Surveillance: Economic Recovery With Meyer

name Lisa Shalott of Morgan Stanley Weafth Management. Lisa Shalott, fantastic to catch up with you, and I will say out front, you have been right over the last couple of months, but over the last couple of weeks that cyclical rotation has started to fade. There is a defensive bias creeping back into this market. What's the message for

clients this morning? Lisa, Yeah, Look, I think that that as you articulated, I think that the concerns over the recent spike in cases um is something that investors are definitely grappling with. And to your point, we have seen, uh, you know, a defensive rotation. Albeit on the one hand, uh you know, people sustained by the fuel of the bed.

But on the other hand, you know, buying things like gold, like utilities, uh, like staples, you know, leading the smoke it so, UM, you know we have uh, you know, articulated that we thought that period um, you know really from game through the end of the year was going to be a very volatile and trade range bound uh, a range bound market, and you know we're we're sticking with that. Um. We still think there's opportunities to buy those cyclicals for what ultimately happened two. But we understand

that we're in a very very toppy critical period here. Uh, and we're not surprised by this defensive rotation and certainly, uh it is validated by that news low the Tom talked about the the the pick up um in in the virus numbers are staggering in the last week A Lisa, compared to what we were a couple of weeks ago, you sound relatively more cautious. So I hope that's a fair characterization of where you stand. And I just wonder

what's the epicenter of that term for you. UM, yeah, No, it's it's as I said, UM, I think we are a little bit more cautious. Look, we're still very uh strongly in that range that we've talked about between two hundred. But as we look at um, you know, these the spike in the COVID nineteen cases. Um, while we don't think that there's appetite either human will or political will to really go back to both the style of all

out lockdowns that we saw in March and April. UM, these are numbers that are going to cause people, uh, you know, local town cities, uh, concern and and stress and and again to Tom's point, UM, if you start hitting limits in certain cities and innsicitalities on their hospital capacity, they will have no choice, but you once again restrict economic activity. H. And I think that that you know,

that's kind of what you're seeing in the numbers. People get the joke you can't fight the FED, but they also worry that the only things that are going to work, um, you know, in an environment where the recovery is very lumpy and impeded by the virus. Uh. Maybe you know with with those very defensive uh names. Alica Shelley, you

good morning. You've always been research based, of course, with the acclaim of Sanford Bernstein and the wonderful Black Books and all that, You've always led with research First, what are you learning from the Morgan Stanley cell Side research team about this nation and its corporations? What is the spirit they're hearing they're feeling going into the summer into

the mystery of the fall months. Yeah, I think one of the the UM you know, most interesting things that we're debating is the extent to which UM companies are going to resume their capital spending. UH. And so one of the reasons that we as a house I think have been somewhat more bullish UH than many And where why you know, our global economists in chet Naya UM you know, have stuck to this more bullish V shaped recovery forecast is because we are seeing a pickup in

capital spending intentions. And that UM was something that I think earlier in the year was much more hotly debated. Now a lot of the capital spending does UM you know, seem to be focused on technology and the cloud and

you know, digital present UM. But UM you know, that's that's really I think, UM, you know, where we still remain very bullish and constructive UM that that capital spending UM you know helps the STEM is Lisa, We're gonna be very lucky to have CHATNYA with us tomorrow, your colleague. A question coming up from a listener, Cliff Marine at mass Mutual, And this really goes to the angst of a lot of investors out there. Has the easy money

been made? Can we just expect lower returns going forward? Well, that's certainly our our view. Um. I mean, if if you just look at the last decade, um, and we talked about this all the time. You know, over the last eleven years, the sup from whom you know has compounded at close to fifteen percent per year, which two times normal. Uh. The corporate credit returns of compounds at

nine person that's about three times normal um. And so if you look at this on it, any of you know, set normalized metrics, either normalized earnings or normalized it just you know, avery expensive market. So in the in the the of a you know, Robert ship type plant work, Um, you know, we're looking at returns over the next three to five years that there's going to be a lot more like four to five percent, not seven or eight percent.

And a lot of of clients you know, have historically expected so um, you know, certainly the fan is throwing unbelievable amounts of ammunition at this the the federal government is doing its part on fiscal but it's really hard to see. Um, you know how financial assets, uh, you know, appreciate materially without us really getting into a dangerous bubble territory at Lisa shout out of Morgan Stanley. Lisa, always appreciate your insight and perspective, and we thank you for

your time. This morning got best to you and the whole of the same erom Morgan Stanley right now a really wonderful conversation, conversation on how we're framing our expectations forward. Michelle Meyer came to the attention of all of Global Wall Street where their financial modeling learned at Boston University. She did brilliant work for Bank of America on real estate, on the thinking of the underpinnings of the economy. She

joins us now with Bank of America. Michelle to the model's work right now, can you use conventional Michelle Meyer economics to look forward or do you have to make it up as you go? Um? So, I think what we've learned is that right now it's really important to do a bottoms up exercise, the bottoms up modeling, right because the shock is so sector specific and it's hitting

the economy in many different ways. So think about it for jobs, for example, probably the best way to forecast the path forward for the labor marketing Unemplymary, is to think carefully about each major sector. How is how are retail jobs going to recover, versus construction, versus autos, versus leisure on hospitality, and from that you can then kind of add up and and think about the big picture. But it's really important to look at the economy on

a center to sector basis. Right now, I agree with that in the partition of goods and services, we've seen goods disinflation and outright deflation at times. Do you suggest we will see service sector disinflation? Look, this is a service sector shock, um and and you're right. Typically it's good that swings around a lot more. It's goods that tend to be the most vulnerable in a recession. But consider the consumer basket that we've seen in the past

a few months since COVID hit. People have been spending on durable goods. They've been spending on household appliances, they've been spending on autos, they've been spending on housing, and they haven't been spending on services, so the big demand destruction has been much more on services. Now part of that comes back, It already is coming back upon reopening, but not fully so. The big oppraise adjustments happened to services.

I don't think it was the outright deflation for broad services because the lodging component, the rental component in there is so broad. But we're going to flirt with that, and certainly many cadgories will be uh disinflation area and and and some will be in deflation territory. Michelle, I'm going to steal from your research the three phases to all of this, the shutdown, the bounce, the recovery. You've talked about that bounce off the trampoline followed by a

long climb up a rope. What are you learning from the bounce in the last month, so, you know, I think it's been stronger than maybe we would have anticipated. And part of that because the reopening was also earlier, So it's it's happened earlier, it's it's been strong. Consumer confidence is so so um it picks up pretty meaningfully, so people also feel better about the world. There's clearly

a desire to re engage. That said, we're now starting to see very early evidence that things are leveling off, whether you look at it in terms of some of the high frequency data around consumer spending or small business openings from a variety of alternative data sources as well, things are starting to kind of peek out, particularly in the states that are further along in the reopening process.

So that tells us that next phase, and thank you for referencing those three phases, UM, that next phase, the the true healing and the recovery phase. UM. We're starting to approach that, and and that's going to be a much more challenging one in my view. And Michelle, another

challenging aspect here is the road ahead for housing. So far, we've seen amazing resilience, and I know this is one of your expertise, is dating back to two thousand, five thousand six, and I'm wondering how long this can last if we don't see a further resurgence, especially since these

are really being driven by mortgage rates at all time lows. Yeah, you know, I think for housing, clearly, the balance has been incredible mortgage purchase applications and eleven year high new construction in particular benefiting the most because of the ability and the ease of of searching for new construction versus existing UM so mortgage rates I think is one factor. I think pandemic related relocations is another factor, particularly out of urban areas. We've seen a lot of survey evidence

to that effect. UM and then the demographics in general have been also favorable for for housing and this factor continues. So no, we won't expect this rate of growth to persist for housing. This is this is a this is a sharp move up UM given the situation UM, but the fundamentals are still pretty UM supportive and if we could assume, and I think rightfully so, that interest rates are going to remain very low for the medium term,

housing should continue to be underpinned. Michelle, when you talk about the migration out of urban areas, is it going to leave zombie lands and some of the big metropolitan areas where there's an incredible amount of commercial real estate that won't necessarily get filled up as well as residential it's been built up over the past few years. So I think there will be some real consequences, of course, from these considerable shifts in population and where people want

to live where people want to work. Um, but remember that their short term adjustments in the end, urban centers are still vibrant. It's still where you know, the heart of businesses tend to lie and and and you know the city is particularly to think New York City. They've been through these shocks over the years and they do bounce back. But I do think in the short term

we will be seeing a pretty meaningful adjustment. And if you think that even just a real estate market in in in in some of the cities versus the suburbs, you're ready starting to see some of that praise convergence even before COVID hit. So the COVID shock just amplifies what was already underway in terms of the migration paths.

Michelle is a real worried that the infection increase of the last several weeks in several states, including Texas, is going to constrain the reopening process and start to hit the data. My worry, just looking at this from an economics perspective, is that the sequential improvement is banned to continue because places like New York are just starting to reopen, those forces will be really powerful. So the africant numbers over the next couple of months might still look strong.

Do you think that could mask some fragility underneath and we might miss what is happening in places like Texas, California, Florida and elsewhere. So you're absolutely right in that, you know, and you think about the aggregate. You have the states that are further along in reopening where the viruses are rising. Things might be starting to slow there because just the length of time post reopening and now they have the

virus concerns. But that's the offset by New York, fu Jersey, Massachusetts, um moving into the reopening process for the along and the reopening process. So that's why it's absolutely critical to look at high frequency data on a state basis. So we do a lot of work where we're trying to um pick out the states, you know, kind of bucket the states into the degree of reopening and track daily weekly data in terms of understanding what economic activity is doing.

And I think the most important indicator will be if the states that are further along in reopening that now have viruses on the rise, as you said, Texas, Florida, hours out, Arizona, and South Carolina in that bucket, if you start to see behavior switch even before there's government policies that that demand that right, just from personal preferences. I think that will be a very important sign. What should we look for in the high Freak can see

data tomorrow morning at claims Statistics. So we love claims. Claims there are a great piece of information, but they are flawed and we've learned that, Um, they're flawed in part because there's backlog issues presumably in terms of how to process these these these indicators. Um, there's all different changes to the claims programs in terms of eligibility and

criteria for receiving claims. So I think you need to take them with a grain of salt when you're translating those claims numbers into actual hiring, and more important, firing really is what you're capturing with it. That said, the stickiness that we've seen from claims has been a sign of a reason to be concerned because it tells you that there's still some firing going on even when we

know there's hiring from reopening. So for claims tomorrow, we do think we're gonna these some models moved down in initial jobs claims remaining above a million and continuing your job is claims, which is probably really one of the more critical indicators when you're trying to to map this to an unemployment a rate. Um. You know, I would imagine it comes down a bit, but I don't think we should expect these dramatic falls right now in claims.

Certainly the data hasn't shown that. Michelle, my Bank for America, Michelle, always enjoy hearing from you and the whole of the team. My best to even yours. Michelle off by the yield differentials and of course the flow differentials, and that's something show have joll News knows well. A credit suites originally after Singapore Desk and out of the London School of Economics, grind shall have good morning to you. What is the

credit suite call on the US dollar morning. We are looking for a weekly dollar linked to some of the points you've already made. Firstly, we do have a situation where the stud is still buying in effect around eight billion dollars a month of treasuries UH. And the banner ship expansion is conclete is continuing with maybe slightly slower than the peak levels that we saw, but still by any historical standard at a fast pace. You also have

still took of yield cuve control rate stressors. For example, Things to Market is still parting around a chance of yield cuve control being introduced in the US within the next three months um some field that the FAT has already decided to do that, and it's the question of working out implementation to these factors together with very low

nominal rates. We talked about real rates, but nominal rates are also very low obviously, and and so yield differentials even the nominal terms and did not preclude being short dollars these days, unlike the last few years. And in folks, for those of you on our simulkas this is really important. How we folded our conversation of yesterday with James Bullard

over to the foreign exchange realities of Shahab. John, the news and yield curve control Shahab, do you just assume that means lower and longer at the zero bound, And as John Farrell mentions, the interst rate market must adapt to that, and that's expressed in your world of foreign exchange. I think that's right. I think in our world of fign exchange, you know clearly real yields do matter. In the long run, but in the very short term nominal

reds matter too. That's that's basically the real cost world, the cost of carrier that you pay for being long or short currency. And at this point in time, unlike recent years, the dollar in nominal terms, does not offer any significant yield pick up, and yield can control would ensure that that would be the case going forward for

a long time as well. So all of a sudden, currencies like the euro or the yen or the Swiss franc that have some positive characteristics from a fiscal perspective relative to the US or from a current account perspective, they don't look so bad all of a sudden, because now they don't have a yield negative yield differential relatives to the US dollar, So owning them becomes much more attractive. And I think that's that's the state of play that we're in right Now's your heart, What does yield curve

control mean to you? When you say you were spect to see it, what are you expecting to see? Well, we believe if it's going to be introduced, it's more likely to be um a bit like the Australian case, for example, in the three to five the three year ten o or maybe up to the five year tenner um, where the fall would effectively signal to the market that is not going to let yields move above a certain level,

a certain very low level up to that point in time. Now, in other countries, for example, in Japan, you have yeld cup control all the way out to ten years. Now, you probably don't need to move into that space quite quite yet. We'll see what happens with inflation expectations. But given the inflation expectations are going up already in the US, presumably you don't need to go that far up be curse. But but even in the three year tenor for example, it's still a major innovation for the US to move

to yueld cup control um. And it's a it's a new challenge for the dollar. And the problem here, of course of the dollar as well as nobody really considers it to be a cheap currency. If anything, most evaluation models would probably have it at the at the expensive end of any long term valuation level, particularlygainst the likes

of the yen and the euro. So it makes the trade easier to be short dollars when you know that it's not even seen as cheap by anybody well sharp looking at where the treasuries are right now out to the belly the curve, We're already there for the Fed, aren't we At thirty three basis points on a five year just outside of the range on the FED funds rate. And I'm just trying to work out what difference yield curve control is actually going to make. Who is the

twenty basis points? How much lower can they go? Well, that's that's true, And as I said, I think the market is already a long way towards pricing in yield cup control being introduced just as recently, so as soon as the next three months. So um, it's definitely something that's in the consciousness of the market already. But the fact is, when you look at the dollar from a longer term perspective, it's not simply the surprise element of more yield cup control and more aggresive yield of control

that could take it lower. Is the especially adding this to an already difficult picture for the dollar. For example, when you look at it from the perspective evaluation, as I mentioned, it wasn't cheap when you look at it in terms of things like the US is likely fiscal

trajectory or current account trajectory. Those aren't looking good. Um. Then you look at political risk, for example, the possibility of unrest around the election in November of the presidential election, but also congressional elections, all of these it's it's the whole picture put together that makes the dollar look difficult

right now. And the other thing, of course, to notice that in the rest of the world you actually have some positive developments going on, particularly in the case of the Euro where um, finally you have a move being made that that seems tangible towards a form of fiscal risk commutualization UM. And that's in the shape of the European Recovery Fund. We'll find out more about this next month when EU leaders meet to discuss it properly. But if that comes through, then you do have a major,

maybe a multi year innovation. UM. That's that's going to be Euro positive exactly at the time as the dollar is facing these problems. And it's these kinds of divergences that tend to lead to effects trends, and if these come through together, that's the kind of thing that would make for example, you're a dollar look a likely candidate to go back up above one twenty within this year. Wow,

that's a big call. I'm wondering that's your highest conviction calls that the Euro will strength and versus the dollar this year. What about emerging market currencies? Is this just a broad risk on trend for the rest of the world versus the US so I think generally speaking, when the Euro is going up, it tends to act as a tail wind for for emerging markets as well relative

to the US dollar. Of course, one issue now with emerging markets is that interest rates have come down a lot in those countries as well, so the risk premium, uh, what you get paid for that is much less than it used to be, So that's that's something to consider.

The Secondly, there are regional differences to consider. So, for example, in Latin America right now, there are countries like Chile and Brazils that have been heavily affected by by the pandemic and continue to be, so we probably would shy away of buying those currencies at this point in time. Um In fact, we like being short the Chilean pesso

and the Brazilian rail for choice. But there's other currencies in the emerging market space where some of these risks are slightly less immediate, and maybe the fiscal positions coming into the crisis were more robust. Um, I'm thinking of things like the Korean one, the Indonesian repair, whether Russian roubles. So those types of currencies do still look to us like they could be winners in a world where the

dollar is falling against the era. You have always great to get thoughts, send out the best to detainment credis way. You have jil and knows on this fex market, looking for your dollar to get out to one twenty before year and right now, Henrietta trades with us with Beta partners as we look to Washington and policy. Just a magnificent career with actual legislative work on the hill, in a course with Marty's y years ago. Uh, Henrietta, I'm wonderful to have you with us. I've got a dumb question,

but an obvious question. How do the people you follow, how do they change in the summer before a big election. What's the behavior that adapts and changes when the heat is on? Well, Tommy never asked a dumb question. Thank you so much. Um, I feel like our clients have been with us first so long that they start to ask the really good questions early. So they're already skipping ahead past the election onto you know, what does tax policy look like under Abiden administration? What can we expect

from further U S EU tensions? Where are we on China? Uh? Uh? They are already into you know, November four who whoa wait a minute, are they assuming the election of the vice president? Um? I think that's the base case for a lot of folks. I think that's what the math tells you. Um. That's certainly what we see from everything since the two thousand and sixteen elections, the various mid terms,

specifically proven by Super Tuesday. We look a lot at the generic polling data, which suggests that Democrats have a lead just in sheer voter turnout of plus ten UM. That suggests a wave that is on far with two thousand and eight. And that's literally just the math. So UM, I think that for investors and our clients who have been through so many elections now and follow the mid terms very closely, understand that the House senator sometimes more

important than who gets elected to the White House. That's where they're prioritizing, So we do a lot of conversations around what does reconciliation instructions look like, where can the corporate tax rate go? Um, What are we looking at on infrastructure? What are the prior or two priorities with deficit and spending, um. So they are very much preparing

for that, which I think is very appropriate. Henrietta, six months ago, when President Trump looked like he might be losing a little bit of ground to the Democratic candidate, stock sold off. Now there is little move why um, that is interesting. I think there is some confusion around obviously coronavirus that gets in the way of that development. I would say that six months ago we were still

dealing with the potential for Bernie Sanders versus Biden. So there was actually a huge relief when Biden won the Super Tuesday state so it became clear that he was going to be the Democratic nominee. Because a lot of investors have been very fearful of just the outside chance

that Bernie Sanders could have been the nominee. So I think there's been a lot of flip flopping back and forth there um, but a really nuanced view of what could happen under a Biden administration is frankly not all that much to the downside and a lot to the upside. If you're looking for economic stimulus in the market, the question is really what's the scale and scope of any stimulus going to be. Is it gonna be a two trillion dollar infrastructure package or is it gonna be you know,

diminimus five billion dollar bill um. We air on the side of two trillion UM. We use the two thousand and nine Biden as a pretty fantastic example. He was literally in the White House during a very similar economic environment, and uh he deficits spent and passed the A R A at the time, which was a huge bill for two thousand nine numbers pills in comparison to what we're seeing this year. Um. And that's that's really our rumor

for what we'd expect from Biden, Henrietta. It also speaks to the potential stimulus that we may get ahead of the election. You wrote in a recent note that if it takes longer to get a stimulus package passed, it will likely big be bigger. Can you please elaborate on that. Yeah, I actually was having a great conversation with a super smart guy UM focused on the auto industry and we've been working with them. Just understand, you know, hey, where are the stimulus bailout is going to come? We saw

the airlines sailouts and the Cares Act. Are there going to be others? You know, there's been rumors of an oil bailout or um questions about cruise lines and hotels, etcetera. The reality is that there's very it's unlikely that we're gonna see bailouts for any specific sectors. Congress still gets gunshy around that after the you know, bailouts of the financial services space essentially in the Great Recession. So there's

a version to sector specific bailouts. But right now, if you were looking at Republican Senate staff, UM and Senate members, there are I would say at least thirteen members who are very opposed to meaningful deficit spending in July. They are expecting robust June employment numbers. We're going to get a roll off of the p p P and the eight weeks of employment requirement there, which will make July

employment numbers shrink meaningfully, is the expectation. So right now, the economic figures don't look so bad, and we get to numbers. People are expecting them on Capitol Hell to be pretty robust. Once we get July numbers in August, that sets us up for the legislative debate period in September. Things are going to look much worse. If things look much worse, then you can get more money gold out.

It's obviously just two months before the election. You could get some concerted efforts from President Trump to say, hey, we really need more stimulus, and then they could loosen the purse strings a little bit. But for right now, they just want to hold on to all their cash with sort of a tight fest. And we had a fantastic to catch out with you. As always a really important discussion one will continue through the next few weeks

and months as we count you dance in November. Right now with our question, the most important interview we could do in this fair city of five boroughs of New York City, then trying to get our restaurants open for the society, the culture, and yes, the food that our restaurants bring. It's everything from McDonald us to a bistro to this and that. In Daniel Blue is at the

top of the heap. Not only the many different restaurants that he has, including Danielle, but also his management of the people, the management of the kitchens in the front of the house as well. Daniel Blue joins us this morning here on Bloomberg Surveillance. Danielle, what do you need right now from Mayor do Blasio, What do you need from Governor Cuomo. Of course, we got into phase two and I'm opening our west side restaurants Barburu and EP

three Boloo with a big terras. And of course they have been flexible with giving the chance to Restaurctor to be able to put tables in the street and open their restaurant. But it's not the only solution. I think we need the city of Zante, New York to be very vigilant and very safe. We need to keep up that very safe. Of course, we need to keep up, but we need to also continue to support the economy

better by bringing back more customers. We have done take out, and take out has been good with Danielle Burick Kitchen, we started uh home delivery and uh you know, we have even delivered to the emptoms and all that. But I think from from the governor, of course, we are gonna need a lot of support, and we are asking for the government to really be sensitive to our industry. Of course, we need to bring people back to work.

Is this once in for Danielle, that we do what Europe does effortlessly, which is granted its summer, that we need to move the restaurants outside, across the sidewalks and indeed out into the streets. Do we have to change the rules of where the walls are restaurants so you can break even And I think, but the summer in New York can be so hot then it can be

very very uncomfortable as well to be outside. And uh, we're looking also maybe at Danielle to be able to transform the restaurant in something more casual, more summary, more Mediterranean, and and do a little pop up for a couple of months and take people in a different sort of set of mind and set of place with a lot of stake, immager And but you know, we have to make sure first and foremost then the city of New York is safe to be able to reopen inside as well,

and we need we need to serious didance from the city and the States to do that. Chef casual dining definitely has a place. Fine dining is dead. That according to Danny Meyer of Union Square Hospitality, is that he's not going to open his finer dining restaurants until there is a vaccine. What's your view on that something of fine dining will be dead, but at the fine dining will be suffering, and the one who can survive is the one who maybe have to do a good negotiation

with the landload. The landload has to be very important to that. But I believe that we uh you know, every uh, every fine craft will still exist and continue to exist. We have the fact that we have the ability to scale down. We have the ability to be able to approach customer with something more centraler, more more soulful, more cheaper, and I think we're going to try to work on all directions with that. I think it's not because we have fine dinings and we don't know what

to cook anything else. And I have proven that with also my all all the different restaurants I have, and fine dining around the world is not going away. I mean Lordon, Sangapore and Paris from everywhere. So I don't think we want America to lose this fine dining for sure. Daniel. One final question, I want you to speak to all of our listeners and viewers right now wondering what's going on in the kitchen. How do you maintain a new

level of cleanliness in the kitchen. Well, we have very free gasign just with the little crew we have right now for doing our takeout. We take everybody go to an exam on a regular basis to be checked everyone when they arrive. We we we have tables with of course gloves and mask and and we want them to

challenge everything from where they come from. Outside. We we make sure that they have spray also to spray themselves they go to change and uh, and then we we we respect the fact that we have to wear a mask and be protected and be safe. We tried the social disc and think of course in the kitchen is very important. Right now we're producing about six thousand meals every day every week every week to seeking me along Wheel downtown and you know it's a lot of work

and we try to be very careful with that. We're really uh, it's so beside the chargeable work the home that take out cooking with Daniel bud kitchen is important. But we also are giving up next week to open even at the end of this week. This weekend we're opening on the West Side, so we hope and we're gonna learn, but we're gonna make a top skills of course, comfortable to its best right in Danielle, as I always say, if I own say BMP, Perry Bys have to say

that I owned shares in it. I have to say, folks. At times in the recent years, I've had the oysters Rockefeller at one of daniel blues wonderful establishments one too many times. Daniel Blue, thank you so much for joining us to today. We'll be fascinating to see the restaurants open across this nation. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at

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