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PGIM Is Selectively Buying Dip In Credit: Collins (Podcast) · Bloomberg Intelligence

0:02
Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul swing you,
0:05
Speaker 1: along with my co host Lisa Brahma wits. Each day
0:07
Speaker 1: we bring you the most noteworthy and useful interviews for
0:10
Speaker 1: you and your money, whether at the grocery store or
0:12
Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
0:15
Speaker 1: podcast or wherever you listen to podcasts, as well as
0:17
Speaker 1: at Bloomberg dot com. Right now, expressed in markets extreme
0:22
Speaker 1: stress if you look at certain credit gauges, if you
0:25
Speaker 1: look at uh, certainly the sell off that is deepening,
0:28
Speaker 1: and but really the place where you're seeing stress or
0:30
Speaker 1: or perhaps the sort of rush of cash is in
0:34
Speaker 1: the treasury market, where you're seeing the biggest one day
0:36
Speaker 1: drop in thirty year yields since two thousand and nine
0:39
Speaker 1: at least, and you're seeing just in general, everyone reprice
0:43
Speaker 1: rates closer and closer to zero. Leno Shlietiev of Bloomberg
0:48
Speaker 1: Economics here with us and and Lena. I just want
0:50
Speaker 1: to get your response to what Larry Cudlow said, And
0:53
Speaker 1: he was talking about how strong the economy was heading
0:56
Speaker 1: into this and that it will be resilient and can
0:58
Speaker 1: recover quickly. Do you were grey well, we agree with
1:02
Speaker 1: him that it will be temporary in a sense that
1:05
Speaker 1: with the current policy response, the slowdown will soon transition
1:09
Speaker 1: into a contraction, and therefore the slow down part will
1:13
Speaker 1: indeed prove temporary. But back to your question, is the
1:18
Speaker 1: economy is strong enough? Going into that, I would say
1:21
Speaker 1: that the latest payrolls report did show that the economy
1:25
Speaker 1: had some strength, and this is the key premise for
1:29
Speaker 1: us to think that we will not deep into a recession,
1:32
Speaker 1: so at least our base case scenario. But the numbers
1:35
Speaker 1: today did not uh, you know, they were not as
1:38
Speaker 1: strong as uh it was looking at the first glance.
1:42
Speaker 1: So first of all, the number was inflated by the
1:45
Speaker 1: construction sector hiring, which was mainly due to weather which
1:50
Speaker 1: was very warm during this winter. So if you see
1:53
Speaker 1: this reversing in the spring, this will exacerbate the slow down.
1:58
Speaker 1: That will cause the services to slow down as well.
2:01
Speaker 1: So I would say, yes, the economy is relatively strong,
2:05
Speaker 1: but the response should be quick and not targeted. It
2:09
Speaker 1: should be a massive response if we want to avoid
2:12
Speaker 1: the recession at least. We're also very fortunate today to
2:14
Speaker 1: have in our Bloomberg and Actor Broker studio Mike Collins
2:16
Speaker 1: joining us Mike as a senior investment officer and senior
2:19
Speaker 1: portfolio manager for p JIM Fixed Income. Uh, Mike, thanks
2:23
Speaker 1: so much for joining us here. You guys have I'm
2:25
Speaker 1: gonna call it a good jillion and one dollars under management.
2:28
Speaker 1: You see the markets on a global scale. What are
2:30
Speaker 1: you seeing today and over the past couple of weeks. Yeah, well,
2:33
Speaker 1: you're finally starting to see the capitulation phase right up
2:37
Speaker 1: until just a couple of days ago, as we're talking
2:40
Speaker 1: to our high yield traders and portfolio managers and all
2:43
Speaker 1: of our different credit sectors, and we said, listen, what
2:45
Speaker 1: can you buy cheap? And they said, there's no real
2:48
Speaker 1: force selling yet. There aren't that many opportunities as much
2:50
Speaker 1: as you would think given the widening we've seen in
2:53
Speaker 1: credit spreads. But I think that's changing a little bit
2:55
Speaker 1: on the margin here, and we're actually in the mode
2:59
Speaker 1: of looking for opera tunities to add risk here. Right
3:02
Speaker 1: to Lena's point, I mean, I think there are are
3:04
Speaker 1: a few big considerations. One, the momentum we had in
3:08
Speaker 1: the economy was really solid, and every data point we
3:11
Speaker 1: get kind of reveals the strength going into this too.
3:15
Speaker 1: There's already been a lot of monetary stimulus, and there
3:17
Speaker 1: will be more. UH. Interest rates for corporates are much lower.
3:21
Speaker 1: Leverage loan issuers and borrowers see their funding costs automatically
3:26
Speaker 1: go down right because their yields are based off liebor
3:29
Speaker 1: so they go down instantaneously right to reduce their interest expense. Three,
3:33
Speaker 1: there will be a huge UH coordinated global policy response
3:38
Speaker 1: above and beyond what we're seeing from central banks. And
3:41
Speaker 1: four these things tend to be seasonal. This isn't like
3:44
Speaker 1: OH eight where you never saw the endgame where people
3:47
Speaker 1: were worried that maybe this is a nine thirties great
3:49
Speaker 1: depression in at last ten years. Here there is some
3:52
Speaker 1: seasonal aspects to this type of virus. So UM, I
3:56
Speaker 1: would bet in six months you're gonna look back and say, Wow,
3:58
Speaker 1: I wish I bought more stuff UH in the in
4:01
Speaker 1: the February and March of of two thousand twenty, Mike,
4:04
Speaker 1: Before I dive into exactly how you buy this dip
4:07
Speaker 1: and what gives you confidence that you're not catching a
4:09
Speaker 1: falling knife, I want to take a bigger picture of
4:12
Speaker 1: question about what Larry Cudlow is talking about and the
4:15
Speaker 1: fiscal response. I mean, what is the potential risk here
4:19
Speaker 1: that there is not a sufficient fiscal response, And that's
4:22
Speaker 1: something that's temporary becomes something much more permanent as companies
4:26
Speaker 1: run out of money and are unable to finance themselves
4:29
Speaker 1: at costs that are feasible. I mean, I'm looking at
4:31
Speaker 1: American airlines borrowing costs going from less than three to
4:35
Speaker 1: more than in a matter of days. How do you
4:38
Speaker 1: sort of save off that risk? Ye? So, so there
4:40
Speaker 1: are two to me, two big risks, right. One is
4:43
Speaker 1: that you actually have a big earnings contraction here. Right,
4:46
Speaker 1: so the IBADA or cash flow part of the leverage
4:49
Speaker 1: statistic debt to IBADA really plummets, and your leverage goes up,
4:53
Speaker 1: and you do get downgrades and you did get funding stresses.
4:56
Speaker 1: There too is a liquidity risk in the markets that
4:59
Speaker 1: you do get or capitulation and people panic and get
5:02
Speaker 1: out of the markets in big size. And we really
5:05
Speaker 1: have not seen that yet. Right. We've seen some big
5:07
Speaker 1: redemptions out of et f s and high yield and loans.
5:11
Speaker 1: Investment grade credit have generally until the last day or so,
5:14
Speaker 1: seeing big inflows as their yields are at new lows
5:17
Speaker 1: and their prices are up significantly. If there's a lot
5:20
Speaker 1: of for selling, which we really have not seen yet. Uh,
5:23
Speaker 1: then people have to scramble and raise money, and even
5:25
Speaker 1: the highest quality bonds, even the best securities, go down
5:28
Speaker 1: in price because you need to sell them to raise money. So,
5:31
Speaker 1: Lena Bloomberg Economics, your base case is not a recession.
5:35
Speaker 1: What are the data points that you're looking at that
5:38
Speaker 1: could push you into recession scenario? What are the key
5:41
Speaker 1: things you guys are looking sure, So we recently downgraded
5:44
Speaker 1: growth forecast to just one percent in the first half
5:48
Speaker 1: of the year. In terms of GDP, we were above
5:51
Speaker 1: two I think just before it all started. So I
5:55
Speaker 1: think we need to look at how growth is evolving.
5:59
Speaker 1: So if we get to a stall speed for year
6:02
Speaker 1: over year growth in the vicinity of one and a
6:04
Speaker 1: half percent, that's where this is a tipping point basically.
6:09
Speaker 1: So if growth slows down below that, uh, that basically
6:13
Speaker 1: passes the point of no return and we will go
6:17
Speaker 1: into a recession. So that's why, you know, I think
6:21
Speaker 1: policy has to be more proactive. Look at what the
6:24
Speaker 1: fit did. They were proactive. They cut rates, So you
6:27
Speaker 1: didn't you weren't necessarily impressed by what you just heard
6:29
Speaker 1: absolutely not. I think it does require a massive policy response,
6:35
Speaker 1: not a targeted one. While they're looking at the data
6:38
Speaker 1: and collecting all of the data that he was talking about,
6:40
Speaker 1: you know, the FED will have to cut to a
6:42
Speaker 1: zero zero low bound and how much ammunition will they
6:46
Speaker 1: have left. So the earlier the fiscal response comes, the
6:51
Speaker 1: better it is. So I want to get your sense
6:53
Speaker 1: here because right now you talked about liquidity pressures that
6:56
Speaker 1: we haven't really seen it so far that we actually
6:59
Speaker 1: say in those to investment grade credit, the high yield
7:02
Speaker 1: bond outflows have been controlled. Trading in the market has
7:05
Speaker 1: withstood it. Today, however, we are starting to see a
7:08
Speaker 1: little bit of a different tone in markets. What are
7:12
Speaker 1: you looking for and how close do you think we
7:13
Speaker 1: are to some sort of liquidity event. Yeah, I think
7:17
Speaker 1: we're still far away from that. I mean, even this morning,
7:20
Speaker 1: we are seeing people looking for for offerings, looking for
7:24
Speaker 1: bonds to buy, right I mean, we've instructed our high
7:27
Speaker 1: yield team to really try to be aggressive here and
7:30
Speaker 1: buy our favorite higher quality high yield bonds um at
7:34
Speaker 1: much wider spreads and much lower prices. And believe me,
7:37
Speaker 1: it's been much more difficult than you would think. Based
7:39
Speaker 1: on what you see on the screens right bid offer
7:41
Speaker 1: spreads have widened, and we still see credit investors recognizing
7:46
Speaker 1: that low interest rates are probably going to be here
7:49
Speaker 1: for a long time. Right right now, the Fed funds
7:51
Speaker 1: futures market are basically pricing in zero funds rate um
7:55
Speaker 1: for the next year and a half or so. And
7:57
Speaker 1: in that environment, again, if there's a dissipation in the
8:00
Speaker 1: spread of the virus, and if there's any stabilization and
8:03
Speaker 1: growth in six months from now, that reach for yield
8:06
Speaker 1: will be will be dramatic. And you are seeing people
8:09
Speaker 1: looking to buy on these dips still in the in
8:11
Speaker 1: the credit markets, at least in the higher quality credits,
8:14
Speaker 1: and we're in that camp. So, Elena, if it is
8:17
Speaker 1: up to the central banks, we've seen the fed B preemptive.
8:21
Speaker 1: What are you saying around the world, there's our coordination there.
8:24
Speaker 1: Do you think there needs to be more? Uh? If
8:26
Speaker 1: the fiscal maybe is not on the front burner right now,
8:29
Speaker 1: I'm not a big believing that. Actually, yeah, if it
8:32
Speaker 1: gets to a credit crunch and things like that, yes,
8:35
Speaker 1: central banks will need to coordinate some sort of currency
8:39
Speaker 1: swaps and other tools they that they engaged during the
8:43
Speaker 1: financial crisis, but in terms of the policy, so we
8:46
Speaker 1: still have some ammunition left in terms of interest rates.
8:49
Speaker 1: So each central bank will do what they need to
8:53
Speaker 1: do for their respective economies, but you know, the fiscal
8:57
Speaker 1: policies again in each different and I mean, we'll have
9:00
Speaker 1: to engage. So I don't really see that much in
9:03
Speaker 1: terms of what can be done in terms of coordination
9:06
Speaker 1: rather than just agreeing that the response should be a
9:09
Speaker 1: big one. Mike, I'm struck by the idea that we
9:12
Speaker 1: are looking at bigger companies still having access to credit markets,
9:16
Speaker 1: and we're looking at the prospect of small to medium
9:19
Speaker 1: size not businesses not having the same sort of financing function.
9:23
Speaker 1: Whether banks are hoarding cash, whether their inventories go down,
9:26
Speaker 1: they have to hold more capital in order to preserve
9:30
Speaker 1: their capital buffers. I'm just wondering, from your perspective, there's
9:33
Speaker 1: been all this money raised in the private debt markets.
9:36
Speaker 1: Is this going to be an opportunity or is this
9:39
Speaker 1: going to be another risk factor as we start to
9:41
Speaker 1: see weakness in some of these portfolios. Yeah, I mean,
9:44
Speaker 1: we've definitely for a long time now been concerned and
9:47
Speaker 1: raise some concerns about the huge influx of money into
9:51
Speaker 1: private debt strategies. I think these are loans too, relatively
9:55
Speaker 1: speculative companies, pretty concentrated portfolios of loans in some k
10:00
Speaker 1: as in summer on a lever basis, And if you
10:02
Speaker 1: do actually see credit cracks in some of those portfolios,
10:07
Speaker 1: I think it could get a little bit ugly. Right, So,
10:09
Speaker 1: I think that is one of the parts of the
10:10
Speaker 1: market that's a little susceptible to to some weakness here.
10:14
Speaker 1: But again, the policy response I think will be targeted
10:16
Speaker 1: to provide liquidity and financing to some of these smaller companies.
10:20
Speaker 1: Even in China they have these things called coronavirus bonds
10:23
Speaker 1: where companies that need the capital are financing their their
10:26
Speaker 1: businesses in their capital shotfalls at really low interest rates.
10:29
Speaker 1: But is there a bigger takeaway here the idea that
10:31
Speaker 1: all of this money was raised for these private credit
10:33
Speaker 1: funds that sort of we're supposed to supplant the big
10:36
Speaker 1: banks and their lending function, and this is the time
10:39
Speaker 1: that they should be swooping in and they should be saying,
10:42
Speaker 1: we have money, we have a record amount of dry powder,
10:45
Speaker 1: let's deploy it in order to make these investments. You know,
10:48
Speaker 1: what does it say if they are not, or if
10:50
Speaker 1: they are incapable of doing so because they're trying to
10:53
Speaker 1: meet marching calls, are other sort of liquidity issues, or
10:56
Speaker 1: just frankly default in their existing portfolios. Yeah, I mean
10:59
Speaker 1: lee in my dream world, right, the FED will tap
11:02
Speaker 1: the banks on the shoulders and say, hey, guys, this
11:04
Speaker 1: is why we forced you to have so much capital,
11:07
Speaker 1: this is why we forced you to have so much
11:08
Speaker 1: liquidity and your asset qualities pristine. You should actually be
11:11
Speaker 1: supporting the economy now. Right. In all past cycles, the
11:14
Speaker 1: banks were piling onto the weakness by being forced sellers
11:18
Speaker 1: because they had all the loans and they had a
11:20
Speaker 1: lot of leverage in the system. They are not in
11:22
Speaker 1: that position. So our long running view has been the
11:24
Speaker 1: banks will not make things worse, and maybe they can
11:27
Speaker 1: actually provide support. Here on the flip side, will some
11:30
Speaker 1: of these private credit funds or these big alternative investment
11:34
Speaker 1: funds become systemically risky in a new kind of way
11:38
Speaker 1: it remembers so, so a lot of these are are
11:39
Speaker 1: locked up. These are long term pools that are locked up.
11:42
Speaker 1: That is really important. Right, This is not oh eight,
11:45
Speaker 1: This is not a global margin call about to happen
11:48
Speaker 1: even the bank loan market is owned almost largely now
11:51
Speaker 1: by c l os. This is long term money that
11:54
Speaker 1: is locked up right. They are not for sellers, and
11:56
Speaker 1: I think that's really important. I think the structure of
11:59
Speaker 1: the markets are much different than they were in a
12:01
Speaker 1: weight You don't have the inherent leverage in the system
12:03
Speaker 1: that's going to force a lot of selling and a
12:06
Speaker 1: margin calls. I think that will help lends stability to
12:08
Speaker 1: the system ultimately. Elena Larry Cutler rightfully so on Bloomberg
12:12
Speaker 1: Television talking up the strong jobs numbers two seventy three
12:16
Speaker 1: thousand jobs. Obviously that's likely to be the last jobs
12:19
Speaker 1: report that we get pre Corona crisis, if you will,
12:22
Speaker 1: what is the your outloo of Bloomberg economics for kind
12:25
Speaker 1: of how this could trend over the next several months.
12:28
Speaker 1: So we looked at the numbers just based on the
12:31
Speaker 1: financial shock before even all the quarantine measures kicking. So
12:36
Speaker 1: that implies a reduction to the average pasing jobs to
12:41
Speaker 1: something like a hundred and fifty thousand on a trend basis.
12:44
Speaker 1: But when we start seeing all the services spending slowing down,
12:50
Speaker 1: you know, people not going out, people like canceling conferences
12:54
Speaker 1: and so on. That will probably get us to the
12:56
Speaker 1: point to the replacement rate of around hundreds thousand months.
13:02
Speaker 1: So that would mean that the unemployment rate will stop
13:06
Speaker 1: falling and potentially could rise, uh, you know, causing a
13:10
Speaker 1: growth recession. Mike, just real quick here to wrap it
13:12
Speaker 1: all up and to tie it together. You said that
13:14
Speaker 1: you were selectively buying on the dip. When do you
13:17
Speaker 1: go in and just say buy everything? I mean, are
13:20
Speaker 1: we getting close to that point when you talk about capitulation? Yeah,
13:23
Speaker 1: you do it when um, you have huge blocks of
13:27
Speaker 1: bonds for sale, names you like that you own that
13:31
Speaker 1: are down five or ten points and you can actually
13:34
Speaker 1: buy them and execute. And we have not seen that
13:37
Speaker 1: at all to this point. Right, And that's when you
13:39
Speaker 1: really go in with with both feet and and maybe
13:42
Speaker 1: that will happen my senses, it probably won't my counts.
13:45
Speaker 1: Thanks so much for joining us. We really appreciate you
13:48
Speaker 1: making the trip across the river from the Jersey side
13:51
Speaker 1: over here to our Bloomberg Interactor Broker studio. Mike's a
13:53
Speaker 1: senior investment officer and senior portfolio manager for PIGIM Fixed
13:57
Speaker 1: Income and you Sliva Senior you s Economist for Bloomberg
14:01
Speaker 1: Economics both joining us here again in our Bloomberg eleven
14:03
Speaker 1: three year studio. Right now in focus, we're looking at markets.
14:16
Speaker 1: They're clawing back some of their earlier losses, so we're
14:18
Speaker 1: not seeing as steep of a decline. Actually a pretty
14:21
Speaker 1: significant pairing of the laws. Still solidly in the redd
14:24
Speaker 1: SMP down one point eight percent, nastacked down at one
14:27
Speaker 1: point seven percent. Oil however, very much in focus, with
14:32
Speaker 1: crude prices absolutely tumbling down at one point more than
14:35
Speaker 1: seven percent after OPEC plus did not come to an
14:39
Speaker 1: agreement on production cuts. OPEC, remember, agreed to production cuts alone.
14:43
Speaker 1: They went to alone, hoping that Russia would join up
14:47
Speaker 1: and do the same, but Russia did not. Joining us now.
14:50
Speaker 1: Julian Lee, Bloomberg oil strategist in London, Julian, can you
14:53
Speaker 1: just give us a sense of what we learned today?
14:57
Speaker 1: I think we've learned that this is an organization appears
15:00
Speaker 1: to be in complete disarray. Um. What OPEC said yesterday, um,
15:06
Speaker 1: sort of late afternoon, was that they were proposing a
15:11
Speaker 1: cut of one and a half million barrels a day,
15:14
Speaker 1: of which the OPEC members would take a million, and
15:17
Speaker 1: then non OPAQUE partners would take the other half million
15:22
Speaker 1: UM that cut would would last throughout the second quarter,
15:25
Speaker 1: so till the end of June. UM. They then sort
15:28
Speaker 1: of hastily got together in an informal gathering in the
15:32
Speaker 1: evening UM and issued another press statement later later in
15:37
Speaker 1: the day to say that in fact they were going
15:39
Speaker 1: to propose that this one and a half million barrel
15:41
Speaker 1: a day cut be extended to the end of t UM.
15:45
Speaker 1: None of these discussions involved Russia or the other UM
15:49
Speaker 1: non opaque members. The Russian alldminister arrived back in Vienna
15:53
Speaker 1: today for a meeting that was scheduled to start at
15:55
Speaker 1: ten o'clock UM. It eventually started at round about three
15:59
Speaker 1: p m. UM. He spent the time before that in
16:02
Speaker 1: in bilateral meetings, mostly with Saudi Arabia's or minister. We
16:07
Speaker 1: hear that in the last fifteen minutes or so the
16:10
Speaker 1: meeting has broken up without an agreement. UM. And this
16:15
Speaker 1: is I mean in some senses this is this is
16:18
Speaker 1: even worse than it sounds for for OPEC and its
16:22
Speaker 1: and its allies, because UM, their current agreement to cut
16:26
Speaker 1: two point one million barrels a day expires at the
16:30
Speaker 1: end of this month. UM. And so without an agreement,
16:33
Speaker 1: at least on paper, those two point one million barrels
16:37
Speaker 1: are going to come back onto the market. So not
16:39
Speaker 1: only are we not going to get a deeper cut,
16:41
Speaker 1: but we may well get oil coming back. So Julian,
16:44
Speaker 1: that just begs the question, how did we get here?
16:46
Speaker 1: There was a time when OPEC or OPEC plus was
16:48
Speaker 1: pretty cohesive, able to push things through. What's changed here?
16:54
Speaker 1: I think that's a very good question, and I think
16:56
Speaker 1: it's it's very unclear at the moment what has changed.
17:01
Speaker 1: Ministers and their delegates are are being very close mouthed
17:05
Speaker 1: at the moment um. They're clearly dealing with the situation
17:08
Speaker 1: that that none of them likes being in. I think
17:13
Speaker 1: that that perhaps what has changed is that there are
17:17
Speaker 1: very different views about how to deal with a crisis
17:22
Speaker 1: that is created by a collapse in demand. Um. Saudi
17:26
Speaker 1: Arabia wants to make a corresponding cut in supply to
17:31
Speaker 1: try and balance markets, to try and prop up prices
17:34
Speaker 1: a bit. The sense that we're getting coming from from Russia,
17:38
Speaker 1: and it really is only a sense um, is that
17:42
Speaker 1: they don't feel that that is perhaps the right response.
17:45
Speaker 1: That what the world needs is a period of lower
17:48
Speaker 1: oil prices hopefully to stimulate some demand, whether that is um,
17:54
Speaker 1: you know, final end user demand, or whether it is
17:56
Speaker 1: countries like China buying more oil to put into stockpiles um.
18:00
Speaker 1: And there may be a real philosophical difference around how
18:05
Speaker 1: you proceed in an environment like this. There's also a
18:08
Speaker 1: question about whether OPEC has completely lost control in every way,
18:13
Speaker 1: because ultimately, this is not a production issue. This is
18:16
Speaker 1: a demand issue, and there is going to be a
18:20
Speaker 1: decline in demand that we've seen escalate as travel gets
18:24
Speaker 1: rearranged and as global industries do start to slow in
18:28
Speaker 1: the wake of the coronavirus. I'm just wondering, from your
18:30
Speaker 1: perspective how that sort of factors into the calculus here.
18:35
Speaker 1: The idea that even if they cut production a lot,
18:38
Speaker 1: it may not make a material difference in the short run. Yeah,
18:42
Speaker 1: I think that is That is a real concern, and
18:44
Speaker 1: I think that's one of one of the Russian concerns.
18:47
Speaker 1: You know. The view is that, yes, there's going to
18:50
Speaker 1: be a very significant hit to oil demand. We can
18:54
Speaker 1: we can see that happening already. UM. But the view
18:57
Speaker 1: perhaps in Moscow is that bad as it may be,
19:01
Speaker 1: it is going to be temporary you know, this is
19:04
Speaker 1: this is not a structural um change in in demand.
19:09
Speaker 1: This is this is a response to a very specific
19:13
Speaker 1: um in this case virus outbreak. But it is something
19:17
Speaker 1: that will have an end and and demand will return UM.
19:21
Speaker 1: And I think this, this perhaps is part of the
19:24
Speaker 1: difference that is emerging. So Julian, there's a I've heard
19:28
Speaker 1: some conspiracy theories out there that this might be Russia
19:31
Speaker 1: maybe trying to put additional pressure on the US shell
19:34
Speaker 1: industry given the precarious financial position of the many of
19:38
Speaker 1: the producers there. Does that have any Does that ring
19:40
Speaker 1: true to you at all? I don't know. I mean,
19:43
Speaker 1: I I think it's always tempting to you know, to
19:46
Speaker 1: to find um conspiracies, to to build around anybody's position. Uh.
19:53
Speaker 1: You know another country that that may have desires to
19:58
Speaker 1: to cause damage to the U S shale sector is Iran.
20:02
Speaker 1: But Iran has been wholeheartedly behind output cuts. I mean,
20:06
Speaker 1: it's not going to have to make any because it's
20:08
Speaker 1: producing really only pretty much what it needs for its
20:12
Speaker 1: domestic consumption. UM. But Iran isn't trying to to engineer
20:16
Speaker 1: a collapse in oil prices to to hurt US shale.
20:20
Speaker 1: And I personally, I doubt that that's the Russian motivation.
20:24
Speaker 1: So right now I'm looking I just to reset here,
20:27
Speaker 1: Crude oil absolutely tumbling. Crude traded on the IMAX down
20:31
Speaker 1: to forty cents a barrel, That is down by three
20:36
Speaker 1: dollars and fifteen cents just today, giving you a sense.
20:39
Speaker 1: Brent traded in London at forty six dollars eighty two
20:43
Speaker 1: cents of barrel. I'm wondering, what is the lower bound
20:45
Speaker 1: here for this demand side crash that we're seeing play
20:50
Speaker 1: out across markets. Well, I think, you know, we We've
20:53
Speaker 1: had a number of analysts coming out with with all
20:56
Speaker 1: sorts of numbers UM. You know, I I've seen numbers
21:00
Speaker 1: suggesting that prices will quite easily fall below thirty dollars
21:04
Speaker 1: a barrel. I've seen, you know, people saying that we're
21:07
Speaker 1: in for a return to the collapses that we've seen
21:12
Speaker 1: in the past of of you know, really low double
21:14
Speaker 1: digits UM. And I think, you know, very much is
21:18
Speaker 1: going to depend on how individual producers respond to UM
21:24
Speaker 1: what appears to be a failure to reach a deal.
21:27
Speaker 1: Does this mean that Saudi Arabia is going to abandon
21:30
Speaker 1: its own output restraint? Are we going to see Saudi
21:32
Speaker 1: Arabia pumping more UM. That would certainly, I think, push
21:36
Speaker 1: prices down. If we continue to see restraint within OPAQ,
21:41
Speaker 1: that that may um, you know, give a little bit
21:44
Speaker 1: of support to prices. But I think that, you know,
21:47
Speaker 1: the really big issue at the moment is is just
21:50
Speaker 1: how fast um and and how widespread the collapse in
21:54
Speaker 1: demand is going to be. And that is still an
21:56
Speaker 1: evolving picture as as this virus spreads around the world.
22:01
Speaker 1: Julian Lee, thank you so much for joining us. We
22:02
Speaker 1: really appreciate your thoughts here. Julian Lee's oil strategies for
22:06
Speaker 1: Bloomberg News, joining us on the phone from London. Boy,
22:18
Speaker 1: the headlines crossing across my Bloomberg terminal this morning just
22:22
Speaker 1: almost too much to take in. You've got the coronavirus latest,
22:25
Speaker 1: you've got the Democratic race really heating up, and you've
22:28
Speaker 1: got better than expected actually stellar jobs numbers. Fortunate. Our
22:31
Speaker 1: next guest can help us pass through all of these
22:33
Speaker 1: things and more. Chris lou Senior fellow, University of Virginia
22:36
Speaker 1: Miller Center and also a former Deputy Secretary of Labor
22:39
Speaker 1: under President Obama, on the phone from Charlottesville. Chris, thanks
22:42
Speaker 1: so much for joining us. Let's just start real quickly
22:44
Speaker 1: with the news today. I guess you know, this is
22:46
Speaker 1: the last piece of economic news will get kind of
22:49
Speaker 1: pre coronavirus in terms of jobs. And it was pretty
22:51
Speaker 1: darn good, wasn't It was surprisingly good? And I think
22:55
Speaker 1: people they need to take with a grain of salt, obviously. Uh,
22:59
Speaker 1: this data has collected the week of February tenth, so
23:02
Speaker 1: that's before the first coronavirus death the United States. Before
23:06
Speaker 1: you know, airlines start cutting back flights and uh, people
23:09
Speaker 1: start canceling conferences and so this this may be I mean,
23:13
Speaker 1: all the data is lagging indicators, but this is perhaps
23:16
Speaker 1: I think, less useful, although it may be an interesting
23:18
Speaker 1: benchmark to see as this coronavirus goes on as to
23:22
Speaker 1: how far we fall from this. Yeah, well, Chris, and
23:24
Speaker 1: this is what it goes to the point of momentum
23:26
Speaker 1: heading into the downturn, and I want to talk about
23:29
Speaker 1: how important that momentum actually is. How much will that
23:33
Speaker 1: buoy any potential ramifications from the spread of the coronavirus
23:37
Speaker 1: and subsequent business shutdowns going forward. So I have to
23:42
Speaker 1: say I was surprised by this number for a couple
23:44
Speaker 1: of reasons. I mean, we know that retail sales have
23:46
Speaker 1: been um or a lot of retailers cutting jobs. We
23:49
Speaker 1: know that Boeing, which is a huge part of the economy,
23:51
Speaker 1: continues to struggle. We know that the manufacturing sector is
23:54
Speaker 1: sort of inching itself out of recession. And there's a
23:57
Speaker 1: lot of uncertainty in terms of UM the ability of
24:00
Speaker 1: China to make good on their Phase one trade deal.
24:02
Speaker 1: So I was expecting a much lower number. So yeah,
24:05
Speaker 1: so this number is curious to me. UM, But I
24:09
Speaker 1: think I think the issue going forward is coronavirus more
24:13
Speaker 1: like a hurricane for instance, which case there's kind of
24:16
Speaker 1: a dip in spending, a dip in UM economic productivity,
24:20
Speaker 1: and then all of a sudden you kind of come
24:22
Speaker 1: out of that. In fact, you are rebuilding and people
24:24
Speaker 1: spend and you sort of come back out of it quickly.
24:26
Speaker 1: Or is it kind of a constant drag on the economy.
24:29
Speaker 1: And the question is is you know, with all of
24:32
Speaker 1: these businesses, you know, starting to issue earning warnings and
24:37
Speaker 1: you know, conferences and other things like that being cut back,
24:39
Speaker 1: when do employers start laying off workers? And if that happens,
24:43
Speaker 1: then this can kind of go south pretty fast. So Chris,
24:46
Speaker 1: we in terms of governmental response, we've had to fed
24:49
Speaker 1: aggressively move here with that emergency cut, um, and you know,
24:53
Speaker 1: the market's discounting even more rate cuts coming up, maybe
24:55
Speaker 1: as soon as the next meeting. We had Larry Cutlow
24:58
Speaker 1: on Bloomberg Television earlier and Jonathan Fara from Bloomberg Television
25:01
Speaker 1: was really pressing them on maybe some fiscal type of
25:04
Speaker 1: stimulus and it Mr Carlo didn't seem to want to
25:07
Speaker 1: go there. What do you think needs to happen from
25:09
Speaker 1: in terms of governmental response, Well, this is the problem.
25:12
Speaker 1: I mean, set rates are actually pretty low, historically low.
25:15
Speaker 1: Right now. Um, we've had you know, a trillion and
25:18
Speaker 1: a half dollars of stimulants through a tax cut, and
25:20
Speaker 1: so right now we're facing a budget deficits of a
25:23
Speaker 1: trillion dollars a year. So a lot of the normal
25:26
Speaker 1: levels you would have as a government policymaker in a
25:29
Speaker 1: time of um uh an economic downturn aren't really available
25:35
Speaker 1: to you at this moment. And truth the truth be told.
25:37
Speaker 1: You know, if the issue is in terms of supply
25:39
Speaker 1: chains in China or people not traveling as much, it's
25:43
Speaker 1: hard to say what um stimulus package, you could get
25:46
Speaker 1: those things up and running again. Let's talk about the
25:50
Speaker 1: concept of zero over zero present overnight interest rates, because
25:53
Speaker 1: that seems to be what's increasingly being priced into markets.
25:56
Speaker 1: Thirty year yells tumbling the most since two thousand nine. Meanwhile,
25:59
Speaker 1: we've got another fifty basis point rate cut being priced
26:03
Speaker 1: in to the feds March eighteenth meeting, And I'm just wondering,
26:06
Speaker 1: do you think this will hurt or help or or
26:09
Speaker 1: sort of on the margins? Do anything in response to this? Well,
26:13
Speaker 1: when we had to cut the other day, you know,
26:15
Speaker 1: Powell was very clear that you know, this is not
26:17
Speaker 1: going to make vaccines come out faster, It's not gonna
26:19
Speaker 1: unstick supply chains. And I think if anything in the
26:22
Speaker 1: market view that as kind of an active panic, which
26:25
Speaker 1: I think then sent to market down even more. Um. Look,
26:28
Speaker 1: I think any kind of stimulus like that is helpful,
26:31
Speaker 1: but I'm not sure it ultimately addresses the problem here,
26:34
Speaker 1: which is there's an incredible amount of uncertainty. Um. The
26:38
Speaker 1: answers I will come from n i H and CDC
26:41
Speaker 1: and the World Health Organization, they won't necessarily come from
26:44
Speaker 1: economic policymakers. And I think what you really need more
26:47
Speaker 1: than anything is you need to kind of a calm,
26:50
Speaker 1: stable leadership at the top of government that's kind of
26:53
Speaker 1: steering the ship through you know, increasingly turbulent waters. Chris
26:58
Speaker 1: Let's search gears a little bit too politics. It was
27:01
Speaker 1: a very very busy and important week for the Democrats.
27:04
Speaker 1: Um down to two candidates. Now give us your lay
27:07
Speaker 1: of the land of how you think it might shape
27:09
Speaker 1: up between Bernie Sanders and Elizabeth Warren, Bernie Sanders and
27:14
Speaker 1: Liza Born. Yes, Warren's right, Um, well with you know, look,
27:19
Speaker 1: I think she did an interesting interview last night, Senator Warren,
27:23
Speaker 1: where um she didn't I'm sorry, Senator Biden, and sat
27:27
Speaker 1: that what I thought, actually, Vice President Biden, Um, I
27:29
Speaker 1: don't think, um, this race is over anytime soon. I
27:33
Speaker 1: think we've got a couple of important states coming down
27:35
Speaker 1: the road. We've got Michigan next Tuesday, and then some
27:37
Speaker 1: really kind of key battleground states of Arizona, Florida, I
27:41
Speaker 1: think on March tenth and so. And obviously the way
27:44
Speaker 1: that Democrats allocate delegates is on up on a kind
27:48
Speaker 1: of a threshold basis, so you can continue to rack
27:50
Speaker 1: up delegates all through this process, and we obviously have
27:53
Speaker 1: another big presidential debate coming up in about nine days,
27:56
Speaker 1: and so there's a lot of dynamics. And I think
27:58
Speaker 1: what's been sort of head spinning for all of us
28:01
Speaker 1: that have been politics a long time is how quickly
28:03
Speaker 1: the narrative has changed over the last couple of weeks.
28:06
Speaker 1: And so I would not be surprised if it changes again, uh,
28:09
Speaker 1: you know, multiple times before we next talk. But I
28:13
Speaker 1: think this race will go you know, well into March
28:15
Speaker 1: and potentially into April if Senator Sanders is able to
28:18
Speaker 1: mount some kind of comeback. Chris, let's bring up both
28:21
Speaker 1: what's going on in markets as well as politics together.
28:23
Speaker 1: And it really is you are the perfect person to
28:26
Speaker 1: do so, given the fact that you've spent decades in
28:28
Speaker 1: public service, including seven years in the Obama administration. What
28:33
Speaker 1: should the response be by the Democratic candidates to the
28:37
Speaker 1: escalating coronavirus to show that they can, you know, take
28:40
Speaker 1: charge and pose some sort of alternative. Well, I think
28:44
Speaker 1: this really plays right into the Vice president's hands. I mean,
28:46
Speaker 1: you know, he's trying to project normalcy, stability, competence, you know.
28:51
Speaker 1: And again, whatever you think about his policies, whatever you
28:54
Speaker 1: think about his you know, debating style. UM, this is
28:57
Speaker 1: a person who's been in Washington a long time. One
28:59
Speaker 1: of his first key UM assignments under President Obama was
29:03
Speaker 1: managing the eight billion dollars stimulus back in two thousand nine,
29:07
Speaker 1: and his charge was to get the money out the
29:08
Speaker 1: doors fast as possible. UM, to look for shove already projects.
29:12
Speaker 1: And so he knows how to manage a crisis. UM.
29:15
Speaker 1: He knows how to up pull the different levels of
29:18
Speaker 1: government programs to get an economy backup and running. So UM,
29:22
Speaker 1: I think this I think is perfect for him in
29:26
Speaker 1: this moment to stand as a contrast. I think, you
29:28
Speaker 1: know what even some of the president supporter would say
29:31
Speaker 1: has been a less than clear message coming out of
29:33
Speaker 1: the White House these days. Chris lou thank you so
29:36
Speaker 1: much for being with us. We really appreciated. Chris lew
29:38
Speaker 1: former Deputy Secretary of Labor and senior fellow at the
29:41
Speaker 1: University of Virginia Miller Center. Really important to have his perspective,
29:45
Speaker 1: given his experiences decades in public service, understanding sort of
29:49
Speaker 1: the nexus of the economy and the private sector as
29:53
Speaker 1: well as governmental response at this day where we see
29:56
Speaker 1: markets unclear of how to price uh the coronavius IRUs
30:00
Speaker 1: risk other than simply by vond Well, as a coronavirus
30:14
Speaker 1: continues to spread globally, strategist economists and investors trying to
30:19
Speaker 1: gauge out what the economic impact will be. Ultimately, the
30:23
Speaker 1: good folks at your Asia Group have some thoughts there.
30:25
Speaker 1: Robert Cohn, Director Global Strategy and Global Macro at the
30:28
Speaker 1: Your Asier Group based in New York City, joins us. Robert,
30:31
Speaker 1: thanks so much for joining us. I know you folks
30:34
Speaker 1: at your Asia Group have done somewhere kind of trying
30:36
Speaker 1: to game out some scenarios here about how the economic
30:40
Speaker 1: impact could play out. What are some of the thoughts,
30:42
Speaker 1: What are some of the takeaways from your analysis? Well, Paul,
30:45
Speaker 1: thanks for having me on the program, And yeah, we've
30:47
Speaker 1: spent a lot of time trying to provide more clarity
30:52
Speaker 1: on the political and the economic dynamics across various scenarios.
30:56
Speaker 1: We don't pretend to have great insight into the epideam theology.
31:00
Speaker 1: We leave that to the medical professionals, but we did
31:03
Speaker 1: take three alternative paths for the virus and then looked
31:08
Speaker 1: at the consequences of that. In the three paths, one
31:12
Speaker 1: is what we call up the nine scenario may be mislabeled,
31:15
Speaker 1: maybe just an optimistic one, which is where the virus
31:19
Speaker 1: peaks within about six weeks, and that's based on a
31:23
Speaker 1: view that China and the other frontline states are able
31:26
Speaker 1: to contain it and there's more a very active strategy
31:29
Speaker 1: across the industrial world. We then also look at two
31:33
Speaker 1: more serious scenarios. One is where the peak in the
31:37
Speaker 1: in the propagation of the virus doesn't come to the
31:40
Speaker 1: middle of the year to something like July, and then
31:43
Speaker 1: a third pandemic scenario in which the virus really continues
31:47
Speaker 1: to spread and propagate aggressively through the end of the year.
31:51
Speaker 1: What we find is that the political and economic dynamics
31:55
Speaker 1: are much more adverse in those second two scenarios, the
31:58
Speaker 1: July scenario in the end year scenario, And in a
32:02
Speaker 1: way it's kind of intuitive that the countries are the
32:06
Speaker 1: politics and a lot of the industrial world are still
32:10
Speaker 1: kind of focusing with on the day to day. There
32:12
Speaker 1: is a political resiliency to deal with this for a while.
32:16
Speaker 1: UH firms can deal with supply chains disruptions for a
32:19
Speaker 1: period of time, but if this extends beyond the middle
32:22
Speaker 1: of the year, we get to we see a lot
32:24
Speaker 1: more fracturing of the politics, We see a lot more
32:28
Speaker 1: pressure on supply chains, particularly in major companies and in
32:32
Speaker 1: the front line sort of industries that are being affected,
32:35
Speaker 1: and we begin to worry a lot more about financial stress.
32:38
Speaker 1: And that's going to of course create some really big
32:41
Speaker 1: challenges for our leaders in terms of who to bail
32:45
Speaker 1: and who to fail. Public policy will face some very
32:48
Speaker 1: tough choices in those scenarios, and so that's the direction
32:51
Speaker 1: in which we looked at in these scenarios. So, Robert,
32:53
Speaker 1: what kind of probabilities if you did at all, did
32:56
Speaker 1: you assign to these three scenarios? Are they fairly equal?
32:59
Speaker 1: Way to it? Is one more likely than the other.
33:01
Speaker 1: At this point we try to avoid putting specific probabilities
33:05
Speaker 1: on it because at the beginning we we there's so
33:08
Speaker 1: many different views out of the scientific community and so
33:12
Speaker 1: much uncertainty now not just about the spread of the
33:15
Speaker 1: disease but also the lethality of it. What I do
33:18
Speaker 1: stress to uh to our clients though, is that you know,
33:24
Speaker 1: if you if you go back a few weeks, we
33:26
Speaker 1: were really very much focused on up a NIGN scenario.
33:30
Speaker 1: It was easy to look at what happened in Stars
33:32
Speaker 1: and look at some of the other disease threats where
33:34
Speaker 1: the markets bounced back very quickly after the initial shock,
33:38
Speaker 1: and to be hopeful for that. And I think now
33:41
Speaker 1: a lot of the people we I talked to really
33:43
Speaker 1: are starting to focus, particularly that middle scenario, that's serious
33:46
Speaker 1: scenario in which the disease spreads aggressively through them until
33:50
Speaker 1: the middle of the year, and are paying more attention
33:53
Speaker 1: to that. And I think what I would argue is
33:54
Speaker 1: that's not fully priced into our markets or to our
33:57
Speaker 1: political discussions. And so we are folks. We're trying to
34:00
Speaker 1: encourage people to pay more attention to that, but I
34:02
Speaker 1: am avoiding trying to put a probability on it because
34:05
Speaker 1: I would probably get that wrong. Yeah, interesting, Robert. We
34:08
Speaker 1: had Larry Cudlow, the director of the National Economic Council,
34:12
Speaker 1: on Bloomberg Television this morning with our own Jonathan Pharaoh,
34:15
Speaker 1: and Jonathan was really pressing him on government, what the
34:18
Speaker 1: government is actually doing. I mean, we've seen the FED,
34:21
Speaker 1: you know, come to the rescue with a what we
34:23
Speaker 1: call an emergency rate cut earlier this week. But some
34:26
Speaker 1: people are concerned that maybe the U. S. Government is
34:28
Speaker 1: not moving fast enough, maybe with some fiscal stimulus along
34:32
Speaker 1: those lines. What does what do your views there about
34:34
Speaker 1: kind of what the U. S. Government has done to date? Well,
34:37
Speaker 1: first of all, I listened to that interview and Jonathan
34:38
Speaker 1: did a spectacular job on it because he raised exactly
34:41
Speaker 1: the right issues. I fed rate cut I think was
34:44
Speaker 1: perfectly appropriate to provide some underpinning to demand, But particularly
34:48
Speaker 1: in the serious and severe scenarios, you have to be
34:51
Speaker 1: focused on the supply side dislocations, and so then you
34:55
Speaker 1: have to ask yourself, you know, what is it we
34:58
Speaker 1: really need to be debating and preparing. Now it goes beyond,
35:02
Speaker 1: it goes beyond helping households who can't get to work
35:06
Speaker 1: and helping small and medium firms. Those are really important steps.
35:09
Speaker 1: But we have to be debating what do we do
35:12
Speaker 1: on tariffs because lightening tariffs does in fact alleviate the
35:17
Speaker 1: supply chain pressures and allows firms to go elsewhere and
35:20
Speaker 1: get the critical supplies they're not able to get from
35:22
Speaker 1: their main suppliers. We have to address issues like we
35:26
Speaker 1: did in two thousand and eight, of whether or not
35:28
Speaker 1: we're going to provide facilities to whole industries, particularly including
35:33
Speaker 1: large firms, and I understand the politics are tough there,
35:36
Speaker 1: but we need to be confronting those kind of issues.
35:39
Speaker 1: And while the FED has some capacity to do that,
35:41
Speaker 1: and I'm sure is thinking about that, if we get
35:45
Speaker 1: into the extended scenarios, there are solvency questions. It's not
35:48
Speaker 1: just the liquidity, which is what the FED is supposed
35:50
Speaker 1: to deal with. It really then becomes a fiscal issue
35:53
Speaker 1: as well. And so those were the right questions to
35:55
Speaker 1: put to Larry Um. He obviously couldn't go too far,
35:58
Speaker 1: but I wish he had been a bit more forthcoming
36:01
Speaker 1: on on the direction of travel for this administration. So, Robert,
36:05
Speaker 1: you know, in the work that you and your team
36:06
Speaker 1: did on the scenario analysis, what have we learned you
36:10
Speaker 1: know from China how this is played out in China
36:13
Speaker 1: In terms of timing, I guess we're seven or eight
36:14
Speaker 1: weeks into this playing out in China. What do we
36:17
Speaker 1: learned there? Well, one big thing we learned is that
36:21
Speaker 1: there's a fascinating and important trade off between very tough
36:25
Speaker 1: containment and economic rejuviation rejuvenation. And as I'm sure you know,
36:31
Speaker 1: the scientists do debate whether you know, if you have
36:33
Speaker 1: a problem the city, So you just shut down the
36:35
Speaker 1: whole city. Where do you focus on identifying the cases
36:40
Speaker 1: and tracing the contacts and the treating those people in
36:42
Speaker 1: a more limited fashion. The Chinese obviously had the political
36:46
Speaker 1: will and the capacity to shut down a whole province.
36:50
Speaker 1: They are now finding it is more difficult to reanimate
36:54
Speaker 1: UH economic activity at the end of that and get
36:57
Speaker 1: people back to work, and I think that type of tension,
36:59
Speaker 1: that's certainly one of the lessons we're learning. The other
37:02
Speaker 1: thing I think we're seeing is this issue of you know,
37:05
Speaker 1: protracted scarring of balance sheets, and this is a lesson.
37:09
Speaker 1: I think we also learned in two thousand and eight
37:11
Speaker 1: that when you have these deep financial UH and economic crisis,
37:16
Speaker 1: however they come, and admittedly two thousand eight it was
37:19
Speaker 1: a different style of crisis that we're facing now, but
37:21
Speaker 1: I think there's a common point here that when you
37:24
Speaker 1: have that, it leaves scars on the balance sheets of households,
37:27
Speaker 1: on the balance sheets of corporations, and it does take
37:31
Speaker 1: a long time to recover. And so the longer this
37:33
Speaker 1: goes on, but the less likely it is you can
37:36
Speaker 1: get a v UH and it's going to be a
37:38
Speaker 1: more like some other letter of the alphabet. I think
37:41
Speaker 1: even the Chinese now, and we even wrote about it
37:43
Speaker 1: today to clients, the Chinese are understanding that a V
37:46
Speaker 1: shaped recovery may not be in the cards. Hey, Robert
37:49
Speaker 1: con thank you so much for joining us. Robert Khn
37:51
Speaker 1: is a director Global Strategy and Global Macro. For you.
37:54
Speaker 1: Raise your group out with a really interesting report trying
37:56
Speaker 1: to game out some scenarios for how this coronavirus may
37:59
Speaker 1: impact economies globally. UH markets again selling off your equity
38:03
Speaker 1: markets off over two percent, coming up, UH, Balance of Power.
38:07
Speaker 1: David Weston coming up in just moments. He will drive
38:10
Speaker 1: the conversation forward risk off day. This is Bloomberg. Thanks
38:15
Speaker 1: for listening to the Bloomberg P and L podcast. You
38:17
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38:20
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38:23
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38:26
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38:29
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio