MS' Zezas: Relief Funds Are Enough for State, Local Needs

in this package for a lot of folks. Let's break it down. We can do that with Michael zzas Uh. He is the chief US public Policy and municipal strategists for Morgan Stanley based in New York. Michael, thanks so much for joining us here. I want to look at initially the amount of money that is going to states and local municipalities. Is it enough and how do you think it will be utilized? Yeah, I think it's enough.

I think it's enough. We had estimated back in May that state and local governments would be short of their budget estimates through the end of calendar one by about two hundred and seventy billion dollars. This is three fifty billion dollars in our two hundred and seventy billion dollars probably now is actually too high of an estimate because we we were looking at an SMP level that was

lower back than UM. We did not account for unemployment being skewed towards lower income workers so that the tax base didn't suffer nearly as much as we thought. So three d fifty billion we think will will relatively well cover the revenue that state and local officials UM expect should have been there. So what does that money get used for at the end of the day, Well, you know, it will depend on a state by state basis, but

ultimately it replaces lost revenue from lost economic activity. UH. Probably enables operating budgets to stay intact, UM capital budgets to continue to flow UH. And it basically just it ensures that thing governments can undertake the normal amount of economic activity they otherwise would have. So does it change UM issuance plans? Were they changed before the bill came along? Does it change rates? Has it already been priced in well?

With regard to the MUNI market, I mean, the muni market is pricing in a way that I think reflects a substantial amount of optimism, and I think well placed optimism about the strength of credit quality, which is to say that if you're providing three fifty billion dollars of grant money when the amount of revenue LASS was going to be less than that, then the credit quality of the asset class is more or less what it was before the pandemic, which is not to say it didn't

have its flaws, but UM certainly UM not nearly experienced the weakness that it was perceived too. So I don't think this as an impact on yields per se that the muni yields will go down relative to treasury yields, but it sort of justifies where market pricing is with regard to supply. I think potentially a transform supply, Whereas without this aid you might have looked at municipalities doing

some refunding activity to create budget savings. Now they're probably more likely to be aggressive in their capital plans and and borrow money to UM match the money they would have used on I pay as you go basis to pay for roads and bridges, etcetera. Alright, so, Michael, this UH bill passed strictly along partisan lines. Party lines. That does not bode well. I wouldn't think for the next round of stimiles that presumably would have some bigger ticket items,

some you know, some infrastructure. How are you guys thinking about that? Well, I think the way that I think you're right that there there's nothing in this process that suggests that infrastructure can be done in a bipartisan way, at least easily, and so I think that sets up a process that is long and arduous, uh and probably one that we think will ultimately be a bill that

has to be mostly deficit financed. So if you're going to have an infrastructure bill that approaches the ambition of what the Biden administration has laid out, there are just aspects of that bill are probably nonstarters for Republicans, starting with some of the tax increases uh that they want to be adjacent to it, as well as many of the environmental standards that they want to be adjacent to it. So if the Democrats have to go it alone, then

they're probably going to follow this budget reconciliation process. Again, that probably means that you're looking at October passage the earliest, because that has to the next fiscal year, and then the Party amongst themselves, has to develop a kind of unanimous view on the nitty gritty of what's in the bill in terms of labor standards, environmental standards, not just how much more they want to spend on roads and bridges.

It's a complicated negotiation, it will take much of the year. Ultimately, we think it will get over the finish line, But this one is a much harder lift than the COVID relief package. Do you think it'll be more than four trillion dollar bill coming over the finish line? That's not in our base case, And I think it's important to defind time frames here too, So yeah, I mean the COVID relief bill is one point nine trillion. The CBO says one point two will be spent this calendar year.

The numbers quoted on infrastructure bills, they tend to be either five or ten year numbers. So um, in our view, yeah, you could look at a multi trillion dollar number over ten years. Um, it's entirely possible that the first proposals are five year numbers. So there's a little bit of apples and orange comparisons here. At the end of the day, we think you'll see something that is at least one and a half trillion dollars spread out over five years or more. What else are you looking for? What else

are you guys looking at? What are you working on right now that we should be focusing on. Well, I think the the tax debate inside of this legislative debate on infrastructure is critical. We're assuming at the end of the day that there's only fifty Democratic Senate votes for about five to six hundred billion dollars worth of tax increases over a ten year period, and that's out of a menu of over three trillion dollars of tax increases

that the by administrations proposed. But but we would expect that the initial proposal here will probably include almost all of those tax increases. So there's there's a It's it's important to understanding diffence between the two because that could affect markets in the short term. Alright, tough to do a bipartisan bill on big tax increases. Americans much prefer free money. Michael zesus, Thanks very much, Cheek us public

policy and municipal strategists at Morgan Stanley. Well, it's Thursday, so we had another jobless claims number hit today. The news is it was the lowest since November. Came in a little bit better and expected. It's a hundred and twelve thousand, But that's still a stubbornly, stubbornly high number. And it's against it that backdrop that President Biden will sign tomorrow. I believe the UH one point nine trillion dollar fiscal stimulus UH plans. Let's bring that all together.

We can do that with Chris Lewis, a senior fellow at the University of Virginia Miller Center. UH. He's former Deputy Secretary of Labor under President Obama, joining us on the phone from Charlottesville. Chris, thanks so much for joining us here. Let's start with the jobs claims. I love to get your thoughts, as a former deputy secretary of labor about how you view this labor market today. Are you concerned about some of this permanent unemployment that we

may be seeing out there? Yeah, you know, I really am. I mean, we have with these weekly numbers. This is now the fifty one week in a row that has exceeded the worst of the Great Recession. So while the numbers are kind of inching down very slowly, there's still at a really elevated level. And I think what I'm as concerned about is, you know, the four million people who UH who have lost their jobs permanently, about six million people who are working part time but would rather

be working full time. We've got a long term unemployment at rates that um, you know, we haven't seen really since the Great Recession at this point. And what we know is that the longer people are out of work, the harder is to get them back. And I think what we've also seen over the pandemic is a lot of the broader changes in the economy, like the shift to online retail, have been accelerated, so a lot of the jobs that people have left probably aren't there anymore.

Right now. You know, the uh the automation UM, which isn't the same as on shifting to online, but it's similar UM. And the shift of manufacturing label to four labor to foreign insurers was something that Donald Trump was working to turn around in some ways. He wanted to bring jobs back to America. President Biden thinks he can

do a better job of it. Do you see that too, You know, Look, I I am confident that the plan they're going to put forward will do that, and I am hopeful that if we can get an infrastructure bill, a real infrastructure bill, that can bring back some of

those jobs as well. But you know, as you said, they're broader globalization trends that make this very challenging, you know, And so I think we need to understand that the manufacturing jobs, many of them that have gone overseas, probably aren't going back because labor costs are just too high in the United States. But when you move to things like advanced manufacturing, that is a place that we can

continue to dominate here in the United States. But it's going to require a level of training of workers that exceeds what we have right now. Chris, you know, we've talked about the uh, the bigger fiscal stimulus plan, maybe one that focuses on infrastructure. Um that see used to be something that is on the ad Biden's plate right now.

Are you concerned that there's just been no bipartisan support of the this one point nine trained dollar plan that really would call in the question ability to do anything bigger down the line. You know, I am concerned, and I think in part because look, we can we can, you know, quibble about some of the things in the bill, but there's so many other things that are just wildly popular.

Leaving aside the stimulus checks, uh, you know, the extension of unemployment benefits, which really needs to happen otherwise eleven million people are going to start to lose uh their check starting next week. But it's the rental assistance, it's the assistance to small businesses, UM money that goes for vaccines and opening school So all of those things there should be consensus on. And I think it's an unfortunate

sign of where partisanship is in Washington right now. That being said, look, we've talked now for for the entire Trump administration and now the beginning of the Biden administration, is that maybe the sweet spot when it comes to buy parsonship is infrastructural. So we'll have to see whether

that happens or not. How do you think Republicans on Capitol Hill are going to UM are going to react to the infrastructure bill because you know, they didn't vote for this bill, but the Republican base was overwhelmingly in favor of it. So even though none of the representatives UM we're able to cast a vote for it, the people they represent want it past. Yeah, and I think

that's obviously one of the contradictions here right now. I mean, I think with infrastructure, as with everything else, the question is going to be how to pay for it. We've kind of tossed the settle depth sit out the window over the last couple of administrations. You're not an M M T guy. You don't like the magic money tree. Look, I'm not one of these people who think that inflation is going to be a problem. But uh, you know, once we got that cut done, we've kind of stopped

talking about the debt of that being said. Look, you know, how you pay for infrastructure will be a critical issue. And obviously one of the things that the President President Biden has talked about is rolling back some of those two tax cuts. So that will be an area where I think Republicans are gonna have a hard time swallowing that. But I do think when it comes to you know, the nuts and bolts of infrastructure like roads and bridges and airports, Uh, there is broad agreement. So hopefully we

will come to that, Chris, we hope. Look, Chris lou from the University of Virginia went to Harvard with UM. Barack Obama worked at Sidney with the Obamas, went to Washington with Obama, and we we're guessing that the Biden team brings you back to d C very quickly. So please come back and talk to us after you get hired by the Biden administration. Chris Leu there a senior fellow at the University of Virginia Miller Center. Now I

want to get straight over to Gaby Coppola. She covers UM well, she covers cars for us, and today we're going to talk to her about Apple because we're all excited once again about the possibility of an Apple car. I feel like Gabby, we've been we've been pretty stoked about this possibility for well on a decade. Now, is it ever going to happen? I think we're seeing very clear signals that it is going to happen. Um. I mean just the talk, you know with automakers that have

been leaking. My colleagues and I did a story a couple of weeks ago about you know, they're in talks trying to find um lighter, which is sort of sensors for self driving car features. UM. I think it is good. It really does look like it's going to happen. This time, I think that it's still a few years away. Are reporting suggest that we're still several years away from seeing an actual product? Why would Apple want to get into

the auto business, Gabby? What's kind of their strategy? Yeah, well, I think, um it's almost become a cliche in my world, but thinking of a of a car as an iPhone on wheels, especially when the cars do you have, um, do have autonomous capabilities? Think about it. I mean, think about what you're going to do in your car if

you don't have to pay attention to the road. I mean, probably I'm going to be taking work email, but you could also be you know, watching TV, or you know, playing video games or basically all the kind of data and services and things shop taking a selfie for the Graham exactly, you'll be Graham and all of that. Apple

wants to own that space. And so if this is the future, and I think even though it's you know, still pretty far away, if the future is cars that can drive themselves, then you're going to basically be living inside your phone when you're commuting, and Apple wants to be able to kind of provide you all the services and that. Let's let's try and guess how far away it is from your experience reporting on UM, you know,

the traditional automakers. How long does it take from start to finish when somebody at GM or somebody at Ford UH comes up with a concept for a new car to you know, design it, to organize production, to figure out the supply chain, They get the prototype, then they you know, start testing it. I mean, what does that process take and cost? Gabby um billions of dollars? UH costs billions of dollars. And I mean a lot of that depends on if you're doing something brand new, which

obviously Apple would be doing. So that means everything you just talked about, design, engineering, UH, testing for safety, you know, things like that, that takes years. So I think that whole process, I mean, I think you probably know as well as I do, but I want to say, like five years, you know, UM, And that's exactly that's UM. That's if you're an automaker who's been doing this for a hundred years or exactly exactly. I was thinking five years and and a couple of billion dollars. But that's

if you already have factories. That's if you're already designing and making cars. So Apple. We know, it was just talking with Day and a couple of others. Chances are they're gonna need to do a whole lot of that

footwork themselves. Yeah. Although the story I did today with my colleague Mark German in in l A, who's our stellar Apple reporter, UM talked about how, you know, Apple may want to take its iPhone handbook and kind of trying to transfer that to the auto industry and UM, you know, they're very used to managing supply chains, and fox Con, who we all know is supplier to Apple, UM is trying to get into the electric vehicle manufacturing business.

So that's why people are looking at them. UM. But I think you know, Apple, as many Silicon Valley UH companies that have tried to get into the auto industry have realized it's really not fun making a car. I mean, maybe it's fun to design it, but the money involved, the thin margins that you get for it is very different from um, you know, writing some software and then charging huge margins on it. So I don't think they want to get their hands dirty with the manufacturing stuff.

That's not what they do. UM. So that's why we think that you know, it would make a lot of sense for them to go after a contract manufacturer, which you know in our story we talked about Magna, which is a Canadian global. This Dyer built my truck, the truck I drive today. Yeah, yeah, yeah, So they can do stup to nuts car manufacturing and they've got a really long track record and a good reputation. Fox Cott already has a good um. Obviously they're already in deep

with that. Well, it's just a question that can they really make cards? Can they make cars? Bending metal? That's the tough part, is Kevin Tyne from Bloomberg Intelligence always says, Gabby Coppla, thank you so much for joining us. Gabby Copple, as the auto reporter for Bloomberg News, joining us on the phone from Detroit. European Central Bank President Christine Lagar discussed her monetary policy decision at a news conference this

morning and had this to say about inflation. Inflation hospited over recent months, mainly on account of some transitory factors and an increase in energy price inflation. At the same time, underlying price pressures remain subdued in the context of weak demand and significance luck in labor and product markets, so with that, the e c B also upped its inflation forecast not UM to an absolute level that is scary

at all, one percent to one point five percent. And of course Europe has had a much more difficult time bringing about inflation than has the US. Right Um, the e c B just simply hasn't been able to move the needle UM the way the Federal Reserve had UM. And it's very interesting also the comparison, because here in Europe, I would say inflation is probably considered more of an evil. Certainly in Germany it's the last thing that people want

to see. UM. Memories of the memories are are are are very long here and the Weimar Republic, although very few people alive now lived through it, UM still uh still leaves a serious scar in the German psyche. It's not nearly as bad I think in the US, Paul, do you think that's the case, you know? And it's been a while since we've had real inflation here, the kind that hurts UM, you know, so there's a discussion of,

you know, kind of good inflation versus bad inflation. UM. And I think we saw the ten year spike a couple of weeks ago matt to one point six percent. That kind of got people's attention, um, and caused them to say, Okay, do we have some inflation creeping into uh this economy more so than maybe we were forecasting, and maybe quicker than we were forecasting. And boy, when you to take a look at some of the commodities

out there, you can certainly get some confirmation. Um. But you know, I was talking about this with Lisa Bramwitz, and you know she's of the opinion that and you know, unless you get real wage inflation, you're not gonna get real inflation in this country. Well, I mean then the kind of inflation that isn't real is still going to

leave a lot of people hungry and unable to drive. Right. So, even if you don't get real inflation in the eyes of an economist or Lisa who is close enough to be an economist, um, it's still going to be the kind of inflation that that makes it hard for people to do grocery shopping and get to work and back if they still have a job. And the other thing I think is interesting is I'll never forget watching Ben bernanke on sixty Minutes when he said, look, deflation is

the big scare. Um, that's what we need to worry about. Inflation we can deal with, no problem. And you can understand where he's coming from. We heard it from Janet Yellen recently as well, who of course no longer at the FED but now in charge of Treasury said, inflation is something that we have the tools to deal with. But Um, you and I were talking to someone recently who pointed out that, yeah, Um, the FED can stop inflation, no problem. Um. The only issue that they is that

they crushed the economy when they do it. The last time we saw it happened was Paul Volker Um, and he was practically assaulted by members of the public as he raised rate to try and stop double digit inflation. Let's bring in John Author's who wrote a Bloomberg opinion piece about um. The only problem basically with the inflation scare being that he doesn't see any inflation. John, Um, are you saying that, yeah, the opportunity word yet? But

yes there is. There is very little clear inflation showing up in official numbers yet, so we've seen it so far. I was just looking at beef prices and they have been steadily rising. Paul noted that UM, it costs now three dollars a gallon to fill up his tank with gas, which is certainly a rising price. And I noticed that the kids think rent is gonna cost nine percent more next year. So some things are definitely starting to scare people.

Oh yes, definitely. What what is interesting and the thing is we have always known, UM, people have been braced for months for an inflation scare in the early months of this year because the big lockdown and also the big fall in the oil price for March last year, are going to drop out of year on your year comparisons, uh, and you're suddenly going to have headline inflation figures that look not like a return to the seventies but sharply worse. So a lot of people have been nervous about what

that psychology, psychological effect will have. What is intriguing to me, just UM writing up the My latest piece is that it's not really new pieces of evidence about inflation of

that is really truly scaring the market. It's um nerves about bond deals because so much is running on also leveraged trading, on on on, you know, as we all know, very low interest rates, and so the great concern is that we's not so much that or the great content for the time being, which explains these incredible rotations and moves within the market for the last week or two. Isn't about the long term prospect of you know, secular

extent of inflation. It's about, Oh, you're gonna have an accident in the bond market, and is that going to bring us all crashing down? Um? And somehow are there We've just about avoided that more by luck and judgments probably. What are some of the areas if we do, in fact get some troubling inflation, Where do you think we're going to see it first? And what kind of where

where where are you paying attention? Well, other than other than oil, which isn't strictly part of what the Fed can try to try to cover, but that's obviously an important part of it. The area you just mentioned as well of rents, that the fact that the low rates have led to very sharp increases in house prices that might well logically lead to a rise in rents in its wake. Other than that, it's all these areas that might be affected by supply bottlenecks, which is much of

much of the economy. UM. Yeah, well, cars, it is one thing. I mean, I've noticed, John, that dealers are marking up cars to an incredibly high margin because you just can't get them on a lot due to the chip shortage. Yes, and well, and I'm trying to I'm trying to buy a laptop for my for my daughter at the moment. Since yes, that that chip shortage also has an effect on computer prices, So you know those are those are big. It's it's it's those supply shortages.

You know, the piggies working its way through the python, and we're now at the stage where their really affecting prices here. And so if you then add that to the base effects and the worries about it change in psychology with all the money around, that's why people think a serious rising inflation could be ahead of us. But I don't think. But what is interesting is the true serious inflation in the measures that we normally look at hasn't really got starting yet. Hey, John, thank you so

much for joining us. We always appreciate getting your thoughts. John author's senior editor Bloomberg Markets, also a bloomberket opinion, comments that joining us on the phone, thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews of Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. Pet On Ball Sweeney I'm on Twitter at pt Sweeney.

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