Surveillance: Dudley Says Fed Can Do More

Holding Court. As a senior research scholar, but far more than that, he developed Goldman Sachs Economics Prejon Hasseas with Ed mcelvey and knew that it was about theory, it was about the guestimates, but it was also the granularity of the data. Bill Dudley joins us this morning. Dr Dudley, I want to go right to the Dudley. It feels

like Ed mcelvy call here. I want to talk about the Dudley Beige Book about how you use data, like Mike McKee just reported, But you have to look at the data in the context of what's going on elsewhere. So you know, the fact that the retail cells were a little weaker in October reinforces the idea that is, the pandemic gets worse and there's more shutdowns and restrictions at the November data, which we haven't gotten yet, will

be even softer. So you know, we have a value that we have to go through over the next six to nine months before the vaccines arrive and we can get people vaccinated. And I think it's gonna be a difficult validy to go through because the pandemic is getting worse and there's no fiscal stimulus package that seems to

be about to arrive in a timely way. This is so so important, folks, and why it's so good to have William Dudley with us right now that the only one I can think of Bill Dudley is Lawrence Meyer. In terms of looking at the granularity of the data week to week, as you did years ago at goldben Sex, what data are you looking for forward to frame out

the next two quarters. I think I'm gonna be focused mostly on the course of the pandemic itself and the reaction of state and local governments in terms of the restrictions that they put in place and how much people actually social distance, you know, to extent that the pandemic worsens and we have more restrictions, that's gonna exert downward

pressure on the economic good data. I think it's also important to recognize that when we get data like what we got today in retail self, we're really looking in the rear view mirror. I mean the data is at over data first half of October data. We're in a much worse place today than we were in the first half. This bility point out is about momentum. Momentum is fighting the data, as you anticipate, is sets to worsen from here because of the restrictions. Let's talk about where this

leaves policymakers, specifically monasty policymakers at the moment. You wrote an upad pace full blom Bug opinion in the last month which said quite clearly that you think many of the shatis for you that they have run out of ammunition. So Bill, where does it leave them right now? Well, they can do more, I mean, they haven't completely run out of ammunition in the sense that they could increase their asset purchases, or they could extend the duration of

the asset purchases that they make. But it just wouldn't have that much consequence because the FED is actually succeeded in what it what turns what it wanted to accomplish. It's made interest rates very low, and it's made financial conditions very accommodative. FED did more, would it help a little bit, But the end of the days, this is really about fiscal stimulus and providing support to incomes to help people get through the valley that we face in

the months ahead. Come balanced Bill as a former policy make at the FED. When you look at things right now, we have market participants come on this program all day, every day, five days a week talking about risk or lack thereof in the credit market. Because it affects presence in it, it's not a good thing at a time like this. Well, I think the FEDS backstops are pretty important because it basically reassures people that there is a buyer of last resort, and so that encourages other people

to be engaging in financial markets. The FEDS, you know, the liquidity facilities of the FEDS has provided Actually haven't had that great out of takedown. Uh. What's happened is that they've served as effective backstops, and I think it's very very appropriate. Another issue that's going to get some attention is whether the FED is gonna extend the date

of when these liquidity facilities laughs. Right now, they're scheduled to end at the end of December, and I think it's very likely that they'll extend them, probably you know, through at least into end of March, and maybe through the first half of two thousand one. Still a lot of people agree that the FED stepped in and provided a backstop to a lot of companies in a good way.

But there's some concern that the FED is dramatically exacerbating inequalities, not just in terms of households, but among companies as well, because right now we're seeing the pain really being felt at smaller companies that don't even register with their bankruptcies, since they simply just close up shop and they don't have access to borrowing money in credit markets in the

same kind of way. Do you think that the FED has almost whitewashed some of the pain with their policies looking at broader markets that have this enthusiasm, and that this is somehow at this point potentially even harmful. Well, I don't think it's harmful. I mean in the sense that it's much better to have financial markets operating than

not operating. I think the problem for the FED is that Monterrey policy is a blue instrument which can't really do much about the fact that the impact of the pandemic follows very unequally on household and on different types of businesses. You know, the FED introduced the main Street lending program to try to get to a set of businesses that can access the capital markets very easily, and it just hasn't worked very well because there's lots of

terms and conditions and so there's been very little take up. Uh. Yeah, I think it's much better for the FED to generate as strong as strong economy as they can and recognizing that there may be on equal burdens. But then that's for Congress and administration to come forward with the fiscal pactes that supports those that are most disadvantaged by what's happened. Meanwhile, next month, the FED is expected by some, including JP Morgan,

to extend the duration of their asset purchases. Do you think that, based on where we are, based on what markets are doing, that they should go through that and that they should make that decision next month, even if market conditions are similar to where they are today. Well, I don't think there's a tremendous rush that they have to do in December. If they waited, I don't think there'll be a great consequence with tenure Treasury note you'll blow one percent. But it sort of makes sense right

if you're buying UH. Treasury is an agency mortgage backed securities. Now, not so much to support market function, but to keep long term rates low. Then why not concent figure purchases in the long end of the market. Dr Dudley, I must ask you about Governor to be it's a very close vote right now. Judy Shelton, I want you to explain to our audience what her theory is grounded in traditional economics. If it's not classical or neo classical, if

it's not kinesiean, what is shelton theory as you perceive it? Well, I don't think I understand her theory. That's to be very blunt about it. Look, I think it's unfortunate that that the Congress is Republican conference is pushing forward to confirm Shelton, UH and Waller. I think it would make more sense to leave those positions open so that Joe Biden put his imprint on the Fed. End of the day, though,

if Shelton were to get confirmed. I don't think would make a huge difference in terms out of the conserves policy bill. I must ask you, and this is so important, if you don't understand your theory, do you perceive that she's coming from some convolution of Austrian economics and a traditional historical German economics, literally from another time and place. Well, she's been inconsistent over time. Right, on one hand, she

has spouses sort of goal standard hard money. On the other hand, she now wants to you know, interest rates extraordinarily low even before we entered the pandemic. So she seems to bend with the political winds. And you really want the Fed to not bend with the political winds.

You want them to be independent of the political pressures. Well, but let's talk about process and just wrap things up that I've lost kind of how many meetings you must have been to at the Federal Reserve if there was someone with a more unorthodox approach to monety policy and policy setting. How loud could that voice possibly be if she was confirmed? Not very loud. I mean, the way the Federals are works, it's a it's a consensus, it's

a committee. The chairman sets the agenda. If you're you know, by your you know, if you have views that are not shared by others on the committee, you can dissent, but you're not gonna have any meaningful impact on policy. I think, you know, if Shelton is confirmed, I mean, the main implication of it just that Biden wouldn't have a chance to appoint governors to the FED, and that might slow down his ability to put people in place that that that that he thinks there are more consistent

with his policy views. Not so much on Montrey policy, but in terms of financial regulation and bank regulation bill. Great to catch up. We appreciate how open you've been, and asked him. Minutes built outly their former New York FED president now Princeton and bloom Bug opinion columnists joining us now Madama Alliance is Global Investors. US investment strategist Mona Kitchen Salk said this morning, understandable the last week or so in this market, but unsustainable Do you share that? Uh?

You know, I actually think that the rotation part of this equity move is somewhat sustainable. So you know, we we see, of course, in the next few months we may get some volatility. We're still not through the toughest part of this virus and this pandemic um. But beyond that, you know, I think the incremental news we got this week in last week was not only vaccines, but vaccines

that were over effective or effective. You know, even the scientists, in their their wildest hopes were not expecting two vaccines that would produced that. So in our mind, that's incremental news that could get us through this pandemic in the

next twelve month period. And so for us, when you think about one where growth may start to accelerate because you have have a true reopening, not only in the US but globally, rates will probably remain low at least through and you have the potential for fiscal stimulus and maybe some fiscal spending. You know, that's not a bad

backdrop for risk assets broadly. So overall, we will continue to feel that if you have some periods of alatility, use that tactically, if you haven't already layered in some cyprocality some non US assets. Start to think about that Mona Walmart is breaking out to a new high. Our corporation is going to adjust to all this. I mean, the bears are there. John's mentioning the gloom of a Bramo. It's the gloom of Sockin and the rest of them

as well, Mona, Just as simple as I can. Are we underestimating the ability of corporations to adapt to this pandemic. You know, clearly this pandemic has accelerated some key trends. So we've seen brick and mortar to online retail, and Walmart's a clear beneficiary that they've accelerated their online programs um but also things like know a work from more work from home employee base that's been accelerated through this.

We think that's here to stay to some extent. Supports cloud computing, supports cybersecurity, going from you know, medical visits in person to tell medicine, you know, another trend that's probably here to stay. So there's several trends that we are seeing that the corporations probably had been thinking about but now really have to get on the ball. These trends have been accelerated through this pandemic and are likely here to stay to some extent, and so that's why

we still think a balance is important. You know, some of these quote unquote stay at home stocks are actually you know, they have three five ten years secular growth trends behind them, and so it's important to have that part of the exposure as well. But you know, we could see a few months at least of really strong outperformance from the cyclical part of the market as well.

Not one of the hardest aspects of this moment is there's a near term, as John was talking about, that's looking darker and darker, and frankly darker than a lot of people had expected with respect to the pandemics trends. And then you have the longer term or the even the intermediate term, which looks better than expected given the efficacy of some of these vaccines. You said in periods of volatility to take advantage and go long into the

trades that you're talking about. What counts is volatility? What's the entry point that you're looking for. Yeah, it's a great question because in some cases, and certainly since the start of this quarter, we haven't gotten many pullbacks in fact s andps up seven and a half or eight percent since septembert and some of the cyclical sectors are up thirteen fourteen, so we haven't quite seen a dip to buy quite yet. We do think over the next two month period three year, and you're not going to

get a continuation of this straight upward movement. There will be pullbocks. Keep in mind, in any given year, three to five pullbocks in a five to ten percent basis or five ten percent range are normal and are probably healthy if we go through another period like that, certainly ahead of one. I think it's important to start thinking about how you want to position as these vaccines get rolled out, as hopefully we start to see this change and shift uh two in consumer behavior, perhaps a little

bit back to pre pandemic activity levels. And so we do think we'll we'll get a period of consolidation that can be used to position yourself accordingly. So it's important to watch for that. No to what extent do you think that people were conditioned by the price action of the spring and condition to look through what's playing out in America right now? And I wonder what you think

the fall out of that actually is. Yeah, it's a great question, because clearly when the Fed stepped in in March, and they stepped in a big way, uh not only bring rates back down to a little round, adding kwee, adding these credit facility programs that really supported the functioning of credit an equity markets. Um, they really did put a bit of a backstop into this market, and so um it does feel like markets are conditioned to buy

that dip. Um. What we'd say is it's important to stay a little bit active and how you buy these dips and how you position yourself in the marketplace. If you to have performance that's in line with you know, the broader indusseries. You do need to think about your waiting in certain sectors, in certain regions, etcetera. And so there is a bit of conditioning, but we think it could be more than just buying the overall market. It's

how you position as you move forward. But as long as the FETE is there, as long as global central banks are in play, um, we think there is a bit of a backstop in the market. And that's some extent helpful, but longer term we'll see what consequences are might great to catch up the fete is that with all without Judy shouts and made jan from invest this, thank you. Let's get started here right now and Amazon tom four to where this so d a Davidson, He writes, brilliant, brilliant, No, yeah,

he's a bowl on Amazon. But this, of course, on this big announcement today, Tom, I get the type two that this is about hurting right aid, hurting CVS, taking market share away, etcetera. What's in it for Mr Bezos? So those are the implications for the competition. This is a large trillion dollar global opportunity for Amazon. So Amazon needs these large global trillion dollar opportunities to sustain their growth and their multiple So my question for Amazon is

what took you so long? But I think this is a great move by Amazon. Okay, so it's there, and you know, I look at I look at Amazon right now. Does this move the needle on their revenues? I mean, is it just is it a five year project? Excellent question, Tom. Collectively,

I would say Amazon's healthcare efforts are needle movers. So you think about how they've kind of been forced into healthcare, testing their employees for COVID, opening these mini clinics for their employees families, and now they're advancing their pharmacy efforts. They had pill pack, now they're going to open an online pharmacy. I think collectively their efforts and healthcare are

needle movers. Well, let's more through things just quickly. The acquisition of pill back, how does it fit into all of this? And do you think they can do this from where they are now organically complimentary to the extent you think of pill pack is making it easier for consumers to follow their prescriptions. I still believe that over time they're going to have physical pharmacies that will complement

their online ones. I really thought acquired Whole Foods in they would devote a portion of that box to a pharmacy. So I still think this is only the beginning, but an important move for Amazon given the large social addressable market TOM. Their Whole Foods acquisition and rollout hasn't necessarily been incredibly profitable. We don't necessarily know. They don't break out all of the data, but they're fries into physical grocery stores in the past have not been as successful.

Why is this time different? Why are we seeing the shares of CBS and Walgreen's plummet on this news so excellent points. Historically Basis has said your sales is my opportunity. I feel like historically Walmart said your gross profits my opportunity, and Walmart went hard in the generic drugs. If you remember, so there is a lot of profitability opportunity for Amazon, especially in generics. Um Grocery, though, is not a high margin category. So I would say that expectations the whole

foods generating materially higher margins were overly optimistic. In the case for pharmacy is different, though, Tom there is a broader question, especially as Democrats have more power heading into one with Joe Biden taking the role of president. There's a question of how much more antitrust concerned. This raises about Amazon, the fact that they're plowing into every aspect of people's lives. Does this matter if it's done organically. Does this put pressure to possibly break them up or

restrain them in some capacity? So I think that it's bipartisans support to restrain the impact of Amazon, Apple, Facebook, and Google. But I think both parties are trying to figure out how to do that. It's my understanding at one point was this warrant proposed legislation to limit acquisitions over a billion. So you'll see a lot of smaller acquisitions if that happens, and to your point, more companies

building it organically. From an anti competitive standpoint, that it's hard for me to imagine that they could prove this is bad for the consumer and at this raises costs and pharmacy. You know, I'm looking at the margins on right aid and come on, it's like a grocery store margin as well. Tom, give us the percentage margin we should see their forget about the cloud for now? What do they make on all the cardboard boxes? On margin?

What are they going to make on pharmacy? As related to that and related to the razor thin margins at Whole Foods yep. So collectively, I think of Amazon is having the potential for adjusted EVA DON margin long term. If I put most profitable least profitable, it'd be advertising first, then cloud, then pharmacy, then third party retail, and then dot dot dot here, but come on, give me a number, stop, Tom, give me a number. Here, I get the IBATA. What's

the cardboard box margin? And what's pharmacy gonna bring? Sure, pharmacy I think confidently will bring more than a ten percent in just e but margin and the first party retail margin is flat. So I'm great to catch up. I appreciate your time today, said some found of that day to have its Incenia Research analysts were this right now? This is it, folks, is such a blur here. I really don't know what the schedule is. We've got such a great team that just throws it at me. And

this is a joy. Ian Bremer joins with your Ragia group G zero Media. He's been asconce sequestered away working on a new book. How many times have you any of you changed your book in the last six weeks given? Not at all, my friend, not at all. I mean, you know, when you're doing a book. If I can't stand up, you're not doing a book. So so many things to talk about. Let us start with the bigger and the broader. Freezcaria talks about a post American world.

What does the post Trump world look like? Um, well, there's it's gonna be a honeymoon. There's no question that most leaders, not all, but most leaders around the world are going to be very happy. You see the back of Trump, and so the big summits that happen will appear much more consensus oriented. They'll be a honeymoon. They'll want to give Biden some small winds to show that

the United States is back. But you and I both know that the reasons that we have so much uncertainty in the global order, have comparatively little to do with Trump. Their structural they are, you know, a United States that is less in leading from the front. You remember leading from behind that started with Obama Biden. Um. You have Europe, which is more divided post Brexit. Um. You have Russia which is in decline and undermining the United States and

our friends. And then you have China, which is not aligning towards the US in political and economic systems at all. None of those things change one bit with a Biden administration. Okay, but the tone changes. And I think all of our listeners, you know, worldwide and whatever their politics is, is they overweight they underweight tone? Dr Bremer, You've been doing this for a while. Tone, We've learned matters. What's the proper

tone in the first weeks of a Biden administration? Is they rebuild state that we care about values, that democracy matters, human rights? Does he does he get on an airplane? I mean, is the big surprise here is Joe Biden is going to do a international tour as president? No? No, I don't think so, because he's entering governance with a very dysfunctional transition in the midst of an incredibly challenging coronavirus at home, and he needs to respond to that

at home. I mean, there's no question that there will be a lot of wins just by undoing stuff that Trump has done. So he rejoins Paris Climate Accord seventy six days after the US left. He tries to get the United States back in the Intermediate nucle Year Forces agreement with the Russians. Um. I mean, you know that you've got a whole bunch of stuff like that. I mean, even the World Health Organization and announcing that the US

will participate in KOVACS for vaccine development and distribution. It's not a game changer. But if you want to talk about tone, all of those are things that show that the United States doesn't want to surprise its allies, wants to be constructive and working with other countries around the world. So and we we just finished up a you know, very contentious election. Now we have a transition that is

not transitioning. Um. How aur adversaries around the world viewing the US right now as we try to transition from one administration, one government to the next. I think governments are transitioning pretty capably. Again. I mean, so you look at a country. There are countries that really are very upset that Trump has gone. You look at Brazil and uh and given both scenarios, views on climate and the Amazon, and the fact that Biden will be a polar opposite,

this is a real problem for him. There's likely to be difficulties with trade, agriculture, you name it on the back of that. And yet it's not going to affect his popularity at home or his likelihood of being reelected one bit. And I think that's the real point. It's it's yes, you, you you want to prepare to have a better relationship with Biden For most of the countries around the world, but overwhelmingly, the United States is not

driving outcomes for a lot of these conflicts. It's a much more multilateral and a much more g zero global environment. And I think that what we're seeing is a lot of hedging. I mean, I had this debate yesterday with Neil Ferguson and he was saying, we're in a cold war, and the strong one of the strongest reasons why we're not in a cold war is because most other countries in the world outside of the United States and China

have no interest whatsoever in picking sides like that. They're all hedging and that that that's an important thing to keep in mind when you think about the post US transition, will the world will are allies and the world leaders in general embrace the US under the Biden administration after the last four years where it really was President trump strategy of America first, and we really burned a lot of bridges. Well, I mean, how many bridges did we burn? Right?

I mean we we We definitely jumped on the bridges a lot and showed petulance. You look at NATO, No, I mean the actual NATO policy. NATO was pretty much as strong today as it was four years ago. The US. Trump pushed for countries to spend more money. The US spent more on defense. You've got forward deployments in Poland, you've got rotating deployments in the Baltic State. Nothing happening

i m F United Nations. The US paid paid its dues, and the i m F has had a pretty good year because so much money has been required for trees that are in tough shape on the back of coronavirus. Trump didn't kill that. So look there are a lot of leaders around the world that find that Trump. A meeting with Trump was an exercise in walking on eggshells. But you never knew what bomb he was gonna throw. Was he gonna say he's gonna pull out troops, or

was he gonna whack you with tariffs? Or tell the Japanese suddenly, Hey, I just called the North Korean leader. What do you think about that? I mean, you know, they didn't like that. So again, I think that they will try to give Biden some early wins. They won't be big, but they'll show that we're so much happier with this guy. The real issue is that the United States is not providing the kind of leadership on trade, on global security, and certainly on the promotion of democracy

that many other Leews would like it to. And that's much deeper than Trump or Biden Obama. That's been going on for a long time with US. We continue Dr Bremer, of course, as Eurisia Group, and I can tell you I've already had some inquiries. Yes, we are planning. We're in intense negotiations multilateral negotiations with the Eurasia Group to do their wonderful and important kick off to the beginning

of the year. Always important themes and scary pression from the Eurasia Group UH Team UH and your thoughts on a not t PP but a China PP trade agreement. There was a great map out in the zeitgeist of China in the Pacific RIM, even down to New Zealand, and then there was like what t p P was gonna be, and it's like not that. And there's this big gray spot called the United States of America not participating in any of us define the vacuum by our

absence in multilateral trade agreements in the Pacific. Yeah, I mean it's kind of like one more Beltan Road. I mean, you and I have talked about that for years. The Chinese are out there building of infrastructure the United States, the companies are, but the government is not, and that aligns these countries more with China. UM. The Chinese drive a big multilateral trade agreement. It's not a massive shift

in terms of tariff production. It's not a high standard agreement like the Trans Pacific Partnership would have been UM, and it's certainly not exclusive. It doesn't stop these countries from trading with the United States, just as when the Chinese build a port through Belton Road, it doesn't stop the United States companies from using that port. It drives more wealth. We like that a world with a China driven our Step deal is a world of higher economic growth.

It's better than a world without it. But you and I would both much rather if the United States was doing more of the driving and we're not interested. Let's remember that the Trans Pacific Partnership was initially tried under Obama Biden. They failed, and then Trump killed it. And now Biden is going to be president and he's not going to raise it again because the Democratic Party wasn't supported,

not the Democratic Party. So the fact that China now is the leading trade partner in the world with over one hundred thirty countries, the fact that China is about two thirds the size of the economy of the US, and its peak, the Soviet Union was less than I mean, it's a much more robust economic competitor. And unlike the

United States, the Chinese government is actually driving strategy. Um. I mean, we've got a lot of corporations the drive strategy, but our government, you know, we have elections that last for two years every four and the US is right now the most politically divided country by far among the advanced potential democracies. It makes it harder for us to get this stuff done around a time ten seconds. And when do we see your next book? Uh? Probably late

sprint have what two? Yeah? You know, I know we're getting their masses there. Thank you so much, appreciate it. They are beautiful. Books are almost like folks chapters like Patrick O'Brien. They're like chapters of books across the span, like a two chapter. Looking forward to that from Dr Bremer. 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