Surveillance: U.S. Response Should Model Others, Stiglitz Says

to cut right. We're gonna talk about what's going on right now, but Joe, I want to go back a small forty years to Grossman's Stiglets, and in it, there is an equation, folks, which is the simplest equation in all of economics. You equal state of plus epsilon. Epsilon is the unobservable. It's what we can't see. Joe Stiglets became acclaimed for this. Joe Stiglets, have you ever seen an epsilon like right now? Have you ever seen the unobservable that we see in this pandemic. We've never seen

a shock as big as we have. But the interesting thing is after the shock has hit, uh, we can trace out some of the consequences. And what I find a little disappointing is that we haven't been doing next second round. The shock we could not have anticipated. Uh, we could have done a better response to it. So, Professor, this shock is what's unique about this shock versus what maybe some things we've experienced in the past. It is

truly truly global. Does the response have to be global because right now it seems country by country or even within the United States state by state. Well, it has to be you might say, both global and local. Uh, if the local hospitals that are going to take care of people. But the fundamental fact is that we won't be able to control the pandemic until we control it everywhere. If it's raging in some part of the world and we don't yet have a vaccine and we don't have

a rest viral, it'll come back to bite us. And that is what was so disappointing about Trump's decision to hold up money on w h O. It's like being upset about the fire department and uh, defunding the fire department in the middle of the fire. Joe. What I find so distressing here is we've got rogueoff and Reinhard publishing a brilliant essay the other day. And you know, folks, I've never said this in my life. Rogoff and Stiglets are on the same page, and and Joe, this is

really critical the urgency of the matter. And we've seen a central bank and frankly central banks plural matter, and the legislature, particularly in the United States, seems locked in almost a pardon the pun a lockey and the individual approach where society cannot collectively battle a viral pandemic. How do we get ourselves out of that? How do we extract ourselves from this forced individualism? Well, I think the hope is that we look around and see what's going

on in other countries and take the lesson. You know, the I m F came out with report yesterday and one of the striking things to me, and that was that the United States it was way ahead of every other country in the number of the fraction of unemployment, the unemployment rate UH and ahead of every country in

a very negative way. When they said, you know, let's make a number us number one, they didn't mean make us number one in having the highest level of unemployment among all the events countries in response to the coronavirus. The other countries have figured it out and have figured out a way to make sure that there is less sufferings,

fewer people are thrown out of their jobs. And what's so devastating the United States is we are the one country where people depend on employment for health insurance in the middle of a health crisis. So the devastating effects in the United States being unemployed, our orders of magnitude worse than another country. And then, Paul, I've been out

of tooralize here. I'm talking to my own book, but it's companies like Bloomberg, and I'll mention Bank of America, Mr Mourne, and today re emphasizing this is not the time to can peoples. You got to find a way to do this. Paul, pick it. So, professor, give us what we know about the US fiscal stimulus response. What do you think the US government should do next? I mean, the FED seems to have really flexed its muscles, exercised many tools in the toolbox. What do you think the

federal response should be going forward? Well, I think there's actually a number of things that we need to do. Uh, some of them are relatively easy. There were some big gaps in our earlier measures for inch things. While we recognize how important it was for people to have paid sickly. We don't want people with COVID nineteen going into the workplace and spreading the disease. And so they passed a law. But what did they do then, under the pressure of

the big companies, exempt at eight of American workers. So we recognized the principle, and then we totally undermine it. So that needs to be changed. Uh. We recognized the principle that we shouldn't have people UH, we should keep the connection between people in their jobs. But then when we designed the program, we designed it in a way

that it's not working very well. Other countries have done UH much better, And there's a bill in Congress to follow the model that the other countries UH used where the employer directly gets a check to pay his workers from the I R S or Social Security. We have all those Uh, we have all the the the information we need. I mean, after all, the I R S is communicating with every corporation and so they know how to communicate. So that's money that could go almost overnight.

And why we didn't do it that way, I have no idea. UH. And then we have some other big gaps. One of the big issues is UH we left out the big NGOs. The universities are research institutions, and so some of the kinds of institutions that are will be absolutely necessary for our revival as a strong economy. I have not been supported. They'll they'll be along with another trunch. If you're just joining us, what's Joseph sticklet's with us of Columbia University. Joe, I want to talk about your

Democratic Party. I know you voted Republican four or five elections ago, but Joe, I want to talk about the need for Democrats, and particularly the visible East Coast Democrats that hang on every Joe Stigley, it's in word, how do they get back to the middle ground. How does the vice president running against President Trump? How does your party ex convention getting to November? How do they find their way back to Hubert Humphrey, Scoop Jackson in the

middle Democratic party ground? So my view is they need to focus on the basic principles, which are principles that you know of American support. Uh, most Americans you know in poeft Po show, they think that seven dollars is not adequate as a minimum wage. They think it's not a livable wage. We need raise a minimum wage. Almost everybody says that the fact of the United States is the only advanced country that doesn't recognize the right to

access to healthcare is a basic human right. We need to recognize that, and there are different ways of doing it. We need a good democratic debate about how to do it. But recognize that principle. Uh, the idea that people should be able to shoot other people, Uh, that you should have. You know, we're not talking about rifles. We're talking about machine guns. Uh that uh the Fourth Amendment not wasn't talking about everybody having the right to have machine guns.

So some forms of gun control. I mean you to stay on the pandemic now, and you know, we all understand on gun control it's about the Senate majority and the power in the rural nature of the Senate, etcetera. I mean, we all get that. On the pandemic and on the politics forward. Do you see any nudging towards the more collective American psychology or do we get done with the pandemic and we just move on as we've

been moving on since you know, forty years ago. Yeah, I'm glad you raised that because that is the essential issue when we have a crisis. We realize that we need collective action, that our individualism can't work, and we turned to government. And here in New York, Governor Como has really done a fantastic job under very difficult circumstances. Uh. So Uh and we see in states like California the role of good leadership and the role of the state in being able to protect people and to get the

pandemic under control. So I think you know this is one of the themes of my book. Uh, People Power and Profits Progressive Capitalism. Uh, it's that we went too far in the extreme at markets where everything we need to get a better balance of balance between recognizing markets are important, but so is collective actalcy Joe, just because of the clock, we gotta leave it there. Joe Stiglets, thank you so much for joining us to Lauria from

Columbia University. Always controversial, we got a ton of response when Professor Stiglets is on. We are committed here to speaking of medicine, and we do that across the wide sphere of this pandemic. We've talked to radiologists, We've talked to epidemiologists. Again, we speak to someone expert in emergency medicine. She's Laurence Soer Johns Hopkins University, their assistant professor, really just outside the pandemic expert in this area. We caught

up with her today here. He is Professor Soer. I think it's a little too early to say whether it's fully accresting or not. We are seeing a slow down in the number of increasing cases. We haven't I don't think peaked that curve yet, but we are starting to see slow downs in the volume um and all the more reason to protect those measures that are in place, like distancing, to ensure that that those volumes don't spike right back up as soon as a sort of quote

unquote go back to normal, Lauren. That is certainly what I see in the fancy exponential or logarithmic charts as well, exactly as you just described it. And so much of that is done on a moving average, where professionals like you and unprofessionals like me, or even the present United States have to use a number of days or weeks or months and blended together to really see the abb How long is that moving average? What's the appropriate length

of time for you to gauge? Well, I think UM, it's changing every day, and I think we're just starting to learn more information about this virus and how it behaves in people. UM. The the key is not to make an assumption way too early, right so, UM, two weeks is really the minimum to even start to understand the data for you want to look at it two

weeks out. So I think we're several months before we really can go back to UM go towards planning to reopen and and go back to normal, Lauren, how quickly what we get a vaccination against the pandemic. There's a lot of really good candidates coming up right now. I think we're we're seeing estimates from the scientists somewhere between three and twelve months, which is unbelievable for vaccine science. It's really fast, and so it's exciting to see all

this progress being made. I think realistically a vaccine that's ready to go out to the general public is about a year away. UM, but we could start seeing candidates that could be used to protect our frontline health workers and for responders earlier. Probably what's the biggest challenge right now? So there are a number of questions Lauren about, for example,

US symptomatic cases right, why are they symptomatic? And until you find out more about them, it's very difficult to get a handle because they keep on transmitting if the lockdown is eased somewhat. But also immunity, how close are we to understanding whether people that have had it can go back safely to work. Yeah, there's a lot of work being done in that immunity question right now, and I think we have to because we're so early in

the outbreak. We have to wait to see how people's immune responses stay over time and also how when people are are ready to go back to work without having symptoms. The biggest challenge right now I see is testing. We're still trying to ramp up testing in a meaningful way, and that is what every single other public health measure hands up on all of those things that we want to use to get back to work, to alleviate social distancing, to be able to travel, to reduce the masks, the

hind one testing more very clear. Thank you so much for bringing that up. What is the constraint I'm getting more testing done? I think it's it's a little bit of a supply issue and a lot of bit of a coordination issue. So making sure that the tests are in the right place, that people have the ability to scale up and test all the people they need to um, that you continue to get the materials, and that you

have the people to run the tests. Lauren Son with us with the Johns Hopkins University and Emergency Medicine as we've been talking to people and nursing there, and also from the Bloomberg School of Public Health. We should of course mentioned that Mr Bloomberg has provided a mens fum anthropy to Johns Hopkins for that School of Public Health

as the founder and owner of Bloomberg Television. In Bloomberg Radio, we now have some turf under U S JP, Morgan, Bank of America, Golden Sec City Group of course others coming out in the superregionals in your community banks as well. Synthesizing this is Kenneth Leon. Here's a CFR, a head of research and also acutely focused on the financials. All it. I believe it's four shops right now, ken Leon, what is the summary? The summary is shift to balance sheet

credit risk. Uh, there's only a few weeks of look into the the recession, so more work will be done for the second quarter. In terms of reserves for loan losses. UM. The question, though, always is how deep will this recession be and how long. I guess the public markets expect a recovery in the second half of this year, but banks are being prudent, which essentially means that they're building

up reserves for non performing loans. That's the good news, Kent, that they already that this balance sheet is strongest city in our sweat too. Here's what I'm trying to get my hands around them, and maybe you can help us. When these guys say they're prepared and when they come through with a que huge credit provisions like the ones we've seen over the last couple of days, what are they prepared for another shutdown that last a month, two months,

three months? Can you understand the duration that they're working with their timeline that enables them to decide how much money they need to put aside. What often happens is banks are ultra conservative, which means they tend to reserve more than what will actually happen. It is likely that if it's a recovery later in the economy, there could be a reverse of these reserves. But at this point, UM, it's essentially the credit committees for these banks are being very,

very conservative. Can I'm struck by this sort of dissidents. We're seeing the increase in credit loan loss provisions, which is deteriorating some of the earnings potential. But City Group just reported it's best fixed income trading revenue in eight years.

And you're seeing this consistently across the big banks, that they are performing better when it comes to treating revenues, and I'm wondering are people being too dismissive of this is sort of the profit winning aspect of a dislocation like this, and the fact that the big banks have been in a position to take advantage of it. So

the banks are serving clients. And then the capital markets trading has been strong, particularly as you know pick UM, and it's mostly investment great as opposed to high yield or other derivatives UM. We're also seeing strength and equity trading with volatility UM. This shines much brighter for a Golden Sax or Morgan Stanley as a percentage of their total net revenues than the large banks, which still have a sizable traditional loan business and just sort of dissecting

the other sort of lending functions of the banks. We're seeing that the increase in c an I lending and say Bank of America is really attributed to the draw down on credit lines that we've been hearing a lot about will the ultimately be a pain point for the banks or a point of profit going forward into what will eventually be a recovery. So, first of all, in terms of lines of credits and unrestricted lines, UM, companies

are taking advantage of that. When we look at that and also look at their loan exposure, UM, we think there's risk in terms of commercial real estate and construction. Uh. The total lines of credit for the big for the four largest bank was just about four hundred sixty billion, four times greater than back in two thousand thirteen. Um. You know, so a lot of this will have in terms of how deep this can be for credit losses will be in industries like real estate, oil and gas.

Goldman has taken a reserve ninety seven million, and UM, you know, we really think it's really a question of getting people act to work versus having unoccupied officers as well as other real estate property types that could be at risk. City saying that numbers just incredible for our listeners and might not have heard this eight percent of employers around the world employees around the world working remotely at city group of phenomenal stat the path forward can

I don't think we should be naive about this. I truly believe that these banks want to help their customers. Of course they do, absolutely, of course they do. But I don't think we should be naive about the pr effort going on right now. None of these banks want to be seen laying off anybody in but they will want to cut costs again. And Ken, I'm just wondering, are we putting off this year's cost cuts for a

huge effort next year. Well, it's a great question. And when you look at state coach holders, it's about serving the public their employees. I don't think investors really are looking at earnings for the next quarter as well. So when you get analytical about this with our efficiency ratio UM, they're not going to be where the banks wanted to

target is the mid fifty percent range. You know, that's another conversation in a better environment, but at this point it's really serving customers and also UM due diligence in terms of non performing loans and Kenna John's observation working from home. Great, what do the banks do that aren't digitally ready? I mean, is this crisis is pandemic just brought to the forefront. They're dead? Is that true? It's over four thousand banks in the US, community banks, smaller banks,

and some that Stilton might have passbooks. So if being digital Ken Ken Ken, John Fair and Lisa Bramwits don't know what a passbook is, that's so far back. And think you know, we're talking community bank, what are they? What are they gonna do? Can? Seriously, what are the non digital gonna do? Their deposits are not going anywhere, and it's really a question of um whether they were

too aggressive in terms of loans. The regional banks have more concentrated industry exposure, some in oil and gas, but I think community banks will just slog along and unlike the rest of the world. Uh, the US banking industry number of banks is still too large, but the concentration of assets with banks greater than two and our fifty billion is over of the total industry. Can just real

quick here, I'm wondering, what's your recommendation on stocks? Do you think that they're buy or do you think that this is sort of indicating some serious caution and risk going forward. We didn't get this right, and we have five recommendations on Bank of America, also on JP Morgan and also City Group and Trading Um at low multiples of net tangible book value. Forget about earnings. We would look for the banks probably to the market performers at

best in your term. But if there is enough turn in the economy, these are great cyclical stocks later this year. Can't get to catch up with the solways Kelly on that cfl right, director of Equity Research, on a busy morning for bank kearnings Right now, folks, this is the conversation of the day if you are part of global Wall Street, and also, as John mentioned yesterday, if your retirement plan has been blown up, which is a few people as well. William Priest wrote a definitive book on

free cash flow a number of years ago. Was my book of the summer one summer. It's called Free cash Flow and Shareholder Yield, and it is a must read. There's no other way, uh to move it. The rumor is the movie will be out next year. Memorial Day Week on John Farrell playing counterpart in it as well. Bill Priest joins us now with Epic Investments. Bill Priests, one of the great foundations of your life. Work on free cash flow is share buy backs. They've disappeared. What

does that do to the priest mathematics? Well, thanks again, Tom. Actually, let's go back one step and just start with the fundamental statement. The value of any business is a function of as ability to generate cash flow. And we define cash flow uh where we as we subtract from the operating cash flow of a business. And he planned capital expenditures in all cash taxes, which gives you free cash flow. And there are only five things you can do with

a dollar free cash flow. You can pay a dividend, buy back stock, pay down debt, reinvest the money internally, or make an acquisition. If you can earn a return above your cost to capital, you should reinvest or acquire. It's the fastest way to growth shareholder value. That said, most companies cannot use all of their free cash flow internally, and as a result, they decide to return some of it back to the owners of the business. Now you

can pay down debt, that's not going to happen. You have a cash dividend and buy backs and buy backs sword after the O eight crisis, and I think you'll see that diminished. It doesn't mean that corporations are going to stop returning capital to the owners of the business, but the buy back method will will come down substantially. Uh. It's uh, it's one of these things where people are going to have an attitude towards buy backs that are not going to be positive when they visit when they

see suffering going on. That said, the corporation's job is the max amid the value to business to the owners. So I think what you're going to see is a substantial diminishment of buy backs, but not necessarily cash dividends. Cash dividends will be down this year for sure, because they're going to be down, But depending on the company, you'll see some like yesterday you had P and G raised the dividends. Day before, I think you had Johnson

Johnson raised or cash dividends. Cash dividends are okay. The banks are a little different. The banks have this problem that in O eight they were viewed as the cause of the crisis. Depending on what country you lived in. Uh, they were treated well or badly. In this country, they were treated rather well, and I think the populace generally feels they were treated too well. So this time around, I do think they have to take a more socially appropriate attitude. And I don't think you'll see any buy

backs by any US banks this year. And Bill they seem to have confirmed this, UH saying that basically they're not going to engage in that they're talking about the banks since sort of the loan loss provisions that we keep focusing on here twenty four billion dollars set aside.

When you look at City Group, Well's, far Ago, Bank of America, and JP Morgan so far for potential loan losses, and I'm just wondering, is there some sort of consensus that's emerging among the big banks in terms of the parameters of how deep this downturn is going to be that's instructive for other earnings going forward. Well good, that's

a very good question. And I think when you look at what's going on, it's unclear what the what the ultimate unemployment number will be, but it's going to be substantial. We have roughly a hundred and we had I should say a hundred and fifty five million jobs in the United States unemployment rate would be thirty million people. We're gonna be at twenty pretty easily, and we will see the biggest unemployment number since since the end of World

War two, really since the depression. And I don't think it's going to prove socially accept a bowl for any financial intermediary to quote do well or have their senior leadership do well when you have that level of unemployment. So I think you'll see very very cautious statements with regarding dividends and as we said earlier, just no buybacks at all. I think other companies, you've seen some people

waive salaries in some parts of the world. I noticed they haven't weighd bonuses, but they have waived salaris that they won't take a salary during this uh, this this tobacco. I think you'll hear more and more of that in the United States as well. It will depend on the build out. I mean, we have to reopen the economy. If we don't reopen economy, and it's going to be

an absolute catastrophe. How well reopen it it will be. Uh. I think it will start probably soiler than many people think, but there will be experimentation, and it will be a while before you get the economy fully opened up. Bill, thanks so much, greatly, greatly appreciate it. Just a quick update there too short. Thanks for listening to the bloom 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.