Surveillance: Deflation A Bigger Concern, Says Jones

you think about this market. For many people, it triggered fears of a second way. For others, it fueled hopes that will reopen quicker and better than expected. To bring someone int who can give us more clarity on what he thinks on that situation. I'm really pleased to say that Judy Mamanuel joined us now of BT. I g Judy, and let's talk about that. Did the weekend's photographs, the pictures of people getting back to normal, did it trigger phase of a second wave or fuel hopes that we

can normalize faster. I think it actually fueled both. John. Uh. You know, it's first of all, it's very clear that the last several months have made this a more emotional time than usual. But I think when when people saw those pictures, you had both you know, and again somewhat dependent on the state you live in, whether the cases are rising or falling, and how the progress is, but

it really drew out emotions. And then if you look at the weather, it was reasonably nice across the country, which I think has sort of fed into the optimism of share prices in the last several days. All right, so let's talk Julianne about the emotion in stocks right now?

What kind of reopening our equity investors pricing in one that is steady and contained and doesn't include a second wave or is it something that comes and fits and starts, but at least as a beginning, so it feels to us as if it's more a fits and starts type of issue. We've called this the potential for you know, everyone's using letters to describe the recovery. We call it a bathtub shape recovery, so that you know, you basically

the US extended sort of into one, as it were. Um. But what really matters, I think, as much as the recovery itself, is what people are pricing in with regard to the medicine and where stocks are right now, uh to us, you know, basically indicates that people are believing that there will be some sort of vaccine not necessarily available for this fall, implying that there could be a second wave, but certainly for you know, the fall of the big challenge for so many people, most investors in

the security market right now, Julian is finding that right balance elebrating your exposure to cyclicality to safety. How do you balance those two things right now? We just saw this classic risk one move yesterday with a huge cyclical till, the stay at home stocks, the likes of Netflix lower, the reopening names, the likes of Delta, the airlines ripping higher. How do you want to balance between the two going

forward from here? Julian, So it's been our view and and we've looked at a lot of data going back the last thirty or forty years, and what we saw is with the remarkable consistency the stocks and sectors that were under performers during the bear market phase, once you transition to a ball market tended to be the leaders. Now we're not entirely sold on the fact that you've

gone into a new ball market. Um, you know, we actually think that at around this level of three thousand and SPX, you probably need to do a bit of work time wise. But in order to sort of account for that risk, and we've seen this the last several weeks, is that people are rotating into small caps, into energy, into financials and taking some chips off the table, uh, from the shelter and play stocks. And we think that's

a prudence strategy to keep to keep doing. Jenny, what would give you more confidence that that move was durable, that that rally was sustainable, that it's more than just a squeeze. Uh. If if a number of companies went into Phase three trials would be a first thing. A second thing is if Washington would listen to Chairman Powell, who has been adamantly for the last month insisting that more fiscal stimulus is necessary, particularly when you look at

at small business USA. The time to put politics aside was a long time ago, and you know, from our point of view, they need to, you know, consider how that package is going to look before the fall. Um. Those are probably the biggest things for US. I was struck this morning by something that Bank of America Global Research put out they said, Hoping that either fundamentals will improve at record speed or that they simply don't matter is a real risk given markets inability to decouple from

recessions in the last ninety years. I'm struck by what you said, Julie, and the fact that people are looking at the medicine perhaps not the underlying fundamentals. How much does the FOMO rally. Does this incredible boost risk assets right now decrease some of the pressure on policymakers to continue with the medicine? Well, I know, the medical aspect of it has got to be sort of full speed ahead.

And I think if you look at the last couple of days, several other companies announcing that they felt good about, you know, moving into face. No excuse me, Juliet, when I say medicine, I'm talking about the fiscal medicine, the idea of policy coming out of Washington's getting together. Yes, yeah, Well, so you know this is an election here, Lisa, and you certainly have a lull right now, given the fact

that the equity markets have moved where they have. But another aspect of it is that certainly what we've seen in the last several weeks, is it ratcheting up of pressure with regard to China, and that is something that sort of, you know, is one of the caps in the marketplace as well. We actually think that as the data continues to it's not going to improve dramatically, you know. Certainly, Jamie Diamond coming out and saying that a rebound, a

stronger rebound is looking more likely, is encouraging. But the fact is is that the employment situation and small business America is still very much you know, at risk. And the closer you get to the fall and the closer you get to the election, the more imperative is going to be forgiven that those are the constituents who are going to be casting ballot um, you know, to to really do a bit more to get us through to where we're at the point next year where you actually

do get a more durable recovery. You mentioned China, and this is a key ingredient to markets right now. So far, I can find a little evidence of worry that this escalation and tensions between the US and China is leading to any dampening in the risk on trade. Do you think that right now investors are overly complacent that we're not going to see a ramping up of tensions that will have a drag on global growth, especially heading into the election. Well, I think it's it's it's probably more

bluster heading into the election. Um. But if you actually look at the options market, which as you know, we do, what you've seen again is that the the hedging for the term just past the election has become cautionary. Again. Downside puts have become very expensive relative to upside calls, which tells you that the risk, particularly with regard to your polity, is more an issue. And we think that's applicable,

you know, regardless of who wins the election in November. Julian, always great to catch up with you send our best of the family. Weren't you brilliant to hear from your Julian and many were there of BT I g to talk about the bond market. Let's bring in a good friend of this program, Kathy Jones of SHOs Schwab. Kathy, fantastic to have you with us. I've been thinking about what I know you've been thinking about, what would create the most amount of pain in this market for the

most amount of people. Inflation? How underpriced is inflation coming out of this as we reopened, Kathy. Oh, it's really underpriced. And you know, let me be clear, we're not looking for a lot of inflation. We have to get through the deflation before we get to worrying about the inflation.

But when you look at the way the markets priced right now, there's really no there's no expectation built into the bond market of inflation, and so it's a huge concern that keeps coming up with our clients, even though we think it's a couple of years down the road, if it's out there at all. It just seems to be some confidence, much more so about the front end of any yield curve at the moment, Cathy, And for

good reason as well. It's really anchored central banks are just going to sit there for a long long time. It seems to be a lot more uncertainty about the longer end have a ten year and out response to any pick up in inflation, Cathy, What are your thoughts on that at the moment, particularly specifically here in the

treasury market. Yeah, I think that there is the expectation that a worst case scenario, the Fed goes to yield curve control, and that keeps the short intermediate term at least anchored, and that they would take whatever moves they would need to take in order to anchor the long end of the curve as well as much as they did in that post World War two era. UM. But I do think that, you know, for people who are worried about inflation or at this this point, the cheapest

way to hedge it is probably tips. Um There there's almost no yield. In some cases they have negative yields, but um in terms of hedging tail rift tips are a very efficient way to do that. And we do see people kind of barbelling their portfolio, so they're buying kind of short term credit and long term tips as a way to play both ends of the spectrum. I'm struggling to understand that where the inflation would come from. People talking about how money printing in the past hasn't

led to inflation. Certainly we didn't see it after two and eight. I do wonder though, whether the trade issues and the deglobalization that we were talking about early on the program will lead to inflation. The idea that overseas production was cheaper, you bring it back on shore, it gets more expensive. How much is that driving the sort of barbel idea that you have. There's quite a bit

of thought about that. Um, I'm a little bit skeptical that companies are really going to reshore that much because it's still going to be a big leap in terms of their costs, and can they really pass those costs on to consumers and um, and not just hurt their margins.

So I could see that you'll see some movement of concentration out of China, as we've already seen, but a lot of it is still going to places that the labor costs are cheaper and you still have sort of this access to global supply chains a Latin America, obviously

the rest of Southeast Asia. So you know, if it's going to happen, if the globalization is going to happen, I think it's a long term process, just a globalization was so, Um, we're just not seeing the kind of inputs to inflation that I think will produce it in the next year two or probably even three. But at some point down the road, you know, there's always a possibility it could materialize, and I frankly think central banks would welcome it, right, they'd be very tolerant of an

overshoot on inflation at this age of the game. Well, that's the point, isn't it, Kathy, that'd be tolerant of it. Let's talk about that reaction function, how they would respond to any of this. Do you think they'd respond at all? Not initially, um, you know, if you think that the safe for the FED. They've undershot their inflation target for I don't know how many years now. UM. We've heard from Powell that you know, the emphasis on this is a symmetric target at two percent on the core PCE

or really whatever measure UM you want to use. And so I think they would be quite tolerant if UM, because I think the central banks believe the inflation is the problem they can solve. They've done this in the past, they know what it takes, UM, and so this is not their big concern. That deflation is the bigger concern. So I think they would let it run for a bit as long as it was a mild acceleration and

not a runaway acceleration. Let's talk about another problem that the federers are of another central banks can't solve, or perhaps have been unwilling to solve, and that's bankruptcy. And John and I were talking about this earlier, this idea that is there any discomfort emerging from f O m C members given the fact that we're seeing a rally in the riskiest debt this month, which is actually outperforming safer notes as investors get more complacent that they'll be

back stopped by the FED and fiscal stimulus. I'm wondering how much that disconnect has led to elevated prices. In other words, how much pain are people going to feel who are buying triple C bonds right now. Yeah, it's been quite remarkable to me how people have sort of piled in UM because of the perception that the FED is going to buy the whole high heal bond market. I mean, if you if you listen to what they said and look at the term sheet, they're not buying

the entire market. I can see that spreads were so elevated that they needed to come down that. I think that that makes sense. Just the provision of liquidity help that. But you know, they've been very specific about buying some fallen angels UM a small all amount, a limited amount of e TF. But you know, people are trained now. I think there's just conditioned now if the fet is buying it. They're buying it, and the perception is that the FETE is supporting the high yield market broadly speaking,

and a lot of people have running. If you look at the assets under management and some of the bigger e t F they've jumped in the last couple of weeks, so clearly a lot of people are chasing the trade. Yeah, it's been shocking to me. I've been watching h y G, the Black Rock High Old bondy TF. It's seen nearly two billion dollars of the influence over the past week, more than five billion dollars so far year. Today, I'm just wondering, are you selling this? Are you basically saying

we're out, We're done. We think you guys are overpricing the FED put and right now we just want to hide out an investment grade and treasuries well, we definitely prefer investment grade UM and at the shorter end, you know, one to five years, which is what the FET is buying on. On the higher we're neutral, but we're being really cautious because a lot of these companies won't qualify

for the FENS program. UM. We do look for defaults to pick up maybe and as high as ten percent in the speculative default, and we think recovery rates are going to be low so UM, particularly with you know, the triple cs and the very low rated bonds UM, we would definitely be out of that me, Lisa, this is the pain trade, isn't it? And we saw it play out in Europe over the last ten years. Once the central bank gets involved in an asset class, it's

totally divorced from fundamentals. You can get spreads grinding tighter even as the economy hardly picks up. We saw that over the last ten years, and I do wonder, Lisa, whether that is the playbook this time around, or whether things are somewhat different. You can't have fed money preventing bankruptcies. There's only so long that asset prices can remain elevated at a time when these companies are getting no revenues.

That's what I'm struggling with, and the idea that some of these companies are putting up islands and cruise ships in order to raise more money and stay alive. At a certain point the time runs out, which I guess, Cathy, that's my question. What's sort of the tipping point at which these companies become insolvent and no amount of fedbackstop can help them. Yeah, I think it's coming, you know,

I think it will probably materialize later this year. Um, we're not seeing the revenue pickup that a lot of these companies need. A lot have been living on rolling over short term debt in the bank loan market, and that that market is has deteriorated pretty quickly. So I think it's coming later this year. For the really low

rated credits. This has been the initial kind of euphoric move of recovery off of you know, spreads at over treasuries, and now they've come down to something that's you know, closer to realistic, I guess, given the backdrop. But even um, even if if the whole country opens up, and even if you know, we start to see recovery, I think some of those companies just can't make it. Their debts are too high. They're not going to recover um to

profitability anytime soon. And I think their leverage ratios just got two out of control. So I think it's coming probably late this year. Cathy Jones will continue the conversation, no doubt. Kathy from Cha Shwa Lisa, just a lot of optimism over the last couple of days relative to where we were several weeks ago about how quickly we can reopen, but not only that, how quickly we can get back to normal. Yeah, if you look at the pictures over the weekend, the pandemics over John, that's apparent

from the Lake of Ozarks. Apparently as everybody gathers in and crowds pools. My question is, are we going to see a second wave of infection in two weeks that will reverse what we've seen, or is this going to give fuel to people who think that perhaps some of the shutdowns have been overdone, giving more of a lift to equity market. It's a big question mark and ultimately it will be one of the determining factors of what's to come this summer. Let's have that conversation on reopening

the conversation of the Morning on that very topic. I'm pleased to say that the fifty four mayor of Boston joins us now. Ma't Marty Welsh, Mr Maynor, fantastic to have you with us on the program. I'd love to get your thoughts on this. There is so much discussion at the federal level, how quickly we should open up At the state level, can you talk to us about the city level why Boston needs to go at its own pace. I mean, first of all, thank you for

having me this morning. Or secondly, I think that Boston is a very densely populated city. We're about seven hundred thousand people and about forty seven square miles. Every day when we're in normal circumstances, are city doubles in size for people coming in to go to work here in Boston. And during college season, we had another hundred and fifty to two hundred thousand college students in our city, graduate students that are learning here in the city of Boston.

So what I want to make sure is is we reopen, we get it right. I'm and about a second surge, and I don't think that our economy and necessarily can handle a second surge and a complete shutdown. So I think it's very important that as we as we reopened, whether it's office buildings or manufacturing or whatever it might be, that we do it in a in a very thoughtful, methodical approach, so that we so we don't have to in the event of a second surge. Again. Well, it's

just in terms of the education system. And you've touched on that, let's expand on it. What's the city prepared for just in terms of how quickly we can get the schools reopened. Well, the colleges and universities are making having conversations now. Uh, some of them have already made statements that they'll be back in August, and I hope they are. Uh. They're talking about doing massive testing and tracing and also potential ices self isolation and if if

somebody tests positive. You know, it's a big part of our economy here in the city of Boston. It's a large employer in these college students that come in and spend a lot of money in our city. They in our restaurants, they shop on our store. So it would be great to see schools open. But the way that's really important for me anyways, Mayor, is to make sure that they're healthy as well. I mean this this is in health, health care, adversity, economy. This all has to

be together. Public health is vitally employed. Right now as you move forward, Uh, you know, nearly over three hundred thousand people have lost their life. Assume me three three thousand people lost life in the world A hundred hundred thou in the United States of America, and quite honestly, if we didn't take all the precautions that we did over the last three months, that number would be five greater. In Massachusetts, were the fourth highest state for the number

of cases, in the third highest state for deaths. And that's not where you want to be. And it's important that we take continue to take this serious and now is not the time to let our guy down. Mr Mayer. I'm wondering whether reopening plans can be determined locally, city by city, or whether in order to be effective they really have to be federally coordinated. I don't think they did federally coordinated. I think they have to be state coordinated, and I think they have to be almost in in

massagus as we usually go by cities and towns. But if you can do about county uh in Massachusetts, the two of the highest counties that have the highest number of cases of Middlesex County in southak County, we're in southa County and Middlesexes next door. If there's an opportunity for us to look at kind of the approach of New York was looking at letting some counties open up

ease and restrictions. You have rural and and and uh and in suburban areas, uh you know, uh so, so it really is important to think about the thought fulm when you think about reopening. You can't just blankely reopen across the country. You know, Massachusetts, Michigan, New York, New Jersey, the highest states. What we're dealing with a different The challenges in our states are a lot different than than Wyoming, North Dakota, South Dakota, and and and and you know

maybe uh Louisville, so Kentucky, I should say. So, I don't think it can be a state by state. It has to be um can't. It can't be by the country. Should say, it has to be state by state. And we're also sharing best practices. So what I watched is going on in Seattle. I watched going in l a and New York, in Houston and Austin places like that.

In Chicago, and I make decisions. Sometimes my decisions are based on what they're doing or where they're out on the surgery for ahead of them, they follow us, and when we follow them, it's about sharing better practices. Mr mayor based on your experience with the virology here, I'm wondering whether you think that the data backs up the reopening enthusiasm that we saw across the country over the weekend.

I think that the data backs up the reopening, and for follow it, I think it's not being followed consistently across the country. I think that you know, the data shows that we don't have fourteen day declines and people feeling the precture reopened. And I appreciate that. I'm elected official of mayor Boston for seven years. Uh and and I can feel the precture sometimes, but it's not about the pressure. It's about doing the right thing. Uh. There's

no difference between reopening and shutting down. When you make a decision shutdown a city, which not many people have had to do in the last hundred years. Quite honestly, their difficult decisions. As we think about reopening all of the work that was done over the last three months, whether it's in Boston or in the Ozarks, how do you can't just let that go by? Just reopening because people want to be out in the sun. It's not

it's not a safe way to do it. Because the data will show us again if there's a second surge, if that surge could be worse than the first one, and that's where the problems will come into play. Well, it's just in the forty five seconds we have left with you, I think it's important to touch on austerity. The good news is that the budget was in good shape in Boston coming into this particular crisis. Coming out of it. There's a real fair about state and city

level austerity. Could you set expectations for us appropriately? Appropriately, I mean, I think we've had seven years of incredible growth in the City of Boston. In this coming year, what we're gonna do is preserve the important pieces of the budget. We're going to be making investments in education, investments, and housing, but we still have to have a balance, responsible budget, so there will be cuts across the board

in the City of Boston. Our final budget will be voted around sometime in the next three weeks here, and we're working right now without Boston City Council to come up with the final products. So it won't be as it won't be as row as the budget as as as last year was. But hopefully we get out of this safely and next year we're going back to prosperity again. Marty.

I hope this is a conversation we can continue. I look forward to doing that with you over the next several months on this particular topic, because I think it's a really important conversation. Boston's Mayda there, Marty Welsh on reopening in Boston as we shift gears to China very much also in the focus right now, and I'm so pleased, say Leland Miller of the China Beige Book CEO joins us. Now so hard to parse the noise from the reality when it comes to some of the saber rattling between

the US and China. Leland, what measures being currently proposed by US Congress should traders should analysts be taking more seriously? Well, there are a couple of different things happening right now, and I think that's one of the reasons why people are a little bit complacent about what's what's really an enormous downside risk to markets over the coming weeks and months. Uh Potus has come out and said, Uh, we're gonna make a big and you know, I'm gonna make a

big announcement on Friday. The presumption is he's gonna come out with some sanctions and some other some other threatening moves. UH Congress has come out with a bill that is actually quite aggressive and then its sanctions individuals, but it also sanctioned Chinese banks that assist those individuals and cracking down on the Hong Kong protests and and so you've got these sanctions looming over over markets. But the bigger deal is actually the question of special status for Hong Kong.

So Hong Kong has a special relationship with the United States in that UH, we don't treat it like mainland China said, it's sufficiently autonomous from China to treat it differently, and the State Department has to make an annual certification that that remains the case. This has always been sort of performer for years and years and years. Now it's a big question. And if this passes, if these Article twenties three sedition laws are jammed through Hong Kong from Beijing,

there's a very good chance. But we will see the certification from the State Department, and that the certification will likely lead at some point in the near future to special status removal, although the president will have the ability to make that bigger or or or lesser, depending on how he wants to to run this. So a lot of things and a lot of risks coming from from these actions. Leland, who would that hurt more provoking the special trading status the US or China? Well, you know,

it's not really gonna hurt China directly. It's gonna hurt Hong Kong. And that's the main problem with this is that most people in Hong Kong are very, very opposed to the fact that Beijing is stamping out their liberty and and and doing away with one country, two systems. That's why this isn't an automatic move uh in regards to Article twenty three. But I think the United States

will have to move forward. Is particularly if you start seeing a restive actions UH when the NPC, when the National People's Congress language is announced, you'll have a question of whether it's going to be uh, you know, softly introduced, or whether you immediately see the security services pulling people out of their houses in preparation for you know, Tanneman

Square anniversaries next week. It's a huge political anniversary. So depending on how the Chinese handle this, you could see a very fierce reaction in a matter of days, or you could see this as a slow boil through the

next couple of months. Leland, Why is Beijing doing this now? Well, I think that it's tempting to look at this through the prism of US China relations and and and certainly there's an element of this, But the reality is that in September, Hong Kong has legislative council elections, and just like the lower elections that were held a number of months ago, pro Beijing forces look like they're going to

be very very poorly. So if you're ever going to sort of tighten the screws and put in uh some some stronger laws to give Beijing control and make sure that Beijing is not embarrassed in September, you really have to act now this summer in order to change the

landscape so that Beijing is not embarrassed in September. So a combination of what's happening externally and what's happening in Hong Kong domestically has created this window where Beijing has to act, and probably act aggressively, if it wants to change what's going to happen in the fall. And it

looks like that's what it's doing right now. John and I were talking throughout the morning about how markets are pretty much shrugging off a repeat of what we saw in recent years with respect to the rising tensions between the US and China over trade. A lot of people saying Phase one trade agreement still on both countries needed, you're saying it's basically dead in the water. Why do

you say that? Well, look, when when people hear sanctions, if they're they're right to sort of, you know, roll their eyes a little bit, say how meaningful are these sanctions to be? Is the Congress or is President Trump really going to sanction since it's a very high level pulp of bureau members, uh, you know, free their assets, do some some some big time moves on the sanction side. Probably not at least right now. So they're right to not take sanctions too seriously quite yet. But the special

status is a really big deal. And if the United States uh pulls that back, then it changes the US China relationship quite significantly. And look, the this it reflects the overall deterioration of the U. S. China relationship going into the fault. I mean, it's getting very, very toxic, and you know, My belief is it's going to be very hard for the President to stand by the Phase one deal when he's not seeing the deal filled. He's going into a very rough election season. China is the

topic of the day. Whose means to China, you know, as the the guy is gonna win this, and he's gonna have to stand by the deal until he can't. So I think Phase one is in real trouble. I think it's likely we don't see it survive the election. And uh, this is just a reflection of the overall toxicity of the relationship right now. Lelan Miller, CEO of China Page, thank you so much for being with us.

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