Surveillance: Global Recovery With Malpass

World Bank President. Mr melt Pass, wonderful to have you with us. Your World Bank wants a shared prosperity. I want you to explain to our fancy audience why we need the impoverished world to get beyond the vaccine and the pandemic, to get beyond the pandemic so we can prosper as well. Great question, everybody, and to you to

your to your well manicured audience. Um, the the challenge is both the moral the moral issues, meaning we really want people everywhere in the world to do well, But there's a very hard economic reason as well that uh that that people will create markets of the future and they will also be the innovators, the the the UH, the really practitioners of growth. That's got to come from

all over the world. So I think there's there's both the responsibility to be engaged in countries worldwide UH, and also the the the profit motive for everyone in the world. We all do better. It's a positive some game if everyone can be in the global economy in a positive way and constructive and keeping track of global public goods like climate issues. David, I have said this for years full disclosure, Mr mail Passes in my book of Eons Ago, David Mayl Pass want to make clear you own the

word fast. You have always looked at the calculus of the global economy and now you do it through the prism of the World Bank. Are we recovering fast? Some of the countries are? You know, China didn't even really have a recession in twenty The US now looks to be h in in a faster recovery, which is welcome. UH. But as as we look at the rest of the at many parts of the world, the inequality is the more striking conditions. So and you can see it you

I heard your the announcer UH. Prior talking about commodity prices and you were talking about oil seventy or eighty dollars. That has a differential impact on different countries. Commodity exporters are feeling the rise right now from commodity prices, and so that's good. But the countries that that use commodities

that aren't commodity producers. Uh. For example, if you're a primary export is tourism, you know, the tourist destinations in the developing world, they're still feeling it very hard, and I think it's going to be a hard David, as do we believe in this reflation trade, or at least markets do. Globally, there's been a lot of money that's

flown into the developing world, into emerging markets assets. Do you think the chance of a debt crisis in the developing world has basically gotten diminished to near nothing or do you think that that's still a really prominent risk. I think it's a prominent risk for a lot of the countries at the bottom, and that has to do with the difficulty of getting new investment. You know, it's not enough to get just new debt. You need to have that debt applied in the countries. Two projects that

are really going to create growth. We're trying to provide the vaccine support that we can that helps the people of the country begin to put it back together again. Food insecurity is a big problem because of both the things going on on a global scale in terms of climate changes, but also because the supply change were disrupted. So all of those mean that the people at the bottom are still not are not feeling a lift, and I think they really need some new systems that will

give them that kind of lift. One new system would be at least wiping out some of their debt to give them a leg up as they try to enter a new growth trajectory. There's been some talk nascent talk about linking at debt reduction to addressing climate change issues. How far along are you in those talks. We're working closely with the I m F on ways that we can uh envision the connection. It's not just climate, it's

development in general. The country's need as if there if there could be debt reduction, that would that would temporarily disadvantage the creditors, but it would provide resources in the country for them to invest into healthcare, into COVID response, UH and into climate and so the rest of the world should see that there's a beneficial linkage from UH for countries where their debt is unsustainable because maybe past governments took on too much debt or the projects that

they that that were being financed didn't work out. Some some of the countries have giant white elephants projects that that someone thought five years ago or ten years ago, thought it was a good project, and it doesn't work out Instill, the people in country have to pay the debt a year after year after year. So there's gotta be some way out of that for the poorest countries. Mr mel Press, I have to ask for Craig Gordon in our Washington team. The delicate question always asked when

we see a change in administrations. You were appointed by President Trump to a five year term at the World Bank, I believe through two thousand twenty four. But now you have a different president. Explain the dynamic of the President of the World Bank with a new Biden administration and how you see that unfolding here in the coming months. I think pretty well. I was proposed by President Trump, but I was selected by the Board of the of

the World Bank. I work for the World Bank and for the shareholders of the World Bank and the governors, which are countries around the world. So as the Biden administration comes in, they guide the relationship as the biggest

shareholder in the in the World Bank. But I work for the for the Bank, and we're doing things that that the Biden administration is supportive of, I think, and I'm sure that they're very supportive of global growth, of developing countries doing better of a of recognizing the importance of climate changes in the in the formation of economic policies in countries. All of those are work synergistically and

work well. And they also I think, I mean, I'm sure are very interested in the poverty reduction goals of the World Bank. That's one of the cores, and so I'm looking forward to that new relationship. David Melps, thank you so much the World Bank President this morning with the good news we've seen over the last number of weeks, and better pandemic statistics, Pinco market strategist, pretty slow manage an investment committee member, so many great to catch up.

We have had faulty A hours full of central banks speak to I sound tired. What was the headline well, I think you are all just talking about. In fact, Lisa just said jobs claims are still elevated eight hundred thousand. And a key comment this week from Lyle Brainerd, who by the way, could well be the next FED chair next year. Keep that in mind, um. She spoke to the idea that even though we've seen improvement in employment, that it's not yet it does not yet fit the

Fed's new definition of what constitutes maximum employment. Remember last August, the FED changed its framework to say that maximum impointment must be broad and inclusive, and so that that's a broadening of the definition. That means even if there's a recoping of the ten million additional jobs that have been lost that have not been regained, that the FED will be looking at different yardsticks to decide whether or not

it should raise its policy rate. And that's an important element and wrinkle in the central bank God world, Tony, congratulations on your new book out. I want to go back to stygums one pages on the short term market to sorry miss I didn't get stay with me here, Okay, The bond market when it moves moves like in the spread market, we move what's called folks, red zone to green zone up and down quickly. We're in the middle of that right now, Anthony Krissenzi. We're we're moving rapidly

on spreads. Is it a normal red zone, green zone abrupt movers or something different this time? Well, it is different than the twenty tens. The ten is the wrong analog for the current period because of the degree of experimentation that's occurring between the monetary and physical authorities. Experimentation meaning the extent to which the Central Bank is enabling the fiscal authority to drop money into the economy in

massive quantities. So that's different. But Lisa mentioned the seven year auction, and that's an important concept in this, and the steepness of the curve. Bond managers love a steep yield curve. Bot investors should love it. Generally, the ten the seven year note on the services yielding one It is one percent yield, but the six year note is eight basis points. Let me give you some strange bond math.

There's a twenty basis point difference. So what does this So what does the seven year become in a year a six year? So today the yield is one percent next year, then if the six years eight basis points. It'll it'll fall on yield. What what happens when yields fall, prices rise by how much? Bondmath is seven years duration times at that change in yield twenty basis points. That's one point four percentage points. So a seven year in the total return any year fields just stopped moving would

be two point four percent. And so there's a cushion, is what I'm saying. Our unit of duration is thirty basis points per unit of maturity of cushion to help a bond manager, bond investor today. Now that cushion is important for the equity investor, to the credit investor, of the investor in the private markets if they are thinking about bonds and they're worried about the move, Uh, that that's a bit of insurance. It's it's it's it's about It's similar to saying that you buy a seven year

today one percent. That's not quite attractive. But I mentioned the total return idea. It is still has diversifying characteristics that enable an investor to take risk in the equity market, in the credit market, in private assets, and so bonds still have a place in a sixty forty split between bonds and stocks contexts. We think there's still hedge value, so from that act is still important. Steepness is important

in terms of what's happened Tony. I gotta say, it does show you, though, where we are the cycle that we're talking about, bond math and such granularity to eke out at two percent two point three percent return based on where yields are, so it does give you a sense of just where we are in the low interest rate environment. I'm wondering on a broader level, though, this rise and interest rates has really come up from the rise in real yields. That's basically not the inflation expectations.

And I'm not sure what to make of this. I mean, we're not seeing inflation expectations go up in tandem with yields. What's the message that's importantly said? In fact, I wrote myself a note top. One of the top things I wrote was real real yields. Good handwriting. You picked up. You picked up on an important point. Um. The important thing that's happening is that the rise in real interest

rates is not affecting the stock market. It's not affecting the credit markets, it's not affecting markets more broadly financial conditions are still loose. It's another way of saying that the pain threshold is been reached, which is to say that yields then could go higher because rising real yields, higher yields tend to be act as a automatic stabilizer self stabilizing UH mechanism in the sense that as yields rise, it causes equities to fall and then yield stop rising.

And so the fact that real yields are having no impact is important. But so you want to watch and see where it is that the rising real yields starts to influence other assets, because that's probably the point where the rising yields becomes self stabilizing, and it's not there. Might be in the high one percent range, close at a two percent for all we know. So long as the equity investor, the credit investor thinks two percent is it. Tony always grid to catch up, So appreciate it's not

great to see you. Thank you. Pimco Mark his strategy's portfolio manager and investment Committee member Francis Donald manual Life. She's really quite good and adapting and adjusting to the changing linkages of market with economics. Francis do you change your economics because of the markets, or to the markets change because of the economics. Uh, well, they're not really

very closely tied together since COVID occurred. But we are at the stage where if we start to see tightening of financial conditions, it will matter to the economic outlook. And this is what central bankers are watching. I watched every minute of Powell speak in the last couple of days. I learned nothing new, and yet overnight a huge amount of information from a lot of central bankers who are clearly worried about their economy because of the financial condition.

That includes Australia who tried to expand purchases and saw yields rise pretty aggressively in response, and includes the ECB coming out and saying we're uncomfortable with this. It includes the Bank of Canada, with two speeches this week trying to imply that they're more nervous than the yield market suggests. These are all central bankers who worry that the financial commissions are now hurting the economy. Well said, now I

know you're focused on the real yield. Friday's Folks one PM, a two hour special this week with John Pharaoll Francis, I want you to focus on the trip point that you're watching. Is it euro Is it the real tenuere yield in the US? Is this something I don't know? Yeah, I'm watching both real yields and the term premium because as much analysis as we do, that's when you hit the circuit breaker on equities. We have a little bit

of ways to go here. You could see real yields rise thirty forty basis points more, but before they become very problematic. But I think Powell himself, who is you know, appearing as those very comfortable, is going to get a lot more nervous as those real yields start to go. Real yields that are this negative with the economic outlook that we have are unsustainable. They have to rise. The hope is that they do it very smoothly and not too aggressively. In the last couple of days on a

little bit more nervous about that. Talking about being nervous and Francis, you do a great reality check. What are you seeing in terms of labor market expand our lack thereof, and how consistent that is with the optimism we're seeing in markets. The biggest challenge of twenty was just acknowledging that we could see these really severe job losses and they wouldn't translate to necessarily a huge economic shock because those we've lost their job were so called lower spenders. Right.

But now as we head into one, we are seeing the employment numbers already lad jobless claims should be doing substantially better than they are now. But it's not an equity trade. It might be a rates trade, because even though we see almost ten million Americans unemployed, they're spending is not feeding through to GDP and retail sales as much as those that are still employed. Now, what I think the mistake is is to ignore that entirely and think the Fed doesn't care. The Fed cares deeply. This

market does not believe the Fed. When the Fed says it won't be hiking rates until the employment side of the mandate is what the market has to listen to more or else they're going to get that wrong. Well, Francis, there's one thing about raising rate, there's another thing about expanding the purchases into longer duration assets, and that seems to be off the table or people aren't really talking about it so much. When does that come back on the table or is that off the table for the FED?

I don't think it's off the table. This FED is going to have to do something to anchor that front and if it starts to rise, just like all these global central banks are trying to contain the moving yield, it's not gonna be enough to just talk down yields from these levels. Powell was extraordinarily devish in the last few days. It did nothing for him. I suspect we're going to hear a little bit more about wheeld curve control at the front end. We might hear about extending WHAM.

These are issues that are going to come back to the frame. I used to think back in December that extending the weighted average maturity of purchases was absolutely on the table. It seems they wanted to save it for a situation like this. That might have been the right move. Franks, As you mentioned the labor market, let's talk about the word you hear a little bit more recently is employment

and not unemployment. Can you walk me through the emphasis shift there, particularly of the last several years for the FED and what that mats is. YEA, that's right. When we do our monthly chart book. We used to just have the unemployment rate. We've now expanded into a range of different members, things like employment to population, labor force participation rates in the United States have dropped very precipitously

and more than we've seen in other countries. This is problematic for the Federal Reserve, and they've been very clear they're expanding the way that they look at the employment market, and we as market players, will have to do that as well, or else we're not going to see what they see, which is the adjusted employment rate for all of these underlying factors is closer to ten percent. It doesn't look as good as we see on our Bloomberg

screens when that non farm heralds comes out. This is another reason why, even though we could see an earlier taper than perhaps some expect, the Fed is not going to raise rates until it s these material improvement there and these underlying issues are not going to correct in one It's going to take a couple of years to help us redefine success fronts is what we should be focused on. Well, I can only define what the Fed

tells us it's watching. That's what I have to do, and essentially what we're looking for are is a material soaking up of that labor force participation rate, getting it much higher, seeing a little bit of a closure of those racial and income disparities. This appears to be a key focus for the Federal Reserve. It doesn't appears that the market believes that this is a key focus. It doesn't appear that the market believes in average inflation targeting.

They're pricing in a rate hype that is too early basically what the Fed is telling us. So either the feed will get swept up and higher inflation, or they're gonna stick to what they're told us, in which case they're not hiking. For instance, this has been hugely, hugely valuable and to me, the heart of the matters. Whatever your number is you've got in your head for Q two g d P, there's a mystery to how that

sustains to Q three Q four. What is the probability or waiting that we underestimate better GDP growth Q three Q four of this year. So I suspect that we're going to see Q one and Q two were much better than most expected degree that price in Now you know, we expected that the soft patch of being Q one, but actually it looks like it was November, December, January. Q one, Q two going to be very strong. Where I think the mistake might be is yes, data will be better in Q three and Q four, but guess

what the reopening trade is priced. We know we're going to have an aggressive reopening. There's so much more scope for downside surprises in the second half of the year.

And this is what really worries me. I tell my team, don't come in and tell me that the vaccines are doing better in virus casecouncer down We know that I need the next big catalysts, and when I think about the next big catalysts, it's a little bit easier for me to sound find downsides and upsides based on what we already know, on what Francis, thank you come at Francis on every day, Francis Donald expend your life investment Management,

chief Economist and head of macro economic strategy. Francis, thank you without question our interview of the month, the quarter, even the year of your optimism of this pandemic ending. Juli Edelstein has a wonderful history with his Israel. He is Minister of Health, but that barely defines his symbolism is one of the last refuse Neis to leave Russia in his politics of his Israel were thrilled that the Minister of Health could join us today. Minister Edelstein, thank

you so much for joining. Thank you for telling us about the success of Israel. How did you do it? How did you succeed at this vaccination program? Well, thank you for having me or I'm really proud to say that the as we speak, we are crossing the line of fifty of the general Israeli population getting at least the first job. I think that the main reason was to start negotiating early, understanding that we are a very small market. The moment companies will actually have the vaccine.

They weren't even looking now at direction, so we started early. The Prime Minister, I do have to say, was actively involved in crucial stages in trying to negotiate the best dates possible, and then our medical teams are HMOs, came into action in an incredible way. The results are that in the two months we reached, as I've said, about fifty of the general is Early population. And we have to keep in mind that right now we don't have the permission from Fiser to vaccinate kids under the age

of sixteen. So I think it's it is a very very impressive result. So, Julie, what is life back to normal in Israel when our flights opened up to the international audience. Well, that's the question I think I'm asked two hundred times a day by my fellow Israelis. So if it's so successful, why don't we go back to normal? And then we all have to we all have to understand that we still have a long way to go.

Right now, we are cautially open, cautious the opening the Israeli economy and social life, cultural life after suffering a very serious attack of the coronavirus just during last month. And the what enables us to open certain areas that we couldn't even dream about opening, like theaters or fitness centers, is the what we call the green pass, which is a certain documents certificate confirming that the person that has either been vaccinated or unfortunately suffered from the disease and

recovered from the disease. So all these people we're talking at this stage about three million people in Israel can use all these facilities safely. And we are continuing the vaccination. We are hoping to reach the situation where as you said, will be close to normal life the way we used

to know. Yeah, one of the hardest topics I know among friends and family is whether people will go back to the same behaviors when the pandemic does lift, or there will be ingrained in some of the distancing and other types of habits that we've established. Have you any surprises up until this point, as you've vaccinated fifty of your population, Well, the surprise, first of all, there's the

psychological aspect that we just started talking about. Definitely, there's this kind of a sigh of relief that comes a little bit, I would say prematurely. People don't understand why if they've already been vaccinated, they still have to wear masks, so they still have to keep social distancing, with which in a country like Israel is very difficult. You know, we are warm, we want to embrace, we want to get close to each other, and and so the psychological

aspect is not easy. But there is also there's also I think in terms of the it's not a surprise, it's it's a fact. There is something that we have to keep in mind. The vaccine is very effective we just had the research that shows the effectiveness the vaccine. But if we are talking about let's say a hundred people, all of them vaccinated in a certain event, out of them, five of five or six are surely not reacting to the vaccines. So that danger is always there, and that's

what we're trying to explain to people. Let's go back to normal, but very cautions. Mr Earlstone. Your your stature within Israeli politics and your your history with Israeli politics forces the diplomatic question. There is a transition in Washington from Trump to Biden. What does Israel need or expect

from President Biden. Well, I think that we have all the reasons to believe that President Biden will keep the tradition of different American administrations, Republican and Democratic, that they were good friends of Israel. We sometimes had our nuances and different opinions and certain subjects, but I did have the personal pleasure of think President Biden, and in my previous capacity as the Speaker of the Knesset, and he's as Vice President of the United States, he is a

good friend. He is knowledgeable about Israel, and I don't have any reasons to to to be worried. I think that the we we will have to continue working with the American administration on different issues, and it's our best interest. And you know what I'll dare say, it's also an American minister. Congratulations on Israel's leadership in this pandemic, Julie Elstein, Israel's Minister of Health, and much more of that and domestic Israel politics. This is the Bloomberg Surveillance Podcast. Thanks

for listening. Join us live weekdays from seven to ten AMI Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast A, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg m