Latest / Bloomberg Intelligence / Market Favors Investors Willing To Accept Equity Risk

Transcript

Market Favors Investors Willing To Accept Equity Risk · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg PENL Podcast. I'm Paul Swinge. 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. Well markets are trying to clawl
• 0:20
  Speaker 1: back a little bit of the sharp sell off we've
• 0:23
  Speaker 1: experienced over the past couple of days, but obviously the
• 0:25
  Speaker 1: concern is still out there about the coronavirus as it
• 0:28
  Speaker 1: spreads outside of China and what it might due to
• 0:32
  Speaker 1: global GDP growth going forward. Our next guest can give us,
• 0:36
  Speaker 1: i think, a really unique insight as to what's going
• 0:38
  Speaker 1: on on the ground in China what it could mean.
• 0:40
  Speaker 1: Patrick Shavanak is economic advisor for Silver Crest Asset Management.
• 0:44
  Speaker 1: Joinings us here on o Bloomberg Gliming three Studio. Patrick,
• 0:47
  Speaker 1: You've got a long history with China thirty years. You
• 0:49
  Speaker 1: actually lived in China, uh for ten years. Give us
• 0:53
  Speaker 1: your sense of how you think this virus is playing
• 0:56
  Speaker 1: out first in China because we've got some it's been there,
• 0:59
  Speaker 1: we've got some data points there, and then maybe as
• 1:02
  Speaker 1: it spreads outside of China. Right now, there's a disconnect
• 1:04
  Speaker 1: between the numbers in China which seemed to suggest that
• 1:08
  Speaker 1: things are under control and the growth rate is slowing UM,
• 1:11
  Speaker 1: and the numbers outside of China which are spiking UM.
• 1:15
  Speaker 1: And so whether that means that China is actually over
• 1:18
  Speaker 1: the hump on this or whether it sheds some doubt
• 1:22
  Speaker 1: on the validity of Chinese numbers, we're gonna have to see.
• 1:25
  Speaker 1: But you know, there's a lot of hope out there
• 1:28
  Speaker 1: that China is going back to work, at least outside
• 1:30
  Speaker 1: of Wuhan, that that will free up some of the
• 1:32
  Speaker 1: supply chains that could create an an economic crunch. Uh.
• 1:36
  Speaker 1: I think it remains to be seen whether that's going
• 1:38
  Speaker 1: to play out as advertised, because there are a lot
• 1:40
  Speaker 1: of people who are holding back and still concerned that
• 1:42
  Speaker 1: this premature. So there have been a number of stories
• 1:45
  Speaker 1: trying to or game what the potential economic impact could be,
• 1:50
  Speaker 1: and honestly, they should all just have economist sitting around shrugging,
• 1:53
  Speaker 1: because you know, there's no way to really understand what
• 1:56
  Speaker 1: the implications could be of something that we don't know
• 1:58
  Speaker 1: that much about, and we don't have that much transparency
• 2:01
  Speaker 1: or visibility into and could progress. I mean, there's so
• 2:03
  Speaker 1: many unknownes. As an economic advisor to people who are
• 2:07
  Speaker 1: actually making bets, what are you saying? Okay? So, so
• 2:12
  Speaker 1: what we're saying to investors is this, We're not We're
• 2:15
  Speaker 1: not taking the bear case or the bull case. And
• 2:18
  Speaker 1: what I mean by that is, um, you know, Bulls
• 2:21
  Speaker 1: right now are saying, Okay, this is going to push
• 2:23
  Speaker 1: this going to be a disaster, is gonna push us
• 2:25
  Speaker 1: into a recession. Bears are saying, which gonna be a disaster,
• 2:29
  Speaker 1: is gonna push us in recession? Bulls are saying, don't worry,
• 2:32
  Speaker 1: this is all under control. It's going to pass. You know,
• 2:36
  Speaker 1: we for the past year have been saying that there
• 2:39
  Speaker 1: are a number of things that have happened or could
• 2:42
  Speaker 1: happen that have slowed the US economy, could slow it
• 2:46
  Speaker 1: further and could even cause a recession. Knowing that, however,
• 2:52
  Speaker 1: this is not a market that is gorging on risk
• 2:54
  Speaker 1: in a relative sense. Um, when you look at relative valuations,
• 2:59
  Speaker 1: safe harbors are very expensive right now, and they've been
• 3:02
  Speaker 1: expensive for throughout this recovery. But they but they are
• 3:05
  Speaker 1: even more expensive now you look at the tenure um treasury.
• 3:09
  Speaker 1: So when you look at relative valuations, actually it favors
• 3:14
  Speaker 1: staying exposed to risk. But you've got to understand what
• 3:17
  Speaker 1: you're taking on when you're doing that, that it means
• 3:22
  Speaker 1: that you are going to be exposed volatility. There are
• 3:24
  Speaker 1: things that can happen, and you need to ask yourself
• 3:27
  Speaker 1: to what extent am i able and willing to ride
• 3:30
  Speaker 1: out a recession if it happens um in order to
• 3:35
  Speaker 1: gain those those higher returns over your investment time horizon. Now,
• 3:39
  Speaker 1: because because nobody can you know, we always say nobody
• 3:41
  Speaker 1: can time the market. Nobody can time this disease, and
• 3:44
  Speaker 1: no exactly know how long it's going to go on,
• 3:47
  Speaker 1: how broad it's going to spread, with the impact is
• 3:49
  Speaker 1: going to be. So so rather than try to do that,
• 3:52
  Speaker 1: you know, you look at the relative valuations and say,
• 3:54
  Speaker 1: you're being paid to take risk over the long term,
• 3:57
  Speaker 1: but how much risk can you really accept? And you
• 3:58
  Speaker 1: need to make an a esthment of what that really is. So, Patrick,
• 4:02
  Speaker 1: what are you in the camp that says, okay, if
• 4:04
  Speaker 1: things do get a little bit more dicey from an
• 4:08
  Speaker 1: economic perspective, growth perspective, that the FED can save us. No,
• 4:12
  Speaker 1: I don't think it has a silver bullet. I think
• 4:14
  Speaker 1: it can help in some ways. I said the same
• 4:16
  Speaker 1: thing about a trade war. Um. You know, the FED
• 4:19
  Speaker 1: cutting rates did help boost certain aspects of the U
• 4:22
  Speaker 1: s economy. In particular, it turned around the housing market, um,
• 4:26
  Speaker 1: which is seeing a real rebound from where it was
• 4:29
  Speaker 1: a year ago. But um, but it didn't really help
• 4:32
  Speaker 1: manufacturing that much in terms of the worries about tariffs.
• 4:35
  Speaker 1: And in the same way, it's not going to cure
• 4:37
  Speaker 1: if there really is kind of rolling lockdowns, not just
• 4:42
  Speaker 1: in China, but in places like Italy, throughout Europe, South Korea,
• 4:46
  Speaker 1: Japan of the global supply chain, then you know, the
• 4:51
  Speaker 1: FED can maybe help alleviate some of that. But but
• 4:54
  Speaker 1: it's not gonna it's not going to turn that around.
• 4:56
  Speaker 1: But I think that sort of building on Paul's point,
• 5:00
  Speaker 1: there is the relative valuation case for riskier assets. Is
• 5:05
  Speaker 1: that predicated on yields remaining this low and going lower? Um? No,
• 5:12
  Speaker 1: I think that. I mean it's it's predicated on the
• 5:16
  Speaker 1: idea that that we're at a relatively low inflation, relatively
• 5:20
  Speaker 1: low interest rate environment going forward for the next several years,
• 5:23
  Speaker 1: and I think that there's an argument to be made
• 5:25
  Speaker 1: that for a variety of reasons that well predate any
• 5:28
  Speaker 1: kind of epidemic, that that that was that that was
• 5:31
  Speaker 1: going to be uh the game going forward? All right?
• 5:34
  Speaker 1: So for your model right now, UM, at Silver Crest,
• 5:38
  Speaker 1: what's your GDP kind of outlook for the next you know,
• 5:41
  Speaker 1: several quarters? Is aren't that recession word out there for you?
• 5:45
  Speaker 1: It's possible, and it was possible throughout last year because
• 5:47
  Speaker 1: of the trade war. Um, but I would say, you
• 5:50
  Speaker 1: know what, Okay, so what are my estimate for GDP?
• 5:53
  Speaker 1: If this year was two percent? That was before any
• 5:55
  Speaker 1: kind of epidemic took place. Um. You know, what are
• 5:59
  Speaker 1: we seeing already? Um? The first hint, you know, the
• 6:03
  Speaker 1: the January numbers in the US economy really quite good. UM.
• 6:07
  Speaker 1: So going into February, what are we seeing. We've just
• 6:10
  Speaker 1: got the first real taste of what it might be,
• 6:13
  Speaker 1: which is the the market p M I flash and
• 6:16
  Speaker 1: that showed the US economy going into mild contraction led
• 6:20
  Speaker 1: by services, which is interesting because manufacturing has been the
• 6:24
  Speaker 1: thing that has been weighing down the US economy over
• 6:26
  Speaker 1: the past half year or so. Now it's actually services uh,
• 6:30
  Speaker 1: tourism and transport uh going into contractions. So and and
• 6:36
  Speaker 1: what what we're also seeing is that on the manufacturing side,
• 6:40
  Speaker 1: the supply chain disruptions are there, but companies so far
• 6:44
  Speaker 1: are managing that by drawing down inventories, are realocating inventories.
• 6:48
  Speaker 1: But that can't last forever, especially if China remains closed
• 6:53
  Speaker 1: for business, and if that extends to other countries throughout Europe,
• 6:58
  Speaker 1: throughout Asia. Do you still when you say go into risk,
• 7:02
  Speaker 1: is that go into US equities or is that to
• 7:05
  Speaker 1: go into European equities? I think you want to be
• 7:08
  Speaker 1: diversified when it comes to that, because you don't, I mean,
• 7:11
  Speaker 1: you don't just want to be saying one risk um,
• 7:14
  Speaker 1: but certainly the and then you know, let me give
• 7:18
  Speaker 1: you an example. I mean, there are places that are
• 7:20
  Speaker 1: risky around the world, are prosin as risky around the world,
• 7:23
  Speaker 1: like the Middle East, uh where, but the risks are
• 7:27
  Speaker 1: entirely different. They're not US recession risks, they're not even
• 7:29
  Speaker 1: global recession risk. There are other types of risks. So
• 7:32
  Speaker 1: so you want to be diversified with any different kinds
• 7:34
  Speaker 1: of risks. But but that said, even when it comes
• 7:36
  Speaker 1: to us recession risk. Um, you are now being paid
• 7:42
  Speaker 1: quite well over the course of say the next three
• 7:45
  Speaker 1: to five years to accept the prospect of going through
• 7:50
  Speaker 1: a recession with your equities and coming out the other end. Um.
• 7:54
  Speaker 1: And unless you're able to time that, you know, and
• 7:56
  Speaker 1: I'm not. But if you're simply somebody who's saying, should
• 7:59
  Speaker 1: I be for the next three or five three to
• 8:01
  Speaker 1: five years in a safe harbor or in equities, I
• 8:04
  Speaker 1: would say you want to be allocated towards equities, recognizing
• 8:09
  Speaker 1: that you need may need to buckle up. Patrick Shavannick,
• 8:12
  Speaker 1: Economic advisor to Silver Crest Asset Management, joining us here
• 8:15
  Speaker 1: in our interactive broker studios. Thank you And as he says, uncorrelated,
• 8:19
  Speaker 1: I think levings bonds. Uh, that's that's highly uncorrelated right now.
• 8:24
  Speaker 1: And a really interesting story as they teater on the
• 8:27
  Speaker 1: potential insolvency there. Well, Disney dropped the bomb last night,
• 8:37
  Speaker 1: surprising someone say, shocking news that Bob Eigre, the longtime CEO,
• 8:41
  Speaker 1: well regarded CEO, is stepping down. Um, and that Bob Chepe,
• 8:46
  Speaker 1: who leads the theme parks, is that going to take
• 8:49
  Speaker 1: over immediately as ceo uh Tara las Chapelle, Entertainment, Telecommunications
• 8:53
  Speaker 1: and Deal's columnists for Bloomberg Opinion, joins us here in
• 8:55
  Speaker 1: our Bloomberg Interactive Broker studio tear it You're at with
• 8:58
  Speaker 1: a really great column today on this news. Did it
• 9:02
  Speaker 1: surprise you as much as it surprised me? Oh my gosh.
• 9:04
  Speaker 1: I saw the email hit my inboxer on four pm
• 9:07
  Speaker 1: yesterday and the subject line was Bob Shapick to be
• 9:11
  Speaker 1: named Disney CEO, and my mouth was just gaping, and
• 9:14
  Speaker 1: I'm like, what, you know? I had these sort of
• 9:16
  Speaker 1: negative thoughts raced through my mind, as I'm sure other
• 9:18
  Speaker 1: people did too, Like the abrupt nature of it made
• 9:20
  Speaker 1: me wonder, you know, is either sick? Is there some
• 9:23
  Speaker 1: sort of me too moment that's about to unfold once
• 9:26
  Speaker 1: again in Hollywood? And of course none of that ended
• 9:28
  Speaker 1: up being the case, at least as we know right now,
• 9:31
  Speaker 1: but just how abrupt it was, and who he chose
• 9:35
  Speaker 1: as the CEO wasn't necessarily who a lot of people
• 9:37
  Speaker 1: thought was the top pick. So I think it just
• 9:39
  Speaker 1: caught people off guard. And I certainly was left just thinking, wow,
• 9:42
  Speaker 1: and you know, what is this going to mean? So
• 9:45
  Speaker 1: I guess a lot of investors thought that Kevin Meyer,
• 9:47
  Speaker 1: the executive who runs the direct to consumer business which
• 9:51
  Speaker 1: includes Disney Plus and Hulu and ESPN plus the streaming business,
• 9:54
  Speaker 1: is what a lot of people feel like are the
• 9:56
  Speaker 1: future of the Walt Disney Company, that he might get
• 9:59
  Speaker 1: the nod here. What do you think? How do you
• 10:00
  Speaker 1: think that's played out here? It's really interesting because I
• 10:02
  Speaker 1: read Iger's memoir last year, Right of a Lifetime, he
• 10:06
  Speaker 1: published in September, and throughout the book he kept talking
• 10:09
  Speaker 1: highly of Mayor, very few mentions of Bob Chapek, who
• 10:12
  Speaker 1: is a really long time executive of Disney and I
• 10:14
  Speaker 1: think probably a good choice for CEO. But it was
• 10:17
  Speaker 1: just interesting that he wasn't mentioned that often, and in
• 10:20
  Speaker 1: the acknowledgements of the book, Igre even called Mayor um
• 10:23
  Speaker 1: like the best strategic partner you could ask for, basically,
• 10:26
  Speaker 1: and just that word partner. It just made me feel like,
• 10:29
  Speaker 1: you know this, this guy is definitely the next in
• 10:31
  Speaker 1: line for when I retires, which his retirement date was
• 10:34
  Speaker 1: supposed to be next year. So when it was chair Peck,
• 10:36
  Speaker 1: it makes you wonder, is there some backstory here? Is
• 10:39
  Speaker 1: this going to create some friction. You know, I don't
• 10:41
  Speaker 1: know what's going to happen now. If you take a
• 10:43
  Speaker 1: step back, it's sort of surprising because you think the
• 10:46
  Speaker 1: streaming business is the future for Disney. That's sort of
• 10:49
  Speaker 1: how they put it out there, that seems to be
• 10:51
  Speaker 1: the future of media, and yet their theme park business
• 10:54
  Speaker 1: has done reliably well at the same it just seems
• 10:58
  Speaker 1: odd that they wouldn't put so one in charge who
• 11:01
  Speaker 1: specializes in what seems to be the future of media,
• 11:05
  Speaker 1: right yeah. I mean, if Disney is signaling to investors
• 11:08
  Speaker 1: that Disney Plus and streaming are the future of the
• 11:11
  Speaker 1: company and that's why they're plowing all this money into it,
• 11:14
  Speaker 1: and you know, earnings are going to take a hit
• 11:15
  Speaker 1: from this this year, that they're thinking this is worth
• 11:18
  Speaker 1: it because this is the new Disney. And then to
• 11:21
  Speaker 1: name someone CEO who really hasn't worked on that side
• 11:23
  Speaker 1: of the company, who has come from the theme park side,
• 11:26
  Speaker 1: who for a long time ran the home video business
• 11:28
  Speaker 1: and the consumer products division, it does send a little
• 11:31
  Speaker 1: bit of a confusing message, though. I think that's why
• 11:35
  Speaker 1: this transition period may be really important. I is going
• 11:38
  Speaker 1: to stick around for the next twenty two months, um
• 11:40
  Speaker 1: as executive chairman. It sounds like he's going to have
• 11:42
  Speaker 1: this sort of amorphous role where he's helping on the
• 11:44
  Speaker 1: creative side of the business. So it feels like he
• 11:47
  Speaker 1: put all the strategic assets in place that he wanted
• 11:50
  Speaker 1: and now he's handing them over to Chapeck to run
• 11:52
  Speaker 1: while I make sure that they keep that sort of
• 11:55
  Speaker 1: creative prowess. And it comes at an interesting time, right,
• 11:57
  Speaker 1: because Disney has all these theme parks world why they
• 12:00
  Speaker 1: have the cruise ships, they have their movie theater business.
• 12:03
  Speaker 1: You know, they rely on movie theater attendance. And so
• 12:06
  Speaker 1: at a time when coronavirus is potentially you know, entering
• 12:10
  Speaker 1: that pandemic stage and the CDC is warning what's going
• 12:12
  Speaker 1: to happen in the US, You're gonna have a guy
• 12:14
  Speaker 1: in charge of Disney who really knows that business well.
• 12:17
  Speaker 1: And then I isn't sort of the face of any
• 12:19
  Speaker 1: of those challenges. He gets to go out on that
• 12:21
  Speaker 1: high note. I think, what do we know about Bob
• 12:25
  Speaker 1: because he's not really well known. Maybe it's a certain investors, yes,
• 12:28
  Speaker 1: but the public now, he's not well known. He hasn't
• 12:30
  Speaker 1: done a whole lot of public interviews and stuff. But
• 12:33
  Speaker 1: He's definitely well respected and and well liked inside and
• 12:36
  Speaker 1: outside the company, So I think people are probably comfortable
• 12:40
  Speaker 1: with the decision, but they were just more taken by
• 12:42
  Speaker 1: surprise by the timing of it and the way it happened,
• 12:45
  Speaker 1: and that there was no mention of Kevin Mayer, who
• 12:47
  Speaker 1: is obviously really important to the company if he's running
• 12:49
  Speaker 1: the streaming business, and it remains to be seen whether
• 12:52
  Speaker 1: he sticks around and what happens there. But I think,
• 12:55
  Speaker 1: you know, it wasn't so much the choice of Bob
• 12:57
  Speaker 1: Chapeck that was an issue. I think people are probably
• 13:00
  Speaker 1: you know, comfortable with that decision, and it sounds like
• 13:02
  Speaker 1: Igor and the board had been preparing for this for
• 13:04
  Speaker 1: a while and said that he was the top candidate
• 13:08
  Speaker 1: for quite some time. So they seem really comfortable with
• 13:10
  Speaker 1: and I don't think investors will be bothered by that,
• 13:12
  Speaker 1: but they just want to know, you know, is there
• 13:14
  Speaker 1: a bigger story to this? And looking at Disney shares
• 13:17
  Speaker 1: there now at the lowest since April of last year,
• 13:20
  Speaker 1: and I'm just wondering, what do you think the main
• 13:22
  Speaker 1: question that investors want answered right now? I think, you know,
• 13:26
  Speaker 1: is Disney going to be successful in streaming and how
• 13:29
  Speaker 1: because you know, even though they've signed up twenty six
• 13:32
  Speaker 1: million customers for Disney Plus, they're not really going to
• 13:35
  Speaker 1: be making a lot of money on that service for
• 13:37
  Speaker 1: quite some time. And there's going to be all these
• 13:39
  Speaker 1: new competitors coming out, so to replace the profit stream
• 13:42
  Speaker 1: that they get from their traditional media business is going
• 13:45
  Speaker 1: to be really hard to do. And also, you know,
• 13:47
  Speaker 1: they had that huge year last year in the in
• 13:49
  Speaker 1: the theaters with Avengers Endgame being the highest grossing film
• 13:52
  Speaker 1: of all time. How do they top themselves? And so
• 13:55
  Speaker 1: I think that those are the questions. And you know,
• 13:58
  Speaker 1: Bob Chapeck, he's going to have a lot to a
• 14:00
  Speaker 1: lot of work to do now. Eiger put a lot
• 14:02
  Speaker 1: of things in place for him, but they're at this
• 14:04
  Speaker 1: inflection point and you know what is Disney Yep, exactly right.
• 14:08
  Speaker 1: I also think Lisa, just respond to your question. I
• 14:10
  Speaker 1: think some of the near term weakness has been the
• 14:12
  Speaker 1: coronavirus because the parks in Shanghai and Hong Kong have
• 14:17
  Speaker 1: been shut down for a month, and um, that's a
• 14:19
  Speaker 1: costing them money their cruise ships. Is Tara's mentioning maybe
• 14:22
  Speaker 1: even the domestic parks as well. Although looking at their
• 14:25
  Speaker 1: shares they're down more than twelve percent year to date,
• 14:27
  Speaker 1: so it's been it's been kind of a rough ride
• 14:29
  Speaker 1: after a pretty good year. Yeah, exactly right, So interesting
• 14:32
  Speaker 1: news coming out at Disney. Terror La Chapelle, thanks so
• 14:34
  Speaker 1: much for joining us real appreciate your opinions. You can
• 14:37
  Speaker 1: read all of Terror's work on Bloomberg dot Com, Slash
• 14:40
  Speaker 1: Opinion and O P I N Goso all the other
• 14:43
  Speaker 1: great work coming out of Bloomberg Opinion, Terris Chica's Entertainment,
• 14:46
  Speaker 1: Telecommunications and deals for Bloomberg Opinion. Well, our friends at
• 15:03
  Speaker 1: Bloomberg Business Week have done it again with another fantastic cover,
• 15:07
  Speaker 1: When the Bull Market Gets Weird. It's a strange story
• 15:10
  Speaker 1: about the world of message boards and stock trading folks
• 15:13
  Speaker 1: and kind of the impact they can have on individual stocks,
• 15:16
  Speaker 1: maybe even the markets. Lu cab Across, asset reporter Bloomberg News,
• 15:19
  Speaker 1: joins us here on a Bloomberg Interactive Broker Studio. You've
• 15:22
  Speaker 1: heard him here before. He is the author of that
• 15:24
  Speaker 1: cover story for Bloomberg Business Week. What's going on in
• 15:27
  Speaker 1: the world of Reddit and message boards and all that stuff.
• 15:30
  Speaker 1: So it's a it's a kind of it's a fun story,
• 15:33
  Speaker 1: and that this is the what we've been waiting for.
• 15:35
  Speaker 1: In a sense, it's to the return of retail to
• 15:37
  Speaker 1: the market. However, in a world where a lot of
• 15:41
  Speaker 1: shares do you cost you know, for instance, Tesla has
• 15:44
  Speaker 1: surpassed nine dollars this year Amazon while north of that figure, UH,
• 15:49
  Speaker 1: the ability of some retail investors to actually buy a
• 15:52
  Speaker 1: share is fairly limited. So what do we do. We
• 15:56
  Speaker 1: can we can buy these options. We can buy these
• 15:58
  Speaker 1: kind of moonshot bets for much much cheaper that have
• 16:01
  Speaker 1: nonlinear payoffs, and you know, it can be exponential. There's
• 16:05
  Speaker 1: been ten percent day daily gains and some of these
• 16:09
  Speaker 1: uh in the event that, you know, the underlying does
• 16:12
  Speaker 1: rise sufficiently. So what's been going on is that there
• 16:15
  Speaker 1: have been a few stocks that the online community of
• 16:19
  Speaker 1: Wall Street Bets as a subredit has really latched onto,
• 16:23
  Speaker 1: and you've seen underlying activity, call activity in those names
• 16:27
  Speaker 1: go absolutely parabolic, and you've seen very very outsized moves
• 16:33
  Speaker 1: in those shares at the same time. So names like Tesla,
• 16:37
  Speaker 1: names like Virgin Galactic, names like Lumber Liquidators, plug Power,
• 16:41
  Speaker 1: which is a fun example because it's literally you know,
• 16:44
  Speaker 1: what's what's old is new again. That was a dot
• 16:46
  Speaker 1: com bubble favorite, so, uh it's and they also think
• 16:49
  Speaker 1: that this kind of activity, the call buying, is also
• 16:53
  Speaker 1: sufficient to uh make their prophecied gains come about because
• 16:58
  Speaker 1: what they're doing and buying a call all if you
• 17:00
  Speaker 1: buy it from a dealer. A dealer is not in
• 17:02
  Speaker 1: the business of taking directional risk. So dealer will say, hey, like,
• 17:05
  Speaker 1: I'll yes, I'll write the call for you. We'll we'll
• 17:07
  Speaker 1: get that done. But I don't want that exposure. So
• 17:10
  Speaker 1: dealer rates a call by stock that's known as delta hedging,
• 17:13
  Speaker 1: and if the underlying continues to go up, you have
• 17:16
  Speaker 1: to adjust your delta hedge and buy Even more so,
• 17:19
  Speaker 1: when they read about this dynamic and A and A
• 17:21
  Speaker 1: piece that we wrote about tessela options, they kind of
• 17:26
  Speaker 1: extrapolated this to the unreasonable degree that if we buy
• 17:29
  Speaker 1: enough calls, these will never go down. So I'm looking
• 17:32
  Speaker 1: just the concept that they're that's great. I'm taking a
• 17:36
  Speaker 1: bigger step back. I mean it is, it's fascinating. But
• 17:38
  Speaker 1: if you take a big step back someone who's not familiar.
• 17:40
  Speaker 1: Nine hundred thousand users are on this Reddit forum are
• 17:45
  Speaker 1: slash Wall Street bets or are slash wsb um. Who
• 17:50
  Speaker 1: are these people? It's a it's very tough. I don't
• 17:54
  Speaker 1: want to mis gender the community, but it would uh,
• 17:57
  Speaker 1: it would seem to be a lot of a lot
• 18:00
  Speaker 1: of males, a lot of males in the let's call
• 18:03
  Speaker 1: it eighteen to thirty five demo, and it's uh, it
• 18:07
  Speaker 1: would be locker room culture. I think to say it
• 18:10
  Speaker 1: would be putting it putting it very kindly. So I
• 18:14
  Speaker 1: mean this harken. This reminds me of kind of the
• 18:16
  Speaker 1: the day trading boom of I don't know, ten or
• 18:18
  Speaker 1: fifteen years ago, and that kind of suggested, all right,
• 18:22
  Speaker 1: this is the top of the market. When these you know,
• 18:24
  Speaker 1: individuals are getting in and bidding up stocks to crazy levels.
• 18:28
  Speaker 1: This might mark the top. What's the thought there? I mean,
• 18:31
  Speaker 1: could have could have happened, could have been I mean,
• 18:33
  Speaker 1: we're we're in a down draft now, we're off the peaks,
• 18:35
  Speaker 1: that this could have been the perfect blow off top
• 18:38
  Speaker 1: signal that we were looking for in the event that
• 18:40
  Speaker 1: we uh continue to extend to the downside and the
• 18:43
  Speaker 1: stock market. What I think is definitely different this time
• 18:47
  Speaker 1: is the how localized A lot of this euphoria is
• 18:51
  Speaker 1: like yeah, sure, stocks in general around the world, we're
• 18:54
  Speaker 1: having a great January, but and you were starting to
• 18:57
  Speaker 1: see just in general retail flow is purely into stocks
• 19:01
  Speaker 1: come back, but the localized nature of how just certain
• 19:06
  Speaker 1: names were really seeing the activity and really getting pushed
• 19:09
  Speaker 1: whereas you know, back in the day it was just
• 19:12
  Speaker 1: everything getting pushed in, people piling into everything. That's what
• 19:15
  Speaker 1: kind of sets us apart and makes it look a
• 19:17
  Speaker 1: little less scary. Also, you know, this was barely getting
• 19:20
  Speaker 1: off the ground. Retail was Retail involvement was really just
• 19:24
  Speaker 1: only starting to come back when we've run into a
• 19:27
  Speaker 1: bit of difficulty getting higher in the general market here.
• 19:30
  Speaker 1: So it you know that that trend could have some
• 19:33
  Speaker 1: staying power in the event that we're able to resume
• 19:35
  Speaker 1: an up trend. The user names soul train, RNs on
• 19:39
  Speaker 1: whole Grand or really catchy right recently unearthed. I'm just
• 19:43
  Speaker 1: wondering how much time do you spend on these on
• 19:45
  Speaker 1: this forum. Actually, this is not the subreddit I frequent
• 19:49
  Speaker 1: the most often. The My subreddit choice is Spoiled Survivor.
• 19:53
  Speaker 1: I like to, you know, try and get hints on
• 19:55
  Speaker 1: with Survivor. Players might be voted off the island next
• 19:59
  Speaker 1: and read it also fairly a depth. Seriously, Oh yeah,
• 20:02
  Speaker 1: there's how much time do you spend on that one?
• 20:05
  Speaker 1: That would that would I'd be embarrassed to say how
• 20:07
  Speaker 1: much time I spend on it, But well, all Street bets,
• 20:10
  Speaker 1: this has been more of a job for me just
• 20:13
  Speaker 1: because it was. It was in mid January when I
• 20:17
  Speaker 1: was noticing just some Tesla calls go off. Tesla was
• 20:20
  Speaker 1: having a great week, but the c seven hundred strikes
• 20:24
  Speaker 1: that were about to expire in two days and would
• 20:27
  Speaker 1: have required Tesla to rally about two days, those are
• 20:31
  Speaker 1: sharing to see a lot of activity, and I was
• 20:33
  Speaker 1: just like, what the heck is going on here? What
• 20:36
  Speaker 1: in the world? Who could possibly want something like this?
• 20:39
  Speaker 1: This is absolutely nuts, And that trail led me to
• 20:42
  Speaker 1: to Wall Street Bets. Yeah, I remember, and you wrote
• 20:44
  Speaker 1: a story about it, and it was a fantastic story
• 20:46
  Speaker 1: in your Business Week's cover story. Also fantastic. Lucawa Bloomberg,
• 20:49
  Speaker 1: cross asset reporter and correspondent for Survivor and the Potential
• 20:54
  Speaker 1: Next Ejected contestant, I'm struck by a story today on
• 21:04
  Speaker 1: the Blue re Terminal trying to explain sentiment behind today's
• 21:08
  Speaker 1: blip upward in equities, they say, blip because one percent
• 21:12
  Speaker 1: move following the drops that we saw in the past
• 21:14
  Speaker 1: few days, looks relatively sanguine in terms of the severity. Yes,
• 21:19
  Speaker 1: blip like um one quote here an investors saying. Investors
• 21:23
  Speaker 1: are saying, Okay, we have gotten a correction done. We've
• 21:26
  Speaker 1: traded off the headlines. Now let's wait and see where
• 21:28
  Speaker 1: the facts come in. Someone who's scouring the facts Brad Setser,
• 21:32
  Speaker 1: Senior Fellow for International Economics at the Council on Foreign
• 21:34
  Speaker 1: Relations and senior advisor at EXANTE Data, with extensive experience
• 21:39
  Speaker 1: with the US Treasury Department and beyond tracking international flows. Brad,
• 21:44
  Speaker 1: you know it would be really good without a sense
• 21:47
  Speaker 1: of the data in terms of the slowdown currently in Asia.
• 21:51
  Speaker 1: How was the data looking leading up to this period
• 21:55
  Speaker 1: of time. Well, the trade data, particularly the US CORD
• 22:00
  Speaker 1: data in Q four was very weak. Uh. US imports
• 22:04
  Speaker 1: from China we're down, let's say, year over year in
• 22:08
  Speaker 1: Q four, largely in because of the still substantial tariffs
• 22:14
  Speaker 1: that Emini bows over the previous twelve months. Uh. There's
• 22:19
  Speaker 1: been some shift in supply chains to Vietnam to Taiwan,
• 22:23
  Speaker 1: but the scale of the shift and supply chains is
• 22:25
  Speaker 1: actually fairly modest. I think the data in Q four
• 22:29
  Speaker 1: was telling us much more about trade destruction than trade diversion.
• 22:35
  Speaker 1: And I think, you know, we're gonna obviously get another
• 22:37
  Speaker 1: quarter of uh significantly less trade because China has largely
• 22:43
  Speaker 1: been shut down. That doesn't tell us very much about
• 22:47
  Speaker 1: the more fundamental forces reordering supply chains. It just tells
• 22:50
  Speaker 1: us that there was a true exogenous shock from the coronavirus.
• 22:55
  Speaker 1: So bred what data what's the data telling us about
• 22:58
  Speaker 1: the economic impact on China right now from the virus?
• 23:01
  Speaker 1: You say it's you know, effectively shutdown. We've seen numbers
• 23:03
  Speaker 1: that maybe half a production shutdown. I'm not sure kind
• 23:06
  Speaker 1: of where that number comes out. But what do we
• 23:09
  Speaker 1: think is going to be the ultimate impact on the
• 23:11
  Speaker 1: economy of China. I mean, I think it's going to
• 23:13
  Speaker 1: be a very substantial slowdown. All the data for you know,
• 23:19
  Speaker 1: coal burning coal, from burning coal to density of of
• 23:25
  Speaker 1: transportation is running closer to the lows of the Chinese
• 23:29
  Speaker 1: New Year than to where it typically would be. That
• 23:32
  Speaker 1: doesn't mean China is completely shut down, but it means
• 23:35
  Speaker 1: it's operating well below capacity, you know, And to state
• 23:38
  Speaker 1: the obvious in a typical week, you generate two or
• 23:42
  Speaker 1: so of the your economic output for the year, and
• 23:44
  Speaker 1: so the longer China is operating AT's ay fifty capacity,
• 23:49
  Speaker 1: the bigger the fall and output. So I think increasingly
• 23:54
  Speaker 1: forecasters are predicting not just a quarter on quarterfall in
• 23:59
  Speaker 1: Chinese out put, but a year or year over year fall.
• 24:02
  Speaker 1: So the output in Q one of this year would
• 24:05
  Speaker 1: be below that of Q one of last year. Now,
• 24:09
  Speaker 1: to put that in contact, remember that the Chinese economy
• 24:14
  Speaker 1: in Q one is typically ten smaller than it is
• 24:17
  Speaker 1: in Q four, so there's a naturally a wide range
• 24:21
  Speaker 1: of seasonal variation. The problem is that this wasn't anticipated.
• 24:25
  Speaker 1: We weren't prepared for it, and so there's going to
• 24:27
  Speaker 1: be more more disruption in supply chains, and it will
• 24:32
  Speaker 1: be a challenge to maintain income when people aren't working.
• 24:36
  Speaker 1: You said trade destruction more than trade diversion. That's what
• 24:39
  Speaker 1: you observed from the data coming out of the fourth quarter.
• 24:42
  Speaker 1: Does that actually help the United States remain a little
• 24:46
  Speaker 1: more insulated from a breakdown and supply chains related to China.
• 24:52
  Speaker 1: I don't think the particulars of Q four mean that
• 24:56
  Speaker 1: the US is more instutted. I think it is. It
• 24:59
  Speaker 1: is that you know, the US to a significant degree,
• 25:02
  Speaker 1: as an economy that produces we we we we spend
• 25:05
  Speaker 1: most of our time producing services for each other, and
• 25:08
  Speaker 1: so the relatively modest share of manufacturing and US output
• 25:14
  Speaker 1: UH and the relatively modest importance of Chinese demand to
• 25:18
  Speaker 1: the U. S. Economy both mean that the US is
• 25:20
  Speaker 1: relatively insulated, more insulated than say, Europe, certainly more interested
• 25:25
  Speaker 1: insulated than most of Asia from the direct effects of
• 25:28
  Speaker 1: the disruption in China. Obviously, what we are not insulated
• 25:31
  Speaker 1: from would be an outbreak of the virus in the
• 25:34
  Speaker 1: United States. Is there any good data that you've seen
• 25:37
  Speaker 1: on what the economic impact could be if we do
• 25:40
  Speaker 1: get what a lot of people feel like is an
• 25:41
  Speaker 1: inevitable outbreak here in the US. Look, I I would
• 25:46
  Speaker 1: think that you might see a UH. You know, I
• 25:50
  Speaker 1: think it depends on the scale of the outbreak. It
• 25:52
  Speaker 1: depends on the location of the outbreak. But if significant
• 25:55
  Speaker 1: parts of the U. S. Economy shut down for a
• 25:58
  Speaker 1: couple of weeks, which you know you would in a
• 26:00
  Speaker 1: bad scenario, see obviously, that would produce a quarter over
• 26:04
  Speaker 1: quarter contraction. Again, I wouldn't put too much emphasis on
• 26:08
  Speaker 1: that just because that is the natural result of people
• 26:13
  Speaker 1: staying at home as a precautionary measure. It doesn't indicate
• 26:17
  Speaker 1: any loss of the economy's potential, but it does create
• 26:21
  Speaker 1: a short term problem for demand if people aren't working
• 26:24
  Speaker 1: in our pain. When you were working at the U. S.
• 26:26
  Speaker 1: Treasury from two, you dealt with Europe's financial crisis, UH,
• 26:32
  Speaker 1: Puerto Rico's debt crisis, a number of other financial shocks.
• 26:36
  Speaker 1: Is there anything you can take away from that experience
• 26:39
  Speaker 1: and apply to what we're experiencing now in terms of
• 26:43
  Speaker 1: the tipping point for when something becomes more than a
• 26:46
  Speaker 1: temporary disruption. Well, I think you you actually end up
• 26:51
  Speaker 1: going back to first principles. Uh. You can't stop what
• 26:56
  Speaker 1: you might call the supply shock. The fact that in
• 26:58
  Speaker 1: order to limit the bread once the virus is established
• 27:02
  Speaker 1: in a particular community, quarantine measures are necessary, and that's
• 27:07
  Speaker 1: going to reduce output. What you can do is limit
• 27:10
  Speaker 1: the second order effects, so you can provide people who
• 27:13
  Speaker 1: can't go to work even though they want to work,
• 27:16
  Speaker 1: with income. You borrow a little bit of money, you
• 27:19
  Speaker 1: distribute it, so you can protect the economy from entering
• 27:23
  Speaker 1: into a self sustaining downward cycle and buffer what is
• 27:28
  Speaker 1: inevitably a short term shock. It's actually really important because
• 27:31
  Speaker 1: Hong Kong is essentially deploying helicopter money right now. They're
• 27:34
  Speaker 1: essentially passing out to two individuals. Is that the right prescription? Yeah,
• 27:38
  Speaker 1: I mean if you all experience the kind of shock
• 27:42
  Speaker 1: that Hong Kong as experiencing. Remember, Hong Kong is a
• 27:45
  Speaker 1: tourism dependent economy, a travel dependent economy, a trade dependent economy,
• 27:51
  Speaker 1: and travel between China and Hong Kong is essentially shut down.
• 27:55
  Speaker 1: That has an economic impact, and Hong Kong is rich.
• 27:58
  Speaker 1: The government has no shortage of budget buffers, and this
• 28:02
  Speaker 1: is the time to use them. Brad Setzer, thanks so
• 28:05
  Speaker 1: much for joining us to really appreciate your thoughts on this.
• 28:07
  Speaker 1: Brad Setzer is the Steven A. Ten Amount Senior Fellow
• 28:10
  Speaker 1: for International Economics at the Council Foreign Relations and also
• 28:13
  Speaker 1: a senior advisor at Exante Data. Thanks for listening to
• 28:17
  Speaker 1: the Bloomberg P and L podcast. You can subscribe and
• 28:19
  Speaker 1: listen to interviews at Apple Podcasts or whatever podcast platform
• 28:22
  Speaker 1: you prefer. I'm Paul Sweeney, I'm on Twitter at pt Sweeney.
• 28:26
  Speaker 1: I'm Lisa Abram Woyds I'm on Twitter at Lisa Abram
• 28:28
  Speaker 1: woyds One. Before the podcast, you can always catch us worldwide.
• 28:31
  Speaker 1: I'm Bloomberg Radio