WEBVTT - Surveillance: Post-Virus Recovery with Dudley 0:00:09.840 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jailey. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.080 Bloomberg dot Com, and of course on the Bloomberg. The 0:00:27.160 --> 0:00:29.800 debt market is, of course with thermometer here and someone 0:00:29.880 --> 0:00:33.680 looking at what we're doing in fiscal stimulus and building 0:00:33.720 --> 0:00:36.960 out as a gentleman from the Massachusetts Institute of Technology, 0:00:36.960 --> 0:00:40.720 of Courses service to the world, at the International Monetary 0:00:40.760 --> 0:00:44.239 Fund under Madame Legarde as their head of Economic research, 0:00:44.280 --> 0:00:47.480 and now at the Peterson Institute, we're thrilled to bring 0:00:47.520 --> 0:00:52.199 to you now Olivier Blanchard. Professor Blanchard, you've written of 0:00:52.280 --> 0:00:56.000 whatever it takes, and that means the issuance of debt. 0:00:56.480 --> 0:01:00.920 Should we fear an issueance of trillions and trillions of 0:01:01.000 --> 0:01:06.400 dollars of American and indeed global debt. I think we 0:01:06.760 --> 0:01:10.039 don't have the choice, is the answer. We basically have 0:01:10.160 --> 0:01:13.160 to do whatever it takes, indeed to make sure that 0:01:13.200 --> 0:01:15.959 we fight epidemic and that we protect the people who 0:01:16.000 --> 0:01:19.680 we did need protection. Although it put bankruptcies for the 0:01:19.720 --> 0:01:23.640 most part so we'll have to spend it. Now what 0:01:23.800 --> 0:01:27.360 happens next, even the well goes to part we don't 0:01:27.400 --> 0:01:30.800 succeed in fighting the virus, which I think is they 0:01:30.800 --> 0:01:33.000 are micly scenario in which case, you know, having that 0:01:33.240 --> 0:01:36.000 it will be the least of our poems. But in 0:01:36.080 --> 0:01:38.880 the scenario which I believe in which we may have 0:01:39.040 --> 0:01:42.400 to increase the ratio of that to g d P 0:01:42.680 --> 0:01:47.199 by ten to thirty for I think we can well 0:01:47.760 --> 0:01:51.280 uh sustain it. The reason is that interest rates, as 0:01:51.320 --> 0:01:54.480 you know, have verre extremely low before the crisis. I 0:01:54.520 --> 0:01:57.680 even though now and we'll probably remain almost sure, you 0:01:57.720 --> 0:02:02.000 remain very lowful for the you know next size ten years, 0:02:02.200 --> 0:02:04.919 which means that at those rates you can actually carry 0:02:04.960 --> 0:02:08.520 that side levels of the teachers, the government and not 0:02:08.680 --> 0:02:11.560 be in trouble. The interest payments are very small. So 0:02:11.600 --> 0:02:13.440 I think we have to do it. We don't have 0:02:13.520 --> 0:02:16.760 a choice, and I think it will be okay. Olivia 0:02:16.880 --> 0:02:19.639 President drag the former ECP president, wrote in the Financial 0:02:19.639 --> 0:02:21.280 Times in the last couple of weeks that we needed 0:02:21.280 --> 0:02:24.240 to see a big, big transfer of risk onto the 0:02:24.240 --> 0:02:26.239 government's balance sheet and it needed to happen quickly. And 0:02:26.280 --> 0:02:29.679 we're seeing that worldwide Olivia, Can we recognize some of 0:02:29.720 --> 0:02:31.840 the risks associated with that? What are the risk the 0:02:31.840 --> 0:02:34.040 downside risk that you're thinking about as we come out 0:02:34.040 --> 0:02:36.919 of this health crisis. After governments have put forward their 0:02:36.960 --> 0:02:41.000 balance sheet and transferred massive amount of risk from the 0:02:41.160 --> 0:02:44.640 corporate sector, from the household sector onto their own balance sheets, 0:02:45.960 --> 0:02:49.400 they think in general, transferring risk from the private sector 0:02:49.480 --> 0:02:52.440 to the public sector is the thing to do when 0:02:52.560 --> 0:02:55.400 day's risk and you want to put it somewhere. The 0:02:55.480 --> 0:02:58.240 reason is that the government has a tool of the 0:02:58.240 --> 0:03:00.920 private sector doesn't have. In the prior tector cannot just 0:03:01.480 --> 0:03:04.200 increase prices on what it sells in order to get 0:03:04.240 --> 0:03:06.680 more revenues, will sell less, so it really doesn't have 0:03:07.440 --> 0:03:10.639 much much room to adjust to a high that the 0:03:10.720 --> 0:03:13.200 government has that room, it's not a pleasant one, but 0:03:13.320 --> 0:03:16.320 it can increase taxes, it can decrease spending, and it 0:03:16.400 --> 0:03:18.160 can do it on the scale that you know, no 0:03:18.280 --> 0:03:22.680 private actor or combination of private actors can do on 0:03:22.760 --> 0:03:25.240 their own. So it seems to me that's exactly the 0:03:25.320 --> 0:03:27.120 right thing to do in the right thing to the 0:03:27.240 --> 0:03:29.520 right way to think, which is you want to transfer 0:03:30.240 --> 0:03:33.480 the risk to the of the acceptor. In normal times 0:03:33.520 --> 0:03:35.360 you don't want to do this because you want people 0:03:35.440 --> 0:03:37.440 to be aware of the risks are taking. But in 0:03:37.480 --> 0:03:41.320 this case, nobody is guilty of having made the virus come. 0:03:41.760 --> 0:03:44.280 This is an unexpected event. It's not the result of 0:03:44.320 --> 0:03:47.280 that behavior, in which case, yes, you want to transfer 0:03:47.320 --> 0:03:51.120 the risk to the public sector. Olivia. Perhaps people are 0:03:51.120 --> 0:03:53.720 not responsible for the virus. But there has been some 0:03:53.760 --> 0:03:57.000 behavior that some people think has been bad or imprudent 0:03:57.040 --> 0:04:00.000 in terms of borrowing a lot of money, hyper level 0:04:00.000 --> 0:04:03.120 reaging up balance sheets and using that cash to buy 0:04:03.120 --> 0:04:06.360 back shares or pay out dividends or pay out private equity. 0:04:06.800 --> 0:04:08.920 Uh pay out And I'm just I'm wondering where do 0:04:08.960 --> 0:04:10.960 you draw the line. I mean, I'm talking about FED 0:04:11.480 --> 0:04:14.240 New York FED, the former New York FED President Bill Dudley, 0:04:14.280 --> 0:04:17.599 and his comment basically, this creates incredible moral hazard in 0:04:17.640 --> 0:04:20.000 central banks and governments should not bail everyone out. Do 0:04:20.080 --> 0:04:23.839 you agree, Yeah, you don't want to bail it out 0:04:23.839 --> 0:04:25.400 of their way of firms which we are going to 0:04:25.440 --> 0:04:29.120 go fast before independence of the crisis that were I 0:04:29.120 --> 0:04:32.680 mean I think that you know, most terms were responsible 0:04:32.720 --> 0:04:35.040 and it was probably okay to actually issue that given 0:04:35.080 --> 0:04:38.240 how cheap it was, but Bobby, some firms went too 0:04:38.240 --> 0:04:42.279 far and those terms absenter crisis would probably have gone 0:04:42.400 --> 0:04:46.200 day up. You don't want to say both now. The 0:04:46.279 --> 0:04:48.200 problem so, in fact is what you want to do 0:04:48.320 --> 0:04:51.279 is basically make sure that you know the effects of 0:04:51.279 --> 0:04:53.960 the crisis, that no more is what you basically take 0:04:54.040 --> 0:04:57.560 on as as as as a sake. Now it's very 0:04:57.560 --> 0:04:59.719 difficult to do. So you basically have to use some 0:05:00.000 --> 0:05:03.200 anket method of the time being in which you're probably 0:05:03.200 --> 0:05:06.440 going to save some firms we should not be saved 0:05:07.000 --> 0:05:09.560 in order to save those which need to be saved. 0:05:09.920 --> 0:05:12.560 You know, this is exactly the savings getting money to 0:05:12.600 --> 0:05:15.520 the people. Ideally, you want to give money to the 0:05:15.560 --> 0:05:18.320 people who actually really needed to basic key going buy 0:05:18.360 --> 0:05:21.599 bread and food next week. But let's say difficult. So 0:05:21.760 --> 0:05:24.560 what we have which is not best, which is not 0:05:24.640 --> 0:05:27.560 good but probably best, is these checks that we're going 0:05:27.600 --> 0:05:29.560 to send. Some of these checks are going to go 0:05:29.640 --> 0:05:32.760 to people absolutely do not need it. Okay, it's the 0:05:32.800 --> 0:05:35.760 same thing for firms. So yes, I don't think there's 0:05:35.760 --> 0:05:38.880 anymore has it involved at this stage, but there's a 0:05:38.960 --> 0:05:43.240 possibility that we are going to help firms which probably 0:05:43.480 --> 0:05:46.680 should not have been helped small costs. Today if you're 0:05:46.720 --> 0:05:50.280 just joining us with us, Olivier Blanchard of the Pearson Institute, 0:05:50.560 --> 0:05:52.960 Professor Blanchard, you've been out to watch at the i 0:05:53.120 --> 0:05:56.760 m F. When crisis occurs, Ms Gorgyav is going to 0:05:56.839 --> 0:06:00.360 have her hands full, to say the least our emerging markets. 0:06:00.440 --> 0:06:04.880 Now in the dynamics there of crisis different than previous 0:06:04.960 --> 0:06:07.839 crises or is it the same old, same old for 0:06:08.400 --> 0:06:15.719 beleaguer em economies because webs common this time is with 0:06:15.880 --> 0:06:20.640 respect to financial crisis, which the capital is a capital outslows, 0:06:20.720 --> 0:06:23.080 and there's always the data for a country to basically 0:06:23.360 --> 0:06:26.880 capital leaves either have very large appreciation and which you 0:06:27.000 --> 0:06:31.520 have dollar that it becomes incredibly expensive. Banks find themselves 0:06:31.520 --> 0:06:34.520 short of funds. So that's common that has to be 0:06:34.600 --> 0:06:37.440 dealt with. But you add to this the original cause, 0:06:37.480 --> 0:06:40.920 which is the virus, and many of these countries just 0:06:41.000 --> 0:06:47.240 don't have the technical equipment and human equipment to deal 0:06:47.320 --> 0:06:49.680 with the virus. They don't have the money. And in 0:06:49.720 --> 0:06:54.279 addition you have these incredibly stupid oil price war which 0:06:54.320 --> 0:06:58.279 clearly is kind of a blessing for countries which import oil, 0:06:58.320 --> 0:07:02.280 but the catastrophy for those with show exported. So it's uh, 0:07:03.400 --> 0:07:06.560 it is really a perfect storm for many of these countries. 0:07:06.680 --> 0:07:09.520 And what worries me is that, you know, we saw 0:07:09.560 --> 0:07:13.360 obsessed with our one contribute, which I understand that we're 0:07:13.360 --> 0:07:16.360 going to be reluctant. I'm afraid to actually do what's 0:07:16.400 --> 0:07:20.160 needed to help them. So you know, for example, the 0:07:20.200 --> 0:07:26.080 development of the virus in Africa is something which scares me, Olivia. 0:07:26.080 --> 0:07:29.040 I think it scares many people. A mutual friend of ours, Muhammadalaran, 0:07:29.080 --> 0:07:31.080 has been on this program so many times over the 0:07:31.160 --> 0:07:34.920 last few weeks talking about the dynamic of sudden stops 0:07:35.200 --> 0:07:37.800 cascading through the global economy, and typically a dynamic we 0:07:37.880 --> 0:07:40.800 typically associate just with emerging markets, and now we've got 0:07:40.800 --> 0:07:44.480 this global phenomena of a sudden stop taking over the 0:07:44.520 --> 0:07:47.040 global economy. Olivia, have you spent any time trying to 0:07:47.080 --> 0:07:52.600 get your hands around what that means for policymakers worldwide? Yeah, 0:07:52.640 --> 0:07:54.920 I think it's a difference for advance to colmis You're 0:07:55.000 --> 0:07:57.480 right that we see we don't see sudden stops in 0:07:57.600 --> 0:08:01.960 advanced to colmies, but we see large capitals when investors 0:08:02.000 --> 0:08:04.800 decide to get out of the market in an advanced ecarmy, 0:08:04.880 --> 0:08:07.160 I think the central bank and largely just go in 0:08:07.280 --> 0:08:11.360 and buy. That's really not a possibility for many of these, 0:08:11.480 --> 0:08:14.800 uh emerging market or developed I mean, you know we 0:08:14.880 --> 0:08:17.520 say emerging market, I think developping carmich are believe, but 0:08:17.600 --> 0:08:19.920 once which are going to settle the most. No, it 0:08:20.040 --> 0:08:22.880 is a situation in which they need outside help. Otherwise, 0:08:23.480 --> 0:08:26.880 you know, everything goes to help. And the IMP is 0:08:26.920 --> 0:08:30.880 working very hard on trying to mobilize money, mobilize farms 0:08:30.920 --> 0:08:33.320 and help these countries. But I suspect many of them 0:08:33.520 --> 0:08:37.160 and conceptually what should happen is that the money should 0:08:37.160 --> 0:08:39.800 be given to fight the virus. It should be given, 0:08:40.080 --> 0:08:44.600 not lent, because you know this is something that that 0:08:44.600 --> 0:08:47.960 that they have to fight. Then even leaving this out, 0:08:48.200 --> 0:08:50.679 some countries are going to be an economic trouble and 0:08:50.760 --> 0:08:54.480 will they will have to come to the FONT for programs, 0:08:54.559 --> 0:08:56.640 and I hope they emerged that the PHONE has the 0:08:56.720 --> 0:09:01.000 means to actually offer these programs. Olivia risk getting in 0:09:01.040 --> 0:09:03.040 trouble here with my producer for going too long, but 0:09:03.040 --> 0:09:04.160 I have to pick you up on that. Are you 0:09:04.200 --> 0:09:07.120 saying the IMF should offer grants and not loans and 0:09:07.200 --> 0:09:10.960 not not gleam shouldn't be offered to advanta. So all 0:09:11.000 --> 0:09:13.080 those ways of doing this, but should think of a 0:09:13.120 --> 0:09:16.040 form of the gifts the IMF. Maybe you can't do it. 0:09:16.920 --> 0:09:20.160 May have some programs which bisically have concessional landing, which 0:09:20.160 --> 0:09:22.880 is so concessional it's nearly gives. But no, it's a 0:09:22.960 --> 0:09:25.240 work of via. It's the job of the im AT, 0:09:25.280 --> 0:09:29.480 the world back and governments themselves. Olivia Blanche had always 0:09:29.520 --> 0:09:31.360 great to get your thoughts, particularly on a morning like 0:09:31.400 --> 0:09:34.199 this morning. Olivia Blanche at that the Peterson Institute, City 0:09:34.200 --> 0:09:42.120 of Fellow right now is the former president of the 0:09:42.120 --> 0:09:46.160 New York Photo Reserve System, William Dudley Bill, thank you 0:09:46.200 --> 0:09:51.080 so much for coming on today. Bob mcteerre at Dallas 0:09:51.120 --> 0:09:54.720 a good number of years ago wrote up a beautiful 0:09:54.800 --> 0:10:01.320 summary of cham Peter in his speech on America, on 0:10:01.400 --> 0:10:05.559 our Economy and on our Spirit. And a great part 0:10:05.760 --> 0:10:09.680 of schaum Pater's courage was to say we could allow 0:10:10.040 --> 0:10:14.040 for failure. That was codified in forty eight but became 0:10:14.200 --> 0:10:18.559 religion in the modern age. Do we still have that religion? 0:10:18.920 --> 0:10:21.680 Are we allowed to fail anymore? Or do we have 0:10:21.760 --> 0:10:27.319 a multidecade workout in is an alternative. Well, I think 0:10:27.320 --> 0:10:30.280 we're allowed to fail, but we don't want to have 0:10:30.360 --> 0:10:33.319 failures occur all at the same time, because that's catastical, 0:10:33.920 --> 0:10:38.040 catastrophic for the economy and for households and in America. 0:10:38.160 --> 0:10:40.040 So the you know, the idea is you don't want 0:10:40.040 --> 0:10:42.439 to have a systemic failure. You find to have individual 0:10:42.480 --> 0:10:45.440 firms fail from time to time, but systemic failure imposes 0:10:45.480 --> 0:10:49.600 so much cost that everybody else it's probably unacceptable. Bill. 0:10:49.640 --> 0:10:52.560 Where do you draw the line between systemic and idiosyncratic? 0:10:52.640 --> 0:10:54.520 I mean this goes to the column that you wrote 0:10:55.000 --> 0:10:57.360 that starts with a pretty bold statement that the FED 0:10:57.480 --> 0:11:01.959 can't and shouldn't rescue everyone. Many companies will fail, especially 0:11:02.040 --> 0:11:06.559 highly leveraged ones. Are these all idiosyncratic? Well, I think 0:11:06.559 --> 0:11:10.440 the issue that's different for non investment grade businesses is 0:11:10.480 --> 0:11:13.480 that they chose to be highly leveraged. You know, this 0:11:13.559 --> 0:11:16.120 is not a situation which they find themselves because of 0:11:16.160 --> 0:11:19.080 the coronavirus. They decided to be highly leveraged because they 0:11:19.120 --> 0:11:22.920 thought that that would increase their return on equity, but 0:11:23.000 --> 0:11:25.080 in fact, in this current environment is going to be 0:11:25.240 --> 0:11:28.080 pretty catastrophic for them. The reason why I explored this 0:11:28.200 --> 0:11:29.960 issue is if you look at the what the FET 0:11:30.000 --> 0:11:33.520 has done to date and what the Congress has done. Uh, 0:11:33.640 --> 0:11:37.520 there's a lot of aid being to support markets broadly, 0:11:37.840 --> 0:11:40.400 but there is not any aid for the non investment 0:11:40.480 --> 0:11:44.240 grade portion of the corporate corporate market, corporate debt market, 0:11:44.720 --> 0:11:47.560 and so the question is should there be There's also 0:11:47.640 --> 0:11:51.280 not much of support for the municipal debt market. Should 0:11:51.320 --> 0:11:53.439 there be? I think there is a strong case to 0:11:53.880 --> 0:11:57.000 for more support for the municipal debt market because state 0:11:57.040 --> 0:11:59.120 and localities are going to be under a tremendous amount 0:11:59.120 --> 0:12:01.679 of train. But should there be aid for the non 0:12:01.760 --> 0:12:05.400 investment grade corporate debt market when these companies chose their 0:12:05.480 --> 0:12:08.760 their capital structures. That's the question I'm poisoning with all 0:12:08.800 --> 0:12:11.280 this debt that we're piling out. It's the same question 0:12:11.320 --> 0:12:15.320 I asked Professor Blanchard. Let me ask Professor Dudley right now. 0:12:15.880 --> 0:12:18.640 Is the way to get beyond this crisis with our 0:12:18.760 --> 0:12:23.040 trillions of dollars of FED action and fiscal actions such 0:12:23.720 --> 0:12:27.120 is to issue bonds and paper to essentially pay off 0:12:27.679 --> 0:12:31.800 on a pandemic over say fifty years. Well, I think 0:12:31.840 --> 0:12:34.120 you're right that what's going to happen is that people 0:12:34.120 --> 0:12:35.600 are going to end up with more debt and it's 0:12:35.600 --> 0:12:38.480 going to take time for them to manage that debt. 0:12:38.640 --> 0:12:41.200 That's probably why, even though we will eventually have an 0:12:41.200 --> 0:12:45.079 economic recovery, recovery probably won't be as powerful as some 0:12:45.120 --> 0:12:49.160 people hope, because after the pandemic, people are going to 0:12:49.240 --> 0:12:51.480 have a lot higher debt burdens than they had going in. 0:12:52.080 --> 0:12:55.679 So you were justifying why the FED is not necessarily 0:12:55.720 --> 0:12:58.880 extending credit or backstopping parts of the MUNI and high 0:12:58.880 --> 0:13:01.400 old bond market. I want to go back to your 0:13:01.400 --> 0:13:04.080 original point though, where you said you have to draw 0:13:04.120 --> 0:13:08.000 a line under systemic risks. At what point will a 0:13:08.120 --> 0:13:12.840 massive defaults in these more highly leveraged areas becomes systemic? 0:13:12.880 --> 0:13:17.520 I mean, just putting moral hazard aside. How risky is that? Well, 0:13:17.559 --> 0:13:22.640 I think that's a very difficult decision to to to make. Uh. Obviously, 0:13:22.920 --> 0:13:25.520 you know, you look at the financial crisis in two 0:13:25.520 --> 0:13:29.200 thousand eight two tho nine, there was a lot of 0:13:29.240 --> 0:13:33.000 credit that the FETE extended, but they know they never 0:13:33.040 --> 0:13:36.280 went anywhere close to the non investment grade corporate sector. 0:13:36.960 --> 0:13:39.760 So I think, you know, just like they discriminated them 0:13:39.800 --> 0:13:43.680 between a one P one rated commercial paper and lower 0:13:43.760 --> 0:13:47.880 rated commercial paper. I think that will probably be to 0:13:47.960 --> 0:13:50.960 make that same determination this time. Now, look, it's not 0:13:51.040 --> 0:13:52.520 up to the FET. I mean, if Congress and the 0:13:52.520 --> 0:13:57.200 Administration and decide that they want the non un investment 0:13:57.240 --> 0:13:59.800 grade sector of the corporate bond market supported, then I 0:13:59.840 --> 0:14:02.719 say the FED would do what it needed to make 0:14:02.760 --> 0:14:04.959 that happen. But it would be expensive. You know, the 0:14:05.160 --> 0:14:08.600 Congress is authorities to four four billion dollars of Treasury 0:14:08.640 --> 0:14:13.000 money to support FED lending. Uh. If that is leveraging, 0:14:13.040 --> 0:14:14.880 that money tend to once, that's four and a half 0:14:14.880 --> 0:14:17.760 billion dollars of firepower. But if you start to extend 0:14:17.800 --> 0:14:20.120 into the riskier areas of the credit markets, you're not 0:14:20.120 --> 0:14:21.840 gonna be a leverage that tend to one. You're gonna 0:14:21.880 --> 0:14:26.000 have to have more Treasury money for every dollar of life. Yeah, Bill, 0:14:26.080 --> 0:14:28.320 one final question, and I don't want you to give 0:14:28.320 --> 0:14:30.800 away the linen in your knowledge right now if you're 0:14:30.920 --> 0:14:34.720 New York FED. But without question, the New York Fed 0:14:34.840 --> 0:14:39.680 monitors the emerging markets monitor monitors off your acclaimed and 0:14:39.800 --> 0:14:44.040 historic desk, the global markets. What do you look for 0:14:44.200 --> 0:14:46.840 in e M? What are the symptoms that the New 0:14:46.920 --> 0:14:50.760 York Fed looks for in the markets of em is 0:14:50.760 --> 0:14:54.360 they head towards a crisis? Well, I think that one 0:14:54.360 --> 0:14:57.080 thing you're gonna be looking for is what's happening to capital. 0:14:57.240 --> 0:14:59.960 Is capital staying put in the emerging markets or everybody 0:15:00.040 --> 0:15:02.280 pulling their capital out of the emerging markets. If you 0:15:02.280 --> 0:15:05.520 have a really strong capital flight out of emerging markets, 0:15:06.040 --> 0:15:10.520 that's going to put them on even more stress. Bill Dudley, 0:15:10.560 --> 0:15:13.440 thank you so much, greatly appreciated today writing for Bloomberg 0:15:13.440 --> 0:15:18.320 Opinion important essay on creative destruction and the failure that 0:15:18.400 --> 0:15:27.280 may be coming down to fact Surveillance has committed to 0:15:27.320 --> 0:15:30.360 giving you the best in conversation Olivier Blanchard with us 0:15:30.400 --> 0:15:33.600 earlier this morning and now joining us with Golden Sachs 0:15:33.600 --> 0:15:39.480 their advisory director and senior investment strategist, Abby Joseph Cohen Abbey. 0:15:39.560 --> 0:15:41.120 We all want to know what you think about the 0:15:41.160 --> 0:15:43.560 markets and my need to get into stocks to be 0:15:43.680 --> 0:15:47.040 about three years or five years. But the great thing 0:15:47.120 --> 0:15:50.920 you're considering now is this changing relationship of the United 0:15:51.000 --> 0:15:54.400 States and China. Catherine man Over at City Group x 0:15:54.440 --> 0:15:57.240 O E c D has spent years on this dysfunction. 0:15:57.760 --> 0:16:03.320 How dysfunctional is this relationship right now, we don't really know, Tom. 0:16:03.400 --> 0:16:06.840 It's a wonderful question, but there's so much that is happening, 0:16:06.960 --> 0:16:09.760 shall we say, in the shadows. The one thing that 0:16:09.840 --> 0:16:13.760 does seem clear is that at the outset of this pandemic, 0:16:14.120 --> 0:16:17.800 the United States has been caught somewhat flat footed because 0:16:17.920 --> 0:16:21.840 of the very weak response at the federal level. And 0:16:21.960 --> 0:16:24.040 one of the things that the world had come to 0:16:24.160 --> 0:16:27.080 expect for the last several decades is that when there 0:16:27.240 --> 0:16:31.440 was a global problem, for example, health problems, the United 0:16:31.480 --> 0:16:35.120 States almost always took the lead, um whether it was 0:16:35.160 --> 0:16:38.560 a bowl it was most recently, even though the United 0:16:38.600 --> 0:16:42.640 States was not the nation most primarily affected, we took 0:16:42.680 --> 0:16:45.360 the lead in terms of the science and also in 0:16:45.480 --> 0:16:48.120 terms of the aid that went to the various nations 0:16:48.120 --> 0:16:50.640 that were afflicted. One of the things that may be 0:16:50.800 --> 0:16:55.040 happening right now is that China may be moving into 0:16:55.080 --> 0:16:58.400 that sort of position. Uh, The United States has not 0:16:58.480 --> 0:17:02.280 been particularly helpful to the point, at least to other nations, 0:17:02.320 --> 0:17:07.359 but we're seeing that China is providing scientific assistance and 0:17:07.440 --> 0:17:10.600 also material I think it's interesting that some of the 0:17:10.680 --> 0:17:14.000 face masks and ventilators that are now on order for 0:17:14.200 --> 0:17:16.520 use in the United States and hopefully they come in 0:17:16.560 --> 0:17:20.439 time our order from China. So abby, is this something 0:17:21.280 --> 0:17:23.119 you know the US has had this? I guess with 0:17:23.160 --> 0:17:25.679 the current administration of America first, is this kind of 0:17:25.680 --> 0:17:28.800 just a I guess the byproduct of that America First 0:17:28.960 --> 0:17:33.960 type of mentality. I think that slogan is somewhat misleading. Um. 0:17:34.040 --> 0:17:36.840 We have been a global leader and one of the 0:17:37.040 --> 0:17:39.920 sources of our strength since the end of the Second 0:17:39.960 --> 0:17:43.200 World War has in fact been these alliances. They have 0:17:43.280 --> 0:17:47.760 been trade alliances, they have been national international science alliances, 0:17:47.800 --> 0:17:51.280 and so on. And the United States has really stepped 0:17:51.320 --> 0:17:54.960 away from that leadership position, particularly in the science field. 0:17:55.520 --> 0:17:59.399 If you take a look at the budgets that were presented, um, 0:17:59.440 --> 0:18:04.800 just as the pandemic was beginning, UH, the administration requested 0:18:05.680 --> 0:18:09.800 percent less in funding for these various functions of the 0:18:09.840 --> 0:18:13.359 US federal government, UM than we had been spending. We 0:18:13.440 --> 0:18:17.440 also know about the withdrawal from the Paris Climate Accord. UM. 0:18:17.480 --> 0:18:21.240 The United States notably withdrew a good deal of its 0:18:21.280 --> 0:18:24.359 funding for the w Health the w h O, the 0:18:24.400 --> 0:18:28.440 World Health Organization, just as the pandemic was getting underway. 0:18:28.480 --> 0:18:31.520 This is non consistent with a long term pattern of 0:18:31.960 --> 0:18:34.679 US behavior Eavy Joseph cohone and the time that we 0:18:34.760 --> 0:18:36.840 have left with you, I have to go back to 0:18:36.880 --> 0:18:39.280 two thousand and eight, where you were known as the 0:18:39.400 --> 0:18:44.480 nation's pinata because you were optimistic about equities, optimistic about America, 0:18:44.800 --> 0:18:48.160 optimistic about a recovery from the crisis, and you took 0:18:48.200 --> 0:18:51.640 a lot of hits. Can you share that same optimism 0:18:51.720 --> 0:18:55.000 in the midst of this crisis, Well, let's correct the 0:18:55.040 --> 0:18:57.879 record a little bit calm, and that was Uh. The 0:18:57.960 --> 0:19:00.760 optimism had to do with a long term for the 0:19:00.880 --> 0:19:04.520 US economy. Uh. In fact, in two thousand and eight, 0:19:04.920 --> 0:19:08.840 early on I took criticism for not being sufficiently optimistic. 0:19:08.920 --> 0:19:11.920 But let's talk about what's happening now in the future. 0:19:12.440 --> 0:19:14.720 I think for those people who take a long term 0:19:15.040 --> 0:19:18.679 view UM one might want to look at some of 0:19:18.720 --> 0:19:24.080 the declines in share prices as a long term opportunity. 0:19:24.119 --> 0:19:26.919 But I think before we actually get any sort of 0:19:27.040 --> 0:19:30.200 meaningful rally going, they're going to be at least three 0:19:30.280 --> 0:19:33.840 or four UM preconditions. One has to be that the 0:19:33.840 --> 0:19:37.480 health crisis itself is under control and that we have 0:19:37.680 --> 0:19:40.720 some sense of where that's going. The second is we 0:19:40.760 --> 0:19:45.040 need confidence in the people who are making decisions on policy. 0:19:45.080 --> 0:19:48.280 I think thus far, the FED and many other central 0:19:48.320 --> 0:19:51.520 banks have really shown a lot of gumption. UM. They've 0:19:51.560 --> 0:19:55.480 moved early, They've moved UH in a large order. I 0:19:55.520 --> 0:19:58.680 think fiscal policy thus far in the United States has 0:19:58.800 --> 0:20:01.800 has also moved in the direction. The third thing we're 0:20:01.800 --> 0:20:04.639 going to need to see UM is not the economic 0:20:04.720 --> 0:20:09.160 and earnings recovery itself, but some sense that we UM are, 0:20:09.280 --> 0:20:12.360 you know, approaching a bottom. Keep in mind that in 0:20:12.400 --> 0:20:17.560 the financial crisis, March two thousand nine represented the bottom 0:20:17.600 --> 0:20:20.639 of the stock market, but the recession didn't end until 0:20:20.760 --> 0:20:24.960 June two thousand and nine. So it's very keen, very 0:20:25.000 --> 0:20:29.280 important to pay attention to valuation, what's priced in not 0:20:29.359 --> 0:20:33.320 just two equities, but also fixed income and commodities. UM. 0:20:33.359 --> 0:20:37.200 I think that a lot of individual investors are probably 0:20:37.520 --> 0:20:40.680 not as keenly aware as they should be in terms 0:20:40.720 --> 0:20:43.520 of what's happening in terms of the dislocations in the 0:20:43.560 --> 0:20:46.159 fixed income markets right now, and we're going to have 0:20:46.240 --> 0:20:48.639 to resolve those as well, because when we think about 0:20:49.160 --> 0:20:52.959 financial structure, it's not just the equity of a corporation, 0:20:53.040 --> 0:20:56.080 it's also what's going on in terms of their credit. 0:20:57.200 --> 0:20:59.600 So I mean, just quickly here, give us your sense 0:20:59.640 --> 0:21:02.919 of I'm in the financial stimulus, the fiscal stimulus that 0:21:03.000 --> 0:21:05.720 we're starting to see here, the first two trillion likely 0:21:05.760 --> 0:21:08.639 to be followed on with another two trillion. Is that 0:21:08.720 --> 0:21:10.240 the way to go? I mean, I guess the girl 0:21:10.320 --> 0:21:12.840 question is how much should be cash to consumers versus 0:21:13.080 --> 0:21:15.719 support for businesses? How do you view that? Yeah, there 0:21:15.960 --> 0:21:18.600 are many people who have done some excellent work on this, 0:21:18.680 --> 0:21:22.040 including the people at the Brookings Institution who have looked 0:21:22.040 --> 0:21:25.680 at this line by line. What I would basically say 0:21:25.800 --> 0:21:28.199 is a lot of this money really needs to be targeted. 0:21:28.560 --> 0:21:31.240 I think the initial pain is going to be on 0:21:31.320 --> 0:21:35.679 our consumers. You know, the reported unemployment rate over the 0:21:35.720 --> 0:21:39.040 next few months could be as high as fifteen percent. 0:21:39.440 --> 0:21:41.960 That will be only part of the story. Use six, 0:21:42.000 --> 0:21:45.520 which is the broader measure. It includes discouraged workers who 0:21:45.600 --> 0:21:48.320 can't even look for a job, that could be as 0:21:48.359 --> 0:21:51.320 high as twenty five And so I think that money 0:21:51.359 --> 0:21:55.359 that goes directly to consumers is going to be terrifically important, 0:21:55.640 --> 0:21:59.040 as will be the options and opportunities we give to 0:21:59.200 --> 0:22:02.280 smaller medium businesses. Now, whether that's in the form of 0:22:02.280 --> 0:22:06.040 a grant forgiven loan. Uh, there are the various vehicles 0:22:06.080 --> 0:22:08.359 that are being discussed. I think this is going to 0:22:08.440 --> 0:22:11.760 be important, and the FED has made it clear that 0:22:11.800 --> 0:22:14.200 they're going to try to provide as much liquidity as 0:22:14.240 --> 0:22:16.760 they can. At this point. It's not a question of 0:22:16.840 --> 0:22:20.000 the price on that liquidity, the cost of credit, but 0:22:20.160 --> 0:22:23.640 really the availability. One of the other things that institutional 0:22:23.680 --> 0:22:27.280 investors are watching carefully is the health of the nation's banks. 0:22:27.840 --> 0:22:30.720 Were very fortunate that because of the tough love which 0:22:30.760 --> 0:22:33.680 followed the financial crisis two thousand and eight two thousand nine, 0:22:34.000 --> 0:22:38.760 our banking system was in much better condition going into 0:22:38.800 --> 0:22:43.320 this economic and health crisis. But we're also watching things 0:22:43.400 --> 0:22:47.119 like revolver loans um you know, our customers of the 0:22:47.160 --> 0:22:51.040 banks drawing down the credit lines that they have, and 0:22:51.080 --> 0:22:54.680 we'll be watching that carefully as well. Addy, Joseph Cohen, 0:22:54.800 --> 0:22:57.360 thank you so much for your commitment to Bloomberg surveillance, 0:22:57.400 --> 0:23:06.359