Surveillance: Bernstein & Dudley on U.S. Stimulus Outlook

Barely describes his public service to liberals and conservatives. He is one of the liberal economists that conservatives are forced to read. They've been doing that for decades with his work in Washington, and he joins us now representing, of course, the Biden administration. Jared, can you apply stimulus in a narrow enough way to help those so beleaguered in this economy?

Sure we can. In fact, much of what's in the American rescue plan is targeted at those at the bottom leg of this K shaped recovery, meaning that this is a recovery where many folks never missed a paycheck did. We're able to work from home and so on, while so many others were stuck bearing the brunt of the pandemic and the economic crisis. For example, we expand a

child tax credit, make it fully refundable. According to a Columbia Poverty analysis group, this reduces child poverty by fifty percent. That's some pretty top shelf targeting from my perspective. We have a history here of decades of what I'm gonna

call lockey in individualism. John Taylor of Stanford, clearly a conservative economist, shows the value Jared Bernstein of automatic stabilizers that benefit all of us, where the halves are benefited by the stabilization of they have not explained in this natural disaster how they have us will benefit by stimulus, for they have nots Yeah, no, I think first of all, one thing to recognize is that our automatic stabilizers often

shut off too quickly. So one of the things we ought to do, and that's a problem that we've had. Is one of the reasons why the American rescue plan is so urgent, because we've had these kinds of air pockets created by the kind of wait and see what happens next, so we get behind the curve. What we need to do is make sure our automatic stabilizers are kicking in with the alacrity that we need them. To

that's embedded in this plan. Yeah. Look, this is a matter of uh, you know, if GDP is a spectator sport for half the economy, Uh, it's simply not going to achieve the goals of the Biden Harris administration. So we have to start building the policy architecture the kind of connective tissue that reconnects GDP growth to the prosperity of all within a special sensitivity to racial equity. And that's in this plan. It's also the more broad building

back Better plan that's coming later. So alright, let's get to those two issues into a distinction. Here. This eight and then the stimulus Is this just the eight package it package and the stimulus packages coming lights out. I definitely think of this much more in terms of relief, at least initially than stimulus and the sense of there are a lot of people who can't go back to work untold. Uh, you know, it's safe to go back in the water. So one of the key parts, of

course of the rescue plan. I heard you guys talking about the European Union. They've had great trouble with us, and it's reflected in their economy, is to not only control the virus, but producing distribute the vaccine in a way that is obviously much more driven by science, much more organized, has a much clear federal presidents than was

heretofore the case. The connection, as I'm sure your team well knows, between controlling the virus, distributing the vaccine, and finally launching a robust recovery is extremely tight, and we cannot drop the ball on that. That's where President Biden is coming from. That's why the urgency of acting now is so acute for him. So let's talk relief to stimulus. We understand the relief pomp. We've talked about this bill many times. What does the stimulus bill down the road

look like? Jared, You know, I guess I wouldn't think of it so much as a stimulus bill. I think down the road, with the help of the rescue Plan, the economy should be moving uh in direction we needed to. I think again, this gets to the point I was making a second ago. It's not enough to have GDP growing a trend. We have to make sure that it's reaching people who have heretofore been left behind. So now

we're talking about more structural changes to the economy. Standing up a childcare sector that's really never existed in this country, to give parents a chance to get into the job market if that's what they want to do. Uh. Finally taking a real stab at clean energy, making sure that we deal with the kind of racial inequities that have plagued this economy so long, in the air of housing and criminal justice, for example. That's the kind of broader,

more structural change. I think you have to distinguish between cyclical and structural, and I think the latter is more of a structural, uh approach. So in order to get there, what's more important for the economic recovery FO checks to each family or local and state aid. You know, this is just we just can't do either are in this case.

And I think that's a good example, because you know, we are in a set of discussions with Republicans who in many cases very much share the urgency that we do, but sort of want to take a different route to get there. And I think the key to the rescue plan, as as the President has articulated, is that it really is calibrated to meet all the various different needs that we face right now. Families are struggling, they need those checks, which By the way, we just got polling data clocking

in about seventy cent approval. But the state and local sector has to get help to reopen schools and to finally distribute the distribute the vaccine, control the virus and

put COVID nineteen behind us. Jared, how important is it to push as much as possible into this bill due to the lack of consensus, the lack of any kind of agreement between Republicans and Democrats on the Hill to get some of those structural changes through that you're talking about, especially if there isn't the onus on getting economic growth. You know, I I gotta say, I think that the bipartisan support for UH, this kind of UH, this kind of relief is actually much broader than you might think.

Now there's the Hill. That's one thing, and I get what you're saying, But in fact, again these polling results show that something like two thirds of the American people support UH, the president's approach, with the majority of Republicans. But it's also if you look at the Business Roundtable, the Chamber of Commerce folks you have on your show, they support this plan. If you look at Republican mayors

across the Land. They support this plan. Trump's former chief economist, Kevin Hassett, Glenn Hubbard, Bush's former chief economists, they support the plan. So it's it's a much broader sense of the urgency of the relief. And I think what we're arguing about in Washington are a set of details that you know, they're important to policy wanks like me and you, but for the American people, Uh, they just need to get get relief out there, you know, as soon as

as soon as possible. JAREDA don't mean to be flipped about it, but you'd expect the approval writing for checks from the government going out to individuals to be high anyway, wouldn't you. Yeah, I mean I think I think that that doesn't mean it's a bad thing. In other words, this is a time when I think we really have to look at the kinds of short falls Americans are facing. You know, these checks have gotten a lot of flak.

If you look at a family with seventy five thousand dollars, for example, many of these folks have savings or savings raids. This is not well known. I looked at this the other day. If you look at people who have zero or near zero savings raids, you get pretty quickly up to income levels around even higher. Now, many of these folks are engaged in mortgage moratoria or rent a uh temporary not rent moratoria. That means that they are accumulating

significant debt. At some point when these moratoria and UH and and forbearance on mortgages uh and these families are gonna face massive debts. So the idea that some of this uh, some of some of these direct payments are saved and not spent initially is actually a feature, not a bug. What we've seen in earlier round is that they're initially saved and then when these families hit an air pocket, there's there. They're spent. And there are middle

class families who are struggling here. Jared, one final question. You and I have known each other for years. I've always asked this question of people. When a new president is minted, a president has you into the oval office or around a table. He's sitting on the couch. And there is a way any given president takes in economic data, economic advice, economic perspective. What is the Biden method in the oval office? It's a great question. He sits in

a chair, we sit on a couch. And what he does is he asks us our economic advice, and he absorbs it through what I think of as kind of a political political economy filter. That is, he's he's not looking to me to give him political advice. Once when I did so, he reminded me that I couldn't be elected dog catcher. I mean he did it in a

nice way. Um, so he's very Joe Biden has has just really sharp political antenna, and you know, he knows what he knows, he knows he doesn't know, so he comes to us for political advice and then he thinks through the political machinations to get to the economic place that meets his vision. Chad, final question from me, and I've sort of got to talk about this. Do you think seventy five dollars for a family isn't enough in America?

You know, I think it's hard to say a blanket statement like that, but I can tell you this, there are lots of families with that income level who have struggled to make ends meet, to keep roofs over their head, to meet not only their basic needs, but to meet their aspirations to send their kids to college. To pay for affordable childcare. And as you know, it's not just the level, it's the derivatives. So you know, families who are at that level and they're stuck at that level

even though they're working hard. The economy is increasingly productive. They see the stock market going up, they see wealth accumulation. You know, we know that the bottom half of families have almost zero in terms of equity in the streets. Just to jump here, because we only have about a couple of minutes, and I need to get this follow up in as a family growing up, there years where we had folest than that. So believe me, I understand

what you're talking about here. But this goes beyond pandemic relief. You're talking about a real ideological shift in the role of government. And if you want bipartisan agreement, Dan and

d C. That's a big oscar, isn't it, Jared? I mean, it isn't it isn't I mean I I think that the role of government has to be to provide opportunities for not just low but for middle and upper middle class families to get ahead, for them to reap some of the benefits of the productivity that they're helping to generate, they're helping to bake a bigger, bigger pie. They should get bigger slices, you know, whatever their income level is.

But the problem is that those bigger slices have only been going to the narrow top top one, top five per cent. So I think the key here is partially the levels. And we talked about that family is being able to meet their aspirations, but the idea that if you're playing by the rules, you ought to get ahead.

And again, I think that policy architecture, that connective tissue has been torn over the years by policies that's been very insensitive to those in the middle class and down, and we're trying to We're gonna try to fix that, Jod. I look forward to continue in the conversation with you. We appreciate times. Thank you, Jap besting that of the White House Council of Economic Advices joining us now from

Jared Bernstein and the Biden administration. The academic William Dudley joins us, of course, his work at Golden Sacks for years and then at the New York Fed. We're thrilled

that Bill Dudley could join us. Writing for Bloomberg opinion today, Bill Dudley, I I look at where we are in the greater theme of things, and there's going to be a point now, maybe a point in the future, where the day to day work of the FED to support the economy is over and they begin to pull away from the monthly fundings that they're doing, they pull away from the jargon in the speeches of providing ultra accommodation.

Are we close to that moment? No, the FED basically has told us that sure, police said is premature to be talking about even beginning to, you know, wind down the rate of acid purchases. So the FED is not probably can do anything different at least until late fall early next year. Well, that may be the policy as well. But then we go FED meeting to FED meeting. You've

been in the crucible to this, Bill Dudley. Little sentences are given out in speeches from say Cleveland, from St. Kansas City, from San Francisco, or from the pressures you faced in New York. Are we gonna see theory come out in the speeches of federal officers in the coming months. Well, it really depends on you know, how strong and the

rebound in the economy is. I mean, what we're hoping is people get vaccinated, and once people get vaccinated, social distancing can be relaxed, the e commy can be reopened. And when that happens, the economy should accelerate pretty sharply because you're gonna have a big increase in demand and uh in the leisure and hospitality area in particular. People are gonna go to movies, they're gonna restaurants, are gonna travel.

So that could be a pretty strong second half of the year if things go well, and I think at that point then people will start at the FED will start to you know, begin to think about it. Okay, how do we start to uh pull pull back? But the FED doesn't want to pull back prematurely because there's still nine million people that have lost their jobs since the pandemic started, and so they don't want to pull back too early because they did. If they do, Bonnils

go up, stock Mark goes down. That titans financial conditions and that makes it harder for the FED to achieve its objectives as we get closer to running the economy. Hot Bell, there's a question of financial stability risks and how you measure it in a time of shadow banking, at a time of robin hood traders, at a time of other structural changes to the market. You put out a column about this. Do you think the FED is gauging systemic risk correctly as they look forward to and

perhaps hotter economy. Well, I think the problem that they have is that at some point they are going to have to turn the dial back away from you know, significant accommodation. And when they touch that dial, when they're perceived too about to touch that dial, markets are gonna react. So I think it's gonna be very difficult for the FED to avoid a you know, a bond taper tantrum. Uh. You know, you're either all in or you're not. And at some point the Fed is not gonna be all in.

And when that happens, markets are going to react. And some of the risks that you put out there in this column that you wrote this morning for Bloomberg Opinion, you mentioned mutual funds and ways to protect against runs on these particular funds. Do you actually view this as a real viable risk going forward if there is some sort of taper tantrum like you're saying, Well, it depends

on how violent it is. But you know the problem we have is we have mutual funds that are vested in very a liquid asset classes like high you'ld dead, and yet we offer these mutual funds and we basically tell people they get their money out overnight, and you can't actually and a lot of people show up at that mutual fund to get their money back. The market really can't absorb that much mutual bonds being sold into

the market. So it makes sense for a liquid mutual funds to basically tell people, no, you don't get overnight liquidity, get weakly liquidity or monthly liquidity, and that gives the mutual fund manager time to actually liquidate their assets in an orderly way so that you don't have the fire sale of assets, which which which would obviously depress prices

even further. Bill an unfair question, but you know I'm legendary for that, So I'm gonna go with the John emails in from Capri and says asked Dudley about drag Bill, Dudley, you would be on the short list of technocrats that would take over the American government if we were in political crisis. We all know that. I mean, you Secretary yelling Mr Brannankey, Dr Brannankey, and and and the rest. Bill Dudley, what is your perspective on what drag is being asked to do? How do guys like you turn

into politicians? Is it doable? Well? Mario Draggy is extraordinarily skilled, not just as a commist but also as a diplomat, So he has the I think the political skills to actually take out political position. You know. I think you saw that in terms of how he handled the European Central Bank during the European crisis. Uh, you know what, We'll do whatever it takes. And that was and it will be enough. And that was a very very important Stephen that showed I think that a lot of sensitivity

to the political side of things. So I think if he were, you know, put in power in Italy to try to, you know, be a party of unity, I think you'd be effective in that job. But that's probably because who he is as a person, not because he is a former central banker. A paradigm shift, and Tom Bill is absolutely right. If you think back when Tricia left and drug stepped up, Tricia had been hiking rates

a couple of times over the previous few years. I think my memory serves correct our way, and I think again in and then drug came on board, and the idea of taking rates negative at the ECB, at a large central bank like that, wasn't really in the conversation at all, Tom. The idea of buying corporate credit wasn't really in the conversation. The idea of getting Germany to come along for the ride, and by softeign debt not part of the conversation. Bill it was apparent on shift.

And I'm just wonder in your mind whether we have taken this too far at central banks. Well, we won't know for a while, but clearly the central banks have done extraordinary things to support economic activity during an extraordinary pandemic. And how this plays out in the long run, you know, it's really you know, as they say, too soon to tell the economist and you though, do you think you sacrifice the dynamism of an economy when the central bank takes a bigger role in the white has done well?

I do think we have to worry a little bit about you know, very very low interest rates, basically you know, keeping companies afloat that probably shouldn't be afloat. You know, there's a so called zombie companies because that can actually interfere with the real allocation of capital from bad uses to better uses. So we'll have to see how it goes. I mean the good news is the u AS economy is pretty dyna dynamic, uh, and so capital does sort of moved to its best use. So I would say

at this point, I'm not that worried about it. But you know, again, we've never done we've never done this before. We don't have any experience in terms of what the recovery will actually look like. So I think it's really premature to be be able to say, oh, geez, I know this is gonna work. Bill, just real quick, care before we let you go, How do you view the games top saga that we've seen over the past couple of weeks. Was this evidence of froth? Well, I don't know.

You know, I don't know if it's evidence of froth. I think it was bad judgment. I mean, you know, you really shouldn't buy assets when they're well above their intrinsic value. If you do that, you're probably going to lose money eventually, because eventually there's going to be more sellers than buyers. I mean to make money in game stock when it's selling it two hundred dollars of share.

The only way you're gonna make money is if there's there's other people to come in behind you to buy the stock at even and push it to even higher levels. That seems like not a very sound proposition when when you know the intrinsic value of the company is much lower.

Great to catch up, as always, come back soon. Bill Dunting, that bloom bag opinion columnist and former New York Fed president, the Dirty Little Secret votes because the cell side is not only about price targets and enthusiasm about up here down there, but it's about the density of the note. Thomas Forte is a d A. Davidson in rights, brilliantly thick notes about the details of a company. Tom Forte,

thanks for joining us. I want to go right to your thoughts on third party where you notice this new dominance of third party Explain to our audience while you have a persistent buy off the dominance of Amazon embracing in other sellers. So if you think about and the importance of third party sales on Amazon, it's more profitable when businesses and individuals sell products on Amazon than when

Amazon sells the products itself. Additionally, I think it puts a lot of the antitrust heat off of the company. I still think there is very significant But if you look at Tom for example, when they reported their Black Friday Cyber Monday sales, they focused on the amount of money third party sellers made selling on Amazon, not Amazon itself. I think it's very important Tom. This raises regulatory risk,

though in a big way. If you think about the big railway railway bearers, they were utilities, they were necessities. This becomes the same thing, the same argument that any company has to join forces with Amazon and use its infrastructure in order to get ahead. What kind of regulatory

risk does this type of dominance create. The good news for Amazon in that regard is Walmart is starting to step up its game in terms of marketplaces, Target is still very well behind, so Amazon can show that there are now more marketplaces that sellers can offer their products on. But I do think the challenge for anti competitive against Amazon is how can they prove consumer harm? How can they prove that this third party effort by Amazon is

using prices to the consumer. And I think that will be a challenge as far as antitrust action goes against Amazon something. Do you think bezel stepping aside take some heat off them a little bit on the regulatary side.

I think putting Andy Jesse head of their largest services effort AWS instead of Jeff Wilkie, who announced his retirement last year and was head of retail, does take some heat off because Amazon again can tell the story of we're enabling individuals and businesses to make money selling an Amazon rather than we're making all this money ourselves selling our own products. To tell me the optic shift is

the strategy. The strategy does not shift. I think this was a declaration by Amazon that they're warmly embracing services. So I think about cloud computing services. Andy Jesse has led that effort since two thousand six launch. I think about services in retail, enabling people to sell an Amazon if they want, delivery services, offering us to advertising services and then healthcare in the future. Amazon pharmacy, in my opinion, is only the beginning. Okay, well, let's let's double barrel

this time for to day pharmacy and advertising. Nobody's talking about and they're smaller they're off the radar, their single digit rounding yarrors. How do they become double digit success? Okay, so let's talk about healthcare. I look at two internal initiatives by the company, COVID night team testing for employees and health clinics for employees families. Those could eventually become customer facing broader initiatives. Advertising on Amazon is very important.

They have their Roku type service, IMDbTV, they have their streaming Thursday Night football, and they have advertising within their e commerce platform. And I think that will continue to grow over time. Investors will look at Amazon and advertising the way we used to look at ABC, CBS, Fox as far as a must buy for everyone, including retailers to advertise on Amazon. You already see Coals advertising on

Amazon as an example. Meanwhile, going forward, there's a question of how much more of a threat Amazon is to the Microsoft Oracles, Google's given the fact that Andy Jazzy is likely to put that much more emphasis on a w S. Do you think that that threat is getting baked into markets or do you think that people are

kind of underplaying it right now? Excellent question and the most important data point yesterday, other than Amazon reporting profits, there were twice expectations was the very significant operating lass Google reported for its cloud computing effort. So I do think that Microsoft is a real challenge for Amazon. But to the extent maybe that they can throw it off Google, that would be a huge long term win for the company.

You sticking at in on fifty tone, Yes, all right, just skin, don't let them come on, Tom, just Tom. We need a price target raise right now, seriously. Okay, Tom, Well, when the cash flows higher, the price target will go up. There we go unless stay, Unless they announced that something happened sales wise over the last hours. I don't have evidence of higher. We're asking everybody whose name is Tom, what do you think of Brady in the Super Bowl? Lisa's in love of them. What do you think you're

gonna give Brady some love? I think that I respect Brady the way I respected Michael Jordan as a Chicago sports fan, uh and never underestimate him. But Patrick Mahomes is amazing, and it breaks my heart the Chicago Bears picture Binsky over Mahomes. There we go there. I mean, that's why forty is just so large on Amazon. Tom,

Thank you? Do you want to get from d I Dins and senior research analysts Christian Bitterley joins us our private She's been listening to all of this talk here, and what it really comes down to is a rationalization of the walls of worry out there, the driver market higher. Christian Bitterly, very simply here in your really bright note, you talk about the walls of cash, the horde, the

pile of cash that's out there. How big is the pile? Yeah, So this is I mean, it's really interesting because we hear all these stories about kind of the exuberance in the market, retail investors pouring into the market, but one of the trends that we've been watching really closely is a lot of cash on the sidelines. We see this from our investors and you can There's really two things that I think are important to note when you're talking

about some of the conservativism out there. So right now, it's about fient of US financial household assets are in cash. So when you go into different segments, this is about thet of certain portfolios held in cash. And what we're having we're having conversations with our clients right now about strategic cash holding. What do you need in terms of

strategic cash. There isn't a right answer, as this is a very personal question, but what we're finding is people are basically taking that amount, that strategic amount, and multiplying it by ten times. So when you add up right now now the amount of cash sitting in money market funds across retail and institutional, it gets you to around twenty five of the S and P five market capitalization. So there is a lot of cash sitting on the sidelines that quite honestly has been a hangover from the

global financial crisis. This is this is cash that has been out there for quite some time, and the savings rate has gone up and is about twice as much as the average over the past decade, I believe. I was just looking at some statistics this morning, Kristen. When your clients call you up and they say, yeah, we hear what you're saying about investing in risk here assets and stocks, and yet what just happened with game Stop. Does this indicate some sort of instability that could cause

broader ripples? What do you tell them? So, I think there's two different things. I think one we have to look at the state of the economy, and then two we have to look at. Do fundamentals matter? So state of the economy, as you just mentioned, we have personal balance sheets are in good shape, right, so two times the average saving rate is what we saw last year, so around people have been restructuring their balance sheets, they've been refinancing mortgages. So you have the individual in a

really good shape. And in terms of the economy, obviously the biggest risk is COVID, but we're anticipating rates of around five percent g VP growth over the next two years, and that is really remarkable. The other question is really around market volatility, right, So one is are we in good shape from an economic standpoint, from a cash standpoint, from an individual standpoint, yes, do fund demouncials matter? I

think that's a resounding yes. But that does not mean that technicals don't drive the market in the short term. And now we have technicals to think about in terms of option volumes. Look at the records that we broke in January, which obviously means leverage and these scenarios, while they're short lives, are becoming more frequent, I think for a variety of reasons. So the first is democratization of

the stock market, which honestly is fantastic. One of the biggest reasons for wealth inequality the fact that wealthy people own the majority of financial assets, and we want more people to invest, not less. But the thing is is there's obviously a difference between investing, speculation and trading. The other considerations are also we have a plunge in the cost of trading, which makes higher turnover. This is becoming more frictionless to the average investor time and capital COVID nineteen.

The work from home, we have more screen time, which means more time paying to attention to the market, to more time trading, and there's often more leverage in the system due to this options activity. So I think the answer is fundamentals absolutely do matter. There are areas to invest in the market, but we expect higher volatility and don't ignore some of these technical pressures which are going to be here to stay. John, what are fundamentals right now?

I'm serious, Like, what fundamentals are we even talking about it a certain point, Yes, Tom, I totally disagree. I think fundamentals are huge, but which fundamentals? I mean, how do you even evaluate price to earnings when you talk about yields as low as they are a serious question. Well, this is for Kristan, but you can't do it off a sharp ratio because you don't know where the risk free return is. You have to plug in John a fictional number. Christian, you get fund a work please? Yeah,

So I think fundamentals. Where where do we find fundamentals and how are we thinking about that in portfolio construction. So the number one area where this comes into play is what we're calling overcoming financial repressions. So this idea that yields are low for longer right racer or low free longer, and that means that you have your average investor looking at like a sixty forty portfolio that's not

going to achieve their objectives. So that has to move up the risk spectrum in terms of the seventy thirty. And this is where fundamentals are super critical. So an area of the market where fundamentals look good from an entry point and also historical fundamentals are really strong is

an area like global dividend growers. So returning our focus to global companies with strong three cash flow generation, strong balance sheets, you're basically achieving a yield of three to four percent, which given we're rate star is very attractive. And then when you think of the underperformance and some of this mean reversion that we talked about in market, these thoughts have lagged because of all of the high flying COVID winners that have really benefited from that momentum.

So that's an area where I think you're achieving attractive yields and you're also there's a strong fundamental story that these companies are strong. And here to say Kristin Greits, catch up, Christin Bidley, Death Off City Private. Thank you. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before

the podcast. You can always catch us worldwide. I'm Bloomberg Radio.