1 00:00:09,880 --> 00:00:13,800 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Daily 2 00:00:13,960 --> 00:00:17,560 Speaker 1: we bring you insight from the best in economics, finance, investment, 3 00:00:18,000 --> 00:00:23,520 Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 4 00:00:23,600 --> 00:00:27,240 Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg. Good 5 00:00:27,280 --> 00:00:30,159 Speaker 1: Morning to Robert Kaplan. He is the president of the 6 00:00:30,240 --> 00:00:33,000 Speaker 1: Dallas Federal Reserve Bank, and he joins us on Bloomberg 7 00:00:33,040 --> 00:00:35,480 Speaker 1: Radio and Television from their Good Morning to you, sir, 8 00:00:36,200 --> 00:00:38,160 Speaker 1: I might good to see you. We'd like to start 9 00:00:38,200 --> 00:00:41,120 Speaker 1: by asking about what you're seeing in your district. You've 10 00:00:41,159 --> 00:00:44,879 Speaker 1: been at the epicenter of the latest COVID surge in cases. 11 00:00:45,479 --> 00:00:50,320 Speaker 1: What's happening to the economy there now? Uh, probably around 12 00:00:50,440 --> 00:00:55,800 Speaker 1: mid June, the sharp rebound we were seeing started to 13 00:00:56,120 --> 00:01:00,840 Speaker 1: moderate and started to stall. That was coincident. It came 14 00:01:00,880 --> 00:01:03,840 Speaker 1: at the same time and along with the resurgence of 15 00:01:03,840 --> 00:01:08,160 Speaker 1: the virus, and so we saw cases increase, we saw hospitalizations, 16 00:01:08,959 --> 00:01:14,240 Speaker 1: UH steadily increase. That has started to moderate. Based on 17 00:01:14,280 --> 00:01:16,760 Speaker 1: the numbers I see the daily numbers, I get it's 18 00:01:16,760 --> 00:01:20,840 Speaker 1: started to moderate over the last number of days. But 19 00:01:20,959 --> 00:01:23,399 Speaker 1: what you saw the state do is put in and 20 00:01:23,520 --> 00:01:30,200 Speaker 1: cities put in uh in UH a backup or unwinding 21 00:01:30,200 --> 00:01:33,840 Speaker 1: to some of the reopening steps. Re emphasize how important 22 00:01:33,920 --> 00:01:36,320 Speaker 1: is to wear a mask, and we saw we saw 23 00:01:36,360 --> 00:01:39,319 Speaker 1: some effect to that, but you're seeing a rebound that's 24 00:01:39,319 --> 00:01:43,119 Speaker 1: stalling to some extent. That's what we're seeing in in Texas. Well. 25 00:01:43,560 --> 00:01:46,959 Speaker 1: That caused you to do a rethink of your economic forecast. 26 00:01:47,040 --> 00:01:51,559 Speaker 1: What do you see ahead for growth and inflation and unemployment. Well, 27 00:01:51,800 --> 00:01:54,680 Speaker 1: and we're because we were seeing it here and in 28 00:01:55,240 --> 00:01:59,720 Speaker 1: a number of other states. Uh, it's still our view 29 00:02:00,320 --> 00:02:03,280 Speaker 1: that will contract for the year at about four and 30 00:02:03,280 --> 00:02:05,920 Speaker 1: a half to five percent has been our view. After 31 00:02:05,960 --> 00:02:08,760 Speaker 1: a very sharp decline in the second quarter, we'd have 32 00:02:08,919 --> 00:02:11,200 Speaker 1: very healthy rebound in the third and the fourth quarter. 33 00:02:11,680 --> 00:02:15,680 Speaker 1: I think I think uh that rebound is more muted 34 00:02:15,760 --> 00:02:19,480 Speaker 1: in the United States now. UH. And it's caused me 35 00:02:19,520 --> 00:02:21,520 Speaker 1: to think that the unemployment rate, if we don't do 36 00:02:21,560 --> 00:02:25,280 Speaker 1: a better job managing the virus, the unemployment rate is 37 00:02:25,480 --> 00:02:28,280 Speaker 1: likely to be above nine percent, between nine and ten percent. 38 00:02:28,720 --> 00:02:33,359 Speaker 1: So we've we've moved up our unemployment forecast. UH. And 39 00:02:33,440 --> 00:02:37,400 Speaker 1: so UM, I think we've got a rebound, UH, but 40 00:02:37,600 --> 00:02:40,600 Speaker 1: it's it's much more muted than it was and if 41 00:02:40,639 --> 00:02:44,160 Speaker 1: we if we don't do a better job managing the virus, 42 00:02:44,560 --> 00:02:46,359 Speaker 1: we're going to have lower growth and we're gonna have 43 00:02:46,400 --> 00:02:49,120 Speaker 1: a higher unemployment rate. And so I've been spending a 44 00:02:49,160 --> 00:02:52,040 Speaker 1: lot of my time talking more about the virus than 45 00:02:52,080 --> 00:02:56,440 Speaker 1: anything else because it's so critical to the recovery. Well, 46 00:02:56,440 --> 00:03:01,480 Speaker 1: the six extra unemployment bonus and eviction moratorio they're gone now. First, 47 00:03:01,520 --> 00:03:04,440 Speaker 1: has the FED has your staff modeled the impact of 48 00:03:04,480 --> 00:03:08,120 Speaker 1: that on the economy? And second, should we expect a 49 00:03:08,160 --> 00:03:12,400 Speaker 1: wave of defaults that might affect credit markets? We have 50 00:03:12,600 --> 00:03:15,640 Speaker 1: looked at it, and one of the things that's unusual 51 00:03:15,960 --> 00:03:20,080 Speaker 1: about this downturn that we've just had is incomes have 52 00:03:20,240 --> 00:03:23,120 Speaker 1: stayed relatively solid, and a big part of the reason 53 00:03:23,720 --> 00:03:27,120 Speaker 1: is these unemployment benefits. And so we're normally in a 54 00:03:27,200 --> 00:03:29,920 Speaker 1: downturn you see a drop in incomes. We haven't seen 55 00:03:30,000 --> 00:03:33,760 Speaker 1: that here. Uh. It's still my view that in some 56 00:03:33,880 --> 00:03:38,440 Speaker 1: form will get an extension of unemployment benefits. So I'm 57 00:03:38,520 --> 00:03:42,640 Speaker 1: quite hopeful that that will continue. But if it didn't, uh, yeah, 58 00:03:42,680 --> 00:03:46,000 Speaker 1: you would see a further weakening in the economy. And uh, 59 00:03:46,200 --> 00:03:49,040 Speaker 1: in particular because consumers wouldn't have as much money in 60 00:03:49,080 --> 00:03:52,040 Speaker 1: their pocket to spend any business people telling you that 61 00:03:52,080 --> 00:03:54,760 Speaker 1: six dollar bonus was keeping people from coming back to 62 00:03:54,800 --> 00:03:58,720 Speaker 1: the labor force. Uh. A lot of business people were 63 00:03:58,720 --> 00:04:02,560 Speaker 1: telling me that, honestly were they were telling me that, Uh, 64 00:04:02,640 --> 00:04:06,600 Speaker 1: it was challenging to hire people. UH. We've looked at 65 00:04:06,600 --> 00:04:09,320 Speaker 1: a number of studies, We've done our own work. We 66 00:04:09,360 --> 00:04:11,360 Speaker 1: don't see it as much in the data, but I 67 00:04:11,400 --> 00:04:15,720 Speaker 1: can tell you I'm hearing it from business people. UH. 68 00:04:15,760 --> 00:04:20,560 Speaker 1: And So, however, whatever the right answer is, I think 69 00:04:20,600 --> 00:04:23,280 Speaker 1: you still are going to need to see extension of unemployment. 70 00:04:23,640 --> 00:04:26,280 Speaker 1: It may be restructured to some extent from the six 71 00:04:26,400 --> 00:04:29,320 Speaker 1: hundred dollars, but I think it's important that we see 72 00:04:29,320 --> 00:04:32,360 Speaker 1: an extension of it. And I think the increased incomes 73 00:04:32,640 --> 00:04:34,680 Speaker 1: while it may have While it may have made it 74 00:04:34,720 --> 00:04:38,680 Speaker 1: hard for certain individual businesses to hire, it's helped create 75 00:04:38,800 --> 00:04:43,640 Speaker 1: jobs because it's helped bolster consumer spending. So the net 76 00:04:43,640 --> 00:04:46,400 Speaker 1: effect still has probably been positive for the economy and 77 00:04:46,440 --> 00:04:50,920 Speaker 1: for employment. A number of your colleagues, at least number 78 00:04:50,960 --> 00:04:54,080 Speaker 1: of epidemiologists joined by your colleague Neil cash Kari of 79 00:04:54,080 --> 00:04:58,240 Speaker 1: Minneapolis UH say that we need another nationwide lockdown for 80 00:04:58,279 --> 00:05:00,560 Speaker 1: about four weeks to defeat the virus and that that 81 00:05:00,600 --> 00:05:03,839 Speaker 1: should be job one over reopening the economy. What do 82 00:05:03,880 --> 00:05:07,640 Speaker 1: you think of that? UH? I probably have a somewhat 83 00:05:07,680 --> 00:05:12,479 Speaker 1: different view based on my conversations again with epidemiologists locally 84 00:05:12,520 --> 00:05:17,240 Speaker 1: and through the country in that UH. The epidemiologist I've 85 00:05:17,279 --> 00:05:21,400 Speaker 1: spoken with, which has been been widespread conversations, believe we 86 00:05:21,440 --> 00:05:26,520 Speaker 1: could manage UH this economy and the virus and have 87 00:05:26,640 --> 00:05:31,160 Speaker 1: the economy open if all of us wore mass. That's 88 00:05:31,200 --> 00:05:33,719 Speaker 1: first and foremost, and then we need a good testing 89 00:05:33,760 --> 00:05:37,719 Speaker 1: and contact tracing regime. But in particular, if we all 90 00:05:37,720 --> 00:05:41,159 Speaker 1: wore mass, they believe it would substantially mute the transmission 91 00:05:41,160 --> 00:05:43,480 Speaker 1: of the virus and you would not need to do 92 00:05:43,880 --> 00:05:47,760 Speaker 1: widespread lockdown, And in fact, many of them fear if 93 00:05:47,800 --> 00:05:50,960 Speaker 1: you did. If you did more lockdowns, if you still 94 00:05:51,040 --> 00:05:55,480 Speaker 1: don't have good following of the healthcare protocols, the lockdown 95 00:05:55,520 --> 00:05:58,960 Speaker 1: to some extent would be wasted. And so I think 96 00:05:58,960 --> 00:06:02,840 Speaker 1: their advice is as UH, be very careful about the 97 00:06:02,920 --> 00:06:09,000 Speaker 1: reopening enforced a widespread UH practice of wearing mass social distancing. 98 00:06:09,400 --> 00:06:13,120 Speaker 1: Now there might be isolated or localized areas in the 99 00:06:13,200 --> 00:06:17,839 Speaker 1: United States where the virus is become unmanageable and they're 100 00:06:17,839 --> 00:06:20,760 Speaker 1: gonna have to take far more extremee steps like lockdowns. 101 00:06:21,520 --> 00:06:23,600 Speaker 1: But I think we're gonna have to learn to live 102 00:06:23,640 --> 00:06:27,440 Speaker 1: with this virus. Um. We're gonna have to learn to 103 00:06:27,520 --> 00:06:32,279 Speaker 1: re engage in our daily activities but still control the virus. 104 00:06:32,279 --> 00:06:36,479 Speaker 1: But widespread mask wearing is essential to that, and I 105 00:06:36,520 --> 00:06:40,000 Speaker 1: think it's probably the most important practice that maybe has 106 00:06:40,000 --> 00:06:43,800 Speaker 1: been done unevenly, and we've we've lost an opportunity to 107 00:06:44,240 --> 00:06:48,240 Speaker 1: to recover and control the virus and grow faster. We're 108 00:06:48,279 --> 00:06:51,400 Speaker 1: speaking with Dallas FED President Robert Kaplan on Bloomberg Television 109 00:06:51,440 --> 00:06:55,840 Speaker 1: and Radio. Do you anticipate, President Kaplan, the FED will 110 00:06:55,920 --> 00:06:58,840 Speaker 1: change its forward guidance, perhaps as early as September and 111 00:06:58,920 --> 00:07:01,920 Speaker 1: tie it to inflation running a little bit above two 112 00:07:02,000 --> 00:07:05,840 Speaker 1: percent for a while. Um. I'll speak for myself. I 113 00:07:06,240 --> 00:07:11,440 Speaker 1: would not do that. Um Uh. We've already given uh 114 00:07:11,680 --> 00:07:15,120 Speaker 1: fairly specific forward guidance in the form of our Summary 115 00:07:15,120 --> 00:07:19,320 Speaker 1: of Economic Projections the SEP, where we've made clear that 116 00:07:19,520 --> 00:07:22,040 Speaker 1: rates are going to stay around the current levels for 117 00:07:22,040 --> 00:07:25,840 Speaker 1: the next couple of years. I would I would far 118 00:07:25,960 --> 00:07:29,320 Speaker 1: prefer when we do give forward guidance in the future 119 00:07:29,640 --> 00:07:32,840 Speaker 1: that we tie it to our dual mandate uh and 120 00:07:32,840 --> 00:07:37,040 Speaker 1: and particularly tie it to the unemployment along with making 121 00:07:37,080 --> 00:07:40,520 Speaker 1: progress on inflation. But I myself would not be in 122 00:07:40,600 --> 00:07:45,560 Speaker 1: favor of tying forward guidance specifically to inflation. I would 123 00:07:45,640 --> 00:07:48,800 Speaker 1: not want to see us do that. Old guys like 124 00:07:48,840 --> 00:07:51,280 Speaker 1: you and me. Remember we last time the Fed traded 125 00:07:51,320 --> 00:07:54,320 Speaker 1: a little bit of inflation for lower unemployment. Uh, the 126 00:07:54,440 --> 00:07:57,240 Speaker 1: Arthur Burns era. Are you worried at all that that 127 00:07:57,360 --> 00:08:03,200 Speaker 1: might be a mistake? Uh? The the inflation dynamic is 128 00:08:03,240 --> 00:08:07,200 Speaker 1: different now. Uh. Meaning used to be as in the 129 00:08:07,360 --> 00:08:10,200 Speaker 1: in the old days, as you say, UH, when you 130 00:08:10,320 --> 00:08:12,920 Speaker 1: had a very tight labor market and you were at 131 00:08:12,960 --> 00:08:15,800 Speaker 1: or pass full employment, you would see inflation. But the 132 00:08:15,840 --> 00:08:19,120 Speaker 1: world has changed. The structure environment of the of the 133 00:08:19,160 --> 00:08:24,040 Speaker 1: economy has changed with technology, technology enabled disruption, which is 134 00:08:24,160 --> 00:08:28,520 Speaker 1: limited pricing power businesses. That along with globalization, has meant 135 00:08:29,080 --> 00:08:31,360 Speaker 1: that the FED has been able to run the economy 136 00:08:31,400 --> 00:08:35,640 Speaker 1: hotter with more muted inflation. And so we've had to 137 00:08:35,760 --> 00:08:39,920 Speaker 1: change the way we think about inflation unemployment. And we've 138 00:08:39,960 --> 00:08:44,600 Speaker 1: also and I've also been much more cognizant of underrepresentative 139 00:08:44,640 --> 00:08:49,800 Speaker 1: groups uh, lower educated UH, Blacks, Hispanics, women with a 140 00:08:49,840 --> 00:08:53,400 Speaker 1: high school education are less. By running hotter, we've been 141 00:08:53,480 --> 00:08:56,880 Speaker 1: able to get these underrepresented groups back into the economy, 142 00:08:56,920 --> 00:09:00,000 Speaker 1: back into the workforce, and I think that's been very valuable. 143 00:09:00,880 --> 00:09:03,440 Speaker 1: The primary and secondary credit market facilities have up to 144 00:09:03,480 --> 00:09:07,000 Speaker 1: seven and fifty billion dollars available, yet you've bought only 145 00:09:07,000 --> 00:09:09,959 Speaker 1: twelve point three billion in bonds. The main Street program 146 00:09:10,000 --> 00:09:11,800 Speaker 1: you can buy up to six hundred billion, but you've 147 00:09:11,800 --> 00:09:15,600 Speaker 1: bought only eighty two million so far. Why doesn't anybody 148 00:09:15,640 --> 00:09:19,960 Speaker 1: want your money? Yeah, so, I've spent a good amount 149 00:09:19,960 --> 00:09:22,520 Speaker 1: of time. For example, I've got a key role in 150 00:09:22,559 --> 00:09:25,640 Speaker 1: the municipal finance program where we we have a five 151 00:09:25,679 --> 00:09:28,679 Speaker 1: it's a five hundred billion dollar program, and we've put out, 152 00:09:28,679 --> 00:09:31,800 Speaker 1: as you noted, a very small fraction of that. I 153 00:09:31,840 --> 00:09:36,440 Speaker 1: think one of the features of the municipal program, the 154 00:09:36,480 --> 00:09:40,400 Speaker 1: corporate bond program is usage is not an indicator of 155 00:09:40,440 --> 00:09:44,560 Speaker 1: the power of the program. Just by announcing these programs 156 00:09:44,880 --> 00:09:48,400 Speaker 1: and making clear that we would help provide a backstop 157 00:09:49,000 --> 00:09:53,319 Speaker 1: to these markets, you've seen a substantial rally and flow 158 00:09:53,360 --> 00:09:57,560 Speaker 1: of funds into these markets to where the FED pricing 159 00:09:57,720 --> 00:10:00,560 Speaker 1: is less attractive the market than market price. Seene and 160 00:10:00,600 --> 00:10:04,400 Speaker 1: the FED hasn't had to actually purchase securities the way 161 00:10:04,440 --> 00:10:06,800 Speaker 1: we might have thought. I think that's a good outcome. 162 00:10:07,480 --> 00:10:10,319 Speaker 1: UH And I think the programs have served their purpose. 163 00:10:11,400 --> 00:10:14,199 Speaker 1: On programs on the other hand, like p p P, 164 00:10:15,360 --> 00:10:18,200 Speaker 1: I think it's very critical that those programs got used, 165 00:10:19,040 --> 00:10:23,160 Speaker 1: and on the Main Street program, I think over time, 166 00:10:23,640 --> 00:10:26,280 Speaker 1: I think we will want to keep getting feedback and 167 00:10:26,320 --> 00:10:29,079 Speaker 1: looking at ways that that program can get more fully used, 168 00:10:29,280 --> 00:10:33,119 Speaker 1: because I do worry as as healthy as the financial 169 00:10:33,160 --> 00:10:37,200 Speaker 1: markets are and as loose as financial conditions are right now, 170 00:10:37,679 --> 00:10:40,719 Speaker 1: one place they're not loose is for small and mid 171 00:10:40,800 --> 00:10:44,120 Speaker 1: sized companies, particularly if they're in person to person contact 172 00:10:44,160 --> 00:10:47,559 Speaker 1: industries and the Main Street program and if there's another 173 00:10:47,640 --> 00:10:50,880 Speaker 1: round of the p p P, those programs are critical 174 00:10:51,360 --> 00:10:55,600 Speaker 1: to helping those small mid sized companies get credit UH 175 00:10:55,640 --> 00:10:58,640 Speaker 1: and so I I do think usage is important to 176 00:10:58,679 --> 00:11:02,200 Speaker 1: look at their One visible aspect of what the FED 177 00:11:02,240 --> 00:11:05,440 Speaker 1: has done, at least according to investors, is the stock market. 178 00:11:05,960 --> 00:11:09,080 Speaker 1: Do you worry that you're creating a bubble however necessary 179 00:11:09,120 --> 00:11:11,800 Speaker 1: your actions maybe, but that it might pop and take 180 00:11:11,840 --> 00:11:16,400 Speaker 1: the economy down with it. I do think it's wise 181 00:11:16,559 --> 00:11:22,240 Speaker 1: for us whenever we're doing UH asset purchases, and we've 182 00:11:22,280 --> 00:11:26,880 Speaker 1: done something I think even more extraordinary in this downturn, 183 00:11:27,000 --> 00:11:30,000 Speaker 1: and that we've done these thirteen three programs which have 184 00:11:30,080 --> 00:11:33,720 Speaker 1: held backstop these financial markets. Yeah, I think we'd be 185 00:11:33,800 --> 00:11:38,280 Speaker 1: wise to be cognizant and concerned about the impact we 186 00:11:38,320 --> 00:11:41,560 Speaker 1: have on risk assets. I think it's necessary, but I 187 00:11:41,559 --> 00:11:44,520 Speaker 1: think it's very important that these programs have a sunset date, 188 00:11:45,000 --> 00:11:48,160 Speaker 1: that the markets understand they're not going to go on indefinitely. 189 00:11:48,480 --> 00:11:51,160 Speaker 1: I know we we've just extended our thirteen three programs 190 00:11:51,200 --> 00:11:54,240 Speaker 1: to December thirty one, but but I do think it's 191 00:11:54,280 --> 00:11:58,280 Speaker 1: important that we emphasize these programs will sunset, they will 192 00:11:58,360 --> 00:12:01,680 Speaker 1: lapse laps, because I think it's very important that these 193 00:12:01,760 --> 00:12:07,760 Speaker 1: markets are able to function without FED support. And I 194 00:12:07,800 --> 00:12:11,719 Speaker 1: think the FED support creates its own UH fragilities in 195 00:12:11,800 --> 00:12:13,920 Speaker 1: the markets, and I think we should be very cognizant 196 00:12:13,960 --> 00:12:17,280 Speaker 1: of that. UH. Can't let you go without asking about oil. 197 00:12:17,320 --> 00:12:21,880 Speaker 1: Bankruptcies are spreading throughout the industry. Prices started to recover 198 00:12:21,920 --> 00:12:24,280 Speaker 1: but now seem to be rolling over a bit. Gasoline 199 00:12:24,280 --> 00:12:28,800 Speaker 1: demand is falling. What is the outlook? Well, so, actually 200 00:12:28,880 --> 00:12:32,439 Speaker 1: gasoline demand the United States has has recovered now to 201 00:12:32,720 --> 00:12:36,680 Speaker 1: again in the neighborhood Hi eighties nine of a year ago. 202 00:12:37,040 --> 00:12:40,760 Speaker 1: I've actually been surprised how strong demand has been even 203 00:12:40,800 --> 00:12:43,800 Speaker 1: with the resurgence of the virus. People are driving. They're 204 00:12:43,800 --> 00:12:46,640 Speaker 1: not taking mass transit, and they're not flying, but they 205 00:12:46,679 --> 00:12:50,640 Speaker 1: are driving their cars. Uh. I think to your point, though, 206 00:12:51,080 --> 00:12:54,800 Speaker 1: with the resurgence of the virus, the recovery in in 207 00:12:54,920 --> 00:12:58,440 Speaker 1: demand has stalled a little bit and is hovering around. 208 00:12:59,559 --> 00:13:02,120 Speaker 1: And at the same time, we've got all this excess inventory. 209 00:13:02,160 --> 00:13:04,240 Speaker 1: You know, we had all this over supply that have 210 00:13:04,360 --> 00:13:07,760 Speaker 1: been built up because of the drop in demand earlier 211 00:13:07,800 --> 00:13:10,200 Speaker 1: this year, and I think it's gonna take till middle 212 00:13:10,240 --> 00:13:13,720 Speaker 1: of one for that excess inventory to be worked off. 213 00:13:13,760 --> 00:13:18,040 Speaker 1: So you're gonna have a very challenging energy industry and 214 00:13:18,240 --> 00:13:22,480 Speaker 1: oil market probably for the next six twelve months, depending 215 00:13:22,480 --> 00:13:25,959 Speaker 1: on how the virus proceeds and how demand recovers, because 216 00:13:25,960 --> 00:13:29,320 Speaker 1: we've got a lot of excess inventory and oversupply. I 217 00:13:29,360 --> 00:13:31,960 Speaker 1: think it will begin to firm later next year. But 218 00:13:32,040 --> 00:13:35,320 Speaker 1: in the meantime, you're seeing shut ins, I mean people 219 00:13:35,440 --> 00:13:38,880 Speaker 1: who are producing who shut in their wells. You're seeing 220 00:13:38,920 --> 00:13:42,280 Speaker 1: recount drop, precipitous lee and I think you'll see US 221 00:13:42,360 --> 00:13:45,640 Speaker 1: production fall from about twelve point eight million barrels a 222 00:13:45,720 --> 00:13:49,360 Speaker 1: day at the end of two will end this year 223 00:13:49,400 --> 00:13:52,000 Speaker 1: around ten point eight million barrels a day, a big drop. 224 00:13:52,640 --> 00:13:55,440 Speaker 1: And and that's even with reversal of most of the 225 00:13:55,480 --> 00:13:58,600 Speaker 1: shut ends. We're just seeing less drilling activity. And you're 226 00:13:58,600 --> 00:14:02,520 Speaker 1: gonna see and you are seen lots of bankruptcies, restructurings, 227 00:14:02,679 --> 00:14:07,760 Speaker 1: and stress in the energy sector. You're the markets guy 228 00:14:07,920 --> 00:14:10,120 Speaker 1: at the FED. You worked at Goldman Sex for a 229 00:14:10,160 --> 00:14:13,400 Speaker 1: long time. The enormous volatility in the treasury market we 230 00:14:13,440 --> 00:14:17,320 Speaker 1: saw back in March. Did that have to happen? Reports 231 00:14:17,320 --> 00:14:20,000 Speaker 1: are it was caused in part by huge levered bets 232 00:14:20,040 --> 00:14:24,240 Speaker 1: by hedge funds. Do we need significant changes? Do we 233 00:14:24,320 --> 00:14:29,320 Speaker 1: need uh supervision of the shadow banking system? Yeah? So 234 00:14:29,640 --> 00:14:32,440 Speaker 1: I do think part of what's what happened in March, 235 00:14:32,480 --> 00:14:36,120 Speaker 1: which maybe hasn't been talked about enough, is is you 236 00:14:36,240 --> 00:14:39,280 Speaker 1: had in March and in part of April a a 237 00:14:40,240 --> 00:14:44,360 Speaker 1: force selling wave through many financial markets. There was a 238 00:14:44,440 --> 00:14:49,360 Speaker 1: substantial amount of embedded leverage, whether people were leveraging treasuries 239 00:14:49,440 --> 00:14:53,760 Speaker 1: as part of risk parity trades or other strategies. And 240 00:14:54,080 --> 00:14:58,320 Speaker 1: part of what the FED did is facilitate that de leveraging. 241 00:14:59,120 --> 00:15:01,360 Speaker 1: But I think now we've been through it, I do 242 00:15:01,440 --> 00:15:04,680 Speaker 1: think it would be worth doing more study as as 243 00:15:04,720 --> 00:15:08,040 Speaker 1: to what what what was the role of embedded leverage 244 00:15:08,080 --> 00:15:12,880 Speaker 1: in these markets, um, and what are the implications? And 245 00:15:12,960 --> 00:15:15,320 Speaker 1: I think again it means the FED dis needs to 246 00:15:15,320 --> 00:15:19,680 Speaker 1: be cognizant that financial stability considerations are sometimes hard to 247 00:15:19,720 --> 00:15:23,280 Speaker 1: see and they can build up, uh and then when 248 00:15:23,280 --> 00:15:25,320 Speaker 1: you have a stress event like we had this year, 249 00:15:25,400 --> 00:15:29,040 Speaker 1: you see it manifest itself. UM. I'm also very aware 250 00:15:29,040 --> 00:15:31,960 Speaker 1: when you mentioned the treasury market, treasury is not the 251 00:15:32,080 --> 00:15:36,960 Speaker 1: natural uh component of a portfolio that maybe it was 252 00:15:37,080 --> 00:15:41,440 Speaker 1: because rates are so low. Uh. You might find that 253 00:15:41,440 --> 00:15:44,400 Speaker 1: that many people used to buy treasuries naturally as part 254 00:15:44,440 --> 00:15:48,720 Speaker 1: of a portfolio will be buying other assets gold, maybe 255 00:15:48,800 --> 00:15:51,360 Speaker 1: other assets. So that will have also have an effect 256 00:15:51,360 --> 00:15:53,640 Speaker 1: on the treasury market that I think we're gonna have 257 00:15:53,680 --> 00:15:56,520 Speaker 1: to spend more time trying to understand. Well, we'll check 258 00:15:56,520 --> 00:15:58,360 Speaker 1: back with you and see what you've learned in a 259 00:15:58,360 --> 00:16:01,320 Speaker 1: couple of months. Robert Cappel, President of the Dallas FT, 260 00:16:01,360 --> 00:16:03,320 Speaker 1: thank you very much for joining us today on Blueberg 261 00:16:03,360 --> 00:16:10,160 Speaker 1: Radio and television worldwide Right now, to begin, are we 262 00:16:10,320 --> 00:16:13,080 Speaker 1: of economic coverage? Here on the simulcast on radio and 263 00:16:13,120 --> 00:16:16,280 Speaker 1: TV worldwide is Ethan Harris. He's a Bank of America 264 00:16:16,400 --> 00:16:19,920 Speaker 1: with authority on the transfer from Greenspan to Bernick with 265 00:16:19,960 --> 00:16:25,520 Speaker 1: this wonderful book, and also on absolutely nailing the non 266 00:16:25,680 --> 00:16:29,600 Speaker 1: V shaped recovery of two thousand seven two thousand and eight, 267 00:16:29,840 --> 00:16:33,120 Speaker 1: No major house did better than Bank of America on 268 00:16:33,240 --> 00:16:36,440 Speaker 1: that call, Ethan, once again, we don't have a V 269 00:16:36,560 --> 00:16:41,520 Speaker 1: shaped recovery. What kind is it? Well, we have a 270 00:16:41,600 --> 00:16:44,800 Speaker 1: two month V followed probably by three months of l 271 00:16:45,120 --> 00:16:47,440 Speaker 1: That's what it looks like, and then hopefully from there 272 00:16:48,080 --> 00:16:49,840 Speaker 1: we start picking up again. But I mean, if you 273 00:16:49,880 --> 00:16:53,720 Speaker 1: look broadly at the data, clearly the resurgence and the 274 00:16:53,800 --> 00:16:56,920 Speaker 1: virus caused the UH a little bit of pulling back 275 00:16:56,960 --> 00:17:00,680 Speaker 1: in the economy, and July and week affect things to 276 00:17:00,720 --> 00:17:03,640 Speaker 1: be kind of flattish for the next few months. What 277 00:17:03,800 --> 00:17:06,600 Speaker 1: is your unemployment statistic for Friday? I mean people are 278 00:17:06,680 --> 00:17:10,560 Speaker 1: verbaling a tennish percent. How much of a mystery is 279 00:17:10,640 --> 00:17:15,199 Speaker 1: that statistic? Well, I mean the employment report is going 280 00:17:15,240 --> 00:17:18,560 Speaker 1: to be could be anything. As we know, economists have 281 00:17:18,600 --> 00:17:21,080 Speaker 1: done a terrible job of forecasting in the last couple 282 00:17:21,080 --> 00:17:24,400 Speaker 1: of months, and that's because there's so much cross currents 283 00:17:24,400 --> 00:17:26,919 Speaker 1: in terms of firing and hiring in the labor market. 284 00:17:27,320 --> 00:17:29,840 Speaker 1: I mean, our guests at this point, is the unemployment 285 00:17:29,880 --> 00:17:33,400 Speaker 1: A dips below eleven, so it comes down to ten seven. 286 00:17:34,040 --> 00:17:36,560 Speaker 1: But to put that in perspective, that would be worse 287 00:17:36,600 --> 00:17:39,320 Speaker 1: than any month during the Great recession of two thousand 288 00:17:39,320 --> 00:17:41,880 Speaker 1: and eight two thousand nine. So it's great that it's 289 00:17:41,920 --> 00:17:45,439 Speaker 1: coming down, but there's still a long way to go. Ethan, 290 00:17:45,440 --> 00:17:47,560 Speaker 1: did you ever think that you'd have a Pyrose guest 291 00:17:47,600 --> 00:17:50,280 Speaker 1: of positive one million, but then also right in the 292 00:17:50,320 --> 00:17:53,360 Speaker 1: line afterwards there's a risk of a negative print. I mean, 293 00:17:53,400 --> 00:17:57,680 Speaker 1: just how unprecedented is this monument pulled this Friday? Yeah, 294 00:17:57,720 --> 00:18:00,359 Speaker 1: I mean it is a product of the unprecedented nature 295 00:18:00,400 --> 00:18:03,119 Speaker 1: of the crisis you have, uh, you know, companies that 296 00:18:03,640 --> 00:18:07,080 Speaker 1: laid off you know, twenty million people and now they're 297 00:18:07,119 --> 00:18:10,240 Speaker 1: hiring some of them back. Uh. And the data we 298 00:18:10,280 --> 00:18:12,760 Speaker 1: look at, the commist look at that's supposed to tell 299 00:18:12,840 --> 00:18:15,359 Speaker 1: us what these numbers are going to be just doesn't 300 00:18:15,480 --> 00:18:18,199 Speaker 1: really tell the whole story. And so we you know, 301 00:18:18,240 --> 00:18:20,560 Speaker 1: we try hard. I mean, every comes just looking at 302 00:18:20,560 --> 00:18:24,600 Speaker 1: these numbers over time, and we're still getting big forecast errors. 303 00:18:24,680 --> 00:18:28,320 Speaker 1: So it's it's just an unprecedented time and so unprecedented 304 00:18:28,400 --> 00:18:31,600 Speaker 1: volatility ethanannic seasonal quocks that we should be coming into 305 00:18:31,640 --> 00:18:34,880 Speaker 1: this print. Well, you do have a little bit of that. 306 00:18:35,040 --> 00:18:37,359 Speaker 1: You've got, um, you know, you don't have the usual 307 00:18:37,400 --> 00:18:40,840 Speaker 1: shutdown of the auto sector and uh so that that 308 00:18:40,880 --> 00:18:43,120 Speaker 1: could help a little bit. We we've got payrolls coming 309 00:18:43,160 --> 00:18:45,320 Speaker 1: in at a million. I think the consensus is a 310 00:18:45,320 --> 00:18:48,280 Speaker 1: little higher than that, but it but those kind of 311 00:18:48,320 --> 00:18:52,520 Speaker 1: smaller seasonal stories are overshadowed by you know, like I said, 312 00:18:52,520 --> 00:18:56,120 Speaker 1: all the volatility of the number, I would view a millions. Okay, 313 00:18:56,160 --> 00:18:59,280 Speaker 1: I mean this is remember payroll survey has taken fairly 314 00:18:59,359 --> 00:19:02,880 Speaker 1: early in the month, so it's reflecting how the economy 315 00:19:02,920 --> 00:19:06,520 Speaker 1: is doing in late June and early July. Things have 316 00:19:06,640 --> 00:19:10,440 Speaker 1: weakened since then, So it's believing or not. It's slightly 317 00:19:10,560 --> 00:19:14,560 Speaker 1: old news. Uh this this July payroll number. It's quite 318 00:19:14,560 --> 00:19:16,760 Speaker 1: clear that the labor market is weakening, and there's faith 319 00:19:16,800 --> 00:19:18,879 Speaker 1: at Washington will come to some sort of deal to 320 00:19:18,960 --> 00:19:22,959 Speaker 1: extend the enhance unemployment benefits. Let's just assume that they 321 00:19:22,960 --> 00:19:24,600 Speaker 1: will come to a deal does it matter if they 322 00:19:24,640 --> 00:19:26,919 Speaker 1: don't come to a deal in the next two weeks 323 00:19:27,000 --> 00:19:28,880 Speaker 1: or three weeks, if it takes them a month, how 324 00:19:28,960 --> 00:19:32,960 Speaker 1: big will the impact be on the economy? Yeah, I 325 00:19:33,000 --> 00:19:35,520 Speaker 1: mean every week of delay it gets a lot worse. 326 00:19:35,640 --> 00:19:37,600 Speaker 1: I mean, these are not you know, the people are 327 00:19:37,600 --> 00:19:41,560 Speaker 1: getting unemployment benefits are on life support here. Their benefits 328 00:19:41,600 --> 00:19:46,200 Speaker 1: don't expire entirely. It's just this the six dollar bonus. 329 00:19:46,280 --> 00:19:49,919 Speaker 1: But that's been a lifeline for the unemployed and for 330 00:19:50,280 --> 00:19:53,720 Speaker 1: the retail sector, which is done pretty well. Um. Every 331 00:19:53,760 --> 00:19:57,720 Speaker 1: week that passes that there's no extension is another week 332 00:19:57,880 --> 00:20:01,240 Speaker 1: where they're cutting back on spending, getting a little more desperate. 333 00:20:01,359 --> 00:20:06,240 Speaker 1: So uh, the timing is very important. Uh. And UM, 334 00:20:06,280 --> 00:20:09,359 Speaker 1: I would hope that they don't cut them too much, 335 00:20:09,520 --> 00:20:12,720 Speaker 1: that they cut them moderately. And I hope that there's 336 00:20:13,080 --> 00:20:16,320 Speaker 1: more in the package than just that the economy needs 337 00:20:16,359 --> 00:20:19,600 Speaker 1: a lot of support right now. We're only halfway back 338 00:20:19,640 --> 00:20:22,000 Speaker 1: to normal. We need a package. It's about half as 339 00:20:22,000 --> 00:20:24,320 Speaker 1: big as what we got in the spring, So it's 340 00:20:24,359 --> 00:20:26,880 Speaker 1: got to be like one and a half trillion nut 341 00:20:27,400 --> 00:20:30,520 Speaker 1: one trillion, and and it needs to be targeted well 342 00:20:30,560 --> 00:20:33,239 Speaker 1: to the people who are most distressed. They're the ones 343 00:20:33,240 --> 00:20:36,600 Speaker 1: who are going to spend money. So the size, the speed, 344 00:20:37,960 --> 00:20:41,760 Speaker 1: the targeted nature of the package, they're all important. And 345 00:20:41,920 --> 00:20:45,320 Speaker 1: right now I'm quite worried. Well, so you have fiscal 346 00:20:45,320 --> 00:20:47,920 Speaker 1: hawks kind of coming back among some of the Republicans, 347 00:20:47,960 --> 00:20:50,360 Speaker 1: and I have to wonder not all deficits are the same. 348 00:20:50,359 --> 00:20:52,440 Speaker 1: We're gonna get a sense of how deep the deficit 349 00:20:52,600 --> 00:20:54,880 Speaker 1: is going to be getting today when the Treasury Department 350 00:20:54,920 --> 00:20:58,400 Speaker 1: releases their financing needs over the next three months. Can 351 00:20:58,440 --> 00:21:01,159 Speaker 1: you give us a sense of how much lower the 352 00:21:01,160 --> 00:21:03,479 Speaker 1: deficit will be, how much shallower it will be if 353 00:21:03,520 --> 00:21:07,560 Speaker 1: there is a successful stimulus versus say, not having a 354 00:21:07,600 --> 00:21:12,040 Speaker 1: stimulus now and a slower growth trajectory going forward. Well, 355 00:21:12,080 --> 00:21:14,600 Speaker 1: I mean, you have to pick your poison here. We're 356 00:21:14,600 --> 00:21:17,440 Speaker 1: not gonna we're not going to solve the budget deficit 357 00:21:17,600 --> 00:21:21,720 Speaker 1: by cutting spending now. I mean, that's just risking driving 358 00:21:21,720 --> 00:21:26,000 Speaker 1: the economy back into collapse. So there's a balancing act here. 359 00:21:26,160 --> 00:21:28,439 Speaker 1: There's no choice. We either going to have a bigger 360 00:21:28,480 --> 00:21:31,040 Speaker 1: deficit because the economy is terrible. We're gonna have a 361 00:21:31,080 --> 00:21:35,640 Speaker 1: bigger deficit because we're spending more money to support vulnerable 362 00:21:35,680 --> 00:21:38,359 Speaker 1: parts of the economy. Um, you know, you can, on 363 00:21:38,400 --> 00:21:40,640 Speaker 1: the margin, maybe reduce the deficit a little bit by 364 00:21:40,760 --> 00:21:44,040 Speaker 1: by cutting the corners. You certainly can can reduce the 365 00:21:44,080 --> 00:21:46,400 Speaker 1: impact on the deficit if you're smart about the way 366 00:21:46,440 --> 00:21:50,280 Speaker 1: you distribute money. So, for example, these checks that they're 367 00:21:50,280 --> 00:21:55,560 Speaker 1: being sent to households, these stimulus checks, most people get 368 00:21:55,600 --> 00:21:58,399 Speaker 1: those checks unless they're unemployed. They're putting them in the bank. 369 00:21:58,600 --> 00:22:02,560 Speaker 1: That's just a handoff from the government to the private sector. Um, 370 00:22:02,600 --> 00:22:04,840 Speaker 1: if you really want to stimulate activity and get a 371 00:22:04,880 --> 00:22:07,440 Speaker 1: good bang for the buck, send it to the parts 372 00:22:07,480 --> 00:22:09,240 Speaker 1: of the economy that needed give it. Send it to 373 00:22:09,280 --> 00:22:13,560 Speaker 1: the unemployed, state and local governments. Uh, you know, um, 374 00:22:14,000 --> 00:22:18,560 Speaker 1: small businesses that are in distress. But these broader stimulus 375 00:22:18,800 --> 00:22:21,639 Speaker 1: programs just don't work very well. We know from history 376 00:22:21,720 --> 00:22:25,000 Speaker 1: that most of that money doesn't make it into the economy. 377 00:22:25,040 --> 00:22:28,280 Speaker 1: It just goes into people's savings accounts. Ethan was sitting 378 00:22:28,320 --> 00:22:31,040 Speaker 1: here talking about policy risk. Argiably, we've already seen a 379 00:22:31,040 --> 00:22:35,399 Speaker 1: policy mistake. These enhanced unemployment benefits have expired. What's the 380 00:22:35,480 --> 00:22:37,760 Speaker 1: damage that will do to the early August data that 381 00:22:37,760 --> 00:22:40,680 Speaker 1: we've got to see in the next countle of weeks. Yeah, 382 00:22:40,680 --> 00:22:42,480 Speaker 1: I mean, it's gonna take a while to see it 383 00:22:42,480 --> 00:22:45,440 Speaker 1: in the numbers, um and each week that passes, it's 384 00:22:45,440 --> 00:22:48,480 Speaker 1: going to get a lot more noticeable. Presumably people have 385 00:22:48,520 --> 00:22:51,560 Speaker 1: been getting this money because a lot of them are 386 00:22:51,600 --> 00:22:54,639 Speaker 1: getting more in unemployment than they would have even working. 387 00:22:55,080 --> 00:22:57,720 Speaker 1: Hopefully they've saved a small amount of it so they 388 00:22:57,720 --> 00:23:00,760 Speaker 1: can kind of survive a week or two. So I 389 00:23:00,800 --> 00:23:02,840 Speaker 1: don't think things that I don't think you fall off 390 00:23:02,880 --> 00:23:05,119 Speaker 1: a cliff in terms of spending. I think it just 391 00:23:05,200 --> 00:23:09,000 Speaker 1: kind of gradually a weekend, and by the end of August, 392 00:23:09,080 --> 00:23:11,639 Speaker 1: if they still haven't passed it, you're seeing a substantially 393 00:23:11,760 --> 00:23:17,040 Speaker 1: slower consumer. We're talking about a weekly benefit of about 394 00:23:17,680 --> 00:23:21,239 Speaker 1: ten billion dollars. That's even for a big economy like 395 00:23:21,280 --> 00:23:25,040 Speaker 1: the US, that's a big number. Uh So it's going 396 00:23:25,119 --> 00:23:27,200 Speaker 1: to be a kind of a sliding down in terms 397 00:23:27,240 --> 00:23:30,159 Speaker 1: of activity. And those retail sales numbers that look so 398 00:23:30,240 --> 00:23:35,040 Speaker 1: fantastic and really weathered the crisis well because the stimulus 399 00:23:35,160 --> 00:23:38,840 Speaker 1: has been so strong for households, those numbers will start 400 00:23:38,880 --> 00:23:42,120 Speaker 1: to fade just as the month goes on, And ethan 401 00:23:42,520 --> 00:23:46,359 Speaker 1: if is the month goes on is frankly unimaginable. Whatever 402 00:23:46,440 --> 00:23:50,920 Speaker 1: anybody's politics, is as well, how do you adjust Q 403 00:23:51,240 --> 00:23:55,480 Speaker 1: three in particularly, how will you just que four g 404 00:23:55,640 --> 00:24:01,000 Speaker 1: d P if we go along? Yeah, well, um, well, 405 00:24:01,000 --> 00:24:03,960 Speaker 1: first of all, we don't think there's gonna be any 406 00:24:04,040 --> 00:24:06,920 Speaker 1: real growth in the third quarter. Now everyone's got a 407 00:24:07,040 --> 00:24:10,160 Speaker 1: high GDP growth number for the third quarter, but that's 408 00:24:10,200 --> 00:24:14,160 Speaker 1: because we ended the second quarter so strong. We had 409 00:24:14,440 --> 00:24:17,800 Speaker 1: huge growth in May and June, and so the launching 410 00:24:17,920 --> 00:24:21,560 Speaker 1: off point for the quarter looks high relative the prior quarter. 411 00:24:22,040 --> 00:24:24,600 Speaker 1: But we don't have any growth in our forecast during 412 00:24:24,600 --> 00:24:28,320 Speaker 1: the quarter. We've just got basically flat activity with as 413 00:24:28,359 --> 00:24:31,320 Speaker 1: we see a small pickup in jobs. So what you're 414 00:24:31,359 --> 00:24:35,120 Speaker 1: gonna do then is you're gonna cut into that even more. Um, 415 00:24:35,560 --> 00:24:39,560 Speaker 1: it's almost impossible to get a to get a negative 416 00:24:40,080 --> 00:24:43,240 Speaker 1: GDP number for the third quarter, given that we start 417 00:24:43,280 --> 00:24:46,160 Speaker 1: off at a higher level. But um, but yeah, I mean, 418 00:24:46,240 --> 00:24:48,040 Speaker 1: as you get into the fourth quarter, you know, you're 419 00:24:48,040 --> 00:24:51,200 Speaker 1: hoping that you know, you get a third quarter maybe 420 00:24:51,960 --> 00:24:54,800 Speaker 1: pick up because of that effective June on the data, 421 00:24:55,200 --> 00:24:56,879 Speaker 1: you're hoping in the fourth quarter you get like a 422 00:24:56,880 --> 00:24:59,800 Speaker 1: five or ten percent growth rate. But you know you 423 00:25:00,000 --> 00:25:02,280 Speaker 1: could in the fourth quarter get a zero if you 424 00:25:02,960 --> 00:25:05,600 Speaker 1: or even a negative number if you don't deliver at 425 00:25:05,640 --> 00:25:09,320 Speaker 1: all in fiscal policy. Now I think they'll deliver. We've 426 00:25:09,359 --> 00:25:13,080 Speaker 1: seen this game. We've seen this, uh, this soap opera before, 427 00:25:13,359 --> 00:25:17,359 Speaker 1: and you know, once people start crying and really hurting 428 00:25:17,480 --> 00:25:20,719 Speaker 1: and then they come to a decision and uh, you know, 429 00:25:21,359 --> 00:25:23,800 Speaker 1: maybe it requires that the markets get a little bit 430 00:25:23,920 --> 00:25:27,479 Speaker 1: upset because it takes too long. But eventually I think 431 00:25:27,480 --> 00:25:30,320 Speaker 1: they'll come to a deal. I just worry that they'll 432 00:25:30,359 --> 00:25:33,359 Speaker 1: wait too long and it won't be well targeted. Ethan 433 00:25:33,440 --> 00:25:35,560 Speaker 1: great to catch up with the big wake ahead. Ethan 434 00:25:35,600 --> 00:25:43,000 Speaker 1: has that at Bank Formata Security. We turned now after 435 00:25:43,520 --> 00:25:48,920 Speaker 1: Mr Kaplan to Catherine Mant. Catherine Man is at City Group. 436 00:25:49,280 --> 00:25:52,920 Speaker 1: She is one of our most distinguished international economists and 437 00:25:52,960 --> 00:25:55,160 Speaker 1: what has been wonderful about her work from her days 438 00:25:55,160 --> 00:25:57,399 Speaker 1: at M I T is she is someone with a 439 00:25:57,480 --> 00:26:01,680 Speaker 1: sense of history. Dr Man. The simple reality for all 440 00:26:01,720 --> 00:26:04,800 Speaker 1: of the FED, all of the academics, and all of 441 00:26:04,840 --> 00:26:09,120 Speaker 1: our viewers and listeners is we've never seen yields at 442 00:26:09,160 --> 00:26:13,440 Speaker 1: this level. Do they damage the economy and do they 443 00:26:13,560 --> 00:26:18,399 Speaker 1: damage confidence at these low levels? Well, there are a 444 00:26:18,440 --> 00:26:20,720 Speaker 1: number of different factors here. I think that you know, 445 00:26:20,840 --> 00:26:24,800 Speaker 1: the bifurcation between the asset side of the economy and 446 00:26:24,840 --> 00:26:28,240 Speaker 1: the real side of the economy is accentuated at very 447 00:26:28,280 --> 00:26:32,199 Speaker 1: low yields because you have the asset side searching for 448 00:26:32,240 --> 00:26:35,400 Speaker 1: any different, any strategy in order to to get the 449 00:26:35,560 --> 00:26:38,400 Speaker 1: return on the assets. That's where the leverage comes from. 450 00:26:38,440 --> 00:26:41,639 Speaker 1: That's where the reach for yield comes from. And yet 451 00:26:41,800 --> 00:26:45,680 Speaker 1: that doesn't translate. That financial market um ooth that comes 452 00:26:45,680 --> 00:26:48,840 Speaker 1: to the fet is not translating into the real economy. 453 00:26:49,119 --> 00:26:52,520 Speaker 1: And that bifurcation is even more apparent now than it's 454 00:26:52,560 --> 00:26:55,840 Speaker 1: been ever. And what is so important about this, folks? 455 00:26:55,840 --> 00:26:58,760 Speaker 1: If you look at within the theoretical model dcor Man, 456 00:26:58,840 --> 00:27:03,640 Speaker 1: the Hicksie and I SL model, the LM curve benefits 457 00:27:03,680 --> 00:27:08,840 Speaker 1: the haves does all the fancy mumbo jumbo doesn't benefit. 458 00:27:08,920 --> 00:27:15,040 Speaker 1: They have knots of American society. There's always bringing in 459 00:27:15,040 --> 00:27:18,240 Speaker 1: the I S l M model on Bloomberg. That's you know, 460 00:27:18,280 --> 00:27:21,560 Speaker 1: you're expecting your your your viewers to be pretty checked up. 461 00:27:21,920 --> 00:27:25,160 Speaker 1: But um so, you know there are channels through which 462 00:27:25,359 --> 00:27:28,359 Speaker 1: the you know, low interest rates, etcetera. Do benefit. The 463 00:27:28,960 --> 00:27:31,680 Speaker 1: quote have knots. I mean, anybody who owns a house 464 00:27:31,800 --> 00:27:34,320 Speaker 1: is actually benefiting right now. And you know, that still 465 00:27:34,400 --> 00:27:37,560 Speaker 1: is a widespread asset holding in the United States. It 466 00:27:37,680 --> 00:27:40,680 Speaker 1: is not everybody, There's no doubt about that, um so. 467 00:27:41,000 --> 00:27:43,440 Speaker 1: But but that is an important channel. And of course 468 00:27:43,680 --> 00:27:47,000 Speaker 1: to the extent that the FED is supporting companies uh 469 00:27:47,080 --> 00:27:50,600 Speaker 1: that are still you know, are still wearing a life 470 00:27:50,600 --> 00:27:53,639 Speaker 1: preserver because we're only in life preserver mode at this point. 471 00:27:54,040 --> 00:27:56,480 Speaker 1: Everybody's trading water hoping that that the virus is going 472 00:27:56,480 --> 00:27:59,560 Speaker 1: to go away or there's a vaccine. Um the FED 473 00:27:59,760 --> 00:28:03,320 Speaker 1: is providing a backstop for those companies and they are 474 00:28:03,359 --> 00:28:06,680 Speaker 1: still in the business of of employing people. So that 475 00:28:06,840 --> 00:28:09,000 Speaker 1: is also something that is that is the role that 476 00:28:09,040 --> 00:28:11,439 Speaker 1: the Federal Reserve place. But there can be no doubt, 477 00:28:11,680 --> 00:28:15,719 Speaker 1: there can be no doubt that the concentration of wealth, uh, 478 00:28:16,359 --> 00:28:19,400 Speaker 1: you know, the Federal reserves policies does benefit those who 479 00:28:19,520 --> 00:28:22,359 Speaker 1: hold wealth and that is very concentrated in the United States. 480 00:28:22,520 --> 00:28:25,320 Speaker 1: But it's not it doesn't have no effect on the 481 00:28:25,359 --> 00:28:26,760 Speaker 1: have nots. I mean, I think we have to be 482 00:28:26,800 --> 00:28:30,320 Speaker 1: fair about that. Catherine rates have remained incredibly load, your 483 00:28:30,359 --> 00:28:32,480 Speaker 1: record lows at the same time that you see inflation 484 00:28:32,520 --> 00:28:35,880 Speaker 1: expectations ticking up, and Mike Wilson of Morgan Stanley over 485 00:28:35,880 --> 00:28:39,120 Speaker 1: the weekend saying that that could actually continue to increase 486 00:28:39,160 --> 00:28:41,760 Speaker 1: over time. Just to quote from him, he quoted Milton 487 00:28:41,800 --> 00:28:45,520 Speaker 1: Friedman famously saying nothing is so permanent as a temporary 488 00:28:45,520 --> 00:28:49,200 Speaker 1: government program. This is potentially more inflationary than appreciated, which 489 00:28:49,200 --> 00:28:52,239 Speaker 1: means that back and rates can rise. Portfolios are not 490 00:28:52,360 --> 00:28:56,360 Speaker 1: positioned for this. Do you agree, Well, I agree that um, 491 00:28:56,440 --> 00:28:59,320 Speaker 1: that rates could rise, UM, but I don't. I don't 492 00:28:59,400 --> 00:29:01,920 Speaker 1: think that. I don't agree with Milton Friedman. UM. The 493 00:29:01,960 --> 00:29:04,320 Speaker 1: other quote that he's very well known for is, of 494 00:29:04,320 --> 00:29:07,280 Speaker 1: course that inflation is always an everywhere a monetary phenomenon. 495 00:29:07,440 --> 00:29:09,560 Speaker 1: In other words, the size of the balance sheet, the 496 00:29:09,600 --> 00:29:13,080 Speaker 1: credit growth that we've been seeing around the world, that 497 00:29:13,080 --> 00:29:15,600 Speaker 1: that that is assumed by the Freedman nights, that that 498 00:29:15,760 --> 00:29:20,520 Speaker 1: this is going to be inflationary ultimately, however, UM and 499 00:29:20,560 --> 00:29:23,480 Speaker 1: the markets are not positioned for that. But the way 500 00:29:23,520 --> 00:29:25,959 Speaker 1: the markets are not positioned, I think is not so 501 00:29:26,080 --> 00:29:28,480 Speaker 1: much that there's going to be inflation that's out of control, 502 00:29:29,360 --> 00:29:32,960 Speaker 1: but there will be more inflation than the markets expect. 503 00:29:33,320 --> 00:29:36,880 Speaker 1: There is a big gap between inflation expectations as measured 504 00:29:36,880 --> 00:29:40,160 Speaker 1: by the market and inflation expectations that is measured by 505 00:29:40,200 --> 00:29:43,520 Speaker 1: the way the market, the um labor market, and the 506 00:29:43,560 --> 00:29:46,920 Speaker 1: product market work. In other words, Milton Friedman's view of 507 00:29:46,920 --> 00:29:49,640 Speaker 1: the world is very macro. The way we think inflation 508 00:29:49,840 --> 00:29:53,440 Speaker 1: works these days is about can workers get get wage 509 00:29:53,480 --> 00:29:56,160 Speaker 1: increases in tight labor markets? The answer is pretty much no. 510 00:29:56,840 --> 00:29:59,880 Speaker 1: Do firms feel like they can raise prices? The answer 511 00:30:00,120 --> 00:30:03,680 Speaker 1: is pretty much no. So you don't have any inflationary 512 00:30:03,960 --> 00:30:07,760 Speaker 1: impetus coming through those kinds of micro foundations of it. 513 00:30:08,640 --> 00:30:12,760 Speaker 1: But the market pricing, the financial market pricing of inflation 514 00:30:13,120 --> 00:30:17,440 Speaker 1: is way below doctor Man. I've got to get in 515 00:30:17,480 --> 00:30:20,400 Speaker 1: a question here on international economics, and I note you're 516 00:30:20,400 --> 00:30:24,440 Speaker 1: wonderful map behind you with Latin America over your right shoulder. 517 00:30:24,880 --> 00:30:29,120 Speaker 1: What is the fragility right now of e M and 518 00:30:29,200 --> 00:30:34,120 Speaker 1: particularly commodity based and virus affected e M. Do you 519 00:30:34,200 --> 00:30:38,560 Speaker 1: find it to be early nineties critical condition or is 520 00:30:38,600 --> 00:30:43,520 Speaker 1: it better than we perceive? There are a couple of 521 00:30:43,560 --> 00:30:48,040 Speaker 1: different cross currents on the commodity market, uh the exposed 522 00:30:48,280 --> 00:30:53,800 Speaker 1: commodity market economies. One of course, is the domestic COVID crisis, 523 00:30:53,880 --> 00:30:56,800 Speaker 1: which is quite apparent in a number of countries in 524 00:30:56,880 --> 00:31:00,480 Speaker 1: Latin America, and that's very negative for for their economies 525 00:31:00,680 --> 00:31:04,360 Speaker 1: and of course the death toll in the individuals. On 526 00:31:04,400 --> 00:31:10,920 Speaker 1: the other hand, the dollar weakness is supportive of commodity pricing, 527 00:31:10,960 --> 00:31:14,320 Speaker 1: and we have seen some improvement in commodity pricing, and 528 00:31:14,360 --> 00:31:18,600 Speaker 1: that is at the margin beneficial for the Latin economies 529 00:31:18,640 --> 00:31:22,040 Speaker 1: in particular. Now we have to overlay on top of that, 530 00:31:22,240 --> 00:31:26,880 Speaker 1: of course that within these economies, even pre COVID, there 531 00:31:27,000 --> 00:31:30,160 Speaker 1: was quite a lot of differentiation in terms of the 532 00:31:30,240 --> 00:31:33,920 Speaker 1: sort of the status and stability of both the political 533 00:31:34,000 --> 00:31:37,240 Speaker 1: systems as well as the as the quality of economic policy. 534 00:31:37,680 --> 00:31:39,640 Speaker 1: So there are really three factors that you do not 535 00:31:39,880 --> 00:31:42,600 Speaker 1: have to wait when we look at at Latin American economies. 536 00:31:42,720 --> 00:31:46,440 Speaker 1: The domestic policy environment, political and political and policy environment 537 00:31:46,600 --> 00:31:50,800 Speaker 1: number two, the COVID and then three dollar weakness educations 538 00:31:50,800 --> 00:31:53,239 Speaker 1: for commodity prices. Doctor Man, thank you so much, very 539 00:31:53,320 --> 00:31:56,320 Speaker 1: valuable after comments and Mr Kaplan, Catherine Man. Of course, 540 00:31:56,640 --> 00:32:03,320 Speaker 1: with city, let's get back to the moment at hand 541 00:32:03,360 --> 00:32:07,800 Speaker 1: for this nation, which is thirty million people unemployment checks aid. 542 00:32:07,880 --> 00:32:11,680 Speaker 1: However you want to put an income substitution, it's evaporated. 543 00:32:11,760 --> 00:32:14,920 Speaker 1: Lessie Vinjamury joins us with Chatham House out of London, 544 00:32:14,960 --> 00:32:18,160 Speaker 1: with a huge focus on the United States and the 545 00:32:18,240 --> 00:32:22,440 Speaker 1: rest of the America's as well. Dr Vinjamury framed for 546 00:32:22,520 --> 00:32:27,080 Speaker 1: us the urgency now for any in all, there just 547 00:32:27,200 --> 00:32:29,600 Speaker 1: seems to be we'll get through this in a week 548 00:32:29,720 --> 00:32:33,840 Speaker 1: or two. Do they have a week or two? No? 549 00:32:34,160 --> 00:32:36,600 Speaker 1: I mean, you know, you think about a hot August 550 00:32:36,640 --> 00:32:40,040 Speaker 1: summer in the United States, thirty million people out of work, 551 00:32:40,080 --> 00:32:43,840 Speaker 1: a lot of people still engaging in those protests um 552 00:32:43,880 --> 00:32:46,960 Speaker 1: and looking for that check and watching the numbers. Right 553 00:32:47,000 --> 00:32:50,280 Speaker 1: the big story is the virus. Watching over one tho 554 00:32:50,600 --> 00:32:54,920 Speaker 1: Americans dying every day and no sign of relief, no 555 00:32:55,040 --> 00:32:58,720 Speaker 1: sign of schools reopening. Hard to imagine going back to work, 556 00:32:58,800 --> 00:33:00,920 Speaker 1: even if their work job. There's going to be very 557 00:33:01,000 --> 00:33:04,680 Speaker 1: little sympathy on the streets of America for a Congress 558 00:33:04,720 --> 00:33:07,520 Speaker 1: that can't get its act together and agree and new 559 00:33:07,560 --> 00:33:11,960 Speaker 1: fiscal stimulus plan that includes a very substantial commitment to 560 00:33:12,440 --> 00:33:16,000 Speaker 1: sustaining those unemployment benefits. But partisanship is the name of 561 00:33:16,000 --> 00:33:19,560 Speaker 1: the game. It's come back. That bipartisan consensus that we 562 00:33:19,640 --> 00:33:23,240 Speaker 1: saw initially it's gone and so you know, but but 563 00:33:23,600 --> 00:33:25,560 Speaker 1: making there's a lot of pressure on both sides right 564 00:33:25,560 --> 00:33:28,640 Speaker 1: now to firm up some sort of package, Leslie. History 565 00:33:28,760 --> 00:33:31,600 Speaker 1: is just littered with this. Whenever the crisis fate, the 566 00:33:31,600 --> 00:33:34,640 Speaker 1: collective will to do more fate with it. We're experiencing 567 00:33:34,640 --> 00:33:37,640 Speaker 1: that at the moment, except the crisis hasn't really faded 568 00:33:37,720 --> 00:33:39,800 Speaker 1: much at all, has it, Leslie? And this is the issue. 569 00:33:40,320 --> 00:33:43,120 Speaker 1: What is Plan B down in d C. And how 570 00:33:43,160 --> 00:33:46,400 Speaker 1: close are way to them actually talking about it? Well, 571 00:33:46,400 --> 00:33:48,520 Speaker 1: I mean, I think you can't stress enough. There is 572 00:33:48,640 --> 00:33:51,520 Speaker 1: no sign and this is you know, watching this from London, 573 00:33:51,560 --> 00:33:56,280 Speaker 1: it is extraordinary to watch America really drive itself down 574 00:33:56,520 --> 00:34:00,720 Speaker 1: the rabbit hole of this crisis. Um m B is 575 00:34:00,800 --> 00:34:03,200 Speaker 1: you know, we're hearing some reports that maybe the White 576 00:34:03,200 --> 00:34:06,000 Speaker 1: House has a plan to step in um to not 577 00:34:06,120 --> 00:34:08,520 Speaker 1: clear what that would be. It clearly has to work 578 00:34:08,520 --> 00:34:12,080 Speaker 1: with Congress. But the Democrats have a strong incentive to 579 00:34:12,239 --> 00:34:14,840 Speaker 1: hold firm, to ask for more, to ask for a 580 00:34:14,880 --> 00:34:20,360 Speaker 1: bigger package, especially as they can see right Donald Trump's polling, 581 00:34:20,600 --> 00:34:24,040 Speaker 1: you know, not holding holding up against his his vice 582 00:34:24,120 --> 00:34:29,400 Speaker 1: presidential contender. Um. And so I think it's difficult to 583 00:34:29,440 --> 00:34:32,560 Speaker 1: see the end in sight, but there's tremendous pressure to 584 00:34:32,360 --> 00:34:35,120 Speaker 1: U to at least have a temporary measure and that's 585 00:34:35,120 --> 00:34:39,120 Speaker 1: what we may well see soon, Leslie. There's the potential 586 00:34:39,160 --> 00:34:42,719 Speaker 1: policy failure on not passing necessarily an extension to the 587 00:34:42,800 --> 00:34:46,359 Speaker 1: enhanced unemployment benefits. There's also policy failure that I think 588 00:34:46,400 --> 00:34:48,760 Speaker 1: is incredibly important to focus on. One that you focused 589 00:34:48,760 --> 00:34:50,920 Speaker 1: on that is the lack of a virus policy. And 590 00:34:50,960 --> 00:34:52,960 Speaker 1: you said that the bottom line is there still is 591 00:34:53,000 --> 00:34:55,960 Speaker 1: no national plan for the virus for fighting it, so 592 00:34:56,000 --> 00:34:58,960 Speaker 1: we need to stimulus. How expensive is it that the 593 00:34:59,080 --> 00:35:02,120 Speaker 1: United States does not not have a cohesive policy on 594 00:35:02,200 --> 00:35:07,319 Speaker 1: fighting the virus. We're seeing the numbers, right, You've seen 595 00:35:07,360 --> 00:35:09,799 Speaker 1: the number of fiscal stimulus, you see the debates going 596 00:35:09,840 --> 00:35:15,640 Speaker 1: on in Congress. But the story of ongoing death, ongoing 597 00:35:15,760 --> 00:35:19,520 Speaker 1: and rising infection in so many states, um and people 598 00:35:19,560 --> 00:35:21,799 Speaker 1: just not being able to function right, not being able 599 00:35:21,840 --> 00:35:23,640 Speaker 1: to leave their daily lives. I think there was a 600 00:35:23,680 --> 00:35:27,120 Speaker 1: period in which there was something novel about it. There 601 00:35:27,200 --> 00:35:29,640 Speaker 1: was really a rally around the flag. And then we 602 00:35:29,680 --> 00:35:32,120 Speaker 1: had a moment of you know, the George Floyd moment, 603 00:35:32,160 --> 00:35:36,400 Speaker 1: which really out there in some in some senses, galvanized Americans, 604 00:35:36,440 --> 00:35:39,879 Speaker 1: brought them together, gave them a focus. And now it's 605 00:35:39,920 --> 00:35:44,359 Speaker 1: getting long, it's getting expensive, and people are looking at September, right, 606 00:35:44,440 --> 00:35:47,960 Speaker 1: they were things to begin in September. John, this is 607 00:35:48,000 --> 00:35:50,480 Speaker 1: so important. You have Dr Vinjamuri with us from London. 608 00:35:50,480 --> 00:35:53,960 Speaker 1: It works, and John, you're nodding acquaintance with the city 609 00:35:54,400 --> 00:35:57,840 Speaker 1: and it's just real simple. Mr Slack, representing the Prime Minister, 610 00:35:58,440 --> 00:36:02,520 Speaker 1: begins to suggest a barckdown of London. John, that's that's 611 00:36:03,080 --> 00:36:05,279 Speaker 1: first of all, is a doable, John, this is a 612 00:36:05,320 --> 00:36:08,320 Speaker 1: worse case option. It was reported by the Sunday Times 613 00:36:08,320 --> 00:36:11,279 Speaker 1: newspaper to a plan to seal off London. And let's 614 00:36:11,320 --> 00:36:13,640 Speaker 1: be clear, we're not there yet. I want to emphasize that. 615 00:36:13,880 --> 00:36:16,400 Speaker 1: But there's a narrative doing the round that the United 616 00:36:16,440 --> 00:36:19,520 Speaker 1: States has a higher tolerance for infections than say the continent, 617 00:36:19,600 --> 00:36:21,719 Speaker 1: and I think that narrative is just too broad for 618 00:36:21,760 --> 00:36:24,480 Speaker 1: what is actually happening in Europe at the moment. On 619 00:36:24,560 --> 00:36:27,040 Speaker 1: the continant, you might be thinking about Europe the mainland 620 00:36:27,280 --> 00:36:30,160 Speaker 1: in the UK, Leslie, that does seem to be just 621 00:36:30,200 --> 00:36:33,040 Speaker 1: as higher tolerance for some of this and to reopen 622 00:36:33,080 --> 00:36:35,600 Speaker 1: and push further, the Prime ministers backed away from that 623 00:36:35,880 --> 00:36:37,799 Speaker 1: in the last week or so. Can you speak to 624 00:36:37,880 --> 00:36:40,360 Speaker 1: what is happening in the United Kingdom at the moment. 625 00:36:41,840 --> 00:36:45,120 Speaker 1: You know, there's a lot of pragmatism amongst the British population. 626 00:36:45,400 --> 00:36:47,360 Speaker 1: You see some of the images of you know, people 627 00:36:47,400 --> 00:36:49,879 Speaker 1: flocking to the beaches, whether it's in Kent or whether 628 00:36:49,920 --> 00:36:53,520 Speaker 1: it's in Cornwall. But the reality is that most people 629 00:36:53,520 --> 00:36:57,680 Speaker 1: are quite cautious. They're seeing that there might be more pressure, 630 00:36:57,760 --> 00:37:00,600 Speaker 1: more shuddering, that there might be reversals that there and 631 00:37:00,640 --> 00:37:02,719 Speaker 1: I think that the one thing that's good is that 632 00:37:02,760 --> 00:37:07,200 Speaker 1: there is now some competence, that there's actually careful planning a, 633 00:37:07,440 --> 00:37:10,560 Speaker 1: B and c. You know, if that infection rate rises 634 00:37:10,600 --> 00:37:13,919 Speaker 1: above a certain level, that there will be shuddering. Uh 635 00:37:13,960 --> 00:37:16,280 Speaker 1: that there's still a lot of uncertainty I think around 636 00:37:16,280 --> 00:37:18,719 Speaker 1: schools that said that schools are opening in September, that 637 00:37:18,880 --> 00:37:21,719 Speaker 1: people are going back to work, a lot of uncertainty 638 00:37:21,760 --> 00:37:23,839 Speaker 1: about how that actually works and what it will mean, 639 00:37:23,960 --> 00:37:26,640 Speaker 1: especially in London where you have so many people reliant 640 00:37:26,640 --> 00:37:30,240 Speaker 1: on the underground, on public transportation to make that happen, 641 00:37:30,239 --> 00:37:32,759 Speaker 1: a lot of people planning to stay at home. But 642 00:37:32,840 --> 00:37:35,000 Speaker 1: it really, I would say, is a very different context 643 00:37:35,160 --> 00:37:37,920 Speaker 1: from what we're seeing in the United States. People largely 644 00:37:38,400 --> 00:37:42,160 Speaker 1: feel that the viruses out of their daily life obviously, 645 00:37:42,560 --> 00:37:45,600 Speaker 1: with the exception of the most vulnerable populations are people 646 00:37:45,680 --> 00:37:49,480 Speaker 1: and elderly care facilities. Um, but life is, you know, 647 00:37:49,600 --> 00:37:53,239 Speaker 1: not normal, but it's it's acclimatized to a new kind 648 00:37:53,280 --> 00:37:55,680 Speaker 1: of normal, learning to live with it. Let's try to 649 00:37:55,680 --> 00:37:57,480 Speaker 1: catch up with these stay safe wi Let's let's lea 650 00:37:57,600 --> 00:38:00,400 Speaker 1: Vinjamini there of Channam House. Thanks for listen listening to 651 00:38:00,440 --> 00:38:04,960 Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on 652 00:38:05,040 --> 00:38:10,879 Speaker 1: Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm 653 00:38:10,880 --> 00:38:14,200 Speaker 1: on Twitter at Tom Keane before the podcast. You can 654 00:38:14,239 --> 00:38:17,440 Speaker 1: always catch us worldwide. I'm Bloomberg Radio.