Surveillance: London After Lockdown With Khan

of the London economy. What he knows is the United Kingdom celebrates something America can't do, which is the return of Premier League football. His beloved Liverpool will go out in the field, no doubt, with pay cuts involved for all the players. But it's so grim and his London. The Mayor has taken a pay cut to signify to the United Kingdom the urgent need for revenues. It is a story sory for America as well. Mayorica, and thank you so much for joining us today. How urgent is

it the Prime Minister Johnson assist your great city. It's really important. It's a pleasure to join you and Lisa and Bloomberg TV, but it's really important the governments across the globe, including my country, understand that the recession we're facing could very soon turn into a depression, and that's why we need an active industrial strategy as we come

out of lockdown. And although the government has actually been pretty good in helping businesses in relation to staff being furloughed, they've been pretty good in the short term, they need to realize that as businesses come out of the lockdown, they need additional assistance as well. I'll give you two examples, Tom. Many public authorities have lost their tax basis from people who used to pay what we call council tax now

in their jobs not paying those tax is. But also businesses who used to pay business rates have stopped paying business rates because their businesses have basically been incubated for the last three months. That means, you know, governments haven't Municipal governments haven't got the funds to provide services. So

I've led by example taken a pack up. But we need the government to step in for the medium to long term to support not just municipal governments but businesses too, and I think governments across the globe will have to do this. I'm reading wolf Hall right now, Mervin King and I are rereading this Magisterial Hillary Mantell book, and it's the spirit of London Mayor in a trading environment of the sixteenth century, tell us about the need to

reopen trade to London and goods and services. How critical is it to get the euros start back. How critical is it to get the airlines up and running again.

It's crucial. I mean. One of the reasons why I say this, and I know you're speaking to me from New York, but you'll forgive me Learning is the greatest city in the world is because of the people who come to our city who make our city great, the students, the tourists, the investors, their businesses, their sports fan and that stopped over the last four months, and we need that to return. I'm very concerned that as the new

academic year begins, many undergraduates may not come. I'm very concerned those who are multinationals who have stopped sending their staff here maybe risk averse to come in here. I'm very concerned some of our world leading theaters, which have been closed for the last four months, may not reopen until next year. And you'll know, the world is a smaller place now. Globalization has some disadvantages, but many advantages, and our strength is our diversity, and that comes from

our visitors and as part of our DNA. And it's really important we safely safely open our doors again to visitors, to businesses and to investors, because we want to return to not business as usual. But I think a new normality will be recognized that actually, what this pandemic has done is shut a spotlight on the fragility of society and of our business model, and we need to make sure the new normal addresses those issues. American I will say that our colleague Jonathan Faroe reminds us of the

pre eminence of London on a regular basis. I do wonder going forward about some of the social unrest that we're seeing in the biggest cities around the world, with Black Lives Matters protests in London that have been ongoing, and I'm wondering how this complicates issues that you've been calling for more police at a time with lower budgets and a time with increasing pressure on that presence. How

do you go forward here? You know the thing, I'm not sure if your American viewers realized this, but the brutal killing of George Floyd didn't just have an impact in Minnesota, Minneapolis and the USA, an impact around the world, And if you're a black Londoner you could relate to the awful way George Floyd was killed, but also black people across the world could because they endure racism, discrimination

and inequality. So although I fully support the Black Lives the Black Lives Matter movement, my concern has being that during a global pandemic, when you're asking people to keep their social distance, we're asking people to stay at home where they can. What they shouldn't be doing is protesting as they are allowed to do, because that may inadvertently

lead to the virus spreading. But separately, you're rightly so this is highlighted that actually, even in London, the most progressive city in the world, there's racism against black people, discrimination against black people, and inequality faced by black people. And those of us in positions of parent influence can't be tone deaf to that. We've got to understand that, empathize with that, but also take steps to address that.

This is a moment which I think we'd kick ourselves if we didn't take advantage of to address the structural racism that's that exist around the world in black people now too much to talk about American We truly look forward to seeing you when we revisit London soon and again a city con the Mayor of London. Right now, we have good news and that is Torsten Slock of

Deutsche Bank. He and Peter Hooper have been doing absolutely spectacular work on a global basis, thinking about where we are and thinking about the ramifications of all these actions by central banks. And one of them is is overused word zombie, the idea of a zombie company, a zombie nation,

or even a zombie global economy. Dr Slack joins us this morning, Torston Slack, what is the Deutsche Bank distinction when you address the word zombie is the definition of a zombie company is a company that simply has so much depth, so much leverage, that they do not have enough profits to pay for the debt servicing costs. And the problem is that since the Finanti crisis without NADA nine, we're interest rates were very low and zero. It incentivized

the corporate sectors to go out and borrow. It incentivized an increase in leverage across the non financial corporate sector. So the consequence was that pet levels have gone up for the last ten years. And this was the problem even before the pandemic arrived here in March. And therefore, what was the answer from the pandemic once the virus

came from pology Megan sydemic. Well, the answer was that when when that was no cash flow coming into the corporate sector, it was substituted by more debt, by more loans in i G. High yields across the board, commercial paper. And therefore we have just magnified some of these problems that we already had with a significant yf the economy being something companies even before the virus came along in March. Okay, but tourist to its stempre terian, we've got to clear

the markets. Are we just simply afraid to go bankrupt? So, I mean, the problem here is that the BIS started looking at this a few years ago and we have simply just updated what they have done. If you look at the number of listed companies on exchanges in the U it's not about eight thousand companies. And look at the share of those that have higher depth servicing costs than they have profits and here processes profits before interest payments.

That means that the interest coveras ratio for those companies

is below one. Well, that share has now gone up, so that of all listed companies do now have that are now in a situate they're not able to service their death And this is of course something that becomes more problematic because the bigger share you have of companies that don't have enough revenue, the more it would actually hold down the potential growth rate in economy, the more it will weigh on the outlook for the economy and long run welfare and long run limits of standards of

living over the next few years. Sosten, This is the key question whether we are sacrificing longer term higher growth, higher productivity for stability now in the near term. And as we repeat that again and again and again every time we come across a contraction, a pant a, make a recession, whatever it might be, does it make it more difficult to make the opposite decision. That's exactly right, John, It's a trade off between the short run. Of course,

everything that fit did was correct. They did save the financial system, they did stabilize financial markets that have made sure that we don't have this significant amount of volatility intervelence. We had in much, but it has come with a number of side effects, and one side effect is exactly

this issue that the lack of revenue. When the doors closed in corporate America and there were no dollars coming into the bottom line, companies turned around to borrowing markets and basically started borrowing in corporate I G. And high yields and commercial paper markets. And that was essentially magnifying a problem that we already had going into the virus. So you're absolutely right, this is increasing the share of companies. This is not only the US, this is also in Germany, France, UK,

around the world. The few of course, is that we will begin to look somewhat similar to Japan in the nine nineties, where you also had very high dead levels in the corporate sector. And this is the problem down the road that can companies survive these significant amounts of debtload, the significant amounts of leverage that we now have that are being magnified accelerated upwards because of the response from

the pharaohs. There's an irony baked in here. Tourist in or the more that are surprises are kept up and these companies are kept afloat with respect to higher debt loads, the more people can have confidence in investing in these even though growth is slowing. Do you expect that paradigm to continue, for these zombies to be kept alive and not allowed to go bankrupt period full stop? To Tom's point, allowing the asset prices to continue to climb despite the

lack of growth, You're right, Lea. I mean, think about the FATS response to what has sort of trickered the lift in the share of companies that are zombies or they don't have enough revenue to pay for the interest statements that was triggered by low interest rates. And now not only do we again have low interest rates, but we actually also have the FAT actively buying I G

and buying phone angels. And what does that mean. That means that they have also incentivized even furthermore credit extension and more leverage increase in the corporate sector. And of course you're non financials in particular have therefore resolved the problem with the lack of revenue by adding on mode. So somewhat ironically, we have exactly as Jonger said, We've

been making some trade halls. In the short run, we're stabilizing things, but we still have this very important problem that we need to look at the fundamental structure of the corporate sector. And again the comparisons with Japan. Before it was all about inflation, and that's of course also still a debate, but now they're more parallels with Japan

that are coming into the radar screen. That becomes very important for investors to your thinking about is it all starts in the SUP or all list stocks in the US that needs to go up, or are there very important sector differences in terms of this leverage increase that we have seen in some Texas and not another toast And this is not capitalism. We should not pretend it is. What is this So I would say, I know this might sound very academic, but I would say this is

interfering with the process of creative destruction. I mean creative destruction is of course that some companies go under. Some company is open up every day on a normal day, that's about one thousand, six hundred companies in the U S that go out of business. And if you have one thousand, six hundred companies that go out of business

every day in the US. Now that artificially i G spreads have been narrowed and also, credit spreads have been narrowed and the cost of capital have been lowered, which makes complete sense from a business side perspective. That's just beginning to open up a lot of questions. What does this mean for the process of creative instructions of companies give starting and companies going on too, And what does that mean then how we think about how dynamic the

US economy normally is. It's already the most dynamic economy in the world, is able to generate a lot of growth and innovestative ideas and products and ways of being much more productive and other countries. But the problem is here that now, well, how is that process actually looking

going forward? If you shot me have a share and a rising share of the corporate sector that is just no longer able to do those significant increases and advances innovations and in productivity that we have been so used to for all these years. Tost and fascinating conversation on one that we are going to have to continue for a tome to com Tustin's look that of Deutsche Bank.

John you nicely framed that is the economics and maybe the financial discussion of a Morgan Stanley or other optimists that are out there, But then there is the reality of opening up and no one wants to open up with the agony that we've seen down south of large gatherings which maybe lead to potential infection. The Lieutenant Governor of the Empire State has provided leadership on this with her Governor Cuomo to open up in a responsible way.

Lieutenant Governor Kathy Hokel joins us this morning. Lieutenant Governor, I want you to give us one anecdote of what it's like to open up state that people in the bigger cities can understand. What is one of those tension points that's been instructive for you. Well, thank you for having me on the show again. And I have been all over upstate in person, Rochester down to Jamestown. I was in Look Tiny Only and yesterday, and I'll tell you what I see. I'm seeing business owners who understand

the gravity of the situation. They have been shut down, they've lost their income for three and a half months. In order to them to survive, they know that they need to first of all, create an environment that's safe, that you walk in the door, that you are six ft apart from other customers, that everybody wears the mask or you don't walk in the door, and there's disrespected on the counter shops. I've seen it everywhere. Because here's

where this is fast. We are all aligned in our interests, governments, those of us who have been leading this charge. Governor Cromo first of all, wants to make sure we get it right. The business owners want to get it right. They do not want to be in the news as being the next hot spot or being uh blown in by their employees or customers as being violators. So the public interests, the business interests, and the government interests are all aligned here to get it right. So I saw

countless examples walking down these streets. Business is proud to put up they're open for business signs and whilst me people back and they are being smart about it. And that's all it takes. This is not a complicated concept to doing what we've been doing while we've had this slow, well thought out, methodical reopening. And it works here. It works here, Lieutenant Governor. We hope it continues to work.

But you know, we all know the hard work of this state can be undone by failures out swear, what are you doing to protect New York from the outbreaks that we're seeing in other states across this country. Yeah, the irony of this is just incredible to consider that just a few months ago we're the epicenter of this pandemic, and other states for telling their residents not to come to New York. Or if you're a New Yorker driving the Floridas for your vacation, you were told you had

a quarantine for fourteen days. So it is extraordinary in the turnaround and the fact that we are now have the state with the lowest rate of in effective So, yes, we are concerned. The Governor addressed this yesterday when asked about what about places like Florida what we have in New York. It's a lot of New York residents have

gone to Florida that becomes Snowberg. I guess they're technically Florida residents then, but they come back to their summer homes uh in the city, the Long Island area or upstate. And unfortunately, we are starting to see paces where they're

bringing the virus now to us. And so the governor is weighing all his options to speaking to experts about what rights we have to protect us because we have suffered too long and we've come back on a long, slow road to get it right, and we're not going to take any steps backwards because of what's going on elsewhere. If we can, we can help it. You know, New

Yorkers cannot go through this twice. We will get through this because we're continuing to ask people to follow the social distinct, wear the mask, and we won't end up like the other states. They're literally putting a halt order on some of the reopenings and that's that's psychologically devastating and it's horrible for the economy. Lieutenant Governor, how close are we to having to actually cut services as a result of the budget deficits in New York State? It's

almost inevitable. I mean, the only life time that we're waiting for is have Congress and the President understand that you cannot have a full economic recovery in this nation without helping out states like New York there were the hardest hit. We are an economic engine that has to get some fuel back into us. And when we get that money and we get that assistance, which we believe should happen, and don't be playing politics. This is not the time to talk about red states and blue states.

We are an important entity and important part of the comeback for the nation, not just our state. So there would be cutbacks. The reality is there will be cutbacks if we don't get that support from the settle government. But the governor has had conversations with the President. We're speaking to our leaders in Congress, and we hope they get it that we all want this economy to come back. And I heard you speaking about, uh, you know that the ten year decline, and you know it's going to

take a long time, and it doesn't have to. We can come back much quicker and supports to settle government spending with revenues from New York since we already donor state. But we just need a little help during this time, and we expected to get it, Lieutenant Governor, very quickly. Here I had the clearest memory of the riots of nineteen sixty four in Rochester, New York. It has been a path with the courage of Nelson Rockefeller and others to provide for African Americans in this nation and in

this state. Are you going to see a national holiday off of what we saw from your governor a few days ago on Juneteenth, two thousand and twenty. I can only speak to what we're doing in the state of New York, but I will tell you many times, when New York leads, others follow, whether it's the lgbt Q rights, whether it's women's rights, whether it's maybe many of the civil rights initiatives, labor rights, environment rights, all those movements

started in New York. And I hope that the rest of the the nation will be aware of what we did in New York by finally giving the recognition that the African Americans deserved to have as part of an important part of their history, which was the Emancipation Proclamations finally being uh enacted and actually executed in Texas, which was

a two year hold up. This is I've marched in June Chief's Paris for the last twenty five years, and I'm so delighted to see a year after year, more people coming out, more people understanding this history and understanding that the root of racism goes back centuries and it's a time to right that wrong and have a have an acknowledgment of that dark part of our history, but also realizing that we can come into a brighter area era if we become cognizant of that history and why

that may still be the remnists of that are still affecting society today. Why there is systemic racism that goes back to that time. Kathy. I think we all hope we can make more progress. Fantastic to catch up with you, as always, Lieutenant Governor of New York, Kathy how called there on reopening at an important day for this nation. Let's bring in about Michael. This is this is someone that we know so well from our talk on the yield market and course on the show The Real Yield.

Look for that coming up soon, folks, Bloomberg Television. Bob Michael. Where is the yield? Bob Michael? When do I get a real yield back? I know it just seems to have been another one of these casualties of the crisis. I guess we'll know things are further returning to normal when it comes back, because by then all the value will have been squeezed out of the bond market. Well, you sound like you've become more constructive in the last

couple of weeks. Can you walk us through whether you have and why for sure we have and when we look at the overwhelming response by policy makers, both monetary and on the fiscal side. It's been dramatic. It's not just been a handful of developed markets. It's been in the emerging markets. In the last couple of days, you've had rate cuts out of Indonesia, You've had a rate cut out of Brazil. Uh, you had a rate cut out of Russia. I looked at where Brazil central bank

rates are there two and a quarter percent. That's where the US was a year ago. So the policymakers have no interest in watching the pandemic continue to shut down the global economy. They're doing everything they can. Is this a case if there is no alternative for you that you've got to put this money to work and need to return and the assets that he used to get a return on just down there anymore, Bob? Or is it something more constructive than that. Um, it's a combination

of both. I love Torsten. I was a little disappointed that in his list of zombies he didn't list the bond market, because that's where we're headed. Central banks are going to control the level of funding across the system, and it's not just front rates. With yeld curve control and unlimited amounts of quantitative ease, they can go across the curve and control the funding rate to their government, and then with purchases of credit, UH, they're controlling the

funding rate UH to the corporate world as well. And of course in the US you're also seeing it with household through toalth programs and other things. So there is a commitment to bring rates down ultra low across the system until we close the output gap, and that's years away. What's the playbook then for investment for investing in a zombie world at a zombie market, both bonds as well

as households and companies. Well, I think last time I was on, I said, I'm sure Tom has his Samuelson lying around, and I'm sure one of the laws in there was don't fight the Fed, and I'm not fighting the central banks or policy makers in aggregate. So rates are coming down, Uh, they've come down a lot. They're going to stay low for a while. We are going

to see an acceleration and growth. But until that acceleration materially closes the output gap and you start to see any inflationary pressure, you're not going to see any talk of of raising rates. UM. So I think what you do is you can continue to extend out into credit and you try to find UH companies and borrowers that can operate UH in a world and an economy that's that's running out a fraction of what it used to. Okay, Bob,

but this is critically important. And you mentioned Paul Samuels in it was a different economy, it was a different America. And the belief that's out there is your world is gains to the elite. How do we have our finance system give us gains that Paul Samuelson saw through the nineteen fifties and into the nineteen sixties for the good of society. Yeah, and and and this is one of

the the effects of the overwhelming monetary response. The initial reaction is to inflate asset prices, and of course the holders of assets are in the upper echelon of the economy, and it could widen the gap between the halves and the have not. I don't know that monetary officials could have or should have done anything better. As I said in the past, I think they should start shifting the narrative. And you're seeing that out of Christine Legarde and the e C. B which is what do you want us

to do? We're not the first policy response, we're the second policy response. The first policy response was for government officials to shut down their economy. Then we responded by lowering rates and creating liquidity and funding for the system. So we now have brought rates down to a level where public and private borrowers can do something with it as they recover. Let's see what they do with it. Focus your attention. There are companies going to borrow and

buy dock shares and raise dividends and make acquisitions? Or are they going to invest in cat bax? And how about on the government side, what are we doing there? Are we just going to pile up the deficit? Are we going to actually invest in healthcare and infrastructure? So I think the narrative needs to change a bit here, Bob. Perhaps the narrative needs to also change around the expected returns profile at a time when you've got a lot of pensions still shooting for that seven percent bogie? What

is an appropriate bogey right now? Given the interest rate environment, and given that strategy that you're just talking about investing companies that that can maneuver in a low growth world. Well, you're right that there are pension funds and their insurance companies that have long dated liabilities they have to match. And what's been interesting to me is the FED support of the curve has been in the front end, somewhat in the intermediate part of the curve, but they're dialing

down their purchases in the long end. So we're seeing three curves of and the law and to me looks as though it's being left to plan sponsors, so the pension funds and insurance companies to negotiate an acceptable rate with some of the borrowers in the market. So so long credit, I don't know that you're going to get seven and a half percent there. I think you're gonna be lucky to be able to book in in the

three area for an ongoing period of time. And I think that forces you to accept that everyone is committed to a recovery. UH. Other markets will continue to appreciate and this isn't the proper environment to de risk in UM so continue to hold the things that have a bit more upside, whether it's equities or privates or alternatives. And and of course that means an implicit face that policy makers will continue to get it right, Hey, Bob, and let's send with the important stuff, shall we. Sixty

is left on the clock. Can we get a score from you for this weekend for Liverpool Everton? Do you realize that Premier League football has shut down but the bond market has continued to operate. Now I'm a buyer of both those markets, so the anticipation has been mouth watering for me. I'm expecting three mail Liverpool. Bob Michael always appreciate it. Tom. Do you see how that worked there? When he switches away from the bond market he gets

to Liverpool, the energy just comes comes up a little bit. Yeah, I got erry. Nil. Folks were jargon free. Nil means zero like shut out. I think most people understand that. Tom. To be honest with you, Bob Michael, JP Morgan, Bob always fantastic to catch up with you. Lisa has got to get used to this. This is going to go on for the next couple of months. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews

on Apple Podcasts, SoundCloud, 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