Following is the full transcript of CNBC's exclusive interview with Richard Fisher, Senior Advisor for Barclays. This interview broadcasted in Asia on Friday, 15 September at the 2017 Singapore Summit.
All references must be sourced to a "CNBC Interview".
Interviewed by Amanda Drury, Contributor, CNBC.
Amanda Drury (AD): I'm sitting here with Richard Fisher, who is currently Senior Advisor to Barclays but he has a lot of feathers in his cap. For example, from 2005 to 2005, he was President of the Dallas Federal Reserve – also a member of the FOMC. But the one that probably is the most instrumental in giving him a great insight into what we should be doing about North Korea is the fact that under Bill Clinton, back in the 1990s, he was the Deputy US Trade Representative. And he was also part of the discussions and part of clinching the US-Korea car agreement, auto agreement, which also led into then, the free trade agreement between the two countries. So let me get to him now. Richard, it's great for you to join us today, here at the Singapore Summit and I'm sure you know you've been watching all the news about North Korea and trying to work out, you know, what we should be doing with regards to getting them to toe the line. Do you think that what has been done so far is enough? And what would you do?
Richard Fisher: I do. And as you may know Mandy, I've spent some time on the DMZ many, many years ago. That tension is palpable. It's a war zone. It's still a hot zone and it's, you have to bear in mind how close these two countries are. Literally you could stop cross-border (and) you're in the other country. Each one worries about the other. And this has to be resolved at some point. The key is China. They have taken some measures. We are taking measures and the United States to penalize Chinese companies that do business and bankers, in particular, that work the accounts for this dictator and his people. But it's going to be a very delicate process. That's all I can tell you.
AD: It is an absolutely frightening process for the globe. I mean, some people would argue that if the right moves had been made already then Mr. Kim would be starting to play ball. He's absolutely not playing ball -
Richard Fisher: Well, there is a little history that involves Singapore here because Lee Kuan Yew, when Clinton was first put in office as a young president, the first visit and conversation he had with Lee Kuan Yew… Lee Kuan Yew warned him that if this wasn't dealt with, North Korea would become the world's nightmare. Nothing was done. And then successive presidents, whether it's George W. Bush or President Obama or whoever it may be, they took a different route. And meanwhile this boil began to fester and now is the most frightening thing confronting global stability.
AD: Do you think that the way the United States is, at the moment, putting pressure on China and China is, of course, saying that we're doing all we can here. Do you think that that's going to backfire?
Richard Fisher: I don't think so. I mean, first of all our relationship is much broader than this. This is a big disrupter. The Chinese cannot be happy that they had an underground nuclear explosion, supposedly the power of a hydrogen bomb, which shook the soil in China. And one of the myths is the Chinese are worried about being flooded with North Koreans coming across the border. It's a rounding error for China. That's not the issue. The issue is their security on the southern border and making sure there aren't U.S. troops that move up or somehow we eliminate that pad that North Korea provides. That's going to be the key to success.
AD: Every time North Korea, you know, sabre rattles, fires up and does a nuclear test, we do see flows into safe havens. And U.S. treasuries have been one of the beneficiaries of that. Bond, with yields so low, it feels like Bonds are telling us one story about the global economy, geopolitical risks, Trump's stimulatory agenda - or lack thereof at this stage of the game. And equities, at record highs in the United States, are telling us a different story. Who's right? I mean, history has said that quite often it's the bond investors who have been the smart ones?
Richard Fisher: Well, the yield curve has been quite flat but it's not just the United States - it's flat in China. I just came, as you know, to see you from Shanghai. And these markets are artificial because of the central bank intervention, the amount of liquidity that's been pumped out of the system, all the quantitative easing that took place or other measures like they've taken in China to stabilize things before the Party Congress. So I don't think the curve is telling you very much. We did have a very weak 30 year auction this week in the United States. It did a two, 10 and 30. And I think the markets began to gag on these low rates. But it's important to keep this in perspective. Right after Brexit, that week in July, the ten-year U.S. Treasury was at 136 and now it's at 218 or wherever it may be trading as we speak. That's a big move. And yet, you would think that the markets would have rediscount of future cash flows based on that incremental change. They haven't. They've continued to rally. But you know, you sense when you read market commentary (that) everybody's very nervous.
But they're all participating in this and they're watching their backs at the same time. So we'll have to see how this (goes). We're at least one standard deviation out of normal valuation range. Or at a minimum, we're priced to perfection in terms of the equity market. So I think it's little bit skittish these kind of events like this –
AD: You think we're priced for perfection in equity markets?
Richard Fisher: In the United States, we're priced beyond perfection.
AD: So it wouldn't take terribly much to have the correction which we have had every single year since 1995 but not yet this year. Do you think we're on tap for one?
Richard Fisher: Well, someday we will. The business cycle works its way. The markets don't go straight up to the sky. But I think it's possible and it could be severe or could be minor. But I think we're pretty well fully-priced based on these very positive low-bar deals that we have around the globe.
AD: In which case, we don't need an aggressive Fed at this stage of the game?
Richard Fisher: Well, we don't need an aggressive North Korea – that's the other thing. So this, little tripwires, little black swans that we see – or as the Chinese call them grey rhinos. I wonder what about that word. But no, I do think that the Fed, first of all, has made it clear they're going to start reversing the sign on the balance sheet. It's a very gradual process. They'll probably start in September.
AD: Next week
Richard Fisher: Yep, and they still have room to increase the short rates 25 basis points. And if I may just put this in perspective, we have a dual mandate at the Federal Reserve. Inflation is running well under two per cent - even though the purchase price index, PPI, came a little bit stronger if you analyze it. That's not what they're doing here. What they want to do is, sort of, buy back some of the balance sheet. Have something to give back, in the case the business circle cycle eventually turns. We're in the ninth year of our economic expansion. We haven't had much more than 10 years in history. We could extend it out but eventually they want to be able to soften the slowdown in the economy. They have to have some rate increases to do that.
AD: They absolutely need some ammunition…
Richard Fisher: And they also need space in their balance sheet. So this isn't the dual mandate at work here. it's really prudent Management of their balance sheet and the interest cycle.
AD: But back when you were at the Fed you were a known hawk.
Richard Fisher: Yes
AD: And probably in about two weeks' time, at least we're hoping that we're going to get an outline of tax reform and there's this Ryan's outline
Richard Fisher: Right.
AD: And there's probably trumps outline and somehow we have to reconcile with each other. And it's a very it's a very fine line. We don't want anything that has too many goodies because that stimulate the economy too much and that the Fed might have to then be very aggressive down the line. You also don't want too little. What would be the right amount? What are you looking for? The problem for the economy at this stage of the cycle?
Richard Fisher: Again we're late in the cycle. We're fully employed. There's 6.2 million jobs are unfilled in the United States. You can't get it better finely-tuned than it is now on current policy. In order to extend the cycle we're going to have to fiscal policy. I was involved with the monetary policy side. And I think we're going to have to have some encouragement for businesses to grow their top lines, increase their cap-ex, still create even more jobs and prolong the cycle. And that's what this exercise should all be about.
AD: Do you think we're on track for a December hike from the Fed and then what would be a trajectory after that?
Richard Fisher: I don't think a quarter point would hurt again because you want to have some purchasing power in your little pocket in order to mitigate any downturn when it occurs and they have a long way to go. We're still just at minimal Fed funds rates.
AD: Ms. Yellen is being very coy about what she's going to do –
Richard Fisher: She's a lovely person, just so you know. We've been friends for a very long time.
AD: She looks absolutely lovely. She may retire in February, she hasn't said either way. What do you think she's going to do? And who do you think… there's lots of names being speculated about, such as Thomas Hoenig and Gary Cohn. If she does retire, who do you think would be a suitable replacement?
Richard Fisher: I think it's sort of a fool's game to guess on this thing. We all know who's campaigning for, whether it's Kevin Warsh on the young end of the age cycle – all the way up to… who knows? Even Marty Feldstein, I think, dreams of becoming Fed Chair.
AD: What about you?
Richard Fisher: Well actually, the poll of economists had me at 4.6 something per cent. But it was ahead of Jamie Diamond So I told Jamie Diamond, "I'm more influential than you are." Ha! As if. But anyway that's where we are. And I do think that she's done a good job. Her job was to begin to wind down. Just get it started - what we call "the exit". My last words with her, and she reminded me of this when they after they made their announcement, were "Your job, Janet, is to begin reversing the sign on the balance sheet. Do it gradually." I think she's accomplished that mission.
We'll see whether or not they take that first step, which they've pretty clearly signalled, in September at the meeting. The meeting's that's upcoming. And then she will have done what, I think, God put her in place to do. And just start the process of reversing the Bernanke era, which was very necessary to do, and now change the sign. We're seeing that - we're about to hit the Bank of England as well. We're beginning to see it elsewhere as well. Saw it in Canada, for example.
AD: Just very quickly, because in the wake of Hurricane Harvey, it devastated Houston and other parts of southern Texas. You're - very close to your heart, naturally. You have said that the rebuilding and reconstruction cannot be done without Mexican labor. What do you think needs to be done on immigration policy, because Trump has been rather harsh.
Richard Fisher: They're going to have to give him breathing room here. Every home in America - whether it's Portland, Oregon or Portland, Maine or there's a little town called Portland, Texas - was built by Mexicans. They're the best laborers. They're the ones that want those jobs: roofers; tilers lumber hammers, whatever it could be. And you're not going to be able to rebuild Houston without Mexican labor. So this is an interesting test case and you can't build, rebuild Florida without Latino labor. We'll see.
AD: We will, indeed. It's been a real pleasure to talk with you Richard, thank you so much for your thoughts today.