Surveillance: Digitization Of The Economy With Auth

Sebastian Gallery where us with Nordia. He's known for writing wonderfully dense important notes where you're like, damn, I hate this guy. I've got to read every paragraph, and we do that with Sebastian uh Galli, especially oh welco. Question to get the conversation started, what is your observation on currency dynamics right now? I think what you're seeing is basically a form of normalization. You're seeing, for example, the euro appreciated against the sterlings is also being driven by

exectations of negative rates. In the United Kingdom. You're seeing some form of normalizations, but no great trends um if you look, for example, in the margo market, the Church's theory, which is something people love to hate for good reasons, has actually been appreciating the last two to three weeks and doing actually quite well, helping the central bank over there to cut the interest rates by fifty basis point today.

You could see it on your bloomwerk. Okay, this is great, and then you know Brazilian ROWL has actually had a couple of good days versus the horrific pandemic statistics out of there. But Sebastian, is there a theme that can be identified here that it helps our listeners and viewers forward over the next ninety days. Concurrency tell us something forward, Well, they can tell you something about the effect in the

negative industry. So if the theme of negative interest rates in the United States is an important one, denied of course by the Federal Reserve, which is close to the banks. They think the banks actually need to have very good balance sheets, and it doesn't help what we call net income, so the ability to generate money by running down the

curve um. But if it does have a negative impact on on the dollar, it's gonna be great, particularly versus emerging markets, also versus g tents such as the euro. It could really reset the level of the dollar. And why because negative entries they hit the people um who are the most sensitive to it, which is namely the safest type of investors, such as foreign reserves. That could be China and the likes. It happened to the euro Zone.

I was there with the CB. They go for negative introvice, particularly to talget these people to force him out of the euro to reduce it. It works to some extent, not completely, but it does work, and as they start moving at a just the level of the euro in the same obviously could happen also in the case of the of the dollars. So one shouldn't neglect the fact the negative industry could have a powerful impact on the US, particularly because it owes money to the rest of the world.

It receives a lot of a portfolio flows, sting portfolio flows, but it actually is not in a great position, though a much better position than they used to be. So it's a negative in Church Chase is not a great story for fixed income in the US or risk taking, but it is a bit, but it could be a

powerful one for the dollar. A wise man once told me, and I won't confirm or deny whether it's a gentleman we're currently interviewing, but he once told me that when an economist becomes a central banker, they have to learn to lie. Sep what are they lying to us about right now? I know nothing about lying is absolutely not sure? Carry on having having clarified it is that I am not involved in this business. The business has central bankings

such as the military, is a business of lying. What your objective is is to gather people around you to create a narrative, to sell their narrative. There'll be hawks, there will be doves, and some of them genuinely are, but they are in the business of creating that storyline, which then drives expectations in the market. You then have

what you could call anchor points within the markets. It's important people large hedge fund manager, larger fixed income guys and to something and they received better information than other sense one of the reasons you want to be invested with them. And they then drive also the narratives with their own views and they group to some extent. Of course, the inforced the FED, and it's a very powerful and

well organized type of operations. So not all central banks are as efficient, but they are generally very very good, from the PBOC in China to the Bank of England which is the oldest one in the most experienced one Bunk Defalse also and and the FED and their business is to create the environments. If they tell you there's no negative interest chase, that means they're probably considering they're working on it. And they told the Bank of England

basically one of the oldest liars in central bankings. Yeah, well, it's definitely the skepticism John, that you've been showing, as you say, is you could get away with that because of his accent accent, he couldn't be that cental Chris Basha. Let's talk about what the FED can do. Let's say they're not lying about not wanting to use negative interest rates or not planning for it at this point, to talk about the additional tools that they have on deck.

We've seen massive inflows into some of the credit et f s and the hills of FED purchases in particular l QD, H, y G and even J and K more than a billion dollars of the past week into each of those funds. How realistic is this? Is the FED back stopping this and how much can the federally expand in this area? A lot? I mean, never underestimate the power of a central bank is one side of banketor used to say, I can put fish on my bounce.

She doesn't really not an issue, so never understimated. The only fish the only time when you wanna they have said that, and the only time when you want to have doubts is when inflation in rising. So when some emerging markets things are broken, for example in the meat industry, that creates inflation. When you have constraints in the system,

then they lose credibility and they're forced to act. But if if you have low inflation, if there are there's a significant amount of slack in the environment, they can do so much. And probably what they're going to do is try to go, of course in the high yield, but go to small and make caps with many caps and the and the likes mainstream facilities. Starting in June, it probably will be increased a vastly going forward. So

that's probably one thing to look forward for. More advransious center bacts even quite bearish on the outlook of the economy to put pressure on the government as well as on on the Congress to do something. But they probably are also deeply concerned that they actually need to put a much more pressure on the economy so that it rebounds quite nicely. Sae tell him, this is the problem.

This conversation, this very conversation is basically why market participants do not believe the Federal Reserve when they turn around and say, no, the negative interest rate. And look, I'd love to think that it's true. I hope they don't go through with this, but there is a reason why so many investors still think there's a chance they go

through with this till you overcome by events. I mean, that's all there is to it, you know, Obi, And in every institution can manage the messages all they want, and then when the facts change, they change, and there can be a set effects. John again, and I'm going to claims, what fifty minutes away, you know, you do a couple of months of unemployment that may qualify as a Sebastian girl. Effects changeable. What's let's finish there, Let's wrap things up. Let's say that the labor market doesn't

snap back quickly enough. Let's say that we really get this really strong disinflationary trend that takes hold. An inflation is steadily holding below where the policy rate is right now, what's the next move at the Fed. Probably the next move is is some form of credit easing quality everything, because they want to sort basically an expanding fiscal balance from from from the government, so they basically expand to absorb it, and so that's where they need to do MBS.

It's going to be very slowly, not MBS, that's going to come more with a lax so that you're talking about six one, six months, one year, and one year and half and two years down the road. Credit easing basically going where the pressure is and try to encourage people to take a credit risk and where it's very difficult to take it, such as mini caps, small caps and the life far more aggressions, negative intricate. That largely depends on the relationship between the White House and UH

and the Federal Reserve. So it's really a debate you really fet is essentially Republican institutions. White House obviously is a Republican one. So on one side they have the banking system, with which they're quite close to. On the other side they are quite close to the economy in general, and so they have to find some kind of balance.

Negative aturey straits are are possible in the in the United States, they're probably working on them in terms of implications, as the sues did for six months, and and that probably will take them in another few weeks, and and the debta ultimately will be a political one. There's the fet is independent, but it doesn't mean that it's not easily to some extent influences in some cases. So thank you so much, greatly, greatly appreciate it this morning. Just

very very smart. Let's forget about the millions. Now, we used to look at statistics weekly that we're two hundred ten thousand, We get all lathered up. If we got near two hundred or a hundred thousand, maybe two hundred and thirty. John and I would stay up all night drinking,

worrying about the future of a fully employed America. And now were up ten times above that two point four million, and as Lisa pointed out presciently hit twenty minutes ago, were so continuing claims matter and that statistic moves in the wrong direction. Stephen Roshido has been a student of this. He's at missooo and his charm is chief US Economist. As he writes a shockingly interesting note, always digging into

y equals see plus I plus G plus annex. Stephen Shudo joins us now steven the claims, but also on your general work. What's the thing that you're most studying about the American economy? Well, I clearly the the two degree of deterioration is unprecedented, not only in size but also on speed, given the nature of the lockdown, none

of that should be a surprise. What I'm really looking at and focusing on that sets this position particular period apart from others that most of us have grown up in is the coordination between fiscal and monetary policy UM striving for the same end result UM. You know, back in n seventy nine, I should say, when Paul Vulker moved us away from interest rate to money supply targeting

adopted monitorism. Basically, the Federal Reserve has been on a process of demand management, i e. Trying to keep the economy from creating underlying inflation pressures, and therefore, anytime fiscal policy was employed, the Federal Reserve work to counter that because they were trying to contain demand. This time through, you're seeing a Federal Reserve take the exact opposite approach, which is, we want to expand demand. We need to expand demand. We will do whatever it takes to amplify

whatever is done on Capital Hill. And they're even coming out and suggesting more fiscal policy is needed, which is another major change in the in the dynamic, because the Fed recognizes the risk they run here is global deflation being imported into the United States, and that's the situation they want to avoid, because once deflation gets here, it's very hard to get rid of. Nobody has been able

to get rid of it to date. Stephen, the fiscal stimulus we've gotten so far, there's been a question about how quickly it's getting out to people. And I'm thinking in part about the enhanced jobless benefits, and this really comes into the numbers that we just saw the Continuing claims. In focus is people try to gauge how many of these unemployed people are actually receiving the money from the

government that has been allocated to them. We saw a bigger than expected jump in the continuing claims now more than twenty five million people receiving those enhanced jobless benefits. What does this mean to you about how quickly people are getting the money versus how quickly people are getting their jobs back or not. As we see certain economies reopen.

You well, I think the problem here is going to be, even though we can get the economy back to a stronger growth trajectory much more quickly than I think some people anticipate, the ability to get the labor market back to where it was is something that is going to

be to take longer. Where it could take us a year to get back to zero on a year over year growth rate basis, so i e. The entire recovery stretches out for over a year essentially this time in one you know, we may be looking at a labor market that's struggling for several years, principally because you know we have people will be looking to try to maximize their returns as much as possible, and the easiest way to do that in an environment where demand picks up

is to create a situation where you control your expenses. So therefore, the le labor market data is going to lag as it is done in every business cycle in history, and this time it's going to be one of the longer ones. The two major jobless recoveries were the post recovery period um and then again the two thousand and seven period where it took us years to get back to where we needed to be in eventually those very low numbers that I was being talked about earlier on

in the beginning of the segment. So I think this is gonna be a long process where the economy could get back to a more healthy environment within a year's time. I think it will take two years to get us back to let's say, a seven percent unemployment rate, Steve, When you look at historical parallels for a moment like this, how useful aren't they? There really is only one, and

even that's not a particularly good historical comparison. Uh, you have to go back um to Jimmy Carter and his credit controls that he imposed on the economy back in to ring out inflation in the economy. That caused the underlying pace of economic activity dropped by ten um and it caused a four percentage point up would jump in the unemployment I should say, a two and a half percent jump in the unemployment rate. So therefore nothing fully

compared to this. But that's the closest we can because again, that was a government imposed tightening of credit on an economy which was much more heavily manufacturing than it is today, and therefore it had a bigger bite on the economy in the extistrict, and the pain was so so severe that they were forced to abandon it almost immediately, which is why it's also is the shortest recession in America's history. What's the partition, Steve Shooto, between big business and small business?

This is beginning to percolate about who's getting the benefits, who's using the benefits, who's returning the benefits, who will get the next tron to benefit? Split America between big business and small business. Yeah, and if you're gonna provide more stimulus, you have to give it the small business. The reason for it is big business has the ability to tap financial markets. And if you look at the ability of the financial markets to provide financing two larger

corporations that have access to these markets. You know, in the first half of this year, we've done about a trillion dollars worth of i G origination trillion dollars UH and a lot of it's been concentrated in the March April May period, no surprise there um. And therefore that's reliquefied a lot of them and allowed them to take a lot of the short term liabilities they've accumulated by

drawing down tow lines of credit. Term amount over longer reduced the impact on their interest expense and reduced their impact on the dependence on short term borrowing, put them in a healthier financial position. It's small America that has to go to the banks, and it's small America that is not being you know, adequately UH dealt with in

this particular period of time. So I think the next round of Stimus honestly has to continue to be focused at small, smaller and mid sized companies and to be focused at individuals, because individuals the end of the day, we are consuming economy. Three quarters of the two thirds of the U S economy is consumer spending, and therefore we need to make sure consumer spending picks up in order to get this economy to pick up. So those are the two areas where I think the next you know,

one trillion dollars should go to UH. And I think it will be at least a one trillion dollar bility, maybe even more than that. I don't think it will be the three trillion dollars Heroes Act that was advanced by the House and Representative. But I think it would be something along the lines of another trillion to trillion and a half, and I think all of that debt

will be purchased by the Federal Reserve. Yeah, that's certainly what we've been seeing, crowding out the private sector in terms of the monetization of all of the debt and all of the deficit that the US is taking on. I just I'm wondering what we can read into beyond the claims Stephen, with respect to delinquencies that we're seeing

increasing with residential mortgages. We've seen it with credit card loans, We've seen it with auto loans, and they've only continued to increase the delinquencies and defaults at an accelerating pace. At what point will we see this peek out? In your opinion, Well, to be honest, with the delinquency process,

um is a lagged process. So again, if you were to get the economy back act to zero on a year over year basis by the second quarter of it probably wouldn't be until the third or fourth quarter of that you would get to be at a point where you'll be glean to be very comfortable that the delinquency rates are rolling over. Steve shad Mansour great a catch out with the set. This is the most important conversation

of the day for so many of us. The whiplash of volatility, the up to eighty on the VIX, where we are now twenty eight, still a way above VIX normal of twenty. It has been a shocking, shocking twelve months. Stephen off the scene, all this before with Federated Herme's running their equity operation. We're thrilled he could speak to us on blue chip in investment. Steve, what did you do in the middle of March? I mean, I mean

you know you're you're doing this for long term. Your idea of short term is three years or five years. What were you doing in the middle of March? Besides looking at it Pittsburgh Pirates spring training most I was watching Pittsburgh Spired string train anything. I uh, you know, our view was in those kinds of down dress Tom. You know, my experience tells me you just gotta hold

your fire. Now. We we went into the thing frankly too optimistic, but we were, you know, basing our view on the idea that the market was probably heading significantly higher. A lot of drivers of this bull market I've talked about on your show, and then the Corona thing hit and it just came out part very very quickly. Um, we were playing the chess game, and um, you know, I learned a long time ago, I'm not the smartest

guy in this chessboard. And that's what I think. At the bears in trouble, they start to think they're smart than everybody else, and I'm looking at the same thing everyone else is looking at, and I'm thinking, well, the Fed's got to do something here. So we were advising our clients hold your ground, hang on your equity overweights.

There will be a reaction here. And so we've held our ground, and um, you know, we think we're still in an up trend, you know, but what I would call like kind of short term beer market within that, and most importantly, Tom, what we have been focusing on is stock picking, because I figured we can't really get this market one way or the other, but we can figure out which of the stocks are gonna win and lose.

So down at the lows, everything was getting closed. It didn't matter whether you were a winner or a loser or something between. And that's where the real opportunity was there was just get by these winners. We know they're going to actually do well in this environment. In fact, in fact, many of them are actually growing their cash flow in the Corona lockdown, and in a way, the

easy part of the game now it's getting. But Paul, what's so important about what Mr Ross says here is it's all easy to say, I got to identify the winners. But in that exercise you try to avoid the losers. I think that's even more important than finding the next Amazon exactly. Yeah, Steve, you know you mentioned it's a game about, you know, if you can just avoid the losers, the blow ups in your portfolio. So so, Steve, what

are some of the sectors here? We again, we retraced kind of half of that decline we saw decline peaked, the tropic retraced, you know, maybe a little bit more than half of that. What are some of the sectors here as you look out to maybe the other side

of this pandemic that it got your attention right here? Well, well, first of all, I just want to take exception to that that this is one of the issues people say, we've only three traced half to decline, if you look at what I call the survivors, which these companies are gonna make it through but need the economy to be alive.

They've retested their March twenty three lows. It's only the winners, and the winners aren't going to retest March twenty three, and so the average of the market looks like it's only retraced half the well off low. It's the place half decline or in the other end, hasn't gone back to those lows. But actually the stocks that matter have uh. In terms of sectors, we continue to think the digitization of the economy is a big theme. It's accelerating as

a result of this. So therefore we like tech, but more importantly, we like companies that are utilizing that now in the broader economy. So it goes across sectors where we're finding companies, particularly in small cap land, that are taking advantage of technology to take share of the example, tele Adoc right in the healthcare space is using technology to deliver healthcare services online. Right that's a big growing business right now. Um, we're looking at u Pharma because

we think that's another that's been a trend biotech. It's accelerating now. Obviously we're even looking at this manufacturing renaissance theme because we have a lot of companies that we think are gonna okay. Right now, they look pretty beaten up. But if this economy does come back as we expect it will, and ship fits and starts, they're going to be taking share as supply chains come back in from China. You know, that's what's going to happen the next five years.

I don't think it matters who's the president. We do we think? Do we think Steve about you know some of the sectors that have just been really crushed. I'm thinking about energy. For example, we're seeing oil come back here um off of this historic lows uh in pricing, negative pricing. Um. What do you think about the energy patch? Well, we're not heavy there yet, we're sniffing around. I think on the energy patch, the way I would play it

is to go with the real, big integrated names. They're usually the boring stocks, but they actually are the beneficiaries. You know, they've got the balance sheets and they're the beneficiaries of the shakeout that's now happening as all these wildcatters in Texas finally find out and this is why the I think spots rowling is like the wildcatters are finding out none of the uh the depots will take their their supply, you know, and so they are being forced to shut in. And a lot of those wells

can't come back up once they're shut in. So it's the big players that have access to storage and have balance sheets to get through this. They're going to benefit from the inevitable rebound in energy prices. It's going to happen over the next three years. There's been no investment in new capacity and a lot of the existing is being shut in and if the economy comes back. I'm not a screaming buy on these names, but I um, you can at least collect the dividend pretty safely here.

I think in the energy space I would play it more defensively, is what I'm saying. Stephen Off driving the market higher here with Federated Army's right now read on the screens to the morning Well Green right now, deal up points SMP for actually higher. Let me give you those levels two nine seven to on standards six zero, six thousand, six hundred on the data VIX under eight seven. Steve, I hate to mention this Paul twice, but I got to do it in one show. It's just a rare thing.

Robert Schiffman in the team over at Bloomberg Intelligence writing up a credit report on one of the small technology stocks called Microsoft. What would you like, Steve both, for those tech giants to do with all that cash? I mean, what's do they have an obligation to do something with it? Or is a is a conservative buttondown guy like you comfortable that they got a jillion dollars on their balance sheet. I like the fact that they got the flexibility. Tom Um.

You know, as the market cap expands, it has not become you know, excessive. They'll do maybe some acquisitions as Microsoft and Google have in the areas that can expand their footprint even further. It is in that space, as you know, rich get richer environment, and that's one of the reasons a lot of the large cabin names are doing well. But it's and even the niche small cab names that have niche capabilities that are growing in this environment. Um,

that's gonna be one of the games here. I guess in the next two or three years, you're going to see further consolidation and that's the case even in some of these sectors we didn't talk about retail, restaurant, chains, hotels. There's gonna be a consolidation of the winning players, and you're gonna have capacity come out of the system that was already suffering going into this thing. And this is just this is just accelerating that process. Now. It's violent

what's going on. And that's the reason why you can't be overly bullish about the economy because the creative destruction process is going to be a little bit of a drag here, I think in the next twelve, d eighteen months, But if you're in the right stocks, I think you can still do very well. See how much are that Does a market really need another round of fiscal stimulus? The first several rounds we got out of Washington were

generally bipartisan, generally out the door pretty quickly. But it looks like this next round, whether it's the three trillion that the House is proposing, not going to be so easy. How much does the market really need another round of fiscal stimulus? I don't think it's tom you know, a pool rather um. What I kept saying during the crisis was this is not a stimulus as the way we normally think about it, it's basically a bridge loan. The economy is healthy, we need a bridge loan to get

us through this liquidity crisis. So I think that's what the first round should be characterized. It was a bridge loan. Now, whether we use stimulus or not, it depends on how well the bridge alone worked and how much creative destruction is now going going to happen. But I think the first rand of stimulus is now happening, which is we've got all this cash piling up. The savings rate is through the roof the so called unemployed, most of them

have been getting cash from the government. The businesses are are are pretty liquid. We're going to see how much of this spending gets unleashed now. And I think that itself is going to be a stimulus. And if we get progress, continued progress on the healthcare side with things like Maderna and the vaccine side, that's a stimulus psychologically to consumers who need a reason to spend their cash. And so let's see how that goes over the summer. And I think this is one reason why there isn't

a bipartisan support here. It's not as odd that we need another big ranch of spending. Steve that's too much optimism go away. That was federated is really greatly appreciated. A ten of it is important that we chronicle this pandemic. And we're just so proud of our staff that has given us experts around the world. Jason Farley has what appears to be a quiet job but extremely important at the Johns Hopkins University where he drives forward their academic

acuity and nursing. We spoke to Dr Farley today and has talked about all those lights at the end of the American pandemic tunnel, many glimmers of hope, and I just want the audience to know that we do see hope on the horizon. The appearance of a calming of the virus in certain locales and in Baltimore I am, and in many other locations is happening. We're seeing a

flattening of the curve. But by no means do that mean we can roll back our our active participation in the social distancing measures when we're out about about our life and I look at you know, rolling back to social participation. The fact is we see social part anticipation. Can we get away with this with the distances between us six ft twelve feet whatever that number is, or do we just really have to stay locked down? There's

a huge pushback. Yeah. No, you know, I think that the population is exhibiting the exact same disillusionment we we anticipate, you know, in the beginning of any kind of pandemic.

You know, there's great science around this. We see this heroic effort of the population to come together into to persevere, and then that over time really gives way to this level of disillusionment where people begin to push back in this feeling of you know, this desire to interact socially, and we have the in the US, the Memorial Day holidays coming up. I would just caution, you know, think

and plan accordingly. If you're getting together with others, you have to set strategies so that you can maintain social distancing. By no means that if the time to bring the entire family together at the barbecue. There's tons of data from the CDC about family related household related when multiple different members of different households are coming together and the subsequent infections that ensue. There's also data about transmissions in

churches who have kind of exceeded their capacity. So again, what the large gatherings. It's really important, Jason, and talk to me a bit about what medicine actually work in treating COVID nineteen. Well, in the treatment of COVID nineteen UM, we still have, you know, the glimmer of hope reducing hospitalization with pridensvere. Although that study did not show statistical benefits related to its um mortality of with the drug, there was a statistical benefit of reducing the symptom burden

and the length of symptoms and hospitalization. UM. We also have great news on the front of initial preliminary results in recent attacks or monkeys as well as some guinea pig models showing initial um ability of the vaccines of the several vaccines in evaluation to produce a great antivirus response. Now there's a long journey between the animal model and the humans, but we do have at least some glimmers of hope that those viruses UM that those vaccines are

helping having an impact on the virus. So all good news is the virus mutating, No, I think UM, it's a relatively stable virus. But we always see because viruses replicate themselves billions and billions of copies per day. Um that we always see a little bit of a drift in the virus structure, so slow model changes in the structure so that we can say that if I gave the virus to persons BE, and they gave it to person SEE, and then they gave it to person D.

Between A and D, we will see small changes. Those changes aren't mutation. Their mutations in their growth that since the word, but they're not mutations that mean that it changes it pathogeniquity typically or changes it it's virulens or the way in which it kills or you know, causes infection. Jason Farley, the Johns Hopkins University School of Nursing. 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