WEBVTT - Surveillance: Moral Hazard With Dudley 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.200 Bloomberg dot Com, and of course, on the Bloomberg Is. 0:00:27.240 --> 0:00:30.440 It's easy to say that Jared Bernstein was an advisor 0:00:30.560 --> 0:00:34.920 on economics and on politics to Vice President Biden, but 0:00:35.080 --> 0:00:38.680 far more importantly, he is one of the liberal economists, 0:00:38.680 --> 0:00:44.040 progressive economists in Washington that every conservative reads and studies. 0:00:44.080 --> 0:00:47.559 He's been doing it for decades Economic Policy Institute and 0:00:47.560 --> 0:00:51.040 now at the Center on Budget and Policy Priorities. Jared, 0:00:51.120 --> 0:00:54.160 we are thrilled you're with us today. What does the 0:00:54.200 --> 0:00:58.800 Biden mandate forward? What does Vice President Biden need to 0:00:58.920 --> 0:01:02.680 do to be not to those committed to MN but 0:01:02.800 --> 0:01:06.720 the marginal voters looking for the Biden message? What does 0:01:06.720 --> 0:01:09.120 he need to say? First of all, it's always great 0:01:09.160 --> 0:01:11.080 to start the day with the three of you. It's 0:01:11.160 --> 0:01:13.920 just fascinating to hear just sitting here in the green 0:01:14.000 --> 0:01:18.479 room listening to your to your wrap. Uh. The vice 0:01:18.480 --> 0:01:22.280 president is running for office that uh in the midst 0:01:22.319 --> 0:01:26.440 of really three crises a COVID crisis, health crisis that 0:01:26.560 --> 0:01:28.560 is an economic one, which of course stems from the 0:01:28.560 --> 0:01:32.479 health crisis, and now just an outpouring of racial violence, which, 0:01:32.600 --> 0:01:34.560 as I think I heard at least implicit in some 0:01:34.640 --> 0:01:38.039 of your comments, feels very justified for for a lot 0:01:38.080 --> 0:01:41.560 of people. And uh, this is the time, as you 0:01:41.560 --> 0:01:43.520 you just played some tape in saying to bring the 0:01:43.600 --> 0:01:48.000 nation together and to restore a competent federal sector, something 0:01:48.080 --> 0:01:51.000 we so sorely lack that can meet the kind of 0:01:51.080 --> 0:01:54.760 shocks that come out a global economy fast and furiously, 0:01:54.800 --> 0:01:59.200 whether it's a pandemic, or whether it's a massive inequality, 0:01:59.360 --> 0:02:02.120 or whether it's a kind of environmental degradation. We said, 0:02:02.360 --> 0:02:07.000 we need a competent, amply funded federal sector that has 0:02:07.040 --> 0:02:11.440 the capacity to protect the American people and give them 0:02:11.440 --> 0:02:14.560 the opportunity they need to just realize their potential out 0:02:14.560 --> 0:02:17.400 there in the economy. And I think broadly speaking, that's 0:02:17.440 --> 0:02:21.640 the agenda. Jared as a former chief economist to former 0:02:21.720 --> 0:02:25.000 Vice President Joe Biden, what is his solution? Is it 0:02:25.080 --> 0:02:27.400 a universal income? What does it mean to have a 0:02:27.440 --> 0:02:30.320 strong federal response, Given the fact that we have seen 0:02:30.480 --> 0:02:34.560 a strong federal response enhance unemployment benefits, a huge program 0:02:34.760 --> 0:02:38.600 to get checks out to Americans below a certain income level. 0:02:38.960 --> 0:02:41.280 What more would find them do well? First of all, 0:02:41.360 --> 0:02:43.920 let me just say the countercyclical response, which is what 0:02:43.960 --> 0:02:47.839 you're talking about there, is very key to what we're 0:02:47.840 --> 0:02:49.760 going through right now. But that's not a plan for 0:02:49.800 --> 0:02:53.760 the future. That's a cyclical response. What I think the 0:02:53.840 --> 0:02:57.400 next president is going to need to do is to 0:02:57.560 --> 0:03:00.519 resolve structural problems within the economy. Me So one of 0:03:00.560 --> 0:03:03.600 the problems there's no one solution because there's so many 0:03:03.639 --> 0:03:07.680 different types of problems. Obviously, people need access to affordable healthcare, 0:03:07.680 --> 0:03:11.799 and Biden has articulated a path towards the universal coverage. 0:03:11.800 --> 0:03:14.840 That's very important. Probably at the top of the list 0:03:14.919 --> 0:03:17.240 now is going to be jobs. I mean that wasn't 0:03:17.240 --> 0:03:19.280 necessarily at the top of the list when the unemployment 0:03:19.360 --> 0:03:22.400 rate was around three percent, but when it's we certainly 0:03:22.400 --> 0:03:24.120 have to talk about jobs. And there you have a 0:03:24.280 --> 0:03:28.919 very deep investment agenda, whether it's on the infrastructure side, 0:03:28.919 --> 0:03:32.440 whether it's on green technology and green jobs, or whether 0:03:32.520 --> 0:03:38.600 it's UH in the caring professions, critically important healthcare, childcare, UH, 0:03:38.920 --> 0:03:43.200 really establishing higher quality jobs for folks in the services. John, 0:03:43.240 --> 0:03:45.080 he had a long time in Washington to try and 0:03:45.120 --> 0:03:48.320 engineer those structural changes, eight years in the Obama administration 0:03:48.840 --> 0:03:51.240 as well. And I asked this diplomatically speaking, I don't 0:03:51.240 --> 0:03:52.800 want to get too political here, but there will be 0:03:52.800 --> 0:03:56.040 some people who say he had his chance. What do 0:03:56.080 --> 0:03:58.800 you say back to that, Uh, you have to recognize, 0:03:58.800 --> 0:04:00.480 I mean, we do have to get political here. We 0:04:00.600 --> 0:04:04.520 have to recognize that before Barack Obama was sworn in, 0:04:05.040 --> 0:04:08.280 there was literally a cabal of Republicans who were meeting 0:04:08.520 --> 0:04:11.880 to try to block every aspect of his agenda. Now, 0:04:11.920 --> 0:04:14.120 he still managed, with the help of the Vice President 0:04:14.160 --> 0:04:16.839 at the time, UH, to push back hard on the 0:04:16.839 --> 0:04:22.320 Great Procession, to establish a very important healthcare change that 0:04:22.400 --> 0:04:27.279 brought our uninsurance rates down by UH and UH and 0:04:27.279 --> 0:04:30.200 and a financial reform that I think has proved pretty durable. 0:04:30.400 --> 0:04:33.480 And that's with tremendous political blowback. Then of course, when 0:04:33.480 --> 0:04:35.799 the Tea Party got to town, they tried to shut 0:04:35.800 --> 0:04:39.840 it down even further. So he's going to need political cooperation. 0:04:39.920 --> 0:04:41.960 And that's one reason I'm sure that Democrats are very 0:04:42.000 --> 0:04:44.560 interested in trying to get a majority in the Senate. 0:04:44.880 --> 0:04:48.560 But even amidst the kind of opposition that he in 0:04:48.560 --> 0:04:51.040 Obama's face. You know, they actually got quite a bit done. 0:04:52.720 --> 0:04:54.479 Jado was great to catch out with you. You, of 0:04:54.520 --> 0:04:56.279 course are allowed to get political. I just try and 0:04:56.279 --> 0:04:59.560 avoid it wherever I can. I don't like it either, 0:04:59.600 --> 0:05:05.840 but in place thing that, Jared, thank you. We've had 0:05:05.839 --> 0:05:10.840 wonderful conversations today with economists Stephen King of HSBC joining us, 0:05:11.160 --> 0:05:14.800 the Lauria Paul Romer on technology here at New York University, 0:05:15.160 --> 0:05:17.880 and now the former president of the New York Federal 0:05:17.880 --> 0:05:21.279 Reserve System, William Dudley, and of course with a distinguished 0:05:21.279 --> 0:05:24.720 career at Golden Sachs before that, in his service with 0:05:24.760 --> 0:05:28.560 Tim Geitner of a bit ago, a crisis ago. I 0:05:28.560 --> 0:05:31.440 guess we could say Dr Dudley, thank you so much 0:05:31.520 --> 0:05:34.800 for joining us. UH Today, John and I were talking 0:05:34.920 --> 0:05:38.400 about inequality, and one of the raps of any FED 0:05:39.120 --> 0:05:43.440 is that it is monetary policy for the elite. Explain, 0:05:43.839 --> 0:05:48.479 trickle down Federal Reserve policy. How do they assist in 0:05:48.560 --> 0:05:53.760 a lesser inequality? Well, the his monetery policy tools are 0:05:53.800 --> 0:05:57.640 really about supporting economic activity and driving the economy to 0:05:57.800 --> 0:06:03.120 higher levels of employment. However, that can actually cause financial 0:06:03.120 --> 0:06:07.159 asset values to go up, and that could actually exacerbate inequality. 0:06:07.200 --> 0:06:12.000 So the FEDS choices not have a recovery have less inequality, 0:06:12.080 --> 0:06:15.760 or have a recovery with buoyant financial asset prices and 0:06:15.800 --> 0:06:18.720 more inequality. So the fence tools are just not suited 0:06:19.040 --> 0:06:23.880 to address the inequality problem. Bill, is it that binary 0:06:24.279 --> 0:06:27.279 or can we find a better balance? I think it 0:06:27.400 --> 0:06:31.400 is pretty much that binary. Obviously. You know, when we're 0:06:31.400 --> 0:06:34.320 in a crisis like this and the FEDS embarked on 0:06:34.520 --> 0:06:37.320 special facilities, uh, you know, the FED could try to 0:06:37.800 --> 0:06:40.279 you know, undertake facilities that fund of money more to 0:06:40.760 --> 0:06:44.159 households and small businesses. But again, the FED is that's 0:06:44.160 --> 0:06:46.719 difficult for the FED operationally. How does the FED actually 0:06:46.760 --> 0:06:50.400 get money to millions and millions of households and small businesses. 0:06:50.800 --> 0:06:53.960 That's difficult to do operationally. It's much easier to intervene 0:06:53.960 --> 0:06:58.360 in the capital markets, where the FED can rely on counterparties, 0:06:58.440 --> 0:07:02.240 primary dealers and others to essentially helped the fit by 0:07:02.480 --> 0:07:05.480 financial assets. Quite more difficult to land down and one 0:07:05.520 --> 0:07:09.159 by one millions into millions of different entities. So that again, 0:07:09.200 --> 0:07:12.600 that's a challenging thing for the FED. But I think 0:07:12.640 --> 0:07:14.120 it is a challenging thing. But there is a broad 0:07:14.160 --> 0:07:17.160 consensus that they should be keeping financial conditions loose to 0:07:17.160 --> 0:07:19.880 help this economy pick up and recover. You're here very 0:07:19.920 --> 0:07:22.280 little debate about that. I think whether debate really is 0:07:22.280 --> 0:07:25.680 about how far the Federal Reserve goes when it does that. 0:07:25.960 --> 0:07:28.440 You can intervene in credit markets, Okay, might be a 0:07:28.440 --> 0:07:31.320 debate there as well, but you can help, say, big 0:07:31.360 --> 0:07:34.240 companies issue debt to keep people on the payroll. But 0:07:34.280 --> 0:07:37.080 when you start to go into junk, you do run 0:07:37.120 --> 0:07:39.240 the risk of running the getting the accusation that you 0:07:39.280 --> 0:07:42.080 are helping those who made risky bets in this market, 0:07:42.600 --> 0:07:45.040 and the likelihood that that actually spills over to the 0:07:45.080 --> 0:07:48.720 broader economy is relatively small. But I guess what I'm 0:07:48.720 --> 0:07:50.280 trying to ask is, how do you know when you've 0:07:50.280 --> 0:07:54.240 done too much? Well? I think the FEDS focus has 0:07:54.240 --> 0:07:57.760 been basically making sure that financial markets work well so 0:07:57.840 --> 0:08:01.000 people can have access. You have access to the markets, 0:08:01.040 --> 0:08:04.120 and that's really the reason for the interventions, even their 0:08:04.160 --> 0:08:06.880 intervention into the high yeld debt market. It's not so 0:08:07.000 --> 0:08:10.440 much to ba allow individual borrowers, but to make sure 0:08:10.520 --> 0:08:12.920 that people actually can access that market and raise my 0:08:13.040 --> 0:08:15.440 yeld in and I think they've been quite successful in 0:08:15.480 --> 0:08:18.720 those efforts. But you raise an important point. People who 0:08:18.720 --> 0:08:21.240 have high yield debt outstanding a lot of that a 0:08:21.240 --> 0:08:23.360 lot of times that's happened by choice, and so for 0:08:23.440 --> 0:08:27.320 the Federal Reserve to intervene and support those asset prices 0:08:27.520 --> 0:08:29.920 are is basically creating a little bit of moral hazard 0:08:29.960 --> 0:08:31.760 in the sense that you're encouraging people to take on 0:08:31.920 --> 0:08:36.440 more debt. So let's talk about the moral hazard and 0:08:36.480 --> 0:08:39.560 broaden out the implications of this period of time. There 0:08:39.559 --> 0:08:41.880 have been some analysts who say the reason why the 0:08:41.880 --> 0:08:44.360 Federals are of really, I don't want to say had to, 0:08:44.440 --> 0:08:46.280 but in some ways had to step into the corporate 0:08:46.280 --> 0:08:48.800 debt market was because of the expansion of the shadow 0:08:48.800 --> 0:08:51.680 banking system. In some ways, they were bailing out the 0:08:51.720 --> 0:08:55.000 shadow banking sector rather than the banking sector, which was 0:08:55.040 --> 0:08:58.520 actually well capitalized. How important in your view is it 0:08:58.720 --> 0:09:01.960 to set regular to wor standards for the shadow banking 0:09:02.000 --> 0:09:03.920 sector that are sort of more similar to what we 0:09:03.960 --> 0:09:07.360 see on Wall Street. Following this, given the fact that 0:09:07.640 --> 0:09:10.760 perhaps this can be viewed as they're having the systemic 0:09:10.800 --> 0:09:14.360 import of Wall Street, of the past. I think you 0:09:14.440 --> 0:09:17.440 raised a very important point is something is systemic that's 0:09:17.440 --> 0:09:20.360 been going to require the Central Bank to invene in 0:09:20.360 --> 0:09:23.760 an unusual way in the middle of a crisis. It's systemic, 0:09:23.800 --> 0:09:26.280 then it needs to be regulated to some degree. And 0:09:26.320 --> 0:09:28.960 so we had a number of players in this last 0:09:29.040 --> 0:09:32.080 few months that had essentially been bailed out by the FED. 0:09:32.160 --> 0:09:35.360 People who edge funds that were invested in cash treasuries 0:09:35.360 --> 0:09:40.120 and short treasury futures said basically their their treasury purchases 0:09:40.120 --> 0:09:43.720 were helping those entities unwind that what turned out to 0:09:43.720 --> 0:09:47.160 be a bad trade. People become very leveraged and they're 0:09:47.200 --> 0:09:49.199 they're big enough to be systemic, and I think there 0:09:49.200 --> 0:09:53.440 needs to be some regulation to rehel that in What 0:09:53.600 --> 0:09:57.240 kind of regulation could the FED push and frankly push 0:09:57.280 --> 0:10:00.719 for from other government agencies that you think would be appropriate. 0:10:01.080 --> 0:10:03.360 From the hedge funds, from private equity, from some of 0:10:03.400 --> 0:10:06.520 the investment firms that have benefited from the Fed's programs 0:10:06.520 --> 0:10:08.720 and will probably continue to based on what they have 0:10:08.840 --> 0:10:12.440 pledged going forward. Well, one thing the FED could do 0:10:12.559 --> 0:10:14.960 is is basically say, look, well, you know you're lending 0:10:15.000 --> 0:10:17.240 to these hedge funds. You're doing requot with these hedge funds, 0:10:17.280 --> 0:10:20.280 there that be a limit on how much leverage you 0:10:20.080 --> 0:10:22.880 you give them. That be one Another thing would be 0:10:22.960 --> 0:10:26.480 money mutual funds. We have mutual funds that have overnight 0:10:26.520 --> 0:10:30.200 liquidity that are invested in very a liquid assets. You know, 0:10:30.280 --> 0:10:32.839 the the sec could change in you say, if you're 0:10:32.840 --> 0:10:36.160 a mutual fund invested in really liquid assets, you can't 0:10:36.200 --> 0:10:39.040 offer overnight liquid you have to offer monthly liquidity. And 0:10:39.040 --> 0:10:41.640 that would also reduce the risk of a fire sale 0:10:41.640 --> 0:10:43.960 of assets. What the FED really wants to avoid in 0:10:44.000 --> 0:10:47.920 these kind of episodes is where people have to dump 0:10:48.040 --> 0:10:50.880 lots of assets into the market and there's no buyers 0:10:51.120 --> 0:10:56.000 and that then historts markets uh significantly. What the one 0:10:56.000 --> 0:10:57.920 way to avoid that is to make sure that the 0:10:58.080 --> 0:11:00.480 people actually have access to liquidity. Other thing that they 0:11:00.520 --> 0:11:02.559 could do is basically say, look, you have to buy 0:11:02.600 --> 0:11:06.120 liquid insurance from the FED during peacetime, so it's available 0:11:06.200 --> 0:11:08.520 during wartime. So there's a number of things that I 0:11:08.520 --> 0:11:11.120 think are worth exploring because you know, we've you know, 0:11:11.120 --> 0:11:12.880 it's one thing, if you have a financial crisis every 0:11:12.880 --> 0:11:15.400 fifty years, if you start to have a financial crisis 0:11:15.440 --> 0:11:18.880 every ten years, then the Fed's actions are going to 0:11:19.000 --> 0:11:22.320 encourage people to take more risk in the future. Long 0:11:22.360 --> 0:11:25.160 ago and far away, Bill Dudley, you and the great 0:11:25.320 --> 0:11:29.800 Ed mcelvey wrote a chapter for me on our fiscal position, 0:11:30.240 --> 0:11:33.839 and you said off of Patrick O'Brien that there was 0:11:33.920 --> 0:11:37.439 not a moment to lose. One is our moment not 0:11:37.559 --> 0:11:42.079 to lose with nine trillion dollars of presumed balance sheet? 0:11:42.520 --> 0:11:46.800 When is that moment out in the distant future. Well, 0:11:46.880 --> 0:11:50.040 what's changed, obviously is that the level of interest rates 0:11:50.080 --> 0:11:53.320 has come down dramatically. So the although we've had this 0:11:53.400 --> 0:11:57.600 explosion in battle, debt death service cost has stayed a very, 0:11:57.840 --> 0:12:00.120 very very subdued. I mean, I think we've had were 0:12:00.120 --> 0:12:02.640 than a tripling of debt outstanding over the last ten 0:12:02.720 --> 0:12:05.880 years or so, yet the debt service cost that barely 0:12:05.920 --> 0:12:08.720 moved upwards. So I think, you know, what, what happens 0:12:08.720 --> 0:12:10.600 to interest rates are going to be critical in terms 0:12:10.640 --> 0:12:14.559 of when the federal debt debt bird becomes important. It's 0:12:14.559 --> 0:12:16.160 not going to be a problem in the next year 0:12:16.280 --> 0:12:19.560 or two, but looking out further down the road, I 0:12:19.559 --> 0:12:22.080 think there will be some consequences to having such a 0:12:22.200 --> 0:12:26.160 large increase in settle bit. But what are your thoughts 0:12:26.160 --> 0:12:30.840 on how much we're monetizing the triestory deficit at the moment. Well, 0:12:30.840 --> 0:12:33.280 we're not monetizing in the sense that the FED isn't 0:12:33.400 --> 0:12:36.400 actually buying, you know, primary issuance of treasury, but that 0:12:36.520 --> 0:12:39.280 we are monetizing in the sense that the FEDS intervening 0:12:39.280 --> 0:12:42.920 in the secondary market and expanding its balance quite shrapiling. 0:12:42.920 --> 0:12:44.400 I mean, the Fed's balance sheet now is up to 0:12:44.440 --> 0:12:47.720 seven trillion dollars. It's gone up by more than three 0:12:47.760 --> 0:12:50.439 trillion dollars just in the last three months. So the 0:12:50.480 --> 0:12:53.679 balance sheet is rising very, very rapidly. Uh. And you 0:12:53.720 --> 0:12:55.840 know that's you know, there's no limit to how big 0:12:55.840 --> 0:12:57.640 the FED balance sheet can get. But you have to 0:12:57.720 --> 0:13:00.200 understand that there are some risks there for the set. 0:13:00.200 --> 0:13:03.280 I mean, the SET is basically becoming taking on quite 0:13:03.280 --> 0:13:05.760 a bit of interest rate risk, right because most of 0:13:05.800 --> 0:13:08.920 its liabilities are reserves which are overnight, and a lot 0:13:09.000 --> 0:13:11.839 of its assets are longer duration assets. So the FED 0:13:11.960 --> 0:13:15.280 actually has an interest rate risk exposure that doesn't get 0:13:15.280 --> 0:13:17.439 talked about very much. But we'll have to get you 0:13:17.480 --> 0:13:19.640 back to talk about it once more. Built only that 0:13:19.800 --> 0:13:22.559 before my New York FED president on a situation of 0:13:22.640 --> 0:13:26.280 the treasury market and on the inequality coming around from 0:13:26.320 --> 0:13:32.840 the federals eves. Right now, Steven Shivaron joins us. He 0:13:32.960 --> 0:13:35.760 is with Federated Hermes and we're thrilled it could be 0:13:35.800 --> 0:13:37.720 with us because he's one of the few people I 0:13:37.760 --> 0:13:43.280 know and the allocation game that really talks to talk straight. Steve, 0:13:43.400 --> 0:13:47.440 how do I feel if I rebalanced out of Amazon, 0:13:47.960 --> 0:13:53.000 if I rebalanced out of Alphabet? Yeah, I think you 0:13:53.080 --> 0:13:56.560 feel pretty pretty loudy and and you know some of 0:13:56.600 --> 0:14:01.160 our thoughts on rebalancing that we've discussed over the years. Look, 0:14:01.200 --> 0:14:04.400 I think right now, you know, we've lived through an 0:14:04.440 --> 0:14:08.040 unprecedented period roughly of ten years where economic growth was 0:14:08.760 --> 0:14:12.040 low but widespread, and it allowed inflation and race to 0:14:12.080 --> 0:14:15.040 stay down, and so the gulf between winners and losers 0:14:15.720 --> 0:14:20.200 was relatively narrow. You could own everything and be okay. 0:14:20.240 --> 0:14:23.040 That's not the world we're in right now. Right now, 0:14:23.160 --> 0:14:27.360 the difference between winners and losers our companies doubling or dying. 0:14:27.520 --> 0:14:30.200 And in that environment, you really need to do your 0:14:30.200 --> 0:14:32.280 work and be active in the way that you invest. 0:14:32.360 --> 0:14:35.160 You need to invest professionally. And it's a case where 0:14:35.480 --> 0:14:38.360 when you see a winner, you hold your winner, Um, 0:14:38.680 --> 0:14:40.160 and I think it's a little bit of a different 0:14:40.200 --> 0:14:43.920 game now than it was pre crisis. Steve. That certainly 0:14:43.920 --> 0:14:45.960 has been true up until now. We see the big 0:14:46.000 --> 0:14:49.600 fang names absolutely dominating the returns that we have seen 0:14:49.640 --> 0:14:53.240 so far. But there's been a shift recently towards the cyclicals. 0:14:53.320 --> 0:14:56.560 Yesterday we saw an out performance in financials the Russell 0:14:56.640 --> 0:15:00.480 two thousand. The underperformance came from the NASDAC. How much 0:15:00.960 --> 0:15:04.080 steam do you think that this trade has? You know, 0:15:04.600 --> 0:15:07.400 it's a debate that we have internally. I think it 0:15:07.480 --> 0:15:09.560 has some steam, and I think what's going on is 0:15:09.640 --> 0:15:14.360 in a very messy way, we're observing the wisdom of crowds, 0:15:14.640 --> 0:15:17.200 and you see it when you see folks shoulder to 0:15:17.280 --> 0:15:19.960 shoulder on the beach and Ocean City, Maryland, or rushing 0:15:20.000 --> 0:15:22.520 into bars in Wisconsin where even and I know that 0:15:22.560 --> 0:15:24.720 there's a whole lot more than this to it, but 0:15:24.800 --> 0:15:27.840 even when you see the large groups gathering for protests, 0:15:27.880 --> 0:15:31.320 what we're finding. What we're doing is we're pushing the 0:15:31.400 --> 0:15:34.560 limits of how hard we can reopen in ways that 0:15:34.640 --> 0:15:38.560 experts would never approve of. But it's giving us information 0:15:38.560 --> 0:15:40.880 as to how aggressive we can reopen and the truth 0:15:41.000 --> 0:15:44.600 is that if as the economy reopens, it's reopening at 0:15:44.640 --> 0:15:48.840 six capacity instead of thirty for an example, that's a 0:15:48.880 --> 0:15:51.320 whole lot fewer companies that die, and that's a whole 0:15:51.360 --> 0:15:54.600 lot more people that are currently unemployed that get back 0:15:54.640 --> 0:15:56.360 to work. And so what I think the market is 0:15:56.360 --> 0:15:59.320 trying to understand is is how long does this social 0:15:59.360 --> 0:16:02.560 distance per victory? How severe is it the period after 0:16:02.600 --> 0:16:05.760 we opened but before we get back to full capacity. 0:16:05.920 --> 0:16:10.320 And because we're pushing it so hard and it is messy, um, 0:16:10.360 --> 0:16:12.040 I think we're starting to get the impression of the 0:16:12.040 --> 0:16:14.400 market is starting to sniff out. But the reopening could 0:16:14.400 --> 0:16:16.640 be more aggressive than we originally thought. I think that's 0:16:16.640 --> 0:16:20.720 what's primarily driving the market, and cyclicals benefit from that 0:16:21.120 --> 0:16:23.280 because they're gonna be where you price in that better 0:16:23.320 --> 0:16:27.080 economic activity. You know, Steve, we talk a lot on 0:16:27.120 --> 0:16:30.960 this program about the disconnect between the brutal unemployment data 0:16:31.000 --> 0:16:33.480 and economic figures that we've been getting out frankly from 0:16:33.520 --> 0:16:36.720 the world, and the markets that have seemed somewhat divorced 0:16:36.760 --> 0:16:39.440 from reality. But it really isn't markets as a whole. 0:16:39.480 --> 0:16:42.320 It has been the fang names, the big tech shares 0:16:42.360 --> 0:16:44.840 that have benefited the most from this environment. It has 0:16:44.920 --> 0:16:47.400 not been the cyclicals which have actually lagged behind and 0:16:47.440 --> 0:16:51.080 posted losses. Are we pricing in a V shaped recovery? 0:16:51.160 --> 0:16:54.600 Given the rotation into cyclicals? Yet? Are we still pricing 0:16:54.640 --> 0:16:58.160 in a V A swoosh uh square root sign. Whatever 0:16:58.200 --> 0:17:01.600 you want to say, I I don't think it matters. Um, 0:17:01.640 --> 0:17:03.400 I mean, I think it is a U shaped recovery. 0:17:03.440 --> 0:17:06.040 It's going to take us, in our estimation until the 0:17:06.119 --> 0:17:10.080 end of until GDP levels get back to where they 0:17:10.080 --> 0:17:12.560 were at the end of nineteen is an example. But 0:17:12.600 --> 0:17:14.960 if you look back at the history of markets, markets 0:17:14.960 --> 0:17:18.200 bottom in recessions. They don't bottom after. They don't bottom 0:17:18.200 --> 0:17:21.480 when things get better. They bottom when data goes from 0:17:21.880 --> 0:17:24.440 de curating at its fastest rate to a slightly less 0:17:24.440 --> 0:17:27.640 fast rate. And if this recession really is the first 0:17:27.680 --> 0:17:31.480 two quarters of this year, well then guess what only 0:17:31.480 --> 0:17:34.280 a month away from its end? And so I think 0:17:34.320 --> 0:17:36.199 what you have to remember is a market is a 0:17:36.240 --> 0:17:38.640 series of individuals trying to get ahead of each other, 0:17:38.960 --> 0:17:40.960 because if you get the winning trade on first, you 0:17:41.040 --> 0:17:44.000 make money when everyone else comes to that realization. And 0:17:44.040 --> 0:17:47.440 what happened here is when unemployment claims stopped driving at 0:17:47.440 --> 0:17:51.280 that higher rate the market bottomed. That that's actually typical. 0:17:51.720 --> 0:17:55.880 It's frustrating because it's illogical, but it's typical of how 0:17:55.920 --> 0:17:58.520 markets react in recession. I say, you've always grit to 0:17:58.520 --> 0:18:00.199 catch out when you might fantastic a half from your 0:18:00.200 --> 0:18:03.920 Steve Chevron, the a Federated Hermes portfolio manager, My best 0:18:03.920 --> 0:18:09.200 to you and the whole of the team. A little 0:18:09.200 --> 0:18:10.960 bit later, of course, Tom hopefully were here from the 0:18:10.960 --> 0:18:13.400 President of United States to go back to the fiscal debate. 0:18:13.440 --> 0:18:16.960 Senator Pat Toomey speaking to Fox Business this morning, saying 0:18:17.040 --> 0:18:19.399 that perhaps another relief bill won't be needed if we 0:18:19.440 --> 0:18:21.879 can reopen this economy. And this speaks to something that 0:18:21.920 --> 0:18:24.120 I know Muhammad al Ain is concerned about as well, 0:18:24.520 --> 0:18:26.520 that we win the war but don't secure the peace. 0:18:26.920 --> 0:18:28.440 And I just wonder if that's something we're hear a 0:18:28.440 --> 0:18:31.000 little bit more about in the months to come. Yeah, 0:18:31.040 --> 0:18:33.359 that's that's I'm I'm really glad you brought that up, John. 0:18:33.400 --> 0:18:36.560 That really shows just some of the disparities that we 0:18:36.640 --> 0:18:40.080 see in Washington. The backdrop for all of this, folks, 0:18:40.320 --> 0:18:44.000 is an extraordinary market. We talked to the technician christopheron 0:18:44.119 --> 0:18:47.320 earlier about the one way move on small caps, the 0:18:47.400 --> 0:18:51.160 one way move on equities. Someone of great extinction, Tobias 0:18:51.280 --> 0:18:54.399 Levkovich of City Group, has been watching carefully and he 0:18:54.520 --> 0:18:57.639 joins us now, Tobias, can you be a buyer of 0:18:57.760 --> 0:19:00.959 stocks on this beautiful Wednesday morning. It's a little bit 0:19:01.000 --> 0:19:03.400 more troublesome at these levels, and markets will come back 0:19:03.440 --> 0:19:09.120 pretty sharply on legitimate reasons, including um tremendous stimulus both 0:19:09.119 --> 0:19:12.359 from the Reserve as well as from the peas from 0:19:12.359 --> 0:19:16.240 the government through the Cares Act particularly, But we've also 0:19:16.320 --> 0:19:19.640 seen the reopening of the economy. We've starting we've seen 0:19:20.280 --> 0:19:23.240 better news on the healthcare front in terms of less hospitalizations, 0:19:23.320 --> 0:19:27.360 less depths, or more better treatments, hopes on vaccines. All 0:19:27.359 --> 0:19:29.920 that is fine, and what I call Fox move is 0:19:30.000 --> 0:19:33.760 kind of played in, which is institutional investors fear of 0:19:33.840 --> 0:19:38.000 missing are not out, but rather fear of meaningfully underperforming. 0:19:38.280 --> 0:19:40.760 So as markets go up, they have to participate, and 0:19:40.800 --> 0:19:43.800 everybody focuses on the techniclos as opposed to some of 0:19:43.800 --> 0:19:47.680 the fundmentals. For example, m how's the unemployment issue is 0:19:47.760 --> 0:19:51.520 going to play out over the next six nine months. 0:19:51.840 --> 0:19:54.200 It is going to be a more difficult economic period. 0:19:54.560 --> 0:19:56.560 If as you touched on something really important, we see 0:19:56.560 --> 0:19:59.840 a price move, and there's always a temptation to if 0:19:59.840 --> 0:20:03.359 I this neat fundamental narrative that fits it. Are you 0:20:03.400 --> 0:20:06.720 saying this is just very technical? It's a position squade's momentum, 0:20:06.760 --> 0:20:08.960 it's the fair are missing out, the fair a missing 0:20:09.119 --> 0:20:12.040 of underperforming, as you've put it as well. So look, 0:20:12.080 --> 0:20:14.840 I think again there are some true fundamental backdrops to it. 0:20:14.880 --> 0:20:17.000 I think probably the best arguments I have heard from 0:20:17.040 --> 0:20:20.800 investors is that companies are making structural change. They're learning 0:20:20.800 --> 0:20:24.400 how to work through, um, the pandemic induced to virtual 0:20:24.480 --> 0:20:27.720 reality that we're kind of enduring over two and a 0:20:27.760 --> 0:20:31.720 half months. Companies have really thought, sought out the efficiencies, 0:20:32.080 --> 0:20:33.760 and they're reacting to it. So they're going to be 0:20:33.800 --> 0:20:38.320 some structural changes that therefore provide better margin opportunity for 0:20:38.359 --> 0:20:40.840 the companies on the outside. I think the problem is 0:20:41.280 --> 0:20:45.280 that those structural efficiencies also mean those jobs don't come 0:20:45.320 --> 0:20:49.840 back as quickly and creates kind of a demand problem. Um. Look, 0:20:50.200 --> 0:20:53.199 we think the forty million numbers are too high in 0:20:53.280 --> 0:20:56.120 terms of the reported claims, simply because there's a number 0:20:56.160 --> 0:20:58.880 of duplication people who have signed up weren't sure if 0:20:58.880 --> 0:21:03.000 they if it kind of you know, correctly submitted another claim, 0:21:03.080 --> 0:21:05.120 and you're seeing you know, certain states coming on telling 0:21:05.119 --> 0:21:07.520 you they're duplicate. So maybe let's say the numbers thirty million, 0:21:07.840 --> 0:21:10.920 two million, and let's even say half of those people 0:21:11.000 --> 0:21:13.919 get back their jobs by YR end, that's still another 0:21:13.960 --> 0:21:16.919 sixteen million people who don't have their jobs. Um, and 0:21:17.000 --> 0:21:19.680 it's going to be problematic in terms of top line 0:21:20.000 --> 0:21:23.560 activity for corporations. There are certain industries that are enduring 0:21:23.600 --> 0:21:26.520 this extraordinarily well, and there's certain ones that are far 0:21:26.600 --> 0:21:30.040 more damaged. Because what's really happened is the pandemics has 0:21:30.080 --> 0:21:34.240 accelerated certain trends that were kind of already underway. So 0:21:34.680 --> 0:21:38.000 the demise of brick and mortar retail has you know, 0:21:38.040 --> 0:21:42.600 increased rapidly. The you know, the trend towards telemedicine has 0:21:42.680 --> 0:21:46.119 also increased the other way very you know significantly. So 0:21:46.160 --> 0:21:48.600 those are some of the things that are changing secularly. 0:21:48.800 --> 0:21:50.840 But again, I think companies have really learned how to 0:21:50.880 --> 0:21:53.000 work through this, and it is a it is a 0:21:53.000 --> 0:21:55.760