Surveillance: Fed's Clarida Says U.S. Can Escape Deflation

sure that Michael McKee is with us. You know him from the press conference with Chairman Powell, usually bringing bringing the room to a bit of a quiet, and I'm thrilled that Mike could joined me, uh this morning. Every moment here is precious. It is, indeed, Mr Vice Chairman,

in historic time. Let me ask the question that I saw in so much research and reading over the weekend, the confidence that the Fed can move the balance she back to normal down the road after this pandemic, after a number of years of return to economic growth, how do you get the genie back in the bottle? Well, Tom, thank you for that question, and enjoy doing your show. As always, First and foremost, I think we have to

recognize that we're in a really unique situation. The coronavirus pandemic is taking a tragic human toll in the US around the world, and and we've asked people to step back from economic activity investing in public health, and so there's going to be a hit to economic activity. And what the Chair Power and We've indicated is we have put in place these lending facilities um under our authority

to act under unusual and exigent circumstances. Uh. It's an ambitious and entirely appropriate, aggressive and forcefully use of monetary policy in these times. But to your specific question, yes, I am. I'm very confident that as the economy recovers from this hit and began begins to return and recover, that we at the over your time, will be able to unwind these programs. You know, Tom and Mike, there's

nothing fundamentally wrong with the U s economy. It came into the year in a very strong position both in terms of employment and growth and financial markets. And I'm confident we can get back there and and at the appropriate time we can scale back these programs. Let me follow up on that, Dr Claren and ask you this, With probably billions of dollars in loans out the companies at near zero for over four years. Are you ever

going to be able to raise interest rates again? Or are we looking at essentially the Fed doing yield curve control now? Well, right now, we're not doing yield curve control. But we indicated in our March statement UH is we're going to keep rates of where they are, which is basically very close to zero, until the economy is on track to achieve this maximum employment and price stabilities. And so the path of the economy is going to dictate

ultimately the path of rates. But in terms of our our programs, these facilities will be in place during the period when the economy is being impacted by the virus UH. In the term sheets for these programs, you'll see that the facilities are due to to stop lending in September of this year. Obviously we can extend that has needed.

Those loans will be in place, they'll have a term of several years and know at the appropriate time, I do not think that we will have that That will be a challenge to us when it's appropriate, But again that's a long way down the road. We think where rates are now is where they need to be, given where the economy is Tom mentioned the notes he's getting from people asking questions, and the one I get most often is why did you feel it necessary to go

into buying junk. Well, we have put in place no fewer than nine facilities over the past several weeks, and and first and foremost are our focus in these facilities, UM is making sure that credit is flowing to businesses, UH and households. And obviously we're we're in the commercial paper market. In the talent program, will be financing auto

loans and credit cards. UM in our main street lending program, we're gonna be partnering with banks to provide financing to businesses and so the really the vast bulk of these programs is really focused on new lending. There is an element of one of these programs that will UH that will be purchasing assets in the secondary market. I think an important point for your listeners and viewers to recognize UM is that several important companies in the US were

investment grade up until this crisis hit. And what we said in our programs is that you know, if they've been downgraded after the after the data of the crisis, they will have access to these facilities. But that really is our focus in these programs, Mr Vice Chairman. The elasticity here the outcomes of this pandemic are extraordin and I'm not asking you to play epidemiologists today unless you'd like to. About what I would suggest is we don't know the speed of outcome. What do you do if

we get a more optimistic outcome? What do you do as an institution if there's a rapidity to our recovery? Well, and obviously obviously time we are looking at a very wide range of scenarios, as I'm sure our other central banks and and policy makers. And we have gotten a lot of bad news, uh in the last several weeks in terms of the spread of the virus um and the impact obviously in the labor market with the sixteen

million initial claims over the last several weeks. So the economy is taking a hit, as I've said, because there's nothing wrong with the economy. We've asked people to step back from economic activity. Uh. There are scenarios that are more optimistic, and obviously we we certainly hope and pray that they materialize. If they do, that'll be a good situation and to be in we will have in place

programs that are essentially time. What we're doing is we're building a bridge until the economy can get to the other side and begin to recover. And if that happens sooner, we'll we'll certainly know what to do at that time. Let's get out on the bridge right now. Of course, you know, Michael McKee is only in charge of rude questions to the Chairman at the press conference. Let me ask a rude question to you, what does the bridge

look like out here? From the FED meetings onward and from the minutes of the FED we will see how will that debate unfold within your Federal Reserve system. Well, obviously you know that those discussions are are private. We can talk, we can discuss as I do my own views, but our meetings I think serve a very useful purpose. As you know, we've had to do a couple of meetings in March by video conference, um, and that was necessary given the rapidity with which the situation was was changing.

But you know, at our committee we will be discussing, i'm sure, are the new facilities that we've announced and discussed about putting them in place, and then we'll get a briefing from staff on the economic outlook and importantly looking at the scenarios both positive, UH and negative. I think the FLMC serves a very important role in in

our monetary policy discussions. The MC, the committee makes those decisions, but of course the Board of Governors of which I'm a member, also plays a role in actually approving and designing these programs facilities. Well, you're the model guy, and Tom put me in charge of asking the rude question. So he asked about optimism. Let me ask you about pessimism. What do you as the worst case scenario and do you think we get a damaging disinflationary impulse out of this? Well, um,

I'm not going to go through scenarios now. We only have ten minutes and that would take longer. What I will say though, and I think it's an excellent question because you'll see there were some some discussion back in January and February that were we to be hit with

the Corona virus. And it's important to remember that the first fatality in the US was in very late February or early March um and and as a result, there was some speculation at the time that if we got hit with the pandemic, that that because of supply chains, that it was an averge supply shock, which would be inflationary. I never believe that. I never bought into that. I always thought if we got hit with the virus spread that it would in net be a shock to aggregate demand.

And that's what I think it is, and demand is impacting very adversely. We're trying to offset that with our policies and fiscal policies playing an important role. But I think on that is disinflationary. I don't believe it's deflationary. I think we have the tools to keep the US economy out of deflation um and to and and to support the economy through this challenging period. But on the narrow question of is this more of a supplier demand shock,

it's definitely more of a demand shock, I believe. Well, to follow up on top question about what the FED discussion is in the future, I know you had to put the fire out, but have you not created the mother of all moral hazard now that you will end up with a lot more dangerous risk taking because everybody knows that if something goes wrong, the FED is there to backstop them. Well, you know, my I really don't

believe that's the case. I think moral hazard impassed circumstances, when it's been associated with financial accesses or private sector SS is obviously something to assess and think about. But in this case, this is entirely an exogenous event. People are not businesses are closing, and people aren't unemployed due to any fault of their their own. And I think this is a clear this is the clearest possible case

that those are not relevant considerations. Again, what the Chair is indicated, and what we've said publicly is we have these lending facilities in place because of these unusual and exigent circumstances, and we'll use our authority forcefully and aggressively until we're in common the economy is recovery. But at that point we'll be prepared and we'll be able to put these tools away when the economy is well on the way to the road to recovery. And I just do not see that as being an issue in the

present circumstance. Mr Vice Chairman, One more question quickly, if I could, There will be a point where things will be calmer and you will be at your Columbia University with Phelps and Stiglets and the rest talking about this, are we forever moving away from a rules based debate? Is discretion the future for any central bank? Well, it's an excellent question in you and I've discussed it many times on your show. The reality of central banking is

it's always been about. I think constrained discretion and rules an important part of communication and thinking about the application of discretion. But again, obviously, in these circumstances, the central bank needs the discretion to put in place policy. He's under unusual and oxygen circumstances, and I think it's entirely appropriate that we've exercised that now, Richard Clarien to thank you so much, greatly appreciate it. This morning. A lot

of people John have rationalized his theory. Dennis Gartman took it further. He said, not only should you own gold, but he said in dollars, maybe not hedge it in something that will be weaker, and that would begin in euro And it is truly without exaggeration of moonshot. Gary Shilling, I would suggest over the years, over the decades, I should say, has had the great call of long term

lower interest rates. But Gartman challenges him now with an extraordinary call on gold, and he joins us snow Dennis thrilled that you could be with us on gold. Real simple here, if I didn't make the gartman like mains, can I get on board now? Absolutely? Tom. First of all, let us understand that I'm not a gold bug. I'm not one of those believers that the world is coming to an end, that that all currencies are going to zero, that governments are doing absolutely the wrong things. I'm actually

an optimist. But I do think that the monetary authorities around the world, led by the FED, but the Bank of Canada, the Bank of England, the Bank, the e c B, the Bank of Japan, even the Bank even the People's Bank of China, have no choice but to remain expansionary. They are. They are expansionary. Now they shall become the expansionary. In the future, They'll become even more expansionary. And as that happens, gold probably shall be the beneficiary.

So is it too late to be a buyer of gold? Actually, it's just broken out above fifteen, above sevent pounds and dollars dollar terms, and I think it's going a good deal higher. So again, as I said, I'm not a gold bug. There are times when you should own gold. There are times when you should not. This is a time where you should. Other than the answer, tiffanies Dennis Gartman, how should I own gold? What is the best UH way to own gold? To play? There are many ways

to own gold. You can own gold futures, but I don't think that that's the better way. I think that there are e t f that one can own. There is at least half a dozen of them. You can hold the gold miners. I hate to give any individual recommendations as to individual stocks because the SEC gets an upset when I do that, So I'll just simply say that there are e t f s a plenty on the New York Stock Exchange and various mining companies. I prefer the e t s. I think it's a better

way to go. Dennis. Your bullish call on gold is it basically a bet on inflation and the debasement of major currencies. It's at least it's not a bet on inflation yet it's it's It isn't, however, a bet on the debasement of major currencies. As I said, the FED, the Bank of Canada, the Bank of England, the ECB at all have been expansionary, and they have no choice but to remain expansionary given the current coronavirus circumstances and the lack of a better term, the recession slash depression

that the world is finding itself in. So it's actually a debasement of the currencies that that is uh the driving for no question about that. So, Dennis, I'm just wondering going forward the main driver as far as who the buyers will be of gold. How much does this stem from central banks trying to move away from dollars. We've seen Russia do this, We've seen China do this, and how much does this stem from individuals just getting

cold gold and putting in their mattresses. Well, first of all, you're one of the few people who really does understand that the that it has been central bank buying that has, in my opinion, has been the driving force. The Russian central banker, I'm trying to remember her name. I just won't blank. That's what happens when you're gonna be sixty nine years old, you forget important names. But she's been

a huge buyer of gold. The Chinese have been a major buyer of gold, and now I think it's the retail that will come in and be a buyer of gold. The Indians have been the second largest buyer of gold individually. They've been locked down, and even with their locked down, the fact that gold has not given up any of its gains and when the when the India reopens, and it shall reopen, I think there would be a mark

propensity on their part to be buyers. Again, what's the most avocation time frame for you to decide to own equities? Don't tell me ten years or twenty years, and don't tell me two days or three days. What's the time zoned dentists that you have for having a belief in the equity market? Honestly, I do think I want to Well, let me say, I hope that the lows have been seen. Do I think that the lows will be tested? Probably?

But I do want to believe and I do think that the lows have probably been seeing amidst the panic of two weeks ago. So where do I think go stock prices will will go? I think I think that from here on out, if you can, if you can have not be if you missed the first five percent on the upside and you already have. I think from here on out you want to err upon the side of being a buyer, and I think you want to be a buyer for next several years. Honestly, maybe it's

just hope. Maybe it's just a belief in America. Maybe it's just a hope that we'll get out of this. But I do want to think that the lows have been seen. How's the FED doing? I think the FED is doing yeoman's work, to be quite honest. I think perhaps they they bent a little bit to the president's demeanor, and and maybe they went a little overboard, but I think that they stood up with the adult in the room when nobody else was going to be the adult

in the room. I think they've led the other central banks in in in acting, and I applaud them. Many people, especially those of us on the far right, take to FED the task. I think the FED should be applauded. Dennis Cartman, thank you so much for being with us. Betsy Grace Sick Morgan Stanley, Head of Banks and Diversified Finance Research, Betsy, always a pleasure to catch up with you, especially on earnings week. So let's start with the earnings.

What are you looking for in the numbers this week when many people see Q onea stale and Q two three four as almost unpredictable. Thank you so much for having me this morning. UM. I look forward to next time when we can be in person. But I appreciate question here on earnings. I think what people are really going to look forward is a couple of things. Number one, what is at that earnings generation rate excluding the reserve

build for credit? Just to understand what the core is going into this, you know, two three four Q downturn as you indicate. But then the second thing is how are the banks treating their reserves under the new accounting standard? Right? Because today, um, we have a new accounting standard started January one, and so we should be ready tomorrow JPM and Wells report we should be ready for um, you know, very large reserve builds to reflect you know, the bank

management's estimates of lifetime losses. The history is they take the arcane accounting and they overdo it. They overreserve, they over save the money for a lousy rainy day, and then down the road they go, oops, we over saved, and they release those reserves and everybody wins. Do you predict that for these banks. You know, it's so interest doing of a question, Tom, because you know banks never over reserve. It's always adequate, right, that's the wording, alright,

just want to make sure they're always adequate. And the definition of adequate is changing, actually, I should say has changed January one with this new accounting role. So so what the management teams are required to do, starting in one queue is say to themselves, what is the lifetime losses in my loan book today on March three one? In a world that has you know, flipped on its head,

as we all know, so that's a big ask. As a result, people like me, we made the best estimate for what we think they'll do, but we you know, everyone on the phone should be prepared for our understanding that you know, the outcome is going to be different. Management teams will have a different point of view than all of us, you know, sell fighters and buy siders because they have the best knowledge of their customer set obviously, so it's gonna be very exciting, earning, very fighting. I

can't wait, Betsy, very exciting. I'm sure. One area that a lot of people are focused on as consumer credit losses and sort of a view into just how bad the situation is there. What are you expecting on that front? Consumer credit is also exciting because the fifteenth of the month we get master Trust data, and you know, to your point earlier one cue, you know, the one key results aren't going to be really telling about what the

forward look is going to be. And also the forward look numbers aren't perfect either because, um, if you have been affected by COVID and you can call your bank and request forbearance, that means that your loan will not show up as a delinquency, you know, until the pandemic and the economy is back on its feet and the banks determine, hey, you know, now is the time that I can assess whether or not you're delinquent or not.

So the delinquency staff and the net charge off staffs are going to be much more modest than expected for a while until you know, the emergency is lifted. So the best data to look at for how the consumer is really doing on a month to month basis will be that master Trust data. Look for the payment rate.

The payment rates back in eight for a lot of banks now at basically telling you consumers have been paying down their loans on the credit card side, that payment rate should start to fall, right, that will be your best indicator of the fifteenth of every month. Betsy, You've touched on something really important, and that's the degree to which banks have stepped in to help consumers and businesses.

And there was a quote from Jamie Diamond of JP Morgan just the other week and his letter to shareholders. They really stood out for me. Knowing there will be a major recession means that we are exposing ourselves to billions of dollars of additional credit losses as we help out consumers and businesses through difficult times. There is a view, Betsy, that these banks can act countercyclically in a way that maybe they wouldn't have done in the past. Can you

just talk to us about bank behavior. Will they contin you to do this or is this downturn as it extends into two, three and four, do you expect them to pull back on help and consumers and businesses on lending to these people? Yeah, I mean, we did this work on the excess capital in the banking system and how much excess capital they have to support corporates and you know their their loan box and the vast majority of banks we cover, both my names and my colleague

Kins will be on the mid cap bank side. You know, they have more than enough excess capital to support line draw downs in the commercial space. Now you know, line draw downs were running it like going into this and you know we're expecting they go up significantly, but you're not going to get to a hundred. So there is excess capital and system. All the things that were put into place in O eight and post O A are there to help in this kind of environment, I have

to say. So I do think that they will continue to support their customers. And importantly, look the capital markets are and you're gonna speaking with Vice chair Clara soon, um, I mean the FED is part of this as well. Being in the market and helping to support the capital markets opens that up. And we saw what a couple of weeks UM of very high issuance in i G some of that line drought down frankly could be paid down with IQ issuance. That has happened by some companies already.

So I would not say it's only banks, it's banks plus FED and FED is UM helping out as well. So Betsy, just to sort of wrap this all together. I'm wondering if you're bullish on the banks and you think that their shares have gotten overly beaten up when it comes to their potential to be more profitable than people expect. On the other side of this, yeah, you know,

we have an equal weight rating on the banks right now. Um, you know, both in large captin my colleagun his mid cap names, and there are certain banks that we are overweight. You know. Frankly City is our top pick right now. Um, it's trading it about half book, and we think that as we get through this, uh, they can re emerge with the ninth percent. Are are we I wouldn't say it's like minting money to Tom's words, but you know it's you know, close to earning their cost of capital

back again. They were just making their cost of capital before we went into this, and you're you're sitting at the stock that's trading in a half book. We're also overweight JP and bavet Um and the m X and Discover. Betsy. Always great to catch up with you, especially on earnings weak Betsy Grisi them more in Stanley. Betsy, my best to you and to say thank you very much. For

joining us this morning. Something happened this weekend, which is really important, folks, in the exhaustion of this pandemic, and of course nothing like the exhaustion of the first responders and nurses, the doctors, the endless ambulance drivers that I hear outside this Mount Sinai Hospital in New York. I realized that I had really lost track of where this pandemic is. So, Paul, I got up early this morning and I really read in on a global basis as

best I could, and where we are. And what is extraordinary about this, Paul, is the complexity involved, the trends, the mathematics, the where are we in any given moment. It's extraordinary, isn't it. It really is, Tom, And it's dynamic. Is dynamic across the globe. It's dynamic across the globe. And you look at Italy, you look at China, you look at some of the UH in the US, and it's even regionally within the US as well. So it's

very dynamic. And when we say that to all of you listening on Sirius x M, I guess some better news in Louisiana, but some real challenges out there. One of the experts we've spoken to is Joshua Sharfstein. He is it the Johns Hopkins University, Bloomberg School of Public Health, and of course their medical institute as well. We should say that Mr Bloomberg is a philanthropist to his Johns Hopkins University and his engineering program of years ago, and

of course founder of Bloomberg GILP. In this radio and television station as well, we spoke to Dr Scherfstein about the state of this pandemic. So we are not yet at New York levels in Baltimore, UM, but I certainly have heard of what you have talked about, that there is a moment um sort of midway in the illness where some people get quite sick and at that point can even um proceeds to death UM, and that that's very scary obviously for the medical team. It's terrible tragedy

in every case that had happened. And I think what people are wondering is that if there is something that can be done to focus on that moment in terms of therapeutic to prevent what maybe an overwhelming immune reaction that is leading to that second decline, help us with the idea of a secondary or reinfection. This is something

out of the influenza of a hundred years ago. But do you think it's a valid wory for listeners and our viewers, this idea that there's a virus and then we re engage with society and we come up again against the same virus a second or even a third time. There's a lot we don't know about this virus, but in general is somebody who has fought the virus off and recovered is unlikely to get that same kind of infection again. I think it's to be very unusual for

that to be the case. And even the reports of sometimes people may have a coverable virus later are not quite the same as saying people can really get sick twice. So I think that we'll have to see what the data is, but it's probably, um, you know, a reasonable assumption at this point that people who at least were reasonably sticking up that are unlikely to get that sick again.

The Prime Minister was exceptionally eloquent. I read it in the Telegraph this morning about the nurse from New Zealand, and I believe the nurse from Portugal as well, who we literally said kept him alive. Give us an update on what you see at Johns Hopkins among the staff, the nurses and all the others assisting the doctors. Well, it's an incredible dedication, um at john Hopkins and and elsewhere.

They really people you know, have felt um that this is they're calling this is a responsibility that the medical center has been very supportive in terms of making sure there's protective equipment and all kinds of other mental health resources for staff. Um. But you know, this is and it's not just the doctors and the nurses. There's a real sense of purpose really for for everybody who's working there. And I think you know, this is a moment in a way that many people have been training for, even

if they didn't realize that at the time. One final question, doctor, if I could the great fear that's out there's things here in New York and particularly in the Borough of Queens have been really, really quite horrific. What's the ability of this virus to spread to secondary cities and tertiary

locations across the nation. Well, it's really remarkable to me is how so many people believe that what will have what's happening there, meaning somewhere else isn't going to happen here, meaning where I live, And um, nobody should really have that sense of competence. You know, people felt like, well, in China, couldn't come to Italy. It's in Italy, couldn't come to the US. But you know it could go anywhere. Any city could be affected. UM, letting our guard down

here it would be a terrible mistake. And I think that, Um, you know, certainly in Baltimore and Washington and other cities, we're seeing increases in cases and they realized how much is at stake here. And I think, um, you know, we're going to be obviously in touch with people in New York and learning a lot from New York's experience and the city. To think that they couldn't have this problem,

are really risking quite a lot. Joshua Shars the Johns Hopkins University, Bloomberg School of Public Health, and of course the medical program is well. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide I'm Bloomberg Radio