Draft Episode for May 26, 2021

and of course, on the Bloomberg Terminal. So this Morning with Francie Lacuai featured one of the great market calls of all time, David mal Past years ago at bear Stearns screaming about the end of the end of deflation in Japan. It was one of the truly great calls of the early part of the last decade. He is now President of the World Bank. David mel Past joins us this morning. David, you have always been one to say, let markets act. The market for menu factured vaccines is

out there. Is it a legitimate market or is it held up now by politics? Is so many nations are desperate for vaccination. Hi, Tom, they are desperate, and I think it's really important that the countries that have excess free up those excess so they can go to countries which have vaccination programs. It's important to do that. Matching between the halves and the ones that are ready to

actually put shots in arms. We have World Bank has will have fifty countries by mid year that are ready with with the personnel standing by, ready to put shots in arms if the world will only let the vaccines flow. So it's not really a market. It's controlled a lot by the various governments and the options that they took out. That was good because it got supply going, but now there's a chance to really distribute the supply worldwide. Who is your most important phone call to Washington or to

London to get this done. I've talked with the US administration. There's several different parts of the administration. There's UH, there's the the NSC, and the there's the HHS, the Health and Human Services Department, and so it's I think there's there's got to be a consensus within the US that there is sufficient supply and therefore it can be released. And I emphasize to countries that have programs in place.

You saw the New York Times article I guess yesterday which described the waste that's going on for some of the distribution outlets. They go to countries that can't use it, and then the vaccines are burned because they've they've expired, So we want to avoid that and actually get people

vaccinated that have systems in place. I repeat. The World Bank has fifty programs UH will will have uh nearly four billion dollars more than four billion dollars ready to pay if someone needs money to facilitate and importantly, the money can go to actual deployment within countries so that they can they can vaccinate we hope hundreds of millions of people. Meanwhile, the US has actually started to release much more vaccine to other nations that are in need recently.

How much has a distribution. The increased distribution from the US and other companies other countries forestalled the emerging markets crisis the World Bank has been seeing brewing. It's important to note what the delivery schedules for those vaccines are and to know if they're going into countries that are prepared to receive the vaccines and actually and actually UH deploy them, you know, put shots in arms. UH. And one of the one of the big challenges in the

developing countries really worldwide is the hesitancy. Some people don't want to don't want to be vaccinated, So one of the things we're doing in in our in client countries is have a communications effort by the country to encourage people to be vaccinated. That's going to say of lives UH and it also brings the economies back on stream. So it's important to be vaccinated and to have a

program of vaccination in these countries. I don't know where the us UH supplies are going, and I think you know, I've called for much greater transparency in terms of the supply we have. The World Bank has put up a major website that shows all of our program documents. You know, it takes a lot of preparation for countries to actually

show they can vaccinate. So each of the documents is you know, as much as fifty pages describing who will do the vaccinations, what the what the system within each country is in order to do it fairly, and how how they'll be paid for, how the costs will be paid for. So I've encouraged others to do that to the transparency is important, David. This is a sensitive question.

There's a question of which vaccine which countries actually receive, and it comes as independent studies show that, for example, Chinese vaccines have not been as efficacious as those created by Visor and MODERNA. Is the World Bank placing an emphasis on the type of vaccine, the brand of vaccine that is received and given it to specific countries, or is it any vaccine treated equally. They need to be w h O approved or approved by a by a a regulatory agency the US, Europe, Japan, UH and there's

only a few that have been approved. But but one thing I emphasize is most of the vaccines are better than not being vaccinated, and so that's important. Are initially in our in our in our January and February programs, UH, it was it was mostly Visor and MODERNA and we're still we're still using that. But it's very important that Astra Zeneca, that Johnson and Johnson, that the Chinese vaccine, even which has now been approved at least initially by

w h O, are available and when ctly. Our programs allow different vaccines to be distributed in different parts of a country. Rural areas may want a different vaccine than hospitals and made your cities, and we've described that in our programs. That's a really important part of getting the job done properly. So we're able to accept and use all of those that I mentioned. Uh, and there will

be more, which is which is great. Uh. And we can also acquire or receive vaccines through kovacs the International Consortium, if it has supplied. That's been one of the challenges and that was discussed in the New York Times article yesterday. David. That's an important distinction. And as always we appreciate your time. You're often generous with it, So thank you, David Malpas that the World Bank President how Would Walked, joined us

now compaty fun Sea of growth equities. Howard, what an important transition point for this economy is You've pointed out pink growth is here potentially and we're about to make this transition from recovery to expansion. How it is a market participant? How do you think about that dynamic? Hevin Polton? Is it? Well, first of all, it's been I think you have to say that we can argue about the amount of stimulus, what the Feds done and all the spending,

but it's been very successful. The economy is rip roaring, and this is the quarter where we will transition from recovery to expansion, and we don't know the exact data on then maybe it's today. Maybe we expansion has just begun this morning. I don't know, but uh, the outlook remains sterling. In terms of growth. You're looking at six

percent plus growth this year. We haven't seen that in this country since after last year we had negative three and a half percent growth, the worst growth since nine and next year we're looking for a slowdown to aout four percent. We haven't even had that for twenty years. And so the stimulus and the reopening in the economy is providing a tremendous lift. And I do think you were talking about the bank lending earlier. I do think you're going to see the demand for lawns pick up.

It has to, given what's going on in the general economy. Howard, were you talk about the rocky road ahead. We had a lovely move here coming out of this expansion, and you are enthusiastic, But you talk about a grind and you talk about a rocky tape. What I n if

I'm enjoying a rocky tape day to day? Well, I would first of all just make the point that typically in the second year after you get the big advance in the market coming off the bottom, that second year usually is much more muted, you know, think returns in the sort of eight to twelve percent range, not range. And if you went back and compared the current trajectory of the market to what happened coming out of the oh nine bottom, we've been following that path very closely.

And if we do continue to follow that path or that script, then we will have a hiccup or two in the next six months, because in two thousand and ten, after a surging market in two thousand and nine, that's exactly what happened. Now that market is still close higher in two thousand and ten, and I think it will be nicely higher this year. Uh, particularly so because I think even more so than in two thousand and ten.

Earnings outlook is is truly uh remarkable, to say the least, because the while the consensus earnings expectations would be for growth of about thirty this year and next year, so two dollars on the SMP this year, two oh five, two oh six next year. Tom if you look at the first quarter earnings that have been reported, the annualized

runway on those is around two hundred dollars. So that would suggest that the consensus earnings numbers for both this year and next year are materially lower that can be substantially higher, and so I do think that, Yeah, I think we're gonna have a rocky tape. We've seen that a little bit. Rates are are and should be grinding higher in tangent with an economy this strong and with some heightened inflationary fears. And it's going to be that

grinding higher interest rates that creates the rocky tape. But beyond that, the outlook at mean is very positive. I would not be too cute in trying to trade this market. It's too early to turn your back on this school market.

Just real quick here, I'm wondering what is priced in, certainly to US equities at this point, given the fact that Janie Henderson just upgraded their forecast for global dividend payments to one point three six trillion dollars this year, the third highest on record, Well, there's a lot priced in, and and so you're talking if you looked at those consensus numbers and markets, you know, twenty three or so times for twelve month earnings historically, you know, for example,

in two thousand nineteen, when rates were in the low two percent range, on the tenure, you had the marketed around sixteen and a half times fuller learnings, So there's a pretty big gap there. And uh, we should be returning to an environment over the next six to twelve months where that tenure yield us back in that two and a quarter to two and a half percent range. That's that's my opinion. And so if you go back to that range, that should call, you know, maybe for

some pressure on equity prices. But but I'll have to go back to my comment on earnings. If we earned over two hundred dollars this year and to maybe even to thirty five next year. Uh, and interest rates are moving higher, who's gonna want to own anything but stocks? You know, bonds that are going to be negative returns. The last twelve months, bonds went nowhere bonsibly negative stocks are really the only game in town. And so I

think that people have to bear that in mind. We could be getting a lot of money coming out of both cash where a lot of money went during the last twelve months, both cash as well as fixed income in order to fuel continue games and are a lot of money still that how we got a lady that how it will that abuty fund seat of growth, Sancuty. What we're doing economics is we have death siles ten

of the American public, say is one estimation. Jared Bernstein is expert at the analysis, the breaking apart, the slicing dicing of those death siles, those one tenths of the American public. He is with the White House Council of Economic Advisors and has been a lead advisor to the President of the United States for over a decade. Dr Bernstein, thank you so much for joining us today. Do you have an understanding now about which death siles have been

advantaged by this historic fiscal stimulus? Who's benefited? Yeah, I know, it's a great question. One of the things you see when the job market tightens up, and this has been a theme of my work for decades, is that those in the bottom half we be the bottom I've deciles, if you want to stick to that metric, um UH benefit disproportionately. When the job market tightens up. You see

the black unemployment rate come down faster. In those situations, you see the wages of low wage workers get a bigger pop. They're just a lot more sensitive to the kinds of bargaining power benefits that come from a full employment economy, so heading back the full employment as quickly as possible is one of the goals of our of our fiscal policy, and the American Rescue Plan is clearly

helping to pull the recovery forward. Not unlike comments I've heard on your show this very morning, the kind of outcomes that you'd expect maybe later on the psycho charity, you starting to see them develop a little bit earlier than anticipated. I'm sorry, what were you asking about in terms of the outcomes you'd expect in the labor market later on in the cycle, which is when you really really start to erode some of the slack. Are you starting to see some of those symptoms earlier in the cycle.

We're starting to see them now, as as to say several years down the line. I think you're seeing a few, but it's more anecdotal and scattered. It really hasn't shown up in the data yet. If you look at the wage data adjusted for compositional effects, you see some promising hints here and there, and you certainly hear anecdotal wage offers that are getting a bump. I do think lower wage workers have some bargaining power based on these dynamics

that we've been talking about. But remember, we still have a highly elevated unemployment rate north of six percent. For blacks, the unemployment rate is nine point seven percent, So we still have a long way to go. But yeah, we're we're seeing some hints in that regard, and I like the way you teed it up, John, which is eroding slack. That's precisely that that's just so important to middle and low wage workers at the moment. There's another dynamic that

has become very political Charitis. I'm sure you'll appreciate more than twenty Republican states, the governors have basically gotten rid of the extra additional unemployed and insurance. What do you think the consequence of that decision will be in the day, Sat, that would expect to see in the coming month, coming complements deeper into sum up. Yeah, it's it's it's a it's a good question. And and here's you know, one of the natural experiments that economists love to tap um.

And we're we're definitely concerned about taking off enhanced unemployment benefits too soon. Every state's going to act on its own, and obviously, economic conditions differ across states. The President has leaned into this pretty firmly, saying that, you know, people who are offered a suitable, safe job need to take it. That's part of the rules of the unemployment insurance system.

But this system has been so important to helping workers, not just the standard based system, but also the added enhanced benefits for workers who are less connected to unemployment because maybe they're gig workers, are self employed, and so it's really helped people get through the recovery, gets i'm sorry, get through the crisis to the other side. And along with the distribution of the vaccine, it's been one of the more important parts, you know, shots and arms, checks

and pockets. That's been part of the formula. Jared, do you see the enhanced unemployment benefits as being a template or serving as a template going forward for some sort of universal basic income, especially if the participation rate continues to fall as it has over recent decades. You know, it's a fair question. I would probably say the direct impact payments are the checks are closer to that than

the UI the unemployment insurance payments. I mean, unemployment insurance is just that it's a specific insurance program, a safety net for people who lose their jobs. And it's one that those course has been in place for many, many decades. It's proved to be an extremely important countercyclical force. I do think the system needs work, and the administration is

very committed to doing that. If you listen to the President's discussion of making sure that the next time we hit it down trip we hit it with the with with the UI system, that's that's more ready for that. That that I think is an important part of our kind of policy infrastructure, that that that we're we're committed

to working on dr pruting. I want you to speak to a small business out there that is petrified of what they see from fancy, big corporations of fifteen dollars an hour, seventeen dollars an hour and up and up wages. I want you to study David Card and the wonderful Alan Krueger and the arch fear that if we raise those low minimum wages, all the other wages come up with it. What's your evidence on that study? Yeah, So this is a very consistent finding around minimum wage increases.

So that if if the minimum wage goes up, many studies have found that there are spillover effects that give a bump to workers right above that minimum wage level. Again, as I mentioned earlier, we are we are seeing increases in low wage offers, uh. And I think that's really important to people who are coming back into the labor market.

Think of it as a price signal. You know, I was thinking of you the other day, Tom, because I was sort of thinking of this in my head, and I'm what I thought was kind of a Keenian way, which was sort of like Cane's meets Highak. You know, the idea that the stimulus both on the fiscal and monetary side, really relief on the fiscal and monetary side, and you know, the the uh, the monetary policy uh also also helping to move the recovery forward. You've got

price signals. You've got price signals. You've got price signals that are that are that are pulling workers back into the labor force. You've got the vaccine out there, fifty percent of adults vaccinated, way ahead of our schedule. And I think those are all very promising developments. I mean, he does this right at the end of the interview, John Ferroll. I mean, Dr Burnstein has set this up huge. You're gonna come back. Dr Burnstein. And I don't mean

on jobs today. We love day have you with John on jobs? Say, after the report, you've got to come back and we've got to talk about the information that's out there that we can't see. We gotta go on the edge of Joe Stigler and you know the others of the information. Just because he said he was thinking of you want him back, I only wanted he was thinking, Jared, do you look at the dal Jones industrial average? Yeah, I've heard about that. When you're in the Here's the thing.

When you're in the White House, you're you're very careful not to react every blip in any index, you know, minute to minute or day to day. Much more heads down, keep recovery going, deliver the goods to the middle class. I think that that's a very diplomatic accounts of that. Yeah, it's always think, always going to get you on the show. Thank you, sir, besting that house trying to us right now, and I am going to rip up the script here

and I can do that. Of course with the gentleman from the Dakota is Kevin Kramer is with orth Dakota, I've always got to keep my Dakota is careful here, gonna be careful what I do. Senator Kramer, I want to stop for a moment for you to speak of the symbolism of your Republican Party and the path from John Warner dying today at ninety four over to the modern Republican party you have identified. I love the idea that I think, like Lincoln, you lost your first three elections.

Tell me how your GOP keeps the Republicans like John Warner and frankly, Senator Deportment of Ohio in the full how do you keep these liberal Republicans in the party? Well, no, thanks for the question. Actually, you know, pragmatism works, and I think that one of the things that Donald Trump brought to the Republican parties he brought the working class

Americans to the Republican Party. I think at the end of his four years, one of the things we lost perhaps are not so much moderates as as probably that the polite uh, you know, moderates if you will, um

certainly the suburban suburban women for example. All of that said, I think that we we take the Trump mantra, and that is to say, the more um less globalist but on America first, globalism, a populism, conservatism, and apply it in a gentler way, not not not shyly, by the way, but I think we have the right governing philosophy to

be a majority party. And I just think that. And and the other thing is this, quite honestly, Joe Biden is going to help us immensely if we can get out of our own way and keep highlighting the you know, the Biden agenda, which includes everything from destroying American energy

while building up Iran and in Saudi Arabia and Russian energy. Uh, if we talk about, you know, putting so much money into the marketplace, um that we create hyper inflation, and all the other stuff, the border crisis, what's going on in the Middle East, his lack of attention to the really big issues. You know, there's nothing like a common

opponent to help unite people. But I do think our own message, to your point, needs to be the Trump message delivered in a way that people are listening, and the lessons learned of losing the presidency, losing the House, losing the Senate. Granted, these are by all small numbers. In two thousand twenty two, beccons, how do you coalesced the GOP on social issues so removed from the core Trump constituency, and I might say social issues that Senator

Warner of Virginia lead with through the seventies and the eighties. Yeah. So I think there's a couple of things. On one is we're seeing a trend that actually does benefit us, a demographic trend, and that is the Hispanic Americans are coming for our way, and they came more our way under Donald Trump. They became our our way because of Donald Trump because they identified more as a working class Americans than they do as Hispanic Americans, which is really

the heart of the American dream. I think we take that same social message and social message that is job creation and and pro family. You don't have to apologize for being a family. Have to certainly understand the culture you live in and and and speak to it. But um, I think that we need, you know, we need to get back in many cases to our roots, but also remembering that the working class American, the forgotten man and woman, is still out there and they're still looking for a voice.

And Donald Trump was that voice. And I think we can continue to give, you know, give that voice, but at the same time recognizing that the world's a shrinking place. And and we also have to remind people that are all of this that we cherish so much depends on a really strong military. And we have to remind people that we didn't used to have a near peerle adversary in China, but now we do. Um. You know, the Soviet Union broke up, but in many respects is coming

back in the person. Senator. There's a question of giving a voice to the working class Americans, and there's also a question of creating the right economic backdrop for them. I believe a coalition of Republicans are about to propose count to propose a one trillion dollar plan to present Biden's infrastructure spending initiative. Do you have a sense of what's in it and whether you would sign on to this? Sure? Great, great question. Um, I do have some sense of it,

and I likely would sign on to it. In fact, I think I've always thought we could go bigger than than we've gone as Republicans while maintaining our philosophy and

our integrity, and that is a couple of things. So I actually am the ranking Republican of the Transportation Infrastructure Subcommittee, and we're going to mark up our surface transportation bill today, and it's it's been negotiated between the four corners that include Tom Carper, Shelley Moore, Capital, Ben Cardon, and myself, and and that's going to be a good step in the right direction. We can go bigger on that simply

by adding another year or two to the authorization. One of the things that I'd like to see is I'd like to see US expand infrastructure. I know Republicans say let's keep it to the you know, the hard concrete issues, and I'm not against that, but I think when you take energy as an example, pipe lines, transmission lines. I had a long visit just Friday with Jennifer Granholme in the Secretary of Energy and said, the beautiful thing about

energy infrastructure is it is infrastructure. It does move commerce to the marketplace, it does create really high paining jobs, it does have a national security implication to it, and it doesn't require any spending on the part of the federal taxpayer. So I think you can get to a trillion dollars by having some simple permitting and regulatory reforms that maintain the integrity of our environmental excellence while at the same time unleashing the private sector investment. And here's

the other thing, you guys. By putting more money in investment in American energy rather than Iranian and Russian energy, you actually help the climate in the environment because we produce even fossil fuels with a much lower car footprint in other countries do Senator, what's the distinction between going even bigger in the proposal that you're talking about and the one point seven trillion dollar the dollars plan that President Biden is talking about, especially when you talk about

high inflation rates. Why is the plan that you're proposing not gonnagonnite inflation or is the other one? You say, well, yeah, because ours doesn't involve more federal spending or more borrowing or you know, more printing of money. To the degree we can repurpose the fifty billions to a trillion dollars it's already been appropriated but won't be spent by the end of this fiscal year. That's not new taxes, that's

not new printing. So that actually puts that that liquidity if you will, to work in the marketplace in a way that creates jobs and creates an asset that at the end has a value and has you know, the movement of goods and services throughout the country. So I actually think that we do just the opposite by by going bigger, as long as we're not printing new money

or borrowing more money. Senator, the only reason we had you on is Lisa A. Bramowitz puts down the German skillet at Crolls Diner like nobody in Fargo, North Dakota. We're not going to do this in February, but we need a surveyor's road trips so Lisa can remember her years in Fargo, North Dakota. I'm thinking pheasant hunting, and you know, maybe in the autumn September, October, can we

get that done. We can absolutely get that done. Lisa probably knows the perfect guide and and if she doesn't, I'll find the best land you can go hunting on um. But so so Carol's Kitchen truly one of the great institutions in North Dakota, and they know how to make homemade German food. They do. Senator, thank you so much for joining us today. He is a Senator from North Dakota. Kevin Kramer here on the day of the death of the senator from Virginia. Truly, he was a Senator from Virginia.

John Warner right now over to fix income Marca. John was looking forward to Kathy Jones or Schwab joining us today. Kathy worked from home, and we've just got to understand right now that it is too trophy taking and the pandemic pianos. There is the Kathy Jones piano shot, and there's a Stephen King over at HSBC piano shot. And for those of you on radio, all you need to know is MS Jones is fabulous and piano and she is a gorgeous is a Steinway, Cathy, You've got behind

you nine thirteen Steinway Major Jermy. Okay, So that can take us, John back to the Dow Jones industrial average and where it was a hundred twenty five years ago. Cathy, explain why yields are lower? Well, I think a couple of things. We've seen some of the commodity prices come off the boil recently. We've seen um some of the indicators that were just skyrock things start to roll over just a little bit. You know, the markets moved up over hundred basis points from the lows last summer so

I think this is a consolidation. And frankly, the talk about tapering canny interpreted as bullish for bonds. So if you think back to two thousand fourteen, everybody remembers a taper tantrum when nels shot up on talking about QUI ending, but when q we actually ended, when they actually papered yields. Well, so if you look at it as the first step towards tightening, you know, it isn't surprising to me that

yields have come off a little bit. Can you imagine a scenario where this continues, then, Kathy, would that be your base case that the removal of QUI will lead to lower yields? No, I think we put q V aside. Frankly, I think on the margin it's somewhat there should allow yields to rise, But I think the more important driver is where is the economy going, where's inflation going? And the big difference between now and say after the financial crisis is we have huge fiscal stimulus and we didn't

have that the last time around. We've been much quicker to bounce back and close that output gap. So I think that yields do continue to move higher from here, but I'm not sure that it's driven by que or anything else other than the economy and inflation and inflation expectations continuing to run pretty strong within the bright town of any given yield right now, Kathy, when you look at inflation expectations real yields, is it real yields that needs to adjust a little bit more And what kind

of adjustment you anticipating? Yeah, that's the kind under right now. I'm not really sure that why really yields are as low as they are. Um Partly, I think inflation expectations have run up pretty rapidly and anticipation of more inflation. But I do think real yields have to come back. So that's one reason we expect you'lds to go back up on the tenure to two two and a half

percent potentially. I think, really you'lls have to adjust if we're going to have real growth in the economy, which is which is what we have, Kathy, how high can benchmark treasury yields go before disrupting financial markets enough to create this feedback loop to send people back to safe havens.

Great question. I'm not a dent sure that I have the right answer to that, But I think what we need is what we would probably need to see is kind of that um not only to see you two and a half percentage on the tenure, but start to see the value of the curve move a bit more. It started to move of just a little bit um, but you start to get the three year, five year,

et cetera moving up. Then the overall cost of capital starts to don't really higher because then the refinancing that's taking place five years out on the curve starts to get more expensive. Cathy, are you going more into risk your credit with the hope and the expectation that the Federal Reserve will backstop markets enough to allow these credits to continue to pay out bigger coupons giving you the

returns regardless of deteriorating credit quality. Should that happen, now, I know it's again a comemdrum in the high yield market. This is a great environment for high yield because you have all those fiscus stimulus, you have pretty easy monetary policy, have the backstop from the Fed, which I think is

winding its way down, and you have some upgrades. Right as the economy has improved and seeing some upgrades The problem is high yields can a price for perfection to take totally like trickle cs, and so we wouldn't be really aggressive in that part of the credit market because I think at the stage of the game, you know, we'll adjust to more greater reality that some of these

companies aren't that aren't that solid, Kathy. What will be the market reaction is the real yield migrates to zero give us a I mean, I think Schwab is such a expanse of what money flow will do. How will flows in fixed income change is we're shocked by a

move to zero percent inflation adjusted yield. Well, you know, if I just look at where our investors are, particularly our retail clients, but even the more institutional clients, they're hoping for higher yields, and they're certainly hoping for higher real yields to extenduration. So I would expect that as we see yields to move up, if we're right about that, we'll start to see more investor flows into longer David bonds.

I haven't seen much of that recently because they're still pretty low, but I think that as fields move up, will definitely see it blows in that direction. You know, people are nervous enough about risky assets. If they want something, talk set it. If you've got positive really gields and bonds um, definitely, I think move move in that direction. Canthy always get ahead from you. Thank you, Canthy Jones that to have sense of a financial research chief fixed

account strategies. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg