Surveillance: Frictionless Trading With Friedman

Street is that everything is free. As you well know, in retail things of running muck. We've got free trades, free trades and all of this trading. There's becoming a new distrust. Almost of our business is done for retail in America. Are you concerned that retails getting a fair deal in this new high speed online economy. Well, I definitely think that the environment for retail investing has really

been been pretty pretty great over the last ten years. Frankly, I think that you know, the fees that retail has had to pay to be able to enter the markets, the democratization of the markets by allowing them to have direct access to the markets over the last ten to twenty years has really been, you know, a key trend that has driven I was in the US markets, but so I I do think that's a longer term trend.

The fact that that the commissions have gone to free certainly has driven more demand within the retail environment UM and retail investors coming into the moment. Is it a free lunch? I mean, this is the key thing. And I go back, of course to our relationship at DINA with Arthur Levitt and his respect for the individual investor thirty years ago. Is it a free lunch? I mean a Schwab says it's free. T d A Merit Trade says it free. You can trade NASTAC shares and it's free.

Is it a free lunch? Well, I, first of all, it really is free for retail UM and I was. I was at NASZAC with Arthur Lovitts during his tenure, and I do think that he really was on a mission to make it so we democratize access at the capital markets, and I think he went a long way in that regard. The online brokers have done an enormous amount to create services that really do benefit retail, and I do think that at the end of the day,

they are getting a good experience. The spreads in our markets are extremely narrow, which means they are getting good executions and they are now not having to pay commissions against and to those retail brokers to gain access to the markets. So for them it really is free active Adina, the spreads might be narrow. Are there sufficient protections against losses in companies, say in China that are filing for I p O S here and trading without necessarily the

same types of oversight the U S companies face. Yeah, and that's actually something that we have been in active dialogue with the SEC about we UM. We encourage them to have a round table recently with the experts, whether the underwriter's accounting firms, the lawyers, the SEC itself and NASAC, WE and all the ex changes we play a big role together and trying to make sure that we've create the right disclosure regime for companies coming to the US

and including companies from China. There are some differences in terms of the disclosure obligations that UM that companies have coming from China as well as UM some reduced oversight that's on the accounting firms that that UM support these companies. So that's an area that we are focused on and trying to create positive change. I think the SEC is also focused on it UM, but those that requires some diplomacy between the United States and China, and it's something

we've really been encouraging them to really to to focus on. aDNA. You've been incredibly proactive about all of this. Can you just walk us through what you have actually done specifically? Yeah, so we we have we have definitely had some concern that we want to make sure that we can play our role in addressing. So we've increased the our our oversight of the accounting firms that are being used by

the by the Chinese companies. We we normally really have rely on the SEC for the but at the same time, we do want to make sure that we have some oversight over the quality the accounting firms that are being used. The second thing is we are requiring at least one member of the management team or consultant to the management team to have US public company experience. And the third thing is we have actually increased the public float requirement

for companies that are listening from China. And all of those three things are things that we can achieve, but it's really a broader ecosystem issue that we're trying to make sure that that the government is working with the Chinese government to address. I mean, I mean this the backdrop for this, folks, is really important. Here. It's the Ali Bob and the up war over Grand Cayman Islands

island positioning, you know, up to years ago, etcetera. But then Adina, you've got the recent wire card train wreck in Germany as well. This is really important. Do you and your other markets do you feel the sec is ambrogating its duty? Well, I think that the SEC IS has an enormous amount of responsibility and they take it extremely seriously in terms of the disclosure obligations that they

place in companies that choose to listen to the United States. UM. I do think that they do an excellent job, frankly of managing those disclosure obligations and reviewing the companies, being very proactive and um writing back questions and comments to companies with their filings and it is it is a huge part of their role. But but Dina aunt is doing Shanghai and Hong Kong. I think I can't remember which markets. They're not doing you, They're not doing ny S, e. Etcetera. Okay, great,

is that a loss for you? Do you care that you didn't get the aunt? I p O. I think that we should look at the U S Markets as really the place where any company from around the world will want would want to come and go public. So I think that we would like to see you every company from around the world choose to listening. Okay, but

then what are you gonna do about it? Besides, you know, the president's out there with the politics of the moment, and maybe President Biden President Trump next term will be the same way. I don't mean to disparage them, but what can you do proactively to maintain America is a place to do capitalism? Yeah? Well, first of all, are we are the engine of capitalism here in the United States,

and we're really proud of that role. We want to make sure we create a frictionalist trading environment, but we also want to make sure we have a really high quality disclosure regime that we operate under here in the United States. And that's really a combination of the role of the SEC, the role of the exchanges, and the role of the underwriters and accounting firms as they play

play their part escape keepers as well. And I think that that's something that we have to make sure we create that balance, making sure that we have the right kind of quality that coming into the United States, but also making the capital markets and maintaining them as open capital markets for the world. UM, it is a fine balance to strike right now, Adina, Have you rejected certain I p o s based on the disclosures even if

the SEC maybe hasn't weighed in. Um, we definitely have we go through a second level of review, and we do absolutely reject companies that we don't think meet our standards, even if they've gone through the disclosure process with the SEC as the defense as to catch you out of you today, Thank you very much. What you want to get to data, Freedman. That that's that, President, And see eight right now on the gyrations of the commodity space,

and it is a deceptive space. The Bloomberg Commodity Index is actually really good math and it's about eighteen percent gold, and with gold of the moon, clearly that index has done better. But what about the rest of the space. Francisco Blanche is head of Global commodities and derivatives and owns gold up to his eyeballs. He's like gold singer in the early Bond movie and he joins us this morning as well, Franstanco Blanche. Let's get gold out of

the way here. Is it dominating all of commodity and analysis right now? Are the index is no good just because of gold? Uh? It makes me last. Uh Look it's uh, we're having old precious metals ripping here. But also frankly we've had a pretty good run on industrial medals. And then then the one commodity hasn't moved all that much has been oil, which has been pretty stable around the forty forty fiveular level for for a few for

a few weeks now. But but yes, there's a lot of focus on precess medals, also a lot of focus on what China is gonna do next in terms of infrastructure and the big pool from from China from a

resources perspective. So so I think I think you can you know, there's a reflation story going on, um and uh and obviously called this is the biggest beneficiary because of of of a lot of micro factors that have that have been piling up to support it right, So, so I don't think it's the only story and commodities. I also think that industrial medals are are tacking up and an oil is kind of waiting on the sidelines until until we get a bigger uptake and economic activity.

That that's I think the reality for oil UM Francisco crisis. Hold on a second therapy because there's a sweet spot between industrial medals and press just metals, and that is silver, which is on a tear. How much do you see that escalating at this point? Can you give us some calls both on silver and gold in the upcoming months? Um? So, we we've we've maintained a twenty plug to our target on silver. UM. I mean obviously the uh one of the things that that silver is good for is solar panels.

And what we are saying is that a large portion of all this money going into infrastructure is going into what some people label the energy transition, and of energy transition means we're going to be using a lot more silver for a lot of this. This uses the same thing applies to copper, by the way, so think about think about the energy transistent medals, what we call the myths the metals in future energy technologies, copper, um uh, lysthium, cobalt,

uh silver itself. So silver is getting is getting very hot, partly because of that, it's a combination, and it's also also some people put as a supportman's gold. It's just some being a little easier to buy. But I mean, I don't quite buy that argument. But I think I think there's certainly that that accelerating trend on silver. I also think both platinum colladium pretty great. Platinum has has

a long way to go here as well. So Francisco, we should say that Tom has been outfitting his entire apartment in solar panels, so he's been attributing to the arise in silver. There's a question of whether the industrial medals can continue to rally in tandem with weakening oil. The idea that you could have demand for building but not necessarily a commensurate demand for crude. Could you see

that happening. It's it's happening to some extent, right because, as we said, a lot of the infrastructure packages that are coming through, and like I said, pretty great China, I think are are are going to to boost that kind of spending. But COVID is primarily a mobility crisis. Um. The more we move, the more COVID spreads, and and that's I think a fact that hopefully has been has

been shown in different ways now. So so my senses that until we have a vaccine or a cure or connection of both, we're gonna have to keep limiting our mobility. And that's not great for oil. Um. We still think that demand will be ninety eight million bells a day for next year on average, but again it should have been a hundreds and three. So we're gonna be maybe five or six million bells a day away from the level of demand that we should have seen next year,

all the things being equal. For instance, so what is the instability to e M here to commodity e M How close are we to where your world folds over into the fiscal world of these e M nations? Um. So I mean I think if you look at if you look at Russia, Russia's reasonable economic shape um, their budget break even is in the mid forties for oil. So with cool oil having rallied back into forty three fortifilar range, they are their reasonable shape um. All the

emerging mark it's not so much. Remember countries like Saudi Arabia have a much higher break even so so they're gonna struggle more. And then other countries which are heavily reliable on things like iron ore or agricultural commornities like Brazil are in better shape because you know, um iron or has been one of the one of the stellar commodities in the past in the past year, so iron eors really is really wrapped here, so that's kind of

benefiting Brazil as well. So so I think for the most part it's oiled nations, and it's those oil nations that have not adjusted their their budgets. Uh And and Saudi Arabia comes from probably at the Fund, but also many others in in Africa and Venezuela obviously and what have you to sort of visits, visit Francisco blind thank you so much with Bank of America of course on commodities.

Michael jesus Is does public policy from Morgan Stanley, but he does it through a wonderful prism of municipal credit. It really helps to be a credit analyst before you spout about public policy. Michael's thrilled to have you on. Let's start with a desperation. How desperate are states and locals to this aid? How bad do they need it? Uh? They need it pretty badly, but not nearly as badly as they would have if the FED hadn't come through

with the Municipal Liquidity Facility the mL left. So by our estimate, state and local government um or our state deficits through the end of fiscal one range anywhere from a d eighty billion to three seventy five billion UH, and the FED MLFT back stop is making roughly two fifty billion dollars available for states. So in theory, before you undertake any austerity measures, you can basically punt most of that budget deficit. You could turn it out about

three years just with the mL LEFT. But the austerity in itself is important, right because if you do have to undertake the austerity or that borrowing, you probably see credit downgrades, you see a drag on the broader macro

economy through staton local government layoffs. So it's it's obviously much better for investors if the care IF cares to what Congress is negotiating right now, put something like two dred and fifty to five hundred billion dollars in state and local aid into the bill, and actually that's where

we think they're gonna end up. So I think at the end of the day, a few weeks from now, you're going to see this problem, I don't want to say solved, but largely mitigated, kind of taking the state of state credit back to where it was in January February of this year. So, in other words, a two hundred and fifty to five hundred billion dollar allocation to state's municipalities in the next round of the Cares Act will be sufficient to totally offset the damage from the

pandemic to state finances. Is that what you're saying. Yeah, I think that's more or less correct, right, And totally totally offset is probably too strong award, but uh, you largely fill in that gap. Um. Now, of course, if we're wrong in our own estimate about how the rest of the pandemic plays out, If um, you know, if the vaccines don't get us to HERD immunity by the first half of next year, then you'd expect a continuation

of revenue shortfalls, further impressuring budgets. But if we are comfortable with the assumption, and we are Morgan family, that you're going to be able to achieve that by the first half of next year, then yes, this is a substantial mitigan to the stress that's opened up for state local finances. Michael, let's get to the substance of the

current debate down in Washington. Day say, there seems to be a general broad agreement on sending more stimulus checks to Americans, on extending the enhanced unemployment benefits to some degree at least. Where's the big sticking point that you expect to emerge in the coming week of negotiations. Yeah, I'd say they're there's kind of there's a few different

sticking points. One is on the absolute size, ever, but Republicans seem keen to want to keep that headline number relatively low to appease some of the depths of hawks Uh and their caucus. The marker they've laid down is we don't want to see more than a trillion dollars. I think practically speaking, there's a good chance that that number is going to have to come up a little

bit to accommodate what everyone wants. Right, if we filter this down to what's bipartisan, what addresses the pandemic impact directly, and what are things that can be done without impacting the budget baseline over the long term. You know, it's still a filter that allows for things like you mentioned, stimulus checks, state and local government aid, an extension of supplemental unemployment benefits. Uh And therefore a trillion dollars probably

looks more like the floor of what's going to happen here. Uh. So they think that's that seems like a red line, but it's going to have to move a little bit. The size of the extra unemployment checks is is it seems like a red line, but it's probably going to have to move a little bit. Um. Ultimately, there's enough agreement around those issues in principle that we're pretty confident you're going to see an agreement here over the next

two to three weeks. Tom, I think this is the really important aspect of this, that the concepts themselves aren't really being debated. It's about size. If they were negotiating the concepts themselves and had broad disagreements over them, I think it would be difficult to get a deal and get a deal quickly. We actually saw this in Europe

a very similar story. The Netherlands weren't debating the concept that we're debating the size, and when you see that plan get in negotiations, I think you can be confident that we can come to a deal. Someone needs to come down a bit, someone needs to come up a bit. We meet somewhere in the middle. If it was about concepts, I'd be much more nervous. I would. I would agree with that, John, But I think it's a huge difference between europe and American. Michael. This goes to the labor

component of our municipal finance. Do you just presume layoffs at the federal, at the state, and at the many cities level. Well, I think there's probably going to be some degree of that, and it tends to sort of, at least at the state and local level, it tends to kind of lag the real economy. Um. Now, I think if we get the appropriation that we think you're going to get, those layoffs become a much lighter touch. But yeah, I mean, I think you can't dismiss the

idea that there wouldn't be any layoffs whatsoever. But this is really about mitigating that effect in the drag on the state, local sector, on the on the broader economic

recovery over time. I think that's heavily influencing the debate in Washington, d C. You have plenty of Republicans who are very reticent initially to extend any aid to state and local governments, right You that Mitch McConnell talking about bankruptcy as a solution, but it seems to have crept in is that there are plenty of Republican states that had big budget gaps, not just because COVID, but because the oil price is going down, and there's an understanding

that the sort of negative feedback loop on the economy um keeps going if you don't fill in some of these budget gaps. Some of the more toxic language isn't a part of the conversation right now. Michael Zess great to cash Oo Morgan Stanley's head of US Public Policy Research, and were delighted to be joined now by Sir Howard Davies is not West Group chairman and actually not West Group because you rebranded today. Sir Howard's actually also congratulations

on that. I mean, first, just on on this consulate Um you know story in Houston. Are we assuming that things between the US and China, that China and the rest of the world will actually escalate on intellectual property issues. Well, it's a it's a difficult one for me to answer, because some citys, of course say there's not much intellectual property in banking, and I think that the financial sector

has not been particularly affected by this issue. But I do know that many companies are concerned that their intellectual property has been well whether stolen is the right word, but has been used by by Chinese competitors. What I find is slightly surprising is that this is something that's taken place in a consulate. I mean, most Western countries consulates are involved in issuing visas, they're not involved in industrial espionage, but it looks as if the Americans do

have some reason to think that's the case. I would say, however, that these kind of tipped for tat closures of offices are things which are quite easy to do, and sometimes they are almost like a safety valve if you like, you know, so you close something, they close one of yours, and you know everybody's made that point. But it will be interestly to see if there's something more to it than that. If it's just a reciprocal closures of consulates,

then it's probably a relatively minor question. How does COVID nineteen actually change the trade war between the U S and China? Does it make it less likely that we'll see a real, you know, second trade war or continuation of because of the already depressed state of the world economy. Well, it raises the stakes, of course, because when everything's going well, you know, governments feel that they can perhaps make make gestures or make political points in the trade area without

too much damage. I think what the COVID situation means is that you're playing with fire here because you're operating against a rather fragile economic background anyway, and therefore taking tough trade measures, imposing tariffs is going to be potentially more damaging than it would be if trade is otherwise buoyant. So I think that's the way in which it affected. Sir Howard, I must turn to this historic moment for

Europe that we saw over the weekend. You are qualified to speak on this with your tenure of duty, your tour of duty rather at siance PO, and of course with your work at the London School of Economic Is Europe a better place this morning because of what occurred this weekend to consolidate the United States of Europe? Yes, it is whether the United States of Europe overstates the case.

I think perhaps it does, but it's clearly a kind of ruby con has been crossed here in that they have agreed to collectively guaranteed borrowing, and that's been something which the Germans and others have held out against for quite a long time. That I think is a very important moment and suggests that the arguments for solidarity a word that doesn't translate terribly well into English, that the arguments for solidarity in Europe have one the day, at

least temporarily. So I do think it's an important moment. Indeed, you could see by the fact that it took them four days to get there that they were overcoming some very serious issues. So I'm modestly optimistic about the way this has turned out, and I think we could see a stronger European recovery as a result. From where you sit right now, and with all your radar at the net West Group and all of your discussions within academics and the experts that are out there, how in recession

is the economy right now? I'm having trouble getting a gauge of the depth or persistency of a slowdown and aggregate demand. The markets are telling me it's worse than the chit chat. What is it, sir Howard. Yeah, what we've seen so far is that some parts of spending have recovered really quite well. Spending on staples if you like, as being pretty flat through the period and that's okay, and spending on consumer durables has picked up really quite sharply.

What we have not yet seen is a sharp pick up in what you might call social expenditure, eating out obviously all the arts related cinemas at tea. That has not yet picked up. And so the question is will people be confident enough to go back to their previous practices of social expenditure, and that I think is going

to take quite a bit of time. So my favorite view of the shape of the recovery is that we have had the beginnings of a V shaped recovery and that that's been quite good as far as it goes. If had slightly better in the UK and the bag of England thought, but that the next part of the V may flatten out a bit because then you reach some social and psychological issues about people's confidence, and that I think will take some time to recover, so Howard thinks.

So much for Howard Davis of Network Group. 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