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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along

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Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jay Leye. We bring

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Speaker 1: you insight from the best and economics, finance, investment, and

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Speaker 1: international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg

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Speaker 1: dot Com, and of course on the Bloomberg Terminal. Let's

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Speaker 1: bring it back in great show. We Harvard Kennedy School

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Speaker 1: Senior Fellow, Megan, do you think it's too premature to

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Speaker 1: have that cycle conversation, a conversation about the cycle and

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Speaker 1: maybe this Fed just never raise an interest rates. I

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Speaker 1: think it is a little premature. There is a huge

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Speaker 1: debate raging about you know, what kind of inflation we're

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Speaker 1: going to get. We know we'll get some temporarily. The

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Speaker 1: Fed has acknowledged as much um, but will it be sustained?

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Speaker 1: That's a big question. I do think though, at the

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Speaker 1: end of this year, if we have unemployment at four

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Speaker 1: and a half percent, as the FED expect and as

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Speaker 1: Secretary Yellen says, we should get to full employment next year,

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Speaker 1: and if we have inflation a two and a half

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Speaker 1: percent at the end of this year, which isn't impossible,

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Speaker 1: it is going to be come increasingly untenable for the

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Speaker 1: FED to argue that the appropriate policy rate in those

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Speaker 1: conditions is zero. So I actually think that the FED

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Speaker 1: will be pushed into hiking sooner rather than later. So

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Speaker 1: I think the scenario where the FED just never hiked

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Speaker 1: through this cycle is a pretty unlikely one. Can we

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Speaker 1: put a number on sooner? Are you a camp type

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Speaker 1: of coal? If you're on the FMC right now, Megan, Um,

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Speaker 1: you know, if you forced me to, the FEED is

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Speaker 1: said that they're going to go ahead and take her

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Speaker 1: purchases first, and that they'll provide a long runway for

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Speaker 1: investors to do that. Um. So you know, if we

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Speaker 1: ended up having a FED hiking in two it would

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Speaker 1: probably happen in in the latter part of that year.

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Speaker 1: But I think that's certainly possible, and certainly I think

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Speaker 1: it's it's likely before the FED zone forecast according to

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Speaker 1: the dot plots, which isn't until the earliest and then

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Speaker 1: applies also that they will start to taper that one

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Speaker 1: and twenty billion dollars in bond purchases that they've been

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Speaker 1: making monthly. How soon could we see tapering? So you

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Speaker 1: could see them start to discuss it at the end

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Speaker 1: of this year. Look, I think tapering is going to

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Speaker 1: be really tricky. Even if the FED goes ahead and

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Speaker 1: guide posts this very clearly well in advance, it represents

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Speaker 1: a binary shift, and therefore I don't see the FED

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Speaker 1: being able to taper without rolling the markets. And we

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Speaker 1: know what happened last time we had a taper there

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Speaker 1: there was a tantrum, especially through emerging markets, and I

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Speaker 1: think this is something that investors really need to watch.

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Speaker 1: How does financial stability way in on this? The idea

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Speaker 1: that the markets are supported by the Fed's ultra easy

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Speaker 1: policies at a time when we do have a new

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Speaker 1: boom supposedly underway, Well, that's certainly, you know, one of

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Speaker 1: the reaction functions of the FED, even though it's not

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Speaker 1: part of their official mandate, it is indirectly and so

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Speaker 1: the FED is looking at this. But even if you

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Speaker 1: get rates starting to go very gradually over the next

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Speaker 1: couple of years, it's it's from zero, and so while

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Speaker 1: a bunch of the markets could look frothy, there might

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Speaker 1: be room for the FED to start um to normalize rates.

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Speaker 1: I don't think we'll ever fully normalize rates, but at

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Speaker 1: least start to hike them. Um So, you know, it's

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Speaker 1: a consideration. But I think that that's a balance that

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Speaker 1: the Fed's going to have to get and they had

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Speaker 1: to get it right in the last hiking cycle as well. Megan,

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Speaker 1: looking forward, do you think that's what shaping the views

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Speaker 1: of the likes of President Caplan on financial stability and right?

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Speaker 1: Do you think he's tying the two things together? Yeah,

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Speaker 1: I mean, look, Kaplan's the markets guys. So I think

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Speaker 1: he's absolutely tying the two things together. But you know,

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Speaker 1: I think it's not just financial stability. It's also the

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Speaker 1: robust growth forecast that we have as well, the bond

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Speaker 1: market moves that we've seen so far this year. I

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Speaker 1: think it's it's all of it together. But he's certainly

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Speaker 1: looking at the markets and thinking that some of them

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Speaker 1: are frothy. He's come out and said that before. Um So,

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Speaker 1: I'm sure that's a part of his his reaction. He

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Speaker 1: said that repeatedly on this a gram. I just wonder

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Speaker 1: how lonely he is on the FMC right now. Megan,

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Speaker 1: it's good to catch up. It's good to see you,

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Speaker 1: as always have a Kennedy School senior scholars, A lot

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Speaker 1: of people joining the dots from what's happening Kia safe

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Speaker 1: from the commodity market, back to what has happened in Europe,

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Speaker 1: where the lockdowns now are said to be extended in

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Speaker 1: places like Germany for several extra weeks, and the question

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Speaker 1: can we get a global recovery where you get that

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Speaker 1: sort of incredible demand for precious metals and oil if

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Speaker 1: you don't have one of the major areas of economic

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Speaker 1: growth firing at all, which is Europe, and they've been

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Speaker 1: lagging behind, and I do wonder whether people are adequately

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Speaker 1: pricing in the ripple effects of that delay in getting

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Speaker 1: back up to speed. Let's have that conversation about the

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Speaker 1: pandemic right now with Dr Amish Adalgia JOHNS. Hopkins Center

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Speaker 1: for House Security Senior Scholar, doctor. Typically you and I

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Speaker 1: would start a conversation by discussing the latest data cases, deaths,

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Speaker 1: the vaccine rollout. I want to do something a little

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Speaker 1: bit different this morning and talk about the things that

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Speaker 1: we need to address after this pandemic is behind us.

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Speaker 1: And one of those things in America is a delicate issue.

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Speaker 1: It's a basicity, it's a complex issue, and what we're

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Speaker 1: seeing through this pandemic due to the the lightest studies informing

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Speaker 1: US doctors that people have gaged white through this pandemic.

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Speaker 1: What do we need to address and how can we

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Speaker 1: address it in America given what we've learned over the

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Speaker 1: last twelve months. So I think that this pandemic virus,

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Speaker 1: because of its ability to really prey on people with

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Speaker 1: other risk factors, really had an easy time finding victims

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Speaker 1: in the United States. And that's because we have very

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Speaker 1: high rates of obesity, cardiovascular disease, and diabetes. Those three

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Speaker 1: conditions really were kindling for this virus to be able

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Speaker 1: to find victims and land them in the hospitals and

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Speaker 1: put all our hospitals into crisis. That coupled with the

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Speaker 1: way our nursing homes have been handled, really explain the

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Speaker 1: trajectory in many parts of what happened with this with

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Speaker 1: this pandemic. So I do think we have to address

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Speaker 1: these other public health concerns, and these are things that

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Speaker 1: are going to be difficult because their lifestyle diseases. That

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Speaker 1: means that we have to tell people that need they

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Speaker 1: need to diet, they need exercise, which are very hard

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Speaker 1: to do because people have been have been telling uh

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Speaker 1: doctors have been telling people to do that for so long,

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Speaker 1: it's just very hard to do. I think that this

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Speaker 1: really lays bare the problem that we have in the

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Speaker 1: next pandemic. Even influenza seasons are exacerbated by these co

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Speaker 1: morbidities that we have. So I do think we have

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Speaker 1: to really think about how do we make our country

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Speaker 1: resilient to pandemics. And that's not just diagnostics, vaccines, medications,

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Speaker 1: and hospital preparatives. It's also getting the population as as

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Speaker 1: fit as healthy as possible so that this virus or

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Speaker 1: any other virus doesn't have so many easy victims around.

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Speaker 1: This is an issue that's been on the public's right

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Speaker 1: down in this country. And now swear for a long

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Speaker 1: long time doctor as you know, where do you think

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Speaker 1: we have fallen short? And if you'd like to see

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Speaker 1: renued effort out of the capital at a federal level,

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Speaker 1: how would you like to see that develop in the

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Speaker 1: months to come. I think it's very hard to come

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Speaker 1: up with a program that's going to be effective against

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Speaker 1: these types of lifestyle diseases because it's so multi factorial,

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Speaker 1: and the government can't really tell people or expect them

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Speaker 1: to diet or exercise as they say. But I think

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Speaker 1: what what you you want to do is maybe launch

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Speaker 1: an education campaign about how this happens in the schools

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Speaker 1: to get people to to be more healthy about their

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Speaker 1: their the choices that they make. I don't know how

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Speaker 1: much of this can be done from a top down approach.

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Speaker 1: It's very very hard to do. It's not my expertise

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Speaker 1: about how to how to change behavior this way, but

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Speaker 1: it's clearly something we need to to UH to fix

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Speaker 1: and it's going to take all out effort to really

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Speaker 1: address these problems which have been chronic and long standing

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Speaker 1: in this country. Yeah, and I will say there has

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Speaker 1: been discussion about whether we are under emphasizing some of

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Speaker 1: the side effects from some of the shutdowns and the

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Speaker 1: prolonged bouts of isolation. I mean, I was looking at

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Speaker 1: this one study that showed that of Americans reported gaining

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Speaker 1: unwanted weight and the average weight gain was twenty nine

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Speaker 1: pounds during the pandemic, just to give some sense, and

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Speaker 1: its people isolated, not having anywhere to go, drinking more,

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Speaker 1: feeling like they are trying to fill their time with

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Speaker 1: prolonged stress, very difficult period of time. As we move

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Speaker 1: towards the end, it is understandable that people want to

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Speaker 1: be done with this, which is why we're seeing crowds

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Speaker 1: on Miami Beach, which is why would we go see

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Speaker 1: restaurants they're people packed in even before the pandemic has lifted.

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Speaker 1: Do we really have a big risk of a third

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Speaker 1: wave as people are just tired of the pandemic and say,

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Speaker 1: at this point, whatever happens happens. I think the United

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Speaker 1: States is going to have some uptick in cases. Whether

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Speaker 1: or not it looks like Europe, I think it remains

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Speaker 1: to be seen. I think what was better in the

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Speaker 1: United States and New York is we have a much

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Speaker 1: more robots vaccination program and the goal is to get

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Speaker 1: as many people vaccinated as possible, and we're doing that,

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Speaker 1: getting to three million people vaccinated. So I do think

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Speaker 1: we're probably able to stay ahead of the worst consequences

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Speaker 1: of people's lack of social distancing. And the other thing

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Speaker 1: is what we're seeing is a decoupling of cases from

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Speaker 1: hospitalizations and deaths because we've now got a lot of

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Speaker 1: people who are living in nursing homes, a lot of

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Speaker 1: people that live in the community with high risk factors vaccinated.

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Speaker 1: So we are going to see cases go up, but

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Speaker 1: hospitalizations and deaths. They we remain the same or go down,

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Speaker 1: which is happening in most of the country right now,

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Speaker 1: and I think that's going to change the way people

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Speaker 1: think about this disease. It becomes a more manageable respiratory infection.

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Speaker 1: So the goal is, we know people are going to

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Speaker 1: be doing this. Our solution is to keep vaccinating as

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Speaker 1: quickly and as fast as possible so that those individuals

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Speaker 1: are less likely to spread this virus and we're not

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Speaker 1: impacted the way Europe is. I don't think it's We're

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Speaker 1: going to have a European trajectory based on just our

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Speaker 1: vaccination numbers alone. This is really important. Do you think

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Speaker 1: that health officials have to nuance their message to say

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Speaker 1: at this point, yeah, we could seem more spread, but

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Speaker 1: it's less harmful just because the most at risk individuals

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Speaker 1: have been largely vaccinated in the United States, So you

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Speaker 1: know what, please try to be careful, but we're not

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Speaker 1: going to crack down as hard as perhaps in other areas.

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Speaker 1: Is that more of legitimate message from healthcare professionals. I

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Speaker 1: do think it is. I think that that actually meets

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Speaker 1: people where they are. It actually uh covers the whole

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Speaker 1: concept of harm reduction that what we've been trying to

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Speaker 1: do with this virus is removed its ability to cause

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Speaker 1: serious disease, hospitalization, and death. And that's what the vaccine

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Speaker 1: is doing. So we're going to not get to COVID zero.

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Speaker 1: We're still going to see blips and cases, but those

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Speaker 1: lips and cases are not gonna end up landing, hopefully

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Speaker 1: on a vulnerable person and putting them in the hospital

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Speaker 1: because we've vaccinated so much. So that's why we have

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Speaker 1: to kind of keep the gas the pelt to the

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Speaker 1: metal basically when we're vaccinating, in order to make sure

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Speaker 1: that this doesn't happen. And I think we have to

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Speaker 1: be more nuanced. We can't keep telling people that this

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Speaker 1: is going to go on forever and ever. They're not

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Speaker 1: gonna they're not gonna listen to and they're not listening.

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Speaker 1: So I think we have to say this is our goal. Doctor, Really,

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Speaker 1: well put and good to see you again. Thanks for everything,

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Speaker 1: Dr Mchadalage. There JOHNS. Hopkin's sense of a house security,

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Speaker 1: Senia Scott, let's bring in and letty while it's not

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Speaker 1: going mast the management head of Active Strategy and salt

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Speaker 1: to me about this moment. We're in for active management

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Speaker 1: for the rotation and help me understand whether it's just

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Speaker 1: a moment in time or something that kind of endure

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Speaker 1: beyond one into two into twenty three. Well, Johnathan, I

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Speaker 1: think it's a great question. Um, certainly, we're going to

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Speaker 1: see a lot of strength in the economy. Like you

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Speaker 1: mentioned earlier, that surge is going to cause earnings growth

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Speaker 1: in several companies, but it's not going to be across

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Speaker 1: the board. And this is where I think active management

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Speaker 1: can really play a role where fundamentals are going to matter.

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Speaker 1: The dream is the dream, but now it becomes the reality,

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Speaker 1: and so who can really capitalize on building cash flow

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Speaker 1: and earnings and those will be the companies that are

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Speaker 1: rewarded more in the next cycle. Give me a better

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Speaker 1: understanding of your process than your approach right now to

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Speaker 1: bottom up analysis and still picking down what do you

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Speaker 1: look for? Yeah, so certainly, you know we have portfolio

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Speaker 1: managers and investment teams that have value focus and growth focus, UM,

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Speaker 1: emerging markets, etcetera across the board. But I would say

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Speaker 1: that instead of focusing on value or growth, what they're

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Speaker 1: focusing on more is ciglicality and secular trends and those

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Speaker 1: are really what's changing almost on a daily basis. The

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Speaker 1: leadership of the market. Certainly the recovery and GDP is

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Speaker 1: pushing that secular trend that we're seeing in value in

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Speaker 1: small cap stocks, but the UM, sorry, the cyclical trend,

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Speaker 1: but the secular trends are really driving what we're seeing

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Speaker 1: across almost every industry. Innovation really has led the way,

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Speaker 1: especially over the last year, and it's going to continue

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Speaker 1: to be an important driver for earnings in cash flow

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Speaker 1: for all industries. So you talked about facing some of

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Speaker 1: the purchases on fundamentals and it's philosophy tuesdays. I'm gonna

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Speaker 1: doub this as philosophy tuesdays. What are fundamentals at a

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Speaker 1: time when so much as being driven by policy, whether

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Speaker 1: it be fiscal or monetary. You know, fundamentals really are

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Speaker 1: how companies are investing for the future. And certainly capital

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Speaker 1: has been very, very cheap. That liquidity has um made

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Speaker 1: it possible for almost every company to survive this past year,

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Speaker 1: but also for them to do relatively well in the marketplace.

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Speaker 1: But now there's gonna be some separation of winners and losers.

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Speaker 1: It's who has focused taken um that liquidity and invested

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Speaker 1: it for the future. And who's going to continue to

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Speaker 1: do that. If you don't invest for your future, you're

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Speaker 1: going to die. And that's what we've seen. Um, that's

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Speaker 1: what we're going to see more and more. Just innovation

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Speaker 1: trends continue, digitalization continues, and all the companies almost across

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Speaker 1: the board are going to have to invest. And do

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Speaker 1: you think that the market is accurately picking up on

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Speaker 1: the companies that are investing well in their future? And

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Speaker 1: I'm saying this at a time when we're expecting game

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Speaker 1: Stoff to come out with earnings and yeah, they're expected

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Speaker 1: to not lose money for the first time in a

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Speaker 1: long time. And yet people might argue that might not

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Speaker 1: be enough to justify the tremendous rally that we've seen.

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Speaker 1: I mean, is the market after efficiently you know, Lisa,

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Speaker 1: I think it's fair to say we're seeing some very

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Speaker 1: strange things. I mean, certainly in my third year career,

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Speaker 1: I have not seen some of the things that I've

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Speaker 1: seen over the last you know, six months, even over

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Speaker 1: the last year. So there there are inefficiencies in the market.

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Speaker 1: And whenever you have this much stimulus thrown into the market,

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Speaker 1: you're going to see things happen like we're seeing today.

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Speaker 1: But what's really driven the market over the last decade

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Speaker 1: is all of this stimulus. It's almost like everyone can

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Speaker 1: survive because capital is so cheap. That trend has to

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Speaker 1: stop at some point, and that's when fundamentals really will matter,

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Speaker 1: and and quite honestly, they still have mattered. For the

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Speaker 1: most part. Investors are focused on cash flow. They're focused

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Speaker 1: on earnings growth, and that's going to become more important,

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Speaker 1: especially when we get to a rising rate environment. Um

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Speaker 1: those are the companies that need to produce earnings. If

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Speaker 1: you have a high multiple now, it might be okay

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Speaker 1: as long as you can rapidly grow your earnings. And

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Speaker 1: before we let you go, I want to finish where

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Speaker 1: we started. I think you did a brilliant job there.

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Speaker 1: Have taken us away from growth versus value to focus

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Speaker 1: on the cyclical aspects of this market and a more

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Speaker 1: secular aspects of this market as well. Some people might

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Speaker 1: go another step further. The cyclical story is a story

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Speaker 1: for me to buy and hold on the short term horizon,

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Speaker 1: and the secular story is something longer time horizon. And

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Speaker 1: I'm trying to understand for you and whether there is

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Speaker 1: a cyclical story that you'd like to hold beyond just

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Speaker 1: say the next twelve months. Yes, I think there are.

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Speaker 1: There are several industrial companies in the manufacturing space and

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Speaker 1: other places that will that are benefiting both from the

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Speaker 1: cyclical trends but also the secular story we have manufacturing

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Speaker 1: coming back to the US. We need to build more

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Speaker 1: in the US that started, you know, over the past

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Speaker 1: four years, that's going to continue into this into this

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Speaker 1: presidential term as well, and so that the secular and

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Speaker 1: the cyclical can emerge in a lot of companies together

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Speaker 1: and that can last, and that could create a cyclical

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Speaker 1: story that lasts much longer than we've seen in the past.

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Speaker 1: That's the one thing we need to talk more about

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Speaker 1: that could get really interesting in the year ahead. And

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Speaker 1: it's great to catch up. Come back soon. Love to

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Speaker 1: catch up and Letty last Faro, Asset Management, Head of

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Speaker 1: Activity Strategy. We spent this morning talking about monetary policy,

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Speaker 1: fiscal policy, the kind of things we always do. We've

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Speaker 1: also talked about looking back twelve months and the lessons

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Speaker 1: learned in the equity market. I think we need to

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Speaker 1: do the same in credit now and we've got the

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Speaker 1: perfect guests to do that with Don Moulin, pretty m

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Speaker 1: CEO and founder. Don Let's start there the look back

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Speaker 1: twelve months, the lessons learned how residient credits being compared

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Speaker 1: to what you expected. What was the big lesson for you, Don,

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Speaker 1: I think the big lesson that we learned is that

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Speaker 1: when the FED decide to do credit que e, which

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Speaker 1: it really did the first time in this crisis, where

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Speaker 1: it made a decision to invest in investment great bonds,

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Speaker 1: would have a dramatic effect all throughout credit and that

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Speaker 1: as a result, don't fight the Fed at a common

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Speaker 1: phrase in the past, was more true this time than

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Speaker 1: ever before, particularly when you pile on fiscal policy, which

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Speaker 1: was extraordinary this time around. UM I think the challenge,

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Speaker 1: referencing some of your other comments is that I think

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Speaker 1: strong expectations of high GDP growth for the latter half

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Speaker 1: of this year and going into next year are our consensus,

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Speaker 1: but people are ensure how that's going to be spent,

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Speaker 1: and so the ability to understand evaluations and credit and

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Speaker 1: evaluations in the equity market, as well as the fact

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Speaker 1: that so many companies have different balance sheets today than

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Speaker 1: they did in two thousand nineteen. No one knows which

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Speaker 1: companies will be, which companies will be the ones that

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Speaker 1: don't benefit, and so there's a challenge right now in

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Speaker 1: credit markets, what's the right narrative of structure? You know,

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Speaker 1: how will movies recover? How will Jim's recover? Do they

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Speaker 1: have too much debt? Do I have too little equity?

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Speaker 1: Because nobody knows what the new normal is. That's true

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Speaker 1: in both stocks and bonds, and you're seeing in stocks

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Speaker 1: people starting to question the cyclical trade. I'm wondering if

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Speaker 1: you're seeing a similar move in credit. This idea that

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Speaker 1: it's been so good and it's been backed by a

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Speaker 1: really easy FED that's now second guessing some of its

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Speaker 1: policies and how applicable they are to a future that

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Speaker 1: looks brighter. I mean, basically, are you starting to get

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Speaker 1: more cautious on credit from here? Well, I think we're

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Speaker 1: going to see the trader's market rather than an investors market,

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Speaker 1: and so less beta, more volatility and credit. We'd hope

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Speaker 1: to see some dispersion there. Certainly shouldn't be more dispersion

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Speaker 1: in the lower quality and the smaller cap names where

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Speaker 1: capital has a harder time accessing. With all the large

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Speaker 1: numbers of money managers, all raising huge amounts of opportunistic

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Speaker 1: capital and distress capital. We think the larger names is

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Speaker 1: certainly priced to perfection, and so more the inefficiencies are

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Speaker 1: on the bottom parts of the market of the smaller sizes.

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Speaker 1: But yeah, it's we're going to see a lot more

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Speaker 1: volatility and credit spreads as the narrative develops. As I said,

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Speaker 1: we don't really know where the consumer dollars are going

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Speaker 1: to be spent. We know clearly they're going to be

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Speaker 1: different than they were in two thousand nineteen, and so

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Speaker 1: as a result, we see opportunity coming. But I think

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Speaker 1: it's the early days of opportunity in this nanosecond. In

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Speaker 1: this moment, I think we're price closer to perfection, but

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Speaker 1: I see opportunity on the horizon. Where is there distress

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Speaker 1: at a time of four percent high old bond yields, Well,

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Speaker 1: we still have businesses that if you look through that,

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Speaker 1: we had a very high default rate UH in two

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Speaker 1: thousand and in twenty and we continue to see an

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Speaker 1: above average default rate coming in. And don't forget that

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Speaker 1: last year we had default rates at almost seven percent

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Speaker 1: in bonds and an excessive four percent in loans and

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Speaker 1: lower recoveries. Uh. You know, we obviously had some gyms

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Speaker 1: who survived as an example, or we had restaurants and

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Speaker 1: quick serve restaurants all suffered and many defaulted. So as

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Speaker 1: a result, the areas that really had the declines in revenue,

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Speaker 1: which was at the leisure, travel and entertainment category, certainly

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Speaker 1: experienced de faults. The companies with access to capital will

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Speaker 1: be the ones. That's similar to your earlier comments on

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Speaker 1: the show talked about Americans who have gained the COVID

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Speaker 1: nineteen pounds. We have many companies that have a much

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Speaker 1: larger balance sheet with the amount of debt and equity,

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Speaker 1: and will the new cash flow that plays out in

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Speaker 1: be adequate to service that valuation or that level of debt.

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Speaker 1: I think there will be many who boomed as a result.

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Speaker 1: That's what we think. The new defaults will be that

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Speaker 1: growth as it changes. I thought so the announcement today

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Speaker 1: that the streaming window for theaters has been shrinking, that's

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Speaker 1: only going to affect the ability for theaters to generate

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Speaker 1: cash flow. And as a result, an area that we

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Speaker 1: think that death probably is solvent, but equities are probably

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Speaker 1: too highly valued, don't get to chops don and found it.

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Speaker 1: Don't thank you. This is the Bloomberg Surveillance Podcast. Thanks

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Speaker 1: for listening. Join us live weekdays from seven to ten

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Speaker 1: am Eastern. I'm Bloomberg Radio and on Bloomberg Television each

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Speaker 1: day from six to nine am for insight from the

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Speaker 1: best in economics, finance, investment, and international relations. And subscribe

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Speaker 1: to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com,

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Speaker 1: and of course on the terminal. I'm Tom Keene and

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Speaker 1: this is Bloomberg