Morningstar - Q4 2020 - 75

I don't think they're divorced in any way, shape,
or form. Commerce is changing so darn
quickly. A lot of the trends in AI, the cloud, and
online shopping went into hyperspeed
because of the coronavirus. Procter & Gamble
recently talked about how they realized
that they can operate with a smaller salesforce and a smaller manufacturing force.
That's a big deal, because it's going to be harder
to bring those jobs back. I think that is
a permanent evolution.

listening to Hamilton on shuffle!) The creation
of a mutual debt instrument where all
countries in Europe are basically on the hook
for a debt issuance that's been directed to
particular countries is an enormous move toward
a true fiscal and banking union for Europe.
Before that happened, when the coronavirus
was still going strong and a lot of the
policy mechanisms were not in place yet, there
was real concern that we could see the

Hopefully, we'll have a hand-inglove relationship between monetary and
fiscal policy.
Rick Rieder

We have to target the areas that are being
left behind, whether with income redistribution,
healthcare subsidies, small-business
lending, small-business initiatives, student loan
initiatives. Hopefully, we'll have a hand-inglove relationship between monetary and fiscal
policy. If you create enough nominal GDP,
you lift all boats, as opposed to just relying on the
central bank to do it.

Game Changers
Bush: Anne, you've said that the European Union
recovery plan could be a game changer in
Europe. Could you explain the significance and scope
of the plan?

Mathias: This is an example of how from
tiny seeds, mighty oaks grow. The turning point
for me in terms of European tail risk was
when France and Germany got together to propose
basically a mutualized debt instrument. It
was almost a Hamiltonian moment. (I've been at
home for months with my teenage daughter

breakup of the eurozone. We could see
Italy needing more than it could get from the
central European monetary authority
and breaking away, followed by Spain and
Portugal. Now the European governing
body will issue its own bond, and the money
is then given in the form of grants to nations that
need it the most. It's not a huge number.
The total value is very tiny relative to the size
of the EU. But the existence within a
policy framework of a mutualized debt issuance
is enormous for Europe.
The euro is up more than 10% since the
Franco-German plan started to be discussed. Part
of that is because the more mutualized debt
issuance, the more fiscal and monetary union you
have in Europe, the more real the euro is
as a currency. Reserve managers around the world
are overweight the dollar and underweight the
euro. If they start shifting, and I think they may
already be, you have a long-term trajectory
where the euro is likely to stay strong and perhaps
strengthen even further.

You can't underplay the importance of it.
It's small, but it's the camel's nose under the tent.
The rest of the camel is going to be coming in
at some point in the near future.
Bush: You mentioned the difference in the
types of stimulus that we've seen in China versus
the U.S. What are the implications of that?
Asia seems to be ahead of the rest of the world in
terms of recovery.

Mathias: Even though China was the country
first and initially most impacted by the
coronavirus, the way that they have chosen to
counter it-by supporting the economy
from an industrial and manufacturing standpoint-
puts them in a pretty good place. We've
seen the Chinese currency strengthen significantly
against the dollar recently, and the trade
balance between China and the U.S. has again
widened and gotten worse from the
U.S. perspective.

China's coming out of this in a pretty good
position. China is now included in the major bond
and equity indexes, and there is a lot more
investor activity in China. There are policy threats
to that activity in this U.S. political environment, but I don't see them getting any
more significant in the near term. Net-net, China
is coming out of this with a structurally
stronger economic and financial market position,
and that's important for investors
to contemplate.

True Alpha
Bush: We've established that rates are very low.

Is now a time to be hiding out in short-term
debt or even cash, or are there reasons to go a little
bit further out on the yield curve?

Rieder: The portfolio you have today
has to be different than the portfolio you had
a year ago. Part of the Fed's agenda is
to make high-quality assets uninvestable
so that you do something different. People ask,
"Should you follow the Fed?" I'm not sure
I want to follow the Fed to buy the five-year
Treasury at 27 basis points. Even parts
of the agency mortgage market don't have any
real upside and have negative convexity

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Morningstar - Q4 2020

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