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

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Speaker 1: we bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Right now,

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Speaker 1: a woman who knows that all of this market chit

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Speaker 1: chat folds right into the guestimate on the American economy.

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Speaker 1: Francis Donald is at Manual Life and does wonderful short

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Speaker 1: brief uh messages and research reports on the concept at hand.

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Speaker 1: She's never written on anything like this Friday's Jobless report. Francis,

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Speaker 1: how do you approach the complete mystery of this Friday's report. Well,

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Speaker 1: I'm not trying to get a sense of what that

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Speaker 1: headline is going to look for. I'm looking for a

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Speaker 1: lot of the underlying details. And what I suspect are

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Speaker 1: going to see is that more people are unemployed on

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Speaker 1: a permanent basis as opposed to temporary and the duration

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Speaker 1: of unemployment is going to start looking much worse and worse.

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Speaker 1: So while you might see headlines seeing we have some

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Speaker 1: moderate improvement, ultimately the underlying foundation of the market is

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Speaker 1: just getting worse and work. There are three unemployment rates,

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Speaker 1: the visible one which everybody is glib about, etcetera. Chairman

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Speaker 1: Greenspan's lovely augmented unemployment rate, and then the all in

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Speaker 1: use six rate, a much higher statistic, which one matters

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Speaker 1: the most, all encompassing. And this is what's been so

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Speaker 1: challenging about COVID nineteen minutes ensuing obsession, is that the

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Speaker 1: pain on the economy has been so much more sinister

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Speaker 1: than what we speak even in headline GDP numbers. We're

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Speaker 1: talking about wage losses. We're talking about larger levels of

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Speaker 1: income and racial disparities that flow as a result of it.

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Speaker 1: As an economist, for us looking at traditional economic data

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Speaker 1: and telling you what happens next, but there's so much

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Speaker 1: more happening under the service here. It's more concerning. And

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Speaker 1: most of all, when we look at the underlying picture,

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Speaker 1: we still have fourteen million Americans that have to be

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Speaker 1: hired just to get us basketball February. It's very difficult

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Speaker 1: for us to look at this number and say, even

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Speaker 1: if we see you know, another one point five million

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Speaker 1: people quote unquote rehired, we're still in one of the

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Speaker 1: worst It's a the worst labor market we've ever seen,

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Speaker 1: and yet here we are. We're going to probably hear

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Speaker 1: a lot of headlines talking about how there's been improvements

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Speaker 1: on Friday. Just doesn't sit right for insis The challenge

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Speaker 1: for you is you've got to take the data, understand

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Speaker 1: how it's changing, then try and understand how investor attitudes

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Speaker 1: to that data are changing as well. If we've got

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Speaker 1: a negative print in the pay Rose report this coming Friday,

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Speaker 1: how do you think investors would respond to that? I

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Speaker 1: think they probably view it as a call to action

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Speaker 1: for policy, and likely some implication that we're going to

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Speaker 1: see a faster move on fiscal stimulus and maybe some

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Speaker 1: additional moves from Powell. You know, for the last month

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Speaker 1: or so been claiming or trying to highlight that the

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Speaker 1: high frequency data that told us bid April was a

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Speaker 1: key positive inflection point is now turning in the other direction.

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Speaker 1: But the key here is not to say the economy

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Speaker 1: is going to worsen and therefore stocks are going to

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Speaker 1: do badly. No, the key here is to say the

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Speaker 1: economy is going to worsen and this is going to

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Speaker 1: engender an important policy response. The game here is no

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Speaker 1: longer than econ data. The game is figuring out how

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Speaker 1: Powell and how we're going to see Congress respond to it.

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Speaker 1: The dominant policy response when it comes to markets has

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Speaker 1: been that of the Federal Reserve monetary policy. And I

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Speaker 1: wonder from a job's perspective, how much the low, low,

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Speaker 1: low interest rate policy that the Fed has the backstop

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Speaker 1: to the markets is actually creating jobs, stabilizing jobs, keeping

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Speaker 1: companies from firing people. Can you draw any connection to

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Speaker 1: the feds policies to employment in the United States right

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Speaker 1: now over the long run. Yes. In the near term,

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Speaker 1: their essential function is to ensure we don't see a

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Speaker 1: credit crisis. That that is their main issue at the

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Speaker 1: current um element. They're doing a very good job of that,

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Speaker 1: and that's why the entire focus of the macros here

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Speaker 1: has really shifted away from monetary policy. Of course, hugely

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Speaker 1: important to the way we're treating and you think from

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Speaker 1: late goal the whole variety of asset classes, but towards

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Speaker 1: fiscal when we look at the city, surprising that and

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Speaker 1: we see, you know, the largest spread between where data

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Speaker 1: came in and economists expectations. I like to sell this,

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Speaker 1: how wrong economists are. They've been the most wrong they've

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Speaker 1: ever been for this particular measure. What we know, and

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Speaker 1: what's my personal senior is that the thing we missed

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Speaker 1: was just how sizeable fiscal stimulus was going to be,

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Speaker 1: how big the numbers were going to be, How he's

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Speaker 1: going to see two thirds of Americans would be making

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Speaker 1: more than they did pre COVID. You know, personal income

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Speaker 1: up double digits on an annualized basis relatives last year.

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Speaker 1: If we lose that main pillar of this rebound, then

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Speaker 1: the econdia starts to worsen pretty substantially. And my concern

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Speaker 1: is that as much as we missed how powerful it

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Speaker 1: would be on the upside, we may miss just how

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Speaker 1: painful it will be on the downside. Francis, I've got

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Speaker 1: to say I like that some do you like that

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Speaker 1: that we renamed the surprise indexes the economist success right

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Speaker 1: or failure right? Basically just judge in them real time.

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Speaker 1: And this has been brutal. This is I have no

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Speaker 1: idea Friday, folks, what we're going to see. I don't

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Speaker 1: know how I make a three month forecast, let in

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Speaker 1: a six month forecast. It's really no different than the companies.

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Speaker 1: But Francis, the heart of the matter here is what

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Speaker 1: you people do, which is count countable things. Can you

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Speaker 1: count the stress in the American economy. You can count

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Speaker 1: a lot of stresses. But we're not using the same

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Speaker 1: measure as we did before. And this is why, honestly,

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Speaker 1: I'm more focused on initial jobless claims this week than

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Speaker 1: i am on it's accountable. It's too stale for us.

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Speaker 1: This crisis moved so quickly. So all those alternative data

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Speaker 1: points that we're now all talking about every day, the

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Speaker 1: Google mobility, the t s A passengers, you know, how

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Speaker 1: many people are going to restaurant data is so much

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Speaker 1: more important and what we witnessed in the past. It's

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Speaker 1: about April is that movement and the ultra high frequency

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Speaker 1: daily and weekly indicators are what gets markets attention. So

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Speaker 1: nonfirm parils, of course, should be the most important number

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Speaker 1: of the week or the month, but it's not going

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Speaker 1: to be. It's going to be all that mobility data.

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Speaker 1: It held us. Are people still moving around and increasingly

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Speaker 1: tom not just our people moving around and our stores open,

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Speaker 1: but what is their confidence level? Are we reopening economies

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Speaker 1: and people feel confident using them? The demand side of

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Speaker 1: the picture. That's also much more difficult to count, so

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Speaker 1: we aly we have to move away from those traditional

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Speaker 1: data points and look at new ones. Is very uncomfortable

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Speaker 1: for economists, and maybe you have to change our models

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Speaker 1: and are forecasting process. But this is COVID nineteen. We

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Speaker 1: have to do economics differently. Francis. I can hear the

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Speaker 1: concern in your voice. It's palpable. Can you walk me

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Speaker 1: through the scarring and the structural changes, the structural damage.

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Speaker 1: But you're really worried about right now. What I see

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Speaker 1: ahead is, you know, we we have to trade on

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Speaker 1: our you know, three months six months basis as well,

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Speaker 1: but we also have long term portfolios. And it's the

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Speaker 1: long term portfolios that I spend a lot more time

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Speaker 1: thinking about because even though we care about equities. In

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Speaker 1: the next six months, we're in the midst of the

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Speaker 1: largest fiscal spend outside of wartime. We are beginning to

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Speaker 1: see the seeds of debt monetization. Look at really, they

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Speaker 1: are deeply negative and likely to stay there. This is

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Speaker 1: a transition to a new system. What that's probably going

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Speaker 1: to see super yield curve is going to uh, you know,

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Speaker 1: probably create some misallocation of capital. It's probably gonna push

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Speaker 1: more money into alternative and hard assets. This is the

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Speaker 1: way that COVID nineteen actually has these more sinister long

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Speaker 1: term impacts on the way our system is working. So yes,

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Speaker 1: I could, you know, lay out why the economy will

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Speaker 1: weaken in the next six months. But what really keeps

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Speaker 1: me up at night is how we need to think

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Speaker 1: about the five contending horizon. That's what's changing very dramatically

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Speaker 1: on a week to week basis here it's going so weickly,

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Speaker 1: and yet it has such long term implications. That's that's

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Speaker 1: where the concern you here in me, John comes from. Francis.

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Speaker 1: One thing Tom has been focusing on for the past

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Speaker 1: few days, and rightly so, is the negative real yield

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Speaker 1: in the United States. This increasing inflation expectation longer term

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Speaker 1: despite the ultra low yields. Now, what's your sense of

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Speaker 1: inflation going forward? So my sense is that we may

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Speaker 1: actually hit a little bit of some concern about stactulation

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Speaker 1: in the second half the year. Now I've got a

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Speaker 1: raging inflation vole. Our models say we get to two

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Speaker 1: and a half percent inflation, The markets think something a

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Speaker 1: little bit under two. But in the second half of

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Speaker 1: the year, a lot of those based effects were going

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Speaker 1: to draw out and inflation, and I'm sure I'm going

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Speaker 1: to have portfolio managers asking me have we underappreciated how

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Speaker 1: much inflation is in the system. I also think we

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Speaker 1: need to move away from the idea that monetary policy

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Speaker 1: is the source of inflation. And remember that deglobalization and

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Speaker 1: huge fiscal spends which large with large fiscal multipliers, that

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Speaker 1: may be where inflation is coming from. So I do

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Speaker 1: expect the market to raise them to places an expectations.

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Speaker 1: I do expect real rates to continue to trend low,

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Speaker 1: will remain negative for a long time, and that is

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Speaker 1: of course going to push more money into search for

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Speaker 1: yield opportunities. It is still bullish, yes all, Francis great

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Speaker 1: to catch up with you. As always, my best to

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Speaker 1: you and yours, Francis Danner. There of many life asset

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Speaker 1: management speaking Tom to the importance of claims this Thursday

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Speaker 1: right now a synthesis and we can do that with Jeffrey,

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Speaker 1: you of v and White Melon. He just does wonderful work, yes,

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Speaker 1: in the foreign exchange space, but much wider than that. Jeffrey,

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Speaker 1: you let me just start with the conundrum of these

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Speaker 1: low interest rates is your attention on the nominal the

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Speaker 1: current rate. Are you focused on real yields? Absolutely real yields,

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Speaker 1: you know, because that ties into financial conditions, and that

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Speaker 1: is what central banks don't wants to tell you. But

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Speaker 1: what they're actually doing with yield control is depressing nominal

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Speaker 1: get inflation, not get in flacition to escape velocity, and

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Speaker 1: depress real yield because that's the real thing pardon upon

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Speaker 1: which helps corporates. So, Jeff, that's the objective right now

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Speaker 1: in the United States? Do you think yield curve control

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Speaker 1: is happening, whether they formalize it and announce it or not.

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Speaker 1: So in effect, I think that's what the market is

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Speaker 1: pricing in. And and as you say, if the central

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Speaker 1: bank doesn't announce it, but if you keep markets believing

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Speaker 1: for long enough and such that it's effectively priced in,

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Speaker 1: then the central banks in general, not just in the

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Speaker 1: US but elsewhere in the UK here I think they'll

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Speaker 1: just won't clap their hands and say job well done.

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Speaker 1: It's always about expectations. If they can get long, longer

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Speaker 1: dated inflation expectations up, then it's a job done. But

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Speaker 1: that's the missing piece of the puzzles right now, non

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Speaker 1: not moving inflation even less. Do you think they can, Jeff, So,

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Speaker 1: now this debate about whether they want to start to

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Speaker 1: tew a target average inflation, you know, not just spot inflation,

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Speaker 1: but inflation over a period. I don't think we're there yet.

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Speaker 1: They can, you know, when they start to say we

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Speaker 1: really want inflation to fly over a five year horizon.

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Speaker 1: If you're starting point is one, then for the sake

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Speaker 1: of argument, it doesn't matter about your end point is

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Speaker 1: four or five. As long as you average out to

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Speaker 1: be two or three. You need something like that enshrined

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Speaker 1: in a REMIT. So the FED Monetary Policy reviewers coming

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Speaker 1: up the UK, they're reviewing this, you know, all the time.

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Speaker 1: Once that is enshrined, then markets may begin to believe it.

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Speaker 1: So we're not there yet, Jeff. I want to talk

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Speaker 1: about the reaction function from the Federal Reserve monetary policies

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Speaker 1: setting going to purchase some of these longer dated bonds

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Speaker 1: as the US Treasury announces in near one trillion dollar

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Speaker 1: borrowing plan in the next three months. Is this basically

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Speaker 1: plunge protection control? Is this basically the FED that's going

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Speaker 1: to prop up asset prices indefinitely until you get some

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Speaker 1: rip roaring inflation, which isn't on the horizon, and it's

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Speaker 1: not a matter of any kind of bleed through to

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Speaker 1: the underlying economy at this point. Well, I don't think

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Speaker 1: any central bank will actively admit that, and that they

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Speaker 1: do know. If you do get the market sell off,

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Speaker 1: if you do get bond sell off, equality selling off,

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Speaker 1: that is a tightening and financial conditions. Now in reality,

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Speaker 1: you know, the economy, if it's growing fast enough, might

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Speaker 1: be able to withstand that hit. But no central bank,

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Speaker 1: you know, wants to take the chance right now, so

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Speaker 1: they will just keep going until we get to escape velocity.

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Speaker 1: That the r B a decided own night. I know

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Speaker 1: they once said, so they're in your curve control already,

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Speaker 1: as are the Japanese. They might start to say, we're

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Speaker 1: controlling a part of the curve we're comfortable with, but

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Speaker 1: at the very long end that starts to steepen due

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Speaker 1: to inflation being priced in, they're okay with that. But

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Speaker 1: they have a set target right now and the absolutely

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Speaker 1: going to stick to it with asset purchases. Right now,

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Speaker 1: the real rates an tenier is a negative at one

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Speaker 1: point all five percent. What's the breaking point here? So

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Speaker 1: the breaking point again is when there are two ways

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Speaker 1: to think about this. One is it a breaking point

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Speaker 1: to the downside and whereby you fall into into a

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Speaker 1: Japan like scenario where no matter how low you depressed

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Speaker 1: real rate um, it's just not going to work due

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Speaker 1: to demographics, due to productivity. Then the markets just say

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Speaker 1: we might as well go home, get out of equities,

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Speaker 1: just stay in cash. There's no difference, or there's going

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Speaker 1: to be a lot of control, a lot of credibility

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Speaker 1: upside inflation risk. But I think right now central banks

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Speaker 1: are more worried about downside disinflation deflation. That word is

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Speaker 1: still forbidden for them. Yeah, but the Tolsa's brilliant question, Jeff,

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Speaker 1: you were doing yield curve control sort of kind of

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Speaker 1: like and that you just correctly stated they're worried about

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Speaker 1: disinflation in downside moves. What do you see in the

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Speaker 1: ten year tips When you see that, I see convexity

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Speaker 1: in some form of gentle acceleration to a Japan like

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Speaker 1: very low real yield. Well, you know that is something

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Speaker 1: about the central banks will just have to try to

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Speaker 1: manage as a type as possible. What is their Tallengs threshold?

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Speaker 1: You look at the five year break evens right now

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Speaker 1: it's falling again. It's it's below you know, one, one fifty, So, um,

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Speaker 1: do you want to contain that to make sure it

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Speaker 1: doesn't just saw as a sign that central bank is

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Speaker 1: doing that the central banks are being too effective? Or

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Speaker 1: do you just want to keep it in arrange right now?

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Speaker 1: The trajectory matters. We've gone from effects of the zero

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Speaker 1: in March down to one and a half. They're happy

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Speaker 1: to keep that pace, even if it goes to two.

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Speaker 1: They're happy with the pace. But if it's suddenly just

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Speaker 1: expands exponentially, then that's the loss of control, lots of

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Speaker 1: credibility we talked about. The risk is always you don't

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Speaker 1: know you've lost control, lost credibility until you actually lose it.

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Speaker 1: And I think that's a risk that all central banks

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Speaker 1: will have to take. Right now, Well, Jeff, let's get

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Speaker 1: to what that means in the effects market, the relative

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Speaker 1: story of a currency pair with the US dollar on

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Speaker 1: the one side, how would you push this through? G

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Speaker 1: turn right now? But so right now and G turn

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Speaker 1: Irrespective of what the RBA said of night, I'm still

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Speaker 1: very comfortable owning AUSSI. AUSSY is the best reflation play

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Speaker 1: right now, they've got some China tail winds in terms

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Speaker 1: of the iron are market, property is reflating there and

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Speaker 1: in terms of trades and are improving elsewhere. Euro were comfortable,

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Speaker 1: you know, adding to euro loongs. Even if when we

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Speaker 1: get a bit of a short term correction, I am

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Speaker 1: a bit more concerned about the ECB being worried about

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Speaker 1: disinflation due to a strong Euro. But overall it's more

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Speaker 1: and more clients are being a asking about the dollar

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Speaker 1: debasement narrative. Are we seeing a shift? Is China going

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Speaker 1: to push for a second win for whom and b internationalization?

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Speaker 1: That as a structural story is going to be really

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Speaker 1: really interesting to see now, urine or story really important.

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Speaker 1: If someone says to me they're like the r C,

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Speaker 1: they're like the Euro, I'm thinking they think we're going

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Speaker 1: to get a pick up in cyclical growth to return

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Speaker 1: to risk appetite. But when they say we're talking to

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Speaker 1: clients about dollar debasement, there's something has happening there. Which

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Speaker 1: one is it, Jeff? One is the short term cyclical

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Speaker 1: uptick of Europe and Australia get their COVID reaction functions

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Speaker 1: right with government investment and you're seeing that in Europe

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Speaker 1: and Australia, and then that's a cyclical upturn for the

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Speaker 1: dollar story and it's also and then be a euro

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Speaker 1: a What is the future for reserve currencies? What is

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Speaker 1: the future for currencies? Full stop? And this new quality

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Speaker 1: paradigm that we have, then will the dollars relationships to risk,

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Speaker 1: to cash to everything else, will that start to change?

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Speaker 1: You've got the one year story versus the ten twenty

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Speaker 1: year story on this. Did you ever think that we'd

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Speaker 1: be talking about the loss of currency status with the

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Speaker 1: dollar index in the nineties. Um, so it's not about

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Speaker 1: full lots of reserve staff. If it's lots of dominance.

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Speaker 1: The US dollar will always be a reserve currency. But

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Speaker 1: will it always be sixty nine dominant terms of payments

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Speaker 1: for of f X transactions those numbers they put out

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Speaker 1: a long time ago. The only direction is probably lower.

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Speaker 1: But is that a one year story or a tenure story?

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Speaker 1: Let's look at the policy mix. Jeff, fantastic to catch

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Speaker 1: up with you as always, Jeff, you of bn Y Mellon.

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Speaker 1: Let's do this. Let's save our conversation of the day

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Speaker 1: and the foundational theories of this economy, in this central bank.

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Speaker 1: There is no one across the Atlantic better qualified than

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Speaker 1: Janet Writing his original work with Mr mal Pass at

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Speaker 1: bear Stearns years ago, now at Breen Capital as their

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Speaker 1: chief economic advisor. Mr Writing is public service to the

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Speaker 1: Bank of England and the Feller Reserve System, and it's

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Speaker 1: definitive on the underlying theories of the FED. John, what's

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Speaker 1: the theory of this Fed. Well, it's clearly shifting to

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Speaker 1: do whatever and it's a shift that's been in process

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Speaker 1: for a while, to do whatever it can to support

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Speaker 1: the labor market, to support minority and underprivileged groups within

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Speaker 1: the labor market that have suffered higher unemployment rates over

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Speaker 1: the years, and paying less attention and increasing little less

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Speaker 1: attention to price stability. I mean, the good news is

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Speaker 1: inflation is low, um. But but I think the bad

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Speaker 1: news is it puts too much bonus on the FED, when,

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Speaker 1: as we know from what happened in the second quarter,

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Speaker 1: fiscal action and timely fiscal action is much more important

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Speaker 1: for stabilizing the real side of the economy. What is

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Speaker 1: the statistic that you have in your head over how

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Speaker 1: much this stimulus should be right now? I mean, everyone

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Speaker 1: says the Republicans are undershooting at one trillion, maybe the

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Speaker 1: Democrats are three chones. Do you have a number in

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Speaker 1: your head over the next year where the fiscal stimulus

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Speaker 1: is going. Could it be five trillion? Well, I don't

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Speaker 1: have a number because I don't know how the virus

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Speaker 1: is going to play out, and I don't know how

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Speaker 1: the medical response is, particularly a vaccine in the timing

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Speaker 1: of the vaccine is going to play out. But we

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Speaker 1: need a fiscal bridge and a monetary bridge across the

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Speaker 1: chasm in economic activity. Now, the economy has rebounded very

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Speaker 1: nicely in May and June. We'll find out later this

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Speaker 1: week about how July began, but it looks like the

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Speaker 1: pace of improvement is significantly flattened out. And you pointed

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Speaker 1: out earlier in the show about my former center field

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Speaker 1: when I was at the New York Fed hitman Harris

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Speaker 1: Ethan Harris um and I agree with him the number

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Speaker 1: could be a million, But we wouldn't be surprised by

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Speaker 1: a negative printing in terms of some of the things

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Speaker 1: that we see. So if there's uncertain about what happened

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Speaker 1: last month, given the data that we have on July,

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Speaker 1: it's impossible to know how the next six to nine

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Speaker 1: months are going to play out. My guess is that

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Speaker 1: by the end of this year, we will still have

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Speaker 1: a substantial amount of unemployment, perhaps an eight nine maybe

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Speaker 1: higher unemployment rate, and that's a lot of people who

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Speaker 1: are unemployed through no fault of their own. I think

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Speaker 1: the good news is in the short run, and something

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Speaker 1: we've been pointing out that the income support was it

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Speaker 1: was search that it more than replaced a lost wage

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Speaker 1: income in total, So there is a savings cursion. And

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Speaker 1: we estimate that savings cursion through the second quarter to

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Speaker 1: be in additional savings of nine twenty five billion dollars.

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Speaker 1: So it's not a it's not a shock. It's a

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Speaker 1: problem for many households, but in totally it's not going

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Speaker 1: to be quite the shock that some people's calculations suggest.

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Speaker 1: But I certainly think we need to extend some form

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Speaker 1: of extended unemployment benefits. Here, John, forgive me, because these

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Speaker 1: are serious issues. But did you really used to call

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Speaker 1: Ethan Harris hit man Harris? I absolutely did. He was

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Speaker 1: a center fielder and cleanup. Did anyone else but to

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Speaker 1: New York for the New York Well, I used to

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Speaker 1: I coached and managed the New York fed Research softball team,

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Speaker 1: and and Ethan was my center fielder and clean up hitter.

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Speaker 1: And you've got a lot of hits, So yeah, I

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Speaker 1: gave nicknames to everyone in the game writes ups, and

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Speaker 1: Ethan was hit man Harris. I love this, just not

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Speaker 1: a name I would ever give to Ethan Harris of

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Speaker 1: Bank for America. John, Let's talk about the new era

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Speaker 1: for central banking. You touched on the price stability mandate.

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Speaker 1: It came out of the nineteen eighties with Mr Volka,

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Speaker 1: the obsession with price stability, the war against inflation. Then

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Speaker 1: came the independence into the nineties, and I just wonder

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Speaker 1: what this new era is, John, where this is going,

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Speaker 1: and what it looks like, and whether it's the right

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Speaker 1: move to leave behind the work of the last several decades.

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Speaker 1: I don't think it look obviously. It's pandemic. Is unlike

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Speaker 1: something that we have faced in the last hundred years.

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Speaker 1: I mean, the last time the US faced a pandemic

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Speaker 1: of this magnitude, the Federal Reserve system was four years

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Speaker 1: or so old. Uh, And we had a very different

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Speaker 1: view of the role of central banks back but back

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Speaker 1: in those times. So I do understand that the here

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Speaker 1: and now is focusing on the economy, focusing on an

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Speaker 1: employment and that's appropriate. But I think that this obsession

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Speaker 1: that we have to raise the inflation rate to two

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Speaker 1: percent when I can find no serious work that says,

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Speaker 1: unless you have a collapse in price level like we

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Speaker 1: had in the Great Depression, running an inflation rate that's

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Speaker 1: half a percent or so lower on average than two

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Speaker 1: percent is a bad thing, and that we have to

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Speaker 1: elevate the inflation rate. I find that a curious and

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Speaker 1: somewhat misplaced obsession. And then John Net goes to the

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Speaker 1: heart of your work over all these death is there

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Speaker 1: any proof to the Central Bank and quote unquote catch

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Speaker 1: up with elevated inflation? Well, you know, I was chatting

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Speaker 1: to Charles plus or uh obviously you know him, a

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Speaker 1: former federal on the show the other day, on the

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Speaker 1: show the other day, and I chatted to him after

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Speaker 1: your show, Um, and he made the point, and it's

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Speaker 1: a point that I agree with that if you haven't

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Speaker 1: been able to hit an inflation target, and you keep

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Speaker 1: on saying that that's what you want to accomplish, then

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Speaker 1: you are in danger of undermining your credibility when it

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Speaker 1: perhaps comes to other important things. I think that's a

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Speaker 1: tremendously tremendously important point, because if there's no economic damage

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Speaker 1: being done by an inflation rate of one and a

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Speaker 1: half percent, in fact, there may even be economic benefits.

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Speaker 1: I don't know that any If you tap a personal

431
00:22:58,000 --> 00:23:01,640
Speaker 1: on the street, socially distanced and wearing masks, awesome, Um,

432
00:23:01,680 --> 00:23:04,840
Speaker 1: you know, is the inflation rate too low for you?

433
00:23:04,920 --> 00:23:07,480
Speaker 1: I don't know many people would say, oh, yes, it's

434
00:23:07,520 --> 00:23:09,800
Speaker 1: too low. I'd like to have my the perch in

435
00:23:09,880 --> 00:23:13,720
Speaker 1: power of the dollars in my pocket eroded more quickly.

436
00:23:14,200 --> 00:23:17,040
Speaker 1: And I don't know anyone they would do that. And

437
00:23:17,119 --> 00:23:22,119
Speaker 1: yet there is this is academic view at the FED

438
00:23:22,600 --> 00:23:25,400
Speaker 1: that somehow the economy will perform better at a two

439
00:23:25,440 --> 00:23:28,360
Speaker 1: percent inflation rate over time. That doesn't one or one

440
00:23:28,400 --> 00:23:31,320
Speaker 1: and a hot centiment. Hold on, hold on here, because

441
00:23:31,359 --> 00:23:34,040
Speaker 1: the idea, especially as the United States adds more and

442
00:23:34,080 --> 00:23:36,400
Speaker 1: more debt, and as companies add more and more debt,

443
00:23:36,440 --> 00:23:39,040
Speaker 1: the whole theory is that we can inflate away these

444
00:23:39,200 --> 00:23:41,760
Speaker 1: debt loads, that basically the rate of inflation will make

445
00:23:41,800 --> 00:23:44,320
Speaker 1: money cheaper so it will be easier to pay back

446
00:23:44,440 --> 00:23:48,280
Speaker 1: this debt. What are the consequences if that doesn't happen,

447
00:23:48,320 --> 00:23:50,719
Speaker 1: how much do taxes have to go up, especially if

448
00:23:50,760 --> 00:23:53,240
Speaker 1: we don't see growth pick up at a faster speed

449
00:23:53,240 --> 00:23:56,000
Speaker 1: than it is now. But you will not find that

450
00:23:56,119 --> 00:23:59,960
Speaker 1: theory espoused at the FED. You will not find people

451
00:24:00,000 --> 00:24:01,720
Speaker 1: of the FED who say, the reason we want to

452
00:24:01,800 --> 00:24:05,399
Speaker 1: higher inflation rate is to inflate away the debt because

453
00:24:05,440 --> 00:24:08,360
Speaker 1: over time, what do we get. We get the Fisher

454
00:24:08,400 --> 00:24:13,680
Speaker 1: equation from irving fisher um, we get higher inflation expectations,

455
00:24:13,960 --> 00:24:16,240
Speaker 1: and that will push up interest rates, and that's something

456
00:24:16,320 --> 00:24:18,760
Speaker 1: the FED would resist. So the FED would then have

457
00:24:18,920 --> 00:24:22,960
Speaker 1: to buy more and more debt through QUEWI, and that

458
00:24:23,160 --> 00:24:27,520
Speaker 1: has the potential to be a dangerous spiral. So not

459
00:24:27,680 --> 00:24:31,639
Speaker 1: the FED thinks the economy work better if people believe

460
00:24:31,760 --> 00:24:34,520
Speaker 1: the inflation rates going to be two percent. The funny

461
00:24:34,560 --> 00:24:36,480
Speaker 1: thing is their studies of the show, and it's a

462
00:24:36,640 --> 00:24:41,840
Speaker 1: very very comprehensive study. Twenty people responded to the study

463
00:24:42,320 --> 00:24:45,280
Speaker 1: of them thought that the inflation rate was ten percent

464
00:24:45,440 --> 00:24:49,919
Speaker 1: or higher. The public in general don't really understand the

465
00:24:50,000 --> 00:24:54,399
Speaker 1: nuances of inflation, and certainly not the measurement nuances between

466
00:24:54,440 --> 00:24:56,840
Speaker 1: a one or one and a half percent inflation rates

467
00:24:56,840 --> 00:24:59,080
Speaker 1: and the two percent one I got time for one

468
00:24:59,119 --> 00:25:02,600
Speaker 1: more question, and we're seeing an unraveling in the real yield.

469
00:25:02,640 --> 00:25:05,760
Speaker 1: The ten year tips just hit a new low negative

470
00:25:05,800 --> 00:25:09,560
Speaker 1: one point zero six folks, the thirty year bond one

471
00:25:09,640 --> 00:25:13,040
Speaker 1: point one nine handle. Right now, do you have in

472
00:25:13,080 --> 00:25:17,080
Speaker 1: your mind what the Fed does if we get a gamma,

473
00:25:17,200 --> 00:25:20,560
Speaker 1: we get a convexity, we get an acceleration in the

474
00:25:20,640 --> 00:25:25,679
Speaker 1: decline of the real yield. Well, I explained that in

475
00:25:25,760 --> 00:25:29,320
Speaker 1: a note that we put out on Friday, which and

476
00:25:29,400 --> 00:25:31,479
Speaker 1: it goes back to the Fisher equation, which is the

477
00:25:31,520 --> 00:25:35,000
Speaker 1: Fed is trying to repress through zero interest rate policy

478
00:25:35,080 --> 00:25:38,280
Speaker 1: in QUEWI the nominal yield, and it's doing that quite successful.

479
00:25:38,359 --> 00:25:41,399
Speaker 1: You report fifty two basis points. They they they're trying

480
00:25:41,400 --> 00:25:43,880
Speaker 1: to get people to believe in a higher inflation rate.

481
00:25:44,160 --> 00:25:46,439
Speaker 1: And people are believing a higher inflation rate, and so

482
00:25:46,480 --> 00:25:50,520
Speaker 1: inflation expectations are moving up, inflation break evens are moving up,

483
00:25:50,800 --> 00:25:54,280
Speaker 1: and the Fed can't repress that. They want that to

484
00:25:54,320 --> 00:25:57,080
Speaker 1: go higher. So they're left with the real yield, which

485
00:25:57,119 --> 00:25:59,919
Speaker 1: is the residual, which has to be forced negative. So

486
00:26:00,000 --> 00:26:02,360
Speaker 1: I don't believe the real yield of negative one percentag

487
00:26:02,359 --> 00:26:04,840
Speaker 1: is somehow truly a growth reading for the outlook for

488
00:26:04,840 --> 00:26:07,199
Speaker 1: the US over the next ten years. It is a

489
00:26:07,280 --> 00:26:11,159
Speaker 1: residual from a combination of interest rate repression on the

490
00:26:11,240 --> 00:26:14,960
Speaker 1: nominal yield and rising inflation expectations, which is also an

491
00:26:15,000 --> 00:26:19,640
Speaker 1: active fed UH policy. What you just heard there from Mr.

492
00:26:19,760 --> 00:26:23,240
Speaker 1: Writing is definitive writing. And this is so important, John,

493
00:26:23,720 --> 00:26:26,720
Speaker 1: is the is the real yield the residual of the

494
00:26:26,840 --> 00:26:30,439
Speaker 1: function or does it initiate the function? John? That is

495
00:26:30,480 --> 00:26:34,480
Speaker 1: the arch debate of modern economics. John riding bring capital.

496
00:26:34,560 --> 00:26:40,520
Speaker 1: John has to catch up, he said, Craig mofit. Michael

497
00:26:40,560 --> 00:26:44,840
Speaker 1: Nathanson always smart on streaming, on entertainment, on content and

498
00:26:44,880 --> 00:26:49,600
Speaker 1: the distribution of that content, joining us now supposedly on

499
00:26:49,680 --> 00:26:52,640
Speaker 1: Disney's earnings, although we're not going there is Michael Nathanson,

500
00:26:52,720 --> 00:26:58,320
Speaker 1: founding partner, Senior research analyst. Michael, you have a sidecar

501
00:26:58,920 --> 00:27:03,000
Speaker 1: UH skill of looking at some of these new technologies

502
00:27:03,040 --> 00:27:07,240
Speaker 1: like snap and the rest of them. Is TikTok a

503
00:27:07,359 --> 00:27:14,479
Speaker 1: valid platform to raise revenues whomever buys it? Yep, morning, Tom,

504
00:27:14,680 --> 00:27:18,879
Speaker 1: I think it is. You know, the engagement is there, Um,

505
00:27:18,920 --> 00:27:22,160
Speaker 1: it's it's you know what we've see in traffic. This

506
00:27:22,160 --> 00:27:25,480
Speaker 1: this this year has been incredible, right. The it's really

507
00:27:25,520 --> 00:27:30,479
Speaker 1: written in terms of time spent and usage. So I

508
00:27:30,520 --> 00:27:33,919
Speaker 1: think I think it can monetize and that will change,

509
00:27:33,920 --> 00:27:35,920
Speaker 1: you know, if it's my Microsoft is going to change

510
00:27:35,960 --> 00:27:40,240
Speaker 1: the dynamic of this industry. Even when Instagram was taken

511
00:27:40,240 --> 00:27:43,080
Speaker 1: out in folks, Sarah Fryar Bloomberg owns a high ground

512
00:27:43,119 --> 00:27:46,920
Speaker 1: on this in her wonderful book Mr. Seistrom in Instagram.

513
00:27:46,960 --> 00:27:50,560
Speaker 1: But Michael Nathanson, is this somewhat equivalent to Instagram? Where

514
00:27:50,560 --> 00:27:55,359
Speaker 1: we all underestimated what Facebook would do with Instagram? Are

515
00:27:55,440 --> 00:27:58,480
Speaker 1: we doing the same thing here? Oh? Without a doubt, Tom,

516
00:27:58,520 --> 00:28:01,359
Speaker 1: even a couple of years ago started uh, you know,

517
00:28:01,800 --> 00:28:06,880
Speaker 1: bringing stories Instagram stories, and I myself, you know, had

518
00:28:06,920 --> 00:28:09,120
Speaker 1: doubts whether or not they can monetize stories because it's

519
00:28:09,160 --> 00:28:12,800
Speaker 1: just a different format, different consumption pattern. But they've done

520
00:28:12,800 --> 00:28:16,840
Speaker 1: it really well. Right, So, um, where there's engaged, where

521
00:28:16,840 --> 00:28:20,199
Speaker 1: there's engagement on mobile phones, there's monetization. That's just what

522
00:28:20,280 --> 00:28:23,040
Speaker 1: we've learned. So yeah, I think that's right. It's a

523
00:28:23,119 --> 00:28:27,320
Speaker 1: really good analogy. Michael. How does Snapchat do it? Though?

524
00:28:27,359 --> 00:28:31,639
Speaker 1: And actually who does snapchat take eyeballs away? From I

525
00:28:31,720 --> 00:28:34,320
Speaker 1: mean with with TikTok No. So so our view is,

526
00:28:35,680 --> 00:28:38,360
Speaker 1: you know, at this point, because we're such a strange

527
00:28:38,440 --> 00:28:41,400
Speaker 1: time when everyone's people were at a school, people working

528
00:28:41,440 --> 00:28:44,280
Speaker 1: from home, it looks like all boats have risen. But

529
00:28:44,320 --> 00:28:49,280
Speaker 1: we think over time, logically, if TikTok sorry TikTok does

530
00:28:50,240 --> 00:28:53,520
Speaker 1: keeps doing well, it's gonna hurt Snap and Instagram. Right,

531
00:28:53,560 --> 00:28:56,920
Speaker 1: It's it's a similar demo, and you would think over

532
00:28:56,960 --> 00:29:01,160
Speaker 1: time is going to hurt them on consumption and and

533
00:29:01,320 --> 00:29:03,840
Speaker 1: on on advertising, that there's gonna be a new competitor

534
00:29:03,960 --> 00:29:09,400
Speaker 1: taking ad dollars away from those two bigger companies. Is

535
00:29:09,440 --> 00:29:11,760
Speaker 1: this the deal of the lifetime for Microsoft or the

536
00:29:11,760 --> 00:29:17,360
Speaker 1: deal of a decade? Uh? It depends on the price, right,

537
00:29:17,600 --> 00:29:21,080
Speaker 1: depends on the price, as Tom Notre on Instagram. Uh,

538
00:29:21,320 --> 00:29:26,200
Speaker 1: you know Facebook paid our little Instagram. Um, it depends

539
00:29:26,200 --> 00:29:28,560
Speaker 1: on the price. But you know what, it's interesting to

540
00:29:28,680 --> 00:29:32,800
Speaker 1: me that they they want to get into this business,

541
00:29:32,920 --> 00:29:36,240
Speaker 1: right because they really not show much interest in a

542
00:29:36,320 --> 00:29:39,760
Speaker 1: consumer business like this. So it kind of us it

543
00:29:39,920 --> 00:29:42,000
Speaker 1: really questions like where do they want to go with

544
00:29:42,080 --> 00:29:44,480
Speaker 1: this and what do they see? So, you know what,

545
00:29:44,640 --> 00:29:46,520
Speaker 1: it's a deal, the deal of the decade in terms

546
00:29:46,560 --> 00:29:49,840
Speaker 1: of a change of strategy. I think Craig from Manhattan

547
00:29:49,960 --> 00:29:53,080
Speaker 1: emails and says, ask him a question about Disney. Let's

548
00:29:53,120 --> 00:29:56,800
Speaker 1: go there, Michael on Walt on Walt Disney, it was

549
00:29:56,840 --> 00:30:01,400
Speaker 1: trading at one ten streaming revenue, moons shot one fifty

550
00:30:01,520 --> 00:30:03,320
Speaker 1: and down we go. It's what we call, folks, a

551
00:30:03,440 --> 00:30:06,959
Speaker 1: red zone green zone chart, Michael Nathan's and does Disney

552
00:30:07,000 --> 00:30:09,120
Speaker 1: have the ability to get up into the green zone?

553
00:30:09,120 --> 00:30:13,280
Speaker 1: A hundred and fifty dollars per share? Tom, We dread

554
00:30:13,400 --> 00:30:17,560
Speaker 1: Disney back in early May. So my answer would be no,

555
00:30:18,520 --> 00:30:22,479
Speaker 1: not for not for the near term, right, the just

556
00:30:22,560 --> 00:30:27,760
Speaker 1: the headwinds in their legacy businesses and parks and movie

557
00:30:27,800 --> 00:30:31,720
Speaker 1: the movies and live sports and cable networks. There's so

558
00:30:31,800 --> 00:30:36,160
Speaker 1: much pressure pushing and pushing those businesses is the wrong way. Yes,

559
00:30:36,200 --> 00:30:40,240
Speaker 1: they've got a great stream story at Disney plus that's

560
00:30:39,880 --> 00:30:44,240
Speaker 1: that's great news. But where they make money, where really,

561
00:30:44,480 --> 00:30:47,200
Speaker 1: you know, drive cash flow, there's so many high winds,

562
00:30:47,520 --> 00:30:50,040
Speaker 1: you know, So it's no we we thought it's gonna

563
00:30:50,040 --> 00:30:52,840
Speaker 1: take some time. In fact, you know, I've been surprised

564
00:30:52,960 --> 00:30:57,120
Speaker 1: how resilient Disney has been during this crisis because in

565
00:30:57,640 --> 00:31:01,920
Speaker 1: previous downturns would have been hit much harder, you know,

566
00:31:01,960 --> 00:31:04,280
Speaker 1: and it hasn't been. Michael. I love when you were

567
00:31:04,280 --> 00:31:07,520
Speaker 1: in that episode in season two A succession, James Murdoch

568
00:31:07,680 --> 00:31:12,600
Speaker 1: walks away from news Corp. Mr Murdoch the son of Rupert,

569
00:31:12,600 --> 00:31:15,600
Speaker 1: and there's the whole family tension and all that. Great.

570
00:31:15,800 --> 00:31:19,240
Speaker 1: How does news Corp fair? Not so much without James Murdoch?

571
00:31:19,720 --> 00:31:24,200
Speaker 1: But just as the generation passes on, what's your update

572
00:31:24,280 --> 00:31:27,720
Speaker 1: on news Corp? Presidentity? Okay, so we don't cover news Corp.

573
00:31:28,080 --> 00:31:32,360
Speaker 1: Quite quite familiar with it. You know, there's there's this

574
00:31:32,400 --> 00:31:35,080
Speaker 1: interesting day Namgant News Corp. They own the Wall Street Journal.

575
00:31:35,160 --> 00:31:37,040
Speaker 1: If you look at where the New York Times has

576
00:31:37,120 --> 00:31:41,120
Speaker 1: moved to terms of its enterprise value, you know, embedded

577
00:31:41,240 --> 00:31:43,640
Speaker 1: in news Corps is the Wall Street Journal. And I

578
00:31:43,720 --> 00:31:47,920
Speaker 1: would think that the company would start focusing on maybe

579
00:31:48,760 --> 00:31:51,400
Speaker 1: cleaning up. They have a lot of disparate assets there,

580
00:31:52,040 --> 00:31:54,680
Speaker 1: and you know, given again what we're paying for the

581
00:31:54,720 --> 00:31:57,920
Speaker 1: New York Times and that that narrative, I would think

582
00:31:57,920 --> 00:32:00,200
Speaker 1: News Corps has to look at it it's as head

583
00:32:00,200 --> 00:32:02,120
Speaker 1: base and start trying to figure out what can they

584
00:32:02,160 --> 00:32:06,120
Speaker 1: do to Jesz and assets on not that relevant anymore, right,

585
00:32:06,200 --> 00:32:08,800
Speaker 1: and it's it worked for Fox, right, So we would

586
00:32:08,800 --> 00:32:11,520
Speaker 1: come on and talk about Fox for all those years.

587
00:32:11,560 --> 00:32:14,760
Speaker 1: And Fox started to work because Rupert decided to break

588
00:32:14,800 --> 00:32:17,560
Speaker 1: the company up and sell it to Disney, and it doubled,

589
00:32:17,840 --> 00:32:20,200
Speaker 1: doubled in a year. And I think you know, news Corps.

590
00:32:20,600 --> 00:32:23,560
Speaker 1: The question for me is, you know, how motivated today

591
00:32:23,600 --> 00:32:26,240
Speaker 1: to kind of clean up the asset base and focus

592
00:32:26,280 --> 00:32:28,600
Speaker 1: in on the well Stree Journal and Dow Jones to

593
00:32:28,800 --> 00:32:33,360
Speaker 1: get investors to pay more attention to it. Michael, if

594
00:32:33,360 --> 00:32:36,080
Speaker 1: you were to, you know, put in a snapshot exactly

595
00:32:36,280 --> 00:32:39,320
Speaker 1: what COVID nineteen does for a lot of media and telecoms.

596
00:32:39,600 --> 00:32:42,920
Speaker 1: Does it just accelerate a trend that was already there

597
00:32:43,520 --> 00:32:49,160
Speaker 1: or does it make them change course? Yeah, it does both.

598
00:32:49,360 --> 00:32:53,560
Speaker 1: You know what we've found we've written about is over

599
00:32:53,680 --> 00:32:58,000
Speaker 1: our career, we've seen these types of crises really accelerate

600
00:32:58,200 --> 00:33:03,400
Speaker 1: trends but also break patterns that you thought were wobbly.

601
00:33:03,640 --> 00:33:07,160
Speaker 1: So you know, this time around, quarter cutting is going

602
00:33:07,200 --> 00:33:11,440
Speaker 1: to accelerate um the decline of linear and entertainment view

603
00:33:11,480 --> 00:33:15,520
Speaker 1: and will accelerate advertising may not come back to you know,

604
00:33:15,560 --> 00:33:17,320
Speaker 1: it's a legacy TV the way that we you know,

605
00:33:17,360 --> 00:33:20,560
Speaker 1: it hasn't the past, so it's going to force It's

606
00:33:20,640 --> 00:33:23,440
Speaker 1: made Netflix, you know, a king because of it. But

607
00:33:23,480 --> 00:33:25,760
Speaker 1: they're gonna force all the companies to deal with that,

608
00:33:25,960 --> 00:33:29,400
Speaker 1: right and many of them, unlike Disney, we're not ready

609
00:33:29,680 --> 00:33:32,200
Speaker 1: for this transition. So you have to catch up and

610
00:33:32,240 --> 00:33:34,320
Speaker 1: spend more money. And I don't know if they have

611
00:33:34,560 --> 00:33:36,840
Speaker 1: you know, the will to do it, because it's really

612
00:33:36,880 --> 00:33:40,200
Speaker 1: expensive to compete in streaming. So to me, this this

613
00:33:40,360 --> 00:33:43,840
Speaker 1: was this has been a terrible outcome for the legacy

614
00:33:43,920 --> 00:33:48,160
Speaker 1: media industry, just terrible because you know, it just made

615
00:33:48,600 --> 00:33:52,720
Speaker 1: Netflix and digital so much stronger so quickly that I'm

616
00:33:52,840 --> 00:33:55,120
Speaker 1: really I'm really quite down on kind of the long

617
00:33:55,240 --> 00:33:59,720
Speaker 1: term future a lot of our our companies here alright, Michael,

618
00:33:59,720 --> 00:34:02,600
Speaker 1: Thanks watch Michael Nathan's in there at Moffatt. Nathanson found it,

619
00:34:03,080 --> 00:34:06,360
Speaker 1: founding partner on Senior Research Analysted. Thanks for listening to

620
00:34:06,400 --> 00:34:10,920
Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on

621
00:34:11,000 --> 00:34:16,839
Speaker 1: Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm

622
00:34:16,880 --> 00:34:20,200
Speaker 1: on Twitter at Tom Keane before the podcast, you can

623
00:34:20,239 --> 00:34:23,440
Speaker 1: always catch us worldwide. I'm Bloomberg Radio,