WEBVTT - Surveillance: Economic Recovery With Meyer 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Leye. 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, 0:00:23.600 --> 0:00:27.159 Bloomberg dot Com, and of course on the Bloomberg. We 0:00:27.240 --> 0:00:30.160 begin the program this Wednesday with someone who was constructive 0:00:30.280 --> 0:00:33.280 when others were bullish when many were still bearish, and 0:00:33.360 --> 0:00:36.640 name Lisa Shalott of Morgan Stanley Weafth Management. Lisa Shalott, 0:00:36.680 --> 0:00:39.080 fantastic to catch up with you, and I will say 0:00:39.120 --> 0:00:41.600 out front, you have been right over the last couple 0:00:41.640 --> 0:00:43.320 of months, but over the last couple of weeks that 0:00:43.400 --> 0:00:47.040 cyclical rotation has started to fade. There is a defensive 0:00:47.120 --> 0:00:50.000 bias creeping back into this market. What's the message for 0:00:50.040 --> 0:00:53.680 clients this morning? Lisa, Yeah, Look, I think that that 0:00:53.800 --> 0:00:57.600 as you articulated, I think that the concerns over the 0:00:58.040 --> 0:01:02.120 recent spike in cases um is something that investors are 0:01:02.160 --> 0:01:06.440 definitely grappling with. And to your point, we have seen, uh, 0:01:06.560 --> 0:01:09.720 you know, a defensive rotation. Albeit on the one hand, 0:01:10.040 --> 0:01:13.360 uh you know, people sustained by the fuel of the bed. 0:01:14.280 --> 0:01:17.240 But on the other hand, you know, buying things like gold, 0:01:17.440 --> 0:01:21.479 like utilities, uh, like staples, you know, leading the smoke 0:01:21.560 --> 0:01:24.800 it so, UM, you know we have uh, you know, 0:01:24.920 --> 0:01:29.080 articulated that we thought that period um, you know really 0:01:29.160 --> 0:01:31.440 from game through the end of the year was going 0:01:31.480 --> 0:01:36.440 to be a very volatile and trade range bound uh, 0:01:36.840 --> 0:01:39.640 a range bound market, and you know we're we're sticking 0:01:39.640 --> 0:01:42.759 with that. Um. We still think there's opportunities to buy 0:01:42.840 --> 0:01:49.080 those cyclicals for what ultimately happened two. But we understand 0:01:49.120 --> 0:01:53.000 that we're in a very very toppy critical period here. Uh, 0:01:53.040 --> 0:01:56.960 and we're not surprised by this defensive rotation and certainly, 0:01:57.560 --> 0:02:00.600 uh it is validated by that news low the Tom 0:02:00.640 --> 0:02:04.520 talked about the the the pick up um in in 0:02:04.640 --> 0:02:08.560 the virus numbers are staggering in the last week A Lisa, 0:02:08.840 --> 0:02:10.560 compared to what we were a couple of weeks ago, 0:02:10.760 --> 0:02:13.400 you sound relatively more cautious. So I hope that's a 0:02:13.400 --> 0:02:15.720 fair characterization of where you stand. And I just wonder 0:02:15.760 --> 0:02:19.560 what's the epicenter of that term for you. UM, yeah, No, 0:02:19.720 --> 0:02:22.200 it's it's as I said, UM, I think we are 0:02:22.240 --> 0:02:25.280 a little bit more cautious. Look, we're still very uh 0:02:25.440 --> 0:02:30.440 strongly in that range that we've talked about between two hundred. 0:02:31.080 --> 0:02:34.400 But as we look at um, you know, these the 0:02:34.480 --> 0:02:38.519 spike in the COVID nineteen cases. Um, while we don't 0:02:38.720 --> 0:02:43.800 think that there's appetite either human will or political will 0:02:43.919 --> 0:02:47.720 to really go back to both the style of all 0:02:47.760 --> 0:02:51.000 out lockdowns that we saw in March and April. UM, 0:02:51.160 --> 0:02:54.600 these are numbers that are going to cause people, uh, 0:02:54.639 --> 0:02:59.720 you know, local town cities, uh, concern and and stress 0:02:59.720 --> 0:03:03.040 and and again to Tom's point, UM, if you start 0:03:03.160 --> 0:03:08.840 hitting limits in certain cities and innsicitalities on their hospital capacity, 0:03:09.120 --> 0:03:13.840 they will have no choice, but you once again restrict 0:03:13.919 --> 0:03:17.600 economic activity. H. And I think that that you know, 0:03:17.720 --> 0:03:19.919 that's kind of what you're seeing in the numbers. People 0:03:20.040 --> 0:03:23.040 get the joke you can't fight the FED, but they 0:03:23.120 --> 0:03:26.800 also worry that the only things that are going to work, um, 0:03:26.840 --> 0:03:29.919 you know, in an environment where the recovery is very 0:03:30.040 --> 0:03:34.200 lumpy and impeded by the virus. Uh. Maybe you know 0:03:34.280 --> 0:03:39.120 with with those very defensive uh names. Alica Shelley, you 0:03:39.200 --> 0:03:42.080 good morning. You've always been research based, of course, with 0:03:42.160 --> 0:03:45.640 the acclaim of Sanford Bernstein and the wonderful Black Books 0:03:45.720 --> 0:03:48.960 and all that, You've always led with research First, what 0:03:49.000 --> 0:03:53.520 are you learning from the Morgan Stanley cell Side research 0:03:53.640 --> 0:03:58.400 team about this nation and its corporations? What is the 0:03:58.600 --> 0:04:03.040 spirit they're hearing they're feeling going into the summer into 0:04:03.080 --> 0:04:05.960 the mystery of the fall months. Yeah, I think one 0:04:05.960 --> 0:04:09.600 of the the UM you know, most interesting things that 0:04:09.640 --> 0:04:14.960 we're debating is the extent to which UM companies are 0:04:15.000 --> 0:04:18.760 going to resume their capital spending. UH. And so one 0:04:18.760 --> 0:04:21.360 of the reasons that we as a house I think 0:04:21.360 --> 0:04:25.719 have been somewhat more bullish UH than many And where 0:04:25.760 --> 0:04:29.240 why you know, our global economists in chet Naya UM 0:04:29.279 --> 0:04:31.960 you know, have stuck to this more bullish V shaped 0:04:32.040 --> 0:04:36.960 recovery forecast is because we are seeing a pickup in 0:04:37.760 --> 0:04:41.200 capital spending intentions. And that UM was something that I 0:04:41.240 --> 0:04:44.719 think earlier in the year was much more hotly debated. 0:04:45.120 --> 0:04:48.640 Now a lot of the capital spending does UM you know, 0:04:48.720 --> 0:04:52.440 seem to be focused on technology and the cloud and 0:04:52.480 --> 0:04:56.480 you know, digital present UM. But UM you know, that's 0:04:56.600 --> 0:05:00.160 that's really I think, UM, you know, where we still 0:05:00.160 --> 0:05:04.880 remain very bullish and constructive UM that that capital spending 0:05:05.120 --> 0:05:08.320 UM you know helps the STEM is Lisa, We're gonna 0:05:08.360 --> 0:05:11.600 be very lucky to have CHATNYA with us tomorrow, your colleague. 0:05:12.080 --> 0:05:14.920 A question coming up from a listener, Cliff Marine at 0:05:14.960 --> 0:05:17.600 mass Mutual, And this really goes to the angst of 0:05:17.640 --> 0:05:20.039 a lot of investors out there. Has the easy money 0:05:20.440 --> 0:05:24.279 been made? Can we just expect lower returns going forward? Well, 0:05:24.320 --> 0:05:28.039 that's certainly our our view. Um. I mean, if if 0:05:28.040 --> 0:05:32.599 you just look at the last decade, um, and we 0:05:32.680 --> 0:05:35.400 talked about this all the time. You know, over the 0:05:35.480 --> 0:05:38.520 last eleven years, the sup from whom you know has 0:05:38.640 --> 0:05:42.320 compounded at close to fifteen percent per year, which two 0:05:42.400 --> 0:05:47.200 times normal. Uh. The corporate credit returns of compounds at 0:05:47.279 --> 0:05:50.640 nine person that's about three times normal um. And so 0:05:50.680 --> 0:05:53.440 if you look at this on it, any of you know, 0:05:53.480 --> 0:05:58.359 set normalized metrics, either normalized earnings or normalized it just 0:05:59.120 --> 0:06:02.920 you know, avery expensive market. So in the in the 0:06:02.920 --> 0:06:08.520 the of a you know, Robert ship type plant work, Um, 0:06:08.560 --> 0:06:12.160 you know, we're looking at returns over the next three 0:06:12.240 --> 0:06:14.279 to five years that there's going to be a lot 0:06:14.320 --> 0:06:18.200 more like four to five percent, not seven or eight percent. 0:06:18.279 --> 0:06:21.320 And a lot of of clients you know, have historically 0:06:21.360 --> 0:06:25.080 expected so um, you know, certainly the fan is throwing 0:06:25.520 --> 0:06:29.920 unbelievable amounts of ammunition at this the the federal government 0:06:30.320 --> 0:06:33.560 is doing its part on fiscal but it's really hard 0:06:33.640 --> 0:06:38.000 to see. Um, you know how financial assets, uh, you know, 0:06:38.080 --> 0:06:41.800 appreciate materially without us really getting into a dangerous bubble 0:06:41.920 --> 0:06:44.720 territory at Lisa shout out of Morgan Stanley. Lisa, always 0:06:44.760 --> 0:06:47.080 appreciate your insight and perspective, and we thank you for 0:06:47.080 --> 0:06:49.120 your time. This morning got best to you and the 0:06:49.120 --> 0:06:55.000 whole of the same erom Morgan Stanley right now a 0:06:55.160 --> 0:07:00.720 really wonderful conversation, conversation on how we're framing our expectations forward. 0:07:00.760 --> 0:07:03.800 Michelle Meyer came to the attention of all of Global 0:07:03.839 --> 0:07:08.040 Wall Street where their financial modeling learned at Boston University. 0:07:08.120 --> 0:07:11.679 She did brilliant work for Bank of America on real estate, 0:07:11.760 --> 0:07:14.920 on the thinking of the underpinnings of the economy. She 0:07:15.080 --> 0:07:18.160 joins us now with Bank of America. Michelle to the 0:07:18.200 --> 0:07:22.640 model's work right now, can you use conventional Michelle Meyer 0:07:22.800 --> 0:07:25.200 economics to look forward or do you have to make 0:07:25.240 --> 0:07:28.440 it up as you go? Um? So, I think what 0:07:28.520 --> 0:07:31.120 we've learned is that right now it's really important to 0:07:31.160 --> 0:07:34.840 do a bottoms up exercise, the bottoms up modeling, right 0:07:34.880 --> 0:07:38.160 because the shock is so sector specific and it's hitting 0:07:38.160 --> 0:07:41.000 the economy in many different ways. So think about it 0:07:41.000 --> 0:07:44.200 for jobs, for example, probably the best way to forecast 0:07:44.240 --> 0:07:47.120 the path forward for the labor marketing Unemplymary, is to 0:07:47.200 --> 0:07:50.400 think carefully about each major sector. How is how are 0:07:50.440 --> 0:07:54.960 retail jobs going to recover, versus construction, versus autos, versus 0:07:55.000 --> 0:07:58.480 leisure on hospitality, and from that you can then kind 0:07:58.520 --> 0:08:00.920 of add up and and think about the big picture. 0:08:00.960 --> 0:08:03.840 But it's really important to look at the economy on 0:08:03.880 --> 0:08:06.760 a center to sector basis. Right now, I agree with 0:08:06.800 --> 0:08:09.560 that in the partition of goods and services, we've seen 0:08:09.600 --> 0:08:13.720 goods disinflation and outright deflation at times. Do you suggest 0:08:13.800 --> 0:08:18.360 we will see service sector disinflation? Look, this is a 0:08:18.400 --> 0:08:22.440 service sector shock, um and and you're right. Typically it's 0:08:22.520 --> 0:08:24.800 good that swings around a lot more. It's goods that 0:08:24.840 --> 0:08:27.200 tend to be the most vulnerable in a recession. But 0:08:27.320 --> 0:08:30.160 consider the consumer basket that we've seen in the past 0:08:30.720 --> 0:08:33.160 a few months since COVID hit. People have been spending 0:08:33.200 --> 0:08:36.480 on durable goods. They've been spending on household appliances, they've 0:08:36.520 --> 0:08:38.840 been spending on autos, they've been spending on housing, and 0:08:38.880 --> 0:08:41.640 they haven't been spending on services, so the big demand 0:08:41.640 --> 0:08:44.080 destruction has been much more on services. Now part of 0:08:44.080 --> 0:08:47.160 that comes back, It already is coming back upon reopening, 0:08:47.360 --> 0:08:50.560 but not fully so. The big oppraise adjustments happened to services. 0:08:50.600 --> 0:08:52.960 I don't think it was the outright deflation for broad 0:08:53.000 --> 0:08:56.120 services because the lodging component, the rental component in there 0:08:56.160 --> 0:08:58.679 is so broad. But we're going to flirt with that, 0:08:59.080 --> 0:09:03.320 and certainly many cadgories will be uh disinflation area and 0:09:03.320 --> 0:09:06.000 and and some will be in deflation territory. Michelle, I'm 0:09:06.000 --> 0:09:08.400 going to steal from your research the three phases to 0:09:08.480 --> 0:09:12.200 all of this, the shutdown, the bounce, the recovery. You've 0:09:12.200 --> 0:09:14.720 talked about that bounce off the trampoline followed by a 0:09:14.840 --> 0:09:17.960 long climb up a rope. What are you learning from 0:09:18.000 --> 0:09:20.760 the bounce in the last month, so, you know, I 0:09:20.800 --> 0:09:24.040 think it's been stronger than maybe we would have anticipated. 0:09:24.080 --> 0:09:26.440 And part of that because the reopening was also earlier, 0:09:26.520 --> 0:09:29.880 So it's it's happened earlier, it's it's been strong. Consumer 0:09:29.920 --> 0:09:33.160 confidence is so so um it picks up pretty meaningfully, 0:09:33.160 --> 0:09:36.000 so people also feel better about the world. There's clearly 0:09:36.040 --> 0:09:40.280 a desire to re engage. That said, we're now starting 0:09:40.320 --> 0:09:43.480 to see very early evidence that things are leveling off, 0:09:43.480 --> 0:09:44.880 whether you look at it in terms of some of 0:09:44.920 --> 0:09:48.640 the high frequency data around consumer spending or small business 0:09:48.640 --> 0:09:51.800 openings from a variety of alternative data sources as well, 0:09:52.040 --> 0:09:54.560 things are starting to kind of peek out, particularly in 0:09:54.559 --> 0:09:57.240 the states that are further along in the reopening process. 0:09:57.520 --> 0:09:59.800 So that tells us that next phase, and thank you 0:09:59.880 --> 0:10:03.400 for referencing those three phases, UM, that next phase, the 0:10:03.120 --> 0:10:07.280 the true healing and the recovery phase. UM. We're starting 0:10:07.320 --> 0:10:09.480 to approach that, and and that's going to be a 0:10:09.559 --> 0:10:13.520 much more challenging one in my view. And Michelle, another 0:10:13.640 --> 0:10:16.680 challenging aspect here is the road ahead for housing. So far, 0:10:16.679 --> 0:10:19.000 we've seen amazing resilience, and I know this is one 0:10:19.000 --> 0:10:21.920 of your expertise, is dating back to two thousand, five 0:10:22.080 --> 0:10:24.800 thousand six, and I'm wondering how long this can last 0:10:25.120 --> 0:10:28.160 if we don't see a further resurgence, especially since these 0:10:28.160 --> 0:10:33.520 are really being driven by mortgage rates at all time lows. Yeah, 0:10:33.559 --> 0:10:36.000 you know, I think for housing, clearly, the balance has 0:10:36.040 --> 0:10:40.160 been incredible mortgage purchase applications and eleven year high new 0:10:40.200 --> 0:10:43.600 construction in particular benefiting the most because of the ability 0:10:43.880 --> 0:10:46.360 and the ease of of searching for new construction versus 0:10:46.360 --> 0:10:49.240 existing UM so mortgage rates I think is one factor. 0:10:49.280 --> 0:10:52.760 I think pandemic related relocations is another factor, particularly out 0:10:52.800 --> 0:10:54.840 of urban areas. We've seen a lot of survey evidence 0:10:54.840 --> 0:10:57.680 to that effect. UM and then the demographics in general 0:10:57.720 --> 0:11:01.520 have been also favorable for for housing and this factor continues. 0:11:01.840 --> 0:11:03.960 So no, we won't expect this rate of growth to 0:11:04.000 --> 0:11:06.040 persist for housing. This is this is a this is 0:11:06.080 --> 0:11:09.720 a sharp move up UM given the situation UM, but 0:11:09.960 --> 0:11:13.200 the fundamentals are still pretty UM supportive and if we 0:11:13.240 --> 0:11:15.839 could assume, and I think rightfully so, that interest rates 0:11:15.880 --> 0:11:19.000 are going to remain very low for the medium term, 0:11:19.200 --> 0:11:22.880 housing should continue to be underpinned. Michelle, when you talk 0:11:22.920 --> 0:11:26.000 about the migration out of urban areas, is it going 0:11:26.040 --> 0:11:29.239 to leave zombie lands and some of the big metropolitan 0:11:29.280 --> 0:11:31.880 areas where there's an incredible amount of commercial real estate 0:11:31.880 --> 0:11:34.760 that won't necessarily get filled up as well as residential 0:11:34.800 --> 0:11:37.319 it's been built up over the past few years. So 0:11:37.360 --> 0:11:40.880 I think there will be some real consequences, of course, 0:11:41.080 --> 0:11:45.880 from these considerable shifts in population and where people want 0:11:45.880 --> 0:11:49.400 to live where people want to work. Um, but remember 0:11:49.640 --> 0:11:53.200 that their short term adjustments in the end, urban centers 0:11:53.240 --> 0:11:56.840 are still vibrant. It's still where you know, the heart 0:11:56.880 --> 0:11:59.960 of businesses tend to lie and and and you know 0:12:00.160 --> 0:12:02.440 the city is particularly to think New York City. They've 0:12:02.480 --> 0:12:05.240 been through these shocks over the years and they do 0:12:05.320 --> 0:12:08.280 bounce back. But I do think in the short term 0:12:08.280 --> 0:12:11.240 we will be seeing a pretty meaningful adjustment. And if 0:12:11.240 --> 0:12:13.240 you think that even just a real estate market in 0:12:13.240 --> 0:12:16.160 in in in some of the cities versus the suburbs, 0:12:16.200 --> 0:12:18.360 you're ready starting to see some of that praise convergence 0:12:18.559 --> 0:12:22.600 even before COVID hit. So the COVID shock just amplifies 0:12:22.679 --> 0:12:26.280 what was already underway in terms of the migration paths. 0:12:26.800 --> 0:12:29.000 Michelle is a real worried that the infection increase of 0:12:29.000 --> 0:12:32.439 the last several weeks in several states, including Texas, is 0:12:32.480 --> 0:12:34.880 going to constrain the reopening process and start to hit 0:12:34.920 --> 0:12:37.600 the data. My worry, just looking at this from an 0:12:37.640 --> 0:12:40.800 economics perspective, is that the sequential improvement is banned to 0:12:40.840 --> 0:12:44.080 continue because places like New York are just starting to reopen, 0:12:44.120 --> 0:12:47.200 those forces will be really powerful. So the africant numbers 0:12:47.200 --> 0:12:49.280 over the next couple of months might still look strong. 0:12:49.600 --> 0:12:53.000 Do you think that could mask some fragility underneath and 0:12:53.040 --> 0:12:56.319 we might miss what is happening in places like Texas, California, 0:12:56.400 --> 0:12:59.840 Florida and elsewhere. So you're absolutely right in that, you know, 0:13:00.000 --> 0:13:01.679 and you think about the aggregate. You have the states 0:13:01.720 --> 0:13:04.520 that are further along in reopening where the viruses are rising. 0:13:04.760 --> 0:13:06.839 Things might be starting to slow there because just the 0:13:06.920 --> 0:13:09.439 length of time post reopening and now they have the 0:13:09.520 --> 0:13:13.680 virus concerns. But that's the offset by New York, fu Jersey, Massachusetts, 0:13:13.960 --> 0:13:16.719 um moving into the reopening process for the along and 0:13:16.720 --> 0:13:19.640 the reopening process. So that's why it's absolutely critical to 0:13:19.760 --> 0:13:23.199 look at high frequency data on a state basis. So 0:13:23.240 --> 0:13:25.360 we do a lot of work where we're trying to 0:13:26.040 --> 0:13:29.960 um pick out the states, you know, kind of bucket 0:13:30.000 --> 0:13:33.080 the states into the degree of reopening and track daily 0:13:33.200 --> 0:13:36.720 weekly data in terms of understanding what economic activity is doing. 0:13:36.760 --> 0:13:39.320 And I think the most important indicator will be if 0:13:39.360 --> 0:13:41.560 the states that are further along in reopening that now 0:13:41.600 --> 0:13:44.280 have viruses on the rise, as you said, Texas, Florida, 0:13:44.559 --> 0:13:47.800 hours out, Arizona, and South Carolina in that bucket, if 0:13:47.840 --> 0:13:51.280 you start to see behavior switch even before there's government 0:13:51.360 --> 0:13:55.600 policies that that demand that right, just from personal preferences. 0:13:55.880 --> 0:13:58.440 I think that will be a very important sign. What 0:13:58.480 --> 0:14:00.360 should we look for in the high Freak can see 0:14:00.440 --> 0:14:04.520 data tomorrow morning at claims Statistics. So we love claims. 0:14:04.559 --> 0:14:07.120 Claims there are a great piece of information, but they 0:14:07.120 --> 0:14:09.880 are flawed and we've learned that, Um, they're flawed in 0:14:09.880 --> 0:14:13.360 part because there's backlog issues presumably in terms of how 0:14:13.440 --> 0:14:17.439 to process these these these indicators. Um, there's all different 0:14:17.520 --> 0:14:20.400 changes to the claims programs in terms of eligibility and 0:14:20.400 --> 0:14:23.480 criteria for receiving claims. So I think you need to 0:14:23.480 --> 0:14:25.560 take them with a grain of salt when you're translating 0:14:25.600 --> 0:14:29.440 those claims numbers into actual hiring, and more important, firing 0:14:29.480 --> 0:14:32.600 really is what you're capturing with it. That said, the 0:14:32.840 --> 0:14:37.600 stickiness that we've seen from claims has been a sign 0:14:37.640 --> 0:14:40.200 of a reason to be concerned because it tells you 0:14:40.240 --> 0:14:44.920 that there's still some firing going on even when we 0:14:45.000 --> 0:14:48.360 know there's hiring from reopening. So for claims tomorrow, we 0:14:48.440 --> 0:14:50.640 do think we're gonna these some models moved down in 0:14:50.640 --> 0:14:54.360 initial jobs claims remaining above a million and continuing your 0:14:54.400 --> 0:14:56.520 job is claims, which is probably really one of the 0:14:56.600 --> 0:14:59.200 more critical indicators when you're trying to to map this 0:14:59.280 --> 0:15:01.880 to an unemployment a rate. Um. You know, I would 0:15:01.920 --> 0:15:04.280 imagine it comes down a bit, but I don't think 0:15:04.360 --> 0:15:07.520 we should expect these dramatic falls right now in claims. 0:15:07.680 --> 0:15:11.160 Certainly the data hasn't shown that. Michelle, my Bank for America, Michelle, 0:15:11.320 --> 0:15:14.040 always enjoy hearing from you and the whole of the team. 0:15:14.080 --> 0:15:20.360 My best to even yours. Michelle off by the yield 0:15:20.400 --> 0:15:23.280 differentials and of course the flow differentials, and that's something 0:15:23.320 --> 0:15:26.800 show have joll News knows well. A credit suites originally 0:15:26.840 --> 0:15:30.520 after Singapore Desk and out of the London School of Economics, 0:15:30.560 --> 0:15:33.320 grind shall have good morning to you. What is the 0:15:33.320 --> 0:15:37.280 credit suite call on the US dollar morning. We are 0:15:37.320 --> 0:15:40.800 looking for a weekly dollar linked to some of the 0:15:40.800 --> 0:15:44.320 points you've already made. Firstly, we do have a situation 0:15:44.320 --> 0:15:47.280 where the stud is still buying in effect around eight 0:15:47.400 --> 0:15:51.280 billion dollars a month of treasuries UH. And the banner 0:15:51.320 --> 0:15:56.520 ship expansion is conclete is continuing with maybe slightly slower 0:15:56.560 --> 0:15:58.440 than the peak levels that we saw, but still by 0:15:58.480 --> 0:16:02.320 any historical standard at a fast pace. You also have 0:16:02.440 --> 0:16:05.720 still took of yield cuve control rate stressors. For example, 0:16:05.800 --> 0:16:09.080 Things to Market is still parting around a chance of 0:16:09.160 --> 0:16:12.120 yield cuve control being introduced in the US within the 0:16:12.160 --> 0:16:14.880 next three months um some field that the FAT has 0:16:14.880 --> 0:16:17.320 already decided to do that, and it's the question of 0:16:17.360 --> 0:16:20.720 working out implementation to these factors together with very low 0:16:20.760 --> 0:16:23.720 nominal rates. We talked about real rates, but nominal rates 0:16:23.720 --> 0:16:27.040 are also very low obviously, and and so yield differentials 0:16:27.080 --> 0:16:29.760 even the nominal terms and did not preclude being short 0:16:29.800 --> 0:16:33.360 dollars these days, unlike the last few years. And in folks, 0:16:33.440 --> 0:16:36.200 for those of you on our simulkas this is really important. 0:16:36.240 --> 0:16:39.800 How we folded our conversation of yesterday with James Bullard 0:16:39.960 --> 0:16:42.720 over to the foreign exchange realities of Shahab. John, the 0:16:42.800 --> 0:16:46.720 news and yield curve control Shahab, do you just assume 0:16:46.800 --> 0:16:50.560 that means lower and longer at the zero bound, And 0:16:50.560 --> 0:16:54.680 as John Farrell mentions, the interst rate market must adapt 0:16:54.680 --> 0:16:57.960 to that, and that's expressed in your world of foreign exchange. 0:16:58.720 --> 0:17:00.920 I think that's right. I think in our world of 0:17:01.000 --> 0:17:04.040 fign exchange, you know clearly real yields do matter. In 0:17:04.080 --> 0:17:07.360 the long run, but in the very short term nominal 0:17:07.359 --> 0:17:10.360 reds matter too. That's that's basically the real cost world, 0:17:10.359 --> 0:17:14.080 the cost of carrier that you pay for being long 0:17:14.200 --> 0:17:17.040 or short currency. And at this point in time, unlike 0:17:17.160 --> 0:17:20.720 recent years, the dollar in nominal terms, does not offer 0:17:20.880 --> 0:17:24.600 any significant yield pick up, and yield can control would 0:17:24.640 --> 0:17:27.960 ensure that that would be the case going forward for 0:17:28.000 --> 0:17:30.520 a long time as well. So all of a sudden, 0:17:30.600 --> 0:17:33.080 currencies like the euro or the yen or the Swiss 0:17:33.080 --> 0:17:38.359 franc that have some positive characteristics from a fiscal perspective 0:17:38.440 --> 0:17:41.359 relative to the US or from a current account perspective, 0:17:41.760 --> 0:17:43.560 they don't look so bad all of a sudden, because 0:17:43.600 --> 0:17:49.080 now they don't have a yield negative yield differential relatives 0:17:49.080 --> 0:17:52.280 to the US dollar, So owning them becomes much more attractive. 0:17:52.359 --> 0:17:54.080 And I think that's that's the state of play that 0:17:54.080 --> 0:17:57.840 we're in right Now's your heart, What does yield curve 0:17:57.880 --> 0:18:00.280 control mean to you? When you say you were spect 0:18:00.280 --> 0:18:03.280 to see it, what are you expecting to see? Well, 0:18:03.640 --> 0:18:06.360 we believe if it's going to be introduced, it's more 0:18:06.440 --> 0:18:09.720 likely to be um a bit like the Australian case, 0:18:09.760 --> 0:18:11.960 for example, in the three to five the three year 0:18:12.000 --> 0:18:14.280 ten o or maybe up to the five year tenner um, 0:18:14.760 --> 0:18:18.879 where the fall would effectively signal to the market that 0:18:19.000 --> 0:18:21.840 is not going to let yields move above a certain level, 0:18:22.600 --> 0:18:26.120 a certain very low level up to that point in time. Now, 0:18:27.160 --> 0:18:29.360 in other countries, for example, in Japan, you have yeld 0:18:29.400 --> 0:18:31.480 cup control all the way out to ten years. Now, 0:18:31.520 --> 0:18:35.119 you probably don't need to move into that space quite 0:18:35.440 --> 0:18:39.159 quite yet. We'll see what happens with inflation expectations. But 0:18:39.440 --> 0:18:42.840 given the inflation expectations are going up already in the US, 0:18:42.960 --> 0:18:45.440 presumably you don't need to go that far up be curse. 0:18:45.920 --> 0:18:48.159 But but even in the three year tenor for example, 0:18:48.240 --> 0:18:50.840 it's still a major innovation for the US to move 0:18:50.880 --> 0:18:53.399 to yueld cup control um. And it's a it's a 0:18:53.400 --> 0:18:56.159 new challenge for the dollar. And the problem here, of 0:18:56.160 --> 0:18:58.520 course of the dollar as well as nobody really considers 0:18:58.560 --> 0:19:01.879 it to be a cheap currency. If anything, most evaluation 0:19:01.920 --> 0:19:04.200 models would probably have it at the at the expensive 0:19:04.320 --> 0:19:08.600 end of any long term valuation level, particularlygainst the likes 0:19:08.600 --> 0:19:10.520 of the yen and the euro. So it makes the 0:19:10.560 --> 0:19:13.080 trade easier to be short dollars when you know that 0:19:13.200 --> 0:19:17.680 it's not even seen as cheap by anybody well sharp 0:19:17.800 --> 0:19:19.680 looking at where the treasuries are right now out to 0:19:19.720 --> 0:19:22.080 the belly the curve, We're already there for the Fed, 0:19:22.119 --> 0:19:24.280 aren't we At thirty three basis points on a five 0:19:24.359 --> 0:19:26.359 year just outside of the range on the FED funds rate. 0:19:26.400 --> 0:19:28.560 And I'm just trying to work out what difference yield 0:19:28.560 --> 0:19:31.520 curve control is actually going to make. Who is the 0:19:31.640 --> 0:19:35.159 twenty basis points? How much lower can they go? Well, 0:19:35.280 --> 0:19:37.760 that's that's true, And as I said, I think the 0:19:37.840 --> 0:19:41.760 market is already a long way towards pricing in yield 0:19:41.760 --> 0:19:45.560 cup control being introduced just as recently, so as soon 0:19:45.600 --> 0:19:48.560 as the next three months. So um, it's definitely something 0:19:48.600 --> 0:19:51.239 that's in the consciousness of the market already. But the 0:19:51.240 --> 0:19:52.600 fact is, when you look at the dollar from a 0:19:52.680 --> 0:19:57.479 longer term perspective, it's not simply the surprise element of 0:19:57.560 --> 0:20:00.000 more yield cup control and more aggresive yield of control 0:20:00.080 --> 0:20:03.880 that could take it lower. Is the especially adding this 0:20:04.040 --> 0:20:07.960 to an already difficult picture for the dollar. For example, 0:20:08.000 --> 0:20:10.080 when you look at it from the perspective evaluation, as 0:20:10.080 --> 0:20:12.240 I mentioned, it wasn't cheap when you look at it 0:20:12.240 --> 0:20:15.400 in terms of things like the US is likely fiscal 0:20:15.400 --> 0:20:19.280 trajectory or current account trajectory. Those aren't looking good. Um. 0:20:19.600 --> 0:20:23.040 Then you look at political risk, for example, the possibility 0:20:23.280 --> 0:20:27.199 of unrest around the election in November of the presidential election, 0:20:27.800 --> 0:20:31.040 but also congressional elections, all of these it's it's the 0:20:31.040 --> 0:20:34.320 whole picture put together that makes the dollar look difficult 0:20:34.400 --> 0:20:36.159 right now. And the other thing, of course, to notice 0:20:36.240 --> 0:20:38.560 that in the rest of the world you actually have 0:20:38.640 --> 0:20:41.600 some positive developments going on, particularly in the case of 0:20:41.600 --> 0:20:45.240 the Euro where um, finally you have a move being 0:20:45.240 --> 0:20:50.280 made that that seems tangible towards a form of fiscal 0:20:50.640 --> 0:20:53.439 risk commutualization UM. And that's in the shape of the 0:20:53.440 --> 0:20:56.680 European Recovery Fund. We'll find out more about this next 0:20:56.720 --> 0:20:59.720 month when EU leaders meet to discuss it properly. But 0:21:00.320 --> 0:21:03.560 if that comes through, then you do have a major, 0:21:04.359 --> 0:21:07.679 maybe a multi year innovation. UM. That's that's going to 0:21:07.720 --> 0:21:10.400 be Euro positive exactly at the time as the dollar 0:21:10.520 --> 0:21:13.480 is facing these problems. And it's these kinds of divergences 0:21:13.560 --> 0:21:16.000 that tend to lead to effects trends, and if these 0:21:16.000 --> 0:21:18.320 come through together, that's the kind of thing that would 0:21:18.320 --> 0:21:21.040 make for example, you're a dollar look a likely candidate 0:21:21.080 --> 0:21:26.160 to go back up above one twenty within this year. Wow, 0:21:26.200 --> 0:21:28.840 that's a big call. I'm wondering that's your highest conviction 0:21:28.880 --> 0:21:30.960 calls that the Euro will strength and versus the dollar 0:21:31.040 --> 0:21:33.879 this year. What about emerging market currencies? Is this just 0:21:33.920 --> 0:21:36.240 a broad risk on trend for the rest of the 0:21:36.280 --> 0:21:41.640 world versus the US so I think generally speaking, when 0:21:41.880 --> 0:21:45.439 the Euro is going up, it tends to act as 0:21:45.440 --> 0:21:49.640 a tail wind for for emerging markets as well relative 0:21:49.680 --> 0:21:52.639 to the US dollar. Of course, one issue now with 0:21:52.720 --> 0:21:55.639 emerging markets is that interest rates have come down a 0:21:55.640 --> 0:22:01.160 lot in those countries as well, so the risk premium, uh, 0:22:01.240 --> 0:22:03.199 what you get paid for that is much less than 0:22:03.200 --> 0:22:05.280 it used to be, So that's that's something to consider. 0:22:05.880 --> 0:22:10.359 The Secondly, there are regional differences to consider. So, for example, 0:22:10.400 --> 0:22:13.560 in Latin America right now, there are countries like Chile 0:22:13.960 --> 0:22:17.399 and Brazils that have been heavily affected by by the 0:22:17.440 --> 0:22:21.520 pandemic and continue to be, so we probably would shy 0:22:21.560 --> 0:22:24.560 away of buying those currencies at this point in time. 0:22:24.960 --> 0:22:27.240 Um In fact, we like being short the Chilean pesso 0:22:27.480 --> 0:22:31.000 and the Brazilian rail for choice. But there's other currencies 0:22:31.080 --> 0:22:34.040