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Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm term Keene

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Speaker 1: jay Leye. 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. Want

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Speaker 1: to start this morning's conversation with Lesia the longest He

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Speaker 1: joins us from invest Goo unless As always, we will

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Speaker 1: not ask our guests to be epidemiologists if they are

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Speaker 1: not epidemiologists. What I'm interested in from an investor's perspective

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Speaker 1: this morning, it's not just how the pandemic data changes,

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Speaker 1: but how investor attitudes changes to those changes in the data.

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Speaker 1: Can you walk me through how you think investors will

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Speaker 1: respond to the latest increase in infections we're seeing across

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Speaker 1: several states. Well, this, this beginning of a second wave,

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Speaker 1: is quite concerning because I think all of us as

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Speaker 1: investors would have expected it a second wave, but would

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Speaker 1: have expected it maybe in the fall. So this second

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Speaker 1: wave starting, especially here in the US, so early on

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Speaker 1: in the summer, is a bit counterintuitive and really assigned

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Speaker 1: that that reopening is is a very delicate situation. I

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Speaker 1: think this puts a spotlight also on the reopening process

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Speaker 1: in Europe. We had successful reopening so to speak. In

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Speaker 1: Asia with the new exceptions right in South Korea, for example,

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Speaker 1: we had a concerning rise. But in Asia broadly speaking,

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Speaker 1: these second waves were contained rather quickly. The implications for

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Speaker 1: investors are are are meaningful because the rotation between defensive

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Speaker 1: and cyclicals, or say from growth to value, or from

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Speaker 1: large cups to small cups. We're really really large themes

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Speaker 1: that were taking place in the last couple of weeks.

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Speaker 1: Unless yeah, there is a belief that they bought to

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Speaker 1: another lockdown is much much high because so many of

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Speaker 1: these states have now built out healthcare capacity that track

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Speaker 1: and trace is far more far forward it was, say

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Speaker 1: several months ago. What's your response to that, Well, the

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Speaker 1: it is natural to assume that over the last three

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Speaker 1: or four months, we uh we have gotten more prepared

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Speaker 1: with respect to testing, with respect to amount of capacity

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Speaker 1: in the healthcare system to handle this UM. I think

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Speaker 1: it's reasonable to assume that the second wave will not

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Speaker 1: cut us as unprepared as we were the first time. So,

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Speaker 1: in my opinion, again with that in mind, the investment

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Speaker 1: strategies should be focused on, as we have argued before,

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Speaker 1: on actually harvesting more credit premium across the credit spectrum,

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Speaker 1: in high yield, in investment rate as these spaces tend

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Speaker 1: to rely more on the amount of monetary stimulus and

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Speaker 1: credit stimulus that we're seeing, which continues, well, equities will

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Speaker 1: suffer to your point earlier about the impact on cyclical

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Speaker 1: equities will suffer more from the disappointment or lack of

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Speaker 1: momentum in earnings that were likely to see in the

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Speaker 1: second half of the year, unless you know it's the

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Speaker 1: V shape recovery died yesterday with Chairman Powell's persistent comments,

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Speaker 1: how does the equity market adjust to that? I mean,

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Speaker 1: if it's another wall of worry, doesn't that benefit stocks? Well? So,

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Speaker 1: maybe not to the same extent, to be honest, because

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Speaker 1: the first wave since the FED and fiscal stimulus um,

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Speaker 1: not only the FED but globally was really about uh,

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Speaker 1: multiples expansion, right, but stocks rows, and there was a

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Speaker 1: V shaped recovery in stocks. It was entirely driven by

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Speaker 1: the price component and multiples expansion. Earnings, as we know,

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Speaker 1: are still in a very very difficult situations and continue

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Speaker 1: to fall from this point on to maintain that recovering stocks,

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Speaker 1: we need to see earnings growth at the cost even

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Speaker 1: multiples compression or or multiple staying flat. But it's critical

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Speaker 1: here in the second phase of potential stocks rally to

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Speaker 1: see the support from earnings growth. While for credit as

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Speaker 1: we're as we're arguing earlier, being senior in claims, just

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Speaker 1: being able to avoid a serious round of defaults and

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Speaker 1: having the backstop of the Federal Reserve that should allow

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Speaker 1: for credit premium to be harvested by investors. Lessio, let's

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Speaker 1: pick up on that and build I know that you've

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Speaker 1: been recommending taking credit risk, or you have been taking

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Speaker 1: credit risk within the high yield space over investment grade

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Speaker 1: in order to capture that extra risk premia. I'm trying

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Speaker 1: to understand the fedback stopping valuations to an extent, but

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Speaker 1: not necessarily preventing companies from going bankrupt as we see

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Speaker 1: the bankruptcy rates rising to the highest level since two

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Speaker 1: thousand and nine. So how do you draw this distinction

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Speaker 1: and how big of a risk is it that you're

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Speaker 1: still going to see this wave of bankruptcies escalate. It

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Speaker 1: is a serious risk, um and these are risky UH

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Speaker 1: credits in some parts of the high old market from

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Speaker 1: our perspective, As I said, allocators, the reminder is always

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Speaker 1: to be to be very diversified in your or credit

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Speaker 1: portfolios in in order to avoid those ideas idiosyncrasies. For

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Speaker 1: more nimble investors, one valid approach this early on into

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Speaker 1: the recovery is to invest in defensive fixed income factors

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Speaker 1: such as quality, high your credit, staying down into the

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Speaker 1: into the curve spectrum, into the into the maturity spectrum,

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Speaker 1: stay staying fub sub five years on both investment grade

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Speaker 1: and high yield, and focusing on on um for the

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Speaker 1: same ratings co horts on on attractive quality and attractive spreads.

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Speaker 1: So when you look at the fixed income universe, you

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Speaker 1: can draw an analogy as you have in equities, focusing

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Speaker 1: on quality and low volatility factors UM rather than value

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Speaker 1: and up in the risk spectrum in credit. Unless you're

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Speaker 1: very quickly here does text still lead? I mean, with

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Speaker 1: all the adjustments, the grimness that we heard from Chairman Powell,

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Speaker 1: is there revenue build of the text that be all

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Speaker 1: and end all of the equity market? Uh? Text still

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Speaker 1: still leads in the sense that it's the it's where

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Speaker 1: quality is today is where the you know, in a

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Speaker 1: low growth world and in a world where more than

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Speaker 1: ever a globalized and diversified source of revenue growth will

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Speaker 1: be important in order to diversify the economic risk. UH

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Speaker 1: text still leads um and and it will provide a

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Speaker 1: little bit less ceclicality, especially at these inflection points where

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Speaker 1: we're beginning to question the sustainability of that v shape. Alessia.

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Speaker 1: I always tried to catch up with this, Alessia the

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Speaker 1: longest that of invested because journal Lisa have mentioned there

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Speaker 1: is a change in the air, and it's not funny.

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Speaker 1: There has been good news on a pandemic over the

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Speaker 1: last number of days, a trend improved and that is

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Speaker 1: abruptly reversed in the last two or three days as

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Speaker 1: a pandemic spreads across this nation and spreads out of

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Speaker 1: troll in so many developing economies. Howard co is a doctor.

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Speaker 1: He is a physician out of Yale University. And yes

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Speaker 1: he had public service with Barack ob Obama in the

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Speaker 1: Department of Health, but far more in the people of

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Speaker 1: the Boston community know this. He has been a true

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Speaker 1: star of medicine in a very medical community. How much

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Speaker 1: so he's done the rarest of rare things in medicine.

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Speaker 1: He's thrown out the first pitch at Fenway Park, and

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Speaker 1: we're thrilled that Dr Coh could join us this morning

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Speaker 1: on the pandemic. Dr co you are so esteemed in dermatology,

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Speaker 1: in oncology, a broad set of internal medicine. Do you

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Speaker 1: buy the idea of a second wave or is it

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Speaker 1: just a spread of the first wave of this virus?

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Speaker 1: Well on March of their tief, the President declared a

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Speaker 1: natural emergency for our country, and unfortunately, the latest data

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Speaker 1: indicate that that emergency is far from over, and we're

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Speaker 1: seeing rising cases and hospitalizations in the West, in the South,

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Speaker 1: and the southeast and rural parts of our country. Rising

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Speaker 1: hospitalizations in particular concern all of us because if hospitals

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Speaker 1: are overwhelmed, patients can't get the care they need and deserve.

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Speaker 1: And as we enter the summer and businesses want to reopen,

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Speaker 1: everybody wants to have a confidence that this pandemic is

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Speaker 1: behind us, and we can't say that at all. So

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Speaker 1: we have to follow all these trends very very carefully,

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Speaker 1: especially as we move into the fall and beyond. So

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Speaker 1: Dr Cole, I want to draw a distinction between a

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Speaker 1: second wave that stems from people actually in a reopening

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Speaker 1: economy getting back out there in a second wave resulting

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Speaker 1: from policy that perhaps isn't securing against a resurgence in

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Speaker 1: the virus. Is what we're seeing right now in Texas

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Speaker 1: and Arizona, an inevitable outcome to the reopening of the economy. Well, Lisa,

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Speaker 1: we're very concerned because we know what works to prevent

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Speaker 1: infections and prevent death, and that is the best public

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Speaker 1: health practices possible. Some states have followed that and watched

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Speaker 1: the indicators and the trends very very closely as they've

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Speaker 1: opened up. Others have proceeded despite the fact that cases

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Speaker 1: and hostilizations and deaths have been increasing. So this is

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Speaker 1: a combination about biological threat but also policy issues that

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Speaker 1: need to be coordinated better on the federal level. At

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Speaker 1: least we have right now fifty states going in fifty

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Speaker 1: different directions. We need a one country, one government approach

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Speaker 1: to this pandemic going forward. Dr CO a lot of

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Speaker 1: people saying there is little appetite to review some of

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Speaker 1: these shutdowns that we saw throughout the nation going forward

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Speaker 1: just because of the economic hit. What other policy tools

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Speaker 1: do you see being effective, they could potentially reduce the

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Speaker 1: number of cases and the potential for a serious second

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Speaker 1: wave going forward without shutting down the economy again. So

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Speaker 1: we have a try the trends very closely. That that's

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Speaker 1: the number one message here. We have to watch those cases, hostilizations, deaths.

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Speaker 1: We have to target our efforts to high risk communities.

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Speaker 1: We know, for example, the communities of Color have taken

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Speaker 1: a real disproportionate burden of the death and suffering to date.

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Speaker 1: We have to make sure that the testing and the

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Speaker 1: contact tracing, and the preparations for PPE for the fall

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Speaker 1: and beyond have to be coordinated at the highest level.

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Speaker 1: These are the things we have to be paying attention

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Speaker 1: to as one country, not fifty states going forward. Howard,

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Speaker 1: Professor Delta, fantastic to catch up with you this morning,

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Speaker 1: said thank you very much for your inputs. Right now,

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Speaker 1: George Bory with us. He's well as far ago, and

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Speaker 1: he writes brilliant, brilliant note summarizing the what to do

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Speaker 1: in the fixed income markets. George Bory, what do I

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Speaker 1: do right now? I've got a small pot of money.

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Speaker 1: I don't want to be inequities. I own enough Apple

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Speaker 1: or I own enough Amazon whatever and I need coupon

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Speaker 1: Where is it? Tom? Good morning, John, Lisa, it's great

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Speaker 1: to be on the show. Thanks for having me, and

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Speaker 1: you ask one of the most important questions I think

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Speaker 1: all investors face today, Tom is sort of what do

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Speaker 1: I do with my money? And you know what people

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Speaker 1: have done with their money in the last you know,

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Speaker 1: call a couple of months, as we've seen a math

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Speaker 1: to rush into UH into very secure money market and

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Speaker 1: government like securities, specifically in the fixed income markets. You've

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Speaker 1: seen money market funds kind of grow by up to

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Speaker 1: two trillion dollars. It's truly a spectacular amount of money. UM. Now,

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Speaker 1: Historically that money will tend to stay in the in

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Speaker 1: the front end of the curve while the economy UH

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Speaker 1: starts to kind of shake itself out. And as we've

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Speaker 1: seen today, UH, you know, we're seeing a bit of

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Speaker 1: a risk adjustment, as you know, people take a little

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Speaker 1: bit of a breather after a pretty spectacular run in

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Speaker 1: most markets. And I think at this particular point in time,

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Speaker 1: it is still a good idea to sort of incrementally

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Speaker 1: move yourself out of the out the risk spectrum. UM

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Speaker 1: yields are very low cash yields are BURO effectively UM

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Speaker 1: and keeping maintaining income is going to be an increasing

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Speaker 1: challenge as we move forward. The FED told us yesterday

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Speaker 1: FED funds are staying at zero, are very close to

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Speaker 1: zero through the end of That means the reach for

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Speaker 1: yield for any saver, for any investor is going to

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Speaker 1: be UH is going to be pretty significant. And Tom,

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Speaker 1: you and I've been on the I've been on the

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Speaker 1: show for many years. We've we've discussed this. UH. This

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Speaker 1: is not a new phenomena. It's just something that it's

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Speaker 1: a reminder. It's gonna be with us for a long

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Speaker 1: period of time. So we look for safe places to

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Speaker 1: park money, to basically try and earn a little bit

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Speaker 1: of income and protect your capital. Capital protection is absolutely critical,

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Speaker 1: and we find many places in the world have fixed

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Speaker 1: income to be able to do that. Well. George and

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Speaker 1: my long risk because I'm longer this economy or long

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Speaker 1: risk because I'm long financial repression. I think, well, you

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Speaker 1: are you you are long risk up to a point.

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Speaker 1: I mean, I think what the FED has done over

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Speaker 1: the last you know, certainly over the last two three months,

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Speaker 1: you know, there's been a massive reduction in volatility. And

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Speaker 1: I think what the FED has done very well is

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Speaker 1: they've they've allowed markets to reopen, they've reliquefied markets, they've

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Speaker 1: repressed volatility. Uh. And you know, there's I guess there's

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Speaker 1: some theoretical limits to how how much risk they can

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Speaker 1: ultimately repressed, but that we don't seem to have reached

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Speaker 1: that point yet. But they've been very successful at reliquifying markets.

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Speaker 1: Now that's encouraged investors to basically reach back out the

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Speaker 1: risk spectrum. The basic mantra of don't fight the Fed,

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Speaker 1: you know, is alive and well today and markets have

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Speaker 1: responded accordingly. Now, yesterday, I think the FED did a

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Speaker 1: very interested, very interesting kind of pivot, if you will. Uh.

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Speaker 1: You know, the way we viewed it is, they delivered

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Speaker 1: a very strong statement of concern. They highlighted the uncertainties.

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Speaker 1: It wasn't necessarily new information, but it was a stark

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Speaker 1: reminder that the out the outlook is very unclear. And

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Speaker 1: and and they've increased credit availability. They've allowed reasonably healthy

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Speaker 1: borrowers to access capital markets. But credit availability it might

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Speaker 1: smooth and economic shock, but it doesn't eliminate the economic cycle.

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Speaker 1: And I think that's what they told us yesterday, you know,

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Speaker 1: expect a long drawn out recovery with the potential of

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Speaker 1: more shocks, and so you're seeing markets respond accordingly, George.

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Speaker 1: To see the cycle play out means that we are

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Speaker 1: going to continue seeing bankruptcies. When you say going out

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Speaker 1: the risk spectrum, are you talking triple C s even

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Speaker 1: though there is the high degree of likelihood to federal

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Speaker 1: not backstop these companies, We say, you make an excellent point.

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Speaker 1: You know, in the world of fixed income, is is

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Speaker 1: tranched by risk, typically by ratings, and the higher quality

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Speaker 1: companies we're talking triple A to mostly triple these. You know,

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Speaker 1: those companies have been able to access the liquidity that

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Speaker 1: the FETE has been able to create. And these companies

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Speaker 1: are largely in survival mode right now. They've increased their

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Speaker 1: cash holdings, they've refinanced their maturities, They've basically bolstered up

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Speaker 1: their balance sheets. I think in anticipation of you know,

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Speaker 1: rougher times ahead, and I think they've taken what a

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Speaker 1: what a big, large, mature company should do. They're they're

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Speaker 1: exercising their financial flexibility, so their position for weaker times

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Speaker 1: going ahead. As you go down the risk spectrum, though

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Speaker 1: it gets increasingly difficult to do that, and we would

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Speaker 1: still have sort of, I think a bit of a

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Speaker 1: higher quality bias um. As you get further down the

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Speaker 1: risk spectrum, there's less support. You know, the fet is

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Speaker 1: not willing to to help these companies, there's less financial flexibility,

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Speaker 1: and then there's very acute economic pressures to our central

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Speaker 1: expectation is at default rates are going to continue to

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Speaker 1: rise this year, you know, upwards of eight on a

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Speaker 1: trailing twelve month basis. Now that's not a historical high,

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Speaker 1: but it's certainly a very kind of stressed level, and

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Speaker 1: that means there's more pain to come. So when you

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Speaker 1: go down the risk spectrum, our our point of focus

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Speaker 1: is cash flow durability. There are functioning companies, you know

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Speaker 1: in the single buble b maybe some triple seas that

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Speaker 1: are that are functioning, that actually have durable cash flow

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Speaker 1: and they actually have very limited borrowing needs. So those

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Speaker 1: companies are good opportunities, but they're few and far between. George,

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Speaker 1: I've gotta leave it. That send up best to the

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Speaker 1: saying why get George Bowery of Franco's right now? And

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Speaker 1: this is in celebration of constructive infrastructure in America is

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Speaker 1: Amy lou She's at the Brookings Institution, but far more

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Speaker 1: importantly does urban policy and is known for success or

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Speaker 1: public service to the nation under Henryson's is noted, but

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Speaker 1: far more her policy program at Brookings is truly world class.

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Speaker 1: Amy Louise, thank you so much for joining us. We

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Speaker 1: are celebrating in New York with a pandemic, the miracle

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Speaker 1: that is a new terminal at LaGuardia. One of our

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Speaker 1: viewers and listeners want to know why we can't do

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Speaker 1: more Laguardias coast to coast. Why is it so hard

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Speaker 1: to succeed it infrastructure in this country. Well, good morning,

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Speaker 1: thank you for having me. Well, the good news is

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Speaker 1: there is by partisan support for infrastructure reform and UM

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Speaker 1: investment in infrastructure. The challenge right now is there is

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Speaker 1: not agreement on UM how to finance that infrastructure or

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Speaker 1: what is the infrastructure of the future, And there's enormous

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Speaker 1: debates that we can't just continue repay highways UM in

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Speaker 1: the same way or connect rural areas together as the

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Speaker 1: Highway Act had traditionally done, but instead we need to

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Speaker 1: invest in more digital infrastructure global connectivity. As you mentioned UM,

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Speaker 1: UM and UM more multimodal choice given the fact that

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Speaker 1: people today move in very different ways, So we do

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Speaker 1: need to think about a huge oriented UM infrastructure with

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Speaker 1: a much more diverse mix of public private resources. Okay,

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Speaker 1: I let me make clear, folks, I'm the only one

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Speaker 1: in this conversation that can remember Dwight David Eisenhower and

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Speaker 1: the advent of the interstate highway system, and tons has

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Speaker 1: been written about that in all Why can't we have

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Speaker 1: an interstate away system of the digital world. Why can't

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Speaker 1: America be Apollo class on that go to the Moon

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Speaker 1: class on that UM. I do think the US is

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Speaker 1: incredibly behind in thinking about a world class UM modern

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Speaker 1: infrastructure UM the way a lot of our international peers

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Speaker 1: have done. UM. We actually need a vision for infrastructure.

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Speaker 1: I think what's so interesting right now is we've had

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Speaker 1: calls for even up to you know, a trillion dollars

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Speaker 1: of an infrastructure package, but no one has said, UM,

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Speaker 1: what that infrastructure is. We do need air connectivity, we

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Speaker 1: do need water sewer infrastructure upgrades, and to make sure

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Speaker 1: that every single household, including those in flints, have access

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Speaker 1: to clean water. We have to have digital infrastructure. As

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Speaker 1: you said like a new digital highway, and each of

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Speaker 1: those systems UM are financed differently, right, not going through

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Speaker 1: the state d OT systems the way the highway system

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Speaker 1: was built. It's a lot more complicated, which means we

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Speaker 1: need even stronger public private partnerships to make sure that UM,

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Speaker 1: this more diverse and broader set of businfrastructure UM is supported, invested,

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Speaker 1: and modernized. AMY. We're talking about infrastructure, which maybe in

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Speaker 1: the future when the government gets together with some sort

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Speaker 1: of infrastructure bill to help stimulate growth and do some

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Speaker 1: of these major projects. But in the here and now,

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Speaker 1: we're reopening economies. This week New York City reopening, and

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Speaker 1: there's a question of what the fate of the of

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Speaker 1: the United States is major cities will be coming out

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Speaker 1: of this pandemic. Given the fact that the spread has

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Speaker 1: been fastest in some of these areas. How concerned are

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Speaker 1: you about the death of the modern city as we

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Speaker 1: know it and sort of the dwindling and population that

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Speaker 1: a lot of people are calling for. Well, first of all,

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Speaker 1: I think we have to remind people that UM this

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Speaker 1: pandemic is impacting everyone, no matter what kind of community

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Speaker 1: you live in. In fact, UM the fastest growth in

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Speaker 1: New cases are not in the big cities, but they're

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Speaker 1: in the suburbs there, in the smaller cities and the

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Speaker 1: rural areas. So the pandemic actually has no borders. So

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Speaker 1: when I hear questions about what is the future of

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Speaker 1: the city UH in a post COVID world, there's an

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Speaker 1: assumption that density puts you at high risk. Yet the

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Speaker 1: reality is that the risk infection is true no matter

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Speaker 1: where you live. And in the long run, what we've

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Speaker 1: seen is that cities will continue have continued to rise

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Speaker 1: over the centuries, and the knowledge economy, the global economy

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Speaker 1: continues to reward places with a high density of talent,

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Speaker 1: of amenities, top tier research in UH, universities, mobile airports,

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Speaker 1: and other innovative firms. So I don't see that changing,

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Speaker 1: but only accelerating in the years to come. Um. But

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Speaker 1: that's said, I do think for high cost cities like

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Speaker 1: New York, like the Day area, there are real questions

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Speaker 1: about whether one can afford to live in a superstar

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Speaker 1: city without a job or with economic uncertainty. You know.

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Speaker 1: Facebook and Twitter, as you know, has announced that some

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Speaker 1: of their employers and employees can now tele a work

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Speaker 1: permanently and that may spur some workers to jump at

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Speaker 1: the opportunity to move to more affordable cities in the heartland,

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Speaker 1: which to me is actually really great for those cities

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Speaker 1: and still good for the economy overall. Dr thank you

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Speaker 1: so much for joining us. Thank you, thank you, thank

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Speaker 1: you for being with us. Thanks for listening to the

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Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,

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Speaker 1: or whichever podcast platform you per I'm on Twitter at

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Speaker 1: Tom Keane Before the podcast. You can always catch us worldwide.

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Speaker 1: I'm Bloomberg Radio