Surveillance: Virus Far From Over, Koh Says

not epidemiologists. What I'm interested in from an investor's perspective this morning, it's not just how the pandemic data changes, but how investor attitudes changes to those changes in the data. Can you walk me through how you think investors will respond to the latest increase in infections we're seeing across several states. Well, this, this beginning of a second wave, is quite concerning because I think all of us as investors would have expected it a second wave, but would

have expected it maybe in the fall. So this second wave starting, especially here in the US, so early on in the summer, is a bit counterintuitive and really assigned that that reopening is is a very delicate situation. I think this puts a spotlight also on the reopening process in Europe. We had successful reopening so to speak. In Asia with the new exceptions right in South Korea, for example, we had a concerning rise. But in Asia broadly speaking,

these second waves were contained rather quickly. The implications for investors are are are meaningful because the rotation between defensive and cyclicals, or say from growth to value, or from large cups to small cups. We're really really large themes that were taking place in the last couple of weeks.

Unless yeah, there is a belief that they bought to another lockdown is much much high because so many of these states have now built out healthcare capacity that track and trace is far more far forward it was, say several months ago. What's your response to that, Well, the it is natural to assume that over the last three or four months, we uh we have gotten more prepared with respect to testing, with respect to amount of capacity

in the healthcare system to handle this UM. I think it's reasonable to assume that the second wave will not

cut us as unprepared as we were the first time. So, in my opinion, again with that in mind, the investment strategies should be focused on, as we have argued before, on actually harvesting more credit premium across the credit spectrum, in high yield, in investment rate as these spaces tend to rely more on the amount of monetary stimulus and credit stimulus that we're seeing, which continues, well, equities will suffer to your point earlier about the impact on cyclical

equities will suffer more from the disappointment or lack of momentum in earnings that were likely to see in the second half of the year, unless you know it's the V shape recovery died yesterday with Chairman Powell's persistent comments, how does the equity market adjust to that? I mean,

if it's another wall of worry, doesn't that benefit stocks? Well? So, maybe not to the same extent, to be honest, because the first wave since the FED and fiscal stimulus um, not only the FED but globally was really about uh, multiples expansion, right, but stocks rows, and there was a V shaped recovery in stocks. It was entirely driven by

the price component and multiples expansion. Earnings, as we know, are still in a very very difficult situations and continue to fall from this point on to maintain that recovering stocks, we need to see earnings growth at the cost even multiples compression or or multiple staying flat. But it's critical here in the second phase of potential stocks rally to

see the support from earnings growth. While for credit as we're as we're arguing earlier, being senior in claims, just being able to avoid a serious round of defaults and having the backstop of the Federal Reserve that should allow for credit premium to be harvested by investors. Lessio, let's pick up on that and build I know that you've been recommending taking credit risk, or you have been taking credit risk within the high yield space over investment grade

in order to capture that extra risk premia. I'm trying to understand the fedback stopping valuations to an extent, but not necessarily preventing companies from going bankrupt as we see the bankruptcy rates rising to the highest level since two thousand and nine. So how do you draw this distinction and how big of a risk is it that you're

still going to see this wave of bankruptcies escalate. It is a serious risk, um and these are risky UH credits in some parts of the high old market from our perspective, As I said, allocators, the reminder is always to be to be very diversified in your or credit

portfolios in in order to avoid those ideas idiosyncrasies. For more nimble investors, one valid approach this early on into the recovery is to invest in defensive fixed income factors such as quality, high your credit, staying down into the into the curve spectrum, into the into the maturity spectrum, stay staying fub sub five years on both investment grade and high yield, and focusing on on um for the same ratings co horts on on attractive quality and attractive spreads.

So when you look at the fixed income universe, you can draw an analogy as you have in equities, focusing on quality and low volatility factors UM rather than value and up in the risk spectrum in credit. Unless you're very quickly here does text still lead? I mean, with all the adjustments, the grimness that we heard from Chairman Powell, is there revenue build of the text that be all

and end all of the equity market? Uh? Text still still leads in the sense that it's the it's where quality is today is where the you know, in a low growth world and in a world where more than ever a globalized and diversified source of revenue growth will be important in order to diversify the economic risk. UH text still leads um and and it will provide a little bit less ceclicality, especially at these inflection points where

we're beginning to question the sustainability of that v shape. Alessia. I always tried to catch up with this, Alessia the longest that of invested because journal Lisa have mentioned there is a change in the air, and it's not funny. There has been good news on a pandemic over the last number of days, a trend improved and that is abruptly reversed in the last two or three days as a pandemic spreads across this nation and spreads out of

troll in so many developing economies. Howard co is a doctor. He is a physician out of Yale University. And yes he had public service with Barack ob Obama in the Department of Health, but far more in the people of the Boston community know this. He has been a true star of medicine in a very medical community. How much so he's done the rarest of rare things in medicine. He's thrown out the first pitch at Fenway Park, and we're thrilled that Dr Coh could join us this morning

on the pandemic. Dr co you are so esteemed in dermatology, in oncology, a broad set of internal medicine. Do you buy the idea of a second wave or is it just a spread of the first wave of this virus? Well on March of their tief, the President declared a natural emergency for our country, and unfortunately, the latest data indicate that that emergency is far from over, and we're seeing rising cases and hospitalizations in the West, in the South,

and the southeast and rural parts of our country. Rising hospitalizations in particular concern all of us because if hospitals are overwhelmed, patients can't get the care they need and deserve. And as we enter the summer and businesses want to reopen, everybody wants to have a confidence that this pandemic is behind us, and we can't say that at all. So we have to follow all these trends very very carefully,

especially as we move into the fall and beyond. So Dr Cole, I want to draw a distinction between a second wave that stems from people actually in a reopening economy getting back out there in a second wave resulting from policy that perhaps isn't securing against a resurgence in the virus. Is what we're seeing right now in Texas

and Arizona, an inevitable outcome to the reopening of the economy. Well, Lisa, we're very concerned because we know what works to prevent infections and prevent death, and that is the best public health practices possible. Some states have followed that and watched the indicators and the trends very very closely as they've opened up. Others have proceeded despite the fact that cases

and hostilizations and deaths have been increasing. So this is a combination about biological threat but also policy issues that need to be coordinated better on the federal level. At least we have right now fifty states going in fifty different directions. We need a one country, one government approach to this pandemic going forward. Dr CO a lot of people saying there is little appetite to review some of these shutdowns that we saw throughout the nation going forward

just because of the economic hit. What other policy tools do you see being effective, they could potentially reduce the number of cases and the potential for a serious second wave going forward without shutting down the economy again. So we have a try the trends very closely. That that's the number one message here. We have to watch those cases, hostilizations, deaths. We have to target our efforts to high risk communities.

We know, for example, the communities of Color have taken a real disproportionate burden of the death and suffering to date. We have to make sure that the testing and the contact tracing, and the preparations for PPE for the fall and beyond have to be coordinated at the highest level. These are the things we have to be paying attention to as one country, not fifty states going forward. Howard, Professor Delta, fantastic to catch up with you this morning,

said thank you very much for your inputs. Right now, George Bory with us. He's well as far ago, and he writes brilliant, brilliant note summarizing the what to do in the fixed income markets. George Bory, what do I do right now? I've got a small pot of money. I don't want to be inequities. I own enough Apple or I own enough Amazon whatever and I need coupon Where is it? Tom? Good morning, John, Lisa, it's great

to be on the show. Thanks for having me, and you ask one of the most important questions I think all investors face today, Tom is sort of what do I do with my money? And you know what people have done with their money in the last you know, call a couple of months, as we've seen a math to rush into UH into very secure money market and government like securities, specifically in the fixed income markets. You've seen money market funds kind of grow by up to

two trillion dollars. It's truly a spectacular amount of money. UM. Now, Historically that money will tend to stay in the in the front end of the curve while the economy UH starts to kind of shake itself out. And as we've seen today, UH, you know, we're seeing a bit of a risk adjustment, as you know, people take a little bit of a breather after a pretty spectacular run in most markets. And I think at this particular point in time, it is still a good idea to sort of incrementally

move yourself out of the out the risk spectrum. UM yields are very low cash yields are BURO effectively UM and keeping maintaining income is going to be an increasing challenge as we move forward. The FED told us yesterday FED funds are staying at zero, are very close to zero through the end of That means the reach for yield for any saver, for any investor is going to be UH is going to be pretty significant. And Tom, you and I've been on the I've been on the

show for many years. We've we've discussed this. UH. This is not a new phenomena. It's just something that it's a reminder. It's gonna be with us for a long period of time. So we look for safe places to park money, to basically try and earn a little bit of income and protect your capital. Capital protection is absolutely critical, and we find many places in the world have fixed income to be able to do that. Well. George and my long risk because I'm longer this economy or long

risk because I'm long financial repression. I think, well, you are you you are long risk up to a point. I mean, I think what the FED has done over the last you know, certainly over the last two three months, you know, there's been a massive reduction in volatility. And I think what the FED has done very well is they've they've allowed markets to reopen, they've reliquefied markets, they've

repressed volatility. Uh. And you know, there's I guess there's some theoretical limits to how how much risk they can ultimately repressed, but that we don't seem to have reached that point yet. But they've been very successful at reliquifying markets. Now that's encouraged investors to basically reach back out the risk spectrum. The basic mantra of don't fight the Fed, you know, is alive and well today and markets have responded accordingly. Now, yesterday, I think the FED did a

very interested, very interesting kind of pivot, if you will. Uh. You know, the way we viewed it is, they delivered a very strong statement of concern. They highlighted the uncertainties. It wasn't necessarily new information, but it was a stark reminder that the out the outlook is very unclear. And and and they've increased credit availability. They've allowed reasonably healthy

borrowers to access capital markets. But credit availability it might smooth and economic shock, but it doesn't eliminate the economic cycle. And I think that's what they told us yesterday, you know, expect a long drawn out recovery with the potential of more shocks, and so you're seeing markets respond accordingly, George. To see the cycle play out means that we are

going to continue seeing bankruptcies. When you say going out the risk spectrum, are you talking triple C s even though there is the high degree of likelihood to federal not backstop these companies, We say, you make an excellent point. You know, in the world of fixed income, is is tranched by risk, typically by ratings, and the higher quality companies we're talking triple A to mostly triple these. You know, those companies have been able to access the liquidity that

the FETE has been able to create. And these companies are largely in survival mode right now. They've increased their cash holdings, they've refinanced their maturities, They've basically bolstered up their balance sheets. I think in anticipation of you know, rougher times ahead, and I think they've taken what a what a big, large, mature company should do. They're they're exercising their financial flexibility, so their position for weaker times

going ahead. As you go down the risk spectrum, though it gets increasingly difficult to do that, and we would still have sort of, I think a bit of a higher quality bias um. As you get further down the

risk spectrum, there's less support. You know, the fet is not willing to to help these companies, there's less financial flexibility, and then there's very acute economic pressures to our central expectation is at default rates are going to continue to rise this year, you know, upwards of eight on a trailing twelve month basis. Now that's not a historical high, but it's certainly a very kind of stressed level, and

that means there's more pain to come. So when you go down the risk spectrum, our our point of focus is cash flow durability. There are functioning companies, you know in the single buble b maybe some triple seas that are that are functioning, that actually have durable cash flow and they actually have very limited borrowing needs. So those companies are good opportunities, but they're few and far between. George, I've gotta leave it. That send up best to the

saying why get George Bowery of Franco's right now? And this is in celebration of constructive infrastructure in America is Amy lou She's at the Brookings Institution, but far more importantly does urban policy and is known for success or public service to the nation under Henryson's is noted, but far more her policy program at Brookings is truly world class. Amy Louise, thank you so much for joining us. We are celebrating in New York with a pandemic, the miracle

that is a new terminal at LaGuardia. One of our viewers and listeners want to know why we can't do more Laguardias coast to coast. Why is it so hard to succeed it infrastructure in this country. Well, good morning, thank you for having me. Well, the good news is there is by partisan support for infrastructure reform and UM

investment in infrastructure. The challenge right now is there is not agreement on UM how to finance that infrastructure or what is the infrastructure of the future, And there's enormous debates that we can't just continue repay highways UM in the same way or connect rural areas together as the Highway Act had traditionally done, but instead we need to

invest in more digital infrastructure global connectivity. As you mentioned UM, UM and UM more multimodal choice given the fact that people today move in very different ways, So we do need to think about a huge oriented UM infrastructure with

a much more diverse mix of public private resources. Okay, I let me make clear, folks, I'm the only one in this conversation that can remember Dwight David Eisenhower and the advent of the interstate highway system, and tons has been written about that in all Why can't we have an interstate away system of the digital world. Why can't America be Apollo class on that go to the Moon

class on that UM. I do think the US is incredibly behind in thinking about a world class UM modern infrastructure UM the way a lot of our international peers have done. UM. We actually need a vision for infrastructure. I think what's so interesting right now is we've had calls for even up to you know, a trillion dollars of an infrastructure package, but no one has said, UM,

what that infrastructure is. We do need air connectivity, we do need water sewer infrastructure upgrades, and to make sure that every single household, including those in flints, have access to clean water. We have to have digital infrastructure. As you said like a new digital highway, and each of those systems UM are financed differently, right, not going through the state d OT systems the way the highway system

was built. It's a lot more complicated, which means we need even stronger public private partnerships to make sure that UM, this more diverse and broader set of businfrastructure UM is supported, invested, and modernized. AMY. We're talking about infrastructure, which maybe in the future when the government gets together with some sort of infrastructure bill to help stimulate growth and do some of these major projects. But in the here and now,

we're reopening economies. This week New York City reopening, and there's a question of what the fate of the of the United States is major cities will be coming out of this pandemic. Given the fact that the spread has been fastest in some of these areas. How concerned are you about the death of the modern city as we know it and sort of the dwindling and population that

a lot of people are calling for. Well, first of all, I think we have to remind people that UM this pandemic is impacting everyone, no matter what kind of community you live in. In fact, UM the fastest growth in New cases are not in the big cities, but they're in the suburbs there, in the smaller cities and the rural areas. So the pandemic actually has no borders. So when I hear questions about what is the future of the city UH in a post COVID world, there's an

assumption that density puts you at high risk. Yet the reality is that the risk infection is true no matter where you live. And in the long run, what we've seen is that cities will continue have continued to rise over the centuries, and the knowledge economy, the global economy continues to reward places with a high density of talent, of amenities, top tier research in UH, universities, mobile airports, and other innovative firms. So I don't see that changing,

but only accelerating in the years to come. Um. But that's said, I do think for high cost cities like New York, like the Day area, there are real questions about whether one can afford to live in a superstar city without a job or with economic uncertainty. You know.

Facebook and Twitter, as you know, has announced that some of their employers and employees can now tele a work permanently and that may spur some workers to jump at the opportunity to move to more affordable cities in the heartland, which to me is actually really great for those cities and still good for the economy overall. Dr thank you so much for joining us. Thank you, thank you, thank you for being with us. Thanks for listening to the

Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you per I'm on Twitter at Tom Keane Before the podcast. You can always catch us worldwide. I'm Bloomberg Radio