Surveillance: Optimistic Outlook With Kostin

of you on radio and television. To people in the trenches, that would be the Lieutenant Governor of the Empire State, Kathy Hukel joins us this morning. Kathy, if you read the Buffalo News, it's writing your face. It's right in our face nationwide. What is the best practice now for politicians to contain the great hospitalization we're seeing? Well, we have a strategy, Tom, and thank you everyone for having back on this once again Western New York where I

live Erie County, Buffalo. We now have a nine point four percent infection rate, and then from just two and a half three percent of a month ago. So I want to just point out first of all these numbers can viral out of controls very quickly, and what that does, it's an infection rate that leads to an increased number of hospitalizations. And that is our greatest fear. Governor Culma and I have said this from the beginning. Our fear

is overwhelming the hospital system. So what we're doing is first of all calling back retired nurses and doctors, asking them to enlist again and help us in this battle, but also asking every single hospital to ensure that they have surge capacity. We had to do this in the spring. We know how it's done, and we can do this once again. Thirdly, we also want to make sure they have enough protective equipment. Remember how frightening it was back when March and April we were scouring the planet in

search of something as simple as a mask. We couldn't get them from anywhere. So we're making sure they have those supplies. But what something we can't control, which is very frightening, the staffing. The staffing. Now, these are individuals who have been in this battle and the front minds of the terrific war for month. They're exhausted, many of them are sick themselves. May them don't want to expose their family members any longer, and that is where we're

having a real crisis point. And early on we were able to enlist thirty thousand people from across the country who volunteered their time to come to the epicenter of the pandemic, New York City. Those people are now needed in their homes in North Dakota, doth Dakota, and Oklahoma, places where it's surging there as well. So that's what we're concerned about. We can create enough beds, we can put up field hospitals if we have to, but we

have to make sure that they're properly staffed. That's the incredible stress on the health care system that we're seeing across the nation and increasingly yet again in New York. From the financial perspective, there is a question of how much money is needed, how soon. And I know you've come the show quite a bit and talked about the

needs financially for New York State. Mitch McConnell currently putting out a bill, a skinny bill to get done before the end of the year that would not include funding for our for your government in New York State or other local governments. My question is how eminently do you need that money. If you do not get it before the end of the year, what gets cut first. We needed this money yesterday. And I don't still do not understand the life of me how Mitch McConnell and the

Center Republicans can be so stinny. This is a once in a year event. It is global pandemic. And I don't even know how they think we're going to get the vaccination. About how they're going to get the vaccine is the stupid If they don't give us money, they're they're being The governor is governor Promo is head of the National Governor's Associations, a bipartisan group. Yesterday they sent a letter thing to the Settle government. We need money to be able to distribute. You're not going to do

it nationwide. Okay, fine, you didn't help us with the testing. You left us on our own throughout this entire pandemic. You have to give us money to make up for the loss in revenues and the way we've been having extraordinary expenses. So, Lisa, I don't I'm not going to stay here. What has to be cut. All I know is it's not acceptable and everyone should be railing to convince the Republicans and bitch mcconnells do this for this country. If we don't get this crisis under control, our economy

is going to implode. Conversely, if we can wrap our arms around this, get enough money to the states like New York so we can have mass vaccination as soon as it's humanly possible, we can super charge our economy once again, and that's what everyone wants. Lustening government. A couple of things to unpack here. One are you saying that without state aid from the federal level, you can't

distribute this vaccine. No, I didn't say that. I'm just saying that we definitely need money to have a robust, aggressive plan. We will do it. This is New York, we'll figure it out. We are left on our own throughout this entire pandemic. Is unfortunate and it never should have been that way. We should have had a national response to this crisis, but we didn't. Failure of the battle government, failure of the Trump administration. So we're the

governor and I've been working on this. We're ready for this. We can handle this, but it's going to be very expensive to get this vaccination out to student, to literally twenty million people, not once, but twice. And that's the challenge that we're facing. So the reality is, if you want to keep funding we want to keep paying for health care workers and people who do that, we need

money from the Settle government. We need their help. I understand you waging lead the McConnell to come to the table. Have you urged speaking belows you to do the same thing, who for many people is perhaps aiming a little bit too high, particularly over the last couple of months going into the election. I don't know what is too high during a global pandemic. These are extraordinary costs. We're not

asking them to help us balance our annual budget. We've had to incur costs that no one ever could have foreseen when they did their budgeting. And now it's not just the Blue states. Never Mitch McConnell said, why will we bail out the Blue states meaning New York, California, Connecticut, New Jersey. Now it is a national phenomenon and we need them to assist every state because this is going

to hold back our economy. And one of the problems we have is that small businesses in particular, and I toured the southern tier west of New York yesterday to visit small businesses. They are barely clinging on for life, and the programs that helped them before, the unemployment program from the Settle government that assisted businesses as well business owners as well as for their employees. That's all going to expire in another within weeks. When that money's gone.

Who do you think is going to be doing the consumer consumer purchasing. We need to keep our economy going. It's going to all dry up. Cathey, we always appreciate you dropping by. We appreciate it. Thank you time this morning, Cathee. How cool that New York's lieutenant governor We're not. Julie Norman joins us. She's a U cell in London, expert on all sorts of issues of distress in politics, and one of that is one of those, I should say, is their study of activism. Professor no Norman, thank you

for joining us on the president elect. Liberals. I guess they're called progressives now, but I like the word liberals better. And then this idea of activism, what is the activism this president will face? We so m I think that's a really good question. I think that will see different kinds of pressures on Biden from both the left and the right. We know that there will be, um, you know, pressure on Biden to move forward on campaign promises that

he made regarding racial justice and addressing entrenched inequalities. And I think a lot of that will take the form of more positive activism the sense of like political pressure. But we'll certainly get some other kinds of pressure from the left as well, which we've already seen in some comments in response to his nominees so far. But I do think he has a very pragmatic team and place. Um He's putting in a lot of people who resonate with UM an individual kind of across the spectrum. So

we'll see what kind of mode that takes. There's a Washington word pragmatic in one way, Will moderate Democrats be pragmatic pragmatic with their more boisterous brethren. Yeah, Well, I think it's just going to be what actually what the Biden administration is actually able to do. We know that they will most likely be somewhat constrained to a more moderate agenda, as it is with with looking like a

most most like Republican Congress. UM. If they are, however, able to give some nods to some issues on the progressive agenda. I think one area will they'll have the most ability to do that is with climate change. We've already saw the seen Biden a point John Terry is a new climates are um. He will most likely use executive action to unwind some of the regulations that Trump

put a stop in regards to the environment. So I think so do it he can in some areas that really are important to the progressives in the party, but it's also clear that he probably won't move as far in other areas that someone the left would want, and perhaps that includes China, although this has been a pipe artisan issue. We saw the New York Times interview with Thomas Friedman with President elect Joe Biden talking about he does not plan to roll back the tariffs on China

in short order. His first order of affairs will be to re establish the ties with allies. What would the United Front look like when it comes to tackling the China issue as they define it? Yeah, wells, I think this is the area where we won't see as much of their real substantive policy shift as much as just

the shift in style. The Bien administration will most likely maintain a somewhat tough on China approach, especially in regards to issues like secure city and technology, but they will be some room open for engagement again on issues like climate change, again on issues like trade, and also doing so in a way that's much more cooperative with allies, especially European allies, rather than just an American first approach or a bullying or strong arm not strong arming of

other countries. Professor, we're talking about policy in the future. Obviously, the President elect is putting together his candidate, putting together his cabinet, and I think we're all happy to see a smooth transition starting to form going into one. But when the president elect starts talking about policy in the here and now set by officials in the Lane duck session, do you think, Professor, that helps the formulation of policy or hinders it. Well, I think this is a challenge

right now for Biden. He obviously wants to weigh in on the big crisis facing Americans right now, the economic crisis and the pandemic, of course, but he has to do so in a way that not only me non pinging too far in the current administration, but also on his own democratic colleagues in Congress. Um, you know we saw yesterday even the bipartisan framework that was put forward, there was some pushback to that from both Republicans and Democrats in other areas of leadership in Congress. But that

was kind of stepping on toads negotiations. But I think the bottom line is that for Biden and for others who just want to see some real changes on these issues, they don't mind that pressure going forward, and they don't mind kind of having a stronger vote in that, even if it's a little bit um, even if it's seen as pressure by other on their own parties. Professor, appreciate your perspective, Jillie Norman that University of College London, professor.

What's great about David Constant is not the Brown University acuity. What's great about him as he writes precise research notes that actually, as an adult used to do looks out one two in three years, you know you're is what you need to know. Blended in one to three years out is a constant twenty six percent lift to this market. He is a golden sex David, good morning. I love how you go out to two thousand, twenty two and you get us out. I think it's sp X forty.

How do we get there? Well, I get there a couple of ways. You get there to around thirty seven hundred at the end of this year. Uh, you get there are forty three hundred at the end of twenty one, and then you get to forty six hundred at the end of two. So that's the path and sort of what are the building blocks behind it? Well, basically, you've got an economy that's getting better, you have earnings that are growing, and you have the rates that they are

staying super low. I mean, those are the three building box. It's not so so brilliant. And it's also the tina trade. What is the alternative? What are the all what else is there that that that's out there? And equities becomes the defaults opportunity. So I want to think about the following way, Uh, Tom, break the market into two pieces. Let's take the five big stocks that are almost a quarter of the market, and let's take together sevent the market.

Those big five stocks, their sales we're up eighteen percent this year, sales for everything else down five percent. So it explains why these stocks were up around fifty percent year today, So they had a great year. We understand that we're looking forward. What's the what's the path forward. These companies are expected to have revenue growth each of the next couple of years of around fifteen percent, So that's kind of part of your leg going forward, Tom.

And the second part, if you think of the other four hundred and stocks, they're expected to have around six percent revenue growth top line sales growth of each of the next couple of years. So that's basically the story is about an economy that's getting better, coming off the pandemic of crisis low and generally getting better. The fed on hold that is our our general assumptions, the vaccination of half HERD immunity by May of next year. All that is to the positive, and I think the market

is recognizing that and we'll continue to do so. It just sounds like a multiple story. But when I taught you and when I read your research, it's not just about the multiple story. It's about better earnings that you're looking for and above consensus earnings. To David, we walk me through why why you're a little bit more constructive than maybe the consensus is at the moment on earning specifically, So if we look at the earnings, uh, Jonathan, it's

a good's a good question. So the consensus expectation it's around one hundred sixty five dollars of SMP five hundred earnings next year one, and we're at a hundred and seventy five dollars. You know what explains that, Well, part of it is a better economic backdrop. We've got GDP growth something around five the consensus expectations of forty nine economists and the Blueship forecast around three point eight percent,

so that's a higher level of activity. There's not much inflation out there, inflation under control, so that's basically allowing companies to have that broader level of of earnings growth with not a lot of a lot of pressure on input costs. So that's your basic Your margins are basically

part of that's recovery. And so those your two you your billion box as we see it in our models, and the Fed has made it very clear in our view that they're on hold for next three years at least, perhaps as long as five years based on the economics forecast, and so that's a pretty benign backdrop. It's a good

backdrop for the equity market. And when you think about the asset allocators, the portfolio managers out there, around fifty percent of the assets are allocated to equities, about twenty little, little little less than twenty to bonds. So what's the alternative cash is offering zero and so that's a still an attractive place for for the equity market. Jompan, that's the index story beautifully, I doubt going out to let's talk about a second level story now the other whites

and a mix for Goldman. Industrious Material has had a lot about that. The cyclical trade of the last month, that's played out wonderfully for so many people who had it on You stand avoid information technology, why divid Jonathan, I wanted you to think about it three ways. I want to think about growth, I want to think about value, and you want to think about cyclicals. The growth story is basically duration equity duration, those longer term cash flows

at the zero lower bound. Those growth in mostly technology is prized, that's worth a lot and they're likely outperformed. You have value. The best value absolutely is in healthcare. They are the cheapest relative to the market in forty years. You got to go back to when when early uh Clinton administration, when they were trying to restructure part of healthcare, look at the Obamacare period of time and ten years ago.

Those are the only times that were similar. And actually the valuation of healthcare is even more attractive than either of those two times. So that's your value trade and your value opportunity. And then the cyclical recovery, of course, is the pandemic relief coming from the vaccinations that we are assuming and some of the industrial companies likely to benefit. So I think that's your three pronged approach to kind

of attacking the market. I think the other areas the market likely to do less well, financials, challenge of the flat yokur, energy still under a lot of pressure, consumer staples, utilities, some of those other areas will be challenge. But those

are the ways that I would break that down. So what I'm hearing from you, David is potentially adding on to what Andrew Slimmon's and Morgan Stanley said earlier, which is perhaps the rally in some of the highest beta cyclical stocks, the travel sectors, the financials areas that have gotten beaten up disproportionately during the pandemic that that perhaps has gotten a little ahead of itself. Is that accurate?

I would say certainly on the on the way you just I would I would sort of break apart your question there at leasta, And since the financials I think have a challenging headwinds in terms of the very flat YO curve, the fact that there's big reserves that need to be taken for the uncertainty on potential defaults from the consumer as well commercial side, the Federal Reserve has

made regulations difficult to actually raise dividends. They're basically one of the most of the banks limited to prohibited from buying back stock at this juncture. So those are some of the key drivers historically that have been benefiting financials when the when those are in play, and they're not there right now. On the industrial side, UH, the idea of vaccination, you know, does offer some better opportunity for some of the travel sector and some of those industrial categories.

I might point to some of the UH, some of the aerospace defense companies as well. I think the way to think about value opportunities is to look at the one and two level of profits and compare those with the pre pandemic level of profits in two thousand nineteen to kind of make that comparison, and for the overall market you'll be a little bit higher. Maybe you're about seven percent higher. That's our estimates, seven percent higher between two thousand nineteen and kind of go out to two

thousand twenty one. But you've got other areas. Some areas we've got really depressed level of profits. Maybe they're fifty six as much as you had two years ago. I think that's the opportunity for a normalization. So that's where the value look at. We look at there and see some of the travel and the hospitality area, you know they would fall into that into that category. Last, I want to pick up on one thing you said earlier.

You were mentioning about credit and kind of what's happening on the The equity market is telling a slightly uh different story from the credit market, because if you look at the strongest balance sheet companies, they're up twenty six percent year to date a portfolio of those, you compare that with a weak Balanti portfolio they're down one percent and that sector neutral. So that's not gonna e skew

towards any one particular area. Yes, you're paying thirty five times for a strong boundary and you're paying thirteen times for a weaker balunty portfolio. But that's telling us that portfolio managers are not totally embracing the idea that the economy is solely recovering. And then we're sort of in the clear, and so you're seeing pockets of opportunity. And I would say, if you have a view that the you know, there's a path towards normalization, some of the

weaker balancie companies would be attractive at this juncture. And they tend to be a cluster around some of the pandemic you know, companies that hurt most in the pandemic. And David, you always make it sounds so easy the past. It's great to catch up. So as always they have a custom that of government sacks, thank you right now on the domestic economy, and John mentions a DP today, claims tomorrow then on to job today and Friday will go beneath the headline numbers here on radio and television.

At a thirty, Michael Faroli joins with JP Morgan, who was definitive a number of years ago, and calculating a shocking statistic for our potential g d P. Michael, before a job's discussion, do you have to reset your analysis of potential GDP after a pandemic? So, I think that's a difficult question. There are certainly aspects of the recent economic environment that would cause one to think that potential

GDP growth may be slower. That said, we've seen a nice recovery in capital spending, so capital formation maybe holding in pretty well here. But I think in the long run, just given the demographic trends, potential is probably gonna be inching down in a little bit every couple of years, just given slower growth in the labor force. And that's just due to long run demographics, not necessarily short run up and downs that we've seen over the course of this year. So what's the run rate on non farm

payrolls of Great shock? Pre pandemic was to see such good non farm payrolls over time? What's your new run rate on NFP? So, uh, when we get back to a normalized state of the world, which could be many years from now, we think it should be under one thousand, which is to say, the number of jobs created just to absorb new entrants into the labor force. So I

think the days. Uh, you know when we grew up when it was two hundred plus that we considered to be a normal runway runway, our way are far behind us. So we are up against a fiscal cliff, and a number of people have come on and talked about this, this idea that some of the unemployment benefits are running out and will expire in the next couple of weeks. How big of a gap is there in your expectations for growth with an extension and without an extension of

those benefits. So the fiscal cliff in terms of jobless benefits at the end of the year, we don't think will be anywhere nearest severe as the one we saw um in August when when the six dollar weekly federal pandemic unemployment compensation payments ran Now, so what's at stake here is two programs. Pandemic Unemployment Assistance which is for gig workers and other types of employees who don't don't normally qualify for benefits, and then this other program which

is called peu CE. Most of the peu CE people will actually graduate into state extended benefit program. So it's really uh people on pe way and they were scheduled only at nine months of benefits anyway, So so there will be a hit here. I don't think it's going to be nearly a severe, as I said, as what we saw over the summer, but certainly something we believe

will be a priority in any UH stimulus tours. Certainly we saw that in a bipartisan proposal yesterday, as as it should be, of course, and this is certainly extended benefits like PUC or something that the government has instituted in almost every recession in the post work period. Michael, just to turn to the I M that came out in the last twenty four hours, I think a lot of people walked away from that a bit confused. The number looked great, then the employment component was really really soft.

And this quote came from them. Companies and supply continue to operate in reconfigured factories, but absentee is um. Short term shutdowns to sanitized facilities and difficulties in returning and hiring workers are causing strengths that will likely limit future manufacturing growth potential. What do you think about that quote that right there, Michael, is that's something that resonates with you about the prospects for the labor market in the net.

So certainly there were some concerns when we had getting back to the other question, when we had those six hundred dollar weekly uh bonus payments, that that was hindering the return of the workforce. But with those behind us, we haven't been hearing as many anecdotes, so I agree that it was a little bit um confusing those uh the comments and that that reading and generally, uh, you know.

One thing I would say is is it's been a little bit confusing how strong manufacturing employment has actually been over the past few years. And actually we've seen manufacturing productivity go down, which is pretty odd because this is a sector where generally we expect high productivity. So I think over time we should come to expect slower manufacturing employment growth. I wouldn't, though, expect it all to happen

in one month. Like I sent my prahas suggest Well, Michael, do you think it makes it difficult to get a read on payrolls this Friday given what we heard yesterday? Well, I think it was difficult even before yesterday. We were getting, you know, differing signals from a number of things we normally look at, and I think the consensus the Bloomberg poll was somewhere between minus a hundred plus seven or

eight hundreds. Quite a wide range there. Hopefully the ADP this morning is UM somewhat correct and saying that it's sort of in the middle of that range. But I think even before the I S M calling this Friday's number has been a little trickier, certainly than normally years. Michael John Herman of m U f G has a great grid this morning showing his relative optimism even though he's got a negative statistic on G d P, and then the street and the I, M F, O, E, C D and all the others as well. Is a

general statement this December, are we too gloomy? I think it depends whether you're talking about the very near term or whether you're talking about the medium term. UH. Through the medium term, I say, I would say UM prospects are looking pretty good, certainly given all the news on

the vaccines, which everyone, all the viewers are aware of. UH. If we get something like the bipartisan UH stimulus deal combined with the vaccines, I think we could be set up for a very strong one, particularly as we get

into the spring months. But if you're talking about the very near term, I think we could be in for some pretty pretty rough months, particularly December January, given given the surgeon, the virus, the presumptive surge following the Thanksgiving holiday, and what that could mean for activity, particularly in consumer services. So if you just have a very short term view, I think there are certainly reasons for gloom. I think if you look beyond a few months, I'm quite optimistic

on prospects through the US account. So Thomas just trolling me at this point saying are we too gloomy and then having you weigh in on it. Michael, I do wonder though, when you talk about how it's going to be very difficult in your term. We keep talking to people about the potential for scarring, and there's a question of how much people are adequately accounting for this in their models for the future beyond the next couple of months. Where are the pitfalls in terms of what people are

pricing in? In other words, is their weakness that's going to be more persistent have longer lasting scars than perhaps people are accounting for. So I think this gets back to somewhat to Tom's question about potential GDP grood. So there certainly will be some scarring. I think the extent is so far the indicators are looking I would say

relative to expectations, and in saying March or April. When it comes to things like permanent unemployment, are people who consider themselves permanently unemployed as a share of the overall pool of unemployed individuals that's actually not moved up as much as certainly I here, uh there, We're still a little depressed on labor force participation. I think if we have strong growth next year, we can hope to bring

those people back into the labor market. H But I think there are reasons to to say the jury is still out. But what I would say is, yes, there will be scarring. The degree might be less than certainly than I have feared since or seven once ago. Michael grig to catch up as always Marca Ferrati, that of Jack P. Mrgan and looking ahead to payrolls Friday. 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