Surveillance: Monetary Policy With William White

conversation with Meredith Sumter. She is with Eurasia Group and she joins us now with a huge scope on the Chinese language, of the media and the party in China. Meredith, what do you glean within the study of the Communist Party right now? How scared are they? How in control

are they? Great to be with you, Tom, I would say that the Communist Party is resolute, remains in control, and are working very hard to put out a narrative of success, even as we have both domestic Chinese on the ground as well as international experts beginning to poke hold um in the narratives that the leadership has put forth. Narrative.

There is a question about China's relationship with third world countries or developing nations, where you end up as with China is the biggest lender and the biggest provider of economic growth. How much has China lost cloud as it takes a harder line with some of these loans that have been secured by oil and other resources throughout the world.

How much cloud have they really lost or they actually gaining in terms of global leadership, Lisa, I would say that China is uniquely positioned as one of the few countries that is proactively giving aid. So while that aid is not without paul artists and not problematic, recipient countries are in need and they're going to take the resources from whence they are are coming. So coming out of this coronavirus at your Asia group, we think a lot about what the post world order is going to look like.

And for sure, the US is losing competence and is not going no longer going to be the power to which all countries turn. At the same time, we do expect that Chinese global influence will increase, But but this is not a leadership that is looking to lead the global order. They're just looking to lead China in China's own interests, and I think that's an important distinction. So they will be more influential, including over US allies and within international institutions, but no one is going to be

in a leadership position. And this is critical because this lack of global leadership is really what has allowed the virus to spread so rapidly and clearly across the world as it has this year. A lot a lot there.

Let's let's unpack a little bit of it and talk about some of the information wars that we have seen with China trying to uh sort of push the narrative that they've been ahead of this very transparent and actually very helpful of providing aid to Italy and to the U S and the form of respirators and masks, and the US claiming that China has not been forthcoming enough with the data. How does that factor into the post

coronavirus world order if at all? Lisa I would say that the lack of transparency is is something that many countries actually expect coming out of China, and the aid will problematic. At least there is some aid, so China

will continue to use that to its effect. But let's the risks that you raise your group identified at the beginning of this year are cap risks including with US China, are still in play, and most of them get significantly exacerbated by this level of stress on the international system.

The risks that are associated with coronavirus, while acute for many of the developed countries that we've seen in Europe and now the United States, they are going to be even worse for emerging markets, in some cases, threatening widespread social and political instability as well as large and lasting economic losses. Now China is an outlier there, and China will remain and a country that is looking to aid others,

and those countries are going to need that aid. So again it's not gonna be without politics or problems or problems at all, but these countries are going to be

in significant means. And it's unclear that the that international institutions or developed market economies that are uh hide up battling their own coronavirush and downward pressure on their own economies are going to be able to deliver differenty companies, think tanks, invest the committees that are asking themselves similar questions at the moment, and one of those questions is about the future and what the future looks like. As things have come back up again, the future relations between

the United States and China. I get the feeling that we're just sort of covering things up a little bit at the moment, making out that things are okay when they're not really okay. I'm wondering what this relationship looks like as we come out the other side. John, we see a significant risk of further deterioration in US China

ties not now love. But the most likely trajectory in our base case is for US and China that the two sides will do enough to keep that Phase one deal from collapsing, but certainly not much more, and no one's talking about Phase two. I think the leadership of both economies are just focused on getting through this year

and focusing on livelihoods of their respective populations. And in that I think China has been much more structural uh and it's it's approach in ensuring that the math layoffs that are threatening other developed market and student to be emergent market economies do not necessarily incur occur in China. The US may not come out so well, and a lot will depend upon how the virus continues to spread or not. By the time we reach late May or

early June, this year. It has been much more of a haphazard approach in the United States between the federal and state government as well as businesses sames that are the backbone of the U. S economy waiting to get the Trent middle of fiscal stimulus that was passed um in in Washington. That's going to be a critical watch point. Which of these two powers are going to come out more resilient with their with their domestic population, gamefully employed

and healthy enough to push their economies forward. Merit. It's one of the advantages here of being here in the surveillance studios. I got the surveillance library next to me, including the history of Todd's football, and I just pulled off the shelf. Henry Kissingers on China from a good nine years ago. He talks about the indestructible day is President g indestructible President. She is certainly the strongest leader since then, but I do not believe that the Chinese

people see him as indestructible. His strength is that there is no other obvious leader to take his place, no other obvious leaders to leave, and he continues to hold a command and control structure over the leading small groups over China's governing governance and authorities. That's his strength. Got to his strength. Not indestructible, but he certainly is in a solid position, regardless of some of the dings in China's armor that we're beginning to see over the last

couple of weeks. Meredith Sumters, thank you so much. With you raise your group. I can't bring in now another guest on place to say Gambrada Santos, JP Morgan US Management Global market strategists will be great to get you with us on the program. Let's talk about it show is we wait for him and how to speak in a couple of days time. The assessment so far the Federal Reserve seeing some science of success. Hi, good morning, Thank you John and Tom and Lisa. It's it's great

to be with you. Um so indeed, I do think that we can really say that this has been a federal Reserve that's been extremely proactive in terms of policy, extremely creative, and we are starting to see some signs of success when we look at the investment grade market, when we look at the treasury market, we are seeing some signs at the worst of the shreat in the financial plumbing is probably behind us. And we're now in

a phase of normalization. And that's really really important here because we don't indeed know exactly how long UM the pandemic will last. We don't know how long the social distancing measures will last. It's really important to have this comfort that the financial markets will work properly as we move through the next weeks and months. Garriella, this is

super important. If you do have the sort of diminishing of financial stress, can you just put your full faith in the Federal Reserve and the US government and governments around the world, in central banks and by risk, knowing that they will do whatever it takes to support markets and get us and get get the economy through this.

I wouldn't go so far that far least. I think it's it's a really important condition to make sure that the financial markets are working properly, but it's not a sufficient condition in terms of really being able to take on risk UM and there I think that's really the missing piece. There is much more around the trajectory of the virus. We are indeed seeing encouraging signs in places like Italy, saying, Germany, New York. But the issue is and something you were touching on earlier, which is okay.

When when the infection raided plateau, what do the next few months look like. I don't think we have a good grasp of that, and I think uptuently turning the activity off, you know, that was like a light swish, which fat. But turning it back on, that's going to be a dimmer. It's gonna be slow. That's what Asia is teaching us. Gabriel partition your clients. Some of them were in the markets, they went down, there was agony,

They feel pretty good, they've bounced back three days. How do you counsel those At one point picked up the phone and called JP Morgan and said, go to cash. What should those people do now in cash? Yes, indeed, Tom, we do have so many different types of clients, from institutional clients to retail clients all over the world. And you know, when when this first started, really our main focus was trying to understand the sources of volatility and

talk them through with our clients. At this point, we're still hearing two very different questions um, one from I would say more um the individual, a retail type of clients asking you know, I'm reading about all these scary numbers uh, tremendous amount of job losses, tremendous amount of

activity contraction, should I indeed be going to cash? And that's where we remind them that actually, because the market moves have been so violent over the past couple of months, portfolios have already due risk, right, They've reacted in advance, they have due risk. Actually, maybe there isn't anything that's needed to be done beyond looking beneath the surface and looking at the quality of companies we own. We also hear from a lot of other clients, and here I

would say mostly institutional clients. They are starting to think about the pass forward and are starting to ask when should I be adding risk? What kind of themes should I be thinking about? Now that this economic and market cycle has come to a close, what does the next

one look like? And that's where we've been having really interesting discussions around international For example, people been saying on the up, so we've really been trying to think about how the last decade um was of course a clear US, our performance, Europe, YEM Japan really lagging behind, and we've been thinking about actually how maybe the US might be one of the last countries out of this particular situation, both in terms of the control of the virus as

well as the path of the recovery. And so we've been thinking about how far ahead worth Asia is, how far ahead some countries in Europe are, and also the social safety net that Europe has, which is usually talked about as a concern, is actually something that's really going to be very valuable for speeding up the recovery here. When the time comes, Am I going to buy stodgy value Europe or are gonna? Am I going to buy the growthiness of America? Even if I think America socially

or fiscally is gonna be behind the eight ball. So I think it's a combination of both. I mean, technolog aology growth is not going away. If anything, this experience is even enhancing that um as we're all becoming tech experts. Um So I think I mean by no means it's tech over and and that's a big theme for the

US and for Asia. But I think that you know where a lot of clients have just completely thrown away value, completely thrown away Europe in parts of other parts of emerging markets, I think that's not such an easy call anymore. And if anything, maybe we bring it a bit closer to a neutral the growth and the value side, the

US and the international Gabriella. We're going to get some earnings reports starting next week, and by all accounts, we're not expecting to get much guidance, because how can you give guidance in this kind of scenario. What are you looking for that actually could be useful information from companies that are delivering their's first quarter reports. Yes, indeed, it is going to be tricky, and it has been tricky

already to calibrate earnings expectations up for this year. We have seen consent just moved down from what was ten percent grows at the beginning of January to about minus four um. But based on our models, if we just throw in the kind of economic contraction we expect, the dollar strength, the falling oil prices, all those variables, it really does look like we should be looking for an earning contraction this year of much closer to minus fifteen percent.

So there's still a ways there in terms of bringing consensus closer to reality. We are looking for some glimmers in the first quarter, but as you mentioned, unfortunately I don't think that we will be getting that guidance from companies exactly, because things are so uncertain, we need to see how activity resumes and evolve beyond mark beyond April. Well, maybe we'll evolve to this Thursday and try to get beyond April. Gabriel Asientos, thank you so much, JP Market

Asset Management. This is the economist, folks, that all the other economists really really listened to when he speaks and when he writes. Mario drag listens. William White was at the Bank of International Settlements at the O E c D. His seminal papers of two thousand and twelve on the history of economics are definitive. They are the papers I give undergraduates who say, help me get smarter. We're thrilled that William White could join us. Now, William White, what

does central banking look like after this pandemic? Well, I, UM,

I fear it's going to be more of the same. Uh. And when I say that, what I really mean is that every time, really for the last twenty or thirty years, when we've had a major problem or a problem that looks like it's lurking in the in the background, Uh, the answer has been print the money and UM I can understand why in the midst of crisis people do that, But this has been going on for such a wrong period of time that what I what I'm very fearful of is one that it won't have the desired effect

of restimulating the economy, and the two it leads to still more of the debt problems and financial instability problems that I think actually threatened our threatened our recovery going forward. So um, what's being done here in terms of reliquifying the markets is absolutely the right thing to do. But I hope they can find some way of renormalizing the

situation once the economy starts to recover. William, how do they go about doing that when they've just transferred so much more debt of its public sector balance sheets, the central bank balance sheet, the government's balance sheet. We've had this huge transfer of debt. Will they be able to back away from any of these measures? Well, the the central bank can back away to a degree in the measure that the economy does start turnaround and we do

start to get some growth. Uh, there's always the possibility

of sort of growing your way out of it. It's going to seek a significant period of time One of the things that I think it would be worthwhile for governments to do, although I know it's it's difficult for them to make credible commitments about the future, is to say that going forward, having um raised this level of government debt as a as a proportion of g d p UH to such high levels, that going forward they will no longer be following the asymmetric policies that they

followed in the past, which is to say, in the past they always responded with fiscal expansion in the downturn, but there was never anywhere near as much fiscal contraction in the upturn, and that a symmetry led to the

government debt ratcheting up and up. We actually do need a kind of a symmetry going forward, but it's a promise to do the asymmetry in the opposite direction, which is to try to ensure that over time, just as in a certain sense after the war, that over time there will be a gradual it will be the government

subjective to gradually reduce those debt ratios. Because um, as everybody's known, I mean from time immemorial, that having high debt ratios, whether in the public sector of the private sector, exposes you to all sorts of uh possible problems going forward. William This is true in theory, and yet in practice there hasn't been a huge problem that has stemmed from the high debt levels over the past decade. And a

lot of people have pointed to this. We haven't seen runaway inflation even as the US continues to print money, and rates have only gone lower. So what's to say that dynamic won't continue. Well, one thing, I think you're you're actually putting your your finger on on the right thing. The markets up until now have been real, have been remarkably incien, you know, unconcerned about increases in government debt.

And that is just a fact. So that when I sort of look forward and I think in terms of where's the room for maneuver here, there's more room for maneuver I think now on the fiscal side than on the monetary side. And I think even prior to the to the pandemic, there was a general agreement in the literature that we should be moving much more towards the use of the fiscal lever in downturns than the monetary lever um. But the market's patients is great but not infinite.

And you can see this for example. I mean we saw this during the European crisis, that you could get circumstances in which people would say, the market would say, as it said to Italy, uh no more. And it is not impossible that the same kind of thing could happen even for bigger countries. UM. We have seen many

examples throughout history. UM. And there's all sorts of empirical evidence and books written and whatever, these kinds of non linear processes where the government spends huge amounts of money, becomes very very highly indebted. Everything is fine until it isn't. And that's the kind of thing that I think we should be we should be careful of, so use the room for maneuver, but conscious that it it can't go

on forever. I will do this, William White. I will get out the August two thousand twelve paper out on social today, folks. It is the definitive economic history of central banking. William White, thank you so much, greatly appreciated. Let's get you back to that self story. Shall in the last four hours, equity markets in a better place, as the data suggest that perhaps we're seeing some signs of success after some of these big lug downs worldwide

and major cities. To continue the conversation on please to say that joining us now is Ron Temple, Last Asset Management, co head of multi Asset and head of US Equity as well and managing to direct it to a long, long, long long list from Ron Temple on his duties of Lazar Asset Management, Ron fantastic to happy, Happy, to catch up with you as well. Let's just start with the stocks that have been under pressure and many people were waiting for new cases to level off. We started to

see that in Europe and beyond. Do you need to see that or do you want to see evidence that this economy can reopen? Yeah, I think it's I think it's obviously positive we see cases level off. But I think there's a real balancing act here as it relates to the coronavirus and that if you get too much optimism, you know, not necessarily in the markets, but too much optimism and positive news out in the media, then does

that undermine the positive story itself? In other words, if people start to think, oh, the worst is behind us, I can start getting out of my house and go about my normal business. Didn't you might actually have that second wave of infection. So so I do agree with the comment earlier that we're flying blind to some degree because there's still a lot of unknowns around this virus and around how it will behave in warmer weather, whether

it will be a second wave. UM, it hasn't even really hit the emerging economies yet in terms of health, the health aspects of it. So I think there there are there are a lot of question marks that said. I mean, the market has sold off a lot, the US was down, and I think it's it's reasonable to expect bounces. UM. I guess where I'm a little concerned is again just trying to figure out how how do you baseline what the earnings hit will be and how long will that earnings have last? Is use of cash

going to be forever changed? I mean, the basic underpinning and all the different research pieces they share buy backs drift away. Do you buy that round temple? Now? I think share buy backs will come back, but I do think there's going to be some lasting changes coming out of this UM in terms of how companies think about husband in cash. I mean, I think we've pushed financial engineering to the limits in the last five years UH in terms of trying to goose earnings even when revenue

growth was pretty lackluster. And so I do think companies will think differently about how much liquidity they want on their balance sheet and access to liquidity through funding lines. So there may be be a bit more prudent approach or more conservative approach to liquidity management. But I don't think that's the end of share BIBAX. I also do think, by the way, the structure of supply chains is going

to change. It's interesting. Last night, the chair, CEO and president of Metronic put out a letter that I think was quite a good letter. But one anecdote they provided is that a single ventilator has fifteen hundred parts from a hundred suppliers in fourteen countries. I mean, when you start thinking about complexity of supply chains, we've always thought of that as a positive, but I don't wonder how many companies are going to be reevaluating that topic as well.

So there are these big, sort of big picture existential questions facing companies, and then there's the more immediate question that we're going to be asking next week when the second quote, when the first quarter earning season begins in earnest here in the United States, and that is can you make money in this envirol? Man, are you going to survive? What are you actually looking for ron at a time when the outlooks are going to be big question marks and shrug emojis from a lot of the

companies that are reporting. Yeah, well, I think I think first of all, you're gonna be looking at liquidity and the strength of balance sheets and making sure that companies have the funding they need in case this it does not end up being the bull case scenario. I mean, I do worry by the way that it seems there's an implicit view that this will all be over in a few months, um, which I worry about because to me, that's the bull case. So I'm gonna want to hear

from companies. Do they have access to funding, how strong is the balance sheet? What are they doing in terms of basically kind of hunkering down. The other thing I'm gonna want to hear is how are they create treating all of their stakeholders. I mean, how are they handling employees? Um? Are they basically trying to keep people on and basically

support them through this period? Of time, because let's not forget, by the way, the labor market was incredibly tight just a few months ago, and you don't want to be losing talented people because when the economy does real open and come back, UM, people are one of the key assets for all of these companies, so we're really being careful about watching how they handle employees and customers. ROLL.

Let's think about what this makes for markets. What we have seen over the last couple of weeks, as the high quality areas of the market, whether it's credit or equity, start to stabilize in facts, start to do a whole lot better in investment great credit here in the United States, What are the necessary conditions that you need to see materialize to see this rally broaden now, UM, I think you're going to have to basically see signs that we've well, I think about what we need to see to exit

this maybe is a different way to answer that we need to see much broader testing in the United States in particular. UM, so far, we've only tested about six thousand people per million, actually about fifty eight d per million people. That's half of what italyast tested, that the third of what Switzerland has done. So we need to get the testing outs. We know who's got the disease

even when they're not symptomatic. Number Two, we need a therapy in place so that people know that if they go back to work and they do get sick, that the severity of the illness won't be as bad as it has been and that death will be very unlikely. And then three, we need a continuation of the FED stimulus, and we need a continuation of fiscal stimulus. So so I think you're gonna it's gonna be several months before you want to move down that quality spectrum. And to

be clear, by the way, I generally favor quality. If you look through the cycle, higher quality companies tend to outperform. And when I say quality, I mean high returns on capital um. There is a part of every cycle where those lower quality companies do outperform and where you do want to go down the quality spectrum. I just think it's too early to make that call right now. I think we're a few months away from that at minimum run. On the balance, do you think people are too optimistic

or pessimistic here? On balance, I would say I think it's a little too optimistic around the healthcaret It's interesting. I've had conversations where people have suggested that that the financial crisis was more challenging than this. I think it's exactly the opposite. I think this is basically a healthcare crisis that becomes a financial crisis if mishandled. The good news is I think the central banks have been incredibly aggressive.

The Fed has actually grown it's balance sheet one point five seven trillion dollars in the last month, and that does not include two fifty billion dollars of mortgage back securities there's not yet settled. So effectively they put one point eight trillion dollars to work. That's more than they did in all of que one or two or three in you know, in their entirety um. And also, I think the federal government, although it fumbled the ball at

the beginning, the two trillion dollar stimulus is aggressive. So so on balance, I think people are too optimistic on the health care side, and that health care is going to drive when we can reopen the economy. UM. Where I think they might be not optimistic enough or not positive enough is what the central banks have done in particular, and how aggressively they've active, appreciate it's on this morning. Thank you very much for John I guess run temple

that of a lassa asset management. All the things we're doing here in this pandemic is we're taking advantage of the public health operation at the John's Opkins at Universities is a Bloomberg public health schools School of Public Health at John's Opkins and a course. We should say that Michael Bloomberg is the founder of our operation and owner of this television and radio station as well. It is

a much larger Johns Hopkins. And today we spoke with a gentleman from their economic division with a cute interest in finance at real estate. Here is Alessandro Rabucci. Our guy Johnson and me in conversation with Professor Rabucci. Emerging market have been it very hard by the initial phase of the crisis. We've seen massive outlaw capital, the most

emerging market repatriating in the United States. The college epidemic is just picking up in the emerging market as we know it lasts for about four months and the pickies for two months, and emerging market are much less capable of absorb the health dimension of the crisis. They will be put down that extreme strain and expect to see I'm sident to decline economic activity and possibly widespread financial damages. Professor,

you are a world authority in real estate. It's something maybe diffuse, it's out there, it's not something we really can touch. How is the leverage within the global real estate system? Are they exposed as other asset classes were exposed at the global level? Leverage in the real estate is not as diffuse and be as in the United States. Typically in emerging market real estate purchases takes place on a cash basis, so from that perspective, leverages in the

real estate is not necessarily the most important problem. However, research shows that impact individual community is affected by pandemic can be extremely long lasting. So a certain segments of megacities in the emerging market maybe particularly damage by their crisis. By their help they mentioned on the crisis itself, Alssandro can I talk a little bit about what is happening here in Europe. Um Italy finds itself in a very difficult situation. It's you can it's economy already uh, sort

of burned with a huge amount of debt. It's likely to take on significantly more what is your perception of the economic trajectory of Italy and whether or not its death is sustainable. Italy in a particularly difficult situation because it was already experiencing difficulty to recover from the gb of financial crisis. Effectively, itally never recovered from the grob of financial crisis and growth was permanently hit by that shock.

These new catastrophe would be extremely damaging for that and help he desperately needed needed from the European community, ideally from the rest of the international community. There is a lot of talk about options for financial rescue through European mechanets. I think it is the time to consider emergency help for international financial institution and chiefly the internectional money that is fun which helped other European economies during the financial crisis.

Professor Rubucci from the Department of Economics at the Johns Hopkins University, we thank him for his perspective today. 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