Surveillance: Systemic Risk With Alpert

then the president's actions put the two together forest down. Well. The bottom line is that this rapid crash in US employment, which is not getting recovered from any time soon, threatens to descend further into systemic crisis. We're going to see household unable to pay their bills, and small and medium sized employers who give jobs to about American workers failing as aggregate demand collapses and extended pandemic and you know, end of the central support to household. So it's it's

really going to be a problem. And you know you were talking about the equity markets a few minutes ago. This period is beginning to resemble that of September April, when the equity market recovered from post crash lows. Government policy errors were building up during that period, and what did you get? You got the Great Depression. So this is very serious stuff. The granularity, Dan Alfert, of your wonderful work with Cornell j u I is just stunning.

What was the granularity of the report that got your attention for so much of America that's struggling. Well, you know what happened was we saw those enormous increases and jobs and then decreases in unemployment in May and June. And you started looking at the sectors in which you saw the increases, and they were leisure in hospitality and

dentist's office and other things you know, retail fully closed. Uh. And so you start describ at your head and say, why are all these people adding back jobs when they're still closed. Um. So we went out and surveyed about sixty people and found out that, in fact, you know, we were now starting to see repeat layoffs of people

who had been quote unquote repaywroll. We started looking to that and realized that it was just it was the p PP program going on, the payroll protection program going on, that was actually encouraging rightly so by the way encouraging employers to repayroll their people, and they were doing that, but what we discovered was that other people who are repayroll of them weren't actually working. Okay, well fine, I

mean that's within your data. What does that mean for g d P. I mean what John and I want to do on a Monday, Dan Alpert is get out to September, get out to October, folks, full disclosure. I see very few little of that in the literature, Dan Albert. Can you take that research and get out to September or get out to October. Yeah. I think what that means is two things. Well, you've got two things going on at the same time. One is, uh, you have a lot of businesses that have been able to extend

their lives only through government support. Those businesses are now going to be put up against the pandemic surging country and won't be able to continue and may not be there in September and October and next year to re employ the people. The second part is that you now are really facing a systemic crisis. I mean, if households cannot pay their mortgages, pay their rents, they're going to use whatever money they have to eat. Um, you're going

to be this potentially trickle into a financial crisis. So that's what the fourth quarter looks like if we don't do something, John, this is so important. Venue and Apple Bama with the great essay in the New York Times on this this weekend on evictions, John, I see a dearth. That's the only word I'm using Today's Earth Monday. I see almost no energy put into what October looks like right now. Tell him I can't get past next week, never mind, Hope. And I think that's fascinating about the

payrolls report. You and I have been talking about it, Dan, the survey week. Who would have thought the survey week and a payrolls report could be the difference between positive a million and negative a million? Dan, is that really where we are? Yeah? I mean right now, the delay between the survey day and the pls report and the actual presentation that reports actually more than twenty days is too much time in this crisis. Too much is happening

during that period of time. And that's been going on for months. So right now you know that if the if the survey data that we have is correct, what you're going to see in August is that negative number. You're going to see the reversal of these three months of job growth and the opposite occur. You're going to see increased layoffs in a boost in the unemployment rate. This, Tom's why everyone still thinks so much more still needs to be done. Dan in Washington, d C. Something is

better than nothing. But let's talk about the something we've got. Over the weekend, the President is basically instructed to redirect funds for disaster relief towards unemployment benefits, the enhanced benefit now from the federal site, Tom three hundred dollars. They asked the states to chip in another one hundred dollars. No one knows if one you can process this quickly and to how longer will last. Bloomberg Economics are saying it could be gone in a couple of months term.

And that's for the deferral of payroll taxes. We know what that hinges on. Will the employers actually follow through in releasing those funds or not? John, there was great research on this over the weekend, Republicans, Democrats, the whole thing focus on this. Journe the Republican senator from Nebraska, called it unconstitutional. You don't need to know anything else.

He went further, he called it unconstitutional. Slot but dan output, what I didn't hear over the weekend was Democrats ready to make a legal challenge because right now, politically speaking, who on Earth wants to be seen challenging what the president announced over the weekend. But these are all political backflips, not economic policy making. Um. You know, to the extent that that money can flow out and to the extent that the states can actually get it out households, which

is a big question mark. Um, through Trump's action, that's great. It delays some of the problem and defers it for another month and hopefully there's some political sanity that can actually emerge. But you know, at the end of the day, this is this is something that is so much bigger than just what the President signed over the weekend, And the biggest part of it to me is making sure that those small and medium sized employers are there to

re employ people when this virus finally comes under control. Yes, Um, you can probably put a band aid on the systemic crisis if you can get some money to households to enable them to pay their rents and mortgages. But at the end of the day, there's gonna be no jobs. And that's the bigger that's the bigger the two problems, and nothing the President did this weekend has anything to do with that. And then I want to go back

to your wonderful book, The Age of Oversupply. What we have in abundance right now is an oversupply of money. There are is trillions of dollars laying around, look for something to do. What happens to our oversupply of capital. Well, this has been something that's been going on for a

couple decades. The problem is, and this has occurred before, when you have a situation where uh, there is no really good opportunity for risk free returns, meaning you know in sovereign bonds, um, you're going to see that money start to flail around looking for some sort of yield and making excuses every which way it turns. They're gonna people are going to go into stock market because the stock market has risen for the last few weeks. People are going to go into gold because gold has risen

for the last few weeks. You see all sorts of things out there that are functionally non economic and that are basically rooted in market momentum. There's absolutely no rationale for any of this. Well, Biden make a difference a president Biden. Does that make a difference in Dan Alpert's American view? Well, yeah, I mean I think an enormous difference, because clearly this administration is dysfunctional. But you know, think about another thing. Think about what happens after November three.

Even if there was not some holy acious battle over who won the election, You've got a long interregnum during which someone needs to make policy. And the question is at that point you're still You're gonna have a lame duck Congress. People are going you know, maybe you'll see a turnover in the Senate, maybe you won't. But at the end of the day, who is going to be there to make policy? Right now, we are floating in

an ocean without an oar. Den Alta Gorett to catch out of the right way to kick takes off this Monday morning, Den Alfadat of Westwood Capital on this economy and the state of politics down in Washington day, say, Mark Sandy, you have a chart that speaks volumes in your latest research on the participation across age and the participation across races in America. What does it say, Well, participation collapsed in the pandemic. We're down about two percentage

points from where we were a pre pandemic. And it's across the border across all ages, ethnic groups. Uh, educational attainment, Uh, you know, some variation, but it just shows you the stress and the labor markets that time is Uh, those folks that had stepped out of the workforce, Uh, step back in and continue and start to look for work. The unemployment rate popularly measure will be closer to fourteen percent, not the ten percent that I want to stop you

right there. This is really really important because John and I get a ton of email marks Andy which says marks Andy's right, the ten percent number is a fiction. Is the ten percent number of fiction? Yeah, it doesn't do justice to the stress in the labor market. It's a fiction in that sense. I mean it's uh, it's copleally. Uh. They haven't changed any of their methodology to b l S, the keeper of the data, so it's it's it's accurate in that sense, but it's not giving you us a

clear sense of the stress and the labor market. I mean, people have stepped out of the workforce. They're not looking and they want a job, they don't think it's a viable to find one. So if you consider those folks, UH, the level of stress a lot higher. That fourteen percent is probably more represented what's going on than the tem percent. But even ten percent, you know, UH, is a pretty

tough labor market. Uh. In the peak of the financial peak of the employment rate in the financial crisis was ten percent for one month, so the stress is very high. Mark I colleague Michael McKay always says there's a big difference between jobs created and jobs restored, and whenever he sees these payrolls report, especially over the last few months, he will refer to them as jobs restored. Can you walk us through the jobs that are becoming Bankmark the

permanent scarring you're already saying in this labor market. Yeah, that's a good point. So a lot of the jobs that we've lost in retail and for hospitality, transportation, anything to do with a tourism, travel, recreation, you know, they they obviously have gotten creamed in the pandemic there there. They some of them have gotten some of those jobs have been restored, but many, many of those jobs are unlikely to come back or unlikely to come back any

time in the foreseeable future. I mean business models are going to change. Uh, example would be business travel. So you know, I have a couple under economists who worked for me across the globe. My biggest expenses compensation, second is rent, and the third is traveled before all this, but given the pandemic and given all the technological changes, we're not going back to the kind of travel we have before. And I suspect many many businesses around the

world are in the same position. So that's a that's a business model that will have to change, and that means there's gonna be a lot, a lot fewer jobs. Just to give you give you a sense of it, we lost twenty two million jobs in March and April. We've gotten uh you know, roughly nine million of those backs were down. Third team probably get another three million back by the end of the year. And that that's where the last ten million. Getting that last ten million back,

it's not going to be easy. It's gonna take time. Probably won't get there until well into the middle part of this decade. Mark you mentioned travel, how much of that is vaccine dependent and how much of it is managers looking around lacking a new cost structure and say, you know what, we're sticking with this? Well, I think with tourism it's about it's about vaccine and confidence that

people aren't going to get sick. You know, particular people who travel, people in their fifties, in sixties, seventies, you know, the baby boomers. You know, they they're not going to travel until that if there's a vaccine they feel comfortable with and they feel like they're not going to get sick, you know, somewhere uh outside of their home, so that that'll come back with vaccine. But the business travel, I just don't see that coming back in the same way,

or it's not coming back anytime soon. Mark, I want to go to the x X so I want to go to the time function here of this stimulus. You've done some political work I'm not gonna say representing democratic politics, but they have used your good research from Moody's analytics. The Obama administration, there's no question about that. Do you sense an urgency in this in this August in Washington or are they just slipping their way into a September

that's too late? Well, they better have a sense of urgency. I mean, if they don't act, and I should say the president's executive orders really doesn't advance the ball significant degree. They're what he's proposed or what his orders is unworkable. Uh, nothing's going to change. And even if he got exactly what he wanted today, it's not enough. So they need a sense of urgency if they if they don't pass a sub San Francisco rescue package, we're going back into recession.

And Jeff Farrow, in this odd weekend that we have here, I think one of my great observations is, never, ever, ever, jne, have I seen conservative economists in such sharp agreement with liberal economists. They all say the same thing, let's go, let's oh, let's go. Well something. They know the recovery is constrained, So you need some kind of demand side response. You need something to offset the shocks to income because

the recovery is constrained by the virus. And my question would be for you, as an economist looking out, let's try and get out to the end of the year, how do you provide any kind of forecast whatsoever without a deeper understanding of what undpends that forecast, which is fiscal stimulus. Yeah, it's an assumption, right, I mean, I'm assuming economy makes its way through without going back into recession.

But that's based on two key assumptions. One that the pandemic remains relatively contained, doesn't get meaningfully worse than you know where we are in terms of infections and the hospitalization. That's a big assumption. And then, of course what's going on in Washington and ciscal policy. Now, you know, in my baseline where I assume we make our way through, I'm assuming a one point five trillion dollar ciscal rescue

package just for context, what the president has proposed. Again, even if it gets exactly what he has ordered, it's about four hundred billions, So you know, just to give you context is just not simply just not enough. And and that's that's that's not He's not gonna be able to execute on that. The things he's being he's asked for are just unworkable anytime in the foreseeable future. What is your run rate on g d P twelve months forward? Uh, well,

twelve months for it. I you know, by then, I hope we have a vaccine, so I hope we're often running by then. But between now and then, uh, you know late this year earling X, I don't think we're going anywhere fast, so we'll be treading water. It's is it pushing pull, it's the it's the headwind created by the virus and the ongoing pandemic and the effect that's having on on consumers and businesses, and then the tailwind

of any fiscal rescue. If if we don't get the tailwind, we don't get the fiscal rescue, then the head wind's gonna blow us right back into recession. And you know, un employment is gonna be rising, not falling. Not be honest about the profession right now in economics, and this

is certainly not a take at your profession. I just want to take for understanding of how uncertain it is and how much we should look at these forecasts and actually penny attention to the moments months out, mom because things are so so difficult A week count, two months out a Coulter A round, Yeah, A great point. I mean that's why you know you can't rely on a

fort one forecast. You have to run different scenarios and and if you're a proved in planner, a proved in business person, you know, you guard against the downside, So you can't just take the you know, the you're expected down the middle of the distribution of possible luck and on my outcomes, because the distribution is very wide, and there's a boatload of uncertainty and and and that's one

reason why you kindomy can't get going right. I mean, you're a business person, and you can't make a forecast. If you can't put numbers in the spreadsheet and calculated return on investment, you're not going to make an investment. You're not gonna hire, you're not gonna expand. And that's one of the key reasons why it's just I think it's pretty hard for us to get going here until the pandemic is over, until we have a vaccine that people feel good about. Marks and D and Moody to analytics,

monk right to catch you out of these. She has a trifect of competencies on Wall Street with JP Morgan asset management, Diana moy joins us uh cf A and also with their great work on foreign exchange and portfolio management of x f X even better, formerly a trader with UBS and there's nothing like losing money as a trader to give you clarity as a portfolio manager. Diana, wonderful to have you with us right now. Let us turn first of all to the linkage of the dollar

to your world of emerging markets. Is it about dollar dynamics or is it e M by itself. It's a bit of both, Um, just Tom, just to kind of look at it. Like most of the markets in effects, we do see bifurcation cleaning out in a big way. So for the DM sensitive EM currency, so we're talking about Central and Eastern Europeans UM currencies and some pockets of Asia UM. Broad dollar dynamics do matter, and those currencies have actually done reasonably well year to date versus

the broad dollar UM. For the high yielding imagine market, it's more on a case by case basis where the fundamental starting point does really make a big difference on how the currency perform. So you look at Turkey UM as a good example that's really struggled to do well because the fundamental starting point UM doesn't change and that's

not aided by a weekend dollar Jana. Typically we talk about one country in am getting in trouble, and then we talk about contagion risks to the rest of the complex. From your perspective, how much exposure risk there too Turkey? Given what's happened over the last several years, it feels

like every twelve months we have the same conversation. How many people have actually de risked and reduced exposure to Turkey that a move like this in the last week or so is irrelevant for the rest of the complex. So that's um That's an interesting question, John, And there's two ways you can look at it. One, the economic exposure for company and countries to Turkey has become ring

fenced in reventeers the vulnerable. The vulnerabilities that Turkey faces are not new to market, so companies have had opportunities to ring fence their economic exposure there um in terms of the impact to broader financial afft um. So this is the contagion of weakness in Turkey spilling over to other markets. Two points One, we see that playing out more in the weaker credit So where these vulnerabilities underpinning an economy, so South Africa would be a good case.

But then two, this is August, right, and we know August is usually quite a liquid month. So those moves in Turkey could potentially spill over. But if we do start to see that moving to better credit, our our our buias would be actually to look for where that contagion isn't warranted to add risk, Where would that pay if you started to say it so, um, I'll give you an example. Let's say if we saw the moving Turkey impacting UM, say someone like Mexico, just because it's

considered another high yield country. I think that would present interesting opportunities for us to buy because the fundamental picture is vastly different in Mexico. So there's no reason you should see Mexico selling off because Turkey is coming under pressure. Whether you're looking at real rates with Mexico having some of the highest in the world of as a Turkey, whether you're looking at inflation dynamics or polity credibility, that's

a totally different story. Um. So for us, the market that we would actually see Turkey related weaknesses are very good opportunity to get involved in dynamo. What is so important to me is the slowdown in g d P, and when I look at the world trade charts, they're exceptionally distressing. How close are we to not financial crisis but liquidity issues within e M because of a lack of world trade. We were much closer to that in you one Q two than we are to day. Tom

Um we are seeing a small rebound in trade. Actually, when you look at the China data, we have seen a pickup in activity coming through there. Um economies have reopened, so exports are starting to pick up again in aggregate, which is promising. And we think the fact that we've passed picked shutdown UM we don't expect to see closed down to the extent that we had in Q one is actually a support. Additionally, the bigger concerns so there's

liquidity and the solvency. The big concern in the midst of the shutdown was whether e M economies will be able to access markets. We've seen sovereigns come and issue debt and investors actually in this low yield rate are willing to finance that. So today I'd say those sorts of concerns are much less than they were three months ago.

How do you play that then, I believe you're suggesting that Johanna risk and feel and um, where would you place risk an We look for one select ems that have exposures to the European recovery story, so Poland check come to mind. Yeah, we look for pockets of Asia

UM that should continue to do well. When you look at how China is dealing with the virus compared to the rest of the world, there's no doubt that they are well ahead of the curves and economic activity today is rebounding, so that's probably the one economy that will have positive GDP growth in So we look for economies that have economic linkages to China in parts of Asia UM to buy both duration and effects exposure, and then

in the high yield markets. It's very much on a case by case basis, so you look at where you have strong fundamentals, where you have credible policy. Mexico is one that I've mentioned, UM Russia potentially, but we want to see what happens in the elections first in the U S election. Janne right to catchy as always really important topic this morning. Danna Mama of Jake Femalkan Asset Management.

We've had a great joy in speaking with Jonathan quick Used with the Rockefeller Foundation, their managing director and of course affiliated with Duke University, has work at Rochester and Harvard over the years and of course this wonderful book, The End of Academics. Dr Quick, we need an update, and the update to me is a resounding success. And deaths of New York State, not only on a log chart is a concave, but there seems to be a real de acceleration in the grim news in New York State.

Let's begin with a good news. How did they do it? Well? They did it by applying the basic lessons, the basic techniques that we have available to us. We've seen in country after country and now state, um after state, and growing number that if you if you get the majority of the population following those personal protective habits distancing face masks, handwashing, avoiding these super spread er large indoor gatherings, If you do that and you also make some adaptations in your

workplaces and communities, uh, you can. You can drive this virus back. And and that's what it's been. It's been a collective action. And it's what what you might call herd behavior. We don't have herd immunity yet from a vaccine. It'll be a while, as you've been discussing, but um, but we do have herd behavior. If all of us take those lessons and applyment our daily lives UM, in our businesses, our schools, in our communities. The distinction this

morning is, I guess there's a lowering case level. That's wonderful news in a stable to rising death Do you just presume the death level will decrease because we're now seeing lesser cases. Well, that's part of it. That's obviously. If you get a few people, a fewer people infected, you're gonna have fewer deaths. But the other bit of good news is that we are getting better at traded coronavirus UM. We're finding that we can be less, we can use respirators less and rely more on on oxygen.

We're finding several medicines a age old steroid decks of method Zone, which for people who are on ventilators will cut the death rate by by a third UM. And we're using some other new drugs like uh disaver, which for people aren't you know, So we've got a combination UM. The other factor is that the newer cases seem to be more in the younger age groups, so there's a lower a lower death right there. So yeah, combination talk

too quick. Lisa emails in from New York, which is just waking up and Lisa wants to know should the kids go back to school? Way in here on the back to school right now? So, I mean this, this is a this is a challenging issue. I mean, everybody wants to get the kids back to schools. The parents do, the teachers do, the schools do, the students do, and UM.

The reality is that there are some parts of the country where the community spread is so low that UM that we can probably be pretty close to normal with schools. The other side of it, though, is that there are places where community spread is so great that it's probably not the time to go back to UM in school. So what we're seeing is communities looking at the evidence.

The teachers, the National Teachers Association and the National UM Academy, and pediatrics many have provided guidance and community by community, they're looking to see what's gonna work for us, for teachers, for students, for the bus drivers, for the janitors, for everybody involved. And UM, this is going to be a COVID year. It's not going to be a normal year. We we can't just UM wish away the virus. But what we can do is develop ways of getting back

to school that worked for our communities. A lot of this doctor comes back to testing, and one complaint we've heard repeatedly is the test takes time to get the results not to I'm just wondering, how do you get those times down a whole lot more quickly. So, UH, we've we when we set out the Rockefeller Foundation and Testing National Test Action Plan, the first step was scaling

up the lab based diagnostic tests, and we moved. We got a fivefold increase over over three months from a million tests a week to five million tests a week. But the result of that plus these surges, is that the delays are such that the tests are useless by the time you get the results. You've spread. So the next phase and we we launched last uh two weeks ago, a strategy that's based on Energin testing by fast turnaround, rapid tests, pointed care screening tests. And these don't require

sending tests off to the lab and back again. They can be done in workplaces, communities and schools. And these newer screening tests are absolutely vital for for workplaces, for nursing homes, for schools. So last week, working initially with six governors and now eight governors, they've come together and made a joint commitment for a major purpose of purchase of endog and screening tests to use in their states.

And those are within minutes or hours turn around. And the big advantage of that is if you do get tested positive um and these are about plus sensitive, so we'll get eight of those who need to be pulled out of circulation and and and then the context traced. So so that's really the next phase. It's a paradigm shift and testing. It's a whole new testing technology, but that's what we need to get us to the level of testing. We need to thank you staying open. I

appreciate your time this morning. As always, tell to Jonathan Quick that the Rockefeller Foundation. 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.