Surveillance: Liquidity And Solvency Critical, Kostin Says

and also in market economics. LOUI, I know John and Lisa want to get to what we'll see Friday, but I've got to give you a victory lap on an essay you wrote, I'm gonna guess a decade ago, maybe coming out of your public service under Secretary Geitner, where you talked about technology of the halves and I have not. You absolutely nailed at then, Dr Alexander, and now we've got the likes of Amazon borrowing at full faith and

credit yields. Can technology do you just in visualize these technology giants just advancing over the coming years, in decades to ever bigger ever more dominant. So I think one of the questions of the economy of it'll last ten years has really been why hasn't productivity growth been stronger given how important and how pervasive tech has been. Look, we're going through a real time experiment of what we can really do with technology, and I think we're going

to be positively surprised. So in many ways, I do think this is an opportunity for that. Um I think the question really is is the right industrial structure for that a small number of very large firms or do you want to see more competition? And that, frankly is going to be the policy debate around tech going forward.

We want to understand, lou, how these companies right size themselves in the months to come, the amount of debt that many of these companies have hats to borrow, What do you expect corporate behavior to look like in the next several months, and how would it shape growth? So, look, I think it makes all the sense in the world for corporations to shore up their liquidity at this point, and capital markets are open, credit markets are open for good borrowers, and so I think it makes perfect sense

for them to take advantage of that. Obviously, you're going to have some companies that are going to face losses over the near term that are very large relative to their existing equity base. You think about the you know, the auto rental companies, the airlines, they are facing fundamental challenges and that's going to be a different kettle of fish. But for most corporations who are going to be able to ride ride this out, um, it makes all the

sense in the world for them to be borrowing. Louis you said that this market is open for good borrowers, and the bifurcation has never been more, never been greater, whether the good corporate borrow or a good consumer borrow. When we're seeing that bleed out in the economic numbers, with the jobless reports on Thursday as well as Friday that we're expecting this week, can the U s economy

maintain some sort of growth trajectory with that divergence intact. So, like, one of the things which is different about this shock from others is how concentrated it is bisector. So those parts of the economy that depend on social contact, the most obvious ones being restaurants and entertainment and all of that are being devastated by this, other parts of the economy that are frankly much less dependent on that and can adapt to working from home and all of those

things are are obviously doing much better. And it's very unusual to have a shock like this that has that disparity, So it really starts with that. I think as we come out of this, as we back away from the most extreme version of social distancing, as we learn how to do these things without and ringing the same kind of exposure, I think you will see those disparities start to diminish. But they're going to be with us for

a long time. So I think the real problem is the jobs available for people who have done that stuff that depends on social distancing. They're going to be depressed for a while. So the US Budget Office came out with a projection saying that it may take nearly a decade for the US economy to recover from the shock that we just saw. What does that mean in terms of the unemployment rate going forward on a sort of

sustainable basis over the next five years. So look, I think the experience we had before COVID nineteen, which suggested that we could get the unemployment rate down to very low levels without having those sorts of problems of inflation we've had in the past. I think that is relevant experience for what we're going to where we should try and get to in the long run. But look, we haven't seen unemployment at these levels since a great depression.

The when we had the Great Recession a decade ago, the unemployment rate got to ten percent and it took us eight or nine years to get it down below four percent. It's over fifteen now. It's going higher before this is over. Yes, it is going to take a long time for us to get back. I'm not sure it's necessarily going to take as long as it did following the last big recession, but it's going to take a long time. This is the issue, Tom, the number

one issue, and Lisa raises exactly the right question on unemployment. Tom, you and I've been talking about this together with Lisa over the last several months or so. We could approach we could have some real improvement in the back half of this year, but we could still end the year at double figures. And that's going to be unacceptable and should be unacceptable to absolutely everybody's son. Yeah, it's absolutely true, and Dr Alexander. What's so important about that observation is

what it does to inequality. You know, we don't need to go on a Tuesday into the Genie coefficient and all the dynamics of inequality. But has it ever been wider? Um, You have to go back a long time for it's been worse. We've never had a shock that is more disparate. One of the things I will just not to bring it back to the employment report we're going to get on Friday. Um, we're expecting average hourly earnings to go up by one point three percentage points on a month

when we lose over five million jobs. Now, how do you make sense of that? The way you make sense of that is the jobs were losing, our low edge jobs, and it hid that that disparity between what happens with average hourly earnings and the headline employment is a direct reflection of the inequality of the effects of this. And I do think that that is an aspect of this which we can't get away from, and it's going to

affect the politics of this in some ways. These are trends that have been out there for a long time. They're not really new, but it is very much going to sort of highlight those problems, and I think it's going to be an important part of the election. What is the social policy that begins to nudge us away from this abrupt inequality? I mean the tradition of Yale academics is Robert Schiller and James Tobin in others where

there was an advocacy for social policy. This is America that's not doing so well on social policy right now. What's the best case to begin to take us from our inequalities? UM? I think you have to try and address UM the underlying causes and start from the beginning, and a lot of that is about education, it's about access to UM social services. So one of the things that's very striking about this is the incidents of mortality around COVID nineteen is related to other conditions which are

related to economic status and your access to healthcare. So I think there's some very basic things you can do UM, starting with healthcare, but also ultimately coming act to education and giving people the skills not only to have higher wage jobs, but to have jobs. Frankly, that can be done uh remotely. So one of the big disparities again is who gets who has the jobs that we can do work from home that is in some sense very much related to those same inequalities and education that are

the things we have to start to address. Leu Alexander from Namura. Always great to get your thoughts on this program. Thanks for your time this morning. Regu Alexander. With this moment ago with Namura and John, the backdrop of this, if you beautifully stated, is an equity market that's got a very much real risk on field, John, do we have a wife for that? I don't have a why the Federal Reserve sequential improvement as we reopened, Tom, there

are many reasons. I think there are many, wise, but I don't really have a win in a moment like this, and why we should be higher. Ectonly futures up thirteen points, up four tents of one percent. Let's talk about the equity markets. Home came. We can bring in the chief US equity strategist of Golman Sachs, a good friend of this show. I'm pleased to say David Couston is with us now. David, you've called this one unloved. I'd call it hated. This move from the bottom all the way

up and through this morning what's your take at the moment. Well, it's interesting the definition between unloved and hated. I guess the indifference what Dante said is the really the the opposite of but the idea of portfolio managers. They're certainly welcomed the idea of a higher market. Most fund managers are long biased, long tilted, whether they're a long only fun mutual fund or whether hedge fund, they can have a long bias. So the rising market has certainly been

been been welcomed. It's it's been unloved. You could argue your your terms hated because most fundationers haven't been positioned UH to participated fully in this in this recovery, I will certainly stay as strategistic surprise at the magnitude and the persistence of the thirty percent moved in the in the FMP five. Of course, uh, as you've talked about, no doubt and then and others. The rally has been so driven by a relatively narrow group of stocks, primarily

in technology. There's helped lift the indexes, but the the underlying typical stock actually hasn't necessarily participated as much as the headline index would would would show, and so that's an issue that has been of much discussion with with with with clients and put foire managers. Now because there's one continue to own the leaders of the market. The top five concentration UH stocks never been this concentrated in history, even back in the Czech bubble of two thousand, the

top five stocks then we're like eight. Now we're talking about one fifth of the market is dominated control the represented by by just five companies. So the UH we know the drivers diagnostically, and then looking forward the the idea of UH the cyclical recovery, which has certainly been been been focused in the last couple of weeks, UH in the last couple of days, frankly, but the persistence of that I would say is is I'm less confident

about that. Would would focus more strategically on some of the market leaders, and whether that's in technology, whether there's more secular growth and UH stronger balance sheet, some of those characteristics UH, in my view, are more sustainable in terms of their drivers. If let's talk about that, it's important the reopening rotation has taken place over the last couple of weeks. What is it about that rotation that you don't think it's durable. What is it about it

that you don't think it's sustainable? So the key issue is the rehiring rates in the United States. The idea is, you know, tragically, we have almost forty million people about for unemployment initial unemployment over the last nine weeks, and how quickly hopefully we'll be quickly, but how how quickly and how many? What percentage of those individuals who have been laid off for furloughed will be rehired by their employers? Basical assumption A lot of people have been making around uh,

you know, and that will drive the economic activity. And as people UH leave shelter in place or begin to reopen some of these state economies, does that lead to more uh sustainability where you've had a big move already uh in a lot of these companies. And I would UH answer the question as follows. I prefer and recommend that you own domestically facing goods producers as contracted with services providers. So every company in the country is classified

as either a goods producer or a services provider. And the lessons from China is that the leading edge of the recovery or the restarted the economy Johnathan has been led by the toms, led by the industrials, not the consumers. So we want to own us companies that are that are more business the business you know, of the goods producing. Those would be a lot of companies in the in the chemical business, uh, chemical space, the machineries of barospace.

That would be your trade, if you will, your your tactical trade. But strategically still looking for stronger balance and technology to be offering better returns over time. What's interesting your David Costan is small caps. Christopher own over Statigos has a brilliant note this morning noticing the elevation of small caps, but he asked the golden sacks like question of do they on an absolute basis advance and can they even advance on a relative basis versus large caps?

Do you have an affinity for small camps right now? I do not, And the reason for that is, UH, strictly on the balance sheet. We know the singular risk in this UH in this economic dislocation has been a collapse in revenues here in the second quarter as most of the country, much of the country was was at home and just the was a lot of activity and

therefore liquidity and balancing strengths were key. So the FED obviously came in with many programs in terms of the UH support in the commercial paper market or in the i G market, and back in some of the small and angels in the in the high yield market, but still the liquidity and solvency or critical issues in the uncertain path of recovery, and therefore would rather own companies with stronger balanties which characteristically are larger companies as contrasted

with smaller companies which typically have more leverage and UH in just they're less flexibility on the on the on the financing side. David, perhaps the theme of the year is growing disparity, whether it's in income's low and high income households, whether it's the companies that are doing well

in the stock market or not doing well. And then the latest from the US Budget Department coming out and showing that the economy is not going to recover in the United States for nearly a decade from the shock that has just experienced. How long can the US equity market as a collective remain divorced from this underlying economic reality as put out there by the United States UH.

As you said, it is the critical question for both society and for the investor community about the what appears to be clear dislocation between the path of what the economy is going through and where the equity markets, which we know a couple of things. Number one, the equity market is a discounting mechanism, so it looks out into

the future and brings this forward. So it is clearly anticipating a steady restart, basically implying that there's not a lot of dislocation, whether that's through the you know, second viral wave, various other just it's going to basically be a steady renormal normalization of the of the process. And that is the first, you know argument and why the equity market has been rising so much. But we have to understand as well that the stock market is not

a pure reflection of the economy. It's definitely much more skewed towards stronger balance sheet companies for example, Uh, it's skewed towards businesses which are more in technology. It's much less in the housing market than the rest of the economy. So there's because they're not purely uh, you know, representative

one or the other. But ultimately there is you know, you mentioned there were divorced between there's been some linkage between the earnings of a company and the overall size of the economy, and the economy is basically driving revenues, and the expectation is businesses getting is getting better. You didn't quite get that, frankly, in the commentary from corporate management in the first quarter conference calls that just ended.

They were generally more subdued to lots of concerns about the pace of restart And so it would suggest to me the STP valve bundered at these levels is trading at a higher level than I half at the end of the year right about, you know, roughly they'll same level. But three thousand is a target the end of the year. And if I think about the risks around this, you're looking at modest upside risk maybe five send opportunity and

five foot to its thirty two. And that's basically because positioning is light neutral to light, and that's where it's been hovering. So investors have not been super embracing using you, Jonathan, your terminology, it's sort of it's, you know, a hated rally. They have not participated on the other hand, you have the concerns about the pace of the restart and can you get all these people back? Do you have a sustainable recovery in the market? Therefore, puts down at fifty

would be ten percent? Is eight in metro skew somewe to the downside. Uh from the risk point of view, David, I'm happy to wrap up an interview. When you borrow a phrase of mine, I'm always happy to lend that to you. David Custod of Government Sacks, the chief US equity strategistad I have the famili is doing well. We appreciate your time this morning. We usually speak on the international relations of the in Bremer, but today we speak with Dr Bremer. If you raise your group about the

international and domestic relations of a better America. All of us are in search of that and we need to fight our way through in the coming nights and days to find that better America. Dr Bremer, you were out in the streets of Manhattan last night, as we were before the curfew. It is the challenges of a New York. What is your reading of history of how we somehow get beyond looting? Well, you know, we know that looting

doesn't define the protest movements. Uh, and and nor the depth of the level of disaffection that exists in the United States right now. This didn't start with Trump. Uh. It's the reason we got Trump. Indeed, is because so many Americans feel like they don't have the opportunity, that the American dream does not apply to them. Uh. Those lessons were not learned after two thousand and eight, two thousand nine. They weren't learned with the Occupy Wall Street movement.

Now they've come back in much more dramatic form. And part because inequality is worse, in part because unemployment and forty million newly unemployed with their slips over the past two months, And in part because the least privileged and most particularly African Americans in the United States have suffered the most dramatically on the back of this horrible coronavirus.

So you know, these things are cyclical, um, and the geopolitics and the economic cycles right now, unfortunately are lining up in a very negative way and it's going to take us a long time to dig out of this time. Dr Bremer give our international audience, and particularly our younger viewers and listeners, a primer on what Max Boot alluded to in the Washington Post yesterday, which is the similarities of the president's tech to George Wallace of another time

in place. How narrow is the president's perspective or does he speak to a much, much greater part of America than Governor Wallace of Alabama? Ever? Did I do think that Trump speaks to a large percentage of disaffected Americans?

What's amazing? I just mentioned unemployment, six to eight percent contraction expected an economy this year, and yet Trump's approval ratings blended at about forty two percent average polls, exactly where he was when unemployment was at record lows and when we were expecting moderate growth in the United States. That that tells you something about how much support Trump has, how strong it is, and also how fundamentally divided the

country is. So if you look at Trump and his electoral game plan for November, he doesn't think that he's trying to win over black votes. I mean, he'd liked them not to vote because it gives them a better shot. But Biden's got that locked up. You know, He's not trying to pick up you know, voters in California or here in New York, city. He's gonna lose the popular vote, probably by several million, but he could still win again.

And the way he wins again um is by ensuring that his base, which is narrower than Biden's but much more enthusiastic, feels like coming out to the polls, and that on the coronavirus side means don't worry about the virus, don't wear a mask. If you don't feel like it, try hydroxy chlora queen. Maybe it'll work. Get back to work. It's normal. While on the blue side of the equation it's fear, lockdown, panic, and maybe they won't mote vote

as much. If you add that to proximate danger of national security, domestic tranquility, the national Guard, the military on the streets, maybe they can make voting more challenging in person in places that he really doesn't want to see turnout. And that's what the fight is going to be about in November. You'll remember, Tom, when you were at your Asia group at the beginning of the year, for the first time since I started the firm, the single top

risk was a domestic us concern. It's never been true. You're right. You and I usually talk about the rest of the world, because the political risk environment usually comes from the rest of the world. But this year it's actually the feeling that the system is so badly rigged against disenfranchised white warp humdal class, against African Americans facing systemic police abuse, and that that is a real concernation. Dr Bremer. Let me bring in my colleague John Farrell. Okay, well,

thanks for that, Tom. I appreciate that he had and I've spoken many times and let's build on some of that. Whether we are at an inflection point. Do you believe we are in an inflection point or were we look back at this moment with disappointment that this was just another moment in time. But I don't think that we are on the brink of civil war the way some in the mainstream media we're actually saying yesterday. And I don't believe that we're about to become an authoritarian state.

The United States is not hungary. Separation and balance of powers are much stronger, the deep bureaucracy is much stronger. But um, I do think that the level of political dysfunction in the United States UM is far deeper than at any point in my lifetime. I was born in sixty nine sixty eight. Clearly in terms of social descent, was nearly as bad. Um. But now you also have the United States entering into an economic depression, and you

have a pandemic that we're still fighting through. And indeed, all of these people out on the streets, many of whom are wearing masks, many of whom are not not engaging in social distancing. Here in New York, a lot fewer cases, a lot of other places where we're seeing these demonstrations still actually have an hour of over one point zero. In other words, the pandemic is still expanding, not under control. Um. That that's unique. And as I said, I don't think this is the beginning of the end

for the United States domestically. In fact, in many ways we're gonna come out of this crisis stronger than our allies, because we've got the robust tech companies, because we export

food and energy. You can't forget about that. But our ability to lead the world with soft power, to lead by example, which has been eroding steadily now for decades, certainly post the collapse of the Soviet Union in ninety one, that is at the lowest point today of our lifetimes, and that will have true, longstanding and structural effect on what the world looks like in the ability of the Americans to shape Yeah, and just sort of tying this

together and quickly here, how vulnerable is the US given all the distractions domestically to some sort of international infiltration, be it a cyber at hack or disinformation that could affect the election, uh, and and disrupt the social unrest even more. I mean, of course it doesn't help. And at the margins, I think the Russians and perhaps the Iranians and Chinese will still be engaging in more propaganda

fake news. Uh. You know, if you remember Black Lives Matter in TwixT the largest Facebook site was actually a Russian site. But to be very clear, the damage that is being done here is being done by ourselves. We're the ones that are so divided, We're the ones that are easier to take advantage of internationally, precisely because we don't have our own house in order. When the Russians tried the same act with the German elections, they got nowhere.

And that's because the country was much less divided and always right, agathos and perspective on this program. Thanks for you want to guess this morning, I help you and yours are doing well, and that if you right a great There is the photograph if the failure of Lehman Brothers, and as the camera looks through the window, they're in the computer screen of gentlemen seeing their careers disappear. Is the Gartman uh letter. It is seven eight nine ten pages.

And yes, we can talk about gold with Dennis Gartman, but maybe we should talk about the politics of the moment that make up so much of his letter, particularly in the back third as well. Mr Gartman comes to us twenty miles somewhere. It's supposed to be no protests. It's not the big city. And yet Dennis, in your neck of the Virginia Woods, there is protest, isn't there. Yes, that it's happened in Virginia Beach. It's happened in Richmond.

There have been marches in Norfolk. There have been marches in Hampton. Portsmouth, where I live has not had anything, or where I live very near has not had anything. Thus far in Suffolk, where that actually do live, has had just a very peaceful march. But all around us, my my daughters in the news business in Raleigh and Raleigh has been on fire for the past couple of days. It's just that this is very frightening, very disconcerting, and I think it plays into the hands of the shy needs.

I think it plays into the hands of the Russians. The Chinese are going to look at this and say, look, if the United States of America calls in troops to to quell the violence, why can't we do the same thing in Taiwan. Why can't we do the same thing in Hong Kong? And I think that's something that people have to start paying attention to. Dennis. Anyone that knows your work knows that you have a cast of Abraham

Lincoln and the Elephant Party. Great, but you were one of the first and the harshest critics of this president. How does the Republican Party regroup with a one term Trump or even with a two term Trump. It's a

very serious question, isn't it. And with the poll numbers coming out in the past couple of days show a very marked decline for the popularity of the president and the possibility of a democratic president and even worse, a democratic Senate, how they're going to resolve this is beyond me to be quite honest, Thank goodness, I don't have

to make that decision. But it does appear that we have a president who's going to call in the troops and take a very substanti substantive law and order perspective that's going to have some support amongst his holdouts that are just absolutely trump eastas from the from the start. We'll see how that prevails with the other scent of the population. But I'm glad I don't have to be the one to make the decision. You would think that given the fact that the prospect of military troops entering

America's cities might be somewhat concerning to equity investors. The tail risks are increasing and being added to each day, and yet we are seeing equity futures higher. And this has been a consistent theme, and a lot of people point to federal reserve action in particular, the also the increase of the fiscal deficit. How does this play out in markets? In other words, can fed and fiscal stimulus basically offset all of the rising tail risks and make

you bullish uncertain risk assets. It makes me. The only place that I can actually be bullish, even modestly is the fact that I do think the yeld curve is going to become more positively sloped. The back end of the curve rates are going to go higher, the short end of the curve rates are going to go lower, and that's going to be beneficial to the banking industry. But otherwise, other than that, I'm hard pressed to come

up with a bullish a bullish rationale. As the Lord Keys once said, though the market can remain irrational far longer than you or I can remain solvent. And the fact that the stock market has been predicated upon a bull run predicated solely upon it. As far as I can see monetary expansionary policies by the Federal Reserve and can buy other Federal by other reserve banks around the world, I guess We're not supposed to fade the Fed, but

I do find it difficult being bullish. I'm I applaud those who have done it, who have gotten bullish, they have been profited, but I I find no sense in them whatsoever. Dennis, to your point, we are seeing the US yield curve widen quite substantially. The gap between thirty year and five year treasury yields now at the whitest since two thousand seventeen. What is this pricing end? Does this indicate some sort of inflation longer term? I think

it does least. I think that's exactly what the market is beginning to understand that thus far, the monetary expansionary policies that have the next cent around the G seven, G A, G nine, G twelve, whatever you want to call it, have not been inflationary, but the eventually they shall be. And I think that's what's going to happen. The grain market doesn't make new lows, it starts to hold hold its own golden US dollar terms has become has has been very strong and likely to continue to

be strong. We're starting to see inflationary pressures as far as labor is concerned. So I do think that that's what's happening, and I think that the yel creve gets demonstrably more positively sloped. As I said, the back end of the curve. I think rates can go up past two percent without any difficulty, and I have it's hard for me to understand that even how that we've been under two percent to begin with, because when I first started trading in the nineteen seventies, on the Board of

Trade in Chicago. The long bond had a fourteen and a quarter percent coupon and you couldn't give it away. But we're gonna go back above two or three or four percent in the long bond, and at the at the short end of the curve, overnight said funds are likely to remain close to zero. So so the yel creve gets demonstrably positively sloped. Dennis Garment, too many themes here to talk about. We never even got to gold.

What we're gonna do is get Mr Garment back on, folks in the coming days to speak to us about to shift in his gold call. He has been hugely tessful with golden Yen and golden Euro and he's made an important sea change there and we're gonna get him on. I promise you we're gonna get him on in the coming days. With this new slow just too hard to get to that call today, Dennis Gartman, thank you so much, of course, the legendary Gartman letter. 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.