Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Daily
Speaker 1: we bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. This
Speaker 1: is a joy. We've always prided ourselves and bringing you
Speaker 1: the best in economics, and in the summer when everybody
Speaker 1: thinks and writes, the best in economics can be one, two, three,
Speaker 1: four or five essays, books are articles. This year was easy.
Speaker 1: Carmen Reinhardt and Vincent Reinhardt wrote a Tour to Force
Speaker 1: for Foreign Affairs magazine and made world headlines in the
Speaker 1: economics community with the pandemic depression. We are thrilled at
Speaker 1: the World Bank Chief Economists could join us this morning,
Speaker 1: and Mr Reinhardt, of course, with Stay and A Schmellon
Speaker 1: in their asset management is chief Economists to the two
Speaker 1: of you, congratulations, I'm putting together this essay. How did
Speaker 1: you piece it together? Carmen? Did you say, Vincent, we
Speaker 1: got to write this the world's coming down to an end?
Speaker 1: Or Vince Vincent, did you tell Carmen we gotta do
Speaker 1: this Carmen, you start, how did you generate this important essay? Well, Tom,
Speaker 1: you know, Vincent and I have been writing together for
Speaker 1: a long time. So you know, back in two thousand
Speaker 1: and ten we wrote for the Kansas City fac for
Speaker 1: the for the Jackson Hole Conference, what the next ten
Speaker 1: years after the global financial crisis, uh looked like? And
Speaker 1: it was taking stock of the aftermath of major shocks,
Speaker 1: you know. Uh, so this certainly classifies as a major shock.
Speaker 1: And these kinds of events lead lasting consequences. They and
Speaker 1: so that's basically the theme where we we came together.
Speaker 1: Let us drive the story forward. And folks, again, I
Speaker 1: can't say enough about a full read of this article
Speaker 1: in Foreign Affairs, Vincent Ronhard, how do we escape this depression?
Speaker 1: And if we have a global or a United States depression,
Speaker 1: is stimulus in large stimulus the only answer. So the
Speaker 1: sad thing is this really is the third time we
Speaker 1: wrote this article for two thousand and eight for the
Speaker 1: European crisis and and one more time for this pandemic depression.
Speaker 1: What do you need? You have to follow Larry Summer's
Speaker 1: advice targeted temporary and timely fiscal stimulus. Uh, they did it.
Speaker 1: Back in March with the Cares Act. They can do
Speaker 1: it again. Comma, can you built on something for us
Speaker 1: confusing a mechanical bounce with the account rate? Is that
Speaker 1: what we've been doing over the last few months. Yes, Um, Look,
Speaker 1: a very simple basic definition of recovery and minimum minimorum
Speaker 1: is you at least have the same level of income,
Speaker 1: same level of GDP that you had before the crisis started. Uh.
Speaker 1: That took UH quite a number of years, five years
Speaker 1: in the US from the last UH the global financial crisis,
Speaker 1: and even longer for Europe. So yeah, before that we
Speaker 1: see a snap back. We see growth rates come back
Speaker 1: simply because the declines were so sharp in the in
Speaker 1: the earlier in the year. But that is rebound. Recovery
Speaker 1: is when you're at least as well off as you
Speaker 1: were before, and that will take some years. So in
Speaker 1: your mind, common do you think this is a political boss,
Speaker 1: a political decision to make the code to say, look
Speaker 1: at the recovery, confuse it with a mechanic co bounds
Speaker 1: and say we don't need more fiscal stimulus, or do
Speaker 1: you just think it's a failure of the understanding of
Speaker 1: economics that we can see the mikecause Vincent's points out,
Speaker 1: you know, there is no simple answer, has elements of both.
Speaker 1: But we've seen it in history, uh, you know often enough,
Speaker 1: the premature declaration of victory. It has always been a
Speaker 1: recurring theme that that you know, the first signs of recovery,
Speaker 1: the green shoots means that's it. And and you know,
Speaker 1: I think that this time, uh, we really didn't learn
Speaker 1: much from the over optimism of two thousand and eight
Speaker 1: two thousand nine, where growth forecasts had to be marked
Speaker 1: down repeatedly. So, Vincent, can you build on that with
Speaker 1: the idea that we're heading into a winter where we
Speaker 1: have a virus that is actually expanding, worsening, spreading, even
Speaker 1: though people are getting more concerned about the debt about
Speaker 1: adding to it with more fiscal support. Do you think, Vincent,
Speaker 1: we are headed toward a double dip recession that will
Speaker 1: hamper growth in a longer term way with scarring economically
Speaker 1: that currently is not being modeled for. So the rebound
Speaker 1: has enough strength right now. There is waning fiscal impetus,
Speaker 1: but their most importantly, there's considerable monetary accommodation. Households have
Speaker 1: a lot of savings, so they have the wherewithal to spend.
Speaker 1: It isn't as much a risk of a double dip.
Speaker 1: It's a risk that we extend the rebound, that it
Speaker 1: takes even longer to get to recovery. And the longer
Speaker 1: it takes to recover the level of activity, the more
Speaker 1: likely unfortunate things happen. Balance sheets get strained, there are
Speaker 1: even more business failures, people lose more and more skills
Speaker 1: and exit the labor market. So I'm more worried about
Speaker 1: the permanent scarring associated with taking too long to get
Speaker 1: to recovery, because usually you can bed on market economies.
Speaker 1: So what does that mean, Carmen in terms of emerging
Speaker 1: markets insolvencies, the idea of this emerging markets crisis that
Speaker 1: a lot of people have been talking about, including yourself.
Speaker 1: Do you think that if we do get this period
Speaker 1: of scarring as Vincent is talking about, that you do
Speaker 1: get that wave of insolvencies in the developing world that
Speaker 1: so far we haven't seen. Well before we say we
Speaker 1: haven't seen the pick up an activity UH, even before
Speaker 1: the pandemic, we had a lot of frailties UH in
Speaker 1: the low income economies and in several emerging markets. With
Speaker 1: this Argentina, Lebanon, Venezuela, Ecuador, now Zombia. This is a
Speaker 1: longer list than what we had in years UH, And
Speaker 1: of course not everything happens simultaneously, but I think the
Speaker 1: stage is set for you know UH number. As I said,
Speaker 1: especially vulnerable are some of the lower income countries, but
Speaker 1: not limited to UH, a very protracted period of UH
Speaker 1: financial fragility, both in the financial bankings in the banking side,
Speaker 1: and the possibility if in the worst cases outright UH
Speaker 1: sovereign dead crisis and they don't need to be with
Speaker 1: the drama of a default, but they would be UH
Speaker 1: still requiring restructuring, still requiring coming to the IMF programs
Speaker 1: and so on. Can Carmen Ryn art Vincent Rayner with
Speaker 1: us here this morning on their important article to the
Speaker 1: pandemic Depression in Foreign Affairs A summer It was, without
Speaker 1: question my essay of the summer, Carmen Ryn, not a
Speaker 1: question for you, and it's delicate. As World Bank Chief
Speaker 1: Economy is do we completely misjudge the percent of g
Speaker 1: d P of stimulus aid income replacement that will be required?
Speaker 1: Are we as sort of institutions and elites completely misjudging
Speaker 1: the two to three percent of g d P is
Speaker 1: not going to get it done, and the statistic is
Speaker 1: much more towards five to six of g d P. Tom. Uh,
Speaker 1: it's not entirely in misjudgment. It's also a reality of capacity.
Speaker 1: I mean, um, you know the do you if you're
Speaker 1: if you're speaking about the emerging world, Uh, the private
Speaker 1: capital flows half significantly retrenched, I wouldn't say right up.
Speaker 1: And so it's really the multilaterals. It's the I m F,
Speaker 1: it's a World bank, it's the development banks. The firepower
Speaker 1: there is very limited. The it's not the Federal Reserve. Uh,
Speaker 1: it's not the you know b O J or the ECB.
Speaker 1: These institutions have constraints and how much they can deliver.
Speaker 1: So it's not entirely about misjudging misjudging this seriousness of
Speaker 1: what is needed, but also you know, having the capacity
Speaker 1: to for over well over a hundred countries to deliver
Speaker 1: that kind of of of shot in the arm comment.
Speaker 1: Just quickly. We caught up with David Rosenberg around about
Speaker 1: forty minutes ago and he wanted your view on how
Speaker 1: higher debt loads can constrain demand constrained potential GDP coming.
Speaker 1: You can can you speak to that for us, given
Speaker 1: how much debt we've just added to the global economy
Speaker 1: in the last nine months, if you started doing work
Speaker 1: on that, well, look, I've been doing a lot of
Speaker 1: work also on the issue on the what I think
Speaker 1: is for the advanced economies, the more immediate issues, which
Speaker 1: I think have to do with private that uh and
Speaker 1: financial fragility. This is what I alluded to, a big
Speaker 1: shot of a big shot in the army, big source
Speaker 1: of stimulus. UH. This time has also been forbearance uh,
Speaker 1: you know, delaying payments uh for households and firms. When
Speaker 1: those programs expire, uh, do those debts continue to be repaid?
Speaker 1: So the more for the advanced economies, as opposed to
Speaker 1: some of the lower income countries and in some of
Speaker 1: the emerging markets, the more immediate immediate issue is the
Speaker 1: private debt UH. And that is already I think, especially
Speaker 1: for for the corporate sector, the small and medium businesses,
Speaker 1: already a source of concern. Vincent royn at the final
Speaker 1: question to you to really look forward, maybe out of
Speaker 1: a pandemic depression. Who knows what what is your market forecast,
Speaker 1: your economic forecast, Rather call for Q one and Q
Speaker 1: two of next year. Advise the Biden administration this morning.
Speaker 1: So we keep slowing from where we have been. Obviously,
Speaker 1: you don't repeat at we have in the first quarter
Speaker 1: a bit of a soft patch, just two percent growth
Speaker 1: because of the absence of fiscal stimulus, and then on
Speaker 1: the assumption Washington d C gets something together, then closer
Speaker 1: to five in the middle part of the year. What
Speaker 1: I really hope we get is something like the CARES
Speaker 1: Act of Targeted and Temporary and Timely uh impetus, rather
Speaker 1: than the American Recovery and Reinvestment Act of two thousand
Speaker 1: and nine, which was timely for sure, but it had
Speaker 1: a very long spend out rate. Now is not the
Speaker 1: time to do infrastructure we needed over the longer haul.
Speaker 1: But right now we've got to get income into the
Speaker 1: hands of people. Guys, we've gotta leave it that common
Speaker 1: fantastic a here from your common Ryan Hart, that World
Speaker 1: Bank chief economist, and Vince thank you, sir, Vincent Ryan
Speaker 1: Hart of Standish Melon Asset Management, Thank you very much.
Speaker 1: The perfect gentleman to speak to right now on is
Speaker 1: truly our global Wall Street brief of the day. Alan
Speaker 1: Ruskin with Deutsche Bank, decades of experience of synthesizing together
Speaker 1: all of these trends alan to John's point, you lead
Speaker 1: with the idea that forward a major pair will be
Speaker 1: dollar and membi looking for stronger you want, and the
Speaker 1: idea that the Chinese you want will replace the Japanese yen.
Speaker 1: How does that happen? How does it you want take over?
Speaker 1: Is a dominant pair? Um Tom, Look, I think the
Speaker 1: Chinese economy is a substantially larger in Japan's already, and
Speaker 1: it's only that gap is only going to get wider
Speaker 1: over time. So it's real economy influence is certainly increasing.
Speaker 1: And obviously at the same time, the authorities in China
Speaker 1: are encouraging internationalization. They're encouraging uh the c N wise
Speaker 1: reserve status to increase over time, so the pool factor
Speaker 1: in terms of official flows is going to increase as well.
Speaker 1: The combination of the real economy side, and you know,
Speaker 1: the encouragement that you know, I think we're going to
Speaker 1: see from the authorities on an ongoing basis is just
Speaker 1: gonna help the Chinese currency and it's poor effect, you know,
Speaker 1: against other currencies in the region. Ellen Ruskin, there's a
Speaker 1: parlor game to when strong euro hurts Germany, strong euro
Speaker 1: hurts Finland, or strong yen hurts Tokyo. At what level
Speaker 1: the stronger and memby hurt Beijing? Are we near there? Look,
Speaker 1: I think there's going to be a lot of sensitivities
Speaker 1: in terms of a very modest appreciation in the UN.
Speaker 1: But I think we forget I think you know memory
Speaker 1: certainly right, the tenure average is roughly around six fifty
Speaker 1: on on dollar China, So I think we shouldn't get
Speaker 1: too caught up with what's happened over the last six
Speaker 1: months or so. Given the appreciation, we're actually back in
Speaker 1: the zone that's actually you know, very well traveled, So
Speaker 1: we shouldn't be at points of extreme sensitivity. But you know,
Speaker 1: if we saw dollar China go to say six twenty
Speaker 1: five or those to the levels, I think there would
Speaker 1: be more concern on the part of the Chinese authorities
Speaker 1: and an important to look at the currency pairs our
Speaker 1: swear Euro China, China, Japanese Yen. And what we've seen
Speaker 1: is that Chinese strength against the Euro and a more
Speaker 1: pronounced way as well. Do you think that makes it
Speaker 1: for the ECB at least makes them less sensitive to
Speaker 1: what's happening on euro dollar as we approach one nineteen
Speaker 1: and maybe go through one twenty. Yeah, I think for
Speaker 1: everybody if they look at their own currencies and they say, okay, well,
Speaker 1: yes we are stronger against the dollar, that in fact
Speaker 1: most other currencies are also stronger against the dollar. So
Speaker 1: net net is not much change, as you say between
Speaker 1: you know, call it the euro and other crosses. Then
Speaker 1: you get reduced sensitivity from the currency side, and people
Speaker 1: recognize that this is a dollar story. This is not
Speaker 1: a China un story or euro dollars story. Um. Up
Speaker 1: until now it's been a mix, I would say, of
Speaker 1: a dollar story and a Chinese un story. Very little
Speaker 1: in the way of really being a euro stories has
Speaker 1: been stuck in the mud. So there's a question. Well,
Speaker 1: and we typically ask a question just quickly, let me
Speaker 1: weigh in, Allen. We typically ask the question whether we
Speaker 1: would need a weaker dollar and whether the world needs
Speaker 1: a weaker dollar. Do you think the world needs a
Speaker 1: stronger Chinese currency? Um? You know, the imbalances have tended
Speaker 1: to grow over time. In the particular crisis, the own
Speaker 1: account to surface in China is substantial in an absolute basis,
Speaker 1: less as a percentage of Chinese GDP, So I think
Speaker 1: there are potential distortions on that side. Um I would say,
Speaker 1: you know, let the market do its thing. I think
Speaker 1: that's the most important thing, and then the imbalances will
Speaker 1: not build in a substantial way. So I was trying
Speaker 1: to jump in because honestly, I was just so compelled
Speaker 1: by this argument here that there used to be this
Speaker 1: world order where everyone was trying to depreciate their currency,
Speaker 1: and all of a sudden there is less emphasis on
Speaker 1: that because there is a question recovering getting money into
Speaker 1: your economy is better. At what point does strength in
Speaker 1: currency matter? Again from a trade perspective of And I
Speaker 1: wonder about this with the u N given the fact
Speaker 1: the Chinese officials have been willing to step in, and
Speaker 1: given the fact that internationally this has been such a
Speaker 1: big driver of flows into the nation. Well, I think
Speaker 1: you know what's interesting, if you look at currencies generally
Speaker 1: on a medium term basis, the evaluation and that you're
Speaker 1: seeing are not that extreme. So you know, the dollars
Speaker 1: within about five percent of fair value, give or take
Speaker 1: depending on different metrics, and you know that's that's not
Speaker 1: extreme by any matter of you know, any any measure,
Speaker 1: and the same can be said for most of the
Speaker 1: other currencies as well. So you know, I would say
Speaker 1: the un euro, yes, you know, the dollar looks on
Speaker 1: the rich side. Yes, the euro looks a little a
Speaker 1: little cheap. Yes, the Chinese yuan looks a lot on
Speaker 1: the expensive side as well. But in terms of the
Speaker 1: actual absolutes um, these are not huge overshoots and undershoots,
Speaker 1: And I think for that reason, it's actually going to
Speaker 1: be relatively comfortable to rain for the authorities to deal
Speaker 1: with at this point in time. It could get a
Speaker 1: lot messier than this. I've you know, certainly seen it
Speaker 1: much worse shape in the early ninety nineties or mid eighties. Uh,
Speaker 1: you know, these are relatively benign circumstances for the authorities
Speaker 1: to deal with. On the flip side, Alan, if you
Speaker 1: take a look at derivative positioning, you could see that
Speaker 1: the short position on the dollar is increasing, and sort
Speaker 1: of the conviction, the complacency and markets around this consensus
Speaker 1: call seems to be growing. Do you see a potential
Speaker 1: for a short squeeze or some sort of information to
Speaker 1: come out, perhaps about the vaccine being delayed that could
Speaker 1: potentially lead to reversal here and strength in the dollar,
Speaker 1: they could upbend a lot of these trades. Um. You know,
Speaker 1: the positioning I think is also quite modest in the
Speaker 1: grand scheme of things. And you highlight you know, the
Speaker 1: vaccine story, which I think is you know, certain is
Speaker 1: going to be critical for the real economy for the
Speaker 1: next year or two, ye know, crucial for markets, and
Speaker 1: it's probably the dominant theme I think, you know, on
Speaker 1: an ongoing basis. Some think it's maybe already priced in,
Speaker 1: but I think that's way too early. And I think,
Speaker 1: you know, if you saw the reversal in those sort
Speaker 1: of trades in the absolutely I mean, I think, you know,
Speaker 1: you you could get some sort of short squeeze um
Speaker 1: that's always possible into urine into December. But I would
Speaker 1: tend to emphasize the trend trade. I would say, the
Speaker 1: vaccine trade is you know, long re cicklic calls in
Speaker 1: G ten Canada, stocky KNOCKI, etcetera. I think it's still
Speaker 1: long e m. It plays to the long Asia trade,
Speaker 1: et cetera. So I think it's still on a medium
Speaker 1: term basis, is still playing towards the short stylar trade
Speaker 1: rather than you know, focusing too much on the squeezed potential.
Speaker 1: Stocky KNOCKI just classic effects. Linco there and thank you,
Speaker 1: and I'm Ruskin by Chief International Strategists, Sweden, Norway. Just
Speaker 1: in case anyone's Guy Johnson's favorite currency pair, actually Guy
Speaker 1: Johnson's favorite currency pair stocky KNOCKI, John, Lisa and I
Speaker 1: and all of team's surveillance feel very strongly pondentories out
Speaker 1: and experts are very in. Deborah Fuller is not only
Speaker 1: at the prestigious University of Washington School of Microbiology, but
Speaker 1: also it is definitive in labs in the processing in
Speaker 1: the development of vaccines, and we're honored that Dr Fuller
Speaker 1: could join us this morning. Dr Fuller, We've got a
Speaker 1: lot of questions about vaccines and all that I want
Speaker 1: to go to my childhood, which was the dreaded booster shot.
Speaker 1: Is a booster shot now the same as it was
Speaker 1: in nineteen sixty or is a booster shot now so
Speaker 1: efficacious and the technology so much better, it's not a
Speaker 1: big deal. A booster shot in in vaccines, particularly the
Speaker 1: covid nanetinge vaccines that we're we're seeing right now, is
Speaker 1: absolutely essential to UH to increase UH and bring the
Speaker 1: immunity UH in individuals that get a vaccine up to
Speaker 1: higher enough levels to protect against the infections. So booster
Speaker 1: sauce can feel dredged in the sense that you might
Speaker 1: experience UH increased reactive unicity in other ways, a bit
Speaker 1: more soreness in your arm, But that tells you that
Speaker 1: it's working. That's what When you get that soreness and
Speaker 1: sort of feeling kind of almost like you're you're getting
Speaker 1: an infection, uh, initially, that tells you that your immune
Speaker 1: system is mountine a really good response to the vaccine,
Speaker 1: and that you will likely be protected against an infection.
Speaker 1: So Tom Kine is talking about booster shots and light
Speaker 1: I assume of the Astrosonica news that came out this
Speaker 1: morning really confusing, more confusing than we got at Adviser
Speaker 1: of Moderna in terms of efficacy, oh, with some statistics
Speaker 1: saying se efficacy, others saying when you have a half
Speaker 1: dose initially followed, but a full dose of this vaccine
Speaker 1: dr fuller. How complicated is the rollout effort when you
Speaker 1: do have to have two rounds of a shot in
Speaker 1: order to get it make it effective? I mean in
Speaker 1: terms of tracking in terms of distribution and frankly in
Speaker 1: terms of how long it takes to get immunity. That's
Speaker 1: a really important question. I an ideal pandemic vaccine movie
Speaker 1: the one that works in a single dose, and that's
Speaker 1: just simply because if people have to receive a second dose,
Speaker 1: often compliance and back for the second dose can go down,
Speaker 1: especially if they experienced some reaction unity with the with
Speaker 1: the first dose. So uh, many of these companies were
Speaker 1: looking at the immuno genacy after the first dose, but
Speaker 1: the levels of the immune responses are just not high
Speaker 1: enough to be confident that it's going to provide the
Speaker 1: level of efficacy that's needed. On the other hand, after
Speaker 1: the second dose plus efficacy that's as good as the
Speaker 1: vaccine is really going to get. And that's really what
Speaker 1: we're going to need ultimately to shut down this pandemic.
Speaker 1: A doctor, that's science, let's talk about the logistics. How
Speaker 1: many vaccines, vaccinations do you think we could roll out
Speaker 1: in America over the next three months? Well, Mudian Advisor.
Speaker 1: As a results of the air A promising data now,
Speaker 1: astra Zeneta will likely be applying for emergencies authorization in
Speaker 1: early December UM. They should have enough safety data by
Speaker 1: then to be able to make the application. Of course,
Speaker 1: will only be the vaccines initially will only be available
Speaker 1: in a limited number, limited numbers that would be for
Speaker 1: highers groups, that would be for your first responders and
Speaker 1: medical personnelity. The majority of us really won't be seen
Speaker 1: these vaccines until up spring. Uh. And some of the
Speaker 1: challenges between then and now will be being able to
Speaker 1: produce sufficient numbers of doses. Billions and billions is what
Speaker 1: we're going to need, because we estimate at least fifty
Speaker 1: to sixty percent of the population ultimately need to be
Speaker 1: vaccinated to to shut down the pandemic. And and so
Speaker 1: that really raised an important point is that we really
Speaker 1: need multiple vaccines, not just one. It's not only one
Speaker 1: silver world being able to shut this down. The fact
Speaker 1: that we're seeing all these vaccines look really at about
Speaker 1: nine efficacy is super promising. Dr Fuller George Saravellis over
Speaker 1: at Deutsche Bank today has a Deutsche Bank chart out
Speaker 1: unheard immunity and it's lovely smooth curves of expectations. Do
Speaker 1: you trust the A and the forecasting of HERD immunity
Speaker 1: or are we actually making it up as we go
Speaker 1: that math is really elegant stuff and it is really
Speaker 1: based on some important measurements. Uh So, yeah, we can
Speaker 1: trust the math. What we what we don't know. Some
Speaker 1: of the things that we don't know. What we into
Speaker 1: this math is the changes in the infection rates that
Speaker 1: could occur between now and then. So the predictions are
Speaker 1: based on, you know, what we know now and as
Speaker 1: we have seen, we've seen a huge surge in cases
Speaker 1: as the weather cooled and that actually exceeded, uh the
Speaker 1: number of cases that was initially predicted at this kind
Speaker 1: for you know, for you know, reasons that for example,
Speaker 1: pandemic fatigue and stuff that really can't be predicted. So,
Speaker 1: uh so what the math is precise, it's based on
Speaker 1: what we know, not what we don't know. Appreciate your time,
Speaker 1: your thoughts and honestly full of that of the University
Speaker 1: Washington skulled of Medicine. This is a joy. David Rosenberg
Speaker 1: for years helped court at Mary Lynch and own the
Speaker 1: high ground on parsing price change. He was absolutely brilliant
Speaker 1: and hugely read. Moving on to all sorts of good
Speaker 1: work in his Canada and now Rosenberg a Research are
Speaker 1: chief economist strategist in Montreal, Canadian fan David Rosenberg. I
Speaker 1: want you to filter disinflation into what yield does. Is
Speaker 1: it just about a demand for paper price up forcing
Speaker 1: yield down. Well, look, I think that there's a whole
Speaker 1: variety of things that goes into bind yield determination. Uh,
Speaker 1: you know, the expectations on the FED and real rates
Speaker 1: in flakes, and expectations obviously both perry large. I'm in
Speaker 1: the camp that thinks that we're probably caught in arrange,
Speaker 1: always amazed that people think the ten ure is going
Speaker 1: to break above one percent, go back to two percent,
Speaker 1: and only that's going to happen. Um. I think that
Speaker 1: there's still gonna be globally a downward pull on treasury
Speaker 1: yields because I think in places expectations, given the size
Speaker 1: of the uplook gap, we're going to come down over time.
Speaker 1: And at the same time, if you're taking a look
Speaker 1: around the world, you take a look at the average
Speaker 1: triple A yield, it's barely above zero. And in the US,
Speaker 1: you know, you get at least uh, you know, seventy
Speaker 1: or eighty basis points, so you know, it's a in
Speaker 1: the land of the blind. The one advent is king,
Speaker 1: and I still think treasuries offered very good value on
Speaker 1: a relative basis. It's I think what you're saying it's
Speaker 1: really really important. It's about the post COVID world and determining,
Speaker 1: defining what is normal. And many people seem to think
Speaker 1: that post COVID, with a vaccine treasury, olads have now
Speaker 1: business south of one percent. You push him back against that,
Speaker 1: David Well, I am pushing back against that, because you know,
Speaker 1: what's your expectation of what the Fed is going to
Speaker 1: be doing. I mean, ultimately your forecast and the ten
Speaker 1: your yield has to be some scrolled expectation of what
Speaker 1: short term it is going to be doing over a
Speaker 1: certain horizon. The Feds already told you that you know,
Speaker 1: they're not going to start to raise rate until inflation
Speaker 1: gets above two percent. Well, but we'll wait a long
Speaker 1: time for that and for us to return to full employment,
Speaker 1: and that's gonna take a long time as well. On
Speaker 1: top of that, look, there's no doubt that we're going
Speaker 1: to get a couple of quarters of pent up demand
Speaker 1: release once the vaccine is broadly distributed. That's going to happen.
Speaker 1: You know, Whi's exactly quarter is going to happen next year.
Speaker 1: I mean, who knows, but it's going to happen. So
Speaker 1: we're gonna get a couple of quarters of pent up
Speaker 1: demand release and then what does the world post COVID
Speaker 1: look like after that? And we never got the inflation
Speaker 1: from oh nine to two tho nine, despite all the stimulus,
Speaker 1: despite the FED. You know, the reality is that the
Speaker 1: same sing the fundamental secular developments have nothing to do
Speaker 1: with COVID that brought us to low inflation and low
Speaker 1: interest rates and low growth Asian demographics, Well, how has
Speaker 1: that changed? And monumental debts? Uh, so you're gonna have
Speaker 1: the ran hearts on. Well we'll talk about then. I
Speaker 1: hope how these massive run up and demits and debts
Speaker 1: are going to be dealing with those resolving those are
Speaker 1: going to be a huge constrained and accurate demand for
Speaker 1: years to come. How are you going to get inflation
Speaker 1: out of that? So we're going to get a bump
Speaker 1: and growth bondyles may go up basis points, and they're
Speaker 1: gonna come right back down again because the same fund
Speaker 1: fundamental forces that brought us down two d base points
Speaker 1: in the ten year notes in the last cycle are
Speaker 1: going to be the same forces that drive yields back
Speaker 1: down towards zero in the next number of years. This
Speaker 1: is fascinating to me, and it comes at a time
Speaker 1: when a growing number of strategists expect the Federal Reserve
Speaker 1: to increase their long and dated bond purchases at their
Speaker 1: meeting next month. There is this expectation that eight billion
Speaker 1: dollars of purchases a month will be more heavily weighted
Speaker 1: toward the ten year, twenty and thirty year maturities. Why
Speaker 1: should the Fed be doing that? If you are right,
Speaker 1: and if yields are going to remain low because the
Speaker 1: economy just is not going to grow that quickly, well,
Speaker 1: that's just another form of what they used to call
Speaker 1: operation twist. Um. I'm you know, who knows that the
Speaker 1: Fed is going to go that route or not this quickly. Um,
Speaker 1: It's not as if a ten year treasury not yield
Speaker 1: has really broken out. It's really just in a range
Speaker 1: you can argue on the top end of the range.
Speaker 1: In the context of a stock market that's gone up
Speaker 1: from the lows, it's pretty remarkable in its own right. Um.
Speaker 1: But if look, that's basically the threat that will always
Speaker 1: be there is that if bond yields become unhinged, the
Speaker 1: FED will come in hard and uh and cap longer,
Speaker 1: longer term yields because that would be a form of
Speaker 1: financial market tightening, would cause mortgage rates to go up.
Speaker 1: They would you know than um, you know, a detract
Speaker 1: from one of the positives in the economy, which has
Speaker 1: been housing. So I think that that is an ongoing threat.
Speaker 1: Just to know that the fat can come in. It's
Speaker 1: like you're talking about credit spreads before knowing the fat
Speaker 1: is going to come in and buy corporate credit by
Speaker 1: how your bonds. Just knowing that threat exists is what's
Speaker 1: caused investor's comfort to go in and and add on
Speaker 1: risk in corporate credit. It's very similar at the long
Speaker 1: end of the curve, where you might be more comfortable
Speaker 1: taking on duration risk knowing that the FED could do
Speaker 1: this at any point in time. Whether or not they
Speaker 1: do it or not, or they talk about in the minutes,
Speaker 1: I mean, who knows, but that's still out there, and
Speaker 1: that alone helps cap the long end of the crew. David,
Speaker 1: I want to talk. You mentioned the Reinhart's and we're
Speaker 1: thrilled there with us. Later in the hour. Folks, my
Speaker 1: essay is the summer the pandemic depression, David, pretty gloomy assessment.
Speaker 1: You're not a gloomy guy. What do equity markets do
Speaker 1: if you get reinhard caution and gloom. Well, look, you
Speaker 1: know we we have you know, we had are you know,
Speaker 1: the worst recession since the nineteen thirties. We had a
Speaker 1: one month draw down of three in the stock market. Uh,
Speaker 1: and then we bounced right back. And actually, when you
Speaker 1: go back to some of the most horrific days on
Speaker 1: economic data, when we're going back tom to like April
Speaker 1: and May, like at the depths of despair, the markets
Speaker 1: actually already started to rally um. And so I think
Speaker 1: that the mantra of you know, don't fight the Fed,
Speaker 1: there is no alternatives, you know, all these things that
Speaker 1: I used to roll my eyes at, you know, it
Speaker 1: seems to have worked in terms of creating confidence in sentiment.
Speaker 1: It's a confidence led market, a sentiment lead market. We
Speaker 1: have a two year Like when you're taking a look
Speaker 1: at the pe multiple on two estimates, it's eighteen. I
Speaker 1: remember when I started the business in eighteen, multiple on
Speaker 1: trailing would have been unbelievably expensive. Today people don't cope
Speaker 1: in eighteen multiple on two year for forward earnings, the
Speaker 1: market is still cheap. So that's mentality of the marketplace.
Speaker 1: So I would say that as long as you have
Speaker 1: the stad they're saying, we're gonna pump the system of
Speaker 1: liquidity um, and so long as you have this belief
Speaker 1: that the vaccines will return us to the old normal,
Speaker 1: which is not my view, but that's the market to you, uh,
Speaker 1: then the stock market may well continue to surprise on
Speaker 1: the upside um. And so you know, I'm not bullish
Speaker 1: on the market, but that's the narrative and the narrative.
Speaker 1: That narrative is certainly one the day. Over the course
Speaker 1: of the past six seven eight months, the out out
Speaker 1: out normal, a few crises of David writes to catch
Speaker 1: up to my disrespectfully amount of what the guy. Since
Speaker 1: you research, and fantastic to have you with us on
Speaker 1: the program. Thank rosen Buck that of rosen Buck Research.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
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Speaker 1: platform you prefer. I'm on Twitter at Tom Keane before
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