Surveillance: Virus Woes Overshadow Stimulus

us in Westwood Capital. UH this morning. Daniel, It's been an extraordinary year, a year everybody wants to forget as we slide into two thousand twenty one. Where is the output gap? Where is the dynamics of our oversupply? Well, I think we what we've seen recently, which is fascinating, is the huge resurgence in imports from China and the country. So what we haven't seen is the reshoring of manufacturing,

the reshoring of production channel. UH. And when I look at the when I look at the import export data, it's it's just fascinating to me how much we are reliant on exaginous oversupply. UH. And of course, at the worst possible time, when a good deal of our labor force is underemployed and unemployed. Well, I want to sorry where I wanted to go, Daniel Airport. Many of us folks have projects for two thousand twenty that we have not accomplished. Dan Alpert is the opposite with Cornell Law.

He has put together a terrific analysis of the labor dynamics of the nation. Dan Albert, how bad is it? Well, we have, you know, somewhere around twelve million people who are not employed, whereas prior to the pandemic they were. I think that that masks considerable softness in the labor force that's exhibited every week when we look at unemployed the claims. These unemployment claims are no longer original layoffs, Meaning if you aggregate the entire amount of unemployment claims today,

you're nearly thirty of the labor force. And clearly we don't have thirty of the labor force unemployed. So what you're seeing is incredible instability and the ability of workers to hold on to jobs. And you know, classic example of that, obviously is what happened in the restaurant industry over the summer. Uh, you know, warm weather and what have you allowed people to re emerge, open their restaurants,

and now you're seeing the same thing play out in reverse. Um. So not just the restaurant sector, but throughout the economy. You're seeing repeat layoffs, repeat unemployment. The same people, many of the same people who filed in the spring, are being forced to refile again. Daniel. How far does this nine billion dollar stimulus effort in Washington, d C. Go to bridge the gap for all of these individuals that

you're talking about. It well, as a calendar matter, obviously, it goes through the first quarter, UM And it's clearly uh, you know, enormously enormously necessary. Uh. The three weekly benefit for a weekly supplement for unemployment is urgently needed. These these people are going to go many of these pupplements, all of their benefits. So the extension of the benefits and the addition of the three hundred supplement, it was clearly needed. My big concern right now is the re

the re establishment of the PPP program. It's interesting because the PPP program really was an alternative way of getting payroll back to people have not actually been called back to work, but we're given the opportunity to receive funds. The problem this time around isn't so much that the unemployment system isn't working. This three supplements really going to help UH and and we're going to get that. We clearly have a fairly high level household savings. It's gradually

burning off. The problem right now is how the businesses

are going to survive. So I'm very interested to see the language in the bill, specifically with regard to the use of the new PPP proceeds, Meaning I think it's about two and thirty billion dollars, whether or not businesses are going to be able to use these proceeds not just to supplement or put people back on payroll who they currently can't employ um, but also whether or not they're going to be able to use it for other expenses such as rent and other payables that they've accrued

over the last several months. Well, you talked about, in addition to the companies and their concerns, the high savings rate among individuals. Do you think that the direct payments to individuals will be effective given the fact that they will target the people who are most vulnerable, or do you think that that money would have been more efficient elsewhere? But what I do think is going to happen is we're going to see an increase in the savings rate

in the first quarters. So you have the six you have the six in a dollar per person checks for the middle class and working class. Those will go out, Those may get expended or they may not. As as

the lockdown period demonstrated. In that period we had a huge increase in retention of funds um Right now, given the viral surge, you have to ask yourself whether or not the h this period is going to see the first quarter is going to see an increase in consumption as opposed to savings because if people are sitting at home and worried about the virus and not getting vaccinated until the second or third quarter, um, you know you're you're probably going to see at least some of the

same phenomena you saw in in March through June. Dan, congratulations on your work with Cornell Law this year. Truly adding value to the view of our labor economy. Daniel Otforts with Westwood Capital. I can't say enough about it, really, what has become a timeless book over a decade age of oversupply on the fixed income market. George Bori, he is with Wells Fargo and is hugely attuned to the

clipping of coupons and the search for total return. George boy In two twenty one, and I contempt to clip a coupon, what little it is, or dare I can say, I'm looking to try to find total return. Yeah, good morning, Tom, and thank you very much, calling from Wells Fargo Asset Management to kind of talk you through fixed income. And as you point out, yields are still very low. But as we said, just mentioned, you can't give up on bonds just yet, whether it's the dollar or U S treasuries.

You know, when people get uncertain, you know, bonds to you know, bonds rally and they tend to really be the anchor for your portfolio as we think about next year, what you're seeing right now is a little bit of a reversal of the trend that's been pretty well established. In our view is that as we get into next year, that view is going to continue. Yields are likely to

continue to creep a bit higher. And I say a bit because there are a lot of very strong forces you mentioned several already limited inflation growth that's uncertain, the trajectory of COVID it's very difficult to just simply, you know, throw in the towel and give up on your bond trade. Bond yields are low for a very good reason. They're likely to stay pretty low, but we'll see a little

bit of incremental move up. So for us, your biggest job, your most important job as a bond investor is number one. It is capital preservation, making sure you maintain the games you've captured over the last one, three, five, ten, twelve, thirty years, bonds have had a great run. Uh, but look for extra income, look for that coupon, look for that just the little bit of payment that's coming your direction.

It's not easy, but you know, we do find corners of the market pockets to try and add that in to the portfolio. Georgia, I'm struck by what one noted bond manager said last week, Scott Minor, who came out and said, you don't want to hire an optimistic bond manager because you just want to get paid back. And I'm looking right now, and bond managers seem to be really optimistic when you look at what people are demanding to own the lowest rated debt. Given the fact that

companies are still struggling. The economy is not back to normal. Do you feel like people have gotten a little bit exuberant when they've gone into this lowest rated debt given that it's paying almost record low yields at this point, there's a big assumption baked into the markets, and that's that's both fixed income in equities and the first the first big assumption is that the Fed's got your back. The FED is going to be with you every step of the way, and they're they're not going to allow

yields to rise significantly. The second is that interest that inflation is going to remain very well contained. Those those are the two factors that I think, you know, we think underpin you know, kind of that bond market enthusiasm, if you will. There's good reason for both of those, as we said, you know, as you mentioned that data looks to support the inflation uh story, And the Fed was pretty committal last week in terms of its willingness

to support support the market. So I don't know if it's a it's an optimistic bond investor, but they're certainly content, and there is there is a certain amount of complacency in the market that does concern US, and and and in spots to the market. We think the markets run a little too far, a little too fast. Investment grade corporate debt is one of those parts of the market.

If you look this year, an interesting stat you know, spreads are basically credit spreads for corporates are just about back to where they were at the beginning of the year. You're over here, one of the smallest changes in credit spreads almost in history, but one of the largest ranges from top to bottom over the course of the year.

So if you look at this in the history books, you're going to say not much happen for investment grade credits spreads in two thousand twenty, But anyone that lives through it knows it's been one heck of a wild ride. Spreads there look tight. We want to take some profits, not sell at all, but take some profits and move that money into other things, maybe a more kind of conservative position in mortgage backed securities higher rated or even

go down in quality. And it will take some optimistic, optimistic check optimistic strategies in high yield, which again, but we gotta find We've got to find those coupons. George, just keep plowing through. That's what we all do. I will say, you know, that's that's well done that morning. So if we gotten to the point where safe bonds aren't so safe anymore, well that's a great point, Lisa.

And based on that sort of belief about the fan and interest rates, your biggest challenge today is not so much your your sort of your your corporate behavior, but just very long durations. You know, the long maturity you have in a bond with very low yields means any marginal increase in yields could represent a pretty big loss in your portfolio. So we're watching that. As I mentioned capital preservation, you have to be very careful about where

you position along the curve. We do have a preference for short to intermediate dated bonds that provides you with a little bit of protection. Long dated purchases need to be for long dated investment. These are these are investments and pensions in saving in very long term savings accounts and for longer duration insurance companies. We want to be careful at the long end of the curve. We want to try and maximize as much yield as possible at the front end. And I think that we think that's

a that's a sensible strategy right now, George. I've been doing this way back to fleet and one of the things that upsets me no end is the belief that bond money will move into equities. What is your experience of psychological bond money all of a sudden finding the equity market. Does that actually happen? It happened, not, not not as much as as maybe we think, I mean,

there there does you know? Obviously there's there's very large asset allocation teams that are constantly managing between bonds and stocks, and as one runs ahead of the other, you know, they'll allocate back and forth. We have a whole team that does that, many of our competitors do, and that is sort of the balance of the market. The big run up in equities, you know, has driven a fair bit of money into bonds. We expect that trend to continue. We have not seen the trend go the other way,

at least not yet. There are some discussions about why you hold bonds and how long you should hold them for, but as it stands today, there's still a bias to move out of equities and into bonds and trying to immunize portfolios as you move through time. So in my long tenure, uh, it's been mostly the other way. And although there's a lot of discussion about it this year, we've yet to really see a meaningful shift going from bonds into equities. But we really don't think that's going

to happen just yet. Great Monday briefing, particularly in this market, tomul George Boy, thank you so much, as well as Fertile Asset Management. Mercedes Carnathon is the Northwestern University in Chicago. I should say Evanston. They like to say Evanston, not Chicago.

Excuse me, professor and joins us on preventative medicine. Right now, Mercedes, I want you to address to our public on radio and television, how you have less of a fear of mutation of variant as we look at the United Kingdom this morning, how do you, as a pro and preventative medicine treat the known that there will be mutations. Yes,

that's a really good point. You know, it is certainly scary to us and concerning when we hear about these mutations, especially when that message is coupled with knew that it is spreading more rapidly. But we've known from multiple viruses over time that they do mutate. That's how they managed

to stay alive. They've got to keep changing so that they can keep infecting people and preferably keep their stream of people UH as open as possible by even changing in the long run enough so that they can start to reinfect people. So we do expect this, But why it doesn't concern me quite as much is that the types of vaccines right now that are being developed can address that directly. They they're different than the flu vaccine, which have to be repeated annually um, and so they

will right now. We still believe they'll be effective even with mutations. So there's a question about the vaccine, Mercedes, But there's also a question of just how long it will be before we can get back to normal, And given the schedule of the vaccinations, the fact that we've seen a little bit of a delay here in the United States, there's a question about supply chains with the recent lockdown in the United Kingdom. How much does this new strain of the virus prolong the pandemic as we

know it. Currently right now, there's no evidence to suggest that the current micro RNA vaccines will not be effective against this new strain, and so I wouldn't say that that's likely to be the delay in our return to normal. What's going to happen. What the delay will be is if our behaviors don't continue to hold the line on

social distancing and masking. Because as you think about our vaccine rollout strategy here in the United States, we're first protecting the infrastructure, and that's the medical infrastructure by vaccinating healthcare workers, and then knows with the highest risk of death. So individuals who are older or in nursing homes, but who we aren't vaccinating first are the people we think are the super spreaders. And so as long as that twenty to nine year old group is not being vaccinated,

we think they're the ones who are spreading it. And so that's what's going to slow down our return to normal. Mercedes, the success smallpox, of ramis of polio, do you do you place this tragedy in that group and that we can be successful with this vaccine and literally eradicate COVID. You know it's possible. Um However, doing so it's going

to take is going to require a global strategy. You know, I was reading concerning reports coming out of Africa, coming out of other developing um out of the continent of Africa, and then coming out of developing world countries where they don't have a vaccine right now, they certainly don't have to have the ability to maintain a vaccine a negative eighty degree celsius, which which is what's required of these

two vaccines. And because of global travel eradication is going to be hard if we don't focus our attention on reaching every corner of the world. Mercedes, just quickly here. I'm wondering what you think of the schedule of the vaccinations as they've been laid out. Who is essential and how quickly can they get vaccinated? Yeah? No, I am pleased with the schedule because I think protecting the infrastructure of healthcare workers who have to interact directly with patients

who have COVID does need to be our highest priority. Next, we do need to address those who have the highest rate of death or poor outcomes, and so I'm pleased with that. I was also pleased over the weekend to see that essential workers were prioritized. Those individuals who are educating our our children, those individuals who are providing food and manufacturing services that cannot be done from home, so

I do think that that is the right route. And if we can bolster the supply chain to get things out to as many people as who want this vaccine by late spring, early summer, perhaps by fall, we can start to see somewhat over return to normal. Mercedes, thank you so much. She's too short of visit today, Sadies

Carnithon of Northwestern University and Preventive Medicine. The news here is extraordinary out of the United Kingdom where they are simply overwhelmed with a mutation of variant of the COVID nineteen virus, and there is a shutdown of the United Kingdom with all other nations reacting. One of those best qualified to speak on this is Megan Green, with her time in the United Kingdom now at Harvard Kennedy School and a senior fellow there as well. Megan, with the

news of the virus. The stimulus has just been subsumed as well. And am I reading last night and into this morning on the stimulus. It's stunning to me how quickly it will all end. Do you just assume it's almost a stop gip stimulus until we get out to

March or April or May. Yes, So the stimulus package Tom was always meant to bridge to the other side, and the other side is a vaccine, which thankfully we have a lot of good news on though I do think this new contagious strain in the UK does raise questions about how quickly this virus will mutate, and whether the vaccine you know, will be effective on it, how often we have to update the vaccine, all those things. But this stimulus really is a stop gap. It's come

really late, and it's a little lame. Honestly, it's It's not as big as I would have liked, but it's better than no stimulus the end of the year at all. If we had waited into till the new administration had come into power, particularly if the Republicans control the Senate, then it probably would have been even smaller. So I think this was probably the best that we could have realistically hoped for. Do you expect that policy will be

committed within the Biden administration. I know you're gonna say, we gotta wait to see the Georgia elections plural. I get that, But are you optimistic about policy or will

it be gridlock as seen for years? So I do think the Biden administer as is committed to both managing this virus, containing it as a top priority, and then to building back better, so taking a more medium term outlook, so not just filling in the hole that we all fell down when we shut down our economies this year, but also looking towards how to upgrade the labor force, how to fundamentally retool our economy for stain sustainability, those kinds of things. But the Biden folks are coming in.

They had a really ambitious spending plan, and I think that will be significantly curtailed, so things like healthcare reform, tax reform, that's gonna be a lot harder um now than than it would have been if there had been any kind of significant majority in the Senate, particularly for the Democrats. But whoever wins in Georgia, it's going to be a razor slim majority. So that will mean that, you know, the Biden administration can do everything it wanted

to do. So, Megan, you said that this fiscal support bill was a little lame, which I imagine is high level cf A speak, But there is a question of the efficacy and the directness of this support. Do you call it a little lame simply because of the size, because you'd like to have seen it be bigger, or is it because of the type of support being delivered.

So both because of the size, I think it should have been somewhere between one and one and a half trillion, and it's it's below that, clearly, but also because it left out any kind of real direct support to state and local governments. So it did offer some indirect support in terms of education, virus um measures, also testing and tracing,

but they were generally pretty small. I mean, they devoted less money to um testing and tracing and the vaccine than they did to the airlines, although the airlines, to be fair, was for kind of payroll support, so it's not um useless. But I'm surprised by how little was actually devoted to the virus itself, because unless we can actually contain this virus, we're just going to keep having to do this over and over and over again, passing

stimulus after stimulus. So go ahead, Well, no, I mean this such a politicized point, This question of what's the best source of or what's the best method of financing here? Is it to give direct payments to individuals and households, or is it to give money to state and local governments. And it's been so highly politicized because Democrats have been for that state and local funding and Republicans have been

adamantly against it. Yet economists have come out also pretty much on either side, with some people saying direct infusions into lower income households is a very direct injection of cash into the economy and others saying that satan local governments need it more. Where do you weigh in on this debate? I think we should have done both. Real borrowing costs are negative, the markets are begging the government to borrow. The FED is begging the government to borrow

to fight this war. So I think the answer is we shouldn't have felt strained in the size and we should have allocated money to both. But policy is generally a question of trade offs, and so you know, I think in this case it was inappropriate that we felt we had to accept some trede offs. I think we could have did both. I think another really interesting point

in this is the reaction to the FEDS facilities. I think the FED has got to be worried about its own independence down it's through that the Republicans are going to be attacking the FED um throughout this administration, so I think that's a concern as well. Well, let's rip up the scripture, folks. I was going to go through other ways with Megan Green, including Red Sox baseball, but this is more important and Red Sox Baseball, Megan Green. It's another shot at the FED independence. How does the

FED defend itself against the battle of independence? Back to mc chesne Martin, so, I think the fan has to be creative in this case. In particular, if the FED can't provide the same kind of cookie cutter programs, then it's just going to have to innovate more. But in an era when you know, central banks globally are trying to not be the only game in town, and they're asking fiscal authorities to step in. If fiscal authorities don't step in, the reality is is that central banks will

have to be the only game in town. And to do that, they're going to have to do really unorthodox things. We've already seen that happen in Europe. BCB is offering teltro's, which are subsidies to the banks um and so you know we're gonna need to see Central Bank gyefy and that's gonna be a lot harder for the FED in particular, and the Fed's gonna be much more sensitive to moving into fiscal spy if the Republicans are constantly taking shots at its independence. And we're gonna rip up the script

twice with Megan Green. We rarely do that except with Megan Green. And that is Russia with the headline out looking for an output lift on OPEC as well. Brent Crude reacts a little bit. We'll see above fifty and it goes down. I don't want to overplay the movement here, but Megan Green. My book of the year, Daniel jurg In The New Map, and it's real simple. He talks about the new map of OPEC, the new map of Russia, the United States, Saudi Arabia and the rest. Does oil

politics matter anymore in your world? Or is that a legacy of another time and place don't matter for who? I guess is the question. It matters less for the US now that shale production means we're a net exporter, but it's still certainly matters. We saw that in March when oil prices started going negative. Kind of what it did to the markets, and also what it started to do to the oil catch Um. It started to prompt

much more consolidation. So oil certainly matters, but less for the US, and I didn't Yeah, Lisa, why don't you jump in here and please rip up the script for a third time. We might as well do that. It's a hat trick. I'll rip up the script for a third time. Let's talk consensus and consensus being turned on its head, because that's really been the theme of today, this question of whether a blip in the market's a blip and sentiment really calls into question the consensus that

has been so dominant in the economics world. The consensus is that next year will be a lot better and that will continue to grow and potentially start to grow out of the pain that we saw in Where are the cracks in that consensus? Megan, Yes, So I've got to say I've never seen such an overwhelming consensus among economists going into a new year. UM. And so I

agree with the consensus. It's hard to disagree that there will be pent up demand released next year off the back of a widely distributed vaccine hopefully UM, and that that should drive at these VON deal is a bit higher the U s L or lower. I think the major potential shortfall of that is is that inflation could pick up, and I actually will die on this hill.

I don't think inflation will pick up, but there is a chance that as you get pent up sending released, you could end up getting a small uptick in inflation. Um if if you ended up having central banks feel like they had to hike into that, then a lot of leveraged companies, a lot of countries in e M will get into big trouble. And so I think that's the most vulnerable point in that consensus view. Megga Green, thank you so much so, Harvard Kennedy School, Senior Fellow

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