Surveillance: Slow Recovery With Fed's Harker

And we see new orders, production and even employment turns slightly positive. So that is New York. What is happening in Pennsylvania and the second district of the Federal Reserve joining us now is Patrick Harker. He is the president of the Philadelphia Fed. Good morning to you, Pat, and thanks for joining us. Uh. I want to ask you off the top, how things are going in the Pennsylvania area. I know that the COVID case rate has risen a

little bit. Are you concerned that you fall back into the same situation that we're seeing in the Sunbelt states? So in the Try state region Pennsylvania, New Jersey and Delaware that we cover, we have seen a little bit of an uptick in the COVID cases, but the governors have taken action to slow the uh the opening a little bit, so I'm not that concerned right now. I think the generally the virus is pretty well controlled here.

It's still a tragedy and there's still a lot of work to be done, but I'm not very worried at this point for this region. What's your view of the economics of the region. How hard have you been hit? How hard are you going to be So the region is defacturing sector has bounced back. We saw our last report last month. We are seeing some good news there. We are particularly the city of Philadelphia itself is predominantly

edge and meds, and I'm concerned about those. Are not just about the large medical institutions which have lost a lot of revenue because of elective procedures being curtailed or delayed, but also in the royal communities here. Those royal health systems have been hurt quite badly through this process. What about the overall US economy Now that we've seen this flare up across much of the country, are you revising

your economic forecast or your outlook? So prior to this, we saw a pretty big hit and queue first half of this year, probably about in GDP in the first half. We thought it would bounce back around in the second half, ending around six down in GDP for the year and unemployment around ten percent. We are revising it right now because with the virus surging in the south and southwest of the country, we are concerned about that. I'm very concerned about that. So this is going to be a

slow recovery. Until we get the virus under control, we can't get the economy back to full throttle. You mentioned EDS and meds. The EDS part of it is your specialty. You came up as an educator. How important is it to get the schools open? How important to the economy this fault. It's very important, but we have to do it carefully because we don't want to put people at risk.

You start, for example, we know that in a child care business, about half the child care institutions, many of them are small uh companies that are taking care of children, about half of them closed, and the remaining ones they lost about at least fifty capacity in remaining open. So it's just simply if people can't find care for their children or be able to get their children to school,

they're gonna have a hard time working. And particularly in a knowledge economy where people's productivity is really their knowledge, if they're concerned about their children and that's weighing on their mind, it's human nature, they're going to be less productive. So I think it's very important, but we can't do it in a way that puts the children or the communities at risk. Obviously a lot of risks for the economy that don't seem to be reflected in equity prices.

Are you concerned about the level of stocks at this point and whether or not it's sustainable or we might be seeing a bubble that could pop and take the economy with it. So the equity market, the stock market is a measure we look at, but I often remind myself it's not the real economy. So for me as a policy maker, I'm looking at the signals coming from the real economy, employment data, inflation data, and so forth.

That is my main concern right now. Well, do you think there is any role for the FED though, in perhaps controlling the rise of equities at this point? At this point we had the FED had that we had to act early and aggressively to help stem the damage from this unprecedented pandemic. And we did that, and so that was job one. Now as we start to climb out of this, hopefully sooner rather than later, we will

address other issues. But we had to act to secure the economy and helps save as much of the economic infrastructure in the country as we could. What more can the Fed do? Lele Brainerd suggested yesterday that you let the economy run hot for a while and explicitly say you're going to let it inflation rise. Is that a strategy on the table for you? So we've been saying for a long time that the two percent inflation goal is symmetric, which means we should overshoot it. We're having

a difficult time doing that. Like all developed economies, UM supported the idea of letting inflation get above two before we take any action with respect to the FED fund try. Do you think that at this point the FED can do a lot to stimulate the economy or is it really up to washing it In the fiscal side, I

think there are things we can do. Our tool can we continue to lend and we have that authority, But yeah, I think the main issues that we're facing right now tend to be on the fiscal side of the House. I would agree with that. What would you like to see what's the most important thing to come out of watching them? What kind of aid? I know you don't want to mention a specific program, but what kind of thing?

Where's the economy weakest that needs help? So I think a couple of things I worry about, And again I don't want to tell Congress what to do, but there are things I worry about. One is a cliff effect of unemployment insurance. Yes, there is a need to get people back to work, and people want to go back to work, but we can't just cut it off because if we cut it off, people stop spending and that will be a hit on the economy. Second, we're seeing the same kind of cliff effect with state and local

governments if they start laying off lots of people. We talk a lot about anchor institutions. Well, one of the big anchor institutions in our economy are state and local governments, so they need some help. So those are two that I think are really important, and the third that I worry about, and we're doing a lot of work to defed on is small businesses. How to maintain the strength

of small businesses, particularly for a minority can. The National Bureau of Economic Research recently put out a report saying it's about of black owned small businesses have closed during this pandemic. This is not only decimating to those businesses, but to the communities they serve. Well, what can the FED do? Are you are banking supervisors? Yesterday in his speech, you were critical of the paycheck Protection program for we focused more on bank relationships rather than need How how

do you redesign that or where can the FED act? Well? I would say I was critical. What I was saying is that a lot of these micro enterprises, that is, enterprises with less than five employees, and we have lots of those in Phildelphia all around the country, they don't have banking relationships because for a lot of reasons, they

don't necessarily trust the institutions. That's the root problem. We have to solve that problem to get I don't accept the fact that people don't have a banking relationship as the status quad and we should just accept We should work on that. We should bring people into the system so that they can have access to things like PPP programs and just have lower fees and better service to build their businesses. Before I let you go, I want to ask you how you're following the economy these days.

We've had two better than expected jobs reports. Do you think we get the same thing for the month of July? And doesn't really matter. It will depend because of what's happening with resurgence of the virus. I'm a little skeptical that we're going to see as good a job's report, but we'll see. But it all comes down to right now,

controlling the virus. The health of the economy is dependent on the health of all of us, and until we get the virus under control, we're not going to get the economy back to where we all wanted to be. You mentioned the fact that we're coming up on this fiscal cliff in July. In the end of September, we're going to have a lot of your lending programs expired. You anticipate at this point they continue. Potentially, it will depend on what the state of the economy is at

that time. Right Thanks very much to Patrick Harker, the president of the Philadelphia Fed. Thanks for joining us today. It is about Ireland and the bomb show announcement this morning on Apple Computer was wonderful about this, as we have with us the Finance Minister of Ireland, Pascal Donahoe. And what is so interesting of Mr Donahoe is his truck from Trinity College in Dublin to real corporate, multinational work in the United Kingdom for Procter and Gamble years ago.

He has lived the multinational nous of the United Kingdom, of the Republic of Ireland, indeed of Luxembourg in Europe. Finance Minister, we are thrilled to have you with us. Welcome to Bloomberg surveillance. Were you surprised by this huge, huge win for your nation and for Tim Cook and Cupertino? Well,

I always believe such an outcome was possible. And Ireland has been very clear now over many many years that we do not make special tax agreements with any company big small here in our country, and all taxpayers are treated equally. We really value the relationship that we have with an employers such as Apple, like we value the relationship that we have with all employers in Ireland and we do not do special deals for them. And this ruling here today is a recognition of US Minister, you

have lived this with p and years ago. I want you to explain to those of continental Europe and frankly those of you worldwide, that appropriate tax policy for multi nationals is not theft from the general taxpayer. Well, I believe it's absolutely imperrasive that big companies are taxed effectively and they are taxed fairly. And I also believe that for very big and very big digital companies, how we are going to tax them in the future is also

going to change. But what was so important about this particular issue is an allegation was made that we were in some way treating Apple differently to other taxpayers that will be here in Ireland. This matter ultimately ended up in the General Court of the European Union and it's

been settled in the way that you've now described. So the message from me, it's a finance minister here in Europe, is that companies, whether they're from Europe, America already well or else in the world, have to be taxed effectively and fairly. And this was a really important issue for our tax code here in Irelands, moving from taxing to spending. There's a big question. You are the president you're the

head of a group of nineteen finance ministers. They will all get together this weekend for that European Commission meeting where they're gonna be speaking about that key trillion dollar trillion euro budget as well as the seven dred and fifty euro billion euro plan that has been proposed. How much pushback are you hearing from the frugal for and

what has been proposed and bringing that fiscal stimulus down. Yes, there is a diversity of debate in relation to this particular project within Europe and inside the European Union, But very broadly, the point I would make to you and to all your viewers across the world if this is a really signature example of Europe deepening its economic architecture and deepening and making stronger the foundations of the Euro and we are doing us to strengthen the ability of

our own economies here in Europe to respond back to the economic shock of COVID and because this is such a big project, of course of our different views in relation to us, but I do believe that within the European Union will reach agreement on the matter and the concerns that my colleagues and friends have amongst some countries for God, in the scale of the fond and how

this money can be used effectively and transparently. I believe what creativity and imagination in the coming days are maybe weaker, so we'll find a way of reaching agreement. Mr Dannio, I want to go back to Apple. I think the sovereignty issue here and frankly as to do with the weekend meetings, but the sovereigny issue here is absolutely critical. Frankly going back to Trinity College and Elizabeth the First

and the formation of liberty in Ireland. What this decision is really about, folding into all the different meetings that are you howners, is about sovereignty of nations to make their own laws. What does it mean for Brussels to see this victory by you today. Well, actually, I believe in the puding of sovereignty and I believe in the sharing of sovereignty. I'm a passionate supporter of the European project.

I'm a deep believer in the process of European integration that we have and they need to look at how we can strengthen it in the future. So I would actually regularly make the case here in Ireland and to crawl us Europe and indeed across the world that the European project about economically and politically, it's an extraordinary achievement that from my point of view personally and politically, I want to protect and want to secure us and I

want to grow within the future. And Commissioner Vestigure is a commissioner that I have huge respect for who I look forward to working with again in the future. Um that said, there are always a number of particular areas in terms of how decisions are made and then how they're implemented that are always going to matter to individual nation states. And from our point of view, the reason this was so important is that it create the inference that we used our national sovereignty in some way to

get favorable treatment to a company. That wasn't the case. It's been recognized by the routing here this morning. But you know, I make all these this case, and I make that argument though in the context of somebody who is a European politician believes in the europe Union and the sharing of sovereignty. But inside that architecture, countries still have roles, their duties and their responsibilities. And that's why this hearing was so important. Finance minister, thank you so

much for joining us this morning. Pasco Donajo is the Irish Finance Minister. Off of this extraordinary ruling out of Luxembourg on Apple computer. Daniel Tannebaum is expert hit what financial companies do given sanction rules and law changes. He's with Oliver Wyman after a distinguished career. He's got a fancy title of America's and a financial crime leader. But mostly what he does is going to rooms and say, okay,

here your options. Dan Tannebaum, what are the options for American banking is they sit two blocks from the Mandarin Hotel in Hong Kong. Thanks Tom. It's it's gonna be a tough morning or day for for US banks opera rating in Hong Kong as they really think about what this could mean. I think it's really important to note, though, that sanctions weren't actually levied yesterday, but a framework was essentially established through the signing of the Hong Kong Autonomy Act.

But if these sanctions are put forth um like many think they could be, and these were very much a blunt instrument rather than a surgical use of sanctions in a very sensitive market. Um it would be nearly impossible for a US bank to be able to comply with U S sanctions and Chinese law simultaneously. Well down, this is the issue. I'm trying to understand the scale, the magnitude of the issue before us right now. And let's just think this out. I don't want to get you

in trouble with any clients. Let's say there's a bank that starts with an H and to the C. They have a headquarters in London and a huge presence. I'm thinking banks, nay, many banks. We're trying to keep down out of trouble. Down. Let's say that bank services a particular client that comes under these sanctions. What did they do? I mean, we've talked about this on the show before. I mean, realistically, they're going to have to pick which

regulatory regime can end up hurting them the most. Now, I do think there's some cause for caution on all of this, because I mean we're potentially a year away from actually seeing any real designations under this program. If you get into the nuts and bolts of what was signed yesterday, the administration have ninety days to identify targets where designating then they have to inform Congress if any foreign banks carried out business with the aforementioned targets um

and they have a year to do that. So you're talking potentially October one before you may begin to see any banking related restrictions or more serious sanctions that get rolled out. Potentially, Dan, the sanctions haven't been levied yet. You made a point of that, and clearly, uh, this is just amping up the arsenal the President Trump potentially

could have. Can you give a sense of why now, because initially a President Trump didn't have that strong of a action publicly to the incursions in Hong Kong's autonomy. And this came, according to some people, sort of suddenly, Well, I mean it didn't. It didn't. Let's let's remember what he signed yesterday. It was a very very bipartisan piece of legislation passed in both the House and Senate that

forced the president's hand. He was essentially given no choice in a veto proof majority to sign the legislation that came across his desk. So Congress is the one that acted and forced the administration to do something. They signed something, but haven't necessarily done anything yet. And I think the next step where the administration have to identify targets. That's the real sensitive piece here. But I don't think it

was necessarily suddenly. Um. He definitely was delayed for a few weeks, and I think the timing was the UK announcement yesterday of of excluding a certain tech company from from involvement in their five G market. UM was you know, this has been a bad week in terms of Western China relation to John's correct delicate questioning of what a given bank would do. Look at the margin, this stops marginal Hong Kong growths for the financial system of the West.

Where do they go when they move from stopping the marginal growth of headcount over to we've got to adjust at the margin or completely an exit Hong Kong. Where would you just suggest they go to? I mean there's no I mean this is still somewhat fresh, so I don't think there is a clear answer of where you'd

go to. I know there's a lot of people in Singapore that are excited of what this could potentially mean for the further growth of Singapore as a financial services hub UM, which is a potentially a logical move from a regulatory standpoint In otherwise, UM there's no clear answer. I don't think anyone is evacuating the Hong Kong market yet, and I think any moves and doing so could be

viewed as premature depending on the business. But this is what a lot of banks, similar to those that we're looking at Bregg's post Brexit locations had to do, may need to begin spinning up our plan if this escalates. Do we stay in Hong Kong or do we actually have to potentially move? I would point out, folks, a trip from Song Kong to Singapore is almost four hours. You're on the plane and you're like, really, it's like

literally New York. It's a lot farther away than anybody imagines. There, Dan give us an update than on what your council would be to banks right now. I mean, I think it's keeping aware of what's happening. The one missed opportunity in all of this was the US again went and alone set forth the unilateral sanctions package that there weren't other countries latching onto, which does make it harder, um have you as you have these more significant business decisions

that have to be made. I think trying to establish what this could potentially mean looking at the China response, which thus far has been focused similar to what it was last week with the designation of Marco Rubio and

Ted Cruz for in response to weaker sanctions. UH. The Chinese response has been at least relatively measured, given I think they're aware that nothing has really happened yet, but companies need to begin to prepare to understand how they can operate in both markets UM without you know, completely running a foul of the other side. And there aren't any clear answers yet given you know, everyone's still decomposing this Executive Order and the Autonomy Act and what it

could potentially mean. Well, Dan, you've now, dear. I think the era of sitting on the fence for many of these companies who won their hand in both regions without really coming out and saying what they think about the situation, that's over, isn't it. It does seem like that's over. I think the relations between US and China have only

continued to worsen over the last few months. UM. And for banks that have grown their business in the APAC region, those that are have significant business in the US, UM, I don't know if they necessarily need to make any choices in the near term, but obviously this does pose a threat to the growth of the business UM going forward. Dan Tannebaum, great to catch up with you. Out of a woman, Partner in America's Anti financial crimes head, joining

us on the latest out of Hong Kong. Bank of America has a franchise in research of trying to figure out the pulse of the by side, John, at any time, this is an important conversation, and I would say in the history of Bank of America's research, there's never been a more important time in this a pandemic than to figure out what the people scared stiff about the actual assumption or thinking happy to say we can bring Jack

Wood it in now. Bank of America Securities head of a research investment committee, Jared, always great to catch up with you, sir. Just how under round is that cyclical part of the market and what will it take to get a durable rotation, one that lasts longer than twenty four hours? Yeah, no, it's look the big cyclical assets the Europe the you know, the the value stocks, the financials either are some of the most hated assets in the world. You have um, everyone crowded into essentially just

one trade, which is which is tech. And our contention is that on the one hand, it's not quite as dangerous at this moment to own tech is as it might might seem. For one thing, a lot of these stocks turned out to be quite more defensive than than

history would suggest. But at the same time, we do see one big risk to the very crowded positioning that that everyone has in place, and that's the risk of a genuine um economic rebound, not just a return to form of the kind of secular stagnations low growth, low inflation, but in the in the instance of a genuine economic uplift cause maybe maybe a huge surge and research and development, hu surgeon, corporate capex, the kind of things that can

really boost productivity. If you get that kind of macro environment, something we've been writing about in recent months, then that would be a big risk to the crowded trade that everyone has in place. Did you You've got a wonderful double degree philosophy and theology. I want you to go all Voltaire on me right now and explain to me the panic and the institutional buy side over where the actual assumption is going. The math doesn't work, It doesn't. It is a you know, it is an existential risk.

Maybe we talk about you know, Heideger and side for a minute, but you know, the math doesn't work in the long term. I think that's why people are increasingly pushing, you know, out of treasuries, out of out of observation, into more equity like investments, into parts of the credit market that have a little more risk in them because the bottling. They have to get some yield somewhere. That's a big theme for us lately where you can go

when yields are low. And I think the good news is that that the support from the FED, the support from fiscal authorities has made some of those act that classes a little bit safer than they work and uh

and you can buy alongside. We can talk about moral hazard, we can talk about long term solvency issues out on the horizon, but I think for the moment, what we're seeing from a lot of investors, both in terms of um you know, uh, households institutions every when really are looking increasingly as in these alternative asset classes and risk your parts of the credit market because they do have to get a yield pick up somewhere. Yeah, Jared, you could look at philosophy, or you could look at there

is no alternative and the bottom line. And the bottom line is, as you pointed out in your research, sent of SMP five hundred stocks are paying dividends that are higher than treasury yields. How long it can this subsist? How long can these companies keep such high dividends relative to benchmark borrowing costs without at least something giving and that gap compressing one way or another. Well, historically that

gap has fallen when an economic conditions recover. And I think that's a function actually more of of treasure yields rising than of you know, dividends falling. Um, that's that's certainly happened in the last three or four you know,

big economic cycles. You saw that that ratio decline. But um, we think that you know, one wrinkle in the in the in the in the story today is that it does seem really difficult to imagine how treasury yields could could rise sharply, if for no other reason than because everyone expects the said to join other central banks in yield curve control. Um. You know, maybe a little bit later rather than sooner. But um, if it's not you know, if it's not that you know, yield rising, UM, it's

the other thing. It's the prospect of increasing central UH infuence to fund you know, expansive new investments, which would be really bullish for growth who would also be painful for for treasury owners. And for that reason, that's why we say that, you know, it's all essentially one big trade either your long duration, your long technology, your long defensives in various ways, or you're starting to look for avenues to bet on a men equal you know, economic

rebound Jared. There's also the other thing of companies cutting their dividends. How concerned are you about the fact that we've seen companies cut their dividends the fastest pace on records so far this year, with a likelihood that that's going to continue in some shape or form going forward.

It's it's possible. We're not We're not overly concerned about that, I think at this moment um if for another reason, because the the amount of policy support that's come online has UM made you know, some of those cuts I

think unnecessary. There's there's certainly pressure political pressure UM, maybe some pressure from shareholders UH to shore balance sheets um in our in our Fundanager survey this month, you know, a lot of institutional investors continue to say, you know, increasing buybacks, increasing dividends was at the very bottom of our list of priorities, which is very understandable at this moment in the business cycle. But um as as a medium term question and longer, we don't expect a lot

of a lot of cuts on that account. In fact, one reason we're suggesting investors start to take a look just take a peek at European banks, for example, maybe add to your watch lists because there is a prospect of of of dividends coming. Lack of conviction here, take a look take pay. Now, let's pretend McClure and you called me up and you say, take a look, take a peek. What is that main Jared, Well, I know I'm being caged because they are. They are, you know,

some of the least owned assets in the world. Our contention is that there's a really great value opportunity there if things continue to go well in Europe with regards to you know, fiscal policy, and and then you know, as as maybe they get permission to pay dividends. Again, that's a really profound opportunity. Okay, John, we're gonna leave it there. Always grid to catch out with you. My best set of say job, what of that banks American?

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