Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Daily
Speaker 1: we bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. This
Speaker 1: conversation is so important with David Constant and Golden Sacks
Speaker 1: that we're gonna get right to it. All three of
Speaker 1: us are really curious about his nuance. Why is that
Speaker 1: in April he got it right? He made a call
Speaker 1: forget about another bot on the gloom Crew torm to
Speaker 1: shreds and Constant went long and there's been a nuance
Speaker 1: to Golden Sachs view forward through this tumultuous two thousand
Speaker 1: twenty David Constant, thank you so much for joining. Just
Speaker 1: simple now what now? What well? This year has been
Speaker 1: about the medical situation. At the core of the challenge
Speaker 1: is medicine. And so if you think about what the
Speaker 1: super Forecasting Project at the University of Pennsylvania is showing,
Speaker 1: they have a estimate every day of what the likelihood
Speaker 1: that there will be twenty five million doses of an
Speaker 1: FDA approved vaccine somewhere in the next six months, twelve months,
Speaker 1: eighteen months, various points in time. The reason I mentioned that,
Speaker 1: Tom is because if you look at where we were
Speaker 1: in July, middle of July, it was reading sixt likelihood
Speaker 1: that there would be a vaccine widely distributed between October
Speaker 1: of this year and April next year. Okay, that ran
Speaker 1: up to sev by the first week of September, and
Speaker 1: the market, the stock market went up around eleven, so
Speaker 1: you check your numbers, that's around. However, that probability has
Speaker 1: since turned around and it's gone from seventy down to
Speaker 1: this morning, and that likelihood has corresponded with a decline
Speaker 1: in the S and P five hundred by around nearly ten.
Speaker 1: So my kind of message to you is that basically
Speaker 1: we have been treating the likelihood of a vaccine and
Speaker 1: you can see that in the data. And John, I
Speaker 1: just want to mention this is Phil Tetlock at the
Speaker 1: University of Pennsylvania with this wonderful book super Forecasting. John
Speaker 1: and David, you were looking at the benchmark compared to
Speaker 1: the probability of getting a vaccine. Can you got beneath
Speaker 1: the benchmark? Because you put out some research on this recently,
Speaker 1: and I think it's really quite interesting. Can you build
Speaker 1: on it? Forest David? Sure. So, I'd say the fundamental
Speaker 1: just a couple of key debates they're going on with
Speaker 1: the with the investor community right now. One is related
Speaker 1: into yield curve and inflation and with the rate interest
Speaker 1: rate market will be But another one at the core
Speaker 1: of that is about growth versus value and where should
Speaker 1: one be. And the core argument is that the people
Speaker 1: behind the value story would say that, gee, when there's
Speaker 1: a vaccine that's developed, when and if that that that
Speaker 1: takes place, that will allow the acceleration of the normalization
Speaker 1: of economic activity, and that means the companies and the
Speaker 1: industries and the sectors that are more cyclical will rebound
Speaker 1: and do better. Uh, that's sort of the narrative behind
Speaker 1: why to own cyclicals. Now I would reject that or
Speaker 1: say that there's a better approach, that the gap in
Speaker 1: valuation is so significant its value not necessarily cyclicals, that
Speaker 1: is the better place to be. So that's the first observation.
Speaker 1: You want to be in value as opposed to necessarily cyclicals.
Speaker 1: And then the question is what's the investment arising so
Speaker 1: tactically value maybe it maybe is attractive right now, no
Speaker 1: question about that, one of the more attractive UH times
Speaker 1: to see value over the last twenty years. But ultimately,
Speaker 1: if you're looking for a longer term story, the secular
Speaker 1: growth companies the ones that have actually generated revenue growth
Speaker 1: and earn his growth despite the pandemic. If we look
Speaker 1: at what happened the second quarter, third quarter looking out,
Speaker 1: the way you want to think about this is if
Speaker 1: you go into the entire market, how many companies are
Speaker 1: able to consistently deliver double digit revenue growth? Well, the
Speaker 1: answer is you start looking at who's generated revenue growth
Speaker 1: in two thousand eighteen and two thousand nineteen. We'll skip
Speaker 1: over this year for a minute. Expected for two thousand
Speaker 1: twenty one, two thousand twenty two, let's get a five
Speaker 1: year compound annual growth will pick up this year, So
Speaker 1: that five year period, only one stocks are expected to
Speaker 1: have been delivering and are expected to do so. So
Speaker 1: that I think is an important argument. So I think
Speaker 1: there's a two two prong way to approach the market
Speaker 1: tactically value, but ultimately it's about growth and the secular
Speaker 1: growth stories I think are likely to be the winners
Speaker 1: for portfolio managers. If you look out twelve months from now.
Speaker 1: It's David, two parts to the argument that you just
Speaker 1: laid out. Let's get to the second part in just
Speaker 1: a moment and pick out the first part. Just give
Speaker 1: us a little one. I want the distinction between value
Speaker 1: and cyclicals. What is that right now? So it's an
Speaker 1: excellent question, Jonathan. It is the idea most people conflate
Speaker 1: those two and they think about cyclical stocks that are
Speaker 1: necessary sort of industrial UH would be would be a
Speaker 1: classic example. UH. Financial stocks often interest rate sensitive. Our
Speaker 1: view basically, cyclical move with the economy, and that's true.
Speaker 1: But then when we think about that those are factually true.
Speaker 1: We can look at a correlation. You say, well, gee,
Speaker 1: is economic data getting better? What sectors and and and
Speaker 1: and stocks tend to do better in that kind of environment.
Speaker 1: Those would be defined as cyclical sort of high UH
Speaker 1: correlation with economic activity. But value is about what is
Speaker 1: the market trading, and so you can look at at
Speaker 1: multiples and and pe multiples or earning zealds are different
Speaker 1: ways of thinking about valuation, and it doesn't necessarily mean
Speaker 1: they're economically sensitive. And so the message Jonathan's kind of
Speaker 1: that first part is we want to find lower multiple
Speaker 1: companies valuation, they aren't necessarily cyclical sensitivity. For example, you
Speaker 1: look at the financials be challenging in a flat yield
Speaker 1: curve environment to actually deliver on better growth, slim net
Speaker 1: interest margins, big reserves because of potential UH long losses,
Speaker 1: UH difficulty to under the c CAR proposals, whether the
Speaker 1: financials can pay dividends or buyback stock. So those are
Speaker 1: some of the headwinds. So those are classically cyclical areas
Speaker 1: of the market, but it wouldn't necessarily UH screen is
Speaker 1: attractive on evaluation basis. That's an example, David, just broadening out,
Speaker 1: you still reasserted your call for thirty six hundred on
Speaker 1: the SMP at year end less than two weeks ago.
Speaker 1: If we don't get fiscal support in Washington, do you
Speaker 1: still affirm your thirty six hundred forecasts. The answer is yes,
Speaker 1: thirty six hundred is a target for end of the year,
Speaker 1: thirty eight hundred middle of next year. And the argument
Speaker 1: I said at the very beginning, ultimately this is a
Speaker 1: medical situation, medical challenge for the economy, for society, and
Speaker 1: ultimately for the equity markets. And I pointed out that
Speaker 1: the level of the market at the broad level has
Speaker 1: really been trading pretty carefully, pretty closely with the probability
Speaker 1: of a vaccine being introduced. So part of the assumption,
Speaker 1: uh that I'm making is that there will be a
Speaker 1: vaccine that's identified. Probably what most portfolio managers are expecting
Speaker 1: and what some of the forecasts are are projecting is
Speaker 1: perhaps in October, may be approved by the FD at
Speaker 1: the end of the year and be widely distributed in
Speaker 1: the first six months and next year. The market, as
Speaker 1: you know, is forward looking, and so they'll start to
Speaker 1: discount that back. And a few weeks ago, with a
Speaker 1: seventy likelihood that it was going to be a vaccine
Speaker 1: available by the end of the first quarter, stock market
Speaker 1: was close to our target, and now it's obviously pulled back.
Speaker 1: I think that's a little less uh probable in the
Speaker 1: in in terms of the data, So there's condrad remains it.
Speaker 1: I don't think it's as essential from a from a
Speaker 1: fundamental point of view, I want to see the resolution
Speaker 1: in Washington. David John Farrell loaded the boat on Apple
Speaker 1: and Amazon a long time ago. That's why he's in London.
Speaker 1: He's looking at four thousand square feet and notting Hill,
Speaker 1: which is great, but what do you do on a
Speaker 1: relative or absolute basis if you want to rebalance out
Speaker 1: of a tech overload? I mean, how do you approach
Speaker 1: the institutional or retail account to high net worth account
Speaker 1: that says, look, I've made a success of it, like Pharaoh?
Speaker 1: What do I do? How do I move out of it?
Speaker 1: How do you lighten up? Intelligently? So it is a
Speaker 1: an absolute essential issue that many growth portfolio managers are
Speaker 1: grappling with. And the issue is as follows that when
Speaker 1: you look at the Russell one thousand Growth Index, the
Speaker 1: top five stocks, those five stocks about twenty five of
Speaker 1: the equity cap of the SMP five andred but the
Speaker 1: thirty nine of the Russell one thousand Growth. So a
Speaker 1: lot of growth managers are actually uh in passive violation,
Speaker 1: out of compliance with the SEC guidelines. What makes it
Speaker 1: diversified mutual fund because they have too great a concentration
Speaker 1: in some of those positions. So the answer that that
Speaker 1: I was sort of providing to you, and that framework
Speaker 1: is looking at which companies can emulate from a earning
Speaker 1: from a revenue, from a sales growth point. If you
Speaker 1: can emulate those big stocks, that you're just mentioning some
Speaker 1: of the big tech stocks and there's only there's not
Speaker 1: that many. But you can think about Vertex, you can
Speaker 1: think about PayPal, UH, you can see Intuitive Surgical. There's
Speaker 1: a variety of companies that have delivered on ten percent
Speaker 1: revenue growth last several years and are projected to do so.
Speaker 1: In some cases have wide moats around their businesses. And
Speaker 1: when I work with the analysts at Goldman, these are
Speaker 1: some of the stocks that we screen as a strategist
Speaker 1: and then also UH that corresponds with the fundamental analysis
Speaker 1: of the companies. And so the answer, Tom is that's
Speaker 1: a way of substituting for some of those large cap
Speaker 1: growth companies. Those growth companies will still do well, but
Speaker 1: these are companies that are maybe more middle size or
Speaker 1: sort of in the ranking order, maybe number seventy one
Speaker 1: or seventy three, seventy They can move up the ranking
Speaker 1: to be one of the larger stocks and that leads
Speaker 1: to out performance. And Tom, that's how I committed that
Speaker 1: tackle that problem. Devid is good to hear from you,
Speaker 1: as always, send out best of the team. David coosten
Speaker 1: neck Alma, SAKS, Chief Equity Strategists. This is the Conversation
Speaker 1: of the Day on fixed income. Cathy Jones is a
Speaker 1: swab center for financial research, and what's important here is
Speaker 1: she's got a wonderful visibility on the challenges individual investors
Speaker 1: are having in bonds. Kathy Jones, where did the sixty
Speaker 1: forty portfolio go? Yeah, a lot of people have tried
Speaker 1: to abandon it and hopes of getting more income, getting
Speaker 1: more safety, getting more diversification. But I really don't think
Speaker 1: it's disappeared entirely. I think it just has to be
Speaker 1: more nuanced on the fixed income side. So if you
Speaker 1: you know, if you look at rolling correlations over the
Speaker 1: last six months or five years, you're still getting diversification
Speaker 1: from treasuries and you know, higher quality bonds. It's just
Speaker 1: the upside is much more limited and the magnitude of
Speaker 1: those changes is much smaller. What's the elasticity on the
Speaker 1: downside if we get yield up and priced down, what
Speaker 1: could be the magnitude of that price down? You know,
Speaker 1: I'm looking at if I look at the tenure treasury
Speaker 1: and we we get to move up and yield this
Speaker 1: year or in the next year, I'd say maybe ninety
Speaker 1: basis points to one percent. I don't think we get
Speaker 1: much more than that on the upside. On the downside,
Speaker 1: you might get down about forty five basis points or
Speaker 1: so in our even less I suppose in a real
Speaker 1: negative scenario. So it isn't the kind of move used
Speaker 1: to see six to ten basis points a day on
Speaker 1: a big down day. And treasuries, I mean in the
Speaker 1: stock market. I'm you're not seeing that in treasuries now.
Speaker 1: It's a much more limited move. In fact, yield high
Speaker 1: in the last twenty four US by a basis point
Speaker 1: with two three move in the equity market, Kathy, so
Speaker 1: many people in stocks have been queuing off what's happened
Speaker 1: with real yields? Can you just unpack that for us
Speaker 1: a little bit what you're seeing at the moment. Yeah,
Speaker 1: you know, the fattest holding nominal rates very steady between
Speaker 1: their zero policy, their forward guidance that it's going to
Speaker 1: stay there for a long time, and what we've seen
Speaker 1: though as inflation expectations come up. So the real yield
Speaker 1: has come down to about negative one percent on the
Speaker 1: ten year treasury, and that gives you very limited choices
Speaker 1: in terms of where you invest your money and the
Speaker 1: fixed income market, But It does work for the FED
Speaker 1: because it makes the hurdle rate for investments very low.
Speaker 1: It encouraged as people to borrow, spend, and invest, and
Speaker 1: that's really what the FEED is trying to get the
Speaker 1: economy to do. The right side of the story anchored.
Speaker 1: I'm just wondering, Kathy. I'm trying to work out where
Speaker 1: you think inflation expectations are going to turn and whether
Speaker 1: we could actually see really to get less negative because
Speaker 1: inflation expectations come in given what we're seeing worldwide at
Speaker 1: the moment. Any thoughts on that, on fact how things
Speaker 1: are developing, Kathy, Yeah, I want My biggest fear in
Speaker 1: the US, and now it extends to Europe because of
Speaker 1: another round of outbreaks of the coronavirus. My biggest concern
Speaker 1: is we don't get fiscal stimulus, the economy slows down again.
Speaker 1: Worst case scenario is a double differ recession. It's not
Speaker 1: our base case, but it's a worst case scenario at
Speaker 1: particularly if we were starting would start to see a
Speaker 1: resurgence in in virus cases here as well. So um,
Speaker 1: I think we're walking a fine line right now. Our
Speaker 1: base case is still for continued improvement in the economy,
Speaker 1: but without the phiscal stimulus, and if we were to
Speaker 1: see more virus cases, we could double dip into a
Speaker 1: recession in the next six months or so. What's the playbook?
Speaker 1: What's the haven in that scenario? If there isn't that
Speaker 1: much lower the ten ure yields can go. It used
Speaker 1: to be investment grade credit, and yet we've seen outflows
Speaker 1: in a little bit of under performance there. What is
Speaker 1: it now? Yeah, I still think it's treasuries. I I
Speaker 1: You're not going to get as much as you did
Speaker 1: in the past out of that trade, but it's still treasuries.
Speaker 1: And keep in mind, I guess in a very negative scenario,
Speaker 1: nominally yields can go negative at the long end. That
Speaker 1: probably would force the Fed to take much more aggressive action.
Speaker 1: But it's not without precedent. If you look at Europe
Speaker 1: that's happened. What about with riskier credit, We've seen some
Speaker 1: pretty big outflows from high bond funds of lady. Is
Speaker 1: this the beginning of a larger trend? You know? I
Speaker 1: think the market needs some correction in high yield has
Speaker 1: gotten very frothy. Some of the junkiest of the junk
Speaker 1: has rallied quite a bit. I don't think that we're
Speaker 1: going to see investors abandon it because you do get
Speaker 1: positive care, you're going to get a year that's you know,
Speaker 1: five percent in high yield. That's tough to get. So
Speaker 1: I think you'll see people come back in barring another recession.
Speaker 1: But it did get overdone. Spreads were very tight, and
Speaker 1: the again the lowest of the low started to do well.
Speaker 1: You mentioned a couple of questions ago, Kathy Jones, this
Speaker 1: idea of what the Fed wants which is completely removed
Speaker 1: from the coupon given duration that the individual investor wants.
Speaker 1: And we spoke with Richard Clarity yesterday. It was a
Speaker 1: complete class act. Great but does he or the people
Speaker 1: around him, do they actually care about financial repression. I
Speaker 1: would say no. Um. I think they look at the
Speaker 1: policy of the Fed as being better for the greater
Speaker 1: good and that that's not going to change their policy.
Speaker 1: They think that savers and investors, although we hear a
Speaker 1: lot of complaints about low interest rates, they think savers
Speaker 1: and investors are benefiting from the rise and risk set
Speaker 1: and their focus is really on the point. John Farrell,
Speaker 1: I think this is just an absolute fundamental condition. We
Speaker 1: tried out in our fancy suits and ties and talk
Speaker 1: all those theoretic mumbo jumbo why retirees and others are
Speaker 1: getting absolutely crushed well over a decade, Kathy, this is
Speaker 1: really important that these interest rates have been low for
Speaker 1: a long long time, not just in the United States
Speaker 1: but also in Europe, and the lower they've gone in
Speaker 1: places like Europe and Japan, they've never gone back up again. Kathy,
Speaker 1: do you worry about the same thing happening in America. Yeah,
Speaker 1: one of the biggest fears we have is something like Japanification,
Speaker 1: where we get stuck in a deflation area or a
Speaker 1: very low inflationary environment and there's not much more monetary
Speaker 1: policy can do. Again, it's not our base case scenario.
Speaker 1: We think that we're actually starting to see the economy
Speaker 1: do a little bit better. I'm relatively optimistic that get
Speaker 1: the virus under control, that it will continue to recover.
Speaker 1: But it is a we're case scenario, and you can't
Speaker 1: rule it out. I mean, there's there's a probability there.
Speaker 1: Maybe it's a low probability, maybe it's five or ten percent,
Speaker 1: but it exists. Kathy. I can tell that I'm going
Speaker 1: to have a long morning with Tom Keane this morning,
Speaker 1: and you can make it a whole lot better if
Speaker 1: you turned around and just played a little tune on
Speaker 1: that piano. Seriously, play the microphones going to work. If
Speaker 1: you can, just please, it would make you that she's
Speaker 1: got I can see you over on the left John
Speaker 1: and Bloomberg Radio, or her beautiful piano behind her, folks,
Speaker 1: and over on the left side. You can see she's
Speaker 1: got her one direction book. Okay. I can just see
Speaker 1: the real turning in her head saying do this show
Speaker 1: again a couple of minutes, Kathy, this is going to work.
Speaker 1: The piano is right by the microphone. Next time, I'll
Speaker 1: play Claire to Loon for Lisa. I promise, thank you
Speaker 1: for Lisa, not for Tom. I love what that that
Speaker 1: right there, that right that describes our relationship with every
Speaker 1: guest that comes on this program. I'll do it for Lisa,
Speaker 1: but not for you, guys. Kathy is going to see it.
Speaker 1: Kathy giants, thank you. Trowan has provided real leadership in
Speaker 1: Washington with piecing together a really smart group linking policy
Speaker 1: into reality. Chris Krueger has provided leadership there with the
Speaker 1: Cohen Washington Research Group, and he joins us right now Chris,
Speaker 1: I got eight ways to go here. But there's a
Speaker 1: point where there's a belief in salvation by Capitol Hill.
Speaker 1: Mark your calendar. When do we see salvation from Capitol Hill?
Speaker 1: Not this year? Um? So you know, uh, forty days
Speaker 1: to election day when hopefully we'll know the outcome of
Speaker 1: the election. But you know, even before the tragic passing
Speaker 1: of Justice Ginsburg, the Phase four fiscal talks, the you
Speaker 1: know two trillion dollar or sort of fiscal lifeline for
Speaker 1: the economy was really hanging by a thread. And now
Speaker 1: with the Continuing Resolution having passed the House, which will
Speaker 1: keep the government from shutting down next week, you've really
Speaker 1: lost your last must pass bill to to get a
Speaker 1: fiscal package done. I say this, Chris Kruger, with great
Speaker 1: respect for all the people working in Washington on policy.
Speaker 1: This debate that we're going to see on Tuesday is
Speaker 1: your world removed from it? Is it just going to
Speaker 1: be a debate about our culture wars, about the great
Speaker 1: differences between Mr Biden and the President. Well, so Chris
Speaker 1: Wallace is moderating from Cleveland on Tuesday night. Um, he's
Speaker 1: announced six of the topics, and you know, one of
Speaker 1: the you know two of the topics involved the Supreme Court.
Speaker 1: And you know whether or not the candidates are going
Speaker 1: to agree to h the election results. So you know,
Speaker 1: at least a third of the debate is going to
Speaker 1: be deeply controversial for nearly four years. Chris, the abnormal
Speaker 1: has become normal. Yesterday President Trump refusing to confirm a
Speaker 1: peaceful transceller of power. Should Joe Biden win the ballots?
Speaker 1: What kind of abnormal should we be girding ourselves for
Speaker 1: from November to December. I would even say November to
Speaker 1: to January twentieth, when the Constitution would end the the
Speaker 1: term of president and vice president. Um, so a few things,
Speaker 1: you know, I'm not I don't think people should be
Speaker 1: terribly surprised about this. I mean, recall in ts Sten
Speaker 1: when when when Trump won the won the presidency in
Speaker 1: the electoral College, losing the popular vote. He then established
Speaker 1: a commission on voter fraud. Combine that with his views
Speaker 1: on mail in ballots over the past six months, and
Speaker 1: this is a pretty um, you know, obvious outcome to
Speaker 1: to where we are. When you look at some of
Speaker 1: the hard and fast dates as laid out by the Constitution,
Speaker 1: the first one is December eight. That's when the states
Speaker 1: must make their final decision on any controversies around the
Speaker 1: appointments of their electors. So there are really no sort
Speaker 1: of hard catalyst between November three and December eight. Um.
Speaker 1: You know, hopefully we'll know the outcome of the election
Speaker 1: on election night, but with the amount of mail in
Speaker 1: ballots that um we we you know, it may not
Speaker 1: be election night. It could be election month. Chris, let's
Speaker 1: talk about that what this could mean for financial markets.
Speaker 1: That's something the market is pricing. It's price for you
Speaker 1: see that in the volatility curve. We talk about that
Speaker 1: often on this program. Chris, I just wander, as you
Speaker 1: look at the polls right now, does it scream tight
Speaker 1: rice to you from what you look at? I think
Speaker 1: what is the real key? The real key here is
Speaker 1: going to be the margin of the Senate because for
Speaker 1: for investors, for markets, you know, a a fifty fifty
Speaker 1: Senate is very different than a you know, a fifty
Speaker 1: five fifty five Democrats in the Senate or even a
Speaker 1: Republican Senate. So I think looking at the Senate margin
Speaker 1: is really going to be critical. And would would point
Speaker 1: out to that a number of the Senate races Uh,
Speaker 1: could come down to recounts, and you have too likely
Speaker 1: runoffs in Georgia which won't happen until January uh fourth
Speaker 1: or fifth. You know. Reminder that the Florida recount in
Speaker 1: two thousand took thirty six or thirty one days, thirty
Speaker 1: two days, something like that. And the Minnesota Senate race
Speaker 1: in in two thousand eight, which was the crucial sixtie
Speaker 1: seat for Democrats, took over six months. So um, you know,
Speaker 1: it's not just the presidential race. I think senate recounts,
Speaker 1: uh in Senate runoffs or something to to keep in
Speaker 1: mind as well, Christ to building what John is talking about,
Speaker 1: a lot of people taking a look at the polls
Speaker 1: saying to very close race even though former Vice President
Speaker 1: Joe Biden has come out ahead. Are you taking any
Speaker 1: messages from the polls that perhaps is different than what
Speaker 1: is commonly believed. Well, you have the national polls and
Speaker 1: you have the battleground state polls. Um. Despite all that
Speaker 1: has happened over the past six months, the pandemic, the recession,
Speaker 1: social protests, etcetera. The presidential race within the national polls
Speaker 1: is somewhat remarkable in that it doesn't really move that much. Um,
Speaker 1: some of the battleground states, we have seen some tightening. Um,
Speaker 1: but you know, you you, I mean with the storyline
Speaker 1: thus far has been that Joe Biden has had a
Speaker 1: pretty durable, consistent lead. You know, the big question will
Speaker 1: be are the polls correct. The national polls in we're
Speaker 1: pretty good. I mean Hillary, you know, I think it
Speaker 1: was about a three basis point um advantage for Hillary.
Speaker 1: She won by you know, call it two and a half.
Speaker 1: So you know, some of those state poles are really
Speaker 1: going to be key, and that's why you're seeing, you know,
Speaker 1: the overwhelming focus on states like Florida, North Carolina, Arizona,
Speaker 1: and obviously the three Rust Belt states. Chris, right, Thanks
Speaker 1: coming on the show this morning, Chris Crook at that
Speaker 1: colon Washington and Recess Group policy analysts. Right now, Ethan
Speaker 1: Harris joins us to say how the Bank of American
Speaker 1: Economics barely describes his contribution over the years. Not only
Speaker 1: is informed book on Ben Bernanke, but also bringing concision
Speaker 1: to the study out of Clark University in Columbia. Dr
Speaker 1: Harris thrilled to have you with us at today. There's
Speaker 1: a lot of moving parts here, Ethan. Michelle Meyer's aged
Speaker 1: over this, uh studying this labor economy. What is the
Speaker 1: moving part that matters? To Ethan Harris, Well, I think
Speaker 1: you guys just talked about it. I mean that the
Speaker 1: problem right now is that the lagged effects on the
Speaker 1: economy are still playing out. I mean, recessions always start
Speaker 1: with some kind of shock, and then as the pain
Speaker 1: kind of builds, you get these second round effects. And
Speaker 1: so having jobless claims, even if they're mismeasured at this
Speaker 1: level UM is quite disturbing. And it's it's a it's
Speaker 1: an indicator of the pain that's still out there UM.
Speaker 1: And it's consistent with the idea that you know, we're
Speaker 1: getting past the phase where uh, you know, we're kind
Speaker 1: of rebounding from that shutdown and now more into the
Speaker 1: grinding uh forward phase with this massive head wind from
Speaker 1: the labor market. So we don't have to torture the data.
Speaker 1: The data is torturing us. Well, put Ethan Harris, I
Speaker 1: think a lot of people would agree with that as well. Ethan.
Speaker 1: Forgive me just for a moment, I want to talk
Speaker 1: about the equity market briefly. Tom A little bit of
Speaker 1: a slip pair on the SMP five and eight tenths
Speaker 1: of one percent now and that's that one hundre of
Speaker 1: breaking down by about one point to eight percent, and
Speaker 1: still the under performance intact. You talked about a bit
Speaker 1: into the bond market. I agree with its subtle, but
Speaker 1: it's there on a tenure treasury. This is where things
Speaker 1: stand right now. You have to come in just a
Speaker 1: single basis point. We're down two basis points on a
Speaker 1: thirty year so just a bit of a breakdown in
Speaker 1: this market. And Ethan, a couple of reasons for this
Speaker 1: breakdown in this market, and it all started over the weekend.
Speaker 1: The idea that because of the division down in Washington,
Speaker 1: we don't get a fiscal agreement in Europe. The idea,
Speaker 1: because of more restrictions on the economies like the UK,
Speaker 1: France and elsewhere, that we have a more pronounced slowdown
Speaker 1: in Europe, maybe even and let's hope this isn't the case,
Speaker 1: a double dip recession. Ethan, how do you view things
Speaker 1: right now with those two issues front and center for
Speaker 1: this market? Right so? I think when you look at
Speaker 1: the equity market, you need to think about two different
Speaker 1: stories here. One is there's a bit of a re
Speaker 1: rating in the market as the as investors realize that
Speaker 1: we're in a low interest rate environment forever going forward,
Speaker 1: and so the return and risk acid should be higher
Speaker 1: in a permanently low rate environment. So the recovery in
Speaker 1: the equity market I think reflects that. It reflects the
Speaker 1: fiscal statement. This reflects the FED and this kind of
Speaker 1: low rate environment. But now we're entering a period of
Speaker 1: tremendous uncertainty. Um. We the fiscal stimulus is steadily fading.
Speaker 1: It peaked in the second quarter, and every quarter going
Speaker 1: forward the money continues to run out. Um And I've
Speaker 1: actually been surprised you haven't slowed down more than this
Speaker 1: by now. The fiscal package is basically dead now with
Speaker 1: this battle over the Supreme Court um, and even after
Speaker 1: the election, we may not get a package. So we're
Speaker 1: kind of removing the patient from the intensive care unit
Speaker 1: too early here. And then you layer on top of
Speaker 1: that the fact that there's this kind of trade war
Speaker 1: stuff growing. You have a likely re escalation of COVID
Speaker 1: cases in the fall as people move indoors, and then
Speaker 1: you've got things like Brexit in the UK. So it's
Speaker 1: I think the market's simply got too many uncertainties on
Speaker 1: its plate and um, and it's going to be under
Speaker 1: pressure for a while here. Well, given the uncertainties, ethan,
Speaker 1: what are the indicators you're watching to indicate a true
Speaker 1: slowdown that could potentially create the backdrop for a double deprocession. Well,
Speaker 1: I think that one of the challenges right now is
Speaker 1: that we're all kind of we've got a cottage industry
Speaker 1: of daily indicators we're all using, including the B of
Speaker 1: a card data, the home base and all that other,
Speaker 1: all the other stuff. Um, none of these indicators have
Speaker 1: really been stress tested through a period to see how
Speaker 1: accurate they are. They're they're useful, they're certainly I think
Speaker 1: they're all this data is very useful. But the data
Speaker 1: we're a bit misleading. In the summer, the daily indicators
Speaker 1: were weaker than the official statistics. I think we need
Speaker 1: confirmation from the official data. We need to see hints
Speaker 1: that the slowdown in retail sales is accumulating into something
Speaker 1: much weaker. Uh need to see an from the job's
Speaker 1: report and so on. So uh, while these timely data
Speaker 1: are you know, we all look at very closely. Um,
Speaker 1: we need to need to get some confirmation from from
Speaker 1: the hard data and Future deteria negative twenty nine. We're
Speaker 1: out of stick big almost two points on the VICS
Speaker 1: thirty point four seven. Right now, Ethan, one final questionnaire,
Speaker 1: We've got to get back to the markets. Dr Harris.
Speaker 1: This morning, the Chancel of the Exchequer talks about a
Speaker 1: United Kingdom permanent adjustment. Do you and your team just
Speaker 1: assume there will be an American permanent adjustment? Um? Well,
Speaker 1: I mean we there's a structural damage to these economies. Um.
Speaker 1: I don't think it's I think we can recover largely
Speaker 1: back to where we started from. But you know, there's
Speaker 1: fundamental changes going on. There's been some good things. I mean,
Speaker 1: we've learned that we can do things more cost effectively,
Speaker 1: for example me working from home. Uh. But there's also
Speaker 1: a lot of damage out there. So yeah, there's a
Speaker 1: structure role component to this whole crisis. Ethan. Good to say,
Speaker 1: you look wow. Send out best to the same. Ethan Harris,
Speaker 1: that Bank of American's Securities head of Global Economic Race such.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
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Speaker 1: platform you prefer. I'm on Twitter at Tom Keane. Before
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