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JPM's Kelly: Expect Another Wave Down In Stock Market · Bloomberg Intelligence

0:02
Speaker 1: Welcome to the Bloomberg PENL podcast on Paul Swinging. Along
0:05
Speaker 1: with my co host Lisa Brahmas. Each day we bring
0:08
Speaker 1: you the most noteworthy and useful interviews for you and
0:10
Speaker 1: your money. Whether at the grocery store or the trading floor.
0:13
Speaker 1: Find a Bloomberg Penl podcast on Apple podcast or wherever
0:16
Speaker 1: you listen to podcasts, as well as at Bloomberg dot com. Paul,
0:20
Speaker 1: one thing that struck me again and again over the
0:22
Speaker 1: past few weeks is that the range of outcomes has
0:24
Speaker 1: never been wider. As everyone tries to be an armchair epidemiologist,
0:28
Speaker 1: and the epidemiologists themselves throughout their arms and say we
0:31
Speaker 1: have no idea and to get a sense though of
0:34
Speaker 1: what may be expected in markets based on different outcomes.
0:38
Speaker 1: That seems to be the increasing focus. Joining us right now,
0:42
Speaker 1: David Kelly, chief Global strategist at JP Morgan Asset Management,
0:45
Speaker 1: which has two trillion dollars of assets under management. David,
0:49
Speaker 1: thank you so much for being with us. I want
0:51
Speaker 1: to start there, the wide range of outcomes. Can you
0:54
Speaker 1: give us your your sort of optimistic case and your
0:57
Speaker 1: pessimistic case based on what we're seeing right now in
1:00
Speaker 1: the data. Yeah. Well, I think the first thing is
1:03
Speaker 1: to recognize that in the baseline UM, this disease is
1:06
Speaker 1: not going away. We have succeeded in stabilizing it. We
1:10
Speaker 1: have flattened the curve, but it's really just a plateau
1:13
Speaker 1: more than a curve. And so running it about you know,
1:16
Speaker 1: twenty five cases a day, running at between two thousand
1:22
Speaker 1: more fatalities a day, and it'll probably keep doing that.
1:26
Speaker 1: Under a base case. Now, a good outcome would be
1:30
Speaker 1: a better treatment UM. We have seen some treatment options
1:34
Speaker 1: one or two UM companies are certainly one approved for emergencies,
1:38
Speaker 1: but there are other treatments out there, and doctors are
1:40
Speaker 1: getting better in terms of protocols. If you can push
1:43
Speaker 1: that mortality rate down, then maybe people feel a little
1:45
Speaker 1: bit more comfortable about getting back to normal, and I
1:48
Speaker 1: think you may see that UM later on this year. UM.
1:52
Speaker 1: On the other hand, you know, a more negative outcome
1:55
Speaker 1: is one in which mortality is just refused to go
1:57
Speaker 1: down significantly and the vaccines to eight So you've gotta
2:00
Speaker 1: you know, we're talking about maybe they'll get a vaccine
2:03
Speaker 1: by the end of the year, maybe it will be
2:04
Speaker 1: distributed by the first quarter, but that's a lot. There's
2:06
Speaker 1: a lot of if a lot of things have to
2:07
Speaker 1: go right there, and if we don't have a vaccine
2:09
Speaker 1: until late one, and we can't and don't push down mortalities,
2:14
Speaker 1: then it's very hard for everybody to get back to normal.
2:16
Speaker 1: And so this could be, you know, this could be
2:18
Speaker 1: a U shape procession rather than a V shape procession. So, David,
2:22
Speaker 1: in your scenarios, I mean, were you factor in the
2:25
Speaker 1: fact that there might be a second wave, a third wave,
2:28
Speaker 1: that we're hearing it from a lot of scientists that
2:30
Speaker 1: that is not only possible but probably likely. Well's the
2:34
Speaker 1: problem is the first wave has to crest. I'm I'm
2:37
Speaker 1: actually a little bit mystified by all this talk about
2:40
Speaker 1: a second wave. I've seen no I've seen evidence in
2:42
Speaker 1: New York City, yes, that that after a horrific two months,
2:47
Speaker 1: the number of fatality has gone down, But it looks
2:50
Speaker 1: to me like the number of new cases has not
2:52
Speaker 1: already gone down by much nationally um And we're relaxing,
2:56
Speaker 1: we're relaxing social distancing, and if that happens, I suspect
3:00
Speaker 1: that the case load really won't come down that much.
3:02
Speaker 1: So it's not so much about a second wave. You
3:03
Speaker 1: just never go rid to the first one. I mean
3:05
Speaker 1: if if the first if you say that, you know,
3:07
Speaker 1: people say that the first wave is done, but we're
3:09
Speaker 1: still running at over a thousand people dying every day,
3:13
Speaker 1: then that's you know, three d sixty thousand people a year. UM,
3:17
Speaker 1: it's you know, and and that's you know, if it's
3:20
Speaker 1: a thousand people a day. So UM, I do think
3:22
Speaker 1: there could be I think we could continue to see,
3:25
Speaker 1: um a heavy case load because we think that only
3:28
Speaker 1: about two percent of the American population right now is infected. UM.
3:31
Speaker 1: That means a vast majority of people have not been
3:33
Speaker 1: infected and are vulnerable to infection. So you know, to me,
3:36
Speaker 1: it's not a matter of a second wave, it's a
3:37
Speaker 1: matter of can we get the first wave to actually
3:39
Speaker 1: question and come down. And this is the question that
3:41
Speaker 1: epidemiologists and and and scientists of all types are trying
3:45
Speaker 1: to figure out, and they themselves can't really understand necessarily
3:48
Speaker 1: the path here From an investment strategy perspective, how are
3:52
Speaker 1: you advising clients at a time of such huge differentials
3:56
Speaker 1: wirth respect to the virology here? Well, I think the
4:00
Speaker 1: first thing to recognize that the markets come back a
4:02
Speaker 1: long way. I mean we were down thirty four peter
4:05
Speaker 1: the trough, and given the size of the recession, that's
4:08
Speaker 1: you know, that's not an unreasonable market reaction. But we're
4:11
Speaker 1: not only down about so I think that there is
4:15
Speaker 1: we are vulnerable to some correction here. I think in
4:17
Speaker 1: the long run, we will get a vaccine, we will
4:20
Speaker 1: get out of this. And I do think that in
4:21
Speaker 1: the long run US stalks may do okay. But I
4:24
Speaker 1: think there's people need to be prepared for a second correction,
4:29
Speaker 1: a second wave down in the market, as people's more
4:32
Speaker 1: optimistic views on this virus sort of petering out go away.
4:37
Speaker 1: So I think that's the first thing. And beyond that,
4:39
Speaker 1: I think you've got to figure out what's going to
4:41
Speaker 1: weather this recession well and what's going to thrive in
4:44
Speaker 1: the rebound um. And then the last thing I'd say
4:46
Speaker 1: is international stocks are still getting cheaper and cheaper relsive
4:49
Speaker 1: to US stocks, and the one region of the world
4:51
Speaker 1: that has done well and getting past this is East Asia,
4:55
Speaker 1: and I do think that people ought to take advantage
4:57
Speaker 1: of that and make sure they've got enough allocation to
4:59
Speaker 1: countries like um, you know, Korea, Taiwan, Australia and and
5:03
Speaker 1: so forth in this in this pandemic, David, are you
5:07
Speaker 1: one of those folks that are concerned that this the
5:11
Speaker 1: financial marks, particularly the risk on markets, are being artificially
5:15
Speaker 1: supported by what has been a very very aggressive federal
5:18
Speaker 1: reserve and central banks globally. Uh. Well, I think that
5:23
Speaker 1: has been a problem for a long time. I can't
5:25
Speaker 1: full the central banks right now. There is nothing else
5:28
Speaker 1: to do but to throw money at this problem and
5:30
Speaker 1: to try and maintain liquidity. So I have no problem
5:33
Speaker 1: with the policy right now. I do think there's is
5:36
Speaker 1: requires a level of real discipline when the economy does
5:40
Speaker 1: come back to remove that support, even if it hurts
5:44
Speaker 1: the economy a bit, because there is a danger at
5:46
Speaker 1: the end of all this, at all this liquidity, if
5:48
Speaker 1: we don't mop it up again, Um, you could cause
5:51
Speaker 1: inflation and higher interest rates down the road and we
5:53
Speaker 1: want to avoid that. But for the moment, yes, I
5:56
Speaker 1: do think the market has been supported by that. But
5:58
Speaker 1: I wouldn't say that that that makes a wrong policy.
6:01
Speaker 1: Just real quick here, David, I'm wondering, is there any
6:03
Speaker 1: as a class you really like right now? Well? I
6:06
Speaker 1: do like, um, emerging market equities for for the long
6:09
Speaker 1: one I think that's important, and then the other thing
6:11
Speaker 1: is um Just to look at those companies, things like technology, um, utilities, healthcare,
6:17
Speaker 1: those sectors that can weather a long pandemic recession, I
6:21
Speaker 1: think they're probably underappreciated relative to some of those more
6:24
Speaker 1: cyclical bounce back sectors which may be still doing too well.
6:28
Speaker 1: Given that, I do think this is going to be
6:31
Speaker 1: most likely a U shape rather than a V shaped procession.
6:34
Speaker 1: Dr David Kelly, chief Global Strategist for JP Morgan Asset Management,
6:39
Speaker 1: thank you so much for joining us and giving us
6:40
Speaker 1: your global perspective. Time to check in with Bloomberg Opinion
6:47
Speaker 1: that we're joined by Shinali Bask. She sat down earlier
6:50
Speaker 1: today with Bloomberg Opinion columnist Peter Orzak, who's head of
6:54
Speaker 1: Lozard's financial advisory practice and a former Obama administration budget chief,
6:59
Speaker 1: to talk about the potential for a cascade of bankruptcies
7:02
Speaker 1: resulting from the pandemic. Let's listen in Well, look, if
7:06
Speaker 1: if unemployment remains elevated for an extended period of time,
7:10
Speaker 1: and especially if there is not additional rounds of government stimulus,
7:15
Speaker 1: we're going we're at some significant risk of cascading bankruptcies
7:19
Speaker 1: where the bankruptcy where bankruptcy at at one firm then
7:22
Speaker 1: infects another firm, uh, and then that infects a third firm,
7:25
Speaker 1: and so on and so forth, and that can do
7:27
Speaker 1: a lot of damage to the economies. That was Peter
7:32
Speaker 1: or Zak, head of Blizard's financial advisory practice. Shanelli Bosta,
7:35
Speaker 1: Bloomberg Wall Street correspondent joins us. Now, So, Shnally, I mean,
7:38
Speaker 1: there is really a risk here. We're starting to see
7:41
Speaker 1: more and more stories crossing the tape here. So as
7:44
Speaker 1: you talked to your contacts, including Mr or Zach, I mean,
7:47
Speaker 1: I guess they're just kind of preparing for what is
7:49
Speaker 1: probably a lot more to come, that's for sure. And
7:53
Speaker 1: what Peter had said this morning was that he could
7:56
Speaker 1: see a potential cascade of bankruptcies where issues with one
8:00
Speaker 1: company can really lead to an issue with another company
8:02
Speaker 1: to another company. He's also has written earlier this year
8:07
Speaker 1: that supply chains are being very heavily impacted by this coronavirus,
8:12
Speaker 1: which could lead to a big consolidation of the supply chains.
8:16
Speaker 1: And I see a lot of banks right now dealing
8:19
Speaker 1: with supply chain financing and issues that are interconnected with
8:23
Speaker 1: these firms, and so these are not just standalone issues,
8:27
Speaker 1: is what I'm saying. And this idea of cascading bankruptcy
8:30
Speaker 1: is quite scary. Well, and I want to go a
8:33
Speaker 1: little bit further, just in terms of what we've already seen. Hurts,
8:37
Speaker 1: for example, is teetering on the brink of bankruptcy. Got
8:40
Speaker 1: to stay from some of its creditors, but there's a
8:42
Speaker 1: concern that, for example, it will have to liquidate some
8:44
Speaker 1: of its inventories of cars in order to make good
8:48
Speaker 1: on its debt. That's leading to concerns about the valuations
8:51
Speaker 1: of cars which goes to dealers. I mean, has anyone
8:54
Speaker 1: talked about the uh, the sort of interconnected nature in
8:59
Speaker 1: terms of tipping point into some sort of critical moment?
9:04
Speaker 1: Is anyone talking about what that would look like? So
9:07
Speaker 1: the thing that's hard about this critical moment, and at
9:09
Speaker 1: least I'm really glad you brought up the value of
9:11
Speaker 1: cars and the value of homes and the value of
9:13
Speaker 1: all the things that are underlying in the economy that
9:16
Speaker 1: nobody wants to talk about yet. And the thing is
9:19
Speaker 1: a lot of people don't expect that the economy will
9:22
Speaker 1: reopen and full. They think it will take a long time,
9:24
Speaker 1: and somebody like or Zach actually thinks that there will
9:27
Speaker 1: be intermittent closures continuing from now and therefore much more
9:32
Speaker 1: stimulus needed in further rounds. So that idea of value
9:36
Speaker 1: of the things underlying our economy nobody knows. But people
9:40
Speaker 1: are a little too exhausted with the current crisis to
9:43
Speaker 1: deal with what that might look like. So it's interesting,
9:47
Speaker 1: shal Is. We talked to Peter Orzag from lazardes are
9:51
Speaker 1: they talking about ramping up some of their staffing and
9:54
Speaker 1: some of the restructuring departments h advisory departments. Well, it's
9:58
Speaker 1: funny that you mentioned advisory because Lazard is also one
10:00
Speaker 1: of the biggest merger advisors in the world, and mergers
10:03
Speaker 1: are virtually nil. There's not a lot able to happen
10:07
Speaker 1: right now. Uh, the idea of hiring bankers for Lazard
10:10
Speaker 1: and a lot of its peers is a really tough one.
10:13
Speaker 1: But restructuring really is a place that's propped up right
10:16
Speaker 1: now and a place that they are seeing activity, but
10:19
Speaker 1: it's not enough activity to really offset the places that
10:23
Speaker 1: even a place like Lazard is losing revenue, which is
10:25
Speaker 1: those large scale deals. One thing that Peter Orzag was
10:29
Speaker 1: talking about was additional stimulus, and I'm wondering where and
10:32
Speaker 1: how they would like to see this deployed, given the
10:34
Speaker 1: fact that we've already seen a tremendous amount poured in
10:36
Speaker 1: through the p p P through checks given to people
10:40
Speaker 1: around the country. So speaking of checks, there's some really
10:43
Speaker 1: great graphics that we've had come out through Bloomberg News
10:46
Speaker 1: to show exactly where all of the money is going
10:48
Speaker 1: for the next wave of stimulus. Or Zach in particular
10:52
Speaker 1: had mentioned that state and local governments are going to
10:55
Speaker 1: be a really important place to direct a lot of
10:57
Speaker 1: this aid. That has been a point of content Chin
11:00
Speaker 1: as we know, we all remember what Mitch mccollin all said,
11:03
Speaker 1: even if the prospect of the difference local government's going bankrupt,
11:07
Speaker 1: that's something a lot of these restructuring artists really deal
11:10
Speaker 1: with as well. But paychecks into the hands of people
11:14
Speaker 1: faster seems to be the consensus, because if you don't
11:17
Speaker 1: have people spending in the economy, then you don't have
11:19
Speaker 1: an economy. Remember yesterday, Lisa, we had Jim Millstein tell
11:22
Speaker 1: us that he was worried that people will turn around
11:26
Speaker 1: and realize the investor class was saved first by all
11:29
Speaker 1: of the federal reserves actions to save credit markets and
11:33
Speaker 1: that the investor class later may have to pay for it.
11:38
Speaker 1: Thank you so much. We really appreciate you taking the type,
11:41
Speaker 1: she Dolly Blassa as a Bloomberg Wall Street correspondent. This
11:47
Speaker 1: has been one theme of really steady yields. You see
11:51
Speaker 1: this both on the treasury side as well as the
11:54
Speaker 1: corporate debt side. Is a growing number of investors factor
11:58
Speaker 1: in Fed stimulus, uh and and and bond purchases. Weighing
12:01
Speaker 1: in on that as somebody who has an intimate knowledge
12:04
Speaker 1: of the Federal Reserve, and that would be Eric Stein,
12:07
Speaker 1: and I'm really glad that we have him co director
12:09
Speaker 1: of Global Income at Eaton Advance Management, because I want
12:12
Speaker 1: to put into perspective the financing plans that the U. S.
12:15
Speaker 1: Treasury Department has, Eric Stein, we are experiencing a three
12:19
Speaker 1: trillion dollar expected issue ins in the second quarter by
12:23
Speaker 1: the US Treasury Department. How much will this cause yields
12:27
Speaker 1: to go up? Given the dynamic that we're seeing in
12:30
Speaker 1: markets right now? First, a lot of you know, first off,
12:33
Speaker 1: thanks certainly for having me on. You know, three trillion,
12:36
Speaker 1: it is a huge number and only sounds huge. It
12:38
Speaker 1: is huge, But um, you know, the FED has basically
12:41
Speaker 1: to me kind of underwritten market functioning in the US
12:45
Speaker 1: treasury market and also underwritten a lot of supply. And
12:48
Speaker 1: so given that the FEDS you know, has rates now
12:51
Speaker 1: effectively a zero just a touch above zero, a lot
12:54
Speaker 1: of programs you're mentioning some in the credit market, quantitative easing,
12:58
Speaker 1: so buying treasuries, and that helps absorb that supply. In addition,
13:03
Speaker 1: and despite the fact we've seen you know, markets rally
13:05
Speaker 1: really over the past you know, five six weeks or so,
13:08
Speaker 1: there still has a lot of uncertainty out there of
13:10
Speaker 1: the world and fear and whatnot. And that also helps
13:12
Speaker 1: to keep keep treasury yields low. So it's not only
13:15
Speaker 1: the FED, but the FED certainly has a very big
13:17
Speaker 1: part in in you know, the stability as you mentioned before,
13:20
Speaker 1: of US treasury yields. So Eric, you mentioned, you know,
13:23
Speaker 1: we're kind of at that zero bound with interest rates.
13:26
Speaker 1: I'm looking at the ten year here trading at zero
13:28
Speaker 1: points six six. So looking at something like the tenure,
13:32
Speaker 1: do you think the FED has any appetite for that
13:34
Speaker 1: part of the curve to be at or below zero? Uh? No,
13:39
Speaker 1: So it's it's interesting. It's a great question. You know
13:41
Speaker 1: that that would be a negative or really inverted yield curve. So,
13:45
Speaker 1: you know, it's a big debate that I have my
13:47
Speaker 1: colleagues that eat advance management. Does the shape of the
13:49
Speaker 1: yield curve matter? Personally, I'm squarely in the camp that
13:53
Speaker 1: that yield curve shape does matter. It's a market signal. Yes,
13:57
Speaker 1: it can be manipulated by the Fed or others, but
13:59
Speaker 1: it is a market signal. And so I think having
14:02
Speaker 1: an inverted yield curve, which if short end rates were
14:05
Speaker 1: a touch above zero in the tenure was negative, there'll
14:08
Speaker 1: be issues with the banking sector. I think there's issues
14:10
Speaker 1: from a market confidence perspective and whatnot. So I think
14:13
Speaker 1: the FED likes very low treasury yields, but they also
14:16
Speaker 1: like a positively sloped yield curve. How concerned are you
14:19
Speaker 1: about a lack of liquidity and the treasury market. I'm
14:22
Speaker 1: hearing that it's actually starting to worsen a little bit
14:25
Speaker 1: as a federal reserve has net purchases that exceed issue.
14:28
Speaker 1: It's so far, Uh, you know, how big of an
14:31
Speaker 1: issue is that? So, I mean it depends to be
14:34
Speaker 1: what type of of you know, less liquidity are you
14:36
Speaker 1: see you know you've heard about for years, let's say
14:38
Speaker 1: in Japan and the JGB market, where there's certain jgbs
14:40
Speaker 1: that don't trade in a particular day because the b
14:43
Speaker 1: O J owned such a large portion of those. I
14:45
Speaker 1: don't I don't think we're not seeing that in the
14:47
Speaker 1: US with the treasury market and the Fed. Uh and
14:50
Speaker 1: then you know, to me, we're certainly not back to
14:52
Speaker 1: what we were in mid March when uh, you know,
14:54
Speaker 1: the treasury market, the on the run off, the run spreads,
14:57
Speaker 1: and the treasury repall market really you know, on the
15:00
Speaker 1: backbone of the fixed income market. But I think the
15:02
Speaker 1: backbone of global financial markets is the U S Treasury
15:06
Speaker 1: and the treasury repo market that effectively wasn't functioning in
15:09
Speaker 1: mid March. It's a lot better today. So certainly, if
15:12
Speaker 1: you're active in one particular security and you're trying to
15:15
Speaker 1: trade that, you know, um, having the FED purchase more
15:18
Speaker 1: than than the issue and supply can cause some issues.
15:20
Speaker 1: But I think we're far away from where we were
15:22
Speaker 1: in the middle of March. So Eric, where are you
15:25
Speaker 1: and the good folks eating vance kind of doing your
15:28
Speaker 1: work right now? Where you seeing some value some opportunities. Yeah.
15:31
Speaker 1: So look, I think you know, eating vance management on
15:33
Speaker 1: the fixing some side, we're very much a you know,
15:36
Speaker 1: a credit credit shop, whether it's municipal credit, corporate credit,
15:39
Speaker 1: sovereign credit, securitized credit. And you know, on one hand, uh,
15:43
Speaker 1: you know, doing credit investing is challenging right now given
15:45
Speaker 1: you know, we don't know, you know, economy is obviously
15:48
Speaker 1: quite weak now likely should be some opening up in
15:50
Speaker 1: some recovery, but the trajectory of that is very uncertain,
15:54
Speaker 1: you know, the length of how long, whether or not
15:56
Speaker 1: we get a second wave of coronavirus and need to
15:58
Speaker 1: shut things down again. Lot of uncertainty and so um.
16:02
Speaker 1: You know, I think that makes it challenging. At the
16:04
Speaker 1: same time, you have FED you know, FED backstop and
16:06
Speaker 1: FED support, which I think is helpful to the credit markets.
16:10
Speaker 1: So I think, you know, certainly parts of the bank
16:12
Speaker 1: loan market and the high yield market that we're you know,
16:15
Speaker 1: selling off a lot of high loan somewhat in February
16:18
Speaker 1: and all those asset classes into the kind of middle
16:21
Speaker 1: or end of March. Uh, they certainly rebound a lot.
16:23
Speaker 1: But I think in the corporate credit markets, you still
16:26
Speaker 1: you see some value um, you know, still certainly there
16:29
Speaker 1: and loans high yield UM. You know, emerging markets that
16:31
Speaker 1: we focus on on the Global Income team, that that
16:34
Speaker 1: I co run um value there. But obviously emerging markets
16:37
Speaker 1: also have their own set of challenges um, you know,
16:40
Speaker 1: given given the health outcomes in some of these countries.
16:43
Speaker 1: But even I think some of the worst fears from
16:45
Speaker 1: a couple of weeks ago, even in emerging markets are
16:47
Speaker 1: a little less concerning than they were. But but they're
16:50
Speaker 1: still going to be challenges for sure. We're speaking with
16:52
Speaker 1: Eric Stein, co director of Global Income and EAT in vance,
16:55
Speaker 1: and previously you worked on the market's desk of the
16:58
Speaker 1: Federal Reserve Bank of New Orc, which was very much
17:01
Speaker 1: in focus. They are expected to start buying e t
17:04
Speaker 1: f s that own credit in the next few days
17:07
Speaker 1: and then follow that up with their program to actually
17:10
Speaker 1: buy initial issuance of corporate debt. Do you think the
17:13
Speaker 1: market has gotten ahead of itself in terms of its
17:15
Speaker 1: expectations for FED purchases given that will just be a
17:18
Speaker 1: fraction of the overall market. Look, look, I think I
17:22
Speaker 1: think the FED is is the signaling effect is quite powerful, um,
17:25
Speaker 1: and so certainly the details of the programs, you know,
17:28
Speaker 1: matter it's something that we're discussing it eat advance and
17:31
Speaker 1: constantly getting questions. You know, one of the detail is
17:33
Speaker 1: going to be out and when the fedge announced this.
17:35
Speaker 1: You have to understand that it takes the FED sometime
17:37
Speaker 1: to announce a lot of their programs just given the
17:39
Speaker 1: nature of that institution, particularly new programs. Programs they're dusting
17:42
Speaker 1: off from O eight are a little bit easier. But
17:44
Speaker 1: but to me, the most important thing is that the
17:46
Speaker 1: FED is shown that the programs will adapt, they will change,
17:50
Speaker 1: typically multiple times, and so you know, the Fed's goal
17:54
Speaker 1: is not to you know, get asset markets back to
17:56
Speaker 1: where they were before the coronavirus, but their goal is
17:58
Speaker 1: to keep credit flowing in the totonomy and so of
18:00
Speaker 1: the extent that you know, if markets were to reverse
18:02
Speaker 1: significantly from here, to me, the FED would would very
18:05
Speaker 1: much adjust the programs and get markets continuing to function. So,
18:10
Speaker 1: you know, while we might not see further gains when
18:12
Speaker 1: the FED actually does some of these purchases, because I
18:14
Speaker 1: would agree a fair about a large amount is already
18:17
Speaker 1: priced in UM. You know, I think sometimes investors need
18:21
Speaker 1: to separate both the signal from the actual purchases and
18:23
Speaker 1: what we've seen really in central banking and the FED.
18:26
Speaker 1: But think about the e C B um, you know,
18:28
Speaker 1: back to the last crisis. A lot of times, if
18:31
Speaker 1: anything's words can be more powerful and the actual actions,
18:34
Speaker 1: assuming that the market thinks that the central banks in
18:36
Speaker 1: this case the FED are credible with those words. Eric,
18:40
Speaker 1: earlier this morning that Lisa and I were talking about
18:43
Speaker 1: bankruptcies and the number that's starting to grow in or
18:45
Speaker 1: were going to see a you know kind of a wave,
18:47
Speaker 1: a cast heading wave of bankruptcies out there. What what's
18:50
Speaker 1: your sense of credit quality out there as you kind
18:52
Speaker 1: of look across your portfolio where some of the areas
18:55
Speaker 1: that concerned. Yeah, look, look, I certainly think, you know,
18:58
Speaker 1: bankruptcies are going to go up from from you know,
19:01
Speaker 1: there were very low levels, you know, for the most
19:03
Speaker 1: part in most corporate sectors, you know, since the financial
19:06
Speaker 1: crisis of of you know, oh seven or eight oh nine,
19:09
Speaker 1: and you know, other than some of the challenges and
19:11
Speaker 1: need let's say the energy sector in fifteen and sixteen, um,
19:15
Speaker 1: you know, and obviously idiosyncratic bankruptcies here and there. So
19:19
Speaker 1: so I think that you know, they're for sure going
19:21
Speaker 1: to go up. You know, to me, the question is
19:24
Speaker 1: how long does that last? And also does it become
19:27
Speaker 1: more socially acceptable for more and more entities to default.
19:31
Speaker 1: I think if that were the case, that would be um,
19:33
Speaker 1: you know, problematic, um, you know, for credit markets and
19:36
Speaker 1: for the economy at large. If it's just the sectors
19:39
Speaker 1: that are you know, either had their issues kind of
19:41
Speaker 1: coming in to the coronavirus shocks, such as the energy
19:44
Speaker 1: sector for sure, it's been exacerbated by the UH no
19:47
Speaker 1: one traveling UM or sectors like you know, airlines or
19:51
Speaker 1: rental cars or whatnot where it's uh you know, those
19:54
Speaker 1: are massively affected due to social distancing and quarantine that
19:58
Speaker 1: we're seeing. For sure, you know, the there's gonna be bankruptcies,
20:01
Speaker 1: there's gonna be credit events in those in those sectors.
20:04
Speaker 1: So I think we're gonna see it. And you know,
20:06
Speaker 1: if you go back in history, actually there are years
20:08
Speaker 1: sometimes you have better returns and credit markets in years
20:11
Speaker 1: when there are some bankruptcies, assuming it's priced into the
20:14
Speaker 1: market even than you know, years where where there are bankruptcies.
20:18
Speaker 1: But for sure, um, you know, it's gonna be something
20:20
Speaker 1: to focus on. Hey, Eric, thanks so much for joining us.
20:23
Speaker 1: We appreciate your time. Eric Stein, co director of Global
20:26
Speaker 1: Fixed Income and eat Vance. They've billion dollars under management.
20:34
Speaker 1: Rental car company Hurts entering into some agreements with some
20:37
Speaker 1: of the lenders to try to buy some more time
20:39
Speaker 1: to stave off bankruptcy. To get the latest, we welcome
20:42
Speaker 1: Eliza Ronald's Hannon. She's a high yield and distress credit
20:45
Speaker 1: reporter for Bloomberg News. Liza, thanks so much for joining us.
20:49
Speaker 1: Give us the latest here on hers. How close is
20:52
Speaker 1: this company to filing for bankruptcy? Well, it has negotiated
20:56
Speaker 1: just a two and a half week forbearance, so I
20:59
Speaker 1: mean it's very close. There's always sort of that hail Mary,
21:02
Speaker 1: that they'll be able to that any given company will
21:05
Speaker 1: be able to strike a deal with creditors at the
21:07
Speaker 1: last minute to avoid Chapter eleven. But you know, Hurts
21:11
Speaker 1: is very much already drawing up the documents, was prepared
21:14
Speaker 1: to file last night if it did not get um
21:18
Speaker 1: the forbearance from creditors. But now it has two and
21:20
Speaker 1: a half more weeks during which lenders have agreed not
21:23
Speaker 1: to for close on its assets, not to demand a
21:27
Speaker 1: liquidation of an enormous lead of cars, for instance. But
21:31
Speaker 1: I think that it's still likely that this time will
21:33
Speaker 1: be used to hash out an agreement that will take
21:36
Speaker 1: place in bankruptcy, because at this point it's just really
21:40
Speaker 1: tough to imagine a company with this complex of a
21:43
Speaker 1: capital structure unwinding everything outside of court lessa. Can we
21:47
Speaker 1: take a step back and talk about the business model
21:49
Speaker 1: of the rental car companies right now? It's not just Hurts.
21:52
Speaker 1: Avis has also come under pressure, but it Hurts is
21:54
Speaker 1: under more given their finances heading into this about two
21:58
Speaker 1: thirds of the business stems from air travel. You fly somewhere,
22:02
Speaker 1: you rent a car to get around. And I'm wondering
22:04
Speaker 1: how much was this really an issue of the pandemic
22:08
Speaker 1: and how much is this a Hurt specific issue of
22:11
Speaker 1: them adding too much debt at a time of uncertainty
22:15
Speaker 1: given uber and lift and just a changing backdrop there. Right,
22:20
Speaker 1: it's a little bit of both. But I think this
22:22
Speaker 1: is really one of the first companies that we've seen
22:24
Speaker 1: that might file bankruptcy almost entirely because of the COVID
22:29
Speaker 1: pandemic fallout. I mean, Hurts has been levered up and
22:33
Speaker 1: somewhat struggling for a couple of years. I mean, it's
22:36
Speaker 1: been sort of on people's watch list, but it's debt
22:38
Speaker 1: has traded at par it has not been a distressed
22:41
Speaker 1: company in that sense um and it's brought in a
22:45
Speaker 1: lot of revenue despite all of its dead It's been
22:47
Speaker 1: able to stay afloat. So unlike some of the companies
22:50
Speaker 1: we've been go bankrupt in the past months or so,
22:54
Speaker 1: which really were fully distressed before COVID, and this really
22:57
Speaker 1: puts them over the edge. Hurts would represent one of
23:00
Speaker 1: the first um or really the first company too end
23:04
Speaker 1: up in bankruptcy pretty pretty explicitly because of the kind
23:09
Speaker 1: of just global shutdown that the that the COVID pandemic
23:13
Speaker 1: has caused. Like you said, you know, it relies a
23:15
Speaker 1: whole lot on travel, and so it's one of a
23:17
Speaker 1: whole number of companies in the travel sector or adjacent
23:20
Speaker 1: to the travel sector that we're now seeing come under
23:24
Speaker 1: real hardship. So Eliza has hurt since some of the
23:27
Speaker 1: other rental companies, have they received fiscal stimulus from the
23:31
Speaker 1: federal government or they are they expecting it um or
23:34
Speaker 1: they want those industries that did benefit a little bit,
23:37
Speaker 1: that's a good question. They have not received any any
23:40
Speaker 1: sort of stimulus or bailout yet. Um, there are, They've
23:44
Speaker 1: been in communication with the Treasury Department. We really don't
23:48
Speaker 1: know too many details on that, but I think like
23:50
Speaker 1: any other company, they're very hopeful that any day now
23:53
Speaker 1: there could be some additional bailout or rescue signance thing
23:58
Speaker 1: that they would that they would qualify for. But no,
24:02
Speaker 1: they have not gotten any any sort of that assistance yet,
24:05
Speaker 1: and so that's kind of been make or break Eliza.
24:09
Speaker 1: There's a question as a growing number of companies file
24:12
Speaker 1: for bankruptcy, how much has already been priced into debt markets.
24:16
Speaker 1: In other words, are we seeing creditors getting crammed down
24:20
Speaker 1: and forced to swallow bigger losses than they were expected
24:23
Speaker 1: or are they already budgeting for this. That's a great question. Uh,
24:28
Speaker 1: it really depends on the company. So any of the
24:30
Speaker 1: companies that have already been distressed before the crisis, uh
24:34
Speaker 1: that it has been priced in. And you've see some
24:37
Speaker 1: really sophisticated hedge fund um owners of the debt and lenders,
24:42
Speaker 1: so they're they've bought in low and they actually are
24:46
Speaker 1: poised to make a lot of money in a restructuring,
24:48
Speaker 1: especially if they end up with some equity control um.
24:51
Speaker 1: But in a situation like HURT, So this is where
24:54
Speaker 1: you're gonna see a lot of people getting hurt because
24:56
Speaker 1: by the time that they would have wanted to sell
25:01
Speaker 1: out things, things went bad so fast in terms of
25:04
Speaker 1: the like enhanced pressure that that travel related companies have
25:09
Speaker 1: come under. So it happened way too fast for anyone
25:12
Speaker 1: to get out at a reasonable level, and they will
25:14
Speaker 1: take a really big hit and it and hurts. Like
25:17
Speaker 1: like some of the retailers that we've seen for bankruptcy recently,
25:22
Speaker 1: the biggest problem is that this fleet of collateral they have,
25:26
Speaker 1: their their assets are collateral on their debt, and for
25:29
Speaker 1: retailers that is inventory, apparel, uh, you know, things like that,
25:34
Speaker 1: and for Hurts, it's it's it's huge fleet of cars.
25:37
Speaker 1: And the scariest part is that they can't liquidate those
25:41
Speaker 1: assets to repay creditors during this pandemic shutdown. So one
25:46
Speaker 1: of the reasons, you know, one of the priorities for
25:49
Speaker 1: Hurts right now is trying to hold off on having
25:54
Speaker 1: to sell all its used car fleet during a period
25:57
Speaker 1: where you know, the cars would fretch really low fire
26:01
Speaker 1: sale princes um and not even repay let it back.
26:06
Speaker 1: That's a big concern for a lot of people. Eliza
26:08
Speaker 1: roynalds Hannon, thank you so much for being with us.
26:10
Speaker 1: Eliza ronalds Hannon, hy yield and distressed credit reporter for
26:14
Speaker 1: Bloomberg News. Thanks for listening to the Bloomberg pen L podcast.
26:19
Speaker 1: You can subscribe and listen to interviews at Apple Podcasts
26:22
Speaker 1: or whatever podcast platform you prefer. I'm Paul Sweeney. I'm
26:25
Speaker 1: on Twitter at pt Sweeney. I'm Lisa abram Woyds. I'm
26:27
Speaker 1: on Twitter at Lisa A. Bram Woits one. Before the podcast,
26:30
Speaker 1: you can always catch us worldwide. I'm Bloomberg Radio