WEBVTT - Surveillance: Expansionary Programs With Kocherlakota 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom keene Jaily. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.640 --> 0:00:27.360 Bloomberg dot Com, and of course on the Bloomberg Paul, 0:00:27.440 --> 0:00:30.240 thank you with missouris where us part of an acclaimed 0:00:30.360 --> 0:00:33.839 teen years ago without Saminski and company and now at 0:00:33.920 --> 0:00:38.320 missoo O doing granular work on oil. Paul, just just 0:00:38.479 --> 0:00:41.280 simply to your research note for this weekend and to Monday, 0:00:41.600 --> 0:00:46.120 what part of this collapse are you most focused on. Well, 0:00:46.200 --> 0:00:50.120 we're obviously following the end of the lockdown, but as 0:00:50.159 --> 0:00:52.120 you know, some of the data, for example out of 0:00:52.240 --> 0:00:56.120 Japan is headed in the wrong direction completely. But as 0:00:56.200 --> 0:00:58.560 you know, the overall problem here is a demand one 0:00:58.880 --> 0:01:02.280 and generally or less, as you also note on focus 0:01:02.400 --> 0:01:04.880 far too much on the supply side. The fact is 0:01:05.000 --> 0:01:08.720 that demand here is is so low relative to anything 0:01:08.760 --> 0:01:11.959 we've previously seen before. It's just a major major problem 0:01:12.440 --> 0:01:15.959 managing the market. That's why we've seen negative prices. It's 0:01:15.959 --> 0:01:19.880 a physical challenge to manage the market and that's manifesting 0:01:19.920 --> 0:01:22.520 itself very clearly in the tape, Paul, are we going 0:01:22.600 --> 0:01:26.040 to see negative prices again on the June contract? It 0:01:26.120 --> 0:01:28.720 depends if people are dumb enough to get caught again. 0:01:29.280 --> 0:01:31.880 I think once you do go into that negative situation 0:01:32.800 --> 0:01:35.400 um where you know you've got to get out for 0:01:35.959 --> 0:01:38.919 any price in order to avoid taking delivery of the crude, 0:01:39.640 --> 0:01:42.360 you could notionally go to any kind of price, you know, 0:01:42.440 --> 0:01:45.080 sort of day before. I think what happened here wasn't 0:01:45.080 --> 0:01:48.160 so much the USO. It was more c T a S. 0:01:48.680 --> 0:01:51.600 Commodity trade advisors who have to get out the day 0:01:51.640 --> 0:01:55.080 before settlement and not allowed to hold a physical position, 0:01:55.600 --> 0:01:57.680 And I think they were probably the sellers that caused 0:01:57.760 --> 0:02:00.400 us to go to minus forty. Once you break loose 0:02:00.680 --> 0:02:02.840 into that sort of territory, obviously you can go just 0:02:02.960 --> 0:02:06.480 about anywhere. It's not if you like a totally real price, 0:02:06.560 --> 0:02:10.239 but it's certainly showing you that there's a massive problem 0:02:10.320 --> 0:02:13.440 with managing oil physically at the moment. I'll try carefully here, 0:02:13.560 --> 0:02:15.959 really carefully if I can. But some people in the 0:02:16.040 --> 0:02:18.320 all patch are obviously very unhappy with the price action. 0:02:18.400 --> 0:02:21.519 Continental Resources Harold Ham came out and asked for a 0:02:21.600 --> 0:02:25.679 probe into what he thinks suggests might be manipulation in 0:02:25.760 --> 0:02:28.400 the commodity market. Paul, it made me wander and I 0:02:28.440 --> 0:02:31.000 asked this question with the greatest respect for anyone working 0:02:31.040 --> 0:02:33.480 in the industry industry, but whether any of these owners 0:02:33.600 --> 0:02:36.760 of say Continental and others too have had the reality 0:02:36.840 --> 0:02:39.160 check about what's about to happen and the support that 0:02:39.240 --> 0:02:42.639 they may or may not get from the government, well, 0:02:42.919 --> 0:02:45.280 I think they would definitely slow to recognize the scale 0:02:45.320 --> 0:02:48.440 of the problem. I wouldn't single out any particular name 0:02:48.520 --> 0:02:50.680 for this. I think the industry in general couldn't quite 0:02:50.720 --> 0:02:54.919 believe what was happening. Obviously, it was an incredibly quick event. 0:02:55.080 --> 0:02:57.800 I mean we went from sailing along fairly normal at 0:02:57.840 --> 0:02:59.919 sixty dollars a barrel on the first of the year 0:03:00.600 --> 0:03:03.000 to a total and after collapse within three months. That 0:03:03.080 --> 0:03:05.839 occurred over the course of about two weeks, so I'm 0:03:05.840 --> 0:03:08.799 not surprised they were they were called short. However, you know, 0:03:09.000 --> 0:03:12.600 very early we were calling for negative prices seeing how 0:03:12.720 --> 0:03:15.200 bad the problem would be. And I'm surprised, for example, 0:03:15.320 --> 0:03:18.359 someone like Concho Phillips it was quite slow to cut. 0:03:18.480 --> 0:03:20.840 I mean, they've got there now, but it was it 0:03:21.000 --> 0:03:23.600 was not as quick a response as we expected from 0:03:23.639 --> 0:03:26.640 the industry given the severity of the downturn. I think 0:03:26.680 --> 0:03:29.320 that we have been a bit negatively surprised by how 0:03:29.400 --> 0:03:31.079 slow it seems it's going to going to be to 0:03:31.160 --> 0:03:34.160 get out of this unfortunately. Um and that you know, 0:03:34.200 --> 0:03:37.160 I'm sympathetic obviously, it's a very difficult situation to manage. 0:03:37.920 --> 0:03:40.160 I think, just to build on that point, there also 0:03:40.320 --> 0:03:43.400 was a probe by the CFTC into other trading that 0:03:43.560 --> 0:03:47.800 was revealed yesterday by Bloomberg and possible manipulation. And there's 0:03:47.840 --> 0:03:51.080 a real question here how much was some of the 0:03:51.280 --> 0:03:55.600 turmoil stemming from people with advanced knowledge of negotiations out 0:03:55.640 --> 0:03:59.880 of Russia, etcetera, versus a lack of an awareness of 0:04:00.040 --> 0:04:03.120 the reality or perhaps denial of the reality that's still 0:04:03.600 --> 0:04:06.720 is being denied to this day. Well, you know, that's 0:04:06.760 --> 0:04:09.600 the crazy thing about the whole situation with with OPEC 0:04:09.800 --> 0:04:13.760 is that there's really no limitation on insider trading. I mean, 0:04:13.800 --> 0:04:17.200 I guess the CFTC can try and go after people, 0:04:17.279 --> 0:04:19.800 but the reality is this is an active cartel that's 0:04:19.839 --> 0:04:25.480 trying to manipulate the market. And also, Paul, just reflect 0:04:25.560 --> 0:04:28.120 on if anyone that's ever been to Vienna or spoken 0:04:28.160 --> 0:04:30.520 to someone that's been to Vienna and watched how this 0:04:30.680 --> 0:04:34.400 meeting operates. The idea that some information slipped through the cracks, 0:04:34.960 --> 0:04:37.240 I mean, come on, it doesn't surprise me at all. 0:04:37.800 --> 0:04:40.320 I would say that it's an active competition to be 0:04:40.480 --> 0:04:43.960 first to give the inside information. But you know that's 0:04:44.000 --> 0:04:46.560 the wild west of the oil market, and you know, 0:04:46.800 --> 0:04:49.120 the regulator I think, can yell at the Russians or 0:04:49.160 --> 0:04:51.839 the or the Satis or whoever. I'm not tingling anyone 0:04:51.880 --> 0:04:56.000 else across the board an active attempt to manipulate the market. 0:04:56.080 --> 0:04:59.680 I mean it's quite open, Paul. There ever was a 0:04:59.760 --> 0:05:03.960 four masure, This is it, and I get to a sovereign, Well, 0:05:03.960 --> 0:05:06.880 it's funnesced to take its lumps and move on. What 0:05:07.040 --> 0:05:10.360 does Saudi Arabia do, What does Kuwait do? What does 0:05:10.520 --> 0:05:14.040 Nigeria do? How do they affect a force masure in 0:05:14.160 --> 0:05:18.680 their core economy? Well, I think you can see clearly 0:05:18.760 --> 0:05:22.600 what's happening strategically through the Saudi official selling prices right 0:05:22.680 --> 0:05:25.480 and what we saw here, interestingly, I think very much 0:05:25.600 --> 0:05:30.360 post the President Trump's President Trump's intervention was that prices 0:05:30.440 --> 0:05:33.680 were raised by Saudi Arabia to the US to reduce 0:05:34.440 --> 0:05:36.479 their sales to the US, but at the same time 0:05:36.600 --> 0:05:40.120 they maintained a very aggressive pricing into Asia, which by 0:05:40.160 --> 0:05:43.920 the way, the next day was matched, if not undercut, 0:05:44.000 --> 0:05:46.440 by Iraq, where I think one of the big tensions 0:05:46.760 --> 0:05:50.280 in the market today is the Saudi versus Iraq uh 0:05:50.440 --> 0:05:54.920 stroke Iran price competition into Asia, which is very interesting 0:05:55.480 --> 0:05:57.800 in terms of what they can actually do that that's 0:05:57.839 --> 0:06:01.000 been a major question, and this is very you know, 0:06:02.040 --> 0:06:05.560 I've taken the OPEC meeting was it's it's very much 0:06:05.600 --> 0:06:08.560 rearranging deck chairs on the Titanic insofar as you're going 0:06:08.600 --> 0:06:10.120 to have to cut whether you like it or not. 0:06:10.960 --> 0:06:13.520 A very good example being Nigeria tom where they've just 0:06:13.600 --> 0:06:16.720 simply been able to unable to sell their all because 0:06:16.800 --> 0:06:19.840 there's no market and m and that's obviously what we 0:06:19.880 --> 0:06:22.480 saw with the negative price as well. It's it's just 0:06:22.560 --> 0:06:24.760 an epic challenge because as you know, the ord industry 0:06:24.800 --> 0:06:28.000 is efficient and it runs with relatively low inventory. This 0:06:28.200 --> 0:06:31.400 just surpasses any capacity to actually manage the oil shorts 0:06:31.440 --> 0:06:34.440 of shutting down production. The Saudis are in good shape 0:06:34.480 --> 0:06:37.599 in that regard because they're so heavily invested with such 0:06:37.600 --> 0:06:39.960 a sophisticated oil system that they can just turn a 0:06:40.080 --> 0:06:44.520 volume knob and change their production. Others, you know, such 0:06:44.560 --> 0:06:47.120 as Nigeria and such as produced in the Permian, they're 0:06:47.120 --> 0:06:49.719 going to find it more difficult to do an orderly 0:06:49.760 --> 0:06:54.560 shut there. What price does the cartel need to break 0:06:54.640 --> 0:06:58.560 even out a fiscal basis just the stability of their governments? 0:06:58.600 --> 0:07:02.360 What price do they need on a ended basis? That's 0:07:02.400 --> 0:07:04.680 fairly well reported by the I M. F. Tom. So 0:07:04.839 --> 0:07:08.200 you'll see about seventy two eighty for sauity, about forty 0:07:08.279 --> 0:07:12.120 to fifty for Russia. I read a hundred and fifty 0:07:12.200 --> 0:07:15.120 for Algeria. You know, one of the one of the 0:07:15.200 --> 0:07:18.240 amusing conceptual things I've highlighted is what do you think 0:07:18.280 --> 0:07:21.200 to break even is? For the US Government's probably about 0:07:21.200 --> 0:07:23.480 a thousand dollars a barrel based on the current epit. 0:07:24.040 --> 0:07:29.040 But but now in all seriousness there's an issue there. 0:07:29.080 --> 0:07:30.680 Of course, the Saudis will tell you they have the 0:07:30.720 --> 0:07:33.680 capacity to raise death um, you know, so they can 0:07:33.880 --> 0:07:35.960 run at a depthosit obviously, and as you know that 0:07:36.120 --> 0:07:38.559 cash brain even as closer to ten dollars a barrel, 0:07:39.000 --> 0:07:41.680 they can get along. Since I'm hugely stabilizing. I mean, 0:07:41.720 --> 0:07:44.280 this is going to really cause problems in many places, 0:07:44.320 --> 0:07:47.720 and I think Russia is probably the most interesting, you know, 0:07:47.800 --> 0:07:50.680 in terms of the difficulties they're going to face financially, 0:07:51.040 --> 0:07:54.440 there are and obviously as another major candidate for serious prominence. 0:07:55.000 --> 0:07:56.920 Let's do this again, Paul, thank you, thank you. Someone 0:07:57.000 --> 0:08:02.720 from the zoo just really really appreciate it. Right now, 0:08:03.240 --> 0:08:06.520 you'd like to digress over to the equity market, John, 0:08:06.600 --> 0:08:08.440 Lisa and I all looked at our one on one 0:08:08.560 --> 0:08:11.360 case and said, let's get somebody on who can give 0:08:11.400 --> 0:08:16.080 us confidence forward. Sevida Supermannian advises for the Bank of America, 0:08:16.160 --> 0:08:20.200 where she's had of equity and quantitative strategy as well. Sevina, 0:08:20.320 --> 0:08:24.040 what is the quantitative observation right now? What is the 0:08:24.280 --> 0:08:28.440 mathiness right now you're focused on? Yeah, no, it's a 0:08:28.480 --> 0:08:30.400 great question. So I think there's a couple of things 0:08:30.520 --> 0:08:33.800 going on. I think from a stock perspective, what we're 0:08:33.840 --> 0:08:37.800 noticing is that the dispersion of stocks has actually increased 0:08:37.840 --> 0:08:41.120 to close to record levels. So what this means is 0:08:41.160 --> 0:08:45.280 that stocks are behaving very very differently from one another um, 0:08:45.360 --> 0:08:49.120 which suggests that there's UM increasing alpha to be made 0:08:49.240 --> 0:08:52.720 or increasing performance money to be made um from stock 0:08:52.840 --> 0:08:56.439 selection rather than just buying or selling the market, or 0:08:56.880 --> 0:09:01.600 buying or selling sectors or broad slabs uh um of companies. 0:09:01.640 --> 0:09:04.079 So I think this is a different environment from what 0:09:04.200 --> 0:09:06.480 we've been in for for you know, the bulk of 0:09:06.559 --> 0:09:10.120 this bull market, where stocks have been very correlated and 0:09:10.520 --> 0:09:14.199 um and have behaved very similarly. Uh So I think 0:09:14.280 --> 0:09:16.800 that's one trend that's that's very different. And then I 0:09:16.920 --> 0:09:19.839 think the thing that's worth pointing out is it for 0:09:19.960 --> 0:09:25.599 equity investors, time is actually the best barbitrage opportunity. And 0:09:25.679 --> 0:09:28.160 what I mean is if if you just extend your 0:09:28.240 --> 0:09:32.439 time horizon on US equities, there's a very unique characteristic 0:09:32.520 --> 0:09:34.880 of stocks where you know, if you look at tenure 0:09:35.000 --> 0:09:37.720 returns of U S stocks, they have very rarely been 0:09:37.800 --> 0:09:41.000 negative less than four percent of the time, which compares 0:09:41.600 --> 0:09:45.679 very favorably to commodities, which you know, commodities returns have 0:09:45.800 --> 0:09:49.360 been negative of the time over ten your periods. So 0:09:49.480 --> 0:09:52.199 I think that the key here is pick stocks and 0:09:52.360 --> 0:09:56.000 extend one's time horizons. Because obviously we're in a rough 0:09:56.080 --> 0:09:58.800 patch right now. Okay, let's say I do that, extend 0:09:58.840 --> 0:10:01.120 the time horizon. And then as you a pretty basic question, 0:10:01.160 --> 0:10:04.839 do I need to pay attention to earning season? You know, 0:10:04.960 --> 0:10:07.280 I think earning season is important in the short term, 0:10:07.360 --> 0:10:09.440 and and again, you know, I think that's what's driving 0:10:09.480 --> 0:10:12.559 the dispersion between stocks, is that we're seeing, you know, 0:10:12.720 --> 0:10:16.360 even within consumer staples, some companies are doing better than 0:10:16.400 --> 0:10:19.800 others depending on what their retail channels are. Um. You know, 0:10:19.880 --> 0:10:22.199 if you sell outside of the grocery store, you're not 0:10:22.320 --> 0:10:24.160 doing as well. If you sell in a grocery store, 0:10:24.200 --> 0:10:27.240 you're doing well. So I think that there are definitely, um, 0:10:27.480 --> 0:10:29.320 you know, kind of themes that were that we're seeing 0:10:29.360 --> 0:10:32.199 across earning season. But but you know, I think that 0:10:32.360 --> 0:10:36.679 even earning season is relatively opaque, so very few companies 0:10:36.720 --> 0:10:40.480 are actually offering forward guidance. In fact, the bulk of 0:10:40.559 --> 0:10:44.079 companies have just stopped talking about earnings guidance for the 0:10:44.160 --> 0:10:46.760 year because we are in a little bit of a um, 0:10:47.040 --> 0:10:49.520 you know, kind of an opaque period in terms of 0:10:49.600 --> 0:10:53.600 how long this business shutdown last um, you know, kind 0:10:53.640 --> 0:10:56.280 of what what the what the impact is going to 0:10:56.320 --> 0:10:58.640 be on earnings. So, you know, I think the earning 0:10:58.679 --> 0:11:01.160 season is important in terms of picking stocks, But I 0:11:01.480 --> 0:11:03.839 actually don't see it as giving us much of a 0:11:03.920 --> 0:11:07.600 guide for how to navigate the next few few quarters. 0:11:08.240 --> 0:11:11.559 How much is buying stocks here a bet on the 0:11:11.600 --> 0:11:15.520 Federal Reserve back stopping the market? Yeah, I mean I 0:11:15.880 --> 0:11:19.440 I personally think that that upside is in the market 0:11:19.559 --> 0:11:23.800 because we've essentially heard say they're going to buy almost anything, 0:11:24.280 --> 0:11:27.520 and um, you know, they're they're buying as the classes 0:11:27.600 --> 0:11:30.400 that they had previously never touched, like high yield bonds. 0:11:30.840 --> 0:11:32.760 So I think that that the good news from the 0:11:32.840 --> 0:11:35.480 set is our in the stocks and they've provided a 0:11:35.559 --> 0:11:40.679 backstop against a major liquidity meltdown. But from here, I 0:11:40.840 --> 0:11:43.760 think the real bet that we're making in buying or 0:11:43.800 --> 0:11:47.960 selling stocks is that the crisis is contained within let's 0:11:48.000 --> 0:11:51.680 call it the first half, and that this is a short, 0:11:52.040 --> 0:11:56.160 kind of a sharp economic recession with either a V 0:11:56.400 --> 0:12:00.319 or a you know, kind of a reasonable U shaped recovery. Um. 0:12:00.440 --> 0:12:02.679 I don't think what's priced in is uh, you know, 0:12:03.520 --> 0:12:06.400 a double U shaped recovery if you will, or you know, 0:12:06.480 --> 0:12:10.920 another um onset of COVID nineteen later in the year. Um, 0:12:11.000 --> 0:12:13.000 So I think that would be downside risk. And I 0:12:13.120 --> 0:12:16.400 also think that the market is actually discounting at this 0:12:16.559 --> 0:12:21.000 point a relatively aggressive recovery on it. On the economic front, 0:12:21.200 --> 0:12:23.960 I mean, what worries me is that the pe ratio 0:12:24.120 --> 0:12:26.760 of the SMP five is right back up to its 0:12:26.840 --> 0:12:31.360 February peak levels because earnings have come down but prices 0:12:31.400 --> 0:12:34.960 are still relatively high. Um So, I think that that's 0:12:35.040 --> 0:12:36.920 the risk, is that that a lot of the good 0:12:37.080 --> 0:12:40.760 policy news is likely to be in the market. Savina. 0:12:40.840 --> 0:12:43.720 I'm struggling to understand. If everybody is looking past earnings 0:12:43.760 --> 0:12:47.240 and past the horrible and getting worse economic data, do 0:12:47.360 --> 0:12:51.040 these jobless claims that we're all focused on matter. Yeah. 0:12:51.080 --> 0:12:55.280 I mean, I think employment has historically been a lagging indicator, so, 0:12:55.920 --> 0:12:58.080 you know, and I think that again we we kind 0:12:58.120 --> 0:13:02.679 of are forecasting us fairly uh employment scenario. I think 0:13:02.880 --> 0:13:06.080 our economists are forecasting tem percent unemployment by the end 0:13:06.120 --> 0:13:09.559 of the year. Um So, so I think that employment 0:13:09.640 --> 0:13:11.880 will while it does, you know, kind of points to 0:13:12.440 --> 0:13:16.840 newer term stresses, doesn't necessarily impact normalized earnings as much. 0:13:17.200 --> 0:13:19.959 I think what it does show, though, is that there 0:13:20.040 --> 0:13:23.360 might be a reticence amongst consumers coming out of this 0:13:24.040 --> 0:13:27.199 to you know, return to buying big ticket items or 0:13:27.240 --> 0:13:32.440 even home home home purchases UM. Given that that consumer 0:13:32.480 --> 0:13:36.480 competence has seen such an extreme shock cevida, how does 0:13:36.600 --> 0:13:41.360 MidCap and small cap resolve itself? Is it through combinations? 0:13:41.800 --> 0:13:46.439 Is it how do they jump start their entrepreneurial you know, 0:13:46.600 --> 0:13:49.920 the pulse the process. Yeah, yeah, it's a great question. 0:13:49.960 --> 0:13:51.719 I think small caps, I mean, I think we will 0:13:51.920 --> 0:13:55.360 will be likely to see consolidations given how cheap small 0:13:55.440 --> 0:13:58.079 caps are today. I mean, the sector is treating at 0:13:58.120 --> 0:14:01.640 the low recessionary levels UM and the gap between large 0:14:01.679 --> 0:14:04.240 and small is the widest we've seen and you know, 0:14:04.400 --> 0:14:07.000 in in multiple decades. So I think that this is 0:14:07.080 --> 0:14:09.880 a This is an environment where large companies can buy 0:14:09.960 --> 0:14:13.719 smaller traps stocks for up for a song. I think 0:14:13.840 --> 0:14:17.200 the real risk though, for smaller companies is whether they 0:14:17.320 --> 0:14:21.200 survive this UM this downturn, because as you know, smaller 0:14:21.280 --> 0:14:25.240 companies are much more GDP sensitive, so you know, large 0:14:25.280 --> 0:14:27.640 caps have a lot more um you know, kind of 0:14:27.760 --> 0:14:30.880 staying power. Uh. But I think that that's the risk 0:14:30.960 --> 0:14:33.880 for the overall assets. Are you are you predicting whether 0:14:34.040 --> 0:14:36.520 the storm are you predicting a roll up phase? I 0:14:36.560 --> 0:14:38.760 mean there was a period what twenty years ago where 0:14:39.120 --> 0:14:41.560 you know, we rolled up the specialty chemical industry over 0:14:41.680 --> 0:14:44.360 three cups of coffee on the July weekend. I mean, 0:14:44.480 --> 0:14:47.000 is that what we're heading for? I mean, I think 0:14:47.040 --> 0:14:49.560 we couldn't see that. We could see more heavy M 0:14:49.640 --> 0:14:52.440 and A activity once we get a little bit more 0:14:52.520 --> 0:14:55.800 clarity on on the length of this downturn. Um. But 0:14:55.920 --> 0:14:59.560 I think that these large and small right now are 0:14:59.680 --> 0:15:03.520 just boarding cash. They're not doing anything. They're suspending buy backs, 0:15:03.960 --> 0:15:06.360 you know, some of them are suspending dividends, and companies 0:15:06.400 --> 0:15:09.200 seem to be very very conservative in terms of cash 0:15:09.280 --> 0:15:12.160 and capital allocation. But I think if we get to 0:15:12.480 --> 0:15:14.440 a point where there's a little bit more clarity on 0:15:14.560 --> 0:15:16.520 how long this fall lasts and whether it's you know, 0:15:16.640 --> 0:15:20.240 there's potential to contain this crisis, that's when you start 0:15:20.280 --> 0:15:24.200 to see the consolidation. But I was embolish on on 0:15:24.280 --> 0:15:28.920 an M and A cycle um sometimes exact Sevida, thank 0:15:28.960 --> 0:15:32.040 you so much, Savida Superbanian with the Bank of America. 0:15:35.200 --> 0:15:38.680 Right now, the former president of the Minnieapples Fed at Rochester, 0:15:39.200 --> 0:15:44.000 Nariannicata Lakota, joins us, Professor, I want to go right 0:15:44.040 --> 0:15:48.400 away to the mathiness of your work, and that is 0:15:48.840 --> 0:15:52.320 that so much of our belief and research is based 0:15:52.400 --> 0:15:56.920 on smooth curves on glide pass odd models that are 0:15:57.560 --> 0:16:01.239 comfortable and at times some would even say elegant or beautiful. 0:16:01.880 --> 0:16:05.960 We've just had the mother of all jump conditions, exogenous shocks. 0:16:06.400 --> 0:16:11.200 How does that change your belief in models? Hi, Tom, 0:16:11.280 --> 0:16:14.200 thanks for having me on. I think models are still 0:16:14.800 --> 0:16:19.240 very useful for trying to organize your thinking about what 0:16:19.440 --> 0:16:25.200 you're you're likely appropriate responses to to to economic conditions. Obviously, 0:16:25.360 --> 0:16:28.640 this was an event that was not forecast by economists, 0:16:29.160 --> 0:16:32.040 but now once we're in the event, I think that 0:16:32.720 --> 0:16:36.880 modeling and can help you with framing what how to 0:16:36.960 --> 0:16:38.920 think about what should be done. And I think it's 0:16:38.960 --> 0:16:41.800 been helpful for my former colleagues in the Federal Reserve 0:16:41.880 --> 0:16:43.920 as they as they try to try to figure out 0:16:43.960 --> 0:16:46.560 what to do next. One thing that they have done 0:16:46.760 --> 0:16:49.960 is being incredibly aggressive, and for the most part, people 0:16:50.000 --> 0:16:53.160 have cheered them. American confidence in the FEDS leadership right 0:16:53.200 --> 0:16:55.840 now is the highest since a green Span era. If 0:16:55.920 --> 0:16:58.200 you take a look at the latest Gallop poll, I'm 0:16:58.200 --> 0:17:01.640 wondering they're going forward about the to say, the politicization 0:17:02.480 --> 0:17:06.119 of the Federal Reserve based on some of the fiscal 0:17:06.280 --> 0:17:11.680 stimulus type of efforts they've been doing. What's your expectation. Yeah, 0:17:11.720 --> 0:17:14.120 I think that's a great questions. I think that, Um, 0:17:15.440 --> 0:17:19.280 what we've seen in this recession. UM, I'm gonna call 0:17:19.359 --> 0:17:21.920 it that because I think go to we're in is 0:17:22.520 --> 0:17:25.080 that there's been a lot of coordination between Treasury and 0:17:26.320 --> 0:17:30.760 the FED and implicit coordination between Congress and the Fed. UM. So, 0:17:31.200 --> 0:17:35.840 for example of that is set up a facility whereby 0:17:36.400 --> 0:17:39.840 they're going to be willing to lend directly to corporations. 0:17:40.680 --> 0:17:46.199 That's basically they're using their ability to create government liabilities money, uh, 0:17:46.320 --> 0:17:52.159 in order to finance a physical intervention by Congress. I 0:17:52.240 --> 0:17:53.840 suspect we're going to see a lot more of that 0:17:53.960 --> 0:17:58.000 as we go forward. Um, it's clear that the American 0:17:58.080 --> 0:18:00.879 public is comfortable with this, it's or that Congress is 0:18:00.920 --> 0:18:03.879 comfortable with it. Um, it's clear the FED is comfortable 0:18:03.880 --> 0:18:06.119 with it. What that's going to mean I think in 0:18:06.320 --> 0:18:09.480 terms of politalization, you know, it's I think that's a 0:18:09.520 --> 0:18:12.320 good question. I I worry about that certainly. How do 0:18:12.440 --> 0:18:14.120 you get the genie back in the bottle? We asked 0:18:14.240 --> 0:18:17.359 Vice Chairman Clara to this question. And many others have 0:18:17.440 --> 0:18:20.040 been asked the same question down there, out there somewhere, 0:18:20.840 --> 0:18:23.720 I get, would you just let the debt run out? 0:18:24.200 --> 0:18:27.240 Or or do you find a way to actually do 0:18:27.359 --> 0:18:29.960 what many would say as responsible and just pull it 0:18:30.040 --> 0:18:34.960 in a little bit. I think that, uh, it's very 0:18:35.000 --> 0:18:37.480 difficult to put the genie back in the bottle unless 0:18:38.000 --> 0:18:41.679 people perceive a cost to having all this debt um 0:18:41.840 --> 0:18:44.399 As long as interest rates remain low, as long as 0:18:44.440 --> 0:18:47.920 inflation remains low, I think that you're going to see 0:18:48.000 --> 0:18:51.520 Congress and the FED continue to feel comfortable with with 0:18:51.800 --> 0:18:55.760 with these kinds of expansiony programs. Professor, you could argue 0:18:55.840 --> 0:18:57.960 that if the Fed's balance she gets to twelve twilli 0:18:58.400 --> 0:19:01.159 in the near term, which isn't a crazy estimate, that 0:19:01.320 --> 0:19:04.119 it won't matter if borrowing costs from beIN low to 0:19:04.160 --> 0:19:06.800 your point, and if everything just keeps chucking along, that 0:19:06.880 --> 0:19:09.000 they'll look like the hero. So why would they become 0:19:09.359 --> 0:19:14.680 a more political body at that point? I think the 0:19:15.040 --> 0:19:17.639 issue is that what is the role of FED in 0:19:17.760 --> 0:19:20.920 terms of fighting fighting recessions? The traditional role for the 0:19:20.960 --> 0:19:24.320 FED is simply, Uh, procession comes along, We're gonna cut 0:19:24.359 --> 0:19:27.200 interest rates if we see inflation on the horizon, we 0:19:27.320 --> 0:19:32.080 raise interest rates. That's a pretty simple technocratic position. Now, 0:19:32.280 --> 0:19:35.679 I think the FED is in the business of Okay, 0:19:35.760 --> 0:19:39.520 which kind of program should we be financing for Congress? Well, 0:19:39.600 --> 0:19:42.160 that's a that's a much more political kind of job. 0:19:42.200 --> 0:19:44.800 And I think the issue is whether or not we 0:19:44.920 --> 0:19:48.639 want a group of as as Americans. We want a 0:19:48.680 --> 0:19:52.600 group of unelected technocrats to to have that have that power. 0:19:52.960 --> 0:19:55.320 As you say, right now, they're the heroes. But I 0:19:56.800 --> 0:20:00.200 I think that this is uh creates risk for the 0:20:00.240 --> 0:20:04.280 institution going down the road. Certainly, That's why I wanted 0:20:04.280 --> 0:20:07.280 to go there. This is so important, Professor CATCHA Dakota. 0:20:08.000 --> 0:20:11.880 Is the risk to the institution? What is your action 0:20:12.040 --> 0:20:14.920 plan for Chairman Powell now as a former member of 0:20:15.000 --> 0:20:19.480 the institution to maintain the integrity of the FED? What 0:20:19.600 --> 0:20:21.119 does he need? Does he need to get out of 0:20:21.200 --> 0:20:24.399 the speaking circuit, or does he need to, you know, 0:20:24.720 --> 0:20:29.000 do the Today Show. What's what's his best practice? Well? 0:20:29.119 --> 0:20:30.879 I don't think I need to give any advice to 0:20:31.119 --> 0:20:36.560 to uh uh to cheer Powell about to handle pup. 0:20:36.840 --> 0:20:39.040 He's done a fantastic job, I think in terms of 0:20:39.080 --> 0:20:42.359 communicating about what the FED is doing. Why it's doing it. 0:20:43.080 --> 0:20:45.880 Um I think that's one of the most striking differences 0:20:45.960 --> 0:20:48.520 I see between where the FED is today as opposed 0:20:48.520 --> 0:20:50.840 to where it was in two thousand and eight, where 0:20:50.840 --> 0:20:52.399 it was also doing I think, things to save the 0:20:52.480 --> 0:20:55.960 US economy, but not communicating as effectively as as Powell 0:20:56.040 --> 0:20:59.879 has done. Um. No, I think it's really this question 0:21:00.160 --> 0:21:02.480 that that you asked about, how do you get the 0:21:02.520 --> 0:21:05.320 genie back in the bottle? You can't do it in 0:21:05.680 --> 0:21:08.639 in May, but I think you have to be some 0:21:08.840 --> 0:21:13.200 thinking what are guidelines for using thirteen three going four? 0:21:13.359 --> 0:21:16.399 You know this this uh clause in the Federals are 0:21:16.440 --> 0:21:17.960 back that seems to say, well, the fake can do 0:21:18.040 --> 0:21:20.159 anything it wants too, as long as your country sectory 0:21:20.240 --> 0:21:23.960 signs on yeah, this is This has been wonderful, professor, 0:21:24.040 --> 0:21:26.119 Thank you so much. Snaria the Cutchler Code of Folks, 0:21:26.400 --> 0:21:28.679 the former president of the Many atmos feer now at 0:21:28.680 --> 0:21:35.280 the University of Rochester. We want to continue our discussions 0:21:35.320 --> 0:21:38.720 now on what we're all experiencing with this pandemic and 0:21:38.880 --> 0:21:41.560 just so many that is the doctors and indeed the 0:21:41.680 --> 0:21:45.280 nurses on the front lines. I spoke today with Jason Farley. 0:21:45.840 --> 0:21:49.440 He's Johns Hopkins University in their Department of Nursing, and 0:21:49.520 --> 0:21:54.399 the professor is truly expert on infectious diseases. Here is 0:21:54.880 --> 0:21:58.600 Professor Farley right now. The vaccine studies are and looking 0:21:58.640 --> 0:22:02.320 at what we call faith on vaccine studies. The type 0:22:02.320 --> 0:22:05.720 of studies are really looking at the safety um and 0:22:05.840 --> 0:22:08.480 whether whether or not we actually see a response, So 0:22:08.560 --> 0:22:11.240 it does the mean system respond to the vaccine, So 0:22:11.400 --> 0:22:14.280 that's not testing epicac and meaning is it effective at 0:22:14.320 --> 0:22:17.640 preventing the virus from occurring if we have the vaccine? 0:22:17.960 --> 0:22:22.000 So those studies come next, and really importantly that will 0:22:22.240 --> 0:22:26.000 That's why we're continuing to project timelines of at least twelve, 0:22:26.080 --> 0:22:31.000 if not eighteen months UM away. Dr Farley, the raging 0:22:31.080 --> 0:22:34.359 debate this morning is in your wheelhouse. You are one 0:22:34.400 --> 0:22:39.720 of the nation's experts on Staphylococcus aureus methicillin in all 0:22:39.800 --> 0:22:45.040 the resistancies and hospitals. The arch fear of medical experts 0:22:45.720 --> 0:22:49.600 is a secondary bout of this virus down the road. 0:22:50.359 --> 0:22:55.760 Explain the likelihood and how it will demonstrate if we 0:22:55.840 --> 0:23:00.400 get a virus come September or December or been into 0:23:00.440 --> 0:23:05.560