the last print
• 2:24
  Speaker 1: was about year on your growth, and we still see
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  Speaker 1: potential for that to continue in the double digits, maybe
• 2:30
  Speaker 1: ten or eleven percent looking out a year forward. So
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  Speaker 1: that doesn't mean the stock market can't continue to go
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  Speaker 1: to move higher. Um, the risk there is the valuation,
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  Speaker 1: as you mentioned, because the valuations are a little bit stretched,
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  Speaker 1: So disappointment in that earnings growth threat could lead to
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  Speaker 1: a pullback. And given the current economic scenario, we think
• 2:50
  Speaker 1: there's there's a potential chance for a pullback. Not to
• 2:53
  Speaker 1: mention all the political and geopolitical risk associated with the
• 2:58
  Speaker 1: current Trump administration that are sometimes blowing up some some
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  Speaker 1: some headwinds into the market that we saw last Wednesday
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  Speaker 1: when the announcement came out that there was a special
• 3:09
  Speaker 1: Council appointment, so on and so forth. So so we
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  Speaker 1: see enough risks out there too to make us a
• 3:13
  Speaker 1: little bit cautious. So how do you position to be cautious?
• 3:17
  Speaker 1: What does that mean? Is it taking all your money
• 3:19
  Speaker 1: and putting it in cash and sitting on it. No,
• 3:21
  Speaker 1: that's not what we would do, right all right? What
• 3:24
  Speaker 1: would you do? So we we still want to remain
• 3:27
  Speaker 1: uh exposed to to the upside inequities, but be defensively
• 3:32
  Speaker 1: positioned for potential dry down. And that's why the BEMO,
• 3:35
  Speaker 1: the Globalastic Management Low Volatility Fund is right now one
• 3:39
  Speaker 1: of the preferred choices to do this because on the
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  Speaker 1: average we offer about the upside participation of the market,
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  Speaker 1: but in a downturn we only deliver about half of
• 3:49
  Speaker 1: the of the negative return. So it's a good, very
• 3:52
  Speaker 1: good trade off seventy versus fifty, So you participate enough
• 3:56
  Speaker 1: that you do get over the long term a better return. So, ernesto,
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  Speaker 1: how is it marketing a low volatility fund at a
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  Speaker 1: time when volatility is the lowest that it possibly has
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  Speaker 1: been in our lifetimes depending on what measure you look at,
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  Speaker 1: And that's precisely the right time to buy protection against
• 4:14
  Speaker 1: volatility spiking. But it is not easy yet, That's what
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  Speaker 1: I was gonna say. I imagine you get a lot
• 4:19
  Speaker 1: of people looking at with one eyebrow raised sort of.
• 4:22
  Speaker 1: You know, really, what are you trying to sell me
• 4:23
  Speaker 1: right now? Well, you buy fire insurance when your house
• 4:26
  Speaker 1: is not on fire, and this is the same reason
• 4:29
  Speaker 1: you buy low volatility when volatility is low. But if
• 4:33
  Speaker 1: there's more chances of its spiking here than than going
• 4:35
  Speaker 1: even further lower. Although do you think that some of
• 4:37
  Speaker 1: the gauges that are traditionally used, namely the vix, are
• 4:40
  Speaker 1: sort of imperfect ways to measure volatility and that you
• 4:44
  Speaker 1: won't be able to rely on the same types of
• 4:45
  Speaker 1: instruments going forward to really reflect some of the jitters
• 4:48
  Speaker 1: that that people are feeling. Yeah, I've heard a little
• 4:51
  Speaker 1: bit about what you're talking about. I haven't dug in
• 4:53
  Speaker 1: deep enough to understand. They say that with a new
• 4:55
  Speaker 1: high frequency trading and all of the new ways people
• 4:59
  Speaker 1: are approaching the market, that maybe low altilities here to stay. Um,
• 5:03
  Speaker 1: I've yet to get my arms around all those notions.
• 5:05
  Speaker 1: But every time you've seen altility get to the levels
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  Speaker 1: like this in the past, the odds are that's going
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  Speaker 1: to rebound from here. And if you look at the
• 5:13
  Speaker 1: market being near the top and volatility at all time low,
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  Speaker 1: all time lows, that is actually a bit of a
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  Speaker 1: warning signal that things can actually go south from here
• 5:24
  Speaker 1: real quick. How do you hedge against volatility? Well, we
• 5:27
  Speaker 1: basically look at every stock in the universe in terms
• 5:30
  Speaker 1: of its risk, and we're looking to buy companies that
• 5:33
  Speaker 1: have lower risk characteristics and at the same time have
• 5:37
  Speaker 1: strong return potential. Companies like the Apple, for example, believe
• 5:41
  Speaker 1: it or not, it's a lower rist stock. Companies like
• 5:44
  Speaker 1: American Express, which is also lower stock, companies like Darden,
• 5:48
  Speaker 1: or companies like Backs are all of these are lower stocks,
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  Speaker 1: but yet with attractive fundamentals and very importantly attractively priced.
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  Speaker 1: Because one of the risk right now in low altility,
• 5:57
  Speaker 1: especially the passive instruments, is there have been priced out
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  Speaker 1: of sight. But we are very conscious of what we
• 6:03
  Speaker 1: pay for our lower stocks, so we're actually trading our
• 6:07
  Speaker 1: portfolio trades at a discount not only to the low
• 6:10
  Speaker 1: autility passive instruments, but the market itself. So we think
• 6:14
  Speaker 1: we're protecting ourselves, protecting ourselves and our clients from hidden
• 6:18
  Speaker 1: the hidden risk of high prices or high valuations in
• 6:21
  Speaker 1: low ball stocks. Ernesta Almos thank you so much for
• 6:24
  Speaker 1: joining us or Nesta Ralmos as head of Equities for
• 6:26
  Speaker 1: BEMO Global Asset Management, which overseas two three billion dollars
• 6:31
  Speaker 1: of assets, and he has the thankless job of going
• 6:33
  Speaker 1: out and convincing people why they should be at all
• 6:36
  Speaker 1: fearful of volatility at a time when everybody seems to
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  Speaker 1: be in a complacent UH days. Thank you so much
• 6:41
  Speaker 1: for joining us. China was downgraded by Moody's overnight for
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  Speaker 1: the first time since Line and Moody's Investor Service cited
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  Speaker 1: China's huge build up of debt as the main risk
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  Speaker 1: factor that the country would have a hard time both
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  Speaker 1: tamping down on leverage and meeting its obligations without running
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  Speaker 1: into some sort of problem, possibly slowing growth and meaning
• 7:17
  Speaker 1: that their obligations would be that much more onerous. To
• 7:20
  Speaker 1: understand what the challenges are for China and how significant
• 7:24
  Speaker 1: UH this ratings downgrade really is, I want to bring
• 7:26
  Speaker 1: in Patrick Shavannick. He's chief strategist at Silver Crest Asset
• 7:30
  Speaker 1: Management based in New York City. Patrick, thank you so
• 7:33
  Speaker 1: much for joining us. I'd love to first get your
• 7:36
  Speaker 1: take on why Moody's thought it would be necessary to
• 7:39
  Speaker 1: downgrade China. Now, this is a surprise move. It was
• 7:42
  Speaker 1: not something that was widely anticipated. Well, it's a shot
• 7:46
  Speaker 1: across the bow. I think that that reflects a host
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  Speaker 1: of concerns that amounting for years about China's reliance on
• 7:55
  Speaker 1: ever expanding credit to drive growth and and the mounting
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  Speaker 1: debt and that that's created and so it's you know that,
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  Speaker 1: it's it's It may be a surprise in the sense
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  Speaker 1: that they didn't signal in an advance, but it's no
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  Speaker 1: surprise to people who have been watching China that this
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  Speaker 1: is a concern, right, And it's interesting to me that
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  Speaker 1: there was not very much reaction. Frankly, and markets certainly
• 8:18
  Speaker 1: not in China. You can see that the tenure yield
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  Speaker 1: actually ended the day down uh a touch, So people
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  Speaker 1: don't seem to be that thrown off by the Moody's warning.
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  Speaker 1: One argument is that a lot of the debt is
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  Speaker 1: held by banks or by the government. In other words,
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  Speaker 1: it would make it easier to bail out. It's not
• 8:38
  Speaker 1: necessarily the consumer getting over leveraged. You buy that argument, Well,
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  Speaker 1: that's true in a sense, and it's also true that
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  Speaker 1: there's not a lot of exposure from outside of China
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  Speaker 1: the Chinese debt um so, so it's it's entirely true
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  Speaker 1: that that within a closed financial system, a lot of
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  Speaker 1: debt can be um structured in all kinds of ways,
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  Speaker 1: and and uh, the kind of default risk that we
• 9:05
  Speaker 1: might see in a market economy is less. But that's
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  Speaker 1: actually part of the problem, and part of the problem
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  Speaker 1: is just the opacity of this and the fact that
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  Speaker 1: that you've got debt that continues amount that even if
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  Speaker 1: it's not recognized, even if the losses um are not transparent,
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  Speaker 1: they become a drag on the economy and a drag
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  Speaker 1: on growth, and and money keeps on flowing in because
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  Speaker 1: people assume that someone well else will pick up the tab. So,
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  Speaker 1: as an investor, how do you invest around China's predicament
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  Speaker 1: the sort of balancing act that is quite dangerous between
• 9:38
  Speaker 1: both trying to prevent excess leverage, uh and not slowing
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  Speaker 1: down the economy so much so as to make the
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  Speaker 1: incredible debtload insurmountable. Well, we've been very skeptical of China's
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  Speaker 1: growth model for some time. Um. You know, I before
• 9:53
  Speaker 1: my current job, I was a professor at Chingwai University,
• 9:56
  Speaker 1: and you know, was one of the people ten years
• 9:58
  Speaker 1: ago highlighting the danger of China's debt explosion. Uh. You
• 10:04
  Speaker 1: know that said I think for the rest of the
• 10:06
  Speaker 1: global economy, a slowdown in in the kind of growth
• 10:09
  Speaker 1: that we've seen in China. Uh, the investment intensive growth
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  Speaker 1: might actually be a good thing for the rest of
• 10:15
  Speaker 1: the global economy. There's been too much over investment and
• 10:18
  Speaker 1: too much over capacity. So uh, to the extent that
• 10:21
  Speaker 1: that you know that they try to rain in debt,
• 10:24
  Speaker 1: which unfortunately they haven't. Uh, you know that that would
• 10:28
  Speaker 1: be a good thing for the global economy and not
• 10:30
  Speaker 1: a bad thing. Um, could you tease that out a
• 10:32
  Speaker 1: little bit? I mean, because I understand what you're saying
• 10:34
  Speaker 1: from the perspective of perhaps, uh, you know, Chinese money,
• 10:37
  Speaker 1: for example, flowing into the Toronto housing market and inflating
• 10:41
  Speaker 1: it to an unsustainable level. But when it comes to
• 10:44
  Speaker 1: other economies in the region near China, I mean, hasn't
• 10:48
  Speaker 1: the incredible growth in China really bolstered all of emerging markets?
• 10:52
  Speaker 1: It depends on where you stand really to the Chinese economy.
• 10:55
  Speaker 1: If you've been feeding China's investment or over investment boom,
• 10:59
  Speaker 1: if you've been selling commodities for example, Uh, if you
• 11:02
  Speaker 1: are you know, uh, if you're if you're feeding it's
• 11:06
  Speaker 1: it's insatiable demand for inputs, then yes, uh, you're hurt
• 11:10
  Speaker 1: by china slowdown, but you know it's China's overcapacity has
• 11:15
  Speaker 1: also been a great exporter of deflation globally, and so
• 11:19
  Speaker 1: you know, we we talk about the idea of secular
• 11:22
  Speaker 1: stagnation throughout other economies. And where does it come from. Well,
• 11:27
  Speaker 1: a lot of it comes from the imbalances that are
• 11:30
  Speaker 1: generated by China's over investment and it's unwillingness to consume
• 11:34
  Speaker 1: commensurate with what it produces. So so rebalancing of China's economy,
• 11:39
  Speaker 1: even if it means slower growth from China, is actually
• 11:41
  Speaker 1: a positive. So in other words, you're saying that potentially
• 11:45
  Speaker 1: China slowing down could actually help inflation picked up? Am I?
• 11:49
  Speaker 1: Am I taking one step too many here? It's you
• 11:51
  Speaker 1: know what the problem is that we assume that all
• 11:55
  Speaker 1: growth is good growth, and no matter where it is,
• 11:58
  Speaker 1: no matter what it consists of globally, and in fact,
• 12:00
  Speaker 1: a lot of the growth that's taken place in China
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  Speaker 1: that's been fueled by all this credit expansion is not
• 12:06
  Speaker 1: good for either China or for the rest of the world.
• 12:09
  Speaker 1: So going forward, what are you looking for to make
• 12:12
  Speaker 1: sure that China is sort of managing this balancing act
• 12:17
  Speaker 1: in a way that isn't going to be messy every
• 12:21
  Speaker 1: What everyone's been looking for is reform, which China four
• 12:26
  Speaker 1: years ago announced was urgent and and would move forward.
• 12:30
  Speaker 1: Uh and in fact we've seen very little to show
• 12:33
  Speaker 1: for it. And and in fact it's interesting because the
• 12:35
  Speaker 1: Chinese response to move the Moody's announcement was well, they're
• 12:39
  Speaker 1: ignoring all the reforms that were undertaking. No. In fact,
• 12:43
  Speaker 1: Moody's move, I think is a reflection of growing frustration
• 12:47
  Speaker 1: by people outside of China watching China's promises about reform
• 12:52
  Speaker 1: and the unwillingness or inability to deliver on them. What
• 12:56
  Speaker 1: kind of reforms. Unfortunately, it's a whole host of reforms,
• 13:01
  Speaker 1: including all the financial sector, allowing for companies that are
• 13:06
  Speaker 1: losing money chronically to fail, allowing for a readjustment of
• 13:11
  Speaker 1: asset markets. We saw a failure to allow that kind
• 13:15
  Speaker 1: of adjustment in the stock market a few years ago
• 13:17
  Speaker 1: in China where they intervene heavily. Uh. There's just a
• 13:21
  Speaker 1: whole host of balances that this Chinese themselves have recognized,
• 13:25
  Speaker 1: UH need a correction, and yet when push comes to shove,
• 13:28
  Speaker 1: they're they're not willing to allow those corrections to take place.
• 13:32
  Speaker 1: Patrick Shavannick, thank you so much for joining us truly
• 13:35
  Speaker 1: truly helpful insight into China's path forward in light of
• 13:39
  Speaker 1: the Moody's downgrade and just in general of how much
• 13:42
  Speaker 1: UH they've expanded their debtload as they've tried to prop
• 13:45
  Speaker 1: up their economic growth rate. Patrick Shavannick is Managing director
• 13:49
  Speaker 1: and chief Strategist at Silver Crust Asset Management in New York.
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• 14:43
  Speaker 1: We have heard a lot about billionaire Carl Icon being
• 14:47
  Speaker 1: an advisor to President Trump, giving him hints on how
• 14:52
  Speaker 1: to change regulations, and it's already coming clear UH that
• 14:56
  Speaker 1: he personally in his empire of companies UH have benefited
• 15:02
  Speaker 1: quite a bit from his influence over President Trump. We're
• 15:06
  Speaker 1: here to explain more. Is Mario Parker, who is an
• 15:09
  Speaker 1: agricultural reporter for bloom Brook News and comes to us
• 15:12
  Speaker 1: from our Chicago bureau. Mario, thank you so much for
• 15:15
  Speaker 1: joining us. UH. First, can you just explain the situation
• 15:19
  Speaker 1: with one company, in particular, CVR Energy, which has already
• 15:23
  Speaker 1: benefited quite substantially from carl Icon's influence over President Trump.
• 15:28
  Speaker 1: Can you explain how sure, absolutely well, M carl Icon
• 15:32
  Speaker 1: owns a majority stake in CVR Energy. It's a it's
• 15:36
  Speaker 1: an oil refiner, and under George Bush um energy law
• 15:42
  Speaker 1: UM most people know it as the Ethanol Mandate UM,
• 15:45
  Speaker 1: oil refiners are required to set aside a percentage of
• 15:50
  Speaker 1: their production to renewable fuels. Now, if you're not able
• 15:55
  Speaker 1: to do that, if you're a refiner and you don't have,
• 15:58
  Speaker 1: say the infrastructure to do that, you have to go
• 16:00
  Speaker 1: on the markets. It's almost like captain trade. You go
• 16:03
  Speaker 1: on the open market and then you purchase something called
• 16:06
  Speaker 1: renewable identification numbers or credits. Right. Well, Carl Liken, this
• 16:11
  Speaker 1: has been costing his business, CVR Energy, upwards of two
• 16:15
  Speaker 1: hundred million dollars, and he's UH fighting UM and advocating
• 16:20
  Speaker 1: a change for the Trump administration to um tweak who's
• 16:25
  Speaker 1: responsible for adhering to this mandate or showing compliance with
• 16:30
  Speaker 1: the mandate. He wants it to be moved from refiners
• 16:33
  Speaker 1: like himself, uh further downstream to closer to the customer,
• 16:38
  Speaker 1: to those that actually have the infrastructure and blend renewable
• 16:42
  Speaker 1: fuels and um. Right now, the market seems to be
• 16:45
  Speaker 1: betting that that the that that icon has a pretty
• 16:48
  Speaker 1: good shot to get his getting his way if if
• 16:50
  Speaker 1: if costs and prices for the credits hard to be
• 16:53
  Speaker 1: any type of indication and Mario, I mean just from
• 16:56
  Speaker 1: an outsider's perspective, this might seem like a pretty small techntality.
• 17:00
  Speaker 1: But just to sort of give a sense of the
• 17:02
  Speaker 1: scope of this potential change in money terms, UH, so
• 17:06
  Speaker 1: far CVR Energy has conceivably saved about sixty million dollars
• 17:11
  Speaker 1: based on the decline in this over the counter market
• 17:15
  Speaker 1: for R and I are basically, uh, these certificates you
• 17:18
  Speaker 1: can get to replace having to actually do the blending
• 17:20
  Speaker 1: of the ethanol in your fuel yourself, right right exactly
• 17:24
  Speaker 1: so just um, just from the fourth quarter of the
• 17:28
  Speaker 1: first quarter of this uh this year, it's been a
• 17:31
  Speaker 1: sixty million dollar swing. It's gone from they spent CBR
• 17:36
  Speaker 1: spent about fifty three point five million dollars in the
• 17:39
  Speaker 1: fourth quarter and uh they saved about where they saw
• 17:44
  Speaker 1: a benefit of about six point four million in the
• 17:46
  Speaker 1: first quarter. And this has been why what's interesting is
• 17:49
  Speaker 1: that it's been widespread as well, So it's not just
• 17:51
  Speaker 1: CVR that's benefited, but also it's competitors as a result
• 17:55
  Speaker 1: of this that we're talking to Valleros, the Delta Airlines, etcetera. Well,
• 17:59
  Speaker 1: you know, you have to think that a lot of companies,
• 18:01
  Speaker 1: there's so much money at stake here that there's going
• 18:03
  Speaker 1: to be a lot of lobbying on all sides. How
• 18:06
  Speaker 1: much power does President Trump and his immediate surrounding officials
• 18:11
  Speaker 1: have to unilaterally change this obligation and sort of kick
• 18:15
  Speaker 1: the requirement downstream a little bit in order to basically
• 18:19
  Speaker 1: effectively reducing the cost of these r and I sure so, Well,
• 18:23
  Speaker 1: it's a little unclear. They do have the power to
• 18:25
  Speaker 1: make that change, and as a matter of fact, the
• 18:28
  Speaker 1: e p A is considering it right now. Public comments
• 18:33
  Speaker 1: public comment period on it ended u in late February,
• 18:36
  Speaker 1: so conceivably we should get some type of verdict yea
• 18:40
  Speaker 1: or nay uh sometime this year, so they have the
• 18:43
  Speaker 1: authority to do it. But of course there's so many,
• 18:46
  Speaker 1: so much money at stakes, so many different parties, that
• 18:49
  Speaker 1: it will ultimately lead to um some some legal confrontation
• 18:53
  Speaker 1: as well. I was gonna say, I mean, stepping back
• 18:56
  Speaker 1: a little bit outside of the nitty gritty of this
• 18:58
  Speaker 1: specific issue. This has to raise some questions about carl
• 19:03
  Speaker 1: Icon's influence over the president, given the fact that he
• 19:06
  Speaker 1: is an unpaid advisor who hasn't been vetted by Congress,
• 19:09
  Speaker 1: who hasn't had to comply with you know, sort of
• 19:13
  Speaker 1: uh conflict of interest protocol, and he is directly benefiting
• 19:18
  Speaker 1: I mean from what he's what he's advocating. What what
• 19:21
  Speaker 1: do people say about that when you talk to that sure,
• 19:23
  Speaker 1: sure talking to just analysts and and and researchers and
• 19:27
  Speaker 1: those that kind of study ethics, I mean, they say
• 19:30
  Speaker 1: that this is almost a clear cut issue of conflict
• 19:34
  Speaker 1: of interest, and it's more information should be disclosed because
• 19:38
  Speaker 1: you know, the sense is that, hey, this person has
• 19:42
  Speaker 1: the president's ear, this person is advocating for this change,
• 19:47
  Speaker 1: and this would uh, this is helping this person financially already,
• 19:52
  Speaker 1: but with this actually itself lead to some kind of
• 19:55
  Speaker 1: legal challenge or is that a harder, harder kind of
• 20:00
  Speaker 1: path to go. No, No, it probably will. I mean,
• 20:03
  Speaker 1: before the magnitude of UH of these games were even disclosed, UH,
• 20:10
  Speaker 1: Senator Elizabeth Warren and other Democratic lawmakers sent a letter
• 20:14
  Speaker 1: to UH federal regulators asking for more information into this issue,
• 20:19
  Speaker 1: how this works, etcetera. And then, of course, on the
• 20:22
  Speaker 1: other side, UM, those opposing this change, from those in
• 20:27
  Speaker 1: the bio fuel industry all the way to UM UH
• 20:30
  Speaker 1: some of the mom and popping convenience stores, etcetera. I mean,
• 20:34
  Speaker 1: it's it's it's likely to be headed to a legal
• 20:37
  Speaker 1: confrontation if this is indeed moved. Mario Parker, thank you
• 20:41
  Speaker 1: so much for joining us. Mario Parker is an agriculture
• 20:43
  Speaker 1: culture reporter for Bloomberg News, coming to us from Chicago.
• 21:00
  Speaker 1: I am lucky because I have Joel Stern in the
• 21:02
  Speaker 1: Bloomberg eleven three our studios with me. He is chairman
• 21:05
  Speaker 1: and chief executive officer of Stern Value Management in New York. Also,
• 21:09
  Speaker 1: he is a visiting professor at five that's right, five
• 21:12
  Speaker 1: different business schools, including the University of Chicago, my alma mater,
• 21:16
  Speaker 1: So I wanted to start with you, uh, to talk
• 21:20
  Speaker 1: a little bit about the complacency that we see in
• 21:22
  Speaker 1: the markets, not generally with a lack of volatility, but
• 21:25
  Speaker 1: with respect to a FED policy error. It seems like
• 21:28
  Speaker 1: when you talk to people, they are they have so
• 21:31
  Speaker 1: much faith in the FED that they're going to move
• 21:32
  Speaker 1: slowly at a reserved pace that everything will just sort
• 21:36
  Speaker 1: of work out and it won't really disrupt markets. What
• 21:39
  Speaker 1: do you think they're getting wrong? Do you think that
• 21:42
  Speaker 1: they're getting anything wrong? Where could the FED surprise them? Well,
• 21:45
  Speaker 1: first of all, if the FED doesn't do much, if
• 21:49
  Speaker 1: a's stable about their policy, that's a good policy because
• 21:53
  Speaker 1: we want the economy and the private sector to do
• 21:56
  Speaker 1: its miracles. And the problem off takes place is when
• 22:01
  Speaker 1: the FED starts to either increase the money supply rapidly
• 22:06
  Speaker 1: or cut back on the money supply rapidly. And if
• 22:09
  Speaker 1: they do either of those two things, we have very
• 22:12
  Speaker 1: bad outcomes. As you know, there has been a lot
• 22:15
  Speaker 1: of liquidity created during the economic meltdown of oh seven,
• 22:19
  Speaker 1: O eight, o nine, And you know, the FED has
• 22:21
  Speaker 1: a balance sheet that it looks like it is as
• 22:24
  Speaker 1: it is exploded, right, and the question is what if
• 22:27
  Speaker 1: they start to, uh, try to pull that stuff in
• 22:31
  Speaker 1: nothing nothing that will not be harmful. Why it has
• 22:34
  Speaker 1: never been let out? You see what happened was the
• 22:37
  Speaker 1: FED has essentially kept it to itself withoutout affecting the economy.
• 22:42
  Speaker 1: Keep in mind, lots of monetorists over the last five
• 22:45
  Speaker 1: years kept saying, oh my gosh, are we going to
• 22:48
  Speaker 1: have inflation? Well, you would have had inflation if the
• 22:51
  Speaker 1: FED had let the bank reserves go into money supply
• 22:54
  Speaker 1: create excess money, and that would have created inflation and
• 22:58
  Speaker 1: interest rates today on government could have been so. In
• 23:01
  Speaker 1: other words, just just reading between what you're saying otherwids,
• 23:05
  Speaker 1: it seems like you think that investors are right to
• 23:08
  Speaker 1: have faith that the FED will only move at a
• 23:10
  Speaker 1: glacial pace and be really reserved. Sorry, I don't think
• 23:12
  Speaker 1: that investors have faith. I think what the FED investors
• 23:15
  Speaker 1: have is expectations, and they have been led to believe
• 23:19
  Speaker 1: by Janet Yellen and even people before her. I have
• 23:22
  Speaker 1: seen interviews with Ben Bernanki after his retirement from the FED,
• 23:26
  Speaker 1: and all of them are saying much of the much
• 23:28
  Speaker 1: of the same thing, and that is this again, if
• 23:31
  Speaker 1: the FED maintains a stable policy, and that means very
• 23:36
  Speaker 1: slow monetary growth. Very slow. Believe it or not, inflation
• 23:41
  Speaker 1: is not coming back. Okay, one more thing I should say.
• 23:45
  Speaker 1: I've been listening to the Europeans and others say, Man,
• 23:49
  Speaker 1: we need at least two percent inflation in order to
• 23:52
  Speaker 1: have two percent real growth. I don't know where they
• 23:55
  Speaker 1: got that theory from. I've been teaching economics for fifty
• 23:58
  Speaker 1: years and I've never heard that argument at all. We
• 24:01
  Speaker 1: don't need any inflation to grow at better than two.
• 24:05
  Speaker 1: In fact, it is my belief if the Fed, I'm sorry,
• 24:08
  Speaker 1: if the If the Trump administration does just two things.
• 24:11
  Speaker 1: Number One, they don't have to all of the two
• 24:14
  Speaker 1: thousand plus regulations that Obama put in place, just the
• 24:18
  Speaker 1: onerous ones, and there are plenty of those. That might
• 24:21
  Speaker 1: be about a hundred and sixty altogether. If they get
• 24:23
  Speaker 1: rid of those regulations, and then they slash the corporate
• 24:27
  Speaker 1: income tax rate, then we're off to the races. What's
• 24:30
  Speaker 1: the reason our twenty six major trading partners have a
• 24:34
  Speaker 1: median corporate income tax rate of only Our marginal tax
• 24:40
  Speaker 1: rate including city and state for corporations is as much,
• 24:43
  Speaker 1: although many corporations only pay about many do, and by
• 24:48
  Speaker 1: the way, one of the reasons they do is the
• 24:49
  Speaker 1: same reason why people like you and me hire tax
• 24:52
  Speaker 1: advisers to bring down our effective tax rate. No, none
• 24:55
  Speaker 1: of us wants to pay the full tax rate, and
• 24:58
  Speaker 1: if you make it worthwhile, make it worthwhile, people will
• 25:01
  Speaker 1: do it. But that's not the point. The point is
• 25:03
  Speaker 1: that when new investments are contemplated, it is the after
• 25:07
  Speaker 1: tax rate of return that people care about on those investments.
• 25:10
  Speaker 1: In other words, to grow the economy, we need new investment,
• 25:14
  Speaker 1: and the question is what will the after tax rate
• 25:16
  Speaker 1: of return beyond that. Now, of course they could look
• 25:19
  Speaker 1: for other tax dodges that illegal and bring the tax
• 25:22
  Speaker 1: rate down, but what if they are unable? So what
• 25:25
  Speaker 1: are the onerous regulations one hundred and sixty truly onerous
• 25:29
  Speaker 1: regulations that you're pointing to, And how can people watch
• 25:32
  Speaker 1: them to sort of get a sense of whether or
• 25:34
  Speaker 1: not they will be cut in order to spur row? Well,
• 25:37
  Speaker 1: they have an effect on me personally. I am the
• 25:40
  Speaker 1: CEO of three companies altogether, and I'm in negotiation now
• 25:44
  Speaker 1: with an overseas fund that wants me to work with
• 25:48
  Speaker 1: them to use my ideas and financial economics to make
• 25:52
  Speaker 1: a new fund based on that, and they said, and
• 25:54
  Speaker 1: we'd like to be publicly traded. I said, well, not
• 25:57
  Speaker 1: in the United States. He said, what, why not New York?
• 26:01
  Speaker 1: I said, you must be kidding. You don't want to
• 26:03
  Speaker 1: be there. This is really interesting because this is the
• 26:06
  Speaker 1: new head of the SEC is making this a priority. Right,
• 26:08
  Speaker 1: is to sort of roll back some of the regulation. Absolutely,
• 26:11
  Speaker 1: the initial public offering. Sorry, more and more and more, listen.
• 26:13
  Speaker 1: I gave a talk two years ago before a private
• 26:15
  Speaker 1: equity group in Miami, Florida. They were just having a
• 26:18
  Speaker 1: convention there and I expected to meet private equity people,
• 26:21
  Speaker 1: but I didn't. I met people who are in the
• 26:23
  Speaker 1: banking business, and I said, what what's happening here? Who
• 26:26
  Speaker 1: are you people? And they said, no, we're ordinary people,
• 26:29
  Speaker 1: just like you. And it looks just like you, Joel.
• 26:31
  Speaker 1: But we went into the banking business because Dodd Frank
• 26:35
  Speaker 1: is stopping the banks from lending money. You see, by
• 26:37
  Speaker 1: the way I went to visit the people over at
• 26:39
  Speaker 1: City Bank, I couldn't believe it. They have over a
• 26:42
  Speaker 1: hundred and fifty new people and their job is to
• 26:45
  Speaker 1: engage in compliance with all of these regulations. That's a
• 26:49
  Speaker 1: good way to run a business, don't you think so?
• 26:51
  Speaker 1: You think that if some of these regulations were pulled back,
• 26:54
  Speaker 1: then you would see more I p o s. You
• 26:56
  Speaker 1: would see more investments and things other than compliance, which
• 27:00
  Speaker 1: a lot of people argue is a nonproductive right. And
• 27:03
  Speaker 1: I would take my company, the new company, I would
• 27:05
  Speaker 1: take it public in New York. I wouldn't take it
• 27:07
  Speaker 1: public in London, which is where I'm going to plan
• 27:09
  Speaker 1: to do it. London. W WE a joint We'll have
• 27:12
  Speaker 1: more than one location for the public offering. But what
• 27:14
  Speaker 1: I'm saying to you is what determines growth is new
• 27:18
  Speaker 1: investment and none of To see new investment, the rate
• 27:22
  Speaker 1: of return on that investment, after taxes and after regulation
• 27:26
  Speaker 1: has to be greater than a required rate of return
• 27:29
  Speaker 1: for the risk. Okay, we know we can calculate the
• 27:33
  Speaker 1: required return for risk. If the returns are going to
• 27:35
  Speaker 1: be above that, we'll have favorable outcomes. But over the
• 27:38
  Speaker 1: last seven eight years, it has been a disaster. Okay, Ulstern,
• 27:43
  Speaker 1: thank you so much for joining us. Truly a pleasure
• 27:45
  Speaker 1: hearing what you have to say. Chuel Stern as chairman
• 27:47
  Speaker 1: and chief executive officer of Stern Value Management. Also he
• 27:50
  Speaker 1: is a visiting professor UH at five or six magic
• 27:54
  Speaker 1: professor at six different business schools. Thanks for listening to
• 28:00
  Speaker 1: the Bloomberg P and L podcast. You can subscribe and
• 28:03
  Speaker 1: listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast
• 28:07
  Speaker 1: platform you prefer. I'm Pim Fox. I'm on Twitter at
• 28:11
  Speaker 1: pim Fox. I'm on Twitter at Lisa Abramo. It's one
• 28:14
  Speaker 1: before the podcast. You can always catch us worldwide on
• 28:17
  Speaker 1: Bloomberg Radio