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It’s important from an economic perspective that unemployed people have a lifeline: Strategist

Doug Peta, BCA Chief U.S. Investment Strategist joins the On the Move panel to discuss the latest on the coronavirus stimulus proposal and what's being done to help workers displaced due to the virus.

Video Transcript

JULIE HYMAN: And then there is stimulus. Still no agreement on that front. We continue to see meetings between the right and the left in Washington on exactly what to do. Mostly at issue, those $600 stimulus checks-- or at least that's one of the big issues-- and how large they should continue to be.

We are joined now by Doug Peta. He is BCA Chief US Investment Strategist who's joining us from New York. Thanks for joining us. I want to ask you about the stimulus first because we continue to have this back and forth. The market doesn't seem that concerned about it even though, from an economic perspective, it seems pretty important to continue to have a lifeline for these people.

DOUG PETA: I absolutely agree that it is very important from an economic perspective to have a lifeline for people who have been unemployed, and it matters in the near term and in the longer term. In the near term, of course, if the unemployed are receiving less in unemployment-benefit insurance, they've got less of an ability to spend. They've also got less-- so consumption would weaken. But they've also got less of an ability to service their debts and other obligations like paying the rent.

So far with that $600 federal supplement to the, on average, $400 a week from state labor agencies, the $1,000 a week has been more than enough to allow consumer-lending performance to be really, really strong, and it has allowed apartment REITs to collect rent. It has allowed apartment managers more broadly in the economy to collect rent. That has prevented a sort of falling domino effect where you would have a multifamily owner default on a mortgage, putting pressure on a bank-- where you'd have retail storefront owners defaulting on a mortgage.

You get enough losses, banks and other lenders become scared and circle the wagons. Then you have less credit availability in the economy, and then you have even viable businesses get starved of capital and die. That hurts employment. That hurts consumption in the near term, and in the longer term, it undermines the capital base. If we had solid viable businesses go away simply because they can't get capital because of sort of this defaulting [INAUDIBLE].


DOUG PETA: So for me, it all starts, at least at the consumer level, with that very generous $600 a week federal supplement--


DOUG PETA: --that allowed the unemployed, on average, to be making about 130% of what they had been making before the pandemic.

ADAM SHAPIRO: But Doug, can you hold right there? We had a guest on last hour. Everything you said is absolutely true, but at what point is the long term got to pull back? Because we have, as he pointed out, 20% zombie companies. And yes, we have to help millions of people right now get through this crisis who are unemployed.

But what about, for instance, yields? We're watching yields hit new lows today. Fixed income for people who are retired, they're getting hurt too. And the long-term pain they will suffer, when does that end?

DOUG PETA: So I had a lot of respect for Ruchir Sharma, who was the guest. We have a lot of respect for him at BCA. He's certainly a very good economist.

But even he acknowledged, you know, in the near term, there is a place for providing some help, for providing, say, some scaffolding for the economy and for the agents in the economy to be able to get through this.

I took his concern as being that, look, this never ends and that every time you have a downturn, policymakers stuff in even more forcefully to intervene, and you never really wean markets or the economy off of that assistance, which leads to, as you mentioned, a lot of zombie companies, companies that really aren't necessarily viable. He defined them as companies that don't have sufficient cash flow to pay the interest on their debt.

But in the near term, it matters. Or sorry, it, of course, matters in the near term. It also matters in the long term, and here's the way it does. GDP is nothing more-- GDP growth is nothing more than the sum of growth in the working-age population and growth in productivity. We can't really do anything about the growth in the working-age population. That's a long-term, structural, demographic story, and birth rates have been declining in the developed world since the early '70s.

Productivity is a bit of a mystery to us as economists. However, one thing we do know is that capital investment in year zero tends to lead productivity growth in year two or year three. If you wipe out viable businesses, if you separate people who are skilled at the particular function they perform for those viable businesses, then the economy's capital base actually is reduced and that you would have less of a base for productivity growth going forward.

So absolutely I have all the sympathy in the world for, you know, not wanting zombies to survive and not wanting to frustrate the process of creative destruction that has been incredibly fecund for capitalist economies. But in the near term, this is sort of the only way through it. If we get to that cascading defaults, you would not only have damage now. You'd have much more longer-term damage.

And we're fortunate with falling bond yields that taking on all this increased federal debt while servicing it isn't really onerous at all when we've got the 10-year yield at around 53 or 54 basis points and the 30-year yield at somewhere in the 110s so that it's not really difficult to service that debt. So, OK, we may as well issue it now because it does look like, hey, two, three, four years out, we're still going to be in a very low-interest-rate regime. Jay Powell has promised us that.

So it doesn't look like it will become terribly onerous to service the debt as far as we can see into the future, and we actually will be putting the economy on a better footing to grow into the future when rates will inevitably rise and it will become more difficult to service that debt.

JULIE HYMAN: Next time we'll have to have Ruchir and Doug here on at the same time so you can debate it directly. Doug Peta with BCA, thank you so much for joining us. Appreciate it.