Surveillance: Election Risks With JPM’s Normand

sat up and paid attention. A Q form mount up, Ben, Why do you see a Q form out upon the cards. I think we've all sort of been a little bit distracted by the by the election. We've just had a quite a big consolidation, I would say in the third quarter on his expectations have sort of followed the upgrade and some of these GDP forecasts we've discounted. We've had

quite a big pull back. At the same time, I think a lot of indicators tell me that we've sort of discounted a lot of the election and what it's and what has done. The sort of concern on the election has prevented I think a lot of investors, who I think are still pretty cautious from repositioning as they would normally be doing in the fourth quarter for what I think is a big growth story, at least sequentially

in one and you haven't seen that reallocation trade. And I think it's coming regardless of who wins the election. I mean, we're looking at four percent us GDP growth next year plus earnings growth and some obviously some segments of the economy which I or some segments of the market would I definitely be overweighting here the more cyclical ones they're gonna see. I'm going to see a lot

more than that I looked then. I've been looking at the SPX chart here in the Bloomberg then, and there's been two glorious opportunities from March to tell Ben Laidler he's run, where do you find a courage? And I'm gonna get the cursor out here the fish Samuel Cares cursor. We're on July three or we're on October two? Does Ben Laidler find the courage? As we correct? Listen, corrections are I mean, we you never sort of rally remorselessly here.

I mean the incremental data point though is going to continue to be positive. I mean, we all were guilty of just cutting estimates sort of too far, getting too bearish. I think that's what happened in sort of March April May. I mean, now we're in the middle of just an earnings and a GDP upgrade cycle, which in Italy is going to need probably a bit more fiscal stimulus. And I'm sure we'll sort of talk about that, but you know,

the incremental data point is positive. I mean, back in April, we were looking at a twelve ninth forward earnings outlook of negative five. Now we're looking at a positive fifteen to twenty. I think we're gonna get more fiscal stimulus. I think we're gonna get a vaccine. And as I say, there are some segments of the market here which have dramatically higher have dramatic operating leverage to all of that, which I think I'm gonna lead this recovery, and they

really haven't done so far. I don't John, I don't believe him. I'm still looking for an entry point. I don't care what Ben Laidler says. He's been so right, John, did you like on a Friday, how I use a surveillance cursor there, the simulcast cursor to nail down those pullbacks. Nice, well done, Thank you, Lisa. Help me help me anytime. I will take out my own surveillance cursor and the

conversation forward bed. You talk about this pessimism that's baked into the market, and yet we see all this data, the economic data coming out showing the steepest recession possibly in history. And I'm looking right now, the NASDAC is up twenty eight percent year to date. I'm looking at SEP up more than eight percent. Where is that pestimism that you're talking about. So you've had I think eighty billion dollars come out of US equity mutual funds since

the bottom. You look at the American Association of Individual Investors bearish, you know, six months into the rally, you've still got forty percent parish. You know, it's still way above average. I even look at the sort of famous Robin Hood's trading volume chart and that's basically the lowest it's been since, uh since March. I look at the VIX again, six months into this rally, it's still above average, and vixed futures, you know, are going higher. From here,

not lower. I mean I can go on and on and on. I mean I would say that, you know, there's very few indicators actually teld me that people are positive. Men. We have a composite um investor centerent indicator which is nearly at contrarian bi levels at this point, and that's historically giving you twelve months return. So I think this

is part of the story. As we rolled through the election, and we put that into sort of the backward mirror, investors, I think are going to be forced to allocate on the basis of a sort of fourteen month view into one of significant growth. Well, then that's what I think really sets you apart from the pack right now, not just the cool but the fact that you don't think this is election dependent. Why don't you think this is election dependent? Well, he I think we've priced quite a

lot into the election anyway. Uh, and and be I just think you look back historically, and you know, I think we over discount elections. Uh. You know, back in twos sixteen, if you knew that Donald Trump was gonna win, what would you you know, and you thought the election was really important, you would have run off and loaded up on energy and financials and then essentially you would have had your head handed to you over the last

time you're talking to me. Then I got one final question here, and again, folks, I can't say enough about you know, we're kidding in but I can't say enough about Ben Laidler's calls here going back to that ugly que four of a few years ago, Ben Layler, the money question is for those that were fortunate enough like John Pharaoh to load the boat on Amazon and Apple, do they sell shares to go to the Laidler rotation or do they hold him and use you new money

to go to the Laidler rotation. That's a good question. I mean I sort of think about it a little bit of sort of structural versus sick of column I do you think that the tech train is a very uh is a very sort of structural traind I mean, they may they may under before for a quarter or two and amongst that sort of rotation into cyclicals, but you know, ultimately I think they're going to be very fine. You know, the story is just a little bit different.

But as I say, I think the real operating leverage is on the cyclical side. I mean that you know, we have a reopening basket. Uh, you know, they're all losing money. There are on a third evaluation of the sort of work from home sort of tech names and and I think and it's where all the earnings upgrades have been coming from. And I think we're gonna get a double surprise here of things that are the top line improving, potentially catalyzed by by a vaccine or not.

But also, you know, I think what we're missing is just a lot of costs being taken out. And I think once the economy sort of really begins to get going again, I think we're going to be stunned by

the degree of earnings upgrades that we see that. And I would say these cyclicals, you know, because investors have sort of been held back by you know this this this very boring debate on fiscal stimulus and are we going to get the election, you know, second wave of vaccines that's really stopped people from going into those cyclicals. So I think you still have a huge opportunity there. It is a boring debate, but it's based to be

the program at the moment. Ben, It's well, it is right if this separation here and we can talk about this John Norman, and the vide here folks, a disinflation in Europe versus inflation worries in the US is really really quite something. John Norman joins us. This is wonderful to get him before the publication of all of JP Morgan research under Joyce Chang that starts on a Friday, It filters out Michael Faroli tonight and then onto Norman's

hyper detailed institutional note for Monday morning. He has had a cross asset fundamental strategy. John, The theme for me this morning is with the jump condition and Ran Menby and the optimism of Asia Pacific recovery. What is the correlation right now between the Asia indicators and the standard

and Poor's five hundred good news. I think there's a reasonable correlation because both of these are moving on the prospect of a Biden victory, and I think a sweep Biden to me is both positive for the SMP and for Asian assets to the extent that you have calmer geopolitics. And of course is that if this is a Biden victory with the sweep, you're gonna have much more domestic stimulus too. So the price action across markets this morning

is very suggestive to me. Of the sweep. The only thing that kind of stands out is the fact that bonos are really moving that much, and that's kind of got to kind of condition how how bullish you are on some of the value rotation trades that the people are also focused on right now. The expectation game is a movable feast. How far out are the markets pricing? Are they pricing out the next Wednesday? Are they pricing out the November three, or are they pricing out say

into Q two of next year. I think the pricing out into the mid part of next year, if not beyond. The simplest way to think about what's going on in markets is they're moving from a fixation on a growth slow down, which was really what started to grip in August and September, to the idea that the cycle is gonna get rebooted through physical stimulus under democratics week. And if it is a reboot, we're talking about an expansion

that's going to go on for quite a while. And we're talking about a focus on data stumbles shifting towards data strength. And I think if we put we followed the normal cyclical path, that that strength will extend well into next year if we get more more fiscal stimulus. So the market is looking quite far ahead in terms of what the stimulus does to the to the cycle's prospects. Well, let's talk about how far ahead this market is getting itself at a moment, John, This new narrative is pretty young.

A couple of weeks ago I had a series of guests on this program. They would turn around to us, all all three of us, and say, contested election is the risk? Now we flipped and we're talking about a blue wife. How vulnerable is that narrative? John? But to me, the vulnerability is not really around the contested election, because I feel like the polls are shifting so far in favor of Biden that that any claims of fraud are

are going to be dismissed fairly quickly. If the margins are very wide and favored of Biden in a lot of states. To me, where you have the vulnerability in terms of a narrative shift is the possibility that maybe the sin it doesn't flip. And so if Biden is the president but there's no change in control in Congress, then we're going to still be dealing with the same impass around fiscal policy that we have now, and all this optimism around the sweep and stimulus and a report

of the cycle is going to collapse. So I think you really have to watch the space closely in terms of what happens with the Senate. To me, if it's a divided government, whether it's under Biden or under Trump, you do have the risk of a decent slowdown in the U. S economy and unwinding of the optimism that's been lifting markets over the past couple of weeks. So, John, you've talked about the vulnerability of the narrative. Let's talk

about the market areas that might be vulnerable. These are the lungs the calls that you've got on right now, curve state, no inflation, break even's, gold, materials, healthcare equities, China equities, bond effects. Out of those calls, John, if

you get that divided government, where are you uncomfortable? Well, the only ones I'm comfortable with is owning Asia, whether it's on the equity or the currency side, because I do have a high conviction view that Biden will end up winning, and that to me is supportive of these geopolitically driven trades like owning Asia, all the other trades you mentioned, the value rotation, the movement up in bond yields,

the steepening, the movement higher in the SMP. This to me is quite conditional on on the sweep, because that, to me, is the only political outcome that gives you some guarantee of a meaningful fiscal stimulus. So I'd still be comfortable with the Asia recommendations as long as Biden is the president. I wouldn't be comfortable with the other stuff unless we get the sweep. So, John, I'm looking at a number of job cut announcements day after day.

Yesterday A T and T. S Warner Media announced thousands of layoffs. Today, Loreal is going to be closing some stores and layoff, laying off four hundred workers. At what point does this matter to your overall bullish thesis. Well, I don't think it matters if we get additional physical stimulus, because I do believe part of the reason we're getting these layoffs is because the income support that's been moving from Washington to Main Street is starting to dry up,

and and so does it need to replace that? And I think if it is replaced, of course there will be job loss is in some sectors, but they'll be job gains and others. And I think you'll see a continuous move down in the unemployment rate without the stimulus, though, I think you have to extrapolate from what's happening in terms of job losses and the loss of momentum and Joba's claims, and you do have to be concerned about a sub train quarter if not too subtrend quarters in

the US and what that means for for markets. So the stimulus means is very key. Meanwhile, John, as you talk about your high conviction trades, he said your highest conviction was that Joe Biden would win the presidency in the United States. When you look at market positioning, how high is the conviction just in the positioning right now that that will be the outcome. I think the position is actually suggestive of a broader election outcome that changes

control of the Senate. To to me, that's the only way you could justify the strength in in all risky markets, as well as the slight firming you've had in yields and the interest in curve steamers. That that to me is a set of trades, a set of market moves which would only be validated by the sweep. So I think investors are definitely leaning towards that, and you know,

of to see the risk is that they could be disappointed. Well, John, one of the tries you think could be insulted, regardless if we get a divided government or not, it's the long China trade right now, dollar China making a move over night and return from holiday. I just wanted John your thoughts on the tolerance of the Chinese policy maker, how extended that try can get. Historically that they don't tend to let the currency appreciate more than sort of

high single digits in any given years. So this is always going to be kind of a lower beta effects trade relative to what you might achieve in equities if you're bullish on the cycle, relative to what you might achieve in the equities if you're bullish on China specifically. But I do think there's a bit of room to go on this. China has a surplus and there's a structural flow into bonds and stocks related to index inclusion.

And my guess is there have been some clients who have been uh less interested in investing in Asia over the past few months thinking that Trump could get reelected. So so my guess is that if you do have Biden as the president, regardless of the agressional welcome, you will see some position covering and some move back into China, which is independent of what's going on the business cycle. John.

One of the great debates here. We talked to the wonderful Matthew Lozetti over Deutsche Bank here recently, and I think it's something that we've heard from Bruce Kasman and your team as well. We're in a present milieu which is an economic flatness, slowdown, and then there's a belief as you mentioned, of economic recovery in the next year. Should our listeners and viewers just discard the present and the past and just be laser focused on what's out

there in two thousand twenty one? Is that basically the emotional exercise. Well, there's always an emotional component to investing. Investing is done by people, and people just can't help but be emotional. But it is important to remember what to me is the big lesson of the post GFC experiences that there are structural constraints on growth after a major financial war economic crisis. There's a need for fiscal

policy to remain expansive for a long time. The policy mistake after the GFC was to let fiscal policy titan for about three years in the US after the GFC. That was part of the reason why you had such anemic growth in the US after that crisis. So I think it is worth remembering that if fiscal policy inadvertment titans, which is what we're gonna see on current legislation, will repeat the anemia of the post GFC years. If fiscal policy is loosened under a different set up in Washington,

we can avoid that thing. Within the glide pass of the ten uere yield, John Norman, where is the important statistic of the ten year yield? Don't tell me it's at one point zero zero, But where where is the point where tenure yield begins to signal issues to you? To me? If tenure rates were probably close to one and a half percent, yes, I think we would have to question whether or not this is potentially doing some

damage to the recovery. Of course, if the context for getting to one and a half percent is uh significant fiscal stimulus, much more on the spending side, less on the on the tax side. It's less worrisome, But I think the market should be very comfortable with a tenure rate up to one percent, maybe even after that. I think it's still too fragile recovery to think that that level of rates is helpful. But remember, the FED has

a very flexible asset purchase program in place. I think they probably have some internal sense of what a helpful level of yields is versus an unhelpful level of yields. So I do have some confidence that the asset purchase program would be adjusted to make sure that rates don't stay at an unhelpful level for very long. So I

think I think this problem is manageable. John Norman grants to catch ups as always send up best to it, saying John Norman that of jap markin there is stimulus, and there'll be fancy conversations today among fancy people in Washington. There is no one in Washington who covers our policy research with tangible experience and actually getting infrastructure done, like

Michael Jesus. He's at Morgan Stanley, He's head of US Policy Research, but far more importantly cut his teeth out of Georgetown in municipal finance of actually getting bridges built, Michael,

I want to go down to the granular here. Business Insider did a great article a year ago or so of the worst bridges in the world, and they go back to the Chester Nimits Bridge in Honolulu built in nineteen nine and stagger through the fifties up to the hemorrhage of construction we had in the nineteen seventies, and it's all worn out. With this infrastructure that we're gonna see, are those bridges and all the rest of it? Is it finally going to get fixed? I think we are

a couple of steps away from that, right. So the stimulus package that's on the table, at least when it comes to So State low government's obviously a critical infrastructure there. They basically own in finance UH infrastructure assets in the US. But this first round of stimulus should have come through is about kind of plugging the hole in revenues, not providing kind of incremental infrastructure if you want infrastructure incremental.

On top of that, probably the political configuration you need coming out of the election is a suite by the Democrats. Um. If that's the case, and then they would probably they would have the motive and the opportunity to pass a large infrastructure build and you could start plugging some of those holes. Uh, you know, a couple of trillion dollars plus throughout the country in terms of deferred capital needs

and new capital around the country. But we're you know, there's a there's a lot of steps, a lot of notes on the decision tree before you get there. All right, So let's not talk about fixing the Nimits bridge of just yet. Tom. We'll discuss that perhaps next year. Michael.

Let's talk about who doesn't get paid if there is not a near term fiscal support bill passed in Washington, d C. How much can we expect state and local governments to have to layoff in masks some of their employees because they cannot increase their deficit the way the national government can. Yeah, it's a good question, right, So let's start with some high level numbers here. Uh. We estimate that states cumulatively through the end of one are

going to be short on revenues about eighty billion dollars. Uh, local governments about nineties so to seventy total. Um. How do you close those gaps? You've got austerity options, so taxing or cutting spending. You've got borrowing options, including obviously the open market, but also the MLF at the FED, which basically is going to cover for all of that. So it's uh, it's a bit of a choice here,

and I expect different states will make different choices. UM. Austerity will probably be part of the picture, and layoffs will probably be part of the picture. UM. And I think borrowing will be too. It's not a great combination, but it's a middle road when all of this plays out. I suspect that states are probably waiting to see if the stimulus negotiation in DC is successful. Maybe they'll leave and hold on a couple more months to see if

the election gets you a configuration that makes it successful. Um. But after that, you know, austerity has to kick in at some point. Mike, we didn't mention the fault risk. What if the day were fit into any of this. I don't think it's particularly meaningful. UM. I think this is a conversation that was perhaps legitimate to have in March and April in the teeth of all of this.

But the FED opening up the MLF, which has a capacity for about fifty billion dollars of borrowing for states, means that if states effectively wanted to turn out their entire revenue shortfall. They could even they couldn't be doing in the open market. The FED is right there on the back stop. So the revenue shortfall sort of creating a jump to the fault story I don't think is particularly meaningful here. That basically is offering the option the states to push this out, spread it out over a

few years if needed. Michael to the mix here of what Lisa was talking about, and I was talking about what it happens if we get sort of the same thing, but flip a Democratic president and still a Republican Senate, then what happens to this huge demand for infrastructure. Yeah, it's a good question. Our base case doesn't see in that situation that you would get an infrastructure bill. The fundamental problem on infrastructure has never been that the parties

don't see the need for it. It's that they don't agree on how to finance it. And the Republican proposals always get twisted up around how do you increase spending without increasing the deficit or increasing taxes, two things that you basically can't get a majority of Republican representatives in DC to do. And then on the Democratic side. Obviously you would be you're potentially willing to do one of those two things, but in the divided government scenario, you

need you need the other side to agree. So unfortunately, I think infrastructure in the type of divided government scenaria you talk about, will just continue to be subject to gridlock. Michaels Jesus got ahead from me, Sir of Morgan Stanley. Well, an eventful Friday, say the least. But what we do at Bloomberg Surveillance on Friday, on radio, on television is getting ready for the weekend, reading and get ready for

the next week. Stephen Stanley is expert at that. He's won every trophy out there with AMers Pierrepoint, and we're thrilled we could get an update. Steven Stanley, what is the distinction right now? What does the update in your American economic call? Sure, well, I think you know we're slowing down. We've gone through the fast recovery phase here, We've gotten back to some percentage of normal um consumption.

Spending through August was about of of pre pandemic levels, employment only a little over half the way back, and now I think we're kind of settling into um the next phase, which is going to be continued recovery, but at a slower pace. And I think, you know, there's been a lot of discussion around the stimulus, and I think in my mind that I think a lot of people are assuming that that the economy is entirely dependent

on another round of stimulus like yesterday. And I think certainly more stimulus sooner would would push growth higher, but um, I think the economy can continue to recover without it in the near term. What is the partition right now in America among goods producers versus service producers. Well, it's pretty stark because the good side of the economy in many ways is back to pre pandemic levels, and even beyond it, retail sales, cordurable goods orders, um, obviously the

housing sector. So they're a number of parts of the economy that are you know, I don't know, booming might be a little too strong, but but certainly very robust. And even within the service sector there's there are winners and losers, and it's really just a function of the pandemic and the restrictions that have been uh put in place.

So you know, you've got some sectors that are struggling like restaurants, and then you've got other sectors that are just kind of a flat on their back, air travel, hotels. That's the story. At the moment, everyone's calling this the K shaped recovery. Now it's getting some real traction. I just wonder how extended those two legs of that K can actually get well. I think that's totally a function

of the of the virus. UM. You know, if six months from now we have vaccines and effective treatments UM, which seems like a not an unrealistic scenario, UM, then you could see a quick revival in some of those sectors that are having trouble right now, even though they've made virtually no progress so far. UM. And I think that's you know, that's the difficulty that we all have in the markets and that the FED has, is that

visibility is just not very far. I mean, we maybe we have a pretty good idea what things are gonna like in two or three months, but once you start talking about six months out, twelve months out, two years out, UM, you know, it could be literally that the scenario could be anything. Stephen, do you think these shifts are COVID dependent or do you think there's some permanency to them. There's certainly things that have taken place that are going

to be permanent. Some structural changes in the economy that we're ongoing and have been accelerated UM. For example, the move to online retailers UM versus brick and mortar UM. That's something that's been going on for years and it's clearly been accelerated. UM. I think you know, one of the most important things perhaps is to come out of this is going to be the move toward work from home.

And I think there are going to be people who uh continue to work from home or or at least work from home some days that maybe never would have happened in the absence of the pandemic. So there's certainly things that are challenging business travel maybe is permanently curtailed to a degree, will have to see UM. So yes, there, I think there will be structural changes well beyond the

point at which the pandemic is a memory. Do you think that these disruptions will have material structural issues for the market. I'm thinking, for example, you talk about commercial real estate, people expecting further declines there, and then I think about regional banks and how much they own in ruth respect to commercial real estate assets. How much will you expect the FED to step in to smooth out any bumps as we go about this recovery, regardless of

any fiscal support from Washington. Right. Well, I think from the Fed's perspective, they're feeling better about this crisis than the last one because we're starting with a financial system that's in much better shape. So they are. They have provided generous support to the markets, and and they stand ready at a backstop in a lot of different places. Um. And thankfully a lot of those facilities haven't really needed to be used because the markets have covered quickly. UM.

So yeah, they're there. I don't think that they're just going to bail out anyone and everyone that uh you know that that needs it, because you kind of have to allow that, um, creative destruction to take place as the economy evolves. But I think that they're going to be pretty generous about providing a backstop and making sure that any adjustments like that that need to take place don't become uh you know, a structural issue, a systemic

issue for the for the financial system. And they've made this clear and yesterday in the meeting minutes from the previous f o MC meeting. They talked about how they could potentially use additional QUEI acid purchases to support the economy. Are they supporting the economy at this point? How much more can suppressing ten year yields by another ten basis points do to actually get more people at work? Yeah, I'm sympathetic to that view, and it's one that I

made for years. I made it the last time through. And it's interesting. There was a study that came out recently, um, that found that that central bank economists around the world put a lot more uh weight or effectiveness on uh QE purchases than non central bank you know, academic private academic economists, And I think there maybe is a blind spot there. Um. The fact is a FED that's really the only major button that they can push beyond board guidance.

So they don't want to admit that it maybe isn't isn't all that helpful. But I mean, as you say, I mean, tenure yields are around seventy five basis points. I don't know that there's much marginal benefits of taking them down another ten or fifteen or twenty basis points from here. If you're just joining us on Bloomberg Radio, Bloomberg Television. Stephen Stanley with us with Amerus Pure Points. Stephen, you know politics is about jobs, maybe even jobs is

about politics. What's a true unemployment rate in a mirror just twenty five days to the election? Yeah, I mean I think there we've got an eight percent unemployment rate. Then you've got about another two percent decline and labor for participation from before the pandemic, and some of those folks won't be able to come back until um, you know, until things straighten out, you know, until schools are fully

open for example. Uh, and some of these businesses are able to get back to normal, and then you've got people who are only able to work part time. So probably somewhere in the in the low double digits, but it's certainly down very sharply. Um, you know from what what an all in unemployment rate would have been at the at the peak of the lockdowns when you're probably talking about something above. Stavin Stanny right to catch up, Sir Stevens. Stanny there. Thanks for listening to the Bloomberg

Surveillance Podcast. Subscribe and listen to interviews on Apple pod Tests 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