Bloomberg Wall Street Week: Meyer & Tisch

Kevin Johnson sec Chairman J Clayton. Bloomberg Wall Street Week with David Weston from Bloomberg Radio from Central China to Northern Italy to Washington. It's all about the coronavirus. This is Wall Street Week. I'm David Weston. Welcome back. In the beginning, the world took the coronavirus in stride. Sure there'd be some hit to Chinese economic growth for a bit, but soon President g would have things back on track. We'd make sure any hit was limited to the first

quarter and limited to China. But then this week the virus broke through whatever firewalls we'd hoped for. So now the question is how much death and destruction are we really looking at? How can we plan for a very different than the one we had expected to help us assess the damage done and what maybe yet to come, and we can lean now our Wall Street Week roundtable of James Tish, CEO of Lowe's running a business spanning hotels, energy and financial institutions, and Michelle Meyer, head of US

Economics for Bank of America Securities. Welcome both. You're good to have you here here. Michelle, you're the economist to start with. You give us a sense of what we know what we don't know about the scale of the economic damage thus far. I think a good place to start is to think about the direct hit to the global economy from the coronavirus, and that would largely be through supply chains. So the coronavirus clearly led to significant

economic damage and China factories are shut down. That's not bleeding into other countries Southeast Asia. You're seeing it in Italy. So the fact that factories can't produce, the fact that you're not able to see the flow of goods through the global economy is clearly a damage. It's going to hit multinational companies and you hear it in in in earnings, you hear from from corporates already. The second way that the coronavirus impacts the economy, and this is what we

got tastes of this week, is through fear. And this is where it can get really problematic. Is if you have this adverse feedback loop between consumer and business confidence and markets um where markets react negatively as they have this week, that spurs additional concern on the part of consumers, and consumers change their behavior. They decide they're not going to go and take that trip, They're not going to go to restaurants, the're not going to go to movie theaters,

and they're gonna stay home. They're going to hunker down, and that could be a significant hit to economic performance. Luckily, we're not seeing that in full blown by any means yet, but that is the risk factor in this war. Paying attention to Jim as a businessman, what do you think about the supply chain issue before we get to the confidence issue, This probably chain issue. How long will it linger? How long could it linger? What kind of damage could

that do? So as I think about this, it's like having a Category six hurricane a thousand miles offshore off in thet the ocean and we don't know for sure if it's going to hit the East coast or if we don't know if it's going to blow out of the way, and so everybody now is panicked about what can happen. Generally they assume the worst. Nobody knows for sure what's going to happen, and so there's just an

enormous amount of uncertainty. And I think that's what's on gluing the markets, and I think that's why this topic is the only topic in the news. So we're in better shape going into this we might have been, Michelle, because we did have some stimulus into the economy, and we've got some economic numbers even this week that are sort of indicating we're doing okay at least a messed within the US. How much headwind, how and how much

tailwind do we have? Yeah, So the hard data in the US, which is not going to yet pick up the coronavirus, has been strong. It's been good, right, The labor market was improving, consumers have been spending, the housing data has been really showing nice recovery. But that all can change quickly, right, So as economists we have to look at for looking indicators, we have to rely on survey data. We have to lie on what financial conditions are telling us. That's a much better indicator of what's

to come now. Of course, those can change rapidly, right Um, So we have been nimble in terms of how we're thinking about the outlook, um, but it's going to take some time before we get confirmation one way or the other in the hard data. Are you seeing the economy is pretty strong right now, John, Yes, Uh, definitely strong,

and it's been strong for a long time. We're we've got between two and two and a half percent growth real growth, So when you combine that with inflation, GDP is growing close to five percent nominally, which is really pretty good. Unemployment is very low, Unemployment claims are low, the business environment is very good right now, and sometime we pumped a fair amount of stimulus in the economy through task cuts and things. Are you surprised it isn't

even stronger than it is? No? Not, not really be because the unemployment numbers are so low. Uh So, I think, uh, the place where we're going to get more real economic growth is through productivity gains, and I think we saw that last quarter, and I think we're going to see

more and more of it going forward. You know, on productivity gains, do you think that there's been a change in how businesses are investing, because presumably in order to get significant productivity games, you need to have a greater willingness amongst the business committee to invest. And do you think that that's potentially in factor You see that all specifically in your space. We see it in terms of

our using robotics in our plastic manufacturing. We see it in in terms of just computer systems in our insurance business. We're seeing you know, it's it's been thirty or forty years that that we've had this I T revolution, and until a few years ago, we really didn't get much measured productivity from it. But now we're really I think we're really starting to see great opportunities for productivity gains.

At the same time, the expensing of capital investment should have made it take off like a rocket ship, shouldn't it. It's really interesting this disconnect that you see from what people say in the business community on the ground around I T and the ability for productivity to pick up and greater efficiency, because it feels like there's a lot more efficiency, but yet in the aggregate numbers that we get reported in GDP, the proctivity numbers have been so

surpar so. Maybe it is just a function of time. Maybe it's a function of you know, the investment lasts long enough, the innovation continues, and you do realize this really impressive productivity boom, which is quite an optimistic story that people are not talking about, especially right now when there's so much fear out there in terms of the risks we're all telling about coronavirus. Our contributors will be staying with us. Coming up the week that was in markets.

This is Wals Free Brief. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. We canvean now our Wall Street Week roundtable of James Tish, CEO of Lowes, and Michelle Meyer, head of US Economics for Bank of America Securities. Equity markets had a particularly rough week this week as risk investors headed for the hills, or at least for bonds and for gold. For our Wall Street Week interview on equities this week, Welcome Gino Martin Adams.

She's Bloomberg Chief Equity Strategies. Welcome to you. Good to have you here. Thank you so I must say you and your team were sort of saying, we're not totally shocked that that can be sold off. Well, there were a lot of signs suggesting that we were headed for some period of weakness. Now, I don't think anybody could have predicted we were headed for a ten percent crush. You did have a lot of rotation into very very defensive strategies occur for the vast majority of this year.

Utility stocks at the equity market peak, we're trading three standard deviations above their long term average. Is a good example of that. Low volatility stocks dramatically outperforming high valet atility stocks. These are kinds of symptoms that you look for for a market that is running on fumes. Momentum was running out. There was just a lot of signals suggesting we were due for some period of correction. We

got it. It was interesting because for a while it seemed like there was this big disconnect between the bond market and the equa market, which is presumably what you're speaking of. I mean, the bond market, so dramatic decrease and interest rates. You're starting to see the flattening or even points of inversion of the yield curve. Which are always indicative of a gloomy outlook. But yet for a while the equity market helds up quite resilient up until

this week. Yes, so what was the trigger? Why this week did you see such a dramatic replacing in the stock market. Now, I think it's a great point because portions of the equity market absolutely reflected that sort of flight to quality in the bond market, and the bond market signals were reflected in things like the utilities premium and the defensive share sort of outperformance, but not all of the equity market reflected and created this bit of

a conundrum. However, I think what happened in the equity market is this me no effect. You saw global stocks underperformed dramatically in the prior in the prior month, that suggested to us that there was a rotation out of global shares and into US shares. Is sort of a flight to quality. But I don't want to really eliminate all of my equity exposure because I don't know how

bad coronavirus is going to be. Right, So US shares held up very very well, especially Facebook, Amazon, Microsoft, Google, the biggest of the big cap shares with the best sort of perceived structural growth prospects and then defensives. But what happened over the course of the last week is we got a lot more news that the coronavirus was spreading right all of a sudden, It's spreading to Japan, it's going to Italy, it's in South Korea, it's in

the Middle East. That kind of information didn't exist two weeks ago, so investors started to capitulate on their overall equity portfolios. At the same time, you've got those big names like Apple and Microsoft coming out and suggesting, hey, we're going to see some learnings damage from this too, and investors had to capitulate on the near term learnings outlook gonna say, there's I think a lot of this is due to the shock that, oh my god, coronavirus

is coming to the United States. What's it? What's it going to do to earnings? As as I look at stocks in general, though they seem pretty cheap to me, we have tenure notes at under a one thirty yield, which if you converted into a pe is over seventy five, and you have the stock market trading at seventeen or eighteen times earnings, So in the context of such low term interest rates, stocks seem to me a veritable bargain.

And in fact, more than two thirds of stocks traded a higher yield than the ten year note, so you can earn the same as the ten year note and hopefully get the appreciation that you would expect to get in stocks. So I think they're actually a pretty a

good value here. I wouldn't disagree. As a matter of fact, we wrote a note just this week suggesting that with the capitulation that we've seen in the equity market this week, stocks are finally back to what are fair value models suggests they should trade at in terms of valuation multiples. The question going forward is well, where will those earnings go? Because when you sign a seventeen handle on SPE you're suggesting that, okay, we're paying for future earnings growth that

is certain. If that earnings number comes down, suddenly that pe looks a little more expensive. And that's the situation we're in right now, is sort of grappling with Yes, valuations right now look cheap, but we don't know where the denominator of that ratio is headed. And until we get a little bit more certainty with respect to where that denominator is headed, or we get more support from policymakers suggesting there will be some firepower supporting the financial markets.

Stocks are likely to waffle around. But it does reuse the question of the V versus you or something pretty quickly. Because there's a V, then that's pretty good bargain. If

it's not, maybe that's sort of such a good boardroom. Yeah, And what we're finding is increasingly analysts are starting to price in more of a U, hopefully not an L. We haven't seen that occur yet, and that's certainly not our forecast, but the macro indicators that we follow would suggest SMP five earning earnings are likely to grow two percent this year. That's a decline in Q one, followed by a modest bounce back through the rest of the year,

finishing the year in more normalized condition. It's a macro model, so it doesn't fully capture all the nuances of every company in the SMP five. Nonetheless, it does sort of fit with the analyst decrease in estimates that we're seeing

across the board. What we've seen over the last month is analyst expectations for Q one fall really quickly, but now they're starting to take out expectations for Q two and a little bit of the third quarter as well, And I think that forms more of a U shaped recovery, which is frankly a little bit more realistic considering we just don't know how far this is going to spread. You rob something part which is a federal reserve. So markets have loved federers ave easing. Um. There's the power

put as many legs to talk about it. Um. So I think there's a questions at what point does a FED step in and support the markets and support the economy. But let's say the FED does come in and ease at the next meeting, the March meetings, they don't do an inter meeting the ease and March meeting. Do you think markets are going to get much relief from that or are they concerned about the bigger picture given how much uncertainty there is just simply about the coronavirus and

how it might spread. Um. You know, I really loathe the words this time is different, because I don't think this time is different, And so you have to err on the side of history, right, And every time the FED has started an using cycle, the stock market has reacted, So you have to acknowledge that, even though the feed is usually easing in times of great uncertainty, when we don't know where the economic environment is going to go and we're really skeptical as to whether that policy has

any efficacy in creating economic growth going forward, the market always reacts. The reason the market always reacts goes back to evaluations. The way the FED implement The way the Fed actually impacts the equity market is through real interest rates, and it's through the pe multiple less so than through

earnings growth. Yes, eventually you're hopefully going to see some pickup and business investments, some pickup and earnings growth that follows along with you know, the anticipation that comes after the FED starts to reduce the policy rate that the initial reaction the equity market is all about the multiple. It's all about the fact that rates are now lower and perceived to be going lower, which elevates multiples and the willingness of investors to take on a little bit

of risk. Source of Jim Tish, Michelle Meyer, and of course Jean and Martin Adams of Bloomberg Intelligence. We'll be back with our contributors head to Bloomberg dot com for more exclusive thoughts from our weekly contributors, along with full episodes in the official Bloomberg Wall Street Week podcast. This is Bloomberg Wall Street Week. This is Bloomberg Wall Street Week with David Westing from Bloomberg Radio. In case of emergency, break glass glass, that is that will trigger the alarm

calling for lower interest rates from the Federal Reserve. That's been the standard play, at least since the Great Financial Crisis of two thousand and eight. But this time central bankers are taking a weight and see attitude. As we heard from FED Vice Chair Rich Clarida just this week, they are closely monitoring the emergence of the coronavirus, which is likely to have a noticeable impact on Chinese growth

at least in the first quarter of this year. The disruptions there could spill over to the rest of the global economy, but it is still too soon to even speculate about either the size or the persistence of these effects. But even if central banks decided to step up in the face of the virus, are we sure it will work this time? Will lower interest rates do anything about a potential pandemic? Let's ask our Wall Street Week roundtable of Michelle Meyer of Bank of America and James Tish,

CEO of SO. I'll ask you first, Michelle, we're seeing lower interest rates help in various ways. What they help this problem? Well, this is a supply shock. Um So. Mon Terrey policy has a hard time addressing supply shocks. They do a whole lot better when it's a demand shock, when it's a demand in efficiency. Um. The other major challenge, of course, is that it's a virus that has could have cannot spread quickly. Um. You know, we could change behavior or not. I mean, the reality is is that

we don't know. Central bankers don't know. Um. That said, what central bankers do know, and what they are looking at right carefully is what markets are telling them. And that's a really important piece of data for them. It's early indications that there's something problematic um, and certainly something that's worrying market investor market participants. Um. So. I think from the first point of view, a right cut is on the table. It is on the table because financial

conditions are deteriorated. If they see credit freezing up, if they see um, you know, further sell off in the market, further increase in volatility um, further inversion of the yield curve, and if the bond markets starts to really pressure the Fed to move, more likely than that they will deliver, even if they don't see the hard evidence in the economy. So if the Fed page attention of the markets, one of the things the markets telling right now is they

should cut rates. If you look at the markets are saying they're expecting maybe three rate cuts this week this year, that's true. I think we're what the stock market and the bond market is telling you is that, uh, they're afraid that people are not going to want to come out of their homes. They're going to self quarantine. And if the issue is people self quarantining, then lower interest rates aren't going to make a difference. People are afraid

of walking on the street and getting sick. No matter how low interest rates are, they're not going to come out. So I think the Fed needs to be very careful to think about exactly what they're solving for and what they think their rate actions are going to do. What should they be doing even apart from the coronavirus. Apart from the coronavirus, my own view is that interest rates are too low. As I said before, ten year notes are one thirty yield um. The c p I is

a hundred basis points higher. In the old days. Uh, you know, years ago people got to find benefit pensions. Today they've got to find contribution uh pensions. So they're saving for their retirement. When we used to have two hundred basis points of real return, you have the magic of compound interest working for the savers. So they'd have a lot more money when they retired because they were able to earn two hundred basis points over the inflation

rate for many years. Today, when you can even earn the inflation rate, that means savers have to save dollar for dollar for their retirement. And what that means is that instead of retiring at sixty three, sixty five, sixty seven, they're going to have to wait to seventy five or eighty in order to retire. And that is going to be quite a shock to a lot of younger workers. And yet, Michelle, if anything, I think we've seen as savings rates go up, actually as the rates have gone down,

people save more and more and more. There was a time we were worried about capital formation and not having enough savings as a country to invest. Now it looks like there's plenty of money to invest, it's not clear we have enough things to invest in. Yeah, I mean, part of the reason you can make the argument that the savings rate has gone up is that you need to just put more dollars away in order to get

the same return because Jim's point, interest rates are so low. Um. But yeah, I think that you know, certainly you've seen distortions in the economy and markets as a result of central bank policy. Some of those distortions are intentional, right. The way that montary policy works when you're so close as you're a little bound and you've expanded your balance sheets and much is by forcing investors into other asset

classes to take on risk um. And in theory, that creates wealth and then that bleeds more, you know, into the broader economy. Um. But that also means that it could change behavior in a way that maybe is damaging, and maybe it does have these consequences down the line that we just don't know about right now. Okay, our contributors will be staying with us. Next we'll get a second opinion from Claudia Assam Washington Center for Equital Growth,

Director of macro Economic Policy. This is Bloomberg Wall Street Week. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. We can clean now our Wall Street Week roundtable of James Tish, CEO of Lowes and Michelle Meyer, head of US Economics for Bank of America Securities. Well, center backers maybe standing pat in the face of the coronavirus, but should they be For that matter, should fiscal authorities be stepping up to the plate when we need them?

Right now here for a second opinion on the role of monetary policy and fiscal policy is Claudia sam She is the director of macro Economic Policy at the Washington Center for Equital Growth. She was previously at the Federal Reserve Board and is the author, of course, of the some Rule, which she devised as an early recession indicator your claim to fame, among others. Claudia, great to have you with us, Thanks for joining us. So so first you, first of all, start with the monetary part. We'll get

to the fiscal part. Start with the monetary part. We've just been talking about what could center bickers, particularly the Federal Reserve due in response to this coronavirus. Well, first, I think the response that they're taking in terms of paying a lot of attentions seeing what the effects are on the economy, that that is the right step for them to be doing right now. I think they have a lot of tools to be able to do this.

One one of the areas, and I worked on this when I was at the Federal Reserve, was developing much more granular data on consumer spending in the United States, so very timely daily data available within three days, and with a lot of geographic detail, so they can look at metro areas if and when any kind of an outbreak of the virus shows up and see what's happening in terms of spending, which would be one of the

signs of an economic impact. That's sort of reassuring. So as a practical matter, do they have that on their dashboard right now? They can be looking in a given area if there's an outbreak and say, we can see within three days what's happening and spending. Yeah, these are data that the Federal Reserve has developed and has tested.

So we use this, for example, looking at the effects of Hurricane Harvey and IRMA in real time, and so the Federal Reserve has had these data, they know how to use them, and I think this is exactly the kind of application to be able to see if these are temporary, if they're more persistent effects, and if they're spreading in the economy, and if they if they see that an area of the country is slowed down for because of the coronavirus, what specifically can the FED do

to to try to counter that. Well, I think the first tool they have is to ease lower the federal fronts rate, lower interest rates, and they do have room to do that at this point. Uh So, I think I think that's the next obvious step. There are definite questions if this becomes a much more severe economic event, which I think at this point we have nothing to say that's going to happen. That's something we need to

be on the watch for. Uh If if say this word to turn into something that's much more widespread in terms of an economic contraction, then I think we're back to the debate of whether the FED is ready for the next recession, and there I am much less sanguine

about the tools that they have. And Claudia, do you think that the FEB would want to wait to see greater evidence in the hard data, so statistics like job creation or for you, you've clearly highlighting importance of the unemployee rate in terms of that starting to turn, or maybe even more leading would be initial jobless claims to see if companies are actually changing their investment in labor or can they rely on some of these regional pockets as a subset of what might come on a national

basis and want to get ahead of that, right, So, I think they're going to be watching economic impacts, whether that's in consumer spending, in the employment numbers. They're obviously paying attention to what's happening in financial markets this week, so that that can financial conditions can have their own feed through the economy, and the Federals are would take those seriously and that could be a game changer in

terms of what they do next. So regardless of whether they're seeing it right now in the spending data, I think that that raises the possibility more that they're starting to think seriously about a rate cut. So would you would you call would you consider this to be the power put that when when the Fed sees stock prices go down ten they say, oh my god, we've got to cut interest rates. So I wouldn't ascribe this necessarily

to Pow. We've seen other examples where financial markets get into a wobbly place and the FED steps in and cuts rates. So there are examples from early twenties sixteen, their examples from last year, and that can be a very effective way to short circuit some of the pessimism of the kind of downward spile that can get going in financial markets. There aren't big costs the economy if the FED does that, and in the past it has proved successful. Well, what if we need more than the Fed?

What if we need more than monetary policy? Talking to us about fiscal policy, as you've talked a lot about that. M Yeah, So I I firmly believe, and there's a lot more conversation in the economic policy and in the academic community that fiscal policy needs to be ready to step up at any point that we have a widespread contraction economic activity. The FED is going to act. They need to act. They have real constraints on what they can do, or at least how effective it can do.

So interest rates are very low, that is likely not what's holding back spending, and that would be true also in a recession. So the FED needs to do what it knows how to do, and federal government, state and local governments they have an important role to play too, And is that basically getting money into people's pockets. So I think the most important thing is that fiscal policy

moves fast. So any kind of support to the economy, if it comes early, it has the chance to make the recession or whatever contraction is happening in the economy, to make it shorter and less severe. And it is so important to take that opportunity as soon as the recession starts to act. And there's a lot of tools that they can get money out to people, to businesses,

to state governments. But I know one of the things that you like to look at in your your research more broadly as the micro story, right, not just the macro picture, but what can you glean from the micro um and would you make the case that on the fiscal side, they actually can be more micro that maybe monetary policies to blunt of an instrument to address UM some of some of the challenges to econty, particularly one like this, that that fiscal policy UM can be more

targeted UM and and and specifically today with the coronavirus, how would you maybe see that playing out. Yes, so I completely agree that fiscal policy has the ability to be targeted, and I think that is really the application that I would think about with the coronavirus. It makes a lot of sense to get financial to support to individuals who end up being infected with the virus aren't able to go to work. They're the ones that need help.

And if you think about it, the federal government, if there's a natural disaster emergency area declared, they get money to individuals whose homes were destroyed. It makes sense that you should give money and support to the people who are directly affected, and the government knows how to do that. The Fed does not have those kind of tools. They have,

as you said, a much blunt or instrument. They have ways to affect the economy as a whole, and frankly, there is no guarantee what they do would actually help the people with the virus. Mclaudie, you said you have to do it fast. I don't normally think about Congress and fast in the same sentence. Forgive me. You're in Washington, you know the way the place works is this realistic. So with a policy change, with a change in mindset.

So the work that I have done and several other colleagues is to think about how could we make fiscal policy automatic, how could we make it move fast? Now we have an excellent opportunity because right now we are not in a recession. A recession is not on the horizon in my opinion, and now is the time that Congress and sit down draft legislation, come up with a plan, and get it agreed to make a commitment build up the infrastructure, and so when that recession hits, physical policy

can move out the door. Would you agree with that, Jim, would you favor that? I'm in favor of it. But there's nothing that I've seen that leads me to believe that there's going to be a cooperation in Congress and that they can get anything done quickly, especially now for for the next eight months as we're going into presidential

election season. I personally had had been hopeful that with this coronavirus thing, that that you would see the parties come together, that the political bickering would would uh sort of come to a standstill. And I haven't seen any evidence of that. We didn't see it this week, if anything, we saw the reverse starting to make it a political football basically about how much money is being appropriated and

whether it's fast enough and the right people, things like that. Exactly. Yeah, okay, And I would add one point to that, and why I agree with you. It is a very optimistic, overly optimistic scenario to think this legislation would pass this year. But there is a real benefit for legislation being drafted, brought to the House, brought to the Senate, because if nothing else, that creates a conversation, it lets the details be hammered out and that text that legislation is sitting there.

And when we get into recession, I think that is a time where you see by bipartisan support to fight back and help people. So there could be benefits. I think there really are benefits from the preparation we could be doing right now. And it could be that other disruptions like the coronavirus, light of fire under Congress people, light of fire under policymakers and get them started planning and drafting legislation. It's a good wish, there's no question

about that. Okay, thank you so much. Quality that's quality of sam of the Washing Center for Equitable Growth. And if you missed an episode of Bloomberg Wall Street Week, full episodes are now available on YouTube, the Bloomberg Terminal, and Bloomberg dot Com. This has been another edition of Wall Street Week. See you next week.