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,
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Speaker 1: Morning to Robert Kaplan. He is the president of the
Speaker 1: Dallas Federal Reserve Bank, and he joins us on Bloomberg
Speaker 1: Radio and Television from their Good Morning to you, sir,
Speaker 1: I might good to see you. We'd like to start
Speaker 1: by asking about what you're seeing in your district. You've
Speaker 1: been at the epicenter of the latest COVID surge in cases.
Speaker 1: What's happening to the economy there now? Uh, probably around
Speaker 1: mid June, the sharp rebound we were seeing started to
Speaker 1: moderate and started to stall. That was coincident. It came
Speaker 1: at the same time and along with the resurgence of
Speaker 1: the virus, and so we saw cases increase, we saw hospitalizations,
Speaker 1: UH steadily increase. That has started to moderate. Based on
Speaker 1: the numbers I see the daily numbers, I get it's
Speaker 1: started to moderate over the last number of days. But
Speaker 1: what you saw the state do is put in and
Speaker 1: cities put in uh in UH a backup or unwinding
Speaker 1: to some of the reopening steps. Re emphasize how important
Speaker 1: is to wear a mask, and we saw we saw
Speaker 1: some effect to that, but you're seeing a rebound that's
Speaker 1: stalling to some extent. That's what we're seeing in in Texas. Well.
Speaker 1: That caused you to do a rethink of your economic forecast.
Speaker 1: What do you see ahead for growth and inflation and unemployment. Well,
Speaker 1: and we're because we were seeing it here and in
Speaker 1: a number of other states. Uh, it's still our view
Speaker 1: that will contract for the year at about four and
Speaker 1: a half to five percent has been our view. After
Speaker 1: a very sharp decline in the second quarter, we'd have
Speaker 1: very healthy rebound in the third and the fourth quarter.
Speaker 1: I think I think uh that rebound is more muted
Speaker 1: in the United States now. UH. And it's caused me
Speaker 1: to think that the unemployment rate, if we don't do
Speaker 1: a better job managing the virus, the unemployment rate is
Speaker 1: likely to be above nine percent, between nine and ten percent.
Speaker 1: So we've we've moved up our unemployment forecast. UH. And
Speaker 1: so UM, I think we've got a rebound, UH, but
Speaker 1: it's it's much more muted than it was and if
Speaker 1: we if we don't do a better job managing the virus,
Speaker 1: we're going to have lower growth and we're gonna have
Speaker 1: a higher unemployment rate. And so I've been spending a
Speaker 1: lot of my time talking more about the virus than
Speaker 1: anything else because it's so critical to the recovery. Well,
Speaker 1: the six extra unemployment bonus and eviction moratorio they're gone now. First,
Speaker 1: has the FED has your staff modeled the impact of
Speaker 1: that on the economy? And second, should we expect a
Speaker 1: wave of defaults that might affect credit markets? We have
Speaker 1: looked at it, and one of the things that's unusual
Speaker 1: about this downturn that we've just had is incomes have
Speaker 1: stayed relatively solid, and a big part of the reason
Speaker 1: is these unemployment benefits. And so we're normally in a
Speaker 1: downturn you see a drop in incomes. We haven't seen
Speaker 1: that here. Uh. It's still my view that in some
Speaker 1: form will get an extension of unemployment benefits. So I'm
Speaker 1: quite hopeful that that will continue. But if it didn't, uh, yeah,
Speaker 1: you would see a further weakening in the economy. And uh,
Speaker 1: in particular because consumers wouldn't have as much money in
Speaker 1: their pocket to spend any business people telling you that
Speaker 1: six dollar bonus was keeping people from coming back to
Speaker 1: the labor force. Uh. A lot of business people were
Speaker 1: telling me that, honestly were they were telling me that, Uh,
Speaker 1: it was challenging to hire people. UH. We've looked at
Speaker 1: a number of studies, We've done our own work. We
Speaker 1: don't see it as much in the data, but I
Speaker 1: can tell you I'm hearing it from business people. UH.
Speaker 1: And So, however, whatever the right answer is, I think
Speaker 1: you still are going to need to see extension of unemployment.
Speaker 1: It may be restructured to some extent from the six
Speaker 1: hundred dollars, but I think it's important that we see
Speaker 1: an extension of it. And I think the increased incomes
Speaker 1: while it may have While it may have made it
Speaker 1: hard for certain individual businesses to hire, it's helped create
Speaker 1: jobs because it's helped bolster consumer spending. So the net
Speaker 1: effect still has probably been positive for the economy and
Speaker 1: for employment. A number of your colleagues, at least number
Speaker 1: of epidemiologists joined by your colleague Neil cash Kari of
Speaker 1: Minneapolis UH say that we need another nationwide lockdown for
Speaker 1: about four weeks to defeat the virus and that that
Speaker 1: should be job one over reopening the economy. What do
Speaker 1: you think of that? UH? I probably have a somewhat
Speaker 1: different view based on my conversations again with epidemiologists locally
Speaker 1: and through the country in that UH. The epidemiologist I've
Speaker 1: spoken with, which has been been widespread conversations, believe we
Speaker 1: could manage UH this economy and the virus and have
Speaker 1: the economy open if all of us wore mass. That's
Speaker 1: first and foremost, and then we need a good testing
Speaker 1: and contact tracing regime. But in particular, if we all
Speaker 1: wore mass, they believe it would substantially mute the transmission
Speaker 1: of the virus and you would not need to do
Speaker 1: widespread lockdown, And in fact, many of them fear if
Speaker 1: you did. If you did more lockdowns, if you still
Speaker 1: don't have good following of the healthcare protocols, the lockdown
Speaker 1: to some extent would be wasted. And so I think
Speaker 1: their advice is as UH, be very careful about the
Speaker 1: reopening enforced a widespread UH practice of wearing mass social distancing.
Speaker 1: Now there might be isolated or localized areas in the
Speaker 1: United States where the virus is become unmanageable and they're
Speaker 1: gonna have to take far more extremee steps like lockdowns.
Speaker 1: But I think we're gonna have to learn to live
Speaker 1: with this virus. Um. We're gonna have to learn to
Speaker 1: re engage in our daily activities but still control the virus.
Speaker 1: But widespread mask wearing is essential to that, and I
Speaker 1: think it's probably the most important practice that maybe has
Speaker 1: been done unevenly, and we've we've lost an opportunity to
Speaker 1: to recover and control the virus and grow faster. We're
Speaker 1: speaking with Dallas FED President Robert Kaplan on Bloomberg Television
Speaker 1: and Radio. Do you anticipate, President Kaplan, the FED will
Speaker 1: change its forward guidance, perhaps as early as September and
Speaker 1: tie it to inflation running a little bit above two
Speaker 1: percent for a while. Um. I'll speak for myself. I
Speaker 1: would not do that. Um Uh. We've already given uh
Speaker 1: fairly specific forward guidance in the form of our Summary
Speaker 1: of Economic Projections the SEP, where we've made clear that
Speaker 1: rates are going to stay around the current levels for
Speaker 1: the next couple of years. I would I would far
Speaker 1: prefer when we do give forward guidance in the future
Speaker 1: that we tie it to our dual mandate uh and
Speaker 1: and particularly tie it to the unemployment along with making
Speaker 1: progress on inflation. But I myself would not be in
Speaker 1: favor of tying forward guidance specifically to inflation. I would
Speaker 1: not want to see us do that. Old guys like
Speaker 1: you and me. Remember we last time the Fed traded
Speaker 1: a little bit of inflation for lower unemployment. Uh, the
Speaker 1: Arthur Burns era. Are you worried at all that that
Speaker 1: might be a mistake? Uh? The the inflation dynamic is
Speaker 1: different now. Uh. Meaning used to be as in the
Speaker 1: in the old days, as you say, UH, when you
Speaker 1: had a very tight labor market and you were at
Speaker 1: or pass full employment, you would see inflation. But the
Speaker 1: world has changed. The structure environment of the of the
Speaker 1: economy has changed with technology, technology enabled disruption, which is
Speaker 1: limited pricing power businesses. That along with globalization, has meant
Speaker 1: that the FED has been able to run the economy
Speaker 1: hotter with more muted inflation. And so we've had to
Speaker 1: change the way we think about inflation unemployment. And we've
Speaker 1: also and I've also been much more cognizant of underrepresentative
Speaker 1: groups uh, lower educated UH, Blacks, Hispanics, women with a
Speaker 1: high school education are less. By running hotter, we've been
Speaker 1: able to get these underrepresented groups back into the economy,
Speaker 1: back into the workforce, and I think that's been very valuable.
Speaker 1: The primary and secondary credit market facilities have up to
Speaker 1: seven and fifty billion dollars available, yet you've bought only
Speaker 1: twelve point three billion in bonds. The main Street program
Speaker 1: you can buy up to six hundred billion, but you've
Speaker 1: bought only eighty two million so far. Why doesn't anybody
Speaker 1: want your money? Yeah, so, I've spent a good amount
Speaker 1: of time. For example, I've got a key role in
Speaker 1: the municipal finance program where we we have a five
Speaker 1: it's a five hundred billion dollar program, and we've put out,
Speaker 1: as you noted, a very small fraction of that. I
Speaker 1: think one of the features of the municipal program, the
Speaker 1: corporate bond program is usage is not an indicator of
Speaker 1: the power of the program. Just by announcing these programs
Speaker 1: and making clear that we would help provide a backstop
Speaker 1: to these markets, you've seen a substantial rally and flow
Speaker 1: of funds into these markets to where the FED pricing
Speaker 1: is less attractive the market than market price. Seene and
Speaker 1: the FED hasn't had to actually purchase securities the way
Speaker 1: we might have thought. I think that's a good outcome.
Speaker 1: UH And I think the programs have served their purpose.
Speaker 1: On programs on the other hand, like p p P,
Speaker 1: I think it's very critical that those programs got used,
Speaker 1: and on the Main Street program, I think over time,
Speaker 1: I think we will want to keep getting feedback and
Speaker 1: looking at ways that that program can get more fully used,
Speaker 1: because I do worry as as healthy as the financial
Speaker 1: markets are and as loose as financial conditions are right now,
Speaker 1: one place they're not loose is for small and mid
Speaker 1: sized companies, particularly if they're in person to person contact
Speaker 1: industries and the Main Street program and if there's another
Speaker 1: round of the p p P, those programs are critical
Speaker 1: to helping those small mid sized companies get credit UH
Speaker 1: and so I I do think usage is important to
Speaker 1: look at their One visible aspect of what the FED
Speaker 1: has done, at least according to investors, is the stock market.
Speaker 1: Do you worry that you're creating a bubble however necessary
Speaker 1: your actions maybe, but that it might pop and take
Speaker 1: the economy down with it. I do think it's wise
Speaker 1: for us whenever we're doing UH asset purchases, and we've
Speaker 1: done something I think even more extraordinary in this downturn,
Speaker 1: and that we've done these thirteen three programs which have
Speaker 1: held backstop these financial markets. Yeah, I think we'd be
Speaker 1: wise to be cognizant and concerned about the impact we
Speaker 1: have on risk assets. I think it's necessary, but I
Speaker 1: think it's very important that these programs have a sunset date,
Speaker 1: that the markets understand they're not going to go on indefinitely.
Speaker 1: I know we we've just extended our thirteen three programs
Speaker 1: to December thirty one, but but I do think it's
Speaker 1: important that we emphasize these programs will sunset, they will
Speaker 1: lapse laps, because I think it's very important that these
Speaker 1: markets are able to function without FED support. And I
Speaker 1: think the FED support creates its own UH fragilities in
Speaker 1: the markets, and I think we should be very cognizant
Speaker 1: of that. UH. Can't let you go without asking about oil.
Speaker 1: Bankruptcies are spreading throughout the industry. Prices started to recover
Speaker 1: but now seem to be rolling over a bit. Gasoline
Speaker 1: demand is falling. What is the outlook? Well, so, actually
Speaker 1: gasoline demand the United States has has recovered now to
Speaker 1: again in the neighborhood Hi eighties nine of a year ago.
Speaker 1: I've actually been surprised how strong demand has been even
Speaker 1: with the resurgence of the virus. People are driving. They're
Speaker 1: not taking mass transit, and they're not flying, but they
Speaker 1: are driving their cars. Uh. I think to your point, though,
Speaker 1: with the resurgence of the virus, the recovery in in
Speaker 1: demand has stalled a little bit and is hovering around.
Speaker 1: And at the same time, we've got all this excess inventory.
Speaker 1: You know, we had all this over supply that have
Speaker 1: been built up because of the drop in demand earlier
Speaker 1: this year, and I think it's gonna take till middle
Speaker 1: of one for that excess inventory to be worked off.
Speaker 1: So you're gonna have a very challenging energy industry and
Speaker 1: oil market probably for the next six twelve months, depending
Speaker 1: on how the virus proceeds and how demand recovers, because
Speaker 1: we've got a lot of excess inventory and oversupply. I
Speaker 1: think it will begin to firm later next year. But
Speaker 1: in the meantime, you're seeing shut ins, I mean people
Speaker 1: who are producing who shut in their wells. You're seeing
Speaker 1: recount drop, precipitous lee and I think you'll see US
Speaker 1: production fall from about twelve point eight million barrels a
Speaker 1: day at the end of two will end this year
Speaker 1: around ten point eight million barrels a day, a big drop.
Speaker 1: And and that's even with reversal of most of the
Speaker 1: shut ends. We're just seeing less drilling activity. And you're
Speaker 1: gonna see and you are seen lots of bankruptcies, restructurings,
Speaker 1: and stress in the energy sector. You're the markets guy
Speaker 1: at the FED. You worked at Goldman Sex for a
Speaker 1: long time. The enormous volatility in the treasury market we
Speaker 1: saw back in March. Did that have to happen? Reports
Speaker 1: are it was caused in part by huge levered bets
Speaker 1: by hedge funds. Do we need significant changes? Do we
Speaker 1: need uh supervision of the shadow banking system? Yeah? So
Speaker 1: I do think part of what's what happened in March,
Speaker 1: which maybe hasn't been talked about enough, is is you
Speaker 1: had in March and in part of April a a
Speaker 1: force selling wave through many financial markets. There was a
Speaker 1: substantial amount of embedded leverage, whether people were leveraging treasuries
Speaker 1: as part of risk parity trades or other strategies. And
Speaker 1: part of what the FED did is facilitate that de leveraging.
Speaker 1: But I think now we've been through it, I do
Speaker 1: think it would be worth doing more study as as
Speaker 1: to what what what was the role of embedded leverage
Speaker 1: in these markets, um, and what are the implications? And
Speaker 1: I think again it means the FED dis needs to
Speaker 1: be cognizant that financial stability considerations are sometimes hard to
Speaker 1: see and they can build up, uh and then when
Speaker 1: you have a stress event like we had this year,
Speaker 1: you see it manifest itself. UM. I'm also very aware
Speaker 1: when you mentioned the treasury market, treasury is not the
Speaker 1: natural uh component of a portfolio that maybe it was
Speaker 1: because rates are so low. Uh. You might find that
Speaker 1: that many people used to buy treasuries naturally as part
Speaker 1: of a portfolio will be buying other assets gold, maybe
Speaker 1: other assets. So that will have also have an effect
Speaker 1: on the treasury market that I think we're gonna have
Speaker 1: to spend more time trying to understand. Well, we'll check
Speaker 1: back with you and see what you've learned in a
Speaker 1: couple of months. Robert Cappel, President of the Dallas FT,
Speaker 1: thank you very much for joining us today on Blueberg
Speaker 1: Radio and television worldwide Right now, to begin, are we
Speaker 1: of economic coverage? Here on the simulcast on radio and
Speaker 1: TV worldwide is Ethan Harris. He's a Bank of America
Speaker 1: with authority on the transfer from Greenspan to Bernick with
Speaker 1: this wonderful book, and also on absolutely nailing the non
Speaker 1: V shaped recovery of two thousand seven two thousand and eight,
Speaker 1: No major house did better than Bank of America on
Speaker 1: that call, Ethan, once again, we don't have a V
Speaker 1: shaped recovery. What kind is it? Well, we have a
Speaker 1: two month V followed probably by three months of l
Speaker 1: That's what it looks like, and then hopefully from there
Speaker 1: we start picking up again. But I mean, if you
Speaker 1: look broadly at the data, clearly the resurgence and the
Speaker 1: virus caused the UH a little bit of pulling back
Speaker 1: in the economy, and July and week affect things to
Speaker 1: be kind of flattish for the next few months. What
Speaker 1: is your unemployment statistic for Friday? I mean people are
Speaker 1: verbaling a tennish percent. How much of a mystery is
Speaker 1: that statistic? Well, I mean the employment report is going
Speaker 1: to be could be anything. As we know, economists have
Speaker 1: done a terrible job of forecasting in the last couple
Speaker 1: of months, and that's because there's so much cross currents
Speaker 1: in terms of firing and hiring in the labor market.
Speaker 1: I mean, our guests at this point, is the unemployment
Speaker 1: A dips below eleven, so it comes down to ten seven.
Speaker 1: But to put that in perspective, that would be worse
Speaker 1: than any month during the Great recession of two thousand
Speaker 1: and eight two thousand nine. So it's great that it's
Speaker 1: coming down, but there's still a long way to go. Ethan,
Speaker 1: did you ever think that you'd have a Pyrose guest
Speaker 1: of positive one million, but then also right in the
Speaker 1: line afterwards there's a risk of a negative print. I mean,
Speaker 1: just how unprecedented is this monument pulled this Friday? Yeah,
Speaker 1: I mean it is a product of the unprecedented nature
Speaker 1: of the crisis you have, uh, you know, companies that
Speaker 1: laid off you know, twenty million people and now they're
Speaker 1: hiring some of them back. Uh. And the data we
Speaker 1: look at, the commist look at that's supposed to tell
Speaker 1: us what these numbers are going to be just doesn't
Speaker 1: really tell the whole story. And so we you know,
Speaker 1: we try hard. I mean, every comes just looking at
Speaker 1: these numbers over time, and we're still getting big forecast errors.
Speaker 1: So it's it's just an unprecedented time and so unprecedented
Speaker 1: volatility ethanannic seasonal quocks that we should be coming into
Speaker 1: this print. Well, you do have a little bit of that.
Speaker 1: You've got, um, you know, you don't have the usual
Speaker 1: shutdown of the auto sector and uh so that that
Speaker 1: could help a little bit. We we've got payrolls coming
Speaker 1: in at a million. I think the consensus is a
Speaker 1: little higher than that, but it but those kind of
Speaker 1: smaller seasonal stories are overshadowed by you know, like I said,
Speaker 1: all the volatility of the number, I would view a millions. Okay,
Speaker 1: I mean this is remember payroll survey has taken fairly
Speaker 1: early in the month, so it's reflecting how the economy
Speaker 1: is doing in late June and early July. Things have
Speaker 1: weakened since then, So it's believing or not. It's slightly
Speaker 1: old news. Uh this this July payroll number. It's quite
Speaker 1: clear that the labor market is weakening, and there's faith
Speaker 1: at Washington will come to some sort of deal to
Speaker 1: extend the enhance unemployment benefits. Let's just assume that they
Speaker 1: will come to a deal does it matter if they
Speaker 1: don't come to a deal in the next two weeks
Speaker 1: or three weeks, if it takes them a month, how
Speaker 1: big will the impact be on the economy? Yeah, I
Speaker 1: mean every week of delay it gets a lot worse.
Speaker 1: I mean, these are not you know, the people are
Speaker 1: getting unemployment benefits are on life support here. Their benefits
Speaker 1: don't expire entirely. It's just this the six dollar bonus.
Speaker 1: But that's been a lifeline for the unemployed and for
Speaker 1: the retail sector, which is done pretty well. Um. Every
Speaker 1: week that passes that there's no extension is another week
Speaker 1: where they're cutting back on spending, getting a little more desperate.
Speaker 1: So uh, the timing is very important. Uh. And UM,
Speaker 1: I would hope that they don't cut them too much,
Speaker 1: that they cut them moderately. And I hope that there's
Speaker 1: more in the package than just that the economy needs
Speaker 1: a lot of support right now. We're only halfway back
Speaker 1: to normal. We need a package. It's about half as
Speaker 1: big as what we got in the spring, So it's
Speaker 1: got to be like one and a half trillion nut
Speaker 1: one trillion, and and it needs to be targeted well
Speaker 1: to the people who are most distressed. They're the ones
Speaker 1: who are going to spend money. So the size, the speed,
Speaker 1: the targeted nature of the package, they're all important. And
Speaker 1: right now I'm quite worried. Well, so you have fiscal
Speaker 1: hawks kind of coming back among some of the Republicans,
Speaker 1: and I have to wonder not all deficits are the same.
Speaker 1: We're gonna get a sense of how deep the deficit
Speaker 1: is going to be getting today when the Treasury Department
Speaker 1: releases their financing needs over the next three months. Can
Speaker 1: you give us a sense of how much lower the
Speaker 1: deficit will be, how much shallower it will be if
Speaker 1: there is a successful stimulus versus say, not having a
Speaker 1: stimulus now and a slower growth trajectory going forward. Well,
Speaker 1: I mean, you have to pick your poison here. We're
Speaker 1: not gonna we're not going to solve the budget deficit
Speaker 1: by cutting spending now. I mean, that's just risking driving
Speaker 1: the economy back into collapse. So there's a balancing act here.
Speaker 1: There's no choice. We either going to have a bigger
Speaker 1: deficit because the economy is terrible. We're gonna have a
Speaker 1: bigger deficit because we're spending more money to support vulnerable
Speaker 1: parts of the economy. Um, you know, you can, on
Speaker 1: the margin, maybe reduce the deficit a little bit by
Speaker 1: by cutting the corners. You certainly can can reduce the
Speaker 1: impact on the deficit if you're smart about the way
Speaker 1: you distribute money. So, for example, these checks that they're
Speaker 1: being sent to households, these stimulus checks, most people get
Speaker 1: those checks unless they're unemployed. They're putting them in the bank.
Speaker 1: That's just a handoff from the government to the private sector. Um,
Speaker 1: if you really want to stimulate activity and get a
Speaker 1: good bang for the buck, send it to the parts
Speaker 1: of the economy that needed give it. Send it to
Speaker 1: the unemployed, state and local governments. Uh, you know, um,
Speaker 1: small businesses that are in distress. But these broader stimulus
Speaker 1: programs just don't work very well. We know from history
Speaker 1: that most of that money doesn't make it into the economy.
Speaker 1: It just goes into people's savings accounts. Ethan was sitting
Speaker 1: here talking about policy risk. Argiably, we've already seen a
Speaker 1: policy mistake. These enhanced unemployment benefits have expired. What's the
Speaker 1: damage that will do to the early August data that
Speaker 1: we've got to see in the next countle of weeks. Yeah,
Speaker 1: I mean, it's gonna take a while to see it
Speaker 1: in the numbers, um and each week that passes, it's
Speaker 1: going to get a lot more noticeable. Presumably people have
Speaker 1: been getting this money because a lot of them are
Speaker 1: getting more in unemployment than they would have even working.
Speaker 1: Hopefully they've saved a small amount of it so they
Speaker 1: can kind of survive a week or two. So I
Speaker 1: don't think things that I don't think you fall off
Speaker 1: a cliff in terms of spending. I think it just
Speaker 1: kind of gradually a weekend, and by the end of August,
Speaker 1: if they still haven't passed it, you're seeing a substantially
Speaker 1: slower consumer. We're talking about a weekly benefit of about
Speaker 1: ten billion dollars. That's even for a big economy like
Speaker 1: the US, that's a big number. Uh So it's going
Speaker 1: to be a kind of a sliding down in terms
Speaker 1: of activity. And those retail sales numbers that look so
Speaker 1: fantastic and really weathered the crisis well because the stimulus
Speaker 1: has been so strong for households, those numbers will start
Speaker 1: to fade just as the month goes on, And ethan
Speaker 1: if is the month goes on is frankly unimaginable. Whatever
Speaker 1: anybody's politics, is as well, how do you adjust Q
Speaker 1: three in particularly, how will you just que four g
Speaker 1: d P if we go along? Yeah, well, um, well,
Speaker 1: first of all, we don't think there's gonna be any
Speaker 1: real growth in the third quarter. Now everyone's got a
Speaker 1: high GDP growth number for the third quarter, but that's
Speaker 1: because we ended the second quarter so strong. We had
Speaker 1: huge growth in May and June, and so the launching
Speaker 1: off point for the quarter looks high relative the prior quarter.
Speaker 1: But we don't have any growth in our forecast during
Speaker 1: the quarter. We've just got basically flat activity with as
Speaker 1: we see a small pickup in jobs. So what you're
Speaker 1: gonna do then is you're gonna cut into that even more. Um,
Speaker 1: it's almost impossible to get a to get a negative
Speaker 1: GDP number for the third quarter, given that we start
Speaker 1: off at a higher level. But um, but yeah, I mean,
Speaker 1: as you get into the fourth quarter, you know, you're
Speaker 1: hoping that you know, you get a third quarter maybe
Speaker 1: pick up because of that effective June on the data,
Speaker 1: you're hoping in the fourth quarter you get like a
Speaker 1: five or ten percent growth rate. But you know you
Speaker 1: could in the fourth quarter get a zero if you
Speaker 1: or even a negative number if you don't deliver at
Speaker 1: all in fiscal policy. Now I think they'll deliver. We've
Speaker 1: seen this game. We've seen this, uh, this soap opera before,
Speaker 1: and you know, once people start crying and really hurting
Speaker 1: and then they come to a decision and uh, you know,
Speaker 1: maybe it requires that the markets get a little bit
Speaker 1: upset because it takes too long. But eventually I think
Speaker 1: they'll come to a deal. I just worry that they'll
Speaker 1: wait too long and it won't be well targeted. Ethan
Speaker 1: great to catch up with the big wake ahead. Ethan
Speaker 1: has that at Bank Formata Security. We turned now after
Speaker 1: Mr Kaplan to Catherine Mant. Catherine Man is at City Group.
Speaker 1: She is one of our most distinguished international economists and
Speaker 1: what has been wonderful about her work from her days
Speaker 1: at M I T is she is someone with a
Speaker 1: sense of history. Dr Man. The simple reality for all
Speaker 1: of the FED, all of the academics, and all of
Speaker 1: our viewers and listeners is we've never seen yields at
Speaker 1: this level. Do they damage the economy and do they
Speaker 1: damage confidence at these low levels? Well, there are a
Speaker 1: number of different factors here. I think that you know,
Speaker 1: the bifurcation between the asset side of the economy and
Speaker 1: the real side of the economy is accentuated at very
Speaker 1: low yields because you have the asset side searching for
Speaker 1: any different, any strategy in order to to get the
Speaker 1: return on the assets. That's where the leverage comes from.
Speaker 1: That's where the reach for yield comes from. And yet
Speaker 1: that doesn't translate. That financial market um ooth that comes
Speaker 1: to the fet is not translating into the real economy.
Speaker 1: And that bifurcation is even more apparent now than it's
Speaker 1: been ever. And what is so important about this, folks?
Speaker 1: If you look at within the theoretical model dcor Man,
Speaker 1: the Hicksie and I SL model, the LM curve benefits
Speaker 1: the haves does all the fancy mumbo jumbo doesn't benefit.
Speaker 1: They have knots of American society. There's always bringing in
Speaker 1: the I S l M model on Bloomberg. That's you know,
Speaker 1: you're expecting your your your viewers to be pretty checked up.
Speaker 1: But um so, you know there are channels through which
Speaker 1: the you know, low interest rates, etcetera. Do benefit. The
Speaker 1: quote have knots. I mean, anybody who owns a house
Speaker 1: is actually benefiting right now. And you know, that still
Speaker 1: is a widespread asset holding in the United States. It
Speaker 1: is not everybody, There's no doubt about that, um so.
Speaker 1: But but that is an important channel. And of course
Speaker 1: to the extent that the FED is supporting companies uh
Speaker 1: that are still you know, are still wearing a life
Speaker 1: preserver because we're only in life preserver mode at this point.
Speaker 1: Everybody's trading water hoping that that the virus is going
Speaker 1: to go away or there's a vaccine. Um the FED
Speaker 1: is providing a backstop for those companies and they are
Speaker 1: still in the business of of employing people. So that
Speaker 1: is also something that is that is the role that
Speaker 1: the Federal Reserve place. But there can be no doubt,
Speaker 1: there can be no doubt that the concentration of wealth, uh,
Speaker 1: you know, the Federal reserves policies does benefit those who
Speaker 1: hold wealth and that is very concentrated in the United States.
Speaker 1: But it's not it doesn't have no effect on the
Speaker 1: have nots. I mean, I think we have to be
Speaker 1: fair about that. Catherine rates have remained incredibly load, your
Speaker 1: record lows at the same time that you see inflation
Speaker 1: expectations ticking up, and Mike Wilson of Morgan Stanley over
Speaker 1: the weekend saying that that could actually continue to increase
Speaker 1: over time. Just to quote from him, he quoted Milton
Speaker 1: Friedman famously saying nothing is so permanent as a temporary
Speaker 1: government program. This is potentially more inflationary than appreciated, which
Speaker 1: means that back and rates can rise. Portfolios are not
Speaker 1: positioned for this. Do you agree, Well, I agree that um,
Speaker 1: that rates could rise, UM, but I don't. I don't
Speaker 1: think that. I don't agree with Milton Friedman. UM. The
Speaker 1: other quote that he's very well known for is, of
Speaker 1: course that inflation is always an everywhere a monetary phenomenon.
Speaker 1: In other words, the size of the balance sheet, the
Speaker 1: credit growth that we've been seeing around the world, that
Speaker 1: that that is assumed by the Freedman nights, that that
Speaker 1: this is going to be inflationary ultimately, however, UM and
Speaker 1: the markets are not positioned for that. But the way
Speaker 1: the markets are not positioned, I think is not so
Speaker 1: much that there's going to be inflation that's out of control,
Speaker 1: but there will be more inflation than the markets expect.
Speaker 1: There is a big gap between inflation expectations as measured
Speaker 1: by the market and inflation expectations that is measured by
Speaker 1: the way the market, the um labor market, and the
Speaker 1: product market work. In other words, Milton Friedman's view of
Speaker 1: the world is very macro. The way we think inflation
Speaker 1: works these days is about can workers get get wage
Speaker 1: increases in tight labor markets? The answer is pretty much no.
Speaker 1: Do firms feel like they can raise prices? The answer
Speaker 1: is pretty much no. So you don't have any inflationary
Speaker 1: impetus coming through those kinds of micro foundations of it.
Speaker 1: But the market pricing, the financial market pricing of inflation
Speaker 1: is way below doctor Man. I've got to get in
Speaker 1: a question here on international economics, and I note you're
Speaker 1: wonderful map behind you with Latin America over your right shoulder.
Speaker 1: What is the fragility right now of e M and
Speaker 1: particularly commodity based and virus affected e M. Do you
Speaker 1: find it to be early nineties critical condition or is
Speaker 1: it better than we perceive? There are a couple of
Speaker 1: different cross currents on the commodity market, uh the exposed
Speaker 1: commodity market economies. One of course, is the domestic COVID crisis,
Speaker 1: which is quite apparent in a number of countries in
Speaker 1: Latin America, and that's very negative for for their economies
Speaker 1: and of course the death toll in the individuals. On
Speaker 1: the other hand, the dollar weakness is supportive of commodity pricing,
Speaker 1: and we have seen some improvement in commodity pricing, and
Speaker 1: that is at the margin beneficial for the Latin economies
Speaker 1: in particular. Now we have to overlay on top of that,
Speaker 1: of course that within these economies, even pre COVID, there
Speaker 1: was quite a lot of differentiation in terms of the
Speaker 1: sort of the status and stability of both the political
Speaker 1: systems as well as the as the quality of economic policy.
Speaker 1: So there are really three factors that you do not
Speaker 1: have to wait when we look at at Latin American economies.
Speaker 1: The domestic policy environment, political and political and policy environment
Speaker 1: number two, the COVID and then three dollar weakness educations
Speaker 1: for commodity prices. Doctor Man, thank you so much, very
Speaker 1: valuable after comments and Mr Kaplan, Catherine Man. Of course,
Speaker 1: with city, let's get back to the moment at hand
Speaker 1: for this nation, which is thirty million people unemployment checks aid.
Speaker 1: However you want to put an income substitution, it's evaporated.
Speaker 1: Lessie Vinjamury joins us with Chatham House out of London,
Speaker 1: with a huge focus on the United States and the
Speaker 1: rest of the America's as well. Dr Vinjamury framed for
Speaker 1: us the urgency now for any in all, there just
Speaker 1: seems to be we'll get through this in a week
Speaker 1: or two. Do they have a week or two? No?
Speaker 1: I mean, you know, you think about a hot August
Speaker 1: summer in the United States, thirty million people out of work,
Speaker 1: a lot of people still engaging in those protests um
Speaker 1: and looking for that check and watching the numbers. Right
Speaker 1: the big story is the virus. Watching over one tho
Speaker 1: Americans dying every day and no sign of relief, no
Speaker 1: sign of schools reopening. Hard to imagine going back to work,
Speaker 1: even if their work job. There's going to be very
Speaker 1: little sympathy on the streets of America for a Congress
Speaker 1: that can't get its act together and agree and new
Speaker 1: fiscal stimulus plan that includes a very substantial commitment to
Speaker 1: sustaining those unemployment benefits. But partisanship is the name of
Speaker 1: the game. It's come back. That bipartisan consensus that we
Speaker 1: saw initially it's gone and so you know, but but
Speaker 1: making there's a lot of pressure on both sides right
Speaker 1: now to firm up some sort of package, Leslie. History
Speaker 1: is just littered with this. Whenever the crisis fate, the
Speaker 1: collective will to do more fate with it. We're experiencing
Speaker 1: that at the moment, except the crisis hasn't really faded
Speaker 1: much at all, has it, Leslie? And this is the issue.
Speaker 1: What is Plan B down in d C. And how
Speaker 1: close are way to them actually talking about it? Well,
Speaker 1: I mean, I think you can't stress enough. There is
Speaker 1: no sign and this is you know, watching this from London,
Speaker 1: it is extraordinary to watch America really drive itself down
Speaker 1: the rabbit hole of this crisis. Um m B is
Speaker 1: you know, we're hearing some reports that maybe the White
Speaker 1: House has a plan to step in um to not
Speaker 1: clear what that would be. It clearly has to work
Speaker 1: with Congress. But the Democrats have a strong incentive to
Speaker 1: hold firm, to ask for more, to ask for a
Speaker 1: bigger package, especially as they can see right Donald Trump's polling,
Speaker 1: you know, not holding holding up against his his vice
Speaker 1: presidential contender. Um. And so I think it's difficult to
Speaker 1: see the end in sight, but there's tremendous pressure to
Speaker 1: U to at least have a temporary measure and that's
Speaker 1: what we may well see soon, Leslie. There's the potential
Speaker 1: policy failure on not passing necessarily an extension to the
Speaker 1: enhanced unemployment benefits. There's also policy failure that I think
Speaker 1: is incredibly important to focus on. One that you focused
Speaker 1: on that is the lack of a virus policy. And
Speaker 1: you said that the bottom line is there still is
Speaker 1: no national plan for the virus for fighting it, so
Speaker 1: we need to stimulus. How expensive is it that the
Speaker 1: United States does not not have a cohesive policy on
Speaker 1: fighting the virus. We're seeing the numbers, right, You've seen
Speaker 1: the number of fiscal stimulus, you see the debates going
Speaker 1: on in Congress. But the story of ongoing death, ongoing
Speaker 1: and rising infection in so many states, um and people
Speaker 1: just not being able to function right, not being able
Speaker 1: to leave their daily lives. I think there was a
Speaker 1: period in which there was something novel about it. There
Speaker 1: was really a rally around the flag. And then we
Speaker 1: had a moment of you know, the George Floyd moment,
Speaker 1: which really out there in some in some senses, galvanized Americans,
Speaker 1: brought them together, gave them a focus. And now it's
Speaker 1: getting long, it's getting expensive, and people are looking at September, right,
Speaker 1: they were things to begin in September. John, this is
Speaker 1: so important. You have Dr Vinjamuri with us from London.
Speaker 1: It works, and John, you're nodding acquaintance with the city
Speaker 1: and it's just real simple. Mr Slack, representing the Prime Minister,
Speaker 1: begins to suggest a barckdown of London. John, that's that's
Speaker 1: first of all, is a doable, John, this is a
Speaker 1: worse case option. It was reported by the Sunday Times
Speaker 1: newspaper to a plan to seal off London. And let's
Speaker 1: be clear, we're not there yet. I want to emphasize that.
Speaker 1: But there's a narrative doing the round that the United
Speaker 1: States has a higher tolerance for infections than say the continent,
Speaker 1: and I think that narrative is just too broad for
Speaker 1: what is actually happening in Europe at the moment. On
Speaker 1: the continant, you might be thinking about Europe the mainland
Speaker 1: in the UK, Leslie, that does seem to be just
Speaker 1: as higher tolerance for some of this and to reopen
Speaker 1: and push further, the Prime ministers backed away from that
Speaker 1: in the last week or so. Can you speak to
Speaker 1: what is happening in the United Kingdom at the moment.
Speaker 1: You know, there's a lot of pragmatism amongst the British population.
Speaker 1: You see some of the images of you know, people
Speaker 1: flocking to the beaches, whether it's in Kent or whether
Speaker 1: it's in Cornwall. But the reality is that most people
Speaker 1: are quite cautious. They're seeing that there might be more pressure,
Speaker 1: more shuddering, that there might be reversals that there and
Speaker 1: I think that the one thing that's good is that
Speaker 1: there is now some competence, that there's actually careful planning a,
Speaker 1: B and c. You know, if that infection rate rises
Speaker 1: above a certain level, that there will be shuddering. Uh
Speaker 1: that there's still a lot of uncertainty I think around
Speaker 1: schools that said that schools are opening in September, that
Speaker 1: people are going back to work, a lot of uncertainty
Speaker 1: about how that actually works and what it will mean,
Speaker 1: especially in London where you have so many people reliant
Speaker 1: on the underground, on public transportation to make that happen,
Speaker 1: a lot of people planning to stay at home. But
Speaker 1: it really, I would say, is a very different context
Speaker 1: from what we're seeing in the United States. People largely
Speaker 1: feel that the viruses out of their daily life obviously,
Speaker 1: with the exception of the most vulnerable populations are people
Speaker 1: and elderly care facilities. Um, but life is, you know,
Speaker 1: not normal, but it's it's acclimatized to a new kind
Speaker 1: of normal, learning to live with it. Let's try to
Speaker 1: catch up with these stay safe wi Let's let's lea
Speaker 1: Vinjamini there of Channam House. Thanks for listen listening to
Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on
Speaker 1: Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm
Speaker 1: on Twitter at Tom Keane before the podcast. You can
Speaker 1: always catch us worldwide. I'm Bloomberg Radio.