tv Prime Interest RT June 20, 2013 8:30pm-9:01pm EDT
good afternoon welcome to prime interest i'm bob english in washington d.c. area and has a day off so here are the stories we're tracking today now the markets are showing no love for bernanke in the thread after hinting yesterday that the fed might wind down quantitative easing in the u.s. responded sold off during the day and again overnight and again during today s. and p. five hundred open below a key technical support this morning and the money is not flowing into bonds as it's had been in the past instead somewhat reminiscent of two thousand and eight money is flowing into cash namely the u.s. dollar and in another twist money is also flowing out of emerging markets at the past his pace since two thousand and eleven we'll talk about the markets on the fed with will neil ferguson and a floor trader ben well as in a little bit and just when you thought the treasury department would simply keep
its meddling to monetary matters secretary jack lew made a full court press for internet censorship excuse me cyber security channeling george orwell the. revolving door exact of citigroup said the growing cyber threat is larger than anything that corporations can solve on their own and this is after several congressmen became quite vocal this is a few days after the trans-pacific partnership called nafta on steroids by some and it secretly negotiated freely would quote hand over u.s. sovereignty to corporate interests and that's according to congressman alan grayson so here's what's in your prime interest.
now yesterday i had the chance to sit down with the author of neil ferguson a harvard professor of history and senior research fellow at both oxford and stanford university's he recently wrote a book called the great degeneration and i asked him about the fed's role in markets and here's what he had to say. well let's talk about the federal reserve as an institution one could make the argument that it institutionalizes moral hazard how does that fit into your world view the central banks are very important indeed there are those who say that the most important institutions in the economy today and judging by the way that people hang on ben bernanke is every word like today like today as we're speaking it's obviously true now i think one has to be careful here the central bank has done a tremendous job of avoiding the great depression we came very very close to total meltdown two thousand and eight two thousand and nine we could have rerun the one nine hundred thirty s. i think ben bernanke is a student of the depression did
a great job of avoiding that scenario but now we're in a different place the stock market is back to where it was in two thousand and seven and everybody there are scary times now. everybody is asking is it time to take the patient off this powerful medication called quantitative easing and i think that debate is going to be quite a protracted one because it's a little too early in my view to say recovery is established we can return to normal we can raise rates i don't think that is going to happen but there are there are critics of the fed who say that what ben bernanke did only prolong the inevitable and that we're going to have pain in the future which is greater than that which we experienced in two thousand and eight how would you respond to the i must say i'm a defender of. this issue i think those who for see a tremendous inflation as a result of quantity of easing don't really grasp how inflation works know somebody who spent his early career studying the german hyperinflation and even worked on russian hyperinflation in the days of bogus yeltsin i can tell you it takes
a lot more than just an expansion of the monetary base to cause inflation you need to broader monetary aggregates to grow and that's very little sign of that is in a very. percent annualized at the most the most in the moment it's nowhere near the . i know it's about three or four percent so if anything i would say this to the significant deflationary risk facing monetary policy at the moment you also need expectations to change inflation doesn't happen if people don't expect prices to be higher next year they really doesn't happen if they don't expect the rate to go up there is absolutely no sign of that in the united states but is there the possibility that this happens because one point seven trillion dollars in excess reserves which is the monetary base that has been allocated to banks which is currently sitting lying fallow at the fed it doesn't matter until it matters could it matter someday i don't very much that we're going to suddenly find ourselves in an inflationary environment any time soon i think too much is broken in the
international financial system the incentives for banks to deal average a powerful the regulatory pressure to raise bank capital relative to assets is pretty powerful and compelling so this is one of those things that really doesn't make sense to worry about a bit like an asteroid hitting the i mean you know it could happen but at this point it's such a low probability i'd be much more concerned about deflation in a world in which there are powerful structural forces pushing deflation for example the demographic changes that we see in many countries the aging populations you know japan is what we need to worry about we need to worry about finding ourselves where japan has been in the last twenty years and you talk about asset price deflation the bonds at zero percent yielding you know that for maybe two decades is that really the biggest danger that we face i mean sometimes in a deflationary environment we can actually see lower prices there have been people that have characterized the long depression of the united states you're
a historian as as a period were you know the average productive the purchasing power actually went up for the average person there are benefits to lower prices we've been enjoying them as the price of technology has gone i mean the price of computing power has climbed dramatic. in the last twenty years and we've all got very accustomed to carrying little mini computers around in our in our jacket pockets that you know would have cost vastly more as well as be vastly larger twenty years ago so that's fine similarly if we see commodity prices going down because we're increasing the production whether it's of energy or of foods what's not so like but i think the really important issue here is if you get into a situation as japan did when you have for lng prices and the interest rate and you can have negative rate policy rates the big problem is the debt deflation problem if you already have a pretty large stock of debt and the real interest rates allowing for inflation is
positive and rising that is a that is an economy killer and that's the reason that central bankers worry so much about deflation and indeed worry more about it than they were about inflation and certainly that ties into their demographic problem and let's just shift a little bit further west to china. where do you see china right now well i think if you look just at the demographics headwind is going to be a very very strong one in the next ten or twenty years the one child policy that shopping introduced means that the chinese workforce is going to start to shrink after a period in which the growth of the workforce has been one of the big drivers of of economic change in the world so that's a big change and it's going to change the way that the chinese economy works wages are going to rise they already are rising because the supply of labor is going to start to contract that is going to reduce china's big competitive advantage which was the china price that has big implications for china's trade rivals because they
are beginning to see that they can be china on price even mexico starts to look like it can compete with china and that's that's really a big change so i think that the chinese story is getting very interesting structurally and it's also getting very interesting cyclical a because. you have and i can sense it a financial crisis coming it's coming because you have some pretty excessive credit growth in the so-called shadow banking sector and the chinese authorities are already dialing that down as they do so there will be i think some significant repercussions and there have been fermented strains in their short term funding markets but long term do you think they're going to be able to come out of this and are the structural changes that you're seeing in the cyclical downturn is like going to be able to be overcome in the long term i'm cautiously optimistic about that i just spent most of april in china met with some pretty senior people in beijing there they are acutely aware of the challenges that they face and they know
that they can't have a system that depends exclusively on infrastructure investment and limited much on prison g.d.p. this is a this this is gone we're not going back to ten percent and in fact we're going to be growing in china closer to seven or even lower than seven percent and i think what is happening right now under the new leadership of president xi jinping is quite a big rethink about what the government's priorities should be and china is no longer going to be run by people who look at the g.d.p. number and the bigger it is the better i mean the attitude is now we need to worry about quality we need to worry about quality of life quality of the environment we need to move towards rule of law the more i hear people saying those things in beijing the more i realize that sounds familiar in the great generation i'm on to something they understand i think that their institutions need to change and that the institutions that are bequeath are simply not compatible with the modern economy and certainly not compatible with the big middle class and you create all these people who suddenly have
a significant income and wealth they need to have property rights otherwise they going to send their money to vancouver and i think that issue is really one that is focusing the mind of the leadership and shifting the priorities away from just growth growth growth and one final question what do you see as the results of the peg. the chinese currency to that of the u.s. dollar is that just is that what's really holding them back in a certain sense and if they d. peg what would the results of that being well what peg i mean in fact the r. and b. the chinese currency has appreciated against the dollar quite so in a narrow band in the narrow band but it's certainly not a peg anymore and if you look at its real exchange rates if you look at a broad measure not just the dollar rate the appreciation is significantly more striking so china partly because of its relatively high inflation and partly because the nominal peg has been crawling upwards is in fact losing the currency war right now relative to japan where its plan has pursued an aggressive
depreciation strategy. with corrode the bank of japan china's kind of like on the back food because the chinese policy which was as you say pegged to the dollar and essentially use that peg to undervalue the currency and keep chinese exports competitive that's all that's gone and the chinese is trying to figure out what the right policy should be in this new era where the very aggressive policy is being pursued by the us by the bank of japan and others the bank of england for that i think for some for some policymakers a somewhat appreciating currency is not a bad thing eight discourages capital flight be it paves the way to remember the internationalization it's very interesting of this in shanghai a couple of weeks ago to see the governor joe of the people's bank of china is talking open internationalisation of the art is amazing and opening up the cap look at that used to be discussed as something in the very distant future and
policymakers are not talking about this is if it's going to happen this year so that is a major change and i think we're going to see r. and b. regionalize ation increasing use of the r. and b. in international transactions and in that sense the days when policy was just we currency exports and growth. that policy's gone. that was neil ferguson author of the great generation stay tuned because up next we'll play my interview with ben willis from the floor of the new york stock exchange we get in the high frequency trading both the good and the bad yes there is some good and talk about the diminishing role of humans in modern trading and then political commentator sam sachs joins me to dual about the role of the speculator.
me asking me and. finally as promised here's my interview with ben willis from the floor of the new york stock exchange where we talk about the vanishing liquidity in the markets h f t and how to buy protection in these crazy market times. i'm standing here on the stock exchange floor. with the third best thanks for joining me now you said that you've been here thirty years what have you been doing this entire time and how that how things change i continue to learn something new every day it's thirty years i come in some things always change so i mean the most dramatic change for me has got been from trading on pay for and learning stock symbols to trading electronically and having a heater in my head that's replaced paper and where are all the h f t algorithms
that i keep hearing about they're not on the floor here they're in the data center so they're here there and i wish i had brought my handheld camera with me i looked at my both of my power here but there imbedded in our head else ok you know high frequency trading often gets a bad knock not all high frequency trading is predatory sure and some of it education is widely credited it's it's it was a necessary tool to interact in the marketplace as it evolved and became more electronic. unfortunate that a limited a lot of the human influence of the marketplace that we now wish we had the new york stock exchange. check that particularly in times of trouble but you know the high frequency trading here most often about is the predatory model that shoot against the trade against other natural participants they have no reason to be in a market that trade against somebody else or a flow that i don't get and you see it as a natural evolution the march toward electronic trading i mean how how is this war
going to look in five or maybe even ten years i don't think it was natural i think was government intervention in the process of all our competitors buying votes in washington. we were at the we were the the platinum or the diamond standard of trading in the world and our competitors like what we had but didn't want to spend the money to get in the door here so they spent the money in washington and that would be reagan and reagan as we have both trading and trading. in penney's fracturing the marketplace where they basically see three major four major trading venues you can now trade in up to eighty different venues in any given day that has done nothing but drain liquidity from each of those holes and left a really awful hole and now we have dark pools and that's maybe ten four percent of total volume what is that how is that impacting your business in your stack exchange the original dark when we would post the full. half three quarters in
a marketplace and most participants would then he's a member to come to the floor and find out where they could trade a block of stock that's not electronically pain and that's where those high frequency traders come in they came in those dark pools to sense where their supply and demand and trade against it but one of the reasons they've gone dark and try and remain dark is to avoid being detected by the marketplace that's not a successful model and you think there is still a role for humans to capture back maybe what was lost a few years ago with electronic trading and so i think my analogy is this where you get out you could probably fly in a plane for five dollars from here to the los angeles if there were no pilots but if you need a pilot when you take off you need a pilot when you land but more importantly you want a pilot case to hit turbulence in the middle of the day for a middle of flight that's what we do for the human element that intervenes and says wait a bit there's something wrong here we've actually been restricted from doing that by our government telling us what we can't do and i can tell you that a short time a choice at night trading wish we had
a little bit more involvement people should knew there was a problem and we want to allow to do anything with the order flow till night literally on what their computers are right and of course they're out of business now and we were here on the flash crash what happened that day and what kind of restrictions were there on you another great example where the flash crash was shot heard around the world sir not a single trade on the floor of the new york stock exchange that they had to be broken because we hit what we called r l r p the stocks reached a where point. it professionals and humans to the point of sales a way to do something so we slow down trading and palaces and in this less than less then sixty seconds we retreated every single one of those stocks that trade here but in that sixty second time period the rest of the world lost their mind and stocks are trading at fifty dollars trade it authentic and of course a lot of those got to pay if they go ahead will they wind up having to break those trades but that was a great example of what happens what and happen again with the might the bottle
right and can happen which is why it's so important to have humans at the point of sale if your stock is sure you really want to be at the hands of the computers and so we saw what happened the flash crash we saw what happened with facebook and it's not pretty you know the basic plans i think you know disaster that happened with nasdaq and there i think as tech is getting the biggest fine ever for that as a result but let's move on it's apple and see day right is it a big day here at the exchange because of that well the expectation was was built into the marketplace and we had nothing but disappointing but sometimes you have a system or was very quiet at waymark very quiet going into the meeting once we got the announcement we start the pick up a little bit but basically what i'm saying is all asset classes across the board not only equities which are down about one hundred forty points on the dow right now but the bond market is really getting hit hard and that is a little bit that's a little this concerning because i think what's really happening is what the natural evolution of interest rates will eventually rise there will be tapering and
that will be a buying opportunity for investors in the equity market so when you see sell offs like this that's when you should have your shopping list ready to be buying the stocks if you know what they are what they're worth that they're probably being sold at a discount ok and we're heading into summer now this summer doldrums are kind of famous for supposed to sell in may and go away that really didn't work so well in may but we lost four points on the upside to your portfolio if you did that so what do you see here for the summer in store for us a fortune i don't see a lot of the trade. it's going to continue to dry up and what will be interesting is the volatility has continued to increase since may because the fed is giving indications or i would tell you that the fed has begun tapering just by the fact that there is what i called job and it's a much more tool in the federal federal reserve and any central bank still blocks the fact that they're talking about is having the side impact so they're having a test below they're seeing what's happened to heals on the bond market they saw what happened to equities so rather than popping
a bubble there deflating it and so far it seems to work so far so good we hope it continues you mentioned volatility are you seeing anything in the vix that's interesting long dated premiums are they going up or the vix is very interesting and it had a pretty good move up although today i'm sure it's growing up even even further as you speak for the markets and it's been fairly dormant by historical standards but the place where i would tell those people that are only investors they want to spend money rather than buying stocks where they were may i thought they were overpriced you're better off buying a little vexed by the protection when i the correction that will happen does it will make money on your fixed position that should help offset the loss then thank you so much for joining us as this is a pen and we are out of here thank you so much.
looking at you it's a little bit different in the bumper but joining me today political commentator sam sachs now when it comes to agriculture the world food prize is the equivalent of the oscars and this comes from a new york times story this year the prestigious award went to the mastermind behind monsanto's big move into genetically modified crops in terms is like a commercial blockbuster winning best picture rather than an independent artsy film but whatever. think about monsanto despite increases in crop productivity nearly every year prices are rising so sam my question for you is this because of the speculators probably look i don't have a problem with speculators i think in general you know speculators sever purpose in the market when people need to sell their oil out of the market and nobody is buying oil they need to speculators come in here and hold the contracts the problem is ramp it speculation which is what we're seeing now the big banks have found
a new market to make a lot of money and that's betting on the price of oil and unfortunately those bets can have significant consequences on the actual price of oil if you if enough people bet that the price of oil is going to go up and by futures contract it's going to go up the price of oil will go up and that has really nothing to do with the supply and demand of oil so the guy who likes free market i think you would be opposed to that to what free markets are we looking at here these big banks they enjoy huge subsidies i mean they're basically subsidized by the federal reserve both in real and notional terms i mean they get their money from the fed and from being able to conduct these transactions and like you said j.p. morgan itself has a huge hand in the role of oil speculation but that doesn't mean that it's a problem that has to do with free markets and i think there is a big difference between what people call deregulation and free markets so it's not a failure of freeloaders we just don't have there's a market for rampant speculation i mean that market's been created now it's a matter of whether we want to keep perpetuating that marketing keep letting it run free or whether we're going to start creeping down in the market now that we see the effects of such remark ok so you're
a central planning kind of guy how do you want to clamp down on these speculators with well i mean there's no i mean the president obama's actually taken on this issue kind of you know we always know you have to you know talk about see if you see proposing more rules on. speculators you know it's tapering you more transparency to it you're right it always gets table because we know where the lobbying interests lie and we know who usually wins when this sort of sort of my question to you is how do you make your central planning theory work like how do you rein in these markets that are not. to begin with you just impose arbitrary guidelines on them and who gets to make those decisions if not you yourself me myself and my central planning. perfect economy i'm the central planner here and i know it in a way that look in two thousand and ten i think it was you had you had rampant speculation in the fact that roughly the same amount of oil that was consumed in china was also bought by speculators in the united states and of course you see the
prices in two thousand and eight the price of oil went up to four dollars four dollars a gallon i mean and it came down to one hundred forty dollars per barrel and then it came down to thirty dollars and that was actually below the cost that it takes to dig it up from the earth whether it's the high price or the low price it has nothing to do with what the price should actually be based on supply and demand if you talk to opec as these prices were going up in two thousand and eight they're like we have no health care there's no problem with this what is the underlying problem the reason that there's so much money flowing into these paper markets whether it's oil whether it's gold or whatever it is because that is basically giving it away now i'm all about free markets so i would say and the fed you know and the subsidies to the big banks and they can just they can figure out some other line of business to get into i agree with you one hundred percent we should do all those things and the other thing we should do if you don't want to speculate or want to get in the market and they want to speculate and buy a million dollars worth of oil or a million barrels of barrels of oil they have to actually take possession of those
million barrels of oil that no one else wants about that's what you need to do when you do your speculating and what about my speculating well i hear you do a lot of speculating bob and i think you should take possession of all the things you speculate on such as what i think we have there it is. that's really are distributed. all right this with them sacks and if you want to weigh in on today's show be sure to like us on facebook at based up facebook dot com slash prime interest and don't forget you can follow them on twitter at sam sachs and you can follow me at. santa. thank you so much for joining us on the door to us. well it was a topsy turvy day here at prime interest first we saw both stocks and bonds
marching down in lockstep to the bernanke you two step then i boarded the express train to new york to talk about the backward ization of liquidity in the markets and the vaporization of our own most sapient traders neil ferguson turned our hope for the west upside down and super sam sachs made us question the role of the speculator of the not for too long so thanks for watching and make sure to come back tomorrow from everyone here a prime interest of a great night. here is mitt romney trying to figure out the name of that thing that we americans call. i'm sorry i missed the guys here and. you saw our little you know what.
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mobile device you can watch on t.v. anytime anywhere. today on politics the conflict in syria and what it means for the president of the united states and the world former ambassador to morocco weighs in plus our politics panel. you need to know that's next on politic would larry king. politicking i'm larry king the obama administration's decision to start arming some syrian opposition groups as were folks sharply makes reactions here to discuss that now a lot of other international issues as ambassador marc ginsberg and.