Surveillance: Equities are Overpriced, Normand Says

open soon. Let's turn out to David Balen, a city private bank, the chief investment officer. David, help me out with this one. As we reopen, is there a reopening rotation in this market? If so, what does it look like? Well, in terms of what we're what we're expecting to see, is, you know, a reopening that is very much focused on

two big trends. One is to refill the supply lines and you know of the for all industrial products and capital expenditures in the second one associated with the consumer um. We expected that reopening is right. This quarter is all about refilling that pipeline and then obviously the rebound will take place in the numbers in Q three and as you've been talking about on the show today, we're going

to continue to see these incredibly bad numbers. And what we're gonna need to see on the opposite side of this is an enormous amount of re employment. Of the thirty odd million people, let's say in the United States who are unemployed, we would want to see half of those people are more reemployed as we entered Q three. And if that's the case, then you can really have

your meeting the market expectations here. So to me, that's what we're gonna be looking for, because that is what's going to drive, in my mind, the the the economic power, the recovery that will give people confidence that the numbers in the markets today are real. How far is the stock market looking out right now? The textbook tells me six months. We understand that's a guestimate, David. How far do you think the stock market is guessing out? Yeah? I think that the stock market Tom has to be

guessing out now about a year. And here's why. First of all, you see that nobody is willing to make really good predictions about what's actually going to happen quarter to quarter for all good reasons. These numbers are unlike anything that we've ever seen, including in the Great Financial Crisis.

So what we need to see as a recovery right where we get through this trough and then we actually experience the type of earnings that you fore and we get some clarity on that, and we're expecting a fifty so a very sharp decline you know about decline in EPs for the SMP and half of that would be

captured back in. So once we get into Q three and we see the recovery, people will need to believe that what they see in Q three will be possible and that will be the key determinant as to whether or not this market can maintain the types of valuations that are being projected when within the elasticities on any given big companies UH income statement. What does furlow mean? Do you? I mean, John? I mean you, you're up to speed on these headlines better than me. British Airways

is furlowing? You know, general mode as a CFO is going to be on with Bloomberg later. I'll bet you theugh furlow. What's furlough mean? Well, in terms of what we're looking at, furlough means obviously temporary unemployment people who's where the company's intention is to re employ them, and furlough also means, at least in the US, that those furloughed employees will get benefits associated with either company loans that are forgiven or because of unemployment benefits that are

made available. Uh. And then when that furlow period is over, there presumably reemployed, and then we'll ultimately be paid by the company. David. This sort of goes to the idea of what the economy will look like. On the other side, the idea of furlowing employees rather than laying them off outright because people are expecting the economy to recover. I'm

struck by the borrowings of some junk raded companies. They are paying more than ten percent yields to borrow money for four years, and I'm wondering whether the cure is worth the worse than the ailment. In other words, how many of these companies that are piling on debt and keeping employees online are not going to survive after the pandemic because they've just simply become overleveraged given economic growth.

It's it's one of the major issues that you know, an unintended and unintended consequences of the FED stepping into the market. What you're talking about is the fact that the companies that might not have been able to borrow are now able to go to the junk market, able to obtain, as you said, capital at very expensive rates to continue their operations, even though they were probably marginal prior to that recapitalization. So the issue there is what

is the strength of the recovery. And one of the reasons why we're very concerned about aspects of the high yield bond market is precisely because there is really no trajectory for those companies, you know, given the slowness of what we expect this recovery will be over the next two years, to really give them any acceleration in their businesses.

So to your point, a lot of companies have seen the postponement of what ultimately will be, you know, either the failure of the company, the merger of the company, or the restructuring of the company, and that's really one of the unintended consequences. We're very carefully looking at credits at City Private Bank to make sure we do not put client capital into those companies because even though the yields look very attractive, they are much more risky than

they appear. So, David, can you square the idea that sort of bearish feel with respect to the high old bond market with your bullish call on small cap stocks which often track the high old bond market in terms of performance. That is a great question also, and I think you have to look at the balance sheets of those companies. So what we've done is we've divided the

high old market itself. Will We've taken out all of the energy securities and taking a look at the remainder of the high old mark market bond market and the companies that are borrowing those, and then we've further divided those companies into those that have resilient business models i e. Which have not been as impacted by this more ket conditions and specifically associated with healthcare, consumer durables, and things like that. Companies that supply parts and services two industries

that are going to recover. An example would be airline services rather than airlines. And by identifying all of those subsegments, you're able to build a portfolio companies that are very highly likely to rebound and to thrive, and to your other point, to the extent that you identify companies that are either over leveled or whether business models themselves are not in essential categories, we are going to avoid them.

But it's this level of discrimination. And by the way, the market has been fairly discriminating in this regard when when you take a little bit small and MidCap equity prices, this is the kind of work that you have to do in terms of portfolio construction now that just six months ago you really didn't need to do because things were relatively sanguine. Would have thrive under what conditions, you know,

let's get back to the main story. We re outake care and there's clearly a massive tower risk of a second wife. Now for some people, that's not a tower risk, that's a base case. Isn't that likely to linger for the next several months, So it is a base case. And I think that this whole debate in the market is to whether or not there is a second wave. We are going to see a material increase in the number of coronavirus cases, whether that be in Europe or

in the United States. And in the US you're actually going to see potentially even more bad dudes in that regard because of the nature of the rolling way that they handled the lockdowns and are now handling the the reopening of the economy. So the question is do these increases in virus cases ultimately once again impact the healthcare system.

You have to go back to the first premise. The reason why we took the step of lockdown was because we thought we would overwhelm healthcare systems and completely have people literally dying at their homes, dying in the streets, you know, and things like that. Unwilling to do that as a society, we then stepped into to stop that. And now we're going to reopen. And the question is how do we make sure that does not happen again. And there's only two ways for that to be true.

One is that the amount of disease goes down, and that's this concept of a trough between the waves. And then the second is that we know that there will be as second wave of barring your treatment or a vaccine um and that that the question is how big that wave is, and it right now in the United States look looks like it could accelerate because of the fact that we didn't tamp down the disease sufficiently. David

gred Skate thow us on a shot. Real appreciate David Betton sending up best to the same one City Private Banks chief Investment officer. This has been one of the pleasant surprises of this tragedy. A weekly conversation even more than that with the Lieutenant Governor of the Empire State, Kathey Hokel joins us right now, Kathy, I want to ask a dumb question. Government can affect policy that makes

things easy. Why can't the State of New York say you can't walk on the streets of New York, New York State without a mask on and those plastic gloves on, those latex gloves on. Wouldn't that immediately build confidence? We build confidence by having the people who listened to us every single day as we give very transparent press officers and tell like this. We tell them the truth. We tell them that if they wear the mask, they couldnt just save themselves but also their families and they have

a responsibility. But we don't have the resources nor the desire to have a police state where we go through and have to try to convince ninety million people to it. Here.

We'd love to, but we're not going to that's not who we are, it's not our character, but we want that same results, and we're appealing to people and their desire to protect themselves and their families and friends and neighbors, and thus far, I have to say, we are starting to see some cracks in this, but people have really uniformly throughout the States been adhering to this, and that's really actually quite astounding that they are the ones, the

New Yorkers are the ones who really changed the trend. If they hadn't been doing the social disting and now the mask, we'd be in a far worse place. So you'll see outliers and we hope we can bring them back into the fold. But right now I think we're doing very well. Governor. When we talk about a May fifteenth three opening in New York, we are talking about upstate. We are not talking about New York City. How much longer do you think it will take for the major

metropolitan areas in the region to reopen. We have put in place the number of metrics better really come from the CBC that we're using up state first of all, and that is to look at the hospitalization rate, the number of vice the you bed being used, the rate of infection, how it's spreading. Also the ability to have more diagnostic testing available as well as contact tracers. So the benefit for New York City is that we will

be able to trial run this upstate. I'm managing parts of upstate Western New York area and looking at these metrics. Do we hit them by May fifteenth? If so, we'll slowly open manufacturing, some retail we could pick up on the curve and construction. This is the same model that we would use downstate. But then we're going to take two weeks and testency whether or not the numbers have gone upwards downwards day the same. And so it's this data that's going to help us drive the reopening of

New York City, which we have to get right. We cannot do it a day to really, but not a day longer than necessary. That we don't want to have the economy held back any longer than is necessary. But also the safety is going to continue to be our our guide guiding stars. So I think it's good for New York City. I don't think there's a single person

New York City who thinks they're ready. They know that they're still seeing the numbers but upstate, we can do a trial one of this and then implement that in New York City in a few weeks. So we don't have a timeline for New York City just yet. Kathy. I'm going to ask you, Delica a question, and I asked it with the deepest amount of understanding of sympathy

for the position you're in. When Governor Cuomo says the fast that we reopen, the lower the economic costs, but the more lives are lost, you guys are in a really tough position now where you have to balance reopen the economy with loss of life. And when that's communicated from Governor Cuomo, it comes across really sincerely, very authentically, and I think it resonates with a lot of people

listening to these news conferences. But behind closed doors, when you have to make that calculation, can you give us a deeper understanding of how you make those decisions? We've heart wrenching. No one in public life ever expects they're going to have to make these types of decisions. We go into public life to make people's lives better, give them education, health care, opportunity for good jobs. You never think that you're going to have to be in the

position to determine between life and death. But it's very clear to us we will choose life over death. That that has been what has guided us. It's not a gray area, it's black and white. And we also know that you can have a livelihood without a life. So people talk about what we have to bring back to economic guests. We do, but we have to bring it back in a thoughtful way that will protect people's lives and also give employees and customers the assurance that when

they come to your establishment they will be safe. That's why we have to get this right. We could flip a switch and open it tomorrow, but there's not a single New Yorker, very few who think that it's safe enough to go out there now, and they're still seeing the numbers that we are. We will get to that point, and I'm going to tell you right now, we're already

planning for a post pandemic future that's even better. Not just reopening our economy, but reimagining areas like the workplace, how we can make it more flexible for people, Reimagining education and making sure it's more accessible truth technology, and all the experience that our teachers have had to go through teaching children at home in our colleges, and how they've had to a debt. We have an opportunity here to make this state even stronger than before, and that's

what we're doing. But we're going to get it right. Lieutenant Governor, you said that there really isn't gray area. I am guessing that President Trump may agree. He was talking about how there are losses on either side. You're seeing mental illness rise, uh, you're seeing the the the concern about substance abuse, domestic violence. Even Governor Cuomo has talked about this. It's not necessarily all all things being equal. I'm just wondering how you weigh things on that side.

As a jobless rate soars to levels not seen in our history. Yeah, this is unprecedent. You know, we're not trying to increase the job We're trying to save people's lives. But we're very thoughtful in this. That's why we've put in place different opportunities for people to get assistance. We have a hotline and emotional health hotline for not just first responders, who I'm sure are going to have lifelong impacts on their mental health because of what they've had

to see and endure during this crisis. But people who have been isolated and people who are lonely, and those are dealing with the the the havoc in their lives from having lost a job when they never dreamed they'd be having to spend hours on the phone trying to get an unemployment application. And so we know there's a severe human toll, and we have assistance for them. We have over nineties thousand people answering phone calls to help them. But at the end of the day, New Yorkers are resilient.

We are a tough bunch. We will come out of this stronger as long as we continue to protect each other with the social distancing and the mass and it's not an easy equation, but we're going to get Yeah, Lieutenant Governor, thank you so much. This is a joyful thank you, Lieutenant Governor. Every week. Joining us right now from JP Morgan is John Norman. He has been a wonderful supporter of all that we do with surveillance because

of a wonderful synthesis in his research note across equities, bonds, currencies, commodities. John, just exceptional historic import coming up in three days. What do you hear from Bruce Casman and your economists that you fold into market choice. To me, the most important takeaway from the work of our economists is that it's going to be an extremely abnormal recovery, meaning it's going to take years to recruit the lost output and the lost jobs, and that usually equates to a multi year

process of recouping the lost profits. That that's got to be a constraint on how much markets can we trace, even if they go up, So that that shape of the recovery, to me, is a lot of what is the views on the asset markets going forward. The views

on the asset markets don't seem that dire. If you take a look at stock prices, particularly within the tech sector, do you think that they're accurately pricing in and I'm not just talking about big tech, just broadly, do you think that equities are pricing in what you're talking about, which is a prolonged period of time with these destroyed

jobs not coming back anytime soon. No, I think the price the over optimistically, meaning they seem to be pricing and extremely smooth transition from the lockdown to the restart of the economies. So even though the levels that we're seeing right now in markets. UM may may may be levels that that UH should be seen in six months time. It's it's a bit premature to be seeing these now. It essentially assumes that the restart is going to be all free, and I think it's going to be a

little more hazard prone than that. So let's talk about it, John, How you a capital with all of that in mind? So for me, you want to be allocating to markets that are still very cheap and have a very direct

central bank back stop. And to me, this is why the credit markets are better risk reward than the equity markets over the over this transition period and to restart the economies, even though I think equity markets will be you know, still higher by by year end, it's just sort of recognizing that as we go through this very awkward restarting process, UM, there are going to be some uncertainties around out the corporate profits outlook, and and it's

better to have exposure to a market where at least someone else is buying regardless of the news flowers and that's someone of course is the FED in terms of what it's doing in the high grade and high young market. So I feel like that's the best risk reward for now, even though I still think stocks you're gonna keep up performing bonds, let's say over the over the next three quarters.

This is something you call it. Bob Michael talked about as well, co investing with the Federal Reserve, And I just wanted to Johmp from your perspective, whether that takes you to the United States of the Europe, the United States over the rest of the world, just geographically speaking, the regional bias, It definitely does. Because there's there's two dimensions to this. One is that the FED is just a much greater participant in in so many sectors of

US financial markets compared to the ECP. The ECB actually has more latitude the ft the e C. We could buy stocks to days we wanted to, but it doesn't. And it has latitudes to buy high yield but it doesn't. So the FAT is the one that's the the broadest

investor uh and playing. But there's another dimension to it as well, which is when you think about what sectors are the end game winners in a post COVID environment, it's it's tag communications, and it's and its healthcare, And these are ones that probably comprise, you know, a good

fortent of the US equity market. So if you just kind of recognize that there's a structural set of winners here, that those winners are much more evident and dominant in the US equity market and other equity markets, it's uh, it's a hands down view that the US stock market

is going to continue on performing. John implicit in your comments is this feeling like there it will be no international consequence to the US is printing trillions of dollars of debt, with the Federal reserves balance sheet poise to exceed ten trillion dollars by the end of the year.

A lot of times in the past this would have been expressed in a weaker dollar versus other currencies, but weaker versus what especially given some of the existential acts right now over in the euroregion, Is that true that basically there is no consequence to the US monetizing its

debt and increasing its deficit dramatically. There will be a consequence to this, It's more question of time horizon and as you suggest, against what asset specifically, so um over the long term, there's a concern this could be inflationary that that is not a concern right now or for this year next year, because you could have particuarly unemployment in the in the US um But there is a consequence in terms of real interest rates, they're they're extremely

low in the US and that makes it difficult to the US to attract financing. And I think that's one of them why you do see the dollars slipping lower versus the end and it slips lower versus the goal price even though stock and credit markets are very healthy right now. So there's there's some I think residual anxiety around the dollar, a currency which is feeding through into some things like the n gold even though it's it's

certainly not a you know, a fire sale. Where it gets more interesting is if you're in a in a much better state of the world in six months time, what's the demand for US assets when qwie is bearing down on real interest rates and other parts of picking up. That's when I think you could see something much bigger in terms of payback against the dollar versus and own a range of currencies. But that's something for six months

from now. John, We're six minutes away from the beginning of three days of history in America within this economic contraction and the sum of it distilled on long term planning for our global Wall Street is what's the new actual rearial assumption? Do you change your actuarial assumption of long term investible assets? Do you have to lower it of disinflation or dare say, do you have to actually raise it because you see it an inflationary impulse out

there somewhere. No. I think what you have to do is rather than be macro about it, you actually have to be more micro and you have to sort of recognize that some sectors are either not going to exist or the you're not going to exist with nearly the same profitability as as they used to, and so you're you really have to reset your assumptions around profits, growth

and margins on a sector bisector basis. And I think that's the kind of arithmetic that people just haven't really gotten around to doing yet to kind of grappling with the first order issue, which is the recession. But there's a whole lot more thinking that around what's bible as a as a sector and you kind of aggregate those into what it might be for profit market as a whole. One final question, John Norman we saw Apple or a glorious bond effort. I think it was two days ago.

Everybody can issue bonds right now, can't they? What is that signal to our listeners. I don't think everyone can issue bonds. I think if you're a or the borrow where you can, and that that's a very important distinction. You know, when you think about UM, what what booming issuance is telling us? It is telling us clearly does a demand for fixing compaigner clearly does a lot of faith that certain UM higher rated borrowers are are still

going to be around after after COVID. But it's it's a lower quality part that one really has to worry about. And obviously the lower quality segments are the ones that have really grown over the past several years of of easy money. So I wouldn't misread that booming issuance as a as a like a health check information across the board. Hi, John, great to catch up with the appreciate it's on this morning.

Sam My best of it saying John Norman that JP Morgan had a cross asset fundamental strategy place decide that how it Davis? So how it Davis joins us? Now the obvious cham and how fantastic to have you with us on the program. Can we just spend a moment reflecting on these devastating jobs figures that are coming through here in America and adaptly likely to be the same in the United Kingdom as well, albeit on a different scale. How how are you thinking about the recovery and how

quickly this labor market heals well? The first thing I have to think about is the personal tragedies that must lie behind these numbers, because there must be a lot of very worried people out there. I think that we desperately need now some sense of direction on the recovery.

In some European countries, notably in Germany. Also at some extent now in France we are seeing a bit of direction and a bit of loosening up, which gives people some optimism and might mean that these job losses were temporary. But at the moment here I'm afraid we don't have that. But we've been told is that we may be told something on Sunday about the way in which the recovery

will emerge. And I think that's increasingly important because the assumption behind a lot of government schemes and a lot of bank lending has been that we face a V shaped recovery, that people will come very quickly up the other side of this canyon. But the longer it goes on,

the much less certain that recovery is. Howard, when you look at the Royal Bank of Scotland's workforce and you look at the fact that so many people are working remotely and getting it done, are you expecting a smaller workforce and one that is less centralized in a big city going forward? For your bank, we are very busy

at the moment. We've managed to keep our branches open and our I T people, particularly those people dealing with small businesses or dealing with people getting mortgage interest holidays, are very busy. So we have said we're not laying people off at this point. We're not asking for support

from the government now. In the longer run, if you look and say, what are we learning in this crisis about the way in which we can operate, you know you have to have you will have to ask yourself some questions about location of people and numbers of people, et cetera. But for the moment, you know, the job unemployment numbers are not coming from us because we are

pretty we are pretty frantic. Actually, your charm, Howard Davies, is as a young lad at Oxford, you had the courage to study modern history and not something fancy like medieval history or the classics and all the rest of it. Tell us about our modern history forward, about government in our society, and particularly your take on the United States of America. Are we actually going to be more government centric? Are we gonna push back against the ethos of Ronald Reagan?

I think you probably. Ah. I'm less expert obviously on the United States than I am on the UK, but I would have thought that the knee jack rhetoric that says, you know, we need as little government as we can. The jokes about saying you know, I'm from the government, I'm here to help you. That doesn't sound like a joke. Now, that sounds as if that's actually serious. Um. And I think that will create a sense among the population. Not those people who had their minds up as several centuries ago.

They weren't change, but there will be a lot of people in the middle who say, well, do you know what this government? You know? Do we want to ridicule all these pointyheads within the belt Way or are they sometimes useful when the economy really falls into trouble. So I do think there will be a change in in rhetoric, but of course it will depend on how effectively the government is seen to have responded, and that looks rather

different from place to place. I think there will be a change in business and how we do business, and that's for sure, Howard, I love your insight on how the United Kingdom will change in the years to come, particularly with banking now. For many people listening to this program in the United States, retail banking in the UK

has changed radically in the last couple of decades. You walk into a bank branch now and you'll see very few people, a lot of machines, very few people, and the machines are now doing the day to day transactions that I think a lot of people are still depending on people for in America. How does that just accelerate that trend in the UK and beyond. Is there something new, a new world of banking that we need to consider just in terms of your day to day operations and

how do you use people? Yes, that's the short answer that question is. Yet the crisis has meant that a lot of people have switched to digital banking who did not wish to do so before. Now the millennials have already done that, that's not used to them. But we had quite a lot of older customers who found this rather frightening and intimidating, and they are now switching because

they've had to, and they are switching quite quickly. So we are going to see an acceleration of the trend towards remote banking, and in due course that will undoubtedly alter things quite a bit. But I guess also the interesting thing about the competitive dynamic is that we have got quite a lot of new ventures, new fintech companies, new digital only banks, etcetera. Some of them are well funded and will survive this crisis and come out stronger,

and some will fall by the wayside. So I think we will see an altered competitive environment in two ways. One it will be more digital, but to some of the marginal players I suspect we'll find it difficult to survive. How it fantastic to get your thoughts this morning. Really appreciate it. Thanks for jointing us to Howard Davis there RBS chairman, joining us on the latest with the job situation and the future of banking as well. In the UK and beyond, it's National Nurses Week and that is

a big deal across this nation. This year. We talked to Laurence Sour of the Johns Hopkins University. Everyone is working incredibly hard to keep up with the patient load, keep up with the demands of using the PPE, keep up with the demands of working over time, to make sure units get turned into COVID in its UM and patients are safely cared for. UM. We're incredibly grateful for the work of our nurses. It's really just been unbelievable. Laurence Sor what I notice about emergency medicine as you

try to learn every step of the way. What do you know now about the therapeutics of this virus versus where you were six weeks ago. Well, we just conducted the first phase of UM, the ACT trial UM, which is the NIH adaptive trial. In the first arm was rem desivare. So we are starting to see some positive data, which is really exciting. UM. We're we're learning a lot about some of the other drugs that have been tried hydroxy chloroquine chloroquine UM. We're learning a lot about proning

of patients. So there's a lot of studies underway, um all throughout the hospital. Laurence Sward talk to me a little bit about how first responders are are feeling about, you know, the president and the administration saying that they want to reopen in the economy, even if it means more, you know, rise in debts and infections. How many percentage of the population we think have had COVID. You know, do we need much more testing to try and understand

where the viruses and in what phase we are exactly? Yeah, absolutely. UM. So I think the first word that comes to mind is scared. Um. When you're in the hospital every day and you're seeing these patients come in quite sick, and knowing that there's so many of the so many of the population who are not infected UM yet and who maybe as states, as states and locations start to reopen,

we get really nervous. Um. We're finally starting to see a bit of an easing in the number of cases in Maryland, and we um, we approach that easing with cautious optimism because you know, as you know, as you start to reopen, you'll see a spike in cases and and in several of the states that are already starting to ease restrictions, their cases are still on rapid increase. So um, you know in states like Florida, Nebraska, other places where they're starting to ease the restrictions there, their

their case counts are actually on the rise. So I think we are all in the health care setting nervous that uh, these restrictions will be eased too quickly and we'll see a massive spike in the number of cases. Do we have more drugs now? And how close are we to a vaccine to try and fight this COVID nineteen. I think we're still a ways away from a vaccine.

I mean everyone is app is working over time on on the development of a vaccine UM and in fact, there was a summit uh late last or sorry earlier last week specifically on focused on racing to get a vaccine up and up and running. It's a true toward a force of global efforts to develop a coronavirus vaccine. On the on the therapeutic side, we have remed does

of year. We saw the positive data come out from the first phase of that clinical trial and several other clinical trials around reim does a hear um so it's it is definitely looking promising. The data are looking promising, but you know that is an IVY infusion drug, so people have to be given in the hospital. So I think there's a lot of people working on drugs that can be given orally drugs that can be given administered at Homer in the outpatient setting. UM, So we have

a long ways to go. Laurence So our expert in emergency room medicine at the Johns Hopkins University and of course part of the Bloomberg School of Public Health. And we thank Michael Bloomberg for his support of this company, the terminal company, Bloomberg LP, and also this radio television station in his philanthropy to his Johns Hopkins University. Thanks

for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever pod cast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio