Surveillance: Economic Recovery With JPMorgan's Kelly

a line from Alan. Four you g ten central banks have expanded their collective balance sheet by two point seven trillion dollars, and two thirds of this comes from one central bank alone, the Federal Reserve. Alan, fantastic to catch up with you, and brilliant research as always with the team over at Deutsche. Just run us through the compare

and contrast right now between Europe and the US. UM Well, John, I think you're absolutely right, you know, to make a distinction not only in terms of what's going on in terms of monetary policy, but what's going on in the fiscal policy. In fact, fiscal policy made it more important. But on the monetary policy side, we all knew that coming into a crisis, Europe starting off with negative rates was not going to be able to do very much. That there was a little bit more leeway from the

Federal Reserve. But it didn't just stop there. Really, we also knew that both central banks would get pulled into unorthodox policies, notably, you know, expanding their balance sheets, and so far, you know, the action has all beyond the Federal Reserve side. Perhaps Europe is you know, not really come off the quee the way that's que after the two thousand and eight crisis, the way the Federal reserved it. So um, the Fed you know, was obviously shrinking as

balance sheet now massively re expanding its balance sheet. But you know, it's it's tended to show a few limits. It's uh, we know the detail in terms of willingness to extend out the credit structures. So the Federal Reserve as the world's most important bank, doing everything it can to ameliorate what is really seen as the sharpest decline in output in modern economic history. Pretty easy at this point, Alan, I'm sure you'd agree to identify the differences between the

United States and Europe. Yet pushing that view through the market is actually far more complex. Through the month of April, over the last three or four weeks, we've had a range on euro dollar of what one oh seven out towards one ten one oh nine, pretty tight narrow trading

range in G ten Allen. Given the differences that you see in Europe and the United States, Why yeah, I think markets a little bit of fuddled in terms of just trying to ascertain, you know, firstly, do you respond to the fact that the US is policy measures have inevitably expanded UH debt as far as I can see, So I think there's a sort of a latent concern

there about the fiscal deficits and at um. And then I think, you know, there are other elements there where people are considering what is a labor market response going to be like in the US versus Europe, your euros. In the US, you're certainly seeing unemployment taking up very, very sharply. In Europe, it perhaps is going to be a little bit slower. Um. Is that flexibility a good or bad thing? The market is confused on that issue. And then I think the other element is just you know,

just the course of this virus. I think there's certainly some concern that the US's response is going to be trickier going forward, particularly when one state, you know, for example, opens and shifts away from lockdowns, another state maybe doesn't, but you still have travel between two states. That that sort of problem that you have in the United States,

you're probably not going to have in Europe. So, um, I think there's a multitude of different factors the markets looking at and they've got bigger fish to fry, as it were. I think, you know, particularly in the emerging market world. Um, you know current the traders that's really seizing on on on trading in that space. Well, that's right where I wanted to go, just because the time, Alan Ruskin, and to me, the single moment on this Friday is Brazil. Brazil's basically got to get the Monday.

How urgent is it for Brazil to begin to solve some of their problems? Um, well, it's been urgent for a long time. I think the big issue you faced with Brazil and a few other emerging market countries is they came into this crisis with a fiscal problem to begin with. And there's a long history of course going back, you know, now, going back a long way where central banks have been asked to effectively financed discore deficits. Um.

So deficits have not been nessy that easily financed. UM And I think that, you know, the history with both in terms of the long term and the short term is deeply problematic, and usually it's going to resolve itself partly in the safety development exists, which is the current arency.

And that's exactly what we're seeing. Well, that's exactly what we're seeing, except that you would expect the dollar to weaken then, I mean, you'd expect the dollar to eventually weaken if the Federal Reserve is basically monetizing the debts of the United States, and that seems by all means

what it's doing. As it's balance sheet expands by two point four trillion dollars since the end of February, why are we not seeing a week or dollar Lisa, So let me just make a quick distinction between what I was saying earlier, which was really related to brasil Um, and why the Brazilian realizes, Actually, you know, weakening the

dollar is a bit of a special case. Um so I think, you know, being the major global reserve currency, there's some sense there that regardless of some of the policies in the short term and perhaps even in the longer term, numerous transactions have been done, and they have been enormous balance sheet in balances effectively which have resulted

in liquidity related demand for the dollar. So I think what you saw particularly you know three or four weeks back, with the dollar had a natural bid because of what effectively were bank related in balances. We saw it particularly as it related to Japanese banks, to lesser degree European banks as well, UM, whereby there was extraordinary demand for dollars.

And if you actually look at what the Central Bank has done, um that you know, these swap lines to the b o J, I think it's being utilized extent about two billion Europe about a hundred and fifty billion, So there has been a strong need for dollar liquidity globally um. And without that liquidity, the dollar would have been even stronger. Alan, always great to get your thoughts on this program, Alan Ruskin, their touts your bank. Hope you and yours are doing well. Alan, thank you very

much for joining us. Let's get a larger global view on oil. He is a head of Commodities and Derivative Research, Francisco Blanche for the Bank of America. Francisco, as you write your research for the weekend, where's the most efficacious price of oil right now, I've lost track. Where's the good spot for Brent crude to be right now? Well, um, I think I mean Thomas. As you pointed out, the economic data is so diffical that UH commodities over to hide.

The commodity markets provide a completely unfiltered view of the economic reality that we're facing today, which which is completely unprecedented. We've never stopped the world for a few months, um out of the seven and UH and and and the problem in oil markets just keeps passing from country to country. When OPEC decided to cut production a couple of weeks ago, the price of the price of of of Dubai and

coment grades was lifted. I think previce a brand, but it didn't do anything to prevent wt I from trading negative at the beginning of the week. So remember that that the more landlocked you are, the less access you have to infrastructure, the more difficulties to place your crew today, and the more likely you are to have to share in your well. And that's what we're saying right now.

We're seeing strong signals to producers to essentially capt the wells and stop flowing their rolls into the five points. Are they responding to that, Francisco, as far as you can say, well, uh, they usually as data, they are not yet the only response that we've started to see is opex, although the deal doesn't really come into play

until May, which of course is Friday next week. Um So, so the issue we're facing here, going back to the point that you guys were making, is you have a thirty percent drop in US GDP, maybe more, you have a twenty two drop in Japan GDP. What does that

mean for oil demand? Will in soil demand is gonna fall by about the school And COVID nineteen is particularly harsh on oil because COVID nineteen is a crisis of mobility um and, and oil is the fuel of transportation, so so we salt oil is the most impacted energy commardity and probably just the most impactive commority period um so, So we are saying we're seeing a very complicated situation here because even the open deal, which is very large,

it's the largest ever, it's only ten million barrels a day, which is about ten so you're you're still producing a lot of excess oil while we're all sitting at home, not driving and not flying and that's that's really the main issue. We need to get back to work to save the oil market here Francisco. Yesterday, Muhammadalarian was speaking with John Faro, and he talked about a growing cognitive

dissonance in markets. I recommend you watch the interview. It was really really interesting and and and stark, but it highlights the cognitive dissonance perhaps is most prevalent in the oil market. We've got theory kind of bumping up against the physical reality where there are not enough places to or oil. And I'm wondering the theory that demand will pick up at some point, when does that fail? I mean, how far out in the contract could we potentially see

zero or negative pricing as storage facilities fill up? Well, um, we we got a glimpse of it this week. And uh, and prices at the end of the day in commodity markets or signals for either consumers or producers or infrastructure operators like pipeline operators or storage owners to take action, and and and and the signal right now that you should be buying cheap oil in the front end of the curve and storing it forward. So I don't think that all prices are going to collapse, um into spots.

I mean, over time they may, and they they will, right so that the curve rolls now. But it's not like the entire curve comes comes down immediately because um uh, there there is uh. There's first of all, the need to to push oil into storage. And secondly, there is going to be the expectation, naturally that the ecount is going to get back to some kind of normal at some point. And don't I don't know what that looks like.

But but when you look at the equity markets you have at d s NP, at you at a fixing cale markets trading frankly a lot better than they did in March. Um, I guess, I guess we were all under under the impression that things are back to robal. That's what we're hearing from circutary Minucine as we're heating from the White House, that we're hearing from our world leaders.

And uh, and maybe it doesn't happen. But but in the meantime, the FED is doing an amazing job papering things over, and the asport's keeping asset values what they are and uh and and and and the governments are are expanding. As you said, before their fiscal budgets to essentially send people money. The real problem we have is that we are not producing any outputs, so service on

how we are. We're sending people money at the time when the account is not really what we're actual output is down thir and I think that's going to be very, very for gold. And that's what we made call. That goal is going to go to three thousand over the course of the next eighteen months because of what's going on on the monetary front and then on the fiscal front. Three thousand on gold Francisco. That's a huge call. When you make that call on the phone to clients in

communication with them, what's the huge pushback right now? Well, I think people are a little confused about what's happening. On a micro basis, I'm not getting a lot of pushback. I think people are just are realizing that this is that this is a major major change in the Fed's balance sheet. They're going to double the balance sheet, maybe triple the balance sheet. The last time they said that that gold basically doubled in value so um and that

was during the global financial crisis. Um So, so that's what we're making this call. We think that that that the expansional fifth balance sheet will will push the ultimate safe haven up pretty dramatically. Here, Francisco, we've got to continue this discussion on gold. We'll do that another time.

Francisco Bond, thank you so much, greatly, greatly appreciate here with Bank of America, we need to frame up here at the end of April this historic moment we're in and trying to stagger into May, and of course with the pandemic we go from May five to the middle of May, and many people now even beginning to talk into June. I know India is doing that as a nation, David Kelly, is it JP Morgan asset management and really quite good linking economics into the investment at world David,

what will you think about this weekend? What will you

write forward to Monday? I'm probably going to be writing about you know, there's another physical package which has just been passed by the House, and we're adding a no flaw of government debt here, and you know, we're really we've got packages that will take us through the middle of the summer, but it looks to me like we still won't have an economy that's really even on a significant route recovery until the middle of next year, and that's an awf lot of extra government debt, and the

central banks are just moneyed as in this debt. So it's it's really, you know, what is a limit there in terms of how much the government, how much debt the government can issue, and how much debt central bank will buy without actually setting up a real problem down the road. David, there's a real willingness I think over the last several weeks to just discount and ignore the

economic data that we've had. But the economic data that we've had, even if it has been expected, does inform you, does tell you something about how difficult the recovery will be. If you've got twenty six million people applying for initial jobless claims and they're sitting there waiting for a job, how quickly did those jobs come back? Well, I think we will get a lot of momentum in the second half of next year once we have a vaccine. The

problem is just getting getting to that point. But once you do have a vaccine, I mean, there are ways you could do this more efficiently because there are a lot of companies will will find hard to restart, but there will be a huge demand for a lot of the entertainment, leisure services, restaurants, retail that that people who are missing out on. So you'll get a lot of momentum going in the economy if you can finance the new companies that will then employ people to do these things. Um,

you can re employ people pretty pretty quickly. So I think the economy by two will be we'll have a strong head of steam and the unemployment rate will be coming down rapidly. But still, you know, we've got to finance an awful lot of misery between now and then. When you talk about financing the Missouri I want to go to your point of debt monetization. Basically, this is the idea that the US is selling trillions of dollars of treasuries and the Federal Reserve is buying them all

up to suppress borrowing costs and create natural demand. That the balance sheet of the Fed is increased by two point four trillion dollars since the end of February. What is the longer term consequence of this if it is an inflation and it isn't a debasement of the dollar, well, I mean, it's hard to debase the dollar against any other currency. I think. I think that the US has got a lot of advantages because other other countries doing the same thing. Of the dollar has always been a

sort of first currency. But we we do we are running a risk. I mean, I think that that the key thing that has protected us all the way through is actually income inequality, because the people who have all these io us aren't using them, and so you don't

get aggregate demand in the economy picking up. But if you the one thing that would cause the no Flader problems is if we try to maintain some sort of egalitarianism as we come out of this, that we try to help people at the bottom of the middle, which is a very good thing to do. But if you do that, you createx extra demand and then inflation gets

going on. Once inflation gets going, people are going to doubt the ability of the federal reserve to corral that inflation, and doubt the ability of the federal government services debt. And that's really the thing that I'm worried about. Okay, this is the heart of the matter. David Kelly, do we invest now over a responsible long term horizon for disinflation or inflation? To me, that's a huge conundrum. Yeah, I think, I think for the long one, you you

you bet on inflation. Um, you know we we First of all, I'm not sure how much disinflation we're going to get in this huge recession because there's so much, so much constraint on supply also, and so it's you know, usually when you have um, you know have in the Great Depression, you had huge excess supply that all these people who wanted to work, all the stuff that people want to sell. But you know, now we don't. We've got a supply shortage as well as a demand shortage.

But when we come out of this, we're gonna have so much debt and so much demand pent up demand. I mean, the savings rate is one of the things going to see of the next few quarters is a huge increase in the savings rate. Um, when did you push that demand into an economy with a limited supply, You could get inflation and the whole you know, everything that we've done in terms of ballooning government deficits around the world has all been possible only because of low

inflation and low interest rates. Yeah, okay, great, but that tells me I want to buy stocks right now, we're only buying eight stocks out there are John mentioned We've got Amazon coming out next week on our knees, Microsoft and the other glory stocks. What do you tell JP Morgan to have management clients who go, I just want to buy eight stocks, Well, no, don't. Don't you know, be diverse, right, because because you don't know what the

next thing is going to get you is. I mean, if we went, if we roll the tape back six months ago and and you asked me as as you do, you know one of the things that you're really worried about next year, I wouldn't put pandemic down as my number one risk. But that's the whole point. So you don't own just eight stocks because you might be owning stocks in the one sector is going to get whacked by whatever it is. That's the next round the corner.

You diversified, And frankly, you know, most of the U S stock market is not actually being impacted that much by this. It's it's the U S economy that's being impacted. But if you look broadly a technology, at healthcare, UM and utilities, consumer stables, there are a lot of companies that can actually write this one out pretty well. Um, So I think there are plenty of opportunities out there.

And also international stocks, by the way, are cheaper than U. S stocks, and East Asia is going to come out of this thing faster than the United States. So I think there's plenty of opportunities around the stock mark around the world if you want to buy equity to protect

yourself against inflation in the long run. David, I'm struggling to understand what you said, the idea that if the middle class benefits from this package of of of fiscal support, that that's going to create inflation that's going to somehow be negative. Why isn't that a good thing in the sense that we're going to end up being able to sort of bail out some the debts and get the economy kind of to reset a little bit before we

move forward. Well, first of all, I first of all, the the the financial problem is only in the recovery when we come roaring back in the second half of twenty one. I want to make that clear. And also it is a very good thing too. I mean, we've got a very unequal society, had much rather than in a society which was more equal. But the key thing is that we have avoided inflation all the way to

this point here. Um, you know, through that long expansion because the economy is actually getting less equal and more and more money was going to people who are richer who wouldn't spend it. Um. And the thing is that if you finally give money to people who are low were income people or middle income people who are really want need the money, and we'll spend the money, then

you get that access demand. I'm not saying it's a bad things associates, just if you if you're going to if you're going to do that, you're going to have to find some way of being disciplined enough to tax money off of richer people to try to prevent demand from soaring above available supply, because that's what gives you inflation. And I said, this whole debt pyramid is you can only be supported if we have low inflation. That's really central to everything here. Okay, And basically this is sort

of borne out by the data. Michelle Meyer of Bank of America saying the stimulus checks so far have gone to buying more things, more consumption. I am curious though, if you walk through what happens, why it becomes such a problem to have the inflation that you're talking about. Well, because because right now you know that we're going to come out of this. We went into this with the

government debt at about eighty percent of GDP. We're gonna come out of it with the debt and a hundred percent of GDP, which is the highest just after World War Two. That's not a problem if you're financing an interest rate to one percent, but if you have higher inflation, you could be financing at five So if you're five percent on the debt, that's five cent of GDP just going to interest payments. And our government spending is about GDPs.

You're using a quarter government spending just making interest payments on the debt. That's going to squeeze everything else, um, and people are gonna wonder, can you know is there some some threat of the government won't be able to make these payments at some stage? These are some huge themes for the next year into even two years as well, folks, David Kelly, thank you so much. With JP Morgan Asset

Management joining us right now. Leslie Vinjamuri of Chadow House in London with a wonderful perspective on the American experiment, Leslie, I, I look at what we're seeing, and I just take the rules thum. You look at the drop of the economy and maybe the expansion of the unemployment rate, You do some fancy geometry and use some fancy words, and you just port that right over to the size of the stimulus. Am I right? That the size of stimulus we're heading towards could be as much as five or

six trillion in a seventeen trillion dollar economy. It is extraordinary time. And when we've already had what the fourth stimulus package where at three trillion now, And you know, the big question is how long does this economic crisis run? And it has everything to do with our ability to tackle the health crisis. So it's difficult to predict the numbers until we know how we're going to do on that front, how we're going to do on testing when

we can reopen the economy. Um. And that's really you know, that is the key question that's going to drive the size of that stimulus. But at the moment, it looks like we are headed towards ongoing stimulus packages that are just absolutely critical because the the economy has has been

shut down, let's say, so fast, so good. I've been really impressed by how while sexual minutition appears to be working with the Democrats to get things done, get things done quickly as well over the last month sick sweeks Nancy Pelosi, how speaker would like to lead the next effort. And I just wonder if that's the moment where we bump into a little bit of tention, some division between

Democrats and Republicans. Look, there's a lot of division already. Um, it is, as you said, it's been remarkably bipartisan in terms of the support the Democrats have had a number of wins that they wanted in terms of oversight and any number of things. Um. And as we get closer to the election towards November, once we get to the summer, that partisanship is going to really drive a number of things.

But I think the scale of the crisis has you know, really been something that's um at least in terms of the economic response, brought people together. Now we're seeing something very very different when it comes to dealing with the health crisis, where opinion varies, where the states are battling it out with the with the with the with the government,

the federal government. Um, but I think you know, one way or the other, we're gonna have to the Congress pulling together with vedition and and and driving this response forward, because as we've seen, we're looking at unappointment being possibly

as high as thirty percent by the summer. Leslie to John's point as he set this segment up where he was talking about how the fiscal response in the monetary response set the decade for for since the two and eight crisis in the US emerged more quickly, is the size of the package appropriate that we have seen so far out of the United States? How big would be

appropriate given the magnitude of the shock in the US? Yes, yeah, I mean, again, to go back to my original point, it's very hard to put a number on it until we see how long we're going to have state after state after state shuttered with the small businesses, closed, corporates, you know, dialing back, they're working from home, things getting

slowed down. And until we know, until we see a you know, the the the the curve of death coming down, the hospital capacity being able to confront that health crisis, until we know when states are going to realben when the economy is going to be real, and we can't put a number on it. We can't put it, we can't put a ceiling on it. Leslie, I want to switch gears here. Let's pretend there's no pandemic right now.

Buried in the Washington Post this morning is a tiny little article a claiming that Vice President Biden is leading the president and this poll or that, and then there's a modest silence. But president of Secretary Clinton was doing better at this time versus the president long ago and far away. How is the vice president doing? How is

Vice President Biden doing well? You know, we are seeing those numbers, and we're seeing, especially in American Americans age fifty and over, that the preference for Biden is really much stronger than that the preference for for President Trump. UM. But it's a long time out, and as we know, the Vice President Biden has is an incredibly difficult climate that the President of the United States has a opportunity every single night to demonstrate, you know, his leadership um

and have Americans to suss that on national television. Biden is not getting that Erican He's having difficult getting into, difficulty getting into the public debate so it's a very it's an uphill battle, Leslie, Thank you so much, Leslie. Vinjamuri with Chatham House in London greatly appreciate that this is the interview of the day on the virology of the moment. He is UH Andrew Pekosh of the Johns

Hopkins University. He's out of Pennsylvania and Rutgers, and he is truly expert on the science that underpins this virus, this horrible virus, and this pandemic. We talked today about

the last twenty four hour newsflow on virology. There's such an important distinction here to make between things that are used as disinfectants, right, that can work on surfaces UH to kill viruses, things that work topically, which are things that you can put on your skin which kill viruses, versus things that you take as as a drug internally in terms of what you can UH and and that affects the virus and can limit the virus. UM. All

of these things UM can be toxic to people. UM. It's the amount that we use, the dose, the the dilution that we use that brings it down into a level where it's less harmful for us and it's still harmful to the to the virus um or or any other pathogen. I thought that the medical officials are in the press conference made clear their unhappiness over these comments. And yet it speaks of the plague and Albert commune, the desperation defined solutions. You're one of our great virological experts.

For you and Dr Fauci and Dr Burke's please tell us how far out there is the solution to this virus. So there are a number of clinical trials that are going on right now, and you know, while well that's not the popular thing to say, there will need some time before we can test some of these treatments to really be sure that they're number one, not causing any

extra harm and number two truly are effective. And I think the other thing to pay attention to, though, is you know, this virus induces a broad spectrum of disease. Um drugs may be effective against the mild forms of the disease, but perhaps not as effective against the severe forms of the disease. So all these things have to be investigated with clinical trials to make sure that the treatments that we're that are being proposed are actually effective

for particular patient populations. But Andrew, how many you know, how many drugs do we know of that could work? Yesterday there was quite a lot of hope and then a big setback when the scilat drug didn't really go as planned. In terms of the Chinese trial. How many more of these drugs will fail just like this one did? Yeah, so I think them Desert trial is a great trial. Some details are lacking, but it seems like that was

really targeting uh, severe cases of of COVID nineteen. Targeting severe cases is very, very difficult because people suffering from those severe cases have a combination of the virus causing damage but also their immune system causing damage. So something. So it may be that relying on just an anti viral drug for severe disease isn't completely the right strategy. We may need to find ways to also temper the immune response that's being induced by the virus for those

severe diseases. The m Deservere drug may be able to work in more mild situations or at early times post infection. How far our way to to actually finding a vaccine? Are we um a vaccine? We're you know, we're in the middle of phase one clinical trials UM for a

number of different vaccine platforms. We would expect to hear something in the next month or two about some of the initial safety work that's going on with those drugs, with those vaccines, and then UM the trials that are going to be putting it into patients to look for efficacy. UM are already being lined up under the assumption that some of these drugs will be safe. O disease vaccines will be safe. So we're still about a year away from anything in terms of a practical rollout of a

vaccine if everything goes well interpecks. So the Johns Hopkins University I thought that was exceptionally timely given the news slow of the last forty eight hours. 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 Key before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.