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Fed Did Exactly What They Needed To Do: JPM's Michele · 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 Ways, 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 Penil 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. Bob Michael, chief investment officer at
0:22
Speaker 1: JP Morgan Asset Management, both fantastic to have you with us.
0:25
Speaker 1: Just walk us through your reaction, your thoughts in response
0:28
Speaker 1: to what's happened in the last hour and twenty minutes. Yeah,
0:31
Speaker 1: I think it's it's been quite stunning, but I feel
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Speaker 1: it was the fair and appropriate move by the FED
0:38
Speaker 1: to step in here. You cannot stand back and watch
0:42
Speaker 1: what's going on and say we're going to wait for
0:45
Speaker 1: the data. The markets were telling us that this is
0:49
Speaker 1: an anticipatory event. We know that the virus will spread
0:54
Speaker 1: and the FED should be doing something. I thought it
0:58
Speaker 1: was a very good press comp friends. I thought the
1:01
Speaker 1: fifty basis point cut was the right amount to do,
1:05
Speaker 1: and I think he positioned it correctly where he said
1:09
Speaker 1: it cannot slow the rate of infection, it cannot fix
1:12
Speaker 1: the broken supply chain, but it will boost household and
1:16
Speaker 1: business confidence and it can avoid a tightening in financial conditions. UM.
1:22
Speaker 1: So I'm happy and relieved that the FED stepped in here,
1:27
Speaker 1: um and did something. But has it changed the strategy?
1:30
Speaker 1: You and I were kicking around some ideas of her
1:32
Speaker 1: email about an hour or so ago on the Bloomberg
1:34
Speaker 1: and just one line from you, Bob just jumped out
1:36
Speaker 1: to me, this is a good bounce to sell high yield, Bob.
1:40
Speaker 1: Why because we know that that the supply chain is broken.
1:46
Speaker 1: We know that there are some industries, travel and leisure
1:51
Speaker 1: in particular, that are going to be impacted. But what
1:54
Speaker 1: about all the suppliers to those industries? Do we understand that?
2:00
Speaker 1: What about the insurance entery? Do we know how long
2:03
Speaker 1: economies will be closed? All of those things draw put
2:08
Speaker 1: a question mark around what corporate profitability will look like
2:12
Speaker 1: for the next several quarters. And I'd rather cash in
2:16
Speaker 1: the chips now and wait it out. Well, I think
2:18
Speaker 1: this is so important, folks. I can't convey enough the
2:20
Speaker 1: polarity across the research screens that we have. We are
2:24
Speaker 1: hugely advantaged by the smartest people on Wall Street, including
2:27
Speaker 1: Mr Michael, and they are split over this emergency. Ray
2:31
Speaker 1: Bob Michael to me, it devolves down to real g
2:35
Speaker 1: d P or maybe some other metric you may like,
2:38
Speaker 1: and that the FED has a look a guess of
2:40
Speaker 1: forecast of a really grim and sustained couple quarter g
2:45
Speaker 1: d P. Have you people modeled that out yet? Can
2:48
Speaker 1: you say it's a negative GDP or flat flat flat
2:52
Speaker 1: flat for X number of quarters? You can't because right
2:57
Speaker 1: now the data in the US looks ay, But the
3:01
Speaker 1: news as it comes out progressively is more school closing.
3:06
Speaker 1: The infection rate continues to accelerate in the US. These
3:09
Speaker 1: are problems. We know it leads to quarantining. We know
3:12
Speaker 1: it leads to a shutdown of the economy. That's the
3:15
Speaker 1: only thing you can do. Now. What the FED has
3:17
Speaker 1: done is it's paved the way for lower cost funding
3:22
Speaker 1: across the system. That takes some of the pressure off.
3:25
Speaker 1: I want to see what happens at the SPA next.
3:28
Speaker 1: That's the entity that's going to make loans too. Small
3:31
Speaker 1: businesses is the right number, I don't think so. Do
3:36
Speaker 1: they have a war chest of a hundred billion? They
3:38
Speaker 1: could drawn we need to see how these things play out.
3:41
Speaker 1: There an awful lot of question marks that that lay
3:45
Speaker 1: ahead for us. The FED cannot be one of these
3:47
Speaker 1: question marks, and it stepped in and did exactly what
3:51
Speaker 1: they needed to do. I mean Jana was framing is
3:53
Speaker 1: earlier with Bunny Quinn. I mean you get the nominal
3:55
Speaker 1: GDP would just say a one percent run rate on
3:58
Speaker 1: g d ps two for sent inflation. That does not
4:00
Speaker 1: get it done for this American economy and the responsibilities
4:03
Speaker 1: of Bob Michael has it is bank Well, Bob, I
4:05
Speaker 1: think you've touched on something massively important. It's how we
4:08
Speaker 1: help short to medium size, small to medium sized enterprises
4:11
Speaker 1: through a massive one off temporary, potentially temporary shock. And
4:16
Speaker 1: I say temporary with a big asterisk on top of it,
4:19
Speaker 1: because it might not be because if we don't deploy
4:21
Speaker 1: the right tools, all of a sudden, you end up
4:23
Speaker 1: with a economic shock that would otherwise be temporary becoming
4:26
Speaker 1: something a lot darker, because people need to lay off
4:29
Speaker 1: staff because they can't get a bridge through to the
4:31
Speaker 1: middle of the year. For me, it's just about how
4:33
Speaker 1: do we get that bridge to the middle of the
4:36
Speaker 1: year when the health christis crisis passes and we have
4:39
Speaker 1: a clearer path towards recovery. We've had the rate cup, Bob,
4:43
Speaker 1: what do you want to see more of? Well, I
4:46
Speaker 1: think we've seen the roadmap, unfortunately from China, which is
4:50
Speaker 1: a month and a half ahead of us, and it
4:53
Speaker 1: is small businesses, the small mid sized enterprises that run
4:57
Speaker 1: out of cash in one month or two months. It's
5:00
Speaker 1: something like a third to two thirds of s mmes
5:04
Speaker 1: run out of cash in a couple of months. So
5:07
Speaker 1: we know when economic activity shuts down, they don't have
5:11
Speaker 1: operating cash to keep going. How we get money to
5:14
Speaker 1: them is important. Is it the s p A or
5:17
Speaker 1: our banks incentive to land and and how do you
5:21
Speaker 1: backstop the banks to be able to do that. That's
5:24
Speaker 1: what we need to see. That's what makes this temporal.
5:27
Speaker 1: If we can extend credit into the system and wade
5:31
Speaker 1: through the slowdown that's coming over the next couple of quarters.
5:34
Speaker 1: But you absolutely do not sit there as the Fed
5:38
Speaker 1: and do nothing. Thank you your powder dry. That's some
5:40
Speaker 1: of the silliest commentary I've heard, Lisa Banner is the
5:43
Speaker 1: tape giving away. It's a correlated giveaway negative negative for
5:48
Speaker 1: the yen is trying to find new weakness and look
5:50
Speaker 1: at the tenure yield. Yeah, that's where exactly where I
5:52
Speaker 1: wanted to go. Right now, we're looking at a tenure
5:53
Speaker 1: yield one point oh three. Just plummeting and really look
5:57
Speaker 1: at the equities right now, absolutely, Lee, really read across
6:01
Speaker 1: the screen. Down now down one point seven SMP, down
6:05
Speaker 1: one point five percent. Bob, you thought that this was
6:07
Speaker 1: an appropriate policy reaction based on the market reaction right now?
6:11
Speaker 1: If it holds through the end of clothes, which is
6:13
Speaker 1: a big if, given how wippie things have been, how
6:16
Speaker 1: can you say that this isn't the market saying it's
6:18
Speaker 1: a policy misstep, using up ammunition now at a time
6:22
Speaker 1: when it's not the correct response to the issue. I
6:27
Speaker 1: don't see what harm this has done. You've just lowered
6:32
Speaker 1: the cost of funding across the system consumers. We've seen
6:38
Speaker 1: this last year with the seventy five basis point cut
6:41
Speaker 1: in the Fed funds rate. It led to an acceleration
6:45
Speaker 1: in mortgage reeflies. Fifty basis points will have a similar effect.
6:50
Speaker 1: Invalidates the current rate environment. I think it's all positive.
6:56
Speaker 1: I think one of the things that may have done
6:58
Speaker 1: is validated. There are legitimate concerns out there. This is
7:02
Speaker 1: the said, and policymakers do not at all of you
7:06
Speaker 1: this as any kind of v shaped event. It's are
7:10
Speaker 1: you with the bottom of the you lengthening out of it.
7:14
Speaker 1: So I don't think it's a policy mistake at all.
7:16
Speaker 1: I think the markets are waking up to the reality
7:20
Speaker 1: that there is a significant problem that lies ahead for
7:23
Speaker 1: the US economy that's going to last more than a
7:26
Speaker 1: month or so. So I'm just had a record low
7:27
Speaker 1: print on the US tenure yield. Your all time low
7:30
Speaker 1: now one zero, two eight three. We're just off it
7:32
Speaker 1: at the moment, but all time lows on tenure yields,
7:35
Speaker 1: the bit coming into the bond market quite phenomenal again
7:37
Speaker 1: with down thirteen basis points. I mean, and you know,
7:40
Speaker 1: Bob Michael has answers that go on forever. We went
7:43
Speaker 1: down a hundred points just on Mr Michael's last answer.
7:48
Speaker 1: I know how much times well, I hates our points,
7:51
Speaker 1: but I've got to tell you because everyone uses it,
7:55
Speaker 1: it kind of what the public matters. I mean, what
7:57
Speaker 1: do you see, Michael? Your ecology got a Paul suns
8:01
Speaker 1: and we talked to Liz and Son. Is it Josh Schwab,
8:03
Speaker 1: You've got a different institutional view. What are institutions doing
8:07
Speaker 1: about Michael now down six d points? What are you
8:10
Speaker 1: observed in the last week. Well, I think one of
8:15
Speaker 1: the things this fifty basis point cut has done is
8:19
Speaker 1: it re steep in the yield curve from three months
8:22
Speaker 1: to tenure. Now that's evaporating very quickly, but we had
8:27
Speaker 1: been inverted. Re steepening it is going to bring in
8:31
Speaker 1: money from overseas. The negative yielding markets are going to
8:35
Speaker 1: find it to their advantage to come in and buy
8:38
Speaker 1: intermediate bonds in the US, high quality investment grade and
8:43
Speaker 1: be able to hedge it back to their base currency
8:46
Speaker 1: with very little cost associated with that. So I would
8:49
Speaker 1: expect overnight money to come pouring in from overseas into
8:54
Speaker 1: the US market generally. So I'll let you do the
8:56
Speaker 1: tenure yield. John Herman just publishes with his great acuity
8:59
Speaker 1: and grant larity, fu mg F you f u f
9:03
Speaker 1: G m u F GEM cut me some slack m
9:08
Speaker 1: u f G Securities America's and he really emphasizes another
9:13
Speaker 1: two rate cuts, highlight the risk of another two rate
9:17
Speaker 1: cuts in the second quarter of this year. So he's
9:19
Speaker 1: on the big watch as well. I want to look
9:22
Speaker 1: also though it just forward break even rates and the
9:25
Speaker 1: idea of what this means for future inflation. They're not
9:28
Speaker 1: increasing materially, and to me that speaks exactly to Bob's point, John,
9:32
Speaker 1: this idea that this isn't necessarily stimulus so much as
9:35
Speaker 1: an acknowledgement of a reality that perhaps was not being
9:38
Speaker 1: acknowledged by markets previously. Yeah, I've been saying this for
9:41
Speaker 1: a number of weeks now affect a number of months.
9:43
Speaker 1: This market has just price the FED as follows. We
9:45
Speaker 1: believe you you're going to give us a lower rates,
9:47
Speaker 1: will price that. But we'll price it right the way
9:49
Speaker 1: through the curve because guess what, we don't believe it's
9:52
Speaker 1: gonna work. We don't believe it's going to end up
9:54
Speaker 1: with higher inflation expectations, and we don't believe you're going
9:56
Speaker 1: to be in a position to hike at any time
9:58
Speaker 1: anytime soon. Down A wrote inter day tenure yielder record
10:02
Speaker 1: low moments ago one point zero to eight zero. Will
10:05
Speaker 1: watch that Jared's around negative and then joan across the
10:09
Speaker 1: pond because we're going to be doing a cable a
10:11
Speaker 1: special edition at twelve noon and today, I'll pull on
10:14
Speaker 1: a British accent and the two year yield there's zero
10:16
Speaker 1: point to three? Zero point to three? Yeah? Is governor
10:20
Speaker 1: currently on a negative rate? Watch to come up Bob
10:22
Speaker 1: Michael's life. He's got a bit of space before he
10:24
Speaker 1: gets the negative rates. But certainly I think a lot
10:26
Speaker 1: of people are looking for a twenty five basis point
10:28
Speaker 1: card for me the other side of the Atlantic. I
10:30
Speaker 1: want to tell you a story. The thirty year yield
10:32
Speaker 1: end of eighteen, the thirty year yield three forty three,
10:35
Speaker 1: three forty three and right now one sixty four. And
10:39
Speaker 1: Bob Michael a friend of ours. I remember it was
10:41
Speaker 1: Mike Collins over at PGIM A couple of years ago.
10:43
Speaker 1: I said to him, in ten years, how will we
10:46
Speaker 1: view this bond market looking back ten years where we
10:48
Speaker 1: think these low yields were ridiculous? And I remember him
10:51
Speaker 1: turning round him and saying, you will wish you had
10:53
Speaker 1: bought a thirty year with a three handle, because you're
10:57
Speaker 1: never going to get it again. Bob Michael, these kind
11:00
Speaker 1: of yels do we have to live with them? Now?
11:01
Speaker 1: Is this it? Yeah? I think we're we're stuck living
11:06
Speaker 1: with them for a while. Um. I think all the
11:10
Speaker 1: things that have been disinflationary, the demographics, the globalization of
11:17
Speaker 1: manufacturing and supply, UM and and the impact of technology
11:23
Speaker 1: aren't going away anytime soon. I don't know what it's
11:27
Speaker 1: going to take. It may take some huge fiscal stimulus.
11:30
Speaker 1: Bob Michael of JP Morgan Asset Management. Always a pleasure.
11:33
Speaker 1: Thank you so much for being with us. Well, Dan
11:38
Speaker 1: Skelly here, Dan, what do you think of this? Well? Look,
11:41
Speaker 1: I think this is the first time that you're seeing
11:43
Speaker 1: a potential conflict or disruption that could affect the consumer.
11:46
Speaker 1: Right when you go back, you think about the last
11:49
Speaker 1: ten years of this upmove in the markets. We have
11:51
Speaker 1: the energy collapse in fifteen, We've been going through a
11:54
Speaker 1: US profits recession for the last eighteen months. Frankly, neither
11:57
Speaker 1: of them has really affected the consumer. And so I
12:00
Speaker 1: think the FED is making this emergency move, as you mentioned,
12:02
Speaker 1: the first time really since oh eight, to have an
12:04
Speaker 1: intermeding move because they're concerned in terms of what this virus,
12:09
Speaker 1: what this trend, this issue, this conflict could mean towards
12:11
Speaker 1: the used consumer. And then there are so many risks
12:13
Speaker 1: at play here. And I caught up with Waking fouls
12:15
Speaker 1: of PIMCOT around about an hour ago, right before the
12:18
Speaker 1: fifty basis point cut from the FED, and he said,
12:20
Speaker 1: we faced the very real risk of a services led recession.
12:24
Speaker 1: And that's not a risk we've had to face for
12:27
Speaker 1: much of the last ten years because a lot of
12:29
Speaker 1: it has come out of China, a lot of it
12:30
Speaker 1: has been driven by manufacturing, exactly right, Jonathan. So if
12:33
Speaker 1: you look back at fifteen sixteen, the positive externality of
12:37
Speaker 1: an energy recession is low gas prices net positive for
12:39
Speaker 1: the consumer. Energy China n e M slowing down, and
12:43
Speaker 1: the US profits recession has not impacted the U S consumer.
12:46
Speaker 1: So it is a risk. It's not Morgan Stanley's base
12:49
Speaker 1: case right now. I think the FED certainly is adding
12:52
Speaker 1: some support and some frankly, some hope that they can
12:56
Speaker 1: support markets in the economy from here, but frankly, rates
12:58
Speaker 1: were already low. Yep. But this is exactly my question.
13:01
Speaker 1: I mean, what signal does it send to the world
13:03
Speaker 1: if the FED has an emergency of fifty rate fifty
13:06
Speaker 1: basis point rate cut and equities don't rally, which we're
13:09
Speaker 1: seeing them whip around and not maybe even doing so,
13:12
Speaker 1: given the fact that the FED is doing so ahead
13:14
Speaker 1: of what could be exactly, as you say, a consumer
13:17
Speaker 1: led reception, so that this was exactly my fear when
13:19
Speaker 1: we saw the emergency rate cut earlier today, was that
13:22
Speaker 1: the market would rally and then you'd see a pullback,
13:24
Speaker 1: and frankly, you're seeing it right now. It also follows
13:27
Speaker 1: yesterday's five percent move. So what I would just say is,
13:30
Speaker 1: if you just zoom out for a second, you think
13:32
Speaker 1: about what's transpired for the last couple of weeks. Frankly,
13:35
Speaker 1: to have the market sell off ten percent and seven
13:37
Speaker 1: trading sessions fastest teen percent correction and market history is unprecedented.
13:42
Speaker 1: And what we typically see if you go back thirty
13:44
Speaker 1: or forty years, Lisa, you have these events, these risk events,
13:47
Speaker 1: whether it's terrorism, whether it's DIZ, whatever it is, you
13:50
Speaker 1: typically get a first low made, you get a potential
13:53
Speaker 1: short term snap back, and then within months, the history
13:56
Speaker 1: shows you typically get a retest of the lows, and
13:59
Speaker 1: so that's likely the case in this scenario as well.
14:02
Speaker 1: We're gonna hear from US companies in April and May
14:05
Speaker 1: what the earnings impact is, so that could potentially be
14:08
Speaker 1: the retest of the low. We've seen the last couple
14:09
Speaker 1: of weeks. It's so interesting here in Den Skelly with
14:12
Speaker 1: Stanley Uh. This warning is the ambiguities that are out there.
14:15
Speaker 1: Dennis Gartman just sent me a love note and he's
14:17
Speaker 1: been dead on on gold, and not only gold, but
14:19
Speaker 1: in the end he makes clear that he tilts towards
14:22
Speaker 1: this is inflationary, just as many people are saying it's disinflationary.
14:29
Speaker 1: What does Ellen Center say? So we're more in the
14:32
Speaker 1: camp that we're gonna see modest inflation this year. We've
14:35
Speaker 1: actually uh seen the potential for the coronavirus to impact
14:38
Speaker 1: global growth to the tune of two and a half
14:41
Speaker 1: percent inflation correlate with that. I don't personally think you're
14:45
Speaker 1: gonna see a massive spike U. I mean, look at
14:46
Speaker 1: what's happening with commodity prices as well. So it's hard
14:49
Speaker 1: to make the case that you're gonna see a huge
14:51
Speaker 1: spike in inflation here in our a lot of moving
14:54
Speaker 1: parts re Lisa. Yeah, and I'm struggling to know, Dan,
14:57
Speaker 1: what do you tell clients when they call you right now? Sure?
14:59
Speaker 1: So two things. One is in the near term, expect
15:02
Speaker 1: higher volatility. Right prior to the last couple of weeks.
15:05
Speaker 1: We saw the most placid, steady, straight up rallies in September,
15:08
Speaker 1: and we all knew that wasn't likely to sustain, given
15:11
Speaker 1: it was mostly boosted by liquidity from the FED. And
15:13
Speaker 1: so what I would say is, in addition to the
15:15
Speaker 1: coronavirus fallout, you've got geopolitical and u S, domestic political
15:20
Speaker 1: cross currents ongoing today and focus of course as well.
15:23
Speaker 1: So the case for rising volatility near near term is there.
15:27
Speaker 1: The second thing, however, we say, is we are still
15:29
Speaker 1: amid a secular bull market. And I made this point
15:32
Speaker 1: the last time I was fortunate to be with you
15:34
Speaker 1: a couple of weeks ago. But the point is we
15:36
Speaker 1: think we're in a twenty year bull cycle in that
15:39
Speaker 1: type of time frame, and the precedent shows from a
15:42
Speaker 1: T two to ninety nine you can have near term pullbacks.
15:44
Speaker 1: Look at the last ten years. We've had three drawdowns
15:48
Speaker 1: in ten years, each of which was a massive buying opportunity.
15:51
Speaker 1: So near term, expect more vol Longer term, we still
15:54
Speaker 1: think we're halfway through a twenty year up movie. Coming
15:57
Speaker 1: the house for you. For you guys at Molgan Stanley,
16:00
Speaker 1: I remember was to a kind of a little bit
16:01
Speaker 1: more capital to the story abroad. Has that changed? Look, Jonathan,
16:05
Speaker 1: we've seen international names and international equities performed better to
16:09
Speaker 1: the downside in the last couple of weeks, which I
16:10
Speaker 1: think illustrates how crowded the growth trade had gotten. Um
16:14
Speaker 1: And so we still like advocating, frankly, to that space.
16:17
Speaker 1: We wouldn't make it a an aggressive overweight today. We
16:20
Speaker 1: want to gradually get into it over time. It's gonna
16:23
Speaker 1: take time, frankly to play out. It's not like a
16:25
Speaker 1: light switch going off, you know. And and frankly, that's
16:27
Speaker 1: the trend. If you look back this decade, it's been
16:29
Speaker 1: a US led market. If I go back to the
16:32
Speaker 1: decade prior to that, from two thousand and two thousand nine,
16:35
Speaker 1: it was an international led market. So typically these transitions
16:39
Speaker 1: take time to play out. What are return is gonna
16:41
Speaker 1: look like over the next decade or so, given the
16:43
Speaker 1: fact that we've got benchmark yields at record lows, how
16:45
Speaker 1: much do we have to lower our returns of expectations
16:48
Speaker 1: even further? Yeah, So we've annualized fourteen percent compounded returns
16:52
Speaker 1: in the SMP the last nine or ten years, which,
16:54
Speaker 1: as you know, is twice the average, so it's unlikely
16:57
Speaker 1: that you're gonna repeat that magnitude of US perforemans we've
17:01
Speaker 1: got over the next five or six years. We've got
17:03
Speaker 1: US returns averaging around four and a half percent UH,
17:06
Speaker 1: and we've got international returns and e M returns doing
17:09
Speaker 1: slightly better than that because the valuation starting points are
17:12
Speaker 1: so much lower. Where we could see a surprise to
17:14
Speaker 1: the upside in brief is if we see a bigger
17:17
Speaker 1: pickup in productivity and demographic led growth in the US.
17:21
Speaker 1: This is the story that frankly, not a lot of
17:23
Speaker 1: people are are talking about, and Ellen Zanner from our
17:25
Speaker 1: economics team has actually led the way talking about how
17:28
Speaker 1: the demographic shift from the savers to the millennials in
17:32
Speaker 1: the next five detain years could lead a big pickup
17:34
Speaker 1: in growth. So maybe that adds some optionality. Lisa, let
17:36
Speaker 1: me paint a picture here. Over here on the wall
17:38
Speaker 1: of monitors that we have here at Bloomberg Radio Worldwide,
17:41
Speaker 1: is an American flag, and I fed a reserve flag
17:44
Speaker 1: and the assembled Michael McKee is not there. He didn't
17:47
Speaker 1: take the golf string down, didn't They didn't anticipate this
17:49
Speaker 1: happening to he didn't you know we'll have someone there.
17:52
Speaker 1: It's a it's a very crowded room with huge anticipation.
17:55
Speaker 1: This goes way beyond Lisa, way way beyond what you'd
17:59
Speaker 1: see at a two pm FED me. My question is,
18:03
Speaker 1: how are they going to thread this needle and say
18:05
Speaker 1: they are trying to be proactive but the U S
18:08
Speaker 1: economy is still strong. How are they going to send
18:10
Speaker 1: the signal that they needed to do a fifty basis
18:12
Speaker 1: point rate cut which has frankly uncleared direct consequences on
18:17
Speaker 1: the actual problem, but also say that we're not going
18:20
Speaker 1: to see a material slowdown. I mean to John, I
18:22
Speaker 1: mean that's the action that we're seeing today in equities
18:25
Speaker 1: with people not clear on what the message is here,
18:27
Speaker 1: because if this is a consumer driven downturn, not a
18:31
Speaker 1: great time to buy stuff. Think he's just going to
18:33
Speaker 1: stand scale. He has been sitting along here, who is
18:35
Speaker 1: with Morgan Stanley Wealth Management? What was your impression? I
18:38
Speaker 1: would say it's become apparent to Jonathan's point that the
18:41
Speaker 1: FED doesn't want financial conditions to be the third risk
18:45
Speaker 1: that derails the cycle. So when you think about the
18:47
Speaker 1: scenario today, it's a consumer potential risk, it's a corporate risk,
18:50
Speaker 1: particularly it pertains to travel, leisure, those sectors, and so
18:54
Speaker 1: I think they just bought time with trying to put
18:56
Speaker 1: a put under the financial conditions risk being the third
19:00
Speaker 1: Chris and Frankly, I would just add to that the
19:01
Speaker 1: FETE is not the only game in town. The G
19:03
Speaker 1: seven met today, so we talked about the FETE and
19:05
Speaker 1: what the initiatives they've taken. Keep in mind, this issue
19:08
Speaker 1: started in China. China has signaled that they're willing to
19:11
Speaker 1: step in with potential fiscal stimulus to support the global
19:14
Speaker 1: economy as well. Jim Bianco joining us now president founder
19:22
Speaker 1: of Bianco Research in Chicago. And Jim, what was a
19:25
Speaker 1: reaction to this fifty basis point right cut? Better wait
19:28
Speaker 1: than never. I think that this was inevitable that they
19:31
Speaker 1: had to do it. I actually thought they were going
19:33
Speaker 1: to do it yesterday, and um, I think it was
19:37
Speaker 1: the right move. There's a question about, as Damian Sassa
19:40
Speaker 1: of Bloomberg Intelligence points out, moral hazard, right, I mean
19:44
Speaker 1: the idea that the Federal Reserve will come in and
19:46
Speaker 1: deliver an emergency rate cut if markets correct. What's your
19:50
Speaker 1: response to that? If the markets correct? All the way
19:55
Speaker 1: back to new highs. I think they should take it back.
19:58
Speaker 1: I think what we have to recognize is not only
20:01
Speaker 1: our careers, but maybe in our lifetimes. What's happening now
20:04
Speaker 1: is unprecedented. What I mean is none of the economic
20:08
Speaker 1: data matters right now, none of what we think matters
20:12
Speaker 1: right now. What we're betting on is what's going to
20:15
Speaker 1: happen in two or three weeks. Are we going to
20:18
Speaker 1: see the number of cases in the United States run
20:21
Speaker 1: the path that we've seen in South Korea, Italy, Iran,
20:26
Speaker 1: China up into the thousands. Are we going to see
20:29
Speaker 1: widespread school closure? Are we going to see millions of
20:32
Speaker 1: two working families have to force to leave one parent home?
20:36
Speaker 1: Are we going to see massive disruption to the economy?
20:40
Speaker 1: And I think that the answer is that is a
20:42
Speaker 1: very real possibility. So the FED getting ahead of that
20:47
Speaker 1: makes sense. Now. If fortunately it doesn't come the past,
20:51
Speaker 1: or hopefully it doesn't come the past, we could say, look,
20:54
Speaker 1: we dodged a bullet, and we could take it back.
20:57
Speaker 1: But right now, if the answer is we're gonna wait
20:59
Speaker 1: antil we hit the brick wall, it's too late. We
21:03
Speaker 1: have to start breaking now, or start adapting now before
21:06
Speaker 1: we run into that wall. Right now, I'm looking at
21:09
Speaker 1: equity as they've been whipping around uh and now they're
21:11
Speaker 1: little changed after being up more than one percent and
21:14
Speaker 1: down almost as much as that. I'm trying to understand, though,
21:17
Speaker 1: what this does. I mean, what does a fifty basis
21:20
Speaker 1: point rate cut actually do, both from financial markets as
21:24
Speaker 1: well as from the underlying economy when money already is
21:27
Speaker 1: practically free. I think, if, if, if, if, What I fear,
21:33
Speaker 1: what I think the market feared with the one of
21:35
Speaker 1: the biggest down weeks ever last week, is that we
21:38
Speaker 1: are coming into a period of huge disruption. Then you
21:42
Speaker 1: have to adjust your standards. All the FED is doing
21:45
Speaker 1: is managing the decline. They're trying to say, look, we
21:48
Speaker 1: know that maybe this is an unusual circumstance that the
21:52
Speaker 1: recession starts in March. It starts in March with the
21:55
Speaker 1: huge disruption that spills into the second quarter marches enough
21:59
Speaker 1: to throw the quarter into negative GDP. We're just managing
22:03
Speaker 1: that decline. And in an era with hundreds of inverse
22:08
Speaker 1: ETFs leverage gtfs, the ability of a market route is
22:13
Speaker 1: very high. So if you want to come in and quote,
22:16
Speaker 1: keep the speculators honest by creating a short squeeze along
22:19
Speaker 1: the way. Otherwise we're going to keep repeating what we
22:21
Speaker 1: saw last week. Is what is what the other thing is.
22:25
Speaker 1: So no, they're not in the business of trying to
22:27
Speaker 1: fix this. They're not in the business of trying to
22:30
Speaker 1: put the market at new highs. They're in the business
22:33
Speaker 1: of trying to manage the decline. So if you put
22:36
Speaker 1: it in that respect, now, like I said, maybe it
22:39
Speaker 1: doesn't come to pass, Maybe the fears that we have
22:43
Speaker 1: about the disruption of economy doesn't come to pass. They
22:45
Speaker 1: can reverse all this, and I don't think that would
22:48
Speaker 1: be a problem. There's a big question, though, what's the
22:50
Speaker 1: signal to markets of this fifty basis point rate cut.
22:54
Speaker 1: If what you're saying is true, that the FETE is
22:57
Speaker 1: just pricing in a new reality today at a time
23:00
Speaker 1: when this has the potential to seriously throw the market
23:04
Speaker 1: into the economy into recession. I mean, does that mean
23:07
Speaker 1: that equities are a cell here? Uh? We can mean that.
23:12
Speaker 1: I think you gotta back up and remember, as I
23:15
Speaker 1: said at the top, the bond market priced in a
23:19
Speaker 1: rate cut literally for yesterday. In fact, I was out
23:23
Speaker 1: talking about that they're all set for a rate cut yesterday.
23:27
Speaker 1: It didn't happen yesterday. Then there was talk that it
23:30
Speaker 1: was going to happen before the open today, and then
23:33
Speaker 1: it came thirty minutes after the open. So what the
23:36
Speaker 1: said delivered is merely what the market wanted. So they
23:40
Speaker 1: didn't surprise the market anyway, maybe only in the timing
23:43
Speaker 1: that it came after the close, I mean after the open.
23:46
Speaker 1: Once the open came, we thought they were done for
23:49
Speaker 1: the day, but apparently not. But I do think that
23:52
Speaker 1: what they gave the market is what it expected. The
23:55
Speaker 1: market is fearing this type of scenario, and so they're
24:00
Speaker 1: not going to create any kind of backlash. They're just
24:02
Speaker 1: kind of going along with what we all fear might happen.
24:05
Speaker 1: We're speaking with Jim Bianco, President and founder of Bianco Research.
24:08
Speaker 1: I'm so glad to say that walking by we have
24:11
Speaker 1: John Farrow and Tom Keene Blueberg Surveillance hosts, and he
24:16
Speaker 1: dragged off the streets. It's lunchtime and we're gonna have
24:19
Speaker 1: lunch in the radio booth. And you know, this has
24:22
Speaker 1: been something we were wondering. When the G seven statement
24:25
Speaker 1: came out this morning, it did not preclude some sort
24:27
Speaker 1: of action and certainly we did see this action come out,
24:31
Speaker 1: and I'm curious from your initial reactions, Uh, Tom, what
24:35
Speaker 1: was your sense when this came across It was an
24:37
Speaker 1: easy decision. I mean, you go twenty five or fifty
24:39
Speaker 1: basis points, and they certainly gave the market what they like.
24:42
Speaker 1: The ramifications of this into the future need to be
24:45
Speaker 1: thought out by everyone. Everybody will weigh in, and they'll
24:48
Speaker 1: be essays written and all that. As I just mentioned
24:51
Speaker 1: to John writing and bring capital. What's so important to
24:55
Speaker 1: me here is the nominal take think Michael Darted and
24:58
Speaker 1: King Partners. That's not just the real economy and adding
25:02
Speaker 1: in a new low inflation, but what's that animal spirit
25:05
Speaker 1: of the top line g d P. There's a psychological
25:07
Speaker 1: response to all of this as well. I think we're
25:09
Speaker 1: in a really, really delicate moment, and Jim, I'd love
25:11
Speaker 1: to have you weigh in on this. If we get
25:13
Speaker 1: adverse price action in the face of actual cuts, there's
25:16
Speaker 1: a real risk that the narrative gets away from Shairman
25:19
Speaker 1: pal Hair. The last thing the FED needs to do
25:22
Speaker 1: today is reinforced the argument that's already out there that
25:25
Speaker 1: they don't have a role to play here is that
25:27
Speaker 1: the risk at eleven o'clock. Jim. I think that is
25:30
Speaker 1: a risk that the FED has, but it's a risk
25:32
Speaker 1: that they have to take. I think that the idea
25:36
Speaker 1: that the FED is going to wait until they get data,
25:40
Speaker 1: We're gonna wait till we see a bad pair of report,
25:43
Speaker 1: or a bad retail sales report, or diving consumer confidence.
25:46
Speaker 1: This will be over at that point that you're talking about,
25:49
Speaker 1: Lady April or May that they would probably get confirmation
25:52
Speaker 1: in the data if this virus spreads to the point
25:57
Speaker 1: that we think so getting ahead of this, I think
26:00
Speaker 1: what Paul could say that the presser is we know what,
26:04
Speaker 1: we know what we're off fearing is going to come.
26:07
Speaker 1: We're acting and if it doesn't come, we could do
26:10
Speaker 1: a nine am fifty basis point hike on the backside,
26:14
Speaker 1: That's what I wanted to bring up. Do you think
26:16
Speaker 1: the FED could actually reverse this? What is the precedent
26:19
Speaker 1: for them being able to reverse this high rates and
26:21
Speaker 1: not cause a disruption. But there's no precedent for EXISTI
26:24
Speaker 1: happened in the first place. We are cutting rates in
26:27
Speaker 1: anticipation of something that we have absolutely no evidence that
26:30
Speaker 1: has happened. But we have a good feeling based on
26:33
Speaker 1: what we've seen in other countries with the amount of
26:36
Speaker 1: virus growth will happen. So this is completely unprecedented territory.
26:41
Speaker 1: So it's an appropriate move in that regard. And if
26:44
Speaker 1: you play up that, yeah, and the backside of it
26:47
Speaker 1: is we could hike rates, We're just gonna go right
26:49
Speaker 1: back to where we were at UM one hour ago.
26:53
Speaker 1: That's all you would be saying is when we high
26:55
Speaker 1: rates if this scenario of massive virus growth in the
26:58
Speaker 1: United States does not come the pass. Just to bring
27:01
Speaker 1: you some insert in some of the price action out there.
27:02
Speaker 1: Of course, risk assets looking for a bit here off
27:05
Speaker 1: the back of a surprise rate cut fifty basis points
27:08
Speaker 1: from the Federal Reserve. Just caught up with Bob Michael
27:10
Speaker 1: over at JP Morgan Asset Management shot him a quick message.
27:12
Speaker 1: He fired back he was looking for a fifty basis
27:14
Speaker 1: point cut. Here's the quote from Bob Head of fixed
27:17
Speaker 1: Income at JP Morgan Asset Management. This is a good
27:21
Speaker 1: bounce to sell high yield. The knock on effects of
27:24
Speaker 1: economy shutting down have yet to be fully understood. It's
27:27
Speaker 1: not just the services sector and travel, etcetera. It's all
27:30
Speaker 1: the supplies to those industries, the data is going to
27:33
Speaker 1: be distorted for the next few quarters. That's the view
27:36
Speaker 1: off the back of a fifty basis point cut, and
27:38
Speaker 1: Jim and I just wonder how many other big players
27:41
Speaker 1: in this market will feel the same way. I think
27:44
Speaker 1: all of them should. I think if you look at
27:47
Speaker 1: what's happened in Japan, South Korea, Italy, Iran, China. As
27:52
Speaker 1: I said earlier, it would almost be a baseline scenario
27:57
Speaker 1: to assume that when we get into late March, you've
28:00
Speaker 1: got thousands of cases in the US, all the schools
28:03
Speaker 1: in the New York City area are closed, and hundreds
28:06
Speaker 1: of thousands of two working family parents have to leave
28:09
Speaker 1: one home to take care of your kids, can't set
28:11
Speaker 1: him a daycare. That's again a group of people again,
28:13
Speaker 1: so that is a massive disruption for an economy if
28:17
Speaker 1: we're going that route. And all we've got to say
28:20
Speaker 1: that we're not going to go that route at this
28:22
Speaker 1: point is wishful thinking. We can hope, and I certainly
28:25
Speaker 1: hope we don't go there, but that's what we're betting.
28:29
Speaker 1: Are not betting up, but that's what we're fearing and
28:31
Speaker 1: reacting to that anticipation, Like I said, there's never been
28:34
Speaker 1: another scenario like this before. Lisa Brahmo with Stephen Stanley
28:37
Speaker 1: published the Damer's pierrepon. His note is scathing. He calls
28:40
Speaker 1: the cut terribly inconsiderate, terribly ill considered, excuse me, terribly
28:47
Speaker 1: ill considered. He makes very clear they're playing stock market. Uh.
28:51
Speaker 1: And that tones out there, John writing and bring Capital
28:53
Speaker 1: felt much the same as uh, Mr Stanley, And you know,
28:56
Speaker 1: this is the arch debate that's going on now between
28:59
Speaker 1: Bob Michael, a JP Morgan and what we're hearing from
29:02
Speaker 1: a select economist to say, just wait a minute, what's
29:04
Speaker 1: the effect here? Why are we doing this? I have
29:06
Speaker 1: to also wonder again this this is not a financial
29:10
Speaker 1: market crisis akin to what we saw in two thousand
29:13
Speaker 1: and eight, where there is a banking issue, and typically
29:15
Speaker 1: the Federal Reserve has the most direct contact with the banks.
29:18
Speaker 1: But I wonder, uh, you know, to what extent people
29:21
Speaker 1: will view this as a negative, will actually weaken the
29:25
Speaker 1: banking system by reducing net interest margins at a time
29:29
Speaker 1: when they need to be increasing some of their lending.
29:31
Speaker 1: I do have to wonder about that. At least I'm
29:33
Speaker 1: not worried about the banks and I don't. But but Jim,
29:36
Speaker 1: I want to jump in on the following and then
29:38
Speaker 1: you can briefe some life into the conversation. To my
29:40
Speaker 1: worry is that an economic shock becomes a financial one
29:44
Speaker 1: because they don't deploy the right tools to address all
29:46
Speaker 1: of this. That if you don't have small and media
29:48
Speaker 1: sized enterprises in this very moment off the back of
29:51
Speaker 1: a really big demand shock, then they're going to come
29:54
Speaker 1: out the other side of this in a couple of
29:55
Speaker 1: months in really bad shape. Yeah, I agree that that
29:59
Speaker 1: is the concern. But um, if I can go into
30:02
Speaker 1: the weeds real quick for you, remember the repos support
30:05
Speaker 1: that the FED was doing that we used to make
30:07
Speaker 1: a lot of noise about. Well, today the amount of
30:10
Speaker 1: repos support that that that the dealers asked the FED
30:14
Speaker 1: broke all the records. Today. They oversubscribed the overnight, they
30:18
Speaker 1: oversubscribed the term repo, and they asked for well or
30:22
Speaker 1: a hundred billion dollars of support. That's not happened that
30:25
Speaker 1: we've oversubscribed both of them in the same day. All
30:28
Speaker 1: of a sudden, there's a tremendous need for liquidity from
30:32
Speaker 1: the banking system. Now, I'm not gonna tell you, I
30:34
Speaker 1: know why, but I didn't expect this to happen. But nevertheless,
30:39
Speaker 1: something else is going on here that all of a sudden,
30:42
Speaker 1: the dealers are demanding huge amounts of liquidity in the
30:46
Speaker 1: market that might have had some play in this, and
30:49
Speaker 1: maybe it's a question to ask Chairman Paul at the
30:51
Speaker 1: press conference. Thanks for listening to the Bloomberg pl podcast.
30:55
Speaker 1: You can subscribe and listen to interviews at Apple Podcasts
30:58
Speaker 1: or whatever podcast platform you prefer. I'm Paul Sweeney. I'm
31:01
Speaker 1: on Twitter at pt Sweeney. I'm Lisa Abram Wohits. I'm
31:04
Speaker 1: on Twitter at Lisa Abram Wohits. One before the podcast,
31:06
Speaker 1: you can always catch us worldwide. I'm Bloomberg Radio