Surveillance: Recovery Risk With Reinharts

four or five essays, books are articles. This year was easy. Carmen Reinhardt and Vincent Reinhardt wrote a Tour to Force for Foreign Affairs magazine and made world headlines in the economics community with the pandemic depression. We are thrilled at the World Bank Chief Economists could join us this morning, and Mr Reinhardt, of course, with Stay and A Schmellon in their asset management is chief Economists to the two of you, congratulations, I'm putting together this essay. How did

you piece it together? Carmen? Did you say, Vincent, we got to write this the world's coming down to an end? Or Vince Vincent, did you tell Carmen we gotta do this Carmen, you start, how did you generate this important essay? Well, Tom, you know, Vincent and I have been writing together for a long time. So you know, back in two thousand and ten we wrote for the Kansas City fac for the for the Jackson Hole Conference, what the next ten

years after the global financial crisis, uh looked like? And it was taking stock of the aftermath of major shocks, you know. Uh, so this certainly classifies as a major shock. And these kinds of events lead lasting consequences. They and so that's basically the theme where we we came together. Let us drive the story forward. And folks, again, I can't say enough about a full read of this article in Foreign Affairs, Vincent Ronhard, how do we escape this depression?

And if we have a global or a United States depression, is stimulus in large stimulus the only answer. So the sad thing is this really is the third time we wrote this article for two thousand and eight for the European crisis and and one more time for this pandemic depression. What do you need? You have to follow Larry Summer's advice targeted temporary and timely fiscal stimulus. Uh, they did it. Back in March with the Cares Act. They can do it again. Comma, can you built on something for us

confusing a mechanical bounce with the account rate? Is that what we've been doing over the last few months. Yes, Um, Look, a very simple basic definition of recovery and minimum minimorum is you at least have the same level of income, same level of GDP that you had before the crisis started. Uh. That took UH quite a number of years, five years in the US from the last UH the global financial crisis, and even longer for Europe. So yeah, before that we

see a snap back. We see growth rates come back simply because the declines were so sharp in the in the earlier in the year. But that is rebound. Recovery is when you're at least as well off as you

were before, and that will take some years. So in your mind, common do you think this is a political boss, a political decision to make the code to say, look at the recovery, confuse it with a mechanic co bounds and say we don't need more fiscal stimulus, or do you just think it's a failure of the understanding of economics that we can see the mikecause Vincent's points out, you know, there is no simple answer, has elements of both. But we've seen it in history, uh, you know often enough,

the premature declaration of victory. It has always been a recurring theme that that you know, the first signs of recovery, the green shoots means that's it. And and you know, I think that this time, uh, we really didn't learn much from the over optimism of two thousand and eight two thousand nine, where growth forecasts had to be marked

down repeatedly. So, Vincent, can you build on that with the idea that we're heading into a winter where we have a virus that is actually expanding, worsening, spreading, even though people are getting more concerned about the debt about adding to it with more fiscal support. Do you think, Vincent, we are headed toward a double dip recession that will hamper growth in a longer term way with scarring economically that currently is not being modeled for. So the rebound

has enough strength right now. There is waning fiscal impetus, but their most importantly, there's considerable monetary accommodation. Households have a lot of savings, so they have the wherewithal to spend. It isn't as much a risk of a double dip. It's a risk that we extend the rebound, that it takes even longer to get to recovery. And the longer it takes to recover the level of activity, the more

likely unfortunate things happen. Balance sheets get strained, there are even more business failures, people lose more and more skills and exit the labor market. So I'm more worried about the permanent scarring associated with taking too long to get to recovery, because usually you can bed on market economies. So what does that mean, Carmen in terms of emerging markets insolvencies, the idea of this emerging markets crisis that a lot of people have been talking about, including yourself.

Do you think that if we do get this period of scarring as Vincent is talking about, that you do get that wave of insolvencies in the developing world that so far we haven't seen. Well before we say we haven't seen the pick up an activity UH, even before the pandemic, we had a lot of frailties UH in the low income economies and in several emerging markets. With

this Argentina, Lebanon, Venezuela, Ecuador, now Zombia. This is a longer list than what we had in years UH, And of course not everything happens simultaneously, but I think the

stage is set for you know UH number. As I said, especially vulnerable are some of the lower income countries, but not limited to UH, a very protracted period of UH financial fragility, both in the financial bankings in the banking side, and the possibility if in the worst cases outright UH sovereign dead crisis and they don't need to be with the drama of a default, but they would be UH still requiring restructuring, still requiring coming to the IMF programs

and so on. Can Carmen Ryn art Vincent Rayner with us here this morning on their important article to the pandemic Depression in Foreign Affairs A summer It was, without question my essay of the summer, Carmen Ryn, not a question for you, and it's delicate. As World Bank Chief Economy is do we completely misjudge the percent of g d P of stimulus aid income replacement that will be required?

Are we as sort of institutions and elites completely misjudging the two to three percent of g d P is not going to get it done, and the statistic is much more towards five to six of g d P. Tom. Uh, it's not entirely in misjudgment. It's also a reality of capacity. I mean, um, you know the do you if you're if you're speaking about the emerging world, Uh, the private capital flows half significantly retrenched, I wouldn't say right up. And so it's really the multilaterals. It's the I m F,

it's a World bank, it's the development banks. The firepower there is very limited. The it's not the Federal Reserve. Uh, it's not the you know b O J or the ECB. These institutions have constraints and how much they can deliver. So it's not entirely about misjudging misjudging this seriousness of what is needed, but also you know, having the capacity to for over well over a hundred countries to deliver that kind of of of shot in the arm comment.

Just quickly. We caught up with David Rosenberg around about forty minutes ago and he wanted your view on how higher debt loads can constrain demand constrained potential GDP coming.

You can can you speak to that for us, given how much debt we've just added to the global economy in the last nine months, if you started doing work on that, well, look, I've been doing a lot of work also on the issue on the what I think is for the advanced economies, the more immediate issues, which I think have to do with private that uh and financial fragility. This is what I alluded to, a big shot of a big shot in the army, big source of stimulus. UH. This time has also been forbearance uh,

you know, delaying payments uh for households and firms. When those programs expire, uh, do those debts continue to be repaid? So the more for the advanced economies, as opposed to some of the lower income countries and in some of the emerging markets, the more immediate immediate issue is the private debt UH. And that is already I think, especially for for the corporate sector, the small and medium businesses,

already a source of concern. Vincent royn at the final question to you to really look forward, maybe out of a pandemic depression. Who knows what what is your market forecast, your economic forecast, Rather call for Q one and Q two of next year. Advise the Biden administration this morning.

So we keep slowing from where we have been. Obviously, you don't repeat at we have in the first quarter a bit of a soft patch, just two percent growth because of the absence of fiscal stimulus, and then on the assumption Washington d C gets something together, then closer

to five in the middle part of the year. What I really hope we get is something like the CARES Act of Targeted and Temporary and Timely uh impetus, rather than the American Recovery and Reinvestment Act of two thousand and nine, which was timely for sure, but it had a very long spend out rate. Now is not the time to do infrastructure we needed over the longer haul. But right now we've got to get income into the

hands of people. Guys, we've gotta leave it that common fantastic a here from your common Ryan Hart, that World Bank chief economist, and Vince thank you, sir, Vincent Ryan Hart of Standish Melon Asset Management, Thank you very much. The perfect gentleman to speak to right now on is

truly our global Wall Street brief of the day. Alan Ruskin with Deutsche Bank, decades of experience of synthesizing together all of these trends alan to John's point, you lead with the idea that forward a major pair will be dollar and membi looking for stronger you want, and the idea that the Chinese you want will replace the Japanese yen. How does that happen? How does it you want take over?

Is a dominant pair? Um Tom, Look, I think the Chinese economy is a substantially larger in Japan's already, and it's only that gap is only going to get wider over time. So it's real economy influence is certainly increasing. And obviously at the same time, the authorities in China are encouraging internationalization. They're encouraging uh the c N wise reserve status to increase over time, so the pool factor in terms of official flows is going to increase as well.

The combination of the real economy side, and you know, the encouragement that you know, I think we're going to see from the authorities on an ongoing basis is just gonna help the Chinese currency and it's poor effect, you know, against other currencies in the region. Ellen Ruskin, there's a parlor game to when strong euro hurts Germany, strong euro hurts Finland, or strong yen hurts Tokyo. At what level

the stronger and memby hurt Beijing? Are we near there? Look, I think there's going to be a lot of sensitivities in terms of a very modest appreciation in the UN. But I think we forget I think you know memory certainly right, the tenure average is roughly around six fifty on on dollar China, So I think we shouldn't get too caught up with what's happened over the last six months or so. Given the appreciation, we're actually back in the zone that's actually you know, very well traveled, So

we shouldn't be at points of extreme sensitivity. But you know, if we saw dollar China go to say six twenty five or those to the levels, I think there would be more concern on the part of the Chinese authorities and an important to look at the currency pairs our swear Euro China, China, Japanese Yen. And what we've seen is that Chinese strength against the Euro and a more

pronounced way as well. Do you think that makes it for the ECB at least makes them less sensitive to what's happening on euro dollar as we approach one nineteen and maybe go through one twenty. Yeah, I think for everybody if they look at their own currencies and they say, okay, well, yes we are stronger against the dollar, that in fact most other currencies are also stronger against the dollar. So net net is not much change, as you say between

you know, call it the euro and other crosses. Then you get reduced sensitivity from the currency side, and people recognize that this is a dollar story. This is not a China un story or euro dollars story. Um. Up until now it's been a mix, I would say, of a dollar story and a Chinese un story. Very little in the way of really being a euro stories has been stuck in the mud. So there's a question. Well, and we typically ask a question just quickly, let me

weigh in, Allen. We typically ask the question whether we would need a weaker dollar and whether the world needs a weaker dollar. Do you think the world needs a stronger Chinese currency? Um? You know, the imbalances have tended to grow over time. In the particular crisis, the own account to surface in China is substantial in an absolute basis, less as a percentage of Chinese GDP, So I think there are potential distortions on that side. Um I would say,

you know, let the market do its thing. I think that's the most important thing, and then the imbalances will not build in a substantial way. So I was trying to jump in because honestly, I was just so compelled by this argument here that there used to be this world order where everyone was trying to depreciate their currency, and all of a sudden there is less emphasis on that because there is a question recovering getting money into your economy is better. At what point does strength in

currency matter? Again from a trade perspective of And I wonder about this with the u N given the fact the Chinese officials have been willing to step in, and given the fact that internationally this has been such a big driver of flows into the nation. Well, I think you know what's interesting, if you look at currencies generally on a medium term basis, the evaluation and that you're

seeing are not that extreme. So you know, the dollars within about five percent of fair value, give or take depending on different metrics, and you know that's that's not extreme by any matter of you know, any any measure, and the same can be said for most of the other currencies as well. So you know, I would say the un euro, yes, you know, the dollar looks on the rich side. Yes, the euro looks a little a little cheap. Yes, the Chinese yuan looks a lot on

the expensive side as well. But in terms of the actual absolutes um, these are not huge overshoots and undershoots, And I think for that reason, it's actually going to be relatively comfortable to rain for the authorities to deal with at this point in time. It could get a lot messier than this. I've you know, certainly seen it much worse shape in the early ninety nineties or mid eighties. Uh, you know, these are relatively benign circumstances for the authorities

to deal with. On the flip side, Alan, if you take a look at derivative positioning, you could see that the short position on the dollar is increasing, and sort of the conviction, the complacency and markets around this consensus call seems to be growing. Do you see a potential for a short squeeze or some sort of information to come out, perhaps about the vaccine being delayed that could potentially lead to reversal here and strength in the dollar,

they could upbend a lot of these trades. Um. You know, the positioning I think is also quite modest in the grand scheme of things. And you highlight you know, the vaccine story, which I think is you know, certain is going to be critical for the real economy for the next year or two, ye know, crucial for markets, and it's probably the dominant theme I think, you know, on an ongoing basis. Some think it's maybe already priced in,

but I think that's way too early. And I think, you know, if you saw the reversal in those sort of trades in the absolutely I mean, I think, you know, you you could get some sort of short squeeze um that's always possible into urine into December. But I would tend to emphasize the trend trade. I would say, the vaccine trade is you know, long re cicklic calls in G ten Canada, stocky KNOCKI, etcetera. I think it's still long e m. It plays to the long Asia trade,

et cetera. So I think it's still on a medium term basis, is still playing towards the short stylar trade rather than you know, focusing too much on the squeezed potential. Stocky KNOCKI just classic effects. Linco there and thank you,

and I'm Ruskin by Chief International Strategists, Sweden, Norway. Just in case anyone's Guy Johnson's favorite currency pair, actually Guy Johnson's favorite currency pair stocky KNOCKI, John, Lisa and I and all of team's surveillance feel very strongly pondentories out

and experts are very in. Deborah Fuller is not only at the prestigious University of Washington School of Microbiology, but also it is definitive in labs in the processing in the development of vaccines, and we're honored that Dr Fuller could join us this morning. Dr Fuller, We've got a lot of questions about vaccines and all that I want to go to my childhood, which was the dreaded booster shot.

Is a booster shot now the same as it was in nineteen sixty or is a booster shot now so efficacious and the technology so much better, it's not a big deal. A booster shot in in vaccines, particularly the covid nanetinge vaccines that we're we're seeing right now, is absolutely essential to UH to increase UH and bring the immunity UH in individuals that get a vaccine up to

higher enough levels to protect against the infections. So booster sauce can feel dredged in the sense that you might experience UH increased reactive unicity in other ways, a bit more soreness in your arm, But that tells you that

it's working. That's what When you get that soreness and sort of feeling kind of almost like you're you're getting an infection, uh, initially, that tells you that your immune system is mountine a really good response to the vaccine, and that you will likely be protected against an infection.

So Tom Kine is talking about booster shots and light I assume of the Astrosonica news that came out this morning really confusing, more confusing than we got at Adviser of Moderna in terms of efficacy, oh, with some statistics saying se efficacy, others saying when you have a half dose initially followed, but a full dose of this vaccine dr fuller. How complicated is the rollout effort when you do have to have two rounds of a shot in

order to get it make it effective? I mean in terms of tracking in terms of distribution and frankly in terms of how long it takes to get immunity. That's a really important question. I an ideal pandemic vaccine movie the one that works in a single dose, and that's just simply because if people have to receive a second dose, often compliance and back for the second dose can go down, especially if they experienced some reaction unity with the with

the first dose. So uh, many of these companies were looking at the immuno genacy after the first dose, but the levels of the immune responses are just not high enough to be confident that it's going to provide the level of efficacy that's needed. On the other hand, after the second dose plus efficacy that's as good as the vaccine is really going to get. And that's really what we're going to need ultimately to shut down this pandemic.

A doctor, that's science, let's talk about the logistics. How many vaccines, vaccinations do you think we could roll out in America over the next three months? Well, Mudian Advisor. As a results of the air A promising data now, astra Zeneta will likely be applying for emergencies authorization in early December UM. They should have enough safety data by

then to be able to make the application. Of course, will only be the vaccines initially will only be available in a limited number, limited numbers that would be for highers groups, that would be for your first responders and medical personnelity. The majority of us really won't be seen these vaccines until up spring. Uh. And some of the challenges between then and now will be being able to

produce sufficient numbers of doses. Billions and billions is what we're going to need, because we estimate at least fifty to sixty percent of the population ultimately need to be vaccinated to to shut down the pandemic. And and so that really raised an important point is that we really need multiple vaccines, not just one. It's not only one silver world being able to shut this down. The fact that we're seeing all these vaccines look really at about

nine efficacy is super promising. Dr Fuller George Saravellis over at Deutsche Bank today has a Deutsche Bank chart out unheard immunity and it's lovely smooth curves of expectations. Do you trust the A and the forecasting of HERD immunity or are we actually making it up as we go that math is really elegant stuff and it is really based on some important measurements. Uh So, yeah, we can trust the math. What we what we don't know. Some

of the things that we don't know. What we into this math is the changes in the infection rates that could occur between now and then. So the predictions are based on, you know, what we know now and as we have seen, we've seen a huge surge in cases as the weather cooled and that actually exceeded, uh the number of cases that was initially predicted at this kind for you know, for you know, reasons that for example,

pandemic fatigue and stuff that really can't be predicted. So, uh so what the math is precise, it's based on what we know, not what we don't know. Appreciate your time, your thoughts and honestly full of that of the University Washington skulled of Medicine. This is a joy. David Rosenberg for years helped court at Mary Lynch and own the high ground on parsing price change. He was absolutely brilliant

and hugely read. Moving on to all sorts of good work in his Canada and now Rosenberg a Research are chief economist strategist in Montreal, Canadian fan David Rosenberg. I want you to filter disinflation into what yield does. Is it just about a demand for paper price up forcing yield down. Well, look, I think that there's a whole variety of things that goes into bind yield determination. Uh, you know, the expectations on the FED and real rates

in flakes, and expectations obviously both perry large. I'm in the camp that thinks that we're probably caught in arrange, always amazed that people think the ten ure is going to break above one percent, go back to two percent, and only that's going to happen. Um. I think that there's still gonna be globally a downward pull on treasury yields because I think in places expectations, given the size of the uplook gap, we're going to come down over time.

And at the same time, if you're taking a look around the world, you take a look at the average triple A yield, it's barely above zero. And in the US, you know, you get at least uh, you know, seventy or eighty basis points, so you know, it's a in the land of the blind. The one advent is king, and I still think treasuries offered very good value on a relative basis. It's I think what you're saying it's really really important. It's about the post COVID world and determining,

defining what is normal. And many people seem to think that post COVID, with a vaccine treasury, olads have now business south of one percent. You push him back against that, David Well, I am pushing back against that, because you know, what's your expectation of what the Fed is going to be doing. I mean, ultimately your forecast and the ten your yield has to be some scrolled expectation of what short term it is going to be doing over a

certain horizon. The Feds already told you that you know, they're not going to start to raise rate until inflation gets above two percent. Well, but we'll wait a long time for that and for us to return to full employment, and that's gonna take a long time as well. On top of that, look, there's no doubt that we're going to get a couple of quarters of pent up demand release once the vaccine is broadly distributed. That's going to happen.

You know, Whi's exactly quarter is going to happen next year. I mean, who knows, but it's going to happen. So we're gonna get a couple of quarters of pent up demand release and then what does the world post COVID look like after that? And we never got the inflation from oh nine to two tho nine, despite all the stimulus,

despite the FED. You know, the reality is that the same sing the fundamental secular developments have nothing to do with COVID that brought us to low inflation and low interest rates and low growth Asian demographics, Well, how has that changed? And monumental debts? Uh, so you're gonna have

the ran hearts on. Well we'll talk about then. I hope how these massive run up and demits and debts are going to be dealing with those resolving those are going to be a huge constrained and accurate demand for years to come. How are you going to get inflation

out of that? So we're going to get a bump and growth bondyles may go up basis points, and they're gonna come right back down again because the same fund fundamental forces that brought us down two d base points in the ten year notes in the last cycle are going to be the same forces that drive yields back

down towards zero in the next number of years. This is fascinating to me, and it comes at a time when a growing number of strategists expect the Federal Reserve to increase their long and dated bond purchases at their meeting next month. There is this expectation that eight billion dollars of purchases a month will be more heavily weighted toward the ten year, twenty and thirty year maturities. Why

should the Fed be doing that? If you are right, and if yields are going to remain low because the economy just is not going to grow that quickly, well, that's just another form of what they used to call operation twist. Um. I'm you know, who knows that the Fed is going to go that route or not this quickly. Um, It's not as if a ten year treasury not yield has really broken out. It's really just in a range you can argue on the top end of the range. In the context of a stock market that's gone up

from the lows, it's pretty remarkable in its own right. Um. But if look, that's basically the threat that will always be there is that if bond yields become unhinged, the FED will come in hard and uh and cap longer, longer term yields because that would be a form of financial market tightening, would cause mortgage rates to go up. They would you know than um, you know, a detract from one of the positives in the economy, which has been housing. So I think that that is an ongoing threat.

Just to know that the fat can come in. It's like you're talking about credit spreads before knowing the fat is going to come in and buy corporate credit by how your bonds. Just knowing that threat exists is what's caused investor's comfort to go in and and add on risk in corporate credit. It's very similar at the long end of the curve, where you might be more comfortable taking on duration risk knowing that the FED could do

this at any point in time. Whether or not they do it or not, or they talk about in the minutes, I mean, who knows, but that's still out there, and that alone helps cap the long end of the crew. David, I want to talk. You mentioned the Reinhart's and we're thrilled there with us. Later in the hour. Folks, my essay is the summer the pandemic depression, David, pretty gloomy assessment. You're not a gloomy guy. What do equity markets do

if you get reinhard caution and gloom. Well, look, you know we we have you know, we had are you know, the worst recession since the nineteen thirties. We had a one month draw down of three in the stock market. Uh, and then we bounced right back. And actually, when you go back to some of the most horrific days on economic data, when we're going back tom to like April and May, like at the depths of despair, the markets

actually already started to rally um. And so I think that the mantra of you know, don't fight the Fed, there is no alternatives, you know, all these things that I used to roll my eyes at, you know, it seems to have worked in terms of creating confidence in sentiment. It's a confidence led market, a sentiment lead market. We have a two year Like when you're taking a look at the pe multiple on two estimates, it's eighteen. I remember when I started the business in eighteen, multiple on

trailing would have been unbelievably expensive. Today people don't cope in eighteen multiple on two year for forward earnings, the market is still cheap. So that's mentality of the marketplace.

So I would say that as long as you have the stad they're saying, we're gonna pump the system of liquidity um, and so long as you have this belief that the vaccines will return us to the old normal, which is not my view, but that's the market to you, uh, then the stock market may well continue to surprise on the upside um. And so you know, I'm not bullish on the market, but that's the narrative and the narrative.

That narrative is certainly one the day. Over the course of the past six seven eight months, the out out out normal, a few crises of David writes to catch up to my disrespectfully amount of what the guy. Since you research, and fantastic to have you with us on the program. Thank rosen Buck that of rosen Buck Research. 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