Kaplanter kaplan dr. Joining us on the fed, the economics, and how it folds into policy. Joins us, james acey from aberdeen standard. We love having him on for a more holistic view of what is going on. How alone is technology here in its ascent . James i think it looks incredibly alone. If you look at the u. S. Equity market without scratching beneath the surface, the messages that youve had an amazing recovery. The equity market is not just priced return to normality, but it has gone beyond. When you scratch a little beneath that surface. They really are the only things pushing higher, almost regardless of incoming data, regardless of the economic environment we face. That trend is global as well. Youou take the msci world, get a very different picture. If you take tech out of u. S. Equities, you get a very different picture again. It does seem that the market is saying that virus were no virus, whatever the world we are about to face, it is not a bad thing for tech. Quite the opposite. That completely ignores an evaluation ignores any valuation. For now, the market is not really in the mood to be too concerned about that extrapolation. It is very much a narrative driven story. Jonathan youve heard several versions of this over the last couple of weeks. The United States markets, the only thing going for the right now, five big techniques big tech names. In europe, policy is better. Has that narrative got to stretched . James definitely. I would take issue even with the narrative to that point because realistically, the annualized klein in secondquarter gdp for some of the countries within the euro zone was absolutely astronomical, around 2. 5 annualized. European countries started from a position that was much more precarious on both a cyclical and structural basis. , the only thing pushing that narrative further was we really were seeing what looked like a concerning spread of the virus in the u. S. , and we werent saying anything near the same in europe. There were some early indications that maybe things arent as the control as we hope in europe, and the extent to which that continues and get worse will definitely feedback to that narrative. Jonathan the optimal way of playing this in the coming months, is it through equities . Is it through fx . Is it through the bond market . Is quitee dollar dramatic, from what we have seen from the peaks at the end of march. Some of that was unwinding all of the conditions, and that makes complete sense. It was that narrative he referred to i think that is really pushing that other pushing the dollar further and further down, but history says that is quite a difficult narrative to maintain, just given the nature of those two major economies, the eurozone and the u. S. They are centered, therefore are slightly different. That makes it difficult where demand is as weak as it is, just on the shortterm technical basis. I think it is fair to say that things like rsi will look it look incredibly overbought, and that is normal for markets to take a breather at that stage. Whether that becomes self fulfilling on the downside for euro, i think that probably goes back to virus data in the nearterm. Lisa youve got the Federal Reserve pushing investors deeper into risk, to search for yield at any cost. Do you think that has gone too far . Is there anything that can disrupt that, giving the feds willingness to continue with their programs . James it really isnt something i have been feeling since march or april. It has felt like an investor ignoreness to completely fundamentals, completely ignore the balance of risks, valuation metrics, that has been with us for so long now. Come part of the fabric. That becomes selffulfilling in end of itself. If i am still an investor, i am still seeking to understand what risks i am taking, how i am being rewarded. I am looking across various asset classes. Most pricing has definitely gone too far. Tom we can fold this into mr. Kaplan of the dallas fed as well. I want to talk about a Small Business, and by that i only mean 9000 employees. This is spirit airways. Gete are the suggestions i that the Airline Business has cratered. The bottom line is 20 to 30 furloughed speaks to the fragility out there as we go into the friday jobs number. Jonathan theyve got to cut the size of the business. These companies are starting to right size for the reality that things arent going back to normal anytime soon. Something that stuck with me for the last three weeks is a quote from jp morgans jamie dimon, when he said the following. This is not a normal recession. The recessionary part of this you are going to see down the road. You will see the effects of this recession. You are just not going to see it all the way but not going to see it right away because of the stimulus. That stuck with me. Tom what is so important is our focus on somebody who employs 800,000 people or 260,000 people. Jon ferro, this is about Small Business like this airline company. Jonathan theres going to be more, and i think the big issue in the previous quarter is that we saw joblessness surge, but disposable incomes held up because of fiscal stimulus. Somebody people benefited from the fiscal package. The back half, this idea that we have seen the bit cyclical test, have we . Tom no james no. In my opinion, absolutely not. We have seen surges in some of the data series because it is just mechanical. Work through that process. People are going back to work. But as one of your clips you were playing just before i came arianthink of mohammed al , that we are starting to see the recovery flatten out. The backbone of every Economic Cycle is employment. That is the longest term indicator which trends alongside the Economic Cycle. We understand why that is because that is the nature of the cyclicality of an economy. If more people are put to work, demand goes up, employers, producers need to increase capacity, so they take on more people to do so. That feeds on itself in a positive fashion. We also know that feeds off itself in a negative fashion. Youve already described the fiscal policy. Some of the effects of that have been in mill he rated. The question for me have been in mill he rated. Normally we cant understand the limits from fiscal policy. It feels like we are in a world where politicians, governments across the piece do not see that there are limits on the quantity of actions they can take. That means if they are prepared to continue putting money into ckets, the impact will be vastly different from what we expect in the shortterm. What problems that creates for the longterm and the potential for huge deficits and debt loads to be serviced, that is a question for another day, but that is something i think we also need to consider at this juncture. So very tricky. Jonathan the conversation will continue. James athey of aberdeen standard investment. I spoke to bob michele of jp morgan Asset Management on friday and said, what is going to cross the 1 line first, the 10 year or the thin year . 1 ,aid the 30 year below and he think the 10 year yield in america, nominal, not real, can turn negative. Negative nominal 10 year yield in america over the next couple of quarters. Tom you and i have got these people lined up, steve major at hsbc, Gary Shilling has been courageously brilliant for decades, but jp morgan has really lead on this. He is on that trajectory. Jonathan coming up on the program come on the fiscal effort and in the sea coming up on the program, or on the fiscal effort in the in d. C. Ritika with the first word news, im riddick a good im ritika gupta. Microsoft is trying to salvage a deal to buy the u. S. Business of tiktok. Floated the idea of outright ban on National Security grounds. The white house has given the companys 45 days to hash out a deal. The u. K. Is reviewing its options for fighting coronavirus flareups. According to the sunday times, a london wide lockdown is being considered if cases continue to spike there. Says instructions imposed in north everett in the north of england show that the government will act when and where necessary. 7eleven will buy Marathon Speedway gas stations. They believe an expanded u. S. Footprint will help growth. Nasa has completed a tramp at return to u. S. A triumphant return to u. S. Space travel. The capsule splashed down into the gulf of mexico with two astronauts. Im ritika gupta. This is bloomberg. They have a 200 proposal. It does not meet American Family needs. Need it. Ly do not they are just staying home because they need more money. Speaker pelosi pushback will continue through this week. The blame game hi in washington. High in washington. Here is your price action squeeze. Last hour, treasuries deteriorating. We begin a new month, the dollar comes back as well. Strength withllar messy talks in d. C. A steepening of the yield curve. We will talk about this in a bit. We have done the markets here. To 30 Million People, unemployment checks, it has evaporated. Out of london with a huge focus on the United States and the rest the rest of america as well. Urgency. Us the do they have a week or two . No. Summerbout a hot august in the United States with 30 Million People out of work. A lot of people engaging with the protests and wanting the numbers. The virus. Ry is watching americans dying every of relief orign schools reopening. It is hard to imagine going back to work. There will be very little sympathy on the streets of america for congress that cannot get it back together and agree on a fiscal stimulus plan. Commitment toa sustaining Unemployment Benefits. A bipartisan consensus that we saw initially is gone. Pressure onot of both sides right now. The collective will to do more fades with it. The crisis has not faded much at all and this is the issue. D. C. . S plan b down in enough,annot stress there is no sign, and watching this from london, it is extraordinary to watch america drive itself down the rabbit hole of the crisis. We are hearing reports that the white house has a plan to step in. Work with has to congress. Democrats have a strong consensus to ask for more and ask for a bigger package. Polling holding up against a Vice President ial contender. I think it is difficult to see the end in sight, but there is tremendous pressure to at least have a temporary measure. That is what we may well see soon. Potential policy failure that is incredibly important to focus on, the lack of a virus policy. We need the stimulus. We see the number of the fiscal stimulus. Ongoing death, there is a time in which there was something novel about it and then we had a moment, the george floyd moment, in some sense it galvanizes americans, brought them together and gave them a focus. Expensive anding they want things to get to begin in september. It real simple. Representing the prime minister, he begins to suggest a lockdown of london. Is it doable . This is a worstcase option. Yet. E not clear i want to emphasize that. The United States has atoll higher tolerance and i think that narrative is too broad for what is actually happening in europe. In the u. K. , it seems to be a higher tolerance. You see the images of the people flocking. But the reality is that most people are quite cautious and they are seeing there might be more pressure. Confidence itome is a b, and c. That there will be shuttering. Still a lot of uncertainty. Especially in london where you have so many people relying on the underground and Public Transportation to make that happen. Different context from what we are seeing in the United States. Virus isrgely feel the out of their daily life with the exception of their most vulnerable population. Elderly care facilities. It iss not normal but climate ties to two a new kind of normal. Great to catch up with you. Stay safe. This goes back to something lisa talked about repeatedly. . Owever it how do we reopen it is a story for the world. Work ifo you focus on you have kids at home, you feel guilty about getting them off the screens. You do not have the bandwidth. Big questions and not a lot of answers. What is interesting here, it is a perfect time for jokes except this is deadly serious nationwide. Much is theme so politicians of all persuasions seem to be disengaged from the weefit inequality with what do with virtual learning. Take get Something Else to care of things for them. A different equation. Kaplan. Robert good morning. This is bloomberg. You doing okay . Yeah. This moving thing never gets any easier. Well, xfinity makes moving super easy. I can transfer my internet and tv service in about a minute. Wow, that is easy. Almost as easy as having those guys help you move. We are those guys. Thats you . The truck adds 10 pounds. In the arms. Okay. Transfer your Service Online in a few easy steps. Now thats simple, easy, awesome. Transfer your service in minutes, making moving with xfinity a breeze. Visit xfinity. Com moving today. From new york city and our audience worldwide, this is bloomberg surveillance. I am jonathan ferro. Offinutes away as we kick august trading. A nice rally off the bottom in the last couple of hours. Yields up 10 basis points. The dollar making a comeback. Eurodollar coming down. 4 . In focus, a big payrolls report is coming up friday ahead of our important interview with michael mckee. Good morning to robert kaplan, the president of the dallas Federal Reserve bank. He joins us. Good morning. We would like to start by asking what you have seen in your district. The epicenter of the latest covid surge in cases. What is happening to the economy . Around mid june, the sharp rebound we were seeing started to moderate and stall. The same time and along with the resurgence of the we saw cases increase and hospitalizations steadily increase. That has started to moderate based on the daily numbers i get. It started to moderate over the last number of days. What you saw the state and backup, ors put in a an unwinding of reopening steps, to reemphasize the importance of wearing a mask and we saw some effect to that. You are seeing a rebound stalling to some extent. Caused you to do a rethink of your economic forecast. What do you see ahead for unemployment . Because we were seeing it here and a number of other still our view that we will contract for the year, about 4. 5 . It has been our view with a very sharp decline in the fourth quarter, i think the rebound is more muted in the United States now. It caused me to think if we do not do a better job managing the virus, the Unemployment Rate is likely to be between 9 and 10 . We have moved up the and so ient forecast think we have got a rebound but it is much more muted than it do a bettere do not job managing the virus, we will have a lower growth and a higher Unemployment Rate. I have spent a lot of time talking more about the virus than anything else because it is so critical to the recovery. The extra unemployment bonus, they are gone now. Has your staff moderate modeled the impact of your staff on the economy and should we expect a wave of defaults that might affect credit markets . We have looked at it and one thing that is unusual about the downturn we just had is incomes stayed relatively solid. A big part of the reason is Unemployment Benefits. You usually see a drop in incomes in a downturn but we have not seen that here. It is my view that in some form, we will get an extension of Unemployment Benefits. I am hopeful that will continue but if it did not, you would see a further weakening in the economy. Particular, because consumers would not have enough money in their pockets to spend. People coming back to the labor force . A lot of people were telling me that it was challenging to hire people. We have looked at a number of studies and we have done our own work. We do not see it as much in the data but i hear from business people, so whatever the right answer is, i think you need to see the extension of unemployment. Fromy be restructured 600, but i think it is important that we see an extension of it. Made it hardhave for individual businesses to hire, it helped create jobs because it helped ulster consumer spending. The net effect has been positive for the economy and unemployment. A number of epidemiologists joined by your colleague, say that we need another nationwide locked down about four weeks to defeat the virus and that should be job one over reopening the economy. What do you think . Differentbly have a view based on my conversations with epidemiologists locally and through the country in that the epidemiologists i spoke with, widespread conversations, believe we could manage this economy and the virus and have the economy open if all of us wore masks. That is first and foremost. In particular, if we all wore masks, they believe it would substantially mute the virus and you would not need to do widespread lockdown. Many of them fear if you did more lockdowns, if you still do not have good following of health care protocols, the lock n would be wasted to stump to some extent. Their advice is, be very careful about the reopening, enforce a widespread practice of wearing masks, social distancing, it might be isolated or localized has become unmanageable and we will have to take far more extreme steps on lockdowns. I think we have to learn to live with the virus. To learn to reengage in daily activities and still control the virus, but widespread mask wearing is essential to that and probably the most important practice. Done unevenly and we have lost the opportunity to control the virus and grow faster. We are speaking with robert kaplan. Do you anticipate that the fed will change its Forward Guidance and tie it to inflation running a little above 2 for a while . I would not do that. We have already given specific Forward Guidance in the form of our economic projections, where we have made clear that rates will stay around current levels for the next couple of years. I would far prefer when we do get Forward Guidance in the future that we tie it to the dual mandate and to unemployment, along with making progress on infla