Speaker 1: Welcome to the Bloomberg Surveillance podcast and I'm Tom Keane.
Speaker 1: Daily we bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. Has
Speaker 1: the rally been justified? Ivan find set joining us now
Speaker 1: Tigers Financial Partner's Chief investment Officer. Ivan. Has the rally
Speaker 1: been justified by fundamentals? Well, I mean there's two issues,
Speaker 1: and the main issue is there's no place else to
Speaker 1: put your money, and it's the powerful results have been
Speaker 1: driven by the incredible efforts of FED Chairman Pal. I
Speaker 1: think FED Chairman Pal single handedly saved the world. I
Speaker 1: mean he acted swiftly and decisively in March, pumping tremendous
Speaker 1: amounts of liquidity into the financial markets, which in turn
Speaker 1: caused other central bankers around the world to do the same.
Speaker 1: And I think that's been the powerful driver of the
Speaker 1: recovery and the fact that, look, I believe in the
Speaker 1: resiliency and the of the and the detestinal fortitude of
Speaker 1: the human spirit that we will come back. We've come
Speaker 1: back from many bad situations, and innovation has led this recovery,
Speaker 1: and it's been led by the tech stocks which have
Speaker 1: empowered the ability to make this shift to support a
Speaker 1: remote and dispersed workforce as an example. Okay, I get
Speaker 1: that UM and it all makes sense. That narrative makes sense.
Speaker 1: And then you see things like Tesla where they do
Speaker 1: a stock split and their shares go infinitely higher. They
Speaker 1: go up by twelve even though you're basically just changing
Speaker 1: a five dollar bill into five ones, which shouldn't, all
Speaker 1: things being equal, make a stock more valuable. You see
Speaker 1: a similar type of move in Apple. What gives I
Speaker 1: mean are these signs of froth? Well, I mean there's
Speaker 1: always pockets of unique focus if you will, I think
Speaker 1: Apple deserves its valuation. I mean, we have a tremendous
Speaker 1: catalyst coming up in the launch of the five G
Speaker 1: enabled iPhone twelves. That will kick off a tremendous supercycle
Speaker 1: because many have been waiting to upgrade to the high
Speaker 1: speed five G enabled phones and there's going to be
Speaker 1: a huge pent up demand as the average iPhone in
Speaker 1: service today is over five years old. So that will
Speaker 1: drive a um a new upgrade cycle in Apple phones.
Speaker 1: Along with their Apple's focus on increasing their services revenue
Speaker 1: and offering more and more services entertainment, gaming, payment, shopping,
Speaker 1: UM that will enable them to further monetize this over
Speaker 1: one and a half billion installed iPhone user base. All right,
Speaker 1: So Ivan, you know, when I was in business school,
Speaker 1: when we were talking about and learning about markets, one
Speaker 1: of the things I learned was you need to have breath.
Speaker 1: You need if you want to have a healthy market,
Speaker 1: you need to have a breath across a wide swath
Speaker 1: of stocks and sectors. We are absolutely, absolutely not seeing
Speaker 1: that in this market. How concerned are you about that
Speaker 1: in terms of the lack of breath in this market? Well,
Speaker 1: that is correct. I mean it has been a very
Speaker 1: narrowly driven rally, primarily by tech stocks. But um technology
Speaker 1: drives our economy forward. I mean, so it's not unusual
Speaker 1: that they have been leading the market and increasingly becoming
Speaker 1: a dominant part of the economy. So two things are
Speaker 1: going to happen. I mean, the market is forward looking,
Speaker 1: and it is predicting that we will see this broadening out,
Speaker 1: that it will will see um improvements in the industrial sector,
Speaker 1: in the consumer sector, which we are seeing. There is
Speaker 1: a positive cadence of economic data that shows the manufacturing
Speaker 1: sector is improving. There's gradual improvement in consumer sentiments, so
Speaker 1: the consumer's outlook is improving. Retail is improving, restaurants where
Speaker 1: they can. So you saw huge jumps in retail sales
Speaker 1: when stores opened. You saw a huge jump and people
Speaker 1: going to restaurants when they could when westaurants started to
Speaker 1: open with outdoor dining. So there is pent up demand
Speaker 1: and I will I think you will see this broadening out.
Speaker 1: The other thing driving the market is optimism that we
Speaker 1: will get a vaccine, hopefully at least available by the
Speaker 1: end of the year. We have three companies scheduled to
Speaker 1: go into three partnerships scheduled to go into trials sometime
Speaker 1: in October. So that is the one thing, the one
Speaker 1: thing that will get us over the pandemic is a vaccine.
Speaker 1: And if we can get UH some type of approval
Speaker 1: by the end of the year and ramp up production
Speaker 1: in the beginning of the next year, we will see
Speaker 1: a tremendous recovery and the market will have correctly predicted
Speaker 1: the turnaround. All right, So I have an outside of
Speaker 1: the fang plus stocks, the six seven names that have
Speaker 1: really been driving this market. Where do you see some
Speaker 1: opportunity here if we're able to look towards the other side,
Speaker 1: perhaps some time I've and you will see a bounce
Speaker 1: back in the auto stocks. And looking at Tesla and
Speaker 1: the optimism over the electric car, General Motors is a
Speaker 1: tremendous play. Mary Barrett says she wants to have twenty
Speaker 1: electric vehicles on the market by three not that far off.
Speaker 1: Also the valuation I mean there. She even was asked
Speaker 1: the question, would you spin off this electric vehicle division
Speaker 1: at some point unlock value? She said, nothing's off the table.
Speaker 1: So General Motors will become a incredible electric vehicle play. Um.
Speaker 1: I think some of the depressed retailers, some of the
Speaker 1: depressed restaurants, and the cruise industry. I mean these stocks
Speaker 1: were decimated by no fault of their own. The cruise
Speaker 1: industry in January was looking at a record year and
Speaker 1: was decimated. And they are doing everything possible to put
Speaker 1: in place the ability to safely sail when they get
Speaker 1: the opportunity when they are allowed to start to sail again.
Speaker 1: I mean a company like Norwegian, which is my number
Speaker 1: one pick in the cruise industry. So there are a
Speaker 1: lot of depressed box So I still like a lot
Speaker 1: of the tech s docs, including a video with their
Speaker 1: announcement yesterday of their new high speed graphic cards. Other
Speaker 1: favorite chip players in the five G rollout are Quelcom
Speaker 1: and Skywork Solutions and Corvo Skyworks in Corvera, both Apple
Speaker 1: Key Apple suppliers. So the five G rollout is a
Speaker 1: powerful investing theme. The recovery of the consumer sector will
Speaker 1: be a powerful investing theme, and I believe it will
Speaker 1: recover and recover very strongly. Just really twenty seconds, how
Speaker 1: high the valuation of Amazon get It's now one point
Speaker 1: seven five trillion dollars. What's the peak in your view? Well,
Speaker 1: I have been recommending Amazon for sometime. It's on our
Speaker 1: focus list in our focus Opportunity portfolio. I don't really
Speaker 1: use price targets, but Amazon, I mean, they're just incredibly
Speaker 1: efficient in their delivery and fulfillment and logistics processes that
Speaker 1: they do support a lot of retail. They continue they
Speaker 1: are the biggest cloud infrastructure supplier, which service provider, which
Speaker 1: has enabled the remote workforce and the distributed workforce. They're
Speaker 1: getting into healthcare. They just announced. There wasn't twenty seconds Ivan,
Speaker 1: We'll have you back. We'll talk about Amazon. I will
Speaker 1: tell you this. It is something that you're not alone
Speaker 1: with a lot of people saying they can see a
Speaker 1: path lower, but they're not willing to sell their Amazon shares.
Speaker 1: Ivan find Set, Thanks for retting a good sport and
Speaker 1: thanks for being with us. Really appreciate it. This is
Speaker 1: the story of the day, by risk, period, full stop.
Speaker 1: The Fed has your back. Maybe Washington d C Will
Speaker 1: get your back as well. We will find out, and
Speaker 1: right now, let's find out with Steve Chivron, Federated Herme's
Speaker 1: portfolio manager. Steve. We have heard from person after person
Speaker 1: who has come on this show and said, by risk,
Speaker 1: that is the result right now from the Federal Reserve
Speaker 1: that has your back from the idea that we probably
Speaker 1: are entering a growth phase after the absolute decimation of
Speaker 1: the labor market earlier this year. Do you agree? Yeah. Look,
Speaker 1: I think the story behind the markets is sent a
Speaker 1: simple I think we've exited recession and we're entering the
Speaker 1: next recovery, which will lead to the next expansion um.
Speaker 1: And I think the reason why we've been able to
Speaker 1: get to hide so quickly is because there's three stats
Speaker 1: I think that explain it. Incomes her up seven and
Speaker 1: a half percent versus last year. Mortgage foreclosures are down
Speaker 1: from three quarters of a percent to two thirds of it.
Speaker 1: And while we did have two hundred bankruptcies in the
Speaker 1: second quarter, that's roughly one fourth of what we were
Speaker 1: doing on a quarterly basis in the Great Financial Crisis.
Speaker 1: So both Congress and the Federal Reserve have protected capital.
Speaker 1: They protected capital in this in this kind of downturn,
Speaker 1: and the consumer and businesses are better positioned then you
Speaker 1: would expect them to be, given the severity of the
Speaker 1: economic contraction that we had. Steve, what won't you buy
Speaker 1: right now? What won't I buy? Well? Look, I think
Speaker 1: you know piling into a treasury bond right here is
Speaker 1: probably not the smartest thing you know between fifty and
Speaker 1: seventy basis points. I think you know more importantly, and
Speaker 1: I am talking a little bit my own book here,
Speaker 1: but I wouldn't buy a whole bunch of ETFs. I
Speaker 1: don't want to own everything right now. I think that
Speaker 1: there are a lot of companies that are not going
Speaker 1: to do well coming out of this, and it's incumbent
Speaker 1: upon investors to be able to sort through industries and
Speaker 1: pick the winners and avoid the losers. I think that
Speaker 1: that's the key theme here. All right, Well, Steve, you know,
Speaker 1: one of the issues you talked about some of the
Speaker 1: positive economic developments, But the fact is a lot of
Speaker 1: that was driven by the fiscal stimulus, putting money into
Speaker 1: people's hands, into consumers hands, into small and midsized businesses hands. Uh.
Speaker 1: And of course the FETE is there with the backstop
Speaker 1: the fet You know, this stimulus is starting to wear out.
Speaker 1: How critical is it that we get new stimulus to
Speaker 1: continue to support the economy. Yeah, I think it's important.
Speaker 1: I don't know, I don't I wouldn't say it's critical. Um.
Speaker 1: I think, look, when you've done such a good job
Speaker 1: of supporting the economy thus far, it's kind of dumb
Speaker 1: to fumble the ball in the red zone here, right.
Speaker 1: I mean, you're probably one fiscal package away from getting
Speaker 1: yourself to towards a vaccine. But if you looked at
Speaker 1: the personal income number that came out earlier this week,
Speaker 1: what you saw was that while the impact of stimulus
Speaker 1: has has waned a little bit, you have seen a
Speaker 1: pick up in compensation from from from work, and so
Speaker 1: I think, look, the economy is healing, it's getting better.
Speaker 1: It's starting to become self sustaining. But there's enough uncertainty
Speaker 1: that anything one more bill probably makes sense. So it'd
Speaker 1: be nice to see Congress, you know, get their acting
Speaker 1: gear here and and get something done, all right, Steve. So,
Speaker 1: as we think about the equity markets, the theme obviously
Speaker 1: has been the you know that the handful of tech
Speaker 1: stocks to fang plus docks and driving in the market.
Speaker 1: When does value get its uh time in the limelight?
Speaker 1: If ever? Yeah, I think people are maybe misreading the
Speaker 1: narrow breath of the market. Narrow breath in the market
Speaker 1: at the end of the cycle is very rasome. Right.
Speaker 1: If every company's hit their fifty two week high and
Speaker 1: there's only two or three that are left that are
Speaker 1: pushing you higher, that is a sign of exhaustion. What
Speaker 1: we have here, though, is the companies that did the
Speaker 1: best during the recession have led us out and the
Speaker 1: other companies haven't participated yet. And we think that's really
Speaker 1: a sign of dry powder. And so as this recovery
Speaker 1: continues to take hold, as we do get closer to
Speaker 1: some kind of treatment vaccine type protocol, and we think
Speaker 1: that you're going to see other companies, some of which
Speaker 1: your value are going to start to participate in a
Speaker 1: much bigger way as the economic recovery intensifies here, and
Speaker 1: so we think that we're on the verge of that.
Speaker 1: We think you can play it in the value space.
Speaker 1: We also think you can play a similar theme in
Speaker 1: small caps, and we think you really don't want to
Speaker 1: be massively underweight international because those international industries have so
Speaker 1: much more value than than than the US do in
Speaker 1: terms of the sector composition. For NAZAC stocks are up
Speaker 1: more than two hundred and twenty percent so far this year. Yesterday,
Speaker 1: Zoom Video community patians rose more than forty one day.
Speaker 1: That was the rally. Some people saying that the justification
Speaker 1: for this is that the low yields make everything cheap.
Speaker 1: Is that the story? I think that's part of it. Look,
Speaker 1: I mean, you know, equity market multiples are are related
Speaker 1: to bond yields, and particularly corporate bond yields, and if
Speaker 1: you look at where the corporate bond yield is to
Speaker 1: be double a, it would suggest that the SMP could
Speaker 1: trade upwards of a high twenties or even low thirties multiple,
Speaker 1: which has never been the case before. I think that's
Speaker 1: part of it. But I think the bigger story here
Speaker 1: as well is that we're in the middle of a
Speaker 1: digital revolution, and what this pandemic has not slowed that revolution,
Speaker 1: it's accelerated it. You saw it in the Salesforce earnings.
Speaker 1: Company after company are looking to upgrade their tech, understanding
Speaker 1: that that's going to be a bigger part of the
Speaker 1: way that they do business. And so I think you've
Speaker 1: got this very interesting combination of this digital industrial revolution
Speaker 1: occurring at a time when you know, bond yields are
Speaker 1: so low um and the world has a scarcity of growth,
Speaker 1: and it exists in the US. It exists in US
Speaker 1: tech stocks, and so if you want access to that growth,
Speaker 1: there's a high price for it. So Steve are Robin
Speaker 1: Hood is right? I mean, are they on the right paths?
Speaker 1: Just buy everything that they say, Look, a stock splits
Speaker 1: as good of a reason as any to buy a stock.
Speaker 1: They're winning. Look, I think when you think about Robin Hood,
Speaker 1: the first thing we have to remember, especially those of
Speaker 1: us that are quote unquote professional investors, is everyone deserves
Speaker 1: the right to have access to the market. Um, there
Speaker 1: are gonna be folks there that maybe don't have as
Speaker 1: much history and experience with the market. That's why you know,
Speaker 1: media like yours exist help them understand that. I think ultimately,
Speaker 1: what companies are realizing is that if there is a
Speaker 1: retail demand, if they can make their shares more attractive
Speaker 1: or more accessible to those retail investors, they're gonna get
Speaker 1: rewarded because those retail investors want access to some of
Speaker 1: these companies. There will be some names that end in
Speaker 1: tears for folks because there's gonna be some hype trades.
Speaker 1: But at the end of the day, I think anytime
Speaker 1: there's more interest in the public markets and the com
Speaker 1: pounding returns, that's a good thing. It's our job as
Speaker 1: an investment industry to help make sure that those people
Speaker 1: have the tools and information to make the best decisions
Speaker 1: that they can. All Right, Steve, If I'm brave enough
Speaker 1: to look to the other side of this pandemic and
Speaker 1: I see an economic recovery in the next twelve months
Speaker 1: really accelerating, what are some of the beaten down sectors
Speaker 1: actually be looking at. Am I brave enough to go
Speaker 1: into financials for example? Yeah? Look, I think if you
Speaker 1: think that economic growth is going to improve, then you
Speaker 1: should expect, you know, long bonds to move up a
Speaker 1: little bit, not not anything you know that would be scary,
Speaker 1: and that would be beneficial to banks. Again, we come
Speaker 1: back to small caps, and we think small caps were
Speaker 1: three reasons their cyclical So as you get a cyclical
Speaker 1: improvement in the economy, they're gonna they're gonna benefit from that,
Speaker 1: much like value stocks. But in addition, fifty of their
Speaker 1: debt is variable rate bank debt, so low rates forever
Speaker 1: are really going to benefit them. And then finally in
Speaker 1: a year, in the first year following a recession bottom
Speaker 1: small caps tend to outperform large by about We think
Speaker 1: that's gonna be your your kind of play on octane
Speaker 1: here in terms of a cyclical recovery plan on oct
Speaker 1: and I like that. Steve Chevron and from Federated Hervey's
Speaker 1: thank you so much, because everyone who talks about the
Speaker 1: economic recovery says it will hinge on the trajectory of
Speaker 1: the virus. The trajectory of the virus is unclear. It
Speaker 1: is unsuspecting. It can pop up when you least suspected,
Speaker 1: even in places like New Zealand, which seemed to have
Speaker 1: gotten it under control. Doctor Deborah Fuller joining us now
Speaker 1: University of Washington School of Medicine, Microbiology Professor Dr Fuller.
Speaker 1: Where are we in this? Some people talk about going
Speaker 1: back to school, that it's going to be a disaster.
Speaker 1: Other people say it's fine. Kids are not vectors of
Speaker 1: this particular virus. What's your take. Yeah, so we're a
Speaker 1: you know, a phase where you know, we're we understand
Speaker 1: how to you know, potentially reduced transmission through you know,
Speaker 1: wearing a mask and practicing um, you know, hand washing
Speaker 1: and and the like. UM. But I'm not so sure
Speaker 1: that you know, the public is actually you know following
Speaker 1: through um correctly in all those practices. And I think
Speaker 1: that's where you know, sometimes you're seeing some schools opening
Speaker 1: up and saying, hey, we've implement all these practices, and
Speaker 1: then they see you know, high spike uh in induction rate. Uh.
Speaker 1: You know, unless you know people are hundred percent compliant
Speaker 1: with all of the you know, the rules, UM, that
Speaker 1: virus is going to take an opportunity and transmit. So
Speaker 1: so I think it's very difficult, uh, you know, in
Speaker 1: the absence of a vaccine, uh, to get everybody to collectively, um,
Speaker 1: you know, work as a team together, wear their masks,
Speaker 1: wash your hands, you know, uh, and uh, you know,
Speaker 1: follow the safe distancing practices that have been recommended. If
Speaker 1: they do that, we could probably safely open schools. And
Speaker 1: that's just you know, get people to cooperate. Dr Fuller,
Speaker 1: There's so many unknowns, at least from my vantage point.
Speaker 1: You see a compliant Can people pack in a subway
Speaker 1: cars if they have masks on? Can people go to
Speaker 1: outdoor dining and sit not exactly six feet away from
Speaker 1: each other but take their masks off to eat as
Speaker 1: long as they are outside? Are these things all safe?
Speaker 1: Or are we already engaging in practices that will necessarily
Speaker 1: spread the virus as we start to become less socially
Speaker 1: distant and try to get back to normal. Yeah, there's
Speaker 1: no guarantee you know that all these practices will you know,
Speaker 1: if you implement them together. And we're talking about you know,
Speaker 1: both the six feet distancing and the wearing of the
Speaker 1: mask and the hand washing. Um. But there is you know,
Speaker 1: evidence out there that it can reduce transmissions significantly. So
Speaker 1: it doesn't mean that, say, some virus still won't transmit.
Speaker 1: But the you know, the way viruses work is they uh,
Speaker 1: you know, the more people that get infected. Then that
Speaker 1: makes more people that can infect others. So if you
Speaker 1: can reduce the number of transmission events to very low levels,
Speaker 1: then yeah, people can go about their business much, um,
Speaker 1: you know, more effectively, and you can start to see, uh,
Speaker 1: the incidences of transmission decline. That's what you saw in
Speaker 1: some of the other countries like uh New Zealand where
Speaker 1: they just implemented these safe practices and you quickly saw uh,
Speaker 1: the you know, the that sort of you know, rate
Speaker 1: of transmission rate go down to almost zero. So it
Speaker 1: is possible. It's just uh it's and it's not guarantee,
Speaker 1: but it's you know, better than what we have right now.
Speaker 1: All right, professor, let's switch gears a little bit to
Speaker 1: the vaccine. That's a discussion I think everybody wants to have.
Speaker 1: Everybody's looking forward towards a vaccine. We know that there
Speaker 1: are approximately a dozen entities out there that are working
Speaker 1: aggressively on a vaccine or various stages. Give us your
Speaker 1: read of the landscape. I feel like I need a
Speaker 1: scorecard to keep track of all these entities out there,
Speaker 1: whether their universities or pharmaceutical companies, are biotech companies, companies.
Speaker 1: Give us your sense of where we are and maybe
Speaker 1: a sense of timing. Yeah, so this is actually we're
Speaker 1: enchering a very siding phase for vaccine development. Right now.
Speaker 1: There are I think about seven candidate vaccines that have
Speaker 1: entered into phase three clinical trials, and that's a stage
Speaker 1: where we're actually testing efficacy of the vaccine as well
Speaker 1: as continuing to test its safety. Is going in tens
Speaker 1: of thousands of people where some people will get up
Speaker 1: placebo and other people get the vaccine, and then it's
Speaker 1: just really a waiting time game where it really the
Speaker 1: viruses control of the timeline right now. What they're going
Speaker 1: to do is wait and see, you know, until a
Speaker 1: certain number of people become infected, and uh then they
Speaker 1: take uh, you know, they open up, take the blinders off,
Speaker 1: because they're blinded to you know, who belongs to what group,
Speaker 1: and they're going to determine are all the people who
Speaker 1: became infector of the majority of them in the placebo
Speaker 1: group and none of them in the vaccine group. And
Speaker 1: if that's the case, then they can then go to
Speaker 1: licensure and start to manufacture and distribute the saccine. For you. So,
Speaker 1: the fact that we have seven of them is very promising.
Speaker 1: That means that these vaccines have passed you know, high
Speaker 1: marks high uh uh marks for safety as well as
Speaker 1: demonstrating the kind of ImmunoGen a season that you're going
Speaker 1: to meet in an effective vaccine. So this is exciting. Uh.
Speaker 1: And so we're at in a sense, the final phase
Speaker 1: and we're perhaps maybe only months away from seeing the
Speaker 1: first vaccine license for for human use. Professor Health, how
Speaker 1: sure can we be about the safety of these um
Speaker 1: vaccines because you know it usually it takes years and
Speaker 1: years of testing, and it seems like we're going to
Speaker 1: get a potentially a vaccine within a year year and
Speaker 1: a half from the beginning of all this, and that
Speaker 1: calls into question safety. How do you think about that? Yeah,
Speaker 1: I mean the the years and years has to do
Speaker 1: with how the process has changed, you know, in the
Speaker 1: events of this pandemic. And the years is because the
Speaker 1: phase one, two, and three are done sequentially normally with
Speaker 1: a pandemic, they are being done in an old were
Speaker 1: laughing fashion, So all of the safety tests are still
Speaker 1: being done. Uh, nothing is being skipped. So by the
Speaker 1: time we have a vaccine that complete Space three successfully
Speaker 1: and shown to be effective and safe, we can be
Speaker 1: confident that it has gone through all of the checkmarks
Speaker 1: that are absolutely required, um, you know, right now to
Speaker 1: license a vaccine for public use. So Dr Fuller, you
Speaker 1: would be fine getting one of the first vaccines if
Speaker 1: it came out. Yeah, I wish I could, you know,
Speaker 1: but I you know, what you have to be aware
Speaker 1: of is that when these vaccines start coming out, they're
Speaker 1: not going to be billions of doses suddenly available for
Speaker 1: anybody to take. It's likely going to have to go
Speaker 1: into first responders and health care workers and the like.
Speaker 1: Uh and so it could be for some of us
Speaker 1: months even after the vaccines have been released for public use,
Speaker 1: before we're eligible to start to you know, show up
Speaker 1: in line to actually receive them. You know that said
Speaker 1: is I've I've said many times I think that it's
Speaker 1: going to take multiple vaccines to really be able to
Speaker 1: tamp down this pandemic. And you're gonna see we have
Speaker 1: seven in phase three. You're gonna see hopefully at least
Speaker 1: half a dozen, maybe five or six over the course
Speaker 1: of the next six months. You know, it's my hope
Speaker 1: that they get license for human use. Deborah Fuller, University
Speaker 1: of Washington School of Medicine microbiology professor, Thank you so
Speaker 1: much for bringing us the facts here as we try
Speaker 1: to look for some sort of vaccine. The economy has
Speaker 1: been the housing market, which has really struck me at
Speaker 1: a time of so much job loss and so much
Speaker 1: pain that we talk about in the consumer sector, the
Speaker 1: idea that you've seen incredible resilience and bidding wars and
Speaker 1: suburban areas for houses, lumber prices tripling in just a
Speaker 1: few months. Joining us, Andrew Holland Horst City Group Global
Speaker 1: Markets chief you as economist, Andrew, what do you make
Speaker 1: of the housing rally? It's just incredible what's happened in housing.
Speaker 1: I mean, I think we've had a more optimistic outlook
Speaker 1: on what the reopening, recovery rebound was going to look like,
Speaker 1: and the data keeps coming in for housing and it
Speaker 1: just keeps being stronger than expected. We saw it earlier
Speaker 1: with mortgage applications that have moved to multi year highs
Speaker 1: and really stayed there. But now you're starting to see
Speaker 1: that come through in sales and starts really just across
Speaker 1: the board. So so an incredible surgeon housing activity, Andrew,
Speaker 1: yesterday are Bloomberg colleagues put out a story saying that
Speaker 1: the Federal Reserve had bought nearly a trillion dollars of
Speaker 1: mortgage bonds over the past couple of months, that they've
Speaker 1: been one of the hugest buyers of this sector, pushing
Speaker 1: down rates, solidifying this market. How much has the housing gains?
Speaker 1: How much have the housing gains really resulted directly from
Speaker 1: FED intervention here? Some FED policy is so important. And
Speaker 1: when we look at the U S economy, of the
Speaker 1: sector that's probably most immediately sensitive to the FED and
Speaker 1: two interest rates is the housing sector. Um, so I
Speaker 1: think it's really mostly about rates coming down. You've got
Speaker 1: lower tenure yields that led mortgage rates to move lower. Um. Yes,
Speaker 1: they're purchasing mortgage fac securities as well, which is keeping
Speaker 1: those spreads compressed. So Um. You can't understate the importance
Speaker 1: of the of the FT or you can't overstate the
Speaker 1: importance of the FED in the housing market right now.
Speaker 1: All right, Andrew, we had some ADP employment numbers out today, Uh,
Speaker 1: you know, weaker than expected. Here. We are seeing some
Speaker 1: approven in the labor market, but maybe losing a little
Speaker 1: bit of steam here, and that's so critical for the
Speaker 1: U S. Economy overall, what's your view of the labor market? So,
Speaker 1: I think again it's another area where we've been continuously
Speaker 1: surprised to the upside with jobs reports. And I'd be
Speaker 1: a little bit careful with the ADP number on the
Speaker 1: economy is just moving so quickly that it's been difficult
Speaker 1: for ADP to kind of keep up with what we're
Speaker 1: seeing in the official statistics that will get out on Friday. UM.
Speaker 1: So we still think that that that number can look
Speaker 1: more positive, UM. But but really important to see this
Speaker 1: re hiring continue, UM. That's been supporting incomes UM, even
Speaker 1: with a very high unemployment rate. So, you know, we'd
Speaker 1: like to get back closer to normal. It's obviously a
Speaker 1: long road, but but so far, the you know, the
Speaker 1: last few months have been a positive story, all right,
Speaker 1: So how critical is it that Congress follows through with
Speaker 1: another round of what I'm gonna call a significant piece
Speaker 1: of fiscal stimulus. The first, the last round, the third round,
Speaker 1: if you will. The three trillion dollars was done on
Speaker 1: generally a bipartisan basis, but it looks like politics is
Speaker 1: creeping back into this round. Yeah, So I think everybody
Speaker 1: thinks it would be a good idea to have more
Speaker 1: fiscal stimulus here. I think that's on both sides of
Speaker 1: the aisle. I think most economists agree. The FED clearly agrees.
Speaker 1: We've heard that from a number of FED speakers. UM.
Speaker 1: You do want to put it in context, though, that
Speaker 1: we've had a very significant fiscal stimulus already. UM. And
Speaker 1: if you look at what's happened with the income support
Speaker 1: that you've had, really the government coming in and substituting
Speaker 1: for incomes that were lost um due to the results
Speaker 1: of the pandemic. UM. You see that incomes have been supported.
Speaker 1: Consumption of course was lower because a lot of avenues
Speaker 1: for consumption were just closed down. And so it means
Speaker 1: that the economy came through this period of four savings.
Speaker 1: Individual households have saved about a trillion above what they
Speaker 1: normally would have saved. UM. So now you have things
Speaker 1: like unemployment benefits that are expiring. That's certainly not a
Speaker 1: good thing for the economy. We'd like to see those restored. Um.
Speaker 1: But even if they're not, I think you do have
Speaker 1: a lot of savings coming before it. So, so certainly
Speaker 1: a better story if we can get that next leg
Speaker 1: of fiscal policy Um, But you know, can this, you know,
Speaker 1: consumption rebound continue even if you don't get the next
Speaker 1: leg of fiscal stimulus. I think, at least for the
Speaker 1: next few months, that story probably still stays intact. I
Speaker 1: get more concerned as I look out to Q four
Speaker 1: into one. I'm going back to the labor market. This
Speaker 1: is still a deeply depressed labor market that still needs
Speaker 1: more help. Andrew All and Horst of City Group speaking
Speaker 1: with us. Andrew, I'm a little uncomfortable as we talk
Speaker 1: about this for a variety of reasons. We're talking about
Speaker 1: the incredible boom and housing, We're talking about the incredible
Speaker 1: boom and equities. We're talking about an unemployment rate above
Speaker 1: ten percent with some permanent losses coming in, job losses,
Speaker 1: job cuts, particularly at the lower income level. This all
Speaker 1: just goes into the story of the widening gap between
Speaker 1: the rich and the poor, the people who can buy houses,
Speaker 1: who can buy stocks, and those who can't and have
Speaker 1: just been laid off. Andrew, what is the structural challenge?
Speaker 1: What is the economic result of this widening divide. Yeah,
Speaker 1: it's a real issue for the U. S economy, and
Speaker 1: certainly those inequalities have been exacerbated by the crisis that
Speaker 1: we've come through, and that's where you know, I'm encouraged
Speaker 1: to see the Federal Reserve, for instance, changing their framework
Speaker 1: talking about pushing the unemployment rate even lower so that
Speaker 1: we can start to bring some of those workers back
Speaker 1: into the economy. Um. I think that's what was happening
Speaker 1: as we got down to a three and a half
Speaker 1: percent unemployment rate. Again, this this is a long road.
Speaker 1: I don't think anyone is saying that, you know, this
Speaker 1: is going to be easy to get back to something
Speaker 1: like a three and a half percent unemployment rate, but
Speaker 1: but you really do want to get back down to
Speaker 1: those very low rates of unemployment to bring a more
Speaker 1: inclusive this into hiring into the labor market. Unfortunately, that's
Speaker 1: where we were, that's not where we are now, and
Speaker 1: I think that's what monetary and fiscal are trying to
Speaker 1: get us back to. Meanwhile, talking about getting back to
Speaker 1: today is back to school, and you see a lot
Speaker 1: of people taking their kids off to their first day,
Speaker 1: first date. Perhaps since March and Andrew, I do wonder
Speaker 1: what the effect is on the younger cohort. I was
Speaker 1: looking at data that showed that the sixteen to twenty
Speaker 1: five year demographic had an unemployment rate of more than
Speaker 1: eighteen percent versus that ten point two percent average. That
Speaker 1: they've been absolutely pummeled. Those entry level jobs have just evaporated.
Speaker 1: What's the longer term economic effect of that? Yeah, So
Speaker 1: that that that's part of why you want to try
Speaker 1: to cure the problems in the labor market as quickly
Speaker 1: as possible. We saw this after two thousand and eight,
Speaker 1: where you had students coming out of high school, students
Speaker 1: coming out of college trying to get that first job
Speaker 1: and finding that that first job just wasn't available. Um.
Speaker 1: And that's probably even more the case with this down
Speaker 1: turn um again because we've seen those entry level jobs
Speaker 1: go away on, those lower wage jobs go away, um.
Speaker 1: And that's a potential avenue for a permanent structural scarring
Speaker 1: on the economy. And that's what you're really trying to avoid.
Speaker 1: I mean, we we all know that the situation um
Speaker 1: is bad in terms of a high unemployment rate right now.
Speaker 1: But what you want to do with policy is try
Speaker 1: to limit the amount of time that we spend at
Speaker 1: these levels um, so that you can get those individuals
Speaker 1: that we were just talking about back into jobs integrated
Speaker 1: back into the labor market, because if you have an
Speaker 1: extended period where you're not in the labor market, that
Speaker 1: means that human capital is not being built. That means
Speaker 1: that that attachment between workers and firms is being lost.
Speaker 1: So really important to try to get that back intact
Speaker 1: as quickly as possible. So, Andrew, what are the good
Speaker 1: folks at City Group thinking about the economy the GDP
Speaker 1: number really through the back half of this year into
Speaker 1: next year. Give us a sense of kind of how
Speaker 1: you think the recovery might look. Yeah, so it's looking
Speaker 1: like every bit as bad as the contraction was in
Speaker 1: Q two, the rebound in Q three, it's not going
Speaker 1: to completely make up for that, but we're going to
Speaker 1: have this kind of very elevated annualized growth number for
Speaker 1: for Q three. And you know, just like in Q two,
Speaker 1: we spent a lot of time talking about this negative
Speaker 1: thirty percent growth is an annualized number, so you're essentially
Speaker 1: multiplying the contraction by four. And also this is some
Speaker 1: things that are transitory. Is there some things that are
Speaker 1: transitory that are going to be reversed and that reverse
Speaker 1: will coming Q three. You should also be careful with
Speaker 1: the Q three number. UM. But now I'll tell you
Speaker 1: that Q three number looks like it's gonna be probably
Speaker 1: closer to thirty percent than twenty percent annualized. And when
Speaker 1: you know, we have first done our forecast, we thought
Speaker 1: maybe it's more like twenty. Again, you're growing from very
Speaker 1: low levels. I want to I want to emphasize that
Speaker 1: this is just trying to get back to kind of
Speaker 1: a more normal level of activity. UM. But it still
Speaker 1: looks like a very powerful growth rate in the third quarter.
Speaker 1: How about twenty one. Is there going to be meaningful
Speaker 1: growth in twenty one? And how much of that growth
Speaker 1: is dependent upon stimulus? Yeah, I think we can continue
Speaker 1: to grow in one. But but that is where you
Speaker 1: start thinking more about stimulus. Like I said, there's a
Speaker 1: lot of kind of stimulus that that was done. We
Speaker 1: had the stimulus checks, we have the enhanced unemployment insurance UM.
Speaker 1: I think that will carry us through probably at least
Speaker 1: Q three, if not the rest of the year. As
Speaker 1: we get into one, UM, that's when you really would
Speaker 1: like to see another leg for for stimulus UM, where
Speaker 1: you'd like to see more help for unemployed workers. You know,
Speaker 1: people who are unemployed through no fault of their own. Um,
Speaker 1: you'd like to see, um, other forms of spending, things
Speaker 1: like infrastructure that have a high multiplier. I mean, those
Speaker 1: are probably things that you can think about after the election.
Speaker 1: Andrew holl And Harst of a city group, thank you
Speaker 1: so much. Whether it's your strength or dollar weakness. So
Speaker 1: let's get that sort of that with Rich. He's a
Speaker 1: former ECB president. He always makes our shows. But are
Speaker 1: who are delighted that Mr Trich joins us this morning? Rich.
Speaker 1: There's a lot of talk about whether the euro is
Speaker 1: just too high. I don't know at what point it
Speaker 1: becomes problematic, but there was a warning start from the
Speaker 1: CB Chief Economists saying like, look, this could mess with
Speaker 1: monetary policy, does it? Yes? I think. I think, of
Speaker 1: course that it is a very very important element to
Speaker 1: consider the U who went up Vitor and many other
Speaker 1: currencies by around twelve percent or go certain period of time,
Speaker 1: and the Europe and New Area does not need that,
Speaker 1: of course, taking into account the difficulty of the present situation,
Speaker 1: the difficulty of the recovery, and also the fact that
Speaker 1: in comparison with the US, we have a growth and
Speaker 1: the catching up process after and in time of pandemic,
Speaker 1: which which takes time, and we are not in the
Speaker 1: best situation possible. So I would say, begger than I
Speaker 1: never policy is never appropriate. And I am a little
Speaker 1: bit hurt. Not by the FED itself because the language
Speaker 1: of the FED is very, very prudent and cautious in
Speaker 1: terms of exchange rate, but from time to time the
Speaker 1: executive branch in the US, he's talking down the door,
Speaker 1: which is absolutely unappropriate. Obviously, there is no place for
Speaker 1: a begger than I never policy in a situation where
Speaker 1: we are, and I hope that they will be as
Speaker 1: responsible as possible. I'm speaking of the executive branch of
Speaker 1: the United States. But Mr, what is the level that
Speaker 1: starts becoming really uncomfortable for euro No, I will not
Speaker 1: pronounce any level, any level, say that plus is a
Speaker 1: big change in my process and myself. We're commenting such move,
Speaker 1: I qualify themselves as modeled myself, I remember, which created
Speaker 1: some emotion, But I really think that what we did
Speaker 1: is can stability and certainly not talking down the main currency,
Speaker 1: which is the dollar, which is not at all appropuli
Speaker 1: that already sent. And you were very clear in your
Speaker 1: comments MS, but you know from here given the FED policy,
Speaker 1: will dollar actually weaken even without that rhetoric from the
Speaker 1: executive that you're talking about, Well, I must confess I
Speaker 1: expect the first to the extent that there is a
Speaker 1: dimension of the exchange rate which is associated with the
Speaker 1: recent decision of the Fed. I think it was totally
Speaker 1: overdone by the market. I mean, the FED only said
Speaker 1: we will if if we do not get out of
Speaker 1: the present situation, will continue to have an accommodating policy.
Speaker 1: But the accommodating policy of the Fed doesn't mean negative
Speaker 1: interest rates, And in yourb you have negative interest rates.
Speaker 1: So the fundamentals are below all the noise that we
Speaker 1: are hearing. In my opinion, there is a very good
Speaker 1: case for certainly not changing the dollar you position based
Speaker 1: on the recent decision of the Fed. I don't think
Speaker 1: there is really a case for that, and I'm sure
Speaker 1: that the market will realize that there is no case
Speaker 1: by that. Well, Mr Trichet, it's Kelly in New York.
Speaker 1: A stronger currency can be a hindrance for inflation, and
Speaker 1: already data show this. Yesterday, consumer prices in the Euro
Speaker 1: Area falling for the first time in four years. How
Speaker 1: big of a problem does that create? For the e
Speaker 1: c B. Well, the problem of the CB is more
Speaker 1: or lit the same as I would say in all
Speaker 1: major supplements. Of course we have inflation, which is much
Speaker 1: to know. That inflation which is much to creates two problems.
Speaker 1: One problem is that we have risk of method realization
Speaker 1: of deflation, and of course this is an ultimate risk
Speaker 1: that we must avoid. And second, of course it go
Speaker 1: alls for very low interest rates, which themselves have their
Speaker 1: own doorbacks, particularly if you are in a in a
Speaker 1: time when you need more accommodating policies. So, all taken
Speaker 1: into account, it is the situation of major sample banks.
Speaker 1: D CD has to cope with that situation, and it
Speaker 1: seems to me that it does it as well as possible.
Speaker 1: I would say, my successor is doing as well as possible,
Speaker 1: and the governing Council is doing as well as possible.
Speaker 1: But the situation is demanding. And then the little why
Speaker 1: precisely we don't need at all change in the overall
Speaker 1: condition that would be conducive to less growth and less
Speaker 1: activity in Europe? Right, Mr Tiha. Given the FEDS move
Speaker 1: last week, this move towards average inflation targeting, does that
Speaker 1: add some pressure for the easy V to follow the
Speaker 1: FEDS blueprint on that front. Well, post of all the
Speaker 1: review I started in January in Europe and it will
Speaker 1: take a little time. I would say that seen from
Speaker 1: the European perspective, the idea of judging on the average inflation,
Speaker 1: the meeting the objective is something which is natural in Europe. Myself,
Speaker 1: I remember going to various capitals, including Berlin for instance.
Speaker 1: In my time, I was claiming that we were up
Speaker 1: to our responsibility when we were delivering more or less
Speaker 1: one average since the setting up of the Euros. So
Speaker 1: it was natural in Europe to reason on an average basis. Uh.
Speaker 1: And I would say that also the fact is in Europe,
Speaker 1: in principle, we consider the headline inflation as the inflation
Speaker 1: that you must looked at because it's the inflation that
Speaker 1: our own fellow citizens are seeing. The code in plation
Speaker 1: is a different concept which is not seen by the
Speaker 1: general public. So of course, if you are following headline inflation,
Speaker 1: it goes up and down, up and down, and you
Speaker 1: have necessarily some kind of averaging to operate. But all
Speaker 1: that being said, we will see what the e c
Speaker 1: B will do. What reassures me in a way in
Speaker 1: what has been decided in the US is that the
Speaker 1: two percent reference was not abandoned. You remember some academics
Speaker 1: were recommending to go down to one percent or even
Speaker 1: zero percent. Others were saying four percent is much better.
Speaker 1: I'm very happy with the two percent, which is, by
Speaker 1: the way, the reference in the US, in Japan, in
Speaker 1: the UK, and in the e c B, which is
Speaker 1: the first, by the way to mention the two percent
Speaker 1: as a very very important reference. So the fact that
Speaker 1: all central banks, including I have to say, in many
Speaker 1: respects Bank of China, have this kind of reference in
Speaker 1: mind is in my opinion, helpful in terms of global
Speaker 1: final fruits stability, global monitory stability. Um, when you look
Speaker 1: at the spectrum of deflation. We started in lockdown looking
Speaker 1: at all this stimulus and thinking it could lead to
Speaker 1: very strong inflation, maybe even rampant inflation is the risk.
Speaker 1: Now you know deflationary holds and actually you're becoming a
Speaker 1: lot more like Japan. Well, again, what we know in
Speaker 1: all advanced economies is that Japan was very much ahead
Speaker 1: of the other major economies. But but we all are
Speaker 1: in that situation which has very well summed up by
Speaker 1: j Power recently namely, first we have a good potential
Speaker 1: which is significantly lower than before. Second, we have a
Speaker 1: really interest with its equivably interest withates that are much
Speaker 1: lower than before. A Third, we have inflation which remains
Speaker 1: extremely low and abnormally low for all reasons, and particularly
Speaker 1: the two reasons I mentioned the materialization of potential, depression
Speaker 1: of a risk, and the two low interest nominal interest
Speaker 1: rates that are I would say engineered by that situation.
Speaker 1: So that is the situation in all advanced economy and
Speaker 1: its calls of cooks for getting out of that situation.
Speaker 1: The supplements are doing all what they can, in my opinion,
Speaker 1: even being much bolder than what was foreseen. And in
Speaker 1: particular the e CP with the pandemic Emergency Purchase Program
Speaker 1: proved the capacity to react to extraorly difficult situation. But
Speaker 1: I mean, the problem is to find the pandemic at
Speaker 1: the present moment. As soon as we have thought successfully
Speaker 1: against the pandemic, we will have the problem that we
Speaker 1: had before the pandemic, and the problem we had before
Speaker 1: the pandemic other problem that we just summed up, so
Speaker 1: we will see exactly how to get out. In my opinion,
Speaker 1: we will get out of that situation, but with the
Speaker 1: help of other partners. The central banks alone cannot change
Speaker 1: the growth potential. They cannot change the heal neutral interest
Speaker 1: rates or equitably interest rates, and that that is the
Speaker 1: responsibility of other partners. And of course we have the
Speaker 1: main problem of the Philips curves, and there I could
Speaker 1: delaborate on that if if we have time. Mrs. We
Speaker 1: were talking about inflation, we talked about of course the
Speaker 1: euro strength, and we started by talking us about the
Speaker 1: Philips curve. I mean, if you look at what the
Speaker 1: Phillips curve has told us so far, this is the
Speaker 1: economic concepts that basically states that inslation and unemployment have
Speaker 1: a stable and inverse relationship. How will that change because
Speaker 1: of the crisis. Looks like it changed dramatically since the crisis, obviously,
Speaker 1: and the turning point is around Liman bothers and and
Speaker 1: a few years after Liman bobbles. So we are now
Speaker 1: in a situation where the philipskirt looks totally flat and
Speaker 1: in major advanced economies, clearly, even with full employment, you
Speaker 1: don't have the inflation pick up that you would normally expect.
Speaker 1: And that of course is a major problem because it
Speaker 1: impacts the full body of the Centle Bank monetary policy.
Speaker 1: Of course, in all those countries, and we were speaking
Speaker 1: of that a moment ago. Of course, it's probably due
Speaker 1: to a number of factors, and academia has worked a
Speaker 1: lot on that. Globalization, new technologies. But I would insist myself,
Speaker 1: I would stress that in most countries, the bargaining power
Speaker 1: of labor has diminished. That's obvious, and that is of
Speaker 1: course mainly economic problem, of course, but also a social
Speaker 1: political problem. And I'm speaking of those countries that have
Speaker 1: full employment. In countries that are not at full employment,
Speaker 1: of course, it's not appropriate it to suggest that we
Speaker 1: should elevate the wages and salaries, because because then then
Speaker 1: it is not in line with the idea to have
Speaker 1: full employment. But in those countries like Japan, like the
Speaker 1: US before the pandemic, like Germany, the Netherlands before the pandemic,
Speaker 1: and other countries Switzerland and so forth, it's abnormally, my opinion,
Speaker 1: is very abnormal that the very weak bargaining power of
Speaker 1: labor calls for uniquely because to augment miserable and calls
Speaker 1: for a nominal evolution of wages and salaries to be
Speaker 1: that flat. And I expect that it will change. It
Speaker 1: must change, It will have to change, because again, it's
Speaker 1: not only an ego problem. It's also a social economic problem,
Speaker 1: and we see that on the social political dimension it
Speaker 1: is more than more a major problem. So I am
Speaker 1: confident that we will solve that problem progressively. But we
Speaker 1: are just in the middle of this problement. Pandemic is
Speaker 1: even a graviating of course, this situation, because it creates
Speaker 1: a new element to privilege. If I may the job
Speaker 1: instead of asking for more, which is accelarists increases great
Speaker 1: Mr trichet coming out of this pandemic. Let's talk about
Speaker 1: other changes. Has the function of monetary policy completely changed?
Speaker 1: All of these exceptional monetary policy is now going to
Speaker 1: have to become semi permanent. Well, it's clear now that
Speaker 1: we have. But it was true before the pandemic, and
Speaker 1: before the pandemic, it was true that the new normal
Speaker 1: was very different from the previous normal. It was true
Speaker 1: that we had certainty to take into account the extraordinary
Speaker 1: capacity of the sample banks to be extraoraly accommodating in
Speaker 1: utilizing a lot of various tools. That's obvious in my opinion.
Speaker 1: My opinion has always been in any case the compass
Speaker 1: that we have is price stability. Price stability as a
Speaker 1: primary mandate, and speaking of what for the rogan santle back.
Speaker 1: But let's not forget. Once you attain price stability, or
Speaker 1: we are in the present situation where the problem is
Speaker 1: to go up to the level of the objective, then
Speaker 1: you can accompany all other policies of the European Union.
Speaker 1: This is the treaty. The treaty says very very clearly
Speaker 1: without placidas to price stability, the ciddled banking system, the
Speaker 1: ECB accompanies all the other policies of the of the
Speaker 1: Opian Union name system on that. Because from time to
Speaker 1: time we are called to say, well, in the US,
Speaker 1: they have two objectives in the in your there is
Speaker 1: only one objective. There is one objective of the game.
Speaker 1: The mention is in the treaty that when this subjective
Speaker 1: is attained to be obtained, then you have to accompany
Speaker 1: the other. I would say, dam of the policies. LEI,
Speaker 1: thank you so much for joining us today as always
Speaker 1: makes us wiser on monetary policy. Janctric they're the former
Speaker 1: easily president. Thanks for listening to the Bloomberg Surveillance Podcast.
Speaker 1: Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or
Speaker 1: whichever podcast platform you prefer. I'm on Twitter at Tom
Speaker 1: Keane before the podcast. You can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio