Reimagining The Investment LandscapeReimaginingTheInvestmentLandscape

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  >> I believe that the only thing we have to fear is fear itself.

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  >> Mr. Gorbachev, tear down this wall.

  >> And the people who knocked these buildings down will hear all of us soon.

  >> America, we have come so far. We have seen so much, but there's so much more to do.

  [ Music ]

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  >> Hello, everybody. I'm Stephanie Flanders, head of Bloomberg Economics. And I'm thrilled to be your moderator for today's discussion, reimagining the investment landscape. We could not quite have imagined how great the timing was going to be for this session. I guess we sort of knew when the US election was. We even perhaps allowed a bit of extra time for clarifying who the winner was. What we didn't know that we would also be having this session hot on the heels of that very, very good and market moving news from Pfizer yesterday regarding its vaccine. So we really have an enormous amount to discuss. It seemed at certain times, beginning of the day yesterday that everything had been changed by this one bit of news. But when the dust settles, what does it really mean for investment opportunities when we look a bit further ahead than just the next few days or weeks? We have some great panelists to discuss that with me today. First, we will have Katherine Neiss, principal and chief European economist for PGIM Fixed Income. Nathan sheets, chief economist and head of global macro research for PGIM, and Ed Campbell, managing director and portfolio manager for PGIM's QMA. I feel like I have to go to you first, Ed, because yesterday was such quite an extraordinary day in the markets as one watched this dramatic rotation and people I know have been going back into the history books to find examples of similar scale rotations. One day later, did you -- did we wake up thinking it was an overreaction? You know, how much did that vaccine news really change the landscape?

  >> Oh, it was great news. And, as you mentioned, you know, the move into what we'll call the reopening trade was really violent. And I really can't think of a day that I've experienced where you had this type of internal market rotation, where you had sectors like energy and financials up 8% while staples tech and consumer discretionary were down. We have the fangs down. A company like Netflix down 8%, but hotels, entertainment, and airline stocks flying. So, you know, we're seeing some follow through today in terms of the cyclical groups leading again. You know, so we'll have to see, you know, whether this is sustained or not, but you've really seen this push and pull within the market that's been going on for quite some time, you know, between cyclical stocks, and let's say quality growth stocks. You can think of, you know, NASDAQ versus DOW as a proxy for it, or growth versus value. And clearly, the growth trade has had the upper hand for both the year date period, recent years, and I mean, I think you can go back and say, you know, for the better part of the decade, right? So the big question is, when are we going to have this great rotation in inequity? So, you know, I saw a Bloomberg headline that I thought something's up quite well. It says, you know, who needs a blue wave when you can have a COVID vaccine, you know. Because, of course, if you have to go back and you look at the market action in the last week, I mean, the equity market has been straight up. But there's really been a lot of rotation back and forth between these reopening trades and, you know, the stay at home trade. And, of course, when the expectation was that we were going to get a blue wave, that sort of gave some fuel for the cyclical trade markets really focused on this big transformative fiscal stimulus that we were unlikely to get. But then, of course, you know, the actual result was divided government, what likely to be divided government. And, you know, that brought us back to the growth in quality trade with tech stocks and healthcare looking to do well. So, I mean, we ultimately think the reopening trade in the cyclical trade is the one that's likely to win out, you know, on a 12-month basis, but getting the timing is going to be tricky. And I'm sure there's still going to be a lot of back and forth.

  >> Well, and it's amazing to think that finally value might have its day, even from my days at JP Morgan, where people were waiting and waiting and waiting for value to come to come back into fashion. And will it -- will this now happen, who knows? Nathan, we had joked last week, when we were talking just after the election, that things always look clear in retrospect in advance, the feeling was that it would be a pretty bad outcome from an investment standpoint, to have divided government and maybe constraints on the scale of fiscal stimulus. At the moment we had that prospect before us, everybody decided, actually, that was the best possible thing. We have now seen the next leg of that, as Ed says, that it says the decision being taken that actually vaccines much better for the world than even a great -- a big stimulus. Do you think that's right first and, you know, what -- how does the prospect for fiscal stimulus feed into this? Is it now much less likely much smaller?

  >> Ultimately, I think the vaccine is critically important. And I think that's what's going to allow our economies to fully reopen and the world to get back to something approximating "normal". But the challenge and I think where the fiscal stimulus is critical is getting from where we are today to the time that we can actually get that vaccine in our arms. And that's likely to still be at least another six or eight months, for many of us. And in some parts of the world, it could even be significantly longer than that. In my mind, I continue to be reasonably optimistic that we're going to get some kind of fiscal stimulus over the next two or three months. I think we will be smaller than the blue wave scenario, maybe on the order of a trillion dollars. Whereas blue waves, we were talking about two or three trillion. However, even as I say that, a goodly part of that two to three trillion that was discussed would have been medium term investments in the economy and not this critical support. So if we are able to get a trillion of unemployment benefits, small business and support to state and local, I think that's going to be very helpful. If we don't, and we continue to face rising case counts, I think this could be a pretty rough three or four-month period, notwithstanding the fact that it does seem that there's a vaccine on the horizon.

  >> You know, but very briefly, I mean, do you think there's a risk? Certainly, obviously, public health officials are worried that people are going to ease up now in the thinking too quickly that everything's over and that they don't have to worry with the vaccine. But do you think the same applies to the fiscal stimulus? You know, we might have -- certainly the Republicans might have felt really they had to manage to pass a stimulus in the absence of a vaccine. Do you think that means they're a risk given what you know about political dynamics in Washington that they too will become too relaxed, too complacent?

  >> I absolutely think that there is some stimulus fatigue. We're hearing it from the Senate Republicans. They have pointed to continue solid economic data, particularly solid data from the labor market as maybe a reason why the economy doesn't need more stimulus. I think the fact that there is a vaccine on the horizon might be another factor that contributes to that. So I think we are seeing a little bit of that. They're nervous about the mounting debt levels which are substantial. But my feeling about about public debt is we've got to get to tomorrow to deal with tomorrow's problems. And if we don't have that stimulus today, it could be a pretty rocky path to tomorrow.

  >> Well, I'm planning to get into. But Katharine, just thinking briefly about Europe and some of the implications of this, I'm trying to think of the sort of version of the reversing of the Warren Buffett line about the tide going out and finding out who's swimming naked. I feel like, you know, when the vaccine comes in, you find out who has the best life preservers, you know, you find out whether there was -- what -- who's got most scarring from this very deep recession. And there's been a very lively debate about whether the European or the US approach to that was going to be more effective, you know, the Europeans preserving jobs maybe at the cost of allowing adjustment, the US -- the opposite. What's your take, if we are now looking at a vaccine coming on a relatively short time present not withstanding Nathan's [inaudible] is you're potentially coming out of this stronger having held on to those jobs?

  >> So it's -- that's a great question. And I think, you know, it's too soon to tell and, you know, the tide hasn't yet gone out. So that will be something to look out for. I mean, I have to say, you know, to echo Ed, the news about the vaccine is is great news, and it feels particularly good sitting here in Europe where we have a second wave real concern about having potentially lost control restrictions, you know, the nights are drawing in already at, you know, 4 o'clock in the afternoon, it's getting dark. So it definitely feels like positive news. But you can tell that policymakers are working hard and trying to manage expectations around the vaccine. And this was, you know, already starting, I would say, around the middle of October, when the European Commission came out with a couple of strategic documents around their strategy for acquiring vaccines and how they were going to disperse these vaccines. And you were starting to get some leaks in the press, you know, that this was really unlikely for a vaccine to be able to go through the authorizations process before Christmas that, you know, it would really take some time, certainly people would be prioritized, there wouldn't be sufficient vaccines to cover everyone, at least till the end of, you know, 2021. And that, in the meantime, social distancing measures will need to be a key tool for trying to manage this virus. So, I think there are -- you know, obviously, it's very good news but lots of managing expectations around rollout in the interim, you know, we have this problem, we don't have a vaccine and this is how we need to deal with it. We're seeing that in Europe. Having settled that, the restrictions that we're seeing now are very different to the kinds of restrictions that we saw in the spring. They are much more focused on sort of discretionary social interaction, recreation, leisure, mixing of households, whereas going to work, going to school continues to be prioritized. And the hope is that, you know, that will be sufficient to bring these numbers under control. And as you say, in the meantime, policymakers in Europe have been very, very clear in signaling that they will provide additional support for healthcare, they will provide additional support for workers, and they will provide additional support for businesses. This is over and above the already really strong social safety net that you have in Europe. And moreover, they have committed that that support will be there for as long as it is needed. So in that sense, there is a much more stable and predictable situation in Europe to carry us through the sort of bridging period, if you like, until the new vaccine comes. And I think as you say, the acid test is going to be at the end of this, you know, can Europe manage the structural change that was necessary in Europe before the pandemic that's just been magnified now? Can they do that and achieve, you know, really strong potential growth? And I think there is a big question mark out on that yet. And time will tell.

  >> Yes, Ed.

  >> I was just wondering if I could add a few comments to the question that you've had asked Nathan, because I thought it was pretty interesting last week that, you know, we had the market go straight up, even though, you know, the market did not get the blue wave scenario that it was looking for, and instead got divided government and, you know, we're likely to get a smaller stimulus, still fiscal stimulus but not quite the transformative fiscal stimulus that we would have been likely to get under a blue wave. And I think it's mainly because, I mean, there was always a collection of positives and negatives associated with each scenario. So the market had, you know, warmed to the blue wave and embraced it, because it was much more focused on the stimulus part. And I think thinking that, you know, the increase in regulations or the corporate tax hikes that were likely to accompany such a scenario would probably come later, because the new administration would kind of tread carefully given the fragile economic scenario. But, you know, with divided government, of course, you know, again, there's a collection of positives and negatives. The tax cuts are probably here to stay in terms of the corporate tax cuts, you know, we're likely to get less in terms of, you know, an ambitious regulatory agenda. We will get a smaller fiscal stimulus. But like Nathan mentioned, it's likely to be smaller. But, you know, I think the economic context coming into the recession was pretty strong. And then it's also just a normal pattern for stocks to be somewhat nervous and volatile coming into election. Yeah, you could think about the two weeks heading into the election, we were down. And then, you know, once the outcome is known and the range of policies that are possible is narrowed, the market tends to rally just because of reduced uncertainty there. So, you know, we saw the VIX, you know, in terms of implied volatility, fall from like 40 to 25. It's the entire VIX futures curve had shifted down. And I think there was some tail risks that were eliminated. Although the market had warmed to the blue wave scenario, as I mentioned, they didn't really want to see a blue tidal wave, because, you know, that could result in, you know, Biden, let's say, being more beholden to demands from the progressive wing of the Democratic Party. There was also this possibility of a contested election, and a constitutional crisis that I think people were worried about. And although we are seeing legal challenges, I think the, you know, the perception among the market is that it's probably a low probability that those are likely to succeed. So in that sense, a couple of tail risks were reduced. And I think that may be behind, even though we've seen these big moves in equity market rotation why we've just seen the market kind of straighten up since, you know, in the last week or so.

  >> Nathan.

  >> Let me strongly agree with Ed's diagnosis. I think looking at these various scenarios and possible outcomes, the market saw lots of pros and cons with pretty much any possible configuration. Once we actually obtain a Biden presidency and likely a split Congress, and people looked at it more closely, I think some of those positives that Ed was articulating, people were pretty enthusiastic about, I'd say, particularly the taxes. And then in addition, the probability that Donald Trump that his approach to China is going to continue under this new administration, particularly an escalation in trade wars is very low. And I think that, broadly speaking, Joe Biden will be tough on China, but it will be different, it will be more multilateral. We will work with allies around the world, particularly allies in Europe, to put pressure on the Chinese through other kinds of mechanisms. And then I'd say another big plus is that Joe Biden will have a more conventional operating style. You know, every day I would come to work and I wouldn't quite know what US policy on some key issues was going to be. And I have to wait for the tweet. And I think that the Biden administration will be more transparent and kind of process clear process oriented. I think those are also big pluses for markets in thinking about the next four years and reduce levels of uncertainty.

  >> I mean, two of the factors that are pretty important, particularly from a global standpoint would be inflation and the dollar. Nathan, going back to my big point at the beginning, I think there would probably be a perception that a vaccine would be less inflationary, if you like, than a fiscal stimulus. But how do you see this playing out? And I guess also, in terms of the global potential for what was known as the reflation trade, I guess.

  >> So I think that we are in an ongoing low inflation environment. And I think we've seen that over the last 10 years since the global financial crisis. Broadly speaking, I think that will continue in the years ahead. I think that's reflecting deep structural factors that we face, like aging demographics, higher debt levels, and resulting deleveraging, the march forward of technology and automation, low entrenched inflation expectations, and so forth. And I think that is likely to continue. And frankly, I think it would have continued more or less independent of the election outcome. Now, a caveat on that is as we get the vaccine and as our economies move back to potential, perhaps quite rapidly, could there be some temporary bottlenecks in there? And to some extent, we even saw that through the summer as the economy was recovering. I think we might see some bottlenecks and some shortages, and that could put some temporary upward pressure on inflation. But my my expectation is that would be short lived, and that we will be back to this low structurally driven inflation environment. And central banks will have to keep rates low as a result for quite a while if they're going to achieve their inflation objectives.

  >> Katharine, what do you think about the dollar and -- the dollar versus the Euro? I mean, we've got potentially a very -- interest rates not going up for several years in the US with the new regime from the fed, but then the same could be said for the ECB.

  >> Yes, that's very true. I mean, you know, if you think back and you remind yourself, the Euro is only 20 years old. It's a very young currency. And yet it's already achieved the status as second most important currency in the global financial system. And I think, you know, definitely the policy action that we've seen over the course of this year, during the height of the sort of pandemic crisis, if you like, from European policymakers, has been really positive. And it's definitely underpinned, I think, the euro. On the monetary policy side, the ECB was very proactive, very aggressive, very robust, addressed the market dysfunction in ways that I think nobody could have imagined. If you just circle back to December 2019, on the fiscal policy side, again, very proactive, not just from national governments but also from the center, a real switch in, you know, how policymakers saw to address this crisis. It was very different to what we saw in the previous two European crisis, particularly coming from Germany and then this recovery plan over the summer with, you know, a really substantial fiscal transfer from those countries that have been less impacted by the virus to those that have been really hit hard, both from a public health perspective and economically they did something that many people could not have imagined. So, you know, I think we do need to understand in that context it's been really a remarkable journey over a short space of time for the euro. But having said that, I think there is one really key and almost killer factor that means that the euro is not really breathing down the neck of the US dollar ready to overtake it. And that is the single fact that there is no genuine single capital market in Europe. Europe cannot be -- the euro cannot compete with the US dollar in terms of the depth and liquidity of its markets. And I think that is fundamentally why, yes, it's second, but it lags quite significantly. Having said that, I think policymakers in Europe are acutely aware of this gap in the institutional structure and fabric of the euro area. And they have been launching action plans. They relaunched one just a few weeks ago again. But, you know, we need to judge on delivery. And so far, I think it's fair to say the progress has been pretty slow. These are very, very complex issues. It's difficult for policymakers to articulate them and get, you know, lots of enthusiasm. There's probably a bandwidth issue as well in Europe. So it's hard to see that they're going to make significant progress to close that gap. And so, I think really, you know, we're likely to see a continuation of, you know, the US dollar being the clear leader here, and the euro lagging to a degree.

  >> I was very struck by what you said about the progress that's been made. I wonder, is it possible that the 2020 will be remembered in history as not just the year of COVID, but the year that the Europeans actually took a serious step towards a federal union and risk sharing with their recovery plan? Do you think that is overstating things? Because it was, as you say, a striking difference with the way they've responded to past crises?

  >> Absolutely. I think if we see that this moment is a moment that generated momentum, if we could see that momentum continuing, I think people will look back at this point as an inflection point. It wasn't just the coronavirus. It was a lot of other factors, events of 2016, I'm sure, you know, played an important part in that. You know, looking through the rearview mirror, I think many now see the austerity measures, post the global financial crisis, the sovereign debt crisis that have been a policy error. And, you know, all these factors came together with the coronavirus. If that momentum continues, I think people really will look at this as an inflection point. If we see that momentum petering out, then perhaps it won't be seen as such a game-changer.

  >> If you ask the German finance minister, he would definitely not say it was a mistake, he would say that it was that that allowed them to have the room to do this at the right time. If you do the right thing in the past, then you're able to spend when it really matters is what he would say. But of course, the view is very different from outside Germany. Ed, we've got quite a few questions. And one of them is that is really -- is a question for a multi-asset investor. In your view, what would be the significant difference in asset class performance between Biden and a Trump administration? And I think -- And we're talking about -- I'm just reading here about EM, US dollar assets, EM local, IG credit. I mean, he really wants you to fix his portfolio or her portfolio for him?

  >> Well, I think, you know, emerging markets are going to benefit under Biden from a less hostile, external policy environment. I think, you know, a lot of this is, you know, not necessarily driven by the election, but I do think we're going to be in a weaker dollar environment, and that's likely to help emerging markets as well. So you think there's been a big narrowing in the interest rate differential between the United States and some of the other major economies, you know, the dollar has been expensive on, you know, most measures like purchasing power parity and real effective exchange rate. The twin deficits are likely to be a headwind for the dollar, and, you know, the dollar is a countercyclical currency. So to the degree, you know, that the vaccine is a light at the end of the tunnel, and we're going to see a normalization of the global economy, you know, that should be a positive -- you know, that should be a negative for the dollar and a positive for emerging markets more generally. So I think emerging markets are cheap. Also, they're cheap compared to US stocks. They have a more cyclically-oriented sector exposure. So, you know, I would expect that, even though we're not going to get this big fiscal stimulus that we are going to get a continuation of a global recovery, and that the stage is set for better emerging market equity performance. And, you know, that's likely to hold for the debt as well. You know, of course, the valuations are not as attractive there where, you know, spreads are a lot tighter. But, you know, if you look at emerging market debt relative to zero bond yield in a -- zero negative bond yields in the emerging world, I mean, in the developed world, they should continue to benefit from that global search for yield. And the general economic recovery should be supportive.

  >> Yeah, we should remember they are still paying quite a lot for their debt. Nathan, I wanted to follow up with you on something else, but go ahead.

  >> So I just wanted to, again, agree with Ed on EM and on the dollar. I very much agree that EM asset class is relatively cheap and that the dollar at this point is a relatively strong currency. And when I look around the world and say where is their scope for a currency to appreciate, I think there is is meaningful room to run upward in emerging markets. So an EM FX, as I say that, it requires a very important caveat, is I think at the moment, there is still a lot of risk in the global economy. Those countries are getting hit by the pandemic, and it's having an effect on risk appetite there as a result, but maybe this is too reductionist but I'd say once we start distributing a vaccine, I think that is going to be a great risk on signal for the emerging markets broadly, but particularly for EM FX. That would be, I think, a key inflection point for them.

  >> A very striking thing about the developing economies as a group is that they have not done badly and the public health impact has not been what many people feared. But they have been absolutely hammered by the global recession. So that would fit with what you're saying. Nathan, we've got quite a few questions, understandably, about potential personnel changes coming out of the Biden administration and a couple in particular, who should Biden have at treasury is one question to put you on the spot. And another question about the Fed and your old friends there, we have not just Jay Powell but the two vice chairs coming up by 2022, their terms, are you expecting to see two out of three, one out of three change?

  >> So for Treasury, I would say the good news is the person that I think Biden will appoint is the best candidate for the job. And that is Lael Brainard, who has previously worked at Treasury. She's worked at the White House, and has been an extremely effective Federal Reserve governor. Her impact at the Fed has been broad based, including being a very disciplined voice on monetary policy, a voice of caution during the hiking cycle, and then playing a critical role in the construction of the various market facilities were rolled out on short order during the spring. So I think Lael Brainard will be the Secretary of the Treasury. And --

  >> Not Janet Yellen, is the other voice -- is the name that we've also had circulated.

  >> So with Janet Yellen, I think that if she's given a senior job in the administration, it's much more likely to be at the Federal Reserve. I think Lael's distribution of talents is a much better fit for the Treasury. She's been there. She knows the land there and the array of issues they deal with. Janet Yellen, I think would be ideal for the Federal Reserve at at this point. Her ability to be able to communicate empathetically to the public is exactly what the Federal Reserve needs. As a technical matter, no one knows the US labor market better than Janet Yellen. And we're in a hole. And I think that she's extremely well placed to be able to guide the labor market economy back to full employment. Now, as I say that, it's also possible that Jay Powell gets reappointed. And I think Jay Powel has done an excellent job, particularly through the pandemic, and that would be strong. So I think putting it together, it looks like a good economic team that's likely to be put in place. In terms of the vice chairs, you asked about, I would say very, very low probability that Randy Quarles gets reappointed. And I think that the administration will be putting in somebody else who's a little bit more vigorous on regulation, when Quarles term expires in October of 2021. A Rich Clarida, that we could go either way. My guess is, again, that Biden would probably want to put one of his people in there. But it would be someone else who's solid, experienced, and will contribute just like Rich Clarida has.

  >> That's interesting. In a way, I'm surprised that you think it's such a lot that it says that much of a live issue Jay Powell's reappointment. But I guess we will see. And one other question that's come in which I think I can put to Nathan first, but I think others Katharine might want to comment as well. What would be the most important component of a stimulus? You talked about potentially a trillion dollars? Is it -- For this stage in the recovery, is it help for cities, is it small business support, where would you put the money?

  >> So ideally, the trillion or so that I'm expecting would be evenly distributed across the state and local governments, as you mentioned. There is a hole in their budgets. It's starting to have an impact on employment, on small business to try to minimize the scarring in that sector. And then third, on further expansion and enhancements of unemployment benefits to help households that are still struggling through this episode. You know, if you press me and say which of the three is the most important, I think I would still say it's most important to get money into the hands of those households that are being most directly impacted by the pandemic. And so, I would lean toward the unemployment benefits. Another frame on this is the reality of this pandemic is that the economic effects of falling disproportionately on those in the lower half of the income distribution. And anything we can do to directly get resources into the hands of those folks is going to be very positive for them. But as we put money in their hands or the experience suggests, they spend it, and it is positive for demand in the economy and for growth.

  >> And the other thing that's come up quite a lot in the questions is relations with China. And Nathan, you had mentioned at the start. And I just wonder, if we assume that there's a slightly more multilateral approach from this administration, but still that a continued toughness against China, Katharine, how do you think that Europe responds to that?

  >> So I think, you know, this is a really great question. And again, it's a factor, I think, behind some of the other stuff that we've already talked about, in the sort of the coming together, the solidarity, the unity that we're seeing from European policymakers. Because in 2018, Europe really got caught in the crossfire of the US-China trade war. Net trade had been contributing to growth in 2017. You know, it's -- it feels like ancient history but, you know, there was a bit of euphoria going on. Looking at the growth numbers in Europe, at that time, people were revising up their estimates of potential growth. And then it all came crashing back down in 2018. And if you looked, of course, it was a very nuanced and broad-paced picture. But for example, you know, purchases of automobiles in China fell, I think, for the first time in 2018, than they had for 20 years. And you could map, you know, a direct impact back to Germany, which is, you know, Europe's largest exports to China. So, I think, you know, this was just another moment where there was a realization within Europe that, you know, it needed to build up a sense of unity and solidarity within the European Union. And I think Angela Merkel, you know, it's a great quote from her at the time of the 2016 US election to take its fate into its own hands. And now, I think the issue around China, in Europe, and in Germany, in particular is a little overplayed. Yes, it makes up 7% of German exports, but German exports to the rest of the EU is 70%. So it's, you know, 10 times the size. But nevertheless, clearly China is is important for Europe. But I think what the Europeans would love to see is working together with the US administration to tackle issues in China around access to their market, particularly in the sphere of industrial policy, where, as we know, in the UK, you know, this concept of the level playing field is just so crucial to the European. So I think they would very much like to see working together with the Americans to continue to have access or improve that access to China given that they have benefited from those trading relationships.

  >> And, I mean, Nathan, do you feel -- are you expecting to see very quickly a change in the approach on trade? And other particular signals that you would see, I don't know, in relation to the leadership of the WTO, or the cancellation of tariffs? What would you be looking for?

  >> So I think that the tone will change quickly. And I think one of the very first things that Joe Biden is going to do is reach out to European leaders and try to strengthen those relationships in ways that Katharine just described. But it's also particularly with respect to China, the Biden administration is faced with a difficult challenge. And that is they want to change the approach. But in the process, they cannot send a message that they're going soft on China. The US political debate now has just shifted dramatically relative to where it was even five years ago. And signals that they were going soft on China, I think would draw immediate fire from both sides of the aisle in Congress. So, they need to build this new strategy and this new approach and sketch out what tough on China looks like. That's not as reliant on tariffs. So putting all of that together, I think that they will rely less on tariffs, but they won't immediately roll them back. It's likely something that will come gradually and down the road.

  >> And is that -- So one question that's come in is there going to be a China deal part two with Biden, or is he just going to be on a completely different agenda?

  >> My instinct on that is it's like if there is a part two, it's going to be built on a completely different foundation than part one. You know, I think that the whole notion of we have these targets that the Chinese are trying to hit in terms of buying US exports, feels to me very central planning and previous administration before the Trump administration had those discussions, should we set targets for them as to what they're going to buy? And the argument again was, well, that's what happened in central planning is when you have these quantitative objectives. And what China needs to do is continue its progress toward a full-fledged market economy. So I think that there may be a China deal, and they may even call it phase two. But intellectually, it's likely to be much different than what it would have been out of Trump.

  >> You've given me an opportunity to give a small plug for Bloomberg Economics, because one of the services that we have done for mankind and womankind is by putting onto the Bloomberg terminal a very detailed US Customs data, which allows us to track in real time whether there was any chance of China actually meeting any of these numerical targets, which were, of course, as you suggest, rather foolish. But we have done that God's work of monitoring it and they will probably now fall by the wayside. No one will pay any attention. Ed, just to step back a bit, you know, people who perhaps don't think about the markets as often as the people on this call, would say, hang on a minute, we had something really terrible happen to the global economy and after a few sort of false starts markets did really well. Now it looks like we're going to come out of it, markets have done really well again. What's going to give-- I mean, you have a President Biden coming in with what most people would say with pretty highly valued equities, particularly in the US, but I would say across the developed economies, what would be the catalyst for that being seriously upset?

  >> Yeah. So, I mean, as you mentioned, you know, equities look expensive, right? If you look at them on an absolute basis, they look expensive. But, you know, if you look at the alternatives, you know, there's not a lot that's attractive either, when you're in a world of, you know, zero yields on cash, zero yields on core bonds. You know, if you look at equity earnings yields, depending on what the market is, you still have four to six earnings yields. So, you know, I think in an environment where the global economy continues to recover, equities are still your best bet out there. I mean, if you think about some of the challenges that we have to other alternatives, like commercial real estate, well, you know, big segments like the office sector or retail are, are still COVID impaired. So I think, you know, as long as the the global economy, the recovery continues, I think, you know, equities will probably continue to grind higher. If we look at the earnings environment in the US, you know, Q3 earnings were much better than expected. And, you know, the whole for earnings for 2020, you know, given the COVID lock downs, you know, the expectations, if we go back a few months ago where that we were going to see, you know, 24% decline in earnings but, you know, we're seeing as, you know, companies are now reporting better than expected results, that the whole is likely to be much smaller, right? If you ask me what the downside catalyst is, I would say, you know, the probability that we have a double dip recession, like if it -- you know, if the vaccine is further off than people expect, if it takes -- if there are challenges associated with, you know, producing it and distributing it that created delay, if we wind up having a much worse than expected COVID winter, you know, we see that infection rates are increasing pretty rapidly. We haven't seen death rates follow, but that certainly could happen, you know, we could see hospitalizations. So if we move toward more restrictions in the United States, like we've seen in Europe, I would say that's the downside scenario.

  >> And we have been tracking, actually, the hospitalization rates are going up in quite a few states now. And just to introduce the climate to this, because I think it's one thing that we know is going to see a big shift from the US administrate -- the new incoming US administration will be the attitude to the climate -- mitigation of climate change. We talked about this last week. You sort of said -- we can say there's going to be much more aggressive action by the US isn't always difficult to draw the line between that and what investors should do. So, Ed, if I ask you, how does it change the way you think about your mix of assets, if the US is now pushing the environment agenda?

  >> Well, I would say, you know, under the blue wave scenario, there probably would have been bigger changes. But, you know, given that we have a divided government -- I mean, certain -- there's certainly things that Biden can do, you know, via executive order that would, you know, repeal some of the things that the Trump administration did, you know, I expect that will, you know, rejoin the Paris accord under Biden. But in terms of anti-fossil fuel legislation or, you know, big subsidies in spending on renewable energy, I just think that's not likely to occur. So you know, it certainly could have long-term implications, but I don't really see it having huge implications for equity strategy in the shorter term.

  >> Nathan, I don't know where to -- Nathan or Katharine actually, did you have -- Nathan, did you have thoughts on --

  >> So what I can say here is that in PGIM Fixed Income, and I think that similar processes are ongoing in other parts of the firm as well, we are in the process of really diving into ESG issues with a lot of vigor. So over the last year or so, we've gone through a process of providing various kinds of assessments and ratings for the universe of credits that we consider purchasing. And that includes certainly lots of corporates but it also includes various structured products and sovereigns as well. And based on those ratings, we're engaging with various issuers, and in launching ESG specific kinds of funds that will focus on these issues. And we're doing it because, one, we think it's the right thing to do. But we're also doing it because increasingly, our clients are demanding it. And I think that that reality, which has accelerated over the last four years is now likely to accelerate even further when you have an administration in the White House is going to be actively encouraging it, relative to an administration that at best over those four years that was indifferent to that trend.

  >> Katharine, do you think it's an -- if the EU is going to be working together with the US more on these issues, how does that change the outlook? Or is it the case, as Nathan suggests, that actually businesses and to some extent cities were already doing this?

  >> Well, if I step back and I think about this US election outcome, you know, Europeans were overwhelmingly favoring a Biden win. I mean, some of the numbers were really quite dramatic, 20% to 80% in favor of Biden. But having said that, and it also speaks to the trade point, I think there is a realism on the part of the Europeans that the transatlantic relationship has changed. You know, yes, I think there is a hope they're going to work more closely together on global trade issues, vis-a-vis China, but I think they are expecting a robust trade relationship bilaterally, you know, maybe dial down a few notches to what we've seen over the last couple of years, but that that will still be there. And indeed, was there even prior to Trump administration. On climate change equally, I think the Europeans would very much like and hope to work together with Americans, you know, together to kind of lay the foundation for how economies can transition to carbon neutrality. But I think there is a realization that if this is a vision that Europe has and it is their stated vision, it has widespread support across the political spectrum, there is wide support across the citizenry, I think they are going to forge ahead with this with or without the Americans. I think the one area where working together with the US could be a real game-changer, and it links to the point I made before around the lack of a single capital market in Europe, is that Europe could really use the US in terms of partnering up to mobilize finance to support the transition of these economies to carbon neutrality. Europe has, you know, the foundation is there, they have the vision, they have the support, they've got the seed money now through this European recovery fund, which is going to be channeled towards a green agenda. But everybody realizes that public money is definitely not going to be enough, you know, to make this transition, which is is a huge transition. And for that, you need to scale up. You need private sector funding. And that, I think, is where the Americans can really help and work together with the Europeans to somehow lay the foundation that would facilitate and enable that. And things like what Nathan described as happening at PGIM fixed income in terms of ESG, these are all really important pieces of the puzzle together that will enable that shift to happen. But Europe, I think from that front, can't do it alone.

  >> Just to go full circle and then we're going to have -- I guess I'll do a final round of questions. But Katharine, just to come back on what you were saying about Europe earlier, is there a sort of equivalent risk of the complacency we talked about on stimulus in the US and in individuals feeling that the vaccines just coming down the track, the positive scenario and the sort of commitment to risk sharing and policy action that we've seen in Eurozone, which is unusual and has not happened before? Do you worry that that's going to reverse too quickly, if we start to get good vaccine news?

  >> I think there is definitely a risk that we won't see the momentum, you know, from this moment in 2020. I think that risk is there. It's not my central case, but I think it is a possibility. The bottom line is, is that Europe still lacks a crucial risk-sharing mechanism. And that is a key fault line in a monetary union. And until that is rectified, you know, that risk will always be there, however tail it may be. I think a number of factors we've talked about on the call today all have really changed the tone and the rhetoric in Europe. You're talking -- You're hearing much more words like solidarity, sovereignty being used in Europe. You know, we need sovereignty in terms of financial markets, we cannot be reliant on London in a post-Brexit world. We need to onshore strategic supply chains. We cannot be reliant on countries outside the EU for important healthcare inputs as we saw in the pandemic. So I think you are getting more of an inward look. And I think that does speak to continued momentum on this path that we're seeing very clearly in 2020, European policymakers coming together working together. But I think until that fault line is irreparably, you know, failed, that tail risk will always be there.

  >> Ed, just taking out on on global level our conversation before about what could go wrong. And it is these -- are these still markets that are more driven by policy expectation than anything else? And it is the risk of premature removal of stimulus really the most fundamental or do you think we are looking past that to the real economics?

  >> Do you mean for emerging economies or do you mean for --

  >> I mean, when we talk about the risk assets, are they still being driven fundamentally by policy expectations, or are we -- how are we going to see that shift to thinking more about recovery and not worrying so much about premature removal of stimulus?

  >> Yeah. So I think we still need stimulus. You know, I think, you know, the stimulus that were likely to get under the current configuration, you know, is likely to be closer to one trillion in the US than three trillion. Given the current economic context, I think that's probably going to be enough. So, you know, I think the economic recovery is continuing, you know, from the COVID lockdown. You know, if you look at the ISM for October, it came in at 59.3. You know, payrolls have surprised on the upside, the unemployment rate came in at 6.9. That's significantly lower than what was expected. The economic surprise index in the US is still firmly in positive territory. So I think we do need a fiscal stimulus if we don't get a package, that's, you know, that's likely to be a setback. But I do think the economy has some real underlying momentum that is likely to continue. And to the degree that the good news that we got on the vaccine yesterday is indicative of, you know, something being delivered in a quicker than expected result that's likely to bolster those.

  >> Nathan, I'm going to give you the last word. We talk a lot about winners and losers from this crisis enough, people often point to China as having its effective response, having potentially accelerated its progress up the league tables of economies and superpowers. How do you, in your gut, how do you think the US is going to come out of this in terms of how is the response by governments going to stack up? What kind of scarring do you think the US will have relative to other countries?

  >> So I think the United States -- this has been very divisive for us. And I would say that our governance, and part of that flows from our federal structure has been sub-par. You know, as I say that, I think that in some sense we're also seeing a flipside of some strength of our country. The fact that many in the United States have been against wearing masks, that's them manifesting their independence. They don't want government to tell them what to do. They don't want experts to tell them what to do. And often that's a strength that independence that has breeds entrepreneurship and innovation and so forth. In this instance, it was a weakness. Similarly, our federal structure, I think, in many cases is a strength. The quip is that the states and laboratories of democracy, we learn a lot through this structure. But in this instance, our response to the crisis has been too fragmented. So I think it's a complicated answer. In this case, it's exposed some of our weaknesses. I think, ultimately, history will judge us now by what happens over the next 6 to 12 months. And if the Biden administration is able to engineer the cooperation that Joe Biden described in his victory speech, then I think that -- I think history will be favorable. And I think the economy may very well be in a better place. But if we continue to fight each other, I think that will bode well -- well, not bode well, in a number of dimensions. So I think the ultimate test is still in the future, Stephanie.

  >> And we will ultimately have more reasons to tune in for events such as this, hopefully, in person one of these days. Thank you so much to all of you. So if I step back and think what are the main takeaways for me, from this, I think there will be US stimulus, at least Nathan thinks at least a trillion dollars worth. But that won't be as important as vaccine development, which will be good for everybody, and maybe especially emerging market assets. That there are downside risks of that probably the biggest risk to that what we were hearing -- I was hearing from Nathan and others was that we will be complacent with the prospect of that vaccine tantalizingly close. And maybe I was interested, Katharine said, maybe in fact, when we think about the bridge to reopening and not being complacent, Europe might be in a better place than the US on that. Finally, we heard that there could well be changes of personnel at the Fed, but maybe not a big change in policy. And President Biden is likely to get the weak dollar that President Trump wanted but never saw. So thank you very much to all of you. And I hope everyone stays well.

  >> Thank you.

  >> Thank you.

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