WEBVTT - Surveillance: Election Risks With JPM’s Normand 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance podcast home term Keene Dearly. 0:00:14.000 --> 0:00:16.560 We bring you insight from the best in economic ex 0:00:16.600 --> 0:00:22.520 financed investment, and international relations. Find Bloomberg Surveillance on Apple Podcasts, 0:00:22.920 --> 0:00:26.840 sound Cloud, Bloomberg dot Com, and of course on the Bloomberg. 0:00:27.320 --> 0:00:29.240 Let's get to the optimism of the moment. We can 0:00:29.280 --> 0:00:30.960 do that with Ben Labler. That's how I had some 0:00:31.040 --> 0:00:34.879 research CEO. Ben. That note dropped in all of our 0:00:34.920 --> 0:00:37.279 inboxes over the last couple of days, and we all 0:00:37.320 --> 0:00:40.640 sat up and paid attention. A Q form mount up, Ben, 0:00:40.640 --> 0:00:42.800 Why do you see a Q form out upon the cards. 0:00:44.720 --> 0:00:46.000 I think we've all sort of been a little bit 0:00:46.040 --> 0:00:49.040 distracted by the by the election. We've just had a 0:00:49.120 --> 0:00:51.200 quite a big consolidation, I would say in the third 0:00:51.280 --> 0:00:55.680 quarter on his expectations have sort of followed the upgrade 0:00:55.680 --> 0:00:58.920 and some of these GDP forecasts we've discounted. We've had 0:00:58.960 --> 0:01:01.560 quite a big pull back. At the same time, I 0:01:01.600 --> 0:01:04.000 think a lot of indicators tell me that we've sort 0:01:04.000 --> 0:01:06.600 of discounted a lot of the election and what it's 0:01:06.640 --> 0:01:08.760 and what has done. The sort of concern on the 0:01:08.760 --> 0:01:12.600 election has prevented I think a lot of investors, who 0:01:12.600 --> 0:01:16.000 I think are still pretty cautious from repositioning as they 0:01:16.000 --> 0:01:18.319 would normally be doing in the fourth quarter for what 0:01:18.400 --> 0:01:21.520 I think is a big growth story, at least sequentially 0:01:21.920 --> 0:01:25.120 in one and you haven't seen that reallocation trade. And 0:01:25.160 --> 0:01:27.840 I think it's coming regardless of who wins the election. 0:01:28.080 --> 0:01:30.360 I mean, we're looking at four percent us GDP growth 0:01:30.400 --> 0:01:36.040 next year plus earnings growth and some obviously some segments 0:01:36.080 --> 0:01:38.039 of the economy which I or some segments of the 0:01:38.040 --> 0:01:40.600 market would I definitely be overweighting here the more cyclical 0:01:40.680 --> 0:01:42.520 ones they're gonna see. I'm going to see a lot 0:01:42.560 --> 0:01:47.200 more than that I looked then. I've been looking at 0:01:47.240 --> 0:01:50.240 the SPX chart here in the Bloomberg then, and there's 0:01:50.280 --> 0:01:54.480 been two glorious opportunities from March to tell Ben Laidler 0:01:54.600 --> 0:01:58.360 he's run, where do you find a courage? And I'm 0:01:58.360 --> 0:02:01.360 gonna get the cursor out here the fish Samuel Cares cursor. 0:02:01.880 --> 0:02:07.120 We're on July three or we're on October two? Does 0:02:07.240 --> 0:02:13.880 Ben Laidler find the courage? As we correct? Listen, corrections 0:02:13.919 --> 0:02:17.000 are I mean, we you never sort of rally remorselessly here. 0:02:17.000 --> 0:02:19.359 I mean the incremental data point though is going to 0:02:19.440 --> 0:02:22.600 continue to be positive. I mean, we all were guilty 0:02:22.680 --> 0:02:25.600 of just cutting estimates sort of too far, getting too bearish. 0:02:25.639 --> 0:02:28.200 I think that's what happened in sort of March April May. 0:02:28.240 --> 0:02:30.600 I mean, now we're in the middle of just an 0:02:30.680 --> 0:02:34.320 earnings and a GDP upgrade cycle, which in Italy is 0:02:34.320 --> 0:02:36.280 going to need probably a bit more fiscal stimulus. And 0:02:36.480 --> 0:02:38.480 I'm sure we'll sort of talk about that, but you know, 0:02:38.520 --> 0:02:41.560 the incremental data point is positive. I mean, back in April, 0:02:41.960 --> 0:02:44.720 we were looking at a twelve ninth forward earnings outlook 0:02:44.720 --> 0:02:47.600 of negative five. Now we're looking at a positive fifteen 0:02:47.639 --> 0:02:50.639 to twenty. I think we're gonna get more fiscal stimulus. 0:02:50.639 --> 0:02:53.639 I think we're gonna get a vaccine. And as I say, 0:02:53.680 --> 0:02:55.400 there are some segments of the market here which have 0:02:55.600 --> 0:02:59.760 dramatically higher have dramatic operating leverage to all of that, 0:03:00.000 --> 0:03:02.000 which I think I'm gonna lead this recovery, and they 0:03:02.040 --> 0:03:04.120 really haven't done so far. I don't John, I don't 0:03:04.160 --> 0:03:06.040 believe him. I'm still looking for an entry point. I 0:03:06.080 --> 0:03:08.239 don't care what Ben Laidler says. He's been so right, John, 0:03:08.280 --> 0:03:10.480 did you like on a Friday, how I use a 0:03:10.600 --> 0:03:17.160 surveillance cursor there, the simulcast cursor to nail down those pullbacks. Nice, 0:03:17.400 --> 0:03:20.800 well done, Thank you, Lisa. Help me help me anytime. 0:03:21.280 --> 0:03:23.919 I will take out my own surveillance cursor and the 0:03:23.960 --> 0:03:27.160 conversation forward bed. You talk about this pessimism that's baked 0:03:27.200 --> 0:03:29.000 into the market, and yet we see all this data, 0:03:29.040 --> 0:03:32.880 the economic data coming out showing the steepest recession possibly 0:03:32.960 --> 0:03:35.800 in history. And I'm looking right now, the NASDAC is 0:03:35.920 --> 0:03:39.040 up twenty eight percent year to date. I'm looking at 0:03:39.200 --> 0:03:41.640 SEP up more than eight percent. Where is that pestimism 0:03:41.680 --> 0:03:45.680 that you're talking about. So you've had I think eighty 0:03:45.760 --> 0:03:48.520 billion dollars come out of US equity mutual funds since 0:03:48.600 --> 0:03:52.880 the bottom. You look at the American Association of Individual 0:03:52.920 --> 0:03:57.680 Investors bearish, you know, six months into the rally, you've 0:03:57.680 --> 0:03:59.680 still got forty percent parish. You know, it's still way 0:04:00.200 --> 0:04:02.280 above average. I even look at the sort of famous 0:04:02.880 --> 0:04:06.920 Robin Hood's trading volume chart and that's basically the lowest 0:04:07.000 --> 0:04:10.040 it's been since, uh since March. I look at the 0:04:10.120 --> 0:04:13.840 VIX again, six months into this rally, it's still above average, 0:04:13.880 --> 0:04:15.960 and vixed futures, you know, are going higher. From here, 0:04:16.040 --> 0:04:17.680 not lower. I mean I can go on and on 0:04:17.760 --> 0:04:18.840 and on. I mean I would say that, you know, 0:04:18.880 --> 0:04:22.280 there's very few indicators actually teld me that people are positive. Men. 0:04:22.320 --> 0:04:26.680 We have a composite um investor centerent indicator which is 0:04:27.040 --> 0:04:29.280 nearly at contrarian bi levels at this point, and that's 0:04:29.320 --> 0:04:32.880 historically giving you twelve months return. So I think this 0:04:33.040 --> 0:04:35.120 is part of the story. As we rolled through the election, 0:04:35.160 --> 0:04:38.520 and we put that into sort of the backward mirror, investors, 0:04:38.600 --> 0:04:40.480 I think are going to be forced to allocate on 0:04:40.520 --> 0:04:42.880 the basis of a sort of fourteen month view into 0:04:43.640 --> 0:04:48.480 one of significant growth. Well, then that's what I think 0:04:48.520 --> 0:04:50.200 really sets you apart from the pack right now, not 0:04:50.320 --> 0:04:52.120 just the cool but the fact that you don't think 0:04:52.160 --> 0:04:54.800 this is election dependent. Why don't you think this is 0:04:54.839 --> 0:04:58.240 election dependent? Well, he I think we've priced quite a 0:04:58.279 --> 0:05:01.520 lot into the election anyway. Uh, and and be I 0:05:01.680 --> 0:05:04.320 just think you look back historically, and you know, I 0:05:04.360 --> 0:05:07.120 think we over discount elections. Uh. You know, back in 0:05:07.160 --> 0:05:09.440 twos sixteen, if you knew that Donald Trump was gonna win, 0:05:09.520 --> 0:05:11.159 what would you you know, and you thought the election 0:05:11.279 --> 0:05:13.599 was really important, you would have run off and loaded 0:05:13.680 --> 0:05:16.320 up on energy and financials and then essentially you would 0:05:16.320 --> 0:05:17.760 have had your head handed to you over the last 0:05:17.800 --> 0:05:22.279 time you're talking to me. Then I got one final 0:05:22.400 --> 0:05:25.320 question here, and again, folks, I can't say enough about 0:05:25.440 --> 0:05:27.360 you know, we're kidding in but I can't say enough 0:05:27.400 --> 0:05:30.560 about Ben Laidler's calls here going back to that ugly 0:05:30.680 --> 0:05:33.480 que four of a few years ago, Ben Layler, the 0:05:33.600 --> 0:05:36.240 money question is for those that were fortunate enough like 0:05:36.400 --> 0:05:39.680 John Pharaoh to load the boat on Amazon and Apple, 0:05:40.120 --> 0:05:43.279 do they sell shares to go to the Laidler rotation 0:05:43.839 --> 0:05:46.239 or do they hold him and use you new money 0:05:46.600 --> 0:05:50.480 to go to the Laidler rotation. That's a good question. 0:05:50.520 --> 0:05:52.000 I mean I sort of think about it a little 0:05:52.040 --> 0:05:53.880 bit of sort of structural versus sick of column I 0:05:53.880 --> 0:05:55.360 do you think that the tech train is a very 0:05:55.880 --> 0:05:58.279 uh is a very sort of structural traind I mean, 0:05:58.360 --> 0:06:00.720 they may they may under before for a quarter or 0:06:00.760 --> 0:06:03.440 two and amongst that sort of rotation into cyclicals, but 0:06:03.680 --> 0:06:05.440 you know, ultimately I think they're going to be very fine. 0:06:05.560 --> 0:06:07.120 You know, the story is just a little bit different. 0:06:07.320 --> 0:06:09.480 But as I say, I think the real operating leverage 0:06:09.720 --> 0:06:11.240 is on the cyclical side. I mean that you know, 0:06:11.440 --> 0:06:14.160 we have a reopening basket. Uh, you know, they're all 0:06:14.279 --> 0:06:17.480 losing money. There are on a third evaluation of the 0:06:17.560 --> 0:06:20.480 sort of work from home sort of tech names and 0:06:21.000 --> 0:06:23.040 and I think and it's where all the earnings upgrades 0:06:23.040 --> 0:06:24.280 have been coming from. And I think we're gonna get 0:06:24.279 --> 0:06:27.360 a double surprise here of things that are the top 0:06:27.480 --> 0:06:30.800 line improving, potentially catalyzed by by a vaccine or not. 0:06:31.040 --> 0:06:32.840 But also, you know, I think what we're missing is 0:06:32.880 --> 0:06:34.520 just a lot of costs being taken out. And I 0:06:34.560 --> 0:06:36.920 think once the economy sort of really begins to get 0:06:36.960 --> 0:06:38.880 going again, I think we're going to be stunned by 0:06:38.960 --> 0:06:41.880 the degree of earnings upgrades that we see that. And 0:06:41.920 --> 0:06:44.200 I would say these cyclicals, you know, because investors have 0:06:44.279 --> 0:06:46.800 sort of been held back by you know this this 0:06:47.000 --> 0:06:49.760 this very boring debate on fiscal stimulus and are we 0:06:49.800 --> 0:06:52.200 going to get the election, you know, second wave of 0:06:52.279 --> 0:06:55.120 vaccines that's really stopped people from going into those cyclicals. 0:06:55.160 --> 0:06:56.920 So I think you still have a huge opportunity there. 0:06:58.480 --> 0:07:00.160 It is a boring debate, but it's based to be 0:07:00.240 --> 0:07:05.480 the program at the moment. Ben, It's well, it is 0:07:06.839 --> 0:07:13.119 right if this separation here and we can talk about 0:07:13.160 --> 0:07:15.560 this John Norman, and the vide here folks, a disinflation 0:07:15.640 --> 0:07:18.480 in Europe versus inflation worries in the US is really 0:07:18.920 --> 0:07:21.720 really quite something. John Norman joins us. This is wonderful 0:07:21.760 --> 0:07:24.400 to get him before the publication of all of JP 0:07:24.520 --> 0:07:27.840 Morgan research under Joyce Chang that starts on a Friday, 0:07:27.920 --> 0:07:31.360 It filters out Michael Faroli tonight and then onto Norman's 0:07:31.400 --> 0:07:35.440 hyper detailed institutional note for Monday morning. He has had 0:07:35.480 --> 0:07:38.800 a cross asset fundamental strategy. John, The theme for me 0:07:38.960 --> 0:07:42.400 this morning is with the jump condition and Ran Menby 0:07:42.640 --> 0:07:47.080 and the optimism of Asia Pacific recovery. What is the 0:07:47.200 --> 0:07:51.760 correlation right now between the Asia indicators and the standard 0:07:51.800 --> 0:07:56.600 and Poor's five hundred good news. I think there's a 0:07:56.680 --> 0:07:59.160 reasonable correlation because both of these are moving on the 0:07:59.240 --> 0:08:01.920 prospect of a Biden victory, and I think a sweep 0:08:01.960 --> 0:08:05.280 Biden to me is both positive for the SMP and 0:08:05.560 --> 0:08:08.760 for Asian assets to the extent that you have calmer geopolitics. 0:08:08.840 --> 0:08:10.240 And of course is that if this is a Biden 0:08:10.360 --> 0:08:12.640 victory with the sweep, you're gonna have much more domestic 0:08:12.680 --> 0:08:15.920 stimulus too. So the price action across markets this morning 0:08:16.040 --> 0:08:18.400 is very suggestive to me. Of the sweep. The only 0:08:18.440 --> 0:08:19.920 thing that kind of stands out is the fact that 0:08:20.240 --> 0:08:22.880 bonos are really moving that much, and that's kind of 0:08:23.280 --> 0:08:25.360 got to kind of condition how how bullish you are 0:08:25.440 --> 0:08:27.520 on some of the value rotation trades that the people 0:08:27.560 --> 0:08:30.800 are also focused on right now. The expectation game is 0:08:30.840 --> 0:08:34.880 a movable feast. How far out are the markets pricing? 0:08:35.240 --> 0:08:37.960 Are they pricing out the next Wednesday? Are they pricing 0:08:38.000 --> 0:08:40.760 out the November three, or are they pricing out say 0:08:40.800 --> 0:08:44.439 into Q two of next year. I think the pricing 0:08:44.600 --> 0:08:47.319 out into the mid part of next year, if not beyond. 0:08:47.480 --> 0:08:49.280 The simplest way to think about what's going on in 0:08:49.400 --> 0:08:52.560 markets is they're moving from a fixation on a growth 0:08:52.559 --> 0:08:54.400 slow down, which was really what started to grip in 0:08:54.600 --> 0:08:56.920 August and September, to the idea that the cycle is 0:08:56.920 --> 0:09:00.319 gonna get rebooted through physical stimulus under democratics week. And 0:09:00.360 --> 0:09:02.960 if it is a reboot, we're talking about an expansion 0:09:03.000 --> 0:09:04.760 that's going to go on for quite a while. And 0:09:04.840 --> 0:09:08.280 we're talking about a focus on data stumbles shifting towards 0:09:08.400 --> 0:09:10.439 data strength. And I think if we put we followed 0:09:10.440 --> 0:09:13.319 the normal cyclical path, that that strength will extend well 0:09:13.400 --> 0:09:15.679 into next year if we get more more fiscal stimulus. 0:09:15.720 --> 0:09:18.000 So the market is looking quite far ahead in terms 0:09:18.040 --> 0:09:22.520 of what the stimulus does to the to the cycle's prospects. Well, 0:09:22.559 --> 0:09:24.920 let's talk about how far ahead this market is getting 0:09:24.960 --> 0:09:27.920 itself at a moment, John, This new narrative is pretty young. 0:09:27.920 --> 0:09:29.480 A couple of weeks ago I had a series of 0:09:29.520 --> 0:09:31.480 guests on this program. They would turn around to us, 0:09:31.520 --> 0:09:33.959 all all three of us, and say, contested election is 0:09:34.000 --> 0:09:36.040 the risk? Now we flipped and we're talking about a 0:09:36.080 --> 0:09:40.160 blue wife. How vulnerable is that narrative? John? But to me, 0:09:40.240 --> 0:09:44.200 the vulnerability is not really around the contested election, because 0:09:44.520 --> 0:09:47.000 I feel like the polls are shifting so far in 0:09:47.120 --> 0:09:50.600 favor of Biden that that any claims of fraud are 0:09:50.640 --> 0:09:52.880 are going to be dismissed fairly quickly. If the margins 0:09:52.880 --> 0:09:54.960 are very wide and favored of Biden in a lot 0:09:55.040 --> 0:09:57.160 of states. To me, where you have the vulnerability in 0:09:57.280 --> 0:09:59.680 terms of a narrative shift is the possibility that maybe 0:09:59.720 --> 0:10:02.160 the sin it doesn't flip. And so if Biden is 0:10:02.160 --> 0:10:04.760 the president but there's no change in control in Congress, 0:10:04.960 --> 0:10:06.560 then we're going to still be dealing with the same 0:10:06.720 --> 0:10:09.560 impass around fiscal policy that we have now, and all 0:10:09.640 --> 0:10:12.360 this optimism around the sweep and stimulus and a report 0:10:12.400 --> 0:10:14.719 of the cycle is going to collapse. So I think 0:10:14.760 --> 0:10:16.559 you really have to watch the space closely in terms 0:10:16.600 --> 0:10:18.320 of what happens with the Senate. To me, if it's 0:10:18.360 --> 0:10:20.880 a divided government, whether it's under Biden or under Trump, 0:10:21.200 --> 0:10:23.280 you do have the risk of a decent slowdown in 0:10:23.280 --> 0:10:26.319 the U. S economy and unwinding of the optimism that's 0:10:26.320 --> 0:10:29.760 been lifting markets over the past couple of weeks. So, John, 0:10:29.760 --> 0:10:31.959 you've talked about the vulnerability of the narrative. Let's talk 0:10:32.000 --> 0:10:34.560 about the market areas that might be vulnerable. These are 0:10:34.559 --> 0:10:36.120 the lungs the calls that you've got on right now, 0:10:36.320 --> 0:10:40.040 curve state, no inflation, break even's, gold, materials, healthcare equities, 0:10:40.120 --> 0:10:43.360 China equities, bond effects. Out of those calls, John, if 0:10:43.400 --> 0:10:48.319 you get that divided government, where are you uncomfortable? Well, 0:10:48.320 --> 0:10:50.880 the only ones I'm comfortable with is owning Asia, whether 0:10:50.920 --> 0:10:53.199 it's on the equity or the currency side, because I 0:10:53.320 --> 0:10:55.440 do have a high conviction view that Biden will end 0:10:55.520 --> 0:10:57.880 up winning, and that to me is supportive of these 0:10:57.960 --> 0:11:01.200 geopolitically driven trades like owning Asia, all the other trades 0:11:01.240 --> 0:11:04.200 you mentioned, the value rotation, the movement up in bond yields, 0:11:04.480 --> 0:11:07.240 the steepening, the movement higher in the SMP. This to 0:11:07.320 --> 0:11:09.800 me is quite conditional on on the sweep, because that, 0:11:09.960 --> 0:11:12.520 to me, is the only political outcome that gives you 0:11:12.600 --> 0:11:15.280 some guarantee of a meaningful fiscal stimulus. So I'd still 0:11:15.280 --> 0:11:18.040 be comfortable with the Asia recommendations as long as Biden 0:11:18.120 --> 0:11:19.720 is the president. I wouldn't be comfortable with the other 0:11:19.760 --> 0:11:23.000 stuff unless we get the sweep. So, John, I'm looking 0:11:23.240 --> 0:11:26.400 at a number of job cut announcements day after day. 0:11:26.800 --> 0:11:30.080 Yesterday A T and T. S Warner Media announced thousands 0:11:30.160 --> 0:11:33.120 of layoffs. Today, Loreal is going to be closing some 0:11:33.240 --> 0:11:36.719 stores and layoff, laying off four hundred workers. At what 0:11:36.880 --> 0:11:42.000 point does this matter to your overall bullish thesis. Well, 0:11:42.160 --> 0:11:45.400 I don't think it matters if we get additional physical stimulus, 0:11:45.440 --> 0:11:47.319 because I do believe part of the reason we're getting 0:11:47.320 --> 0:11:51.520 these layoffs is because the income support that's been moving 0:11:51.640 --> 0:11:55.560 from Washington to Main Street is starting to dry up, 0:11:55.720 --> 0:11:57.679 and and so does it need to replace that? And 0:11:57.720 --> 0:11:59.400 I think if it is replaced, of course there will 0:11:59.400 --> 0:12:01.079 be job loss is in some sectors, but they'll be 0:12:01.160 --> 0:12:03.160 job gains and others. And I think you'll see a 0:12:03.240 --> 0:12:06.679 continuous move down in the unemployment rate without the stimulus, though, 0:12:06.720 --> 0:12:08.839 I think you have to extrapolate from what's happening in 0:12:08.960 --> 0:12:11.640 terms of job losses and the loss of momentum and 0:12:11.720 --> 0:12:14.079 Joba's claims, and you do have to be concerned about 0:12:14.480 --> 0:12:17.599 a sub train quarter if not too subtrend quarters in 0:12:17.640 --> 0:12:19.599 the US and what that means for for markets. So 0:12:19.640 --> 0:12:22.480 the stimulus means is very key. Meanwhile, John, as you 0:12:22.520 --> 0:12:24.520 talk about your high conviction trades, he said your highest 0:12:24.520 --> 0:12:27.599 conviction was that Joe Biden would win the presidency in 0:12:27.679 --> 0:12:30.719 the United States. When you look at market positioning, how 0:12:30.920 --> 0:12:33.440 high is the conviction just in the positioning right now 0:12:33.760 --> 0:12:37.480 that that will be the outcome. I think the position 0:12:37.600 --> 0:12:41.360 is actually suggestive of a broader election outcome that changes 0:12:41.400 --> 0:12:43.160 control of the Senate. To to me, that's the only 0:12:43.200 --> 0:12:46.720 way you could justify the strength in in all risky markets, 0:12:46.800 --> 0:12:49.560 as well as the slight firming you've had in yields 0:12:49.880 --> 0:12:51.920 and the interest in curve steamers. That that to me 0:12:52.080 --> 0:12:54.400 is a set of trades, a set of market moves 0:12:54.679 --> 0:12:56.839 which would only be validated by the sweep. So I 0:12:56.920 --> 0:12:59.679 think investors are definitely leaning towards that, and you know, 0:12:59.760 --> 0:13:03.320 of to see the risk is that they could be disappointed. Well, John, 0:13:03.320 --> 0:13:05.480 one of the tries you think could be insulted, regardless 0:13:05.480 --> 0:13:08.120 if we get a divided government or not, it's the 0:13:08.200 --> 0:13:10.719 long China trade right now, dollar China making a move 0:13:10.920 --> 0:13:13.160 over night and return from holiday. I just wanted John 0:13:13.200 --> 0:13:16.120 your thoughts on the tolerance of the Chinese policy maker, 0:13:16.600 --> 0:13:21.840 how extended that try can get. Historically that they don't 0:13:21.880 --> 0:13:24.800 tend to let the currency appreciate more than sort of 0:13:24.880 --> 0:13:27.880 high single digits in any given years. So this is 0:13:27.960 --> 0:13:31.640 always going to be kind of a lower beta effects 0:13:31.720 --> 0:13:34.320 trade relative to what you might achieve in equities if 0:13:34.320 --> 0:13:36.280 you're bullish on the cycle, relative to what you might 0:13:36.360 --> 0:13:39.640 achieve in the equities if you're bullish on China specifically. 0:13:39.960 --> 0:13:41.599 But I do think there's a bit of room to 0:13:41.679 --> 0:13:44.040 go on this. China has a surplus and there's a 0:13:44.040 --> 0:13:47.520 structural flow into bonds and stocks related to index inclusion. 0:13:47.640 --> 0:13:49.560 And my guess is there have been some clients who 0:13:49.600 --> 0:13:52.840 have been uh less interested in investing in Asia over 0:13:52.880 --> 0:13:55.560 the past few months thinking that Trump could get reelected. 0:13:55.640 --> 0:13:57.760 So so my guess is that if you do have 0:13:58.280 --> 0:14:01.000 Biden as the president, regardless of the agressional welcome, you 0:14:01.080 --> 0:14:04.080 will see some position covering and some move back into China, 0:14:04.120 --> 0:14:06.760 which is independent of what's going on the business cycle. John. 0:14:07.000 --> 0:14:08.599 One of the great debates here. We talked to the 0:14:08.600 --> 0:14:11.679 wonderful Matthew Lozetti over Deutsche Bank here recently, and I 0:14:11.760 --> 0:14:13.880 think it's something that we've heard from Bruce Kasman and 0:14:13.960 --> 0:14:16.840 your team as well. We're in a present milieu which 0:14:16.880 --> 0:14:20.560 is an economic flatness, slowdown, and then there's a belief 0:14:20.640 --> 0:14:23.640 as you mentioned, of economic recovery in the next year. 0:14:24.320 --> 0:14:28.000 Should our listeners and viewers just discard the present and 0:14:28.080 --> 0:14:32.240 the past and just be laser focused on what's out 0:14:32.360 --> 0:14:35.360 there in two thousand twenty one? Is that basically the 0:14:35.920 --> 0:14:41.440 emotional exercise. Well, there's always an emotional component to investing. 0:14:42.000 --> 0:14:44.360 Investing is done by people, and people just can't help 0:14:44.440 --> 0:14:47.800 but be emotional. But it is important to remember what 0:14:48.000 --> 0:14:50.880 to me is the big lesson of the post GFC 0:14:51.040 --> 0:14:55.040 experiences that there are structural constraints on growth after a 0:14:55.120 --> 0:14:58.440 major financial war economic crisis. There's a need for fiscal 0:14:58.480 --> 0:15:01.640 policy to remain expansive for a long time. The policy 0:15:01.720 --> 0:15:04.560 mistake after the GFC was to let fiscal policy titan 0:15:04.680 --> 0:15:07.520 for about three years in the US after the GFC. 0:15:08.040 --> 0:15:09.640 That was part of the reason why you had such 0:15:09.640 --> 0:15:13.000 anemic growth in the US after that crisis. So I 0:15:13.040 --> 0:15:16.600 think it is worth remembering that if fiscal policy inadvertment titans, 0:15:16.680 --> 0:15:19.040 which is what we're gonna see on current legislation, will 0:15:19.320 --> 0:15:22.520 repeat the anemia of the post GFC years. If fiscal 0:15:22.560 --> 0:15:26.120 policy is loosened under a different set up in Washington, 0:15:26.440 --> 0:15:29.640 we can avoid that thing. Within the glide pass of 0:15:29.720 --> 0:15:33.080 the ten uere yield, John Norman, where is the important 0:15:33.160 --> 0:15:35.440 statistic of the ten year yield? Don't tell me it's 0:15:35.440 --> 0:15:38.400 at one point zero zero, But where where is the 0:15:38.520 --> 0:15:42.560 point where tenure yield begins to signal issues to you? 0:15:44.560 --> 0:15:47.960 To me? If tenure rates were probably close to one 0:15:48.000 --> 0:15:52.040 and a half percent, yes, I think we would have 0:15:52.120 --> 0:15:54.800 to question whether or not this is potentially doing some 0:15:54.880 --> 0:15:58.080 damage to the recovery. Of course, if the context for 0:15:58.160 --> 0:16:01.240 getting to one and a half percent is uh significant 0:16:01.280 --> 0:16:04.240 fiscal stimulus, much more on the spending side, less on 0:16:04.360 --> 0:16:07.040 the on the tax side. It's less worrisome, But I 0:16:07.160 --> 0:16:09.520 think the market should be very comfortable with a tenure 0:16:09.640 --> 0:16:13.000 rate up to one percent, maybe even after that. I 0:16:13.080 --> 0:16:15.840 think it's still too fragile recovery to think that that 0:16:16.000 --> 0:16:18.720 level of rates is helpful. But remember, the FED has 0:16:18.800 --> 0:16:21.680 a very flexible asset purchase program in place. I think 0:16:21.720 --> 0:16:25.040 they probably have some internal sense of what a helpful 0:16:25.120 --> 0:16:27.480 level of yields is versus an unhelpful level of yields. 0:16:27.520 --> 0:16:29.520 So I do have some confidence that the asset purchase 0:16:29.560 --> 0:16:32.800 program would be adjusted to make sure that rates don't 0:16:33.000 --> 0:16:35.000 stay at an unhelpful level for very long. So I 0:16:35.040 --> 0:16:38.760 think I think this problem is manageable. John Norman grants 0:16:38.760 --> 0:16:40.720 to catch ups as always send up best to it, 0:16:40.760 --> 0:16:47.280 saying John Norman that of jap markin there is stimulus, 0:16:47.360 --> 0:16:51.240 and there'll be fancy conversations today among fancy people in Washington. 0:16:51.800 --> 0:16:55.640 There is no one in Washington who covers our policy 0:16:55.760 --> 0:17:02.200 research with tangible experience and actually getting infrastructure done, like 0:17:02.360 --> 0:17:05.000 Michael Jesus. He's at Morgan Stanley, He's head of US 0:17:05.080 --> 0:17:09.200 Policy Research, but far more importantly cut his teeth out 0:17:09.240 --> 0:17:15.479 of Georgetown in municipal finance of actually getting bridges built, Michael, 0:17:15.520 --> 0:17:18.119 I want to go down to the granular here. Business 0:17:18.160 --> 0:17:20.399 Insider did a great article a year ago or so 0:17:20.560 --> 0:17:22.840 of the worst bridges in the world, and they go 0:17:22.960 --> 0:17:26.680 back to the Chester Nimits Bridge in Honolulu built in 0:17:26.800 --> 0:17:30.879 nineteen nine and stagger through the fifties up to the 0:17:31.000 --> 0:17:34.600 hemorrhage of construction we had in the nineteen seventies, and 0:17:34.760 --> 0:17:39.200 it's all worn out. With this infrastructure that we're gonna see, 0:17:39.720 --> 0:17:42.359 are those bridges and all the rest of it? Is 0:17:42.440 --> 0:17:46.719 it finally going to get fixed? I think we are 0:17:46.800 --> 0:17:49.680 a couple of steps away from that, right. So the 0:17:50.359 --> 0:17:53.680 stimulus package that's on the table, at least when it 0:17:53.720 --> 0:17:57.160 comes to So State low government's obviously a critical infrastructure there. 0:17:57.240 --> 0:18:02.399 They basically own in finance UH infrastructure assets in the US. 0:18:03.000 --> 0:18:05.800 But this first round of stimulus should have come through 0:18:06.440 --> 0:18:08.840 is about kind of plugging the hole in revenues, not 0:18:09.000 --> 0:18:13.000 providing kind of incremental infrastructure if you want infrastructure incremental. 0:18:13.040 --> 0:18:16.760 On top of that, probably the political configuration you need 0:18:16.880 --> 0:18:21.479 coming out of the election is a suite by the Democrats. Um. 0:18:21.600 --> 0:18:23.960 If that's the case, and then they would probably they 0:18:23.960 --> 0:18:26.600 would have the motive and the opportunity to pass a 0:18:26.680 --> 0:18:29.480 large infrastructure build and you could start plugging some of 0:18:29.560 --> 0:18:32.320 those holes. Uh, you know, a couple of trillion dollars 0:18:32.400 --> 0:18:35.520 plus throughout the country in terms of deferred capital needs 0:18:35.560 --> 0:18:38.359 and new capital around the country. But we're you know, 0:18:38.560 --> 0:18:40.960 there's a there's a lot of steps, a lot of 0:18:41.240 --> 0:18:43.760 notes on the decision tree before you get there. All right, 0:18:43.920 --> 0:18:46.359 So let's not talk about fixing the Nimits bridge of 0:18:47.680 --> 0:18:50.560 just yet. Tom. We'll discuss that perhaps next year. Michael. 0:18:50.760 --> 0:18:53.639 Let's talk about who doesn't get paid if there is 0:18:53.720 --> 0:18:56.640 not a near term fiscal support bill passed in Washington, 0:18:56.760 --> 0:18:59.400 d C. How much can we expect state and local 0:18:59.480 --> 0:19:02.199 governments to have to layoff in masks some of their 0:19:02.240 --> 0:19:05.240 employees because they cannot increase their deficit the way the 0:19:05.320 --> 0:19:09.680 national government can. Yeah, it's a good question, right, So 0:19:09.920 --> 0:19:12.760 let's start with some high level numbers here. Uh. We 0:19:13.320 --> 0:19:17.600 estimate that states cumulatively through the end of one are 0:19:17.600 --> 0:19:21.880 going to be short on revenues about eighty billion dollars. Uh, 0:19:22.400 --> 0:19:26.600 local governments about nineties so to seventy total. Um. How 0:19:26.680 --> 0:19:29.920 do you close those gaps? You've got austerity options, so 0:19:30.240 --> 0:19:35.560 taxing or cutting spending. You've got borrowing options, including obviously 0:19:35.640 --> 0:19:38.840 the open market, but also the MLF at the FED, 0:19:39.000 --> 0:19:41.280 which basically is going to cover for all of that. 0:19:41.960 --> 0:19:45.520 So it's uh, it's a bit of a choice here, 0:19:45.560 --> 0:19:49.040 and I expect different states will make different choices. UM. 0:19:49.200 --> 0:19:51.560 Austerity will probably be part of the picture, and layoffs 0:19:51.600 --> 0:19:54.399 will probably be part of the picture. UM. And I 0:19:54.480 --> 0:19:57.040 think borrowing will be too. It's not a great combination, 0:19:58.080 --> 0:20:01.320 but it's a middle road when all of this plays out. 0:20:01.680 --> 0:20:04.359 I suspect that states are probably waiting to see if 0:20:04.400 --> 0:20:08.600 the stimulus negotiation in DC is successful. Maybe they'll leave 0:20:08.680 --> 0:20:10.800 and hold on a couple more months to see if 0:20:10.800 --> 0:20:14.560 the election gets you a configuration that makes it successful. Um. 0:20:15.640 --> 0:20:18.840 But after that, you know, austerity has to kick in 0:20:19.480 --> 0:20:23.080 at some point. Mike, we didn't mention the fault risk. 0:20:23.320 --> 0:20:24.840 What if the day were fit into any of this. 0:20:26.960 --> 0:20:29.680 I don't think it's particularly meaningful. UM. I think this 0:20:29.840 --> 0:20:33.119 is a conversation that was perhaps legitimate to have in 0:20:33.280 --> 0:20:35.280 March and April in the teeth of all of this. 0:20:36.160 --> 0:20:40.480 But the FED opening up the MLF, which has a 0:20:40.600 --> 0:20:45.119 capacity for about fifty billion dollars of borrowing for states, 0:20:45.200 --> 0:20:48.679