Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jailey.
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,
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Speaker 1: us now Sunny kind of coach genoency equity strategist. He
Speaker 1: joined us on a five tinny rights to a a head
Speaker 1: from you, sir? Are you more preoccupied with what's going
Speaker 1: right or what could go wrong? So jump back in
Speaker 1: two thousand and nine. I remember I was sitting in
Speaker 1: an industrial um industrial company conference and they were going
Speaker 1: through multiple slides of what their contingency plans were. This
Speaker 1: was in the summer of two thousand nine, so the
Speaker 1: market was up, but you were still kind of in
Speaker 1: the grip of the Great Financial Crisis and people were
Speaker 1: looking at each other, son, how can the market be
Speaker 1: up so much? So this conferences companies talking about what
Speaker 1: could their contingency plans on what could go wrong if
Speaker 1: when it goes wrong. I raised my hand and I said,
Speaker 1: have you guys got a contingency plan of what could
Speaker 1: go right? And then what could go right? Is always
Speaker 1: revolved around credit, and I was reading a Bloomberg story.
Speaker 1: I'm gonna look away from the camera for one second
Speaker 1: just so I can read a little bit out of
Speaker 1: the story. Um Alphabet Chevron. Chevron priced a two year
Speaker 1: bond yield yesterday with a point three three three coupon.
Speaker 1: You had on the high yield side. Aluminum packaging company
Speaker 1: Ball Corp. Sold one point three billion of ten year
Speaker 1: notes at two point eight seven high yield two. So
Speaker 1: you go into an economic and market kind of catastrophe
Speaker 1: or problem when you have a need for money with
Speaker 1: limited or no access to it. Clearly that's not the case.
Speaker 1: How do you stand full of the credit market? Keep
Speaker 1: on stocks? Yeah, that's I hate to listen the guys
Speaker 1: printing the money keep telling us their game plan. They're
Speaker 1: they're not even thinking about thinking about thinking about I mean,
Speaker 1: you can go on and on about not thinking about
Speaker 1: raising race. It's for guidance and potentially for the rest
Speaker 1: of my career unless you get a major surge of
Speaker 1: inflation that's sustainable. Remember the tenure inflation break evens are
Speaker 1: still at about one point six percent. They want core
Speaker 1: inflation at an average of two percent. These guys are
Speaker 1: going to have their foot on the pedal until the
Speaker 1: fur for the foreseeable future, and as a result of that,
Speaker 1: the need for returns and pension plans is creating a
Speaker 1: demand equation. Is Lisa pointed out not just for treasurieson
Speaker 1: is that Bloomberg story pointed out for for investment grade
Speaker 1: and speculative credit. Tony, When does the real economy matter? Well,
Speaker 1: so this is an incredible time, Lisa, because what we
Speaker 1: have is this access liquidity we've never seen before, coupled
Speaker 1: with At the same time, if you look at the
Speaker 1: o e c D, which is the Organization of Economic
Speaker 1: Cooperation and Development, they tracked thirty seven countries as of
Speaker 1: their end of June data and it works with a
Speaker 1: six week lags, so it's really mid May. At the
Speaker 1: end of June, they were saying that there were zero
Speaker 1: of the thirty seven economies that were showing positive or
Speaker 1: above average UM composite leading indicators that pivoted to month
Speaker 1: to month. So we have an economy that has largely
Speaker 1: been in collapse that is just beginning to pivot higher.
Speaker 1: Whenever that's happened in the past, you've had to sustained
Speaker 1: economic recovery so it's really important that we don't need
Speaker 1: an incredible surgeon economic activity, because that would that would
Speaker 1: change the whole dynamic of credit. You want what we're
Speaker 1: getting well a little better than we're getting, especially for
Speaker 1: the small businesses than people that need the money. You
Speaker 1: are beginning to get that inflection higher. You've got to
Speaker 1: concept to some degree that the economic story is beneath
Speaker 1: the index. With text all absolutely ripping. I think the
Speaker 1: tech sector up about yet today the KBW Bank index
Speaker 1: is still down around about That's not because the economy
Speaker 1: is doing well, it's because it isn't. Yeah, there is discretion,
Speaker 1: certainly that is beneath the surface of some of these indexes.
Speaker 1: Hard pressed to find the discretion though in a junk
Speaker 1: bond yielding two point eight seven five, Hard to find
Speaker 1: the discretion in a record amount of issue ends across
Speaker 1: the board, in more junk bond issue in so far
Speaker 1: year to date than all of last year. Tony. Looking forward,
Speaker 1: there is a question here of how sustainable this is,
Speaker 1: especially in light of some pretty serious potholes. For example,
Speaker 1: there is no deal in Washington, and the time is
Speaker 1: ticking and the pain is deepening. Can you imagine Washington
Speaker 1: is not going to come to a deal, and they're
Speaker 1: gonna let the only purpose of the government is to
Speaker 1: support people, and they're gonna let everybody fail. So our
Speaker 1: underlying assumption is they will get. Pain is the motivate
Speaker 1: motivator for change and growth. They will get, and enough
Speaker 1: pain the feedwill back loop will become negative enough that
Speaker 1: they will come to a deal. But again, we've got
Speaker 1: to separate what um is good or bad, right or wrong.
Speaker 1: Those don't matter, Okay, I frankly, I don't think this
Speaker 1: incredible use of debt ultimately is going to be a
Speaker 1: good thing, but that doesn't matter. It is. So what
Speaker 1: I try to guide our institutional clients and wealth management
Speaker 1: clients overseas is try to get by what intuitively seems
Speaker 1: good or bad, right or wrong, and just focus on
Speaker 1: what is. We've had almost one or two frillion dollars
Speaker 1: of corporate credit new issues, which allows those companies to
Speaker 1: bridge the gap until we get the continued pivot and
Speaker 1: economic activity that historically, when you look back at periods
Speaker 1: of similar high volatility followed by a drop, you know
Speaker 1: a retracement of the volatility. When you see correlations as
Speaker 1: high as they were in March. Those are periods where
Speaker 1: it's the beginning of a new economic and market cycle,
Speaker 1: and that's really the differentiator. Is it the beginning of
Speaker 1: a new and economic and market cycle? And the data
Speaker 1: that we have suggests that it is. It's only something's
Speaker 1: gotta break. And I'm just wondering what breaks first. Is
Speaker 1: it the market and the market rally over the last
Speaker 1: few months, or is it the resolve down in Washington,
Speaker 1: Because right now, I'm with you, of course they've got
Speaker 1: to get something done. But at the moment, this economic
Speaker 1: dates in America is fairly resilient relative to what people
Speaker 1: expected to see coming into Walkers And I'm just wondering
Speaker 1: what breaks the resolve down in Washington again, John, Like,
Speaker 1: if you look at the t s A numbers, even
Speaker 1: with the increasing case of COVID nineteen over the last month,
Speaker 1: the T s A numbers are still going up. So
Speaker 1: what's happening is you've taken something that's gone from extraordinary
Speaker 1: and it's moving more towards normal. And at the same time,
Speaker 1: like I said, you're going to get this pressure in
Speaker 1: Washington to actually get something done. But again, with all
Speaker 1: of that in the game, you're having incredible money pushed
Speaker 1: into the system that bridges the gap. Now, of course
Speaker 1: you're gonna have to have a deal in Washington. You're
Speaker 1: gonna have to have the economy recover. And that's where
Speaker 1: you have to when you look at the historical data,
Speaker 1: when it is set up like it is, you do
Speaker 1: get those things to happen. I will say it's the
Speaker 1: tao of Tony Dwyer. Just look at what is and
Speaker 1: that is the wall of money. If you're looking at
Speaker 1: the wall of money, why not just invest in small
Speaker 1: cap stocks and call it a day. Say, eventually the
Speaker 1: rally will get to some of the less loved sectors
Speaker 1: and that's where you're gonna actually get the biggest returns.
Speaker 1: And that's that's our call. So when when John asked,
Speaker 1: you know what breaks first the market, Let's define the market.
Speaker 1: So here's what we have. We have the stay at
Speaker 1: home stocks which are now defensive in nature, the megacap
Speaker 1: fang stocks which are now defensive in nature. So let's
Speaker 1: say the economy gets a lot better, they should correct.
Speaker 1: As the economy is what's been happening over the last
Speaker 1: couple of weeks, where the economically sensitive small cap emerging
Speaker 1: markets do way better because you're starting to price in
Speaker 1: return economic activity. While it's it's into this very interesting.
Speaker 1: People keep thinking that this is like the bubble of
Speaker 1: the dot com boom because only a few stocks are
Speaker 1: driving the index gains. But it's totally opposite when you
Speaker 1: look at the average stock. The ny SC composite uh
Speaker 1: New New uh ny SC advanced to client line cumulative
Speaker 1: advanced to client line. I think made a new high
Speaker 1: this week, all time high. It was in a two
Speaker 1: year down trend by the time you hit the dot
Speaker 1: com bubble peak. So yes, a few stocks are definitely
Speaker 1: driving the gains, and I think it's far. It's excessive,
Speaker 1: there's no question. However, a lot of stocks, even the banks,
Speaker 1: if you look at from the low, they're highly there's
Speaker 1: still a high correlation because they've been going up, just
Speaker 1: not as much. And that's where the opportunity exists, is
Speaker 1: where you get some of the fang stocks maybe to
Speaker 1: go sideways, consolidate their gains with economic activity improving, while
Speaker 1: these other areas, the economically sensitive recovery areas really start
Speaker 1: to ramp Tony, you am more than welcome to join
Speaker 1: us anytime you like to it. It's a Bloomberg story
Speaker 1: in the morning, whenever your life just a little bit,
Speaker 1: just a little bit, Tony, send my best to the
Speaker 1: family trying to catch out Tony to of countercur generite.
Speaker 1: Thank you very much. Joining us now is the wonderful
Speaker 1: Lisa Hornby Investments US Fixed income portfolio manager Lisa HORNBI
Speaker 1: fantastic to catch up with you. Policy has been the
Speaker 1: bigg issue this year in I could have told you
Speaker 1: every single data point and many people still would have
Speaker 1: got the market call wrong. What's the policy focus for
Speaker 1: you right now, Lisa, I mean, it's clearly an extension
Speaker 1: of these benefits. UM. You know, I think the points
Speaker 1: you both were making, or you three were making right
Speaker 1: before I came on, we're right. Will the will the
Speaker 1: central government get it together and UM continue these unemployment benefits?
Speaker 1: I mean right now, the to me is surviving on stimulus.
Speaker 1: You know, you think about UM some of the packages
Speaker 1: that are going to that are going to be rolling
Speaker 1: off potentially the unemployment benefits. The question as to whether
Speaker 1: or not state and local government to get release. I mean,
Speaker 1: these are some of the big economic questions we're asking
Speaker 1: ourselves in state and local governments. Employee eighteen million people
Speaker 1: um small businesses right, they employed sixty million people. Surveys
Speaker 1: there are showing that optimism and hiring plans are well
Speaker 1: below where they were pre pandemic. These are the kind
Speaker 1: of questions that we're asking, Are we going to see
Speaker 1: some kind of fiscal relief package that continues what we've
Speaker 1: seen before, that potentially even expands on it. From a
Speaker 1: fixed income investors standpoint, do you bet on the FED
Speaker 1: poot just the idea that, no matter what, there is
Speaker 1: going to be a pinning of treasure yields roughly where
Speaker 1: they are regardless of policy, Or do you really look
Speaker 1: to some sort of resurgence and inflation and some sort
Speaker 1: of economic data to sort of get your guidelines um
Speaker 1: To an extent, there's a FED put So we we
Speaker 1: first and foremost look at evaluations when we're evaluating markets,
Speaker 1: when we're evaluating credit um, and valuations today tell us
Speaker 1: they're more or less median level. So things are not expensive,
Speaker 1: things are not cheap. But what keeps us engaged in
Speaker 1: the markets despite them being just fair value is the
Speaker 1: fact that we do have this tremendous liquidity environment. So
Speaker 1: the FED keeps us perhaps more engaged in fixed income
Speaker 1: because we do think there is some degree of a backstop.
Speaker 1: But we will continue to become or we will become
Speaker 1: much more cautious if we start to see spreads really
Speaker 1: wretched in here, because there is still a tremendous dislocation
Speaker 1: between where markets are trading today and what the underlying
Speaker 1: economy tells us. And this is not something that we
Speaker 1: think will be gone in just a couple of months time.
Speaker 1: There are going to be sustaining pressures on certain points
Speaker 1: of the economy for a long time to come. There's
Speaker 1: a question about the intelligence of buying treasuries as an
Speaker 1: investment right now given the negative real yields. Where are
Speaker 1: you on that? I mean, do you see treasuries is
Speaker 1: truly acting as a hedge against equity volatility going forward? Um?
Speaker 1: You know, we're fairly neutral duration here in our portfolios.
Speaker 1: I think the FED is the backstop. I find it
Speaker 1: really difficult to see rates moving aggressively, to be honest,
Speaker 1: in either direction. Um, at this point in time, I
Speaker 1: think we're kind of in a range. And you know, yes,
Speaker 1: I think that you want to have some treasuries in
Speaker 1: your portfolio if we do have another risk off event.
Speaker 1: But equally, I think that we're going to see the
Speaker 1: government response very very quickly, both on the FED and
Speaker 1: the fiscal side, if we do have another major downturn
Speaker 1: in financial assets. I think they learned their lesson this
Speaker 1: time around. I mean, the magnitude and the briskness of
Speaker 1: the response was just incredible, and that's what stabilized markets
Speaker 1: in a in an actually very short period of time.
Speaker 1: Lisa Homeby this market is taken down a tremendous amount
Speaker 1: of supply on both the sulfon and the credit side.
Speaker 1: Are you seeing any signs of it? Take whatsoever? You know?
Speaker 1: From my perspective, it seems that investors just can't get enough.
Speaker 1: I mean, the US is still the highest yielding developed
Speaker 1: market in the world bar italy um, and so we
Speaker 1: are still seeing that international demand. Hedging costs have gone
Speaker 1: all the way down, you know, a couple of percentage
Speaker 1: points if you look back over the last eighteen months.
Speaker 1: So we are still seeing that international demand. It seems insatiable.
Speaker 1: And we're even seeing domestic um sort of retail demand
Speaker 1: as well. Uh So, right now, it seems that people
Speaker 1: are just can't get enough of credit. You look at
Speaker 1: the deals that have come um in the market. Over
Speaker 1: the last few weeks, the concessions have been completely erased.
Speaker 1: I mean in many cases they're coming twenty basis points
Speaker 1: through where the initial price talk is. So the demand
Speaker 1: is still there. Um, you know, the FED is still
Speaker 1: there as a back stop. People, I think are looking
Speaker 1: through this congressional impass at the moment and thinking something
Speaker 1: will get done. Um. And you know, I think some
Speaker 1: of that risk premium is probably not I think there
Speaker 1: should be a somewhat greater degree of risk premium in markets,
Speaker 1: just given some of the uncertainty that's out there. But
Speaker 1: at the moment, you know, it's kind of it's a
Speaker 1: little bit to kind of calm. Lisa Hollby, just a
Speaker 1: final question from me. We face this really strange dynamic
Speaker 1: and credit right now. It feels like a momentum trade
Speaker 1: where lower yields get lower yields, and the strong gets
Speaker 1: stronger the week get weaker. And when I say to
Speaker 1: people what's the money being used for when they issue
Speaker 1: this debt, they'll sets to lock in low rates. And
Speaker 1: that's a good thing because average borrowing costs are lower,
Speaker 1: and therefore I want to buy the credit. But Lisa,
Speaker 1: that just tells me you want to buy the credit
Speaker 1: because average boring costs are lower, so you buy the credit.
Speaker 1: Then they issue some more than boring costs come lower again,
Speaker 1: so you buy some more. At least, it just feels
Speaker 1: like this weird cycle where leverage might be going up,
Speaker 1: but because average boring costs are lower, people want to
Speaker 1: buy Lisa. What breaks that trend? I mean, that's that's
Speaker 1: been the story of the last ten years, if you
Speaker 1: think about it right. Rates have been going down for
Speaker 1: that almost entire period of time, and companies have been
Speaker 1: issuing more debt UM. I think what breaks if there's
Speaker 1: a few things that break it? Um the central banks
Speaker 1: starting to deliver a different message than the one which
Speaker 1: they're delivering now, so that they're no longer going to
Speaker 1: be as supportive as they were. I think inflation coming
Speaker 1: through UM in a material, material and very sustained way,
Speaker 1: nothing like what we saw yesterday that was just you know,
Speaker 1: one data print. I think that you need to see
Speaker 1: serious inflation for them to change their tune. UM. You know,
Speaker 1: there's a million other potential variables that could change things.
Speaker 1: But that's why I think you use valuations as your guide.
Speaker 1: And as as credit becomes more expensive, Um, you have
Speaker 1: to be really judicious about which companies you own. There
Speaker 1: are certainly still companies out there that are buying back
Speaker 1: debt that that are actually taking some of the higher
Speaker 1: coupon debt out of the market, so leverage, you know,
Speaker 1: maybe more or less unchanged. They have large cash buffers
Speaker 1: as well. Um. So I think you just have to
Speaker 1: be cautious about which companies you're buying and stick to
Speaker 1: high quality, more defensive names. Lisa. Before we let you go,
Speaker 1: can we sec congratulations from my family, the Bloombergs of
Speaker 1: Veileance family to yours and stand. There's a new little
Speaker 1: Hornby in the family. What's his name, Alexander? Thank you
Speaker 1: very much. He's a he's a proud but Bloomberg watcher.
Speaker 1: He's been watching between the last few months at He's
Speaker 1: a lucky little boys. Have a great mom. Lisa. Fantastic
Speaker 1: to catch up with you as always, are best to
Speaker 1: your family, Lisa, Hornbie there of Schroeder's. A little bit
Speaker 1: later this week, there will be a conversation between the
Speaker 1: United States and China on the Phase one agreement. We
Speaker 1: understand that China would also like to bring in We
Speaker 1: chatted TikTok into the chat as well. This is what
Speaker 1: the Wall Street Journal reported this morning. We reported it
Speaker 1: a little bit earlier on let me repeat it again
Speaker 1: for you. This from the Wall Street Journal a couple
Speaker 1: of hours ago. More than a dozen major US multinational
Speaker 1: companies raised concerns in a call with White House officials
Speaker 1: just yesterday about the potential broad scope and impact of
Speaker 1: Mr Trump's executive order targeting we chat set to take
Speaker 1: effect in the next month. On that coal arrange of
Speaker 1: companies including Apple and the Walt Disney Company joining us. Now,
Speaker 1: a man who understands this issue better than most. It's
Speaker 1: Lee the Miller of China based book Leland. Great to
Speaker 1: catch up with you, sir. Let's start there the tension
Speaker 1: between these two countries over this specific issue tech. Where
Speaker 1: is this heading, Leland? Well, A lot of it depends
Speaker 1: on whether or not we see the trade deal last
Speaker 1: through the election. That's holding a lot of this back.
Speaker 1: But on the tech side specifically, the problem is the
Speaker 1: White House wants to do something. It wants to take
Speaker 1: ownership of the issue. It wants to push back on
Speaker 1: some some very legitimate national security issues related to TikTok
Speaker 1: and related to wa chat. But it hasn't really fleshed
Speaker 1: them out. And I mean it's not an accident that
Speaker 1: we saw forty five day kick out on any action
Speaker 1: on TikTok and wheat Chat, particularly when you're talking about
Speaker 1: wheat Chat. They just don't know how to pull it
Speaker 1: back to to to restrict parts of it and not
Speaker 1: dramatically hurt us companies like Apple and others who used
Speaker 1: the watch at the payment of ration for for huge
Speaker 1: chunks of their sale. So they haven't really thought this through.
Speaker 1: They want to be aggressive, but but there's but the
Speaker 1: jury still out of which direction they're gonna go on this?
Speaker 1: Which direction they're gonna go on this? Does this mean
Speaker 1: that you expect them to pull it back? Does this
Speaker 1: just imagine? Do you expect that they're going to put
Speaker 1: provisions within the band that allow the companies like Apple
Speaker 1: to sell we chat on on their eye store Apple Store?
Speaker 1: Was it E store? I like that? Yeah. Look, I
Speaker 1: think look TikTok should have a sale. I think that
Speaker 1: could end this if if you see a sale within
Speaker 1: within the coming weeks, I think that's very likely. We
Speaker 1: chats a much more difficult issue, and I think that
Speaker 1: the chances are that you see a broad based aggressive
Speaker 1: solution is very low. I think there's a chance that
Speaker 1: this thing gets kicked out past the election. They're gonna
Speaker 1: have to do something, but there are plenty of remedial
Speaker 1: actions from Cyphius and others in which they can sort
Speaker 1: of tweak things at the margins. The more they're getting
Speaker 1: into this issue, the more they realize that they don't
Speaker 1: understand the second and third order effects. So they want
Speaker 1: the political om from doing a big, broad anti China action,
Speaker 1: but they're not prepared for the fallout, so I think
Speaker 1: it'll be less than people expect. Headline cross on a
Speaker 1: Bloomberg Leland, let me bring it to you that India
Speaker 1: is set to be poised a band Huawei and z
Speaker 1: t A from five G network trials. This is not
Speaker 1: just about the United States and China, Leland, It's about
Speaker 1: China and a whole host of countries. How are they
Speaker 1: handling this right now? And do you think President she
Speaker 1: has pushed things a little bit too far? Yeah, I
Speaker 1: think that they're handling us about as poorly as you
Speaker 1: could possibly handle this issue. One of the mistakes people
Speaker 1: make is is thinking that Huawei and zt are just
Speaker 1: another Chinese company or two, they're not, They're there, and
Speaker 1: there are five. You know, Huawei in particular is the
Speaker 1: Chinese semiconductor champion uh in terms of building out five G,
Speaker 1: and so you have an enormous nation national security issue
Speaker 1: where where countries are now becoming aware of just how
Speaker 1: dangerous it might be to to integrate Huawei into all
Speaker 1: of their new next generation telecommunications. The US has has
Speaker 1: been pushing on the but it wasn't until China really
Speaker 1: antagonize the entire universe during and in the aftermath of
Speaker 1: their COVID hit that that that that the countries are
Speaker 1: really taking notice on this. So, you know, this is
Speaker 1: something in which Chijn Ping, I think has overplayed his cards.
Speaker 1: He just this is just going in the wrong direction
Speaker 1: for China. It's a real problem because they're not going
Speaker 1: to be able to pull this back if if UAWE
Speaker 1: gets cut off. The narrative over the past few months
Speaker 1: has been that China will recover faster than the rest
Speaker 1: of the world from the pandemic because they clamped down
Speaker 1: harder and there, and they had the virus first. Is
Speaker 1: what you're saying that that is not necessarily the case
Speaker 1: because they are facing these other pressures due to some
Speaker 1: of their international trade policies. Well, they may recover faster
Speaker 1: and first, but recovery no longer means what people think
Speaker 1: it used to mean. So you know, if you're looking
Speaker 1: at at a month on month improvement qure and quarter improvement,
Speaker 1: we're seeing that in our data. You're seeing that in
Speaker 1: the p M I s. What you're not seeing is
Speaker 1: a return to normalcy. You're not seeing on your growth.
Speaker 1: Our last data show no on your growth whatsoever. And and
Speaker 1: and quite frankly, that's not what the p M eyes
Speaker 1: are showing either. People have decided they don't understand how
Speaker 1: to read the p M I s, which have no
Speaker 1: bearing on your and your trends. So I think you
Speaker 1: are seeing recovery partly because China was hit with COVID
Speaker 1: first and so they're emerging fastest, But you're not seeing
Speaker 1: a real recovery. And then you've got all these geo
Speaker 1: political tensions and trade tensions and technology tensions they're adding
Speaker 1: on to this. So I would be very hesited about
Speaker 1: declaring this a banner recovery story, even if they're doing
Speaker 1: better than most. I love the p M I shade.
Speaker 1: That's such a blimperg conversation Leland, It's okay. I appreciate it.
Speaker 1: Little bit of that of the China Facebook. Thank you, sir,
Speaker 1: Thank you very much. Let's get to a Lennon shall
Speaker 1: wait of BMO Capital Markets see joins us right now
Speaker 1: in your thoughts on the trajectory of the recovery and
Speaker 1: what you're seeing in the Tyson right now. Well, when
Speaker 1: I take a look at the economic data, we see
Speaker 1: a pause in some of the improvement that we have
Speaker 1: been seeing, which is troubling. And the reason that it's
Speaker 1: so troubling is because we're entering this period where the
Speaker 1: market is not going to trust the economic data, not
Speaker 1: because of data collection issues, but rather because the recent
Speaker 1: spike in COVID nineteen cases hasn't ultimately flowed through to
Speaker 1: the labor market. I think that the August non farm
Speaker 1: payrolls report is going to be very telling, and to
Speaker 1: a large extent, the market is going to be in
Speaker 1: a holding pattern and tell then, at least in treasury space,
Speaker 1: obviously we see what's going on with the equity market.
Speaker 1: They seem to be trading off of an entirely different
Speaker 1: set of facts and expectations as we have in rates
Speaker 1: at the moment. You know, it's important to bring up
Speaker 1: just the idea that there is this pessimism based into
Speaker 1: the rates market, that yields are so low, not just
Speaker 1: because of a FED poot, but because people have very
Speaker 1: low expectations for the US economy. There wasn't much of
Speaker 1: a market response to this better than expected unemployment report,
Speaker 1: but the tenure yields did turn up, price down, yields higher.
Speaker 1: For I believe a fifth day ian. If we do
Speaker 1: see a better than expected trend in the data, how
Speaker 1: high could those yields go. Well. I think it's important
Speaker 1: to keep in context that yesterday we had the August
Speaker 1: refunding auction of new ten years, and we get new
Speaker 1: thirty years today. So a bit of what's going on
Speaker 1: right now is an auction, an auction concession, so pricing
Speaker 1: a new supply. In the event that the data does
Speaker 1: turn and sentiment broadly improves, there's nothing to keep a
Speaker 1: move toward the seventy five basis point level in TINS
Speaker 1: from occurring over the course of the next six to
Speaker 1: eight weeks. We do have constructive seasonals for treasuries between
Speaker 1: now and the middle of the necessisis point coal I
Speaker 1: have a two months basically that already, Um, I mean,
Speaker 1: we're not going to one per cent in the next
Speaker 1: two months. I agree with you on what you're saying here.
Speaker 1: I understand what you're trying to say. I don't necessarily
Speaker 1: agree with the call, but we slam bang in the
Speaker 1: middle of the range of the last two or three
Speaker 1: months fifty basis point the low end of the range.
Speaker 1: We saw that last week, the top end of the
Speaker 1: range ninety basis points from the beginning of June. There's
Speaker 1: an idea that some people have that somehow the Fed
Speaker 1: can cap the long end and not just anker the
Speaker 1: front end. And what's your thoughts on that. Well, they
Speaker 1: are in actively buying treasuries certainly further out of the
Speaker 1: curve as well, so quee in and of itself creates
Speaker 1: a structural demand. Now, whether they can actually cap ten
Speaker 1: in thirty year yields using their monetary policy in the
Speaker 1: front end, it's an open question, but an operation twist
Speaker 1: or overweighting purchases further out of the curve would do it.
Speaker 1: And frankly, at this moment, what's really driving ten thirty
Speaker 1: year yields even though they are within that defined will
Speaker 1: range is global growth and inflation expectations. So an uptick
Speaker 1: in inflation comparable to what we saw yesterday, that that extends.
Speaker 1: I think that would be the missing ingredient to really
Speaker 1: reprice the longer and entire and a lot of people
Speaker 1: would agree with you HSBC coming out and saying, if
Speaker 1: the Fed hadn't stepped in treasure, yields may actually be
Speaker 1: even lower, not higher, than where they are now because
Speaker 1: growth would be that much slower. Which brings me to
Speaker 1: the balance sheet. A lot of people when the FED
Speaker 1: was originally ramping up its program in response to the pandemic,
Speaker 1: we're expecting the balance sheet to get to ten trillion
Speaker 1: dollars by the end of the year. Right now, it's
Speaker 1: a little bit around seven trillion dollars. It's kind of
Speaker 1: bouncing up and down depending on the week. It seems
Speaker 1: to have stabilized. Have you rotchet to back your expectations
Speaker 1: of how many assets the Fed will have to or
Speaker 1: want to buy before your end in order to support markets.
Speaker 1: I think at this point the Fed has told us
Speaker 1: the pace that they're going to continue purchasing at, and
Speaker 1: that does keep a target um growing in trillions by
Speaker 1: one on the table. I don't think that what's playing
Speaker 1: out right now in the real economy is giving the
Speaker 1: FED any confidence that they'll need to buy less. And
Speaker 1: if anything, as the economic data continues to unfold throughth
Speaker 1: balanced the year, will probably see a risk for an
Speaker 1: expansion of some of the existing programs rather than a
Speaker 1: contraction unless there's a decidedly positive turn that I don't
Speaker 1: think anyone in the market is currently expecting. And at
Speaker 1: this point, given where we are given more borrowing costs,
Speaker 1: are is a fens effort doing anything to actually help
Speaker 1: the economy. Well, what the SET is doing is they're
Speaker 1: trying to push investors further out the yield curve, further
Speaker 1: out the credit curve, and further through the capital structure,
Speaker 1: which is why we're seeing equities performing the way that
Speaker 1: the way that they are at the moment, and ideally
Speaker 1: that then provides an incentive for FUR to continue to
Speaker 1: expand and higher back, or to expand and higher back.
Speaker 1: Some of the people that were laid off, recall, we
Speaker 1: lost twenty five million jobs. We've only gained back of that,
Speaker 1: so there's still a lot of work left to go,
Speaker 1: and the FETE has made it clear that they're okay
Speaker 1: risking bubbles at this point, given that the reality is
Speaker 1: that they need to re employ the labor force, writes
Speaker 1: to catch up. As oh, I stand touchwa you in
Speaker 1: linen that of being a capital markets now joining us
Speaker 1: to talk about fiscal action. As Jason Furman, he's Harvard
Speaker 1: Kennedy School professor and from a chairman of the Council
Speaker 1: of Economic Advisors during the ADMABA administration. Jason, thank you
Speaker 1: for joining us. When you look at how far apart
Speaker 1: Democrats and Republicans actually are, I think it's over one
Speaker 1: trillion dollars. Is it a bit like Europe? They're far apart.
Speaker 1: They're the overture as I get shot down. But at
Speaker 1: the end of the day, they'll find a deal in
Speaker 1: the eleventh hour or is it different Frenzying, It is
Speaker 1: past midnight already. UM. One of these programs expired at
Speaker 1: the end of June. The other program expired at the
Speaker 1: end of July. And you know, the lead negotiator for
Speaker 1: one of the sides has now gone on vacation. So
Speaker 1: I am very worried about you know, when the two
Speaker 1: sides will come together. I assume at some point they will, UM,
Speaker 1: but I think it could you know it's unlikely to
Speaker 1: happen this month, Jason doesn't make a difference. So we
Speaker 1: understand that one of the biggest sticking points is actually
Speaker 1: aided to stay in local governments. Does it make it
Speaker 1: or how much of a different does it make if
Speaker 1: we have something in August or if we have something
Speaker 1: in September? Is it Is it going to scar the economy? Yeah?
Speaker 1: I think it makes a big difference. I think we're
Speaker 1: already doing irreversible or not irreversible, but persistent harm to
Speaker 1: the economy. UM states and localities should have had this
Speaker 1: aid months and months ago before they set their budgets
Speaker 1: for this year. The school year has begun in many
Speaker 1: states in the United States, and they have enormous expenditures
Speaker 1: they need to make in order to make schools safe.
Speaker 1: If they can't make school safe, they can't have the students,
Speaker 1: which makes it harder for their parents to work, which
Speaker 1: has another um not gone effect on the economy, where
Speaker 1: right now in the largest fiscal contraction the United States
Speaker 1: has ever seen, as the Cares Act, which was roughly
Speaker 1: five billion dollars a month, has gone down to what
Speaker 1: I would estimated at about forty five billion dollars. Given
Speaker 1: the president's executive order, that's about how much stimulus UM
Speaker 1: that is worth. So a huge fiscal contraction state behind
Speaker 1: the curve knock on effects for parents working UM. This
Speaker 1: is not at all good for the US economy, Jason.
Speaker 1: People on the other side would argue, we're seeing a
Speaker 1: pretty rapid improvement, that we're seeing jobless claims fall from
Speaker 1: their peaks, that the unemployment rate, while still incredibly high
Speaker 1: based on historical normalcy, is still a lot lower than
Speaker 1: it was during the peak of the shutdowns. What would
Speaker 1: you say to people saying we're just on the path
Speaker 1: to recovery. Sit tight, Wait, don't increase the deficit because
Speaker 1: we're getting there. I would say to those people that
Speaker 1: all of those economic data and it has been a
Speaker 1: rapid recovery varies. Employments recovered less than half, consumer spending
Speaker 1: has gone almost all the way UM. But all of
Speaker 1: that rapid recovery has been in the face of a massive,
Speaker 1: massive policy response. And if you end that massive policy response,
Speaker 1: the prop underlying that will be gone. Disposable personal income
Speaker 1: was up ten not even at an annual rate in
Speaker 1: the second quarter. That's why consumption got all the way
Speaker 1: back to where it was a year ago. That helped
Speaker 1: support the job recovery. That didn't happen on its own.
Speaker 1: That happened because people had massive amounts of cash, and
Speaker 1: we're now about to take that away, all right, Jason.
Speaker 1: There's an argument that if they add to the extra
Speaker 1: six hundred dollars a week or six hundred dollars an
Speaker 1: extra stimulus for people who are unemployed, that that will
Speaker 1: actually lead to people not going back to the workforce.
Speaker 1: But there was a study done by the University of
Speaker 1: Chicago and fivety eight that suggested that actually a decrease
Speaker 1: in unemployment benefits would lead to an increase in joblessness.
Speaker 1: Do you agree? Does that make sense to you? I
Speaker 1: think the higher the unemployment benefit, the debt or the
Speaker 1: economy is in the next couple of months because people
Speaker 1: have more money to spend, and that's the most important
Speaker 1: direct effect. I think at some point it has a
Speaker 1: labor disincentive, and so I personally would taper that number down,
Speaker 1: start reducing it from six hundred dollars a week um
Speaker 1: To date that it's been completely fine, all the evidences,
Speaker 1: it's completely fine. I don't think six hundred dollars a
Speaker 1: week is the right number for December. Something more like
Speaker 1: four hundred dollars a week would both support consumption but
Speaker 1: have a better balance with the work incentives that will
Speaker 1: matter more in the future than they have in the past. Jason,
Speaker 1: when should we start worrying about deficits? Not not this year,
Speaker 1: probably not next year. Interest rates are really low. In fact,
Speaker 1: they're negative adjusted for inflation. The economy is way below
Speaker 1: where it should be. I just don't think that needs
Speaker 1: to be a concern for a while, unless, for in seeing,
Speaker 1: you're you're passing something permanent. If you want to do
Speaker 1: a new health reform that last forever, I think you
Speaker 1: should be paying for that. But if these are temporary
Speaker 1: measure is um people want to lend money at a
Speaker 1: negative interest rate, we should be taking those loans and
Speaker 1: not worrying about them. And Jason, you know what you
Speaker 1: did at is as much as money that the fight
Speaker 1: between Republicans and the Democrats is actually how about you
Speaker 1: know the economy Wolffair in the months ahead, if we
Speaker 1: don't have a stimulus, what's your base case for what
Speaker 1: the US economy will look like at the end of
Speaker 1: the year without a stimulus, you have a w shaped recovery,
Speaker 1: because consumption, as I said, is back to where it
Speaker 1: was pre crisis. Even though the unemployment rate is ten percent,
Speaker 1: you would have expected consumption to be down about ten
Speaker 1: given the state of the labor market. That's what would
Speaker 1: happen if there's no new stimulus and a ten percent
Speaker 1: decline and consumption would be a very sharp contraction, might
Speaker 1: show up in Q three, might show up in Q four,
Speaker 1: would be compounded by further cutbacks at the state and
Speaker 1: local level. Francy and really interesting to see that we
Speaker 1: were expected to be talking about the phase two of
Speaker 1: the trade deal between the US and China. Right now
Speaker 1: we are still talking about Phase one, and we're going
Speaker 1: to be assessing Phase one. US and China negotiators meeting
Speaker 1: on Saturday, still with us to talk about some of
Speaker 1: the international implications here. Jason Furman, Harvard Kennedy School professor
Speaker 1: and former chair of the Council of Economical Advisors under
Speaker 1: President Obama's era. I'm wondering, Jason, from your perspective, how
Speaker 1: significant are these Phase one trade talks given the fact
Speaker 1: that we're supposedly we're supposed to have a deal that
Speaker 1: China isn't really close to complying with it based on
Speaker 1: the pandemic, and that tension seemed to be rising between
Speaker 1: the two nations. I agree with everything you said, except
Speaker 1: that based on the pandemic caveat, I didn't expect China
Speaker 1: to comply with it. I didn't think it made sense
Speaker 1: even to negotiate this type of managed trade where they
Speaker 1: promise to buy certain things. The whole US approach to
Speaker 1: China has failed because it's been entirely unilateral, ignored. The
Speaker 1: w t O hasn't worked with our allies, has focused
Speaker 1: on illegitimate objective, which is these purchasing goals, and we
Speaker 1: need to change all of that because it's really important
Speaker 1: to put pressure on China to do it in a consistent,
Speaker 1: effective and multilateral manner. Well, President Trump wretchetting up the
Speaker 1: pressure on China, particular banning US companies from doing business
Speaker 1: with we Chat of ten Cent as well as TikTok,
Speaker 1: and trying to understand here why we're not seeing this
Speaker 1: reflected markets. Given the fact that Apple among other companies,
Speaker 1: have said that this could potentially be a big hit
Speaker 1: to their profitability for a business that accounts for nearly
Speaker 1: a fifth of the revenues yeah. And I think what
Speaker 1: President Trump is doing, you know, when he talks for
Speaker 1: getting a share of the revenue on the TikTok deal,
Speaker 1: is just sending exactly the wrong message to the Chinese.
Speaker 1: We should be sending him message of consistent adherents to law,
Speaker 1: neutral treatment, um and the like. So I think it's terrible.
Speaker 1: He also has a record, though, President Trump, of backtracking
Speaker 1: when he needs to, especially for the sake of the market.
Speaker 1: I think one author called it the Trump put and
Speaker 1: that's what the market seems to expect will happen here,
Speaker 1: or maybe they think Joe Biden will save them with
Speaker 1: its policy. It's gonna be very tough on China, but
Speaker 1: not I wouldn't expect as erratic and inconsistent as what
Speaker 1: we've seen in recent years. And Jason, how would you
Speaker 1: advise a Biden administration in their dealings with China. I
Speaker 1: would say that the United States does not have enough
Speaker 1: leverage all by itself. So let's settle the trade wars
Speaker 1: with Canada, with Mexico, with Germany, with other countries around
Speaker 1: the world, and let's make common cause and let's reorient
Speaker 1: the objectives. It isn't how much American stuffed China buys
Speaker 1: Germany isn't gonna help negotiate a deal for China to
Speaker 1: buy Boeing jets UM. It's China's intellectual property rules, neutral
Speaker 1: treatment under the law, UM and the like. So a
Speaker 1: renewed US multilateralism can actually be stronger in pushing China,
Speaker 1: but pushing it in a more principled and rules based manner. Jason,
Speaker 1: when you look at the pandemic, and you know the way,
Speaker 1: it's kind of resetting what maybe some of our priorities are.
Speaker 1: It could be health, it could be investing in climate change,
Speaker 1: it could be all sorts of things. Will it actually
Speaker 1: will this pandemic end our obsession with economic growth? I
Speaker 1: don't think it's gonna end our obsestion with employment. UM.
Speaker 1: That is a problem now, and I think in all
Speaker 1: of our economies in Europe, the United States, a year,
Speaker 1: two years, three years from now, we're gonna have vary
Speaker 1: success unemployment and bringing that down will be a major
Speaker 1: of jective. The public policy is going to struggle with
Speaker 1: UM for years to come. And you know, we've also
Speaker 1: seen you giving people cash, whether through unemployment, through checks,
Speaker 1: through other mechanisms, has to some degree helps solve this problem,
Speaker 1: at least in the short run for many households, and
Speaker 1: so I don't think this is going to make cash
Speaker 1: and money any less important than it was before. Wait, Jason,
Speaker 1: are you advocating for some sort of MMT, some sort
Speaker 1: of modern monetary theory? Here? Modern monetary theory is like
Speaker 1: a stopped clock that's right twice a day, and now
Speaker 1: is one of those rights. So you're not saying going
Speaker 1: forward that this is your your policy. What do you
Speaker 1: think about the de globalization shift in general and in
Speaker 1: the possibility that it's going to increase prices and purchasing
Speaker 1: decreased purchasing power for the average consumer in the US.
Speaker 1: Is that something you're worried about. I'm a little bit
Speaker 1: worried about it. I mean, it's two types of deglobalization.
Speaker 1: One is an artificial one because where incapable of getting
Speaker 1: along as countries. I think that's a big problem. Um.
Speaker 1: The other is a natural one that you know. It
Speaker 1: turns out the cost of globalization just to your balance sheet,
Speaker 1: your bottom line is a bit higher than your thought
Speaker 1: because of these unexpected events happening a little bit more
Speaker 1: often around the world. And so I think there's some
Speaker 1: natural retrenchment. But I also do think that the economic
Speaker 1: benefits of globalization are so enormous that in any scenario,
Speaker 1: companies consumers are going to find a way to have
Speaker 1: a lot of it. Jason, if we don't have stimulus
Speaker 1: in the US, will the Democrats be blamed for it?
Speaker 1: The Republicans will blame the Democrats. The Democrats will blame
Speaker 1: the Republicans. I think ultimately, UM, the president, fairly or
Speaker 1: unfairly in this case, I would say fairly, UM bears
Speaker 1: the blame when there's dysfunction and failure. All right, Jason,
Speaker 1: thank you as always for joining us Jason Firm and
Speaker 1: their Harvard Kennedy School professor and former chairman the Council
Speaker 1: of Economic Advisor. Thanks for listening to the Bloomberg Surveillance podcast.
Speaker 1: Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or
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