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Vanguard Sours on Riskier Credit, Likes International Equities · Bloomberg Intelligence

0:05
Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.
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Speaker 1: Along with my co host Lisa Abramowitz. 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 and L
0:20
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. You know, Lisa,
0:33
Speaker 1: when you help manage more than five trillion dollars, it's
0:37
Speaker 1: very good to listen to people who have that kind
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Speaker 1: of responsibility. And we're lucky to have Greg Davis. He's
0:43
Speaker 1: the chief investment officer for the Vanguard Group total assets
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Speaker 1: under management. I'm sorry, I misspoke. Five point one trillion dollars.
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Speaker 1: We have a five point one trillion dollar man in
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Speaker 1: the office. Well, it's great to be here with you today.
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Speaker 1: All right, Uh, let's let's let's let's do the sort
1:01
Speaker 1: of news stuff first and then we can get into
1:03
Speaker 1: some details because we want to get your thoughts on
1:05
Speaker 1: a lot of stuff. The jobs, the non farm payroll
1:08
Speaker 1: report today, your your reaction, your thoughts. You know, it
1:11
Speaker 1: was slightly weaker than what we expected, but if you
1:13
Speaker 1: take into consideration the two month revisions of fifty nine
1:15
Speaker 1: thousand dollar fifty nine thousand jobs. We thought that was
1:18
Speaker 1: still a relatively strong report. You saw the unemployment rate
1:21
Speaker 1: ticked down slightly and the unemployment rate you six, tick
1:24
Speaker 1: down even more at seven point five percent. So overall,
1:27
Speaker 1: we thought it was a solid report. And just real quick,
1:29
Speaker 1: do you care about the trade tensions or is it
1:31
Speaker 1: all just noise at this point? You know, I think
1:33
Speaker 1: you have to pay attention to it, but I think
1:34
Speaker 1: at this point it's still early on and there is
1:36
Speaker 1: a lot of noise in that, and I think the
1:38
Speaker 1: market has really discounted just given the you know, conversations
1:41
Speaker 1: have been happening for the last several months that you
1:43
Speaker 1: still have to wait and see how it plays out
1:45
Speaker 1: over time, and the markets have actually held in pretty
1:47
Speaker 1: well given that attention. All right, so what are your
1:50
Speaker 1: three top bets for this year? So when we think
1:53
Speaker 1: about for our for our active you know, active fixed
1:55
Speaker 1: income portfolios, again, what we've been trying to do is
1:58
Speaker 1: trying to be a bit more defensive when it comes
2:00
Speaker 1: to the credit space, given the fact that valuations when
2:02
Speaker 1: it comes to investment grade bonds and high yield are
2:05
Speaker 1: not as attractive if they were, you know, over the
2:07
Speaker 1: last ten years or so, so we think there's been
2:10
Speaker 1: a lot of spread compression. We view that as a
2:12
Speaker 1: place for us to be slightly more defensive, and given
2:15
Speaker 1: where we are in terms of the economic cycle and
2:17
Speaker 1: what the Federal Reserve is doing, there's a risk that
2:20
Speaker 1: as the Fed goes to more restrictive policy in emerging markets, investment,
2:24
Speaker 1: grade and high yield will also all be impacted. From
2:27
Speaker 1: a negative standpoint, investors may have been complacent in getting
2:33
Speaker 1: double digit returns in the past, are they going to
2:36
Speaker 1: have to readjust their thinking. Absolutely. If you look at
2:39
Speaker 1: where valuations are around the globe, I mean our our
2:42
Speaker 1: investment Strategy group has recently done are done their analysis
2:45
Speaker 1: in terms of expectations for the next ten years, and
2:48
Speaker 1: when you look at the US equity market, the expectations
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Speaker 1: there are that you get a tenure annualized return of
2:53
Speaker 1: about three point nine percent. When we ran the same
2:55
Speaker 1: analysis five years ago, the expectation was closer to eight percent.
2:59
Speaker 1: The reason it means a lot today is that we
3:01
Speaker 1: still think that outside of the US given valuations, that
3:05
Speaker 1: international equities actually offer more compelling value, and that the
3:08
Speaker 1: returns over the next ten years are gonna be somewhere
3:09
Speaker 1: in neighborhood about six and a half percent or so.
3:12
Speaker 1: So again, the you know, basically saying that investors need
3:15
Speaker 1: to focus on international diversification. And the other thing I
3:18
Speaker 1: would point out is that the fact that yields have
3:20
Speaker 1: started to rise, cash treasuries, investment grade bonds are actually
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Speaker 1: more of a compelling investment today than they were five
3:27
Speaker 1: years ago. So it's actually a a real competing force
3:30
Speaker 1: relative to equities in in certain cases. All right, now,
3:33
Speaker 1: let's get to the real issue. Let's talk about fees.
3:35
Speaker 1: Let's talk about the fact that Fidelity is trying to
3:37
Speaker 1: be you, trying to beat you by being the first
3:42
Speaker 1: fund to offer zero fees basically free funds. And this
3:47
Speaker 1: made headlines earlier this week. So is Vanguard concerned that
3:52
Speaker 1: Fidelity is going to out Vanguard? Vanguard The way we
3:56
Speaker 1: think about it, Look, we have we have a mutual
3:58
Speaker 1: ownership structure, and you know, the way we see these
4:01
Speaker 1: stories playing out, it's really the Vanguard effect. Right at
4:03
Speaker 1: the end of the day, Because of Vanguard's approach of
4:06
Speaker 1: continuing lowering fees for investors, we're seeing more and more
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Speaker 1: competitors continuing to lower fees for their investors as well
4:12
Speaker 1: and for the overall marketplace. We think that's a good thing.
4:14
Speaker 1: But when you look at Vanguards specifically the average expense
4:18
Speaker 1: ratio across our entire complex, both index and active, at
4:21
Speaker 1: which of our funds are actually actively managed, our complex
4:25
Speaker 1: wide expense ratios of love and basis points. And although
4:28
Speaker 1: we might have some competitors out there that use a
4:30
Speaker 1: lost leader strategy and reduce the costs in certain areas
4:33
Speaker 1: across the board, investors still get tremendous value by coming
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Speaker 1: to Vanguard in our ownership structure. I just want you
4:40
Speaker 1: to go back to something that kind of alluded to,
4:42
Speaker 1: which is that investors are going to get going to
4:45
Speaker 1: have to get used to something different, meaning lower returns.
4:51
Speaker 1: Do you find that people feel that they will be
4:53
Speaker 1: the exception to that, and as a result, they make
4:57
Speaker 1: mistakes because they don't want to scept average, They don't
5:01
Speaker 1: want to accept those single digit returns, so they go
5:04
Speaker 1: and do things that they don't have the experience or
5:07
Speaker 1: the knowledge to actually do with their money. You know,
5:10
Speaker 1: we we saw this, We saw this um you know,
5:12
Speaker 1: shortly after the financial crisis, when you had basically money
5:14
Speaker 1: market funds yielding zero, and you saw investors migrating out
5:18
Speaker 1: taking on more risks. So they migrated out to the
5:20
Speaker 1: further end of the yelker. First it started with short
5:23
Speaker 1: term bonds and it was intermediate. Then it was a
5:24
Speaker 1: long end again just trying to find other places for yield.
5:28
Speaker 1: And then they started going deeper in terms of credit
5:30
Speaker 1: risk by going into you know, high yield, and then
5:33
Speaker 1: they started to expand it even further by going into
5:35
Speaker 1: bond like products. On the equity side, reads high dived
5:38
Speaker 1: and yielding stocks. But the great thing now is that
5:41
Speaker 1: when you look at the valuations around around the marketplace,
5:44
Speaker 1: what you can see is that investors don't need to
5:46
Speaker 1: take as much risk anymore, at least at this point
5:48
Speaker 1: in time. You're not benefiting a lot taking on a
5:50
Speaker 1: lot of duration risk and taking on that interest rate
5:52
Speaker 1: exposure further out the curve because the curve is so flat.
5:55
Speaker 1: So you can avoid having some of that volatility by
5:58
Speaker 1: being more focused on the shorter end of to curve.
6:00
Speaker 1: But for most investors, we would tell them to again
6:03
Speaker 1: look at the risk tolerance, have a balanced portfolio around
6:06
Speaker 1: the globe, both equities and fixed income, and make sure
6:09
Speaker 1: that they're continually rebalancing because some of these ratios can
6:12
Speaker 1: get out of line over time. So, given the fact
6:14
Speaker 1: that we're moving into a more volatile period, supposedly, Um,
6:19
Speaker 1: do you think that we've seen peak passive? No? You know,
6:22
Speaker 1: when you think about no, I don't think that's the case.
6:26
Speaker 1: When you think about when you think about the value
6:28
Speaker 1: proposition at passive passive offers to investors is that they
6:33
Speaker 1: have they get they get a market return at a
6:36
Speaker 1: very low cost. And what it's been shown is that
6:39
Speaker 1: active managers really have a hard time in the long
6:41
Speaker 1: run out performing their benchmarks net of fees. And so
6:45
Speaker 1: in less active managers substantially substantially reduced their fees, they're
6:49
Speaker 1: gonna have a hard time in the long run beating
6:52
Speaker 1: beating the indiceas. And that's going to continue to allow
6:55
Speaker 1: passive investing to be a very popular, you know, technique
6:58
Speaker 1: for for investors. Just quickly, what is more overvalue today?
7:03
Speaker 1: Corporate bonds high yield or investment grade corporate bonds UM
7:10
Speaker 1: investment grade corporate bonds, if you look at where they
7:12
Speaker 1: are from the valuation perspective, there's somewhere around the fifteen
7:15
Speaker 1: percentile um from a spread perspective over the last ten
7:20
Speaker 1: year periods, so we'd say they're pretty deeply overvalued at
7:23
Speaker 1: this point in time. I think what you have to
7:25
Speaker 1: really really be cognizant of is the fact that again,
7:28
Speaker 1: as the Federal Reserve keeps hiking interest rates and they
7:30
Speaker 1: get to that point where they start becoming restrictive in
7:32
Speaker 1: terms of economic growth, that part of the market is
7:35
Speaker 1: definitely going to be at risk for spread widing. So
7:38
Speaker 1: at what point will they be restrictive? I mean, people
7:41
Speaker 1: are widely expecting the Federal Reserve to raise rates in September.
7:45
Speaker 1: Are you expecting two rate hikes this year? And at
7:47
Speaker 1: what point next year? How many rate hikes would be
7:50
Speaker 1: a mistake. So we're expecting we're expecting two rate hikes
7:54
Speaker 1: this year, both in September and December, and we're expecting
7:56
Speaker 1: somewhere in the neighborhood of two to three rate hikes
7:59
Speaker 1: next year. You know, by the time we get to
8:01
Speaker 1: the second half of next year, we could actually start
8:03
Speaker 1: approaching the restrictive territory. And the question becomes is there
8:07
Speaker 1: still enough momentum in the economy, both from a GDP
8:11
Speaker 1: growth and an inflation and jobs perspective. That the FED
8:14
Speaker 1: keeps going and if that's the case, we may end
8:16
Speaker 1: up going too far. All right, So what are the
8:18
Speaker 1: chances of a downturn next year? I know a lot
8:20
Speaker 1: of people have been talking about possible recession. So in
8:26
Speaker 1: our expectations based upon our models are showing, you know, um,
8:29
Speaker 1: the probability of recession the next twelve months have gone
8:31
Speaker 1: from about five percent up to ten. Now, what we're
8:34
Speaker 1: expecting towards the tail end, the tail end of twenty nineteen,
8:37
Speaker 1: if we're looking forward a year from there, we'd expect
8:41
Speaker 1: we'd expect that the recession rest starts to rise to
8:43
Speaker 1: something like thirty over the course of the next year.
8:46
Speaker 1: So I would take us through the end of today.
8:50
Speaker 1: We got the news that the Intercontinental Exchange plans to
8:52
Speaker 1: launch a regulated physical bitcoin futures contract and warehouse in November.
9:00
Speaker 1: What's the conversation at Vanguard about cryptocurrencies and bitcoin? Then
9:06
Speaker 1: we're not fans of We're not fans of of of bitcoin. Um.
9:09
Speaker 1: We are very interested in the technology that underlies bitcoin
9:12
Speaker 1: in terms of blockchain and what it can do in
9:14
Speaker 1: terms of increasing efficiency when it comes to settling transaction,
9:17
Speaker 1: receiving index data and things of that nature. But the
9:21
Speaker 1: concept of investing in bitcoin, we think that's a bit
9:23
Speaker 1: of a speculative bubble, all right, So the blockchain trend
9:28
Speaker 1: perhaps is not more hype than it is reality because
9:31
Speaker 1: there have been some studies at show that. No, we
9:32
Speaker 1: think there's real potential there in terms of increasing efficiencies
9:35
Speaker 1: and uh. And again that's that The reason we're interested
9:38
Speaker 1: in that is because to the extent that can help
9:39
Speaker 1: us drive down costs even further, we think there's value there.
9:42
Speaker 1: So what about flows, what are you seeing there? And
9:45
Speaker 1: is there some divergence between institutional flows and individual flows
9:50
Speaker 1: right now? So we haven't seen a big divergence. UM
9:53
Speaker 1: So this year, this was through June. UM we have
9:57
Speaker 1: taken in about a hundred billion in cash flow, and
10:00
Speaker 1: that's been broken up between I'd say about half of
10:03
Speaker 1: that was in US equities, with the in the equity market,
10:07
Speaker 1: with the majority of going into index products, and then
10:09
Speaker 1: we've had you know, fair flows the rest broken up
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Speaker 1: between UM fixed income as well as money market. So
10:15
Speaker 1: money markets has really seen a lot of growth this year,
10:18
Speaker 1: just given the fact that the curve is flattened so much. Right,
10:21
Speaker 1: the flows that you're talking about, the people look at
10:24
Speaker 1: the expense ratios first rather than the product. I think
10:28
Speaker 1: informed investors will always look at the expense ratio first. Um,
10:32
Speaker 1: you know, when when they've made the decision that they
10:33
Speaker 1: want to invest in the money market product or a
10:36
Speaker 1: actively managed fund, the expense ratio is something they always
10:39
Speaker 1: take a look at. And especially in an environment where
10:42
Speaker 1: you're expecting returns whatnot, it's on the bond side, or
10:45
Speaker 1: even on the equity side to be somewhat muted relative
10:48
Speaker 1: to what we have experienced historically, expense ratios make a
10:51
Speaker 1: big difference. It's eating more and more of your returns
10:53
Speaker 1: if you're in a high cost product relative to a
10:55
Speaker 1: low cost product. Do you think we're ever going to
10:57
Speaker 1: see a fund that actually pays investors to invest with it.
11:01
Speaker 1: You know, there's all kinds of marketing gimmicks, gimmicks, so
11:03
Speaker 1: I'm not sure. You know, maybe it's possible. I I
11:06
Speaker 1: don't know. I really don't know. I mean, like, do
11:07
Speaker 1: you think that if we're going to be close to
11:09
Speaker 1: zero for almost all funds in five years? I think
11:13
Speaker 1: it's difficult to tell, but I would I would. I
11:15
Speaker 1: would expect that you will see this continued, this continued
11:18
Speaker 1: impact of you know, firms that have economies of scale
11:22
Speaker 1: will continue to lower prices, and the firms that are
11:24
Speaker 1: you know, higher cost producers will continue to struggle quickly.
11:28
Speaker 1: What's your biggest mistake you've made over the last twelve months.
11:33
Speaker 1: I would say we were probably as a firm, we're
11:35
Speaker 1: probably a bit slow when it comes to um a
11:38
Speaker 1: bit too early, i should say, when it comes to
11:41
Speaker 1: reducing our exposure to investment grade credit. Again, we expected
11:46
Speaker 1: that spreadwood wide and not at some point in time,
11:48
Speaker 1: and we're a bit too early to a bit too
11:50
Speaker 1: early to that trade. UM. So i'd say that was
11:53
Speaker 1: probably a bit of a bit of a miss from
11:54
Speaker 1: mark perspective, but not a miss that you've seen a
11:57
Speaker 1: hundred billion dollars of influences here and that you are
12:00
Speaker 1: a five point one trillion dollar man. Greg Davis, thank
12:03
Speaker 1: you so much for being with us. It is such
12:04
Speaker 1: a pleasure having in my pleasure. Greg Davis is Chief
12:07
Speaker 1: investment Officer at the Vanguard Group. Van's guards total assets
12:12
Speaker 1: under management five point one trillion dollars. It is an
12:15
Speaker 1: economy unto itself. China's u N is headed up for
12:33
Speaker 1: its worst weekly loss in its history, joining US now
12:37
Speaker 1: to talk about that. Some of the latest efforts out
12:40
Speaker 1: this morning from the PBOC to try to mitigate some
12:44
Speaker 1: of those losses is Steven England are Global head of
12:47
Speaker 1: G ten FX Research North American macro Strategy for Standard
12:50
Speaker 1: Charter Bank. He is also a Bloomberg opinion columnist. Stephen,
12:54
Speaker 1: thank you so much for being with us. We really
12:56
Speaker 1: enjoy having you on. What's your take on the move
13:00
Speaker 1: that the PBOC, the People's Bank of China took this
13:02
Speaker 1: morning to try to how should we say this, I
13:06
Speaker 1: guess perhaps prevent people from speculating too much on the
13:10
Speaker 1: ones drop. UM. First, thank you for having me on. UM.
13:15
Speaker 1: I think what you're seeing is that the UH Chinese
13:19
Speaker 1: act that markets have been increasingly under pressure. The equity
13:21
Speaker 1: market has been under performing, UH, not just the US
13:24
Speaker 1: equity market, but even neighboring Asian equity markets. UM. So
13:29
Speaker 1: it feels as if, UH, there's a perception that China
13:33
Speaker 1: is much more vulnerable to these trade tensions than say
13:37
Speaker 1: what's thought a month ago, or even or even two
13:39
Speaker 1: months ago. And that's translating into both weakness and equities
13:42
Speaker 1: and weakness in the exchange rate. UM. What the Chinese
13:47
Speaker 1: authorities want, I think is one to keep money easy
13:51
Speaker 1: onshore because there's both an onshore market in continental China
13:56
Speaker 1: and an offshore market um outside of China. They want
14:00
Speaker 1: to keep monetary conditions easy on shore for domestic economic
14:05
Speaker 1: reasons because their their economy has been kind of wobbling
14:07
Speaker 1: a little bit, nothing dramatic, but not performing as well
14:10
Speaker 1: as they would have wanted. At the same time, they
14:13
Speaker 1: don't want by keeping money easy on shore to encourage
14:16
Speaker 1: money to leave. So they're saying, look, if you if
14:19
Speaker 1: you want to UM do these transactions, you actually have
14:23
Speaker 1: to basically like post the margin and just keep it
14:26
Speaker 1: on deposit with the PBOC. So it makes it harder
14:29
Speaker 1: and discourages the movement to capital from on shore to offshore,
14:34
Speaker 1: and in sometimes should mitigate the weakness in c n
14:38
Speaker 1: Y in c and Y and c n H. Stephen Anglader,
14:41
Speaker 1: we were listening earlier today to an interview with Larry Cudlow,
14:44
Speaker 1: Director of the National Economic Council. Larry Cutlow said he
14:48
Speaker 1: believes that China's currency is weakening and that it's a
14:53
Speaker 1: lousy investment. He also said that China's China has a
14:57
Speaker 1: weak economy. Do you agree well, look, you know, I've
15:03
Speaker 1: I've been here long enough. I've seen the dollar at
15:05
Speaker 1: one sixty against the euro, and and you know now
15:08
Speaker 1: it's at one sixteen. So currency is weakened, currency strengths,
15:12
Speaker 1: And i'd say the Chinese, the Chinese economy, it's it's
15:15
Speaker 1: as I said before, it's disappointing. It's not doing as
15:18
Speaker 1: well as some people, you know, many people expected, but
15:22
Speaker 1: it's not in free falls by any means. It's just like,
15:26
Speaker 1: you know, call it a bump. And I think the uncertainty,
15:29
Speaker 1: uncertainty about the parish is adding to some of the pressure.
15:34
Speaker 1: But it's not a crisis. It's it's uh, you know,
15:37
Speaker 1: it's it's an irritant. But in this way I would
15:39
Speaker 1: characterize it. So if it's an irritant, would this be
15:42
Speaker 1: a good opportunity to invest in China? Well, you know,
15:47
Speaker 1: I think if you're investing in China, you're you're making
15:51
Speaker 1: a bet that the paraficies will be resolved in a
15:56
Speaker 1: kind of you know what most people expect to happen,
15:58
Speaker 1: which is that the US and China will have very
16:01
Speaker 1: low tariffs, and they'll keep on talking about intellectual property,
16:04
Speaker 1: which is a much more complicated issue. Um, if he
16:10
Speaker 1: believes that that's going to be the ultimate outcome, notwithstanding
16:13
Speaker 1: the short term gyrations. UM. You know, China would be
16:16
Speaker 1: very interesting even you have, given how much it's sold off.
16:18
Speaker 1: But you know, you have to be clear that you
16:21
Speaker 1: have a strong view that this will be resolved in
16:23
Speaker 1: a way where we don't where everyone doesn't end up
16:26
Speaker 1: with tariffs on each other. Stephen, you've been covering the
16:31
Speaker 1: FX markets and engage with them for about two decades,
16:34
Speaker 1: and you've seen a lot of different phases. Has it
16:38
Speaker 1: ever been harder to kind of understand the different winds
16:41
Speaker 1: at play that it is right now given the rhetoric
16:44
Speaker 1: and the tweets and and all of that mixed with
16:48
Speaker 1: a lot of easing, a lot of central bank intervention. Well,
16:54
Speaker 1: you know, i'd say, in as it's happening, it always
16:57
Speaker 1: seems hard. It's very very hard to know what the
17:00
Speaker 1: next one percent or five percent move on the dollar
17:03
Speaker 1: is going to be. UM, And I'd actually say it's
17:06
Speaker 1: not much worse now. I think it's for many of us.
17:10
Speaker 1: The the political dimension, both the geopolitical and domestic political dimension,
17:15
Speaker 1: is UH an additional complication. But you know, you look
17:20
Speaker 1: at volatility in in FX markets as far from from
17:23
Speaker 1: being extreme. So I think it's it's something you just
17:26
Speaker 1: adjust to. Stephen, taking a look at the dollar euro
17:30
Speaker 1: right now one nine pounds, sterling, one thirty yen one eleven,
17:35
Speaker 1: you think the dollar is going to continue to strengthen,
17:38
Speaker 1: you know, I think the dollar is strengthening on on
17:42
Speaker 1: um these power of concerns because it is behaving like
17:45
Speaker 1: a safe haven. UM. I think investors have become you know,
17:50
Speaker 1: are flirting with the idea that US may actually have
17:52
Speaker 1: a good economy, notwithstanding the slope of the yield curve
17:55
Speaker 1: and some of the other questions that have been raised.
17:57
Speaker 1: And so I think that there's an emerging set more
18:01
Speaker 1: comfort with the U S economies and say there worth
18:03
Speaker 1: a month ago, two months ago, or six months ago. Um.
18:07
Speaker 1: So that's all all the positive, but I'd say overwhelmingly
18:10
Speaker 1: the sentiments on Europe is so negative that Europe. You know,
18:15
Speaker 1: if Europe just holds its place, that will be a
18:18
Speaker 1: euro positive. So you know, again, the euro dollar story
18:22
Speaker 1: is one that you know, I don't think it's going
18:24
Speaker 1: to be the main story. The story could be how
18:27
Speaker 1: the euro and the dollar together do against the rest
18:31
Speaker 1: of the world UM, but you know, the usual sort
18:35
Speaker 1: of all the up or down against the euro UM. Yeah.
18:39
Speaker 1: I don't think that's going to be a dramatic issue
18:41
Speaker 1: in in coming months because both of them have strength.
18:45
Speaker 1: All right, I'd love to get your view just real
18:47
Speaker 1: quick on what this means. If we are seeing dollar
18:50
Speaker 1: strength that will continue because people are realizing that the U.
18:53
Speaker 1: S economy is doing well, what does this mean for
18:56
Speaker 1: emerging markets? Well, you know it's going to be difficult
19:01
Speaker 1: for them, um, emerging markets. You know, again, there's there's
19:04
Speaker 1: been a sell off, certainly on the currency side, and
19:07
Speaker 1: there certainly valuation is there. But the question is, you know,
19:12
Speaker 1: where's the sizzle? You know, what are you buying? You know,
19:15
Speaker 1: if if growth is coming primarily from the US, it's
19:19
Speaker 1: not very good intensive intensive, it's not very commodity is intensive.
19:23
Speaker 1: So you know, the question is what is going to
19:27
Speaker 1: sort of be the trigger to get people back into
19:30
Speaker 1: the emerging markets. And and again, valuation is very important
19:33
Speaker 1: at a certain point to get so cheap that they
19:35
Speaker 1: can only go up. But I think you'd like to
19:38
Speaker 1: see some of you know, some indications that the economies
19:40
Speaker 1: are are stabilizing and surprising to the upside. Stephen just quickly,
19:45
Speaker 1: Does this mean that commodity based currencies will continue to
19:49
Speaker 1: weaken against the dollar? Yeah? I think you know, there's
19:54
Speaker 1: a structural story here, which is um, you know, we
19:57
Speaker 1: buy services on the margin. We don't. We don't buy
20:00
Speaker 1: all the intensive goods. You know, Europe is growing, but
20:02
Speaker 1: they buy services as well. I think it's you know,
20:05
Speaker 1: there's a supplied demand balance, but serve an uphill battle
20:08
Speaker 1: for for the commodity producers, especially if China is looking soft.
20:12
Speaker 1: All right, we gotta leave it there. Stephen Englander is
20:15
Speaker 1: the global head of g TENX Research and North American
20:19
Speaker 1: macro Strategy for Standard Charter Bank, and he is also
20:24
Speaker 1: a Bloomberg opinion columnist. Will the explosion of money creation
20:45
Speaker 1: catch up with the US economy? This is one of
20:47
Speaker 1: the most difficult questions of the moment, especially as the
20:51
Speaker 1: Federal Reserve continues to raise interest rates bit by bit
20:55
Speaker 1: to try to get to some normal level. To weigh
20:58
Speaker 1: into this, and very very happy to say we are
21:00
Speaker 1: going to be joined by a Mere Sufi, Professor of
21:03
Speaker 1: Economics and public Policy at Chicago's Booth School of Business. Uh, Mere,
21:07
Speaker 1: thank you so much for being with us. I'm super
21:12
Speaker 1: I'm really I'm excited to hear your perspective. You wrote
21:14
Speaker 1: The House of Debt, which was widely thought to be
21:18
Speaker 1: a very accurate and interesting look at the explosion of
21:20
Speaker 1: debt leading to the financial crisis. You just posted an
21:23
Speaker 1: article that was published again, arise at household debt systematically
21:28
Speaker 1: predicts a decline in subsequent GDP growth. This was a
21:31
Speaker 1: line from the report Where are we now in terms
21:34
Speaker 1: of credit explosion and what does it say about growth
21:36
Speaker 1: going forward? So one of the positive signs is that
21:40
Speaker 1: the household debt expansion during this recent cycle is not
21:43
Speaker 1: nearly as dramatic as what it was from two thousand
21:46
Speaker 1: two to two thousand and six. And that's mostly because,
21:49
Speaker 1: you know, most of household debt is associated with mortgages
21:51
Speaker 1: and housing and the boom we saw from two thousand
21:54
Speaker 1: and two thousand seven, which is unprecedented in history. Nowadays
21:58
Speaker 1: we have more auto debt, more student debt, but just
22:01
Speaker 1: the magnitude of the increases is not nearly as large.
22:04
Speaker 1: So that's one positive sign um. I think generally we
22:08
Speaker 1: are at a point in the cycle where it seems
22:10
Speaker 1: like credit is very easily available for corporations, for firms,
22:14
Speaker 1: and for households, and that generally forecasts probably lower growth
22:19
Speaker 1: going forward. But I don't think we're anywhere near where
22:21
Speaker 1: we were and say two thousand six or two thousand
22:23
Speaker 1: seven speak if you count a little bit about the
22:26
Speaker 1: debt of the government and what that does to financial markets.
22:31
Speaker 1: So in our research, we looked at forty countries going
22:35
Speaker 1: about back to about the nineteen sixties, and we actually
22:38
Speaker 1: don't find evidence that arise in government debt tends to
22:44
Speaker 1: predict financial crises or recessions with the same power as
22:49
Speaker 1: right is in private debt. Why private debt, I mean
22:52
Speaker 1: both debt to non financial corporations and to households. So
22:57
Speaker 1: that seems to be one of the most more robust correlations,
23:02
Speaker 1: is the private debt predictability. Government debt doesn't seem to
23:05
Speaker 1: predict as well. What usually happens is there's a crisis
23:08
Speaker 1: caused by private debt expansion, and then the government debt
23:12
Speaker 1: goes up in response, and as we saw in Europe
23:14
Speaker 1: in two thousand ten and two thousand eleven, that can
23:16
Speaker 1: often cause problems. But it's not the rise in government
23:19
Speaker 1: debt that generally causes uh Either financial crises or a
23:23
Speaker 1: slowdown in economic growth. So, just to sort of underscore this,
23:27
Speaker 1: household debt is really the best predictor. Explosion of household
23:30
Speaker 1: debt is the best predictor of the magnitude of the
23:33
Speaker 1: next downturn. Corporate debt a bit, but less so in
23:36
Speaker 1: government debt, not as much at all. That's right. That's right.
23:39
Speaker 1: And one of the nice things is we've actually seen
23:41
Speaker 1: example since the publication of our book. UH, the you
23:45
Speaker 1: know economy in the world that had probably the most
23:47
Speaker 1: severe recession over the last five years was Brazil. In
23:50
Speaker 1: Brazil in two thousand, fifteen and sixteen, they had one
23:52
Speaker 1: of the worst recessions they've had on record. And in
23:54
Speaker 1: our view, it's unsurprising that in the decade before there
23:57
Speaker 1: was just a tremendous expansion of household debt, auto debt,
24:00
Speaker 1: paid a loans, mortgage debt. Uh. And again I think
24:03
Speaker 1: that's one of the big reasons why Brazil had such
24:05
Speaker 1: a big downturn from two thousands fifteen and two thousand
24:08
Speaker 1: and sixteen. So I guess that this is really interesting
24:10
Speaker 1: to think about right now because you have banks like Goldman,
24:14
Speaker 1: Sachs and many others trying to ramp up consumer lending,
24:18
Speaker 1: and you're seeing credit card outstandings going up. Auto loans
24:22
Speaker 1: have been a robust area of lending for a while.
24:25
Speaker 1: I'm just wondering, at what point do you start to
24:27
Speaker 1: get concerned that we're heading toward another uh sort of
24:31
Speaker 1: peak that could uh for tell some pain. Yeah, I mean,
24:34
Speaker 1: I've been looking at the data, especially in the auto
24:36
Speaker 1: market and the credit card market. As you point out,
24:39
Speaker 1: those are really the markets that seem hot um in
24:41
Speaker 1: terms of the willingness of creditors to provide more financing
24:45
Speaker 1: to consumers. Uh. There's a few questions about what the
24:48
Speaker 1: trigger would be that would cause those markets to suffer.
24:51
Speaker 1: I've been thinking a little bit about a rise in
24:53
Speaker 1: gas prices. For example, if gas prices were to rise
24:56
Speaker 1: one or two dollars per gallon, you could imagine a
24:59
Speaker 1: lot of people with a lot of auto debt don't
25:02
Speaker 1: have much room to adjust, especially if you think about
25:06
Speaker 1: drivers for uber and lyft. So it doesn't seem like
25:09
Speaker 1: a disaster's eminent to me, But I'm thinking about the
25:12
Speaker 1: kinds of economic shocks that would lead to a situation
25:16
Speaker 1: in which consumers have a difficult time paying back the
25:19
Speaker 1: interest payments and principle on those credit cards and auto
25:22
Speaker 1: loans and the rising gas prices is one that I
25:24
Speaker 1: kind of think of, And of course any labor income
25:28
Speaker 1: shock to the economy would would be dangerous. In all
25:32
Speaker 1: of our research, there's usually some shock that you need
25:35
Speaker 1: in order to get the high household debt to then
25:37
Speaker 1: really have a bad effect on the economy. That collapse
25:39
Speaker 1: in house prices, for example in two thousand seven and eight,
25:43
Speaker 1: is really what happened. Then what effect does the deregulation
25:46
Speaker 1: of financial industries have on the health of an economy. Well,
25:51
Speaker 1: one of the big points of our recent research is
25:54
Speaker 1: to show that deregulation in the long run, and there's
25:58
Speaker 1: a lot of research to support this, improve financial efficiency
26:01
Speaker 1: and improves the allocation of credit and growth of an economy.
26:06
Speaker 1: But in the short to medium runs, think about three
26:08
Speaker 1: to five years, it sometimes can basically amplify the business cycle.
26:13
Speaker 1: That is, a deregulated banking sector kind of throws a
26:17
Speaker 1: bit more fuel on the fire during booms, and then
26:20
Speaker 1: subsequently oftentimes we see more severe recessions. The recession, for example,
26:26
Speaker 1: was preceded by a huge wave of deregulation in the
26:29
Speaker 1: banking sector that we argue in some of our research
26:33
Speaker 1: lead to an expansion of lending, especially to real estate
26:36
Speaker 1: and commercial real estate, which then made the recession of
26:40
Speaker 1: one worse than it otherwise would have been. You know,
26:43
Speaker 1: one of the biggest explosions in debt and consumer debt
26:46
Speaker 1: of late has been really in the student loan area.
26:49
Speaker 1: And you know, one question I've had with a number
26:50
Speaker 1: of analysts is how much do people just simply ignore
26:54
Speaker 1: this because they're backed by the federal government, and how
26:56
Speaker 1: much people pay attention to this as as a potential
27:00
Speaker 1: sort of fragile fragile node. That's a great point. I
27:03
Speaker 1: think the first point you made is quite important, and
27:06
Speaker 1: that most of that debt is being provided or back
27:09
Speaker 1: directly by the federal government. In that sense, there's not
27:13
Speaker 1: much of a risk that there's going to be a
27:15
Speaker 1: student debt default crisis that will precipitate a broader banking
27:19
Speaker 1: crisis or financial crisis. So in that sense, it's different
27:22
Speaker 1: than mortgage debt or auto debt or some of the
27:25
Speaker 1: other markets that we worry more about. I think when
27:28
Speaker 1: we think about student debt, it's not so much the
27:31
Speaker 1: cyclical worries we have. It's more a longer run drag
27:35
Speaker 1: on consumption, especially for younger and say middle aged Americans
27:40
Speaker 1: who have a lot of student debt. And what does
27:42
Speaker 1: that mean about the overall US economy. It just seems
27:45
Speaker 1: like the US economy has a very hard time generating
27:49
Speaker 1: the kind of demand that is needed to sustain high growth.
27:53
Speaker 1: And we either try to sustain that demand through more credit,
27:57
Speaker 1: truth through boosting the economy through lower you know, lower
28:00
Speaker 1: interest rates by the FED UM and now student debt
28:03
Speaker 1: to me, just is another drag that's going to make
28:06
Speaker 1: it harder in the long run for us to generate
28:08
Speaker 1: the kind of the kind of consumption that we need
28:11
Speaker 1: in order to sustain the economy. Just quickly, twenty seconds.
28:16
Speaker 1: Do non bank financial companies and the expansion of their
28:20
Speaker 1: credit facilities amplify the business cycle? Yeah, One of the
28:24
Speaker 1: points of our recent research is really to look at
28:27
Speaker 1: the important role of non banks, especially during the two
28:30
Speaker 1: thousand to two thousand seven cycle. And now there's a
28:33
Speaker 1: lot of research in the academic sphere about you know,
28:36
Speaker 1: fintech and just how many, for example, mortgages are now
28:40
Speaker 1: being originated by non traditional financiers. Think about Quicken and
28:44
Speaker 1: some of the other lenders and the fact that they're
28:48
Speaker 1: less regulated, the fact that they had less skin in
28:50
Speaker 1: the game, you know, is is something that that one
28:52
Speaker 1: wants to worry about, and we're thinking about the quality
28:54
Speaker 1: of those loans. Thank you very much, Amira Sufi, professor
28:58
Speaker 1: at the Chicago Boots School of bisin this thanks for listening.
29:15
Speaker 1: For more details about the job market, we turned to
29:18
Speaker 1: Tom Gimbal. He is the chief executive of LaSalle Network.
29:22
Speaker 1: It is a national network for job placement. Tom, thanks
29:26
Speaker 1: very much for being with us. Can you explain why
29:30
Speaker 1: you we don't see wages rising as fast as many
29:34
Speaker 1: would like. Yeah. Absolutely. Number one, We're we're in a
29:37
Speaker 1: global economy, so it's not it's not as domesticated obviously
29:41
Speaker 1: as it used to be. So we're not competing against
29:43
Speaker 1: our neighbors in the cul de Sac or the High
29:45
Speaker 1: Rise for jobs. So we are competing against people in
29:49
Speaker 1: in India, in China, in Latin America. And when you're
29:52
Speaker 1: doing that, and those companies, um are not at the
29:55
Speaker 1: same level of compensation and societally wise, you're gonna happy,
30:00
Speaker 1: but that are paid less. So it's not necessarily just
30:02
Speaker 1: that our economy is doing well. It's what labor can
30:04
Speaker 1: be acquired for so that is still a major issue.
30:08
Speaker 1: So Tom just to push back a little bit, because
30:10
Speaker 1: we hear about shortages of certain types of workers, shortages
30:13
Speaker 1: of construction workers, of truck drivers, of plumbers and builders,
30:17
Speaker 1: and all sorts of industrial jobs here in the US.
30:21
Speaker 1: Would there not be a shortage if perhaps these these
30:25
Speaker 1: companies just offered more money. Unfortunately that's that's not the case.
30:31
Speaker 1: And the reason being is look at truck drivers, where
30:33
Speaker 1: there there's a huge shortage and companies are willing to
30:36
Speaker 1: pay a lot more, but people don't want to be
30:38
Speaker 1: truck drivers. Now there's reasons behind that, where to drive
30:41
Speaker 1: a commercial truck over state lines you have to be
30:44
Speaker 1: at least twenty one years old. So you get people
30:46
Speaker 1: that don't get their college degree that's starting a career
30:48
Speaker 1: when they're eighteen and they're not going to make that shift.
30:51
Speaker 1: We've also seen a situation due to the quote unquote
30:54
Speaker 1: gig economy where people are doing stuff that are are
30:58
Speaker 1: no skills required on non office jobs or construction jobs
31:02
Speaker 1: that are easier on the body, like being an uber driver,
31:04
Speaker 1: and that's taking people away. So now you've got where
31:07
Speaker 1: we really have gone from manufacturing and distribution economy to
31:11
Speaker 1: service economy. And so we're seeing that just paying more
31:14
Speaker 1: isn't going to do it unless you're targeting the right people.
31:18
Speaker 1: And that's where businesses have to evolve, is where they're
31:21
Speaker 1: going to find the people, how they're targeting the people.
31:23
Speaker 1: And the most important thing that haven't been touched on
31:25
Speaker 1: in this economy is training and development to acquire and
31:29
Speaker 1: retain staff. Well, do uh do job applicants have the
31:34
Speaker 1: skills and the experience necessary for the jobs in growing
31:39
Speaker 1: areas like technology, healthcare, logistics. Yeah, and and there really is.
31:45
Speaker 1: It's a tale of two economies, right. It's the blue
31:47
Speaker 1: collar economy we were just talking about, and then it's
31:49
Speaker 1: the white collar economy um of technology and sales and marketing.
31:54
Speaker 1: And that's where the discrepancy is. And so when you
31:57
Speaker 1: look at the long term unemployed, that number really didn't
32:00
Speaker 1: change in this report and hasn't for some time because
32:03
Speaker 1: those folks they're they're out of this economy. They don't
32:05
Speaker 1: have the skills gap, are they Because of the skills gap,
32:09
Speaker 1: they can't get back in unless they move downstream into
32:12
Speaker 1: a lower level position or a blue collar job, and
32:14
Speaker 1: they don't want to. So what we have to do
32:16
Speaker 1: in the skills gap is figure out a more college
32:19
Speaker 1: graduates are going to get jobs than ever before, and
32:22
Speaker 1: we're not seeing any slowdown in that area. And number two,
32:26
Speaker 1: if companies really need people to continue to grow profits
32:29
Speaker 1: and revenue and shareholder value, they need to spend more
32:32
Speaker 1: money in training and development. So one thing that I'm
32:36
Speaker 1: trying to understand is we focus on the average numbers
32:39
Speaker 1: that we get out, is how bifurcated is the market
32:43
Speaker 1: four jobs between sort of the top earners and the
32:47
Speaker 1: low earners. Are we seeing faster wage gains at the
32:51
Speaker 1: top of the income sphere of versus a lower one. Yeah,
32:55
Speaker 1: I do believe that exists. And what ends up happening
32:59
Speaker 1: due to the ad vent of technology is that jobs
33:02
Speaker 1: on the lower end become easier due to the technology
33:05
Speaker 1: technologically advanced advancements. Right, So, so if due to the
33:10
Speaker 1: technological advances that people either have to continue to grow
33:13
Speaker 1: to grow their career, but if they stay at the
33:15
Speaker 1: same level, the jobs get easier, So they're not going
33:17
Speaker 1: to get paid more for doing the same work. When
33:19
Speaker 1: you look at the executive level side, and why those
33:21
Speaker 1: salaries increase is because people are learning, growing and being
33:24
Speaker 1: promoted into those roles, and they're getting paid. Is their
33:28
Speaker 1: advancement and their skill set rises. It's not as simple
33:30
Speaker 1: to say people who make more money are going to
33:32
Speaker 1: grow faster. They're growing faster because they have the ability
33:35
Speaker 1: to make more money, and that gets lost in the equation.
33:38
Speaker 1: It's not simply keep the low people oppressed and pay
33:41
Speaker 1: the rich people more. Is about what are they accomplishing
33:43
Speaker 1: and are they growing tom What accounts for the lack
33:47
Speaker 1: of summer jobs that are available for young people, Well,
33:51
Speaker 1: I think there's a variety of reasons. I think what
33:53
Speaker 1: you see a lot more happening is college kids and
33:56
Speaker 1: high school kids want to do internships. So if you
33:58
Speaker 1: grow up in an area where you believe that you're
34:01
Speaker 1: going to go to college and have a white collar career,
34:03
Speaker 1: people want to start in that area is as soon
34:06
Speaker 1: as they can. And so what ends up happening is
34:09
Speaker 1: the hourly jobs, the delivering pizza, the retail jobs. Those
34:12
Speaker 1: end up going to lower income people who companies know
34:15
Speaker 1: we're going to be there. So there isn't as much
34:17
Speaker 1: seasonality in summer work as there used to be. And
34:20
Speaker 1: I think a lot of this goes to the social
34:22
Speaker 1: mediazation of America. Is that when kids are seeing that
34:25
Speaker 1: on shark Tank and through Instagram of eight five year
34:30
Speaker 1: old kids that are making hundreds of thousands, millions of
34:33
Speaker 1: dollars at an early age, what do I need to
34:35
Speaker 1: do to get there as fast as possible? And that's
34:38
Speaker 1: not about taking an hourly job at the local retail store. No.
34:41
Speaker 1: Tom pim is talking about this. He has a daughter,
34:44
Speaker 1: I have a son. We're both looking for them to
34:47
Speaker 1: go bring in their worth, right, he's nodding at me.
34:50
Speaker 1: I mean, I'm partially kidding, but actually I think that
34:52
Speaker 1: they would probably enjoy having the responsibility. Tom. Just going forward,
34:57
Speaker 1: I'm trying to figure out when people the thing that
34:59
Speaker 1: people tell talk about is the slack in the labor market.
35:02
Speaker 1: Are there more people who are on the sidelines who
35:05
Speaker 1: will get brought in as this labor market continues to improve.
35:09
Speaker 1: What's your take on that. If you're on the sidelines
35:12
Speaker 1: in this economy, it's because you want to be on
35:14
Speaker 1: the sidelines. And I what I mean by that is
35:16
Speaker 1: you may not like the position that you can go
35:19
Speaker 1: and play in the game, but you can play good. Right,
35:22
Speaker 1: So doing the sports analogy, you may want to be
35:25
Speaker 1: a quarterback. But if the position that's open for you
35:27
Speaker 1: that the coach likes is a wide receiver. If you
35:30
Speaker 1: want to play in the game, be the wide receiver.
35:33
Speaker 1: Don't complain that you're not the quarterback. And so the
35:35
Speaker 1: white collar analogy is you may have had a job
35:38
Speaker 1: doing accounting or finance. In this economy. If you can't
35:40
Speaker 1: get a job doing accounting and finance, then you're not
35:43
Speaker 1: good enough to be at it. So you've got to
35:44
Speaker 1: take a job at a lower level. Might be administrative,
35:46
Speaker 1: might be in a call center, might be blue collar.
35:48
Speaker 1: But if you want a job and you want to
35:50
Speaker 1: make money and you don't have one in this economy,
35:52
Speaker 1: you're the problem. So then thirty seconds, if you're the
35:54
Speaker 1: if you're saying to these people, you're the problem. And
35:57
Speaker 1: there still is um a pretty low prior age participation
36:01
Speaker 1: rate relative to history. What's that all about about accountability? Right?
36:07
Speaker 1: So the participation rate of people is what happened during
36:11
Speaker 1: the recession in the in the thirties was people would
36:14
Speaker 1: they double up and have multiple families living in houses
36:16
Speaker 1: and sell apples on the street for a dime. And
36:18
Speaker 1: what we had coming out of two thousand nine was
36:20
Speaker 1: an entitlement situation and people think the government's going to
36:23
Speaker 1: be there to support them. And today we're in a
36:25
Speaker 1: situation where there's a skills gap, yet there's a ton
36:27
Speaker 1: of jobs available. Blue collar and white collar people need
36:29
Speaker 1: to get off the couch and take get back in
36:31
Speaker 1: the game. There you go, Tom Kimball with some tough talk.
36:34
Speaker 1: Tom Gimbell, founder and chief executive officer for LaSalle Network
36:37
Speaker 1: based in Chicago. Uh. He said just in some notes
36:41
Speaker 1: to us ahead of this that he has been in
36:43
Speaker 1: this business for more than twenty five years staffing and
36:45
Speaker 1: this is the best jobs market he has ever seen.
36:48
Speaker 1: So there's no excuse. If somebody doesn't have a job
36:51
Speaker 1: and wants to have a job, they should be able
36:53
Speaker 1: to get one. Thanks for listening to the Bloomberg n
37:00
Speaker 1: L podcast. You can subscribe and listen to interviews at
37:03
Speaker 1: Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm
37:07
Speaker 1: pim Fox. I'm on Twitter at pim Fox. I'm on
37:11
Speaker 1: Twitter at Lisa Abramo wits one. Before the podcast, you
37:14
Speaker 1: can always catch us worldwide on Bloomberg Radio