WEBVTT - Surveillance: U.S. Response Should Model Others, Stiglitz Says 0:00:05.720 --> 0:00:12.960 Ye. Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane 0:00:13.480 --> 0:00:17.560 Jai Ley. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:28.600 Bloomberg dot Com, and of course, on the Bloomberg Joining 0:00:28.680 --> 0:00:32.080 us now the Laureate of Columbia University, Joe, I want 0:00:32.080 --> 0:00:34.440 to cut right. We're gonna talk about what's going on 0:00:34.560 --> 0:00:36.720 right now, but Joe, I want to go back a 0:00:36.840 --> 0:00:41.560 small forty years to Grossman's Stiglets, and in it, there 0:00:41.640 --> 0:00:45.680 is an equation, folks, which is the simplest equation in 0:00:45.800 --> 0:00:50.520 all of economics. You equal state of plus epsilon. Epsilon 0:00:50.680 --> 0:00:54.560 is the unobservable. It's what we can't see. Joe Stiglets 0:00:54.600 --> 0:00:58.440 became acclaimed for this. Joe Stiglets, have you ever seen 0:00:58.480 --> 0:01:02.360 an epsilon like right now? Have you ever seen the 0:01:02.480 --> 0:01:08.120 unobservable that we see in this pandemic. We've never seen 0:01:08.800 --> 0:01:14.000 a shock as big as we have. But the interesting 0:01:14.040 --> 0:01:18.880 thing is after the shock has hit, uh, we can 0:01:18.920 --> 0:01:23.240 trace out some of the consequences. And what I find 0:01:23.440 --> 0:01:27.000 a little disappointing is that we haven't been doing next 0:01:27.040 --> 0:01:31.399 second round. The shock we could not have anticipated. Uh, 0:01:31.440 --> 0:01:35.759 we could have done a better response to it. So, Professor, 0:01:35.920 --> 0:01:39.000 this shock is what's unique about this shock versus what 0:01:39.040 --> 0:01:41.040 maybe some things we've experienced in the past. It is 0:01:41.160 --> 0:01:46.240 truly truly global. Does the response have to be global 0:01:46.240 --> 0:01:48.920 because right now it seems country by country or even 0:01:48.960 --> 0:01:52.600 within the United States state by state. Well, it has 0:01:52.640 --> 0:01:56.240 to be you might say, both global and local. Uh, 0:01:56.280 --> 0:01:58.440 if the local hospitals that are going to take care 0:01:58.440 --> 0:02:02.160 of people. But the fundamental fact is that we won't 0:02:02.200 --> 0:02:06.200 be able to control the pandemic until we control it everywhere. 0:02:06.680 --> 0:02:09.720 If it's raging in some part of the world and 0:02:09.760 --> 0:02:11.720 we don't yet have a vaccine and we don't have 0:02:11.760 --> 0:02:15.000 a rest viral, it'll come back to bite us. And 0:02:15.160 --> 0:02:20.200 that is what was so disappointing about Trump's decision to 0:02:20.280 --> 0:02:24.600 hold up money on w h O. It's like being 0:02:24.680 --> 0:02:30.440 upset about the fire department and uh, defunding the fire 0:02:30.520 --> 0:02:33.160 department in the middle of the fire. Joe. What I 0:02:33.200 --> 0:02:35.880 find so distressing here is we've got rogueoff and Reinhard 0:02:35.960 --> 0:02:39.560 publishing a brilliant essay the other day. And you know, folks, 0:02:39.560 --> 0:02:42.160 I've never said this in my life. Rogoff and Stiglets 0:02:42.200 --> 0:02:46.520 are on the same page, and and Joe, this is 0:02:46.600 --> 0:02:51.360 really critical the urgency of the matter. And we've seen 0:02:51.400 --> 0:02:55.960 a central bank and frankly central banks plural matter, and 0:02:56.000 --> 0:03:01.160 the legislature, particularly in the United States, seems locked in 0:03:01.240 --> 0:03:05.200 almost a pardon the pun a lockey and the individual 0:03:05.240 --> 0:03:13.040 approach where society cannot collectively battle a viral pandemic. How 0:03:13.080 --> 0:03:15.680 do we get ourselves out of that? How do we 0:03:15.720 --> 0:03:20.919 extract ourselves from this forced individualism? Well, I think the 0:03:20.919 --> 0:03:23.480 hope is that we look around and see what's going 0:03:23.520 --> 0:03:26.480 on in other countries and take the lesson. You know, 0:03:26.880 --> 0:03:30.640 the I m F came out with report yesterday and 0:03:30.960 --> 0:03:34.600 one of the striking things to me, and that was 0:03:35.000 --> 0:03:39.400 that the United States it was way ahead of every 0:03:39.440 --> 0:03:43.640 other country in the number of the fraction of unemployment, 0:03:43.680 --> 0:03:47.560 the unemployment rate UH and ahead of every country in 0:03:47.600 --> 0:03:50.280 a very negative way. When they said, you know, let's 0:03:50.280 --> 0:03:53.360 make a number us number one, they didn't mean make 0:03:53.480 --> 0:03:56.640 us number one in having the highest level of unemployment 0:03:56.880 --> 0:03:59.920 among all the events countries in response to the coronavirus. 0:04:00.320 --> 0:04:03.520 The other countries have figured it out and have figured 0:04:03.560 --> 0:04:08.119 out a way to make sure that there is less sufferings, 0:04:08.400 --> 0:04:11.839 fewer people are thrown out of their jobs. And what's 0:04:11.880 --> 0:04:15.760 so devastating the United States is we are the one 0:04:15.800 --> 0:04:19.240 country where people depend on employment for health insurance in 0:04:19.279 --> 0:04:22.640 the middle of a health crisis. So the devastating effects 0:04:22.640 --> 0:04:27.480 in the United States being unemployed, our orders of magnitude 0:04:27.720 --> 0:04:31.000 worse than another country. And then, Paul, I've been out 0:04:31.040 --> 0:04:33.080 of tooralize here. I'm talking to my own book, but 0:04:33.200 --> 0:04:36.480 it's companies like Bloomberg, and I'll mention Bank of America, 0:04:37.040 --> 0:04:40.240 Mr Mourne, and today re emphasizing this is not the 0:04:40.320 --> 0:04:43.599 time to can peoples. You got to find a way 0:04:43.640 --> 0:04:46.480 to do this. Paul, pick it. So, professor, give us 0:04:46.520 --> 0:04:50.200 what we know about the US fiscal stimulus response. What 0:04:50.240 --> 0:04:53.560 do you think the US government should do next? I mean, 0:04:53.560 --> 0:04:57.320 the FED seems to have really flexed its muscles, exercised 0:04:57.360 --> 0:04:59.279 many tools in the toolbox. What do you think the 0:04:59.320 --> 0:05:03.040 federal response should be going forward? Well, I think there's 0:05:03.080 --> 0:05:06.039 actually a number of things that we need to do. Uh, 0:05:06.160 --> 0:05:09.080 some of them are relatively easy. There were some big 0:05:09.120 --> 0:05:12.720 gaps in our earlier measures for inch things. While we 0:05:12.760 --> 0:05:16.960 recognize how important it was for people to have paid sickly. 0:05:17.120 --> 0:05:20.240 We don't want people with COVID nineteen going into the 0:05:20.240 --> 0:05:23.520 workplace and spreading the disease. And so they passed a law. 0:05:23.600 --> 0:05:25.479 But what did they do then, under the pressure of 0:05:25.520 --> 0:05:29.760 the big companies, exempt at eight of American workers. So 0:05:29.960 --> 0:05:32.680 we recognized the principle, and then we totally undermine it. 0:05:32.960 --> 0:05:37.039 So that needs to be changed. Uh. We recognized the 0:05:37.120 --> 0:05:42.760 principle that we shouldn't have people UH, we should keep 0:05:42.800 --> 0:05:46.679 the connection between people in their jobs. But then when 0:05:46.720 --> 0:05:50.280 we designed the program, we designed it in a way 0:05:50.520 --> 0:05:54.000 that it's not working very well. Other countries have done 0:05:54.160 --> 0:05:57.159 UH much better, And there's a bill in Congress to 0:05:57.279 --> 0:06:01.440 follow the model that the other countries UH used where 0:06:02.040 --> 0:06:07.920 the employer directly gets a check to pay his workers 0:06:07.960 --> 0:06:10.839 from the I R S or Social Security. We have 0:06:10.960 --> 0:06:15.880 all those Uh, we have all the the the information 0:06:16.000 --> 0:06:17.960 we need. I mean, after all, the I R S 0:06:18.040 --> 0:06:22.520 is communicating with every corporation and so they know how 0:06:22.520 --> 0:06:26.800 to communicate. So that's money that could go almost overnight. 0:06:26.800 --> 0:06:28.440 And why we didn't do it that way, I have 0:06:28.600 --> 0:06:32.520 no idea. UH. And then we have some other big gaps. 0:06:33.240 --> 0:06:37.120 One of the big issues is UH we left out 0:06:38.360 --> 0:06:43.719 the big NGOs. The universities are research institutions, and so 0:06:44.080 --> 0:06:46.279 some of the kinds of institutions that are will be 0:06:46.360 --> 0:06:52.360 absolutely necessary for our revival as a strong economy. I 0:06:52.560 --> 0:06:56.160 have not been supported. They'll they'll be along with another trunch. 0:06:56.240 --> 0:06:58.320 If you're just joining us, what's Joseph sticklet's with us 0:06:58.640 --> 0:07:01.760 of Columbia University. Joe, I want to talk about your 0:07:01.839 --> 0:07:04.920 Democratic Party. I know you voted Republican four or five 0:07:05.279 --> 0:07:08.680 elections ago, but Joe, I want to talk about the 0:07:08.720 --> 0:07:13.600 need for Democrats, and particularly the visible East Coast Democrats 0:07:13.640 --> 0:07:16.840 that hang on every Joe Stigley, it's in word, how 0:07:16.840 --> 0:07:19.360 do they get back to the middle ground. How does 0:07:19.400 --> 0:07:23.160 the vice president running against President Trump? How does your 0:07:23.320 --> 0:07:27.880 party ex convention getting to November? How do they find 0:07:27.920 --> 0:07:31.400 their way back to Hubert Humphrey, Scoop Jackson in the 0:07:31.480 --> 0:07:37.280 middle Democratic party ground? So my view is they need 0:07:37.280 --> 0:07:41.160 to focus on the basic principles, which are principles that 0:07:42.560 --> 0:07:49.120 you know of American support. Uh, most Americans you know 0:07:49.200 --> 0:07:54.240 in poeft Po show, they think that seven dollars is 0:07:54.320 --> 0:07:57.720 not adequate as a minimum wage. They think it's not 0:07:57.800 --> 0:08:00.840 a livable wage. We need raise a minimum wage. Almost 0:08:00.920 --> 0:08:03.880 everybody says that the fact of the United States is 0:08:03.920 --> 0:08:06.920 the only advanced country that doesn't recognize the right to 0:08:06.960 --> 0:08:09.680 access to healthcare is a basic human right. We need 0:08:09.720 --> 0:08:12.360 to recognize that, and there are different ways of doing it. 0:08:12.440 --> 0:08:14.760 We need a good democratic debate about how to do it. 0:08:14.800 --> 0:08:20.200 But recognize that principle. Uh, the idea that people should 0:08:20.200 --> 0:08:23.920 be able to shoot other people, Uh, that you should have. 0:08:24.320 --> 0:08:27.560 You know, we're not talking about rifles. We're talking about 0:08:27.600 --> 0:08:33.880 machine guns. Uh that uh the Fourth Amendment not wasn't 0:08:33.920 --> 0:08:36.520 talking about everybody having the right to have machine guns. 0:08:37.240 --> 0:08:41.160 So some forms of gun control. I mean you to 0:08:41.240 --> 0:08:43.640 stay on the pandemic now, and you know, we all 0:08:43.880 --> 0:08:46.560 understand on gun control it's about the Senate majority and 0:08:46.559 --> 0:08:48.880 the power in the rural nature of the Senate, etcetera. 0:08:49.120 --> 0:08:52.400 I mean, we all get that. On the pandemic and 0:08:52.440 --> 0:08:57.800 on the politics forward. Do you see any nudging towards 0:08:57.800 --> 0:09:02.800 the more collective American psychology or do we get done 0:09:02.800 --> 0:09:04.760 with the pandemic and we just move on as we've 0:09:04.760 --> 0:09:08.160 been moving on since you know, forty years ago. Yeah, 0:09:08.200 --> 0:09:10.480 I'm glad you raised that because that is the essential 0:09:10.520 --> 0:09:14.679 issue when we have a crisis. We realize that we 0:09:15.160 --> 0:09:21.080 need collective action, that our individualism can't work, and we 0:09:21.240 --> 0:09:25.480 turned to government. And here in New York, Governor Como 0:09:25.559 --> 0:09:31.400 has really done a fantastic job under very difficult circumstances. Uh. 0:09:31.480 --> 0:09:37.560 So Uh and we see in states like California the 0:09:37.679 --> 0:09:41.280 role of good leadership and the role of the state 0:09:41.440 --> 0:09:44.520 in being able to protect people and to get the 0:09:45.840 --> 0:09:49.640 pandemic under control. So I think you know this is 0:09:49.679 --> 0:09:52.360 one of the themes of my book. Uh, People Power 0:09:52.400 --> 0:09:58.200 and Profits Progressive Capitalism. Uh, it's that we went too 0:09:58.240 --> 0:10:03.160 far in the extreme at markets where everything we need 0:10:03.160 --> 0:10:06.720 to get a better balance of balance between recognizing markets 0:10:06.720 --> 0:10:12.760 are important, but so is collective actalcy Joe, just because 0:10:12.760 --> 0:10:14.760 of the clock, we gotta leave it there. Joe Stiglets, 0:10:14.800 --> 0:10:17.640 thank you so much for joining us to Lauria from 0:10:17.640 --> 0:10:21.240 Columbia University. Always controversial, we got a ton of response 0:10:21.280 --> 0:10:35.200 when Professor Stiglets is on. We are committed here to 0:10:35.280 --> 0:10:37.840 speaking of medicine, and we do that across the wide 0:10:37.880 --> 0:10:40.959 sphere of this pandemic. We've talked to radiologists, We've talked 0:10:40.960 --> 0:10:47.400 to epidemiologists. Again, we speak to someone expert in emergency medicine. 0:10:47.480 --> 0:10:52.360 She's Laurence Soer Johns Hopkins University, their assistant professor, really 0:10:52.640 --> 0:10:57.360 just outside the pandemic expert in this area. We caught 0:10:57.400 --> 0:11:00.160 up with her today here. He is Professor Soer. I 0:11:00.160 --> 0:11:02.000 think it's a little too early to say whether it's 0:11:02.040 --> 0:11:04.400 fully accresting or not. We are seeing a slow down 0:11:04.400 --> 0:11:07.400 in the number of increasing cases. We haven't I don't 0:11:07.400 --> 0:11:10.080 think peaked that curve yet, but we are starting to 0:11:10.200 --> 0:11:13.520 see slow downs in the volume um and all the 0:11:13.520 --> 0:11:15.960 more reason to protect those measures that are in place, 0:11:16.040 --> 0:11:19.520 like distancing, to ensure that that those volumes don't spike 0:11:19.640 --> 0:11:21.439 right back up as soon as a sort of quote 0:11:21.480 --> 0:11:25.400 unquote go back to normal, Lauren. That is certainly what 0:11:25.480 --> 0:11:29.040 I see in the fancy exponential or logarithmic charts as well, 0:11:29.120 --> 0:11:32.480 exactly as you just described it. And so much of 0:11:32.520 --> 0:11:37.520 that is done on a moving average, where professionals like 0:11:37.600 --> 0:11:41.679 you and unprofessionals like me, or even the present United 0:11:41.720 --> 0:11:45.640 States have to use a number of days or weeks 0:11:45.760 --> 0:11:49.880 or months and blended together to really see the abb 0:11:50.440 --> 0:11:54.360 How long is that moving average? What's the appropriate length 0:11:54.400 --> 0:11:58.560 of time for you to gauge? Well, I think UM, 0:11:58.720 --> 0:12:01.760 it's changing every day, and I think we're just starting 0:12:01.800 --> 0:12:04.400 to learn more information about this virus and how it 0:12:04.440 --> 0:12:08.320 behaves in people. UM. The the key is not to 0:12:08.400 --> 0:12:12.200 make an assumption way too early, right so, UM, two 0:12:12.240 --> 0:12:15.360 weeks is really the minimum to even start to understand 0:12:15.360 --> 0:12:17.640 the data for you want to look at it two 0:12:17.679 --> 0:12:21.040 weeks out. So I think we're several months before we 0:12:21.120 --> 0:12:24.920 really can go back to UM go towards planning to 0:12:25.040 --> 0:12:28.600 reopen and and go back to normal, Lauren, how quickly 0:12:28.720 --> 0:12:32.800 what we get a vaccination against the pandemic. There's a 0:12:32.800 --> 0:12:35.760 lot of really good candidates coming up right now. I 0:12:35.800 --> 0:12:40.400 think we're we're seeing estimates from the scientists somewhere between 0:12:41.200 --> 0:12:45.000 three and twelve months, which is unbelievable for vaccine science. 0:12:45.040 --> 0:12:47.679 It's really fast, and so it's exciting to see all 0:12:47.760 --> 0:12:51.439 this progress being made. I think realistically a vaccine that's 0:12:51.480 --> 0:12:53.800 ready to go out to the general public is about 0:12:53.800 --> 0:12:56.959 a year away. UM, but we could start seeing candidates 0:12:57.000 --> 0:12:59.640 that could be used to protect our frontline health workers 0:12:59.679 --> 0:13:03.719 and for responders earlier. Probably what's the biggest challenge right now? 0:13:03.760 --> 0:13:06.280 So there are a number of questions Lauren about, for example, 0:13:06.400 --> 0:13:09.880 US symptomatic cases right, why are they symptomatic? And until 0:13:09.920 --> 0:13:11.720 you find out more about them, it's very difficult to 0:13:11.720 --> 0:13:14.800 get a handle because they keep on transmitting if the 0:13:14.840 --> 0:13:18.600 lockdown is eased somewhat. But also immunity, how close are 0:13:18.640 --> 0:13:21.280 we to understanding whether people that have had it can 0:13:21.320 --> 0:13:24.079 go back safely to work. Yeah, there's a lot of 0:13:24.120 --> 0:13:26.560 work being done in that immunity question right now, and 0:13:26.600 --> 0:13:28.760 I think we have to because we're so early in 0:13:28.760 --> 0:13:30.800 the outbreak. We have to wait to see how people's 0:13:30.840 --> 0:13:35.679 immune responses stay over time and also how when people 0:13:35.679 --> 0:13:39.280 are are ready to go back to work without having symptoms. 0:13:39.080 --> 0:13:42.200 The biggest challenge right now I see is testing. We're 0:13:42.240 --> 0:13:44.560 still trying to ramp up testing in a meaningful way, 0:13:44.640 --> 0:13:47.440 and that is what every single other public health measure 0:13:47.480 --> 0:13:49.880 hands up on all of those things that we want 0:13:49.880 --> 0:13:52.960 to use to get back to work, to alleviate social distancing, 0:13:53.000 --> 0:13:56.520 to be able to travel, to reduce the masks, the 0:13:56.679 --> 0:14:01.079 hind one testing more very clear. Thank you so much 0:14:01.080 --> 0:14:04.440 for bringing that up. What is the constraint I'm getting 0:14:04.440 --> 0:14:08.400 more testing done? I think it's it's a little bit 0:14:08.400 --> 0:14:10.000 of a supply issue and a lot of bit of 0:14:10.000 --> 0:14:13.079 a coordination issue. So making sure that the tests are 0:14:13.120 --> 0:14:15.240 in the right place, that people have the ability to 0:14:15.320 --> 0:14:18.000 scale up and test all the people they need to um, 0:14:18.040 --> 0:14:20.000 that you continue to get the materials, and that you 0:14:20.040 --> 0:14:22.880 have the people to run the tests. Lauren Son with 0:14:23.000 --> 0:14:26.320 us with the Johns Hopkins University and Emergency Medicine as 0:14:26.360 --> 0:14:28.520 we've been talking to people and nursing there, and also 0:14:28.560 --> 0:14:31.320 from the Bloomberg School of Public Health. We should of 0:14:31.320 --> 0:14:34.600 course mentioned that Mr Bloomberg has provided a mens fum 0:14:34.640 --> 0:14:37.800 anthropy to Johns Hopkins for that School of Public Health 0:14:37.840 --> 0:14:42.240 as the founder and owner of Bloomberg Television. In Bloomberg Radio, 0:14:50.520 --> 0:14:53.240 we now have some turf under U S JP, Morgan, 0:14:53.920 --> 0:14:56.760 Bank of America, Golden Sec City Group of course others 0:14:56.800 --> 0:15:00.760 coming out in the superregionals in your community banks as well. 0:15:00.920 --> 0:15:04.840 Synthesizing this is Kenneth Leon. Here's a CFR, a head 0:15:04.840 --> 0:15:09.360 of research and also acutely focused on the financials. All it. 0:15:09.480 --> 0:15:12.000 I believe it's four shops right now, ken Leon, what 0:15:12.120 --> 0:15:16.600 is the summary? The summary is shift to balance sheet 0:15:16.680 --> 0:15:20.360 credit risk. Uh, there's only a few weeks of look 0:15:20.480 --> 0:15:24.640 into the the recession, so more work will be done 0:15:24.960 --> 0:15:31.040 for the second quarter. In terms of reserves for loan losses. UM. 0:15:31.080 --> 0:15:34.440 The question, though, always is how deep will this recession 0:15:34.480 --> 0:15:38.680 be and how long. I guess the public markets expect 0:15:39.040 --> 0:15:41.640 a recovery in the second half of this year, but 0:15:41.760 --> 0:15:45.200 banks are being prudent, which essentially means that they're building 0:15:45.280 --> 0:15:49.600 up reserves for non performing loans. That's the good news, Kent, 0:15:49.720 --> 0:15:52.120 that they already that this balance sheet is strongest city 0:15:52.120 --> 0:15:54.040 in our sweat too. Here's what I'm trying to get 0:15:54.040 --> 0:15:55.720 my hands around them, and maybe you can help us. 0:15:56.040 --> 0:15:59.160 When these guys say they're prepared and when they come 0:15:59.160 --> 0:16:01.280 through with a que huge credit provisions like the ones 0:16:01.320 --> 0:16:03.240 we've seen over the last couple of days, what are 0:16:03.240 --> 0:16:06.920 they prepared for another shutdown that last a month, two months, 0:16:06.960 --> 0:16:09.760 three months? Can you understand the duration that they're working 0:16:09.800 --> 0:16:13.520 with their timeline that enables them to decide how much 0:16:13.560 --> 0:16:18.240 money they need to put aside. What often happens is 0:16:18.360 --> 0:16:22.600 banks are ultra conservative, which means they tend to reserve 0:16:22.720 --> 0:16:27.760 more than what will actually happen. It is likely that 0:16:27.840 --> 0:16:32.440 if it's a recovery later in the economy, there could 0:16:32.440 --> 0:16:37.240 be a reverse of these reserves. But at this point, UM, 0:16:37.240 --> 0:16:40.920 it's essentially the credit committees for these banks are being very, 0:16:41.040 --> 0:16:45.800 very conservative. Can I'm struck by this sort of dissidents. 0:16:45.840 --> 0:16:50.160 We're seeing the increase in credit loan loss provisions, which 0:16:50.240 --> 0:16:53.400 is deteriorating some of the earnings potential. But City Group 0:16:53.480 --> 0:16:58.160 just reported it's best fixed income trading revenue in eight years. 0:16:58.200 --> 0:17:00.760 And you're seeing this consistently across the big banks, that 0:17:00.800 --> 0:17:03.800 they are performing better when it comes to treating revenues, 0:17:04.119 --> 0:17:07.080 and I'm wondering are people being too dismissive of this 0:17:07.160 --> 0:17:11.200 is sort of the profit winning aspect of a dislocation 0:17:11.320 --> 0:17:13.040 like this, and the fact that the big banks have 0:17:13.119 --> 0:17:16.879 been in a position to take advantage of it. So 0:17:16.920 --> 0:17:19.520 the banks are serving clients. And then the capital markets 0:17:19.600 --> 0:17:23.720 trading has been strong, particularly as you know pick UM, 0:17:23.760 --> 0:17:27.800 and it's mostly investment great as opposed to high yield 0:17:28.040 --> 0:17:32.200 or other derivatives UM. We're also seeing strength and equity 0:17:32.240 --> 0:17:36.560 trading with volatility UM. This shines much brighter for a 0:17:36.640 --> 0:17:40.040 Golden Sax or Morgan Stanley as a percentage of their 0:17:40.040 --> 0:17:43.199 total net revenues than the large banks, which still have 0:17:43.720 --> 0:17:48.160 a sizable traditional loan business and just sort of dissecting 0:17:48.560 --> 0:17:51.760 the other sort of lending functions of the banks. We're 0:17:51.760 --> 0:17:54.439 seeing that the increase in c an I lending and 0:17:54.480 --> 0:17:56.800 say Bank of America is really attributed to the draw 0:17:56.840 --> 0:17:58.840 down on credit lines that we've been hearing a lot 0:17:58.880 --> 0:18:02.240 about will the ultimately be a pain point for the 0:18:02.280 --> 0:18:05.400 banks or a point of profit going forward into what 0:18:05.680 --> 0:18:10.919 will eventually be a recovery. So, first of all, in 0:18:11.040 --> 0:18:16.080 terms of lines of credits and unrestricted lines, UM, companies 0:18:16.119 --> 0:18:19.120 are taking advantage of that. When we look at that 0:18:19.320 --> 0:18:23.880 and also look at their loan exposure, UM, we think 0:18:24.160 --> 0:18:28.359 there's risk in terms of commercial real estate and construction. Uh. 0:18:28.480 --> 0:18:31.359 The total lines of credit for the big for the 0:18:31.400 --> 0:18:35.159 four largest bank was just about four hundred sixty billion, 0:18:35.240 --> 0:18:39.280 four times greater than back in two thousand thirteen. Um. 0:18:39.400 --> 0:18:41.800 You know, so a lot of this will have in 0:18:41.920 --> 0:18:46.800 terms of how deep this can be for credit losses 0:18:47.119 --> 0:18:51.119 will be in industries like real estate, oil and gas. 0:18:51.160 --> 0:18:56.840 Goldman has taken a reserve ninety seven million, and UM, 0:18:56.880 --> 0:18:59.159 you know, we really think it's really a question of 0:18:59.240 --> 0:19:04.640 getting people act to work versus having unoccupied officers as 0:19:04.680 --> 0:19:08.720 well as other real estate property types that could be 0:19:08.760 --> 0:19:13.199 at risk. City saying that numbers just incredible for our 0:19:13.200 --> 0:19:15.000 listeners and might not have heard this eight percent of 0:19:15.000 --> 0:19:18.200 employers around the world employees around the world working remotely 0:19:18.240 --> 0:19:22.240 at city group of phenomenal stat the path forward can 0:19:22.240 --> 0:19:24.520 I don't think we should be naive about this. I 0:19:24.560 --> 0:19:26.720 truly believe that these banks want to help their customers. 0:19:26.720 --> 0:19:29.439 Of course they do, absolutely, of course they do. But 0:19:29.480 --> 0:19:31.240 I don't think we should be naive about the pr 0:19:31.320 --> 0:19:34.160 effort going on right now. None of these banks want 0:19:34.200 --> 0:19:38.800 to be seen laying off anybody in but they will 0:19:38.880 --> 0:19:43.120 want to cut costs again. And Ken, I'm just wondering, 0:19:43.119 --> 0:19:46.240 are we putting off this year's cost cuts for a 0:19:46.359 --> 0:19:50.719 huge effort next year. Well, it's a great question. And 0:19:50.760 --> 0:19:54.040 when you look at state coach holders, it's about serving 0:19:54.040 --> 0:19:59.320 the public their employees. I don't think investors really are 0:19:59.440 --> 0:20:03.359 looking at earnings for the next quarter as well. So 0:20:03.640 --> 0:20:08.000 when you get analytical about this with our efficiency ratio UM, 0:20:08.119 --> 0:20:10.800 they're not going to be where the banks wanted to 0:20:10.920 --> 0:20:14.160 target is the mid fifty percent range. You know, that's 0:20:14.200 --> 0:20:19.560 another conversation in a better environment, but at this point 0:20:19.560 --> 0:20:24.679 it's really serving customers and also UM due diligence in 0:20:24.800 --> 0:20:29.760 terms of non performing loans and Kenna John's observation working 0:20:29.800 --> 0:20:34.159 from home. Great, what do the banks do that aren't 0:20:34.280 --> 0:20:38.480 digitally ready? I mean, is this crisis is pandemic just 0:20:38.640 --> 0:20:43.200 brought to the forefront. They're dead? Is that true? It's 0:20:43.240 --> 0:20:47.960 over four thousand banks in the US, community banks, smaller banks, 0:20:48.160 --> 0:20:53.000 and some that Stilton might have passbooks. So if being 0:20:53.119 --> 0:20:58.160 digital Ken Ken Ken, John Fair and Lisa Bramwits don't 0:20:58.160 --> 0:21:03.040 know what a passbook is, that's so far back. And 0:21:03.240 --> 0:21:09.320 think you know, we're talking community bank, what are they? 0:21:09.359 --> 0:21:11.480 What are they gonna do? Can? Seriously, what are the 0:21:11.560 --> 0:21:16.760 non digital gonna do? Their deposits are not going anywhere, 0:21:16.880 --> 0:21:22.119 and it's really a question of um whether they were 0:21:22.160 --> 0:21:26.480 too aggressive in terms of loans. The regional banks have 0:21:26.840 --> 0:21:31.199 more concentrated industry exposure, some in oil and gas, but 0:21:31.240 --> 0:21:35.680 I think community banks will just slog along and unlike 0:21:36.000 --> 0:21:39.480 the rest of the world. Uh, the US banking industry 0:21:39.920 --> 0:21:43.520 number of banks is still too large, but the concentration 0:21:43.560 --> 0:21:46.399 of assets with banks greater than two and our fifty 0:21:46.480 --> 0:21:50.880 billion is over of the total industry. Can just real 0:21:50.960 --> 0:21:53.840 quick here, I'm wondering, what's your recommendation on stocks? Do 0:21:53.840 --> 0:21:55.199 you think that they're buy or do you think that 0:21:55.320 --> 0:21:58.720 this is sort of indicating some serious caution and risk 0:21:58.760 --> 0:22:02.600 going forward. We didn't get this right, and we have 0:22:02.760 --> 0:22:08.280 five recommendations on Bank of America, also on JP Morgan 0:22:08.960 --> 0:22:14.520 and also City Group and Trading Um at low multiples 0:22:14.560 --> 0:22:18.800 of net tangible book value. Forget about earnings. We would 0:22:18.880 --> 0:22:23.119 look for the banks probably to the market performers at 0:22:23.160 --> 0:22:26.120 best in your term. But if there is enough turn 0:22:26.200 --> 0:22:29.680 in the economy, these are great cyclical stocks later this year. 0:22:30.200 --> 0:22:32.840 Can't get to catch up with the solways Kelly on 0:22:32.920 --> 0:22:36.520 that cfl right, director of Equity Research, on a busy 0:22:36.560 --> 0:22:49.679 morning for bank kearnings Right now, folks, this is the 0:22:49.840 --> 0:22:52.560 conversation of the day if you are part of global 0:22:52.560 --> 0:22:55.960 Wall Street, and also, as John mentioned yesterday, if your 0:22:55.960 --> 0:22:59.160 retirement plan has been blown up, which is a few 0:22:59.200 --> 0:23:02.440 people as well. William Priest wrote a definitive book on 0:23:02.600 --> 0:23:04.600 free cash flow a number of years ago. Was my 0:23:04.640 --> 0:23:07.800 book of the summer one summer. It's called Free cash 0:23:07.840 --> 0:23:12.080 Flow and Shareholder Yield, and it is a must read. 0:23:12.119 --> 0:23:15.080 There's no other way, uh to move it. The rumor 0:23:15.200 --> 0:23:17.400 is the movie will be out next year. Memorial Day 0:23:17.400 --> 0:23:21.360 Week on John Farrell playing counterpart in it as well. 0:23:21.440 --> 0:23:24.720 Bill Priest joins us now with Epic Investments. Bill Priests, 0:23:24.760 --> 0:23:27.520 one of the great foundations of your life. Work on 0:23:27.600 --> 0:23:32.199 free cash flow is share buy backs. They've disappeared. What 0:23:32.280 --> 0:23:37.600 does that do to the priest mathematics? Well, thanks again, Tom. Actually, 0:23:37.680 --> 0:23:40.000 let's go back one step and just start with the 0:23:40.040 --> 0:23:43.280 fundamental statement. The value of any business is a function 0:23:43.320 --> 0:23:47.560 of as ability to generate cash flow. And we define 0:23:47.640 --> 0:23:50.879 cash flow uh where we as we subtract from the 0:23:50.880 --> 0:23:53.840 operating cash flow of a business. And he planned capital 0:23:53.880 --> 0:23:57.480 expenditures in all cash taxes, which gives you free cash flow. 0:23:58.240 --> 0:24:00.119 And there are only five things you can do with 0:24:00.200 --> 0:24:02.520 a dollar free cash flow. You can pay a dividend, 0:24:02.560 --> 0:24:06.359 buy back stock, pay down debt, reinvest the money internally, 0:24:06.560 --> 0:24:09.840 or make an acquisition. If you can earn a return 0:24:09.880 --> 0:24:13.360 above your cost to capital, you should reinvest or acquire. 0:24:13.440 --> 0:24:16.919 It's the fastest way to growth shareholder value. That said, 0:24:17.320 --> 0:24:21.120 most companies cannot use all of their free cash flow internally, 0:24:21.480 --> 0:24:23.760 and as a result, they decide to return some of 0:24:23.800 --> 0:24:26.399 it back to the owners of the business. Now you 0:24:26.440 --> 0:24:28.760 can pay down debt, that's not going to happen. You 0:24:28.800 --> 0:24:32.159 have a cash dividend and buy backs and buy backs 0:24:32.480 --> 0:24:36.360 sword after the O eight crisis, and I think you'll 0:24:36.400 --> 0:24:39.720 see that diminished. It doesn't mean that corporations are going 0:24:39.800 --> 0:24:42.920 to stop returning capital to the owners of the business, 0:24:42.920 --> 0:24:47.639 but the buy back method will will come down substantially. Uh. 0:24:47.680 --> 0:24:50.680 It's uh, it's one of these things where people are 0:24:50.720 --> 0:24:52.840 going to have an attitude towards buy backs that are 0:24:52.840 --> 0:24:55.320 not going to be positive when they visit when they 0:24:55.359 --> 0:24:59.520 see suffering going on. That said, the corporation's job is 0:24:59.560 --> 0:25:02.360 the max amid the value to business to the owners. 0:25:02.359 --> 0:25:04.320 So I think what you're going to see is a 0:25:04.560 --> 0:25:09.160 substantial diminishment of buy backs, but not necessarily cash dividends. 0:25:09.720 --> 0:25:12.160 Cash dividends will be down this year for sure, because 0:25:12.200 --> 0:25:15.960 they're going to be down, But depending on the company, 0:25:16.119 --> 0:25:19.439 you'll see some like yesterday you had P and G 0:25:19.640 --> 0:25:22.159