Surveillance: Political Pendulum With UCL's Klaas

catch up with you, sir. We'll start with a simple one, How on earth do you navigate the next twenty four hours for this market? I think with no great certainty. You know, we don't know who's going to win the election. I think that that it looks likely but Biden will win, not clear that the Democrats will take the Senate. And what's even less clear is what the markets immediate reaction will be. So you know, I'm still at the mindset there are certain things that seem to be happening globally.

Is a cyclical rebound in endurable goods um led by the US and Asia, and I think that will continue whoever wins the White House and pretty much everything else. I think you simply have to say you don't know, and deal with not knowing. That's where I wanted to go, Michael. I wanted to get a from you know, the domestic politics. We'll do that with some other good guests here this morning. Michael, I'm fascinated by what you think about e M in what seems to be ain't not a surge, but just

a resiliency and up to e M why is that occurring? Well, it's two stories. One is index composition. The the Emerging Market Index is now absolutely dominated by Asia, you know, particularly South Korea, Taiwan, China and obviously Chinese listed in Hong Kong UM. And you know, those countries are very the least affected large economies by COVID directly, so you

have stable domestic demand. Um. They also feed in you know, Healy into technology and heavy industrial activity, and and that remains the strongest part of the of the domestic of the domestic US economy. So you know, for various reasons this time around, e M is is something of a haven and the underlying currencies are strong. I heard your comments on the dollar. You know, I would say the dollar is less weak at ninety four rather than stronger

ninety four. But the currencies which have really been strong this year have been the Asian currencies. Um. And you know, you put all of that together, E M is A is a relatively safe place to be right now, Michael, what's more important for your investment thesis right now? The US election or the path of the virus? You know, I would save the latter, and I would say the

impact of the latter on demand for doable goods. Um. You know, because that has been as I say that the big plus of the last few months has been the resilience and in fact, lappily the acceleration of spending on doable goods in the face of a violence which has has has not been under control, certainly in the United States. Michael. What do you see in the high frequency data at the moment and do you think that should drive risk assets in the United States? You know,

I think it's less important than it was. I mean, the high frequency data told us in the springtime that the people were starting to you know, engage in you know, engage in commerce again. Um. You know, I think, you know, I don't think it's as important today. You know that there's the fluctuations that you see in something like restaurant usage. Um, you know, I think that that you know, I think that you have the point, but you do need a leap of faith to invest at this point in time.

I think you're entitled to say that the virus is not going to be conquered the foreseeable future, and the European economy is going to turn turtle and you're going to go super defensive. Yeah, I think that would be a mistake, or you're entitled to save. But we've come this far, and we've seen patterns of spending emerged from the virus that look to be resilient and look to be fairly long lasting. And you know, a narrow portfolio

that focuses on on on the positive. I hate to say the positives to the virus, um you probably makes sense going forward. I want to bring up a d x Y, folks. This is a really important series. This is basically Pacific RIM currencies, Asia currencies, UH less Japan is well on the chart. I hope we get it up. Here goes back to UH the beginning of UH the year and I I look Michael Scholl at a d x Y. That's not the right chart, Folks, will get it for you. Here in a bit, but it's basically

been a moonshot within that. What's the specificity in the Pacific room there? It is up we go off of the March low for those of you on radio, it's a moonshot from March straight up. On the Asian currency. Good morning, Michael Purvis, Michael Scholl. What is the specificity on the Pacific rim? I want to get granuel here? Do you buy big gap, do you buy consumer? What do you buy um? You know? You know, I think index level, career, Taiwan both, you know, both quite interesting.

And you know, I've always felt that the shares, for all of their faults, and they have many, many faults, are the only sort of true true diversifier of portfolios. Be a market does whatever it wants to do and doesn't pay a great deal of attention to the rest of you know, to the rest of the world. But I think high quality Korean and career and and and and Taiwan. You know, do make sense right now. Michael Shaw of Michael Field ASID Management. Michael, great to catch up,

Thank you very much. Part of the charm of Diana Amoa of JP Morgan is not only a UBS her early work on trading desk where she enjoyed the bid walking away, but as a manager of fixed income portfolio, she's a bit aware that if yield goes up, price goes down. We're thrilled to Diana could join us here this morning on the benchmark tenure Diana, I see since early August the price is declined three percent. That's a lot of coupon. How far are we from real price

decline in the barn market. Well, it really depends on what we get from these elections, UM, and then how things play out following that. In terms of US policy, UM, we have a range UM, so we had a range of point five to one percent on the tenure um over this quarter into year end, looking at various scenarios, various election outcomes. So we think that the most aggressive

end UM, so that would be a blue wave of outcome. UM. Initially we could get up to one percent, but to move significantly higher than that given the headwinds that we're facing with COVID cases rising globally, and you know, as you were discussing with Europe shutting down, UM, I think that's going to be really tough, Janna. When volativity is elevated cross asset and correlations, traditional correlations start to break down.

How much forced the risking takes place well in the in the in the heart of the moment, I think it depends on what kind of portfolios people have constructed and what expectations are UM. So it passed political shocks where we've had outcomes the one pricing by market. You certainly did see a significant amount of risking because markets were caught out either because polls were pointing to a

different outcome than what materialized. I'd say in this particular instance, what we're seeing actually is quite the opposite, where the polls seem to be consistently pointing to UM a specific outcome, but markets are reluctant price it. Maybe because of the experiences of twenty sixteen UM and bread fit, so I would expect in this instance UM the amount of the risking would be significantly less than what we've seen in

the past. Well, Diana, to build on which I was talking about Handing Kravis of KKR last week said I've been investing for over fifty years. I don't remember a time when I've seen such volatility as we see today. There seems to be ablieve that because as rates are so low, so close to the zero lower bound, that there is no haven and that people are are going to go to the same exit if there is some

sort of event that transpires. Is that a sense that you have that basically the only head right now is having extra cash to be able to respond to something. Well, extra cash is definitely something that markets already seem to hold. When you look at the m m F, a function of Bloomberg which we mentioned in the past, um a lot of cash went into money market funds that went from about three point six trillion four point eight at

the peak. It's still at four point three trillion, So there is a significant amount of cash already sitting in the sidelines. I'd say the frustration for investors who look at traditional sixty fourty portfolios is that treasuries haven't actually been acting as a hedge in this latest bout um of weakness. If you try and understand the logic behind it,

it makes sense. You know, aggressive fisical um is one thing that would actually need repricing of cars in the back end of the US as the as the Treasury comes to find that in the market. But a failure of that to materialize with impact equities. What investors need to think of is think of what else could act as balanting portfolios. UM. So I'm unfortunate that I started my career in a margin market. So it's I can think of several things in em that could work as

potential hedges on a downside scenario. UM. Looking at the option space in e M currencies could make sense into an event such as these as that has actually been working reasonably well UM in certain pairs. So it's not that it's impossible to construct portfolios, it's just that investors need to think beyond traditional hedges. Danna. We needed that

downside protection. Last week in Europe, that's for sure. Some headlines coming from Chancellor Mircle speaking at a news conference in Berlin saying the following Facing a difficult winter with an aggressive virus, sites are tripling of COVID nineteen patients and intensive care and tom. This has been the story across Europe, not just in German but in the northwest of this country as well. Overwhelming the health care system was the concern back in spring, and unfortunately in Europe

it's the concern all over again. Well, John, I'm called by this by outside my walk up in Manhattan to see the tents go up as they did in February Merchant April just outside Mount Sono. But to meet John. It is about hospitalization. I sided South Dakota, today's Sioux Falls with some serious hospitalization issues. What's it like for NHS and the United Kingdom? Difficult? The future hard and that's why the Prime ministers reacted the way it did

over the weekend. It was very localized Tom, as I say, in the northwest of the country and cities like Liverpool, and they were hoping that they have this multi tiered system to deal with different regions. Now the forecast coming from the advisors to the Prime Minister to suggesting that that could be something that doesn't just overwhelm a single region, but overwhelms the country. This is about making sure by the time we get to Christmas is not a whole

lot worse. The problem this minister has, Tom is that he was recommended by his advisers months ago, back in September, to have a two week circuit breaker, a two week lockdown to prevent us from getting to where we are now. He chose not to, and here we are the problem that many people in this country have is that if we're going to do another lockdown, what's the objective. What's

the objective. Is it to get back to where we were before and actually try this track and trace system again and open up more effectively, or we're just doing this in the hope that we have a vaccine announcement

tom in the next thirty five days. And I'm not gonna truils hear, but I'm going to point out the fact that these headlines from Germany are coming from a quantum chemist, and there seems to be a little bit of a different difference in the tone john from the quantum chemist versus a gentleman from ford In and maybe Wharton, and then also Prime Minister Johnson as a journalist. I mean, there's a different tone to a Merkele virus headline, very much so. But Merkele and Promister Johnson going in the

same direction at the moment. Dana of Japing Morgan Investment Management, Diana than Key our team today and tomorrow, we'll try to give you as sophisticated to coverage as we can from people with authority. Brian classes On a Carlton in Minnesota. He has a cottage industry going in the United Kingdom of looking at the decline of democracy or throw the doctor class could join us this morning from u c L. Brian, you have been hugely visible and hugely articulate on the

decline of democracy. Let's begin with the US. Can we staunch that and resurrect democracy tomorrow? I think we can begin to UM. I think that there has been a sustained attack on democratic institutions in the United States, and I think despite you know, being a nonpartisan expert, this

has been from one side, predominantly right. So you have rhetoric coming out of the president attacking the press, um, you know, trying to scapegoat minority communities, and also most re stently around the election saying things like, you know, we can't trust the votes, even though there's evidence that we can encouraging supporters to vote twice, etcetera. So it's a long term rebuild that we're going to write because yes, well, I don't mean to interrupt, because because the time, Brian,

I've got to get to this. It's too important, and you are one of the great experts on this. You are a fabric of the north uh northern part of our Midwest. Where would we go back to William Jennings, Bryan Huey Long, whatever name the other names, and of course President Trump, this is populism at hand. Do you

see populism extending it reach across America? Or as you say it, with clear and direct messaging, can it be staunched like it was with Huey Long of Louisiana and what it was like it was with Jennings Bryan Well. I think reality has a way of catching up with populism. And I think what happens is often populous, often big

slogans and few solutions. And what's happened recently is that the coronavirus has been reality, the economy has been reality for President Trump, and so I think there is a turn back towards people who actually understand things right, that actually understand how economies operate and how public health can be best served. And that's why you know Dr Fauci, for example, is the most widely trusted figure in the United States political system at the moment, because people are

turning back to experts. So I think there is a pendulum shift that's happening in the United States. There are boards over the windows in midtown Manhattan and across the cities in the United States. This is unusual the day before an election. There is a feeling of eerieness before the storm. And my eleven year old son said to me last night, are we gonna be okay? Is it going to be violent? Is the sense of violence overstated here? Or do you get the sense, uh that the unrest

just in general has that ability of potentially percolating. I I am very worried. I'm more worried than I've been about any election, certainly in my lifetime. And I think the reason for that is because there's not really an

exit ramp for either side here. The stakes are so high that when we wake up on Wednesday, or potentially much further along, if we don't know the results quickly, you know around half the country is going to find this to be an existential threat because the hyperpolarization has taken such root in this kind in the United States. And I think that's something where you know, this is a longer term project. It's not going to get fixed

no matter what the result is on Tuesday. And I am very worried about the prospect of if there is a contested election, especially widespread unrest. Brian speculating what happens Wednesday morning. Can we talk about what has happened and tell me whether attacking the process actually damages the process given the record turn out that we've seen so far

and early voting. Yeah, so I think there has been a like a really good response here to voter suppression in the sense that you know, in Texas there are more people voting now and have already voted than in the entirety of But that being said, you know, there's also some really worrying signs. We had a foiled plot to kidnap the governor of Michigan. We've had murders at various protests. We also have the president directly endorsing an attempt to push a campaign bus from the Biden campaign

off the road in Texas. So, you know, temperatures are very high, and I think that with Trump telegraphing that he might declare victory before all the votes are counted, the risks are high. You know, in in economics term we talk about tail risk. I think there's a very large tail risk here where it's it's still improbable that there's gonna be widespread unrest and violence. But it's such a damaging prospect that we have to take it very very seriously and do everything we can to stop it.

Bran asked this in a really delicate way, and it's not allowed question. Why do you think those stores are boarded up? Who do they think is going to attack them come election morning, come Wednesday. Well, I think there's going to be uh, you know, the potential for violence no matter what the result is. To be honest, Um, I think that there is a series of communities that

feel extremely invested in this result. And I think that you know, when you have a situation in which those fans have been flamed from people in power for a very long time. Um, the polarization is just at boiling point. It's really at boiling point. And so I think, you know, regardless of what happens, it's not just about who wins

and who loses. It's also the rhetoric that I think is extremely damaging from President Trump saying that we shouldn't trust the result right months of saying the election is rigged despite evidence to the contrary. And so I think that only heightens tensions. And I think regardless of what the result is, there is a significant risk of unrest in American cities. Brant Class appreciate the time this monic.

Thank you, said University College London Professor Daniel in the b MP Perry about his chief US economists and had a macro strategy there and far more importantly, he's one of our best best thinkers of the set of outcomes forward. He has made real clear that we have a chance to be in the uncharted, the uncharted territory of many different outcomes, Daniel, in which is the uncharted territory you're

most focused on right now? Well, there are are a lot of potential terra incognita places that we can go in this very unprecedented election. Uh, it's clear that we have seen a fairly uh norm breaking president. But what I'm most worried about is come January, there's still no clear picture as to who the president of the United States is. Uh, and both Joe Biden and Trump show

up claiming that they are the legitimate president. Well, within that outcome, which I'm gonna call suitably gloomy, So it's January and we really don't know where we are. Certainly there's some form of tension and contested as well. What does that do to the economy. Is there a run ray to this economy right now where it can sustain

that political shock? That is the trillion dollar question. Um. I think Tom, that the implications of something like that are just so unfathomably profound that it's hard not to believe that that's going to have a pretty dramatic effect upon markets and the economy. So I really hope that we don't get there, um, And I think we do have a lot of ways that we can avoid the slope toward a constitutional crisis. But if we get there,

we'll just have to wait and see. What's your view on how the market is pricing a lot of this, This narrative is all over the place. It's like a pendulum from one extreme to the other. A few months back, it was a worry about a contested election. A few months forward it is the blue wave and pricing that in, and then all over again a week going into the election,

we start talking about contested again. Dan, where's that coming from? Yeah, I think it's because the sticks are just so high, and Um, the outcomes are just so extreme on on either direction, um, When really what we're seeing here is just a shift in the polls of you know, a couple of points here, a couple of points there. I mean, what really is striking about this selection is actually just how stable it has been. Joe Biden has always led to Donald Trump by anywhere from nine from from six

to to ten points. I mean, that's those aren't insignificant numbers, but compared to the pretty wild swings that we saw in sixteen, it's actually, Um, the main feature of this election is stability. And yet um, people modern markets extrapolate from the race tightening a bit to the race widening of bit and and they say this is either going to be a DEM sweep or or a contested, close, messy election. And by the way, Um, the fact that the election is going to be contested, um, is different

from the election actually being close, messy and chaotic. It's almost certain that President Trump is going to contest the results. He may contest the results even if he is won, as he does as he had done in Steen. Um. But the real question is this is going to be close enough that there's a legitimate case to be made that are recounting or one of these election lawsuits can actually swing the difference. Well, Dan, you now did. Though, let's just sit on the markets for a moment. We're

extrapolating out yesterday's price action. Whatever yesterday or last week's price action actually was that pendulum swinging some aggressively despite the fact polls have been really, really stable DWN. That just screams to me that no one has a clue what's going on. So Wednesday morning, even if we do get a result and we know what that result is, we're just gonna extrapolate out last hour's price action without really thinking about what any of the stuff means over

the medium term. Well, no, I think that come election day, or rather the morning afterward, UM, there is a set of scenarios where we can know pretty for sure who who the winner is, UM and UM is Therefore there there are some certain scenarios where I think markets can become pretty confident that Joe Biden is the winner. UM. I do think if Donald Trump is the winner, we may have to take longer for some of the key

Midwest states to to come in. UM. I think markets, you know, hate a vacuum, and therefore knowing for sure what the results are would help UM. But yeah, there is still on this looming interregnum period between November and January, where if if it does look like Joe Biden has won the election, then we have a lame duck president, who, as we said earlier, um, is pretty norm breaking. Will again have to wait and see what a lame duck

Trump administration would look like. Dan, There's so much uncertainty not only about the election, but also how markets will respond to any particular election outcome for people who are looking for some sort of ballast, for something to hang on to, some certainty, is following the virus numbers really the most important thing for them right now? Um. I do think that the recent market reaction is probably a function not just of the election, but also worries about

the third wave UM in in the US. UM. But yeah, I mean at the same time, Uh, it does look like the fatality rate of this wave, as tragic as it is, is better than in the first and second wave. So there's a lot of moving parts here. Um. Again, I think markets are desperately trying to look for something to hold on to construct a narrative when the simple answer is that all we can do is really wait, where is the biggest asymmetry of risks that you see

right now the asymmetry of risk. UM. I think actually the biggest asymmetry is that the virus can mutate in another way that's less benign. UM. I know that the you know, the general science of epidemiology is such that viruses don't actually want to kill their hosts. They want to keep their host alives so that I can continue

to replicate, which is the whole purpose of being. But we should remember that in the nine eighteen Spanish influenza, we had three massive waves, and it was actually the second wave which was more dangerous and fatal than the first wave. UM. I wouldn't rule out that the virus can mutate again in a very dangerous way. UM. That makes so what we had seen earlier only a foreshadowing of us to come. Daniel and I want to go back to pure market economics. What's our g d P

this quarter and into the first quarter of next year. Yeah, So, of course we had a very impressive looking Q three at an annualized streight point one percent, but it's important not to uh read too much into that. We're still roughly three or four percent below pre crisis levels. And now comes the hard part. Um, much of the growth in you three is a mechanical reversal of the lockdown related contractions that we have seen in Q one and

Q two. Now as the economy faces UM this third wave in in the Mountain States and the Midwest, UM as we still await UM whether a vaccine will be UH, whether an effective vaccine will be ready UM and and widely distributed now I think comes and finally, UH, Congress is currently stalled in providing the fiscal support that you know, the vast majority of economists think is is necessary. Right now, we are in this UH, we are in the doldrums,

were in the stalling out sort of period. I think growth is going to get much much harder from here. UM and UH. As we said, there are some significant downside risks. UH in before us as well, and love catching up down on that. It's US economist over at BMP. Parabolt also heads up that macro Strategy covered the markets as well. 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 Keene Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio