Surveillance: Fiscal Caution With IMF's Gaspar

state of global fiscal policy. Vita gas Bar doesn't get the ga Gina Geita Gopinath gets at the I m F. But trust me, his Fiscal Monitor is a critical document in these times. Dr Gaspar joins us. Now, Vitor, I want you to give me an update on your confidence that we can expand by trillions. Are debt over the justification that interest rates are so low? Do you buy

that concept? Yes? I do, uh dom So, what we emphasize in this sub blog that I've just put out together with pakpe Enough is that global debt is at this point in time at record levels never in history as global public that being so high. It is now above a hundred of percent of world GDP. It is so high because we're facing a crisis like no other, and in that context, the fiscal response has been very

quick and and precedented. Just to give you an idea, in the last few months, the response of fiscal policy is bigger than during the local finational crisis. If you take together two thousand and eight, nine and ten, so in a few months we're above the response of three years during the global finational crisis that was absolutely appropriate to support to extend lifelines to households and firs made

vulnerable by the crisis. Right, this enormous level of debt, this enormous level of debt is in a sense compensated in terms of impact on the budget by these very low interest rates that you're talking about. And this but I want to I don't mean to interrupts her, but because of time, I want to cut to the chase. We have Dr L. Aaron on with us in the next hour. He has acclaimed for speaking of T decisions. What is the T decision we are all going to make two and three and five years out after we

count up the trillions of dollars of debt? What is the T decision down the road for political authorities is they look at endless debt, so I would not put

the issue that way. Nominal infest rates and so debt service costs are relatively low as a percentage of GDP, even with these very high levels of that, because inflation and inflation expectations are very low, and at this point in time, as getago enough, my colleague emphasized yesterday, we're more concerned about too low inflation than to high inflation. The epidemic has boosted precautionary savings, investment will be prudent, and so for a while we are going to have

a situation where savings exceeds investments. So our balance of risks points to the fact that premature withdrawal of fiscal support is a more pressing danger than the high levels of that, and that's our balance at the moment. There's a question of how companies, how nations are spending the money that they're pumping into their economies as they try to support everything as it gets back up and running.

How good a job our nations doing at supporting companies that are viable in the longer term rather than just the zombies that are going to die out even if they are supported in the short term. So as I was saying the short term priority, the number one priority is public health, and that requires fiscal support to vulnerable households, vulnerable firms, and those interventions should be regarded as life lives.

As the situation normalizes, as we pass the face of the Great lockdown, as the economy is opened gradually, you we have in a sense to pivot towards policies that facilitate the reallocation of resources. And so it is necessary to pivot from support to jobs, to support to people, from a blanket lending to firms to a much more

discriminating approach. And again, as Getago penas Uh said yesterday, it's important that the intervention by the government includes capital type instruments, equity participations, perhaps even partial nationalizations, so that the issues of solvency can be tackled appropriately and the natural restructuring of the economy actually takes place. You know, this is philosophy, Friday. We hear a lot of big ideas, and this has been an era of big ideas as

people try to reimagine what society will look like. On the other side, there is a question of how good a job in the here and now governments currently are doing how optimistic you are based on what you have seen that they will implement the policies as you're talking about, are you optimistic about that or are you sort of doubling down on these messages because you think that they're

not getting through. So we are actually quite impressed by how speedy and how effective the interventions by governments have been in the phase of the Great Lockdown. We have put out a annexed to the World Economic Outlook with the physical perspectives, and we have an online document that reviews policies followed by more than fifty countries. What we see is unprecedented action. We see eleven trillion dollars of measures. Many of those measures are measures with above the line

impact on the budget. There have been crucial to support firms, to support households. Now the situation is very difficult. We face radical uncertainty, and the first priority is public health. The first priority is to control the epidemic. Why because only by controlling the epidemic are we going to be able to reduce uncertainty and so to create conditions for the economy to pick up in a sustainable way, for investment to pick up, and for the transition to a

new model of sustainable and inclusive growth they call. So we're not out of the woods yet. A lot remains to be done, but up to now, the ability of governments to deliver timely, targeted and temporary measures have been quite impressive. Okay, so fantastic, get your thoughts on a program today. I appreciate your time. Always valuable to us, we tell guessed by that of the IMAF. No one has studied the cycles of this like Jim Paulson and

Luther Oldweden. He's really a student of melding economics into the history of our financial system and the opportunities to take and the mind fields to avoid. Jim Paulson joins us now from his UH Minnesota. Jim Paulson the courage to be in the market now was Lesa mentions the confidence of the CFO. How do you develop confidence to participate in anything except Amazon and Apple? Yeah, it seems

like that on some days. Tom, I um, you know, I really think that in some ways that this is a very you know, unique situation where and there's no doubt about that, But in some ways it's also very common to what it feels like at the start of other new expansions and new bowl markets. Um, there's a lot of doubt. There's a lot of problems on Main Street. UM, a lot of them seem like they're going to last

for a long time, and they probably will. But yet that's the same kind of situation that existed like when the market first took off, or in two thousand nine, when it first took off, there was a lot of doubt there too, and the market went up and it seemed like it was disconnected from the reality that was that was going on on Main Street in both of

those cases. And yet against that wall of fear, with massive policy support that we had in two and we had in two thousand nine, the market kept rising and eventually economic conditions on Main Street also improved. It took a long time before we got back to normal. We had elevated unemployment rates well into the late eighties, well into the last expansion. We never really got back to the unemployment rate again until many, many years later. So

you know, we've got a lot of issues today. But I still think we're in a new expansion in a new ball market. And jam I had this argument a lot. In fact, I think you're closely aligned with the thoughts of Morecin Stanley that this is normal, the reopening, the recession playbook. It stands people, as you know Jimmy pushing back. They'll say, there's a structural sailing to how quickly we can normalize it, stopped start, it's different, it's not normal.

What's your message for them, Well, I I think that you know, there's certainly differences every time, and we've got a big difference to your child. I totally agree with that. We've not ever had a pandemic that I've been you know, studied before, and it does have unique characteristics. But you know, there's been unique characteristics in the past. There were start stop in the two thousand nine recovery too. I mean, we had massive bank failures and brokerage from failures. Our

banking system was totally challenged. Sometimes that looks a little better, Sometimes it looked a little worse. Um In in in the early eighties we had basically a depression and energy and agriculture in my home state of Iowa. UM commodity deflation. Uh, that was a lot of starting stop there too. I don't know if they're this specific thing is is unique to the day, but in reality it's pretty common to

the past. We The real key here is you don't have to get back to normal before security prices move. They've already moved long before we're back to normal, and they probably continue to do that. UM. If we can just trend northward in terms of economics, I think that's going to be sufficient, even if it's slow, and even if it's starting style well, let's say it's slow. When it's start and stop, let's talk about what you want

to own. The rotation into the cyclical areas of this market worked for about five minutes and then really stalled through the month of June. Jim with the backdrop right now that we're facing with a week where the dominance of megacat tech is back on top, how uncomfortable does it fail to pivot away from that story and back to value again, back to the cyclical areas of this market.

I do own Bolt John, I'd own the Barbell, I continue to own New Era growth, and I would I would continue to add exposure in what I'd say the broader market, which to me is who go small caps in their nationals UM. And I really think, on the one hand that there's greater participation going on here than advertised. Yes, it's done. It's been a their or market since the

June eight top here. But from the Marche low, the Russell two thousand index, the equally weighted SMP five and the market cap weighted SMP five hundred are all up, are all had risen by about so there is greater participation here still still going on. It may not be every week, but I think if right now we've got a baristattitude towards pandemic and reopening, if that turns back to bullishness again, I think we'll see the broader market pick up. In the meantime, your high growth equities are

going to continue do well. I don't really see a bubble in growth like I saw in two thousand. I mean, right now in tech, for example, the forward multiple on SMPF under text twenty seven times. It was fifty five times in two thousands. Right now the relative key motiple is one point one times the SMP. It was two times SMP. And the reason that people are buying those stocks today, it's not because they're out over their skis

with massive you know, bullishness. It's because of defensiveness. They're buying those stocks like they used to buy utility right. Well, Jim, this has sort of been the argument by a lot of big investors that basically the big tech are the stalwarts and are the utilities going forward. On the other hand, if you take a look at who is buying, retail investors are accounting for a greater proportion of total volumes

in the equity market in the United States. The head of execution for Citadel coming out yesterday and saying at any given day, uh, there is one fifth of all trading activity attributed to these retail investors, which have traditionally been thought of as the dumb money. Do you agree or do you think that they're smarter than the institutions that are being more reticent to pile in. Well, I guess that you have to be be determined. I don't. I don't believe that the size of the retail run

to me um is is of a magnitude. I think that's concerning like it might have been in earlier periods. And I also don't know at least one who knows. But I also don't think it's it's backed by you know, uh, rabid bullishness and optimism. I think there are people that were looking and using these growth stocks as defensive investment. Whether that's going to prove to be accurate, I don't know, but it's it's not something we've done in the past.

When when we've had this run concentrated run into these big cap tech stocks in the past, it's been a signal of over bullishness, and that just does not evidence to me today the character of that sector has really changed. Jim fantastic to catch up with these as always Jim Paulson there of Luthold Wait and really fortunate to be joined on the program now by Mohammed al Arian, chief

economic advisor to Ali and son of course Bloomberg opinion columnist. Mohammed, We've been following this crisis over the last several months together, and it just feels like we're entering something different, a new phase. There's a shift here. What are your thoughts on it? There is drawn and it's really happening in the economy in the US, and that is a migration up of layoffs from small and medium sized companies to

larger ones. And that's consequential. Vote for what it says about the demand side, but also what it says about the supply side, and there is a lot of businesses are not buying into the v they see a different the nation and regardless of the journey, Dr Larry and Warren Buffett made a t decision this week to invest

in a distress asset. I think what's missing in our analysis on a Friday in July is how businesses, how executives will respond, what are the t decisions CEO, CFOs and big money is going to make over the next year. So for most businesses it really comes down to three issues. Is my balance sheet strong enough a B what is demand and where you're gonna look like? And see what is my cost structure is going to look like? For the marketplace, that's a really interesting aspect going on because

the marketplace has to also incorporate two things. One is the very heavy hand of policy and secondly are technicals that have proven very strong but remain delicate. So it's a really interesting configuration um that we're going to be talking about for a long time tom going forward. But the basic issue is that there's much more fluidity out there economic and financial of course health wise than we've seen for a very long time. Mommed, what is it

about the technicals that you think a delicate right now. So, I think what you have is the extension of what has been the formal trade, the Tina trade, and the fear of missing out because central banks are our best friends the Tina. There is no alternative but stocks, but but certain stocks within that that have become both defensive and growth at the same time, and that has attracted

a lot more interest from the retail side. And the retail side has had quite an influence in the last month or so, you know, John, I think more retail participation is very important. It broadens the marketplace and importantly it means society buys into a market based system even more. However, you don't want retail to be the victim of a head fake. And that's what I really worry about. Victim of a head fake. Another way to say, this is

a bubble. That's what Rob or not a research affiliates called the tech stocks and the valuations right now there, Do you agree? So, I think there's there's two issues of the head fake. One is to be careful that central bank support does not go all the way down to the faulting companies. The false imply capital impairment and the experience with Hurts, where should be one that that should be puts front and center of every retail investor.

The second element relates to rob are not really good interview with you yesterday, which is there was a time when the marketplace thinks in relative terms, and there's a time when it thinks in absolute terms. And relative terms, tech makes absolute sense. They have strong balance feet, positive cash flow, good management, and on the sunny side of both the COVID journey and what's on the other side of the COVID journey. But in absolute terms, look at

the valuations. And what I have learned in my experience in the marketplace is that the market can be obsessed with relative values for a very very long time and then almost overnight, it shifts to absolute. And that moment can be quite a jarring moment if you don't realize where you are on valuations. In Muhammad, You've done this

with Bill Gross at PIMCO. You know, Bill Gross had his famous Monroe trader on his desk where you're quota yield, yield yield, and all of a sudden you go from relative to absolute and all you're worried about his price price price, How close are we in the bond market with where nominal yields are, real yields are, and negative yields are to you flipping from a yield analysis to a price analysis to protect capital. So a lot depends on which part of the bond market. And I think

it's really important to distinguished tom. And let me start with a story that was often told that PIMCO, which is the person who comes home and says, look, I bought a dog for thirty dollars and his wife says, are you crazy? You spend thirty tho dollars for a dog? And he answers, yeah, a great deal. That cat was selling for forty tho. Right, there's a point at which relative trades don't make sense. I think you're gonna see this in high yield You're gonna see this in emerging

market corporates. You're gonna see that in certain sovereign emerging markets. You're not gonna see it higher up in the counital structure because central banks have and will continue to influence those yields and those spreads. So people have got to be much more careful into how they treat the bond market. It is very different when you get near the fault risk. Mohammad,

You've gotta be careful. Otherwise people listening to this might think that people of pimp care actually brought thirty dollar dogs, and I'm sure that maybe maybe that was in the case you mentioned a couple of times, then they certainly didn't. Pimco Bimko is and always has been a very fundamental driven shop, right John, John, I paid thirty two thousand ProVet Bill. I'm sorry, which is why you call him

vet bill. I'm sure because of the costs are Mohammed, you mentioned them a couple of times there, didn't you, And I just think that it wasn't by accident. Are you concerned about the evaluations and emerging markets? I am. I think people don't realize how tough it is for the typical emerging market. Phase one was simply dealing with the spin over from what was happening in China, what was happening in Europe and the US, which is lower exports,

lower commodity prices, lower tourism, lower form direct investment. Phase two is dealing with their own COVID our breaks. If you look at what's happening in Latin America, it is tragic if you're looking at parts of what's happening in Africa, it is tragic. So the demand on their resources and the need to divert more resources to the health care

system is just going to go up. And I think that people don't realize that there is, to quote my colleagues at Gramacy, a paradigm of non payments coming up for certain emerging market credits. A paradigm of non payments. The idea that perhaps some of the sovereign debt could get written down, and we've seen some of that from the I m F. So far, where are we in that How much do you think the sovereign debt of

developing markets could get written down ultimately? So we've seen ongoing with Ecuador, with Argentina, that's that market based solutions, like you say, we've seen the I m F and the World Bank work with the three twenty on a debt service suspension initiative for the poorest countries, and they've

made it very clear that they expect burden sharing. Um. The issue is, as you know, Lisa, it is not easy to dictate burden sharing from a top down perspective, and that's where the I m F and the World Bank are struggling and finding a way for private sector involvement, as they call it ps I. I think it's gonna come. I think when countries go from immediate emergency assistance to one thing, longer term support from this institution, one of

the requirements is going to be burden sharing. And I don't think credit is quite realize that that's going to migrate up from the lowest income countries to some, not all, some of the middle income emerging markets as well. Mohammed. When people say burden sharing right now, we think of Europe and the fiscal talks are set to take place

later this month. You have really pushed back over the last year, maybe longer, when people have come on programs like this and talked about pivoting away from America and American assets towards Europe and the consonant. What's the pushback now? So I think we're getting closer to him. I think we've learned once again that it takes a crisis to move Europe, and what you're seeing happening in Europe is

I think an important moment. So I must say that I'm really encouraged by what's going on in Europe right now, Um, it would be important to see how these negotiations proceed. Um. There are people that the countries are still resistant, but on the whole, I think they're going to get to a better place. And I told you that the time will come to fade the US in favor of Europe. We're getting much closer to that. I would not fade the US in favor of the merger markets though, Mohammed,

always appreciate your time. Thank the family for us wind you. I know it's super early on the West coast and this is a disruption for the Larian household as well. Have a fantastic to catch up this Mhammed al Arian there of Blomberg opinion and of course chief economic advisor to ALIAS, this is a joy and a day. Given the pandemic and the carnege economically across the nation, it is good to speak to someone authoritative from a firm that owns the franchise. That would be Cowen and Company.

Not only with Chivan Rumor, the legendary airline analysts, the Boeing analyst, but also with Helene Becker. Cowen truly owns a high ground on airline analysis. To thrilled that MS Becker could join us this morning, Helene, I want to cut to the chase and the headlines. I know you've done this, calculate how many people would become unemployed across

the American aviation business. Yeah. So at the start of the year, there were seven d fifty people employed in aviation, and we estimate that by the end of the year there will only be between five hundred fifty and six hundred thousand people employed. So somewhere between hundred fifty and two hundred thousand people will lose their jobs. Um. You know in the fourth quarter of this year. Hallong, we

caught up a several months ago. You and I were talking and just how depressing some of these numbers would be for the business. Can you just walk me through what the industry looks like right now? What's booking look like? What does capacity load factors look like on some of these playing some of these roots. Yeah, so, um, so we're better than we thought we'd be when we caught

up the first time. We thought we'd have by August first, about four hundred thousand people traveling, and that was based on the eight seven thousand people at the nater So on April fourteen, t s A screened eighty seven thousand people versus a normal day when they would screen about two and a half a million, So you see the decline there. And then now, um we're screening about on Tuesday's, Wednesday, Saturdays.

We're screening between six d six hundred fifty thousand people on the peak four days, so that would be Thursday, Friday, Sunday, Monday, we're screening you know, between seven seven fifty thousand people. So that's a faster recovery than we were expecting. And that's without business travel and really without international travel. Without those two, we don't think traffic can really exceed a million UM by the end of the year, and that's

our forecast. By the holidays, December holidays, we have a million people going through UM T s A every day with without business and without international Where are people going domestic? That's that's actually a really good question. UM. So it's visiting friends. So the people who are traveling visiting friends and relatives, leisure and people who absolutely have to travel. So this like eighty some one thousand people we saw in April, we're people who were traveling because they were

probably rated related doing work related to the pandemic. Now you have people, um where states have opened up and where like Universal Orlando and SeaWorld opened earlier in June, you have people starting to take vacations to those locations. Now. Um, whether that continues given the rampant um a level of of coronavirus that we're seeing in those states, you know, remains to be seen. Disney is supposed to open, Disney Orlando is supposed to open tomorrow. Um. You know, obviously

new rules, but that's what's happening. It's it's the Florida beaches, it's western states with um national parks. You know, we're

seeing a lot of outdoor activities, all right, Helene. So, given the fact that we're not expecting to see demand for international or business pick up to the levels that we had seen earlier in the year until perhaps according to industry projections, how many airlines do you think have to go out of business to right size to sort of correct the over supply of seats and flights that we have currently in the market. Yeah, so I think

that's a great question. I think the way the government set it up in the short term, as none of the airlines will go out of business but the amount of capacity that will come out of the network. So we've said between eight thousand aircraft will not have been parked and will not come back, um, you know after in let's say bye by this time next year. So UM, when you think about the level of capacity, that's that's

equal to an air size of one full airline. Hello, give me by a hold cell here, give me the single best I three idea three years, five years out which management is going to be most opportunistic and add shareholder value when we get through this this tragedy. Yeah, so Southwest is probably our best idea in the short term. UM, just because they've they've got net cash. UM, they're really

well positioned. They did a huge cash grab earlier this year about thirteen billion dollars worth a liquidity UM, they've paid down their three six or four day term loan. We think they're really well positioned to get share in every recession since I've covered this group, which is more than three decades, and they've grown share. I think that's like our number one idea. UM are big contrarian idea. The one that you know we got a lot of pushback on is American because we don't think they're going

out of business. They've raised a ton of cash. Um they still have some assets that they can raise. They don't have any debt do before two they paid down there two sixty four day term loan that was due next year, so they're not in that you know shape right now. And um So I think those would be, you know, one very contrarian and kind of out there and the other, you know, more of a um quote

unquote safety idea very contrariant given the borrowing costs. Helen, I always enjoy catching up with your fantastic to get your insights on this program. Elne back there of Cowen and Helene is always so compassionate about the work is to make up some of these companies. This industry is really going to strop the top for a long long time. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast

play for him you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.