Bloomberg television and bloomberg radio. Morning across this nation. All of you working at home, and good morning around the world, particularly in liver, great written Great Britain in liverpool, Great Britain. I want to get to the pandemic in a moment, but in Francine Lacqua conversation, i dont know if they brought of negative rates. Do you see negative rates in the United Kingdom . Jonathan if they couldnt negative Interest Rates, it will be up to the bank, not rishi sunak. And i hope it does not happen. Some policymakers have flirted with the idea over the last liverpool,ks area on saymichele texted me to hes very happy that his dear livable that his dear liverpool are now the champions in the merely. Cash in the premier league. Tom that gets us to the story of the moment, which is the pandemic area i was fascinated by the images in the telegraph in the times. Explain to us the oddity of seeing absolutely packed beaches in the United Kingdom, much like what we saw in florida. Jonathan growing up in the u. K. , for most people come when the sun does finally come out, seeing the beaches packed like that is not get it just doesnt last very long because the weather itself does not last very long. It gets rainy and cold all over again. So i dont know if that will last the whole summer. But on a serious note, social distancing is going to be a huge issue. What we are learning in places like texas, if you dont handle the virus, you constrain the economy in a way because even if you mandate the reopening of the economy, as lisa has pointed out some any times, will consumers turn up to the stores . Will the businesses keep those stores open . They are making those decisions for themselves, never mind what the governor has to say. Tom this goes to the reading for the weekend. To me, there is no question that the key mystery for the weekend is the readjustment, the tweaking of economic earth in america given the medicine we have seen this week Economic Growth in america given the medicine we have seen this week. Lisa we see equities continue to trade up, although there is a bit of a misunderstanding, decided that markets are completely shaking off the broader economy area i am wondering how much that narrative is skewed by the faang stocks that have led the charge and are going to remain strong over the course of the pandemic area there is a disconnect between market activity that people to and the path of the pandemic. I keep going back to this get it is so hard to wrap your head around this time with such on clarity such unclarity. Tom we have a perfect guest for you to refrain for the second half of 2020. Theres not much of a data check because theres not much going on area i am going to point out the four decibel points the four decimal points on the twoyear yield. It will be amazing to see if the twoyear yield rates down with the stability we have seen. Brent schutte follows that with northwestern mutual. He looks at the placement of investment for northwestern clients nationwide. Thrilled to have you with us. Cfa 101. All it lets go to first principles. Why is watching the twoyear yield right now . Tont i would bring it back a lot of the comments on the disconnect between the market in the economy, and what that means. To me, as you think about the twoyear yield, i would also point out the 10 year yield 0. 7 . Why are equities still up . To me, relative valuation is more important than absolute valuation. Our advisors have to put their clients money somewhere. Me, the yields are going to stay low for some time, and i think Federal Reserve wants to keep in their and once you to buy stocks as a result area that is the difference as a result. I have seen a much more active Federal Reserve that cares about where markets are at mother once you take risk and will try to get you to take risk. Tom and jonathan and i am sure your clients want yield enhancing strategies. What do you suggest they should do in an environment of zero rates for the foreseeable future . Brent that is a difficult question. An overweight to equities. We have tilted towards that but we are making sure on the opposite side of the region that we are not taking too much risk. I think where people really get caught is where they are actually loaded up on risk on both sides. Right now, given where yields are, we arent stretching for yield, but we are overweight in equities because we do believe the path of least resistance, even with all of the virus conversations we just had, is still higher. Thoseis always playing risks off against each other. Overweighthat does in equities mean right now . Are you staying long the more defensive arts of this market, which some people now consider to be Software Stocks . What does that look like . Brent right now we have a foot in both camps. Early end of march and april, we did add more to cyclicality, but still had an overweight to large caps area i think if you look the next few years, you will see parts of the market that have underperformed will actually do better as the economy continues to climb out of this economic valley that covid created. I know theres parts of the economy that are closing, but theres other arts that are reopening we think a nationwide lot down is a slim possibility. You combine that with what the fed is doing, and lets not forget that each morning we wake up and find out we have better ideas of treatments, vaccines that are progressing. That would be the ultimate in game, where you see a pretty heavy market rally, and that is what is keeping stocks afloat. Lisa when you talk about betting on some of the less well loved stocks, like some of the smaller cap more be sectors, i am trying to pair that with the idea that the bankruptcy rate has risen to the has level since 2009, and is expected to continue to increase. Even though companies are able byaccess and are propped up the Federal Reserve, they still are failing even the lack of demand how are you avoiding these pitfalls Going Forward . Well small caps perform coming out of every recession, so i imagine that that would be the case during the same time period. Certainly we have active managers. We also use etfs. Theeneral, that is kind of detailed to the overall asset Class Performance yet berkeley, britain real rates are negative in the Federal Reserve is trying to keep in their, and when the economy begins to climb out of a hole, small tax small caps typically perform very well area i think that is kind of the detailed to the overall Asset Allocation climbing out of that valley. Optimism veryour much is reflected by a lot of individuals. I think youre not alone in feeling that ultimately, we will come to the other side, there will be a vaccine, we will reemerge on the others in some form in the nottoodistant future. What are you baking into that assumption . When do we get the vaccine . Do we get another fiscal rescue package and perhaps a reupping of the enhanced on and women benefit . Brent one, i look at the bank of america surveys, what hedge Funds PensionFund Managers are doing, and i am not sure i see the optimism that everyone thinks is out there. Survey. E parish i think people are waking up and realizing that you may actually get the vaccine which people were skeptical about area things have continued to stretch past next six to nine months area i think then my bullish optimism may be wrong. But im not so sure. I bring it back to common sense. If we dont go back to nationwide lockdown, with Central Banks doing what they are doing, i think the market is at least supported, and i get the benefit of a little bit or of immediate time horizon then perhaps other guests on your show get. Jonathan Brent Schutte of northwestern mutual, fantastic to catch up with you. You. Just outlining the upside risk, as well as the downside risk. For me, we have been talking since the end of february now about you bridged the other side , building a policy bridged to help people and Companies Get through this. We saw how they got to the other side, and that is why policy is still going to have to step up in the next 30 days. It is a huge issue. Tom the foundations of the bridge built on sand. Theres a lot of different opinions on this it would make jokes about it, but the reading this weekend into july 1, i cant believe i am saying this, into q3 really are going to be interesting to see how people shift on where are we on that bridge, and what is the stability on the bridge as we try to get to somewhere out there, i will say march of 2021. Jonathan we have had real evidence this week that we are going to be below capacity in this economy for an extended time, and maybe much longer than people anticipated a couple of months ago. I understand the market is trading on sequentially area the aggregate data will improve mechanically because new york go from shut down to opening, and more, and the next few weeks. The reopening process is constrained. If we are going to have doubledigit through the yearend, you have to imagine the bankruptcies you follow are going to carry on acting up carryon racking up. Lisa they already are, and they are expected to continue. Jonathan coming up on the program, Michael Purves will join us on this equity market in this worldwide economic situation. Equity futures down five, off by a little more than 0. 1 . This is bloomberg surveillance. Ritika with the first word news, im ritika gupta. The u. S. Hasnt seen a daily the coronavirus pandemic hit. The country registered its biggest jump in cases, leading some to reverse plans to reopen their states. Texas has suspended elective surgeries in big cities. Businesses that are already up and can operate, but only at reduced occupancy limits. The Trump Administration has asked the supreme to rule that obamacare is invalid. The administration filed a brief with the court last night, urging that the entire Affordable Care act must fall, including protections for people with existing conditions with preexisting condition. The court is set to hear the case around the time of the election. Germany threatening sanctions if the Trump Administration follows through with its threat to target the nord stream 2 pipeline. Credit suisse has frozen plans for a Wealth Management hub in miami. The goal was to attract billions from the rich in latin america, but costs outweighed expected returns. It would have been credit suisses return to Wealth Management after a four year absent. Four year absence. Global news 24 hours a day, on air and on quicktake by bloomberg, powered by more than 2700 journalists and analysts in more than 120 countries. Im ritika gupta. This is bloomberg. We are not really seeing a high degree of the impact yet. What will need to be determined is what it looks like when we get into the second half of the year, when deferrals begin to wear off, we find out and discover where the economy is in the second half of this year. I think a lot of that is still left to be determined. Thomas michaud of kbw. I think we have little visibility going into yearend, with this economy and depend to make situation will look like. Alongside tom keene, together with lisa abramowicz, im Jonathan Ferro. We are one hour and 12 minutes away from your opening bell. We rolled over just a bit, down six points on the s p 500, off by 0. 2 . The curve has been flatter through much of the morning so far. Your thirtyyear down almost three. In foreignexchange, muted price action in g10 for much of this morning. Eurodollar going absolutely nowhere. Pound sterling just a little bit weaker. The pound just a little bit lower. Tom maybe francine the quad driving the pound weaker with her conversation with the chancellor of the exchequer earlier today. To have you reset for the second half of 2020, a guy who writes an incredibly interesting Short Research note. Michael purves is great because it is six or seven or eight pages, instead of the three pages of boilerplate. In that, he always tries to get out in front of the trend. With theat to a t issue currency dynamics a year ago. We are thrilled he could join us this morning. Really simply, where is the opportunity right now . What are you writing about as the true alpha generating opportunity for the second half . Michael it is a tough question. I think it is tough for any of us. I would start by answering that question, saying that if the first half was very binary, almost in a risk on risk off, the second half is going to be much more nuanced, less binary set of analyses. Theres a lot of things coming to the foreground after we tear the fourth of july holiday, which is right around the corner. I think the framework shifts. In terms of how i am positioned for the second half, i am looking opportunistically to sell volatility. I did that a couple of weeks ago when we had that vix spike after the fomc. Long equity on my portfolio to have a core islands of what most other people have, a core cap to have reliance on what most other people have, the big cap techs. I think the second half is looking at this potential pivot where the european condition may be moving into a more interesting place with the stimulus slowly coming together, and at the same time, rising Political Risk in the United States and a whole bunch of uncertainties about what kind of policy we will get out of the in 2021. Spx to be mostly range bound. Committed. Hard to be not to add too much into that answer, but i would also suggest arguably a consensus trade right now, but ive been very constructive on Precious Metals for some time, and continue to be so. I think you see a lot of pickup there, particularly in the in the miners and silver. Jonathan do you think we could see real outperformance on the continent . Michael weve all been there. Hope inl had slivers of 2017. That lasted about six or nine months area but i do think there is something that investors have to keep their eye on, which is perhaps covid as a catalyst has brought together a new sense of european cohesion, and you are large that with this very 750 billion euros stimulus panel stimulus plan that france and germany are anchoring , getting countries on board with it. It underscores declining, if it happens, it will harmonize Interest Rates across the euro zone. The spread of btps to bunds will come down, and arguably bund yields will come higher as well, but the risk premium that has always existed in the euro should come down. Theres a lot that can happen between now and whatever that might become a reality, but it represents a very important shift. In terms of trading it, it may be the long euro trade is easier then long equities right now, or the widow maker of shorting the bunds, but over the long term, it can attract very substantial flows that are very u. S. Focused back into the euro zone, and that has implications that will work or cross the investment landscape. Thereis momentum building that we have not seen before. Purves ofael tallbacken capital, thank you for joining us. I am just struck by a question you raised this week. Is this capitalism . What is price discovery at a time when you have Central Banks leading the zone with, and you have all of these fiscal rescue packages . How do you discuss what price discovery is or what is baked into markets at this went . I hear this struggle with every Investment Management that comes on, and i feel it. It is a struggle on how to get upside in a market so dominated by these external factors. Jonathan it is all about policy. It is bid really difficult for a lot of people because it has been really difficult for a lot of people because you can get the market call really wrong. I think we not just sit here and think whether capitalism has been killed. I think what weve got to work out is what is it what does it mean, what are the consequences. We are sacrificing higher per activity higher productivity and higher growth in the future for stability now. Arguably in financial markets, that is what they have achieved. But they have sacrificed in the future, that is going to be an ongoing debate, and i think it is going to be a debate we will continue having on this program. Tom we have only been doing it for 10 years. I will go back to financial repression, and that we are pricing in finance without question the austrian 100 piece 97 inre right now is up the last three years. That is a gain, but that doesnt help savers. That doesnt help retirees. It doesnt help society. Jonathan it does not help tom keene, either. From new york city, good morning. Down, 0. 2 . E are this is bloomberg surveillance. Jonathan from new york city, this is bloomberg surveillance. ,rom audience worldwide alongside tom keene and lisa abramowicz, im Jonathan Ferro. Awaiting the Economic Data in the United States. We can cross over to Michael Mckee. Personal income and personal spending. Michael we are still waiting for it and it has just crossed. ,t comes out less than expected but in the direction we expected. Incomes had risen and spending have fallen. There reversed. Personal income down after rising 10. 5 last month. Falling up 8. 2 after 13. 6 in april. Those are both lower than anticipated. We are looking at the pce deflator. Everybody is wondering if we are going into deflation. On a yearoveryear basis, up. 5 . We are holding in on that. The court on a yearoveryear basis rises to 1 . Maybe a little bit less concern than we have in the past. If i caning to see find the breakdown. It happened last month and im not seeing it. What happened last month was personal incomes rose because transfer payments, the Unemployment Insurance everybody got rose so much. Put that in the bank and had more money to spend. They did not spend it because everybody was locked down. Now some of the money is going out the door, and the impact of the unemployment checks has been absorbed. We are seeing an actual decline. It is hard to get the numbers right away off of the web. I have it here. Just a second. What we want to know is if that is the case, not seeing it right away. I will not keep you here. That is the story. We will watch for it and give you the data as the day goes on in terms of how it broke down. Spending is down spending is up, which is a good sign, incomes are down. Jonathan this is why you can depend on Michael Mckee, because he actually tries to read the release as they come out every morning when we get this data at 8 30 eastern. Michael, when you think about the income figures, the next 30 days on the fiscal side will be of huge importance. Michael yes. When we get to the end of july, the extra 600 people have been getting in Unemployment Insurance, that goes away. That has been a big contributor to personal incomes . What will people do if their jobs have not come back . Their incomes will drop that will have an impact on spending, which puts urgency and whether Congress Puts in another stimulus package. Tom Michael Mckee. He makes it look easy but what we are doing in realtime and what Michael Mckee does every day is extraordinary. I will have Jonathan Ferro bring in our next guest. Ken leon. I think this headline is incredibly important. Upated you see a stock go is up 15 on a westership with kanye brand ss. Jonathan can you repeat the name of the brand . Stick with gap. Kanye west. Tom , it is kanye. Jonathan always great to educate you. Wants to talkleon about the banks. Ken leon joining us. Dont worry. I will start the interview, not tom. What did we learn from the Federal Reserve yesterday evening . Ken unprecedented. What was released yesterday was in a normas insight about the Federal Reserve use was enormous insight about the Federal Reserve use and the sensitivity to the coronavirus. It also gives us insight into the expectations under loan losses for the banks, and then return of capital, it is fascinating to see the narrative the fed has looking out from today, not only to the issues but 2021. There was much more language and scenarios not only to a ushaped, not a vshaped, but a we doed scenario where not have a second rise of covid19, but the fed has been thinking about this. I think that is important. Tom you absently nailed this as you always do. I was thunderstruck by the language we saw from the team. Why did they do that . What is the back story on the why when there was so much ambiguity and mystery past september . Ken it is a great question. It was two things. You had to have a narrative that linked stress test that did not look bad and economy where unemployment was far greater in the adverse scenario of 10. 3 unemployment. Second, we are looking at unemployment that is not likely to recover with outgrowth of the feds view, but over a long period of time. That has led to what does this mean in terms of the health of the Banking System and what can the fed do even though the 10 know the fed does not what the outlook is for the rest of the year and next year. That brings their actions as we dividendch is to limit and dividend increases, to pull back the percent of their capital return. Stock repurchases. Either way, banks from the largest ones, we want to continue this conversation with the fed Bank Supervisors looking at data and looking up plans by year end. That is exactly where i wanted to go, the idea of what they are going to be doing later on. How concerning is the Additional Capital plan that the fed has asked banks to resubmit, which Alison Williams of Bloomberg Intelligence say is a broad negative for the Banking Sector . Ken we already know what they have planned for this year. It brings you back to the july earnings coming up with loan losses and the projected loan losses on their historical framework was 433 billion. Once you get into the covid19 scenarios, you are looking anywhere from 600 over 700 million. The fit is recognizing the fed is recognizing banks will see, especially in three areas, commercial loans, credit cards, and real estate, that there is incredible uncertainty about the economy, the labor market, there will be loan losses. Realistic. Being it is a new environment. March theh before banks look to be strong, they will be much more conservative than the csuite or the ceos of the larger banks about their capital. Lisa the reaction in markets has been relatively muted. We are seeing wells fargo down 3 ahead of the opening, but that does not take into account yesterdays 5 gain. Agree, or do you think there is more potential downside . Ken when you get to that capital return, no surprises. There is a threshold in terms of computed net income. Wells fargo may not need it in terms of their ratio. Overall, the market, the equity ket and investors attractive value in training at tangible book value, they are the ultimate cyclical stocks in the market and looking beyond the next six months, banks will hopefully do much better and given the protection from the fed and capital requirements, there is not much more downside on what the loan losses will be. Incredibly higher than what the fed is projecting. Tom one final quick question. What does this mean for jamie dimon, brian moynihan, and the rest of the guys . How do they respond as we wander into july . Spirit will be about phase two, which is the road to recovery. The first phase was taking care of employees and customers. Now they banking executives do the hard work to ensure they can sheet,cate their one their ability to manage risk, and their ability to manage all of the businesses, including the capital market. Today, it is read hard for any of the banks to look out and get any ability to project what their businesses will do for them. It will be a fascinating ride relatednext six months to the dynamics of the u. S. And as we look the profile, also the return we get as investors. Jonathan cannot agree more. Well summarized. Kenneth leon, global director of industry and equity research. We talked about building the bridge to the other side. Have we still not made it to the other side . The banks were part of the solution of last couple of months. If this goes on and we have a period of time with low capacity economic down. To hunker that is the fear. I hope that does not materialize. They were the solution over last couple of months. Lets hope that remains the case. Ive got totom say, i thought the stress test would be accurate. I got this wrong. I thought there was a lot more nuanced than everything i expected. Jonathan we are down six on the s p 500,. 2 . We will get you in shape for the opening ballot the opening bell about 15 minutes away. Lets get a check on the bond market. We come down two basis points on the 10 year maturity. On 30s. E basis points the purpose platter. New york, this is bloomberg surveillance. Ritika the race to reopen in the u. S. Has been thrown into reverse. Reported the biggest jump in coronavirus cases. Almost half of the new infections come from florida, california, arizona and texas. Today the white house will hold its first Coronavirus Task force briefing and almost two months. On capitol hill, the house has passed a democratic overhaul policing laws. And democrats are far apart on a liability shield european offering to compromise with the u. S. U. K. , italy, and spain could initially only tax automakers and digital services. The u. S. Is threatening to hit those countries with tariffs. Lates headed for only second weekly decline since april. New coronavirus cases in the u. S. Have clout the outlook for demand. It is one of the single biggest bets on the Aviation Industry since it was shuttered by the pandemic. Bain capital has agreed to buy virgin australian. The terms of the deal were not disclosed. Bane says a significant amount of capital will be injected into the airline to wipe out virgin global news 24 hours a day, on air and on quicktake by bloomberg, powered by more than 2700 journalists and analysts in more than 120 countries. I am ritika gupta. Bloomberg. Especially with texas being one of the largest gdp contributors, it is concerning. Impact will lead to several other states closing down officially, putting in those quarantine measures, and if that happens to us, that will setback the economic recovery that has been going on since april. An of wellsnna h fargo and this program about an hour and a half ago. Alongside tom keene together with lisa abramowicz, im Jonathan Ferro. Need an hour without the stupidity of my colleague, mr. Tom keene. I will be catching up with mom and elerian. Over to you, tom. Tom thank you so much. Greatly appreciate that. Mohamed elerian will be fascinating. It is a treat to bring in brad setser. It was a young guy when the papers came off the screen. That happens very rarely that someone writes papers and they come out of the screen, and that is what brad setser did at a most early age. He served the nation of treasury. He joins us today. Has my book of the summer, the world. It is a simple, straight talking book on International Relations. What would you frame as the setser future of our International Relations . It is not the consensus, what is it . Brad i will give you a classic dodge. I think it is way too early to tell. Frame this that will pandemic Economic Future have not been made. The outcome in november matters. Set of policyd decisions on trade, on american alliances, on the relationship that will be central to the post pandemic world. We are only beginning to lay those out. Where we are after this election, the day after this election, what will be the best practice to resurrect our state department from where we have been in the last administration, whether it is a second trump term or a new biden term . Brad it is a lot easier to imagine the process with a new by ive every reason to think joe biden would pick a strong and wellrespected secretary of state, but i think biden has made it clear he would ties to traditional allies. At least in the first six months, i think that would be a relatively easy to orchestrate in the sense there would be in a normas appetite on the part of america there would be an enormous appetite on the part of americas traditional allies to work closely with the new administration. The hard part comes when it defines the substance of the new relationship. There are obvious things biden could do to get relations off on a better foot. Narrowing trade conflicts to focus on china, settling some of the outstanding trade tensions with europe is an example of obvious. Lisa there is a question Going Forward how much we will continue with the deglobalization we have been talking about if not effectuating over the last few years. I wonder to what degree you are seeing us rejigger the supply chain away from china, redomesticate them in a way of a lot of people have been calling for. The data ishonest telling us the opposite story, a disconnect between the discussion of deglobalization in the reality, which is some ways the world is sinocentric. Down, stills still hindered by the state of the ,andemic in the United States but production is more or less back at capacity. What you see is not just the u. S. But around the world, imports are down, but imports from china are down less than overall imports. ,hinese imports are increasing and in the past couple of months of u. S. And chinese data, imports from china have been the year theyfor were down 25 . , think in the first instance the way the pandemic has moved around the world has at least for the Second Quarter reinforced dependence on china. China is the center of mask production right now and everybody is welcome with that rise in demand. If youre serious about reducing supply chain dependence, it will take policies that actively promote that outcome, whether that is how the u. S. Procures medical equipment, whether it is some other measures that support at the Current Exchange rate with china up and running, the natural pressure is towards reinforced dependence with china. , the tariffsick have failed to reduce international dependence between the u. S. And china . Brad i would not say that. Failed to bring production back to United States. The tariffs were reasonably effective at creating an incentive for production in vietnam. Import from china were down 20 belowbillion, where they were before the tariffs. The tariffs had an effect, but some of the effect is strangely being undone by the course of the pandemic and the fact that chinese production chain got back up and running before everyone else did. Cfr, thanksetser, you so much for being with us. To me one of the Big Questions is how much will a rejiggering of the supply chain push the inflation picture and building costs people have been using the past several decades of globalization . Not seeing it yet, and yet people are still saying we are going to. Tom color me skeptical. Theres been a lot of talk, it was assumed we will rejigger our timelines. Our supply lines. I will believe it when i see it. Im going to wait and see. It will be an interesting way forward for us. Mohamed elerian with Jonathan Ferro. A good conversation. , jason kelly00 with lebron james and company. This is bloomberg. Michael jonathan from new york city for our audience worldwide, good morning, good morning. The countdown to the open starts right now. Equity futures negative. We begin with the big issue. This was the week where the tolerance of policymakers was finally tested. There is a massive outbreak of covid19 across texas. You are seeing infection rate grow. Covid19 is widespread in arizona. Inthere are some regions texas running tight on Hospital Capacity that may necessitate a localized strategy. We have done a stepbystep approach, and it was aiden approach reflective and it was our approach reflective of the unique situation of each area. There is more work to do. We cannot let up. If anything, we need to redouble our efforts. Jonathan many of the governors are increasingly worried, the president of the United States increasingly oim