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September 2, 2020

Investing in the Age of COVID

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Nela Richardson
Nela Richardson | Principal, Investment Strategist, Edward Jones

Nela Richardson outlines factors to consider in determining investment strategy and evaluating the economic outlook. Richardson covers how management of COVID-19 will shape the recovery, the shape of the overall recession, how past and likely future government stimuli help bridge gaps, and what a long-term growth perspective can do for resilient investing. Richard Green asks questions regarding how bonds have changed; the fate of office space and brick-and-mortar retail; whether the latest corporate commitments to diversity, inclusion, and anti-racism will follow through on their promises; what businesses are moving as a result of lockdowns; and more.

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Please note this automated transcription may contain errors.

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Richard Green: Well, good morning, everybody. Welcome to Lusk Perspectives. My name is Richard green I'm Director of the USC Lusk center for real estate pleasure having you with us today.

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Richard Green: As we have our last lusk perspectives before Labor Day. It is my great pleasure to welcome from Edward Jones Nela Richardson. Nela has long been a crowd pleaser here at the lusk center. She's spoken at our retreats to

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Richard Green: Great praise from our audience and we're really looking forward to what she has to say. Just a little background. She has a PhD in economics from the University of Maryland.

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Richard Green: She's worked variously at Freddie Mac, the consumer finance Protection Bureau.

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Richard Green: Redfin where she served as chief economist before that she was at Bloomberg and now she's principal with Edward Jones responsible for investment strategy for them.

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Richard Green: Just a couple of housekeeping items before I turn it over. First of all, we're going to be

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Richard Green: Changing our format a little bit for the next month or so we will continue lusk perspectives, but they will be in the form of a podcast recorded webinar because of people's availability, so look for

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Richard Green: Less perspectives from Amy cuts on credit scores from Lori Goodman on the state of the mortgage market Lori from the Urban Institute.

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Richard Green: From Sean Armstrong and distressed debt and from Roy march on the state of the CBS market.

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Richard Green: If you have questions for nila, feel free to type them into the Q AMP a box and I will do

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Richard Green: What I can to moderate your question. Sometimes I combine similar questions together so that I could get to as many as possible. I can. With that, let me ask nila Richardson to take it away nila thank you very much for being with us this morning.

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Nela Richardson: Well, it's a delight to dine you thank you Richard. I'm going to just jump in and get started by by sharing my screen screen here.

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Nela Richardson: And I'll just say from the outset, it's a delight to join your audience, I, I've always enjoyed speaking to this group. I look forward to Q AMP a

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Nela Richardson: So you want to make sure we leave plenty of time for that. I also want to say I'm wearing two hats today in this presentation, and in general.

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Nela Richardson: I'm both an economist by training, but I'm also an investment strategist and never have those two roles.

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Nela Richardson: Felt so disconnected. It's actually the number one question, we're getting from clients, how come the stock market continues to rise rallying

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Nela Richardson: 52% from the march 23 low best August and 34 years and how can you get that kind of performance when the economy seems so disrupted at some points so dire.

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Nela Richardson: So it's really about making sense of these two very different views of the future, the economic view and the market view which has been extremely optimistic. So I hope to put some color on those two views and not sounds gets a frantic. So that's my goal for this presentation.

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Nela Richardson: So here's what we're thinking about in terms of investing in the age of coven. So that's kind of what I'm wrapping this presentation around the first point, it's been said by many, including our current Fed Chair pal that the path of

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Nela Richardson: will shape the economic recovery. You can't get around it. When this all first started, there was this false choice between safety and opening up the economy and we now recognize that you can't do one without the other.

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Nela Richardson: And so this is very much top of mine, we think like a lot of analysts who are studying the space that the recession is likely to be abnormally short, I would say.

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Nela Richardson: To start to recover and the third quarter with a big bounce. But what comes after that is actually more interesting.

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Nela Richardson: A lot slower than I think people are expecting a lot more protracted and so we'll talk a little bit about that.

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Nela Richardson: Part of that big bounces related to the third point, it's really the help that we've seen to date from the monetary and fiscal stimulus and optimism.

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Nela Richardson: That that stimulus will continue. And that's going to be called out into question as well.

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Nela Richardson: And then finally, because I am an investment strategist. I'm going to leave me with some some free investment advice in terms of what we're expecting

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Nela Richardson: But what one thing to be sure the first half of 2020 shows you the importance of a long term perspective, because if you would have pulled out.

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Nela Richardson: Your money on March 23 as the markets went haywire, you would have missed one of the most remarkable rebounds that we've seen in the market. So

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Nela Richardson: This is just a study case study a clinic and diversification and then discipline and in an emotional time fraught with a lot of fears by people

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Nela Richardson: Not making emotional decisions and I know you all know that. But it's a great reminder. So let's start with the path of coven because

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Nela Richardson: Again that is going to be what is determinant of how the economy recovers and there is some some good news here.

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Nela Richardson: At the end of July, we were looking at 70,000 new daily cases. And we've seen that trail off to right around 40,000

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Nela Richardson: Daily new cases here as of the end of August. Now I join you from New Jersey, which was a former hotspot. One thing we've seen

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Nela Richardson: Is that the coast have been at times the hotspot, but also Florida and Texas the south and southwest and now it's the Midwest, that is struggling with the pandemics parts of rule, Illinois, for example, are now in the news so

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Nela Richardson: This is a virus that has an unpredictable path. And that's why it makes the economic recovery so hard to call

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Nela Richardson: But we think that as long as the virus stays contained and that's a big assumption that probably isn't everybody's model right now that will still see outbreaks, but they'll be contained

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Nela Richardson: We won't see a resurgent of a national lockdown on the scale that we saw in April. Now it is debatable whether we saw an actual national lap down if you compare it to Asia and Europe.

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Nela Richardson: Only about 68% of the economy actually locked down in the United States, but we don't think we'll go back to that level even have locked down as long as these cases. Stay contained

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Nela Richardson: So what does that look for, like, for GDP.

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Nela Richardson: It's it's a good reminder at this point that creep pandemic, we were in the midst of the longest US economic expansion in history.

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Nela Richardson: And that we expected that expansion to continue. There was nothing obvious that was going to prop up and derail it

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Nela Richardson: We also were in the midst of a very slow and tortoise like expansion with growth around 2% over this almost 11 year time period so

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Nela Richardson: The almost the superpower of the longevity of the expansion pre pandemic was the slow growth in low inflation. So that's kind of the context in which we found ourselves.

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Nela Richardson: In March when coven 19 outbreak really affected the economy. It's worth noting that in the in the two weeks, last two weeks of March when the economy really shut down.

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Nela Richardson: That was enough to lead to a 5% annualized drop in first quarter GDP. We've seen a GDP in the second quarter be worse than that, as the lockdown spread down to over 30% on an annualized basis.

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Nela Richardson: That is that is back to a Great Depression levels and again a remarkable time in the economy on very little very little in the way of

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Nela Richardson: Months in terms of the shutdown the markets around in large part because most folks think that that recession will be short lived.

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Nela Richardson: But the timeline to pre pandemic levels is what's in dispute. And so even if we can declare victory on the recession, it's going to be a long time till we reach back to

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Nela Richardson: Levels of economic input output. One of the reasons is the toll that's been have it on the on the labor markets.

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Nela Richardson: Going into the recession we were at a 50 year low and the unemployment rate of three and a half percent now the unemployment rate in green is that 10.2%

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Nela Richardson: This is again very high levels, it matches the highest levels of the 2008 2009 recession.

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Nela Richardson: That wage growth bar is important in terms of historical perspective, just to say that even under a lot of expansion. We didn't see a lot of wage growth.

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Nela Richardson: During that expansion. We're seeing an uptick in the way to work for all the wrong reasons is because the impact of code has largely been on service sector jobs.

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Nela Richardson: And that's where the pain is hit. So with those job losses.

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Nela Richardson: We're seeing wages go up because those jobs lost were lower wage jobs and as we're seeing some

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Nela Richardson: Recovery in those job losses. There's also a lack of momentum. So we're getting fewer and fewer jobs posted every month. And that's something to watch because

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Nela Richardson: What's important in terms of the labor market is that the temporary job losses. Stay temporary if they

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Nela Richardson: Transition to permanent job losses that it's going to take much longer to see an economic recovery. So that's something we're watching rather closely.

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Nela Richardson: The last point I'll say to this is one of the indicators for watching, which I don't have a chart core when we have plenty of chart. So I don't want to overturn you is jobless claims which come out every Thursday.

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Nela Richardson: You know i i am fascinated by the market reaction to jobless claims because at over a million people applying for unemployment insurance every week.

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Nela Richardson: That's still some progress from 6.9 billion that we saw earlier at the early stages of a pandemic and even a drop below a million is cheered in the markets.

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Nela Richardson: Even though that's much higher than the 700,000 previous record and any other downturn. So regardless of how you cut it this million is way too high for a healthy recovery. It's something we're watching and we need that number to come down much more quickly than it has been

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Nela Richardson: You know, I have several of my colleagues have started looking at different data.

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Nela Richardson: Than just the standard backward looking data like the labor market to kind of figure out what's going on in this economy because you're seeing a lot of

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Nela Richardson: bizarro things I'll just be frank with you. This is a time of honesty. First of all, again, I don't have a trade on this, but we can just talk about it. You guys are all in real estate, the housing market.

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Nela Richardson: The housing market is booming we saw at the biggest monthly gain in July from June on record in the midst of a pandemic existing home sales up 25% for the month.

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Nela Richardson: We also saw us high house prices up eight and a half percent to a median sales price that's the highest on record. We're seeing

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Nela Richardson: If you believe popular Laura and I do a bit of a migration out of the cities into the closest suburbs, maybe even further out as someone who spent most of my housing career talking about

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Nela Richardson: Sales in the cities and the cost of the cities and at the expense of the suburbs, I am in whiplash right now as I watched the suburbs really pick up steam. So we're seeing that

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Nela Richardson: And we're also looking at the recovery in terms of things like airplane bookings which are still very

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Nela Richardson: Low. You can see in that chart compared to a year ago, but have seen some recent improvement.

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Nela Richardson: We look at restaurant reservations, I myself have not sat inside a restaurant since March 10 which happened to be my husband's birthday, that means

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Nela Richardson: The market march 23 low, which was my anniversary was at home for me ordering takeout so

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Nela Richardson: Watching open restaurant reservations is something that we're looking at. We're also looking at mobility data. This is Labor Day weekend coming up. It's usually a high mobility data.

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Nela Richardson: As a resident of New Jersey with kids in public school, I cannot leave

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Nela Richardson: The tri state area, unless I have all my kids quarantine for two weeks. So the choice of going outside of the tri state means my kids can't go to school and we come back over the weekend.

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Nela Richardson: That's likely to affect that mobility data. So we're seeing some improvement. That's still far short of last year, even in these early, early numbers.

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Nela Richardson: And this is just the dead Dallas fed mobility and engagement index. Another way to look at people and how they're leaving their home. And you can see that short of last year, and some scenarios if the reopening

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Nela Richardson: Continues to be safe, we might see an economic economy recovery that strengthens but again it's the path of the virus that will be dependent right now the Atlanta Fed is projecting

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Nela Richardson: GDP growth, though in the third quarter based on data, kind of like this and other data they're expecting a rebound in the third quarter of 26%

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Nela Richardson: If that happens, and that could be a pretty optimistic forecast. But if it happens. We'd still be 5% below the pre pandemic level so still long haul to go in terms of the economy pre crisis.

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Nela Richardson: I like to show the chart after really giving you a lot of bad news. I'd like to balance it with a little bit of good news.

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Nela Richardson: A little bit of good news here is that household balance sheets, we're in pretty good shape going into this crisis and they've held up

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Nela Richardson: Mainly because of the unprecedented levels of federal stimulus. And that's why that stimulus that fifth round of stimulus.

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Nela Richardson: currently sitting on the sidelines and Congress is so important to so many people here we have household debt service ratios, only to make the point that

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Nela Richardson: If you look at savings compared to disposable income or

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Nela Richardson: Debt compared to disposable income, you can see that we were looking at low levels going into this pandemic lower levels. Then, and the 2007 2009 period. And if you compare that then then to our friends up north in Canada.

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Nela Richardson: When it comes to the consumer going into this pandemic. We were in much better shape in Canada for every dollar of disposable income. The typical can Canadian has $1 77 and debt.

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Nela Richardson: So their trajectory is going to look quite different than in the United States where we have low levels, relatively speaking of consumer debt at the moment.

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Nela Richardson: But high levels of federal debt which Canada doesn't have. So every developed nation is going to have a different composition

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Nela Richardson: And their recovery is going to look slightly different, even though the trigger for a recession is the same for all of us. So, so, one of the reasons that

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Nela Richardson: The markets have done so well. I would say this is probably the primary reason is the Fed response today if you can just come back with me to march.

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Nela Richardson: What was going on in the credit markets were was astounding things that were typically liquid like investment grade corporate debt highly rated corporate

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Nela Richardson: investment grade in the Nestle debt and even some long term treasuries. We're selling like there was no tomorrow. I mean, things were just selling rapidly.

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Nela Richardson: We saw a lot of D location in the credit markets and the Fed reacted immediately they did a few things.

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Nela Richardson: Lowered benchmark policy rates to new zero. We know this announced and limited Treasury purchases expanded purchases to commercial and residential mortgage securities.

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Nela Richardson: This is a playbook we've seen before in 2008 2009 then they did a step further.

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Nela Richardson: Buying investment grade corporate bonds investment raise funds ETFs by municipal bonds. So stepping into the credit market and its really Congress

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Nela Richardson: The Fed can't take a loss. That's one of the the rules of the road that the Fed place by they can't take a loss on alone, and it was congress who enabled.

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Nela Richardson: This particular part of the playbook investing in great investment rate corporate bonds. This wasn't allowed during the 2008 2009 crisis that allowed the Fed to be a bit more agile and then finally even investing in high

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Nela Richardson: junk bonds recently we've seen another change by the fed the psyche of average inflation targeting allowing perhaps the inflation rate to go above 2% for an extended amount of time to get an average of inflation.

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Nela Richardson: And I might have missed my inflation slide here.

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Nela Richardson: I messed up to get an average of inflation around 2% in some sense, this is laughable in some sense it's tragic because even with all that expansion, we haven't been able to

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Nela Richardson: show any up 2% inflation. So the idea of the average inflation above 10% takes imagination.

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Nela Richardson: What would that take it would take some kind of wage inflation perhaps some credit availability, perhaps. But the truth is, the Fed can can set up a lot of facilities.

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Nela Richardson: But it can't make things planned and we've seen banks actually draw back fall back in terms of lending to consumers, because they're not getting

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Nela Richardson: The margin, they need to make that profitable with interest rates as low as they are now so

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Nela Richardson: Going forward, the Fed has done a remarkable job and providing liquidity to the credit markets and liquidity.

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Nela Richardson: To the stock market. And that's that liquidity is under pending the rally we've seen, but whether it can stimulate the economy is going to be a question that will have to come back to over and over again and I think

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Nela Richardson: Your speakers in this series will come back to that question. Another word on the policy response, not just in the United States where

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Nela Richardson: We're talking about trillions of Sam Neill is from bipartisan stimulus by the US government waiting on that fifth round of stimulus and the markets are price for it.

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Nela Richardson: But if you look at the G 20 countries. Overall, the stimulus to date has been larger for the as a percent of GDP than any other

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Nela Richardson: Than all three years of the global financial crisis and, and the second truck just shows you that the US is not allowed in terms of the stimulus.

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Nela Richardson: In terms of the amount of loans and equity injection and guarantees into the market by federal governments. In fact, if you look at Germany and Italy, Japan as a percent of GDP. They bought ACTED AGGRESSIVELY that's a big difference from the 2008 2009 period.

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Richard Green: You look at just a clarification question on that last slide.

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Richard Green: You have it being 11% for the US.

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Nela Richardson: Yeah, so this this

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Richard Green: airs

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Richard Green: But the cares Act was 3 trillion. And then you have the Fed, you know, as you said, like 5 trillion and we have a $20 trillion economy. So what, how am I doing my math wrong.

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Nela Richardson: It's just the fiscal response.

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Richard Green: Okay, but even the fiscal 3 trillion is more like 15% of 20

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Nela Richardson: Right, so I think this chart was a little out of date. So I get. I get your point, it was

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Richard Green: Early on I just see it now. It says, April.

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Richard Green: 2020 on there. Okay.

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Richard Green: Okay.

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Richard Green: All right. Okay. I'm sorry, I'm annoying about things like that but

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Nela Richardson: Fantastic clarification. So even bigger than 11%. Thank you.

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Nela Richardson: Bruce matter even when they're big. So I appreciate you clarifying that. And, and in the process we found our inflation turn

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Nela Richardson: This chart is something I think you you might be familiar with at least one is better off basis that inflation has been low below target.

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Nela Richardson: Course inflation is below target their headline inflation. So if you look at. If you strip food and energy prices out still below target and and the charts. There we have is debt to GDP.

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Nela Richardson: For all the decades until the question we have from clients and Edward Jones has about 7 million clients around the country. Most of them are in in their 70s, so they

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Nela Richardson: They're at the latter stages of their life cycle in terms of retirement and investing so they remember that. That's only to say they remember these earlier.

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Nela Richardson: Periods of inflation. So we haven't seen and we don't expect to see a spike in inflation, we are not seeing that oil spike because of the oversupply of

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Nela Richardson: Oil. We're seeing a covert be deflationary in the near term, we do think inflation increases, but not meaningfully and probably not up to that 2% target.

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Nela Richardson: But we do have a scenario because of very low inflation and the Fed kind of double down on that last week talking about average inflation targeting where interest rates. Stay lower for longer for an extended period of time.

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Nela Richardson: I just gave a brief on the St. Louis fed where James Bullard who's the president of the bed is put some numbers to this average inflation targeting idea.

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Nela Richardson: He sees average is two and a half percent for an extended amount of time. I also had the privilege of speaking to Ben Bernanke he last week.

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Nela Richardson: He he couches this policy as not a big deal because they haven't changed the inflation target of 2% but they've given themselves some wiggle room to make it more effective.

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Nela Richardson: But I think there are some questions that will be pulled out of this. How long does average how high is average. And so those questions are still going to have to be communicated in terms of

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Nela Richardson: For guidance. But here's what we see when we look at Central Bank policy around the world.

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Nela Richardson: In terms of longer term bonds and what we just heard it. Here is the five year average versus the 10 year government bond yields. And what you see is that for many

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Nela Richardson: For for a substantial amount of sovereign debt yields are are negative in the eurozone, Japan, we're seeing negative interest rates.

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Nela Richardson: Higher here in North America still the most positive game in town when it comes to develop sovereign debt. There's still ample foreign demand for US Treasury debt. Another reason why we think

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Nela Richardson: Inflation stays contained. This is a chart that we pull out for our clients because there is concern that bonds aren't doing what bonds promise to do which is to provide income.

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Nela Richardson: And we always talk about this risk and return idea in investing and especially as you get to the latter parts of your

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Nela Richardson: Allocation cycle. You want some stable cash flow. You want some income. Let's face it, you want bonds to do what bugs are supposed to do. But with these yield so low.

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Nela Richardson: Bonds are not doing their income function. What they are doing is providing some pushing against volatility. So here we have a chart of years of declining stock prices and

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Nela Richardson: The returns of bonds over time. You can see generally when stocks fall bonds increase. And that's why you get that diversification. That's really important. The question though.

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Nela Richardson: Is Ken bonds even played this role going forward and a very low interest rates scenario. And that is something that investors are still working out. Speaking of stock prices. I mentioned that stocks are up 52% from the march 23 low

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Nela Richardson: stocks have in the s&p 500 have reached a new record from February 19. Why is the biggest question I get from our clients and why do stocks wire stocks continuing to rise as as

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Nela Richardson: The economy is continuing to struggle and the easiest question, the easiest answer is that the Fed is the stocks are looking to the future.

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Nela Richardson: So they're looking for a quicker than normal recovery in the economy and earnings and just like the second quarter was likely the trough in the economy of the bed in the markets is that earnings

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Nela Richardson: How, what have which plummeted in the second quarter will rebound sharply in 2021 and it almost didn't matter. The magnitude of the economic decline in terms of the stock market. It was the Ford look on turn in terms of

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Nela Richardson: The recovery that mattered more as we saw in the second quarter of about 81% of s&p 500

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Nela Richardson: Firms beat expectations and I coin this the power of low expectations analysts forecasts have been so low that they were easy to be most firms did that and and but what what earnings are in earnings are the key driver to stock price performance over time earnings are

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Nela Richardson: usually take about three years to recover from across the stock market is now projecting at quicker than normal recovery of one year. And that's where we think there's, it's, it's a little bit optimistic.

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Nela Richardson: So that's something we're watching in terms of earnings scenario going forward. The last thing I'll say on this because there's so much we can talk about is that we cannot

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Nela Richardson: Forget that the s&p 500 is structurally different now than it was in 2008 2009 meaning tech and healthcare are the only sectors that actually produced earnings in the second quarter and they are driving this rally.

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Nela Richardson: The stay at home economy has benefited and over concentrated stock market that leans towards tap and zoom and Google Hangouts and everything we're using to increase connectivity.

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Nela Richardson: Just a word on global GDP. We're expecting a big decline in the

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Nela Richardson: In this year round 5% maybe a little more to put that in context that in 2008 2009 we saw a global decline of about point 1% right now.

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Nela Richardson: forecasters are still optimistic, the global economy is likely to be bound in 2021 so we'll see if those countries that were earlier on containing coven can sustain the recovery.

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Nela Richardson: I think I'm I'm running short of time. So I think, ending with politics is an amazing way to end before we open up your questions. I hope you will agree with me, Richard, because I think you we cannot

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Nela Richardson: miss the point that this is an election year, typically starts to well in an election, a common enemy typically does well you know I shouldn't years till when it doesn't usually means

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Nela Richardson: The outcome combat what pays the price, but I think this for a number of reasons. This will be a different election year than we've seen

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Nela Richardson: Your couple things that we're telling clients here three credits to remember. The first is what the chart.

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Nela Richardson: That consumer sentiment tends to be dominated by political affiliation, regardless of market conditions. So you can see that chart of consumer sentiment from

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Nela Richardson: The Michigan University consumer confidence survey and the red are Republicans blue democrats democrats

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Nela Richardson: Not surprisingly, or more optimistic than Republicans during the to Obama terms.

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Nela Richardson: Republicans become more optimistic in 2016 and your Trump. You can see all them have declined in terms of consumer sentiment, but the order has retained with Republicans still more confident than democrats

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Nela Richardson: Independents somewhere in the middle, interesting though under the two Obama terms, the stock market returned about 14%

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Nela Richardson: The under Trump today. It's been about a 12% return, even under the pandemic.

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Nela Richardson: And so the takeaway is that stocks tend to increase about 10%, on average, regardless of who sits in the Oval Office. It matters in many ways. For many of us, but in terms of stocks economic and corporate conditions matter much more than politics.

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Nela Richardson: We've also seen in the stock market declines right after election stocks declined in 2008 media. Media Utley after Obama's first term again in 2012

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Nela Richardson: They declined in 2016 but those declines were short lived, and then stops rally forward so

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Nela Richardson: Really, there's not a lot of attention paid to buy the stock market to either social conditions or politics as much as we are distracted, in terms of our views and on headlines in these two dimensions stocks continued to be myopic in terms of how they they they work.

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Nela Richardson: I think this is a good place to end. I have other charts. But we can wait for if any of them are relevant in terms of the questions I'm going to stop my screen share for now and turn it over to Richard. Thank you.

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Richard Green: You live. Thank you very much.

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Richard Green: Not surprisingly, wonderful presentation.

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Richard Green: Clear thoughtful.

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Richard Green: So I'm gonna, I'm going to use my prerogative testing the first couple of questions. So first of all, we talk about the stock market. The s&p as a market cap of about 27 trillion

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Richard Green: But apples, about to have that Microsoft's about 1.7 of that Google is about 1.1 and Amazon's about 1.7 so like a quarter of the s&p is for company.

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Richard Green: So how broad basis, the stock market performance, the excellence of this performance and how much is it being driven by a few a handful of companies.

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Nela Richardson: It's being driven by a handful of companies. If you look at the performance to date from March 23 to where we sit now we can't deny that structurally

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Nela Richardson: This is a market that's bent towards the benefits of coded in terms of the stay at home economy and those stocks. So, that is that is what's really driving

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Nela Richardson: If we could say secular for five months, five months trend. So every time we get optimism in terms of stimulus optimism in term either monetary or or fiscal every time we get optimism about vaccines reopening testing medicines we see a

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Nela Richardson: Rotation from the tech stocks to more cyclical sectors like even industrials financials.

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Nela Richardson: That benefit from an economic recovery. So these rotations have been short lived, but people point to them as evidence that the stock market rally is broadening

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Nela Richardson: The last word. I'll say on this is the question then comes. Are we on a at a bubble like a.com bubble that's been a burst that's pertinent question for those in California even Southern California probably have

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Richard Green: A WE HAVE A. We have a lot of employment. Now, because basically LA is cheaper than San Francisco. Oh yeah, Microsoft, Google has a very large presence here, of course, the content providers are here.

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Richard Green: Actually would like to ask you about. But yeah, I'm sorry. Continue.

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Nela Richardson: But if you look at those those things that we, we, as long term investors look for in companies, they have that too. They have strong balance sheets, the ability to grow dividends over time and earnings and that's different.

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Nela Richardson: Than what we saw during the.com bubble. And if you look if you listen to the commentary in those firms, there is a sense that that those companies pulled some demand from future years forward, but also that they have a runway.

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Nela Richardson: Because there is going to be an economic transition that's permanent and that need for connectivity is going to be important. So it's not just about tech in terms of investing or in terms of

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Nela Richardson: Where the drivers are in the corporate economy. It's about those companies who are able to tap into tech like attributes like strong balance sheets like

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Nela Richardson: Using connectivity. We saw that with target earnings

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Nela Richardson: In terms of retail those retailers who doubled down on investing in e commerce. Those are the ones that are winning those that are tied to physical location are not going to do as well. And you see that dichotomy.

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Nela Richardson: Going forward and healthcare and innovative companies are going to be the ones that lead in that industry. So we think that there's opportunities at every sector, but you have to go industry by industry trying to replicate this tech attributes.

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Richard Green: So, and again I'll remind the audience feel free to type your questions into the Q AMP a box. Um, let's talk a little bit about bonds because, I mean,

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Richard Green: The strong return recent return reflects the fact that you had capital gains in bonds because interest rates felt so the 10 year Treasury rate fell more than about 200 basis points, not by 20 basis points.

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Richard Green: On you look at where they are now. And if you think there's a zero bond on 10 year Treasuries. And maybe there isn't.

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Richard Green: They have 10 year duration, by definition, which means that at the capital gain you can get at most 6% and that's forever over the life of the bond.

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Richard Green: On you're getting 6070 basis points of current return. Does this change how well bonds work as a from a diversification standpoint, given that there's a real limit. Now to their ability to gain value.

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Nela Richardson: Yeah, I think I hinted that bad in my comments. We're not going to see a means that chart I showed that was also that there's a portion of that chart that experience 1000 basis points decline and interest rate.

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Nela Richardson: Of 2019 which was a strong year of returns

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Nela Richardson: That for both bonds and stocks, bonds, performed the best they had in 17 years it was because there was this the client and interest rates.

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Nela Richardson: We knew going into this year, we weren't going to be able to mimic or replicate that. So does call into question. How do you get the same level of different, not just the income forget income real rates. I mean, forget where the 10 year yield and it is now real rates for everybody.

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Richard Green: Negative. Yeah.

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Richard Green: Yeah, if you look at

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Nela Richardson: Right. So, so what we've done as a firm is and we've overweight and high yield. So we've gone deeper in the credit space.

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Nela Richardson: In order to get that kind of diversification, there is a risk to that you don't want to search for yield, especially in an economic environment. So we are watching it, and that is something investors should be aware of that.

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Nela Richardson: Unique we still think you need that kind of diversification that fixed income can provide but you're going to have to look for it, not just in treasuries, maybe in credit

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Nela Richardson: You're going to have to look for it and equities are going to have to look for it in an international we have emerging market does. So it's going to have to broaden from just investing in treasuries.

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Richard Green: And this is that a diversified portfolio of emerging market, market countries or their emerging countries that you really like.

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Nela Richardson: Now we are index. So we fall

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Nela Richardson: Back so we don't we don't take this kind of best that's ever done a very conservative from when it comes into investment policy. And so we we stay with the index.

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Richard Green: So from Joel Brian a question. Warren Buffett recently purchase gold saying is worried about the massive borrowing in the country. What, what is your, what is your view on gold and on what Warren is saying.

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Nela Richardson: What is maybe a Warren Buffett. I mean, I am looking at his moves lately divesting from airlines divesting from banks.

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Nela Richardson: By our US banks JPMorgan going into Japanese financial institutions and buying gold. I think there's a message here we could learn from

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Nela Richardson: And then we get this question a lot about goal. First of all, gold is it has is up near record highs. So we're a little wary and we still buy into the mantra.

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Nela Richardson: Buy low, sell high. And it's high. So that's a concern for us. We don't like gold and precious metals as an investment class. This is part of our philosophy because they don't generate cash flow on their own. It's really a

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Nela Richardson: Price. It's driven by sentiment supply and demand and for that reason it makes us wearing. So we have a little bit in portfolio, but not a lot.

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Richard Green: Just for you. So let's move on to our favorite hard asset, which is real estate.

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Nela Richardson: Among group.

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Richard Green: Which is a hard asset that does generate cash flow.

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Richard Green: Give us on the office market and what it's likely to look like going forward. And you know because presumably you think about office suites every now and then.

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Nela Richardson: I think it's going to be a painful restructuring for the office market and the the consistency of remote work.

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Nela Richardson: Is I think here to stay. I know that at we just opened up a couple hundred jobs at Edward Jones and all of them are location agnostic.

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Nela Richardson: So anywhere you are. We have a job for you. And that's very different than when I came on.

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Nela Richardson: Board when it was St. Louis, and I was on a plane every week to St. Louis from New Jersey. Now it's like we don't care where you are.

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Nela Richardson: We can we can come to you through technology. And I think that's going to play a role because there's an understanding. One of the reasons earnings beat expectations is that

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Nela Richardson: Companies were vigilant about cost and now there's an understanding that a way to cut costs is in real estate. That being said, I think the need for in person.

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Nela Richardson: Connectivity will actually be there in the future past coven and you can see that with some bets Google and Facebook are making a New York City buying up real estate near Penn Station. Google is expanding its put in New York, so

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Nela Richardson: I think you're going to see a reorientation of cities, they're not going away, but it's going to be a painful near term in terms of office space.

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Nela Richardson: And a lot of companies that can say remote will probably stick

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Nela Richardson: At least a portion of their workforce will be remote

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Nela Richardson: So,

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Richard Green: I took us a little bit about, you know, one of the big questions is how do. Can we maintain productivity with people working at home, and let me know. And so one of the things that occurs to me is, we are being very productive right now working from home.

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Richard Green: I know I've been pretty productive. The last six, seven months the permanence. There's nothing else to do.

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Richard Green: So you might as well work because it actually helps keep you said, and there's no movies to go to. I can't go to a restaurant but I get certain all the things I like to do

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Richard Green: Or not available, other than taking walks, so I take walks, but that's about it. If we come back to a world where there are distractions and people really going to see, first of all, stay at their work.

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Richard Green: And the second thing is, how do you interact with your colleagues now because the Enrico morality stuff on it. The importance of accidental conversations, there's there's real empirical evidence that it matters that just hanging out with people leads to the generation of ideas.

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Richard Green: That other forms of communication. Don't and a CEO of a and I will grab this as have an office.

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Richard Green: Real estate company said to me, but this working from home works well when it comes to doing the stuff you already know how to do. But from the standpoint of creativity and growth, she doesn't see that it's

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Richard Green: Just see that it's a sustainable as a way to do business. You have any thoughts on that.

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Nela Richardson: Yeah, it might. I might go in a different direction and then maybe you're, you're going, because I think the first structural hurdle here.

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Nela Richardson: Is schools. So just give a personal scenario. This is the second day of school for my children there. And then at schedule which means they are remote fully

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Nela Richardson: Monday, Wednesday and Friday and they are in person, half days to San Thursday and they are online afternoons every day of the week.

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Nela Richardson: Okay, that's the schedule. How do I go to work and I'm lucky that I can join you from zoom that I can do most of my job from from right where I am.

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Nela Richardson: But you know if I'm in the construction trade. If I have to leave my home. How do I get care for that kind of schedule. And I think that we have a real structural behemoth this fall in terms of work. The second thing I'll say is that it's going to disproportionately affect women.

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Nela Richardson: More than men because women. So are the primary caretakers. And we've already seen married women with children, their labor.

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Nela Richardson: participation rate has gone down during this expansion. So what happens when you add this structural issue.

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Nela Richardson: In terms of schools and then bringing it back to the connectivity issue. I also think that those who go back into the office are more likely to be male

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Nela Richardson: More likely to be older in their careers and not have these family considerations or may have parents rental considerations. I've heard of a number of colleagues their parents moved in with them that they still are working with. But who, who is actually able to join that that workspace.

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Nela Richardson: And who's going to be allowed to engage in that connectivity that we know what leads to learning leads to promotion.

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Nela Richardson: Those accidental conversations that lead to familiarity and and and then access and and job career growth. So that is a key concern for me. Not just what we all be able to do it someday, but the disparate impact of who gets to do it. Don't be. Yeah.

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Richard Green: Well, I think that that's going to return to and Robin Billups has a question. She said, You largely answered it, but I want to return to it, which is about

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Richard Green: A diversity, equity inclusion social justice and he is G are these are real things that are influencing corporate behavior or are they in Robbins terms just window dressing.

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We

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Nela Richardson: Have to take a day because they don't know how honest to be now.

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Nela Richardson: And

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Richard Green: It's just we won't repeat anything you

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Said,

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Nela Richardson: First, I've never seen corporations as a unified sector respond so directly. So immediately to a social cause I participated. I'm on the US.

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Nela Richardson: United States Chamber of Commerce foundation and I, which is a right leaning leaning lobbying groups, the Chamber of Commerce and they hosted an equity of the opportunity event this summer had 6000 small business owners.

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Nela Richardson: Are and they're trying to engage with corporate America on a variety of different

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Nela Richardson: Ideas related to racial disparities. I also had the privilege of interviewing to Fed Chairman wanted to Atlanta your colleague, your friend.

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Richard Green: Yes and yes, we're very proud of Raphael.

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Nela Richardson: And Neel Kashkari at with the Minneapolis Fed in the wake of the George Floyd killing and what they both said

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Nela Richardson: Was the Fed out front. First of all, acknowledging racial discrimination. Secondly, saying that maybe

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Nela Richardson: Systematic racial discrimination institutional racial discrimination haven't heard those words coming out of the feds

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Nela Richardson: Mouth saying that there is a role that the Fed can play and hinting at what pal had been talking about last year that the lower they kept interest rates, the more they saw

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Nela Richardson: The benefits of a healthy labor market extend and broaden so that's consistent, but also looking in house nail was very frank that they, they did a lot of weeding to promote

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Nela Richardson: Diversity Inclusion at the Fed in Minneapolis palace been and and Raphael very explicit that they need to do that in the Fed system in general. So at

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Nela Richardson: Edward Jones, we've done a variety of things. So in that sense, the immediate reaction I think has been awesome an encouraging. I've never seen it now.

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Nela Richardson: What happens next, because there are a lot of words tied to that reaction. And we're really going to need action. So when actions. I mean,

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Nela Richardson: Will promotion rates change will hiring change will we see parody in terms of compensation. That's where the rubber meets the road on the corporate action haven't seen any of that yet. So, waiting for it and hopefully we'll see it.

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Richard Green: So, um, I want to come back to it. Thank you for that. That was wonderful answer and by what Neel Kashkari ran for governor of California against Jerry Brown didn't do very well.

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Richard Green: But He activated a fascinating campaign. One of the things is he, he lived as a homeless person and I think it was Fresno for a week to see what it was like. And I was always

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Richard Green: Very impressed by that and what that disparities, a California, the Central Valley verse because that's, that's all I do want to come back to a few more real estate.

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Richard Green: Issues. One is

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Richard Green: Retail and you referred that target has been brilliant

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Richard Green: At basically integrating their bricks and mortar operations with their online stuff and their drive through setup so that

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Richard Green: If you don't want to wait for Amazon to bring you stuff tomorrow, you can get your car and go get it. And I think they guarantee three hours, something like that.

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Richard Green: And Costco seems to be doing quite well and they do really interesting things with inventory management, but as a sector. I mean, we've seen nothing but bad headlines JP JC Penney

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Richard Green: Neiman Marcus.

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Richard Green: Is retail dead. I mean it or is it with a very small number of companies, maybe Walmart maybe target maybe Costco, a few others grocery anchored stuff seems to be doing okay drugstores seem to be doing okay but other than that. Have we just are we just done with retail

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Nela Richardson: We're done with brick and mortar.

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Nela Richardson: I think what we

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Richard Green: Find that yeah

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Nela Richardson: Yeah, I think what we've seen in the retail industry is a speeding up of the timeline of what was already happened.

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Nela Richardson: We were already talking about dead malls, we were already talking about JC Penney over on its heels and and what coven has done is

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Nela Richardson: The firm's that we're ready to adapt did like Target and I think my husband is like a key contributor to targets revenues, because he loves the app.

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Nela Richardson: He I don't think I'll ever set foot in a target. Again, honestly, and just more personal examples because of coven I now get meat delivered. I get vegetables deliver against wine delivered. I don't need to go out and I don't see myself stopping any of these deliveries, so

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Richard Green: I still need to pick up my own meat, vegetables,

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Nela Richardson: That are okay. Okay, good.

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Nela Richardson: I think we're we're making transitions here very rapidly that weren't anticipated to happen for years and now they're happening now and what what retailers had had told us is that they were going to double down on experience experiential

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Nela Richardson: Experiences for their customers. So when you go into an Apple Store, what's the experience

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Nela Richardson: Go into nor strums what's the experience. Well, nobody wants an experience in the time of coven and so it's going to be again.

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Nela Richardson: Dependent on the pandemic, whether we even want things experiences and will we be able to feel them digitally as opposed to end person. So I think retail is changing, but it's changing in in the same direction. It was that changed was going before the pandemic. It's just faster.

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Richard Green: Yeah, well, you know, even the experience thing. I never completely convinced six what I've asked shopping center owners. How do you make money on experience.

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Richard Green: They can't really give me a good answer. I mean, restaurants, the way it used to work was I remember our couple of who ran matrix for years, saying that

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Richard Green: His best restaurant was worse than his worst real estate in terms of the economics of the restaurant, per se, but you had them the mall because they brought people in would then buy stuff. And so if you're going to a world where now it is just the restaurant.

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Richard Green: And I'm remembering while the restaurants, don't make money. How does that even work.

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Richard Green: Indicates that you know the story about experiences, even a problematic story.

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Nela Richardson: I never bought it either. I'm not someone who likes to shops and I figured, I'll just give them grace on that.

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Richard Green: Okay, well I yeah yeah i mean i to be I yeah, as I said, I do actually like grocery shopping

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Richard Green: But that's like looking at food. That's it. Um, let me let me finish the to let product class. I just, if you could say a few words that are going to go from the bad one to the better one.

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Richard Green: Views on hospitality. You know when you show those great graphs on air travel, you have any sense of when that might start to come back. And then finally, you know, the only about industrials we're building so much of it so quickly. Could, could we outstrip that the demand for it.

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Nela Richardson: That's a great questions. I don't know if I'll be able to provide a lot of insight on industrials I think

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Nela Richardson: That is something to watch. We've been in press. I'm going to start with the one I know that question where I am not sure I can get as much into the weeds as as ensure the question we'd like. But we've been impressed with

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Nela Richardson: The rally and industrials I'll be it's from a very low level. And that is a signal to us of an early recovery. So we are watching that space.

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Nela Richardson: Battle

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Nela Richardson: In terms of our equity research team. The first question you'll remind me.

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Later.

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Nela Richardson: On

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Richard Green: When people might start traveling again.

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Nela Richardson: I think only to say, I think that I'm going to be a little contrarian that the consumer gets back to traveling faster than the business sector does. And here's why.

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Nela Richardson: I think businesses have understood this cost cutting measure that a lot of these meetings that were in person. Don't have to be. And they're realizing that on the profits. I'm also concerned that that cost.

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Nela Richardson: Vigilance will extend to who they bring back into the labor force that they laid off. And I think that's going to be a key trend to watch in terms of the corporate sector will they retire.

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Nela Richardson: What the composition of that rehiring will be, will it be contract work or permanent work. We saw out of the 2008 2009 recession was part time contractors first before permanent

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Nela Richardson: And then I would lump this into the commercial real estate question and the air travel. We estimate that that business travel is about 12% of airline revenue. So can you do it on the consumer side I think

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Nela Richardson: I think people are ready to travel. I think that there is money. If you look at the housing market. There is some money there for the upper income folks that

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Nela Richardson: Or even home renovations that people do you want to get out. Once it safe. So I think it's a matter of just holding on for the airlines until we get the safety that will encourage people to travel again.

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Richard Green: So I'm we're coming up close, but I there's one really good question from john Loper so if you're willing to stay maybe a minute or two over

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Richard Green: I do want to ask you this question from john Loper

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Richard Green: Do you see companies moving to states that have had shorter less restrictive closings for covered 19 since the business in the south and Texas have been able to continue

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Richard Green: While tri state and West Coast have been more restrictive and are still mostly close will accelerate growth in these regions. And so while they're real estate recover faster. So sorry. But, you know, how, how will this influence where people locate

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Nela Richardson: corporate companies will pick something businesses big businesses, they're going to pick up and move for anybody. They don't have to now they can source talent from I know anywhere in the world right because anywhere where they're strong connectivity.

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Nela Richardson: smaller businesses, though, that makes might make a lot of sense. In fact, you know, in New York City. There's the Seinfeld, the betas of whether New York is dead.

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Nela Richardson: And why am I going to pay taxes and taxes are going to go up when I can relocate to Florida and operate my business, not at 25% capacity but at full capacity.

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Nela Richardson: And I think that that decision for smaller businesses are going to be meaningful. So why don't expect large companies to be influenced by location medium and small firms may well be influenced by location you might see that rotation, out, out of those major cities that are more

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Richard Green: Yeah, that's the New York is dead, or the San Francisco is dead narrative is is the world's great cities of them had periods when they've been written off as dead.

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Richard Green: In that vein, Tokyo was 90% level during World War Two.

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Richard Green: And it still. I mean, it never cease to be the center of economic activity in Japan London has been through pandemics and wars and it's still London after now that it's been down periods and New York and the seven days.

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Richard Green: For to New York drop dead with fiscally a mess. It was horrible. It had crime and it came back. So, but, but the question is, I think, when it comes back. That's really hard. Is it three years, five years 10 years that's going to be a really hard question to know the answer.

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Nela Richardson: And I love to talk to you for hours about cities. I always enjoy listening to your insights on that. But I'll just leave on an up note because I think

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Nela Richardson: One thing that's troubled me about cities is how the growth has not been inclusive and if you look

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Nela Richardson: At how who's leaving the city. It's the people who can leave the city to people who can afford to leave the city and what's left or the people who are in the city who live in the city whose

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Nela Richardson: Families in the city is working in the city and can't live and I'm not sure that is a bad thing.

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Nela Richardson: That the city comes back to the people who are rooted there and now it's up to the city to figure out how to make it work for the people who are in there and and are committed to being there. And I think that might be a bright spot that comes out of some of this dislocation.

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Richard Green: So on that eloquent note, let me thank you again nila Richardson, for joining us today. I hope you'll come back and see us again sometime it's always really wonderful to have you. Thank you for your how forthright you are and your views your very well informed views and

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Richard Green: I would like to remind people, again, our next set of less perspectives will be podcasts videos that will be on the less perspective websites you can subscribe to lusk perspectives

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Richard Green: so we hope you'll sign up

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Richard Green: Again, thank you all for joining us. I will look forward to seeing you again soon have a great Labor Day weekend, everybody.

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