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Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom keene Jaily.

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Speaker 1: We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg This

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Speaker 1: is the question I get seven. When do the restaurants open?

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Speaker 1: When do we take the risk the offices come back?

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Speaker 1: When do we take the risk given these wonderful statistics

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Speaker 1: of getting ourselves back to some form of normal. Well,

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Speaker 1: thank you, Toma, Lisa Pervy back on this show. Well,

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Speaker 1: the answer is we want to get back to full

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Speaker 1: economic activity in the state of New York as well.

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Speaker 1: And we are the ones that are suffering as well

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Speaker 1: because we're not seeing the revenues come in. We have

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Speaker 1: amatic shortfall because of this. But that being said, there

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Speaker 1: is a reason, a very well thought out, compelling reason

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Speaker 1: on why we went from having the highest rate of

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Speaker 1: infection in the country to now among the lowest twenty

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Speaker 1: four consecutive days less than one percent infection. Right, So

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Speaker 1: people will say, Okay, why aren't we all back to normal? Well,

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Speaker 1: here's what we're facing and literally this is going on

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Speaker 1: in real time. Schools are starting to open. We'll have students,

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Speaker 1: thousands and thousands of students leaving the security of their

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Speaker 1: homes going into places where they're congregating with other students

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Speaker 1: and teachers. We also have colleges returning thousands of students

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Speaker 1: coming from all over the country, see as they're supposed

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Speaker 1: to be quarantining before they come to a New York campus.

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Speaker 1: We don't know if that's happening with assurances, as well

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Speaker 1: as now seeing an increase in infections in places like Europe,

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Speaker 1: which is where it came from in the first place.

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Speaker 1: So we have this perfect storm brewing, and now on

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Speaker 1: what we're talking about, we could end up having to

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Speaker 1: shut that and everything that we reopened. Cathy, I I

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Speaker 1: get that idea, as we're all waiting for a vaccine

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Speaker 1: as well. But the only alternative then, and Lisa and

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Speaker 1: I observed this in the island of Manhattan, and you're

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Speaker 1: living it in the complaints and the stresses of government,

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Speaker 1: and that is people are flat on their backs. The

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Speaker 1: stimulus that you need from Washington, give us the immedius

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Speaker 1: of the immediacy of that. How critical is that and

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Speaker 1: what size do you believe you need. Well, the governor

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Speaker 1: has contacted our state representatives in Washington, our federal representatives

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Speaker 1: representative and that we need billion dollars. We need that

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Speaker 1: right now. And the reason we need that is because

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Speaker 1: we also have to give money to schools so they

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Speaker 1: have the resources to make the environment safer, to give

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Speaker 1: parents some confidence that they'll have enough protections in place

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Speaker 1: before they spend their most precious treasure off to school.

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Speaker 1: So we need it for schools. We also needed for

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Speaker 1: first responders, law enforcement, childcare help here. If they don't

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Speaker 1: do this, I'm telling you, this is going to be cataclysmic.

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Speaker 1: Our state cannot sustain this loss in revenues without having

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Speaker 1: the federal government do what they're supposed to do. This

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Speaker 1: is not a New York state pandemic. It was a

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Speaker 1: national phenomenon. And this is when you call upon the

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Speaker 1: federal government to help out. And we're not going to

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Speaker 1: stop pounding. I'm never gonna stop continue to say you

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Speaker 1: have a responsibility. It's once every one years, step up

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Speaker 1: and do your job. To the President and to the

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Speaker 1: Republicans in the Senate that are trying to punish the

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Speaker 1: Blue states, those are their words, not mine. And it

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Speaker 1: has to stop cathy. In the meantime, trash isn't getting

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Speaker 1: picked up as frequently. There are rats all over the place.

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Speaker 1: Crime is ticking up. People are leaving the state, People

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Speaker 1: are leaving New York City. Is it too late? Is

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Speaker 1: the tax base getting destroyed for the future revenues of

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Speaker 1: this region. We're going to be in for some tough time,

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Speaker 1: no doubt about that. We are, I'm not was going

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Speaker 1: to be very honest. The governor has been very honest

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Speaker 1: in painting the pick sure what lies ahead. We are

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Speaker 1: anxious to get the economy going back again, and the

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Speaker 1: vast majority of activity is up and running. It's not

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Speaker 1: to the same scale it used to be, but we're

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Speaker 1: still in the middle of a pandemic. No one has

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Speaker 1: declared victory over the coronavirus. We're not there yet, and

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Speaker 1: it's gone on longer than anyone wanted or ever hope too.

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Speaker 1: But our model was what happened in nineteen eighteen and

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Speaker 1: nineteen nineteen, and it wasn't just a one year front

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Speaker 1: like it goes till nineteen nineteen. And if that is

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Speaker 1: what we're facing, we're not through this yet. But we

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Speaker 1: cannot have restaurants open and say you're back to work,

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Speaker 1: everybody leave unemployment, you know, set up your child care,

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Speaker 1: figured all out. Then two weeks later the infection rate

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Speaker 1: goes up as I'm sorry, we're shutting you down again.

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Speaker 1: We think that is more disruptive, which is why we're

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Speaker 1: taking the cautious approach, but still understanding that this is

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Speaker 1: causing a lot of harm and pain to our beloved

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Speaker 1: city and our beloved state. I mean, this is painful

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Speaker 1: for all of us to witness this as well, Kathy.

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Speaker 1: In the meantime, New Jersey facing a lot of the

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Speaker 1: same issue, and Governor Phil Murphy came out yesterday and

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Speaker 1: proposed taxing high frequency trades of stocks in that state.

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Speaker 1: Is New York considering something similar. The governor is not

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Speaker 1: talking about increasing taxes at this time, and and sees

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Speaker 1: he's not. That is not where we're going. We are

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Speaker 1: trying very hard to understand, uh that we have Washington

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Speaker 1: understand we need their assistance now and then we'll be

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Speaker 1: able to manage this going forward. So that's not what

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Speaker 1: the governor is speaking about at this time. And we

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Speaker 1: want to make sure that we don't drive people from

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Speaker 1: the state. We want to make sure that there you

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Speaker 1: know that we do. You know, we really respect the

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Speaker 1: taxes overall and uh and with respect of fees, that's

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Speaker 1: not something I'm where if he's looking at Bloomberg with

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Speaker 1: an article out on that right now, Lieutenant Governor, how

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Speaker 1: are you not going to drive people from the state.

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Speaker 1: You're not getting a lot of help with the Trump

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Speaker 1: tax law on that New Jersey is getting absolutely pounded.

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Speaker 1: How do you avoid the angst of New Jersey? Well,

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Speaker 1: I will say this as bolden dasis as any New

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Speaker 1: York I would say there's only one New York and

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Speaker 1: the tri state region is still critically important to our economy.

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Speaker 1: Smart people still want to be there, People still want

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Speaker 1: to come to the city, and the ideas were having

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Speaker 1: some tough times now. But this could have an effect

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Speaker 1: one real estate prices. It couldn't actually make it more

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Speaker 1: affordable in some respects. There's a lot of young people

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Speaker 1: who are smart and the creatives and their understand technology

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Speaker 1: that we're the number two tech region in the entire country.

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Speaker 1: We surpassed Boston a couple of years ago, and we're

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Speaker 1: not giving up that mantle. We're still the place people

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Speaker 1: want to congregate. They can't do it the way we

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Speaker 1: used to. But this is growing an opportunity for people

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Speaker 1: to now be able to afford to live in the

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Speaker 1: New York City area and still be there. There's that's

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Speaker 1: not going to change. New York is still going to

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Speaker 1: Lieutenant Governor Jets Bills September thirteen. Who's gonna win the

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Speaker 1: important stuff? Tom Oh, John, you cannot ask me. You

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Speaker 1: could ask you any question you want. You're not at

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Speaker 1: the im Bill. I'm a Bill Spaniard. I am shocked

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Speaker 1: to hear that. You. Thank you so much. He is

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Speaker 1: a Lieutenant governor of the Empire state right now on China,

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Speaker 1: as Pisade joins with Brookings and with Cornell, and he

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Speaker 1: is definitive at putting rigorous international economics into our politics

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Speaker 1: of China. Professor Pissade, thank you so much for joining us.

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Speaker 1: I want to go back six years to your Dollar Trap.

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Speaker 1: What a wonderful book, The Dollar Trap. How is the

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Speaker 1: Dollar Trap changed with Chairman Powell and the new idea

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Speaker 1: of a persistent weaker dollar. The interesting thing, Thomas that

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Speaker 1: the strength of the dollars certainly suggests that the dollar

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Speaker 1: might be losing some ground in international finance. But on

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Speaker 1: the other hand, what Chairman Powell did in the height

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Speaker 1: of the crisis, which was a loving countries around the

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Speaker 1: world to have credit lines where they could use their

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Speaker 1: holdings of U S. Treasuries as collateral to get dollar

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Speaker 1: funding from the U S. I think has if anything,

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Speaker 1: strengthened the dollar's position as it is of currency um

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Speaker 1: Certainly the dollar might lose some ground as a payments currency,

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Speaker 1: as an minby and other currencies eventually catch up, and

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Speaker 1: as a reserve currency. My views, the dollars position is

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Speaker 1: of anything stronger than ever to steal from dr ollarion.

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Speaker 1: What are the unknown unknowns into September, into the end

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Speaker 1: of the year, given this new regime of higher yield

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Speaker 1: negative real yields and a weaker dollar, what's the unknown

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Speaker 1: known for as to our prasade, So, I think the

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Speaker 1: configuration of the three major currencies is of course a

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Speaker 1: critical issue. What sort of economic rebound, if anything, we

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Speaker 1: see in the other major economies, especially Japan and the Eurozone,

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Speaker 1: is going to matter a great deal, And what sort

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Speaker 1: of policy actions we see from the other three other

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Speaker 1: two G three central banks, the Bank of Japan and

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Speaker 1: the European Central Bank will matter a great deal. And

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Speaker 1: the configuration of the G three currencies ultimately ends up

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Speaker 1: having a very big effect on virtually every the country

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Speaker 1: in the world. Now, China, of course, is an interesting

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Speaker 1: wildcard in here, because China's economy is doing quite well.

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Speaker 1: The recovery has been much stronger virtually every indicator's short

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Speaker 1: term or long term high frequency um low frequency also

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Speaker 1: suggests that the Chinese economy is well back on tract

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Speaker 1: But now the Chinese economy is moving to this dual

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Speaker 1: circulation approach which Residency Jentping has talked about, where they're

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Speaker 1: going to rely less on external demand a lot more

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Speaker 1: on domestically generated demand. But at the same time, China

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Speaker 1: is trying to increase its market share in terms of technology,

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Speaker 1: trying to increase technology and self sufficiency. So the one

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Speaker 1: thing that I think is emanating from China is the

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Speaker 1: possibility that this um UH difficulty between the U S

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Speaker 1: and China, the tensions are going to persist, and I

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Speaker 1: think we're seeing many more countries also beginning to push

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Speaker 1: China a little bit against the wall and pushed back

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Speaker 1: against its expansionis tendencies. Do you think that this makes

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Speaker 1: China more powerful or less powerful, given that it continues

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Speaker 1: to show strength in this recovery, even at a time

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Speaker 1: of dissonance overtrade internationally. Now, China could have used this

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Speaker 1: moment much more astutely in order to pull countries on

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Speaker 1: its side, but I think there has been a lot

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Speaker 1: of pushback, first of all, about the COVID narrative and

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Speaker 1: what China's role in that was. And in addition, there's

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Speaker 1: been pushback on a variety of Chinese tools, including its

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Speaker 1: debt that is issued to a lot of countries. Now,

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Speaker 1: China has tried to play the adult in the room,

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Speaker 1: and they have tried to argue that they are the

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Speaker 1: big protectors of the global governance system as it stands,

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Speaker 1: including the WT on the Multilateral Trading System. China has

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Speaker 1: stepped forward with at least some modest debt relief in

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Speaker 1: the context of poor economies, especially those in Africa. But

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Speaker 1: I think the world is not quite buying it, yot,

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Speaker 1: and there is a concern that anything that you get

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Speaker 1: from China does come with strings attached, either economic or political.

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Speaker 1: So I don't think they've used this moment as well

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Speaker 1: as they could have, given that their economy is doing well,

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Speaker 1: given that the US is leaving a bit of a

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Speaker 1: void on the international stage. This is all pretty abstract.

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Speaker 1: What's concrete is if you have a teenager or a tweenager,

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Speaker 1: they are probably hooked their TikTok accounts and they're doing

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Speaker 1: different dances. I know Tom does them in the breaks,

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Speaker 1: But I'm wondering, from your perspective, trying to taking a

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Speaker 1: harder line right now on the TikTok the sale of TikTok,

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Speaker 1: at least in the US in order to keep it operating.

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Speaker 1: Do you think that this actually gives China more leverage

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Speaker 1: against the US? What's the outcome? How do you read

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Speaker 1: this in terms of China's trade policy? So I think

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Speaker 1: of this as a hostile around the Ping Pong diplomacy.

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Speaker 1: Both the US and China are viewing this as the

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Speaker 1: new battleground. That is take um. The US is concerned

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Speaker 1: about what is practically an existential issue for the one

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Speaker 1: area in which it has a significant advantage over China,

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Speaker 1: which is in the high technology There are also national

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Speaker 1: security considerations at playing. China, on the other hand, wants

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Speaker 1: to increase its market share in terms of the high

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Speaker 1: technology industry, moved towards technology self sufficiency. So I think

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Speaker 1: what we're seeing with TikTok, We're going to see with

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Speaker 1: a lot of other technology companies where these two countries

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Speaker 1: start using that essentially as ponds in this much broader

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Speaker 1: game to try to dominate the technological field. So I

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Speaker 1: think we will see escalating tensions and there's going to

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Speaker 1: be no easy way out. Many companies are going to

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Speaker 1: get caught up in this mailstrum. Professor Prasadic, I'd love

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Speaker 1: your perspective on this. I looked at TikTok for a

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Speaker 1: fun filled eighteen minutes and I noticed that no one

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Speaker 1: was doing differential equations. Okay, great, And what I want

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Speaker 1: to know, Professor Prasad, is what's the national risk of TikTok?

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Speaker 1: Now that is an open question. Tom. Certainly the Trump

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Speaker 1: administration would like us to believe that TikTok provides a

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Speaker 1: way essentially to gather up our teenagers minds my daughter,

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Speaker 1: that is, are you serious, um? But also the notion

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Speaker 1: is that they might find the way into Americans mobile

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Speaker 1: phones and use that as a conduit to soak up

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Speaker 1: a lot of information about perhaps not just teenagers, but

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Speaker 1: the appearance as well. Whether this is in fact a

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Speaker 1: major security this I think is far from obvious. But

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Speaker 1: that is the concern that is at play here. Okay,

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Speaker 1: I understand it's a concern, but you're the most connected

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Speaker 1: knife guy we know on this. Is there any evidence

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Speaker 1: that this could pored over from what Lisa watches fifteen

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Speaker 1: hours a day over over to like a national security risk.

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Speaker 1: There's one of Lisa loves we're watching this radio. Just

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Speaker 1: plaint out a radio. We're watching TikTok on TV. You're

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Speaker 1: really glad you're listening on radio. Dr Prasad, Come on,

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Speaker 1: this is a national risk. That's a fair point, Tom.

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Speaker 1: I think this is being used as a bogeyman for

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Speaker 1: the ruch broader set of concerns about China and to

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Speaker 1: use every available tool um at America's disposal to push

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Speaker 1: back against China. Like I said, the real issue here

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Speaker 1: is not about TikTok, not about social media, but really

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Speaker 1: about the technology frontier um and I think both countries

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Speaker 1: are going to use every available tool to push back

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Speaker 1: against the other. So I'm a lot less concerned about

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Speaker 1: TikTok than perhaps about communications equipment which could come with

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Speaker 1: security holes. But the US is not holding back, and

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Speaker 1: clearly this administration wants to send the message that is

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Speaker 1: going to get tough on China on every available front,

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Speaker 1: and TikTok is just an easy target right now. Just

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Speaker 1: to set the record straight, I'm not watching silly Roosters, Tom,

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Speaker 1: I'm still watching Renegade to try to get that dance right.

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Speaker 1: Because my son told me I did it wrong the

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Speaker 1: first time. I will tell you this, Dr Prasade, you

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Speaker 1: said something incredibly important, the idea that there will be

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Speaker 1: many other companies that will be sort of used as

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Speaker 1: pawns in this larger battle between the US and China

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Speaker 1: for tech supremacy. What companies do you expect could potentially

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Speaker 1: get brought into this in the near future. So there

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Speaker 1: are a lot of communications companies, but in addition, financial

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Speaker 1: services companies such as Ali Baba and we Chat you know,

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Speaker 1: we Chat pay intencent Pay are dominant in China right now,

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Speaker 1: they're beginning to make in roads and other countries. Financial

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Speaker 1: services in addition to technologies and other area where I

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Speaker 1: think we're going to see a significant set of tensions

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Speaker 1: between the two countries because here again there is an

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Speaker 1: existential issue. What the US does very well is provide

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Speaker 1: high technology goods, um it innovates and it provides very

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Speaker 1: good financial services. These are exactly the areas where China

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Speaker 1: is hoping to up its economy and gain market share

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Speaker 1: around the world. So we're going to see a broad

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Speaker 1: scale of conflict no matter what happens in the US.

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Speaker 1: Dr prossand thank you so much, really really appreciate today

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Speaker 1: as our prosade of Cornell and Brooklyn's as well. Gabriella

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Speaker 1: Santos joins US global market strategist JP Morgan. Gabriella, I

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Speaker 1: wanted you to do your foreign exchange act right now,

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Speaker 1: like you're writing for Ferrolean Casman on a Friday afternoon,

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Speaker 1: E M. E M really is disassociated itself from the

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Speaker 1: major currencies. What does it signal that we've seen persistent

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Speaker 1: EM weakness over the LA in FX over the last

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Speaker 1: number of weeks. So Tommy, you're absolutely right to point

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Speaker 1: out that the dollar weakness that we've been seeing for

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Speaker 1: the past few months has been much more concentrated versus

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Speaker 1: the G ten and specifically versus the Euro, and I

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Speaker 1: think that's largely a reflection about more optimism about growth

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Speaker 1: in Europe, the EU Recovery Fund really lowering the risk

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Speaker 1: premium for the Euro and less worried about a fiscal

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Speaker 1: clifs in Europe versus the US. In emerging markets. As

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Speaker 1: you point out, we do still have pockets of concern

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Speaker 1: uh in terms of economics and fiscal situations, and namely

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Speaker 1: in the countries that have been having a much harder

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Speaker 1: time with COVID, like Latin America and India. So there's

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Speaker 1: those currenties still reflecting a concern there and a simultasts

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Speaker 1: you can rip up the script, Gabriella, you are truly

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Speaker 1: expert at this, you have lived it. Identify for us

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Speaker 1: the solution for Latin America in this pandemic. The distribution

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Speaker 1: of the forty cent or whatever of the deaths is

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Speaker 1: just frightening. How does Latin America solve this conundrum. It's

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Speaker 1: been absolutely heartbreaking to see that Latan has really been

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Speaker 1: one of the major epicenters of UMU cases and of

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Speaker 1: fatalities as well. Part of it is not a surprise

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Speaker 1: in countries like Brazil and Mexico that had less of

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Speaker 1: a national strategy, but part of it is a surprise

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Speaker 1: in certain Latan countries that reacted very quickly with very

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Speaker 1: strict lockdowns. Peru, did Columbia, Ur Argentina, and I think,

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Speaker 1: unfortunately that's a reflection of some of the issues Latin

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Speaker 1: America has, like economic informality, uh, like less hospital beds

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Speaker 1: per people. So unfortunately, it's not an easy solution for

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Speaker 1: Latin America hasn't been able to pursue that European model

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Speaker 1: with great success. Um So I think the solution is

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Speaker 1: to continue providing as much fiscal support as is possible

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Speaker 1: while being able to prioritize the health issue at the

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Speaker 1: same time. Unfortunately, latam does have more of less tight

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Speaker 1: fiscal space, unfortunately, but I think it's about trying to

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Speaker 1: have that balance between providing support and continuing to focus

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Speaker 1: on the health issue. It's it's not an easy solution though,

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Speaker 1: and not an easy solution for the U S either,

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Speaker 1: even though they do have the benefit of being the

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Speaker 1: major economy in the world. Very much a dissonance right

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Speaker 1: now between an unemployment rate above ten percent, possibly going

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Speaker 1: to stay there through the end of next you're without

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Speaker 1: more fiscal support, and a stock market that keeps hitting

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Speaker 1: new highs. Do you see this as a disconnect or

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Speaker 1: do you see this as a logical extension of the

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Speaker 1: big tech leading the way. I think there's honestly, much

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Speaker 1: more rationality happening the equity market when we look beneath

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Speaker 1: the surface. One interesting statistic is the sectors that are

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Speaker 1: at the epicenter of COVID nineteen. You're very services impacted

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Speaker 1: sectors like travel, leisure, hospitality, retail. They are huge employers.

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Speaker 1: They make up twenty percent of employment, so that's why

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Speaker 1: we have such a high unemployment rate, but they only

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Speaker 1: make up six percent of earnings per share growth for

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Speaker 1: the SMP five. So it makes sense that you have

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Speaker 1: that disconnect between economic pain versus actual improvements in earnings

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Speaker 1: expectations over the past few months. And another way to

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Speaker 1: see that is just to see to your point that

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Speaker 1: the sectors that are leading are the ones that are

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Speaker 1: actually seeing positive earning growth, whereas the doctors that are

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Speaker 1: lagging are those cyclically uh exposed doctors and and fifty

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Speaker 1: seven percent of them are still down here today. Yeah,

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Speaker 1: and there is rationality. Sure zoom to the moon. Right

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Speaker 1: after reporting earnings yesterday showing incredible strength and then better

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Speaker 1: than expected forecasts, it continues to rally. But then Tesla

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Speaker 1: and Tom Rightley so has been harping on this this

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Speaker 1: idea that their shares have gained a thousand percent in

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Speaker 1: the past twelve months. Now they're going to sell more shares.

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Speaker 1: They're going to do it in a sort of different way,

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Speaker 1: geared towards private sales, that kind of reminiscent of what

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Speaker 1: Hurts did. Doesn't it feel a little frothy to you?

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Speaker 1: Don't the valuations feel a little heavy at this point

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Speaker 1: given the economy. I would say two interesting things about

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Speaker 1: the story you're pointing out. The first is just that

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Speaker 1: we've actually been seeing a tremendous amount of equity issuance,

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Speaker 1: not just by Tesla right now, but also over the

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Speaker 1: past few months. We've also been seeing a tremendous amount

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Speaker 1: of credit issue once and that's been all incredible. We

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Speaker 1: well absorbed. I think that's a huge success for the Fed,

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Speaker 1: for example, that they were open, they were able to

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Speaker 1: open up capital markets once again. So to me, that's

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Speaker 1: a sign that things are functioning properly. Um. I also

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Speaker 1: think it's a sign that actually we still have a

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Speaker 1: lot of money on the sidelines, over trillion dollars in

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Speaker 1: money market funds, more than we have pre pandemic. So

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Speaker 1: there's still a lot of money that needs to be

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Speaker 1: put to work and that's why we've been able to

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Speaker 1: absorb this issue and so well an absolute and on

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Speaker 1: a relative basis, what's the sweat of institutions? I mean,

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Speaker 1: September one, everybody's got a dress up for Q three

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Speaker 1: quarter in and then they've got a dash to the

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Speaker 1: end of the year to justify their existence. What's the

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Speaker 1: sweat to buy the high flyers? So I think there

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Speaker 1: there is not a concern about a bubble in the

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Speaker 1: tech stops, or the or most high flyers, because they

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Speaker 1: are justified by strong revenue grows, strong cash flow. But

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Speaker 1: I think there is a concern about right size possessions

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Speaker 1: after they have increased so much. So maybe you still

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Speaker 1: like certain of these names, but you're positioning in them

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Speaker 1: has just gotten way too high. So you want to

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Speaker 1: bring that down a bit, maybe rebalanced with certain companies,

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Speaker 1: certain sectors that haven't shot to the moon quite as much.

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Speaker 1: So it's more about right sizing versus a concern about

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Speaker 1: a bubble altogether. Gabrielle, I've got to ask about Brazil.

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Speaker 1: I've got to ask about the opportunity in Latin America.

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Speaker 1: There's a point where it's going to go, go, go,

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Speaker 1: and it just hasn't happened. When does it go? Yes, indeed, Tom,

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Speaker 1: you know, for for Latin America, especially the big countries

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Speaker 1: like Brazil, Mexico, Argentina, there there really has not been

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Speaker 1: much growth over the past decade, and we keep waiting

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Speaker 1: for economic reform. Brazil is a prime candidate over the

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Speaker 1: past year that has sizzled out a bit. So when

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Speaker 1: I look at Latin America, I look at it less

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Speaker 1: as a growth equity opportunity. I think that's much more

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Speaker 1: an emerging asia. Right now we look to Latin a

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Speaker 1: Maratha still much more on the fixed income side. You

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Speaker 1: still have a country like Mexico offering one of the

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Speaker 1: only positive real yields in the world. Gabriel Santos, thank

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Speaker 1: you so much, greatly appreciate it. With JP Morgan today

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Speaker 1: a nice reset there for September. Right now is a

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Speaker 1: reason Gershon Distantfeld is never gonna come back on the

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Speaker 1: program with the lines Bernstein aby co head a fixed

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Speaker 1: income thrilled he could be with us. Gershon at gunpoint

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Speaker 1: years ago, you me and Paul had to study Eminem,

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Speaker 1: Madigliani and Miller theorem, which is the market is blind

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Speaker 1: whether you issue bonder stock and everybody goes, yeah, yeah, yeah,

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Speaker 1: well maybe not. But when a company chooses to do

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Speaker 1: an equity offering like Tesla, or they choose to do

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Speaker 1: a bond offering, explain to our audience how that works. Well, first,

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Speaker 1: I'm curious, why do you think I'm never going to

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Speaker 1: come back on the program. We're doing eminem? What did

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Speaker 1: I do you know we're doing? What do you do?

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Speaker 1: We're doing serrim here, We're doing serri here a eminem?

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Speaker 1: How we're doing theory theory? Well, I you know, I

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Speaker 1: thought you're gonna ask a different theory because but you know,

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Speaker 1: the Federal Reserve has been doing a lot of theory

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Speaker 1: over the past and not a lot of not a

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Speaker 1: lot of practice, which I'm sure we're gonna we're gonna

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Speaker 1: get to. Um, Well, what in particularly you want to

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Speaker 1: talk about in theory theory as to why you issue

431
00:24:24,840 --> 00:24:28,040
Speaker 1: Why you issue equity, like Elon must says, I'm gonna

432
00:24:28,080 --> 00:24:31,199
Speaker 1: do this unique five billion dollar deal rather than do

433
00:24:31,240 --> 00:24:36,119
Speaker 1: another bond deal. Well, look, in theory, you issue you know,

434
00:24:36,200 --> 00:24:40,240
Speaker 1: you issue equity when you think that it's it's favorable

435
00:24:40,280 --> 00:24:42,160
Speaker 1: for you in the long run, depending on the price

436
00:24:42,160 --> 00:24:45,520
Speaker 1: of your equity versus the price of your debt um.

437
00:24:45,600 --> 00:24:49,320
Speaker 1: You know, it's it is hard to imagine today, given

438
00:24:49,440 --> 00:24:54,040
Speaker 1: where rates are and how cheap debt financing is, and

439
00:24:54,040 --> 00:24:59,199
Speaker 1: how available debt financing is, that you wouldn't want to,

440
00:25:00,240 --> 00:25:04,080
Speaker 1: especially if you're highly rated. You wouldn't want to utilize

441
00:25:04,080 --> 00:25:06,640
Speaker 1: the dead markets. And we've seen, you know, investment grade

442
00:25:06,680 --> 00:25:10,600
Speaker 1: companies do that in abundance um. You know, I haven't

443
00:25:10,600 --> 00:25:13,440
Speaker 1: studied the TESTA situation in details, I can't. I can't

444
00:25:13,480 --> 00:25:15,760
Speaker 1: comment on on that one in particular. I'm not an

445
00:25:15,760 --> 00:25:18,760
Speaker 1: equity investor, but you know, in general, I think the

446
00:25:18,800 --> 00:25:22,800
Speaker 1: other debt markets have been very, very available and cheap

447
00:25:23,080 --> 00:25:26,480
Speaker 1: for most companies, and and most companies should be doing.

448
00:25:26,520 --> 00:25:28,399
Speaker 1: You look, most companies should be if you think about

449
00:25:28,440 --> 00:25:32,479
Speaker 1: their long term pension obligations. If a highly rated company

450
00:25:32,520 --> 00:25:35,840
Speaker 1: can issue long term thirty year debt at three percent

451
00:25:36,040 --> 00:25:40,040
Speaker 1: when their actually assumptions on their pension funds are seven

452
00:25:40,160 --> 00:25:42,159
Speaker 1: or eight percent, that's something they should be doing all

453
00:25:42,240 --> 00:25:45,880
Speaker 1: day long. If you're a fixed income expert, as you are,

454
00:25:46,840 --> 00:25:50,880
Speaker 1: what is the Powell impact of corporate issuance? What does

455
00:25:50,920 --> 00:25:54,640
Speaker 1: the Jackson whole speech mean? Is it every CFO saying

456
00:25:54,720 --> 00:25:58,760
Speaker 1: let's go, let's go, we gotta do it now. Well,

457
00:25:59,520 --> 00:26:03,879
Speaker 1: I don't know that it's it's right now more than

458
00:26:04,000 --> 00:26:08,080
Speaker 1: the past few years. You know, every CFO has been

459
00:26:08,240 --> 00:26:12,280
Speaker 1: looking at at low rates and tight spreads for many,

460
00:26:12,320 --> 00:26:15,399
Speaker 1: many years now, and they've taken advantage of it, and

461
00:26:15,440 --> 00:26:17,800
Speaker 1: they should continue to it. You know, is the party

462
00:26:17,880 --> 00:26:21,040
Speaker 1: going to end at some point um? As they push

463
00:26:21,040 --> 00:26:23,840
Speaker 1: inflation higher. It to remember also that inflation is a

464
00:26:23,920 --> 00:26:26,800
Speaker 1: kind of a double edged sword for corporations. It really

465
00:26:26,840 --> 00:26:29,560
Speaker 1: depends on your ability to push it through at the

466
00:26:29,600 --> 00:26:32,440
Speaker 1: top line. You know, we also talk about inflation as

467
00:26:32,440 --> 00:26:35,720
Speaker 1: if it's just this one measure, and the reality is

468
00:26:35,720 --> 00:26:40,240
Speaker 1: an inflation is incredibly uneven um. Just looking at goods

469
00:26:40,240 --> 00:26:43,920
Speaker 1: inflation versus service inflation. Right, Goods inflation in many respects

470
00:26:43,920 --> 00:26:47,280
Speaker 1: has been coming down for two decades. Right. The computer

471
00:26:47,440 --> 00:26:49,920
Speaker 1: power that we all have in the in our our

472
00:26:49,960 --> 00:26:53,639
Speaker 1: smartphone is greater than the most powerful computer was fifteen

473
00:26:53,640 --> 00:26:56,320
Speaker 1: it twenty years ago, as opposed to to many forms

474
00:26:56,320 --> 00:26:58,440
Speaker 1: of service inflation which have been going up, you know,

475
00:26:58,520 --> 00:27:00,520
Speaker 1: high single digits for a long time times. So there

476
00:27:00,560 --> 00:27:03,440
Speaker 1: isn't just one measure of inflation. So some companies can

477
00:27:03,480 --> 00:27:06,840
Speaker 1: push through that and can push you know, prices hired

478
00:27:06,840 --> 00:27:09,800
Speaker 1: by quite a bit, and many, especially given the pandemic,

479
00:27:09,840 --> 00:27:13,520
Speaker 1: are struggling to even keep prices flat. So gersha On,

480
00:27:13,600 --> 00:27:16,360
Speaker 1: a lot of economists have been telling me that what

481
00:27:16,400 --> 00:27:19,520
Speaker 1: the Chairman Powell did last week at the Jackson Hole

482
00:27:19,920 --> 00:27:25,960
Speaker 1: speech was historic. My response is, okay, taking inflation above

483
00:27:26,000 --> 00:27:29,280
Speaker 1: two for a certain period of time is different policy.

484
00:27:29,760 --> 00:27:32,280
Speaker 1: But in reality we haven't seen two percent inflation in

485
00:27:32,320 --> 00:27:35,760
Speaker 1: a decade. I'm just wanting, in all practicality, what do

486
00:27:35,800 --> 00:27:39,600
Speaker 1: you think it really means for markets? So it was

487
00:27:39,720 --> 00:27:44,040
Speaker 1: historic in that is it is a stated departure from

488
00:27:44,040 --> 00:27:46,520
Speaker 1: what the FETE has done in the past. But as

489
00:27:46,560 --> 00:27:49,479
Speaker 1: I said at the outset, it's just theory. There is

490
00:27:49,600 --> 00:27:53,400
Speaker 1: There was no practice. There was no indication of how

491
00:27:53,440 --> 00:27:56,400
Speaker 1: that's going to be done, and Shairman Powell gave himself

492
00:27:56,480 --> 00:28:00,480
Speaker 1: a tremendous amount of wiggle room. Uh Um. It was

493
00:28:00,760 --> 00:28:04,520
Speaker 1: noncommittal at all. There was no mathematics at all about

494
00:28:04,560 --> 00:28:08,760
Speaker 1: how they're going to calculate that inflation UM hedge the

495
00:28:08,840 --> 00:28:11,800
Speaker 1: language around what it means to overshoot. He said it

496
00:28:11,840 --> 00:28:15,800
Speaker 1: would likely be appropriate um and that the overshoot would

497
00:28:15,800 --> 00:28:19,840
Speaker 1: only be moderate there was no time horizons given. Um.

498
00:28:19,880 --> 00:28:22,159
Speaker 1: There was an out saying they would re evaluate the

499
00:28:22,200 --> 00:28:24,840
Speaker 1: framework every single five years. So you know, I think

500
00:28:24,920 --> 00:28:28,600
Speaker 1: the market is needs a lot more clarity on what

501
00:28:28,680 --> 00:28:31,280
Speaker 1: all this means, and and I think it is expecting

502
00:28:31,280 --> 00:28:34,520
Speaker 1: it in the September meeting. Whether you get it, I

503
00:28:34,560 --> 00:28:37,399
Speaker 1: don't know. UM, So again what this means from market?

504
00:28:37,440 --> 00:28:39,600
Speaker 1: You know, look, the curve steepend on this, which you

505
00:28:39,600 --> 00:28:42,840
Speaker 1: would expect it. It didn't steepen dramatically. You gotta continue

506
00:28:42,840 --> 00:28:45,000
Speaker 1: to get a weaker dollar. Those are all things you

507
00:28:45,000 --> 00:28:48,680
Speaker 1: would expect. UM. If they were serious about this, I

508
00:28:48,720 --> 00:28:51,600
Speaker 1: think you would get a much weaker dollar, you get

509
00:28:51,680 --> 00:28:54,960
Speaker 1: much more curve steepening. But to your points, we haven't

510
00:28:55,000 --> 00:28:57,240
Speaker 1: seen super sent inflation in a long time. I think

511
00:28:57,240 --> 00:29:00,280
Speaker 1: the market remains skeptical, and that's why you know, you're

512
00:29:00,320 --> 00:29:03,040
Speaker 1: not seeing anything dramatic. You should see a much, much,

513
00:29:03,320 --> 00:29:05,800
Speaker 1: much steeper curve if they were serious about this, and

514
00:29:05,840 --> 00:29:08,960
Speaker 1: if they had the ability to do it. Here's the problem, right,

515
00:29:09,360 --> 00:29:12,520
Speaker 1: The problem is they can don't control everything. While there's

516
00:29:12,560 --> 00:29:18,760
Speaker 1: certainly a shock on the supply side, they need fiscal

517
00:29:18,800 --> 00:29:21,000
Speaker 1: policy to take care of the demand side. If we

518
00:29:21,040 --> 00:29:24,320
Speaker 1: don't get fiscal help. Demand is going to be depressed

519
00:29:24,320 --> 00:29:26,040
Speaker 1: to the point where they're not going to be able

520
00:29:26,080 --> 00:29:29,960
Speaker 1: to generate that inflation so on that control everything. So

521
00:29:30,120 --> 00:29:32,640
Speaker 1: on that front, person, are you discounted? You believe that

522
00:29:33,240 --> 00:29:37,400
Speaker 1: Congress will in fact step up and provide another round

523
00:29:37,440 --> 00:29:42,480
Speaker 1: of fiscal stimulus, you know that against the round of politics.

524
00:29:42,560 --> 00:29:44,800
Speaker 1: You know, who doesn't in an election a year you

525
00:29:44,800 --> 00:29:47,840
Speaker 1: would think which side doesn't want to give money out

526
00:29:47,840 --> 00:29:49,960
Speaker 1: to Americans? Yet they haven't been able to come to

527
00:29:50,000 --> 00:29:54,680
Speaker 1: an agreement because of just the bitter partisanship that that

528
00:29:54,760 --> 00:29:58,040
Speaker 1: we uh, we find ourselves in. So you know, I

529
00:29:58,360 --> 00:30:00,880
Speaker 1: can't expectate on politics, but clear really, you know, if

530
00:30:01,120 --> 00:30:04,360
Speaker 1: we don't get something that's gonna depress demand, and that's

531
00:30:04,360 --> 00:30:06,680
Speaker 1: gonna it's gonna be hard to get inflation no matter

532
00:30:06,680 --> 00:30:13,120
Speaker 1: what the Fed does, it's just joining us income. When

533
00:30:13,640 --> 00:30:15,720
Speaker 1: if we get a slowdown, if we get a lethargy

534
00:30:15,760 --> 00:30:19,720
Speaker 1: in queue four actually some kind of legitimate weakness, what

535
00:30:19,760 --> 00:30:25,719
Speaker 1: does that do to bonds? Well, I think higher quality

536
00:30:25,760 --> 00:30:29,720
Speaker 1: bonds will rally. Um that that's that's the lesson we

537
00:30:29,720 --> 00:30:31,960
Speaker 1: we've gotten from Europe. You know, we've been talking for

538
00:30:32,000 --> 00:30:33,880
Speaker 1: a number of years now, how the low level of

539
00:30:33,960 --> 00:30:37,520
Speaker 1: rates means duration won't protect you as much when things

540
00:30:37,600 --> 00:30:40,280
Speaker 1: go badly. But we learned that, you know, even bonds

541
00:30:40,280 --> 00:30:43,520
Speaker 1: are traded negative yields, they can go more negative. UM.

542
00:30:43,600 --> 00:30:47,720
Speaker 1: So I would expect that, you know, government treasuries will

543
00:30:47,800 --> 00:30:51,200
Speaker 1: rally if we if we get weakness, um. You know,

544
00:30:51,360 --> 00:30:54,000
Speaker 1: can they go negative like they went in Europe. That's

545
00:30:54,120 --> 00:30:58,400
Speaker 1: a longer discussion. Maybe maybe not, but they will rally um.

546
00:30:58,800 --> 00:31:02,440
Speaker 1: And you know, lower quality bonds will will likely sell off.

547
00:31:02,480 --> 00:31:05,400
Speaker 1: That's what usually happens. You know, the market seems to

548
00:31:05,440 --> 00:31:08,400
Speaker 1: be discounting all forms of risk right now, whether it's

549
00:31:08,440 --> 00:31:10,560
Speaker 1: the risk of research, is the virus, the risk of

550
00:31:10,800 --> 00:31:15,120
Speaker 1: volatility around the election. But clearly, you know, one thing

551
00:31:15,160 --> 00:31:18,280
Speaker 1: I think that is we should also take away from

552
00:31:18,480 --> 00:31:22,080
Speaker 1: from the jacksonal speech is that you know, as the

553
00:31:22,760 --> 00:31:26,560
Speaker 1: FED reactions is gonna become less dependent or even maybe

554
00:31:26,560 --> 00:31:29,440
Speaker 1: not dependent at all on data. You know, we scrutinize

555
00:31:29,480 --> 00:31:32,600
Speaker 1: all the data, and the Fed's basically told you that

556
00:31:32,880 --> 00:31:35,720
Speaker 1: they just want to generate inflation and their reaction function

557
00:31:35,720 --> 00:31:38,120
Speaker 1: they're not going to respond to the strength of the

558
00:31:38,120 --> 00:31:41,600
Speaker 1: weakness of data. Christian gonna leave it there gristiaan distant field,

559
00:31:41,640 --> 00:31:43,280
Speaker 1: not enough time, Thank you so much. With the A

560
00:31:43,400 --> 00:31:46,560
Speaker 1: B just really really smart. They're on bonds and the

561
00:31:46,680 --> 00:31:48,640
Speaker 1: view forward into QUE and a Q sree and into

562
00:31:48,720 --> 00:31:52,240
Speaker 1: QUE four as well. Thanks for listening to the Bloomberg

563
00:31:52,280 --> 00:31:58,240
Speaker 1: Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,

564
00:31:58,600 --> 00:32:02,600
Speaker 1: or whichever podcast as platform you prefer. I'm on Twitter

565
00:32:02,640 --> 00:32:06,120
Speaker 1: at Tom Keene before the podcast. You can always catch

566
00:32:06,200 --> 00:32:08,640
Speaker 1: us worldwide. I'm Bloomberg Radio