Latest / Bloomberg Intelligence / This Market Looks A Lot Like Q2 2008: JPM's Bob Michele

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This Market Looks A Lot Like Q2 2008: JPM's Bob 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 Waits. 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
• 0:18
  Speaker 1: that Bloomberg dot com. In response to the economic impacts
• 0:22
  Speaker 1: from the coronavirus, the Federal Reserve is stepping up and
• 0:26
  Speaker 1: stepping in in a big way, supporting liquidity the market,
• 0:29
  Speaker 1: not just buying treasuries, but also going into the corporate
• 0:31
  Speaker 1: bond market to get a sense of what that means
• 0:34
  Speaker 1: for the credit markets. Who welcome Bob Michael. Bob is
• 0:37
  Speaker 1: a chief investment officer and head of Global fixed Income,
• 0:39
  Speaker 1: Currency and Commodities at JP Morgan Asset Management. Bob, thanks
• 0:43
  Speaker 1: so much for joining us. So as we take a
• 0:45
  Speaker 1: look at what the Fed is doing here and its
• 0:47
  Speaker 1: support of the markets and liquidity in the markets, what
• 0:51
  Speaker 1: do you make of their moves into the corporate credit market.
• 0:56
  Speaker 1: Good morning, Paul, I take some moves into the corporate market,
• 1:00
  Speaker 1: and also let's not forget into the municipal market and
• 1:04
  Speaker 1: into parts of the non agency mortgage market where critical
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  Speaker 1: and necessary. So I applaud it um. They had to
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  Speaker 1: keep those markets functioning. They couldn't allow what was happening
• 1:18
  Speaker 1: in those markets where they were effectively frozen with very
• 1:21
  Speaker 1: little trading going on because they were perceived to be
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  Speaker 1: outside of any kind of central bank safety net, to
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  Speaker 1: continue to operate that way. So I think it was
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  Speaker 1: a good first step, Bob. The FED has said that
• 1:35
  Speaker 1: they are going to delve in THEO into the corporate
• 1:37
  Speaker 1: debt market, they have yet to actually do so, and
• 1:39
  Speaker 1: I think it's interesting that yesterday FED Chair J. Powell
• 1:42
  Speaker 1: indicated they were willing to go further, and yet they
• 1:45
  Speaker 1: haven't even taken the first steps when it comes to
• 1:47
  Speaker 1: actually implementing it. In the credit markets. Do you think
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  Speaker 1: the market's gotten ahead of itself piling into junk bonds,
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  Speaker 1: in particular with the expectation that they'll be back stopped
• 1:56
  Speaker 1: by the FED. Yeah, I think so. And when you
• 2:01
  Speaker 1: think about what the FED is doing, they're going to
• 2:03
  Speaker 1: buy UH fallen angels or companies that were rated investment
• 2:09
  Speaker 1: grade towards the end of March that may drop into
• 2:13
  Speaker 1: the high yield market. I think that's smart because those
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  Speaker 1: are companies that were running basically investment grade financials before
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  Speaker 1: the crisis. The crisis isn't their fault, and you're putting
• 2:24
  Speaker 1: too much pressure on the rating agencies. You're effectively telling
• 2:28
  Speaker 1: the rating agencies without being able to buy uh fallen angels,
• 2:34
  Speaker 1: that they could be leveling a death sentence on these companies.
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  Speaker 1: So they took that away. But when we look at
• 2:40
  Speaker 1: their support of the high yield market, we estimate that
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  Speaker 1: it will be roughly ten of the high old market. Uh.
• 2:48
  Speaker 1: It's not a lot. Uh. It will keep the high
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  Speaker 1: yield market functioning, but it also doesn't prevent high yield
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  Speaker 1: companies from defaulting. I think you're going to see a
• 2:59
  Speaker 1: rise in the fall rates for a prolonged period of time. So,
• 3:03
  Speaker 1: but here's what I'm struggling to understand. Yesterday after FED
• 3:06
  Speaker 1: Chair J. Powell's press conference, about half a billion dollars
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  Speaker 1: flowed into h y G or at least that was
• 3:12
  Speaker 1: the total amount of flows yesterday into the biggest US
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  Speaker 1: high old bond et F which by is the broad market,
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  Speaker 1: not just fallen angels. And you said that you do
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  Speaker 1: think the market's gotten a little ahead of itself. So
• 3:23
  Speaker 1: does that mean that you're selling high old bonds here?
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  Speaker 1: What does that mean in terms of your positioning? Well,
• 3:30
  Speaker 1: it means a lot of things. I think a lot
• 3:33
  Speaker 1: of the market got confused when he said there would
• 3:36
  Speaker 1: be a new term sheet on the Men's Main Street
• 3:39
  Speaker 1: lending facility, and most investors took that to mean that
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  Speaker 1: the leverage limit that was put in place might be
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  Speaker 1: relaxed or eliminated, which we then broaden out the coverage
• 3:52
  Speaker 1: to more highly levered companies in a broader array of
• 3:57
  Speaker 1: of the universe. After all, they our employers, and I
• 4:01
  Speaker 1: think people initially went to that. We step back and say,
• 4:06
  Speaker 1: hang on, in this market, you've got to take every
• 4:09
  Speaker 1: company and you've got to stress it. And we do
• 4:11
  Speaker 1: multiple stress tests trying to think, you know, how, how
• 4:15
  Speaker 1: how deep could the recession go for how long? Where
• 4:18
  Speaker 1: does it peak? And unemployment? We do things like a
• 4:21
  Speaker 1: shutdown for nine months and unemployment peaking at over and
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  Speaker 1: then see what a company's balance sheet could look like,
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  Speaker 1: could it withstand it? Do they have access to capital?
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  Speaker 1: And by the way, when you run that kind of
• 4:34
  Speaker 1: stress you find a lot of companies even though they
• 4:37
  Speaker 1: may have access to capital at that point in time,
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  Speaker 1: Actually it doesn't make sense for them to do additional
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  Speaker 1: borrowing because they'll realize at the other end of this
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  Speaker 1: their ability to pay back all that debt won't be there.
• 4:51
  Speaker 1: The market's got to start to realize that just because
• 4:55
  Speaker 1: there's access to lending and borrowing doesn't mean companies will
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  Speaker 1: continue to take on another turn of leverage. At some
• 5:05
  Speaker 1: point they'll realize they can't service it. So, Bob, given
• 5:09
  Speaker 1: you know the backdrop for your economic outlook at JP
• 5:12
  Speaker 1: Morgan Investment Management, asset management, how much risk are you
• 5:16
  Speaker 1: guys willing to take right now? A very moderate level
• 5:22
  Speaker 1: of risk in fixed income. The core of our portfolios
• 5:26
  Speaker 1: are invested along the theme of co invest with the
• 5:29
  Speaker 1: central banks. What they're buying, you buy. That's a pretty
• 5:32
  Speaker 1: good safety net, at least for liquidity around you. Then
• 5:37
  Speaker 1: roll up your sleeves and and look at what falls
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  Speaker 1: outside of that safety net, in in the corporate space,
• 5:45
  Speaker 1: in the security space, in the muni space, and see
• 5:48
  Speaker 1: who can withstand an extended period of a shutdown UH
• 5:53
  Speaker 1: and high unemployment UH. And you find out that there
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  Speaker 1: are some companies out there, there are some industries that can,
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  Speaker 1: but there are awful lot that can't. I'm just wondering, Bob,
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  Speaker 1: what's your base case. You said you're looking at potential
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  Speaker 1: stress cases of nine months, just quickly here, what's your
• 6:12
  Speaker 1: base case for the economy? Well, our base case is
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  Speaker 1: that that you don't return to normal um for a while,
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  Speaker 1: and that we will see unemployment peak at over and
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  Speaker 1: then as you start to get to the end of
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  Speaker 1: you're down to about nine percent. Now, that may seem
• 6:32
  Speaker 1: great relative to a peak of over but let's not
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  Speaker 1: forget that during the financial crisis, unemployment peak at ten percent,
• 6:41
  Speaker 1: and we know what kind of pain it was to
• 6:43
  Speaker 1: try to recover from that. So there's a lot of
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  Speaker 1: hardship ahead. This feels to me like the second quarter
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  Speaker 1: of two thousand and eight, where the first quarter was horrible.
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  Speaker 1: There were policy responses um and and the market immediately
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  Speaker 1: became optimistic, and then the horror of what had actually
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  Speaker 1: happened starts to hit into the data. Bob Michael with
• 7:10
  Speaker 1: a pretty bleak assessment. Bob, You've been right many times.
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  Speaker 1: It's always a pleasure speaking with you. Bob Michael, Chief
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  Speaker 1: investment Officer and head of Global fixed Income, Currency and
• 7:18
  Speaker 1: commodities at JP Morgan Asset Management, saying invest alongside the FED,
• 7:25
  Speaker 1: don't go into much riskier credit, and really the idea
• 7:29
  Speaker 1: that this reminds him a lot of the second quarter
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  Speaker 1: of two thousand and eight when people said bear Stearns
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  Speaker 1: was an anomaly, and then of course in September the
• 7:38
  Speaker 1: levant moment. It is the story of the year and
• 7:44
  Speaker 1: a story that continues, and that is that big tech
• 7:46
  Speaker 1: continues to outperform. Facebook actually had been under pressure among
• 7:51
  Speaker 1: the big tech names ahead of yesterday's earnings report, but
• 7:54
  Speaker 1: they blew expectations out of the water and actually even
• 7:57
  Speaker 1: pointed to some stability and ad revenue there's airs up
• 8:00
  Speaker 1: four point six percent. To help make sense of all
• 8:03
  Speaker 1: that we've learned and the advertising model of a new era,
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  Speaker 1: Laura Martin joined us now senior media analyst with Niedem
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  Speaker 1: and Company. And I want to ask Laura, just starting
• 8:13
  Speaker 1: with the Facebook and the Google earnings or Alphabet earnings
• 8:16
  Speaker 1: that we've gotten, do you get this sense that the
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  Speaker 1: tech giants will somehow win out from this period of
• 8:23
  Speaker 1: time in the long term and in terms of consolidating
• 8:27
  Speaker 1: viewers and consolidating ad revenue. Um the answers yes, because
• 8:32
  Speaker 1: of their their balance sheet strength. So, uh alphabet balance
• 8:37
  Speaker 1: sheet had over a hundred billion dollars of cash and
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  Speaker 1: they had positive free cash flow of five point four
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  Speaker 1: billion in the first quarter. Facebook, which is a much
• 8:46
  Speaker 1: smaller company, had seven point five billion dollars of free
• 8:50
  Speaker 1: cash flow and they have sixty billion dollars on the
• 8:53
  Speaker 1: balance sheet. Both come of nuts cash um. Both companies
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  Speaker 1: are paying all of their hourly workers, all the people
• 9:00
  Speaker 1: who aren't coming to work, and Facebook said they're still
• 9:03
  Speaker 1: going to hire ten thousand people this year, which means
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  Speaker 1: these companies are going to persist even if they go
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  Speaker 1: into cash losses. They will not go bankrupt. They will
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  Speaker 1: have access to capital, mostly their own, and therefore they
• 9:16
  Speaker 1: will survive when some of their competitors will go under. So, Laura,
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  Speaker 1: I was looking, I was, you know, looking at some
• 9:22
  Speaker 1: of the guidance or some of the commentary from Facebook
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  Speaker 1: last night, and they're talking about April advertising revenue being
• 9:28
  Speaker 1: kind of flatish for the first a few weeks of
• 9:31
  Speaker 1: April versus last year. I found that really hard to
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  Speaker 1: believe given what's going on out there in the economy.
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  Speaker 1: How do you think ad revenue for even even the
• 9:39
  Speaker 1: digital media companies over the next you know, several months
• 9:43
  Speaker 1: will look well. So I don't know if you remember
• 9:47
  Speaker 1: Paul back to their I p O about of their
• 9:49
  Speaker 1: revenue came from something called app installs, which was like
• 9:52
  Speaker 1: a legion. Remember Zenga Games and Farmville and all that
• 9:56
  Speaker 1: stuff where they would get like a buck if you
• 9:57
  Speaker 1: spent five bucks. Well, that's what's happened a now is
• 10:01
  Speaker 1: they have literally not talked about let's call that direct response,
• 10:04
  Speaker 1: which is what that's called. In ten quarters, all they
• 10:07
  Speaker 1: do is talk about advertising for small and large businesses.
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  Speaker 1: So yesterday, the reason they're flat is because thirty of
• 10:15
  Speaker 1: their revenue is up and it is those app installs
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  Speaker 1: or that direct response, and they have really downplayed that
• 10:24
  Speaker 1: verdict that like that kind of advertising. But that is
• 10:27
  Speaker 1: what's boy in them, and it's the same thing that
• 10:29
  Speaker 1: boyd snap right those snap also thought dr open It's
• 10:33
  Speaker 1: ad revenue in April was up because so much of
• 10:37
  Speaker 1: their revenue is up. But at Facebook, what we're seeing
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  Speaker 1: is a floor created by these app installs, this direct response,
• 10:46
  Speaker 1: and the fact that when there's a target market, they
• 10:49
  Speaker 1: don't sell keywords like Google sells travel. Well if travel
• 10:54
  Speaker 1: disappears they can't sell a travel keyword to a jeweler
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  Speaker 1: or to something, you know, a healthcare worker. But that's
• 11:01
  Speaker 1: not true if Facebook. If Facebook is trying to target
• 11:04
  Speaker 1: everybody listening to you today, all the smart people listening
• 11:07
  Speaker 1: to you at a and suddenly traveled like the four
• 11:09
  Speaker 1: Seasons in Budapest, stops advertising. That's okay. They can sell
• 11:14
  Speaker 1: all of us to the jeweler or two of game
• 11:17
  Speaker 1: app because we're the same demo. So what we're getting
• 11:20
  Speaker 1: is a better auction result at Facebook, whereas keywords are
• 11:24
  Speaker 1: siloed and therefore they're just having zeros in some categories
• 11:28
  Speaker 1: for keywords over at Google. So, Laura, how much of
• 11:31
  Speaker 1: this dominance has already been priced into Facebook. It's a
• 11:37
  Speaker 1: good question. I mean, the fact it's up means fifty
• 11:40
  Speaker 1: of us didn't really under the fifty analysts that cover it,
• 11:43
  Speaker 1: didn't really understand the business model. Similarly to Google, their
• 11:46
  Speaker 1: robustness up ten percent yesterday meant that despite the forty
• 11:50
  Speaker 1: people that cover Google, we didn't understand how their business
• 11:54
  Speaker 1: model worked. I mean, you saw YouTube was up revenue
• 11:57
  Speaker 1: in the first quarter. So part of what's happening is
• 12:00
  Speaker 1: we make assumptions based on what they disclose over ten quarters,
• 12:05
  Speaker 1: and then when COVID pushes on those business models and
• 12:08
  Speaker 1: they perform differently, we start asking questions about why that is,
• 12:12
  Speaker 1: and we learn more about what's underlying theo's business models,
• 12:17
  Speaker 1: like the fact that direct response is still thirty of
• 12:19
  Speaker 1: Facebook's advertising and Google is zero direct response. So laard
• 12:24
  Speaker 1: Lea's switch hears just a little bit and talk about
• 12:26
  Speaker 1: some of the big media companies that you've got that
• 12:28
  Speaker 1: you've been covering for so long. How do you think
• 12:30
  Speaker 1: this new world that we're in, maybe this new normal
• 12:33
  Speaker 1: that we may be going into, is going to impact
• 12:36
  Speaker 1: the big media companies if you changed kind of your
• 12:38
  Speaker 1: outlook at all. So I think what we're waiting to
• 12:43
  Speaker 1: see here, Paul is, as you know, TV has bought
• 12:46
  Speaker 1: well in advanced local spots three weeks in advanced national
• 12:49
  Speaker 1: spot like a year in advance. So we're actually expecting
• 12:52
  Speaker 1: to one to be more robust for the old media companies.
• 12:56
  Speaker 1: But without live sports, there's a big revenue down draft
• 13:00
  Speaker 1: because that's twenty um depending on the season of total advertising,
• 13:05
  Speaker 1: and it deferred, you know, obviously hurts YESPN most and
• 13:09
  Speaker 1: Fox lease because they don't really have UM Basketball, which
• 13:12
  Speaker 1: is the current season. So I'm looking for the impact
• 13:15
  Speaker 1: of live sports, which I don't think is a long
• 13:17
  Speaker 1: term impact. I'm looking at disconnect from the TV ecosystem,
• 13:20
  Speaker 1: which hurts most of these companies in their subscription revenue line.
• 13:24
  Speaker 1: And then I'm interested in what they say about the
• 13:26
  Speaker 1: upfront because normally, as you know in May, about inventory
• 13:30
  Speaker 1: is bought in May for the next year. Will no
• 13:32
  Speaker 1: one's making new season episodes, so we're not going to
• 13:35
  Speaker 1: have actually a false season unless people go back to work,
• 13:39
  Speaker 1: like actors go back to work in fall. So I'm
• 13:41
  Speaker 1: very interested to see with the eight billion dollars that
• 13:45
  Speaker 1: is normally committed in the upfront in May, if we're
• 13:48
  Speaker 1: not going to have programming in the new U semester,
• 13:51
  Speaker 1: the new fall season, I'm interested in what they say
• 13:53
  Speaker 1: about that. Laura, just about a minute here, But I'm
• 13:55
  Speaker 1: wondering whether this will shift the dominance to online advertising
• 14:00
  Speaker 1: in terms of spending. I know that the thirty second
• 14:03
  Speaker 1: ad has been resilient in terms of being and commanding
• 14:06
  Speaker 1: the highest price, but is that going to shift with
• 14:08
  Speaker 1: more of the budget going to online providers. So Facebook
• 14:13
  Speaker 1: specifically said they're seeing no offline budgets moving into their world.
• 14:18
  Speaker 1: Everything they're seeing was a pre existing budget that had
• 14:21
  Speaker 1: automated controls, and as CPMs have fallen by sixteen Senate, Facebook,
• 14:26
  Speaker 1: those budgets step up. Um Also, Google asserts that it
• 14:30
  Speaker 1: will hasten the you know, the adoption of digital. But
• 14:36
  Speaker 1: I just think it's too early to tell. And then
• 14:37
  Speaker 1: COVID literally happened the first week in March, right, that's
• 14:40
  Speaker 1: when they said they all hit a wall the first
• 14:42
  Speaker 1: week in March, and it's now round numbers the second
• 14:44
  Speaker 1: week in April. So I think it's too early to see.
• 14:48
  Speaker 1: I think consumer behavior might be easier to predict. Consumers
• 14:51
  Speaker 1: are going to use the commerce for consumers may use
• 14:54
  Speaker 1: digital outlets more. But on the advertiser slide, I just
• 14:57
  Speaker 1: don't think advertisers can react in four weeks to it's
• 15:00
  Speaker 1: happening in a pandemic. Laura Martin, thanks so much for
• 15:03
  Speaker 1: joining us. We always appreciate getting your thoughts on the
• 15:05
  Speaker 1: media and digital landscape. Laura Martin, senior media analysts for
• 15:09
  Speaker 1: Needham Company, joining us on the phone from Los Angeles.
• 15:12
  Speaker 1: We appreciate that. So at least I think you know
• 15:13
  Speaker 1: the kind of the takeaway here is, boy, these digital
• 15:16
  Speaker 1: media companies, they were strong going into this pandemic, and
• 15:20
  Speaker 1: it looks like they're coming stronger on the way out. Yeah.
• 15:23
  Speaker 1: I just have to wonder about consolidation. And I've read
• 15:26
  Speaker 1: a number of lawyers who have commented saying that they
• 15:31
  Speaker 1: don't think the antitrust regulators are going to be that
• 15:33
  Speaker 1: harsh on big tech looking to acquire competitors that might,
• 15:38
  Speaker 1: you know, we otherwise going out of business. Yeah, because
• 15:41
  Speaker 1: going into the pandemic, the big tech was clearly under
• 15:44
  Speaker 1: the regulatory microscope, and maybe that has been shift a
• 15:47
  Speaker 1: little bit, which could again be a benefit for the
• 15:49
  Speaker 1: big tech. Yesterday, FED Chair J. Powell sounded about as
• 15:57
  Speaker 1: somber as a FED chair could get. He had a
• 15:59
  Speaker 1: pre need doubt, a dire outlook for the US economy,
• 16:02
  Speaker 1: and rightly so, given the fact that ten years of
• 16:06
  Speaker 1: job gains has been more than wiped out in just
• 16:09
  Speaker 1: six weeks. Joining us now is someone with intimate knowledge
• 16:12
  Speaker 1: of both the Federal Reserve and the Treasure Department. Nathan Sheets,
• 16:15
  Speaker 1: chief economist for Pejim fixed Income Joining us now, Nathan,
• 16:19
  Speaker 1: so glad to have you on with all of your insights.
• 16:22
  Speaker 1: I want you to give us a sense of your
• 16:25
  Speaker 1: thoughts on the Fed's efforts to backstop corporate debt, in particular,
• 16:29
  Speaker 1: because FED Chair J. Powell had an opportunity yesterday to
• 16:32
  Speaker 1: send expectations straight and say the Fed isn't going to
• 16:35
  Speaker 1: delve deeper into junk he did not do that, and
• 16:37
  Speaker 1: in fact so that they were prepared to do more
• 16:39
  Speaker 1: and the net effect was more money into junk bonds.
• 16:42
  Speaker 1: What's your take, well, J. Powell was categorical that the
• 16:48
  Speaker 1: Federal Reserve is prepared to bring the full force of
• 16:53
  Speaker 1: its balance sheet to bear in supporting the financial markets generally.
• 17:00
  Speaker 1: But I think, as your questions suggests, there are remaining
• 17:04
  Speaker 1: questions about various pockets of the market and in uh,
• 17:09
  Speaker 1: in reality, how aggressive is the Federal Reserve going to be?
• 17:14
  Speaker 1: And I have to say that as I've seen some
• 17:17
  Speaker 1: of the soundings from the Federal Reserve about its core
• 17:22
  Speaker 1: por purchase programs, it has left me with some questions.
• 17:26
  Speaker 1: For example, before a company is eligible to have its
• 17:31
  Speaker 1: bawns purchased, even on the secondary market, it looks like
• 17:36
  Speaker 1: it's going to have to fill out a form and
• 17:39
  Speaker 1: and make a number of attestations to the Federal Reserve,
• 17:44
  Speaker 1: and I think it's an open question and say, how
• 17:46
  Speaker 1: many how many firms are going to be willing to
• 17:50
  Speaker 1: do this and where is it going to leave the
• 17:54
  Speaker 1: corporate bond markets relative to the headline that the FETE
• 17:57
  Speaker 1: is buying. So I think there are real questions about
• 18:01
  Speaker 1: the Fed's efforts in that particular space, where broadly they're committed. UH,
• 18:07
  Speaker 1: they'll they'll do what's necessary, they'll use all the tools,
• 18:10
  Speaker 1: but certain corners of the markets. I think we still
• 18:13
  Speaker 1: have a lot a lot to learn about how far
• 18:15
  Speaker 1: they're willing to go. So, Nathan, you mentioned tools in
• 18:18
  Speaker 1: the toolbox, what else realistically can the Fed dude going
• 18:23
  Speaker 1: forward if this pandemic is longer than perhaps currently anticipated.
• 18:30
  Speaker 1: So qualitatively, in terms of supporting the markets, I think
• 18:35
  Speaker 1: that they are bringing to bear uh the lion's share,
• 18:40
  Speaker 1: maybe maybe the totality of what they have. UH. They
• 18:45
  Speaker 1: are prepared to buy aggressively. They're keeping rates low. UH,
• 18:51
  Speaker 1: they're expanding their balance sheet in a very significant way.
• 18:56
  Speaker 1: But quantitatively, I think that we can see uh meaningful
• 19:02
  Speaker 1: further increases in the size of the balance sheet. And
• 19:05
  Speaker 1: then in addition, UH, the Congress is allocated over four
• 19:09
  Speaker 1: hundred and fifty billion dollars to the Treasury to backstop
• 19:13
  Speaker 1: federough Reserve facilities, and less than half of that money
• 19:17
  Speaker 1: has been allocated to date. And most of those facilities
• 19:21
  Speaker 1: that I was suggesting the corporates an example of this,
• 19:23
  Speaker 1: are not even up and running yet. So I would
• 19:26
  Speaker 1: say Job one for the Fedough Reserve is to get
• 19:29
  Speaker 1: these facilities up and running and then to make sure
• 19:33
  Speaker 1: that they are actually meeting the needs in the markets.
• 19:37
  Speaker 1: Uh and UH from there if if those needs end
• 19:41
  Speaker 1: up being greater, the FED has plenty of additional firepower
• 19:46
  Speaker 1: to bring to bear, given its balance sheet and that
• 19:49
  Speaker 1: war chest with the Treasury. So Nathan, let's go there
• 19:52
  Speaker 1: to that main Street loan program. We've got some news
• 19:54
  Speaker 1: today saying that the FED plans to expand the parameters
• 19:57
  Speaker 1: for potential applicants and and build former New York FED
• 20:01
  Speaker 1: president had a great column about this yesterday, talking about
• 20:04
  Speaker 1: how difficult it will be for the FED to thread
• 20:07
  Speaker 1: the needle. Here, just do if you had a chance
• 20:10
  Speaker 1: to look at the at the news today and kind
• 20:12
  Speaker 1: of give us a sense of what it means in
• 20:14
  Speaker 1: terms of which businesses will be able to access this.
• 20:17
  Speaker 1: I did see this, and I think your analogy to
• 20:21
  Speaker 1: threading the needle is exactly right. So, on the one hand,
• 20:25
  Speaker 1: moving into this space is very difficult for the FED
• 20:30
  Speaker 1: and that they're taking onto their balance sheet potentially a
• 20:33
  Speaker 1: broad range of heterogeneous collateral that they're not really that
• 20:39
  Speaker 1: familiar with. On the other hand, the needs in this
• 20:44
  Speaker 1: space are tremendous and that many of the firms that
• 20:48
  Speaker 1: are eligible for this facility are the high yield issuers
• 20:53
  Speaker 1: and high yield companies that are just absolutely being pummeled.
• 20:58
  Speaker 1: So then the question is how do you do line
• 21:00
  Speaker 1: a facility that meets their needs well at the same time,
• 21:03
  Speaker 1: uh it doesn't make the FAD feel too uncomfortable given
• 21:06
  Speaker 1: its uh it's roast tolerance. And I think what we
• 21:09
  Speaker 1: saw in this revision today was an effort to fine
• 21:13
  Speaker 1: tune it and to make it more attractive to small borrowers,
• 21:18
  Speaker 1: and that they cut the minimum loan size from a
• 21:22
  Speaker 1: million dollars down in down to five hundred thousand. It
• 21:27
  Speaker 1: added a new class of loans that would be eligible
• 21:30
  Speaker 1: and specifically companies that are deemed to be somewhat riskier.
• 21:35
  Speaker 1: But another concern is that for many of the larger
• 21:38
  Speaker 1: firms that are eligible. The maximum loan size is pretty small,
• 21:43
  Speaker 1: so there are there are many constraints on this thing.
• 21:46
  Speaker 1: We saw the fad kind of move in this direction,
• 21:48
  Speaker 1: but it remains to be seen how big and how
• 21:50
  Speaker 1: aggressive this facility is going to be. I think this,
• 21:53
  Speaker 1: along with the corporate program, is the big question. Mark
• 21:57
  Speaker 1: and Nathan, thanks so much for joining us. To really
• 21:58
  Speaker 1: appreciate your thoughts and commentary. Nathan Sheets, chief economists and
• 22:02
  Speaker 1: head of macroeconomic research at p JIM Fixed Income, joining
• 22:06
  Speaker 1: us here with thoughts on the FED and all the
• 22:08
  Speaker 1: programs that are out there at Lisa as Uh Nathan
• 22:12
  Speaker 1: was suggesting, it's I think right now the key issue
• 22:15
  Speaker 1: for the market is actually getting those programs up and running,
• 22:18
  Speaker 1: getting the cash into the marketplace. We will have more
• 22:21
  Speaker 1: on that coming during the remainder of the show. This
• 22:24
  Speaker 1: is Bloomberg. It's time to check in with Bloomberg Opinion.
• 22:30
  Speaker 1: We're joined today by Opinion commas Liam Denny giving us
• 22:33
  Speaker 1: some thoughts on a couple of things I want to
• 22:36
  Speaker 1: look at with you. Liam. First, Tesla reported some numbers
• 22:40
  Speaker 1: last night, the stocks up five. I'm looking at the
• 22:43
  Speaker 1: stock here. Boy just had an extraordinary up a hundred
• 22:46
  Speaker 1: percent this year just extraordinary. What are some of the
• 22:49
  Speaker 1: key takeaways for you, Liam from what we heard from
• 22:52
  Speaker 1: Elon Musk and company. Well, for me, you know, it
• 22:57
  Speaker 1: all comes down to the numbers, which which tend to
• 22:59
  Speaker 1: get obscured. Um, you know during the actual theater of
• 23:04
  Speaker 1: Tesla's earnings call um. This is the third quote unquote
• 23:10
  Speaker 1: surprise profit from Tesla in a row. The first one
• 23:15
  Speaker 1: was announced back in October and since Vince then, um,
• 23:19
  Speaker 1: you know, those three gap profits have added up to
• 23:23
  Speaker 1: the princely some of two million dollars. Now. In the meantime,
• 23:29
  Speaker 1: the company's value has surged by I think it's up
• 23:33
  Speaker 1: about a hundred and twenty billion dollars also, so there
• 23:38
  Speaker 1: is still this fundamental disconnect between Tesla's valuation and the
• 23:42
  Speaker 1: actual results that it's producing. And I actually think, um,
• 23:47
  Speaker 1: you know, the results we got carried some pretty um,
• 23:51
  Speaker 1: pretty serious portents of of what's going to happen in
• 23:54
  Speaker 1: the current quarter, all right, before we dig into what's
• 23:58
  Speaker 1: going to happen at current order shares a Tesla up
• 24:01
  Speaker 1: nearly five percent, and this comes after Elon Musk pulled
• 24:04
  Speaker 1: an Elon Musk when on one of his tantrums uh.
• 24:07
  Speaker 1: During the Tesla earnings call talking about some of the
• 24:10
  Speaker 1: stay at home orders. We have a clip of that.
• 24:12
  Speaker 1: Why don't you take a listen to say that they
• 24:15
  Speaker 1: cannot leave their house, um, and they will be arrested
• 24:18
  Speaker 1: if they do. This is this is a this is
• 24:21
  Speaker 1: a this is fascist, This is not democratic, This is
• 24:25
  Speaker 1: not freedom. Give people back the god freedom. That was
• 24:31
  Speaker 1: Elon Musk coming out against orders that have been said
• 24:34
  Speaker 1: to save possibly thousands, if not millions of lives in
• 24:39
  Speaker 1: order to prevent the spread of the pandemic. I don't
• 24:42
  Speaker 1: want you to weigh in necessarily on your views and
• 24:44
  Speaker 1: social distancing and some of the policies. I'll save you that, Liam,
• 24:49
  Speaker 1: But I do want to get a sense of what
• 24:50
  Speaker 1: we can expect it from Tesla going forward, whether it
• 24:55
  Speaker 1: really does have the hope of the entire auto industry
• 24:59
  Speaker 1: at a time when oil prices are plunging. Well, I
• 25:03
  Speaker 1: think the first thing to say is, you know, if
• 25:05
  Speaker 1: I was running a company that have been built on
• 25:08
  Speaker 1: the back of billions of dollars of subsidy and was
• 25:11
  Speaker 1: pivoting strongly to a market run by the Chinese Communist Party,
• 25:17
  Speaker 1: I'm not sure I would necessarily wrap myself in the
• 25:20
  Speaker 1: flag of libertarianism. Um. I think what this speaks to
• 25:26
  Speaker 1: is really anxiety at Tesla because it is very much
• 25:30
  Speaker 1: a momentum company and a momentum stock. And I think
• 25:34
  Speaker 1: any car manufacturer will tell you that if you have
• 25:39
  Speaker 1: a plant where the utilization suddenly drops to zero, that
• 25:44
  Speaker 1: starts with a serious impact on your profits in cash
• 25:47
  Speaker 1: flow pretty quickly. Now, going back to the first quarter results,
• 25:51
  Speaker 1: it's worth remembering that Tesla didn't really shut down its
• 25:56
  Speaker 1: main Fremont factory until the very last week of March.
• 26:00
  Speaker 1: So when we look at the cash burn, which was
• 26:02
  Speaker 1: something like million dollars, you have to remember that that
• 26:06
  Speaker 1: was in the context of a quarter where actually the
• 26:08
  Speaker 1: plant was running virtually all of it. So I think
• 26:12
  Speaker 1: in the second quarter, particularly with the lockdowns being extended
• 26:16
  Speaker 1: into next month, um, we're going to see some really
• 26:19
  Speaker 1: serious cash burn in the second quarter results. And so
• 26:24
  Speaker 1: I think, Um, you know, Musque's comments about fascism really
• 26:30
  Speaker 1: speak to a deep need on the part of the
• 26:32
  Speaker 1: company to actually get that plant reopened. So that's kind
• 26:36
  Speaker 1: of where I wanted to go. Liam. Is there any
• 26:38
  Speaker 1: sense of when that plant will be reopened? It's not
• 26:41
  Speaker 1: like they have plants all over the world, like some
• 26:43
  Speaker 1: of the big three automakers, for example, they can kind
• 26:46
  Speaker 1: of shift production. They're kind of dependent pretty you know,
• 26:50
  Speaker 1: significantly on that Freemont plant. Yeah, that's true. I mean
• 26:54
  Speaker 1: the Chinese plant is getting back up and running, but
• 26:56
  Speaker 1: that's that's a new plant. It can't offset what's happening
• 27:01
  Speaker 1: in the US anytime soon. UM. As for when the
• 27:05
  Speaker 1: other plant opens, I mean, right now, your guess is
• 27:07
  Speaker 1: as good as mine. Right, it depends on when California
• 27:11
  Speaker 1: lifted stay at home orders. Um. And then of course
• 27:16
  Speaker 1: it will take a little time for the plant to
• 27:17
  Speaker 1: get back up to speed. And then with we we
• 27:21
  Speaker 1: shouldn't ignore the other side of this, which is demand.
• 27:24
  Speaker 1: I mean, these are high priced items in a US
• 27:29
  Speaker 1: economy with you know, thirty million people of far for
• 27:32
  Speaker 1: unemployment as the deep damage is being inflicted on incomes worldwide. UM.
• 27:40
  Speaker 1: So I think you know, this isn't something that's going
• 27:43
  Speaker 1: to go away quickly. Liam about twenty seconds here, I'm
• 27:47
  Speaker 1: just wondering shifting gears to the oil majors. Do you
• 27:50
  Speaker 1: think that any of the major oil companies will preserve
• 27:53
  Speaker 1: their dividend after this route? I think the US companies
• 27:58
  Speaker 1: will try the hardest to preserve it because you know,
• 28:04
  Speaker 1: after a decade of really poor returns, it's it's it's
• 28:07
  Speaker 1: really the only thing that investors have to hang onto now.
• 28:11
  Speaker 1: The the UK majors had the highest dividend yields of
• 28:16
  Speaker 1: all of them, and so I had a really strong
• 28:18
  Speaker 1: signal to cut. All the companies are facing a very
• 28:22
  Speaker 1: challenging environment or whether they're having to balance spending versus dividends,
• 28:27
  Speaker 1: but I think the US companies will hold out the longest.
• 28:30
  Speaker 1: Liam Denning, thank you so much for taking the time
• 28:32
  Speaker 1: to day Liam Denning, energy Mining and Commodities columnist with
• 28:36
  Speaker 1: Bloomberg Opinion, talking about that Elon Musk doing Elon Musk, Yeah, yeah,
• 28:42
  Speaker 1: putting it yet putting it frankly into a more serious
• 28:46
  Speaker 1: perspective here, which is it speaks to his desperation. This
• 28:48
  Speaker 1: is a momentum company, and the momentum for now is
• 28:52
  Speaker 1: still with us. Thanks for listening to the Bloomberg Penl podcast.
• 28:57
  Speaker 1: You can subscribe and listen to interviews at Apple Podcast
• 29:00
  Speaker 1: or whatever podcast platform you prefer. I'm Paul Sweeney, I'm
• 29:03
  Speaker 1: on Twitter at pt Sweeney. I'm Lisa Abram Woits I'm
• 29:06
  Speaker 1: on Twitter at Lisa Abram wohits one before the podcast.
• 29:09
  Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio