WEBVTT - Surveillance: Recovery Trade With Abby Joseph Cohen 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along 0:00:09.240 --> 0:00:13.080 with Jonathan Ferrell and Lisa Brownwitz Jay Ley, we bring 0:00:13.119 --> 0:00:17.159 you insight from the best and economics, finance, investment, and 0:00:17.280 --> 0:00:23.280 international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg 0:00:23.360 --> 0:00:29.920 dot com, and of course on the Bloomberg Terminal. The 0:00:30.080 --> 0:00:34.040 grand experiment John at Goldman Sachs many many years ago 0:00:34.600 --> 0:00:38.480 was to say, Abbey, Joseph, Abbey, Joseph Cohen, we can 0:00:38.560 --> 0:00:40.479 hire her and she can make a name of it. 0:00:40.560 --> 0:00:45.600 On Women's International International Women's Day, It's very important that 0:00:45.720 --> 0:00:48.200 we speak and get the current thoughts of Abbe Joseph 0:00:48.280 --> 0:00:53.760 Cohen of Goldman Sachs advisory director and their senior investment strategist. Abby, 0:00:53.840 --> 0:00:57.240 you have seen this too many times before, the angst 0:00:57.440 --> 0:01:01.680 of the ambiguity up we go almost the fear of 0:01:01.800 --> 0:01:07.360 economic and GDP success. How do equities react when you 0:01:07.400 --> 0:01:12.600 get a surge in g d P as we anticipate. Well, Tom, 0:01:12.720 --> 0:01:15.240 first of all, thank you very much for including me 0:01:15.880 --> 0:01:19.480 today in the discussion. Uh. It is an important day 0:01:19.480 --> 0:01:23.200 in an important week for women. Um. You are asking 0:01:23.360 --> 0:01:26.880 exactly the right question about the markets uh. And that 0:01:27.080 --> 0:01:30.800 is this um is it good news or bad news 0:01:30.840 --> 0:01:34.080 for the economy to be recovering, And I would say 0:01:34.240 --> 0:01:38.160 it is good news. Now. We are seeing, of course, 0:01:38.200 --> 0:01:43.040 this very significant rotation in terms of views. Those stocks 0:01:43.080 --> 0:01:47.520 that have performed extremely well only because interest rates were 0:01:47.560 --> 0:01:51.760 down uh and low may have a problem, but there 0:01:51.760 --> 0:01:55.800 are plenty of other opportunities in the equity market as 0:01:55.880 --> 0:01:58.960 we do see a rotation towards those stocks that do 0:01:59.080 --> 0:02:02.160 better when we feel work comfortable with the pace of 0:02:02.200 --> 0:02:06.160 economic recovery and hopefully over the next couple of years 0:02:06.440 --> 0:02:10.400 true economic expansion. UH. These of course include the small 0:02:10.440 --> 0:02:13.920 cap names, also the value names where there's been this 0:02:14.000 --> 0:02:17.600 wide gap in things like pe ratios and so on. 0:02:18.120 --> 0:02:22.000 We're also seeing an improvement in stocks that are great sensitive. 0:02:22.040 --> 0:02:25.320 There are some security some companies that do better when 0:02:25.360 --> 0:02:28.120 interest rates are a little bit higher, and we of 0:02:28.160 --> 0:02:32.720 course are seeing some movement now in those seens that 0:02:32.760 --> 0:02:35.640 do better when we come out of lockdown. And the 0:02:35.680 --> 0:02:39.640 good news on the vaccine UH will I think be helpful. 0:02:39.680 --> 0:02:43.720 And of course those areas include things like restaurants and accommodation. 0:02:43.880 --> 0:02:46.160 I mean, I'm not going to mince words. Goldman Sachs 0:02:46.160 --> 0:02:48.760 has been out front on a bull call. Constant has 0:02:48.840 --> 0:02:52.600 led the way to sp xtree. What does the gloom 0:02:52.639 --> 0:02:58.040 crew get wrong? Well, the the argument behind this really 0:02:58.200 --> 0:03:02.920 great outlook from from David is also based upon the 0:03:03.560 --> 0:03:07.280 above consensus for you from Jon hot Sis, our chief economist, 0:03:07.600 --> 0:03:10.359 who believes that this year the US will see g 0:03:10.560 --> 0:03:14.080 d P of close to seven percent, and it's even 0:03:14.160 --> 0:03:17.880 better fourth quarter over fourth quarter, basically about seven point 0:03:18.000 --> 0:03:21.520 seven percent. And that's based upon let's say four factors. 0:03:21.960 --> 0:03:26.480 Number one, this very robust fiscal package. Number two, the 0:03:26.520 --> 0:03:31.720 Fed staying basically friendly, UH. Number three, UH, the virus 0:03:31.760 --> 0:03:36.040 to press sectors beginning to rebound. And also let's remember 0:03:36.120 --> 0:03:39.200 that there's an awful lot of pent up savings in 0:03:39.240 --> 0:03:43.520 the economy. UH, the average consumer balance sheet and again 0:03:43.560 --> 0:03:46.280 I'm looking at the media and there are many exceptions, 0:03:46.600 --> 0:03:51.280 but the average exactly actually looking good. Debt balances are down, 0:03:51.440 --> 0:03:54.160 savings are up. And when people feel a little bit 0:03:54.200 --> 0:03:57.640 better about the outlook, UH, they'll start to to move 0:03:57.720 --> 0:04:00.880 forward um and and start set think. And that's great 0:04:00.960 --> 0:04:03.880 for the economy. But you asked about the gloom crowd, 0:04:04.320 --> 0:04:06.720 and I think with the gloom crowd keeps coming back 0:04:06.760 --> 0:04:10.080 to is that there could be an uptick in inflation. 0:04:10.640 --> 0:04:14.880 Wouldn't be surprising. That's built into Yahn's forecast as well. 0:04:15.560 --> 0:04:19.040 But let's look at inflation as being a function of 0:04:19.040 --> 0:04:21.960 two different things. Number One, there are some special factors 0:04:22.240 --> 0:04:25.640 happening this year. Maybe it's the energy prices and so on. 0:04:26.160 --> 0:04:30.400 And there's also, of course that quick rebound um in 0:04:30.520 --> 0:04:33.839 prices from the very depressed levels that we saw in 0:04:33.920 --> 0:04:38.680 some sectors. But the second important reason that inflation may 0:04:38.720 --> 0:04:41.880 move up a little bit um is that we are 0:04:41.920 --> 0:04:45.080 seeing an improved economy, and I think that's great news. 0:04:45.080 --> 0:04:47.520 You know, it's the opposite side of the coin. On 0:04:47.520 --> 0:04:50.320 one side, the economy is doing better. On the other side, 0:04:50.600 --> 0:04:54.360 prices are not quite so depressed. The Goldman Sax forecast 0:04:54.440 --> 0:04:57.280 on cp I does show it moving up from about 0:04:57.320 --> 0:05:00.480 a one point one last year to two point five 0:05:00.560 --> 0:05:07.360 this year. But we're looking at CPI that by historical levels, 0:05:07.400 --> 0:05:10.880 that is not a problematic level for inflation, and by 0:05:10.920 --> 0:05:13.839 the way, that is the FEDS target level for inflation. 0:05:14.120 --> 0:05:17.080 About I think you've seen it all, and many people 0:05:17.120 --> 0:05:19.120 come on this program and they try and look to 0:05:19.240 --> 0:05:21.599 history to find a parallel with the moment we're in 0:05:21.680 --> 0:05:25.240 right now. How original is this moment and what makes 0:05:25.240 --> 0:05:28.200 it unique? That's a great question. And I think what 0:05:28.360 --> 0:05:32.599 makes it unique is that none of us, regardless of 0:05:32.640 --> 0:05:35.520 how long we've been in the markets, have seen a 0:05:35.560 --> 0:05:41.880 pandemic inspired recession, UM bear market, and now of course 0:05:42.040 --> 0:05:46.960 the recovery. And what pleases us in terms of what 0:05:47.080 --> 0:05:51.600 might happen is that we are seeing policies that are 0:05:51.640 --> 0:05:56.000 aimed at providing relief. So we've had a friendly federal 0:05:56.040 --> 0:05:59.080 Reserve and other central banks are doing what they can 0:05:59.160 --> 0:06:01.800 as well. And now, of course we have this very 0:06:01.839 --> 0:06:06.680 meaningful relief package coming in the form of fiscal policy. 0:06:07.120 --> 0:06:10.960 And I think it's important not to categorize this totally 0:06:11.040 --> 0:06:14.480 is a stimulus package, because it's not. It's a relief 0:06:14.520 --> 0:06:17.800 package aimed at getting us out of the hole. And 0:06:17.960 --> 0:06:21.039 the next important thing to be watching is what the 0:06:21.120 --> 0:06:26.080 Congress can pass and the President can sign with regard 0:06:26.160 --> 0:06:30.719 to really moving us forward UM, and that would include UM, 0:06:30.760 --> 0:06:35.840 you know, things like the infrastructure reform, things like addressing 0:06:35.920 --> 0:06:38.960 some of the big issues in the labor markets, UM 0:06:39.120 --> 0:06:43.559 and UH. There are some underlying problems that really must 0:06:43.600 --> 0:06:46.640 meet must be addressed, and are not quite addressed yet, 0:06:47.120 --> 0:06:49.839 even in this very large package that we expect to 0:06:49.880 --> 0:06:53.039 be assigned into law later this week. I mean, that's 0:06:53.120 --> 0:06:55.880 on the fundamental side, or it's become the fundamentals in 0:06:55.960 --> 0:06:59.320 terms of fiscal support. There's also a question on the 0:06:59.320 --> 0:07:02.440 technical side what that means in markets we've seen coming 0:07:02.480 --> 0:07:05.000 into this year. This year is different also because the 0:07:05.040 --> 0:07:07.960 global reflation trade trade has not come along with a 0:07:07.960 --> 0:07:11.000 weeker dollar. In fact, the dollar is stronger against every 0:07:11.040 --> 0:07:15.080 single emerging markets currency major one out there a year 0:07:15.120 --> 0:07:17.120 a year to date, and we're looking today at the 0:07:17.120 --> 0:07:19.280 biggest cell off of the ms c I Emerging Market 0:07:19.280 --> 0:07:22.400 Currency Index versus the dollar going back to last March. 0:07:22.640 --> 0:07:25.160 How does that alter your views going forward or do 0:07:25.200 --> 0:07:27.880 you think that this is the indication of a different 0:07:27.880 --> 0:07:30.720 regime where the dollar can strength and yields can rise 0:07:31.120 --> 0:07:32.840 and that doesn't come along with the rest of the 0:07:32.880 --> 0:07:35.520 rest of the world improving at the same pace. Yea, 0:07:36.000 --> 0:07:39.840 So let's let's step back for just a moment um. 0:07:39.840 --> 0:07:43.480 When we do currency forecast, obviously we're looking at all 0:07:43.520 --> 0:07:47.560 the same factors that other people are, but one factor 0:07:47.640 --> 0:07:51.120 really has dominated since the beginning of the pandemic, and 0:07:51.200 --> 0:07:54.239 that is the safe haven nature of the US dollar 0:07:54.880 --> 0:07:58.560 as the world's reserve currency UM, and if anything, that 0:07:58.600 --> 0:08:02.760 has been somewhat in anst UM over the recent past, 0:08:03.160 --> 0:08:07.000 in part because the United States UM has been able 0:08:07.040 --> 0:08:10.680 to take somewhat more aggressive measures than other nations in 0:08:11.120 --> 0:08:14.480 coming out and we also are now looking a little 0:08:14.520 --> 0:08:16.960 bit better in terms of vaccination rate and so on. 0:08:17.600 --> 0:08:22.160 What happens going forward in will be a function not 0:08:22.280 --> 0:08:25.280 just of US, but it's two of all currencies. What 0:08:25.440 --> 0:08:29.560 happens to other nations UM. So far we have seen 0:08:30.280 --> 0:08:33.880 some disappointment with regard to some of the emerging economies. 0:08:34.480 --> 0:08:37.080 But one thing we should all be watching is whether 0:08:37.480 --> 0:08:41.679 an improved tone in US economic activity will help bring 0:08:41.760 --> 0:08:45.560 our trading partners along with US. And that certainly would 0:08:45.600 --> 0:08:48.080 be a good new scenario. You know, John, you mentioned 0:08:48.080 --> 0:08:50.360 that last week. I mean one final question, if we 0:08:50.480 --> 0:08:52.960 can on this day as we look to women like 0:08:53.040 --> 0:08:55.160 you that were out front. You know this and I 0:08:55.200 --> 0:08:59.160 know this from the CFA Institute that securities research lead 0:08:59.200 --> 0:09:02.840 the way, whether we're Abby Joseph Cohen, Luis Humata, what 0:09:02.960 --> 0:09:07.280 Sally Crocheck did at Bernstein, and the wonderful Alice bb Longley, 0:09:07.320 --> 0:09:10.520 who I read religiously years ago. I believe it at 0:09:10.640 --> 0:09:14.560 d l J. How do we impart what securities research 0:09:14.679 --> 0:09:21.200 did with women over to other parts of the financial industry, Tom, 0:09:21.280 --> 0:09:26.160 It's a vexing question. What we basically see in financial 0:09:26.240 --> 0:09:30.320 services and some other industries as well, is that there 0:09:30.360 --> 0:09:33.559 may be a large number of women coming in at 0:09:33.559 --> 0:09:36.560 the bottom end of that pyramid, and we all have 0:09:36.679 --> 0:09:39.480 to do better, not just in financial services but other 0:09:39.600 --> 0:09:44.000 industries in enhancing that pipeline. So, for example, we do 0:09:44.120 --> 0:09:48.120 see that women are well represented in the number of industries, 0:09:48.720 --> 0:09:51.360 but as you move up, say to the VP level 0:09:51.520 --> 0:09:55.440 or the empty level, that's where we see uh flattening out. 0:09:55.760 --> 0:09:58.600 And by the way, while we can point to problems 0:09:58.679 --> 0:10:01.840 here in the US, it's worse in most other countries. 0:10:02.440 --> 0:10:06.480 Um and and so they're looking to us interestingly to 0:10:06.520 --> 0:10:09.520 get things better. But let me spend just one more moment, 0:10:09.600 --> 0:10:12.520 you know, we we tend to think about these professional 0:10:12.640 --> 0:10:16.200 white collar jobs. The real problem for many women in 0:10:17.640 --> 0:10:20.800 this has not been a good year for women who 0:10:20.800 --> 0:10:24.160 are really on the front line, those who are heavily 0:10:24.200 --> 0:10:29.240 represented in some of those virus afflicted sectors, including restaurants 0:10:29.240 --> 0:10:33.280 and accommodation, but also in state and local governments where 0:10:33.320 --> 0:10:37.640 women tend to be overrepresented by numbers in physitions like 0:10:37.800 --> 0:10:41.520 teachers and social workers. And over the last year, state 0:10:41.559 --> 0:10:45.680 and local governments have in fact reduced jobs by something 0:10:45.720 --> 0:10:50.480 like nine hundred thousand, and that affects women much more dramatically. 0:10:50.880 --> 0:10:54.000 The labor force rate for women now is much lower 0:10:54.000 --> 0:10:57.080 than for men. If you look at adults, it's about 0:10:57.960 --> 0:11:02.960 participation for men, it's only for women, and this has 0:11:03.040 --> 0:11:07.080 long term consequences in terms of potential scarring of the 0:11:07.160 --> 0:11:10.880 labor force, especially for women. I'll be really important issues 0:11:11.120 --> 0:11:12.920 and we appreciate your time coming on this probably around 0:11:12.920 --> 0:11:15.160 this morning to share them. Abbe Joseph coming that of 0:11:15.240 --> 0:11:24.160 Gellman sax An International Women's Day. We have been flattered 0:11:24.200 --> 0:11:27.800 by how our team has gotten us some important voices. 0:11:27.840 --> 0:11:31.840 Abby Joseph Cohen on the Marcus Elizabeth economy in China 0:11:32.320 --> 0:11:36.199 and now Deborah Fuller from the number one microbiology platform 0:11:36.240 --> 0:11:39.720 in America that is all known as a University of 0:11:39.760 --> 0:11:43.360 Washington and their School of Medicine and Microbiology, where she 0:11:43.480 --> 0:11:47.280 provides important research leadership. Were thrilled she could bring us 0:11:47.360 --> 0:11:50.120 up to date on the pandemic. Deborah Fuller, there's so 0:11:50.120 --> 0:11:53.040 many looking at the clear and present. You and your 0:11:53.160 --> 0:11:56.360 leadership at Washington are trying to figure out where we'll 0:11:56.400 --> 0:11:59.600 be on COVID two years from now, five years from now, 0:12:00.000 --> 0:12:03.240 and even indeed out the two thousand thirty one. How 0:12:03.280 --> 0:12:06.679 do we prepare for the next virus? Right? So, right 0:12:06.760 --> 0:12:09.680 now we uh, we're doing great against the current viruses, 0:12:09.720 --> 0:12:13.360 but as we can see that, we're constantly battling new 0:12:13.440 --> 0:12:17.080 variants that are coming out Already the manufacturers Jane J. 0:12:17.280 --> 0:12:21.040 Mcdonna Viiser, they're updating their vaccines to combat the next 0:12:21.080 --> 0:12:23.200 one to come. And so we're we're gonna enter in 0:12:23.200 --> 0:12:26.200 the cycle that would be similar to two flu, where 0:12:26.240 --> 0:12:28.640 we're just going to have to constantly get another update 0:12:28.720 --> 0:12:31.400 and and always lingering in the background would be uh, 0:12:31.520 --> 0:12:33.920 the potential that a new variant could emerge, It could 0:12:33.920 --> 0:12:36.960 cause yet another pandemic. That's the case for flu, and 0:12:37.000 --> 0:12:39.839 that's the case for coronaviruses. So what we're working on 0:12:40.000 --> 0:12:44.760 is really thinking about the future, is really about developing 0:12:44.880 --> 0:12:48.480 what we would call hand coronavirus vaccine, one that would 0:12:48.520 --> 0:12:51.960 be able to induce immune responses against parts of the 0:12:52.040 --> 0:12:55.600 virus that are very conserved and and allow us to 0:12:55.679 --> 0:12:59.000 have immunity against not just the current variants, but future 0:12:59.040 --> 0:13:02.240 variants to come in and provide us protection against the 0:13:02.280 --> 0:13:06.120 future pandemics. Are we constrained because we don't have an 0:13:06.120 --> 0:13:11.120 efficacious vaccine that can go worldwide and particularly to worldwide 0:13:11.160 --> 0:13:15.120 impoverished areas that we don't need the refrigeration or the 0:13:15.200 --> 0:13:19.040 fanciness of m RNA vaccines. Do we need to get 0:13:19.080 --> 0:13:23.439 to a basic vaccine? Absolutely. I have always said that 0:13:23.480 --> 0:13:26.400 the ideal pandemic vaccine is one that could be UH 0:13:26.880 --> 0:13:30.280 stored at room temperature and administered in a single shot 0:13:30.320 --> 0:13:33.560 and ideally self administered. That is really the way to 0:13:34.720 --> 0:13:39.400 effectively and rapidly distribute and get a vaccine quickly worldwide, 0:13:39.440 --> 0:13:43.160 in into core as well as wealthy countries. That's another 0:13:43.200 --> 0:13:45.680 area that we're working on. We're working on a room 0:13:45.679 --> 0:13:50.040 temperature stable UH nucleic acid vaccine that's actually based on 0:13:50.160 --> 0:13:53.200 DNA rather than RNA, because that's much more stable and 0:13:53.280 --> 0:13:56.160 when that can be self administered without a need on syringe. 0:13:56.360 --> 0:13:58.320 It's about to say self administered with a needle might 0:13:58.400 --> 0:14:00.880 be a different proposition, DOT or full or perhaps people 0:14:00.880 --> 0:14:03.800 wouldn't be that excited about that. There is There is 0:14:03.800 --> 0:14:06.120 a question though, whether the mr and A technology is 0:14:06.200 --> 0:14:09.440 shortened the time from the discovery of how to combat 0:14:09.520 --> 0:14:12.360 a new strain of either coronavirus or some other virus 0:14:12.720 --> 0:14:16.360 to actually getting vaccines rolled out into people's arms. How 0:14:16.440 --> 0:14:21.000 much have we shortened the vaccine rollout? Oh substantially? With 0:14:21.320 --> 0:14:23.840 the RNA vaccines as well as the new viral vector 0:14:23.920 --> 0:14:27.920 vaccines that Jane j is developing, enables really rapid update 0:14:27.960 --> 0:14:31.080 because you only need the sequence of whatever variant is 0:14:31.160 --> 0:14:36.000 emerging to Traditionally, vaccines would take eight nine months to update. 0:14:36.200 --> 0:14:39.680 With these new technologies, we're looking at eight nine weeks 0:14:39.760 --> 0:14:41.400 to be able to update and then roll out a 0:14:41.440 --> 0:14:45.200 new version. Dr Fuller, How different are these vaccines from 0:14:45.200 --> 0:14:47.680 one another? Base of this idea that a lot of 0:14:47.680 --> 0:14:50.600 officials are trying to prevent people from vaccine shopping, and 0:14:50.680 --> 0:14:55.280 yet there have been different efficacy rates, right they The 0:14:55.320 --> 0:14:58.480 efficacy rates are really based on the fact that the 0:14:59.160 --> 0:15:02.920 vaccines were at really different times. The Madonna Advisor m 0:15:03.000 --> 0:15:05.960 RNA vaccines were tested when the first variants emerged, and 0:15:06.280 --> 0:15:10.120 these vaccines, all three vaccines, were designed to combat that 0:15:10.160 --> 0:15:15.000 initial variant. So so the the RNA vaccines were actually 0:15:15.240 --> 0:15:18.680 the world variant with stacked in favor of making those 0:15:18.720 --> 0:15:21.480 look actually better because when you have a vaccine that 0:15:21.560 --> 0:15:24.160 is a better match to the current variant, you're going 0:15:24.200 --> 0:15:26.600 to get better efficacy. So J and J by the 0:15:26.640 --> 0:15:29.400 time they got to their clinical trial, the variants had emerged, 0:15:29.440 --> 0:15:32.520 and so the differences I think in efficacy really can't 0:15:32.560 --> 0:15:35.600 interpret that to mean that to one vaccine is better 0:15:35.680 --> 0:15:38.040 than the other. What's really important is if you look 0:15:38.080 --> 0:15:41.160 at real lot, real world impact, what we're seeing is 0:15:41.200 --> 0:15:44.160 all three of these vaccines have a profound impact and 0:15:44.240 --> 0:15:48.600 protecting against severe disease and death. I mean we're closed 0:15:48.600 --> 0:15:53.040 to protection from death. And that's really what's important. That's 0:15:53.040 --> 0:15:55.440 what we're after with vaccines is to get it to 0:15:55.480 --> 0:15:57.720 a point where we don't have to be afraid of 0:15:57.800 --> 0:16:00.440 the high mortality rate of this virus. To that point, 0:16:00.440 --> 0:16:02.600 it's very close. Don't thanks few times today, don't to 0:16:02.680 --> 0:16:04.760 Debora full of that, the University of Washington School of 0:16:04.760 --> 0:16:14.160 Medicine professor. There is a point, is Liz Goldenberg lectured 0:16:14.200 --> 0:16:17.080 me years ago, where you switch from yield to a 0:16:17.160 --> 0:16:21.400 price analysis. Cathy Jones at Schwab Center for Financial Research, 0:16:21.440 --> 0:16:24.040 and knows this very well. She watches the flows of 0:16:24.080 --> 0:16:26.920 what people are doing with their money. And Cathy, I 0:16:27.040 --> 0:16:29.800 calculate from the end of August, I have a tenure 0:16:29.880 --> 0:16:33.360 yield down a good amount in price, eight point three 0:16:33.400 --> 0:16:36.560 percent down in price. Are we heading for a bond 0:16:36.760 --> 0:16:40.400 bear market? You know? I think we could be over 0:16:40.440 --> 0:16:43.960 the long run. I certainly think that the lows that 0:16:44.000 --> 0:16:47.640 we've put in UH, those very very low yields around 0:16:47.640 --> 0:16:50.280 half of one percent on the ten year or I 0:16:50.400 --> 0:16:53.000 think a third of one percent of the tenure UH 0:16:53.160 --> 0:16:57.080 is probably the low for a long time. But bear 0:16:57.200 --> 0:17:00.880 market is you know, price over time or yield over time. 0:17:01.040 --> 0:17:04.000 So we're looking out two to five years down the read. Yeah, 0:17:04.040 --> 0:17:06.240 I think that yields continue to go higher as long 0:17:06.280 --> 0:17:11.600 as the economy does recover from the COVID COVID nineteen crisis, 0:17:11.680 --> 0:17:14.879 as it continues to do. But the magnitude of the 0:17:14.960 --> 0:17:19.400 move from here is not likely to be nearly as 0:17:19.520 --> 0:17:22.359 fast or as great I think in the next leg 0:17:22.760 --> 0:17:25.960 as it has been from that previous flow. Kathy, we 0:17:25.960 --> 0:17:28.080 discussed so many times about how self limiting a move 0:17:28.160 --> 0:17:29.600 high would be because of the amount of debt that 0:17:29.640 --> 0:17:32.040 we've added to this economy. I remember in and around 0:17:32.080 --> 0:17:35.639 one percent talking about one maybe it was maybe it 0:17:35.680 --> 0:17:38.399 was one fifty, one sixty Right now, where is it 0:17:38.440 --> 0:17:42.240 in your mind? Well, you know, one sixty was our 0:17:42.280 --> 0:17:44.720 target coming into the year, and now that we're here, 0:17:44.760 --> 0:17:46.639 we do start to see a little bit of that 0:17:46.720 --> 0:17:51.080 pushback from the risk markets and risk assets. But certainly 0:17:51.160 --> 0:17:53.800 yields are not so high that we're going to see 0:17:53.800 --> 0:17:58.000 a huge economic deterioration from here unless unless we start 0:17:58.080 --> 0:18:00.560 to see credit spread blow out or something like that. 0:18:00.840 --> 0:18:04.639 You know, you push up towards positive real rate and 0:18:04.720 --> 0:18:08.720 the two percent plus area, and then we're probably going 0:18:08.760 --> 0:18:12.040 to see a negative feedback loop work its way through. 0:18:12.119 --> 0:18:14.720 You know, you have a lot of companies, the smaller, 0:18:15.440 --> 0:18:19.640 low rated, unrated companies, the zombie companies that have been 0:18:19.760 --> 0:18:22.879 rolling over debt for a long time. Their ability to 0:18:22.920 --> 0:18:25.560 continue to do that if rates push up another forty 0:18:25.560 --> 0:18:28.840 fifty basis points is going to be challenged. Wait, that's important. 0:18:29.000 --> 0:18:31.640 Another forty fifty basis points. That's all it would take 0:18:31.800 --> 0:18:34.160 for some of these companies to face true financing pressures. 0:18:34.200 --> 0:18:37.800 You're talking about in the high yield space in particular, Yeah, 0:18:38.040 --> 0:18:41.600 we just did an analysis of some of the zombie companies. 0:18:41.720 --> 0:18:44.760 That's hard to get really good data, but a lot 0:18:44.760 --> 0:18:48.280 of have been really living on fumes. And so you know, 0:18:48.320 --> 0:18:51.080 if you if you look at the private debt area, 0:18:51.200 --> 0:18:55.199 the really low rated UM bonds, they're going to be 0:18:55.320 --> 0:18:59.920 challenged unless unless the conditions changed in terms of revenue. 0:19:00.000 --> 0:19:02.000 Well from here, the reason why this is such an 0:19:02.040 --> 0:19:04.320 important point, Cathy, is because people have come on this 0:19:04.359 --> 0:19:06.600 show and others and said that the real rate risk 0:19:06.760 --> 0:19:10.119 is for rates increasing, right, is duration and not credit 0:19:10.160 --> 0:19:12.679 because credit looks good given the backdrop that we have 0:19:12.760 --> 0:19:15.239 in the easy financing conditions. Are you saying that that 0:19:15.359 --> 0:19:18.119 story is changing, that credit is starting to matter that 0:19:18.240 --> 0:19:21.480 much more because as you get that rise and interest rates, 0:19:21.680 --> 0:19:24.280 some of these credits are that much more sensitive to 0:19:24.400 --> 0:19:28.679 any tightening, let alone forty fifty basis points. Well, I 0:19:28.720 --> 0:19:31.520 think you have to differentiate between saying, you know, investment 0:19:31.560 --> 0:19:35.400 grade where we've seen a sell off from the investment 0:19:35.440 --> 0:19:39.760 grade market basically because of duration, not credit risk. Right, 0:19:39.800 --> 0:19:42.679 And we're not worried about i G. Even in the 0:19:42.760 --> 0:19:45.560 higher rated part of hill, We're not worried as much 0:19:45.680 --> 0:19:49.520 because you know, this is a potent um combination of 0:19:49.680 --> 0:19:55.119 easy fiscal a very accommodative monetary policy, and very expansive 0:19:55.119 --> 0:19:57.800 fiscal policy. That's good for credit. But when you get 0:19:57.800 --> 0:20:00.600 into the lower rated credit where are you've seen this 0:20:00.920 --> 0:20:05.440 big build up of debt and the lack of earnings 0:20:05.480 --> 0:20:08.080 that we've seen. Unless they start to kick in on 0:20:08.119 --> 0:20:10.920 those earnings, we're going to see some deterioration there. Well, Kathy, 0:20:11.000 --> 0:20:12.719 we have to talk about the next logical question then, 0:20:12.760 --> 0:20:15.399 and that's the maturity wall funding requirements, And from what 0:20:15.400 --> 0:20:17.400 we've seen in the last twelve months is an extension 0:20:17.400 --> 0:20:19.760 of the average maturity for so many of these companies 0:20:20.000 --> 0:20:23.280 because funding conditions have been so good. It's there a 0:20:23.400 --> 0:20:26.439 maturity wall on the horizon. I haven't heard about it. 0:20:26.480 --> 0:20:30.720 Do you see it? Yeah? I don't have an askment 0:20:30.760 --> 0:20:33.520 of maturity wall that we're particularly worried about at this 0:20:33.600 --> 0:20:36.119 stage of the game. Um, you know, there is a 0:20:36.160 --> 0:20:38.359 lot of that build up and we're certainly going to 0:20:39.320 --> 0:20:42.400 face some financing problems down the road, but I think 0:20:42.400 --> 0:20:45.000 it continues to get pushed out, so that's not something 0:20:45.000 --> 0:20:48.439 we're worried about for this year or even early next year. Kathy. 0:20:48.600 --> 0:20:50.920 Always good to see you as always Kathy Jones of 0:20:50.960 --> 0:20:59.400 the SWAB Center for Financial Research. We've been the great 0:20:59.440 --> 0:21:02.280 privilege of talking to those within the Ethan Harris shop 0:21:02.280 --> 0:21:05.240 at Bank of American Securities. As we mentioned with Dr 0:21:05.320 --> 0:21:08.840 Harris the other day, Michelle Meyer has been absolutely brilliant 0:21:08.840 --> 0:21:11.320 over the years and the pulse of the American economy. 0:21:11.600 --> 0:21:14.399 She joined us here with their leadership and not only 0:21:14.440 --> 0:21:19.199 that but her symbolism of International Women's Day and getting 0:21:19.200 --> 0:21:22.680 it done. Michelle, you know we have followed followed your 0:21:22.720 --> 0:21:26.600 career and it's always narrow questions about this and that. 0:21:26.760 --> 0:21:29.560 I want to give you a broader question. What is 0:21:29.600 --> 0:21:35.280 the quality of US seven point three percent economic growth? 0:21:35.640 --> 0:21:38.240 What's the makeup of that big number you have Q 0:21:38.480 --> 0:21:42.320 four to Q four. Thanks Tom, and thanks for the 0:21:42.440 --> 0:21:45.639 question having me on today on an important day. UM So, 0:21:45.680 --> 0:21:48.760 when you think about the drivers of US economic growth, 0:21:48.800 --> 0:21:52.680 and particularly this year with a studying we're forecasting seven 0:21:52.680 --> 0:21:54.679 point three percent growth, when you measured on that Q 0:21:54.840 --> 0:21:57.320 four of a Q four basis, we think a lot 0:21:57.400 --> 0:21:59.480 of it has to do with the consumer. It has 0:21:59.520 --> 0:22:02.119 to do with the resolve of the consumer to spend 0:22:02.480 --> 0:22:05.440 and the ability of the consumer to spend. I mean, 0:22:05.760 --> 0:22:08.760 this is a household sector that is sitting on very 0:22:08.800 --> 0:22:11.679 strong balance sheets, that is sitting on a lot of 0:22:11.760 --> 0:22:14.280 dry powder in terms of the amount of cash that 0:22:14.400 --> 0:22:17.280 is accumulated and more to come um, which as a 0:22:17.280 --> 0:22:20.639 result of the latest stimulus spill um and and the 0:22:20.680 --> 0:22:23.879 consumer has already engaged, it's proven to be resilient, and 0:22:23.920 --> 0:22:26.439 we think there's a lot more to come um in 0:22:26.480 --> 0:22:29.600 the coming months and quarters as the economy continues to 0:22:29.600 --> 0:22:32.119 move forward and it's reopening. Michelle, do you think that 0:22:32.160 --> 0:22:34.840 the concerns have been overstated that people have been holding 0:22:34.920 --> 0:22:38.360 cash simply to pay down debt going forward that's been deferred. 0:22:39.800 --> 0:22:42.640 I think that has been overblown on an aggregate basis. 0:22:42.680 --> 0:22:45.640 I'm sure that is happening on a on a micro level, 0:22:45.680 --> 0:22:47.879 and you certainly see that in some of the narratives 0:22:47.880 --> 0:22:50.040 and in the anecdotes that are out there, but you're 0:22:50.080 --> 0:22:52.240 not seeing that on aggregate. I mean, when you think 0:22:52.280 --> 0:22:55.440 about the debt levels, we don't have that much debt 0:22:55.520 --> 0:22:59.800 to pay down. It's not the the two thousand eight period, 0:23:00.119 --> 0:23:02.760 or you had very very very much the case that 0:23:02.840 --> 0:23:05.440 there was access debt, you needed to deleverage. Households need 0:23:05.480 --> 0:23:08.199 to clean up their balance sheets. It's not the case today. 0:23:08.240 --> 0:23:13.200 We entered this crisis, this pandemic with pretty low debt ratios, 0:23:13.440 --> 0:23:18.160 historically low financial obligations ratios. Um And I think yes, 0:23:18.240 --> 0:23:20.480 some will we go Some of that excess cash will 0:23:20.520 --> 0:23:23.120 be going to pay down debt, but the majority will 0:23:23.160 --> 0:23:25.760 be able to be used in some form, to be 0:23:25.800 --> 0:23:27.560 able to be kind of pumped back into the economy 0:23:27.640 --> 0:23:30.159 via spending. Well, the economy have the same sort of 0:23:30.200 --> 0:23:33.040 composition when people start pumping their money back in other word, 0:23:33.119 --> 0:23:38.520 services goods, given that that dynamic has shifted quite a 0:23:38.560 --> 0:23:40.760