Surveillance: Biden Plans With Bernstein

We update our view on the US China shift from trade war to Capitol Wall. What does that mean, Jared? Well, hey, John, it means that, you know, this is this goes from a very narrow you know, fight around soybeans and then maybe semi conductors under the last administration too. In the future, much more open ended, all hands on deck, you know,

complete follow mobilization. Well that's a year anyway. When we looked at this bill, you know, one of the things we saw is that is that although of course you guys are right, there's there's this bipartisan you know, rhetoric, there's there's some unanimity politically in Congress. I mean, Congress voted unanimously. I believe, you know, to delist Chinese A d R s from US exchanges last year. But when we look at this bill, we find something a little different.

The numbers will teams that quite match up. I mean, if you think about research and development, which is undoubtedly you know, the front lines of the future of new technology and who's gonna win the future, I think the Chinese National Party Congress just to prove something like five hundred billion dollars for R and D. They've they've been beating the US on this measure for a while and really ramping up the bill that the Bide administration just produced.

It's not five billion. I think it's about a hundred and eighty billion for research and development investment. And that doesn't sound like catching up to me. Such a watertime King brning to you, and I really want to congratulate you, folks. It is rare that someone at any bank puts on a research report where the world stops. I think John and I at least you can agree that when Woodard publishes really the whole global Wall Street world stops to

read what he's talking about. Jared, what are you in Bank of America say about what institutions are gonna do with their cash, not what the public is gonna do, but what is Global Wall Street going to do with their cash in a boom economy. Well, they're there time there is. There's some reason for optimism because our our at Bank of America is that we're on the cusp of one of the biggest capex booms in modern history.

I mean, I think you'll have to go back to Ronald Reagan to see a period over the next five years that will look, you know, uh, quite like this one. So we do expect the industrials, um technology, other firms are going to be expanding capacity rapidly. Part of that is just an organic rebound coming out of the recession, but part of it is going to be planning unmet demand that they'll want to build into for the first

time in a very long time. And so we do expect that there's gonna be new building in property, plants, and equipment, I mean real fixed aff that physical investment um, not just intellectual property, not just ways to squeeze you know, more efficiency out of workers, which has been the trend for for quite time. So if we have supercent capex growth,

you know, as our trend for a while. Um, you know, our commists expect our our analysts expect a wide ranging surge, and I think that's gonna be a real positive for US GDP Jared. How do you factor in potentially higher taxes on corporations with this expectation for a capex boom. It's a tricky moment. Obviously, a lot of a lot of you know, corporate leaders are going to push back about this, and I say, I think it's important to keep in mind from the from the bide administration side

of things, that this is undoubtedly an opening bid. You know, you have to play a bad cop before you can play good cop. You have to show two progressives that you know, you try to to hike taxes on the rich and tack taxes on corporations, etcetera. So that when moderates UH come in and then pushed back, you can sort of make some compromises. So you know, I don't think anyone expects that the final bill, whatever does get past,

will necessarily look like this. But that being said, I think everyone agrees, including corporate leaders, that if you grow the high enough, um, you know, paying a slightly higher share of taxes is a trade well worth making this is the analysis. What's the market kill? The market call is that the real openings priced then, I mean the summer spending, the wet, hot American summer that we're about to get where everyone you know goes a little that nuts for a little while. Uh is gonna feel great

for the real economy. It's it's already priced into Wall Street, and it may not feel great to Wall Street. Remember April, you had the real economy in tatters and stocks, you know, ripping higher. I think we're about to see something more like the reverse in which the real economy reopened. It's a great time for people who you need to find jobs and and and markets don't really have that much actually to go on, so it could be a little bit of a digestion moment um. I think what matters

more is what happens when you do see infrastructure paths. Now, we're gonna be talking about this for a while. There's gonna be a lot of political back and forth, you know,

this summer around these builds. I think it's one of these unusual moments where you actually want to you know, sell the tell the rumor and buy the news like by and once you actually know what's in the bill and what can get passed and will get done, and and on on that front, I think you know investors have not at all priced anything, and and you are not ready in oppositions for for what's going to come.

It's just gonna acquire a lot more analysis until we get there, Jared, I want to finish on this idea of how individuals are going to spend cash, not just corporations. And you had in your phenomenal note the idea that sixty of the excess savings, the excess cash savings the United States, about more than one and a half trillion dollars, has gone to the top of income earners. The idea here that they are less likely to spend perhaps not

as inflationary as people had expected. Can you please elaborate on that absolutelyly. So. We know from history that folks who already have quite a lot of money don't tend to spend it in an aggressive way if they get a little bit more. That's not true for middle and lower income households, who are sort of hands the mouth every every paycheck matters. So historically, when you give some ext r income to the bottom brackets, you know they

will send it more. And that's that's been the kind of hopes I think in the Byte administration, uh, even the Trump administration last year in terms of getting aid out to people. Well, we found in this survey is that some of the you know, some of the respondents are telling us that with the sinus checks, they're actually gonna save um most of it or or majority said that they're going to save either keep it in cash,

payoff debts. Uh, you know, maybe save it in some financial assets, put it into the market, but they're not going to be spending in the real economy by the same degree that history would suggest. And that's why our comments expect, yes, a surgeon inflation this summer, you know, a bit of a wild moment, but that by next

December we're back below two percent inflation. Jared, before you run, let's talk about something actual economist suggests the same, Michelle Mind leading them a million tomorrow, a million payrolls growth. What's behind it? Jarrett, I think you're seeing, I mean in in in some parts of the country where folks are are keeping it tight, uh, you know, where things haven't changed very much from you know, six or eight

months ago. But other parts of the country. They reopened already, and I said, I think that's going to feed through to the job numbers because people, you know, want to get back to normal. Employers want to get back to normal, and they're not waiting for the CDC to tell them that they can. Very true, Jeff, which said that repeatedly on this show. That's for sure, Jared, What did Jared get to see you? Jo want to get from Bank America.

Let's talk to the White House right now at least to say that back where us is Jared Bernstein, White House Council of Economic Advisors Member Jarget have to forgive me. The last conversation we had was about whether the bill was too much. Now we're having a conversation about whether it's too little. Two point two five trillion over eight years. Why does this get it done? This is like the Goldilocks story of economic policy. Right, it's too hot, it's

too cold? Uh? The uh, the bill is UH is of a magnitude to really dig into the infrastructure deficiencies that have evolved in this country over so many years. And as people have said something, praise something, criticism, we define it infrastructure quite broidly here to include not just roads and bridges, which are essential and something the President's long talked about, but also clean energy, housing, the care economy. UM.

There are many components to this bill. The factory is twenty five pages long, and of course there are a set of paid for us that more than pay for the the expenditures over over fifteen years. I want to pick out one of the numbers, jared a hundred and eighty billion, of which goes to what's billed is the biggest non defense research and development program on record. The President keeps bringing up China in the White House statement.

You talk about the ambitions of an autocratic China a challenge of our time, and we've seen the Made in China plan that was released several years ago. Jared a hundred and eighty billion. It just feels like a dip in the ocean. We caught up with Bank of America about forty minutes ago on this very topic, who said exactly that it's not enough. Why do you think it is? Because I think you have to just look at a lot of other line items and not just that one.

This uh, this measure, This American Jobs Plan is replete with many more tax credits and incentives for R and D and innovation that dig a lot deeper than that. There's the ones in the manufacturing space, but there's a full spate of ones in the clean energy space. When you get to electric vehicles, we do a very deep dive into incentivizing the production of not just electric vehicles,

but charging station and batteries here in this country. So this is the largest play I've seen in my economic career to onshore industries, to build up nascent industries, to grab global market share in areas where we could we could beat our competitors. Jared Berson, I want to go to your claim book altogether now. The goal here is altogether now, and every report I see is a huge

body of America is in support of infrastructure, etcetera. I want you to speak right now to some fancy Republican sitting fat nap in a suburb about why they should support this bill even if their senator doesn't. Well, if they do feel that way, they're they're among a significant majority of Republicans support investment in infrastructure. So uh, this is something that is widely recognized, as your own reporting

has showed as a great need. I think there's been a pretty significant disconnect between Republican opposition to anything that comes from the other side and where constituents and the population is at large. And look, Joe Biden got eighty one million votes from all of America to not just uh fight with folks here, but to make sure that he meets the needs of the country. And that's what that's that's what he's doing here. What's the mix that you see and how do you respond to those on

the left? What's the mix that I see in the mix within the bill? The social programs versus bridges. You know, Jinna Romando, the Secretary of Commerce has to fix a bridge in Rhode Island. Great, we all get that. But in this program, whatever anybody wants to say, there's a lot of social messaging, social hope, and plan. How do you respond to progressives that want more well, I mean,

it's funny you should say that. I was just reading an article in the Washington Post where Derek Hamilton's, who's a I think quite a brilliant and also a renowned progressive, a scholar of of of racial disparities, was was pointing out that our definition of infrastructure here is broad, and it should be not only does the bill do the kinds of traditional measures we've talked about and and the clean energy and the innovation and the manufacturing part, but

there's also a deep housing policy that goes after exclusionary zoning, which is something you rarely see from the federal government with a really interesting competitive program. And and and this is an area where systemic racism is embedded. If you look at how we stand up the care economy, this

is something progressives care a lot about. So I think if people start looking at what's in here, they're going to recognize that it's it's plenty progressive, and especially when you get to the highly progressive tax pay for us. And I'll just point out that Gina Raimondo is going to be on Bloomberg Television today at thirty p m. To weigh in more, you know, Jared, I think there's a lot of agreement on the end goals of this two point to five trillion dollar plan. How we get there, though,

is a point of contention. And there is this reputation of government funded operations being incredibly inefficient. People point the DMV waiting in line and waiting on it for hours to just speak to someone for a basic procedure. What are you telling people to ensure them that we're not going to end up with forty d m vs that are inefficient and not using money. Well, yeah, that's a great question. I have a two word answer for you,

President by Ok. I worked for Vice President Biden at the time during the implementation of the Recovery Act, and he recognizes, really more than any politician I've ever worked for it. That's simply signing legislation and moving on to the next thing. You know, going to land the next airplane is not the way to go. We have to This is a passion of his. We have to show, uh, the American people who are footing the bill for this, that we are not just signing documents here, that we're

paying full attention to implementation. And if you look and if you look at the distribution and production of the vaccine, I think you see good governance is back in town and at work, and you're going to see that in this plan as well. I am chucked Jarrett that you think the current president is part of the solution. Let me get to the next question. Looking forward, where's the

rest of it? Where the tax hikes now? Swear what can we expect, Jared, and when I think the President said something to the tune of mid April in terms of the next part of this called the Family's Plan, And I'm not gonna get ahead of him on on

the announcements in there, but don't expect you to. Just in the time we have charity, you could just characterize the effort just a little bit more clearly for us, is this a bigger redistribution effort, a big a wealthy distribution effort that's still to come in a couple of weeks. Much more in the sense of building back better, That is, this is an effort to deal to dive more deeply into the to the parts of that you see that

you don't see that much in this point. We do have some care economy in here, but there's more to do there. There's education, uh, and then there's tax tax issues on the personal side of the code. So there's there's more to get back to and and we will in a matter of weeks, not months, Jered. People view this plan as being a starting point in negotiations. Picking up on the tax point are the higher taxes on corporations and individuals making more than four hundred thousand dollars

non negotiable going forward. Well, the President has put that four hundred thousand line in the sand, and uh, that's something he is continually elevated. And I don't think, I don't want to say anything's non negotiable because the President is consistently shown that he's willing to reach across the aisle and try to get input from the other side. But that's been a very solid commitment of his. I think I think that the idea that we're going to

just keep doing things and never paying for them. If you want to come forward with different ideas of how to pay for things as long if you recognize that four hundred k boundary, you know we're willing to listen. Dr Bernstein. Will the Congressional Budget Office score or analyze this bill and what will be their timeline? Eight years, fifteen years, or thirty years. Typically the Congressional Budget Office uses a ten year budget window, so that would be

their timeline. Now, this is about an eight year spending plan, but the tax increases just continue on uh forever, So by year fifteen, the revenue razors pay for the plan. But the CBO tends to use a ten year window. Jared, It's always good to catch up, and we appreciate the on guning contributions to this probagram. Thank you for the tryansparency, Jack Bernstein. That White House Council of Economic Advices right now, Michael Wilson joins us, MIKEA. Wilson. He has been dead

on with Morgan Stanley on small Camp. Michael, let me just cut to the chase. How do you adapt to adjust to Q two? Yeah, well, thanks Toime. Yeah, I think the Q two is going to be the actual reopening right. So, Um, the dream of reopening, the dream of restarting the economy is always you know, bullish, and it's a you know, because there's no prove prove it moment. Now, Um, as we actually reopen the economy, um, we're gonna have

to do it. Um and execution risk goes up. So that's not the end of the bullmark is and a disaster. But at the stock level, you know, we're expecting disappointment. I mean, we think it's gonna be difficult for a lot of companies to manage this, and all by the way, some companies are gonna take advantage of it, take share

and will operate quite well. So one of our recent calls is, you know, we did downgrade small caps instead a heck of a run, and it's kind of a lower quality area, and we're basically recommending that people do upgrade the portfolio bit on the quality side as we go through this reopening period in Q two and Q three. It's a fair to say you think this is a sound the news of ent Mike Well, I don't think it's to sell the news in terms of, you know,

equities over bonds and that we go. I think it's more of a let's just get I mean, the low quality part of the trade has really worked, as you know, John, I mean we've been bullish from the lows on the idea that's what always happens, and low quality does really

well coming off a recession. We looked at that data recently and the relative out performance of low quality over higher quality and some other things we can talk about has been extraordinary small caps over large for example, and we just want to capture that because this is the time of the recoveries in any cycle where you revert back a little consolidation and quality actually becomes more invador again,

at least temporarily. A foundation for your coal. Mike, along with the rest of the team, has just been where we are on the cycle, the old playbook, the reopening, the recession playbook, the early stage part of the cycle. We've moved on from that. In your words, you and I've caught up several times on this in the last month. Now you're thinking about the duration of the cycle, the intensity of the cyclists. Well, can you add in those

dynamics and why that shapes your thoughts right now? Mike, Yeah, I mean we've been waiting to write this note for a couple of years, to be honest, because we always felt that as we went into this recession, we didn't predict a pandemic, but we felt like this next recession was going to challenge policymakers because we're still very close to the zero bound, and this transition to fiscal policy um has only been accentuated by the fact that we're

in a pandemic. Right there's no governor on what you know, politicians can do because it's a health crisis, and that was a perfect foil for this accelerated transition to a new regime. We think it looks very much like the post World War two period in many ways. We we wrote about this, and what that really means, bottom line, is that we're likely to have more of a boom

bust type outcome the last thirty years. I mean, as rates have been coming down, the fit has been allowed to be extraordinarily accommodative, and that's why you had these long economic expansions. There was no pressure from monetary policy. But we're always shooting below trend on targets on growth and inflation. We think that's changing now and what that means is more frequent recessions. That's actually a great investment opportunity.

You know what you're doing, Um, I mean that cycle analysis one oh one, And that's why we think this note is pretty important for people to read. So, Mike, how are you preparing for the bust? And when could it be? Oh? It's I mean, look, the next recession is not anytime soon. I mean, but look, let's let's talk about the last couple of expansions. Least I mean the lasted eight years. We think it's probably more like

four to five years. So and so what that means in the very near term is you move out of that early cycle playbook to more of a mid cycle playbook, and that means, you know, once again, low quality tends to you know, not perform as well. As an example, small caps tend to not do as well. Um, we just upgraded consumer staples relative to consumer discretionary. Consumer discretionary tends to be the best early cycle performing group. Well,

that period is probably coming to an end. So there's a lot of things to think about in your portfolio construction. How does big tech factor into this, Mike, especially considering how high the run up was and where evaluations are. Yeah, so tech is um you know, obviously from a cynical standpoint, tech should be doing quite well. Because obviously as you come out of a recession, things like semi conductors and some of the more cynical parts of tech benefit from that.

There's gonna be a huge camp x boom um. I think that's I think that's something to look forward to. And so like tech hardware, some of the older traditional type tech companies that could benefit from that may do better for us. It's a neutral for a couple of reasons. Number one, the pandemic was unusual and that we saw a pull forward of demand last year for a lot of technology companies. As we digitize the economy and and

made it easier to work from home. So there's gonna be some payback on demand the short term there we think that could be a bit of a head wind. But then structurally longer term, you know, this idea that rates are now bottoming from a long term perspective and they're gonna continue to rise is gonna be a headwin on valuation for some of these secular growth companies. So it's much once again, it's much more about picking pots and trying to find things that can buck that trend.

My ten years back fifteen point six per year, twenty years back eight point seven percent per year, sp X thirty years back ten point three percent per year, the great wrong call has been as an actual single digit equity world forward, can you be double digit in the US? I don't think so over long periods. If if you buy into our view that rates are bottoming, I mean, the reason those returns have been above trend time is directly reproportional to the fall and long term interest rates.

Stocks are long duration assets, okay, and they do they do better when obviously rates are falling. So if you buy into the idea that rates a bottom for the long cycle. That's a head wind and that's not once again, it's not the end of the world, but it's it's it's harder, you know, it's running into the wind. Mike, tremendous, always getting us. That's a thing more, Mike Wilson that Morgan Stanley, chief US equity strategist on this market as

we reopen and the dietist starts to come through. Amber just SUSA is expert on what we call risk behavior on a Swarthmoor and of course a John Hopkins Bloomberg School of Public Health Drs just SUSA is knee deep and what we do with our behavior given medical crisis. Dr de Seusas, thank you so much for joining us this morning. We are changing our behavior now and pros like you are worried about rising cases, rising hospitalizations, indeed a fourth wave. Do we risk a fourth wave with

our behavior based on pandemic optimism? Ys, Good morning, m Absolutely, we have seen rates increase for the past week or two across all states um and we are in a moment where there's a lot of reasons for optimism. We have more than a quarter of all Americans have their firsts of the vaccine. The end isn't sight. Things will be getting better, but we are not there right now, and we see rates rising because people are being less cautious. And this is normal behavior. I mean, I know it's

Swathmore Amber. You had to read Comus the Plague at gunpoint. I mean, that's what you do with Swathmore. And there's that optimism at the end of the book. But the pandemic keeps going. For our our listeners and viewers across this nation and worldwide, what is the best practice right now to manage our optimism. Well, we year into this pandemic. We do know what behaviors transmit the infection, and we do know how to be safe. So people want to

see their friends and loved ones. We understand that we can be social wall still physically distancing, so we need to maintain mass squaring. And when you're getting together with unvaccinated people, not get together in large groups um and

and we are seeing people not make those choices. There's a question of what happens when we are perhaps six months post pandemic, how often we have to get booster shots, how often we have to revisit COVID, whether COVID will become a sort of omnipresent virus that we have to grapple with and that continues to mutate. This visor study that John was talking about crucial and indicating that perhaps

the vaccination has a longer lasting shelf life. What's your sense by in the budding research of how present coronavirus will be and also with respect to the vaccines, how long lasting their effects will be. Yeah, this is a race right now of the virus first vaccine, and it depends on several factors. We do have really good news. We have high efficacy of the virus of the vaccine.

It looks like the vaccine is also going to be effective in younger individuals from initial studies as was mentioned, UM, but we do have virus is mutate and so with the initial information that we have on immunogenicity suggests that UM, people that that it will last for months and probably years UM the vaccine efficacy or natural immunity from affection. But as the virus mutates, it's very likely we will need some kind of booster shot at some future point.

It won't be lifelong protection when it comes to her immunity. Do you have a sense of what that means now that we're getting an acceleration of vaccination. Yeah, so her to me, and he's not an exact point, but we do need to have a critical map of people vaccinated

before we get that that benefit of reduced transmission. And so we're going to need to see the majority of infection, majority of Americans vaccinated, so more than fifty, likely sixty or seventy before we really begin to see that benefit. But it is a matter where the more individuals and are vaccinated, the higher the benefit is. So we'll want to keep going and get those rates as high as

we can. Dr de sus So when you see Delta Airlines say things are better and we're going to fill the middle seat in economy on an airplane, how does the prolo you respond? I mean, these are really difficult choices. And so if there's vaccinated individuals who are wearing masks um and you know, getting together in a middle seat, the risk is going to be lower. But if it's if it's unvaccinated individuals, if people are making choices before they get on as planes that have put them in

increased risks, it really is a concern. And so I see us opening up at the same time, we need to be driven by the data, and we were bringing rates down. Things were looking good a few weeks ago, but they have taken a real turn for the worst, and I think that's why the alarm is being raised. We need to follow the data, and it suggests the increases that we see pretend really badly for the next few weeks, and we need to turn this around if

we don't want to see a huge court way. Dontor thanks for paying with us, come back soon one you doctor Amber disos that at Jones Holkins, Bloomberg School, the Public House. 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 In. This is Bloomer