>> you still have arguably the greatest of urchins between real echo -- diversions between real economic outcome. >> it is not going to be a downturn again. >> we are getting evidence that the recovery is tapering off. yes, jobless claims, but not by that much. >> in the last hour, a lot of

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 you've 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: you've 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 technique's -- 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 second-quarter 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

weren't saying anything near the same in europe. there were some early indications that maybe things aren't 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 short-term 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 near-term. lisa: you've 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 fed's willingness to continue with their programs? james: it really isn't 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 self-fulfilling 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: they've got to cut the size of the business. these companies are starting to right size for the reality that things aren't going back to normal anytime soon. something that stuck with me for

the last three weeks is a quote from jp morgan's 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: there's 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. you've 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 can't 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 short-term. what problems that creates for the long-term 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, i'm riddick a good -- i'm 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 company's 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. 7-eleven 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. i'm 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 presidential 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 worst-case 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?

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♪ 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. euro-dollar 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 inflation.

favor ofld not be in tying forward guidance specifically to inflation. i would not want to see us do that. remember guys would the arthur burns era. are you worried at all this might be a mistake? >> the inflation dynamic is different now. you had a very tight labor market, and you would see inflation. but the world has changed, the structured environment of the economy has changed. , the fed hasgy been able to run the economy hotter with more muted inflation. way we had to change the

think about inflation unemployment. i have also been more cognizant of underrepresented groups, lower educated, blacks, hispanics, women with a high school education. we have been able to get these underrepresented groups back to the workforce. >> up to $750 billion here you can buy up to $600 billion, up to 82 million dollars so far. >> i have spent a good amount of time, i have a key role in the municipal advance program, where it is a $500 billion program and we put out as you noted a small fraction of that. one feature of the corporate not anogram is it is

indicator of the power of the program. just by announcing the programs, and making clear we would help provide a backstop to these markets, you see a substantial rally and flow of funds into the markets, to where the fed pricing is less attractive, the market pricing, and the fed has not had to actually purchase securities the way we might have thought. i think that is a good outcome and i think the programs served their purpose. on programs on the other hand like ppp, i think it is critical that those programs got used. on the main street program, i think over time, we will want to keep getting feedback and looking at ways that program can get more fully used because i do worry, as healthy as the financial markets are and as loose as financial conditions are right now, one place they

are not loose is for small and midsized companies, ticket early if in person-to-person contact. of thee is another round ppp, those programs are critical to helping small and midsized companies get credit. i do think it is important to look at. >> one thing is the stock market. do you worry that you are creating a bubble? however necessary or actions may be, that it might pop and take down the economy with it? ,> i think it is wise for us whenever we are doing asset , even more extraordinary in this downturn. i think we would be wise to be cognizant and concerned about

the impact on risk assets. the markets understand they will not go on indefinitely. we just extended our programs to december 31. i think it is important we emphasize these will last. it is important these markets are able to function without fed i think the fed support creates its own fragility's in the markets and we should be very cognizant of that. without oilt you go bankruptcies spreading. gasoline demand is falling. what is the outlook? states, it hasd recovered in the high 80's, 90% of a year ago.

how strong surprised the demand has been. people are driving. they are not taking mass transit or flying but they are driving their cars. your point, with the resurgence of the virus, the recovery of demand has stalled a little bit and is hovering around 90% and we have got excess inventory. all this supply that had been built up because of the drop in demand earlier this year. i think it will take till the middle of 2021 for that inventory to be worked off. you will have a challenging energy industry and oil market probably for the next six or 12 months depending on how the virus proceeds and how demand recovers, because we have a lot of excess inventory and oversupply. it will begin to firm later next year and in the meantime, you are seeing shut-ins, people you areg who shut in,

seeing recount drop precipitously, and i think you will see u.s. production fall from 12.8 barrels per day at the end of 2019 to this year around 10.8 million barrels per day. a big drop. that is with the reversal of most shut-ins. we are seeing less drilling activity and you are seeing a lot of anger please, restructurings, and stress in the energy sector. are the markets guy at the fed and worked at goldman sachs for a long time. the enormous volatility we saw back in march, did that have to happen? byorts are it was caused hedge funds, do we need significant changes, do we need the shadow banking system? >> yes, i think part of what happens in march which may not have been talked about enough, is you had in march and part of

april a for selling wave through many financial markets. whether people were leveraging treasuries, parity trades or other strategies, part of what the fed did is facilitate the deleveraging, but i think now that we have been through it, it would be worth doing more study as to what was the role for the leverage and what are the implications. financial stability iterations are sometimes hard to see and it can build up and when you have a stress event, you see it manifest itself. when you mention the treasury market, treasury is not the natural component of a portfolio that it may be was because rates

are so low that you might find many people who used to buy treasuries naturally as part of a portfolio will be buying other assets. golden may be other assets. that will have an effect on the treasury market that we will have to spend more time to understand. >> we will see what you have learned in a couple of months. robert kaplan, president of the dallas fed, thank you. back to you, john. >> great work as always. good to hear from the president of the dallas fed as well. to wrap things up quickly, on unemployment benefits, the fed president commenting and saying anecdotally, they are hearing from businesses that say unemployment benefits are making rehiring difficult. he does not see in the data or the net basis that the economy will be baked -- weaker if it is not extended. on forward guidance and state guidance, toward

say, a threshold, unemployment, to tie forward guidance to the unemployment rate. the third point on financial markets, which might be the most controversial part, is that these programs should be allowed to sunset. policymakers have to understand that investors are conditioned by how policymakers behave, and those programs have only recently been extended. i do not think you will find anyone in the market who believes they will sunset if they will disrupt market pricing. which i assume they will. >> no question. particularly in prices, it has been difficult. are we in a crisis right now? not if you are apple or amazon. i would suggest when everything is said and done, huge part of the market has not participated in they feel in crisis. >> alisa, your thoughts. i know you're itching to weigh in.

on the credit portion of it. literally itching to get into the conversation. >> how can the program sunset if the entire market pricing structure hinges on the promise, with dallas fed president kaplan confirming that it was not even the take up, just the promise of the backstop of the fed. how can you justify buying a 30 year treasury at 1% yields if you do not have the promise of a fed backstop no matter what? >> that is the heart of the matter, where the yield market is. man,rn now, to catherine at citigroup, one of our most distinguished national economists. she is someone with a sense of history. the simple reality for all of academics,l of the

and all the viewers and listeners, is we never see yields at this level. do they damage the economy and do they damage confidence at these low levels? >> there are a number of different factors. the bifurcation between the asset side of the economy in the real side of the economy is essentially it at various low yields. you have the asset side searching for any strategy in order to get returns on the assets. that is where leverage comes from, the reach for yield, and yet that does not translate, the isancial market from the fed not translating to the real economy. that is even more transparent now than ever. important, if you look at the theoretical model,

all of the fancy mumbo-jumbo does not benefit the have-nots of american society. >> premium at model on bloomberg, you expect your viewers to be kept up. whichare channels through the low rate benefits to have-nots. anyone who owns a house is benefiting. holdingwidespread asset in the united states. that is an important channel. to the extent the fed is that areg companies still wearing a life preserver, because we are only in life preserver -- life preserver mode at this point, the fed is providing a backup for those companies and they are still in the business of employing

people. that is also something that is the rolled federal reserve latest. -- place. there can be no doubt that the concentration of wealth, federal reserve policies benefit those who hold wealth, and that is concentrated in the united states. it does not have no effect on the have-nots. we have to be clear about that. >> rates remain low. you see inflation going up. over the weekend, that could actually continue to increase over time. he quoted milton friedman famously saying, nothing is so permanent as a temporary government program. more inflation, which means the back end can rise. portfolios are opposition for this, do you agree? >> i agree that rates could rise but i do not agree with milton friedman.

the size of the balance sheet, that we have seen around the ifld, that is assumed that this is going to be inflationary ultimately. the markets are not positioned for that. but the way they are not positioned is not so much that there will be inflation that is out of control, but there will be more inflation than the markets expect. there is a big gap between inflation expectations as measured by the market and inflation expectations measured by the market, the labor market and the product market. world is very macro. the way we see inflation works is can workers get wage increases? the answer is pretty much no. two firms feel like they can raise prices? the answer is pretty much no. you do not have inflationary

impetus coming through those kinds of micro foundations. ,hat the market pricing financial market pricing of inflation as well -- way below 1%. question here on international economics. i know your wonderful map behind you with latin america over your right shoulder. what is the fragility right now commodity-based virus-infected em? do you find it to be early 1990's critical condition or is it better than we perceive? >> there are a couple of different crosscurrents on the commodity market. commodity market economies. one is domestic covid crisis, which is quite apparent in a number of countries in latin america and negative.

hand, the dollar weakness is supportive of commodity pricing. we have seen some improvement in commodity pricing. that is beneficial for the latin economies and but to her. we have to overlay on top of that that within these economies even pre-covid, there was quite a lot of differentiation before -- in terms of the status and ability of political systems as well as the quality of economic policy. there are really three factors we have to way if we look at latin american economies. political and policy environment. the covid. and dollar weakness. >> thank you. very valuable. at the mix on a monday, and we can talk about the market, talk about bonds, but

the date calendar for the week has -- is absolutely overwhelming like last week. day, the is the key jobless report for the month of july where the gap between expectations is incredibly wide, and regardless, it is very clear that the labor market is weakening. just what the response will be and just how much remains to be seen. >> -1.02. --t is inflation-adjusted yield is extraordinary. >> it basically means the fed is sitting on treasury yields even as inflation goes up. at what point will people protest against losing money and treasuries? >> i am losing money and i am triple leveraged and you are double leveraged on amazon. moon, 24.76.

we all do this with a little more resilient dollar. please stay with us through the day on bloomberg radio and on bloomberg television. good morning. ♪

jonathan: we advance .6% on the s&p 500. we begin with the big issue and it is not tictoc. unemployment benefits expiring in talks on the road to nowhere. >> we have proposed an extension at $600 so that while we negotiate a solution, at least all of those people do not lose their money. democrats are insistent on having this as a part of a larger deal. jonathan: take a listen. >>