Surveillance: Debt Transparency With Malpass

for beleaguer nations. To begin, give us an update on the urgency of debt relief for many troubled nations. Hi, Tom, and and and a good morning. Um Well, the deepest urgency is for growth and reduction in poverty and in to get their countries need investment, new new cash flows, new investment, and one obstacle to that is the is the debt burden. If you if you're a new investor and you know that your money is going to go to help pay off old debt, that creates an obstacle

to the new investment. So we're trying to find relief from both the debt service, meaning that the payments that the countries have to make. These are the poorest countries

in the world. They don't have the resources to fight COVID, so to reduce their current cash flow payments, but also looking at reducing the stock of their debt, which would give light at the end of the tunnel the debut are expert on this from your tour of duty as global economists for Bear Stearns, and you and I know Stam Fisher in the Wonderful Summary read book he wrote, we know the work of Bill Rhodes when he was at City Group on debt workout, etcetera. Is it the

same pole season procedures? Is from another time and place. There's a world bank working at debt workout with a new different formula, a new different process. Uh, it's different. I talked, happened to talk with Bill Rhodes last week. He's doing well. By the way, was involved in many of the previous debt restructurings. Those in the nineteen eighties. I was at Treasury with the with the during the Latin debt crisis. Those were syndicated bank loans and so

they had a different restructuring process. Uh. And also very importantly a different dynamic between creditors and debtors because that the banks needed the repayments in order to maintain their equity capital. This time around, basically beginning in two thousand four or so, there has been a huge build up of debt in the poorest countries coming from China and

also from private sector. Credit is through bonds, your Euro bonds for example, and those are those are more difficult to instructor and the dynamic between the creditor and the debtor has shifted in favor of the creditor. So the problem this causes for growth for new investment is the creditor is sitting there wanting on the doctor uh, and that creates a big challenge in terms of creating light at the end of the tunnel for the poorest countries.

You have on your website, Mr mal Pass a phenomenal box chart of these troubled nations and their relationship with China. This is a delicate question, David, and I hope you come back to Bloomberg Surveillance after my rudeness. But how intrusive is a Trump White House in their negotiations with China for you at the World Bank to have a constructive workout of troubled nation debt with China. How much does the Trump administration get in the way. I would

frame it that way, Tom. The issues are the US may have issues with China, for example on trade UH, but then the world separately recognizes that we're all trying to work together to get growth in developing countries. So the challenge is that over the last ten years or so, China has UH made many loans into developing countries with terms that aren't transparent UH and also with terms that are that are higher in interest rate than than than

the countries can afford UH. And so the challenges is somewhat a technical one for the whole world working together looking for a way to find a way through this and China, China needs to participate the G They in the G twenty in April they said they were fully engaged in this. But then getting each of the Chinese lenders, there's there's many official lenders from China, getting each of them on board is a challenge. So what we're pushing and I'm glad you raised the website, so we are

we are thinking that transparency will help UH. And so if we can disclose for example, when central banks make swaps between each other, that's actually a debt or some of the types of those swaps our debts and could be disclosed as debts and should be um When Ecuador does a restructuring as they did last week, there are other creditors who were not included in the main restructuring, and the terms of those other restructuring should be disclosed. This way people can look at it and get a

better outcome. Okay, David, good morning to you. So that transparency should help maybe facilitate those conversations with China. But in the current climate, do you get any sense than David that the Chinese are going to join with your effort with the d S s I to to alleviate this debt servicing burden for the for the for the poor nations. Yes, certainly so many of the Chinese creditor agencies, so China x In Bank, they have they have a

number of lenders in China. Uh they're participating in the d S s I with the restructuring terms that are that other countries are using, some of them are not, and so that that creates the challenge that we're that we're working on through by disclosing that. In other words, if there can be more information I think we'll get a better outcome. Other things I should say that we're working on is in the longer run, some of the countries, the h the most debt constrained, really need a reduction

in the stock of debt. What we've been talking about so far is is the China's participation and everyone, all the creditors participating in a moratorium on the on the re aiments from the countries. But so far they they're the countries are just adding that amount on to the end of the loan, so there's not really debt stock relief um and with the interest rate environment as low as it is right now, net present value isn't a

good metric of trying to figure that out. So we're looking at ways to do a reduction in the actual amount owed so that then more investors will come into

the countries. If we look ahead to the meetings that always take place in the in the fall, in the autumn, the I m F and the World Bank meetings, should we look ahead with that kind of time horizon in mind to see an extension of the d S S I so further relief on debt servicing costs and should we go further than that should we hope in October to see something on the underlying stock of debt, then um,

yes and yes. So I spoke with the G seven finance ministers on Monday and they're they're they're favorable, and I think to G twenty will be favorable on an extension of the debt service moratorium. And then the next step is is harder to have agreement to to actually do haircuts or write downs. That has happened in the past, for example, in the nineteen eighties and the Latin deck crisis, it got to the point of of haircuts, but it took so long that the countries were in deep, deep

trouble by the time that happened UH. And so one of the things we're trying to do is UH is accelerate that so you can get to a good outcome sooner. You know, this is important, and I'd like to mention other things. We're working on a whole range of areas, and one is the inequality of the current global UH crisis.

It's hitting the forest countries and people the hardest. And another so we're working hard on that with big new UH surge in World Bank Group lending to these countries And the other thing I wanted to mention is vaccines, which are so important, and so the fund the financing that the World Bank has available for things like healthcare, and we we've done over a hundred programs just in

April and May. Those can be used for vaccines, for therapeutics, and so I think the world concentrating on that, putting more money into those efforts is used. David, you know what, I mean to make a joke about it, because this is tragic stuff. But if you look at Jay John Burns Murdoch's wonderful work at the FT with Johns Hopkins University, there's Bolivia, there's Panama, there's Latin America, and then there's this World Bank country, the United States of America up

there with pandemic. What would David mal Pass in the World Bank do to help the United States not have as ugly death statistics like these other truly impoverished nations. Uh. I mean, one thing we should recognize is we're in new territory. The pandemic is new, the severity of it is new, and it's coming at a time when many of the developing countries had too much debt um So

as as we think about the the US. I think you move through methodically with ways to uh, ways to allow the businesses that can reopen, to reopen, the schools to reopen where they can. That becomes a very important part of people's productivity. You want to raise the productivity. UH. And then in the long run you need to get good well well UH well targeted investments UM UH in the US and everywhere. UH. I think that comes from

transparency if you know what the investment is. For example, in the US time you know, I've advocated the disclosure of the outlay projections of public pension funds. A huge amount of money goes into these funds and you don't know what the what, what the outlay, what the outlays are used for, what the projections are for the future on those outlays, So they become a burden on the

allocation of investment. So developing countries, of of of finished bit and in developing countries, we need a way that they can move investment from the old sectors, the pre pandemic sectors, into the new sectors. That's a core ofing on We're gonna leave it there. David Malpus, thank you for the update with the World Bank as well. Jill carry Hall joins us right now with Bank of America. Joe.

We just sparked to Canadas smoke to Candice Browning here in the last hour about your new focus on small cap you're a specialist there as well. Is it about a rotation from tech to small cap or is it about tech still doing well and small cap finally picking it up. Well, I think to your point on on yields earlier, we've been a market where what's been what's been gears has been rewarded, so yield has been scarce, growth has been scarce, and you've seen a lot of

these themes working for a number of years now. Small caps have obviously been been challenged by you know, trade tensions, They've been challenged by the fundamental backdrop their lack of quality.

But I think you know, one of will we've been cautious relatively on small caps in your term, one of the longer term bullish themes for small caps is that if we do see this this shift from from globalization to localization and the reshoring of US manufacturing which Candice was talking about, um, we think that could be a bullish longer term theme for for small cap companies in the coming years. What is the star the sectors specificity of small caps? I mean, do I just go out

and buy small camps? Are you looking at different sectors for example tech small cap right Well, I think one of the important things right now is that you are seeing a lot of divergence within the market in terms of valuations, in terms of performance read so it's been a good backdrop for stock pickers UM for from a sector basis, we are within small caps starting to see some of the more value oriented cyclical sectors start to wait better in our works as some of the commodity

oriented cyclical sectors that previously looked like value traps are now starting to look like better value UM. So, overall, value is a theme that we like within the market. We do expect we will see that rotation out of growth into value as the profits recovery and economic recovery broadens out. And then on the on the restoring theme, we think that you know, there's there's a number of

subsectors that are slated to benefits. So certainly some some tech companies, but also a number of industrials that are focused on on automation or engineering. UM even in in other cyclical sectors. A number of regional banks that might be exposed to manufacturing hubs reefs, which is a big part of small caps, that that's a sector where industrial rates, warehouses, the could benefit as well. Jil A, good morning to you.

I've heard a lot about reshoring this week, and a lot more in conversations with American strategists and American business then than than I have with with people here in Europe. Is it going to remain quite a US phenomenon and is that because businesses think it plays well in Washington or because they really intend to follow through on this well. I think while while you as you see firms move out of areas like China, there are certainly some other

regions of Asia, for example, that will benefit. But a lot of companies are talking about bringing and bringing companies back to North America and to the US. So I think, you know, in areas like the Midwest and the sun Belt, that's where some of these banks, reas, etcetera that that I mentioned could could benefit. Um you know, if we see higher regions from manufacturing, this could benefit lower income consumers and areas like you know, retail value retailers like

Burlington and Coles. So I think there's a lot of areas within the U s CAN that can benefit. And we are starting to see early signs of this, even though it is a long term theme actually taking hold. We're seeing, you know, when we checked earnings calls, We're seeing more and more companies start to talk about this on earnings calls. We're seeing you know, supply chain professionals

talk about this. So companies, you know, even though Capex has been in a down cycle, they are starting to talk about making tangible shifts with respect to this theme. And is there something that's going to create jobs in America or is it something that's going to going to drive the bottom line of businesses that create automated automation technology. There are plenty of those in Europe. Yes, we think so.

And I think Candas mentioned earlier that you know, for every manufacturing job that's created, you could see somewhere around

six or seven jobs created in other industries. So um, you know, we think that that's why the overall pick up in unemployment and and in potentially wages could could benefit some of these areas like select retailers UM, and they'll just be more demand for for banking financial services, So there's a lot of um knock on effects from the scheme, uh that that we could see across the U S. And then certainly for for automation, UM you know,

companies in industrials like Rockwell or companies that focus on industrial leadsers or things like that. Um, you know, there's that angle as well. That that automation and the Internet of things and a lot of these big themes that we've been talking about as a research department we see as as big multi year themes related to this as well. How here with Savita Supermannians work. I mean, when we look at the E s G as you know, top fifty stocks maybe top two D stacks, can small cap

go E s G? Are they just not there yet? Well? I think you know what, it's a challenge in smaller caps because a lot of these companies may not have the resources that it came to it, or the or

the disclosures. So it's tough for to evaluate. But when we've done some work looking on on sub themes of e SG for example, um, you know, diversity, women on the board, etcetera, we found that that E s G still still works within small caps, so that companies that you know, for we'll have more diverse or as better governance, are treating at higher multiples. Consistently you're seeing better returns

on equity. So this is something that I think as the as we continue to see money flow into E s G strategies and as companies continue to focus on this um we found that E s G was particularly important during the downturn that even though we saw outflows out of E t F s broadly, we were continuing to see inflows into E s G types of strategies. So, you know, I think it's a very important theme that that we as the Department of reading a lot about

and small caps. Obviously there's there's less disclosure there, but I think that will continue to increase. Okay, we don't do enough of this. Jill carry All, thank you so much on small caps. Really really appreciate that. To get you through August and into the autumn is James Bianco. Jim Bianco writes a wonderfully eclectic note for Bianco Research out of Chicago. He is appearing with us only because

of Chicago Cubs are in first place. Jim Bianco, I loved what you said there about about this enigma of where tips are give us insight on how unusual these inflation adjustice statistics are. The problem is is the Federal Reserve is the biggest player in that market. Since March,

they've bought a quarter trillion dollars worth of tips. And if you're looking at the tips market and you're trying to discern a signal out of it about the outlook for inflation or the outlook for the economy, you have to be be careful that it's a bit distorted because the biggest buyer is the central Bank. Now it doesn't mean that it's it should be ignored or are not looked at, but it is become more complicated to try and understand it. What other signals have value to consider inflation?

You know, that's a good question, because you'd have to go away from the signals that are not with the central bank. The surveys of inflation like the University of Michigan survey or the Consumer Confidence survey, or the commodity markets themselves, that central banks are playing in those markets and those numbers are turning higher and they are expecting more inflation as we move forward from here. So there's

definitely signals on the horizon that inflation is coming. You could argue the tips market is saying the same thing, but I'd be a little bit careful in over reading the tips market. I want to try and rely on some of those non market indicators. And good morning to Jim talking about other indicators. How confident are you that inflation readings We just got some out of the UK this morning, inflation a little bit stronger than had been anticipated,

but that might be short lived. How confident are you that inflation readings are giving us accurate information? Given the way our spending patterns have shifted so much, the basket that the statisticians rely on might not be the basket that you and I actually consume. That it's absolutely right that you know, in the pandemic, especially to move to online, that what we are consuming now is what we weren't consuming four or five months ago, so that there could

be a bit of a distortion. But at the end of the day, let's remember what's going on, which is the fundamental for pushing inflation higher. We have a higher unemployment rate, we have we're producing less stuff because the economy is at a lower level than it was a few months ago, and we're stimulating the economy by giving

people either stimulus checks or extra unemployment. I know it rolled off in August first, but that might come back, and so we've got less supply, we've got demand being stimulated, and that, I balance, should lead to higher prices, otherwise known as inflation. And I think that that's what a lot of the surveys are telling us might be coming. But but knowing what we know about the way the central banks want to keep costs or keep the costs of funding debt low, at this point, do we really

think that do we really see inflation coming meaningfully? Jim, I suppose a lot of people talk about inflation and they just mean, you know, we've bounced up, expectations have bounced up from the lows of Mars, But that doesn't necessarily mean we're off to the races and inflation goes

much much higher from here. Yeah, you know, that's a good point, and I do think that we are going to see meaningful inflation, probably in the second half of twenty one or in the twenty two as the economy strength is an all the stimulus starts to add in as well to the central bank, especially the Federal Reserve is going to go to something called an average inflation target. They're gonna say two percent is not their target, it's their average, so they can run it above two percent.

Bear in mind, they're not gonna change policy one inch. They're just going to announce that the target is changed as well. Good my, Jim Bianco. This is as rare as it can be. This is like when the White Sox are better than the Cubs, and that only happens once a century. Is there any evidence out there whatsoever that governments can reflate an economy, that governments can you know, somehow magically make two or two point five or three

percent inflation appear. No, there's no evidence at all. In fact, two and a half three percent inflation at the core level, we haven't seen that in thirty years. It was the early last and and you know, I get you go to the other side of the equation too, if you ever got to three percent or maybe a little bit more in inflation, there's very little evidence that the governments or the central banks could stop it. Okay, they wanted

to stop it. I mean, I don't want to go all Nelly Fox on you here, but let's stay with the white sox here right now, just to bust your chops. But Jim Bianco, what is so so important here? Is the FED in their timeline? Do you just assume their timeline is way out past what the zeitgeist is that it's twenty three or dare I even say two thousand and twenty four. Yeah, I'm gonna go white sex with

you two. They want to Richie this come run that's gonna go into the upper deck and hope they keep it rates that zero down to twenty three or twenty four. But they're only going to kind of do it one

meeting at a time. They're gonna give you forward guidance there's gonna be no inflation, and then when it's arts to percolate and percolate too much, they'll change it and Diagnow that's not going to happen right away, but I suspect that when all is said and done, they'll be moving on inflation a lot sooner than they think, probably in a year to eighteen months as opposed to three years. Jim, you know, you do a lot of different things a bond market. I loved your tips work as well. I

want you to address for our listeners and viewers. This stock market, it seems to be uniquely and differently unloved. How do you participate? You know, that's um the stock market. I'm in a pushback, and I understand people have said that it is the most hated bullmarket ever. We were saying that pre pandemic, we're saying that post pandemic. But there are plenty of instances. There's eight signals that the

public is in in in a big way. The Robin Hood type of retail accounts which now count for of all the volume, which was practically nothing a couple of years ago. They're in in a in a big way too. They're in a big way in the concentration you see in the in the fame stocks. Those are almost a quarter of the SMP. You gotta go back fifty years to find five stocks that had that big awaiting in the market. So they were in that market. And I think as far as to your question, the reason that

they hated is those bottom three companies. I think they're still struggling with the economy to return to normal. But those top companies, especially those top twenty or top, their stay at home companies and they're doing very well and they're pushing the whole index higher. Jim Bianco, thank you so much. Just brilliant and love the Cubs. Jim Bianco. They're from Chicago, combining academics in African American history with also the operation of it all. Mr Bunch, of course,

Secretary of the Smithsonian Institution. This is a fascinating and deeply important interview for the nation. On two accounts. It is peer to peer with David Rubinstein, but far more than that, it is a philanthropy of Mr Rubinstein to the nation. David, I want you to explain when you walked in that museum and you saw your emancipation Proclamation and your thirteenth Amendment of Abraham Lincoln sitting in that museum,

what was that like? While I was very proud that I was able to uh provide those through the museum and to help them get the African American History and Culture Museum off the ground. As you probably know, that museum cost about five forty million dollars, half of which came from the federal government, half of which came from private contributions. And I was very pleased to be part

of it. It's an extraordinary museum, and the Lonny Bunch of the person who started it from scratch, and now he's the not only was ahead of that museum, but now he's the head of the Empire. Smithsonian. The Secretary, as he's called. The inside story is the reason the Washington Redskins exists. David is so there's something more controversial in the Smithsonian institution in Washington. It's been a pinata

for decades. How will Mr Bunch, in your conversation with him, how will he drive forward the Smithsonian to stability and to a more modern institution. Well about or so of the money comes from the federal government, so making sure Congress is happy is always important. But then we get a lot of philanthropic contributions from around the country. We

make sure that continues. And then because the museums have been closed, we've lost some revenue sources from restaurants and other kinds of uh shops that we have in the museums. There are nineteen museums at the at the Smithsonian and but almost a ten research centers, and those museums have been largely closed, though two are now open. The National Zoo is open, and there's reports that there may be a new baby panda being born very soon which will

get a lot of interest. And then the UH the Space Museum out of Dullars uh Ubar Hazy is open and they's expected that other museums will gradually open, assuming we do this with appropriate social distancing. I say we um Lonnie is a friend of mine. I was the chairman of the board of the Smithsonian when Monty was selected to be the new secretary, and I've been on the board for about a dozen years. I was a chair for about three years. David, A good morning from London.

A good afternoon from here. What is the Smithsonian? What did Lonnie tell you about what they are doing, what they're thinking of doing around around racism and around adding to the stock of education on that subject here in the UK, there's been a lot of soul searching around the people we chose to put on platforms over recent years and statues that are up in in all kinds

of civic spaces. It's important perhaps that those people, if they're toppled, that that maybe they find a place in a museum and people can learn the lessons of history. What is the museum thinking about doing there it's appropriate that somebody from London's is on this club because Mr Smith's himself was British, as you may know. Upon his death, he ultimately provided about five hundred thousand dollars to create the Smithsonian in the mid eighteen hundreds, and that's how

he got the Smithsonian's named after him. Of course, to answer your question, the Bank of America has recently given the Smithsonian million dollars and the Smithsonian is trying to raise another five million dollars for fifty million dollars to have a conversation and dialogue about race that will go throughout all the museums of the Smithsonian, the nine Team museums, but also try to have a very frank conversation about race at the Smithsonian, just as Smithsonian racial matters, but

about the entire country. Now. No conversation is going to solve all racial problems, of course, and there's no doubt that there are going to be racial discrimination, uh for some time in this country. But it's a beginning, and I think it's an important beginning. It's an important beginning. Important parts of the conversation, how how are they managing to return to anything like normal operations? David, because I know that one of the things you talked about was

the way that teamwork really shown through. And this is something I've heard from a number of leaders in business also that although the pandemic has thrown up incredible challenges for business leaders, it has also shown a light on resilience and and seen work in a way that perhaps normal times don't. Is that something you took away from your conversation. Well, sure, Remember most people in the United States love the Smithsonian. Is I like to say nobody

doesn't like the Smithsonian. Everybody likes the Smithsonian because people have fond memories of it, and part because its attendance is free. There are no admission prices, and that's because Congress is putting up the money for it. Its taxpayer money. So people have fond memories. I do when I was a child of going there for free, and and many other people I have those similar memories. Today. What we want to do is get the museums open again, and

that's what Lonny Bunch is trying to do. But we have to do it an appropriate social distancing way and way that isn't gonna lead to viruses and the employees getting getting sick or the people attending, So every employee will have to wear a mask. Those coming into the museums will wear masks, and we have to make sure we don't have too many people, and we'll open them up gradually over a period of time and see how it goes, and if we make mistakes, then we'll have

to correct them. But it's gonna take a while. And I think, just as other organizations around the United States that are figuring out other museums how to open up, the Smithsonian is is really the museum everybody's watching because we are the biggest museum complex in the world. David rudin Stein, thank you so much. It is peer to peer. These are wonderful conversations with business, finance, and indeed Washington leaders. Lonny Bunch of the Smithsonian Museum. That's tonight at nine

pm is well. 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