Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Ley.
Speaker 1: We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. We
Speaker 1: begin the program this morning with Anna Hand of Wells Fargo,
Speaker 1: the equity strategist over there. And I know that in
Speaker 1: the short term you are cautious. Longer term you are
Speaker 1: firmly in the risk on camp. Can you tell me why? Thanks? John,
Speaker 1: Well Even with three opening being slowing down in key
Speaker 1: areas such as Texas, you're seeing nationwide that it's continuing
Speaker 1: and the consumer spending is coming back, that demand has
Speaker 1: been pent up. So as I persist, we think that
Speaker 1: the risk seeking and the equity ride could continue. And
Speaker 1: what do you take away from the still closes that
Speaker 1: we've seen from the reopening process hitting poles in Plaicus
Speaker 1: light Texas. It's certainly concerning, John, you know, especially with
Speaker 1: Texas being one of the largest GDP contributors to the
Speaker 1: national GDP. That is uh, it's concerning. But where it
Speaker 1: really needs to impact is it going to lead to
Speaker 1: several other states closing down officially re uh re putting
Speaker 1: in those quarantine measures, and if that happens to us,
Speaker 1: that's really going to set back the economic recovery that
Speaker 1: had been going on since April. And I want to
Speaker 1: go back to your derivatives work years ago and particularly
Speaker 1: almost back to your physics and dynamics at Yale University
Speaker 1: and real simple, what's the bet of the market right now?
Speaker 1: What's the exposure of the market right now into the summer.
Speaker 1: You say exposure, You're thinking risk exposure, I'm guessing. So
Speaker 1: if you think about that, there are people who are
Speaker 1: positioned for the upside, but it's not this uh you
Speaker 1: fork reach for all grab. You still have a lot
Speaker 1: of people putting on protection and being cautious because, to
Speaker 1: be frank, you know, March was only three months ago,
Speaker 1: and it really hurts some investors. On the other hand,
Speaker 1: you have those that are been piling into the markets.
Speaker 1: You look at the retail flow. We look at some
Speaker 1: robin Hood data and you see that people are eager
Speaker 1: to participate in this rally. So you have two warring forces.
Speaker 1: Our view is still that risk one and longer term
Speaker 1: equities will be higher what's really interesting area and I'm
Speaker 1: glad you bring it up. And it goes back, folks
Speaker 1: to what's called a rehedge, where you go out and
Speaker 1: you have to reset up your belief structure three months
Speaker 1: out or six months out. Do you anticipate more volatility
Speaker 1: and equities is institutions and hedge funds have to struggle
Speaker 1: to rehedge to reset their bets. We do think that
Speaker 1: the couple of months ahead will be volatile, and when
Speaker 1: you look at the dryms market, the term structure on
Speaker 1: the SMP options, it's looking like we're gonna have some
Speaker 1: choppes and elevated vix could persist for some time. That
Speaker 1: being said, what's given us confidence in our equity play
Speaker 1: is that you see credit spreads remaining rather tight. And
Speaker 1: even as credit spreads marine tight, that keeps a cap
Speaker 1: on those equity balls. So it lets us be more
Speaker 1: confident telling investors to continue that risk on value play. UH.
Speaker 1: And yesterday we got the results from the Federal Reserve
Speaker 1: stressed tests of the US banks. It was actually somewhat surprising,
Speaker 1: and it came with a possible review further of the
Speaker 1: capital plans of the big banks later this year. The
Speaker 1: FED is requiring banks to resubmit those Does that uncertainty
Speaker 1: give you any pause about investing in financials? Given the
Speaker 1: fact that their dividends are capped, they're not going to
Speaker 1: be buying back any shares through at least the third quarter,
Speaker 1: and there does seem to be a feeling there could
Speaker 1: be additional measures taken in the very near future. You
Speaker 1: have a great point, Linsa, and let me start with
Speaker 1: the dividends. So they cap dividends and they tie those
Speaker 1: dividends to the income stream. But I think them being
Speaker 1: able to pay out mostly the third quarter is something
Speaker 1: we expected. You know, we weren't expecting this huge raising dividends,
Speaker 1: so it's not the worst news for us, and then
Speaker 1: slashing buy backs and saying no buy back third quarter.
Speaker 1: I would say the consensus view was mostly no buy
Speaker 1: backs for the rest of this year, So that was
Speaker 1: rather expected. What was unprecedented was that they're going to
Speaker 1: ask for another review a resubmitting of that capital plan
Speaker 1: in September. But you know, frankly, it's kind of like
Speaker 1: getting a test graded and getting it back with all
Speaker 1: these red marks. If you get a chance to review
Speaker 1: and resubmit, it could actually help and be something to
Speaker 1: look forward to in September as another catalyst. Alright, and
Speaker 1: I just broadening out a little bit. We want to
Speaker 1: look at the risks heading into November. There was a
Speaker 1: time when in a political year, an election year, the
Speaker 1: election would be on the forefront of a lot of
Speaker 1: people's minds. Right now it seems to be on the
Speaker 1: back burner. At what point when we start to see
Speaker 1: election risk bleed into the market action, I think actually
Speaker 1: it's already starting to breathe bleed into the market, Lisa.
Speaker 1: It certainly has been the backburning, like you said, because
Speaker 1: of the coronavirus and the reopening the economy. But more
Speaker 1: and more you're seeing this all being tied together. As
Speaker 1: President Trump is handling the coronavirus situation that affects his
Speaker 1: popularity in the polls, and as Canada Biden has become
Speaker 1: more and more likely to win the presidential seat. It
Speaker 1: comes into question, what if the Dems take a full sweep.
Speaker 1: If that happens, the changes in the new economic plan
Speaker 1: you see from that side, that could come a lot
Speaker 1: faster than expected. So the domestic political rest to us
Speaker 1: looks a bit under priced, and we're gonna be watching
Speaker 1: that carefully as it develops. It's Tom King. This has
Speaker 1: been one of these stories that has come on the
Speaker 1: right down a massive way in the last week the election,
Speaker 1: just more and more people discussing the potential outcome come November.
Speaker 1: And I always think that sometimes the market gets like
Speaker 1: a distracted toddler which can only focus on one thing.
Speaker 1: And the one thing this market is focused don't come
Speaker 1: November is the tax cut and whether the tax cut
Speaker 1: gets reversed and the Republicans lose the Senate. That seems
Speaker 1: to be overwhelmingly the single focus of market participants going
Speaker 1: into November. Well that's maybe the focus of the participants,
Speaker 1: and maybe that's typical John of elections to worry about
Speaker 1: the tax ramifications of all Democrat House, Senate, White House
Speaker 1: as well, or any of the combinations the permutations you
Speaker 1: can get. But what is so important here, folks about
Speaker 1: the tax ramifications is all the other distractions as well.
Speaker 1: And one of the great overlays here for equity investors
Speaker 1: will be some form if I'm elected free beer, fiscal stimulus.
Speaker 1: We may even get two tranches of fiscal stimulus before
Speaker 1: the election. How does that fiscal stimulus play into the
Speaker 1: Powell put the ability the FED to prop up equities.
Speaker 1: I think it helps the power put really and you know,
Speaker 1: if you've seen how Trim and Power has spoken in
Speaker 1: the past off M meetings, he's asking for more fiscal aids,
Speaker 1: saying that we've done this much on the monetary side,
Speaker 1: but we need more. So right now where we put it,
Speaker 1: we think definitely, Uh, it's better than a coin flip
Speaker 1: to say that we're going to get more stimulus, but
Speaker 1: in what form looks like it's probably going to take
Speaker 1: more like a state and local for aid there, but
Speaker 1: we don't know yet. We're gonna have to see when
Speaker 1: Congress reconvenes in July, and that's going to help the
Speaker 1: economic recovery for sure. And thank you great to get
Speaker 1: you on the program and gotta get you back soon.
Speaker 1: Anna hand there of Wells Faco on the secondy market
Speaker 1: to set up our guest right now, and we're about
Speaker 1: a perfect guest for you to reframe for the weekend
Speaker 1: and for the second half of two thousand twenty. There's
Speaker 1: not much of a data check because there's not much
Speaker 1: going on. Futures negative too, but I'm going to point
Speaker 1: out the four decimal points for the two year yield
Speaker 1: point one, seven, five nine. It will be amazing to
Speaker 1: see if the two year yield breaks down with the
Speaker 1: stability we've seen. Brett shoot, he follows that kind of stuff.
Speaker 1: He's with Northwestern Mutual and looks at the placement of
Speaker 1: investment for Northwestern clients nationwide. Brought thrilled to have you
Speaker 1: with us, and I want to go like c f
Speaker 1: A one on one, I'd call it as well, let's
Speaker 1: go to first principles. Why is watching the two year
Speaker 1: yield important right now? Well, I guess I I bring
Speaker 1: it back to kind of a lot of the comments
Speaker 1: on the disconnect supposedly between the market and the economy
Speaker 1: and what that means. And I guess to me, as
Speaker 1: you think about that two year yield, i'd also point
Speaker 1: out the ten ye yields of point stuff and percent.
Speaker 1: So the question of why our equities still up, I
Speaker 1: think is answer a lot by those competing yields, because
Speaker 1: to me, relative valuation is more important than absolute evaluation.
Speaker 1: Um Our clients have to put their um our advisa
Speaker 1: and to put their clients money somewhere. And when yield
Speaker 1: to that low, you have a stock market that's more supported, right,
Speaker 1: and so to me, the yield are gonna stay low
Speaker 1: for some time, and I think the Federal Reserve absolutely
Speaker 1: wants to keep them there and they want you to
Speaker 1: buy stocks as a result. And that's the difference in
Speaker 1: my career over the past twenty six years, I've seen
Speaker 1: a much more active fe are reserved, a federal reserve
Speaker 1: that cares about where markets are at, a federal reserve
Speaker 1: that wants you to take risk, and they'll continue to
Speaker 1: try to get you to take risk and brand your clients.
Speaker 1: I'm sure one yield enhancing strategy is given where the
Speaker 1: front end of the Yolk curve is given, whether the
Speaker 1: long end of the yeld curve is as well. What
Speaker 1: do you suggest they should do in an environment of
Speaker 1: zero rates for the foreseeable future. Yeah, that's the really
Speaker 1: difficult question, because, um, you know, if you stretch for risk,
Speaker 1: you can get caught off sides if you have risk
Speaker 1: on in both sides of your portfolio. And so we
Speaker 1: do have an overweight to equities. We have tilted it
Speaker 1: towards that, um, but we're making sure on the opposite
Speaker 1: side of the equation that we're not taking too much risk.
Speaker 1: And I think where people really get caught is where
Speaker 1: they actually are loaded up on risk on both sides.
Speaker 1: And so right now, um, you know, given where yields are,
Speaker 1: we we aren't stretching for yield there, but we are
Speaker 1: overweighting equities because we do believe the path of least resistance,
Speaker 1: even with all the virus conversation that we has had,
Speaker 1: is still higher and so it's always playing off. Let's
Speaker 1: talk about how you'll overweight in equities if we can.
Speaker 1: What is overweight in equities mean? Right now, you're taking
Speaker 1: the sign of a county on are you adding to
Speaker 1: to that? In the tips we've seen over the last
Speaker 1: couple of days, you stay in long the more so
Speaker 1: co defensive parts of this market, which some people now
Speaker 1: consider to be solfware stocks. What do you do when
Speaker 1: you drive a white stocks? What does that look like?
Speaker 1: So right now we have a foot in both camps,
Speaker 1: and so when we added back at the end of
Speaker 1: March early April, we did add more tostick locality, but
Speaker 1: we still do have an overweight to large cap. I
Speaker 1: guess that's more of the timing type of mechanism. I
Speaker 1: think if you look out the next few years, you
Speaker 1: will see parts of the market that have underperformed will
Speaker 1: actually do better as the economy continues to climb or
Speaker 1: to walk out of this economic value that COVID created.
Speaker 1: Actually we created this economic valley, but actually broad based
Speaker 1: social distancing. And now I know there's parts of the
Speaker 1: economy that are closing, but on the opposite side, there's
Speaker 1: other parts that are reopening. And we think a nationwide
Speaker 1: lockdown is a slim probability, which I think you can
Speaker 1: bind at with what the fet is doing and not
Speaker 1: let's not forget that each morning we wake up and
Speaker 1: we find out that we have better ideas of treatments, um,
Speaker 1: we we have vaccines that are progressing, And so that
Speaker 1: would be the ultimate endgame where you would actually see
Speaker 1: a pretty heavy market rally, I suppose, And I think
Speaker 1: that's what keeping stocks afloat. And when you talk about
Speaker 1: betting on some of the less well loved stocks, like
Speaker 1: some of the smaller cap or some of the more
Speaker 1: beaten up sectors, I'm trying to pair that with the
Speaker 1: idea that the bankruptcy right right now has risen to
Speaker 1: the highest level since two thousand and nine and expected
Speaker 1: to continue to increase as even though companies are able
Speaker 1: to access credit and are propped up by the Federal Reserve,
Speaker 1: they still are failing given the lack of demand. How
Speaker 1: are you avoiding these pitfalls going forward? I mean, if
Speaker 1: you look historical, I think small caps performed well coming
Speaker 1: out of every recession, and so I would imagine that
Speaker 1: if I looked back, I would find that to be
Speaker 1: the case that there would be bankruptcies rising during the
Speaker 1: same time period. And so you know, certainly we have
Speaker 1: active managers. We also do use e t fs, But
Speaker 1: in general, I guess that's that's kind of details to
Speaker 1: the overall I think acid class performance. And I think historically, um,
Speaker 1: when real rates are negative on the Federal Reserve is
Speaker 1: trying to keep them there, which they're going to do
Speaker 1: for some time, and when the economy begins to climb
Speaker 1: out of the whole um, small caps typically performed fairly well. Uh.
Speaker 1: And so I don't know if I have a perfect
Speaker 1: answer for you, um, but I think that's kind of
Speaker 1: the the detail to the overall ascid allocation and the
Speaker 1: asset class climbing out of that valley. And let's keep
Speaker 1: in mind they've been under your optimism. Excuse me, but
Speaker 1: your your your optimism very much is reflected by a
Speaker 1: lot of individuals, and I think you're not alone in
Speaker 1: feeling that ultimately we will come to the other side.
Speaker 1: There will be a vaccine, we will get through this
Speaker 1: and re emerge on the other side in some form
Speaker 1: in the nazo distant future. What are you baking into
Speaker 1: that assumption? When do we get the vaccine? Do we
Speaker 1: get another fiscal rescue package and perhaps a re upping
Speaker 1: of the stimmly enhanced unemployment benefits? Sure those things one,
Speaker 1: I'm not for sure my optimism is shared. So I
Speaker 1: look at the Bank of America surveys, I look at
Speaker 1: what hedge funds and pensions fund managers are doing, and
Speaker 1: I'm not so sure. I see the optimism that everybody's
Speaker 1: thinks is out there. I look at the American Association
Speaker 1: of the Individual Investors, I see the Barish survey um
Speaker 1: and the and then the number of bulls being low.
Speaker 1: I think right now, the reason why the market rallies
Speaker 1: every time there's a dip is because people are waking
Speaker 1: up and realizing that you may actually get that vaccine
Speaker 1: which people were skeptical about. If it continues to stretch
Speaker 1: past the next you know, six months to nine months.
Speaker 1: I think then my bullish optimism may be wrong. UM,
Speaker 1: but I'm not for sure, and I guess I bring
Speaker 1: it back to common sense if we don't go back
Speaker 1: to a nationwide lockdown with central banks doing what they're doing. UM.
Speaker 1: You know, I think the market is at least supported,
Speaker 1: and I get the benefit of a little bit more
Speaker 1: of an intermediate term time rise. And then perhaps many
Speaker 1: of your guests who come on their show get of
Speaker 1: Northwestern Mutual Chief investment strategies brand fantastic to catch up
Speaker 1: with you. Thank you Kenley on joining us nap from right.
Speaker 1: Can don't worry, I'm starting the interview, not Tom. What
Speaker 1: have we left from the Federal Reserve yesterday evening? It's unprecedented. UM.
Speaker 1: I think what was released yesterday was enormous insight about
Speaker 1: the Federal Reserves, views about the US economy and also
Speaker 1: the sensitivity to the coronavirus. It also was insights in
Speaker 1: terms of what the expectations under scenarios of loan losses
Speaker 1: for the banks and then in terms of return of capital.
Speaker 1: But it was absolutely fascinating to see the narrative that
Speaker 1: the Fed has looking out from today, not only over
Speaker 1: the rest of this year but one, and there was
Speaker 1: much more language and scenarios not only to a U shape,
Speaker 1: not a V shape, but a W scenario where hopefully
Speaker 1: not we don't from the second prize of COVID ninety.
Speaker 1: But the FED has been thinking about this and deliberated yesterday.
Speaker 1: So I think that's important as the economy. Can you
Speaker 1: absolutely nail this as you always do. I mean, I
Speaker 1: was thunderstruck by the language we saw from Randall, course
Speaker 1: and the rest of the team. Why did they do that? Ken?
Speaker 1: What's the back story on the why where there was
Speaker 1: so much ambiguity and mystery out past a September tom
Speaker 1: It's a great question, And there was two thags. One,
Speaker 1: they had to have a narrative that linked, you know,
Speaker 1: over ten years stress tests that didn't look at an
Speaker 1: economy where unemployment was far greater than their adverse scenario
Speaker 1: of ten point three unemployment. Second, we're looking at unemployment
Speaker 1: that is not likely to recover what job growth in
Speaker 1: the Fed's view, but over a longer period of time.
Speaker 1: And that has led to what does this mean in
Speaker 1: terms of the health of the banking system and what
Speaker 1: can the FED do? Even though on the tenure framework.
Speaker 1: They are strong, but the FED just doesn't know what
Speaker 1: the outlook is for the rest of this year next year,
Speaker 1: so that brings in their actions as we know, which
Speaker 1: is to limit essentially to only dividend dividends but no
Speaker 1: dividend increase, pullback sevent their capital return, no stock repurchases.
Speaker 1: And by the way banks from the largest ones JP
Speaker 1: Morgan to the to those of the thirty three. We
Speaker 1: want to continue this conversation with the FED banks supervisors
Speaker 1: looking at data and look for the capital plans by year,
Speaker 1: and that's an amazing reference exactly I wanted to go
Speaker 1: is exactly the idea of what they're going to be
Speaker 1: doing later on. How concerning is the additional capital plan
Speaker 1: that the FED has asked banks to read submit, which
Speaker 1: Alice Williams of Bloomberg Intelligence has said is a broad
Speaker 1: negative for the banking sector. Well, we already know in
Speaker 1: terms of at least what they're planned for this year
Speaker 1: for dividends and no buy backs. But it brings you
Speaker 1: back to the July earnings coming up with loan losses,
Speaker 1: and the projected loan losses on their historical framework was
Speaker 1: four hundred thirty three billion and when you get into
Speaker 1: the COVID nineteen scenarios, you're looking anywhere from six hundred
Speaker 1: to over seven hundred million, you know. So it's it's
Speaker 1: the fet is recognizing that banks are going to see,
Speaker 1: especially in three areas related to commercial loans, credit cards,
Speaker 1: and real estate, that there's incredible uncertainty about the economy,
Speaker 1: the labor market, and there's going to be loan losses.
Speaker 1: So I think the fet of course, is being realistic
Speaker 1: to it's a new environment. And even though the even
Speaker 1: though before March the banks look to be very strong,
Speaker 1: they're going to be much more conservative than the c
Speaker 1: suite or the CEOs of the larger banks about their
Speaker 1: capital can The reaction in markets has been relatively muted.
Speaker 1: We are seeing Wells Fargo shares down about three percent
Speaker 1: ahead of the trading day opening, but that doesn't take
Speaker 1: away yesterday's nearly five percent gain. It seems like people
Speaker 1: are pretty sanguine about the measures that the FED has taken.
Speaker 1: Do you agree or do you think that there is
Speaker 1: more potential downside for bank stocks? So when you get
Speaker 1: to that category of capital return, I don't think there's
Speaker 1: big no surprises here. There is a threshold in terms
Speaker 1: of computed net income to dividends or the payout ratio,
Speaker 1: and Wells Fargo may not need it in terms of
Speaker 1: their ratio NT. But overall, the market, the equity market
Speaker 1: and investors see the banks as of really a try
Speaker 1: the value and and trading at discounts to net tangible
Speaker 1: book value. UH. They are the ultimate cyclical stocks in
Speaker 1: the market, and I think looking beyond the next six months,
Speaker 1: banks are likely to do much better and given the
Speaker 1: protection from the FED and their capital requirements, there's not
Speaker 1: that much more downside unless the loan classes are going
Speaker 1: to be incredibly higher than even what the FED is projected.
Speaker 1: One final quick question here, what's all this mean for
Speaker 1: James Diamond, Brian Moyning and and the rest of the guys?
Speaker 1: Mean what you know? Like what how do they respond
Speaker 1: to this? As they wander into July, their their spirit
Speaker 1: and comments are going to be about phase two, which
Speaker 1: is the road to recovery. The first phase was taking
Speaker 1: care of employees and customers. Now they have to be
Speaker 1: bank executives and do the hard work in terms of
Speaker 1: making sure that they can communicate the strength of their
Speaker 1: balance sheet, their ability to manage credit risk and their
Speaker 1: ability really to manage all the businesses, including the capital markets.
Speaker 1: So they're going to be positive. But uh, you know,
Speaker 1: given what we've read from the FED. Yet you know
Speaker 1: today it's really hard for any of these banks to
Speaker 1: look out and give any ability to project what their
Speaker 1: businesses will do on performance by your end. So it's
Speaker 1: gonna be a fascinating ride for six months, Tom John,
Speaker 1: you know, just related to the dynamics of the US
Speaker 1: economy and global how it filters to banks and as
Speaker 1: investors as we look at the profile of these stocks
Speaker 1: and also the return we get as investors. Couldn't agree more.
Speaker 1: Ken really well summarized Kenneth Lee on their CFR right,
Speaker 1: Global Director of Industry and Equity Research. This is a
Speaker 1: joy right now to bring in bread sets Or to
Speaker 1: stays with the CONSOL on Foreign Relations barely does justice
Speaker 1: to coming out of Harvard ce Poet Oxford, where he
Speaker 1: was a young guy and the papers came off the screen.
Speaker 1: That happens very rarely that somebody writes papers and they
Speaker 1: come out of the screen. And that's what young Setsor
Speaker 1: did at a most early age. He served the nation
Speaker 1: at Treasury. He joins US today. Tannem bomb fellow at
Speaker 1: CFR Brad Richard Hass has out right now my book
Speaker 1: of the summer, The World. It is a wonderful, simple,
Speaker 1: straight talking book on international relations. What would you frame
Speaker 1: is the setser future of our international relations? If it's
Speaker 1: not Washington consensus, what is it? Oh, I'll give you
Speaker 1: a classic dodge. I mean, I honestly think it is
Speaker 1: way too early to tell. Uh, the choices that will
Speaker 1: frame the post pandemic economic future haven't really been made. Obviously,
Speaker 1: the outcome here in November matters, but I think there's
Speaker 1: a still a broad set of policy decisions on trade,
Speaker 1: on American alliances, on the relationship with China that will
Speaker 1: be central to the post pandemic world, and we're only beginning,
Speaker 1: I think to lay those out. I look, Brad, at
Speaker 1: where we are, and after this election, the day after
Speaker 1: this election, what will be the best practice to resurrect
Speaker 1: our State Department from where we've been the last administration.
Speaker 1: Whether it's a second Trump term or a new Biden term, Well,
Speaker 1: it's a lot easier to imagine the process with a
Speaker 1: new Biden term. Let by a I have every reason
Speaker 1: to think that that Joe Biden would pick a very strong,
Speaker 1: very well respected secretary of State. But I think Biden
Speaker 1: has made it very clear that he would prioritize America's
Speaker 1: ties to his traditional allies, and at least in the
Speaker 1: first six months, I think that that would be a
Speaker 1: relatively easy to orchestrate, in the sense that there would
Speaker 1: be an enormous appetite on the part of America's traditional
Speaker 1: allies to work more closely with a new administration. The
Speaker 1: hard part comes when it needs to sort of define
Speaker 1: the substance of the new relationship. But you know, there's
Speaker 1: some pretty obvious things that Biden could do to get
Speaker 1: relations off on a better foot. I mean, narrowing trade
Speaker 1: conflicts to focus on China and settling some of the
Speaker 1: outstanding trade tensions with Europe is for example, a fairly obvious.
Speaker 1: But there's a question going forward how much we are
Speaker 1: going to continue with the de globalization that we seem
Speaker 1: to be talking about at least, if not effectuating over
Speaker 1: the past few years. I'm wondering to what degree you're
Speaker 1: seeing us rejigger supply chains away from China, redomesticate them
Speaker 1: in a way that a lot of people have been
Speaker 1: calling for. Well. To be honest, right now, the the
Speaker 1: data is telling us the opposite story. So there's a
Speaker 1: disconnect between the discussion of deglobalization and the reality which
Speaker 1: is right now in some ways the world is more sinocentric.
Speaker 1: US production is still down so hindered by the state
Speaker 1: of the pandemic in the United States, while Chinese production
Speaker 1: is more or less back at capacity. So what you
Speaker 1: see is that this is not just for the US.
Speaker 1: Around the world, UM imports are down, but imports from
Speaker 1: China are down less than overall imports, So Chinese imports
Speaker 1: are increasing in market share. And in the past couple
Speaker 1: of months of US and Chinese data, imports from China
Speaker 1: have been flat, whereas you know at the beginning of
Speaker 1: the year they were down. So I think you know
Speaker 1: in the first instance that the pandemic and the way
Speaker 1: the pandemic has moved around the world has at least
Speaker 1: in the second quarter, reinforced dependence on China. There are
Speaker 1: China's the global center of mask production right now, and
Speaker 1: everybody is welcome in that rise helping me demand. So
Speaker 1: my my view is that if you really are serious
Speaker 1: about reducing supply chain dependence, it will take policies that
Speaker 1: actively promote that outcome, whether that's how the US procures
Speaker 1: medical equipment, or whether at some other measures that support
Speaker 1: increased resilience. UH. At the current exchange rate. With China
Speaker 1: up and running, the natural pressure is actually towards reinforced dependence.
Speaker 1: Just real quick, twenty seconds. Would you basically consolidate this
Speaker 1: by saying that the tariffs have failed so far to
Speaker 1: reduce international dependency between the U S and China. No,
Speaker 1: I wouldn't say that. I think you know. The tariffs
Speaker 1: clearly what the arrists failed to bring production back to
Speaker 1: the United States, the production the tariffs were reasonably effective
Speaker 1: and creating an incentive to move some production to Vietnam.
Speaker 1: Imports from China would be down about a hundred two
Speaker 1: d and fifty billion ballpark below where they were before
Speaker 1: the tariffs. So the tariffs had an effect, but some
Speaker 1: of that effect is sort of strangely currently being undone
Speaker 1: by the course of the pandemic and the fact that
Speaker 1: the Chinese productions and chain got back up and running
Speaker 1: before everyone else. Brad Setser cfr Fellow, thank you so
Speaker 1: much for being with us as always, wonderful to hear
Speaker 1: your insights well. The joys this year in the past
Speaker 1: twelve months was to swore right down to Washington, this
Speaker 1: is pre pandemic and wander into a building and see
Speaker 1: a wonderfully, wonderfully reinvigorated International Institute for Finance. And this
Speaker 1: is under the leadership of Tim Adams. He is out
Speaker 1: of Kentucky. Tim Adams serving the nation at Treasury and
Speaker 1: took on the wonderful job at ii F, the consortium
Speaker 1: of all the banks worldwide, truly reinvigorating that important institution.
Speaker 1: And we're thrilled the Tim Adams could join us this morning. Tim,
Speaker 1: how is ii F doing in a pandemic? I mean,
Speaker 1: I guess you go virtual, but if any of our
Speaker 1: listeners groups wants to get together, there's nothing like physical
Speaker 1: intect is there. Hey? Tom, thanks for having me. And
Speaker 1: that's probably the best intro I think I've ever had.
Speaker 1: You know, about fourteen fifteen weeks ago we went virtual.
Speaker 1: We've done forty events over the period of times six
Speaker 1: thousand participants, so we didn't miss a beat. We're able
Speaker 1: to function from home from our basements or garages, our attict.
Speaker 1: I do miss my colleagues. I'm miss seeing our clients
Speaker 1: and our around the world, and I look forward to
Speaker 1: being able to do that, but we're out there functioning
Speaker 1: every day. Tim, one of the great questions, and there's
Speaker 1: a stress test in the global issue in European banking
Speaker 1: and that in the big banks, the ones that you
Speaker 1: spend a lot of time talking to, is we're all
Speaker 1: waiting for consolidation. Does this disease, this virus, this pandemic,
Speaker 1: does it speed up that process or does it delay
Speaker 1: the process of global banking consolidation? A good question, Tom,
Speaker 1: I think in in the short term we're all firefighting.
Speaker 1: We're ensuring the capital continues to flow to the real economy.
Speaker 1: But I think once we come out of that, the
Speaker 1: arresting issue that we need consolidation, I think we're gonna
Speaker 1: see it in Europe. We've seen a couple of announcements
Speaker 1: UH in the Gold States over the last couple of
Speaker 1: days and large banks consoliday, and we're going to see
Speaker 1: in Asia and the US has been consolidating for twenty
Speaker 1: or thirty years in that process will continue, if not accelerate.
Speaker 1: So Tim, I guess I have to admit not being
Speaker 1: a banking expert, but I've read a lot of the research.
Speaker 1: This morning, I was a little bit surprised that the
Speaker 1: you know, the Federal Reserve added some new rules that
Speaker 1: could limit dividends and buy backs because I thought the
Speaker 1: stress test the banks came through in pretty good shape.
Speaker 1: I've been told by bank analys and fund managers that
Speaker 1: the banks are much better shape now than they were
Speaker 1: going into the two thousand and eight financial crisis. How
Speaker 1: do you kind of play that or what's what's your
Speaker 1: take on that? Well? Yeah, first of all, the said
Speaker 1: said quite explicitly, where the sources strength for the economy
Speaker 1: rather than the source of the problem. So very different
Speaker 1: in two thousand and eight two thousand nine, and in
Speaker 1: the intervening period, we've raised globally almost four trillion dollars
Speaker 1: worth capital, So the banks are well capitalized, lending is up,
Speaker 1: the US deposits are up, and we're channeling resource to
Speaker 1: real economy. But distress does showed that we need to
Speaker 1: continue to husband resources for potential downtime going forward. So
Speaker 1: it's a sense that this is a precautionary measure, because
Speaker 1: says I look at some of the big banks that
Speaker 1: JP Morgan's, the Bank of Americans of the world, the
Speaker 1: balance sheets look pretty rock solid to me. I completely agree.
Speaker 1: I think this is being just cautionary. That's the fed's job,
Speaker 1: and I must applauded to FED. J. Pale and Randy
Speaker 1: Quarrels another done a remarkable job in this period of time.
Speaker 1: It is precautionary. I think it makes the makes sense
Speaker 1: that the stock price had taken up this morning. We
Speaker 1: saw the same thing in Europe when similar measures are
Speaker 1: put in place. But it is time for caution, and
Speaker 1: this is extreme caution. I applaud to FED efforts. Tim Adams,
Speaker 1: how is the relationship of our August politicians with the bankers?
Speaker 1: What was it five years ago? Four years ago we
Speaker 1: had bankers lined up swearing in in Congress and all
Speaker 1: that is the relationship proved a bit. Oh, the relationship
Speaker 1: is much better and we have a great relationship with
Speaker 1: the administration also members of Congress. You know, again, Tom,
Speaker 1: we're part of the solution. We're channeling capital to the
Speaker 1: real economy. Lending is up, deposits are up. You know,
Speaker 1: we have visions in place for relief, for auto relief.
Speaker 1: So yes, well, no, that that's very fair that the
Speaker 1: Trump administration I think has been very much pro sort
Speaker 1: of corporation. And while students that how do you, Tim,
Speaker 1: and with your wonderful political attun nous, how do you
Speaker 1: feel the banks will adapt to the protests across this
Speaker 1: nation that are much more social, Not so much black
Speaker 1: lives matter, but all lives matter. How will the banks
Speaker 1: immediately adapt to that? That's a great question, Tom. You know,
Speaker 1: if you look at Jamie Diamond, who headed the Business
Speaker 1: poun Table for the past three years, he among other
Speaker 1: corporate leaders are looking for ways to promote diversity within
Speaker 1: their own institutions. We need to reach out to forgotten communities,
Speaker 1: those who feel that not only economy but socially they've
Speaker 1: been left behind. We need to do a better job there,
Speaker 1: without question, and that's made the real challenge before us.
Speaker 1: What I find Tim HadAM so important here has There's
Speaker 1: been some true leadership and indeed governance on this by
Speaker 1: selected bankers, but it's got to get much broader within banking,
Speaker 1: even farther beyond the the II F Are you optimistic
Speaker 1: bankers could do that? I'm optimistic that we can be
Speaker 1: a part of the solution, without question. I've not a
Speaker 1: number of some calls this week where the top topic
Speaker 1: was how can we play a positive role in society?
Speaker 1: Not just in capital formation and lending, but how can
Speaker 1: we be a real agent of change? Yeah, yes, absolutely.
Speaker 1: One of the reasons folks, I hope this pandemic ends
Speaker 1: is so I can do a Swarry in Washington with
Speaker 1: Tim Adams in the ii F. It is an important
Speaker 1: meeting with a lot of really really good expert discussion.
Speaker 1: Tim Adams he is the CEO of the International Institute
Speaker 1: for Finance. Thanks for listening to the Bloomberg Surveillance podcast.
Speaker 1: Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or
Speaker 1: whichever podcast platform you prefer. I'm on Twitter at Tom
Speaker 1: Keane before the podcast. You can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio