Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Leie.
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,
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Speaker 1: we all know him now. Kevin Walls joins us now,
Speaker 1: the former FED governor. Kevin always great to catch up
Speaker 1: with you, sir. I just want to go back to
Speaker 1: February and start there if we can. The FED can't
Speaker 1: wait to respond to the coronavirus that was you in
Speaker 1: the Wall Street Journal in late February. I think pretty
Speaker 1: much every single one of us on this program agreed
Speaker 1: with you. Now the conversation has switched almost one eight.
Speaker 1: Has the FED stepped in too far? Has the FED
Speaker 1: done too much? Kevin? How do you respond to that now? Yeah,
Speaker 1: it's a it's a great question. Good to be Tom
Speaker 1: with you and Jonathan. Um So, I'd say a few
Speaker 1: things first, when the regime changed in February this year,
Speaker 1: that's the job of the central Bank to be super aggressive.
Speaker 1: And the earlier you can be aggressive, frankly, the less
Speaker 1: you have to do later. Uh, so they moved not
Speaker 1: with the speed I would have liked, but in historically speaking,
Speaker 1: pretty quickly. When you look at where they are now,
Speaker 1: they seem to be moving with overwhelming force. They seem
Speaker 1: to be incredibly aggressive, even as risk assets are at
Speaker 1: incredible highs. I wish that same aggressiveness were being felt
Speaker 1: in the policies they were putting on Main Street. In
Speaker 1: main Street, their policies seem to be late, delayed, cumbersome,
Speaker 1: and frankly not terribly affective. So that chasm between the
Speaker 1: aggressiveness to push up risk assets and push down bond
Speaker 1: spreads doesn't seem to be matched on Main Street. Do
Speaker 1: you think the focus on one of the other right
Speaker 1: now is leading to market malfunctioning? They say that every
Speaker 1: single point objective is about market functioning. I just wonder
Speaker 1: whether effort now impairing market functioning. Kevin, it's a listen.
Speaker 1: It's hard for me to say with a straight face
Speaker 1: that markets aren't functioning well and that rationale for policy
Speaker 1: action was astute sixty or eighty days ago. It's really
Speaker 1: hard for me to say that the aggressive policies, the
Speaker 1: doubling of the FED balance sheet, entering bond markets that
Speaker 1: we never flawed about entering in the last crisis, that
Speaker 1: we're doing that because markets aren't functioning now that that
Speaker 1: that explanation isn't great. And my own judgment is monetary
Speaker 1: policy matters at least as much for the reasons is
Speaker 1: it gives as the decisions it makes. So I think
Speaker 1: that that rationale is certainly in need of some updating.
Speaker 1: And if I look at what's happening in markets, with
Speaker 1: the FED having this kind of massive imprimature on financial markets,
Speaker 1: it's easy to see how they're moving around financial assets.
Speaker 1: But what ultimately matters, Jonathan, is what you said at
Speaker 1: the beginning is what about the real economy? And again
Speaker 1: it doesn't appear to me as though much of this
Speaker 1: is trickling down to the real economy in a meaningful
Speaker 1: way from the Federal Reserve. Well, Kevin, is that the
Speaker 1: Fed's job. I mean, the main street lending program is
Speaker 1: very new for the FED because they're gonna be taking
Speaker 1: on credit risk and becoming responsible for deciding who to
Speaker 1: lend to, how to lend them, when to cry force
Speaker 1: some companies into bankruptcy. Should the FED even be doing
Speaker 1: this or does the responsibility lie elsewhere? So the responsibility
Speaker 1: really lies in the Congress to come up with what
Speaker 1: can be done on the real side of the economy.
Speaker 1: They outsourced that responsibility to the Treasury Secretary and the
Speaker 1: Exchange Stabilization Fund, and then the Treasury took much of
Speaker 1: their authority and devoted it to the Federal Reserve. To
Speaker 1: stand up this main street credit facility, Jonathan was kind
Speaker 1: at the beginning to talk about a Wall Street out ed.
Speaker 1: I wrote, I wrote about this main street credit facility
Speaker 1: with a much worse name than than they gave it
Speaker 1: about three months ago. And what my principle there was
Speaker 1: is something they frankly haven't adopted, which is, UH, provide
Speaker 1: ample and immediate liquidity to all solvent comers on Main
Speaker 1: Street with immediate effect against good collateral. But that's not
Speaker 1: the way the main Street credit facility works, at least
Speaker 1: as they've iterated it now several times. I think you're right.
Speaker 1: Least it's not the Fed's job to be deciding on
Speaker 1: every loan. But the good news is they happen to
Speaker 1: regulate five thousand banks. It is their job. And so again,
Speaker 1: if I were to have designed that facility, as I
Speaker 1: wrote about eighty days ago, the FED would have regulated
Speaker 1: the banking institutions who would have provided loans to their
Speaker 1: typical clients against good collateral based on their solvency before
Speaker 1: the crisis. And the only job the FED would have
Speaker 1: would be to ensure that the banks would have done
Speaker 1: proper underwriting. If they would have underwritten a loan to
Speaker 1: widget Manufacturer and Toledo on February first, and they follow
Speaker 1: those same underwriting standards, then that's a good loan. Any
Speaker 1: losses that might be had, and surely they might, those
Speaker 1: losses would be offset by the money that the Treasury
Speaker 1: Department had granted the Federal Reserve. I prefer that kind
Speaker 1: of amun and ample liquidity to this kind of picking
Speaker 1: and choosing. And to see the aggressiveness again in in
Speaker 1: financial markets and the lack of aggressiveness, the slowness of
Speaker 1: response in main street, it makes me actually quite concerned
Speaker 1: about the real economy. Well, let's talk about what is
Speaker 1: going to happen in the future, Uh not, perhaps just
Speaker 1: taking a look at what they should have done. You
Speaker 1: wrote a recent op ed in the Wall Street Turnle
Speaker 1: that if policymakers get next steps wrong, will look a
Speaker 1: lot like two thousand and eight in terms of the
Speaker 1: sanguine feeling right now turning into catastrophe later in the year.
Speaker 1: Do you see policymakers on that path right now? So,
Speaker 1: you know, we should begin with what Chairman Pal's word
Speaker 1: is of the moment uncertainty. We have to have epistemic
Speaker 1: humility about what we know, an epistemic humility about the
Speaker 1: efficacy of these policy tools. You know, I feel a
Speaker 1: lot better, Lisa about the state of playing the risks
Speaker 1: over the second half of the year if we had
Speaker 1: used the decade before this crisis putting our own house
Speaker 1: in order. Chairman Pale said how it would have been
Speaker 1: better if Congress had been more fiscally responsible in the
Speaker 1: decade between these crises, so it would have plenty of
Speaker 1: flexibility and plenty of credibility to provide massive increases in debt.
Speaker 1: I think the same is true of the Federal Reserve.
Speaker 1: Had the uncertainty principle, which they talked about frequently now
Speaker 1: been what they talked about between, the Fed would have
Speaker 1: come into this process with a lot more traditional ammunition.
Speaker 1: It wouldn't be having to reach into all these new
Speaker 1: markets with uncertain effects. So as I look at the
Speaker 1: second half of the year, LEAs. So what I'd say
Speaker 1: is a W looks a lot like a V until
Speaker 1: it turns out to be a W, and Rene of
Speaker 1: us really the contour of this economy. I guess what
Speaker 1: i'd say as a final word on this, you were
Speaker 1: to take an Olympic swimmer and a novice swimmer like me,
Speaker 1: and you locked us down at the bottom of the pool,
Speaker 1: and then you finally unlocked us. Well, we'd both be
Speaker 1: racing up to the service at some point, but that
Speaker 1: wouldn't really help us understand who was the Olympics swimmer
Speaker 1: who was ready to go do a hundred laps and
Speaker 1: who was the guy just trying to get his head
Speaker 1: above water. Kevin, I've got this image of you in
Speaker 1: Stanford's water polo team just getting it done out there
Speaker 1: against Pepper Dyne. I can just see it coming. Kevin,
Speaker 1: you are identified more than any economic official and policy
Speaker 1: official with Republican politics and of course the storied family
Speaker 1: you married into. I don't know if you grew up
Speaker 1: on third base, but you're decided to living on third base.
Speaker 1: From your view and with the honesty you've had for decades,
Speaker 1: are we moving ourselves towards an ever more gilded age.
Speaker 1: Is the price of all this funny money and policy
Speaker 1: than in two thousand twenty five or two thousand thirty,
Speaker 1: we are going to be ever more unequal. Well, Tom,
Speaker 1: I should first disabuse you of your visual not least
Speaker 1: of me on the water polo team, I can hardly
Speaker 1: swim and uh and I grew up in a regular
Speaker 1: family and upstate New York and have parents that are
Speaker 1: probably so excited to be watching you on TV right now.
Speaker 1: But in terms of the substance of the question, which
Speaker 1: is really where at this moment of consequence we really
Speaker 1: should be focused, I would say because we've had an
Speaker 1: aggressive central bank, not least in times of crisis where
Speaker 1: we need a central bank to be an emergency authority,
Speaker 1: but in ordinary times treating that like it is an emergency,
Speaker 1: like we've had an emergency every day since the darkest
Speaker 1: days of two thousand and eight. These kinds of aggressive
Speaker 1: policies do lead to misallocations of capital, do lead to
Speaker 1: financial assets that trade better than real assets, and there's
Speaker 1: a certain unfairness to that. So that's this is no
Speaker 1: time to be trying to have a full philosophical discussion
Speaker 1: inside the four walls of the FED. But the idea
Speaker 1: that they should have been fine tuning between two thousand
Speaker 1: ten and two thousand twenty, instead of thinking ahead towards
Speaker 1: what are the risks? You end up with policies now
Speaker 1: that I'm afraid do tend to take the income inequality
Speaker 1: and more important, balance sheet inequality, and we make it
Speaker 1: somewhat unfair. Half of our fellow Americans have not been
Speaker 1: able to benefit because they don't have equity in a
Speaker 1: four one K planner, in stocks, they don't have equity
Speaker 1: in their house. So as they look at the run
Speaker 1: up in these markets, they ask themselves the question, what's
Speaker 1: in it for me? And that's why again the Feds
Speaker 1: focusing on the real economy and we'll let financial markets
Speaker 1: take care of themselves. Kevin, I'll get told off with
Speaker 1: squeezing one more question, and but I've got to that's
Speaker 1: the comment on monesty policy. What about FISCO. I'm making
Speaker 1: sure the house was in order that you touched on that.
Speaker 1: It's that another way of saying that tax cut a
Speaker 1: couple of years back was a mistake. So what I'd
Speaker 1: say is fiscal policy has a certainly important role to play.
Speaker 1: But Jonathan, too much of the discussion is how big
Speaker 1: should the next stimulus bill. Frankly, the size of these
Speaker 1: stimulus packages mean a lot less are a lot less
Speaker 1: important than the design of them. So when I think
Speaker 1: about tax policies then and tax policies today, tax policy
Speaker 1: and fiscal policy more more broadly needs to be designed
Speaker 1: to encourage investment back in the services sector of the economy,
Speaker 1: back in the real side of the economy, instead of
Speaker 1: financial flows chasing the S and P at these historic levels. So,
Speaker 1: as I think about the next stimulus bill, which they
Speaker 1: say will be somewhere between the fourth July recess in August,
Speaker 1: my encouragement, my my uh overlying counsel I would say
Speaker 1: to the authors of that is make sure that there's
Speaker 1: incentives for real people to re engage back in the
Speaker 1: workforce because they've been displaced, and real investment find its
Speaker 1: way into real property, plant and equipment. Again, I shouldn't
Speaker 1: say this in front of a new show where so
Speaker 1: many of your your listeners are investors. We get the
Speaker 1: real economy to do the right thing, and I don't
Speaker 1: worry about I don't really worry about the S and P.
Speaker 1: Kevin had a fad in the mount and I'll get
Speaker 1: a straight answer to that question, but I appreciate your response. Nevertheless,
Speaker 1: Kevin always tried to catch up this, Kevin Walsh, the
Speaker 1: former Federals of Government. Let me say right now, this
Speaker 1: is my book of the summer, There's no question about it. Yes,
Speaker 1: I mentioned Rock and Roger, and the other day is
Speaker 1: book on community, the third Pillar. But Richard hass has
Speaker 1: written a jewel called the World. A brief introduction Ambassador
Speaker 1: has thank you for jumping back on with us again today.
Speaker 1: You end your book on Order and Disorder. Where are
Speaker 1: we right now? Good morning Tom. Unfortunately most of the
Speaker 1: arrows are pointing in the direction of greater disorder. That
Speaker 1: was already true before the pandemic, and what the pandemic
Speaker 1: has done is essentially accelerated the pace of history. So
Speaker 1: whether it's US Chinese relations deteriorating, or the increase and
Speaker 1: poverty around the world, an increased the number of refugees.
Speaker 1: You could go on and on and on, but so far,
Speaker 1: at least, this is a cloud without a silver lining. Richard,
Speaker 1: if we can talk about some of the immediate friction
Speaker 1: in the last couple of days, I think a lot
Speaker 1: of people are trying to work out what it all means,
Speaker 1: particularly market participants that might be willing to disregard this.
Speaker 1: Can you just talk about the significance of what has
Speaker 1: happened between Injured and China in the last forty hours. Yeah,
Speaker 1: these are the world's two most populous countries. They've had
Speaker 1: essentially undemarcaded border, the line of actual control now forever.
Speaker 1: They fought a war over this what sixty years ago,
Speaker 1: and you've got two armies cheat by jow and I
Speaker 1: don't think either government necessarily wanted to have it come
Speaker 1: to blows. But any time you have large groups of
Speaker 1: soldiers over contested areas, there's that at risk. Both countries
Speaker 1: now are increasingly nationalists, and we're seeing this as a
Speaker 1: trend where whether it's to tracked because of problems with
Speaker 1: the coronavirus or its economic aftershocks. So this was something
Speaker 1: that that could have happened, it just did. I think
Speaker 1: the real question now is whether both countries, essentially the
Speaker 1: government step in and calm things down. Won't You won't
Speaker 1: have any solution, but the question is simply whether you
Speaker 1: have some kind of mutual pulled back. Do you sense
Speaker 1: that de escalation is the path forward? At this point,
Speaker 1: I think it's more likely than not from what I
Speaker 1: can see. What was so interesting about the finding was
Speaker 1: how almost pardon the world, almost primitive with clubs and this,
Speaker 1: I mean there was a kind of hand to hand
Speaker 1: combat we haven't seen since times, almost like the Korean War.
Speaker 1: So this was really really localized. So Yeah, if I
Speaker 1: were a betting man, I would bet that that there's
Speaker 1: a pullback you don't see anything like a full scale war.
Speaker 1: That would be my bet. Well, Richard, the hand to
Speaker 1: hand combat you're talking about, perhaps is why some people
Speaker 1: are shrugging it off, saying, well, at least it's not
Speaker 1: a nuclear threat, right, But over a North and South
Speaker 1: Korea you have the prospects of some sort of altercation
Speaker 1: picking up after the bombing in North Korea of South
Speaker 1: Korean uh, diplomatic diplomatic entity. I'm just wondering if there
Speaker 1: is a broader takeaway for all of these percolations of
Speaker 1: geopolitical tensions that are happening. Now. You said we're fast
Speaker 1: forwarding history. Is there some broader takeaway about leadership in
Speaker 1: the modern world? One I dis alluded to the leadership
Speaker 1: is pressed and is looking for wagged the dog kind
Speaker 1: of safety valves. Do you have a possibility is to
Speaker 1: look at the United States. We've got COVID, we've got
Speaker 1: the protests, we've got the economic problems, and it's quite
Speaker 1: possible that countries around the world are looking to take
Speaker 1: advantage of a divided and distracted the United States. So
Speaker 1: North Korea, you know, you might see this is an
Speaker 1: opportunity to pressure to the South to relieve sanctions. The
Speaker 1: US North Korean talks have gone nowhere. North Korea wants
Speaker 1: economic relief. The US South Korean relationship is bad because
Speaker 1: the US has been hammering them. So it's quite possible
Speaker 1: the North Koreans decided to put pressure on the South
Speaker 1: to see if they couldn't cut separate deal. You know,
Speaker 1: Richard hass I know, you know, And this is the
Speaker 1: legacy of the Right brothers and how they planted the
Speaker 1: Department of Physics at Oberlin College. And I know you
Speaker 1: want to physics at Oberlin straight A's you know, the
Speaker 1: poet and physics ambassador. Yeah, physics for poets, you know,
Speaker 1: is an Oberlin physics giant. That there's a vacuum out there,
Speaker 1: in the vacuum out there's President Trump in his foreign
Speaker 1: policy what happens after one term Trump or two term
Speaker 1: Trump when we try to close that vacuum of foreign policy.
Speaker 1: I think there is a vacuum. There has been a
Speaker 1: pattern of serial withdrawal from the world, a combination of
Speaker 1: isolationism and unilateralism on the part of the United States.
Speaker 1: At the moment, the vacuum is not so much being
Speaker 1: filled as as it's being allowed to fester. So you
Speaker 1: don't see China is not in a position to fill it.
Speaker 1: The Europeans would like to, but they lacked the power
Speaker 1: US more likely things just getting year. So for people
Speaker 1: from a business point of view, the United States doing
Speaker 1: less is uh. You know, we've been, in some ways
Speaker 1: the general contractor of global order for for generations now.
Speaker 1: I think there's also, though a big difference between a
Speaker 1: one and a three term Trump presidency. Two terms American
Speaker 1: alliances might not survive, or if they survive it, they
Speaker 1: would be fairly empty. Uh. A one term Trump presidency,
Speaker 1: I think a president buy it and we'll try to
Speaker 1: restore things. The problem is he will inherit if he
Speaker 1: is elected a country that really wants to face inward
Speaker 1: to deal with our domestic challenges, and he will inherit
Speaker 1: one of the most daunting, demanding in boxes any president
Speaker 1: has inherited, and that combination means that it won't be
Speaker 1: easy for anyone, no matter what his intentions are, to
Speaker 1: turn things around. It'll be difficult. Richard has always great
Speaker 1: to get your thoughts and perspective and your insight on
Speaker 1: this program. Thanks for jointing us today. The Counsel and
Speaker 1: Form Relations president and author of The New York's Times
Speaker 1: best seller The World a brief introduction and remorse a
Speaker 1: city group definitive and commodities in oil, and let me
Speaker 1: ask a direct question. Give us an update on the war,
Speaker 1: the microeconomic oil war between Saudi Arabia and Russia. Well,
Speaker 1: that war is kind of over for a while. There's
Speaker 1: a truce that's been imposed, partly by Donald Trump, partly
Speaker 1: by the follies that were associated with their actions in
Speaker 1: March um. So they're coming back to reality. Each country
Speaker 1: is seeing a tremendous drop in capital spending uh, and
Speaker 1: they're they're they're tightening their belt for another day. I
Speaker 1: don't think we're going to see the levels of production
Speaker 1: that we saw from either of these countries again until
Speaker 1: the middle of the next of this coming decade, and
Speaker 1: I want to talk about the price of oil, which
Speaker 1: has been so hard to get right for a lot
Speaker 1: of this year. It went from its demand story to
Speaker 1: a supply story with all the cuts, and now perhaps
Speaker 1: back to a demand story. As Beijing closes its schools
Speaker 1: and we see a pickup in virus cases in places
Speaker 1: like Florida and Texas and the United States, what do
Speaker 1: you see going forward in terms of demand that could
Speaker 1: potentially send oil prices well below where they are currently
Speaker 1: at three seven dollars traded on the IMAX. Well when
Speaker 1: we look at the dynamics between the supply and the
Speaker 1: demand side. Now actions taken voluntarily involuntarily in the United States, Canada,
Speaker 1: all of the OPEC countries and UH and the NANOPAC
Speaker 1: countries associated with them, those supply actions are going to
Speaker 1: dominate no matter what happens. We're moving from a period
Speaker 1: of record inventory accumulations and builds to what is going
Speaker 1: to be a period of very strong, if not record
Speaker 1: inventory draws. The cuts are not being seen yet. We're
Speaker 1: still seeing inventories growing in the United States. The API
Speaker 1: data yesterday had a growth in inventories. I bet it
Speaker 1: will be a bigger number today with the I A.
Speaker 1: And that's because of the armada of tankers that were
Speaker 1: sent out by Saudi Arabia and others of these countries
Speaker 1: in Arch April UH and in the beginning of May.
Speaker 1: So we're seeing, you know, cuts that are real. Those
Speaker 1: cuts are taking four or five million barrels a day
Speaker 1: out of the market um and UH. And the demand
Speaker 1: increases of there. I mean, even with the second wave
Speaker 1: hitting China, the underlying the demand factors are just not
Speaker 1: as strong as this WI factors. Edward Morse. With the
Speaker 1: many equilibria of the supply and demands of oil, where's
Speaker 1: the optimum price right now? I have no idea where
Speaker 1: a barrel should be. What's the should of oil right now? Try?
Speaker 1: Yeah'll try to be brief. It really relates to the
Speaker 1: cost structure of the world, the cost curve for oil uh.
Speaker 1: And if we look at the data that have come in,
Speaker 1: costs is still going down. So we're we're in a
Speaker 1: environment if this were a market that we're working the
Speaker 1: way the market should be working. UH. And that's where
Speaker 1: we expected to eat to eventually get to. But there
Speaker 1: are out of blocks of lumpy inventory in the middle
Speaker 1: to try to sort that one out. At most City,
Speaker 1: the head of Global Commodity Research, it always tried to
Speaker 1: catch up with you to get your perspective set right now,
Speaker 1: Juliet Coronado joins us. She's out of the University of
Speaker 1: Richard Clarida. That would be our Banish Champagne, Illinois, and
Speaker 1: of course out of Texas in Austin as well. Dr Coronado,
Speaker 1: are you forecasting this economy is a natural disaster recovery
Speaker 1: or are you trying to treat it as a normal
Speaker 1: recessive recovery. UM, let me say it's a bit of
Speaker 1: a hybrid of both. And in fact, one of the
Speaker 1: problems with the natural disaster analogy is that the natural
Speaker 1: disaster is still with us. UH and I am in Texas.
Speaker 1: I'm sheltering in Texas right now, Tom and we're seeing
Speaker 1: escalating cases of COVID and we're opening up and yet
Speaker 1: we're going to live with this disease. So as businesses,
Speaker 1: as consumers, we have to make our decisions knowing that
Speaker 1: there is this deadly disease swirling around out there. So
Speaker 1: that makes it very difficult to go back to normal,
Speaker 1: and that makes it quite different from a hurricane This
Speaker 1: is not something that's going away. It is something that
Speaker 1: resurges when we open up, and then we all have
Speaker 1: to make these risk management decisions. Businesses have to make them,
Speaker 1: consumers have to make them. And that's what's going to
Speaker 1: make us very difficult to get back to normal. That's
Speaker 1: gonna mean some businesses are still going to go out
Speaker 1: of business despite the fiscal support because they just won't
Speaker 1: be viable at fifty capacity or seventy capacity. So I
Speaker 1: think there's a lot of frictions that lie ahead of us.
Speaker 1: What is your glide path then? For the unemployment rate,
Speaker 1: We've seen a horrific number. Now we have a recovery tomorrow, folks,
Speaker 1: we get the jobless claim statistic again, give us those
Speaker 1: glide pass In terms of the U three unemployment rate
Speaker 1: into the end of the year, what's it looked like. Well,
Speaker 1: the U three is probably even itself one of the
Speaker 1: more problematic measures of unemployment because we know we've lost
Speaker 1: a tremendous amount of people that have dropped out of
Speaker 1: looking for work right now because things were shut down.
Speaker 1: We don't know how many of them will come back
Speaker 1: or when um And what we're seeing is a tremendous
Speaker 1: amount of churn. That's what CLAIMS is telling us. We've
Speaker 1: got millions of people newly unemployed. These are not people
Speaker 1: that were UH sidelined during that first phase of shutdowns.
Speaker 1: These are new unemployment. That's probably more permanent job losses. Meanwhile,
Speaker 1: we know there's millions of people reconnecting with their employers
Speaker 1: as things do open up. So this just tremendous churn
Speaker 1: makes it more difficult to get a read. We saw
Speaker 1: net job creation. I think that will probably continue UH.
Speaker 1: And then the question for the unemployment rate is do
Speaker 1: people leap back in and try to find you know,
Speaker 1: start looking for jobs, which could actually push the unemployment
Speaker 1: rate up. We also know, by the way, there's a
Speaker 1: significant measurement problem that the BLS is grappling with that
Speaker 1: led to an understatement of the uth ree unemployment rate
Speaker 1: by several percentage points UH in May and even more
Speaker 1: in April. They are redesigning their survey to try and
Speaker 1: address that, which means we could get a pop in
Speaker 1: the June unemployment rate just because they're resolving that measurement issue.
Speaker 1: So I think we're going to have some bumps along
Speaker 1: the road, some ebbs and flows, in the unemployment rate.
Speaker 1: I think, like the FED best guesses will still be
Speaker 1: close to ten percent by year end. That's not an
Speaker 1: unreasonable forecast given the magnitude of the number of people
Speaker 1: sidelined junior. A consensus has emerged for the pragmatists, the
Speaker 1: group of economists who believe, coming out of a shutdown,
Speaker 1: you get that initial shop bounce and then the real
Speaker 1: long slog, the big recovery ahead begins. One thing I've
Speaker 1: struggled with over the last couple of days, So I'm
Speaker 1: just trying to established Judy, and I'd love you to
Speaker 1: help on that the dividing line between the shop bounce
Speaker 1: out of the reopening and then that recovery the longest
Speaker 1: sloge that many people anticipate is that an August event,
Speaker 1: like July event, September event. What's the dividing line some
Speaker 1: of Some of that depends Jonathan on Congress and how
Speaker 1: much they do in terms of this phase four. So
Speaker 1: we know that, for example, the unemployment benefits, and in July,
Speaker 1: we know that the p p P gave small businesses
Speaker 1: two and a half months of payrolls, which is running
Speaker 1: out now. And so whether or not we get a
Speaker 1: new tranche of unemployment benefits and funding for small businesses,
Speaker 1: and maybe another round of checks that could extend the
Speaker 1: bounce period, right, that could mean more. We know that
Speaker 1: we've seen the footprint of that stimulus in retail sales,
Speaker 1: in the job's numbers. That's exactly what it's intended to do,
Speaker 1: but there may be some complacency. It does seem like
Speaker 1: a consensus is forming to get the Phase four done. Uh,
Speaker 1: it's just a question of how big and how many?
Speaker 1: What what what what the elements will be. The other
Speaker 1: big pothole coming is in the fall, which is a
Speaker 1: big hiring season for teachers and state and local employees.
Speaker 1: And we know that they are on the mat. Their
Speaker 1: budgets are crushed. They have already been letting go millions
Speaker 1: of workers, and so that's going to be a challenge
Speaker 1: for that fall. Typical fall hiring season will probably be disrupted.
Speaker 1: So I think it's gonna be rather than sort of
Speaker 1: bound stade, there's going to probably be several boundss and
Speaker 1: fades as we move along this recovery path. Well, Julia,
Speaker 1: I want to talk about the economic misses in terms
Speaker 1: of economic projections from Wall Street analysts. This is unprecedented. Yeah,
Speaker 1: yesterday's surprise the retail sales to the upside was dramatic,
Speaker 1: more than double what was expected. Our economic models broken
Speaker 1: at this point, not just economic models, Lisa um, actually
Speaker 1: measurement is also broken, so we know, and actually the
Speaker 1: Census in the release yesterday they said they haven't been
Speaker 1: able to survey lots of businesses that have shut down
Speaker 1: or gone out of business. So I think one of
Speaker 1: the things we're seeing in the numbers, for example, for jobs,
Speaker 1: for the Employment report, which also relies on surveys, and
Speaker 1: any of these government statistics that rely on surveys, there's
Speaker 1: going to be a bit of an upward bias because
Speaker 1: distressed companies and distressed people don't answer surveys. So we
Speaker 1: get maybe even a upper end of the truth, a
Speaker 1: rosier picture of the truth that will be revised over
Speaker 1: time as we benchmark to harder underlying data. So I
Speaker 1: think that's we knew coming into this that measurement was
Speaker 1: going to be disrupted, that getting our arms around the
Speaker 1: magnitude of this is is was going to be really
Speaker 1: really tricky, given how unprecedented it is, so that we're
Speaker 1: seeing noise in the data was expected and anticipated, and
Speaker 1: in fact we even anticipated that the surprises would be
Speaker 1: bigger than anything we'd ever seen. So that's exactly what
Speaker 1: we're in the middle of right now. Julia, Let's push
Speaker 1: this a little bit further. If this is expected and
Speaker 1: there is an upside bias to the data being collected,
Speaker 1: is there anything in the high frequency information that you're
Speaker 1: looking at that gives you a sense of how much
Speaker 1: worse things are? Yeah, so that's triangulating, is the name
Speaker 1: of the game. And so yeah, looking at all kinds
Speaker 1: of sources of data, things like UM a DP are
Speaker 1: helpful in this environment and actually jobless claims themselves that's
Speaker 1: hard numbers. Now we know there's been even there some
Speaker 1: processing delays and some program it you know, UH challenges
Speaker 1: for state and local governments getting these programs up and running.
Speaker 1: So those aren't per pinpoint perfect, but they're probably more reliable. UM.
Speaker 1: They don't capture everything. They don't capture the flow back
Speaker 1: into employment as timely as UM saying maybe a DP does.
Speaker 1: But yeah, we're looking towards all any kinds of high
Speaker 1: frequency real UH measurement based data that we can UM
Speaker 1: and again, the range that it tells us, the range
Speaker 1: of the picture. We know the whole is deep, deeper
Speaker 1: than anything we've seen, uh in our lifetimes. We know
Speaker 1: that we are starting to come out of it in
Speaker 1: many ways. We know that May is a month of growth,
Speaker 1: for example, on the consumer side, on the hiring side.
Speaker 1: I think that that's probably the right picture, but again,
Speaker 1: putting a fine point on that is going to probably
Speaker 1: take years till we can actually revise and refine those estimates. Um,
Speaker 1: But I think we're moving right now in in a
Speaker 1: good direction. Um. The question for me as a forecaster
Speaker 1: right now is struggling with how does this resurgence in
Speaker 1: the virus affect things. We know we're not gonna shut
Speaker 1: things down to the same extent, but yet we're living
Speaker 1: with this incredibly disruptive infectious disease. So what does that
Speaker 1: due to the shape of the recovery, What does that
Speaker 1: do to defaults and delinquencies and uh, you know the
Speaker 1: jobs picture for example. So that's as a forecaster, that's
Speaker 1: what does that due to the shape of the recovery
Speaker 1: is what I'm grappling with right now. Julia. Fantastic to
Speaker 1: get your perspective. As always, Juli Karnata, that of Macro
Speaker 1: policy perspectives. I wish we'd listened to Mike Wilson. I'm
Speaker 1: aregn standing the last couple of months, that's for sure,
Speaker 1: and I'm pleased to say we can start this morning's
Speaker 1: program with the chief equity strategist here in New York City, Mike.
Speaker 1: Fantastic to catch up with you, sir. What to set
Speaker 1: you apart from me in the last couple of months
Speaker 1: is your willingness to say the recession playbook is still
Speaker 1: intact and there's nothing different about coming out of this
Speaker 1: contraction compatible the other contractions, Mike, Would that be a
Speaker 1: fact characterization? Yeah, thanks guys for having me, And yeah,
Speaker 1: I think that's a very fair, uh sort of you
Speaker 1: know the way we've positioned ourselves, which is essentially, look,
Speaker 1: you have to put the blinders on a little bit
Speaker 1: when you go into a recession from a financial market standpoint,
Speaker 1: because markets tend to anticipate these things. And you know,
Speaker 1: we've been talking about this set up for over a
Speaker 1: year or two, and I think that's probably what set
Speaker 1: us apart two is. And I came into this year
Speaker 1: kind of more negative than most, expecting the risk of
Speaker 1: a recession being higher. So then when of course when
Speaker 1: it happened, you know, the market was actually already ready
Speaker 1: for that, and then we had a liquidation in March.
Speaker 1: And the thing that's different this time, though, I think,
Speaker 1: is that we are in this incredible period of financial repression,
Speaker 1: and that's obvious. And one thing I've learned kind of
Speaker 1: the hard wain in the last ten years is that
Speaker 1: when risk amium appears, you just have to grab it.
Speaker 1: And that appeared in March. We've written about as extensively
Speaker 1: as you know, I mean an equity rich premium basis.
Speaker 1: We were as cheap in March as we were in
Speaker 1: March of O nine. And you may say, well, how
Speaker 1: could that be. We weren't down as much because rates
Speaker 1: had fallen so much, and so markets have become you know,
Speaker 1: attuned to that, and they reacted and investors stepped in.
Speaker 1: And that's what we've been doing. And and yes, the
Speaker 1: recession playbook has been working, as it typically does during
Speaker 1: these periods. Many people anticipate the bounce that we're seeing
Speaker 1: of the economic data to flatten out later this summer,
Speaker 1: and for that reason, they're not willing to extrapolate out
Speaker 1: the recent upside surprises too far, too quickly. In fact,
Speaker 1: some people willing to disregard the bounce that we're seeing
Speaker 1: coming into the month of June. What do you say
Speaker 1: to those people when you have those conversations at the moment, Well,
Speaker 1: I mean, look, you you said the top of the show.
Speaker 1: I mean, part of the reason why economic surprises are
Speaker 1: bouncing so much as because expectations collapsed, and that that's
Speaker 1: also part of our view. You know, you're getting a
Speaker 1: V shape recovery because you're compared since are just so easy.
Speaker 1: And of course it's going to have to flatten out
Speaker 1: now because like every time the data comes out better,
Speaker 1: expectations rise, so the bar essentially get gets gets lifted
Speaker 1: as well, so it will flatten out. But we still
Speaker 1: think the rate of change will continue to be positive
Speaker 1: through the rest of this year, quite frankly, and we
Speaker 1: we're not expecting us to be back to where we
Speaker 1: were in the fourth quarter of nineteen until the end
Speaker 1: of next year. And the words, there's still a lot
Speaker 1: of runway from here to there for the rate of
Speaker 1: change to continue to increase, and that's what the markets
Speaker 1: will focus on. The markets will focus on as long
Speaker 1: as growth is moving forward, the market will continue to
Speaker 1: look forward and you know, it's really hard to think
Speaker 1: about this way, but you know we're actually in a
Speaker 1: recession now that's obvious. That means I don't have to
Speaker 1: worry about a recession. Okay, that means the market doesn't
Speaker 1: have to worry about a recession like it was perhaps
Speaker 1: in December and January, not knowing how this is going
Speaker 1: to play out. But we know how it's going to
Speaker 1: play out now it's happening, and we know what the
Speaker 1: policy response is going to be. And so in some
Speaker 1: ways you could argue, giving these stocks are long duration
Speaker 1: assets and you remove the immediate risk of a recession,
Speaker 1: surprising us, it can actually start discounting the future in
Speaker 1: a more visible way. Mike, how do we rotate in
Speaker 1: such an unusual and particularly with the fixed income market
Speaker 1: odd market? How do we rotate from seven or eight
Speaker 1: stocks showing for the most part profitability and everybody loves
Speaker 1: them in that to those that are at a twelve
Speaker 1: multiple a fifteen multiple. Dare I say the richness of
Speaker 1: a seventeen multiple? What will be the catalyst to have
Speaker 1: those stocks improve on a relative basis? Yeah, that's a
Speaker 1: that's the right question. It's a great question. I think
Speaker 1: it's it's very simple. My experience has been that when
Speaker 1: the relative earnings revision breath starts to favor those cheaper companies,
Speaker 1: meaning the earning start going up at a faster rate
Speaker 1: for those more cyclically geared companies than these you know,
Speaker 1: wonderful secular growers. And you might say, so, how could
Speaker 1: that possibly happen? Well, because the arrange, you know, we're
Speaker 1: so lousy over last year or two that they can
Speaker 1: actually grow faster in the short terms of those rooms,
Speaker 1: and the expectations have come down more. You know. One
Speaker 1: of the things I worry a little bit about the
Speaker 1: work from home beneficiaries that you did really well in
Speaker 1: the early part of this recovery is that they didn't
Speaker 1: they really lower their expectations. You know, the analysts continued
Speaker 1: to keep their expectations high. So there's just there's not
Speaker 1: as much surprise factor potentially as the economy continues to recover,
Speaker 1: and there could be a little bit of payback quite frankly,
Speaker 1: from the pull forward on the work from home dynamic. Mike,
Speaker 1: I gotta say, one reason why I love reading your
Speaker 1: reports is your view on the short term paired with
Speaker 1: the medium and long term. Talking about last week's sell off,
Speaker 1: saying it was healthy overdue. It could be even due
Speaker 1: for another five to seven uh percent decline in addition,
Speaker 1: but it's a by the dip moment. I want to
Speaker 1: talk about the risks to that outlook, one of them
Speaker 1: being the increase potential increase in trade tensions between the
Speaker 1: US and China, especially as we see Robert Lheiser heading
Speaker 1: to Congress today. How significantly do tensions have to ratch
Speaker 1: it up for you to reassess your call? Yeah, mean,
Speaker 1: this is definitely still a concern that's out there. I
Speaker 1: think you know, you all mentioned it earlier. You know,
Speaker 1: the market seem to be too focused on it anymore.
Speaker 1: I think the market is focused on it. It's just
Speaker 1: it's got so many things to focus on from day
Speaker 1: to day. So there's no doubt that the China, you know,
Speaker 1: US trade relations are still you know, fragile, I'd put
Speaker 1: it that way, um, you know, and we have far
Speaker 1: from resolved all of the issues that have been debated,
Speaker 1: and I think a Phase two trade deal is pretty
Speaker 1: much off the table anytime soon. And I guess the
Speaker 1: risk now is do we roll back the Phase one
Speaker 1: trade deal to some degree? Like our view is that. Uh,
Speaker 1: you know, we think phase one is okay for now,
Speaker 1: it's not at risk. However, if you know this becomes
Speaker 1: a uh you know, a situation where either candidate apparticularly
Speaker 1: the president can use to try and bolster their poll numbers,
Speaker 1: that's where it becomes a bigger risk, and that's probably
Speaker 1: a third quarter issues. I don't think it's an issue
Speaker 1: right now. Uh, there's other things that the White House
Speaker 1: is focused on try and you know, get going in
Speaker 1: the right direction. But if they decide to use it
Speaker 1: as a lever to boaster the polls, that's where it
Speaker 1: becomes more dangerous because you know, once you go down
Speaker 1: that path and start saber rattling again, and it's hard
Speaker 1: to pull back in. So I think it's a third
Speaker 1: quarter issue, and we got a monetary closely. Mike Wilson,
Speaker 1: one of your joys is the fabulously concise reports of
Speaker 1: Betsy Grayceick. You get to read that stuff and frame
Speaker 1: an opinion of the two big defailed banks. What's the
Speaker 1: Mike Wilson view of American banking given what you see
Speaker 1: from Ms Gray? Yeah, it's uh, I mean like banking
Speaker 1: has been a tough gig for the last ten years,
Speaker 1: and that's what you know, post financial crisis and a
Speaker 1: period of financial repression has done. Um uh. There's two
Speaker 1: two things I think about from here. First of all,
Speaker 1: we are you know, constructive that the econome is gonna improve,
Speaker 1: and that means the rates, the back end rates should
Speaker 1: should move up and and increase the yokerve, which is
Speaker 1: good for you know, that interest margins, and that's a
Speaker 1: that's potentially a positive tail one, I think. Secondarily, you know,
Speaker 1: everybody's talked about deregulation over the last few years. It
Speaker 1: hasn't really uh led to any kind of big boost
Speaker 1: in activity. Quite frankly, however, one thing I would say
Speaker 1: is different now is you know, during the post financial
Speaker 1: crisis period, we had what we call the shadow banks
Speaker 1: in their intervening and and doing their job as the
Speaker 1: as the regulated banking system had been kind of compressed
Speaker 1: and not being able to operate as effectively for a
Speaker 1: lot of different reasons. There's a there is a positive
Speaker 1: argument I think to be made that some of that
Speaker 1: some of that business, you know, there could be shared
Speaker 1: gains coming back towards the regulated banking system because the
Speaker 1: FED completely needs the banks to be operating efficiently. If
Speaker 1: they ever want to get inflation, we've got to get
Speaker 1: velocity of money up. I mean, banks are the ones
Speaker 1: who actually create real money in the economy. And so
Speaker 1: you know, we could see a steeper YO curve, we
Speaker 1: could see some more deregulation and some share gains back.
Speaker 1: You know, that's why we're constructive, and we're constructive on
Speaker 1: the American banking system having kind of a rebirth here
Speaker 1: as we get reflation and we have a recovery. Myke Wilson,
Speaker 1: you've been constructive and so far you've been right. Morgan
Speaker 1: Standy's chief US equity strategists, Mike always tried to catch
Speaker 1: up with you. Said my best to you and to
Speaker 1: the hold of the scene. This is the way it works, Folks.
Speaker 1: In London, not every month, but once or twice a year,
Speaker 1: there is a conference and if you're at the London
Speaker 1: School of Economics, it's held in some old ancient hall
Speaker 1: named after Lionel Robbins or someone else, or in their
Speaker 1: spectacular new conference center of the Chisad Center. And Paul
Speaker 1: Deguar walks in, who's a good friend of this program
Speaker 1: and truly one of the leading lights of fiscal analysis
Speaker 1: in Europe, and you will stand up and there'll be
Speaker 1: four or five worthies on the stage. But that's not
Speaker 1: what's important. What's important is the place is packed, and
Speaker 1: there are students down the aisles, up and back, and
Speaker 1: everyone to hear a pin drop listens and they will
Speaker 1: listen to Barry Ikon Green. We are thrilled to professor
Speaker 1: I can Green can join us this morning for a
Speaker 1: virtual conference. He is in California at Berkeley, not in Laws,
Speaker 1: not in London at l s E, the London School
Speaker 1: of Economics. Professor Iken Green, what is it like doing
Speaker 1: a virtual conference? It's just not the same? Is all
Speaker 1: those pack calls? Is it? It really isn't the same.
Speaker 1: You uh, you can do it in your sorts. You
Speaker 1: don't get you don't don't get the adrenaline rush you do. Uh.
Speaker 1: Seen two or three hundred faces in the audience, and
Speaker 1: it makes me worry about our pedagogy at the university.
Speaker 1: We can't really teach courses in the same way either.
Speaker 1: I totally agree. Is Berkeley going to return yet? I
Speaker 1: know Penn State we're talking to the other day, they're
Speaker 1: returning in the fall. Is a university of California Berkeley
Speaker 1: decided to return. We haven't decided, but I think there's
Speaker 1: a very very high probability it will be mainly online.
Speaker 1: You will have an extraordinary panel at the London School
Speaker 1: of Economics this evening on the pandemic. What will you say,
Speaker 1: Professor I Ingrid We have a new study that looks
Speaker 1: at the long term political consequences of living through a pandemic.
Speaker 1: So we have data on forty seven epidemics and in
Speaker 1: the past, from stars to a bola that affected in
Speaker 1: some manner upward of a hundred and twenty countries, and
Speaker 1: you can see there's a long term impact on people's
Speaker 1: trust in their government and their leaders, and it's strongly negative.
Speaker 1: If you live through a pandemic, you grow skeptical about
Speaker 1: the ability the capacity of your institutions, can you say,
Speaker 1: C D C and your leaders to cope with those
Speaker 1: kind of threats. So, Professor I have three children that
Speaker 1: are in that age eighteen to twenty five, that impressionable
Speaker 1: age where you start to form really strong personal opinions. Here,
Speaker 1: what do you think, uh, the fallout will be for
Speaker 1: those folks? Uh, after having dealt with this pandemic here
Speaker 1: which you know we're four or five months in who
Speaker 1: knows how long it's really gonna go on. For those
Speaker 1: are the folks for whom we really find a strong effect.
Speaker 1: So if you live through a pandemic uh when when
Speaker 1: you're in grade school, there's no lingering persistent impact on
Speaker 1: your attitudes. If you live through one as an adult
Speaker 1: over the age of five, there is no lingering effect either.
Speaker 1: But if you're in those impressionable years and you know
Speaker 1: it from first hand observation, UM, that's when there are
Speaker 1: neurological changes in the brain. That's when people encounter college
Speaker 1: aged students encounter new ideas for the firm first time.
Speaker 1: And those are the people who grow skeptical about their
Speaker 1: capacity of their government to do good uh for for
Speaker 1: decades and too short of visit. But very one final question,
Speaker 1: if we could, do you perceive, with all of your
Speaker 1: work in international economics, going back to the classic Golden
Speaker 1: fetters and what you've done with the I m F
Speaker 1: studies and such, do you perceive a shift in America
Speaker 1: away from our economic individualism, our flavor of capitalism or
Speaker 1: will we reaffirm the way we do capitalism. There's going
Speaker 1: to be strong pressure I think to have a more
Speaker 1: European welfare state where we do more in terms of
Speaker 1: providing healthcare, elder care, child care to the populace. And
Speaker 1: the question is whether we will become more European in
Speaker 1: terms of paying taxes as well, or a very serious
Speaker 1: debt problem blows up in a stead. Oh this has
Speaker 1: been a joy too short of visit Professor Ichen Green,
Speaker 1: thank you so much tonight an important conference at the
Speaker 1: London School of Economics. Very Green Party, professor at Berkeley.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast
Speaker 1: platform you prefer. I'm on Twitter at Tom Keane before
Speaker 1: the podcast. You can always catch us worldwide. I'm Bloomberg Radio.