WEBVTT - Surveillance: Fed Wants You To Take Risk, Schutte Says 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Ley. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.080 Bloomberg dot Com, and of course on the Bloomberg. We 0:00:27.200 --> 0:00:30.960 begin the program this morning with Anna Hand of Wells Fargo, 0:00:31.040 --> 0:00:33.479 the equity strategist over there. And I know that in 0:00:33.560 --> 0:00:37.680 the short term you are cautious. Longer term you are 0:00:37.800 --> 0:00:41.160 firmly in the risk on camp. Can you tell me why? Thanks? John, 0:00:41.400 --> 0:00:44.440 Well Even with three opening being slowing down in key 0:00:44.440 --> 0:00:48.360 areas such as Texas, you're seeing nationwide that it's continuing 0:00:48.720 --> 0:00:52.160 and the consumer spending is coming back, that demand has 0:00:52.200 --> 0:00:55.160 been pent up. So as I persist, we think that 0:00:55.240 --> 0:00:58.560 the risk seeking and the equity ride could continue. And 0:00:58.760 --> 0:01:00.800 what do you take away from the still closes that 0:01:00.800 --> 0:01:03.960 we've seen from the reopening process hitting poles in Plaicus 0:01:04.040 --> 0:01:07.520 light Texas. It's certainly concerning, John, you know, especially with 0:01:07.600 --> 0:01:10.440 Texas being one of the largest GDP contributors to the 0:01:10.560 --> 0:01:14.360 national GDP. That is uh, it's concerning. But where it 0:01:14.440 --> 0:01:17.399 really needs to impact is it going to lead to 0:01:17.640 --> 0:01:23.120 several other states closing down officially re uh re putting 0:01:23.160 --> 0:01:27.360 in those quarantine measures, and if that happens to us, 0:01:27.400 --> 0:01:30.280 that's really going to set back the economic recovery that 0:01:30.440 --> 0:01:34.679 had been going on since April. And I want to 0:01:34.680 --> 0:01:37.880 go back to your derivatives work years ago and particularly 0:01:37.959 --> 0:01:41.440 almost back to your physics and dynamics at Yale University 0:01:41.880 --> 0:01:45.440 and real simple, what's the bet of the market right now? 0:01:45.560 --> 0:01:49.560 What's the exposure of the market right now into the summer. 0:01:50.640 --> 0:01:54.360 You say exposure, You're thinking risk exposure, I'm guessing. So 0:01:54.480 --> 0:01:57.120 if you think about that, there are people who are 0:01:57.200 --> 0:02:00.480 positioned for the upside, but it's not this uh you 0:02:00.680 --> 0:02:03.520 fork reach for all grab. You still have a lot 0:02:03.560 --> 0:02:07.040 of people putting on protection and being cautious because, to 0:02:07.120 --> 0:02:09.640 be frank, you know, March was only three months ago, 0:02:09.760 --> 0:02:13.040 and it really hurts some investors. On the other hand, 0:02:13.360 --> 0:02:16.480 you have those that are been piling into the markets. 0:02:16.560 --> 0:02:18.680 You look at the retail flow. We look at some 0:02:18.800 --> 0:02:21.720 robin Hood data and you see that people are eager 0:02:21.760 --> 0:02:25.960 to participate in this rally. So you have two warring forces. 0:02:26.320 --> 0:02:29.119 Our view is still that risk one and longer term 0:02:29.160 --> 0:02:32.480 equities will be higher what's really interesting area and I'm 0:02:32.480 --> 0:02:34.359 glad you bring it up. And it goes back, folks 0:02:34.360 --> 0:02:36.320 to what's called a rehedge, where you go out and 0:02:36.360 --> 0:02:39.360 you have to reset up your belief structure three months 0:02:39.400 --> 0:02:43.000 out or six months out. Do you anticipate more volatility 0:02:43.120 --> 0:02:47.359 and equities is institutions and hedge funds have to struggle 0:02:47.400 --> 0:02:50.640 to rehedge to reset their bets. We do think that 0:02:50.680 --> 0:02:53.400 the couple of months ahead will be volatile, and when 0:02:53.400 --> 0:02:56.280 you look at the dryms market, the term structure on 0:02:56.320 --> 0:02:59.520 the SMP options, it's looking like we're gonna have some 0:02:59.600 --> 0:03:03.840 choppes and elevated vix could persist for some time. That 0:03:03.960 --> 0:03:07.840 being said, what's given us confidence in our equity play 0:03:07.960 --> 0:03:11.240 is that you see credit spreads remaining rather tight. And 0:03:11.320 --> 0:03:14.520 even as credit spreads marine tight, that keeps a cap 0:03:14.600 --> 0:03:17.520 on those equity balls. So it lets us be more 0:03:17.560 --> 0:03:21.880 confident telling investors to continue that risk on value play. UH. 0:03:21.919 --> 0:03:24.519 And yesterday we got the results from the Federal Reserve 0:03:24.600 --> 0:03:28.519 stressed tests of the US banks. It was actually somewhat surprising, 0:03:28.680 --> 0:03:32.000 and it came with a possible review further of the 0:03:32.080 --> 0:03:34.840 capital plans of the big banks later this year. The 0:03:34.840 --> 0:03:38.839 FED is requiring banks to resubmit those Does that uncertainty 0:03:38.880 --> 0:03:42.360 give you any pause about investing in financials? Given the 0:03:42.400 --> 0:03:44.920 fact that their dividends are capped, they're not going to 0:03:45.000 --> 0:03:47.560 be buying back any shares through at least the third quarter, 0:03:47.920 --> 0:03:50.000 and there does seem to be a feeling there could 0:03:50.080 --> 0:03:52.840 be additional measures taken in the very near future. You 0:03:53.120 --> 0:03:55.200 have a great point, Linsa, and let me start with 0:03:55.240 --> 0:03:58.240 the dividends. So they cap dividends and they tie those 0:03:58.280 --> 0:04:01.400 dividends to the income stream. But I think them being 0:04:01.440 --> 0:04:04.360 able to pay out mostly the third quarter is something 0:04:04.400 --> 0:04:07.800 we expected. You know, we weren't expecting this huge raising dividends, 0:04:07.840 --> 0:04:10.200 so it's not the worst news for us, and then 0:04:10.240 --> 0:04:13.280 slashing buy backs and saying no buy back third quarter. 0:04:13.720 --> 0:04:16.200 I would say the consensus view was mostly no buy 0:04:16.240 --> 0:04:18.480 backs for the rest of this year, So that was 0:04:18.600 --> 0:04:22.480 rather expected. What was unprecedented was that they're going to 0:04:22.560 --> 0:04:26.680 ask for another review a resubmitting of that capital plan 0:04:26.760 --> 0:04:30.200 in September. But you know, frankly, it's kind of like 0:04:30.279 --> 0:04:32.960 getting a test graded and getting it back with all 0:04:33.000 --> 0:04:35.239 these red marks. If you get a chance to review 0:04:35.279 --> 0:04:38.320 and resubmit, it could actually help and be something to 0:04:38.360 --> 0:04:43.120 look forward to in September as another catalyst. Alright, and 0:04:43.240 --> 0:04:45.360 I just broadening out a little bit. We want to 0:04:45.360 --> 0:04:47.960 look at the risks heading into November. There was a 0:04:47.960 --> 0:04:50.960 time when in a political year, an election year, the 0:04:51.000 --> 0:04:52.760 election would be on the forefront of a lot of 0:04:52.760 --> 0:04:55.279 people's minds. Right now it seems to be on the 0:04:55.279 --> 0:04:57.240 back burner. At what point when we start to see 0:04:57.279 --> 0:05:02.560 election risk bleed into the market action, I think actually 0:05:02.600 --> 0:05:05.200 it's already starting to breathe bleed into the market, Lisa. 0:05:05.920 --> 0:05:08.919 It certainly has been the backburning, like you said, because 0:05:08.920 --> 0:05:12.320 of the coronavirus and the reopening the economy. But more 0:05:12.360 --> 0:05:15.560 and more you're seeing this all being tied together. As 0:05:15.600 --> 0:05:19.400 President Trump is handling the coronavirus situation that affects his 0:05:19.440 --> 0:05:23.159 popularity in the polls, and as Canada Biden has become 0:05:23.720 --> 0:05:26.400 more and more likely to win the presidential seat. It 0:05:26.440 --> 0:05:30.000 comes into question, what if the Dems take a full sweep. 0:05:30.360 --> 0:05:33.480 If that happens, the changes in the new economic plan 0:05:33.600 --> 0:05:36.320 you see from that side, that could come a lot 0:05:36.440 --> 0:05:39.880 faster than expected. So the domestic political rest to us 0:05:40.000 --> 0:05:42.320 looks a bit under priced, and we're gonna be watching 0:05:42.360 --> 0:05:45.040 that carefully as it develops. It's Tom King. This has 0:05:45.080 --> 0:05:46.839 been one of these stories that has come on the 0:05:46.880 --> 0:05:49.440 right down a massive way in the last week the election, 0:05:49.760 --> 0:05:53.600 just more and more people discussing the potential outcome come November. 0:05:53.800 --> 0:05:55.839 And I always think that sometimes the market gets like 0:05:55.880 --> 0:05:58.240 a distracted toddler which can only focus on one thing. 0:05:58.240 --> 0:06:00.440 And the one thing this market is focused don't come 0:06:00.480 --> 0:06:03.480 November is the tax cut and whether the tax cut 0:06:03.520 --> 0:06:06.279 gets reversed and the Republicans lose the Senate. That seems 0:06:06.320 --> 0:06:10.800 to be overwhelmingly the single focus of market participants going 0:06:10.839 --> 0:06:13.960 into November. Well that's maybe the focus of the participants, 0:06:13.960 --> 0:06:16.839 and maybe that's typical John of elections to worry about 0:06:16.880 --> 0:06:21.360 the tax ramifications of all Democrat House, Senate, White House 0:06:21.400 --> 0:06:25.760 as well, or any of the combinations the permutations you 0:06:25.800 --> 0:06:29.279 can get. But what is so important here, folks about 0:06:29.320 --> 0:06:33.839 the tax ramifications is all the other distractions as well. 0:06:34.120 --> 0:06:38.000 And one of the great overlays here for equity investors 0:06:38.279 --> 0:06:42.600 will be some form if I'm elected free beer, fiscal stimulus. 0:06:42.680 --> 0:06:46.520 We may even get two tranches of fiscal stimulus before 0:06:46.560 --> 0:06:51.039 the election. How does that fiscal stimulus play into the 0:06:51.160 --> 0:06:54.920 Powell put the ability the FED to prop up equities. 0:06:55.320 --> 0:06:58.360 I think it helps the power put really and you know, 0:06:58.440 --> 0:07:01.000 if you've seen how Trim and Power has spoken in 0:07:01.040 --> 0:07:04.599 the past off M meetings, he's asking for more fiscal aids, 0:07:04.640 --> 0:07:07.000 saying that we've done this much on the monetary side, 0:07:07.000 --> 0:07:09.920 but we need more. So right now where we put it, 0:07:10.120 --> 0:07:13.320 we think definitely, Uh, it's better than a coin flip 0:07:13.480 --> 0:07:15.480 to say that we're going to get more stimulus, but 0:07:15.560 --> 0:07:18.080 in what form looks like it's probably going to take 0:07:18.080 --> 0:07:21.240 more like a state and local for aid there, but 0:07:21.680 --> 0:07:23.800 we don't know yet. We're gonna have to see when 0:07:23.880 --> 0:07:26.920 Congress reconvenes in July, and that's going to help the 0:07:27.000 --> 0:07:30.280 economic recovery for sure. And thank you great to get 0:07:30.280 --> 0:07:31.840 you on the program and gotta get you back soon. 0:07:31.880 --> 0:07:34.800 Anna hand there of Wells Faco on the secondy market 0:07:38.320 --> 0:07:40.360 to set up our guest right now, and we're about 0:07:40.360 --> 0:07:42.640 a perfect guest for you to reframe for the weekend 0:07:42.720 --> 0:07:45.720 and for the second half of two thousand twenty. There's 0:07:45.720 --> 0:07:47.520 not much of a data check because there's not much 0:07:47.560 --> 0:07:50.360 going on. Futures negative too, but I'm going to point 0:07:50.360 --> 0:07:53.720 out the four decimal points for the two year yield 0:07:53.800 --> 0:07:58.800 point one, seven, five nine. It will be amazing to 0:07:58.840 --> 0:08:01.120 see if the two year yield breaks down with the 0:08:01.200 --> 0:08:04.520 stability we've seen. Brett shoot, he follows that kind of stuff. 0:08:04.520 --> 0:08:07.960 He's with Northwestern Mutual and looks at the placement of 0:08:08.040 --> 0:08:12.680 investment for Northwestern clients nationwide. Brought thrilled to have you 0:08:12.760 --> 0:08:14.720 with us, and I want to go like c f 0:08:14.800 --> 0:08:17.000 A one on one, I'd call it as well, let's 0:08:17.040 --> 0:08:20.240 go to first principles. Why is watching the two year 0:08:20.320 --> 0:08:24.600 yield important right now? Well, I guess I I bring 0:08:24.600 --> 0:08:26.679 it back to kind of a lot of the comments 0:08:26.680 --> 0:08:30.320 on the disconnect supposedly between the market and the economy 0:08:30.800 --> 0:08:32.520 and what that means. And I guess to me, as 0:08:32.559 --> 0:08:34.480 you think about that two year yield, i'd also point 0:08:34.480 --> 0:08:36.160 out the ten ye yields of point stuff and percent. 0:08:36.640 --> 0:08:40.280 So the question of why our equities still up, I 0:08:40.280 --> 0:08:42.559 think is answer a lot by those competing yields, because 0:08:42.559 --> 0:08:46.120 to me, relative valuation is more important than absolute evaluation. 0:08:46.400 --> 0:08:49.040 Um Our clients have to put their um our advisa 0:08:49.160 --> 0:08:51.320 and to put their clients money somewhere. And when yield 0:08:51.360 --> 0:08:54.320 to that low, you have a stock market that's more supported, right, 0:08:54.720 --> 0:08:56.880 and so to me, the yield are gonna stay low 0:08:56.960 --> 0:08:59.680 for some time, and I think the Federal Reserve absolutely 0:08:59.720 --> 0:09:01.920 wants to keep them there and they want you to 0:09:02.080 --> 0:09:04.560 buy stocks as a result. And that's the difference in 0:09:04.559 --> 0:09:06.920 my career over the past twenty six years, I've seen 0:09:06.920 --> 0:09:09.959 a much more active fe are reserved, a federal reserve 0:09:10.000 --> 0:09:12.280 that cares about where markets are at, a federal reserve 0:09:12.320 --> 0:09:14.040 that wants you to take risk, and they'll continue to 0:09:14.040 --> 0:09:16.360 try to get you to take risk and brand your clients. 0:09:16.360 --> 0:09:18.680 I'm sure one yield enhancing strategy is given where the 0:09:18.679 --> 0:09:20.319 front end of the Yolk curve is given, whether the 0:09:20.360 --> 0:09:22.679 long end of the yeld curve is as well. What 0:09:22.720 --> 0:09:25.360 do you suggest they should do in an environment of 0:09:25.440 --> 0:09:28.800 zero rates for the foreseeable future. Yeah, that's the really 0:09:28.840 --> 0:09:31.719 difficult question, because, um, you know, if you stretch for risk, 0:09:31.760 --> 0:09:33.480 you can get caught off sides if you have risk 0:09:33.559 --> 0:09:35.800 on in both sides of your portfolio. And so we 0:09:35.880 --> 0:09:38.080 do have an overweight to equities. We have tilted it 0:09:38.120 --> 0:09:40.400 towards that, um, but we're making sure on the opposite 0:09:40.440 --> 0:09:42.560 side of the equation that we're not taking too much risk. 0:09:42.920 --> 0:09:45.240 And I think where people really get caught is where 0:09:45.280 --> 0:09:47.600 they actually are loaded up on risk on both sides. 0:09:48.280 --> 0:09:51.160 And so right now, um, you know, given where yields are, 0:09:51.240 --> 0:09:54.079 we we aren't stretching for yield there, but we are 0:09:54.160 --> 0:09:57.880 overweighting equities because we do believe the path of least resistance, 0:09:58.160 --> 0:10:00.640 even with all the virus conversation that we has had, 0:10:00.760 --> 0:10:03.800 is still higher and so it's always playing off. Let's 0:10:03.800 --> 0:10:06.360 talk about how you'll overweight in equities if we can. 0:10:06.760 --> 0:10:09.480 What is overweight in equities mean? Right now, you're taking 0:10:09.480 --> 0:10:11.640 the sign of a county on are you adding to 0:10:11.640 --> 0:10:13.439 to that? In the tips we've seen over the last 0:10:13.480 --> 0:10:15.840 couple of days, you stay in long the more so 0:10:15.960 --> 0:10:18.280 co defensive parts of this market, which some people now 0:10:18.360 --> 0:10:20.800 consider to be solfware stocks. What do you do when 0:10:20.840 --> 0:10:22.480 you drive a white stocks? What does that look like? 0:10:23.400 --> 0:10:25.240 So right now we have a foot in both camps, 0:10:25.360 --> 0:10:27.760 and so when we added back at the end of 0:10:27.840 --> 0:10:30.480 March early April, we did add more tostick locality, but 0:10:30.559 --> 0:10:32.800 we still do have an overweight to large cap. I 0:10:32.800 --> 0:10:34.760 guess that's more of the timing type of mechanism. I 0:10:34.800 --> 0:10:37.240 think if you look out the next few years, you 0:10:37.280 --> 0:10:40.280 will see parts of the market that have underperformed will 0:10:40.280 --> 0:10:43.400 actually do better as the economy continues to climb or 0:10:43.440 --> 0:10:45.800 to walk out of this economic value that COVID created. 0:10:46.000 --> 0:10:48.800 Actually we created this economic valley, but actually broad based 0:10:48.800 --> 0:10:51.480 social distancing. And now I know there's parts of the 0:10:51.520 --> 0:10:54.040 economy that are closing, but on the opposite side, there's 0:10:54.080 --> 0:10:56.880 other parts that are reopening. And we think a nationwide 0:10:56.880 --> 0:10:59.600 lockdown is a slim probability, which I think you can 0:10:59.640 --> 0:11:02.360 bind at with what the fet is doing and not 0:11:02.440 --> 0:11:05.160 let's not forget that each morning we wake up and 0:11:05.200 --> 0:11:08.600 we find out that we have better ideas of treatments, um, 0:11:08.640 --> 0:11:11.360 we we have vaccines that are progressing, And so that 0:11:11.360 --> 0:11:13.560 would be the ultimate endgame where you would actually see 0:11:13.720 --> 0:11:15.760 a pretty heavy market rally, I suppose, And I think 0:11:15.760 --> 0:11:18.600 that's what keeping stocks afloat. And when you talk about 0:11:18.720 --> 0:11:22.040 betting on some of the less well loved stocks, like 0:11:22.080 --> 0:11:24.400 some of the smaller cap or some of the more 0:11:24.440 --> 0:11:27.080 beaten up sectors, I'm trying to pair that with the 0:11:27.120 --> 0:11:29.640 idea that the bankruptcy right right now has risen to 0:11:29.679 --> 0:11:32.160 the highest level since two thousand and nine and expected 0:11:32.160 --> 0:11:35.120 to continue to increase as even though companies are able 0:11:35.160 --> 0:11:37.920 to access credit and are propped up by the Federal Reserve, 0:11:38.200 --> 0:11:41.760 they still are failing given the lack of demand. How 0:11:41.800 --> 0:11:45.760 are you avoiding these pitfalls going forward? I mean, if 0:11:45.760 --> 0:11:47.920 you look historical, I think small caps performed well coming 0:11:47.920 --> 0:11:50.200 out of every recession, and so I would imagine that 0:11:50.240 --> 0:11:51.640 if I looked back, I would find that to be 0:11:51.679 --> 0:11:53.880 the case that there would be bankruptcies rising during the 0:11:53.920 --> 0:11:56.520 same time period. And so you know, certainly we have 0:11:56.600 --> 0:12:00.480 active managers. We also do use e t fs, But 0:12:00.600 --> 0:12:03.080 in general, I guess that's that's kind of details to 0:12:03.080 --> 0:12:07.079 the overall I think acid class performance. And I think historically, um, 0:12:07.080 --> 0:12:09.120 when real rates are negative on the Federal Reserve is 0:12:09.440 --> 0:12:10.920 trying to keep them there, which they're going to do 0:12:11.000 --> 0:12:13.440 for some time, and when the economy begins to climb 0:12:13.480 --> 0:12:17.160 out of the whole um, small caps typically performed fairly well. Uh. 0:12:17.200 --> 0:12:18.840 And so I don't know if I have a perfect 0:12:18.840 --> 0:12:22.439 answer for you, um, but I think that's kind of 0:12:21.480 --> 0:12:25.280 the the detail to the overall ascid allocation and the 0:12:25.320 --> 0:12:28.160 asset class climbing out of that valley. And let's keep 0:12:28.160 --> 0:12:31.319 in mind they've been under your optimism. Excuse me, but 0:12:31.480 --> 0:12:33.960 your your your optimism very much is reflected by a 0:12:33.960 --> 0:12:36.360 lot of individuals, and I think you're not alone in 0:12:36.480 --> 0:12:39.520 feeling that ultimately we will come to the other side. 0:12:39.800 --> 0:12:42.400 There will be a vaccine, we will get through this 0:12:42.600 --> 0:12:45.160 and re emerge on the other side in some form 0:12:45.240 --> 0:12:48.240 in the nazo distant future. What are you baking into 0:12:48.280 --> 0:12:51.360 that assumption? When do we get the vaccine? Do we 0:12:51.440 --> 0:12:55.640 get another fiscal rescue package and perhaps a re upping 0:12:56.160 --> 0:13:00.480 of the stimmly enhanced unemployment benefits? Sure those things one, 0:13:00.520 --> 0:13:02.760 I'm not for sure my optimism is shared. So I 0:13:02.840 --> 0:13:05.160 look at the Bank of America surveys, I look at 0:13:05.200 --> 0:13:07.800 what hedge funds and pensions fund managers are doing, and 0:13:07.840 --> 0:13:09.800 I'm not so sure. I see the optimism that everybody's 0:13:09.800 --> 0:13:12.080 thinks is out there. I look at the American Association 0:13:12.120 --> 0:13:15.400 of the Individual Investors, I see the Barish survey um 0:13:15.720 --> 0:13:17.360 and the and then the number of bulls being low. 0:13:17.720 --> 0:13:19.880 I think right now, the reason why the market rallies 0:13:19.880 --> 0:13:22.199 every time there's a dip is because people are waking 0:13:22.240 --> 0:13:24.320 up and realizing that you may actually get that vaccine 0:13:24.320 --> 0:13:27.360 which people were skeptical about. If it continues to stretch 0:13:27.400 --> 0:13:30.559 past the next you know, six months to nine months. 0:13:30.640 --> 0:13:34.680 I think then my bullish optimism may be wrong. UM, 0:13:34.720 --> 0:13:36.560 but I'm not for sure, and I guess I bring 0:13:36.600 --> 0:13:39.000 it back to common sense if we don't go back 0:13:39.040 --> 0:13:43.319 to a nationwide lockdown with central banks doing what they're doing. UM. 0:13:43.360 --> 0:13:45.840 You know, I think the market is at least supported, 0:13:45.880 --> 0:13:48.640 and I get the benefit of a little bit more 0:13:48.640 --> 0:13:50.760 of an intermediate term time rise. And then perhaps many 0:13:50.760 --> 0:13:53.840 of your guests who come on their show get of 0:13:54.080 --> 0:13:58.200 Northwestern Mutual Chief investment strategies brand fantastic to catch up 0:13:58.200 --> 0:14:03.920 with you. Thank you Kenley on joining us nap from right. 0:14:04.000 --> 0:14:07.040 Can don't worry, I'm starting the interview, not Tom. What 0:14:07.120 --> 0:14:11.000 have we left from the Federal Reserve yesterday evening? It's unprecedented. UM. 0:14:11.200 --> 0:14:16.600 I think what was released yesterday was enormous insight about 0:14:16.640 --> 0:14:21.320 the Federal Reserves, views about the US economy and also 0:14:21.360 --> 0:14:26.440 the sensitivity to the coronavirus. It also was insights in 0:14:26.560 --> 0:14:31.840 terms of what the expectations under scenarios of loan losses 0:14:31.920 --> 0:14:35.440 for the banks and then in terms of return of capital. 0:14:35.720 --> 0:14:39.720 But it was absolutely fascinating to see the narrative that 0:14:39.760 --> 0:14:43.640 the Fed has looking out from today, not only over 0:14:43.920 --> 0:14:47.600 the rest of this year but one, and there was 0:14:47.680 --> 0:14:52.000 much more language and scenarios not only to a U shape, 0:14:52.400 --> 0:14:56.720 not a V shape, but a W scenario where hopefully 0:14:56.760 --> 0:14:59.920 not we don't from the second prize of COVID ninety. 0:15:00.920 --> 0:15:04.560 But the FED has been thinking about this and deliberated yesterday. 0:15:04.880 --> 0:15:07.520 So I think that's important as the economy. Can you 0:15:07.600 --> 0:15:10.240 absolutely nail this as you always do. I mean, I 0:15:10.280 --> 0:15:13.480 was thunderstruck by the language we saw from Randall, course 0:15:13.800 --> 0:15:17.000 and the rest of the team. Why did they do that? Ken? 0:15:17.120 --> 0:15:20.520 What's the back story on the why where there was 0:15:20.600 --> 0:15:25.640 so much ambiguity and mystery out past a September tom 0:15:25.640 --> 0:15:29.040 It's a great question, And there was two thags. One, 0:15:29.240 --> 0:15:33.000 they had to have a narrative that linked, you know, 0:15:33.120 --> 0:15:36.800 over ten years stress tests that didn't look at an 0:15:36.800 --> 0:15:41.360 economy where unemployment was far greater than their adverse scenario 0:15:41.520 --> 0:15:47.400 of ten point three unemployment. Second, we're looking at unemployment 0:15:47.960 --> 0:15:51.600 that is not likely to recover what job growth in 0:15:51.640 --> 0:15:54.920 the Fed's view, but over a longer period of time. 0:15:55.800 --> 0:15:58.600 And that has led to what does this mean in 0:15:58.760 --> 0:16:01.960 terms of the health of the banking system and what 0:16:02.240 --> 0:16:06.040 can the FED do? Even though on the tenure framework. 0:16:06.320 --> 0:16:09.440 They are strong, but the FED just doesn't know what 0:16:09.560 --> 0:16:12.000 the outlook is for the rest of this year next year, 0:16:12.560 --> 0:16:16.960 so that brings in their actions as we know, which 0:16:17.000 --> 0:16:23.520 is to limit essentially to only dividend dividends but no 0:16:23.640 --> 0:16:29.720 dividend increase, pullback sevent their capital return, no stock repurchases. 0:16:30.240 --> 0:16:33.240 And by the way banks from the largest ones JP 0:16:33.400 --> 0:16:36.720 Morgan to the to those of the thirty three. We 0:16:36.800 --> 0:16:41.000 want to continue this conversation with the FED banks supervisors 0:16:41.720 --> 0:16:45.440 looking at data and look for the capital plans by year, 0:16:45.520 --> 0:16:50.720 and that's an amazing reference exactly I wanted to go 0:16:50.960 --> 0:16:53.240 is exactly the idea of what they're going to be 0:16:53.320 --> 0:16:57.520 doing later on. How concerning is the additional capital plan 0:16:58.000 --> 0:17:00.640 that the FED has asked banks to read submit, which 0:17:00.640 --> 0:17:03.720 Alice Williams of Bloomberg Intelligence has said is a broad 0:17:03.840 --> 0:17:06.800 negative for the banking sector. Well, we already know in 0:17:06.920 --> 0:17:09.800 terms of at least what they're planned for this year 0:17:09.800 --> 0:17:12.119 for dividends and no buy backs. But it brings you 0:17:12.160 --> 0:17:16.359 back to the July earnings coming up with loan losses, 0:17:16.440 --> 0:17:21.119 and the projected loan losses on their historical framework was 0:17:21.480 --> 0:17:25.919 four hundred thirty three billion and when you get into 0:17:25.960 --> 0:17:31.520 the COVID nineteen scenarios, you're looking anywhere from six hundred 0:17:31.560 --> 0:17:35.040 to over seven hundred million, you know. So it's it's 0:17:35.240 --> 0:17:39.560 the fet is recognizing that banks are going to see, 0:17:39.720 --> 0:17:45.520 especially in three areas related to commercial loans, credit cards, 0:17:45.800 --> 0:17:50.960 and real estate, that there's incredible uncertainty about the economy, 0:17:51.040 --> 0:17:54.080 the labor market, and there's going to be loan losses. 0:17:54.800 --> 0:17:58.840 So I think the fet of course, is being realistic 0:17:59.320 --> 0:18:03.320 to it's a new environment. And even though the even 0:18:03.400 --> 0:18:07.280 though before March the banks look to be very strong, 0:18:07.680 --> 0:18:10.000 they're going to be much more conservative than the c 0:18:10.240 --> 0:18:13.360 suite or the CEOs of the larger banks about their 0:18:13.359 --> 0:18:16.480 capital can The reaction in markets has been relatively muted. 0:18:16.480 --> 0:18:18.840 We are seeing Wells Fargo shares down about three percent 0:18:18.880 --> 0:18:22.200 ahead of the trading day opening, but that doesn't take 0:18:22.240 --> 0:18:25.600 away yesterday's nearly five percent gain. It seems like people 0:18:25.600 --> 0:18:28.680 are pretty sanguine about the measures that the FED has taken. 0:18:29.119 --> 0:18:31.159 Do you agree or do you think that there is 0:18:31.359 --> 0:18:34.600 more potential downside for bank stocks? So when you get 0:18:34.640 --> 0:18:37.480 to that category of capital return, I don't think there's 0:18:37.520 --> 0:18:41.280 big no surprises here. There is a threshold in terms 0:18:41.320 --> 0:18:45.560 of computed net income to dividends or the payout ratio, 0:18:45.640 --> 0:18:49.560 and Wells Fargo may not need it in terms of 0:18:50.119 --> 0:18:55.399 their ratio NT. But overall, the market, the equity market 0:18:55.560 --> 0:18:59.960 and investors see the banks as of really a try 0:19:00.160 --> 0:19:04.639 the value and and trading at discounts to net tangible 0:19:04.680 --> 0:19:09.080 book value. UH. They are the ultimate cyclical stocks in 0:19:09.119 --> 0:19:13.439 the market, and I think looking beyond the next six months, 0:19:13.920 --> 0:19:18.040 banks are likely to do much better and given the 0:19:18.119 --> 0:19:21.719 protection from the FED and their capital requirements, there's not 0:19:21.840 --> 0:19:25.199 that much more downside unless the loan classes are going 0:19:25.240 --> 0:19:29.080 to be incredibly higher than even what the FED is projected. 0:19:29.920 --> 0:19:32.240 One final quick question here, what's all this mean for 0:19:32.320 --> 0:19:34.680 James Diamond, Brian Moyning and and the rest of the guys? 0:19:34.720 --> 0:19:37.680 Mean what you know? Like what how do they respond 0:19:37.720 --> 0:19:41.560 to this? As they wander into July, their their spirit 0:19:41.600 --> 0:19:44.160 and comments are going to be about phase two, which 0:19:44.240 --> 0:19:48.200 is the road to recovery. The first phase was taking 0:19:48.240 --> 0:19:51.119 care of employees and customers. Now they have to be 0:19:51.200 --> 0:19:54.520 bank executives and do the hard work in terms of 0:19:54.800 --> 0:19:58.080 making sure that they can communicate the strength of their 0:19:58.080 --> 0:20:02.440 balance sheet, their ability to manage credit risk and their 0:20:02.480 --> 0:20:07.080 ability really to manage all the businesses, including the capital markets. 0:20:07.359 --> 0:20:10.240 So they're going to be positive. But uh, you know, 0:20:10.600 --> 0:20:13.080 given what we've read from the FED. Yet you know 0:20:13.200 --> 0:20:16.159 today it's really hard for any of these banks to 0:20:16.240 --> 0:20:21.920 look out and give any ability to project what their 0:20:21.960 --> 0:20:25.040 businesses will do on performance by your end. So it's 0:20:25.040 --> 0:20:28.320 gonna be a fascinating ride for six months, Tom John, 0:20:28.680 --> 0:20:32.200 you know, just related to the dynamics of the US 0:20:32.240 --> 0:20:35.840 economy and global how it filters to banks and as 0:20:35.920 --> 0:20:38.920 investors as we look at the profile of these stocks 0:20:39.160 --> 0:20:42.400 and also the return we get as investors. Couldn't agree more. 0:20:42.480 --> 0:20:45.439 Ken really well summarized Kenneth Lee on their CFR right, 0:20:45.480 --> 0:20:52.480 Global Director of Industry and Equity Research. This is a 0:20:52.560 --> 0:20:54.920 joy right now to bring in bread sets Or to 0:20:54.960 --> 0:20:58.080 stays with the CONSOL on Foreign Relations barely does justice 0:20:58.440 --> 0:21:01.679 to coming out of Harvard ce Poet Oxford, where he 0:21:01.800 --> 0:21:05.200 was a young guy and the papers came off the screen. 0:21:05.680 --> 0:21:09.280 That happens very rarely that somebody writes papers and they 0:21:09.320 --> 0:21:12.199 come out of the screen. And that's what young Setsor 0:21:12.320 --> 0:21:16.000 did at a most early age. He served the nation 0:21:16.040 --> 0:21:19.480 at Treasury. He joins US today. Tannem bomb fellow at 0:21:19.560 --> 0:21:23.520 CFR Brad Richard Hass has out right now my book 0:21:23.520 --> 0:21:27.400 of the summer, The World. It is a wonderful, simple, 0:21:27.800 --> 0:21:33.000 straight talking book on international relations. What would you frame 0:21:33.200 --> 0:21:38.360 is the setser future of our international relations? If it's 0:21:38.400 --> 0:21:42.399 not Washington consensus, what is it? Oh, I'll give you 0:21:42.440 --> 0:21:44.760 a classic dodge. I mean, I honestly think it is 0:21:44.920 --> 0:21:50.359 way too early to tell. Uh, the choices that will 0:21:50.560 --> 0:21:57.240 frame the post pandemic economic future haven't really been made. Obviously, 0:21:57.280 --> 0:22:01.880 the outcome here in November matters, but I think there's 0:22:01.960 --> 0:22:07.560 a still a broad set of policy decisions on trade, 0:22:08.280 --> 0:22:15.240 on American alliances, on the relationship with China that will 0:22:15.240 --> 0:22:19.920 be central to the post pandemic world, and we're only beginning, 0:22:20.080 --> 0:22:24.960 I think to lay those out. I look, Brad, at 0:22:25.080 --> 0:22:28.720 where we are, and after this election, the day after 0:22:28.760 --> 0:22:33.240