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JOHN HERRMANN, DIRECTOR-INTEREST RATES STRATEGY, MITSUBISHI UFJ SECURITIES (USA) INC., IS INTERVIEWED ON BLOOMBERG RADIO
JANUARY 07, 2016
SPEAKERS: JOHN HERRMANN, DIRECTOR-INTEREST RATES STRATEGY, MITSUBISHI UFJ SECURITIES (USA) INC.
MICHAEL MCKEE, BLOOMBERG NEWS
TOM KEENE, BLOOMBERG NEWS
[*] TOM KEENE, HOST, BLOOMBERG SURVEILLANCE: Mike McKee, frame the Atlanta GDP vector right now into our next wonderful guest.
MICHAEL MCKEE, ECONOMICS EDITOR, BLOOMBERG TELEVISION/BLOOMBERG RADIO: Well, it's ugly. The Atlanta Fed tracks the latest releases that impact GDP and puts together an "if it were released today" kind of tracking.
KEENE: And it has gotten a lot of traction.
MCKEE: Yes, and right now, they're looking at a seven-tenths percent, a zero in front of that decimal point, a seven-tenths percent gain in GDP for the fourth quarter, which makes, by comparison, John Herrmann of Mitsubishi UFJ a raging optimist because you are all the way up, John, at nine-tenths of a percent. Where do you see all this extra growth coming from?
JOHN HERRMANN, DIRECTOR-INTEREST RATES STRATEGY, MITSUBISHI UFJ SECURITIES (USA) INC.: Yes, we're basically - the Atlanta Fed model and our models are suggesting that your Bloomberg consensus, the Fed's forecast are way too optimistic.
So if you went back - I think this is an interesting point - if you went back to the December Fed meetings of December 15 and 16, at that time, the Wall Street consensus was, oh, we're going to grow 2.1 percent in the fourth quarter, the gasoline price is so low, balmy weather so there was no heating costs and people were going to take all this extra money and spend it and go here, go there, and do this, and do that, that everything was fine. And the Fed was like, yes, everything is so good, we're going to hike rates, and everything is great.
But if they - if the Fed knew that - you know, they already said it was a close call. If the Fed knew that it's just barely growing one percent in the fourth quarter, not this 2.1 percent estimate or some people were higher than that, some people were 2.5 percent and so on, if the Fed knew it was one percent or even a little bit lower, and they said it was a close call previously, they might have even backed off, or they might have had a few dissenters.
So I think this is really, really important. And Tom has given us a lot of air play on this thing, but we've been really critical of the Wall Street consensus and so on, and the hype - we call it the hype machine, the last few years of over hyping GDP growth.
KEENE: Okay.
HERRMANN: And they've finally come down.
KEENE: John -
HERRMANN: And that's where they belong.
KEENE: You do granularity like nobody else and the granularity, folks, goes across an equation Y equals C plus I plus G plus net exports.
HERRMANN: Net exports.
KEENE: A lot of people, including governors, presidents, and chairs -
HERRMANN: Yes.
KEENE: - of all central banks are rationalizing now put an asterisk next to net exports because of global trade dynamics and that. Discuss.
HERRMANN: Okay.
KEENE: Can we do that? Can we look at our U.S. economy and the continuum of export - without exports?
HERRMANN: I think that's a mistake. What Tom is suggesting, folks, is this. If you just stripped out and took like the private domestic component of GDP - so, for example, consumer spending, business spending on equipment and software, residential construction markets, other construction activity -
KEENE: Yes, the redo of Paul Ryan's office on the Hill.
HERRMANN: Right, exactly. So you just strip - you sort of cherry pick the best components and only focus on them. And then ignore everything else, ignore the fact that we're going through an inventory correction right now, and ignore the fact that we got a correction in the fracking industry, ignore the fact that we have a strong dollar that is really impacting - negatively impacting the manufacturing sector and our export sector in the United States.
And if you ignored all those other features, then just focus on these three or four really nice components, then you can sort of live in a bubble and move rates where you want. But it's a big mistake. And they've tried to rationalize it by saying, oh, they're smaller components of GDP. But the fact is GDP, even without it, is still struggling to sustain two percent to 2.5 percent. So it's a big mistake, first thing.
The second thing is if you look - to Tom's point on granularity, I looked at the manufacturing payrolls since 1930. And right now, the current headcount level in manufacturing is the lowest since the year 1941. We've done a full round trip since 1941. All the headcount that we used to grow, all the middle class jobs that we used to have there, all the guys who finished high school but weren't smart enough to finish college, go get jobs in the manufacturing sector, get a career, have a family, have a house, own a car or two, those jobs are back to the headcount levels back to the 1941 level. It's unbelievable. It's a travesty.
So the thing is you can't just ignore this stuff. You've got to like have some attention to this. But the economy is beset by - as we've discussed before, beset by structural problems, especially in the labor force. And the Fed keeps ignoring them. It's not getting any air play in Washington because the two parties would actually have to work together to solve it. And they don't want to do that. So they'd rather fight and scream at each other and insult each other than actually solve something.
But the deal is we've got these problems, and the longer you wait to solve them and address them, the worse it's going to be.
KEENE: Okay.
HERRMANN: And right now, we've been ignoring them for about eight or nine or ten years. It's a big problem.
KEENE: John Herrmann with us with Mitsubishi. I really look forward to continuing with him.
HERRMANN: Thank you, Tom.
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2016 CQ Roll Call