Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Daily
Speaker 1: we bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. Right now,
Speaker 1: we want to have a conversation with a former president
Speaker 1: of the New York Fed. As I said earlier, Bill
Speaker 1: Dudley has done a public service this morning. I believe
Speaker 1: it's a two part essay for Bloomberg Opinion, and it's
Speaker 1: essay today is a tourtive force of clarity on what
Speaker 1: we're doing moving from four trillion to seven trillion and
Speaker 1: indeed out to a possible ten trillion dollar balance sheet
Speaker 1: of our central Bank. Every ECON, one on one student
Speaker 1: should be required to read the Dudley as he built. Dudley,
Speaker 1: congratulations on the clarity that we've known for years from
Speaker 1: your work at Goldman Sachs. What is the singular distinction
Speaker 1: of what Chairman Powell needs to do forward with the
Speaker 1: presumed ten trillion dollar balance sheet. Well, what it means
Speaker 1: is we're going to have a lot of access reserves
Speaker 1: in the banking system allow of deposits in the banking system. Uh,
Speaker 1: and that that's going to create some anxiety that that
Speaker 1: that that fuel is going to lead to inflation. What
Speaker 1: are the implications the implications of when the fit by
Speaker 1: treasury securities and mortgage backed securities is the added amount
Speaker 1: of reserves and bank deposits in the system. The reserves
Speaker 1: have already doubled. Second implication is that that forces the
Speaker 1: private sector hold more cash and deposits than before. And
Speaker 1: the third implication is that the sense of private sector
Speaker 1: may not want to hold all that cash and deposits.
Speaker 1: That encourages them to move into higher riskier, higher yielding assets,
Speaker 1: and that pushes up asset prices. It does not, however,
Speaker 1: need lead to in lation because the fact can control
Speaker 1: credit demand by raising the interest rate that pays on
Speaker 1: reserves at the appropriate time. I will take your singular
Speaker 1: distinction that the FED can control this fear of inflation.
Speaker 1: And certainly, folks in two thousand and eight we saw
Speaker 1: the inflation nieces just dropped by the low inflation that
Speaker 1: surprised them. What I would point out, though, Bill Dudley,
Speaker 1: is all of our listeners and viewers on this simulcast
Speaker 1: understand the phrase, there's no such thing as a free lunch.
Speaker 1: What is the price of a distortion that is a
Speaker 1: ten trillion dollar balance sheet? Well, I mean, I think
Speaker 1: there's a couple of things. Number One, obviously, this has
Speaker 1: implications for financial asset prices, and so defend withdraws this
Speaker 1: liquidity that that's going to have some consequences for financial
Speaker 1: asset valuations. The second consequences of the FED is actually
Speaker 1: taking some risk in its balance sheet. I mean, if
Speaker 1: you think of the FED right now, it's a lot
Speaker 1: of long term assets financed overnight, and that's fine when
Speaker 1: in short term and rates aired zero. But if you
Speaker 1: run the clock ahead a few years and the set
Speaker 1: has to raise short term interest rates, you have a
Speaker 1: situation where short term, the cost of the other set
Speaker 1: of paying interest on reserves could actually exceed the returns
Speaker 1: on its portfolio, and so the FED could actually start
Speaker 1: to lose money. Bill you said, when the FED starts
Speaker 1: to reduce its balance sheet, when the FED starts to
Speaker 1: raise rates. Can the Fed ever do either of those things? Well,
Speaker 1: obviously all depends on the paths of the coronavirus pandemic
Speaker 1: and also how the economy response to that. I'm assuming
Speaker 1: that a few years from now we'll be back to
Speaker 1: a more normal economy, and when we when we're back
Speaker 1: to a more normal economy, will also be back to
Speaker 1: a more normal level of interest rates. Bill, we just
Speaker 1: got data showing that June is on pace for the
Speaker 1: fastest pace of issuance ever for US junk bond sales.
Speaker 1: What are the consequences of the debt being occurred by corporations,
Speaker 1: not to say the United States of America as a
Speaker 1: result of the FEDS policies. Well, the shore run, it
Speaker 1: means people have the cash and resources to stay in
Speaker 1: operation in the long run. Obviously, there's limits to how
Speaker 1: much that people can take on, so there's a risk
Speaker 1: of servicing that dead over the longer term. I mean,
Speaker 1: the set is worried about today and tomorrow and next
Speaker 1: week and next month. They're not so worried about what's
Speaker 1: going to happen in five years from now. But you
Speaker 1: know there will be a hangover from what we're experiencing today.
Speaker 1: I look, Mr Dudley at all that we've gone through,
Speaker 1: and I would suggest this was not in your textbooks
Speaker 1: at Berkeley years ago. It is unorthodox. Do you have
Speaker 1: a confidence in the belief of all of the smart
Speaker 1: people like you to get this fixed, even if we're
Speaker 1: working off original theory. Well, we've never gone down this
Speaker 1: particular path before, so I think Tom yet to be
Speaker 1: a little bit cautious and say, we don't know how
Speaker 1: this is all going to turn out. That said, it's
Speaker 1: certainly better than allowing the economy to sink beneath the
Speaker 1: way it's gonna have a full flown depression. So I
Speaker 1: think what the FET is doing is appropriate, but we
Speaker 1: don't yet know how this is all going to play
Speaker 1: out over the long run. Bill Dudley, I give Chairman
Speaker 1: Paul extremely high marks. Everybody grows into the position and
Speaker 1: the pressure of those very bright lights, and he's I think,
Speaker 1: really handling much better now the press conference, in the
Speaker 1: back and forth and the nuances of all this. But
Speaker 1: the thing that's out there is what if we receive
Speaker 1: some form of exogen is shock to the system given
Speaker 1: this balance sheet build up? Are we prepared for the
Speaker 1: not the next pandemic. I don't want to get all
Speaker 1: fiery in that, but are we prepared for any kind
Speaker 1: of exogen is shocked within our debt markets? Well? I
Speaker 1: think the FED has shown that they have a pretty
Speaker 1: wide array of tools to deal with market functioning issues,
Speaker 1: and I think one of the great successes in the
Speaker 1: last few months is that we had a lot of
Speaker 1: market stress in March going into April, and the FED
Speaker 1: introduced a number of special liquidity facilis that have actually
Speaker 1: caused markets to return to good functioning. So I think
Speaker 1: it tells you that the FED still has pretty good
Speaker 1: tools to deal with things like illiquidity. The problem I
Speaker 1: think we have fundamentally, though, is that the pandemic is
Speaker 1: causing harm to household and corporate balance sheets, and there's
Speaker 1: limits to what the FED can do with respect to
Speaker 1: that damage. My favorite quote over the weekend fund manager
Speaker 1: called the Federal Reserve helicopter parents for the market. I
Speaker 1: thought that was pretty apt at a time when you
Speaker 1: have a lot of worries that are just being absolutely
Speaker 1: pushed away at the at the behest of the Federals.
Speaker 1: Or if people saying, put your faith in the FED,
Speaker 1: don't fight the Fed. The FED has our backs. I'm
Speaker 1: wondering how concerned you are, Bill that this takes the
Speaker 1: pressure off of Congress of federal lawmakers to actually pass
Speaker 1: some stimulus efforts that could potentially get to main street
Speaker 1: faster than some of the Fed's programs. Well, I think
Speaker 1: Cheri Pale has made that same point that it can't
Speaker 1: all be just about Monterrey policy. The pandemic is causing
Speaker 1: harm to people's incomes, to their balance sheets, and that's
Speaker 1: something that really terry policy can't repair by it. So
Speaker 1: that's why you need fiscal policy stimulus. So, you know,
Speaker 1: one of the you know, risk here is that people
Speaker 1: think that the FED is all powerful and basically put
Speaker 1: all the all the weight on the FED. And the
Speaker 1: fact I think that we need more, probably probably gonna
Speaker 1: need more fiscal stimulus than what we've got to take.
Speaker 1: Dr Dudley, thank you so much for joining us today.
Speaker 1: Bill Dudley is the former president of the New York Fed.
Speaker 1: An exceptionally interesting and clear essay for Bloomberg Opinion today,
Speaker 1: and I really anticipate, folks, what I believe is a
Speaker 1: presume second essay from Bill Dudley on the prescription forward
Speaker 1: given a ten trillion dollar deficit right now with us
Speaker 1: and we're thrilled to bring you here for an important
Speaker 1: conversation on deflation and disinflation. James Sweeney of Credit Sweets
Speaker 1: he writes, wonderfully direct research reports this out of the
Speaker 1: acuity of a London school of economics. James, I've got
Speaker 1: to start with what was in the literature this week again,
Speaker 1: which is the what if what if we do fiscal policy?
Speaker 1: What if we do fiscal salvation? And what if we
Speaker 1: run out of it before we get a legitimate recovery?
Speaker 1: Is that feasible? Is that possible? I mean, with the
Speaker 1: politics the way they are right now, I think anything
Speaker 1: is possible with fiscal I mean I could imagine a
Speaker 1: strong stimulus, I could imagine a temporary strong stimulus that
Speaker 1: runs out, and I can imagine no stimulus, and that
Speaker 1: creates a lot of uncertainty for the outlooking both directions.
Speaker 1: They all look in both direction, and then it sort
Speaker 1: of it really comes down to that the V shaped idea,
Speaker 1: and I get I looked at the spreadsheets down we're
Speaker 1: going up. We go que three. How big of a
Speaker 1: mystery is the fourth quarter of this year. It's a
Speaker 1: very big mystery. And I think that, well, we've got
Speaker 1: three uncertainties. I mean, first we have are we going
Speaker 1: to have another fiscal stimulus? We have that extended unemployment
Speaker 1: help running out on July thirty one, So you're gonna
Speaker 1: have a big drop in household cash flows at to
Speaker 1: that if if you don't you renew it um, and
Speaker 1: it looks like they probably won't. They might extend it,
Speaker 1: but not renew it. But on top of that, you know,
Speaker 1: we have ongoing contagion, accelerating contagion in many states, and
Speaker 1: could that lead to more shutdowns? Even without more shutdowns,
Speaker 1: could it lead to people staying home to the extent
Speaker 1: where we don't have the full recovery, um, you know,
Speaker 1: the full post shutdown normalization we were hoping for. And
Speaker 1: then you have the election as well, So UM, I
Speaker 1: think you have to put large arab bands around any
Speaker 1: forecast for for the fourth quarter this year and arguably
Speaker 1: for the third two. Let's talk about the bounce we've
Speaker 1: seen as well, James, and how the bounce, the data
Speaker 1: bounds that we've seen over the last month informs your
Speaker 1: views about the ladder end of this year. What do
Speaker 1: you take your wife from the bounds? Yeah, it does
Speaker 1: not inform my view about the latter half of this year.
Speaker 1: This bounce was entirely predictable. This is turning the light
Speaker 1: switch off on the economy and turning it back on again.
Speaker 1: It's pretty it's pretty easy if if hours work to
Speaker 1: go down because they sent this home and then we
Speaker 1: they bring us back to work and hours work, they're
Speaker 1: going to go back up, and the data are going
Speaker 1: to bounce. But it's not answering answering any of the
Speaker 1: big questions. So you know, the unemployment to jump in
Speaker 1: this is so so significant. So many people are looking
Speaker 1: at this data bounce and they're extrapolating out two three
Speaker 1: Q two for que into what does inform your view
Speaker 1: about the year still to come? Well, I mean, I
Speaker 1: think you can extrapolate this bounce out a few more months,
Speaker 1: as long as you're seeing people return to work. But
Speaker 1: further out, I mean, if I'm thinking about the labor
Speaker 1: market at the end of the year, I want to
Speaker 1: know how damaged our businesses, How bad are their balance
Speaker 1: sheets and earning so that they can't hire. I want
Speaker 1: to know how bad are their sales expectations given that
Speaker 1: the virus may still be around and a lot of
Speaker 1: people might be avoiding certain activity. And I want to
Speaker 1: know even how much how many efficiencies have businesses found
Speaker 1: while their workers have been working from home? So some
Speaker 1: business is maybe discovering that they could rearrange somethings, use
Speaker 1: less space and fewer workers. And I think all of
Speaker 1: those three factors are different factors that backward looking forward,
Speaker 1: looking at a productivity one which could lead to an
Speaker 1: elevated unemployment rate later in the year. So I think
Speaker 1: the unemployment rate is falling now for very simple and
Speaker 1: simplistic reasons, where the light switches is being dialed back
Speaker 1: up again. But um, it's gonna be high. It's gonna
Speaker 1: be a lot higher than three and a half percent
Speaker 1: at the end of the year, maybe in the high
Speaker 1: single digits are even higher. Um And and you know,
Speaker 1: so we've got to really think about all those factors separately, James,
Speaker 1: Efficiencies is a sort of a dirty word right now
Speaker 1: as people look for the second wave of layoffs. How
Speaker 1: much are the federal reserves policies buoying this market from
Speaker 1: a main street perspective, keeping some of these businesses alive
Speaker 1: and can continue to through the end of this year. Well,
Speaker 1: there's no doubt that the p p P program in particular,
Speaker 1: which I think of more of the Treasury of the
Speaker 1: Treasury program than a fit probe him, has has kept
Speaker 1: a lot of businesses going UM and I think the
Speaker 1: FED programs in general have kept credit flowing. You've had
Speaker 1: this extraordinary issuance in the primary markets, but it doesn't
Speaker 1: mean everything is good. I mean you're gonna have a
Speaker 1: lot of business failures and we don't know what the
Speaker 1: balance sheet damage looks like six months from now. So
Speaker 1: it's just a very, very big deal when you have
Speaker 1: the GDP contraction of this size driven by the virus.
Speaker 1: We've had policy responses which are extremely forceful UM, but
Speaker 1: it's even possible that they are not enough. And that's
Speaker 1: why you circle July thirty one as the date that
Speaker 1: some of the Cares Act benefits expire. And and this
Speaker 1: is going to be the next particularly important moment that
Speaker 1: markets are going to focus on as we've come to
Speaker 1: learn what the second half is going to be. Like James,
Speaker 1: everyone's becoming a social scientist and trying to pass through Google,
Speaker 1: Google searches and other soft high frequency data to get
Speaker 1: a sense of what the consumer behavior is going to
Speaker 1: be with respect to the virus as well as businesses.
Speaker 1: What are you looking for? What sort of the early
Speaker 1: indicators that can give us a sense of just how
Speaker 1: much business is being suppressed by people's concerns and frankly,
Speaker 1: how much businesses have to respond by shutting down so
Speaker 1: that they don't have the extra expenses of being open
Speaker 1: without enough business to justify it. Yeah, there's different forms
Speaker 1: of foot traffic data, web traffic data, you know, hours
Speaker 1: worked data. I mean, there's a lot of very ultra
Speaker 1: high frequency macro data that didn't exist just a few
Speaker 1: years ago, and right now, I would say, survey quite
Speaker 1: quite a few of these numbers. Um, you're not normalizing,
Speaker 1: You're you're normalizing very slowly in the states that reopened first,
Speaker 1: and then the states that reopened later they're slowly normalizing too.
Speaker 1: And now in the states that reopened first, you have
Speaker 1: a very sharp pick up in contagion in a number
Speaker 1: of them. So I think the best case scenario was
Speaker 1: the viruses is a little quiet, and you know, you're
Speaker 1: you're rich hurning workers to work, and some workers are
Speaker 1: avoiding risks, and therefore you can't expect a normal level
Speaker 1: of demand. But if the virus is severe been a
Speaker 1: lot more workers and customers are going to avoid going out,
Speaker 1: and in those most affected sectors like restaurants and travel
Speaker 1: in airlines, etcetera. You know you're gonna have a problem,
Speaker 1: and so every data point on the contagion UH suggests
Speaker 1: you know something bad for the second half of the year. James,
Speaker 1: you made your name with Niel Sauce studying deflation and
Speaker 1: really pushing against the deflation gloom in Europe, ages and
Speaker 1: ages Ago. I want you to parse right now the
Speaker 1: disinflation of America in goods and services. We've had a
Speaker 1: pernicious decline in price for goods at times fine, but
Speaker 1: services have been remarkably stable. Can you model out, given
Speaker 1: this pandemic and the tough recovery, can you model out
Speaker 1: services disinflation or even outright inflation? Sure? Well, I mean
Speaker 1: in the way inflation is measured about to and thirds
Speaker 1: is services prices, and one third is good. And it's
Speaker 1: important to know that because you know, most people really
Speaker 1: look at cars and look at gasoline, and there's their
Speaker 1: view on inflation. But the services are important, and you've
Speaker 1: got things like housing, healthcare, and financial services in there
Speaker 1: which are opaque, and sometimes the prices are even basically modeled,
Speaker 1: at least in the short term. Right now, housing inflation
Speaker 1: looks likely to put downward pressure on overall inflation um,
Speaker 1: financial inflation, and the others are in healthcare a little
Speaker 1: bit more mysterious. Um. But this was a huge drop
Speaker 1: in services consumption, the likes of which we haven't seen
Speaker 1: since the Great Depression. And right now we have a
Speaker 1: much bigger services sector. So you know, we're gonna see
Speaker 1: headline inflation bounce around zero for a while. We're gonna
Speaker 1: see core inflation bounce around one percent um. Services are
Speaker 1: doing some of that work. I mean, there's certain goods
Speaker 1: like airlines and use cars that are that are doing
Speaker 1: it on the good side as well. But this is
Speaker 1: the temporary implications on prices from the shut down and
Speaker 1: from the virus. The wrong term questions a little different.
Speaker 1: The one final question, James, it's just real simple here.
Speaker 1: If we're gonna model this kind of nominal g d P,
Speaker 1: should we begin to really aggressively talk about a FED
Speaker 1: that manages for nominal GDP and not real GDP. Well, yeah,
Speaker 1: I mean I think really the dual mandate is nominal
Speaker 1: GDP in a way, because you've got you know, the
Speaker 1: unemployment rate is the real growth piece and the inflation
Speaker 1: is the is the inflation piece. So there you have it.
Speaker 1: If you're doing both right, You're you're really targeting nominal,
Speaker 1: just not you know, explicitly. Um So, I think we've
Speaker 1: had a four percent nominal GDP trends in the US
Speaker 1: over the past ten years, and hopefully we can get
Speaker 1: back on it. I think the equity market is trading
Speaker 1: as if the expectation is we're going to be on
Speaker 1: that four percent nominal GDP trend before too long. Um
Speaker 1: The bond market seems to have its doubts, and I
Speaker 1: think that that encapsulates pretty well the range of opinions
Speaker 1: right now on deflation and inflation, a wide range of
Speaker 1: opinions on pretty much everything right now. James task to
Speaker 1: catch up with you said as alwise, James Sweeney of
Speaker 1: Credit sways on this market, this economy, this recovery. Joining
Speaker 1: us now is he did a bit ago? Uh? Joining
Speaker 1: us now is the head of the m t A.
Speaker 1: Their chairman Patrick Foy joins us now. Pet A hundred
Speaker 1: and thirty two people within your huge organizations succumbed to
Speaker 1: the virus. The courage in the heat of this was noted.
Speaker 1: What will they do? What will the m t A
Speaker 1: do to celebrate on this reopening? Well? Phase two Phase
Speaker 1: two is a big step for New York City and
Speaker 1: frankly a big step forward for the UH for the country.
Speaker 1: On gladtime that you're gonna be eating in New York
Speaker 1: City restaurants five days a week. The city needs the
Speaker 1: business and the UH and the tax revenue. Throughout the
Speaker 1: entire pandemic, the m t A UH employees, UH, Subways, buses,
Speaker 1: Metro North Long our Road, road bridges and tunnels have
Speaker 1: been heroes, moving heroes. They've done extraordinary work in the
Speaker 1: most trying circumstances. At one point, UH a total of
Speaker 1: well over ten thousand employees or under home quarantine. Ten
Speaker 1: thousand employees have returned to work. The number of employees
Speaker 1: on home quarantine is in the is in the hundreds,
Speaker 1: down from thousands. And tragically, a hundred and thirty two
Speaker 1: of our colleagues succumbed to the virus at at the
Speaker 1: mt A, Subways, Buses, New York City Transit, Metro North
Speaker 1: Long Island Railroad, UH, and UH, and that is tragic. Obviously,
Speaker 1: New York has been the epicenter of the UH of
Speaker 1: the pandemic, but the MTA workforce has been heroes, moving heroes,
Speaker 1: first responders, and essential employees, including fellow transporters. What will
Speaker 1: be the process of someone on a subway, someone on
Speaker 1: a bus not wearing a mask. Wellok it state law
Speaker 1: to wear a mask on public transit. As a result
Speaker 1: of an executive order that Governor Cuomo issued some weeks ago,
Speaker 1: I can tell you that UH compliance by our employees
Speaker 1: is universal. We have done physical counts on the subways.
Speaker 1: The original account was a ninety two mask compliance by
Speaker 1: our employees. We believe it is now. We've got a
Speaker 1: robust communications and messaging plan to get the number even higher,
Speaker 1: and we've been distributing over the last couple of weeks
Speaker 1: millions of masks to writers who were returning to the system.
Speaker 1: It is not optional, it is mandatory and state law
Speaker 1: to wear a mask on transit. Public health officials tell
Speaker 1: us that the single most important thing any anybody can
Speaker 1: do in whatever environment they're in, but including on transit,
Speaker 1: is to wear a mask. Protects you, it protects your
Speaker 1: fellow commuters, and it protects our employees. Pet I've been
Speaker 1: looking at pictures of workers cleaning all of the subway
Speaker 1: cars twice a day, which is fantastic for anyone who
Speaker 1: wants to write a clean subway. It all takes money,
Speaker 1: and your CFO said that it could be as soon
Speaker 1: as early July, at which point the m TABLE run
Speaker 1: out of money, will run out of federal funding that's
Speaker 1: been propping up the finances. What then if the federals,
Speaker 1: if if the federal government does not re up that financing,
Speaker 1: what happens to the m t A. So so at
Speaker 1: least a just one point of clarification, which is important.
Speaker 1: Our employees are not cleaning subways. UH, They're not cleaning stations.
Speaker 1: They're disaffecting them. And we've been doing that since since
Speaker 1: Mark three. Bob Foreign, our CFOs concern is is well placed.
Speaker 1: We're in a dire financial situation. We got the MTA
Speaker 1: received three point eight billion dollars, was awarded three point
Speaker 1: eight billion dollars in the Cares Act. That money will
Speaker 1: carry us through July, will be drawing it down through August. UH.
Speaker 1: The f t A, at U, S d OT has
Speaker 1: done a good job of facilitating and expediting that money.
Speaker 1: The Heroes The Heroes Act, which passed the House thanks
Speaker 1: to Speaker Pelosi UH and the support of the New
Speaker 1: York Congressional Delegation, provides an additional three point nine billion
Speaker 1: dollars of federal funding. It's obviously subject to Senate approval.
Speaker 1: It is absolutely critical that the MTA received that money.
Speaker 1: We hired McKenzie to do a review of our finances
Speaker 1: UH and the looking at the revenue decline because ridership
Speaker 1: is down across the system, expenses her up and also
Speaker 1: a dedicated package of taxes and subsidies which also accounts
Speaker 1: for fifty of the mt A revenue in a in
Speaker 1: a normal year. Mackenzie's midpoint is seven point seven billion dollars,
Speaker 1: So the three point eight from CARES and the three
Speaker 1: point nine in the House bill on the Heroes will
Speaker 1: take us through. It's critical that we received that federal funding. PA,
Speaker 1: just real quick here. That distinction that you made between
Speaker 1: disinfecting and cleaning, why was that an important distinction to make? Well?
Speaker 1: We we UH. Cleaning means taking the coffee cups out
Speaker 1: and the refuse on a on a subway car or bus.
Speaker 1: We've been disinfecting using disinfecting agents since since March three
Speaker 1: because of the pandemic. We've also been piloting the use
Speaker 1: of ultra violet sea light on subway cars and busses
Speaker 1: were doing that right now. We worked with a Columbia
Speaker 1: University professor, Dr David Brenner or the Irving Medical Center
Speaker 1: at Columbia, who's an expert on ultra violet light. He
Speaker 1: concluded in this innovative collaboration with the m t A
Speaker 1: and ultra violet sea light kills the COVID nineteen virus.
Speaker 1: We've also been piloting the use of anti microbials, which
Speaker 1: we believe and to be verified by independent laboratories and
Speaker 1: regulators that it too will kill the COVID nineteen virus
Speaker 1: and has the potential to do that for weeks and
Speaker 1: months after application. That would be a game changer. And
Speaker 1: the point I wanted to make to our riders is
Speaker 1: that we are looking at every step we can to
Speaker 1: minimize public health risk to our customers, answer our employees,
Speaker 1: ultra violet light, ultra violet sea light, ants on microbials
Speaker 1: or evidence of that. Pat way pray shot hot work
Speaker 1: the city, the whole city does. And I thoughts with
Speaker 1: the team of the m c A. Patfoy that off
Speaker 1: the m c A right now, let us turn to
Speaker 1: what we do, which is economics, finance, investment, and more
Speaker 1: on foreign exchange than anyone in the world. And we
Speaker 1: can do that with Jane Foley of Robbo Bank. She's
Speaker 1: exceptionally attuned to not only what the speculators are doing,
Speaker 1: but also the commercial banking interests of her Robbo Bank.
Speaker 1: Jane Foley, I have to start with the dollar. I
Speaker 1: noticed today looking at the Bloomberg Dollar Index, which is
Speaker 1: basically resilience for four years, even pushing into five years
Speaker 1: of relatively strong dollar. That's been a great miscall. When
Speaker 1: do we finally see the dollar give way to what
Speaker 1: the consensus call is? Is we just dollar weakness? You
Speaker 1: know something that's a really interesting question because let you say,
Speaker 1: the consensus called for a number of years has been
Speaker 1: that we will have a weaker dollar, and finally with
Speaker 1: the dollar, bears are saying, well, this year, this is
Speaker 1: going to be the year that we see this weeker
Speaker 1: dollar because a little that money printing that we've had,
Speaker 1: Look at all the excel liquidity that we saw at
Speaker 1: the FED and other central banks add But you know,
Speaker 1: I think the answer really will be in risk appetite,
Speaker 1: because it's not just this year that we've seen, say,
Speaker 1: a correlation between the dollar and emerging market stocks. This
Speaker 1: has been going on at least since twenty eighteen, and
Speaker 1: it seems to me that the answer to the dollar
Speaker 1: or the dollars the dollars trend will be an emerging market.
Speaker 1: If the market is confident enough to keep on investing
Speaker 1: in e M, the dollar will go down. If it isn't,
Speaker 1: it won't and the dollars still will have this safe haven.
Speaker 1: So if we do have another wave, if we do
Speaker 1: have later on in the year markets really concerned and
Speaker 1: stock markets got ahead of themselves, well, in sort of instance,
Speaker 1: the dollar is likely to do well. But if the
Speaker 1: market carries on being really optimistic and being in this
Speaker 1: blind stupor of optimism because of central bank money, well
Speaker 1: the dollar could soften. It certainly could. Jenny's there's another
Speaker 1: way of saying, don't waste your time looking at rate differentials. Well,
Speaker 1: you know, great differentials obviously come into it. I mean
Speaker 1: they're the bread and butter clearly of foreign exchange. But
Speaker 1: that they it has changed. So for instance, if we
Speaker 1: consider for ins as a carry trade, it used to
Speaker 1: be the days when we used to sell the air
Speaker 1: and as as the funding currency and by the Aussie
Speaker 1: But if you look now where Aussie rates are then
Speaker 1: really not that high anymore. Last year people swapped, for instance,
Speaker 1: to to to the Mexican pay so as as a
Speaker 1: carry trade. But in terms of funding currencies, perhaps now
Speaker 1: you have a lot more choice. You've got negative interest
Speaker 1: rates for a variety of different countries now, not just
Speaker 1: of course at the end, so the market has changed.
Speaker 1: Interest rates will always be important. But I think what
Speaker 1: we have, as we all know, in terms of crisis,
Speaker 1: we have this big correlation where we have risk one
Speaker 1: and risk off and in those sorts of environments we
Speaker 1: have less detail. Well, let's talk about the characteristics of
Speaker 1: this particular regime just a little bit more, Jane, going
Speaker 1: into the downturn, the March contraction that we saw not
Speaker 1: just in the economy but in this market to increasingly
Speaker 1: the Euro was becoming the funding currency of choice, then
Speaker 1: it quickly unwound. Have you seen that build up in
Speaker 1: any particular way that's significant enough that we need to
Speaker 1: think about more. I think the euro has been significant
Speaker 1: this year. Now, We've got to remember that the Eurozone
Speaker 1: has an enormous current account surpers. Germany has an enormous
Speaker 1: current account surpers, and what we saw in March when
Speaker 1: we saw this big sell off in risky currencies and
Speaker 1: and e M in particular, we obviously saw the dollar benefit,
Speaker 1: but I would always say I think the Euro held
Speaker 1: up relatively well against the US dollar. I think what
Speaker 1: we actually saw was sort of e M versus G
Speaker 1: ten with with the dollar coming out at the top
Speaker 1: of the bundle of of the G ten. But but
Speaker 1: you're held up well. And then of course last month
Speaker 1: we had those two pieces of news which I think
Speaker 1: was significant for the Euro. We had at the ECB
Speaker 1: really put in its mouth where it's where it's money,
Speaker 1: where its mouth was, and say, look, we do not
Speaker 1: want fragmentation, and we do not want the market to
Speaker 1: think about fragmentation. We're going to buy those peripheral bonds.
Speaker 1: We're going to stop that sort of talk, which helped
Speaker 1: the Euro. And of course we also had that European
Speaker 1: Commission bunship proposal that was a step forward. Now clearly
Speaker 1: that's got to be ratified, but we've still got the
Speaker 1: euro really boid on that. So I think the sort
Speaker 1: of neutral point for for Euro dollar has shifted tire
Speaker 1: on the back of European news, and I think that
Speaker 1: is significant. Jana, the dollar is still very much the
Speaker 1: funding choice of many countries, and that's the reason why
Speaker 1: the feasurers have opened up that swap line and expanded
Speaker 1: it dramatically in the wake of the dollar crunch that
Speaker 1: we saw in March. Last week marked the first time
Speaker 1: that the FED started to taper that and people are
Speaker 1: expecting that to continue. The demand for dollars coming down.
Speaker 1: Does that tell you that the dollar crunch is over?
Speaker 1: Does that tell you that this could be a potential
Speaker 1: risk with the dollar surging again, if there is a
Speaker 1: liquidity shortage around the world. I think it tells you
Speaker 1: both of those things. I think it tells you at
Speaker 1: least for now. Yes, the the the the eye of
Speaker 1: the storm has passed. The middle of the crisis has gone,
Speaker 1: and things are calming down, and we can see that
Speaker 1: in lots of different asset crisis too. We wouldn't have
Speaker 1: stock markets where they are now if we were in
Speaker 1: the middle or you know, still in the eye of
Speaker 1: the storm. But we also know, you know, all of us,
Speaker 1: we look at our screens every day and we see
Speaker 1: worry news about the coronavirus in the US, and we
Speaker 1: see the r rising again in Germany or you know,
Speaker 1: in Brazil, we see terrible news, and then we know
Speaker 1: that we're going to face bad economic news as well
Speaker 1: over the next few months at the very least. So
Speaker 1: we all know that there is another wave, and if
Speaker 1: there is another wave, it will be the dollar and
Speaker 1: possibly the end in the currency world that well, we'll
Speaker 1: see still some flows and central banks will have to
Speaker 1: react again if that does happen. Jane, I got killed
Speaker 1: this weekend. I lost so much money on the tarts.
Speaker 1: It's incalculable. Where can I make back money in foreign
Speaker 1: exchange in the next six months. Where's a tradeable trade
Speaker 1: right now in f X? Which pair gets it done?
Speaker 1: You know what, I think the trade that you might
Speaker 1: be putting on today it could be very different to
Speaker 1: the trade that you're sitting on in six months time,
Speaker 1: and it very much depends as to whether or not
Speaker 1: we get that second wave or not. If you are
Speaker 1: extremely confident that we weren't, then yeah, maybe you'll make
Speaker 1: money out of selling the dollar. But you know, looking
Speaker 1: at the Aussi dollar, that does worry me. I think
Speaker 1: we see the same picture in the Aussie dollar as
Speaker 1: we see in many stock markets, and we see a
Speaker 1: lot of good news in that price, and if we
Speaker 1: see a lot of good news in the price, it
Speaker 1: clearly means that the market is is more susceptible to
Speaker 1: it's it's a bad news. And I do think that
Speaker 1: we've got some retracement to go, potentially a lot of
Speaker 1: retracement that certainly some retracement in the next few months.
Speaker 1: So you know, I would be a cello and rallies
Speaker 1: of risk currencies like the Aussie and we'll I'd be
Speaker 1: very concerned about Sterling if we do not get a
Speaker 1: trade deal soon between the UK and the EU. I
Speaker 1: think Sterling could be really quite vulnerable. We've got to
Speaker 1: spend some time talking about Brexit in a not too
Speaker 1: distant future. James Foley of Rather Bank, I'm sure you
Speaker 1: can hardly wait week and hardly wait great to catch
Speaker 1: hell with you this morning. My best to you and yours.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
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Speaker 1: platform you prefer. I'm on Twitter at Tom Keane before
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