The Fed Should Go Negative: Former Fed President Kocherlakota

that Bloomberg dot Com. Time for Bloomberg Opinion right now, we turned to Bloomberg Opinion calumnist Narayana culture Lakota, former Minneapolis FED president also a professor of economics at the University of Rochester. Uh Nariana, thanks so much for joining us here. Boys, we think about the response to the pandemic. The US Federal Reserve Bank, I think is generally getting very good marks from the marketplace in terms of acting early,

acting acting decisively. But you make the argument that the Fed should really consider going negative in terms of interest rates. Give us your thoughts there. Yeah, thanks a lot for

having me on. Um. You know, I think the chairman laid out the case pretty well on it'ss conference, so he certainly didn't go make the next step of actually going negative with rates which is he said that the FED has to be prepared to use all its tools to support the economy and the recovery that we hope it will be coming soon, and that that um that

means include to me means including going negative with rates. UH. Pushing rates down further would stimulate spending um and stimulate on the part of the households and stimula investment on the part of businesses as it always does, and that would be helpful for the for the U S economy. What is your view? I mean, I guess you know, people look at say Japan, Germany, you know, developed countries with negative rates. It just doesn't seem right, doesn't seem

like the right strategy, the right policy. How do you view this negative and interstrates in general? You know, I think what's what's happened is that economies turned to them, as would be true in the US case, whence the situation is bad. So you can't just look at a raw correlation between who's using negative rates and the what their situations like and say, gee, it looks like all the countries that that have negative rates have are not

doing that well economically. Well, that's because they view them as this emergency tool they only turn to when when the situation is going badly. Um. The other problem is that there're there's a limit to how negative to being able to go, are willing to go in something? In some instances, and you know, a quarter percentage point are fifty basis point cut in interest rates. It's helpful, it's supportive, but it's absolutely not a panacea for all possible economic ills.

That's the US ever done that for any appreciable amount of time as a policy matter before. Uh, you know, now you're taking a little bit out of my knowledge base. But my understanding is that rates did go negative for some time in the during the Great Depression. But but other than that, no, I don't think right, it's not

something typically in the toolbox for the US FED. So one of the things when we think about the actions by the FED, UM, is that the concern or the expectation, the assumption is that this pandemic has relatively short life measured in quarters. How about if it you know, if it's just one in a series of waves of this virus and actually goes much longer, what does the FED do? Then? I think that's a great question. I think the FED and Congress. Uh, you know, I think and and Treasury.

I think there's you know, there's basically been been all these entities in the government I've been working together. The perspective is by the time we get into this to the certainly we get into the fourth quarter of the year, um, the economy is going to be in a very robust recovery path and uh, they won't need the further further back stopping from from the FED at that point. And I think that's led the FED in other entities to say, boy, the main job here is to keep businesses alive, try

to freeze the economy where it was in February. Well, that might be acceptable if you're talking about three or four months intervention, but if you're talking to three ten years, I mean ten is obviously quite extreme, but to three years even you're really getting in the way of the dynamic flow and processes that really drive us economy. Where we want companies to go out of business because they're not as being as effective at fulfilling what consumers want.

And we want workers to be able to move from job to job, um, because they're not there may be more productive that new job than they were the old one. So I worry that, uh, these these interventions are really designed to be temporary. As the shock becomes more persistent, they're gonna introduce more and more distortions in the economy, leading to to worsten worse outcomes. So just real quick seconds, what do you think about the Fed's decision to kind

of go into the corporate bond market. Yeah, I think that it's uh uh, I think that the So it's a questionable one because I think of the fact that basically, I think companies should be facing a lot of risk right now, it's appropriate for them to be borrowing at high interest rates because it's a very risky world. I think the Fed's intervention is getting in the way of that signal from the market. Interesting enough to see how

that plays out in the coming weeks and months. In Narayana Culture Lakota, former Minneapolis FED president and Bloomberg Opinion columnists, also professor of economics at the University of Rochester, we appreciate uh you coming on. You can uh read all of Narayana's work at Bloomberg dot Com, Slash Opinion, and O P I n Go. That's where you can find all of the Bloomberg Opinion work, which is so good and we love having the folks on here talking about kind of what is going on in the markets in

the broader implications for the markets. Well, we're right in the midst of earning season. We've gotten a lot of the numbers coming had a big tech last night. We had Amazon and Apple, uh some some big numbers. Next week we have some more a lift in Uber and some other names. Dan i'ves, managing director equity research at what but Securities is a fantastic person to chat with when we think about big tech. Dan, thanks so much for joining us here. Let's start with those Apple numbers

last night. I guess all in all, pretty solid numbers, right, yeah, better than feared. I mean investors including ourselves were respecting a horror show a Friday the thirteen type quarter, just giving the pandemic and the supply chain issues, and when you ripped the band aid off was better than expected.

And I think you combine that with at least some you know, ways of hoop in China from a demand perspective, I think that was enough for investor to network on the other side of this dark valley and by the stock so Dan, what do you make of them? I guess, you know, not giving guidances, that's I mean, obviously a lot of companies are not giving guidance, but for Apple, uh, that's pretty unusual. They usually been pretty solid about giving you at least a range of guidance in terms of

some of the big items. Yeah, it's unprecedented for Apple, and I think for many companies. And I think the knee jerk you saw last night with the stockdown, and I've talked to some investors that are worried about that, but I take a step back. I mean, right now, when you look at June quarter, given all the variables, all the demand issues, it would be like cook playing a game of blindfolded darts to give guidance for June,

and I think that would be imprudent. And I think right now Moose investors are looking past June into September, into next year. That's what the valuations offer. And the important thing is services. That's the rocket Gibraltar for Apple. I mean, that's continuing to be very strong. That midteam growth that's something like in live actually be focused on

along with China. So Dan, I know there's been some discussion about some of the new products, A mid price phone, uh five G phone, you know, perhaps a new supercycle if you will, for the five G phone pandemic, this crisis, this economic uncertainty impacting those product rollouts. Yeah, that's really I think the bigger question. If you look at what we're seeing with unemployment, the average consumer focus more about their health, groceries and hand sanitized and their thousand now

our plus iPhones. What does the man look like over the next six, twelve, eighteen months, you know, and I see at least right now from our data points in Asia, it's showing that this is going to be what I would call a moderate products cycle, not the initial supercycle from five G, but it's a two parts supercycle which goes in two thousand twenty one. I mean, you'll see about ten to fifteen percent taken off units. But when you look at that, you have nine million I phones.

Just to put numbers around it, three hundred fifty million of those iPhones have not upgraded their phone in forty two months, so there's massive pent up demand. But that's us and why they have the lower end version on the FD with three nine nine price points, which could be attractive to many consumers in this type of environment. All right, da, in time we have Left, I want to switch gears a little bit. We've got Uber and

Lift coming up earnings wise. Boy, when you think about those companies, um, I just is there's just no demand for those products? Is that just kind of dry up? What's the status of Lift and Uber? It's a category five storm. I mean when you think about the gig economy from an Airbnb to Uber and left, they're really in the eye of the storm. Now for Uber uber Eats, which was really i'd say the black cloud on the story has now actually become a benefit. But this is

another one'll ride. We cut our numbers. Wow, But I think it's one where you look, if you look at the valuation, can they navigate through the small equity perspective? We think the answers yes, and then you look at obviously a much more moderate growth profile. But I think it's a pro offitable one and it's one of these investors they're looking out six twelve, eighteen months with an Uber with you in a semi normalized environment obviously one

that has you know, just massive uncertainty abound. So as you talk to the companies and Dan, are they concerned at all about consumer behavior? May there may be some permanent changes to consumer behavior that will either work in the favor or maybe against the kind of the ride hailing business model in general. Yeah, in terms of the gig economy and ride handling, it's all headwards. I mean,

there's really no glimmer of positive in this environment. I think they're from a business model perspective, going to have to do things to get consumers comfortable with the sefety

of the vehicles. From a COVID perspective, and there are concerns, and I think there's one when you look at ride charns what the market opportunity looks like on the other side of this dark valley, And I think you're gonna have tend to sifteam scent of consumers that will not get into a ride sharing vehicle, let alone maybe a taxire or mass transportation. So that's definitely a big issue

here that needs to be navigated for these comings. But next week leaches the first step to getting some visibility here. And just real quick twenty seconds, how are the balance sheets right now? The balance sheets? We they'll get through the storm, and I have some more equity perspective. But they're gonna have to cut cost. I mean it's gonna be some you know, some pain ahead from a cost kind of perspective. Hey, Dan, thanks so much for joining us.

We always appreciate your perspective on all things technology. Dan

ives is a senior technology analys for web Bush Securities. Uh. You know, we had some good numbers out of Apple, and as Dan was suggesting here, the business model, uh, is pretty robust when you take a look at the Apple, when you take a look at the new products they have coming as well as the growth of their services business, which is Dan has said has really been kind of the bedrock for the company and the growth story going for or so Apple some solid results stock after trading

off initially kind of coming back so uh, investors kind of looking towards the other side of that right now. We're taking a look at the markets. Uh, you know, a red day in the markets here when you take a look at the SMP five thirty three decline that sell off we had as a pandemic really became apparent for investors. We clawed back almost half of that. The question is where do we go from here to help

us with that we welcome uh and Witty Bahuguna. Uh. She is a head of multi asset strategy at Columbia thread Needle Investments. Uh, and Witty, we thank you so much for joining us here. I think a lot of investors are just trying to get a handle on has the market bounced back too much? Given what we are seeing in terms of macro economic data, given what we're seeing in terms of eight earnings and lack of earnings forecast? How do you what do you make of the market

right here? And Witty Hi, Paul um, Yes, I think the rebound from the often we saw in March have been spectacular. Part of it understandable given the amount of monetary and physical support we have seen announced since the crisis began. But the speed of the rebound have been spectacular and does seem a bit ahead of fundamental given what lies ahead for the next forceable couple of quarters

at least. Paul, alright, so it's really interesting here again we had to these incredible gyrations down first and then up. How do you How should investors, to the extent they want to look to the other side of this pandemic,

how should they be positioning themselves right here. So I think if you're thinking twelve to eighteen months ahead, where we hopefully Paul have much clarity on UM, not just the not not just how they NOMY will respond, but whether we have some sort of vaccine or therapeutics to

help the economy open up substantially, not just gradually. I think twelve months to eighteen months ahead we should not see much difference in our positioning we I think we should see equities, big bonds and your standard as a allocation will make sense looking ahead look twelve to eighteen months. But in the short term, the bounce back has been, as you mentioned, spectacular and appears a bit ahead of

where the fundamentals are currently. So looking a few quarters ahead, I think it's probably best to be a little more cautiously positioned UM and think about how this economy opens up, and what do we see in terms of people coming back, consumers spending again, businesses opening up, and the production take off. And cautially yeah, exactly, because one of the things that I know is has many economists and investors concerned is

just the state of the labor market. This is a consumer driven economy and we've had boy over thirty million jobs lost just in the last five to six weeks, just stunning, stunning numbers. Um, how does that suggest to you that this economy will come back? How are you guys? What's your base case for how the economy uh will bottom? Where will bottom? And how will come back up? So that is the key question everyone's asking these days, and our base cases that we will not see a V

shaped rebound in the economy. Now, the markets may behave differently, Paul, and as you can see, they already are, but the economy will most likely see a protracted recovery. The numbers you mentioned are stunning. These are very expected though, because this is a policy induced shutdown of the economy. Um. So we are encouraging people not to work. But the recovery will be from from those levels of unemployment is never quite immediate. Companies go out of business, it takes

a time to restart. Employment takes time, some people decide to leave the labor force. All those dynamics makes us think that this will be a protracted, you shaped or um slower recovery then, UM, then then you then you would think if it was a simple exogenous shock. I think what would be really critical is to build people's confidence to come back to um to to to sports arenas, theaters, and and start enjoying life again, which drives a large part of the U S economy, and we expect that

will be a slow process. Now, what would completely change the dynamics is that if we have a sure um medical solution to all this, as you can see if pisotic leave, when we get some confidence that there will be a vaccine, there will be a heteropeutic drug that helps us fight even the even the virus if someone gets it. Those sort of medical developments can change the dynamic very quickly. But right now our expectations are that those are slower movie uh solutions and and likely we

are going to see it retracted. And I'm sorry I have to interrupt here. We have to go to Connecticut Governor Ned Lamont and Witty Bahuguna head a multi asset strategy, Columba thread Little thanks so much. Well, we're looking as we hear more and more from state governors around the country, where you're really coming to get us get a sense of the fiscal pressures put upon state and local municipal budgets.

Of question is what does that mean for the municipal bond investors that have been supporting uh, these entities to do that. We welcome Joe my sec He covers all things municipal bonds for Bloomberg Briefs. Joe, thanks so much for joining us again. So let's talk about this the I guess the stress that states are being put under the finances of these states and how much can the federal government actually help them out. Well, nice to be

with you, Mr Sweeney. Um, you know, it's uh that the federal government is so far providing help in the form of basically no borrowing from the Fed, but it's also now looking at possibly one trillion dollar package. This is going to be next uh you know aid package. Nancy Pelosi said she's heard that there are demands were up to a trillion dollars. So we'll see, um, you know.

Then you know in Congress they're not they're not meeting right now about it, and the states and municipalities are really uh in a spot they're they're looking forward to getting some of this money. Well, it's in interesting what we've seen, Joe, as you well know, is this virus is has not you know, been equal across the country.

Certain hotspots, whether it's on the coast or something like that, in states like New Jersey, Connecticut, Uh, New York certainly even California, you know, bearing a higher a brunt of this than some other states. How the securities how he missed a bond market kind of treated some of those high risk states. Uh, you know, it's it's uh, you know, the bond market right now is uh, it's it's it's

trying desperately to get back to normal. So we've seen sales new issue sales the last you know, three weeks or so, it's wee or four weeks. So we've we've seen people come to market. Um, we haven't seen uh, you know, ballout spreads. But you know, you talk about the states under pressure, you know, it's obviously you know, a good idea for for New Jersey not to come to market, you know, possibly right now, although it's as similarly enough, Illinois plans to come to market in a

couple of weeks. And another issue I wrote about today, Uh, the Metropolitan Transportation Authority is coming to market next week, which is sort of astounding because these you know, Illinois and the m T a h in addition to New York city, of course, have been sort of the faces of the pandemic so far. What kind of premium are they will they have to pay? Do you think to get back into the market given what's really changed for

their finances in their states? Wow? Okay, so Illinois. Uh, they are about four other basis points over the triple A benchmark in ten years now, so you know that's in the five maybe in the sixes, uh, which you know right now the triple A bench markets at one forty two, So that's what you're getting one of forty two tax exempt in ten years. Uh? Now are you going to get four hundred or five hundred bases points? I don't know. A lot could happen in two weeks,

but you know it's possible. M T A Uh, you know, obviously Les because M T A is higher rating. He's rated eight too with bestment grade by Booty's and uh, you know, it's it's it's amazing there's a credit where the subway ridership has dropped, so it's the cash is

has evaporated, and they've gone to the federal government. They've got to uh, you know, everyone you could think of asking for money, and uh, you know, it's just such a fixture in New York though that you know, it's I suspect it won't do, you know, as badly as perhaps Illinois. Interesting, I see that state unemployment funds also another area of risk here. They're you know, going broke from the flood of claims California, New York, Texas among states.

They're also seeking federal loans. How do you think that's going to play out. I think there will be no choice but for a Congress to make sure that those funds are topped up. Uh, it's just it's just it's an unfortunate squeeze. But this is what happens when you decided to shut down. I guess it's about of your economy and so well. See federal government to the rescue.

Joe my Sac, Editor Bloomberg Brief for Bloomberg News, giving us are everything we need to know about the miss bond market, and of course, as we hear from governors around the country. Ned Lamont of Connecticut we heard earlier today talking about the uh the deficit in the state of Connecticut for this fiscal year. We've heard about that

from Governor Cuomo as well. But we had some really tough results out of the oil giants Chevron and Exxon Mobile here not surprising, I guess with what we've seen the decline in global oil prices as supplying to and dynamics just really fall apart for global crude. To help us walk us through the details, who welcome our good friend Fernando Valier, oil and gas analysts for Bloomberg Intelligence. Fernando,

thank you so much for joining us. Give us kind of the key takeaways at thirty foot takeaways you have from these two giants Chevron and ex On Mobile and Paul, great to be here. I think you know. With excell And it's really just a tight rope. They have to balance uh their balance shoot at the same time as not cutting too much spending because their portfolio is in dire in dire need of a revamping. And that's what

we saw from the call. Even with Darren Woods, they can't really go afford to cut too much because if they do, they just jeopardize their ability to sustain the dividend into the second The other half of this, the rest of the future um. With Chevron, they're in a

much more comfortable position. They have a good portfolio, they had a lot of growth that came through over the past several years, and they have the best balance shoot in the business, so they can afford to cut a lot of their capex and still sustain that dividend even due this downturn. So it's really a tale to um what happened ten years ago, paying out now where Chevron really did their homework in the prior decade, and and that they're sitting pretty relative to all of their peers.

So for x On Mobile, let's go back to that dividend issue. We're seeing lots of companies across many sectors, you know, reducing or eliminating their dividend because recognizing that this is really going to be a threat to the liquidity and to their capital. What's the feeling at x On there They seem pretty adamant about not cutting their dividend. Well, I'd actually say from the call it was the first time to even entertained the idea that a dividend cut

could eventually happen if this lasts for a long time. Uh, Darren Wood's the CEO, painted a fairly optimistic picture about our recovery. We don't know that that materializes as rosy as he's painting it. But you know, after a shell cut their dividend UH sixty seven per sent first time since World War Two. It's really showed that the industry has to rebase to a new future. And and we really don't know how consumption is going to come back.

We've seen in China that there's been more gasoline consumption because people are avoiding public transportation. UM. But on the side of trade and certainly on the side of airlines, that domain is going to be subdued for a very long time. And that all impacts their ability to to to recover their profits. And essentially, UH that maintained that capital structure that was built for an oil price at

least double what we're seeing currently. So for an, had the big oil companies received any federal support um from the fiscal stimulus plans be seen, uh not so far, not the large cap ones and UH and really there's very limited room for them to to outwardly support uh these companies. The oversupply is global and we're already seeing a response to speak at Dealtec plus cuts. Um. Okay, Fernando, sorry,

I have to interrupt, Fernando. We're going to go to Governer Andrew Cuomo, Fernando Vai, Oil and Gas Animal from Bloomberg Intelligence. We thank you so much for talking with us. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa abram Woyit's I'm on Twitter at Lisa abram Woyds one Before the podcast,

you can always catch us worldwide. I'm Bloomberg Radio