WEBVTT - Surveillance: Recovery Bets With El-Erian 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Daily 0:00:13.960 --> 0:00:17.000 we bring you insight from the best in economics, finance, 0:00:17.040 --> 0:00:23.520 investment and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.640 --> 0:00:27.840 Bloomberg dot Com, and of course on the Bloomberg Interesting 0:00:27.920 --> 0:00:30.960 Dynamics and of course all of us folks overwhelmed by 0:00:31.040 --> 0:00:34.239 so many cross currents, so many events, including, as Jonathan 0:00:34.880 --> 0:00:39.000 mentioned there, the pandemic, the new news, the new iterative news, 0:00:39.080 --> 0:00:43.120 if you will, of this terrible virus. He has been 0:00:43.320 --> 0:00:49.440 hugely visible, persistently prolific, but Muhammad Alarian always writing smartly 0:00:49.960 --> 0:00:55.480 about economics, finance and investment from his core foundation of 0:00:55.600 --> 0:00:58.360 game theory. We're thrilled that Dr Alarian could join us 0:00:58.360 --> 0:01:01.840 this morning. Of course, writing too often for Bloomberg Opinion. 0:01:01.960 --> 0:01:05.880 He will take up a modest position at Cambridge University 0:01:06.000 --> 0:01:09.880 in the autumn months. Mohammed, wonderful to have you with us. 0:01:10.319 --> 0:01:13.240 Everybody out there right now has to make a t 0:01:13.520 --> 0:01:16.920 decision of do they want to play on the markets 0:01:17.040 --> 0:01:19.880 or in fear, do they want to remove themselves from 0:01:19.920 --> 0:01:24.240 the markets. How do you approach that T decision? Good morning, Tom, 0:01:24.240 --> 0:01:27.639 and good morning for having me. Look, it fundamentally comes 0:01:27.640 --> 0:01:30.759 down to how you feel about the disconnect between finance 0:01:31.040 --> 0:01:33.800 and the economy. If you believe, like I do, that 0:01:33.920 --> 0:01:39.800 ultimately fundamentals will assert themselves, then you are more cautious 0:01:39.840 --> 0:01:42.880 about this market, and you're worried not just about the 0:01:43.000 --> 0:01:46.040 level of the market, but you're starting to get worried 0:01:46.080 --> 0:01:50.440 also about relative pricing. If, however, you believe that technicals 0:01:51.560 --> 0:01:54.400 call them fomo, the fear of missing out called them tina, 0:01:54.480 --> 0:01:57.560 there was no alternative. And if you believe that central 0:01:57.600 --> 0:02:01.360 banks will continue to protect every asset, then you can 0:02:01.400 --> 0:02:05.200 participate in this market on the longside, regardless of fundamentals. 0:02:05.240 --> 0:02:07.800 So it really comes down to how where it are 0:02:07.840 --> 0:02:11.600 you that fundamentals matter? So have it. Let's talk about 0:02:11.600 --> 0:02:13.680 the fundamentals. You and I have discussed this now for 0:02:13.760 --> 0:02:17.280 several weeks. What matters the initial improvement sequentially month or 0:02:17.280 --> 0:02:20.600 month week on week, or the overall limits of the recovery, 0:02:20.639 --> 0:02:23.000 the limits of normalization. There's just a real push and 0:02:23.000 --> 0:02:25.320 pull there. One of those things will be a dominant 0:02:25.400 --> 0:02:28.400 driver for quite a while. Which one is it? So 0:02:28.440 --> 0:02:32.560 it's now both because of the level of the marketplace. 0:02:32.600 --> 0:02:35.960 So in the beginning, it was about the the the 0:02:36.080 --> 0:02:41.880 sequential improvement, and markets got reinforcement of sequentially improving situation 0:02:41.960 --> 0:02:46.480 on health and therefore on the economy, and Marcus got 0:02:46.520 --> 0:02:52.240 carried away. So now the implicit valuation is that not 0:02:52.400 --> 0:02:56.720 only will the journey be a pleasant one, but you're 0:02:56.720 --> 0:03:01.040 also certain about the destination. And we've been getting over 0:03:01.080 --> 0:03:05.040 the last couple of days are digitimate questions are both 0:03:05.080 --> 0:03:08.600 about the journey and the destination. What we haven't been 0:03:08.639 --> 0:03:13.120 getting is any question mark about central bank support that 0:03:13.360 --> 0:03:18.960 is consistent and strong. No, really about market fundamentals, market technicals. 0:03:19.000 --> 0:03:22.560 You see again today the buy the dip mentality, the 0:03:22.639 --> 0:03:25.320 conditioning to buy the dip is very deeply embedded in 0:03:25.360 --> 0:03:28.000 this market. Scarring, Mohammed. Scarring is something I want to 0:03:28.040 --> 0:03:29.679 talk about with you. The I m F mentioned that 0:03:29.720 --> 0:03:32.080 in the last twenty four hours, the permanent job losses, 0:03:32.160 --> 0:03:35.960 the bankruptcies, the sectors that just won't come back. I've 0:03:36.000 --> 0:03:38.120 got a headline crossing a Blimberg terminal right now. The 0:03:38.160 --> 0:03:43.080 American airlines see second quarter revenue decline of about capacity 0:03:43.160 --> 0:03:47.119 down sev in the second quarter. Have you got your 0:03:47.160 --> 0:03:49.520 hands around the amount of scarring that we will have 0:03:50.080 --> 0:03:52.560 coming out of the other side of this pandemic. Yes, 0:03:52.680 --> 0:03:55.600 more on the supply side than on demand side. So 0:03:55.640 --> 0:03:58.800 on the supply side, we're going to see hits to 0:03:59.000 --> 0:04:02.880 both the productive dy on on on the capital side 0:04:02.920 --> 0:04:05.080 and on the labor side, we are going to see 0:04:05.120 --> 0:04:10.640 a process of deglobalization that is driven by households, governments, 0:04:10.720 --> 0:04:14.520 and the corporate sector. And the result of that absent 0:04:14.600 --> 0:04:16.960 And I want to stress there's nothing we DestinE depends 0:04:17.000 --> 0:04:20.640 on policies, but absence policies to improve productivity will be 0:04:20.800 --> 0:04:24.080 lower productibility and lower growth. And that's what you hear 0:04:24.120 --> 0:04:26.040 from the IMF, you heard it from the O E, 0:04:26.120 --> 0:04:28.760 c D, you heard it from the World Bank. What's 0:04:28.760 --> 0:04:31.640 more uncertain is the demand side, John, we don't know 0:04:32.360 --> 0:04:37.039 what's going to happen to people's marginal propensities to consume. 0:04:37.160 --> 0:04:40.840 How willing will people be to spend money, How willing 0:04:41.240 --> 0:04:45.720 will people be to um continue behavior that the U. S. 0:04:45.760 --> 0:04:48.720 Consumer has been so good at, which is drive the economy. 0:04:48.800 --> 0:04:51.920 Will we come out with a more frugal society or not? 0:04:52.120 --> 0:04:54.880 That's still a question mark Mohammed. I want to talk 0:04:54.920 --> 0:04:58.039 about this decline and productivity and growth that you're talking about. 0:04:58.120 --> 0:05:02.040 Paired with the question marks are round demand and deglobalization, 0:05:02.200 --> 0:05:04.680 which a lot of people think will actually be inflationary 0:05:04.720 --> 0:05:07.240 because if you bring supply chains home, you won't necessarily 0:05:07.279 --> 0:05:11.760 capture the efficiencies of cost that some of the globalization did. 0:05:11.960 --> 0:05:15.840 I'm wondering, does this feel like a stagflationary environment? Is 0:05:15.880 --> 0:05:18.479 that what you're portraying here? Well, you do have two 0:05:18.480 --> 0:05:22.920 inflationary pressures. One is simply the rewiring of supply chains 0:05:23.680 --> 0:05:26.440 and the inefficiencies that come with that, and the other 0:05:26.520 --> 0:05:29.839 one is we are seeing least a significant increase in 0:05:29.880 --> 0:05:33.599 industrial concentration. The big firms are getting bigger and we're 0:05:33.640 --> 0:05:37.320 losing the mid size and the small firm. However, to 0:05:37.440 --> 0:05:42.760 translate that into a stagflationary projection, to say inflation will 0:05:42.800 --> 0:05:46.560 result means that you have a view on demand, and 0:05:46.600 --> 0:05:49.160 as I said earlier, the demand side is really uncertain 0:05:49.279 --> 0:05:53.440 right now, Mohammed, you are going to go to Cambridge 0:05:53.720 --> 0:05:57.800 and the legacy there of all this mathematics and foundational 0:05:57.920 --> 0:06:01.200 theory is Frank ram Zee, who we lost at a 0:06:01.360 --> 0:06:06.400 shockingly young age, distant distant distant ago. Right now, our 0:06:06.440 --> 0:06:10.800 foundations are being shaken to the ground, we've got a pandemic, 0:06:10.920 --> 0:06:15.120 we've got the shocks of this economy, and really original 0:06:15.279 --> 0:06:20.400 economics and monetary theory. Do you understand the foundations right 0:06:20.440 --> 0:06:25.040 now that we're standing on or is the mathematics broken. Look, 0:06:25.040 --> 0:06:30.040 we're dealing with unusual uncertainty to use per Nankee's term, 0:06:30.200 --> 0:06:34.400 or radical uncertainty to use morfern king. So the structure 0:06:34.440 --> 0:06:37.720 of the economy is in play. And as you know, 0:06:38.440 --> 0:06:40.839 when the structure of the economy is in play, you've 0:06:40.880 --> 0:06:44.880 got to bring in many elements um of economics or 0:06:44.880 --> 0:06:48.040 behavioral finance, of game theory to try to understand what's 0:06:48.080 --> 0:06:50.760 going on. I keep on stressing to people the most 0:06:50.760 --> 0:06:52.919 important thing right now is not what you think, but 0:06:53.080 --> 0:06:55.840 how you think. It is this ability to bring in 0:06:55.880 --> 0:06:59.720 a multidisciplinary approach to try and figure out what are 0:06:59.720 --> 0:07:03.039 the questions and what you should be monitoring and talk 0:07:03.120 --> 0:07:06.120 about monitoring. Look, Tom, even the data that you and 0:07:06.200 --> 0:07:08.600 I look at these days, it's completely different from four 0:07:08.640 --> 0:07:10.800 months ago. We didn't look at mobility data, we didn't 0:07:10.800 --> 0:07:13.400 look at the restaurant booking data. But that's what we're 0:07:13.400 --> 0:07:16.360 looking at right now to try and understand what's going on. 0:07:16.720 --> 0:07:19.640 So I think it's a different challenge. What it's exciting 0:07:20.240 --> 0:07:23.280 for economists is they have the tools, but they have 0:07:23.360 --> 0:07:26.280 to make sure that they adapt accordingly. Somehippens. Let's just 0:07:26.280 --> 0:07:28.800 finish that. The data point that you are laser focused 0:07:28.800 --> 0:07:31.320 on at the moment, the high frequency data. Maybe what 0:07:31.440 --> 0:07:34.120 is it? So I look, like everybody else, at the 0:07:34.200 --> 0:07:37.440 high high frequency data. UM so I look at mobility data, 0:07:37.880 --> 0:07:40.200 certainly at health data. I look at infections, I look 0:07:40.240 --> 0:07:43.840 at hospitalization, I look at what how how is the 0:07:44.120 --> 0:07:49.280 individual household interacting with the economy travel data. I mean, 0:07:49.560 --> 0:07:51.920 you're just trying to get a notion of three things, John. 0:07:52.040 --> 0:07:56.760 One is what is the health situation? Two is our 0:07:56.880 --> 0:08:01.800 households engaging? And three is our humping is engaging. Remember 0:08:02.320 --> 0:08:05.080 it's these thweet things are not of health because there 0:08:05.080 --> 0:08:07.160 are people who are whisk loving the people who are 0:08:07.160 --> 0:08:11.280 whisker verse who react differently to health indicators. So we've 0:08:11.320 --> 0:08:15.400 got to keep all three under close monitoring, and they'll 0:08:15.440 --> 0:08:18.560 give you some feel for how we are going through 0:08:18.560 --> 0:08:21.200 this journey. It is going to be a checkmark, it's 0:08:21.200 --> 0:08:23.240 not going to be a shop v and it's going 0:08:23.320 --> 0:08:25.960 to be one subject to a lot of volatility. Mohammed. 0:08:26.080 --> 0:08:28.280 Always great to catch out with you five ten on 0:08:28.320 --> 0:08:30.440 the West coast. Can you apologize to the family on 0:08:30.440 --> 0:08:32.720 our behalf if we've welkened them up with this interview? 0:08:32.760 --> 0:08:39.760 Muhammad Alarian a Bloomberg opinion. Some of all Street hides 0:08:40.160 --> 0:08:43.240 in the Greek letters. We hide in the derivative dynamics 0:08:43.280 --> 0:08:47.280 and expert at that is Dean Current at mcrow Risk Advisors. 0:08:47.280 --> 0:08:50.280 I'll be direct, I don't understand half of his research. 0:08:50.400 --> 0:08:56.679 Note he does extremely sophisticated analysis of the interior dynamics 0:08:56.720 --> 0:08:59.200 of the market and he joins us right now, Dean, 0:08:59.280 --> 0:09:02.679 you were the first name we mentioned yesterday. Basically it 0:09:02.720 --> 0:09:06.959 was get Dean Currentent. What did you observe in the 0:09:07.000 --> 0:09:12.920 interior dynamics yesterday? Yeah, thanks Tom. A tremendous move obviously 0:09:12.920 --> 0:09:16.559 in the SPUM So we were running at about a 0:09:16.679 --> 0:09:20.000 twenty five implied volatility, so that's about a one point 0:09:20.080 --> 0:09:23.360 five move a day. That that's high in of course 0:09:23.440 --> 0:09:27.360 historical context. We moved six percent, so that's a four 0:09:27.400 --> 0:09:31.480 standard deviation move. Our little normal distribution table is going 0:09:31.559 --> 0:09:33.840 to tell us that's supposed to happen once every sixty 0:09:33.880 --> 0:09:37.240 three years. So first we know of course markets aren't 0:09:37.240 --> 0:09:41.040 normally distributed. That the tails are fat and they're active. Um. 0:09:41.040 --> 0:09:44.120 But the biggest I think conclusion from yesterday is just 0:09:44.360 --> 0:09:48.120 below the surface of the market UM. As has been 0:09:48.160 --> 0:09:52.560 discussed widely, the factor rotation is violent. UM. So I 0:09:52.640 --> 0:09:56.319 keep track of a market neutral index from momentum stocks, 0:09:56.360 --> 0:10:00.280 and again I underscore market neutral and it has had 0:10:00.400 --> 0:10:03.439 seven straight days of four and four point five pc 0:10:03.679 --> 0:10:06.800 moves or more, and that's a hundred volve for a 0:10:06.880 --> 0:10:12.000 market neutral index. It's it's just it's staggering. So again 0:10:12.040 --> 0:10:15.480 it's it's just negative stocks moving like panty stock staying. 0:10:15.520 --> 0:10:18.320 It's been absolutely remarkable, and I think what we're looking 0:10:18.360 --> 0:10:20.880 for are signs that maybe the coast is clear. And 0:10:20.880 --> 0:10:22.839 I know that's the trillion dollar question it always is. 0:10:22.880 --> 0:10:24.440 But as you look at the VIX curve right now, 0:10:24.840 --> 0:10:27.520 what signal do you take away from that at the moment. Yeah, So, 0:10:27.800 --> 0:10:30.640 I think what what the VIX is telling us is 0:10:30.760 --> 0:10:34.440 that the market was really unprepared for this. So anytime 0:10:34.480 --> 0:10:36.400 the market moves down like it did, the VIX is 0:10:36.440 --> 0:10:40.679 obviously going to fly higher. It outperformed the move uh 0:10:40.800 --> 0:10:43.880 lower in the SMP by quite a bit. So so 0:10:43.960 --> 0:10:46.800 the move higher involved is telling us the degree to 0:10:46.880 --> 0:10:50.040 which people were caught off side, and I think that 0:10:50.160 --> 0:10:53.400 can be confirmed by looking at open interest in VIX 0:10:53.440 --> 0:10:57.040 options had gotten very quiet, so the ownership of let's 0:10:57.040 --> 0:11:00.000 say things like upside calls to protect portfolios was quite 0:11:00.120 --> 0:11:04.080 low coming into this. Dean taking a step back. After 0:11:04.160 --> 0:11:06.160 two thousand ten, a lot of people were saying that 0:11:06.200 --> 0:11:10.080 the FED stimulus and involvement in markets had dampened volatility dramatically, 0:11:10.480 --> 0:11:13.680 and we saw a real flat market, a real calm market. 0:11:14.120 --> 0:11:17.160 I'm wondering if there is a larger takeaway from yesterday 0:11:17.160 --> 0:11:18.920 that the FED is throwing the kitchen sink at the 0:11:18.960 --> 0:11:21.800 market in order to improve and smooth out market functioning, 0:11:21.840 --> 0:11:25.440 and you still see these whip saw technical reactions that 0:11:25.520 --> 0:11:28.600 indicate some sort of liquidity issues or high degrees of 0:11:28.679 --> 0:11:32.840 leverage getting unwound. Is there some larger takeaway about the 0:11:32.840 --> 0:11:35.960 FED reaching its limit and in terms of being able 0:11:36.000 --> 0:11:40.319 to dampen volatility, I think it's exactly right there. At 0:11:40.320 --> 0:11:46.160 every turn when we have these significant risk offs two twenty, 0:11:46.559 --> 0:11:49.400 At every turn, the degree to which the policy responses 0:11:49.679 --> 0:11:55.840 larger and more overwhelming and wades further into private markets. UH, 0:11:55.880 --> 0:11:58.680 it just is telling us that the financial system is 0:11:58.720 --> 0:12:02.320 something that's it's unwheeled. UM. I think that that old 0:12:02.360 --> 0:12:06.320 adage don't fight the Fed. UM is of course focused 0:12:06.360 --> 0:12:09.440 on asset prices the stock market, but I think in 0:12:09.559 --> 0:12:12.800 terms of buying volatility buy insurance. Whenever you're doing so, 0:12:12.920 --> 0:12:16.080 you are fighting the FED. And so I we have 0:12:16.160 --> 0:12:20.480 to respect the significance of this move yesterday. It's violent, 0:12:20.520 --> 0:12:23.600 it tells us something. But at the end of the day, UM, 0:12:23.640 --> 0:12:27.200 a stable VIX or a low lower vix UH is 0:12:27.240 --> 0:12:30.600 part of the fed's playbook. It can't sit by idly 0:12:31.000 --> 0:12:33.640 and allow the VIX get that back up into the fifties, 0:12:33.679 --> 0:12:37.800 allow high yield spreads to spiral higher. UM. It'll sit 0:12:37.960 --> 0:12:40.360 for a little bit, but at some point you're going 0:12:40.440 --> 0:12:43.160 to have the FED come back in UM in the 0:12:43.240 --> 0:12:46.360 name of market functioning. And so again, when you buy insurance, 0:12:46.360 --> 0:12:48.880 you've got to keep that in mind. The policy response Dean. 0:12:49.040 --> 0:12:51.160 One final question, and I'm just going to be as 0:12:51.200 --> 0:12:53.400 direct as I can, and you can go nuanced as 0:12:53.440 --> 0:12:57.080 you like. The game is momentum. Do you buy the 0:12:57.160 --> 0:13:03.360 shift from momentum to vailue, momentum to small cap momentum 0:13:03.360 --> 0:13:08.360 to international or do you stay momentum. I stay with momentum. 0:13:08.440 --> 0:13:12.319 I think that the real economy is what is ultimately 0:13:13.120 --> 0:13:15.800 going to drive that relationship. And of course we've seen 0:13:15.840 --> 0:13:18.839 that shift back into small caps and value. It came 0:13:18.920 --> 0:13:21.880 undone violently, UM a lot. So much of it's just 0:13:21.960 --> 0:13:25.280 the function of the success to which the economy reopens. 0:13:25.720 --> 0:13:28.360 I'm skeptical on that. You know, again, you're you're fighting 0:13:28.360 --> 0:13:31.440 the said you're fighting the policy response from the government, 0:13:31.840 --> 0:13:35.000 UM that they are going to feel invested in keeping uh, 0:13:35.040 --> 0:13:39.079 you know, keeping income earners with with income if they 0:13:39.080 --> 0:13:42.720 don't have jobs. But the degree to which these weaker 0:13:42.760 --> 0:13:46.280 companies with weaker balance sheets are gonna be able to 0:13:46.040 --> 0:13:49.200 uh to thrive, I think is very much an open question, 0:13:49.320 --> 0:13:51.920 just given how challenging the reopening the economy is going 0:13:51.960 --> 0:13:56.160 to be. Tancount it a macro risk advisors stay always 0:13:56.160 --> 0:13:58.040 fantastic to catch up with these. My best to you 0:13:58.120 --> 0:14:03.280 and the whold of the scene now is a real 0:14:03.400 --> 0:14:06.920 treat And this is without question the must listen interview 0:14:07.559 --> 0:14:10.720 for Global Wall Street. How good of an interview is this? 0:14:11.160 --> 0:14:15.640 Muhammadalarian will take notes. That's because he knows Jeremy Stein 0:14:16.080 --> 0:14:20.760 owns a high ground of our theoretical finance, the underpinning 0:14:21.120 --> 0:14:23.880 of what we do. He's a former Fed governor, also 0:14:23.920 --> 0:14:27.600 a member of Princeton Gymnastics. Just a few years ago. 0:14:27.880 --> 0:14:30.920 He runs the herd of cats at Harvard known as 0:14:30.920 --> 0:14:35.920 the Harvard Department of Economics. Professor thrilled to have you 0:14:36.640 --> 0:14:39.600 with us. I want to talk about the foundations of 0:14:39.680 --> 0:14:43.920 Marko Witz, of William Sharp Objet trainer from a million 0:14:44.000 --> 0:14:48.200 years ago. Does any of that stuff work at the 0:14:48.320 --> 0:14:51.520 zero bound? Well, some of it works, um, But I 0:14:51.560 --> 0:14:53.600 think one issue with the zero bound is if you're 0:14:53.600 --> 0:14:56.920 a stock market investor, um, you know, there's not a 0:14:56.920 --> 0:15:00.320 lot of other attractive stuff out there, and they want 0:15:00.320 --> 0:15:03.200 to diversify that. Your general risk appetite is pretty hot, 0:15:03.440 --> 0:15:05.400 and I think we're seeing some of that in markets now. 0:15:05.960 --> 0:15:08.640 I look at the zero bound, and of course what 0:15:08.760 --> 0:15:13.120 we do at Bloomberg Surveillance is talk macroeconomics and monetary theory. 0:15:13.600 --> 0:15:16.680 I want you to take the zero bound over to 0:15:16.760 --> 0:15:21.960 the capital asset pricing model, the fundamental theorems that everybody 0:15:21.960 --> 0:15:26.320 on Wall Street uses. How does that geometry work if 0:15:26.320 --> 0:15:29.120 there isn't a real yield if there isn't a virtual 0:15:29.200 --> 0:15:33.000 nominal yield and even negative rates in Europe, how does 0:15:33.040 --> 0:15:37.280 the geometry work. I'm not sure about the geometry, but 0:15:38.400 --> 0:15:40.720 you know, I sit on the board at the Harvard 0:15:40.760 --> 0:15:42.440 and Downland and one of the things that you see 0:15:42.440 --> 0:15:46.640 in Downman's generally a whole class of other investors when 0:15:46.720 --> 0:15:50.320 ranks are zero um and they have targets for returns, 0:15:50.400 --> 0:15:53.880 they end up pushing pretty hard into riskier assets. And 0:15:55.000 --> 0:15:57.320 I think that more than anything is the sort of uh, 0:15:57.440 --> 0:16:02.480 the sort of mechanism that's that's that play days. Professor. 0:16:02.520 --> 0:16:05.280 One concept that people have discussed, not just through this pandemic, 0:16:05.280 --> 0:16:07.120 but over the last several years at the so called 0:16:07.160 --> 0:16:10.320 reversal rate, when rates go beyond a certain level and 0:16:10.360 --> 0:16:14.000 become counter productive. Professor, what are your thoughts on that concept? 0:16:14.840 --> 0:16:17.080 You know, it's an interesting idea, and the basic idea 0:16:17.120 --> 0:16:19.800 is that when rates are very low, it damages the 0:16:19.840 --> 0:16:22.680 profitability of the banking sector, makes it harder for banks 0:16:22.680 --> 0:16:26.280 to lend. It's an interesting idea, I would say, an 0:16:26.280 --> 0:16:29.480 idea that I'm more focused on now that's related is, 0:16:29.560 --> 0:16:31.160 you know, another thing that can make it hard for 0:16:31.200 --> 0:16:33.440 the banks to lend is when their capital position is 0:16:33.480 --> 0:16:36.800 badly repaired. UM And in that vein, you know, well, 0:16:36.840 --> 0:16:40.360 I think the FED has done basically an admirable job, 0:16:41.040 --> 0:16:43.400 and I really want to applaud the Fed and share Powell. 0:16:43.520 --> 0:16:46.040 I think that on a number of dimensions have really 0:16:46.120 --> 0:16:49.680 risen to the moment. One concern I have is that 0:16:49.720 --> 0:16:53.400 they've been more passive UM with respect of the banking 0:16:53.440 --> 0:16:56.960 system than you would ideally like. UM. Another, a number 0:16:57.000 --> 0:16:59.880 of other countries have gotten their banks to stop paying 0:17:00.000 --> 0:17:03.280 of it ends to conserve capital. The bigger thing that 0:17:03.440 --> 0:17:05.600 again that I worry about for the banking system now 0:17:05.720 --> 0:17:09.000 is not the reversal interest rate, but as as we 0:17:09.080 --> 0:17:12.200 saw last time around the global financial crisis, they take 0:17:12.200 --> 0:17:14.440 a big enough hit to their capital, they're going to 0:17:14.520 --> 0:17:17.199 be very impaired in their ability to land any interest 0:17:17.280 --> 0:17:20.639 rate UM And I think Professor, pretty much every CEO 0:17:20.880 --> 0:17:22.639 that would come on a program like this would probably 0:17:22.640 --> 0:17:24.399 tell us that the capital position is strong when they 0:17:24.400 --> 0:17:27.680 can afford their capital RESTERM programs, they've suspended their buy backs, 0:17:27.680 --> 0:17:29.680 and they can meet their dividends. What is it about 0:17:29.720 --> 0:17:31.400 the big banks on Wall Street that you think maybe 0:17:31.480 --> 0:17:34.240 some people are missing? Well, I mean I think it's 0:17:34.280 --> 0:17:38.440 good to to to remember the lessons from last time around. UM. 0:17:38.520 --> 0:17:41.160 So if you think about the financial crisis, last time 0:17:41.400 --> 0:17:43.800 the banks paid I would say something like over a 0:17:43.840 --> 0:17:48.639 hundred billion dollars in UH share repurchases and dividends between 0:17:48.720 --> 0:17:52.240 mid two thousand seven, and women didn't really raise a 0:17:52.240 --> 0:17:55.240 lot of capital, didn't really get to to raising equity 0:17:55.320 --> 0:17:59.639 capital until after the stress test period. UM. You know, 0:17:59.760 --> 0:18:03.679 the thing is deteriorate, and the deterior not necessarily immediately 0:18:03.720 --> 0:18:06.440 all at once. UM. I think here the market is 0:18:06.480 --> 0:18:08.880 trying to tell us something, as it did last time around. 0:18:09.280 --> 0:18:12.399 Banks stocks probably down, bankstockuments. I'm gonna say it's down 0:18:12.400 --> 0:18:16.400 about thirty five relative to an SMP. That's down only 0:18:16.440 --> 0:18:20.320 a handful of percent year to date. UM. Last time around, 0:18:20.760 --> 0:18:23.760 the market was pretty good at being forward looking. Um. 0:18:23.960 --> 0:18:26.680 Those banks who stops declining the most were the ones 0:18:26.720 --> 0:18:29.280 that had the biggest loan losses. But I think, you know, 0:18:29.680 --> 0:18:32.880 this is a very big economic shock. It's a very 0:18:32.880 --> 0:18:37.840 big economic shock. The conventional measures of capitalization that banks 0:18:38.000 --> 0:18:41.040 look at our counting base, they tend to be backward looking. 0:18:41.480 --> 0:18:43.720 If you look at more forward looking indicators, I think 0:18:43.760 --> 0:18:47.160 there's reason and I wouldn't even say it's the baseline expectation. 0:18:47.240 --> 0:18:50.840 But is there a tail whereby you should be seriously concerned. 0:18:51.040 --> 0:18:53.399 I think the answer is probably has Wait. Just to 0:18:53.440 --> 0:18:56.760 be really clear here, professor, are you saying that the 0:18:56.880 --> 0:19:00.320 risk of a banking failure is greater the PHOED to 0:19:00.359 --> 0:19:03.399 reserve is acknowledging right now? Okay, I wouldn't use the 0:19:03.440 --> 0:19:05.840 word to failure. I'm not. I think the banks are 0:19:05.920 --> 0:19:08.560 well enough capitalized that that's not something even in a 0:19:08.560 --> 0:19:12.320 sort of tale scenario. But you know, well before failure, 0:19:12.600 --> 0:19:16.040 if they lose three, four or five basis points of capital, 0:19:16.480 --> 0:19:19.560 that seriously impairs their ability to lend. And so back 0:19:19.600 --> 0:19:23.199 to the sort of concept of the reversal interest rate again, 0:19:23.480 --> 0:19:26.600 the bigger, the bigger constraint on their lending will be 0:19:26.920 --> 0:19:29.080 a shock. Again, it can be a moderate and not 0:19:29.320 --> 0:19:32.720 catastrophic shock to their capital. But if you're thinking about 0:19:33.119 --> 0:19:36.240 you know what will help the recovery um in the 0:19:36.280 --> 0:19:39.760 next year, Having a strongly capitalized banking sector I think 0:19:39.760 --> 0:19:42.159 will be one of the more important, one of the 0:19:42.200 --> 0:19:45.560 more important elements Professor's time. We're talking about some of 0:19:45.600 --> 0:19:48.560 the consequences of the FEDS policies, and you have, uh, 0:19:48.600 --> 0:19:51.320 the potential oversight of banks on one hand, and on 0:19:51.400 --> 0:19:54.840 the other hand, you have a question of capital efficiency. 0:19:54.880 --> 0:19:56.479 And I know you've done a lot of work on this. 0:19:56.560 --> 0:19:58.240 A lot of people saying it doesn't make sense for 0:19:58.320 --> 0:20:00.640 Hurts to be bankrupt, for people to be buying its 0:20:00.640 --> 0:20:04.000 shares and now to be potentially raising additional money and 0:20:04.040 --> 0:20:06.840 selling more shares. It just seems like the market is 0:20:06.840 --> 0:20:09.959 getting less efficient as rates go down, and people look 0:20:10.000 --> 0:20:12.879 at the FED as a perpetual backstop. What is the 0:20:12.920 --> 0:20:15.720 consequence of the lack of efficiency that a lot of 0:20:15.760 --> 0:20:19.320 people are talking about in markets? Well, you know, I think, uh, 0:20:19.359 --> 0:20:21.600 you know, Mark, there's an old saying that markets are 0:20:21.960 --> 0:20:24.040 I think this was to Paul Samuels, and the markets 0:20:24.040 --> 0:20:27.560 are macro inefficient but micro efficient. And I think you 0:20:27.600 --> 0:20:29.840 see some of that now. I mean, I would would 0:20:29.840 --> 0:20:32.320 not want to try to even begin to explain the 0:20:32.359 --> 0:20:34.680 overall level of the market. But again, if you look 0:20:34.760 --> 0:20:38.240 at individual companies, there's some logic there. As I said, 0:20:38.240 --> 0:20:41.439 in the banking sector being one example. Um, you know, 0:20:41.440 --> 0:20:44.439 I think the relative performance of bank stocks tells you something. 0:20:44.520 --> 0:20:47.600 I think even within bank stocks, we're seeing those that 0:20:47.640 --> 0:20:51.560 are most consumer exposed being hit the hardest, And I 0:20:51.560 --> 0:20:53.800 think there's some So I don't think, I don't think. 0:20:53.840 --> 0:20:56.080 I'm not sure. I buy the idea that all this 0:20:56.160 --> 0:20:59.639 sort of micro efficiency has has been taken out of 0:20:59.640 --> 0:21:02.640 the market. Jeremy Stunt, I want to go against your 0:21:02.720 --> 0:21:06.600 expertise and finance right now as a representative of Harvard 0:21:06.600 --> 0:21:09.920 Economics and all of that heritage. Of course, we speak 0:21:09.960 --> 0:21:12.720 to Ken Rogoff and to Benjamin Friedman and back through 0:21:12.760 --> 0:21:17.200 Marty Feldstein. You lost a giant here in this tragic 0:21:17.280 --> 0:21:22.960 summer and Alberto Elisina. How will you replace the unreplaceable 0:21:23.000 --> 0:21:28.119 of Alberto Elisina? How do you replace that beautiful holistics 0:21:28.160 --> 0:21:32.639 of political economics of Professor Ellissina? Did? Wow? Okay, I 0:21:32.680 --> 0:21:36.720 was not expecting that question. That's a very moving question. Um. 0:21:36.760 --> 0:21:39.520 You know, it's just a heartbreaking loss for our department. 0:21:39.720 --> 0:21:42.880 And as you say, um, Um, it's gonna be hard 0:21:42.880 --> 0:21:46.080 to repla very very hard impossible to replace him in 0:21:46.160 --> 0:21:48.160 terms of what he brought as a researcher. I mean, 0:21:48.160 --> 0:21:50.560 this was a guy who was doing really nobel. Calbert 0:21:50.680 --> 0:21:54.879 or Um founded the modern field of political economy in 0:21:54.920 --> 0:21:58.159 many ways. Um, But you know I sat in the 0:21:58.160 --> 0:22:01.240 office basically next to him for twenty so when you know, 0:22:01.280 --> 0:22:02.800 when you raise the question and swert of not like 0:22:03.000 --> 0:22:05.240 thinking of that. I'm just thinking of one of the warmest, 0:22:05.720 --> 0:22:09.960 kindest and most general uh colleagues I had. And you know, 0:22:10.240 --> 0:22:12.879 in talking to others in our department and they think of, 0:22:13.080 --> 0:22:15.520 you know, what we've lost and how we missen. It's 0:22:15.520 --> 0:22:18.439 it's the personal that swort of everybody seems to seems 0:22:18.480 --> 0:22:21.159 to speak to. Jeremy Stein, thank you so much for 0:22:21.240 --> 0:22:29.439 joining Bloomberg Surveillance today. He is at Harvard University for Lisa, 0:22:29.680 --> 0:22:33.119 John and I. Folks, there have been benchmarks through this pandemic, 0:22:33.200 --> 0:22:36.399 and one of them has been good informed in intelligent 0:22:36.480 --> 0:22:41.080 conversations with the Lieutenant Governor of the Empire State, Kathy 0:22:41.160 --> 0:22:44.520 Hokel joins us again for an update of briefing. Kathy, 0:22:44.600 --> 0:22:47.520 let me give you the safe general question first, how 0:22:47.640 --> 0:22:50.760 is the reopening of the state from Buffalo to New 0:22:50.840 --> 0:22:53.800 York and out to the Hampton's how's it going? Thank 0:22:53.800 --> 0:22:55.600 you for having me on the show again. It is 0:22:55.640 --> 0:22:58.639 going phenomenally well. And I say that not just from 0:22:58.680 --> 0:23:01.639 my business Lieutenant Governor, but as someone who literally as 0:23:01.680 --> 0:23:05.399 recently as yesterday walked the streets. I was in Niger Falls, 0:23:05.440 --> 0:23:07.760 I was in Lockport. The day before, I was in Rochester, 0:23:08.240 --> 0:23:11.040 and there is such an excitement about reopening and an 0:23:11.160 --> 0:23:14.000