Bloomberg Wall Street Week: Murphy, Rieder and Summers

with David Weston from Bloomberg Radio. Markets get their hopes up investors look past fears of a cold war with China and a possible second wave of COVID. This is Bloomberg Wall Street Week. I'm David Weston. It was a week of hope, but is it hope triumphing over experience. Equities continue to climb higher, but lurking in the background are those growing tensions between Beijing and Washington, and as well a fear that there might be a second wave of a pandemic that as of this week, has claimed

a hundred thousand American lives. The economic numbers are stunning to be sure. This week, jobless claims fell for the first time in two and a half months, but during that period of time, over forty million Americans have become unemployed. Fiscal and monetary authorities continue to look for more solutions. That's after they've already thrown trillions of dollars into the

stew of government support. So which story isn't we should believe the hopeful one of the equity markets back almost to the level they were pre COVID, or the one that tells us that we are not yet out of the woods. Rick Reader of Black Rock, really knows rates like no one else in this new world, and he sees the effect of FED action on yields right across the yield curve. But the FED has done has been

pretty powerful. But you know, there is something that I think people underestimate when you when you think about what the FED does with central banks can do. When they before they wheel out the bazooka and say this is what we will do if we need to, the markets tend to take them at their word. Particularly is FED that has a lot of credibility to day. So the FED actually hasn't done a lot in the credit markets

at all. But what's happening is there's a sense that the FED will be there for emergency reasons or to provide for markets to actually function effectively. So what's happening now is you're seeing a manifestation of what the FED has done. Let's take interest rates to zero. They're gonna keep them at zero for an extended period of time.

And what it's as long as the economy is reasonably stable than this demand for income and we've talked about a bunch of times, the demand for income in the world because of the aging, demographic, etcetera, is so profound. And as long as people feel like, gosh, I need to that the economy is gonna be stable, I can start to go and get that income. And then when you think about the size of the high yield market,

it's only a trillion dollar market. Do you think about the market cap of Amazon, it's more it's been uh And you think about it's a bigger Amazon is bigger than the entire high you horning there's not enough income in the world, And so what you're seeing is this is Gosh, I gotta get income. Economies doing fatter. I'm anticipating will continue to do better, and so the surge of money that's commenced been restive to say the least.

So as a result, yields are really suppressed, I would say, and it's reasonably cheap still to borrow money despite everything that's happened. Does that sort of give government to blank check for stimulus? We had to former central bankers Carston's and Vabor come out and say this is really dangerous because we're basically gonna have the central banks funding the government debt. So you know that it has a long complicated discussion, and I would say a couple of things

that are really important. One is there is something that's really profound about the ability for the governments to actually borrow today. I'm not saying there's an unlimited amount of the governments can borrow. They have to be conscious of. You can put too much doubt on the system. You create a crowding out effect for the corporate sector, household financials, etcetera. But today, because of the demograph, we can talk about the system is actually set up to be a lender.

Insurance companies, pension funds actually need the assets and actually need to lend. And what's happened when you drop rates to so low, um, it's causing people to say, gosh, where do I go to actually be a lender? And so into day's environment, you can actually, you can actually create some more debt on the system as long as you're creating nominal GDP, which I would argue in the US we will have some some improvements, significant improvement and

nominal GDP to pay down the debt over time. But I think it's fair to say we shouldn't go too far, but to put a bit more down on the system, given the circumstances, is actually not as scary as it's been historically. Think about it. When we were back in oh six, oh seven, the households were indebted because the housing market, the financials were indebted. We're in a better position today, happening side. You've always got to be pragmatic

about you can't just keep doing it. And but we can afford to do a little more debt, certainly to get to the other side of what is a shock to the economic system. So with that, that's the fixed income side of your book. Let's go to the equity side, because a lot of people saying, boy, the equities look like they're pretty high considering what we're really seeing in the economy, the equities telling us something meaningful about the recovery.

But the first as we can't leave the fixed thing in side, because as part of why the equities are doing, uh doing a they're doing. When you move interest rates to to to zero, then you're basically telling people you need to find something else to do. And and when you can't create income in other ways, you need to find something else to do, and you create this transmission effect that gets into the discount rate on equities, that

gets into the alternative assets that equities are. And listen, I think the equity market is too high on a short term basis given what the economy is telling you. But part of what I think people have been maybe maybe a bit short sighted about is you don't buy equities for the next quarter, and people talk a lot

about next quarter and p ratio offer this year. If you go over the intermediate term and think about guess you've got we don't have interest low interest rates for a long time, and you think about where earnings are going to be over a long period of time. These equities are a long duration the longest duration asset there is equity valuations when you take equity risk premium and think about where we are versus on a low interest rate, on a low level where companies can borrow and actually

buy back their stock if they want to. Equities are not high. I mean, I think they can go higher in the near terms. I think they should pull back a little bit probably, But you know, if you're building balance in your portfolio and you're a long term investor and medium term investor, to hold equities in the portfolio, you know, versus owning you're not gonna make any money owning the ten year Treasury note at sixty eight basis

points sixty nine basis points. So I do think that that equities makes sense as long as you're an investor and can be thoughtful about. Gosh, I'm not gonna look at you know, could I go down in the next week or so. You could go down a bit, But I think people are under estimating equities for the for the intermediate to long haul are actually still okay value here.

That was Rick Reader of black Rock coming up. We talked with the governor of one of the states hit hardest by the coronavirus as it moves cautiously to open back up, Governor Phil Murphy of New Jersey. That's next on Wall Street Week on Bloomberg. This is Bloomberg Will

Street Week with David Weston from Bloomberg. Ready, New Jersey has been one of the state's hardest hit by the coronavirus, and Governor Phil Murphy has been on the front lines organizing efforts to bend the curve, comforting those afflicted, and, as he says, playing moneyball by sticking to the science. I hope what we can offer, folks um is that you know some basic sort of themes, which is number one, public health creates economic health. Inasmuch as we're all chopping

at the bit to get everything opened again. If we if we transpose those steps or we jumped the gun, I think we throw gasoline on the fire. And I think we've been very deliberate. And the second handed glove with that is we say all the time that data determines dates. So inasmuch as we don't ever want this to be abstracted. In fact, we eulogize a handful of people every day. I call families every day to make

sure it always stays personal. Having said that this is moneyball, this is what's the day to telling us and what's it allowed that data allow us to do? And I hope that that we get that right. So far, so good, and just about every one of those briefings that I've seen, at least. You also give credit to people in New Jersey for complying with the restrictions that are not easy to comply with. You mentioned chomping in the bit. People are chomping to put in New Jersey and elsewhere as well.

As you start to back off, and it's not just an on off switch, it's by measures. How do you ensure compliance? It's going to get harder and harder. Yeah, it probably is. But I have to say both individuals, David, in terms of staying at home and staying away from each other and wearing face coverings, as well as businesses both big and small, the compliance has been overwhelming relative

to any expectation. Now, clearly as the weather has gotten warmer, as the clock has continued to tick, as folks see other states that have been less hard hit than New Jersey and New York, as they you know, that's all human nature, and I I get that. Are there more folks today than there were a month ago? Uh, saying

you know, I'm gonna open on June something. Yeah, there are some more, but I will say this, and by the way, I think the other point I would make is that we have we've done, We've started to open up. We've not this is not uh, you know, we we recognize that we need to take steps. For the most part, folks have done the right thing. What about the politics

of it within New Jersey? We've seen, at least in some other places some of the states, a fair amount of politics involved where some people are really not just clamoring to get back, but really demonstrating pretty active in it. What's been the politics New Jersey? Do you have the legislature with you? Do you have the politicians back in you here? Yeah, for the most part, we do. There's

been some demonstrations, There's no question about it. Nothing at the scale that we've seen in a place like Michigan, for instance, But they have been pretty regular demonstrations. And I don't begrudge that we never have. I would prefer folks to them virtually that they don't congregate, But that bothers me more than the demonstrations. Uh, you know, there's always exceptions with any legislature. But we we've had a very good across the aisle, give and take, generally strong support,

and we've needed them. You know, we need laws to get past. We need to for instance, we need an ability to borrow money to fill up the enormous budget hole that we have as an example. But so far, so good. Again, there are some folks who, naturally, in any democratic reality, are gonna go off and say and do their own things. But for the most part, we're

we've been in a good place. One of the tricky things everyone is confronting is reopening at the schools, and unfortunately, with the summer most people are not going to school anyway. But you've got the fall coming up. It's a lot of uncertainty about how that's gonna work. As you approach that question, what are the criteria're gonna use, What are the things you're considering about how and when to open

your schools? You know, we've promised folks by sort of mid June, we're gonna give them guidance, uh at least on pre K through twelve, And we're clearly talking to the universities and higher in community constantly as well. Um, and it's it's my bias, David strongly is that we get back to school. Uh. We've done the virtual stuff as well as any American state, but there's for a whole host of reasons, including mental health, the richness of

the experience. I'd like, I want to see us back in school, but it's got to be a new normal if you ask me a different question. But relatedly, what's my biggest what what's the hardest nut to crack? I think it's gonna it's going to be the young, healthy, asymmetric, asymptomatic, unwitting student who could pass this virus to an older educator, administrator, someone with underlying health challenges. That's got to be the one piece of this that we've got to get right.

I think we can with social distancing, face coverings, maybe virtual instruction, even within the in the bricks and mortar reality, but we've got to make sure we get that right. One of the things you said is a particular chan elenge of New Jersey is long term care facilities. It is not unique j New Jersey, but you've had a big issue with that. What are you doing about that? How can you really going forward sort of protect some of our elderly, some of the people with some of

the underlying conditions. Yeah, we've been clabbored in long term care. We're not alone for sure. But uh. Of the eleven thousand, four one deaths, almost five thousand of them are from long term care facilities. Uh. And by the way, early on, when I just mentioned about schools early on, that was sort of the the spark that created the fire, the symptomatic unwitting heroic by I might add, healthcare employee or

love one visiting and unwittingly passing it on. So we've thrown the kitchen sink at this, including at the uneven operator performance. The Attorney General has got an investigation outstanding. The National Guard, I'm very happy to say the President is just re up the funding to extend the National Guard. They're in a lot of our long term care facilities. The Federal Veterans Administration has come in and helped us out, not just in our veterans homes which have been hit,

but also in other homes. We hired a nationally renowned firm. We're now we're now in the process of universal testing and re testing, cohorting, separating patients positive from non positive. We've learned a lot of lessons. The in that industry has learned a lot. We all have the hard way unfortunately. But it's also an economic issue. Without adat, we are getting increasing numbers of unemployed and the inclusion New Jersey, I think is that one in nine. Now you're up to.

At what point do you still expect this is going to bottom out? Do you see a bottom to this unemployment? And it's starting to turn back around? Please God sooner than later. Uh. I think it's correlated with a couple of things. David number one, the responsible continued responsible reopening that we get that right that we don't have. You know, we're going down on one way street. I don't want to turn the car around and go back the other way. Uh. And secondly, I'll give you a big game changer, and

that is direct federal cash assistance to states and municipalities. Uh. It's talked about. There are a couple of bills, including Bob Menendez, one of our great senators co sponsor with a Republican colleague, Bill Cassidy in Louisiana. UH is a good example, Speaker Pelosi with the Heroes Act. UH. We need that, Uh, not just a blue state, not just

New Jersey, all American states need that. And and frankly, that's the biggest potential accelerant that's available to us right now to reboot our economy and get as close to that that long uh long sought after V shaped recovery. That's to me the biggest game changer available. That was Governor Phil Murphy of New Jersey. Coming up. Europe finally gets its act together for a fiscal stimulus package. That's next on Wall Street Week on Bloomberg. This is Bloomberg

Wall Street Week with David Weston from Bloomberg Radio. We wrap up the week with our very special contributor Larry Summers. As always so Larry, welcome, Good to have you here. Af Throughout the entire week, markets were sort of a little nervous about China, and then at the very end of the week, President Trump had a big news conference at the White House and he said, boy, there are bad things coming from China. He did withdraw from the w h oh, so there's gonna be sanctions, but the

markets could have shriped it off. Is this real or is it saber rattling some of both uh our withdrawal from the W HO is probably not as consequential as when the United States decided not to join the League of Nations after the First World War, but it may be the most important withdrawal from internationalism that the United States has engaged in since the Second World War. It's a completely irresponsible act that will set back the effort to combat disease in the world and will ultimately hurt

our security. God knows the w h O is deeply flawed, but the United States should be fixing it, not abandoning it, and future generations will regret this decision and the lack of trust uh that comes from it. It's not something that affects the profits of companies over the next several years, so it doesn't affect the stock market. But that's the really consequential thing. The sparring on Hong Kong doesn't involve

something that is going to concretely hurt corporate profits. That's why the market didn't react, and the market has been pricing in the fact that the United States and China are at deep blogger heads in a way they haven't been since Nixon opened to China fifty years ago, and

that's what's continuing to play out. But think that the fact that there's no market response shouldn't make people complacent, not about the United States abandoning the world's health organization, and not about the state of the US China relationship, which I believe if history goes wrong, goes off track in this decade, the far and away the most likely way in which that will happen is fissures between the

United States and China. So, Larry, if the goal is to modify China's behavior in some way, shape or form, is there a way to do that? As a practic man, it looks like President she has decided what he wants to do, whether it's in Hong Kong and other places. It doesn't look like anything we're doing is changing his

mind any Look. I think one of a lessons of human life, and it's also a lesson of global life, is that it's harder to change people and it's harder to change nations then we often hope it would be, and that threats and scolding are not all that effective as UH tactics, And so I'm not surprised that this isn't working very well with respect to China, And of course it creates all the wrong incentives over the medium

and UH long term. It strengthens the people who say in China that any kind of inter relationship with the United States is a mistake against those who want to be more intertwined UH with UH the United States. It teaches China that they need to avoid any kind of vulnerability to US, which means they will put more emphasis on splintering UH their technologies and their economic approach from

anything that's global and is involved U with US. But in fairness, UH, these are really hard problems, and it's much easier to object to particular means that are being pursued UH than it is UH to propose ways that will be effective. I think over time, we're gonna have to reduce our aspirations for how much we're going to change China and concentrate on the set of issues that

most directly UH impact on our security. And we're gonna have to think about aspects of our own behavior UH that at times are provocative and recognized that in a bargain UH you have to demand, you get to demand things, but you also have to respond to uh the other side's concerns, and that our concept can't be that we run the world and China gets to decide how exactly it wants to fit into the world we run. That's probably not gonna work given China's current strength and UH

broad economic power. The one other thing, one other that's one other thing if I could, Uh, David, I think probably the single most serious farm policy error that the Trump administration has made is the more you think that China is, in various ways a serious threat, the more important it is that we have strong global alliances with

all the other countries in the world. And so what is odd is a strategy of UH elevating the Chinese China threat and at the same time not aggressively trying to get close to all the other countries and instead, in many ways abrogating commitments UH to them and lashing

out at them UH in various ways. In a world where we want to put trade sanctions on China, what could be dumber than threatening trade sanctions on Canada and Europe and all the other countries who we need to cooperate with us if we're to have a realistic chance

of influencing China's behavior. Larry, I want to come back to the unit statis just for a couple of minutes here because you've expressed concern about how quickly we're coming back, at least in some parts of the country, whether we're ready, whether we have the testing, the contact tracing, things like that. We are starting to open back up, even here in New York. Now we're hearing New York City maybe open

with the next couple of weeks. How will it be different these cities now, these big cities are a lot of talk now, But what are these cities like New York City, like Boston, the places, whether they'll ever be the same again. Look, I think to two separate questions there, uh David. Several weeks ago um a set of criteria were laid out. There seemed to be a consensus around

those criteria. In fact, the Trump administration laid them out for how much progress we had to make with respect to health, how much death counts had to come down, how much testing had to be in place. None of those criteria have been matched, and we're still moving ahead. And I think those were probably reasonable criteria when we laid them out, and I think it's therefore quite risky

to be moving ahead. I can understand why the decision is being made, but I'm very concerned that I think we are taking substantial risks of a second wave of a re emergence UH. Everything the world knows about pandemic disease suggests that it doesn't grow. It's not an inverted V. It doesn't grow and then revert back to zero. It's more like upside down. W It goes up and then

it comes down, and then it goes up again. And I think we're taking a substantial risk of that, and people, UH, markets, UH need to be aware that that's very much a risk we're taking. We could be doing much more to minimize that risk. We could have a much more organized national effort to make to massively increase the level of testing UH in the United States, for example, but we don't.

We could be engaged in a major effort when there are tens of millions of people who are unemployed, to hire people to do contact tracing so as to reduce UH the spread. We could recognize, as is increasingly being recognized by the scientists, the problem of super spreaders and be trying to pursue targeted strategies directed at making sure that any superspreaders are separated from the rest of the population.

As rapidly as possible. But we're not doing any of that, and so I think we are taking substantial, uh needless risks of more trouble down the road. We may look out, it may be okay, nobody can predict uh pandemics, but uh sometimes people don't buy insurance and they don't get sick and it work shout. Okay not to have what insurance, But that doesn't make it the right thing to do.

So I'm alarmed our strategy. I think it's extremely odd that as a country we are debating, and this is a bipartisan issue, we're debating a three trillion dollar bill, and not two percent of it is devoted to uh finding vaccines and therapies and increasing testing. And so I would suggest as a minimum threshold of responsibility that of any legislation we devote to addressing these economic problems be devoted to the health aspect. Okay, there you have it,

Thank you so much. Larry some re Seon, a special contributor of Courstion is former Secretary Treasury. That's it for this edition of Walstert Week. I'm David Weston. See you next week. This is Bloomberg