How the economic crisis has discriminated against lower wage workers: Portfolio Manager

Franklin Templeton Fixed Income CIO Sonal Desai joins Yahoo Finance’s On The Move panel to assess the state of the U.S. economy and weigh in on country’s financial road to recovery.

Video Transcript

ADAM SHAPIRO: I'm going to turn our attention to not just retail but this economy overall as states begin to slowly reopen up. Even New York City is looking at potentially opening up partially perhaps in June.

Sonal Desai is Franklin Templeton's Fixed Income Chief Investment Officer, and she joins us now. It's good to have you here. Thanks for joining us.

SONAL DESAI: Thank you so much. Thanks for calling me.

ADAM SHAPIRO: So we're seeing some positive results, at least, for large retail, but then we have, you know, the Federal Reserve Bank president out of Dallas, Mr. Kaplan, Robert Kaplan, this morning saying unemployment's going to hit 20%, and by the end of the year, it could still well be over 10%. So when you look at that in the context of a potential economic recovery, what do you see?

SONAL DESAI: So, you know, I think that it's going to be really important for all of us not to just-- you know, the whole question-- you know, the alphabet soup of what the recovery is going to look like, U, V, W, K, I think in some ways it misses the point of it because what we're really trying to understand is how temporary or permanent is what we are seeing. Second quarter absolutely what we're going to see-- I heard, as you noted, you know, we might be looking at 30%. We might be looking at 40%. Beyond the point it becomes a number. The question is what happens in Q3? What happens in Q4?

I think we should listen very carefully to what both Treasury Secretary Mnuchin and Jay Powell said yesterday. There is the potential for us to see a very sharp recovery, but there is also the potential for this to become a protracted downturn, and it lies very much in the hands of policymakers right now.

What the government can do is a lot to try and cushion the impact of what we've seen due to the COVID crisis. What it cannot do is substitute reopening and substitute actual going back to work and trying to get the economy going again, and that's where I think the trick is going to be. We are now in the second half of May and June, and I think what's going to be critical is over the next couple of weeks to see how many people start getting back to work.

And I'm not talking about all of us who are clearly managing to do our jobs from home. I'm talking about the people who need to be at work, mostly.

JULIE HYMAN: Sonal, it's Julie here. So if you're looking at the scenario where we have had all of this stimulus from the government and the outlook for the economy is somewhat binary but also quite uncertain and you're looking at a 10-year year, for example, of around 0.7%, does that accurately or adequately price in these scenarios?

SONAL DESAI: You know, right now I would say it probably does. There is a scenario where within six months or seven months-- and again, reflecting on the increased costs to retailers and the increased costs across the board, whether you're talking about flying or retail. I think seven or eight months down the line, it's a wide-open question will retailers be forced to pass along some of these price increases? And if they do, I doubt very much that the Fed is going to tighten. But will 10-year yields drift a little bit higher? It's a possibility.

Do I see a massive reduction in 10-year yields? That's not my baseline right now. I think we're going to be range bound for a while, certainly for the next three to six months while we see what actually ends up happening.

It is a fascinating point right now that we are in in the economy because this is-- it's not just the virus, which tends to discriminate in the sense of clearly being dramatically worse for certain segments of the population, be it people with comorbidities or older people. But the economic crisis has massively discriminated as well, right, in the sense that it's definitely the people who are more vulnerable and at the lower end of the wage scale who are being more heavily impacted by job losses. So I think from every perspective getting people back to work is going to be the number-one priority for the economy.

JARED BLIKRE: Jared Blikre here. We were just talking about the longer end of the curve, the yield curve, so I want to talk about the shorter end, specifically the benchmark. You know, we've had fed funds futures pricing in negative rates in the future. It's somewhat abated now. Do you see this as an eventuality? Can the bond market force the Fed into that situation of negative rates even if Powell doesn't want to go there?

SONAL DESAI: You know, I really don't think so. I think there is nothing-- Powell has made it very clear. Various Fed members have made it clear. It's not a costless solution. The Fed has a lot of dry powder.

I remember before we even got to the stage of the Fed doing what it is now doing in terms of looking at high-yield ETFs, even IG ETFs. The Fed is going into uncharted territory, and there's a lot more uncharted territory where it can go before it goes to negative rates. Negative rates have some very fairly severe consequences, as we have seen in the case of Europe for savers, for example. It is not something which is useful for anybody starting from the average households to banks in any way, shape, or form. And it's not obvious that it does very much, actually, in terms of getting more credit out to stimulate the economy. So I tend to believe that the Fed will not be pushed into driving rates negative and they'll go into many other areas before they do that.

AKIKO FUJITA: Sonal, you've alluded to a number of times the choppy recovery that we can expect, initial demand that comes straight out of the reopening and then potentially some of these businesses that are kind of teetering on the edge may eventually go under. You know, Jay Powell has made it pretty clear that we are slowly reaching the limits of monetary policy at this point. As you look at what the government has done, what's the missing piece, you think, on the fiscal side that needs to be acted on soon?

SONAL DESAI: So, you know, the fiscal side, what happened? I thought what we saw over the course in March-- over the course of March and early April was remarkable. You've got the most divided, polarized Congress in history, and within two weeks of declaring an emergency they managed to pass a two point-- you know, eventually first-- a $2.2 trillion in all fiscal package, and that is remarkable.

And, of course, in speed something was lost in terms of targeting and accuracy, and so you've got unintended consequences, for example, with 50% of states now having-- being in a situation where unemployment over a four-month period actually pays more than median wages, which means that you've got different policies fighting against each other. On the one hand, you're trying to help via the Payroll Protection Program small businesses over a small period of time, but they can't bring their workers back because workers-- actually it's preferable for them to stay unemployed for a bit longer.

So I think what fiscal policy needs to do now, in large part, is to try and correct some of these anomalies. So why do you continue with protection? You need to also incentivize, maybe via bonus payments somehow, for people to also come back to work because indefinitely people cannot remain out of work. And I think this is what maybe the next round of fiscal policy does need to focus on to try and mitigate some of these issues which came up.

And certainly something will need to be done on state and local front, but I think that that's going to be a wide-open question how much is done and how it gets distributed.

ADAM SHAPIRO: Sonal Desai, Franklin Templeton's fixed income CIO, always good to see you. Thanks for joining us.

SONAL DESAI: Thank you so much. Thank you for calling me.