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Fed Balance Sheet Will Be At $9 Trillion Next Year: BI's Jersey · Bloomberg Intelligence

0:02
Speaker 1: Welcome to the Bloomberg Penl podcast on Paul Swing You.
0:05
Speaker 1: Along with my co host Lisa Brahmas, each day we
0:07
Speaker 1: bring you the most noteworthy and useful interviews for you
0:10
Speaker 1: and your money. Whether at the grocery store or the
0:12
Speaker 1: trading floor. Find a Bloomberg Penl podcast on Apple podcast
0:16
Speaker 1: or wherever you listen to podcasts, as well as at
0:18
Speaker 1: Bloomberg dot com. There's a big question and it has
0:21
Speaker 1: been underpinning a lot of the market activity over the
0:23
Speaker 1: past few weeks, and that is the treasury market, this
0:27
Speaker 1: massive funding market and frankly offering benchmark rates for around
0:32
Speaker 1: the world, and it has been beset by incredible dysfunction.
0:35
Speaker 1: Ira Jersey has been covering it all. He's been covering
0:38
Speaker 1: it all for decades back at Credit Suite and beyond.
0:41
Speaker 1: Now he is our head of US interest rate strategy
0:44
Speaker 1: at Bloomberg Intelligence. Ira, is the dysfunction over and I
0:48
Speaker 1: think that this is sort of the key question is
0:50
Speaker 1: people look at the lack of liquidity in this key
0:53
Speaker 1: market as being unprecedented and highly disruptive, regardless of what
0:58
Speaker 1: we see out of Washington, d C. Well, it's been
1:01
Speaker 1: better the last the last twenty four hours for sure, Um,
1:04
Speaker 1: but it's still it's still very spotty. It's not what
1:07
Speaker 1: it used to be. And I think a big part
1:09
Speaker 1: of that is not necessarily because the Fed is buying
1:12
Speaker 1: a lot of bonds. In fact, I think that at
1:14
Speaker 1: some level that's helping at least a little bit UM.
1:17
Speaker 1: But I think it's just this lack of risk appetite.
1:20
Speaker 1: And and like you mentioned, Lisa, you know, there's gonna
1:22
Speaker 1: be a lot more bonds to come. I mean if
1:24
Speaker 1: if um, you know, even even if there's a smaller
1:28
Speaker 1: fiscal stimulus plan, like closer to a trillion than the
1:31
Speaker 1: two trillion, you're still going to have a massive um.
1:34
Speaker 1: Lack of tax receipts, for example, is going to be
1:37
Speaker 1: a big thing that you're going to see over the
1:38
Speaker 1: next couple of months at least. So there's gonna be
1:41
Speaker 1: a lot more supply of treasuries over the next year,
1:44
Speaker 1: regardless of exactly how big the um the fiscal stimulus
1:49
Speaker 1: plan ultimately becomes. Well, all right, that's actually where I
1:52
Speaker 1: wanted to go. Okay, so we have some stability, still
1:54
Speaker 1: pockets of great illiquidity. But now the quick question shifts
1:58
Speaker 1: to financing this massive stimulus bill. That we're expecting, especially
2:02
Speaker 1: without those tax receipts that you were talking about. With
2:04
Speaker 1: the deadline push back to July, how is the government
2:08
Speaker 1: going to do this? We've heard something about a twenty
2:09
Speaker 1: year bond, about a fifty year bond, but ultimately doesn't
2:12
Speaker 1: it come back to T bill issuance in the short run,
2:14
Speaker 1: just to stave off the cash deficit. Yeah, that that's
2:17
Speaker 1: a percent right. In fact, we put out a piece
2:19
Speaker 1: just just this morning about that very that very thing
2:23
Speaker 1: where um, basically T bill issuance is probably gonna go up,
2:26
Speaker 1: but I'm gonna use this letter. Remember it's trillion, probably
2:30
Speaker 1: go up over one trillion dollars over the next six
2:33
Speaker 1: months or so. And one of the reasons for that
2:35
Speaker 1: is is twofold. One is it will take a little
2:39
Speaker 1: bit of time for the Treasury Department to ramp up
2:42
Speaker 1: the amount of coupon issues. So that's the amount of
2:44
Speaker 1: longer term death that they're going to issue. So they
2:46
Speaker 1: will be issuing a twenty year They said that. They
2:48
Speaker 1: said that it's going to debut in in May and
2:50
Speaker 1: kind of just in time for a lot of this
2:52
Speaker 1: fiscal stimulus to be funded. Um. I think that there's
2:56
Speaker 1: a chance that they might do a longer term the
2:58
Speaker 1: fifty year ultra bond, but I still think it's there's
3:02
Speaker 1: a question about how much demand they'll have for that,
3:05
Speaker 1: so there's a shot. But yes, there is likely to
3:07
Speaker 1: be maybe up to three and a half trillion dollars
3:10
Speaker 1: of T bills outstanding. Now what's interesting is even at
3:13
Speaker 1: those massive levels, that's about the same percentage of the
3:16
Speaker 1: treasury market um that the that that there was back
3:21
Speaker 1: before two thousand seven when the Treasury Department reduced the
3:24
Speaker 1: amount of tea bills that it issued so um, So
3:27
Speaker 1: basically you're going back to historical norms in terms of
3:30
Speaker 1: how much tea bills might be the size of the market,
3:32
Speaker 1: and I think that that's going to be something you
3:34
Speaker 1: to see. So so anyone who really wants super safe
3:36
Speaker 1: assets can get them. What's what's neat about that now
3:40
Speaker 1: that the Treasury Department will like is t bolls. Right
3:42
Speaker 1: now in the short short end, so one month and
3:45
Speaker 1: three months te bills are trading at zero, so they
3:49
Speaker 1: don't yield anything. So you know, if there was a
3:51
Speaker 1: time to issue you know, short term debt, it's now
3:54
Speaker 1: when you can basically fund it for free. Are so
3:57
Speaker 1: in the treasury market, the market participants say, hey, the
4:00
Speaker 1: FED has done pretty much everything it can do, it
4:03
Speaker 1: needs to do, it should do. Now it's really up
4:05
Speaker 1: to Congress and the administration to really push on the
4:08
Speaker 1: pedal of fiscal stimulus. Yeah. So so the so fiscal
4:12
Speaker 1: stimulus is needed for two reasons. I mean, one is
4:15
Speaker 1: because you know, the Federal Reserve is designed to kind
4:18
Speaker 1: of help market function and allow the financial institutions to
4:23
Speaker 1: be able to lend to other institutions. Right, So, so
4:27
Speaker 1: that's the job of the FED by going in and
4:29
Speaker 1: doing some of the facilities like they are doing like
4:31
Speaker 1: buying corporate credit for example. It's not completely unprecedented, but
4:36
Speaker 1: it's pretty close. And and that has to be back
4:39
Speaker 1: stopped by the by the federal government because the Federal
4:42
Speaker 1: Reserve doesn't like to take credit risk. They basically make
4:46
Speaker 1: loans with big haircuts because they don't want to take
4:49
Speaker 1: credit losses. So fiscal stimulus needs to uh come to
4:53
Speaker 1: help like small and medium sized businesses where it's difficult
4:56
Speaker 1: for the FED to go directly to those businesses and help.
4:59
Speaker 1: So you know the fact that they've announced that they
5:01
Speaker 1: want to do a facility through the SBA through the
5:04
Speaker 1: Small Business Administration to help those uh, those types of
5:08
Speaker 1: businesses which the Federal Reserve can help fund. But ultimately
5:11
Speaker 1: it's a governmental organization that needs to really focus on that.
5:15
Speaker 1: And that's one of the reasons why we're looking at
5:18
Speaker 1: um this fiscal stimulus plan to maybe even add more
5:22
Speaker 1: ammunition to what the FED has been doing, um and
5:25
Speaker 1: uh and and provide the more equity capital so they
5:27
Speaker 1: can even help help more. Just real quickly here, Ira,
5:32
Speaker 1: I'm looking right now at the Fed's balance sheet, which
5:34
Speaker 1: surged on March eighteen, last week to four point six
5:39
Speaker 1: seven trillion dollars. How big is it going to get
5:41
Speaker 1: by the end of all of this? So I'm actually
5:44
Speaker 1: looking at the spreadsheet right now that I've been working on,
5:46
Speaker 1: So I can't tell you the exact number, but I
5:48
Speaker 1: can say much much larger double at least, yeah, at
5:54
Speaker 1: least double. So in other words, you're expecting at least
5:56
Speaker 1: a nine trillion dollar Federal Reserve balance sheet I say
5:59
Speaker 1: this time next year. Uh, that would not surprise me. Yeah,
6:02
Speaker 1: that that's kind of in line with what we're talking about.
6:04
Speaker 1: I think a big part of that is how how
6:07
Speaker 1: what is the take of of some of these new facilities.
6:09
Speaker 1: So even if the Federal Reserve, you know, kind of
6:12
Speaker 1: slows down its purchases of mortgages and treasuries, which I
6:15
Speaker 1: think eventually it will do, is the SBA facility, for example,
6:19
Speaker 1: which is really where the pain point is in this
6:21
Speaker 1: whole uh, in this whole mass with the central distancing
6:24
Speaker 1: um is uh is that going to get to a
6:27
Speaker 1: trillion dollars or not? And that's going to be a
6:28
Speaker 1: big question. All right, Jersey, thank you so much for
6:31
Speaker 1: joining us. We really appreciate your commentary here and what
6:33
Speaker 1: has been a very busy period in the U S.
6:36
Speaker 1: Treasury markets. Our Jersey chief US interest rate strategist for
6:39
Speaker 1: Bloomberg Intelligence joining us on a phone. Lisa, Yeah, that
6:42
Speaker 1: was enough that at me more than doubling. Uh you
6:45
Speaker 1: know in terms of the balance sheet, Wow, that means
6:47
Speaker 1: more than nine trillion dollars that will be the it's
6:49
Speaker 1: balance sheet. And I believe that that will be a
6:52
Speaker 1: hot potato political issue for a lot of people and
6:55
Speaker 1: yet viewed as crucial and stabilizing the market right now. Yeah, absolutely,
6:59
Speaker 1: and that market uh a much stronger day today, Lisa's
7:02
Speaker 1: we've been saying, uh, the dall up seven. That's four
7:05
Speaker 1: hundred points on uh the DAL so again a risk
7:08
Speaker 1: on day today as a market tries to price in
7:11
Speaker 1: where this is all going. This is Bloomberg. All right,
7:17
Speaker 1: let's talk to a professional about what to do with
7:18
Speaker 1: these markets. Matt Maylei, chief market strategist at Miller Tebec
7:21
Speaker 1: Joints us here, Matt, thanks so much for joining us. Wow. Okay,
7:25
Speaker 1: so we've got the green on the screen today, but
7:26
Speaker 1: just help us put into perspective what we're seeing in
7:30
Speaker 1: the markets really over the last couple of weeks, but
7:32
Speaker 1: certainly over the last several days. Well, if you know,
7:35
Speaker 1: it's it's it's funny because back in when the thing
7:38
Speaker 1: first to hit, uh, we were saying that people should
7:42
Speaker 1: raise some you know, the market was priced for profession
7:44
Speaker 1: and people should raise some cash because if we get
7:47
Speaker 1: a severe downturn, you'd be able to you know, be
7:50
Speaker 1: able to put that cash to work. And now we're
7:52
Speaker 1: kind of seeing the the the the opposite situation where
7:54
Speaker 1: we're gonna be a little bit more comfortable, uh, not
7:56
Speaker 1: saying that the bottom is going to is in and
7:58
Speaker 1: today's markets doing better. But you can't, you can't, I
8:01
Speaker 1: think it's impossible to grab the h uh, the exact pick,
8:04
Speaker 1: the exact bottom. So if you're tipping your toe back
8:06
Speaker 1: in here and usual in buying more on a very
8:10
Speaker 1: gradual scale down basis, Uh, you know a year now
8:13
Speaker 1: or a year from now or two years from now,
8:14
Speaker 1: you're gonna look quite good because uh, once it does mound,
8:17
Speaker 1: it's gonna be impossible to chase it. So you do
8:19
Speaker 1: have to take advantage of it whence down. Man, I
8:21
Speaker 1: want to follow up on that, the concept of once
8:23
Speaker 1: it bounces, you won't be able to chase it. That
8:27
Speaker 1: sort of implies that we are going to see some
8:29
Speaker 1: massive recovery, and that doesn't seem to be the consensus
8:33
Speaker 1: right now of my at least economists who I speak to.
8:36
Speaker 1: Can you talk about the market recovery and how it
8:38
Speaker 1: might look versus some of the economic estimates that we're
8:42
Speaker 1: hearing that are not so optimistic. Well, we've always got
8:45
Speaker 1: to understand that that that that the stock market moves,
8:48
Speaker 1: especially on the way back ups, and in this case
8:51
Speaker 1: it was only was a very mild delay. Usually there's
8:53
Speaker 1: a big uh the stock market rolls over, but you know,
8:57
Speaker 1: six months in front of the uh, the economy. Now,
9:00
Speaker 1: you know, because of this kind of you know, black
9:02
Speaker 1: swan event, it only happened shortly after uh it became
9:06
Speaker 1: evident that it was a rear its ugly head. And
9:09
Speaker 1: but the thing is when the when the market uh tends,
9:12
Speaker 1: it bounces a lot earlier, I mean, and and the
9:14
Speaker 1: simple reason is is that it sells off very much
9:17
Speaker 1: more quickly than the economy slows down, so it prices
9:20
Speaker 1: in some of the worst case scenarios much more quickly.
9:23
Speaker 1: Now again that's not to say that this market can't
9:25
Speaker 1: go down further, uh, but the important thing is for
9:30
Speaker 1: investors to do is to uh separate what's going on
9:34
Speaker 1: in the stock market to what's going on in in
9:36
Speaker 1: the economy because there's always that lag. And one of
9:39
Speaker 1: the key reasons why people, I mean people I don't
9:42
Speaker 1: really want to have a lot of conference to buying
9:43
Speaker 1: these stocks until things feel better. But you know something,
9:46
Speaker 1: history shows us that when things really feel better, the
9:49
Speaker 1: markets already seen a big bounce and a big move up.
9:51
Speaker 1: So to gradually buy stocks uh and on over the
9:55
Speaker 1: next few months. And I'm not just saying to the
9:56
Speaker 1: next week or two, over the next few months is
9:58
Speaker 1: going to be a good way to take advantag of
10:00
Speaker 1: this severe downturn. So as you think about it, you know,
10:03
Speaker 1: the volatility that we've seen in the market, we continue
10:05
Speaker 1: to see in the market some um, you know, sectors
10:08
Speaker 1: really at historically low valuations. Um. I'm thinking about you know,
10:12
Speaker 1: some of the cruise lines and some of the leisure
10:14
Speaker 1: lines that got hit the most and earliest. How would
10:16
Speaker 1: you suggest people do get back into the market to
10:19
Speaker 1: the extent they want to kind of dip their toes
10:21
Speaker 1: or dollar cost average or however you gonna swing it, right,
10:24
Speaker 1: I mean, one of the things, of course, we we
10:26
Speaker 1: know that these cruise lines are the the airlines, etcetera.
10:30
Speaker 1: You know, when they turn around, boy, you're it's going
10:33
Speaker 1: to be a Grand Slam home run. Whoever can pick
10:35
Speaker 1: that bottom. But like I said, it's almost impossible to
10:38
Speaker 1: do that. The thing is, with so many high quality names, uh,
10:42
Speaker 1: and you know companies with great balance, she's of great managements,
10:45
Speaker 1: uh and things like that, you're still gonna be able
10:47
Speaker 1: to hit a two run homer. So why you know,
10:49
Speaker 1: why go for the Grand Slam when you can hit
10:51
Speaker 1: two run homer. Usually you only get an opportunity where jeez,
10:54
Speaker 1: I can get a beaten down stock or beaten down
10:57
Speaker 1: group because it's separate from what's going on in the
10:59
Speaker 1: rest of the world. Therefore, the best I can do
11:01
Speaker 1: in the really quality names as a single, the boy
11:03
Speaker 1: I can hit a grand slam with this other one. Now,
11:05
Speaker 1: if you can hit a home run or a double,
11:08
Speaker 1: why not go with the high quality names? And that's why,
11:10
Speaker 1: you know, uh, there's much less risk, but still a
11:13
Speaker 1: lot of reward and those uh, those high quality names.
11:16
Speaker 1: We're speaking with Matt Malee, chief market strategist at Miller
11:19
Speaker 1: Tabac and Matt, you know, your argument sounds compelling. It
11:22
Speaker 1: makes sense based on the by the dip kind of
11:24
Speaker 1: mentality that we've seen over the past decade. There's a question, though,
11:28
Speaker 1: that the disruption here is fundamentally changing the economic outlook
11:32
Speaker 1: and fundamentally changing the balance sheets of a lot of companies,
11:36
Speaker 1: and it doesn't seem like all of them will be rescued.
11:39
Speaker 1: How do you sort of get confidence that this time
11:43
Speaker 1: will be like the others and by the dip will
11:45
Speaker 1: work at a time of such incredible uncertainty just about
11:50
Speaker 1: you know how quickly this will recover, whether we might
11:52
Speaker 1: be heading into a depression, Well, I think one of
11:56
Speaker 1: the things that's going to be you know, first of all,
11:58
Speaker 1: you know again, I just want to admit to say
12:00
Speaker 1: that I I you know, when when the markets started
12:01
Speaker 1: heading down, I was saying, you know, sell sell, sell
12:04
Speaker 1: the bounces. So you know, I was early calling for
12:07
Speaker 1: UH investors to be careful, raise some cash. And really
12:10
Speaker 1: when the market is still down twenty I was saying
12:13
Speaker 1: the same thing, raise cash on bounces. However, the thing is,
12:17
Speaker 1: and you're absolutely right, the at least the one of
12:20
Speaker 1: the things that we people will stay as your jeez,
12:22
Speaker 1: I can go back in and it's much more than
12:23
Speaker 1: a dip this time, it's a big it's a crash basically.
12:26
Speaker 1: But what do I do do I just buy the
12:27
Speaker 1: stock market and buy everything like I've I've done it.
12:30
Speaker 1: I did in two thousand and eighteen, I did in
12:31
Speaker 1: two thousand and sixteen. That works like a charm. Now
12:34
Speaker 1: you have to be much much more careful. Uh, it's
12:37
Speaker 1: now becoming a stock Because market people have been saying
12:39
Speaker 1: that was gonna happen for a while, it's happening now. Uh.
12:42
Speaker 1: You know, I believe that to a certain degree that
12:45
Speaker 1: the passive investing is gonna be is dying. Uh and
12:49
Speaker 1: and so therefore investors need to be thinking about specific companies. Uh,
12:53
Speaker 1: not just specific industries, but specific countries within the best industries.
12:57
Speaker 1: And you know you talk to your investment advisor. Uh.
13:00
Speaker 1: Use the mutual funds uh that that have traditions of
13:05
Speaker 1: having really good stock pickers. Is not that there's not
13:07
Speaker 1: a huge amount of those, but there are several they
13:09
Speaker 1: are very very good. And that's why I think people
13:12
Speaker 1: can can dip their toes back in and cost U
13:15
Speaker 1: dollar cost average down rather than jump back in and say, geez,
13:17
Speaker 1: I'm just gonna buy the smpor or some sort of
13:19
Speaker 1: etf uh with my eyes with my eyes closed somehow,
13:23
Speaker 1: What are you looking at right now? What are the
13:24
Speaker 1: names today that you're looking at, or the sectors today
13:26
Speaker 1: that you're looking at. Well, one of the things it's funny,
13:30
Speaker 1: is this whole toole technology thing. And I've been a
13:33
Speaker 1: little surprised by this, but I shouldn't have been. Now,
13:35
Speaker 1: this whole technology thing, this whole smart phone, it's just amazing.
13:41
Speaker 1: I mean the funny but in years, Paddy, when I
13:44
Speaker 1: you know, in the in the nineteen eighties, nineteen ninies,
13:47
Speaker 1: even into the especially after the tech bubble, uh in
13:50
Speaker 1: the in the in the next stecond in two thousand's
13:52
Speaker 1: the odds, I guess, as they call them. Uh, the
13:54
Speaker 1: people would say, oh, geez, you know when you go
13:56
Speaker 1: back in, you don't want to go right back into
13:58
Speaker 1: the tech area because that's the most real more risky Yeah,
14:00
Speaker 1: more more reward. But it's a very very risky area,
14:04
Speaker 1: uh this time. And therefore they tend to do better
14:07
Speaker 1: on the on the way up, and then they get
14:08
Speaker 1: clobbered on the way down. But now technology has become
14:12
Speaker 1: so such a backbone of our economy. It's not the
14:15
Speaker 1: risky part of it. Uh. You know, there's certainly parts
14:17
Speaker 1: of technology they are more risky than others. But you've
14:21
Speaker 1: got some great companies out there that they're the backbone
14:23
Speaker 1: of the U S industry. It's not general motors anymore,
14:26
Speaker 1: it's not general electric anymore. It's the Apples and the
14:29
Speaker 1: Microsoft's of the world. Uh, that are the backbone of
14:32
Speaker 1: of our and and we've seen that in the way
14:34
Speaker 1: that the market has gone down instead of underperforming it
14:38
Speaker 1: the Nasdaq, which is obviously heavily weighted in technology shares,
14:42
Speaker 1: it has gone down the same amount of the SMP.
14:44
Speaker 1: It didn't underperform on the way down, even though it
14:47
Speaker 1: did outperform nicely on the way up. And that's encouraging
14:50
Speaker 1: to me that some of the names you'd wanted to
14:52
Speaker 1: avoid it avoid in past sell offs, at least early on. Uh,
14:57
Speaker 1: these technology names, especially the high qualit ones, are the
15:00
Speaker 1: ones you do want to be buying, and they have
15:02
Speaker 1: outperformed over the last six trading days. And so I
15:04
Speaker 1: think that tells you something right there, Matt Maylee, thank
15:07
Speaker 1: you so much for taking the time. Matt Maylee, chief
15:09
Speaker 1: market strategist at Miller, Ta Back and Company, joining us
15:12
Speaker 1: on the phone. And Uh, those iPhones. I think that
15:15
Speaker 1: I think that the smart phone industry is onto something, Paul.
15:18
Speaker 1: I think people are going to still use their their
15:20
Speaker 1: smartphones after this coronavirus disruption catch on to be a thing,
15:24
Speaker 1: I think. So I think that that might be a
15:26
Speaker 1: place of of of use. Actually interesting to think about
15:29
Speaker 1: how much actually cloud computing and all tech is going
15:33
Speaker 1: to get a boost from this. Time to check in
15:38
Speaker 1: with Bloomberg Opinion, we're joined by opinion calumnist Gary Shilling.
15:42
Speaker 1: No better person here to chat to in terms of
15:44
Speaker 1: getting some long term perspective on the US economic condition
15:49
Speaker 1: and how it may fare given this coronavirus. Gary, thanks
15:52
Speaker 1: so much for joining us. We just heard Larry Cudlow
15:55
Speaker 1: make the comments that he believes the An administration believes
15:59
Speaker 1: that this stimulus package will set up the US economy
16:02
Speaker 1: for strong second half. Do you uh entertained that type
16:06
Speaker 1: of optimism. No, I don't. I think the kind of
16:09
Speaker 1: disruptions we've had people pulling their horns. You look at
16:13
Speaker 1: what happened after nine eleven. I mean, it was over
16:16
Speaker 1: in a matter of minutes, but people worried about follow
16:19
Speaker 1: on attacks and so on and so forth. I think
16:22
Speaker 1: this is going to have a decided impact on on
16:25
Speaker 1: confidence of consumers and and and businesses in this country.
16:30
Speaker 1: And there are other important things too. I think that
16:33
Speaker 1: it's uh, it's marking a further pull away from globalism.
16:38
Speaker 1: Had bloom another Bloomberg column on that one. And you
16:41
Speaker 1: know the point is, with the disruption of supply chains
16:45
Speaker 1: and so on, I think this place of the hands
16:47
Speaker 1: of people like Trump who are very protectionists, the idea
16:51
Speaker 1: of more self sufficiency, pulling away from globalism. Dr Schilling, Gary,
16:57
Speaker 1: it's wonderful having you because you have had a forecasting
17:01
Speaker 1: record like no other, and in nine you're one of
17:04
Speaker 1: the few people who thought that a recession would start
17:07
Speaker 1: late in the year it did. Looking out now at
17:10
Speaker 1: the same site of the same type of foresight, I'm wondering,
17:14
Speaker 1: do you see a similar sort of downturn, protracted downturn
17:19
Speaker 1: that monetary policy, fiscal policy just can't stop. Yeah, I
17:25
Speaker 1: think that's the case. I mean, you know, this is
17:27
Speaker 1: a big debate. Now, do you have a you have
17:29
Speaker 1: a v bottom. I think it more maybe looking more
17:32
Speaker 1: like an endless l you have a decline and then
17:36
Speaker 1: a very slow recovery. Sure you get the initial drop,
17:40
Speaker 1: a lot of money being put into people's hands. Uh,
17:43
Speaker 1: and low income people will spend it. They spend at
17:46
Speaker 1: least of their incomes. But other people, businesses, I think
17:49
Speaker 1: are going to be a lot more, a lot more
17:51
Speaker 1: cautious on this. And also to restart all these supplies change.
17:56
Speaker 1: I mean, China is you know, they're talking about people
17:58
Speaker 1: going back to work, but to get things re established
18:01
Speaker 1: and get the supplies, it's a very supply chains are
18:04
Speaker 1: very intricate. You can have you can have a semiconductors
18:08
Speaker 1: producing Korea. They go to Taiwan for siginal assembly for
18:11
Speaker 1: our sub assembly, than to China to go into cell phones,
18:14
Speaker 1: and in our export of the US. You have all
18:16
Speaker 1: these supply chains and it takes a long time to
18:19
Speaker 1: get those things re established. So it's interesting Gary the
18:24
Speaker 1: you know, a lot of the Wall Street economists are
18:26
Speaker 1: kind of looking for that V shaped recovery. So it'll
18:29
Speaker 1: be interesting to see whether that comes to fruition. Give
18:31
Speaker 1: us your sense of what you think the FED has done.
18:34
Speaker 1: Fed had a very busy day yesterday, really came on
18:37
Speaker 1: strong with more quantitative easing. Give us what your your
18:40
Speaker 1: thoughts on how you think the FED is handling this. Yeah,
18:42
Speaker 1: they used to call this pushing on a string, you know,
18:45
Speaker 1: and you pull on the string, you get results. You're
18:47
Speaker 1: tight monetary policy. But when you push on a string,
18:50
Speaker 1: it just goes limb. I think that's a situation. I mean,
18:53
Speaker 1: the FET is basically made uh. Plenty of money available, uh,
18:57
Speaker 1: and and the question is it is and so much
19:00
Speaker 1: a question of liquidity as a question of solvency, and
19:04
Speaker 1: the question of of who wants to borrow, who wants
19:06
Speaker 1: to who wants to spend h So you really shift
19:10
Speaker 1: over to fiscal policy. As having to carry the have
19:14
Speaker 1: to carry the the the water. The FED just the
19:18
Speaker 1: Fed is just I mean they've done vertaly everything they
19:20
Speaker 1: can except literally dumb money out of helicopters. Yeah. Well,
19:24
Speaker 1: and given the fact that you have served on the
19:27
Speaker 1: staff that the San Francisco Fed, UH Bank of America,
19:31
Speaker 1: I'm wondering how concerned you are about the idea of
19:34
Speaker 1: the IRA. Jersey was just talking about that the Fed's
19:36
Speaker 1: balance she could climb beyond nine trillion dollars in short
19:39
Speaker 1: order here. Well, uh, you know the thing is that
19:43
Speaker 1: that people are have gotten very callous to this. You say,
19:47
Speaker 1: have a big concern. You go back to the days
19:49
Speaker 1: of Paul Ryan and the sequestering, the idea that big
19:53
Speaker 1: devas its big monetary ease would result in inflation and
19:58
Speaker 1: higher interest rates. Well, of course, what's happened is you've
20:01
Speaker 1: had these deficits now a trillion dollars and headed much
20:05
Speaker 1: much higher with the reaction of the coronial coronavirus, and
20:10
Speaker 1: interest rates to come down. So you've got they call
20:13
Speaker 1: that modern modern monetary Uh theory. You know, theory follows fact.
20:17
Speaker 1: You have the facts, you dream of a theory to
20:19
Speaker 1: make them so so there's literally there's literally no concern
20:22
Speaker 1: about devicits. And right now, you know the world is
20:27
Speaker 1: is lusting for dollars. That's why you saw the strength
20:31
Speaker 1: and the dollar. You've seen the strength and treasuries. Uh,
20:34
Speaker 1: this is where people want to be. These are the
20:35
Speaker 1: safe havens. And also I think we're the prospects of
20:40
Speaker 1: of lower inflation even deflation. Uh, you have less reason
20:44
Speaker 1: to worry about about the deficits and reserve action. Gary Shilling,
20:50
Speaker 1: thank you so much. Too. Sure. Unfortunately we have to go,
20:53
Speaker 1: but I could speak with you all afternoon. Gary Shilling
20:55
Speaker 1: as the president of a Gary Shilling and Co. Also
20:58
Speaker 1: a Bloomberg opinion columns. We look at some of the
21:03
Speaker 1: stability that we're seeing in certain markets and the surge
21:07
Speaker 1: in US equities, and there is still a huge question
21:10
Speaker 1: mark around the mortgage market, really a huge pain as
21:13
Speaker 1: we see funds including investual Mortgage Capitalal the latest saying
21:17
Speaker 1: that they are unable to meet margin calls. Is the
21:20
Speaker 1: value of mortgage debt falls plummets. Logan Modashami, covering the
21:25
Speaker 1: mortgage market for years, senior loan officer at a MC Lending,
21:29
Speaker 1: contributed to Housing Wire. I want to get your sense logan,
21:33
Speaker 1: what exactly is it that's causing the incredible pain within
21:37
Speaker 1: the housing market, within the mortgage market. That goes beyond
21:40
Speaker 1: a lot of the other declines that we've seen another
21:43
Speaker 1: asset classes. The mortgage margin meltdown really happened when rates collapsed,
21:49
Speaker 1: and I think the first thing we have to think
21:51
Speaker 1: about is that the e e p O risk early
21:53
Speaker 1: payoff risks just blew out the entire system. So what
21:57
Speaker 1: you saw was that UH mortgage companies cannot afford to
22:01
Speaker 1: push rates lower, and they I think March nine, we
22:05
Speaker 1: saw about a one percent increased in rates that week,
22:08
Speaker 1: even though the ten year yield went all the way
22:10
Speaker 1: down to a thirty two basis points. The business of
22:14
Speaker 1: being in the mortgage business basically collapse on everyone. So
22:18
Speaker 1: you're starting to see credit freeze. All the non QM
22:22
Speaker 1: mortgage lenders are gone, not none of them are around,
22:25
Speaker 1: are there? Some of them might come back, but they're gone.
22:28
Speaker 1: QM being QM being mortgages eligible for Fanny Freddy No
22:33
Speaker 1: non q M are those that are outside the Freddy
22:35
Speaker 1: and Fanny guidelines. So basically the only lender right now
22:40
Speaker 1: the government. Everyone's basically a loan process or for government loans. UH,
22:45
Speaker 1: and Freddie and Fanny are still under government grips, so
22:49
Speaker 1: they could still function somewhat normal, but it was a
22:52
Speaker 1: complete meltdown. Uh. There's not enough money in the mortgage
22:57
Speaker 1: business to offset these margin calls. And I wouldn't be
23:00
Speaker 1: surprised if we have more casualties going out. But the
23:04
Speaker 1: Fed Federal Reserve obviously saw what was going on and
23:07
Speaker 1: they're going to be aggressively going back into the mortgage
23:10
Speaker 1: backed securities. But I'm not sure this is going to
23:14
Speaker 1: UH end without more casualties in the mortgage industry. All right,
23:18
Speaker 1: So logan, is there anything in the stimulus plans that
23:22
Speaker 1: there's a house plan, there's a cent a plan that
23:23
Speaker 1: you've seen that will try to address the mortgage market. Well,
23:28
Speaker 1: we're looking at basically twelve months of mortgage payments not
23:33
Speaker 1: being need to be made if you're part of this
23:36
Speaker 1: coronavirus UH plan that facilitates that you can show your
23:41
Speaker 1: job or the abil need not to pay. So the housing,
23:45
Speaker 1: it's really interesting. The housing market is on fire. It
23:49
Speaker 1: is literally the best first two months of the year. UH.
23:53
Speaker 1: And for myself, as somebody who's talked about years, is
23:56
Speaker 1: going to look good. It even surprises me. Thirteen year
23:59
Speaker 1: highs and existing home sales, new home sales three months
24:02
Speaker 1: sales is on is on fire. We have eight percent
24:05
Speaker 1: existing home sales median sales price growth that is way
24:08
Speaker 1: too hot. And then this happened. So I think once
24:13
Speaker 1: you get mortgage backed securities being purchased, once lockdown protocols
24:17
Speaker 1: are taking off, people can go walk the earth without
24:20
Speaker 1: social distancing. We can get back to a more traditional
24:23
Speaker 1: housing market that it was hot, hot, hot, The sector
24:27
Speaker 1: was hot, the economy was fine before this virus. But
24:31
Speaker 1: you're gonna have to deal with some of the casualties
24:33
Speaker 1: and the mortgage business. And you know, we're gonna have
24:36
Speaker 1: to see how much does inventory actually move up when
24:40
Speaker 1: people cannot functionally put their house on the market. So look,
24:43
Speaker 1: and let's unpack some of this. The whole idea of
24:45
Speaker 1: the casualties in the mortgage market. You're talking about the
24:49
Speaker 1: mortgage market outside of the Fannie and Freddie backing, and
24:52
Speaker 1: I'm wondering what that means for people looking to buy
24:56
Speaker 1: a home. Does it mean that their rates go up
24:59
Speaker 1: if they're more ridges are above a certain amount, Does
25:01
Speaker 1: it mean that they're just generally is going to be
25:03
Speaker 1: less capital around for home loans. How does that translate.
25:08
Speaker 1: We're we're right now seeing the market get a little
25:11
Speaker 1: bit better because races jumped up one cent on everyone
25:15
Speaker 1: and all the banks were raising rates. So it's starting
25:18
Speaker 1: to get a little bit better. So over time, whatever
25:21
Speaker 1: is left in the industry should be able to function
25:25
Speaker 1: normally now that the FED is in the system. So
25:28
Speaker 1: we'll see. But there are for for example, when you
25:31
Speaker 1: have when you lose an entire branch of a mortgage industry,
25:34
Speaker 1: be non qu on lenders that stress nobody was going
25:37
Speaker 1: to give them money. Credit has froze, so some of
25:41
Speaker 1: the non traditional lending is gone not happening. So I
25:45
Speaker 1: think that's that's the first blaming aspects. But can you
25:48
Speaker 1: talk about who they lent to? In other words, what
25:51
Speaker 1: niche did they fill that won't be filled if these
25:54
Speaker 1: companies go up, go belly up. Here's a here, here's
25:57
Speaker 1: a people that are over forty three debt to income ratios,
26:02
Speaker 1: people that have bank statement loans, people that don't traditionally
26:06
Speaker 1: get verified through a self employment or W two taste
26:09
Speaker 1: of those loans that are not part of the qualified
26:13
Speaker 1: mortgage are gone so bank statement loans and and higher
26:18
Speaker 1: debt to income rat shows those loans are not going
26:20
Speaker 1: to be around this year. Uh so that I think
26:23
Speaker 1: that's the marketplace that gets hit. Now we're looking at
26:26
Speaker 1: probably less than three of all mortgages that are being done,
26:30
Speaker 1: especially with bank statement loans, but that marketplace right now
26:33
Speaker 1: is permanently shut off. Logan, how would you compare what
26:37
Speaker 1: we're experiencing the mortgage market now versus two thousand two nine,
26:42
Speaker 1: And does that give you any roadmap for how it
26:44
Speaker 1: may recover? You know, in two thousand eight. I remember
26:47
Speaker 1: when in August of two tho remember Wells Fargo did
26:49
Speaker 1: a flash showing eight percent mortgages everywhere, and that was basically,
26:54
Speaker 1: we don't want to do business anymore. Now you see
26:56
Speaker 1: some of the mortgage rates increase, you know, to try
26:59
Speaker 1: to stem the remember the refinance demand booming, purchase application
27:04
Speaker 1: demand booming, so you have some capacity constraint. It's a
27:07
Speaker 1: much different marketplace because you don't have this over leveraged
27:10
Speaker 1: credit bubble on the consumer side and on the on
27:14
Speaker 1: the on the financial side. So it's different in the
27:16
Speaker 1: sense that more traditional lending will move on. Find Freddie
27:20
Speaker 1: and Fannie are still under the governmentship protection. That'll be fine.
27:25
Speaker 1: Back then, you know, you had no idea what was
27:28
Speaker 1: going to happen every single day. So the traditional side
27:32
Speaker 1: of lending, basic, fundamental sound home lending is still here,
27:36
Speaker 1: but some of the niche players are gone right now.
27:38
Speaker 1: And I don't see as long as the government is
27:41
Speaker 1: holding Freddy and Fanny's hand, this will be okay. If
27:44
Speaker 1: they were fully publicly traded companies that weren't under the
27:48
Speaker 1: protection of the government, that might have been a different story.
27:51
Speaker 1: I think that's the most important thing we have to
27:53
Speaker 1: We have to be very grateful that the government is
27:55
Speaker 1: still part of Freddy and Fanny right now, because the
27:57
Speaker 1: mortgage market itself is still functioning when you just have
28:00
Speaker 1: the niche players taken out. Logan Mota, thank you so
28:05
Speaker 1: much for joining us Logan as a senior loan officer
28:08
Speaker 1: at AMC Lending Group, also a calumnist for the Housing Wire,
28:11
Speaker 1: joining us from Irvine, California. And again, Lisa, once again
28:14
Speaker 1: we get into a crisis mode in the financial markets.
28:17
Speaker 1: We see pain in that wortgage market, just like we
28:19
Speaker 1: did back in two nine. Well, to me, it was
28:22
Speaker 1: just striking that there's some mutual funds that got pretty
28:25
Speaker 1: top ratings from morning stars as far as their performance went.
28:29
Speaker 1: Seeing forty drops in days last week, I mean this massive,
28:34
Speaker 1: massive declines that we saw as margin calls were not met,
28:38
Speaker 1: as redemptions had to be met. And this is the
28:40
Speaker 1: bid lists that we saw over the weekend with commercial
28:43
Speaker 1: property and uh some prime mortgage debt that had been
28:47
Speaker 1: repackaged that was trying to be sold at fire sales.
28:50
Speaker 1: Really interesting. Thanks for listening to the Bloomberg P and
28:54
Speaker 1: L podcast. You can subscribe and listen to interviews at
28:56
Speaker 1: Apple Podcasts or whatever podcast platform you prefer. Um All Sweeney,
29:00
Speaker 1: I'm on Twitter at PT Sweeney. I'm Lisa Abram Wohits.
29:03
Speaker 1: I'm on Twitter at Lisa Abram Wohits. One Before the podcast,
29:06
Speaker 1: you can always catch us worldwide on Bloomberg Radio