Surveillance: Fed's Virus Response With Warsh

February and start there if we can. The FED can't wait to respond to the coronavirus that was you in the Wall Street Journal in late February. I think pretty much every single one of us on this program agreed with you. Now the conversation has switched almost one eight. Has the FED stepped in too far? Has the FED done too much? Kevin? How do you respond to that now? Yeah, it's a it's a great question. Good to be Tom

with you and Jonathan. Um So, I'd say a few things first, when the regime changed in February this year, that's the job of the central Bank to be super aggressive. And the earlier you can be aggressive, frankly, the less you have to do later. Uh, so they moved not with the speed I would have liked, but in historically speaking, pretty quickly. When you look at where they are now, they seem to be moving with overwhelming force. They seem to be incredibly aggressive, even as risk assets are at

incredible highs. I wish that same aggressiveness were being felt in the policies they were putting on Main Street. In main Street, their policies seem to be late, delayed, cumbersome, and frankly not terribly affective. So that chasm between the aggressiveness to push up risk assets and push down bond spreads doesn't seem to be matched on Main Street. Do you think the focus on one of the other right now is leading to market malfunctioning? They say that every

single point objective is about market functioning. I just wonder whether effort now impairing market functioning. Kevin, it's a listen. It's hard for me to say with a straight face that markets aren't functioning well and that rationale for policy

action was astute sixty or eighty days ago. It's really hard for me to say that the aggressive policies, the doubling of the FED balance sheet, entering bond markets that we never flawed about entering in the last crisis, that we're doing that because markets aren't functioning now that that that explanation isn't great. And my own judgment is monetary policy matters at least as much for the reasons is

it gives as the decisions it makes. So I think that that rationale is certainly in need of some updating. And if I look at what's happening in markets, with the FED having this kind of massive imprimature on financial markets, it's easy to see how they're moving around financial assets. But what ultimately matters, Jonathan, is what you said at

the beginning is what about the real economy? And again it doesn't appear to me as though much of this is trickling down to the real economy in a meaningful way from the Federal Reserve. Well, Kevin, is that the Fed's job. I mean, the main street lending program is very new for the FED because they're gonna be taking on credit risk and becoming responsible for deciding who to lend to, how to lend them, when to cry force some companies into bankruptcy. Should the FED even be doing

this or does the responsibility lie elsewhere? So the responsibility really lies in the Congress to come up with what can be done on the real side of the economy. They outsourced that responsibility to the Treasury Secretary and the Exchange Stabilization Fund, and then the Treasury took much of

their authority and devoted it to the Federal Reserve. To stand up this main street credit facility, Jonathan was kind at the beginning to talk about a Wall Street out ed. I wrote, I wrote about this main street credit facility with a much worse name than than they gave it about three months ago. And what my principle there was is something they frankly haven't adopted, which is, UH, provide ample and immediate liquidity to all solvent comers on Main

Street with immediate effect against good collateral. But that's not the way the main Street credit facility works, at least as they've iterated it now several times. I think you're right. Least it's not the Fed's job to be deciding on every loan. But the good news is they happen to

regulate five thousand banks. It is their job. And so again, if I were to have designed that facility, as I wrote about eighty days ago, the FED would have regulated the banking institutions who would have provided loans to their typical clients against good collateral based on their solvency before the crisis. And the only job the FED would have would be to ensure that the banks would have done

proper underwriting. If they would have underwritten a loan to widget Manufacturer and Toledo on February first, and they follow those same underwriting standards, then that's a good loan. Any losses that might be had, and surely they might, those losses would be offset by the money that the Treasury Department had granted the Federal Reserve. I prefer that kind of amun and ample liquidity to this kind of picking

and choosing. And to see the aggressiveness again in in financial markets and the lack of aggressiveness, the slowness of response in main street, it makes me actually quite concerned about the real economy. Well, let's talk about what is going to happen in the future, Uh not, perhaps just

taking a look at what they should have done. You wrote a recent op ed in the Wall Street Turnle that if policymakers get next steps wrong, will look a lot like two thousand and eight in terms of the sanguine feeling right now turning into catastrophe later in the year. Do you see policymakers on that path right now? So, you know, we should begin with what Chairman Pal's word is of the moment uncertainty. We have to have epistemic humility about what we know, an epistemic humility about the

efficacy of these policy tools. You know, I feel a lot better, Lisa about the state of playing the risks over the second half of the year if we had used the decade before this crisis putting our own house in order. Chairman Pale said how it would have been better if Congress had been more fiscally responsible in the decade between these crises, so it would have plenty of flexibility and plenty of credibility to provide massive increases in debt. I think the same is true of the Federal Reserve.

Had the uncertainty principle, which they talked about frequently now been what they talked about between, the Fed would have come into this process with a lot more traditional ammunition. It wouldn't be having to reach into all these new markets with uncertain effects. So as I look at the second half of the year, LEAs. So what I'd say is a W looks a lot like a V until it turns out to be a W, and Rene of

us really the contour of this economy. I guess what i'd say as a final word on this, you were to take an Olympic swimmer and a novice swimmer like me, and you locked us down at the bottom of the pool, and then you finally unlocked us. Well, we'd both be racing up to the service at some point, but that wouldn't really help us understand who was the Olympics swimmer who was ready to go do a hundred laps and who was the guy just trying to get his head

above water. Kevin, I've got this image of you in Stanford's water polo team just getting it done out there against Pepper Dyne. I can just see it coming. Kevin, you are identified more than any economic official and policy official with Republican politics and of course the storied family you married into. I don't know if you grew up on third base, but you're decided to living on third base.

From your view and with the honesty you've had for decades, are we moving ourselves towards an ever more gilded age. Is the price of all this funny money and policy than in two thousand twenty five or two thousand thirty,

we are going to be ever more unequal. Well, Tom, I should first disabuse you of your visual not least of me on the water polo team, I can hardly swim and uh and I grew up in a regular family and upstate New York and have parents that are probably so excited to be watching you on TV right now.

But in terms of the substance of the question, which is really where at this moment of consequence we really should be focused, I would say because we've had an aggressive central bank, not least in times of crisis where we need a central bank to be an emergency authority, but in ordinary times treating that like it is an emergency, like we've had an emergency every day since the darkest

days of two thousand and eight. These kinds of aggressive policies do lead to misallocations of capital, do lead to financial assets that trade better than real assets, and there's a certain unfairness to that. So that's this is no time to be trying to have a full philosophical discussion inside the four walls of the FED. But the idea that they should have been fine tuning between two thousand ten and two thousand twenty, instead of thinking ahead towards

what are the risks? You end up with policies now that I'm afraid do tend to take the income inequality and more important, balance sheet inequality, and we make it somewhat unfair. Half of our fellow Americans have not been able to benefit because they don't have equity in a four one K planner, in stocks, they don't have equity in their house. So as they look at the run up in these markets, they ask themselves the question, what's

in it for me? And that's why again the Feds focusing on the real economy and we'll let financial markets take care of themselves. Kevin, I'll get told off with squeezing one more question, and but I've got to that's the comment on monesty policy. What about FISCO. I'm making sure the house was in order that you touched on that. It's that another way of saying that tax cut a couple of years back was a mistake. So what I'd say is fiscal policy has a certainly important role to play.

But Jonathan, too much of the discussion is how big should the next stimulus bill. Frankly, the size of these stimulus packages mean a lot less are a lot less important than the design of them. So when I think about tax policies then and tax policies today, tax policy and fiscal policy more more broadly needs to be designed to encourage investment back in the services sector of the economy, back in the real side of the economy, instead of

financial flows chasing the S and P at these historic levels. So, as I think about the next stimulus bill, which they say will be somewhere between the fourth July recess in August, my encouragement, my my uh overlying counsel I would say to the authors of that is make sure that there's incentives for real people to re engage back in the workforce because they've been displaced, and real investment find its

way into real property, plant and equipment. Again, I shouldn't say this in front of a new show where so many of your your listeners are investors. We get the real economy to do the right thing, and I don't worry about I don't really worry about the S and P. Kevin had a fad in the mount and I'll get a straight answer to that question, but I appreciate your response. Nevertheless, Kevin always tried to catch up this, Kevin Walsh, the former Federals of Government. Let me say right now, this

is my book of the summer, There's no question about it. Yes, I mentioned Rock and Roger, and the other day is book on community, the third Pillar. But Richard hass has written a jewel called the World. A brief introduction Ambassador has thank you for jumping back on with us again today. You end your book on Order and Disorder. Where are we right now? Good morning Tom. Unfortunately most of the

arrows are pointing in the direction of greater disorder. That was already true before the pandemic, and what the pandemic has done is essentially accelerated the pace of history. So whether it's US Chinese relations deteriorating, or the increase and poverty around the world, an increased the number of refugees. You could go on and on and on, but so far,

at least, this is a cloud without a silver lining. Richard, if we can talk about some of the immediate friction in the last couple of days, I think a lot of people are trying to work out what it all means, particularly market participants that might be willing to disregard this. Can you just talk about the significance of what has happened between Injured and China in the last forty hours. Yeah,

these are the world's two most populous countries. They've had essentially undemarcaded border, the line of actual control now forever. They fought a war over this what sixty years ago, and you've got two armies cheat by jow and I don't think either government necessarily wanted to have it come to blows. But any time you have large groups of

soldiers over contested areas, there's that at risk. Both countries now are increasingly nationalists, and we're seeing this as a trend where whether it's to tracked because of problems with the coronavirus or its economic aftershocks. So this was something that that could have happened, it just did. I think the real question now is whether both countries, essentially the government step in and calm things down. Won't You won't have any solution, but the question is simply whether you

have some kind of mutual pulled back. Do you sense that de escalation is the path forward? At this point, I think it's more likely than not from what I can see. What was so interesting about the finding was how almost pardon the world, almost primitive with clubs and this, I mean there was a kind of hand to hand combat we haven't seen since times, almost like the Korean War.

So this was really really localized. So Yeah, if I were a betting man, I would bet that that there's a pullback you don't see anything like a full scale war. That would be my bet. Well, Richard, the hand to hand combat you're talking about, perhaps is why some people are shrugging it off, saying, well, at least it's not a nuclear threat, right, But over a North and South Korea you have the prospects of some sort of altercation picking up after the bombing in North Korea of South

Korean uh, diplomatic diplomatic entity. I'm just wondering if there is a broader takeaway for all of these percolations of geopolitical tensions that are happening. Now. You said we're fast forwarding history. Is there some broader takeaway about leadership in the modern world? One I dis alluded to the leadership is pressed and is looking for wagged the dog kind of safety valves. Do you have a possibility is to

look at the United States. We've got COVID, we've got the protests, we've got the economic problems, and it's quite possible that countries around the world are looking to take advantage of a divided and distracted the United States. So North Korea, you know, you might see this is an opportunity to pressure to the South to relieve sanctions. The US North Korean talks have gone nowhere. North Korea wants economic relief. The US South Korean relationship is bad because

the US has been hammering them. So it's quite possible the North Koreans decided to put pressure on the South to see if they couldn't cut separate deal. You know, Richard hass I know, you know, And this is the legacy of the Right brothers and how they planted the Department of Physics at Oberlin College. And I know you want to physics at Oberlin straight A's you know, the poet and physics ambassador. Yeah, physics for poets, you know,

is an Oberlin physics giant. That there's a vacuum out there, in the vacuum out there's President Trump in his foreign policy what happens after one term Trump or two term Trump when we try to close that vacuum of foreign policy. I think there is a vacuum. There has been a pattern of serial withdrawal from the world, a combination of isolationism and unilateralism on the part of the United States. At the moment, the vacuum is not so much being

filled as as it's being allowed to fester. So you don't see China is not in a position to fill it. The Europeans would like to, but they lacked the power US more likely things just getting year. So for people from a business point of view, the United States doing less is uh. You know, we've been, in some ways the general contractor of global order for for generations now. I think there's also, though a big difference between a

one and a three term Trump presidency. Two terms American alliances might not survive, or if they survive it, they would be fairly empty. Uh. A one term Trump presidency, I think a president buy it and we'll try to

restore things. The problem is he will inherit if he is elected a country that really wants to face inward to deal with our domestic challenges, and he will inherit one of the most daunting, demanding in boxes any president has inherited, and that combination means that it won't be easy for anyone, no matter what his intentions are, to turn things around. It'll be difficult. Richard has always great to get your thoughts and perspective and your insight on

this program. Thanks for jointing us today. The Counsel and Form Relations president and author of The New York's Times best seller The World a brief introduction and remorse a city group definitive and commodities in oil, and let me ask a direct question. Give us an update on the war, the microeconomic oil war between Saudi Arabia and Russia. Well,

that war is kind of over for a while. There's a truce that's been imposed, partly by Donald Trump, partly by the follies that were associated with their actions in March um. So they're coming back to reality. Each country is seeing a tremendous drop in capital spending uh, and

they're they're they're tightening their belt for another day. I don't think we're going to see the levels of production that we saw from either of these countries again until the middle of the next of this coming decade, and I want to talk about the price of oil, which has been so hard to get right for a lot of this year. It went from its demand story to a supply story with all the cuts, and now perhaps

back to a demand story. As Beijing closes its schools and we see a pickup in virus cases in places like Florida and Texas and the United States, what do you see going forward in terms of demand that could potentially send oil prices well below where they are currently at three seven dollars traded on the IMAX. Well when we look at the dynamics between the supply and the

demand side. Now actions taken voluntarily involuntarily in the United States, Canada, all of the OPEC countries and UH and the NANOPAC countries associated with them, those supply actions are going to dominate no matter what happens. We're moving from a period of record inventory accumulations and builds to what is going to be a period of very strong, if not record inventory draws. The cuts are not being seen yet. We're still seeing inventories growing in the United States. The API

data yesterday had a growth in inventories. I bet it will be a bigger number today with the I A. And that's because of the armada of tankers that were sent out by Saudi Arabia and others of these countries in Arch April UH and in the beginning of May. So we're seeing, you know, cuts that are real. Those cuts are taking four or five million barrels a day out of the market um and UH. And the demand

increases of there. I mean, even with the second wave hitting China, the underlying the demand factors are just not as strong as this WI factors. Edward Morse. With the many equilibria of the supply and demands of oil, where's the optimum price right now? I have no idea where a barrel should be. What's the should of oil right now? Try? Yeah'll try to be brief. It really relates to the cost structure of the world, the cost curve for oil uh. And if we look at the data that have come in,

costs is still going down. So we're we're in a environment if this were a market that we're working the way the market should be working. UH. And that's where we expected to eat to eventually get to. But there are out of blocks of lumpy inventory in the middle to try to sort that one out. At most City, the head of Global Commodity Research, it always tried to catch up with you to get your perspective set right now, Juliet Coronado joins us. She's out of the University of

Richard Clarida. That would be our Banish Champagne, Illinois, and of course out of Texas in Austin as well. Dr Coronado, are you forecasting this economy is a natural disaster recovery or are you trying to treat it as a normal recessive recovery. UM, let me say it's a bit of a hybrid of both. And in fact, one of the problems with the natural disaster analogy is that the natural disaster is still with us. UH and I am in Texas.

I'm sheltering in Texas right now, Tom and we're seeing escalating cases of COVID and we're opening up and yet we're going to live with this disease. So as businesses, as consumers, we have to make our decisions knowing that there is this deadly disease swirling around out there. So that makes it very difficult to go back to normal, and that makes it quite different from a hurricane This is not something that's going away. It is something that resurges when we open up, and then we all have

to make these risk management decisions. Businesses have to make them, consumers have to make them. And that's what's going to make us very difficult to get back to normal. That's gonna mean some businesses are still going to go out of business despite the fiscal support because they just won't be viable at fifty capacity or seventy capacity. So I think there's a lot of frictions that lie ahead of us. What is your glide path then? For the unemployment rate,

We've seen a horrific number. Now we have a recovery tomorrow, folks, we get the jobless claim statistic again, give us those glide pass In terms of the U three unemployment rate into the end of the year, what's it looked like. Well, the U three is probably even itself one of the more problematic measures of unemployment because we know we've lost a tremendous amount of people that have dropped out of looking for work right now because things were shut down.

We don't know how many of them will come back or when um And what we're seeing is a tremendous amount of churn. That's what CLAIMS is telling us. We've got millions of people newly unemployed. These are not people that were UH sidelined during that first phase of shutdowns. These are new unemployment. That's probably more permanent job losses. Meanwhile, we know there's millions of people reconnecting with their employers as things do open up. So this just tremendous churn

makes it more difficult to get a read. We saw net job creation. I think that will probably continue UH. And then the question for the unemployment rate is do people leap back in and try to find you know, start looking for jobs, which could actually push the unemployment rate up. We also know, by the way, there's a significant measurement problem that the BLS is grappling with that led to an understatement of the uth ree unemployment rate by several percentage points UH in May and even more

in April. They are redesigning their survey to try and address that, which means we could get a pop in the June unemployment rate just because they're resolving that measurement issue. So I think we're going to have some bumps along the road, some ebbs and flows, in the unemployment rate. I think, like the FED best guesses will still be close to ten percent by year end. That's not an unreasonable forecast given the magnitude of the number of people

sidelined junior. A consensus has emerged for the pragmatists, the group of economists who believe, coming out of a shutdown, you get that initial shop bounce and then the real

long slog, the big recovery ahead begins. One thing I've struggled with over the last couple of days, So I'm just trying to established Judy, and I'd love you to help on that the dividing line between the shop bounce out of the reopening and then that recovery the longest sloge that many people anticipate is that an August event, like July event, September event. What's the dividing line some of Some of that depends Jonathan on Congress and how

much they do in terms of this phase four. So we know that, for example, the unemployment benefits, and in July, we know that the p p P gave small businesses two and a half months of payrolls, which is running out now. And so whether or not we get a new tranche of unemployment benefits and funding for small businesses, and maybe another round of checks that could extend the bounce period, right, that could mean more. We know that we've seen the footprint of that stimulus in retail sales,

in the job's numbers. That's exactly what it's intended to do, but there may be some complacency. It does seem like a consensus is forming to get the Phase four done. Uh, it's just a question of how big and how many? What what what what the elements will be. The other big pothole coming is in the fall, which is a big hiring season for teachers and state and local employees. And we know that they are on the mat. Their

budgets are crushed. They have already been letting go millions of workers, and so that's going to be a challenge for that fall. Typical fall hiring season will probably be disrupted. So I think it's gonna be rather than sort of bound stade, there's going to probably be several boundss and fades as we move along this recovery path. Well, Julia, I want to talk about the economic misses in terms

of economic projections from Wall Street analysts. This is unprecedented. Yeah, yesterday's surprise the retail sales to the upside was dramatic, more than double what was expected. Our economic models broken at this point, not just economic models, Lisa um, actually measurement is also broken, so we know, and actually the Census in the release yesterday they said they haven't been able to survey lots of businesses that have shut down

or gone out of business. So I think one of the things we're seeing in the numbers, for example, for jobs, for the Employment report, which also relies on surveys, and any of these government statistics that rely on surveys, there's going to be a bit of an upward bias because distressed companies and distressed people don't answer surveys. So we get maybe even a upper end of the truth, a rosier picture of the truth that will be revised over

time as we benchmark to harder underlying data. So I think that's we knew coming into this that measurement was going to be disrupted, that getting our arms around the magnitude of this is is was going to be really really tricky, given how unprecedented it is, so that we're seeing noise in the data was expected and anticipated, and in fact we even anticipated that the surprises would be bigger than anything we'd ever seen. So that's exactly what

we're in the middle of right now. Julia, Let's push this a little bit further. If this is expected and there is an upside bias to the data being collected, is there anything in the high frequency information that you're looking at that gives you a sense of how much worse things are? Yeah, so that's triangulating, is the name of the game. And so yeah, looking at all kinds of sources of data, things like UM a DP are helpful in this environment and actually jobless claims themselves that's

hard numbers. Now we know there's been even there some processing delays and some program it you know, UH challenges for state and local governments getting these programs up and running. So those aren't per pinpoint perfect, but they're probably more reliable. UM. They don't capture everything. They don't capture the flow back into employment as timely as UM saying maybe a DP does.

But yeah, we're looking towards all any kinds of high frequency real UH measurement based data that we can UM and again, the range that it tells us, the range of the picture. We know the whole is deep, deeper than anything we've seen, uh in our lifetimes. We know that we are starting to come out of it in many ways. We know that May is a month of growth, for example, on the consumer side, on the hiring side.

I think that that's probably the right picture, but again, putting a fine point on that is going to probably take years till we can actually revise and refine those estimates. Um, But I think we're moving right now in in a good direction. Um. The question for me as a forecaster right now is struggling with how does this resurgence in the virus affect things. We know we're not gonna shut things down to the same extent, but yet we're living

with this incredibly disruptive infectious disease. So what does that due to the shape of the recovery, What does that do to defaults and delinquencies and uh, you know the jobs picture for example. So that's as a forecaster, that's what does that due to the shape of the recovery is what I'm grappling with right now. Julia. Fantastic to get your perspective. As always, Juli Karnata, that of Macro

policy perspectives. I wish we'd listened to Mike Wilson. I'm aregn standing the last couple of months, that's for sure, and I'm pleased to say we can start this morning's program with the chief equity strategist here in New York City, Mike.

Fantastic to catch up with you, sir. What to set you apart from me in the last couple of months is your willingness to say the recession playbook is still intact and there's nothing different about coming out of this contraction compatible the other contractions, Mike, Would that be a

fact characterization? Yeah, thanks guys for having me, And yeah, I think that's a very fair, uh sort of you know the way we've positioned ourselves, which is essentially, look, you have to put the blinders on a little bit when you go into a recession from a financial market standpoint, because markets tend to anticipate these things. And you know, we've been talking about this set up for over a year or two, and I think that's probably what set

us apart two is. And I came into this year kind of more negative than most, expecting the risk of a recession being higher. So then when of course when it happened, you know, the market was actually already ready for that, and then we had a liquidation in March. And the thing that's different this time, though, I think, is that we are in this incredible period of financial repression,

and that's obvious. And one thing I've learned kind of the hard wain in the last ten years is that when risk amium appears, you just have to grab it. And that appeared in March. We've written about as extensively as you know, I mean an equity rich premium basis. We were as cheap in March as we were in March of O nine. And you may say, well, how

could that be. We weren't down as much because rates had fallen so much, and so markets have become you know, attuned to that, and they reacted and investors stepped in. And that's what we've been doing. And and yes, the recession playbook has been working, as it typically does during these periods. Many people anticipate the bounce that we're seeing of the economic data to flatten out later this summer, and for that reason, they're not willing to extrapolate out

the recent upside surprises too far, too quickly. In fact, some people willing to disregard the bounce that we're seeing coming into the month of June. What do you say to those people when you have those conversations at the moment, Well, I mean, look, you you said the top of the show. I mean, part of the reason why economic surprises are bouncing so much as because expectations collapsed, and that that's

also part of our view. You know, you're getting a V shape recovery because you're compared since are just so easy. And of course it's going to have to flatten out now because like every time the data comes out better, expectations rise, so the bar essentially get gets gets lifted

as well, so it will flatten out. But we still think the rate of change will continue to be positive through the rest of this year, quite frankly, and we we're not expecting us to be back to where we were in the fourth quarter of nineteen until the end of next year. And the words, there's still a lot of runway from here to there for the rate of change to continue to increase, and that's what the markets

will focus on. The markets will focus on as long as growth is moving forward, the market will continue to look forward and you know, it's really hard to think about this way, but you know we're actually in a recession now that's obvious. That means I don't have to worry about a recession. Okay, that means the market doesn't have to worry about a recession like it was perhaps in December and January, not knowing how this is going

to play out. But we know how it's going to play out now it's happening, and we know what the policy response is going to be. And so in some ways you could argue, giving these stocks are long duration assets and you remove the immediate risk of a recession, surprising us, it can actually start discounting the future in a more visible way. Mike, how do we rotate in such an unusual and particularly with the fixed income market

odd market? How do we rotate from seven or eight stocks showing for the most part profitability and everybody loves them in that to those that are at a twelve multiple a fifteen multiple. Dare I say the richness of a seventeen multiple? What will be the catalyst to have those stocks improve on a relative basis? Yeah, that's a that's the right question. It's a great question. I think

it's it's very simple. My experience has been that when the relative earnings revision breath starts to favor those cheaper companies, meaning the earning start going up at a faster rate for those more cyclically geared companies than these you know, wonderful secular growers. And you might say, so, how could that possibly happen? Well, because the arrange, you know, we're so lousy over last year or two that they can actually grow faster in the short terms of those rooms,

and the expectations have come down more. You know. One of the things I worry a little bit about the work from home beneficiaries that you did really well in the early part of this recovery is that they didn't they really lower their expectations. You know, the analysts continued to keep their expectations high. So there's just there's not as much surprise factor potentially as the economy continues to recover, and there could be a little bit of payback quite frankly,

from the pull forward on the work from home dynamic. Mike, I gotta say, one reason why I love reading your reports is your view on the short term paired with the medium and long term. Talking about last week's sell off, saying it was healthy overdue. It could be even due for another five to seven uh percent decline in addition,

but it's a by the dip moment. I want to talk about the risks to that outlook, one of them being the increase potential increase in trade tensions between the US and China, especially as we see Robert Lheiser heading to Congress today. How significantly do tensions have to ratch it up for you to reassess your call? Yeah, mean, this is definitely still a concern that's out there. I think you know, you all mentioned it earlier. You know, the market seem to be too focused on it anymore.

I think the market is focused on it. It's just it's got so many things to focus on from day to day. So there's no doubt that the China, you know, US trade relations are still you know, fragile, I'd put it that way, um, you know, and we have far from resolved all of the issues that have been debated, and I think a Phase two trade deal is pretty much off the table anytime soon. And I guess the risk now is do we roll back the Phase one

trade deal to some degree? Like our view is that. Uh, you know, we think phase one is okay for now, it's not at risk. However, if you know this becomes a uh you know, a situation where either candidate apparticularly the president can use to try and bolster their poll numbers, that's where it becomes a bigger risk, and that's probably a third quarter issues. I don't think it's an issue right now. Uh, there's other things that the White House is focused on try and you know, get going in

the right direction. But if they decide to use it as a lever to boaster the polls, that's where it becomes more dangerous because you know, once you go down that path and start saber rattling again, and it's hard to pull back in. So I think it's a third quarter issue, and we got a monetary closely. Mike Wilson, one of your joys is the fabulously concise reports of Betsy Grayceick. You get to read that stuff and frame

an opinion of the two big defailed banks. What's the Mike Wilson view of American banking given what you see from Ms Gray? Yeah, it's uh, I mean like banking has been a tough gig for the last ten years, and that's what you know, post financial crisis and a period of financial repression has done. Um uh. There's two

two things I think about from here. First of all, we are you know, constructive that the econome is gonna improve, and that means the rates, the back end rates should should move up and and increase the yokerve, which is good for you know, that interest margins, and that's a that's potentially a positive tail one, I think. Secondarily, you know, everybody's talked about deregulation over the last few years. It hasn't really uh led to any kind of big boost

in activity. Quite frankly, however, one thing I would say is different now is you know, during the post financial crisis period, we had what we call the shadow banks in their intervening and and doing their job as the as the regulated banking system had been kind of compressed and not being able to operate as effectively for a

lot of different reasons. There's a there is a positive argument I think to be made that some of that some of that business, you know, there could be shared gains coming back towards the regulated banking system because the FED completely needs the banks to be operating efficiently. If they ever want to get inflation, we've got to get velocity of money up. I mean, banks are the ones

who actually create real money in the economy. And so you know, we could see a steeper YO curve, we could see some more deregulation and some share gains back. You know, that's why we're constructive, and we're constructive on the American banking system having kind of a rebirth here as we get reflation and we have a recovery. Myke Wilson, you've been constructive and so far you've been right. Morgan Standy's chief US equity strategists, Mike always tried to catch

up with you. Said my best to you and to the hold of the scene. This is the way it works, Folks. In London, not every month, but once or twice a year, there is a conference and if you're at the London School of Economics, it's held in some old ancient hall named after Lionel Robbins or someone else, or in their

spectacular new conference center of the Chisad Center. And Paul Deguar walks in, who's a good friend of this program and truly one of the leading lights of fiscal analysis in Europe, and you will stand up and there'll be four or five worthies on the stage. But that's not what's important. What's important is the place is packed, and there are students down the aisles, up and back, and everyone to hear a pin drop listens and they will

listen to Barry Ikon Green. We are thrilled to professor I can Green can join us this morning for a virtual conference. He is in California at Berkeley, not in Laws, not in London at l s E, the London School of Economics. Professor Iken Green, what is it like doing a virtual conference? It's just not the same? Is all those pack calls? Is it? It really isn't the same. You uh, you can do it in your sorts. You

don't get you don't don't get the adrenaline rush you do. Uh. Seen two or three hundred faces in the audience, and it makes me worry about our pedagogy at the university. We can't really teach courses in the same way either. I totally agree. Is Berkeley going to return yet? I know Penn State we're talking to the other day, they're returning in the fall. Is a university of California Berkeley

decided to return. We haven't decided, but I think there's a very very high probability it will be mainly online. You will have an extraordinary panel at the London School of Economics this evening on the pandemic. What will you say, Professor I Ingrid We have a new study that looks at the long term political consequences of living through a pandemic.

So we have data on forty seven epidemics and in the past, from stars to a bola that affected in some manner upward of a hundred and twenty countries, and you can see there's a long term impact on people's trust in their government and their leaders, and it's strongly negative. If you live through a pandemic, you grow skeptical about the ability the capacity of your institutions, can you say, C D C and your leaders to cope with those

kind of threats. So, Professor I have three children that are in that age eighteen to twenty five, that impressionable age where you start to form really strong personal opinions. Here, what do you think, uh, the fallout will be for those folks? Uh, after having dealt with this pandemic here which you know we're four or five months in who knows how long it's really gonna go on. For those are the folks for whom we really find a strong effect.

So if you live through a pandemic uh when when you're in grade school, there's no lingering persistent impact on your attitudes. If you live through one as an adult over the age of five, there is no lingering effect either. But if you're in those impressionable years and you know it from first hand observation, UM, that's when there are neurological changes in the brain. That's when people encounter college aged students encounter new ideas for the firm first time.

And those are the people who grow skeptical about their capacity of their government to do good uh for for decades and too short of visit. But very one final question, if we could, do you perceive, with all of your work in international economics, going back to the classic Golden fetters and what you've done with the I m F studies and such, do you perceive a shift in America away from our economic individualism, our flavor of capitalism or

will we reaffirm the way we do capitalism. There's going to be strong pressure I think to have a more European welfare state where we do more in terms of providing healthcare, elder care, child care to the populace. And the question is whether we will become more European in terms of paying taxes as well, or a very serious debt problem blows up in a stead. Oh this has been a joy too short of visit Professor Ichen Green, thank you so much tonight an important conference at the

London School of Economics. Very Green Party, professor at Berkeley. 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.