Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom keene Jaily.
Speaker 1: 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. Well,
Speaker 1: let us get right to it. We've got lots in
Speaker 1: store here on our simulcast, and we welcome all of
Speaker 1: you right now. The Secretary of Labor of the United States,
Speaker 1: Eugene Scalia. Of course, we're thrilled to have you on,
Speaker 1: Mr Secretary, after this Supreme Court decision, how will the
Speaker 1: Department of Labor adapt and adjust immediately to this historic decision? Well, Tom,
Speaker 1: good to be with you, and yes, it is an
Speaker 1: important decision the Court issued yesterday. We at the Labor
Speaker 1: Department don't have primary responsibility for a minister during that
Speaker 1: particular law. The Equal Employment Opportunity Commission, the e o
Speaker 1: C is the agency charge with administering Title seven. But
Speaker 1: we're certainly reading through the Court's decision and the Court
Speaker 1: has ruled and will adhere to that. I mean, it's
Speaker 1: very important here to understand, Mr Secretary, that you will
Speaker 1: set the tone and we would suggest that Gene Scalley
Speaker 1: has been doing that for years. Mr Secretary, there's ideas
Speaker 1: here of religious exemption to the normal labor of this
Speaker 1: country that businesses can say, no, we digress from this ruling,
Speaker 1: We're not going to do it. Do you think that
Speaker 1: will be evident immediately? And how should E O C
Speaker 1: or labor respond? Well, Tom, I think that was one
Speaker 1: of the issues that Justice Gorsage, in his opinion for
Speaker 1: the majority side, stepped a little bit. He acknowledged that
Speaker 1: people of faith and religious institutions particularly uh might be
Speaker 1: affected more than other institutions by this decision. Uh, uh
Speaker 1: and and uh, and he said that's an issue that
Speaker 1: will address some other day. So I think that was
Speaker 1: one of the issues that decision potentially raises that Uh, Well,
Speaker 1: we'll get addressed by the courts down the road. The
Speaker 1: major the dissenters would have liked the court to address
Speaker 1: that more fully, but the majority didn't. And so we'll
Speaker 1: we'll take a closer look and see what implications that
Speaker 1: has for our programs. Mr Secretary, thank you for addressing
Speaker 1: these issues. The issue right now, Sir, is double digit unemployment.
Speaker 1: Give us an update on what your micro data sees
Speaker 1: of a depression level joblessness in America. Well, Tom, I
Speaker 1: have to say, I think the comparisons to the Depression
Speaker 1: only get you so far. We have had very high unemployment.
Speaker 1: We've had too many Americans put out of work, uh,
Speaker 1: and we know the hardship that's meant for them and
Speaker 1: their families. At the same time, we got here by
Speaker 1: a very different route than we got into the Great Depression,
Speaker 1: and I think the jobs report we put out what
Speaker 1: ten eleven days ago suggest that we're going to come
Speaker 1: out of it by a different route. That we put
Speaker 1: two point five million Americans back to work in the
Speaker 1: month of May, and I think that's a trend that's
Speaker 1: contuning right now. As you know, that data was a
Speaker 1: month old. Uh. There's been a lot of reopening since then,
Speaker 1: so I think people are getting back to work. It is,
Speaker 1: of course important that that happened safely, and that's something
Speaker 1: we keep an eye on. But I think we're making
Speaker 1: real headway on the employment picture right now. Let's talk
Speaker 1: about that, miss the Secretary, do you see any evidence
Speaker 1: right now whatsoever that the enhanced unemployment benefits that were
Speaker 1: past is holding back re hir Rank, we hear uh, John.
Speaker 1: We hear concerns about that, raised UH anecdotally by a
Speaker 1: number of employers. That point that they make is that
Speaker 1: with the enhanced unemployment benefit provided by the federal government,
Speaker 1: which is UH six hundred dollars a week, you put
Speaker 1: that on top of the state benefit, and people can
Speaker 1: be making between fifty and fifty five thousand dollars on
Speaker 1: an annualized basis on unemployment, which is obviously significantly more
Speaker 1: than one typically sees. And the concern is they'll not
Speaker 1: return to work. What we'll keep an eye on that.
Speaker 1: That benefit, as you know, expires at the end of July. UH.
Speaker 1: Congress set that sunset in anticipation that we wouldn't be
Speaker 1: shutting down our economy at that point. We'd have reopened
Speaker 1: it and we'd want people to be going back to work.
Speaker 1: And Mr Secretary, I remember when we spoke to you
Speaker 1: last you said that you do expect those enhanced unemployment
Speaker 1: benefits to expire in July, and we have heard the
Speaker 1: same from other administration officials. What could make you change
Speaker 1: your view? In other words, what data could come in
Speaker 1: weaker than expected that would make you think, you know what,
Speaker 1: even if people are making more than they had previously made.
Speaker 1: It doesn't mean that they necessarily aren't going back to
Speaker 1: work because they don't want to, and at least they
Speaker 1: can continue to pay their rent. Well, I think those
Speaker 1: are a couple of different questions. Will look a variety
Speaker 1: of data coming in, as you know, obviously, on July two,
Speaker 1: we'll put Art put out our report for June. I
Speaker 1: think that report will show many more jobs added to
Speaker 1: the economy. But let's look at that report, watch other trends, UH,
Speaker 1: and see what additionals additional measures may be needed. I
Speaker 1: don't think that, uh, it's going to be continuing that
Speaker 1: six benefit, which again was a very important, valuable benefit
Speaker 1: for American workers while we were closing our economy, but
Speaker 1: it was a blunt instrument UH that was adopted UH
Speaker 1: in March as things were closing so quickly in light
Speaker 1: of some real limitations that the states had in their
Speaker 1: unemployment insurance systems. I think we've learned a lot since then,
Speaker 1: and I don't see that as the policy going forward.
Speaker 1: Let's talk about the policy going forward. Repulsed this morning
Speaker 1: of a one trillion dollar infrastructure program. It's the sectary.
Speaker 1: Are you working with the Department of Transportation on that plan.
Speaker 1: Their discussions obviously, as you would want throughout the administration
Speaker 1: about what the right steps are for the economy. And
Speaker 1: we certainly appreciate the UH implications that infrastructure bill could
Speaker 1: have throughout the economy, including for employment, and and those
Speaker 1: are among the things that are being talked about. Infrastructure
Speaker 1: one of them. And once Triti in dollar plan, well,
Speaker 1: there's been different numbers put on it. Um John, I'll
Speaker 1: just leave it at saying that certainly something that's being
Speaker 1: talked about, and there's been some interest and expressed in it.
Speaker 1: But we're watching the economy. You know. One of the
Speaker 1: things that I've said on this show before is one
Speaker 1: of the real marks of the virus is how swiftly
Speaker 1: things have changed. And so I think it's important to
Speaker 1: take the time now to watch the economy, developed watch
Speaker 1: the reopening, see how it progresses, and not rush in
Speaker 1: UH to a play from the playbook that we used
Speaker 1: back in March, for example. But we'd love to carry
Speaker 1: on the conversation, say so, hopefully we can get you
Speaker 1: back on soon. Because this labor market healed quickly in
Speaker 1: the first month. I'm not sure how many economists think
Speaker 1: it will continue very quickly, and we'd love to get
Speaker 1: your input on a continued basis of the day to
Speaker 1: tinues to come through Eugene Scalia that the U S.
Speaker 1: Secretary of Labor on this labor market and the club economy.
Speaker 1: For those of us of a certain vintage, there's a
Speaker 1: way that you read research on the street. At JP Morgan.
Speaker 1: The way was always Friday evening. You would get the
Speaker 1: report from Robert Melman, and it would ruin your Friday
Speaker 1: evening because you would start reading it and you'd have
Speaker 1: to go for fifteen or even twenty pages. The tradition
Speaker 1: continues with Michael Faroli putting together a jewel of a
Speaker 1: report for Global Wall Street every Friday evening. He joins
Speaker 1: us now the chief US economists for JP Morgan. Michael,
Speaker 1: what you're looking at on the consumer are little micro
Speaker 1: details like charge card dynamics. What do you see right
Speaker 1: now from the American consumer? Well, what we see in
Speaker 1: May was a pretty nice rebound from the depths of April.
Speaker 1: We see that in a variety of metrics, as you
Speaker 1: mentioned at Daily uh Dad, on charge cards, a number
Speaker 1: of other indicators which seemed just as I said, a
Speaker 1: very strong rebound in May we'll find out an hour's
Speaker 1: time exactly how strong. And it looks like that was
Speaker 1: continuing into into June. We already have a strong indication
Speaker 1: of this rebound in May auto sales report, which increased
Speaker 1: for two uh So, you know, I think, in line
Speaker 1: with the comments earlier, the early part of this recovery
Speaker 1: are going to be in a way easy because you're
Speaker 1: coming off of such little levels, and I think the
Speaker 1: easy part should be made June, perhaps July. I think
Speaker 1: after that the story gets a little more interesting. But
Speaker 1: it does look like they should be pretty strong for
Speaker 1: real consumer sending. So let's get to like some of Mike.
Speaker 1: Let's just jump out to Walker's late August going into September.
Speaker 1: If we haven't passed another bill down in Washington to
Speaker 1: how this economy to support people who are unemployed in
Speaker 1: a bigger way, to incentifize corporates to rehid workers. What happens, Well,
Speaker 1: it's not necessarily the death metal of recovery, but I
Speaker 1: think further stimulus would be nice insurance against a relapse
Speaker 1: into more economic weakness. We know for a fact that
Speaker 1: given the current policy environment, you're gonna have a pretty
Speaker 1: big decline in real disposable income in the third quarter.
Speaker 1: And the reason is you pack so much of that
Speaker 1: stimulus into the second quarter, whether it's the stimulus, checks,
Speaker 1: expanded unemployment benefits, the paycheck protection program. And so we
Speaker 1: really have to be confident that the economy has its
Speaker 1: own recovery dynamics in place for there to be no
Speaker 1: need for further fiscal stimulus. I don't think it's an
Speaker 1: absolute necessity or a certainty that we need it, but
Speaker 1: it certainly would be nice insurance against against the relap
Speaker 1: into relapse into further weakness as we get into the
Speaker 1: late summer. So my cow past established a signpost to
Speaker 1: determine whether we need the extra package or not. The government,
Speaker 1: the administration down in Washington, are going to take the
Speaker 1: next month to look over the day, to pour over
Speaker 1: the data and draw conclusion as to what we do
Speaker 1: and donate. Is that too early? Uh So? I think
Speaker 1: part of the problem here is, you know, the classic
Speaker 1: fool in the shower, uh challenge with setting either fiscal
Speaker 1: or monetary policy when it actually lack. And so if
Speaker 1: we have to wait until we actually see the data
Speaker 1: in the late summer early fall, it may be too late.
Speaker 1: Given the implementation lacks and so forth. So, uh, you know,
Speaker 1: Congress and the Fed have a tough job here, which
Speaker 1: is to make a judgment on what the economy is
Speaker 1: going to look like. And we fourth quarter and act now,
Speaker 1: and I think if we wait until late July, that
Speaker 1: may may not pass that test of being a little
Speaker 1: forward looking in how we set policy. And this goes
Speaker 1: to where actually exactly where I wanted to go, this
Speaker 1: idea that yes, the economy is recovering, but there still
Speaker 1: are more than twenty million Americans collecting unemployment benefits. There's
Speaker 1: still are companies going bankrupt at an accelerating pace, depending
Speaker 1: on which part of the economy you're looking at. And
Speaker 1: it raises a question of whether the rebound that we're
Speaker 1: seeing is largely confined to markets or whether the economy
Speaker 1: is keeping pace. And I'm wondering, from your perspective, Mike,
Speaker 1: given the fact that you try to square the markets
Speaker 1: with the economy, how much of the federal reserve stimulus,
Speaker 1: of the of the rebound that we're seeing in stock
Speaker 1: and bond prices, how much of that is getting into
Speaker 1: the real economy. So the first thing I would say
Speaker 1: is it does look like the real economy, UH turned
Speaker 1: the corner in May. I think we should see some
Speaker 1: confirmation of that later this morning. We already saw that
Speaker 1: in the jobs datas, and the economy is picking up. UH. Now,
Speaker 1: it is true that when it comes to markets, publicly
Speaker 1: traded companies probably employ only about a third of the workforce.
Speaker 1: So that leaves about two thirds of the workforce that
Speaker 1: is employed by companies that aren't listed on the stock exchanges,
Speaker 1: so that don't have listed bonds at the FETE is buying.
Speaker 1: That doesn't mean, of course, that the that actions don't
Speaker 1: have trickled on effects to the rest of the economy.
Speaker 1: And of course some of those actions will support UH
Speaker 1: non corporate behavior for example, for example, lower mortgage rates. Certainly,
Speaker 1: the housing sector is one area the economy that looks
Speaker 1: like it's holding in reasonably well here, and I think
Speaker 1: a little mortgage rates have to have some some role
Speaker 1: in that. So it's true that you know, Look, I
Speaker 1: think what you're gonna hear from Powell later this morning
Speaker 1: is that the Fed's actions are designed entirely to help Americans,
Speaker 1: American households. And you know that said, there are only
Speaker 1: limited tools that the FED has to to support the comedy, Michael.
Speaker 1: I know that Bruce Casman has a bottle and there's
Speaker 1: a genie in it on his desk, but I'm sorry
Speaker 1: the genies out of the bottle. Let's pretend we're at
Speaker 1: the Booth School seminar in Manhattan. Must attend, folks for
Speaker 1: anyone in economics, and we have to look at the
Speaker 1: central bank history of buying stuff. They can't stop, can they?
Speaker 1: Once they start? It's really really hard to say no
Speaker 1: to buying the next marginal bond or in some banks history,
Speaker 1: to buy the next marginal share of Apple computer. Do
Speaker 1: you have any confidence that this FED can behave well?
Speaker 1: So to think? Two points I would make at least
Speaker 1: one is that the FED has stopped in the past.
Speaker 1: After QUE three, we had to took a taper tantrum
Speaker 1: for them to stop, but they were able to h
Speaker 1: pull that off. Uh. Secondly, and maybe something that the
Speaker 1: markets aren't fully appreciating here is that the two corporate
Speaker 1: credit facilities which have received so much attention over the
Speaker 1: past twenty four hours, those are set to expire on
Speaker 1: September three. And so the FED, I think deliberately here
Speaker 1: when they implemented these programs in March set expiration dates
Speaker 1: because they didn't want them to be lingering on now.
Speaker 1: Of course they can extend to those expiration dates, but
Speaker 1: it will take a judgment of the committee that economy
Speaker 1: is under performing. So I do think the Fed made
Speaker 1: a reasonable program design choice here whereby UH these should
Speaker 1: be self expiring provided the economy is in a decent
Speaker 1: position by the end of the third quarter. Mike, what
Speaker 1: would you ask J Powell today if you were on
Speaker 1: the Senate Banking Committee? I think one thing I would
Speaker 1: ask him is why so there's been some indication that
Speaker 1: that is the next big step is going to come
Speaker 1: in September? I would I would ask him why wait
Speaker 1: until September? Why not act last week? Or why not
Speaker 1: act in late July. Yes, we don't know the shape
Speaker 1: of the recovery in two or three years from now,
Speaker 1: but it's almost certain to be um in a rather
Speaker 1: depressed state. So I would I would ask him why
Speaker 1: why wait this program get ahead? From me? I'm sure
Speaker 1: you'd have more than one question my Ferrati that of
Speaker 1: Jack Mulligan, the chief US economist. If you're ever so lucky.
Speaker 1: In science, you can read Leninger's bio chemistry and say, well,
Speaker 1: I sort of wandered by it. Then there are others
Speaker 1: that master it. Peter Hoe tested that l and then
Speaker 1: in biochemistry at Rockefeller University and then onto wild Cornell.
Speaker 1: He is, without question with Mr Fauci, our leader on vaccines.
Speaker 1: Peter Hotez joins us this morning from Baylor at University. Peter,
Speaker 1: I take great issue with the media silliness over the
Speaker 1: second wave. It's a three variable differential equation. Are we
Speaker 1: looking at a second wave or is it just the
Speaker 1: normative expansion of a virus in pandemic? Well, I can
Speaker 1: uh really articulate. First of all, thanks for having me,
Speaker 1: and I think you're the only major news anchor that
Speaker 1: knows what managers biochemistry is though. That's really cool. Uh.
Speaker 1: With regards to uh, what's happening here in Texas, what
Speaker 1: happened was we did a good job. Initially. We we
Speaker 1: saw what was happening in New York. We went on
Speaker 1: lockdown and in the middle of March and we did everything.
Speaker 1: We never got that surge like you saw in New York.
Speaker 1: But then we couldn't keep it together. We couldn't hold
Speaker 1: it together. The modelers told us we had to keep
Speaker 1: this in place throughout the month of May. We opened
Speaker 1: it up towards the end of April, and now we're
Speaker 1: seeing a massive resurgence. So I don't know if so
Speaker 1: much as the second wave meaning reintroduction, is just that
Speaker 1: we never we never brought it down to zero to
Speaker 1: containment mode like we could have. And now the numbers
Speaker 1: are flaming precipitously in Houston and Dallas and in Arizona.
Speaker 1: Now also, you were scrambling to acquire to invent to
Speaker 1: give us a vaccine. Give us an update. Yeah, so
Speaker 1: we have. We're we've developed a low cost recombinant protein
Speaker 1: vaccine made any East. The same technology used to make
Speaker 1: the recombinant hepatitis the vaccine used all over the world,
Speaker 1: and it's made locally in India and Brazil and Indonesia
Speaker 1: and Bangladesh, and we decided we're going to use that
Speaker 1: technology to make a low cost, affordable, highly accessible COVID
Speaker 1: nineteen vaccine. And it's going great guns. It looks really promising,
Speaker 1: and we've been engaging the Food and Drug Administration to
Speaker 1: move that along and we think this could be one
Speaker 1: of the first global health vaccines used. All of the
Speaker 1: US used everywhere and made locally. So the problem is
Speaker 1: we're not a farmer company, so we don't get all
Speaker 1: the stuff that you hear about what the operation works
Speaker 1: feed companies. In terms of big time government assistance, we're
Speaker 1: getting some from the n i H. But you know
Speaker 1: we're raising money privately too, and hopefully we're gonna enough
Speaker 1: the big partnership with India. We hope in the in
Speaker 1: the coming days of the week dr Hotels. We saw
Speaker 1: from Moderna's CEO that they're expecting that a vaccine, if
Speaker 1: all things go well, could be ready by Thanksgiving. I'm wondering,
Speaker 1: for your perspective on the front lines, how close are we.
Speaker 1: I mean, what's the time frame not only forgetting a
Speaker 1: vaccine that is effective and has proven safe, but also
Speaker 1: can be widely distributed as your talking about. Yeah, certainly
Speaker 1: not by Thanksgiving. What's going to happen is you're going
Speaker 1: to UH and you we're going to see a number
Speaker 1: of the warp speed vaccines enter into UH Phase three
Speaker 1: clinical trials beginning in July UH and then it's probably
Speaker 1: gonna take about a year to collect all of the
Speaker 1: data that we need UH to show that the vaccines
Speaker 1: actually work and that the vaccines are actually safe. And
Speaker 1: that's the part you can't rush. I mean, oftentimes this
Speaker 1: is sort of in the biotechs do this, and even
Speaker 1: the White House does this. They they frame this as
Speaker 1: a manufacturing issue. That like, they talk about it in
Speaker 1: the same context that we'll talk about making ventilators or
Speaker 1: diagnostics kits. And it's not the same. Yes, there are
Speaker 1: manufacturing issues, but the big hurdle is you need to
Speaker 1: give it the time to show that it works and
Speaker 1: it's safe. Uh. And that means doing a thirty person
Speaker 1: study and I don't I don't see a path by
Speaker 1: which you can collect enough safety and data showing that
Speaker 1: it works before the end of the year. So I
Speaker 1: more likely in the in the middle of next year
Speaker 1: at the earliest. And even then that would be a
Speaker 1: world dance speed record. But I don't know where these
Speaker 1: you know, some of the c e O s and
Speaker 1: some of the some of the people coming out of
Speaker 1: the White House day we're going to have it by
Speaker 1: the fall. I just don't see how that can happen.
Speaker 1: Doctor appreciate time this morning. As always, I'm looking forward
Speaker 1: to getting you back on the program that was Dr
Speaker 1: Peter hot As that of the Baylor College of Medicine,
Speaker 1: Chairman on the Hill for two days. Used to be
Speaker 1: called a Humphrey Hawkins. You can't remember what they call
Speaker 1: it right now. Always interesting to get the Q and
Speaker 1: I always different from the Senate versus the rabble in
Speaker 1: the House. It'll be interesting to see you. Wonder if
Speaker 1: they'll address negative interest rates somehow. I don't think it
Speaker 1: will come up. We can do that with our guests.
Speaker 1: Kenneth Rogoff joins us, of course, at Harvard University. He
Speaker 1: has been a wonderful supporter of Bloomberg on the Economy
Speaker 1: and Bloomberg Surveillance over the years, and we're thrilled that
Speaker 1: he could join us right now. Can I have to
Speaker 1: ask you about your courageous book, The Curse of Cash, Folks.
Speaker 1: It was my book of the Year a few years ago.
Speaker 1: Ever important now can give us an update on the
Speaker 1: efficacy of negative interest rates in the United Kingdom and
Speaker 1: in the United States of America, given how their financial
Speaker 1: systems are so different from Europe, would negative interest rates
Speaker 1: help well? Right now? There's so much going on. I
Speaker 1: don't think it would be a good idea to do
Speaker 1: something so experimental this minute, But if in two years
Speaker 1: after the government is you know, gone through many more
Speaker 1: stimulus spending measures, after the fellow reserve has you know,
Speaker 1: basically tried to guarantee ever been a credit provider of
Speaker 1: last resort in the economy for a long time, if
Speaker 1: things still aren't growing, if the interest rates are very low,
Speaker 1: I absolutely think that this should be on the table.
Speaker 1: It's just silly to take it off the table. And
Speaker 1: yes it would work it but it has to be
Speaker 1: done the right way. I don't think even Europe has
Speaker 1: done it the right way. You have to deal with
Speaker 1: cash hoarding, uh so that you can make interest rates
Speaker 1: very negative. But let it be noted that the studies
Speaker 1: coming out of the European Central Bank have by and
Speaker 1: large been finding that negative interest rates have worked fairly well,
Speaker 1: haven't caused the problems people said. There has been passed
Speaker 1: through in the banking sector from you know, certainly the
Speaker 1: healthy banks, and they find the effects on investment are
Speaker 1: very similar to normal monetary policy. And I think that's
Speaker 1: what we could expect in the United States and the
Speaker 1: United Kingdom. Are we nationalizing our bond market? I mean
Speaker 1: that's the question that Chairman Paul is going to get
Speaker 1: from the Senate today, all all of these different programs,
Speaker 1: including announcement yesterday that they will in some way and
Speaker 1: let's say it's efficacious, they will buy corporate bonds troubled
Speaker 1: and less troubled. Keen, is it anything but a mass
Speaker 1: nationalization of our debt? Well, it depends on what happens next.
Speaker 1: So if it turns out that things get better pretty quickly,
Speaker 1: this clearly will you look like a pretty low cost
Speaker 1: move that had a big benefit. But you know, it's funny.
Speaker 1: Usually in crises before this, uh, they would say, well,
Speaker 1: here's a company that we think is solvent, but there's
Speaker 1: a liquidity problem. So we're going to provide liquidity and
Speaker 1: make sure that they can still get financing and not
Speaker 1: needlessly go bankrupt. That's, you know, usually the main idea.
Speaker 1: The thing is, if the virus goes on, there are
Speaker 1: a lot of companies that will need to change radically.
Speaker 1: They will be liquid because of the FED, but not
Speaker 1: solve it because of the virus. And I think they're
Speaker 1: going to run into trouble. They're taking a gamble. It's
Speaker 1: a smart gamble perhaps, but absolutely it's a gamble. Of course,
Speaker 1: this can't go on forever. You can't just have the
Speaker 1: taxpayer guarantee every credit in the economy, but you could
Speaker 1: also have good morning, Professor Rogolf, you could also have
Speaker 1: a situation where you have a second wave, but actually
Speaker 1: it's only pockets of the economy that are closed down.
Speaker 1: And you know, how likely is it that we have
Speaker 1: a second lockdown like we saw in the last couple
Speaker 1: of months. Well, that's a very good point. I mean,
Speaker 1: I don't know. I mean I think I wonder if
Speaker 1: we had to do it again, if we locked down
Speaker 1: in the same way. There's certainly lots of papers floating
Speaker 1: around saying that they're smarter ways to do it. I
Speaker 1: don't know. Uh, you know, and it's not just what
Speaker 1: the government does. That's how people react. So clearly, if
Speaker 1: they're just localized problems that can be contained, it not
Speaker 1: an issue. But the likelihood of a major second wave,
Speaker 1: you know, from the epidemiologists I speak to, is very
Speaker 1: very high going into late fall and winter. I mean,
Speaker 1: maybe we'll be able to deal with it better, but
Speaker 1: you know that that's that's the concern. Uh. And you know,
Speaker 1: even something that was enough to scare people back into
Speaker 1: their houses, So there there's there's some things like restaurants, hotels,
Speaker 1: cruise ships and things which feed into those which are
Speaker 1: just going to need to be restructured, and so UH
Speaker 1: the questions how far that's going to go. Are we
Speaker 1: going to still be in cities the same way that
Speaker 1: we were we go to smaller and middle size cities.
Speaker 1: I don't know. I suspect there's gonna be a lot
Speaker 1: of restructuring. And we haven't mentioned the political change, which
Speaker 1: is going to certainly have an impact on UH corporations.
Speaker 1: I mean, I don't think this is just you know,
Speaker 1: I think we're going to see an acceleration of the
Speaker 1: movement for redistribution of income deglobalization. These are going to
Speaker 1: have impacts on some firms and they're not all going
Speaker 1: to remain in business. We've been talking about deglobalization quite
Speaker 1: some time. Do you think it will be a very
Speaker 1: stark globalization and you know, or are we going to
Speaker 1: quickly get back to normal? I don't want to use
Speaker 1: the word quickly, but you know, how long will it
Speaker 1: take to go back to more normal? I mean, we've
Speaker 1: had waves of globalization and deglobalization in the past, and
Speaker 1: my views that we were headed for a wave of
Speaker 1: deglobalization anyway for political reasons, not economic reasons. Uh, you know,
Speaker 1: the Trump Sanders two thousand and sixteen kind of catalyzed that,
Speaker 1: and this is gonna make that go further. They're going
Speaker 1: to be things brought on shore for national security reasons,
Speaker 1: and then there's going to be a lot of other
Speaker 1: things brought on shore supposedly for national security reasons, like
Speaker 1: Canadian steel, but you know not, and so I think
Speaker 1: it'll be pretty pretty significant. A lot of countries are
Speaker 1: are are nervous after this and again this push you know,
Speaker 1: to try to um say strength and labor unions in
Speaker 1: the United States. That's hard to do when you remain
Speaker 1: very highly globalized, right Ken, I know that at Harvard
Speaker 1: for years, you've studied the course, you've taught the course
Speaker 1: rather free lunch three oh two? Can you explain the
Speaker 1: free lunch of forever at the zero bound? The dot
Speaker 1: plot chart goes out two years at the zero bound.
Speaker 1: Who knows after that? And all of our viewers and
Speaker 1: listeners instinctively know there's got to be a price to
Speaker 1: that free lunch at the zero bone? What is the price? Well,
Speaker 1: I mean, it depends on what we do. Obviously, so
Speaker 1: I mean, I think right now the global normal global
Speaker 1: real interest rate is negative. And so given that inflations
Speaker 1: very low, and that they're not prepared to use negative
Speaker 1: interest rates, which is really the only way to raise
Speaker 1: inflation to target or above target if they wanted to,
Speaker 1: I think interest rates are going to set at zero
Speaker 1: for a long time. The concern really is this idea
Speaker 1: that therefore, UH companies can borrow as much as they
Speaker 1: want and the government will bail them out. The government
Speaker 1: can borrow as much as it wants and the settle
Speaker 1: Reserve will baild it out, And of course that is nonsense.
Speaker 1: Their limits to these things. We're doing the right thing now,
Speaker 1: but of course they can't go on forever. I suspect
Speaker 1: we're going to see it go on for a long time.
Speaker 1: Can roll off with this right now. And Richards is
Speaker 1: Whether's Fidelity Internationals. He has a fabulous acuity about investment
Speaker 1: management and about the trends that we see in finance
Speaker 1: and economics. And Richards, I want to talk to you
Speaker 1: about the quiet, silent thing that's out there. It's witnessed
Speaker 1: in the new dot plot, which is a flat line
Speaker 1: at the zero bound out two years Fotty b roll
Speaker 1: In Oil just told us oil demand out two years
Speaker 1: will suffer, and that is people like you have to
Speaker 1: recalibrate what we're going to return long term. Are you
Speaker 1: working at fidelity with an actual assumption under four percent
Speaker 1: per year return? M and interesting, interesting question. I mean,
Speaker 1: I think, I think what you're going to see is
Speaker 1: quite a wide dispersion of returns what the overall aggregate
Speaker 1: comes out to. It's, as we all know, in this environment,
Speaker 1: who can predict anything. I'm not going to pretend I'll
Speaker 1: have the crystal ball on that or undebitedly seeing is
Speaker 1: a much greater disparity between those who've got the cash
Speaker 1: flow of those who got the balance sheet and those
Speaker 1: who do not. And to try and sort of bring
Speaker 1: that back to real life, if you look at, for example,
Speaker 1: what the if you look at insurance company balance sheet
Speaker 1: right now and you look at the proportion of higher
Speaker 1: yielding assets that will typically be on it because of
Speaker 1: the way the accounting allows them to get a better
Speaker 1: a lot of capital up if you like, from high
Speaker 1: yield versus equity. For example, the FED action has a
Speaker 1: very direct impact on how robust that bounce sheet looks.
Speaker 1: So there's an awful lot as I mentioned earlier about
Speaker 1: this smoothing at the bottom of the v that has
Speaker 1: a direct impact on how certain sectors and has certain
Speaker 1: stocks within those sectors are resilient or not coming through this,
Speaker 1: which makes it really a stock pickers market. Okay, it's
Speaker 1: a start pickers market. But and Richards, I want to
Speaker 1: go back to the long term responsibilities of investment houses,
Speaker 1: like you know, your work with M and G years
Speaker 1: ago and your work now with Fidelity. Yesterday we had
Speaker 1: a California bomb show where we've decided we're going to
Speaker 1: leverage up to make the bogey to pay retirees. That's
Speaker 1: not in any of the textbooks, is it. No, it's
Speaker 1: absolutely not. And I think some of your other guests
Speaker 1: this morning, as as a real live economists rather than
Speaker 1: humble practitioners like me, well we'll have a really good
Speaker 1: insight into the complexities of some of that stuff. No,
Speaker 1: we are absolutely in new territory. And there is a
Speaker 1: strong argument that can be made that if you're a
Speaker 1: government or another entity and you can borrow along at
Speaker 1: practically zero interest rates, actually you can get a lot
Speaker 1: of productive capacity out of that. It just depends what
Speaker 1: you put that into So it comes back to the
Speaker 1: use of the capital as much of the simple act
Speaker 1: of borrowing, which will clearly determine the returns because we
Speaker 1: don't really know how is consumption, how is a basic
Speaker 1: economic consumption model going to be affected by what we've
Speaker 1: come through, And until we know what the job recreation
Speaker 1: is after this, when everyone comes off the government schemes,
Speaker 1: it's really difficult to see how the consumer is going
Speaker 1: to respond and how the consumer response is going to
Speaker 1: have a huge impact on whether some previously viable business
Speaker 1: models are still viable in the future. But if you
Speaker 1: have a viable business model and you can bet or low,
Speaker 1: then then clearly you have the chance to generate really
Speaker 1: good returns out of this. And talk to me a
Speaker 1: little bit about dividend cuts and how actually impacts investor
Speaker 1: decision making. So dividend cuts are you know, the signaling
Speaker 1: around dividend cuts are one of probably the most challenging
Speaker 1: things that we have to manage because dividends have been
Speaker 1: a large proportion of total return over the years, and
Speaker 1: that ability to reinvest those dividends and the compounding effect
Speaker 1: from that. There's been quite a lot of signaling from
Speaker 1: quite a lot of the companies that we look at
Speaker 1: where they have cut dividends, but it's in the recognition
Speaker 1: that it's not necessarily one and done, that there is
Speaker 1: a hope on an expectation as the broader economic environment normalized,
Speaker 1: whenever that might happen, that a return to some level
Speaker 1: of dividend plus some level of dividend growth is an expectation.
Speaker 1: So there is there is a feeling that not all
Speaker 1: the dividend cuts are clearly permanent, but some will be.
Speaker 1: And that's where it comes back to looking at the
Speaker 1: resilience of the balance sheet, looking at the cash that
Speaker 1: has been raised through equity issues, looking at what the
Speaker 1: underlying cash flow is. I think what we have to
Speaker 1: be really careful about when we pull all of that
Speaker 1: together into a portfolio is to make sure that when
Speaker 1: we are when we are selling our investment products and
Speaker 1: when investors are buying it, for example, an income funds,
Speaker 1: that they really understand is the income that is being
Speaker 1: paid out true income or is there is there an
Speaker 1: element of capital distribution within that? Because I think that's
Speaker 1: the risk as an individual investor that you can get
Speaker 1: into when you start to actually look at that income
Speaker 1: paying funds. Are you really sure you understand what you're
Speaker 1: buying within that? So it's not an easy and simple scenario. Here.
Speaker 1: Has active management, you know, shown its value during the crisis.
Speaker 1: I think it really has. I mean, when we've looked
Speaker 1: across I mean, you know, obviously generalities are always difficult,
Speaker 1: and I look at the funds that we look after,
Speaker 1: and we've definitely seen the types of funds that have
Speaker 1: a wider REMIT, that have a stronger thematic edge to
Speaker 1: them and perform better. And in particular, funds with a
Speaker 1: kind of e s G tilt to them r s
Speaker 1: G ratings stocks that we rate more highly in our
Speaker 1: own proprietary s G rating system unquestionably outperformed both on
Speaker 1: the equity side and interestingly on the debt side through
Speaker 1: the crisis. It's certain, you know, it's a relatively short
Speaker 1: time period to look at that in but that has
Speaker 1: been supported by data from other other types of index
Speaker 1: providers and so forth. So I think it does show
Speaker 1: you that active management done in the right way can
Speaker 1: really add value through this. But obviously it is quite
Speaker 1: specific to individual themes, to individual types of mandates that
Speaker 1: you have. But we're certainly comfortable and we've seen ourselves
Speaker 1: in net influ all through this year, pretty much into
Speaker 1: our active fonds, so it's an interesting picture. And thanks
Speaker 1: so much, And which was their fidelity at international? Thanks
Speaker 1: for listening to the Bloomberg Surveillance podcast. Subscribe and listen
Speaker 1: to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform
Speaker 1: you prefer. I'm on Twitter at Tom Keane before the podcast.
Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio