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We're Looking At A Secular Shift To Lower Rates: PGIM's Tipp · Bloomberg Intelligence

• 0:01
  Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, along
• 0:04
  Speaker 1: with my co host of Bonnie Quinn. Every business day
• 0:06
  Speaker 1: we bring you interviews from CEOs, market pros, and Bloomberg experts,
• 0:10
  Speaker 1: along with essential market moving news. Find the Bloomberg Markets
• 0:13
  Speaker 1: Podcast on Apple podcast or wherever you listen to podcasts,
• 0:17
  Speaker 1: and on Bloomberg dot com. Well, as we all know,
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  Speaker 1: it is f O m C Statement and News Conference day.
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  Speaker 1: We'll be hearing from FED here J Powell later on.
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  Speaker 1: It's not as if we haven't been hearing from FOOD members,
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  Speaker 1: but he can only add to the dialogue or the
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  Speaker 1: conversation that's being had across the country. Let's bring in
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  Speaker 1: somebody else who will be speculating about this, and that
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  Speaker 1: is Robert tip Managing director, chief investment strategist at p Jim, Robert,
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  Speaker 1: thanks for joining. So we'll get the statement to two pm.
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  Speaker 1: What will be different from the last statement I think
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  Speaker 1: the FED is going to take a breather here. I
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  Speaker 1: think they're gonna, you know, continue to emphasize that they're there,
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  Speaker 1: that they're bringing online all of the aggressive programs that
• 0:56
  Speaker 1: they've announced. But I think they're at the bridge stage,
• 1:01
  Speaker 1: you know, we've gone through the drop into the void,
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  Speaker 1: and they sprung into action and they instilled in the
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  Speaker 1: Market's really the first phase, which was the leap of faith.
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  Speaker 1: But now we're on the other side, we're getting evidence
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  Speaker 1: of recovery. And as you may have been made clear
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  Speaker 1: by the payroll number, I mean, obviously it's early days,
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  Speaker 1: but you'd expect the first stages could see some pretty
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  Speaker 1: rapid growth and so it's difficult for them to pour
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  Speaker 1: a lot of gas on and fire all remaining bullets
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  Speaker 1: as the economy is is um really accelerating. I think
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  Speaker 1: they're gonna plant some seeds here, uh and leave the
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  Speaker 1: door open and leave the impression that they definitely want
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  Speaker 1: to ensure this recovery and that they're not taking it
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  Speaker 1: for granted. But I think fresh steps here, I programs
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  Speaker 1: kind of shock and awe. I think it's gonna those
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  Speaker 1: are going to be limited. So, Robert, you mentioned that
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  Speaker 1: better unexpected jobs report we got last week. How are
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  Speaker 1: you thinking about the economic recovery for the remainder that
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  Speaker 1: you're going into next year? Now, how's that changed for
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  Speaker 1: you over the last several weeks. Sure, Well, I think
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  Speaker 1: the expectation was based on the way this is played
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  Speaker 1: out in other places that that you you know, should
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  Speaker 1: expect to see a rapid recovery in some ways in
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  Speaker 1: these early stages. I mean, we had a sudden stoppage
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  Speaker 1: and activity, everybody locking down and staying home. But you
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  Speaker 1: immediately saw sequential growth beginning weeks ago in auto sales
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  Speaker 1: in activity levels. And as that happens, you know you
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  Speaker 1: need service people on the ground coming back to work.
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  Speaker 1: So I think that this is a much more difficult stage.
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  Speaker 1: The leap of faith stage, there was a lot of police.
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  Speaker 1: There's a lot of value in the markets. Now you're
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  Speaker 1: looking at valuations and markets that are below average. Uh,
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  Speaker 1: and you're at the evidence stage. And so I think
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  Speaker 1: you're you're going to continue to get progress in markets,
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  Speaker 1: but you're going to get a lot more volatility, a
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  Speaker 1: lot more back and forth as people question whether this
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  Speaker 1: is going to be fast enough in terms of growth
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  Speaker 1: to get companies to the other side, how long it's
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  Speaker 1: going to be sustained, and so on. If we don't
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  Speaker 1: get more physical stimulus and unemployment benefits and the extra
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  Speaker 1: stimulus runs out in July, what happens, Robert? Yeah, I mean,
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  Speaker 1: I think you're going to have to get some more stimulus.
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  Speaker 1: They're going to have to keep that going to some
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  Speaker 1: extent um because you can't have uh, you know, a
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  Speaker 1: huge swap of the population, you know, without income, and
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  Speaker 1: there's a you know, when you look at the dead
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  Speaker 1: styles in terms of wealth, income, savings, and so on,
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  Speaker 1: there's very little wiggle room for uh, you know, broad
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  Speaker 1: spectrum of the population. And so I think that even
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  Speaker 1: if you're getting millions of jobs created every month, it's
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  Speaker 1: not going to be the majority of jobs getting recreated
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  Speaker 1: in the next few months. And so they're going to
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  Speaker 1: have to keep something going there. So, Robert, where do
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  Speaker 1: you see value in the fixed income markets? We've had
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  Speaker 1: again a nice rebound in risk assets. Where where do
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  Speaker 1: you see value? Yeah, let me answer that question and
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  Speaker 1: back and fill a little bit on the last one. So,
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  Speaker 1: you know, looking out over the long term, I think
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  Speaker 1: spread product is going to outperform. You're gonna have to
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  Speaker 1: be very selective though. You know, we're looking across pretty
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  Speaker 1: much all sectors, whether it's high quality structured product UH,
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  Speaker 1: European peripherals, hard currency and local emerging markets i g.
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  Speaker 1: High yield corporates. UH. There are good values in all
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  Speaker 1: of these areas UM. But as legislation is worked on,
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  Speaker 1: as we get closer to the election and we see
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  Speaker 1: more of Biden and the competition for leadership in that race,
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  Speaker 1: UH and all the other things geo politics, trade wars, UH.
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  Speaker 1: You know, you have UM investors in many cases that
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  Speaker 1: may have been chased into a rally that they didn't
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  Speaker 1: believe in. And you'll see, you know, more days like
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  Speaker 1: today where it's not just one way progress. You're gonna
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  Speaker 1: get backing and filling. I think over the long run though,
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  Speaker 1: that's where the value is going to be. Number one
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  Speaker 1: is in spread product. I think number two, there's gonna
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  Speaker 1: be a lot of opportunities on the interest rate side
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  Speaker 1: because I think whether the said UH really doubles up
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  Speaker 1: on their programs today or not, and I think that's unlikely.
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  Speaker 1: I think in the long run you're still looking at
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  Speaker 1: a shift of secular shift to lower rates and the
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  Speaker 1: long term forwards and markets. Frankly, right now, I don't
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  Speaker 1: really reflect that it's still some value even laft At
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  Speaker 1: back into the treasury curve, Robert, thank you, the back
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  Speaker 1: end of the treasury curve and spread products. Much appreciated
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  Speaker 1: your time today. It is Robert Tip, chief investment strategist
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  Speaker 1: at p JIM joining us there, and I do want
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  Speaker 1: to point out that the tenure yield today is at
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  Speaker 1: seventies seven basis points, just a little bit of move
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  Speaker 1: after we got that CPI data negative month over month,
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  Speaker 1: down by point one percent. At the two stands spread
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  Speaker 1: at fifty nine basis points right now, Remember when we
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  Speaker 1: were worried about that going negative. Surely fixed that one. Alright,
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  Speaker 1: Thanks once again to p Jim's Robert Tip. Always love
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  Speaker 1: chatting with him. It is time to check in with
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  Speaker 1: me work opinion. Now we're joined by opinion columnist Jonathan
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  Speaker 1: Bernstein on his latest column, to do with the elections
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  Speaker 1: coming up in a short five months from now. The
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  Speaker 1: column entitled be ready for a long election night this year. So, Jonathan,
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  Speaker 1: you say that administering the action would already be a
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  Speaker 1: challenge even if everyone acted in good face. But there
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  Speaker 1: are many more challenges this year, including that we could
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  Speaker 1: actually be looking at a whole week. Just explain if
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  Speaker 1: you can, what you mean by by that. Well, what's
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  Speaker 1: happened is as more and more voters are doing early voting,
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  Speaker 1: doing vote by mail, doing other forms of absentute voting,
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  Speaker 1: it just takes longer to count the ballots. And that's
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  Speaker 1: been a trend that's happening over the last several elections,
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  Speaker 1: and it's going to be accelerated this year because we're
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  Speaker 1: expecting way more vote by mail this year, and so
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  Speaker 1: there's going to be a lot of states that only
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  Speaker 1: can count you know, sixty or so of their ballots
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  Speaker 1: on election night, and so we need to expect that
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  Speaker 1: it's going to take days, maybe up to you know,
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  Speaker 1: ten days, fifteen days to get a final result from
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  Speaker 1: some states, including some of the battleground states. So is
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  Speaker 1: it the case that you know, we're not going to
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  Speaker 1: see uh, the election called on election night that no
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  Speaker 1: matter what, it's very likely that we won't have a
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  Speaker 1: conclusion to the election for again, up to maybe ten days.
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  Speaker 1: It depends on how close the election is. Of course, um,
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  Speaker 1: there are gonna there's a bunch of states that you know,
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  Speaker 1: basically are still going to be able to call the
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  Speaker 1: state that election night. But um in some of the
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  Speaker 1: other states, including Pennsylvania and Arizona, which are both major
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  Speaker 1: battleground states, expected to be this time if those states
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  Speaker 1: turn out to um be the margin of you know,
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  Speaker 1: victory we're not going to know, possibly for quite some time.
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  Speaker 1: And the thing is, there's nothing wrong with this. This
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  Speaker 1: is planned. This is how it needs to be to
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  Speaker 1: get everybody to vote and to have an accurate account.
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  Speaker 1: So one of the important things for everybody to do
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  Speaker 1: in a in a position to do so is to
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  Speaker 1: warn everyone in advance this is going to happen. This
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  Speaker 1: is okay, this is not fraud, this is not questionable.
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  Speaker 1: There's nothing wrong with this. This is the best way
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  Speaker 1: to let everybody vote and I get an accurate count.
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  Speaker 1: And yet, Jonathan, why do I have premonitions of all
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  Speaker 1: sorts of challenges and court cases on an attorneys general
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  Speaker 1: bring broad in. Well, there's no There's two things. One
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  Speaker 1: is legitimately, there's a close election. Both parties are going
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  Speaker 1: to fight for their rights, and that's you know, there's
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  Speaker 1: nothing wrong with that. Then, on top of that, we
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  Speaker 1: have a president United States who who alleged fraud without
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  Speaker 1: evidence in an election that he won. So we're sort
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  Speaker 1: of all expecting him to allege fraud no matter what happens,
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  Speaker 1: because that's what Donald Trump does. He claims fraud based
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  Speaker 1: on nothing. So you know it's it's gonna be a
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  Speaker 1: there's a good chance it's going to be a mess,
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  Speaker 1: especially if it's a close race. It's gonna be a mess.
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  Speaker 1: It's gonna look ugly. And the best we can do
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  Speaker 1: is warn everybody, Hey, this is what to expect. I mean, Paul,
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  Speaker 1: just you know, stop there for one second. I just
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  Speaker 1: think how strange it is that you're putting effort into
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  Speaker 1: explain to the public that fraud is not going to
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  Speaker 1: take place, but you have the president saying is taking place.
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  Speaker 1: How do you exact about that? It's interesting, you know, Jonathan,
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  Speaker 1: that's a great question. I mean, I think the issue
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  Speaker 1: is here, is the delay this election primarily driven by
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  Speaker 1: the write in votes, the mail in votes that are
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  Speaker 1: resulting from the pandemic, or is there anything else going
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  Speaker 1: on here? Well, a lot of states are just shifting
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  Speaker 1: more to mail in votes to begin with, and states
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  Speaker 1: have different rules so that some states you can the
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  Speaker 1: deadline is to get a um to give the ballot in,
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  Speaker 1: to give the ballot um you know, in the mail
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  Speaker 1: on election day, so it may take another day or
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  Speaker 1: two to be to arrive, and then they have to
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  Speaker 1: sort it and they have to come and it takes
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  Speaker 1: a lot longer to count um absentee votes and vote
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  Speaker 1: by mail because you have to certify it. You have
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  Speaker 1: to make sure it's a real bad You can't just
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  Speaker 1: you know, throw everything through the machine, so it takes longer.
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  Speaker 1: And then there's an additional complication, which is in the
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  Speaker 1: thing we have to let people know, which is that
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  Speaker 1: the people who tend to vote at the last minute
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  Speaker 1: tend to be more Democratic than Republican. So we need
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  Speaker 1: to expect in most states. It's not it's not consistent
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  Speaker 1: across all states, but it is true in both Pennsylvania
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  Speaker 1: and Arizona. We expect the election night count to be
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  Speaker 1: better for Republicans than the final result. And there's a
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  Speaker 1: good chance that Republicans may have to lead on election night,
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  Speaker 1: while experts who know you know, who know how this works,
• 11:28
  Speaker 1: know that Democrats have a very good chance of overtaking that.
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  Speaker 1: How will this affect how we should read pulling on
• 11:34
  Speaker 1: the way up to the election? Obviously pulling has not
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  Speaker 1: had a great record recently anyway, but you know, presumably
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  Speaker 1: there would be you know, different polls this year, a
• 11:44
  Speaker 1: different types of of of collecting data and people reading
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  Speaker 1: them differently, and you would have thought, hopefully better than
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  Speaker 1: the last couple of elections. Will it make a difference.
• 11:55
  Speaker 1: That's a great question. The pulling actually last time around
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  Speaker 1: was better than people thinking the national polls basically got
• 12:01
  Speaker 1: it right, some of the state polls were wrong. Um,
• 12:04
  Speaker 1: where there's no particular reason to think that absolutely voting
• 12:08
  Speaker 1: vote by mail will really affect that. Posters have learned.
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  Speaker 1: You know, people now start voting in early October. Um,
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  Speaker 1: it's more of a one month election that then takes
• 12:18
  Speaker 1: a week to count than a one day election that
• 12:20
  Speaker 1: takes one night to count. Um. So so there's actually
• 12:23
  Speaker 1: sort of slipped the JOm. Both sides and posters have
• 12:25
  Speaker 1: gotten better, have gotten pretty good at knowing that's happening
• 12:29
  Speaker 1: and adjusting for it. So we may have polling errors,
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  Speaker 1: but it shouldn't really affect the count that much. Johnathan Bernstein,
• 12:36
  Speaker 1: thanks so much for joining us. Jonathan Bernstein, Bloomberg Opinion
• 12:39
  Speaker 1: columnists covering all things political. I think, as you suggested, Vanni,
• 12:44
  Speaker 1: this is going to get kind of ugly as we
• 12:46
  Speaker 1: kind of get up to this election and trying to
• 12:48
  Speaker 1: process the days after. Yeah, I mean we're definitely five
• 12:51
  Speaker 1: months away. But yesterday alone you had Paul to to
• 12:54
  Speaker 1: Jonesy and Bruce Richards already talking about starting to look
• 12:57
  Speaker 1: towards the election, and so you know when you have
• 12:59
  Speaker 1: major investor is like that doing it, you know the
• 13:01
  Speaker 1: rest of the country is. But of course there's the
• 13:02
  Speaker 1: conventions to get through first Pall Yeah, exactly, And Johnson
• 13:05
  Speaker 1: said the key here's uh kind of education letting people
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  Speaker 1: know that this is going to happen. But Jonathan's columns
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  Speaker 1: the first time I kind of kind of came up
• 13:14
  Speaker 1: to this issue. So there's a lot more education that
• 13:16
  Speaker 1: needs to be had going forward, but it will be
• 13:18
  Speaker 1: certainly an issue. Great Jared, thank you so much. We
• 13:23
  Speaker 1: appreciate that. Market Drivers is brought to you by Commonwealth
• 13:26
  Speaker 1: Financial Network for the sixth raight time. JD Power ranks
• 13:29
  Speaker 1: Commonwealth number one and independent advisor satisfaction among financial investment firms.
• 13:35
  Speaker 1: Visit Commonwealth dot com to learn more. Looking at the
• 13:39
  Speaker 1: markets here, as Greig was just mentioning, we're kind of
• 13:41
  Speaker 1: kind of a mixed SMP down slightly down, down a
• 13:43
  Speaker 1: hundred and fifty points. But the NASTAC is hired to
• 13:46
  Speaker 1: get a sense of what's really going on and how
• 13:48
  Speaker 1: we should be thinking about these equity markets going forward.
• 13:52
  Speaker 1: In the face of this global pandemic. We welcome our
• 13:54
  Speaker 1: good friend Gina Martin Adams. She's an equity strategist for
• 13:58
  Speaker 1: Bloomberg Intelli. Gina, thanks much for joining us here. Give
• 14:02
  Speaker 1: us your sense here of kind of how you're viewing
• 14:04
  Speaker 1: the markets here. After this nice bounce off the lows
• 14:08
  Speaker 1: that we've seen any equity markets, how are you kind
• 14:11
  Speaker 1: of taking a look at the next twelve months for
• 14:13
  Speaker 1: the equity markets. Yeah, so when we think about where
• 14:16
  Speaker 1: equity markets are, the bounce in our view has been
• 14:19
  Speaker 1: entirely driven by policy infusion. Much lower rates for a
• 14:23
  Speaker 1: longer period of time, a commitment by the Fed to
• 14:25
  Speaker 1: at least double the size of the balance sheet and
• 14:28
  Speaker 1: purchase many, many assets across the bond market spectrum has
• 14:32
  Speaker 1: certainly elevated valuations and equities um. But we've now priced
• 14:36
  Speaker 1: effectively priced that policy infusion in, so we're waiting for
• 14:40
  Speaker 1: our next like higher And I do think that's why
• 14:43
  Speaker 1: you're seeing the market sort of take a pause here,
• 14:45
  Speaker 1: rotate back into some longer term winners. And I do
• 14:49
  Speaker 1: think we're in for a period of maybe a rockier
• 14:52
  Speaker 1: climb as we move into more of us show me
• 14:55
  Speaker 1: market and by that I mean, we're going to have
• 14:57
  Speaker 1: to see the economic data continue to improve of maybe
• 15:00
  Speaker 1: a little upward revision momentum emerge in the earnings UH
• 15:04
  Speaker 1: in the earnings expectations stream to really drive performance from here.
• 15:09
  Speaker 1: So we've gone from policy driven market to what's likely
• 15:12
  Speaker 1: to be more of an economically and earnings driven market
• 15:15
  Speaker 1: over the next several months in our view. Yeah, just
• 15:17
  Speaker 1: as you talk about that, we're seeing the fangs hire
• 15:20
  Speaker 1: today which again shows the NASDA two thirds of percent,
• 15:23
  Speaker 1: while the other indicries are lower, but Gina not by
• 15:26
  Speaker 1: very much. And if you say we're going back to
• 15:30
  Speaker 1: the fundamentals, you know, what does an improvement look like,
• 15:33
  Speaker 1: Because we're looking at seriously negative numbers, particularly for earnings
• 15:37
  Speaker 1: next quarter. We are, but the expectation is for that
• 15:40
  Speaker 1: negativity to persist. And I think that's an important and
• 15:43
  Speaker 1: important point to make. If you look at your average
• 15:46
  Speaker 1: recovery following recession lows, you typically get a ten percent
• 15:51
  Speaker 1: growth pace in EPs following those lows in the year
• 15:55
  Speaker 1: after those lows, So ten percent is your average we're
• 15:59
  Speaker 1: making in a five for some expectation in terms of
• 16:02
  Speaker 1: our forecast for where the SMP five fundered is most
• 16:04
  Speaker 1: likely to go the consensus expects only one and a
• 16:07
  Speaker 1: half percent growth, So I think this is an important
• 16:10
  Speaker 1: thing to keep in mind, is there's no implied expectation
• 16:14
  Speaker 1: for recovery really in the earning stream. In terms of
• 16:17
  Speaker 1: consensus expectations, I would argue the market is probably be
• 16:20
  Speaker 1: pricing in about two percent growth following our our second
• 16:23
  Speaker 1: quarter trough. So that's why we're so sensitive to what
• 16:27
  Speaker 1: happens with the pace of economic growth and earnings recovery. Yes,
• 16:30
  Speaker 1: the current economic numbers look bad, but they are getting
• 16:33
  Speaker 1: less bad. As long as they continue to get less
• 16:36
  Speaker 1: bad and start to migrate to potentially growth, we're more
• 16:39
  Speaker 1: likely to see revision momentum revert higher or more likely
• 16:43
  Speaker 1: to see earnings beat expectations, and that's going to keep
• 16:47
  Speaker 1: the market most likely moving higher, albeit certainly not at
• 16:50
  Speaker 1: the double digit pace of monthly growth that we've experienced
• 16:54
  Speaker 1: most recently. It'll be it'll most likely be a rocky,
• 16:57
  Speaker 1: rockier climb because it's driven more by improve the earnings
• 17:00
  Speaker 1: expectations and improving economic outlook, which by its very nature
• 17:04
  Speaker 1: is much more difficult and more difficult portion of the
• 17:07
  Speaker 1: equity market climb than the pure valuation expansion driven portion
• 17:10
  Speaker 1: that we've just been through. So you know, we've had
• 17:13
  Speaker 1: the FED kind of come out, you know, since the
• 17:15
  Speaker 1: beginning of this pandemic, could be quite aggressive, quite a
• 17:19
  Speaker 1: forthright in kind of their views of how they need
• 17:21
  Speaker 1: to stimulate the market and add to liquidity to the market.
• 17:25
  Speaker 1: Fiscal stimulus is kind of taken a back seat here.
• 17:29
  Speaker 1: Is that does the market need to see another big
• 17:31
  Speaker 1: round of fiscal stimulus here or is that not a
• 17:35
  Speaker 1: prerequisite for the support of this market right here? I
• 17:38
  Speaker 1: think it will entirely depend upon the pace of economic recovery.
• 17:41
  Speaker 1: I mean, I think we can all admit that we
• 17:42
  Speaker 1: were very shocked by the pace of employment recovery recorded
• 17:47
  Speaker 1: in the month of May, just on a couple of
• 17:49
  Speaker 1: weeks of reopening. To see that kind of employment growth.
• 17:52
  Speaker 1: There's a lot of skepticism as to whether it will continue.
• 17:55
  Speaker 1: But if it does continue into June, I think the
• 17:57
  Speaker 1: fiscal bodies are going to really start the question how
• 17:59
  Speaker 1: much spending they need to do, how much stimulus they
• 18:03
  Speaker 1: need to do. At the same time, you've got a
• 18:05
  Speaker 1: lot of fear out there that we're going to have
• 18:07
  Speaker 1: another reinfection wave, that we're going to experience some you know,
• 18:10
  Speaker 1: sort of um greater shutdown come winter months, and so
• 18:15
  Speaker 1: I think that they want to reserve some firepower in
• 18:17
  Speaker 1: the event that we do see some sort of reinfection
• 18:20
  Speaker 1: going forward. Not to mention, the fiscal budget is not
• 18:22
  Speaker 1: exactly sanguine at this moment in time. We certainly accumulated
• 18:26
  Speaker 1: a tremendous fiscal fiscal deficits, so I think they're going
• 18:29
  Speaker 1: to be somewhat conservative, certainly follow the data. I think
• 18:32
  Speaker 1: in certain cases there's enough political momentum, such as the
• 18:35
  Speaker 1: extension of unemployment benefits, to probably get something through. But
• 18:41
  Speaker 1: we're unlikely to see a massive Zooka package like we
• 18:44
  Speaker 1: saw in the spring, simply because we do appear to
• 18:48
  Speaker 1: be pushing past the worst of the worst, and as
• 18:51
  Speaker 1: long as we're going to continue to see some incremental
• 18:53
  Speaker 1: improvement in economic growth, your case for extraordinary fiscal expenditure
• 18:58
  Speaker 1: um in that kind of environment, it is diminished somewhat,
• 19:01
  Speaker 1: and the equity market is not necessarily counting on it.
• 19:03
  Speaker 1: You know, with one and a half percent growth forecast
• 19:06
  Speaker 1: for earnings over the next twelve months, the equity market
• 19:08
  Speaker 1: is essentially just saying, hey, we're going to have incremental
• 19:11
  Speaker 1: improvement in the economy. I would say another fiscal package
• 19:14
  Speaker 1: is um likely to provide a big booth. Gina, very briefly,
• 19:18
  Speaker 1: what do you make of the distressed equity investing that
• 19:19
  Speaker 1: we're seeing right now? Her, it's jes a big j
• 19:21
  Speaker 1: C penny. Yeah, I mean, I think it's just a
• 19:24
  Speaker 1: risk tolerance move. I do think that what's happening in
• 19:27
  Speaker 1: general is an improvement and risk tolerance investors are willing
• 19:30
  Speaker 1: to go out the curve in terms of lower quality investments,
• 19:34
  Speaker 1: higher volatility investments. That's very symptomatic of sort of recession loads,
• 19:40
  Speaker 1: very consistent with experience as the past. UM. I wouldn't
• 19:43
  Speaker 1: call it necessarily taking a flyer, but certainly finding those
• 19:47
  Speaker 1: um those potential opportunities where we've seen extraordinary dislocation and
• 19:53
  Speaker 1: maybe some mispricing in the market is definitely the risk
• 19:55
  Speaker 1: appetite of the day, right, Gina. Thank you have to
• 19:58
  Speaker 1: live there, Gina, Martin Addam when we're intelligence the chief
• 20:01
  Speaker 1: equity strategists, Thank you for that. There's one CEO I
• 20:08
  Speaker 1: probably not want to be during these times, and that
• 20:10
  Speaker 1: is an insurance company CEO. They are on the hook
• 20:13
  Speaker 1: for so much or at least they say they're not.
• 20:16
  Speaker 1: But those who are claiming they are sometimes have a
• 20:20
  Speaker 1: pretty good argument, or at least they think they do.
• 20:23
  Speaker 1: Let's bring in somebody who knows both sides of the story,
• 20:25
  Speaker 1: and that is Matt Pozzola, who covers all of the insurers,
• 20:29
  Speaker 1: particularly the property and casualty insurers for US at Bloomberg Intelligence. So, Matt,
• 20:34
  Speaker 1: the story for the insurers just keeps getting more and
• 20:36
  Speaker 1: more complicated. We had the pandemic, we had events canceled
• 20:40
  Speaker 1: for that reason, and then of course we had protests,
• 20:44
  Speaker 1: some of which turned into riots. Just how on the
• 20:47
  Speaker 1: hook are insurers for all of these events? Yeah, the
• 20:52
  Speaker 1: combination of all these events will probably make for the
• 20:56
  Speaker 1: worst insured loss year ever. UM as a bull of
• 21:00
  Speaker 1: distinctions to make when you're you know, saying that, typically, UM,
• 21:05
  Speaker 1: when you have a large event, which previously the most
• 21:08
  Speaker 1: cost the event was Hurricane Katrina in the United States,
• 21:11
  Speaker 1: that's usually isolated to at least one geographic region. So
• 21:15
  Speaker 1: what's really distinguishing the pandemic is the fact that it's
• 21:20
  Speaker 1: impacting pretty much every major, large global city in the world. UM.
• 21:25
  Speaker 1: And that's what's going to contribute to this large loss Alright,
• 21:28
  Speaker 1: so Matt, can the insurance industry handle this? Yeah, for sure.
• 21:33
  Speaker 1: So the insurance industry is well capitalized. Two thousand seventeen
• 21:37
  Speaker 1: and two thousand eighteen were pretty bad years in the
• 21:39
  Speaker 1: United States for insured losses, with a number of hurricanes
• 21:43
  Speaker 1: adding up, and even through that, insurance companies remained pretty
• 21:47
  Speaker 1: well capitalized. And I think the other important point is
• 21:51
  Speaker 1: that if these losses are very geographically dispersed um by region,
• 21:57
  Speaker 1: they're going to be very very dispersed by company me too,
• 22:00
  Speaker 1: So it's going to be spread across the entire global industry.
• 22:03
  Speaker 1: So I wouldn't have capital concerns for the entire industry.
• 22:07
  Speaker 1: Some companies here and there could get into trouble thought well.
• 22:10
  Speaker 1: And of course we should note that when it comes
• 22:12
  Speaker 1: to that side of the equation, insurance companies are huge investors,
• 22:16
  Speaker 1: and with the out and NASDAC and all those industries
• 22:19
  Speaker 1: at all time highs, that part of their balance street
• 22:23
  Speaker 1: hasn't really been hurt like it might have been. But
• 22:25
  Speaker 1: one of the other side, I mean, we had so
• 22:28
  Speaker 1: many lobbying groups trying to get injurers to pay out
• 22:31
  Speaker 1: money for things like rent or you know, COVID nineteen stoppages,
• 22:35
  Speaker 1: and they just are not prepared to do so they're
• 22:37
  Speaker 1: going to fight it all the way. It may go
• 22:40
  Speaker 1: to you know, a higher court or even the Supreme
• 22:43
  Speaker 1: Court at some point. But what what what will happen
• 22:47
  Speaker 1: with contract law? Will those contracts be changed post talk? Yeah?
• 22:53
  Speaker 1: I don't think so, Vanni. So a number of states
• 22:57
  Speaker 1: tried to essentially force insurance cut these to retroactively pay
• 23:02
  Speaker 1: business interruption claims that specifically excluded viruses, and those bills
• 23:09
  Speaker 1: have seemed to have lost momentum um in the various
• 23:13
  Speaker 1: states and none of them came into law. The industry
• 23:15
  Speaker 1: would have fought that very hard, and like you said,
• 23:17
  Speaker 1: it could have even been the case that went all
• 23:19
  Speaker 1: the way up to the Supreme Court. I don't think
• 23:21
  Speaker 1: that's going to happen retroactively. I do think going forward
• 23:25
  Speaker 1: there will be a number of things. Were already discussing
• 23:28
  Speaker 1: a global or i should say United States Pandemic fund
• 23:33
  Speaker 1: where insurers would potentially pay pandemic claims but then could
• 23:38
  Speaker 1: be reimbursed, kind of similar to what we have for
• 23:41
  Speaker 1: terrorism right now. So I think the effects are going
• 23:44
  Speaker 1: to be in the future more than they are changing
• 23:48
  Speaker 1: contracts that already happened in the past. So, Matt, how
• 23:51
  Speaker 1: these big property and casualty insurance stocks, how they performed
• 23:56
  Speaker 1: here in the markets. You're talking about some of the
• 23:57
  Speaker 1: biggest losses ever. I can't imagine investors wanted to have
• 24:01
  Speaker 1: anything to do with these things. Yeah, I think so.
• 24:04
  Speaker 1: What happened initially was the stocks took a big dip
• 24:09
  Speaker 1: in conjunction with the market, and in our published view
• 24:12
  Speaker 1: was that the stocks went down a lot more than
• 24:16
  Speaker 1: what their exposure might be even in the worst year ever. Uh,
• 24:21
  Speaker 1: they've since rebounded, and as Vonnie was mentioning earlier, obviously
• 24:24
  Speaker 1: these companies are big investors, and when a lot of
• 24:28
  Speaker 1: industry participants are talking about this being the biggest loss ever,
• 24:32
  Speaker 1: they are including, uh, the investment impact, which is not
• 24:38
  Speaker 1: typically included when we talk about this. So, uh, there's
• 24:42
  Speaker 1: a little bit of I guess, you know, building up
• 24:46
  Speaker 1: the event, maybe even bigger than it is. And what
• 24:50
  Speaker 1: I would note is that several large insures have already
• 24:52
  Speaker 1: said that in the second quarter they did see and
• 24:55
  Speaker 1: as we've seen with the market, a dramatic rebound in that.
• 24:58
  Speaker 1: So I think that's going to be a little bit
• 25:00
  Speaker 1: of a limiting factor. What about events, how long will
• 25:04
  Speaker 1: events be canceled for? And you know, out to when
• 25:08
  Speaker 1: our insurance companies liable in the sense of, you know,
• 25:12
  Speaker 1: when do people actually start booking things? I mean, are
• 25:14
  Speaker 1: people booking things pre pandemic for two or is that
• 25:19
  Speaker 1: like not even on the cards? Yeah, it's not the
• 25:22
  Speaker 1: These policies will typically be written on an annual basis,
• 25:26
  Speaker 1: so stuff that may be happening in one Uh, those
• 25:31
  Speaker 1: policies may not even be written yet. And if they are,
• 25:34
  Speaker 1: they're certainly going to exclude um viruses and pandemics. So
• 25:40
  Speaker 1: you know, what we're what we'll see now is the
• 25:42
  Speaker 1: fall out of stuff for this year and maybe the
• 25:45
  Speaker 1: first half of next year, and a lot of that's
• 25:48
  Speaker 1: going to fall on the European market, which writes a
• 25:50
  Speaker 1: lot of that event cancelation insurance, especially for these big
• 25:54
  Speaker 1: events like Wimbledon. Um, you're not going to see US
• 25:57
  Speaker 1: insures taking a lot of that risk. So I mean,
• 26:01
  Speaker 1: have we seen these companies take some big low loss
• 26:04
  Speaker 1: provisions or just put you kind of provisions for losses
• 26:09
  Speaker 1: on their policies that Um yeah, I mean, well, so far,
• 26:13
  Speaker 1: I'd say the US companies have not. The first quarter
• 26:17
  Speaker 1: they didn't have huge losses. Child for instance, it was
• 26:22
  Speaker 1: very low number, but they said, you know, we need
• 26:24
  Speaker 1: to be prepared for the second third quarter that we're
• 26:27
  Speaker 1: going to have a lot higher of losses. So the
• 26:31
  Speaker 1: biggest losses right now have been in European companies and
• 26:36
  Speaker 1: um reinsurance companies, which is insurance for the insurance companies.
• 26:40
  Speaker 1: So as of right now, it's it's still a little
• 26:43
  Speaker 1: bit of a weight and see game where you know,
• 26:44
  Speaker 1: everyone's talking about the big losses out there. We do
• 26:47
  Speaker 1: see the Europeans having them, but as far as the US,
• 26:50
  Speaker 1: we still have to wait for the second and third quarter.
• 26:52
  Speaker 1: And Matt, thanks so much for joining us. We appreciate
• 26:55
  Speaker 1: it as always. Matt few Palazzola senior analysts covering the
• 26:58
  Speaker 1: property and casual the insurance business for Bloomberg Intelligence. He's
• 27:03
  Speaker 1: got years of experience covering that space. And you know, interesting,
• 27:06
  Speaker 1: even though it's going to be uh the worst year
• 27:09
  Speaker 1: ever in terms of losses for the insurance companies AI,
• 27:13
  Speaker 1: they're able to handle it from a financial perspective, and
• 27:16
  Speaker 1: b their stocks are actually bouncing back off those thods
• 27:18
  Speaker 1: really fine. Fascinating. Thanks for listening to Bloomberg Markets podcast.
• 27:24
  Speaker 1: You can subscribe and listen to interviews at Apple Podcasts
• 27:27
  Speaker 1: or whatever podcast platform you prefer. I'm Bonnie Quinn, I'm
• 27:31
  Speaker 1: on Twitter at Bonnie Quinn. And I'm Paul Sweeney. I'm
• 27:34
  Speaker 1: on Twitter at pt Sweeney. Before the podcast, you can
• 27:36
  Speaker 1: always catch us worldwide at Bloomberg Radio