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June 3, 2020

The Shape of the Recovery

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Torsten Sløk
Torsten Sløk | Chief Economist, Deutsche Bank

Torsten Sløk joins Richard Green to outline the three different factors that play into the future of finance, including the virus curve flattening, financial markets stabilizing, and the ultimate shape of the economic recovery. Green offers questions concerning US and China relations, how foreign investment in American real estate might change, and the difference between the finance structure of Europe versus the US.

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Please note this automated transcription may contain errors.

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Richard Green: So welcome everybody to Lusk perspectives. My name is Richard green I'm director of the USC Lusk center for real estate.

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Richard Green: It's my pleasure today to welcome Torsten Slok chief economist for Deutsche Bank securities. I was just reminiscing with Torsten that we first met in 2011 at a Bank of Korea conference.

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Richard Green: On the financial crisis and how to avoid having financial crises in the future.

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Richard Green: A Torsten is someone if you're not on his mailing list. You want to try to get on it because he says material that I find always thought provoking.

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Richard Green: And new he has angles on the world that other people don't. And that's why I asked if he would participate with us today. And so without further ado Torsten slot. Thank you for being with us today.

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Torsten Slok: Well, thanks so much, Richard. It's a real honor to be here and I have really look forward to this.

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Torsten Slok: What I'm going to do now is I'm going to share my screen and walk through my presentation. And as you and I talked about recently the logic would be to spend about half an hour.

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Torsten Slok: On talking about the economic outlook and where we see things going and where things have been during this recession and this

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Torsten Slok: Digital period that we're going through, but both from a health perspective and from an economic perspective and then try to offer some perspectives of the shape of the recovery look like and what is the also overall going forward from him.

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Torsten Slok: So we're going to basically talk about is in very simple words. First of all, where are we in this crisis and how should we think about

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Torsten Slok: What we've been through for the last several and what is the speed of progression in terms of the different things that are going on out. I think this first chart here that I'm showing on the screen.

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Torsten Slok: Is an attempt to try to summarize this and as simply as possible the panelists job here shows you the number of countries in the world.

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Torsten Slok: With a higher than 5% growth rate in the data number of confirm coronavirus cases, the red line is Vic.

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Torsten Slok: As you know, big measures implied volatility in equity markets. In other words, over the next 30 days.

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Torsten Slok: What is the implied volatility and options market in terms of what is it the dispersion of us in terms of where we are going.

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Torsten Slok: And as you can see the correlation of this chart here for both series showed that the blue line from a health perspective we sold the peak in the number of

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Torsten Slok: New cases growing at the fastest race was around late March and then of course as economies around the world, of course very important in the US.

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Torsten Slok: Began to go in to lock down and shut down and different countries. This is it differently. That's a different stringency meshes.

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Torsten Slok: With how this was done in different countries, even for us. There's also stringency measures.

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Torsten Slok: Will, how is this done and what was the different levels of how stringent and how the meeting was implemented by the main conclusion as you can see is that from

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Torsten Slok: Basically late March up onto the middle of April, we saw the blue line come down and it came down relatively quickly.

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Torsten Slok: And then as we got into the second half of April and to where we are today. The line is still falling but it's just falling at a slower rate.

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Torsten Slok: So the good news is trend is your friend in the blue line we're certainly still seeing globally.

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Torsten Slok: The number of new cases. In other words, the growth rate and how bad it is, as the slowing down.

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Torsten Slok: And when the same thing in the red line, the mix, which has was not driven so much by the blue line, but we're throwing more by what the fit was doing and what fiscal policy was doing

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Torsten Slok: That has also been coming down. And again, very similar picture coming down very quickly from late March until the middle of April. And then since the middle of April headline. I still been falling but it's just been falling at a slower rate. So as I've written in the title, the virus.

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Torsten Slok: Peak two months ago and Margaret stress is going away.

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Torsten Slok: For the speed of progress is flowing but noses things generally getting better. And this of course is very important.

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Torsten Slok: This, of course, brings me to the general agenda and the giveaway that I had organized the presentation here today name name said there are three different crisis that we are fighting or battling

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Torsten Slok: We are fighting a health crisis show you a few charge in terms of what's going on with a virus.

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Torsten Slok: What is the curve doing in terms of the virus globally in the US and as a lot of other data for the US and we could have talked about budget became

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Torsten Slok: The virus curve is flattening out. So let's just take a few pictures and figure. What does that mean in terms of the specifics in particular for the US.

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Torsten Slok: And more importantly, where is the US register countries, including Europe and, of course, Italy and elsewhere, where they have done more. And what does that mean for how we think the alpha for the US health situation overall. Then I have a few charts about foreign markets.

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Torsten Slok: What does the financial markets curve. If you will look like is it flattening out

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Torsten Slok: Take still getting worse. And obviously, as we know, and as a written here financial markets are stabilizing

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Torsten Slok: And the third and final Christ that we are battling with and we will be battling with for quite some time is of course the economic crisis. So in summary,

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Torsten Slok: The way that we think about what's going on at the moment is that you need to categorize your thinking interactive questions about

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Torsten Slok: Well how far along are we battling in the virus crisis up I don't always battling in the financial market crisis and finally

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Torsten Slok: How far along are we in battling the economic crisis that has come along. And finally I'll end up. This is what I do in my job. So I need to have a child with a method invocation. So I have a picture then

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Torsten Slok: That talks about, what are they missing who gave a race ethics credit inequities. In other words, but different financial markets.

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Torsten Slok: Regional and I spoke about when we discussed them doing this presentation that

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Torsten Slok: We could also aggregate along a lot of different charts about hosting sites and housing current and different demographics and the housing market but you all on this call is you know these things much better than me.

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Torsten Slok: So I thought, it will be hopefully more valuable. So think about this from a sort of macro economic and a marketing perspective, which is why the presentation is organized around the three different bullet points of Navy looking first at the virus curve.

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Torsten Slok: Than the financial markets situation and then the economic situation. So with that little agenda and let's first look at some of the curves for what's going on with a virus.

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Torsten Slok: Shot here. If you're going to take some other title shows your new confirm occasions of Cobra 19 in the US and Italy.

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Torsten Slok: What's interesting here is, as you can see. So I basically moved the lines and it used to be the case that the US was in round numbers about two weeks behind Italy and as you can see this

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Torsten Slok: Trend was following along quite nicely for a few weeks there in the beginning of it.

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Torsten Slok: But then we began to see the red line still stay relatively elevated compared to the blue line coming down. So that's why

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Torsten Slok: A very important part of the conversation and markets and probably also about all the time.

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Torsten Slok: Is what I've written the title name and lack of social distancing means that the US is now more than two weeks behind Italy.

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Torsten Slok: In other words, red line is still moving down, but you can do a lot of different pictures, looking at us outside of New York City and the tri state area.

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Torsten Slok: And you will see the line a lot flatter relative to what you have, of course, in New York, where you have a shot down there was much more

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Torsten Slok: Stringent and the mitigation measures were much more severe them. So that's why I'm one thing that many. I talked to in the pension fund community in Europe.

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Torsten Slok: I talked to a lot of asset managers in the US and in Boston and the West Coast and of course also talk to banks and investors in Japan and Taiwan.

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Torsten Slok: One conversation about this chart here is that people are beginning to say, Well, where is it more likely we have a second wave

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Torsten Slok: Where is it more likely that there might be more barriers for longer and this chart here tells you that there is a risk.

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Torsten Slok: That the US could be somewhat behind a nice on some front that we are monitoring very carefully.

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Torsten Slok: To what extent the red line is going down. And if you really take your ruler out here. You could see that it's our last 123 weeks or so. The red line, it could actually

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Torsten Slok: Be painted the picture that has moved more sideways so this makes you a little bit worried

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Torsten Slok: That he was really nice to see and continue to go down. Otherwise, we will come back and think about conversations in terms of what does this mean

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Torsten Slok: If you're not seeing this improvement in the overall level of the number of cases and one case that internationally, of course, is getting a lot of examples sweetened with the red line here.

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Torsten Slok: So now, just to be clear, what does this chart to remember the text another time. This is new confirmed cases of Kobe 19 us x, New York, and Sweden.

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Torsten Slok: And Sweden never had a shutdown. They never closed schools. The never close doors. The never close workplaces us outside of New York, which design.

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Torsten Slok: You know, look at this and say, okay, now it's beginning to look at

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Torsten Slok: It like a similar picture and now you're beginning to wonder, okay to didn't have a shutdown and still depend on looked at your resume, similar to what we see in the US outside of the tri state area.

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Torsten Slok: So this is also why a lot of conversations I have with investors are about this idea that will maybe the chances of a second wave

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Torsten Slok: And maybe this idea that, oh, now we should just quickly reopen maybe those things they do become an important part of the conversation in terms of what what are the risks.

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Torsten Slok: If you didn't have the social distancing that was required and what are the risks of us now answers a situation similar to sweeten

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Torsten Slok: That have had, of course, a high level of people who have died a lot of higher level of people who have been infected.

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Torsten Slok: The main conclusion still is despite those two pictures that if you look at the number of cumulative death, which is what this chart here shows you look at the text another time. And Kimberly this from Kobe 19

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Torsten Slok: In the G seven and sweet and and this is a seven day moving average, they

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Torsten Slok: Promising story, if you will, in the overall scheme of things is that even in Sweden and forgive me for spending so much time on tweeting, but it turns out to be very, very important experiment which we actually did.

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Torsten Slok: We can discuss and this is not a political debate, we can discuss with a sweetener that too many people that have died or not and whether they're the right strategy or not.

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Torsten Slok: But even though Sweden didn't have a shutdown, it is still the case in the black line that sweetness actually been able to flatten the curve.

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Torsten Slok: So this gives some confidence that maybe even in the US, we will be able to curb so

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Torsten Slok: The bottom line. And these pictures here and there's many other ways are many other charts that you could bring along to a discussion about this.

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Torsten Slok: But the bottom line here is that if I'm a global as an advocate and I think about where should I invest

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Torsten Slok: In your words, why should I be looking at the housing market coming back faster read some through where

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Torsten Slok: Then this shot at least gives you some confidence that tweeting and those phrases that it's still not have a shot down have actually been able to do reasonably well. So we are

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Torsten Slok: In the camp of those who do not believe that we will have a second wave and we are of course monitoring these charts on a daily basis. My team update this all the time. But the main conclusion is

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Torsten Slok: It looks like things are generally moving in the right direction, which of course to fix us confidence that for now. It is possible to flatten the curve or the virus runs

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Torsten Slok: Even without necessarily another shot down later this year. So the main conclusion is number one is very simply set

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Torsten Slok: The buyers crave flattening out and we are of course very pleased to see that because the virus and what the virus does drives everything in Miami drives everything in the shape of the recovery.

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Torsten Slok: So therefore, this does is this the first domino break, no matter how you look at it when you're thinking about what will be happening to market and what will be having to the economy.

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Torsten Slok: So let me now turn to financial markets and what has been happening in front of course to the virus breaking out.

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Torsten Slok: And this chart here shows you, I know there's a lot of different things going on here but this chart here just shows you in very

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Torsten Slok: Simple plain English, what have central banks done in different countries in response to the turbulence that we saw in the markets.

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Torsten Slok: And over there to the left, you see monetary policies, of course, central banks in the G seven countries and China, which is what you see here.

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Torsten Slok: They've been cutting interest rate that we provide. We created to support we have swap lines we have as purchases

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Torsten Slok: All these the wind means yes this is where they did that. And you can see they basically all do the same thing, maybe very aggressively cutting rates were aggressively supporting financial markets.

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Torsten Slok: Exposes we have had very little policy change on it comes to intervention and capital flow measures.

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Torsten Slok: When it comes to a different things that have been other banks, which of course is very important for financing perspective also real estate and what's going on in mortgages.

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Torsten Slok: Of course, the different things. As you can see in different countries, but the big picture also is a number of initiatives that have been helpful for the banking sector and finally

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Torsten Slok: financial policy to porous state loans or credit guaranteed return a launcher as a moratorium payments is, of course, something that's also familiar

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Torsten Slok: When it comes to moments for barons and everything that we've been debating so much more recently, but the main conclusion is

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Torsten Slok: This shot here on his own shows you that it was pretty aggressive was done and it was not only in the US here that we did this, this was done globally.

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Torsten Slok: And that's of course also just tells you that the central banks were completely on top of this very, very quickly. One very important point in my view also looking ahead, is that this crisis was not

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Torsten Slok: Caused by homeowners or mortgage services or banks or anyone else. This was literally add natural different somebody was in some sense, ready to be easy.

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Torsten Slok: For the central banks because the political support was very significant for the central banks to go out and support things and that's why the central banks have been so ready to be successful.

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Torsten Slok: With next time. If you look at the text below the title. This shows your financial stress.

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Torsten Slok: In the United States, there are various measures of financial stress one simple way of talking about financial stress that if I throw into my kitchen sink.

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Torsten Slok: Western measures the stock market credit spreads mortgage rates if I throw in different indicators of what's going to investment grade credit commercial paper and I do principal component, and I try to extract

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Torsten Slok: What is the common factor that these financial indicators have that can give me in one indicator and idea about financial distress is the US financial system at the moment.

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Torsten Slok: And there are two different indicates that do that. The blue line is the only father with is the obvious finance of research at the Treasury Department. They have a financial stress index that is baby.

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Torsten Slok: Blue Bird in the red line also as a financial distress index and the big picture here, as you can see is that when a peek.

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Torsten Slok: Over here to the right, you could see that we saw for both indicators and level of financial distress that was nowhere near where we were in 2008 and nine.

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Torsten Slok: But it was, of course, very bad relative to what we've seen for the last 10 years

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Torsten Slok: And of course, the central bank action that we just saw puts us back very significant where the level of financial distress is now.

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Torsten Slok: We're not quite back if you look at the blue and the red line, and there are some finer nuances econometric a statistically about how this is measured

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Torsten Slok: But the main conclusion is that the reason we're not quite back to where we were in February. But the trend to certain your friend when it comes to financial system using

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Torsten Slok: Is Joseph distresses overall. And of course, the main thing that we all hear about all the time is, of course, what's going on in the stock market.

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Torsten Slok: And one way of doing it is that they're thrown his level is to look at the total value of the global stock market.

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Torsten Slok: And the total value of the global stock market. So think about the value of the s&p 500 index the footsie adding up global financial markets from the equity side.

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Torsten Slok: You get that their global financial market was about 90 trillion in February, then it dropped to in round numbers around 60 trillion

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Torsten Slok: So we had a loss of equity of around 30 trillion basically the meta weeks which we all know was very dramatic than central banks came in and did a lot

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Torsten Slok: And now we're crawling out of this whole some would say we're moving very quickly. But we're crawling out of this whole recipe rapidly. Now back to roughly 7879

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Torsten Slok: Trillion overall. So now we have quote unquote just back from central and down from where we were at the peak, then we can

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Torsten Slok: Talk about that in a minute. We can talk about whether visitors to overvalue to other things. But the main conclusion is

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Torsten Slok: This of course is very helpful for corporate america this is help anyone who is looking to finance themselves.

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Torsten Slok: And one very important aspect of what has been happening with this crisis is to think about what was the problem. Rob was a shock that hit the economy.

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Torsten Slok: When we suck me show the virus came in on and all businesses started closing

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Torsten Slok: Well, if we had a coffee shop here in Brooklyn where I live, we would suddenly see no sales, we would no longer sell coffee. So therefore, we were not all that ad revenue.

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Torsten Slok: And what the fifth. In response to this, of course, was to make sure. Okay, well, gee, we're not getting any revenue in alpha in our coffee shop.

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Torsten Slok: What can we do at the Federal Reserve when we can make it possible

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Torsten Slok: For those businesses that revenue to go and borrow in commercial paper markets to go borrow an ID markets TO BORROW. BORROW in some parts of how you markets.

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Torsten Slok: And this chart here shows you what we're interest rates in commercial paper. In other words, if we were a corporate that needed to money.

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Torsten Slok: That we didn't get any revenue substitute the lack of revenue.

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Torsten Slok: By borrowing and commercial Paper Mario that you can see here, borrowing costs and commercial paper Margaret's both in the blue line for financial commercial paper.

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Torsten Slok: This is a commercial paper minus oh yes but this is a spread. But this is just a complicated way of saying what are the costs if I'm a company and I need to borrow

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Torsten Slok: And if you're a financial company if you're not financial as you can see the Angela is those costs essentially back to where they were in February, so that it has been extremely successful.

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Torsten Slok: In narrowing and pushing down the cost of borrowing for corporates. This is also what you see further out the credit curve.

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Torsten Slok: This is the level of you in in bit rate credit, which is the blue line, you could see the blue line is actually back also in level turn where he was in February.

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Torsten Slok: high yield is a little bit special, because how you as you know in the creditor stack, some parts of high yield.

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Torsten Slok: A lower rated triple C. And for a while he was also energy hard him when all prizes being so low. This, of course, was creating a lot of distress.

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Torsten Slok: A lower ready quality in coos and loans and things that have low ratings, but the main conclusion is look at the red line, as you can see is that

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Torsten Slok: We're not quite back to where we were in February and we've certainly also see significant improvements, broadly speaking, when it comes to high yield.

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Torsten Slok: One footnote when it comes to the bigger financing, when you think about

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Torsten Slok: The US economy. One thing that's really important to keep in mind is to think about this from your economics textbook. The Modigliani Mila

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Torsten Slok: The room they talked about the financing of the corporate sector this chart here shows you that that's actually very significant differences in terms of process of financing for the corporate sector.

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Torsten Slok: To the left, you see that in United States, the yellow bank loans actually make up only a very small part of financing for the corporate sector and the vast majority of financing for the corporate sector, as you can see

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Torsten Slok: Is the green and the red name the ID bonds that are rated in different policies, but also high us and institutional loans. This is very different from Europe.

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Torsten Slok: Had that the vast majority of financing for the corporate sector.

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Torsten Slok: Is the banking sector. So this become very important when you then start thinking about, well, if you have a shutdown off the corporate sector.

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Torsten Slok: In other words, if there's no revenue in the corporate sector because the economy is shutting down. Well, it does matter a heck of a lot

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Torsten Slok: What is the sources of financing, whether it is something to happen in the banking sector or something that happens in the market.

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Torsten Slok: And that is of course very important for how things should be responding and the final point of course on this is to think about the vulnerabilities and I'm not going to move through this

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Torsten Slok: Because I want to get to the economics and economic outlook, but there are, of course, now some people who are beginning to say, well, wait a minute.

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Torsten Slok: If I think about if you look at the text. The text in the time here. Keep on their abilities in high yield known and private credit markets.

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Torsten Slok: As you know, there's that discussion over the last few years that the loan markets have grown significantly

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Torsten Slok: And you have also seen how your markets grow significantly. So here are the different ways of thinking about, well, what are some of the risks when we look ahead about

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Torsten Slok: What is going on a high end market what's going on a low mark is what's going on in private debt markets, but the main conclusion is that there's still some issues in credit

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Torsten Slok: Although the status thing very helpful and very, very forceful in the way that they've been dealing with things.

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Torsten Slok: There's still a number of issues when we think about private credit that are making a summary about what is ahead in terms of sustainability for credit markets in terms of where things are going, but the main conclusion. Still is.

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Torsten Slok: And this is summarized in this wonderful job that the support from the Fed has just been completely supportive and full and very aggressive and this has now brought the conversation in financial markets to this picture here.

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Torsten Slok: This shows you the forward multiple for the s&p 500. So what does that mean that means what is the p e ratio of 12 months ahead on expectations that analysts have today. And as you can see the phone with multiple is 22

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Torsten Slok: And this is not rocket science. As you could see it looks like the stock market activity or value. So one question that I am getting literally every day. And I talked to clients around the world about all the time is

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Torsten Slok: Why is it that the salt mine keeps on going up when the output for the East in the P ratio is so rich and deep

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Torsten Slok: And of course the answer is if it is providing this enormous support to credit markets, we still have a lot of people that are underweight equities.

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Torsten Slok: We still have that economic data as we're seeing literally today continues to get better. So that means that we're crawling out of the whole calling out of the canyon.

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Torsten Slok: So all these things and sentiment combined and also adding any optimist views on vaccines and other things continues to push equities higher, but it does look like

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Torsten Slok: That we are getting to a point where valuations are raise interest rates compared to the historical picture as you could see in this picture here.

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Torsten Slok: Let me down and now with the file idea and me about the economic outlook. So what I have. I told you up to this point. But after this finance all your two things.

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Torsten Slok: And those things, things are actually ready to be upbeat that the virus curve looks really good.

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Torsten Slok: And financial margins were bred to be good. We can debate marks are going up and whether you agree that this is something that should happen or not happen.

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Torsten Slok: But the bottom line where we should right now is that I both these friends, we actually look, it looks like we have things ready to be a reasonably well under control.

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Torsten Slok: So let's now talk about the third and final bullet point on my agenda, namely the economic recovery and what's going on and where we are much more worried about things not getting quickly fixed

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Torsten Slok: In this picture here and try to list what I've written in the title naming the behavioral changes.

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Torsten Slok: That are going to slow growth over the coming quarters and when I worked at the IMS they work at the IMF is really organized around these three different areas that also sector.

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Torsten Slok: The corporate sector and the government sector and the private sector that the IMF always looked at of course is the external sector.

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Torsten Slok: But think about it from a macro economic perspective, this is a bit of a dog's breakfast of different things that you could start worrying about but look at the household sector.

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Torsten Slok: What are the behavioral changes which will be worrying about increasing if I read through the first bullet for Greece, a precautionary status on houses.

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Torsten Slok: Similar to what we saw as in the Great Depression and other words also saving a lot of money.

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Torsten Slok: That, of course, means that the savings rate will go up. If I say more money, that means my company logo down if I need to rethink my savings.

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Torsten Slok: That means on my consumption with, by definition, go down to a consumption is probably going to be weak because house those needs to rebuild that savings.

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Torsten Slok: Up to where they were before the crisis came along, more space between Sita restaurants cinemas concert conference, the trains, buses, airplanes.

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Torsten Slok: Fewer people traveling on vacation going out on to where have I seen all contributing to lower consumer spending.

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Torsten Slok: Only generation staying at home until it actually just released less willing to put your parents homes.

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Torsten Slok: limits on the number of people in supermarket. At the same time, or online shopping more online doctor visits.

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Torsten Slok: Few people go into fitness center to in group sports more people driving their own cars are white property transportation health insurance is going up so

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Torsten Slok: You could say, Wow, this is a really a lot of different things. How do I think about this. The way I think about this is that when I talked to a lot of hits

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Torsten Slok: And a lot of people who are active in quantum investing in quantum messing you normally look at some

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Torsten Slok: Very simple indicator say leverage, I would have a screen of companies that are like that have no leverage. I don't like companies that have high leverage. Okay, so that gives you some names.

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Torsten Slok: I have a different screen of names. Some companies that have high profit growth or high up dial higher earnings growth.

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Torsten Slok: I like them. I don't like those that are low any shows. I have another screen that tells you something about companies that have missing the R amp D rates as low investment in R amp D and I tried to find a common

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Torsten Slok: Factor of companies and that would invest in them. And this is what quantum Muslims do to try to find the typical patterns.

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Torsten Slok: And then try to rank these according to where are the most profitable. The story of the returns. Well, those indicators are the ones that you'll be looking at

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Torsten Slok: What we're telling you. And this is really important for markets is that now there's a whole new factor or in fact a language on principal component

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Torsten Slok: Analysis that there's something missing in the kitchen sink that becomes important at either of what Margaret will be doing

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Torsten Slok: That's why so many quant funds are struggling at the moment, simply because the new dimensions of social distancing suddenly you should not look at companies according to leverage and profit growth and R amp D growth.

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Torsten Slok: Now you have to look at is this a business that's in social face to face or social distancing is significant not significant.

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Torsten Slok: Is this something that matters for older generations raises the younger generation.

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Torsten Slok: So what has really caused a lot of problems for the investment community is that Kwan funds as traumatic time because they don't have a history.

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Torsten Slok: Of data, helping them understand what the patterns are that they should be looking for because they're not seeing

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Torsten Slok: These variables very well that now becoming important for the household sector and the simplest way of thinking about this in the economic outlook is in this job here.

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Torsten Slok: This shows you the share of total US Consumer expenditures by age. So look at this, if people that are more than 65 years old they account for 20% of consumer spending.

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Torsten Slok: It with people that are more than 55 years old they account for more than 40% of consumer spending. As you can see, these trends have been going up.

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Torsten Slok: Because they are more baby boomers that more people in the older generation. And the problem is

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Torsten Slok: That people in the older generation. Of course, if they're going to stay home until there is a vaccine.

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Torsten Slok: Then the risk is that they made their follower that consumer spending. Not only are they not going out to eat in restaurants and flying airplanes and going says

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Torsten Slok: But there's also more evidence, you look at the daily data of all the purchases that they're not driving for cars.

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Torsten Slok: That are browsing for electronics for furniture for washers and dryers and everything that if you do that from a consumer group good good perspective. So the main conclusion is

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Torsten Slok: This is also holding back consumption, more broadly, for the older generation. So the first for problems. Looking ahead, is that the older generation might be staying home. And this is an issue.

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Torsten Slok: When you think about the risks overall from a consumer perspective, then some people look at this chart and I different people sent me all kinds of stories all the time, why I'm wrong, and also sometimes why I'm right.

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Torsten Slok: But one picture of course that's important is to try to then track daily data for restaurant attendance and whether people are actually going out or not.

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Torsten Slok: And there is from Open Table, which is, you know, is the app on your phone. Where do restaurant bookings it we have been quite surprised. In some states, you know, Texas, Tennessee and Georgia.

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Torsten Slok: That we have had a quite a move up in the number of people that are going, I'll get again.

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Torsten Slok: I know, and my econometrics teacher and Richard will probably not too proud of my god it and what I did. I just ran a regression on a time trend and I tried to ask the question.

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Torsten Slok: When are we back to anything that looks normal. And as a lot of things going on to whether this is actually going to be the scenario or not. But the main conclusion is

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Torsten Slok: It looks like this will be a slow crawl out of the hole, and this is why what we have in this chart here when you look at the shape of the recovery.

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Torsten Slok: And we can. We spend a lot of time talking about the GDP level and where we are now races where we've been historically

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Torsten Slok: Remember here and this is important in financial crisis in 2008 and nine. It took about two years before we got back to the level of GDP that we had before the crisis.

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Torsten Slok: And now we're talking a lot about is the V, is it you, is it L is the Nike swoosh what exactly. It's a shame. It's a recovery.

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Torsten Slok: I would say this is more like a DB the pot, because the V is so deep, it's actually going to take time to come out of this.

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Torsten Slok: So it may actually take more time over here to get out of this before we get back to the pre buyers level when it comes to what we saw earlier. So, yes.

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Torsten Slok: Exactly. It does look like a V. But in the V is so deep that it'll take a very long time and we have our GA bank forecast with the red line when had a CB o the Congressional Budget Office all card.

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Torsten Slok: Which is the thought of red light and the blue chip which is a consensus and all of them tell the same story. It is going to be a long, long period before we get out of this and get to the end of this problem we have ahead of us.

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Torsten Slok: Are consumer spending being so depressed.

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Richard Green: Towards to go back to that chart from it. It's just one thing I just want some clarification on. Thank you.

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Richard Green: There it is, why is the left hand access differently than the right hand access

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Torsten Slok: But that's because my resources and a major problem and I have fixed that. And the email that you got for me today have the right access but then the answer is that this is all in 20 trillion left X axis is wrong about the picture doesn't change both of them are the

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Torsten Slok: Picture is the same. It shows the exact same because it's all on the right hand side that they are anchored. The 332

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Torsten Slok: Now that I skipped it, we just did. He goes, this is important for many people who are listening in here and also

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Torsten Slok: And now, of course, a lot of what I mentioned the beginning. Most of the central banks have been providing a lot of action.

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Torsten Slok: How we could all agree, and then the housing market when I sit down with our housing analyst and I sit down with our securitization group in mortgages.

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Torsten Slok: Of course, they come position as well. It's good that they finished providing liquidity support, so I can get alone.

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Torsten Slok: But what about the fundamental issue that people fall behind on their mortgages and not here is the worst job, if you will, or the fear, you can have when you are in the housing industry and the housing market.

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Torsten Slok: This shows you the red line is that the unemployment rate has gone up a lot. But the problem is that historically low unemployment rate and the doula highly correlated with an old delinquency rate.

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Torsten Slok: And as you're getting the longer the blue line stays elevated the more programmatic it will be for households. So another way of saying that is that it okay that I just showed you here and this to forecast.

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Torsten Slok: The sheep yo estimates and this is similar to our number that the unemployment rate that is this year will still be more than 10%

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Torsten Slok: If you still more than 10% that are unemployed, I begin to worry from a macro perspective that we will transition away from just the liquidity crisis.

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Torsten Slok: To also being at so many crisis where many homeowners will begin to not be able to pay their mortgages and you'll begin to see across the whole score spectrum.

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Torsten Slok: Trouble with people not paying your bills, simply because the liquid you raised without to go up as you know all better than me. Many people didn't pay their mortgage on the first and many didn't pay on

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Torsten Slok: May the first and then now on during the first week was literally just a few days ago. Also, many people didn't pay an informed by that is that now we suddenly hit the 90 day the language rate.

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Torsten Slok: Unless you're no better than me. And when the 90 day to leverage rate goes up, then begins to open up a whole range of nature is about what happens to auto loans when people are 90 days delinquent. Well, then you could do repossession off the car.

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Torsten Slok: You could show up outside my house and repossess my car and drive away with it the same thing, of course, for credit cards, when the 90 day language, the race out to move up.

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Torsten Slok: So that's a lot of issues going home to going to doing your homework in terms of monitoring what's going on with different types of consumer

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Torsten Slok: Credit and of course most importantly mortgages and the same thing comes on the corporate side.

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Torsten Slok: Now the rule. And again, as the unemployment rate and the red line is now chapter 11 bankruptcy filings. And as you can see, this is also again.

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Torsten Slok: proving this risky back to the table that thing though. Maybe there's not just in the credit crisis, maybe the reach of risk, but this becomes a fiscal crisis in terms of salty.

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Torsten Slok: And maybe, therefore, we will have more problems with people not being able to pay their loans. Now you could then say, wow, gee, this feels a lot of bad stories for financial markets, why equity so high.

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Torsten Slok: Where the important thing about this is also that of course politicians in DC and around the world are seeing the same pictures.

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Torsten Slok: So what really becomes about when you're talking about what financial markets will be doing

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Torsten Slok: Is that I'm 100% confident that Washington DC is watching the exact same data that we are watching and I exactly observing that is the regeneration.

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Torsten Slok: In the legal to race, if there's more increase in default and photo shows

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Torsten Slok: Of course, they might be coming with more insurance policy initiatives. So this becomes a very difficult situation where yeah I know from the messages on the tour rating.

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Torsten Slok: Or maybe I should also be spending a significant amount of time figuring out what negotiate and Chuck Schumer and Mitch McConnell and Trump and what they're going to do.

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Torsten Slok: And what you're doing and company also can come up with in terms of responses to work this situation, take us if nothing is being done.

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Torsten Slok: So with that, let me end with the last job and forgive me for showing you this, but this is what I do in my job named me providing Miss occasions and investment recommendations for

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Torsten Slok: As an educator saying global investors and just for the sake of the argument this. I know this is not the end. It's nothing to do with the housing market and such. But I think it does.

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Torsten Slok: Provide a backdrop for you a nice in terms of how I think about what's going on and what will be happening going forward. So what the Fed is doing with the fittest on hold.

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Torsten Slok: GDP will decline 39% of the second quarter is, you know, estimates that the unemployment rate will be 10% by the end of this year. This is very important for everything in house it

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Torsten Slok: wasn't married within tenure race was slowly move higher the fifth tapering and exit from lockdown is pushing on retire.

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Torsten Slok: We think the curve will receive a by the end of this year, of course, the Fed is engaged and we can talk about literally in a lot of to we a lot of buying

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Torsten Slok: And particularly, the front of the yield curve, they're not buying in the long end as aggressively as AI and the front end.

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Torsten Slok: And the front end. A lot of the issue and from the Treasury is it feels so the Fed and the treasure meeting in the front of the Eucharist.

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Torsten Slok: But there's a lot of issues going into when you have such a significant fiscal expansion.

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Torsten Slok: What does that mean across the UK in terms of what would they could look like and what does that particular of course for long rates.

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Torsten Slok: Credit Spreads we still think Chris was will go narrow fit support and more liquid Maurice will narrow ID and higher spread over the coming quarters.

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Torsten Slok: Stock market with Clara ethical epistemology current meaning the highest term and the recession current should also generally the data.

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Torsten Slok: Center criticism for the next from knock down with which equities higher s&p 500 will interview be 30 to 50 by the end of this year. In other words, starts going up from where we are.

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Torsten Slok: In other will not hurt a power complain about valuations. He doesn't talk about the phone with multiple on he told his carrying the economy over the river.

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Torsten Slok: across to the other side to get on the other side of the virus. We think it will go down the thing you're $1 bill to 120

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Torsten Slok: Dollar has been going down. More recently, things continue because the spread between us rates and boons

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Torsten Slok: The spread between us rates and global rates has narrowed goes in the front end alone because effectively loan rate among races and coming down.

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Torsten Slok: Commodities rebounding, of course, but a lot of dishes, because the economy's reopening as, you know,

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Torsten Slok: One important statistic is 20% of all demand goes to trucks and cars so says no trucks and cars on the road. So, of course, there's very little on demand.

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Torsten Slok: Now the trucks, cars are coming back, people might even be driving their car. That means that you will see more demand for oil and of course that's why all prize. I go

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Torsten Slok: Find the emerging markets. I didn't talk too much about that. But that's, of course, also one area where the virus has been, of course, having a very significant impact. So I ran a little bit of time to wait so sorry about that. But let me stop there and turn it back to you.

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Richard Green: Totally fine worse than. And so a question I've gotten. Will you share your slides with us.

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Richard Green: Yes. Great, thank you. So we will post them on the less perspectives websites have looked for that coming soon. Thank you.

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Richard Green: And before I turn it over to audience questions. I have a few a biome you showed the really interesting slide about the number of countries where Colby cases arising by five cents a day.

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Richard Green: On a population way that basis. Do you have a sense of what that would look like.

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Torsten Slok: That's a really good point. So now you can expect you to think about emerging markets and places like India and elsewhere, where you're certainly still seeing to to original

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Torsten Slok: There is a lot of issues going into your points is just

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Torsten Slok: And so, as, as we all know, to will here if you look at the x axis, this is just time and on the left axes. I just have the number of countries.

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Torsten Slok: So you have to rewrite the number of countries. This is make them sign and China on the same chart. So, and sometimes this is misleading, but it still gives at least. From a broad perspective.

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Torsten Slok: The idea that a nice globally, things look like they're more under control. There's a lot of discussion in em and among em em investors about

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Torsten Slok: The discharge does not look like this for em alone. So you're right. That's a lot going into a this is just waving my arms or ice and read them to India, but there's certainly a lot of issues, to your point. So absolutely.

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Richard Green: And then along those lines. If you tell me your account. What, what, what is the growth rates in the US, I should know that.

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Torsten Slok: Yeah, so it's still less than 5% per day. If you look at the chart that I have here. Let me and where I think I showed you this one here.

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Torsten Slok: I still think that they they important thing that they have causes worthwhile thinking about. And this is, of course, when we talked about we have different if you tomorrow. Just which also one of the UK and

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Torsten Slok: The US and we discussed this with them all the time and opposed to a hedge funds, I talked to, they have an Army of Darkness and images that tried to look at the blue line here and say,

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Torsten Slok: Is this flattening out. Is it just to invite New Yorker, can we continue to reopen I mean all the things that go into conversations about

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Torsten Slok: Whether this is flattening out or not. And this is why there are many different camps.

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Torsten Slok: It'd be an offer, if you will, is this conversation is very wide I need people who say, of course, we have a second wave and I meet other people who say, no, no. They absolutely not.

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Torsten Slok: Sweden shows that things are under control. So, then things about. So the. Absolutely. You're right that there's a lot of stuff going into looking at individual state level and even regional considerations about

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Torsten Slok: What exactly are the likelihood that we will have this under control.

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Torsten Slok: And that I do that we will not have this under control. In other words it from him from a finance perspective, I would like to assign a probability to the good outcome.

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Torsten Slok: And then finish with a bad outcome. And this is of course what investors tried to do all the time. This is not what's happening in equity markets for the other reasons I mentioned

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Torsten Slok: But it certainly is very important because the demand and suddenly comes back and says, gee, things actually much worse than we could have a significant reverse loads of what's going on in equities.

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Richard Green: So I made a really interesting point about

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Richard Green: All this debt potentially leading to a debt crisis, but you also your forecast is that long term treasuries go up a little bit, but only a little bit. So if you look at just doing some math in my head.

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Richard Green: Is if a year ago 10 year Treasury is we're at about 2% that are actually a little higher. And now they're going to remain under one, that means when you issue 10 years of the interest is half what it used to be as much as we've added to that we have remotely doubled it

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Torsten Slok: And so is it

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Richard Green: Possible that we actually see debt services. The sheriff GDP falls result of this

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Torsten Slok: Absolutely. But then as you, of course, and as you and I have spoken about. Also, many times that of course also brings become an agent to Japan.

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Torsten Slok: That has encouraged a high debt levels 250% of GDP and it's true that it is sustainable, as long as interest rates at zero.

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Torsten Slok: But then you start asking. Okay, what's the difference is in Japan and the US and Japan 96% of GDP of government debt. It's helped to basically insights Japan. So in that sense, Japan is not

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Torsten Slok: Honorable to rest of the world things in the US, about a third of US Treasuries, I helped my furnace and it's a footnote about a third of us investment great credit is also helped by foreigners.

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Torsten Slok: So we suddenly become actually very sensitive and US case where the rest of the world peace about US policy making.

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Torsten Slok: Both what they think about fiscal policy and monetary policy, the credibility of the regime if Jay Paul is replaced by someone in February of 2022 and the Central Bank, the Fed in the stage.

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Torsten Slok: For us to have different credibility.

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Torsten Slok: Then you start wondering, what does that mean for the rest of the world time fundraising in the US. So you're right.

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Torsten Slok: Absolutely if interest rates are low, we will not have a debt problem. And this is what Japan shows, but the fifth big difference when you and I know I'm talking

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Torsten Slok: Someone who worked at the IMF for many years before I came to Japan.

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Torsten Slok: If you have an issue where a lot of the bed is held abroad and just again go to, well, this is what we're seeing over the last several years in Turkey.

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Torsten Slok: Argentina, South Africa, many emerging markets have had this fact that suddenly the rest of the world doesn't want to finance things anymore.

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Torsten Slok: And we can then say, well, yours is a global reserve currency. So this will never happen. And I'm having a lot of sympathy for that. But all I'm saying is that that

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Torsten Slok: Needs to be rolled over and the more debt levels go up.

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Torsten Slok: It is beginning to raise the issue as I was alluding to also just the fifth and need to buy a lot of 10 year bond to benefit very aggressively saying we don't have one of their you can control and buying the front end view.

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Torsten Slok: We are not keen on buying in the long and the fifth one is for every meeting, including the last tip that came out.

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Torsten Slok: Have been in it. We don't want to bail out politicians, we don't want to buy the long end. We want the long end to be trading on his own. So that's why a lot of the questions.

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Torsten Slok: Around what you're asking about here are very, very important. And of course, particularly important for the housing market and for mortgage rates. But so far, where we sit right now. Yes, it's true servicing costs low

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Torsten Slok: But the vulnerabilities by any way you look at it. I've certainly gone up.

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Richard Green: So I'm going to segue into a question for a number of our audience James Cameron, because it really should rest of the world investing in the US. And one of the things of course is China has substantially slowed

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Richard Green: In fact, reversed its investment in the US, over the last several years. It doesn't seem to matter at all that much to the US economy. And so, James. This question is will have Hong Kong conflict crisis affect the global economic recovery.

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Torsten Slok: So one thing that is a very interesting about that question is that they the problem that I think is going on in financial markets is that this is a very unquantifiable risk.

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Torsten Slok: You think about it. We all have an MBA or economics degree and we all sit and think about what's going on and how do we find these risks.

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Torsten Slok: And suddenly, someone comes in to. I have a spreadsheet for the US economy when I try to predict what GDP will do and someone comes in and says,

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Torsten Slok: Okay, there is something going on in Hong Kong and China, we may or may not have an escalation of something and then they come in and say, well, now there's also a riot and social unrest.

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Torsten Slok: And let me escalate and escalate and I have really no tools and ways of about whether this is going to get better, worse, any of these things.

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Torsten Slok: And likewise, now we have suddenly in Europe, a situation where I'm on the European Commission and European Recovery fund and Italy and Germany.

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Torsten Slok: And the problem is I don't know how to stop these things into my cap and model.

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Torsten Slok: So I just don't really have any good framework for thinking about these risks and the interesting thing is you could then say

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Torsten Slok: Well, why, who then putting. Sure. Oh wait on that doesn't mean you should be putting a lot of weight on that, if it's a risk that you don't understand the macro textbook and the finance takes what will tell you.

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Torsten Slok: That if you have a cloud coming in over the Alto. That is an unquantifiable risk that I can't really diversify.

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Torsten Slok: And I can't really go away from that risk, then I should really be hunkering down ain't going away from risky assets, but at this point.

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Torsten Slok: The market seems to just be saying, well, this is Justin, but they're going to China issue, this is just something that we've heard now for several years.

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Torsten Slok: And I don't know how to quantify that risk the markets still wind up for several years. So maybe now again the best approach is the markets conclusion, clearly.

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Torsten Slok: To be overly worried about that issue. But the bottom line to your question is, and to change with question here is that there's certainly

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Torsten Slok: A lot of risk that this could come live jack out of the box and become a very significant issue.

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Torsten Slok: If this turns out in the wrong way and I don't have any scenarios. Exactly. For what that means, but it's pretty clear that the tensions are growing and what goes with China.

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Torsten Slok: And there's also a lot of things that you could begin to work at the we saying, this has no impact on earnings for this and P 500 no impact.

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Torsten Slok: On the outer for the US economy and there are certainly scenarios where these things could become very important. So the problem is I just don't have a toolbox for point of these risks and very interestingly

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Torsten Slok: Almost the psychological and sociology perspective, the market is now saying, You know what, I can't quantify that risk. So therefore, I'm not going to worry about it.

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Richard Green: I want to pursue this conversation a little further, because there is no doubt there's, there is certainty that China us relationships have deteriorated and yet today we have a

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Richard Green: Argument over who's airplanes can land where this morning. Do you think is a chance. This will lead to on shoring of certain manufacturing processes that the supply chain will be different, which means it will be perforce less efficient and therefore drive up the price of consumer goods.

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Richard Green: So,

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Torsten Slok: I do believe that this will and has already met to supply chain disruptions. The issue is that the way that consumers are measured

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Torsten Slok: If you think about what is the weight in a CPI casket, the way to the CPI baskets to anything that has a supply chain. If you think about

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Torsten Slok: Even cast the weight of cars in the CPI basket. Many CPI basket, as you know, is what is my consumption and your consumption.

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Torsten Slok: And what is it that the money that I spend every month. What does that go through and the biggest part of the CPI baskets, as we all know, on little is housing.

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Torsten Slok: In round numbers housing has a weight of around 40% maybe 40% of my consumption goes to paying my mortgage on my rent.

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Torsten Slok: The next biggest component is health care. So healthcare has a weight and run numbers of around 20% then the next. So now we're already up to 60%. The next few

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Torsten Slok: Leisha is travel expense within services overall have a weight of roughly around two thirds. So that means that supply chains and stuff that I buy in Walmart or that are buying grocery stores to buy an Amazon.

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Torsten Slok: Actually has a relatively small awake in my consumption basket. So as much as you're right, we've obviously higher prices of every from

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Torsten Slok: ventilators and masks and medical equipment and medical devices and now has to be produced domestically. And that's going to be definitely more expensive.

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Torsten Slok: The weight to that in the CPI, the weight in our consumer spending is going to be much smaller relative to how much money we're going to spend

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Torsten Slok: On housing services, more broadly speaking, and the problem is when you're on fire rate goes up to 15% and many people lose their jobs than the demand.

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Torsten Slok: Impact on inflation is going to be a lot bigger. Which means that, therefore, we see much higher risk of deflation.

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Torsten Slok: Than we do operation. There are certain parts of the CPI that certainly will go up. But the vast majority of the CPI basket.

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Torsten Slok: Is at risk of going down most prominently boss, of course you on this call housing prices and what has to do with the market and also everything that has to do with services, more broadly, if

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Torsten Slok: The unemployment rate is double digit still by the end of the year. So the main conclusion is, yes, in the short term and yeah I'm talking about the next two, three years I feel very much more about much more downside risk to inflation. Then there is upside western region.

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Richard Green: So you just answered pastor Scott shopping this question. What I like to do is combine them.

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Richard Green: With questions for Bob altering James Torres look at it if the well ask, it is. This is how do you see all of this affecting the different real estate food groups.

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Richard Green: Housing in particular multifamily versus single family retail office industrial and hotel, and I will tell you, Robert owns a bunch of hotels.

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Richard Green: Playing out over the next six months to a year or so.

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Torsten Slok: So my, my main answer. And now I'm in it. And I remember you told me to other economists and this is what I do. So this answer is completely colored by my background on what I do, but my main problem is

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Torsten Slok: That if the unemployment rate today's 15% and on Friday and our third your bank forecast, they will go up to 19% and by the end of this year, according to the CEO, as I mentioned, it will be 10% that is unfortunately

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Torsten Slok: Not good environment, economically speaking, that's not good for residential real estate. That's not good for commercial real estate is not good for office space apartments.

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Torsten Slok: Hotels is not good across the board for anything in real estate. When you unfortunately such a high level of unemployment. That being said, as you all know, and as

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Torsten Slok: All of you are much more with me. There's a lot of adjustments going on in business models. There's a lot of things that are going on in terms of activity and a little issue, of course, that is a silver lining in this

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Torsten Slok: As you alluded to also Richard that interest rates and mortgage rates have come down.

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Torsten Slok: Come down as much as the fit and we all would like but they have certainly come down and the fact remains, this race. I'm come down have actually shown

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Torsten Slok: Quite a significant increase in mortgage purchase applications and of course also rifai

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Torsten Slok: People I actually fairly aggressively and actively trying to think about the mortgage finance.

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Torsten Slok: Is also a lot of issues with it for burns initiatives and there's a lot of issues they haven't spoke about a Fannie and Freddie for a little while. But I mean, now they're coming to the radar screen in terms of what can be done.

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Torsten Slok: In terms of trying to tap into all the negative impact of having the unemployment rate so elevated for so long. So I would say, broadly speaking,

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Torsten Slok: The consumer and the unemployment rate would unfortunately be the first step for me for thinking about the answer to your question, but the same

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Torsten Slok: To your point, of course, when you begin to hear and now again I'm colored by living in New York City.

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Torsten Slok: A lot of people are moving out of that and I have people working for me and Deutsche Bank who basically and I'll saying I'm going to leave Manhattan and move out to the suburbs, because of fear is a virus.

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Torsten Slok: Because thing that's going on and meaning in broad terms with the mortgage market in the housing market.

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Torsten Slok: And maybe this has been accelerating this trend so multifamily reds into synchrony has certainly also seen a very structural shift where more people are moving at least for now towards single family residential multifamily so

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Torsten Slok: There's the bias that I still think that then there's some structural stories inside different segments of this year, really MPs.

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Torsten Slok: That wanted spend some time thinking about what they were looking like. But the short answer to your question is that if

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Torsten Slok: If the CEO and the Fed and we have the forecast that the economy is still 10% by the end of the year. That means that we still have

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Torsten Slok: A nice six months and maybe even more ahead of us where things are going to look at raising the distress. I will mention as the final point is that then

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Torsten Slok: It's my impression that there's some investors out there and doing some hedge funds that are beginning to think really hard about that. What if we tomorrow get news about a vaccine.

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Torsten Slok: Was if we get a news about a vaccine everything I told you will be completely reversed.

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Torsten Slok: Then you of course people go out and shop immediately all generations will go out and shop immediately.

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Torsten Slok: He will be thinking about housing very differently. Immediately you just had a whole different houses. So as much as I don't have a view on whether we get a vaccine all our doctors

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Torsten Slok: will only get it back to 2021 by the various this upside reset the contentious expects no vaccine no vaccine no vaccine as there is certainly a headline.

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Torsten Slok: That things look better. That could of course also dramatically change the outlook and of course they added valuations of many things and CBS and in residential real estate.

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Richard Green: Even if they're gonna take a while to wrap up manufacturing

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Torsten Slok: Markets would react. I completely agree. And we take a while before you and I, Richard would be getting the needling now on, but it was certainly market would react immediately if the West up to headline coming through.

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Richard Green: Two or so. James has another aspect to his question about what is interesting. I brought a little bit about international capital flow. So you talked a little bit of credibility and hope that was to our debt but

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Richard Green: More generally, how is American real estate going to look relative to other real estate around the world. We know it actually has been a large sorber a foreign capital.

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Richard Green: Canadian more than any other any other kinds of the Chinese left but still Norwegians like American real estate. The Germans like Singaporeans like it.

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Richard Green: Do you think that the relative position of us real estate piece of the other real estate around the world will change as a result of this, and as a result for the better for the worst.

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Torsten Slok: I think the answer to that is that us real estate still looks pretty good.

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Torsten Slok: And the problem is, and you can hear from my funny accent. Maybe I'll maybe not. But I'm European and spend a lot of time, of course, thinking about European issues.

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Torsten Slok: And the products that they were the whole situation with Italy and Germany and the European Union.

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Torsten Slok: Still unfortunately being somewhat challenged in terms of how much money they can spend fiscally remember in Europe to have the growth of the business impact.

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Torsten Slok: The Maastricht Treaty, which says you can only have a circle of deficit that has now been suspended. So there is a lot more spending, but unfortunately Italy was very, very hard hit.

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Torsten Slok: And unfortunately, we need a lot more physical support to the southern European countries, so your will be quite busy that for a while.

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Torsten Slok: As a lot of important issues going into who finances that and who pays the bills and what are their broader outlook for different European countries, but the big picture is that them still

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Torsten Slok: From this perspective, that significant support from a fiscal policy perspective in the US was so much bigger than what you saw elsewhere. In other words,

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Torsten Slok: US government here. Everyone included a browser congress and administration.

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Torsten Slok: Put together the fiscal parents that was about 10% of GDP stimulus directly into sending checks to households to the TV program.

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Torsten Slok: To everything that we're supporting in terms of getting the economy going in so many different dimensions.

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Torsten Slok: And the amount of money that was thrown at the US economy, which is so much bigger than rub. We saw throne of the economy and Europe. Europe decided instead to give loan guarantees.

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Torsten Slok: loan guarantees your quotes up by that is called in German loan guarantees to keep working on the payrolls loan guarantees to corporates. But the short answer to your question is

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Torsten Slok: Because the fiscal stimulus. What's so much stronger and so much more aggressive in the US. I still think that the US has a better chance of refounding quicker.

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Torsten Slok: And therefore, to your question us real estate, generally speaking, aside from all the health issues which are very complicated.

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Torsten Slok: But US economic data and the US broader outlook does look like it's a rebound fast them relative to what we have seen in the European case and of course also

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Torsten Slok: In the Japanese case and more broadly and some conversations about China and Korea looking a little bit better.

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Torsten Slok: It still is that them with us. It looks because of that business engine be so much more aggressive is still to this point from a cyclical perspective and need to look more attractive.

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Richard Green: A lot of this is one of your really fascinating slides was the slide that I prepared how things are financed in Europe, relative to the US.

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Torsten Slok: Europe is 80% bank finance stand in the US. I don't remember what slice of the pie. It was, but it was not

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Richard Green: There we go.

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Richard Green: There we go. So 80% bank loads of us were in Europe, excuse me, and 20% and I like to read 20%

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Richard Green: In the US, I mean, does this have important implications. One of things I think about it. So first of all is, does this mean that European

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Richard Green: Debt is more floating rate debt and the US it's more fixed rate and therefore that

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Richard Green: The corporate sector is more vulnerable to interest rate risks in the Europe area versus the US and conversely, does that mean that the US is more subject to interest rate risk than the Europe on the financial side of the market. Yeah.

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Torsten Slok: Exactly. So I think if you think about what are the implications. Let's say that we had a company

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Torsten Slok: And the company was not performing particularly well we had some shark either that was because of us. Because of something happened and suddenly demand started going down.

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Torsten Slok: In the US case because the pie chart to the left is so market oriented its own market driven

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Torsten Slok: That company would be immediately punished because the market would be saying hey you're having problems. So now therefore your spreads are going out.

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Torsten Slok: There is no sitting around inside a bank or sitting around inside the financial system and saying okay let's wait and see.

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Torsten Slok: They tried to give them some more credit you would immediately see the response and immediately see more sensitivity to interest rates.

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Torsten Slok: So in some sense, and and i'm not saying one system is better than the other, but it is quite important to think about

427
00:57:47.070 --> 00:57:54.030
Torsten Slok: A system, the US financial system specifically is just much more sensitive to the market and to what's going on in financial markets.

428
00:57:54.300 --> 00:58:03.540
Torsten Slok: More broadly, because investors follow the news about different companies and what different companies have good news when they're bad news. The credit spreads move around executive in sync. As the news comes in.

429
00:58:03.960 --> 00:58:12.960
Torsten Slok: When a shark comes around the one that we're facing at the moment that is very, very broad based, then you can begin to say, okay, but if you have in the country to the left in the US.

430
00:58:13.290 --> 00:58:18.360
Torsten Slok: That suddenly credit spreads whitening out because corporates are not selling any x wing doors are closed.

431
00:58:18.630 --> 00:58:24.810
Torsten Slok: corporates are not selling any product Wednesday is epidemic because they're not having any sales when the stores are closed and there's no revenue.

432
00:58:24.990 --> 00:58:31.980
Torsten Slok: Because we need to stay indoors, because of the virus, whether the consequence of causes that the green and the red stop wiping out dramatically.

433
00:58:32.280 --> 00:58:38.370
Torsten Slok: Which is why, as if it was basically saying, okay, we need to make financing available for corporates, which is why it was absolutely critical.

434
00:58:38.640 --> 00:58:41.670
Torsten Slok: For the fifth to go in and buy the red and the green and buy

435
00:58:41.910 --> 00:58:50.640
Torsten Slok: In the corporate bond markets to make sure that financing costs were very, very low. So the corporate could replace the lack of revenue that they didn't get when there was a shutdown.

436
00:58:50.850 --> 00:59:06.630
Torsten Slok: With borrowing because of the pie chart to the left being so dominant Lee is significantly influenced by what's going on in market this of course is very different in Europe with credit markets are a lot smaller. So the short answer to the question is do you can conclude that

437
00:59:09.510 --> 00:59:15.120
Torsten Slok: Thanks a lot of city life is worse or better registered to a market based financial system which is we seem to the left.

438
00:59:15.390 --> 00:59:20.700
Torsten Slok: And some people would have different views on different dimensions, but the main conclusion still is that they're given the shot that we were faced with

439
00:59:20.970 --> 00:59:30.750
Torsten Slok: It makes complete sense that they came in and said we're going to buy credit because credit is where all the vulnerabilities were given that it was such a significant part of the finance people culprits.

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Richard Green: So Torsten slot. We're coming up to the top of the hour. Again, thank you very much for taking an hour out of your schedule for us. Again, I highly recommend first and stuff.

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Richard Green: When we put up the presentation and has his contact info. So I think you'll be able to get on his mailing list.

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Richard Green: Our next less Perspectives is on June 9 at 1pm that will be David Griffin, the CEO of Freddie Mac. So David is also a longtime friend of mine. So I'm very excited to be welcoming him to this series again Torsten thank you very much for being with us.

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Torsten Slok: Thank you.

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Richard Green: And thank you all for joining us again. I hope to see you next week. Be safe out there, everybody.

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