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I Can't Remember A More Difficult Time For EM: Bill Rhodes · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penl podcast on Paul Swing You.
• 0:05
  Speaker 1: Along with my co host Lisa Brahmas, each day we
• 0:07
  Speaker 1: bring you the most noteworthy and useful interviews for you
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  Speaker 1: and your money. Whether at the grocery store or the
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  Speaker 1: trading floor. Find a Bloomberg Penl podcast on Apple podcast
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  Speaker 1: or wherever you listen to podcasts, as well as at
• 0:18
  Speaker 1: Bloomberg dot com. I am so pleased to say we
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  Speaker 1: are going to focus on emerging markets, assets and the
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  Speaker 1: nations themselves with somebody who has been a pivotal player
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  Speaker 1: in many of the restructuring is done throughout the developing
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  Speaker 1: world over the past number of decades. Bill Rhodes, Senior
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  Speaker 1: Advisor for City who helped in the nineteen eighties and
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  Speaker 1: nineties negotiate a lot of the rescue financing packages in
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  Speaker 1: the developing world. Currently President, chief executive officer of William
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  Speaker 1: Rhodes Global Advisors. Bill, always phenomenal to have you on
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  Speaker 1: the show. And I want to start with the coronavirus
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  Speaker 1: and its impact, the humanitarian impact on emerging markets. We
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  Speaker 1: don't talk about it that much. What do you glean
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  Speaker 1: as you travel? As you talk? You know, whether it's
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  Speaker 1: travel virtually or talk with your contacts as far as
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  Speaker 1: how how prevalent the virus is and how damaging it's been.
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  Speaker 1: First of all, it's great to be on you with
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  Speaker 1: you guys, Lisa, and I think the impact is going
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  Speaker 1: to be substantial on most parts of the emerging markets.
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  Speaker 1: I think, UH, we're already seeing this UM in UH
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  Speaker 1: in Latin America, UH, in case of Brazil, it's hitting Mexico.
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  Speaker 1: And of course in Asia we've you know, we've seen
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  Speaker 1: a lot of it because it started in in China,
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  Speaker 1: migrated to South Korea, and I must say the South
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  Speaker 1: Koreans have done the best job of getting testing out
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  Speaker 1: there and controlling it. But some of the economies UH
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  Speaker 1: in Southeast Asia are also being hit very hard. India, UH,
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  Speaker 1: you've had a second wave in UH, in Singapore, Malaysia.
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  Speaker 1: So I think that in countries like Turkey, in the
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  Speaker 1: Middle East and others are being hit. So I think
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  Speaker 1: this is delayed reaction. The area that people are most
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  Speaker 1: concerned about at this point is Africa because they don't
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  Speaker 1: have the hospitals UH and they don't have the health
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  Speaker 1: systems in place. UH. And so I think that the
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  Speaker 1: emerging markets are going to be hit particularly hard, much
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  Speaker 1: more than the developed markets that we've seen today. So
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  Speaker 1: it's interesting. Bill. Let's focus a little bit on Latin America. UM,
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  Speaker 1: where is some of the big risks there? You know,
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  Speaker 1: some of the issues you highlight about Africa in terms
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  Speaker 1: of health care and sanitation, so once a lot of
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  Speaker 1: that applies to many parts of Latin America. What are
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  Speaker 1: you most concerned about? Well, I think the situation in Brazil.
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  Speaker 1: It's the largest country and the president boll Conaro doesn't
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  Speaker 1: want to admit that there's a problem, and he's battling
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  Speaker 1: with his own uh, with his own Congress and many
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  Speaker 1: of the governors, and the fear there because it's a
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  Speaker 1: country of two hundred fifteen twenty million people, and the
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  Speaker 1: fear there is that this thing could get out of hand.
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  Speaker 1: And of course they've been going through a period of
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  Speaker 1: difficulty in an economy for the last five years. UH,
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  Speaker 1: And so I think this this could be a very
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  Speaker 1: difficult situation. UH. You also have the impact of the
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  Speaker 1: Venezuelan refugees all throughout Latin Americas, some five million of them,
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  Speaker 1: which exacerbates the situation because a lot of them bring
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  Speaker 1: things like millary and other things with them, and so
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  Speaker 1: it's a it's a real problem. I was earlier this year,
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  Speaker 1: I was in Trinidad in Guyana, where you have a
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  Speaker 1: lot of Venezuelan refugees, and also northern Brazil in the
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  Speaker 1: state of Roraima. Venezuela as a complete disaster area in
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  Speaker 1: the sense that the health system completely has collapsed already
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  Speaker 1: under Maduro, and what could happen there is could be
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  Speaker 1: a real humanitarian crisis with COVID nineteen in a place
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  Speaker 1: like Venezuela. So if you ask me what country I'm
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  Speaker 1: most concerned about in the sense of the hit, it's
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  Speaker 1: probably Venezuela as far as the impact on the most
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  Speaker 1: number of people, who would be Brazil. So I'm curious
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  Speaker 1: the the answer in the developing world. In the developed world,
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  Speaker 1: I should say, has been to socially distance shutdown. Businesses
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  Speaker 1: and governments are just flooding people with money, are trying
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  Speaker 1: to in order to stave off the economic damage. What
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  Speaker 1: has the response been like, both financially as well as
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  Speaker 1: socially in some of these developing markets, particularly in Latin America. Well,
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  Speaker 1: I think that we're still I think unfortunately at the
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  Speaker 1: early stages you know, I did this op ed on
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  Speaker 1: the eighth of April. UH talking about my concerns is
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  Speaker 1: that the markets were underestimating the dangers of of COVID
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  Speaker 1: nineteen because to me it smells somewhat of the Spanish
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  Speaker 1: flu problems of eighteen nineteen and twenty, where the first
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  Speaker 1: Browns gave people the feeling that it was all over
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  Speaker 1: and they and the real hit came in the second round,
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  Speaker 1: second and third rounds, and and so there's real concern
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  Speaker 1: that the worst is yet to come. So Bill, we
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  Speaker 1: haven't really necessarily it's a kind of in country by
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  Speaker 1: country and even within the United States, state by state,
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  Speaker 1: focusing on efforts to get this under control. Is there
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  Speaker 1: a mechanism for a kind of a global response, because
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  Speaker 1: I think about some of these emerging markets and I'm
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  Speaker 1: just not sure they can do it on their own.
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  Speaker 1: I think that's very correct. Well, I can't. And what
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  Speaker 1: I advocated my up ed was sort of a recreation
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  Speaker 1: of the spirit of Gordon Brown when he put together
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  Speaker 1: UH the G twenty Countries um as a response to
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  Speaker 1: the global economic crisis at that time when he was
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  Speaker 1: Prime Minister in two thousand nine, was heading the G
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  Speaker 1: twenty and I think the I m F, World Bank
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  Speaker 1: were all involved in that, but I think this is
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  Speaker 1: much more serious. And you see they're talking about uh
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  Speaker 1: suspension of debt payments. Uh, you know for the most
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  Speaker 1: needy country these UH, the I m F, the World Bank,
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  Speaker 1: and UH, the G twenty has talked about that through
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  Speaker 1: the end of the year. But that's not going to
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  Speaker 1: be sufficient. And then you have you have the aid
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  Speaker 1: that for instance, the Europeans and the US have been
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  Speaker 1: giving these countries drive along and they're now in this
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  Speaker 1: strap situation. We're speaking with our good friend Bill Rhodes.
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  Speaker 1: Bill as a president CEO of William Rhodes Global Advisors,
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  Speaker 1: whose former chairman at City Bank. We're talking about the
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  Speaker 1: outsized effect likely to have on emerging markets from the
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  Speaker 1: coronavirus and Bill, does there really need to be a
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  Speaker 1: global response to help out some of these emerging markets
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  Speaker 1: which may have, you know, limited capabilities to kind of
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  Speaker 1: take care of their own populations. I think, without a
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  Speaker 1: doubt there needs to be something more done than the
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  Speaker 1: G twenty is done. I think the I m F
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  Speaker 1: and World Bank are looking at announcing additional programs, although
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  Speaker 1: they are now talking about programs that they've never done before,
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  Speaker 1: and so you have to have a united response through
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  Speaker 1: the G twenty rather than a one off type situation.
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  Speaker 1: And uh, then just to change it for a moment,
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  Speaker 1: when you take a look at the EU and U
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  Speaker 1: and the e C, you know, it's the situation that
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  Speaker 1: the EU is going through. Who have been major suppliers
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  Speaker 1: of aid to a lot of these countries, they are
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  Speaker 1: in a difficult situation themselves. I mean Spain's had over
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  Speaker 1: twenty one deaths, Italy very similar, and they are struggling
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  Speaker 1: to keep the EU together and talking about a rescue
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  Speaker 1: package for those countries of a trillion to a trillion
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  Speaker 1: and a half euros. Uh. And this type of thing
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  Speaker 1: will also help the emerging markets because uh, that will
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  Speaker 1: push I think the G twenty to do more if
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  Speaker 1: their own economies are being taken care of to help
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  Speaker 1: the emerging markets. But this is the most difficult period
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  Speaker 1: I can remember for the emerging markets in my lifetime,
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  Speaker 1: in your lifetime, I mean more even in the Latin
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  Speaker 1: American crisis. More even in the Latin American crisis, Asian
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  Speaker 1: financial crisis, uh, any of them. Because this is coming
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  Speaker 1: out of nowhere and a lot of these countries uh
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  Speaker 1: leaves you and I have discussed with Paul in the past.
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  Speaker 1: Um have borrowed very heavily in foreign currencies uh to
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  Speaker 1: support their economies and with a strong dollar, Uh, this
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  Speaker 1: is gonna be a real problem. So I think you're
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  Speaker 1: gonna have a wave of debt restructurings are also going
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  Speaker 1: to hit the emerging markets, and they're going to be
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  Speaker 1: very very difficult because the creditors themselves have problems. So
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  Speaker 1: we're in for a very very difficult strain period, uh,
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  Speaker 1: you know, with without a doubt. And then of course
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  Speaker 1: a number of these countries are royal exporters that has
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  Speaker 1: oil up uh, you know Brazil, I could run through them,
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  Speaker 1: a number of countries in Africa and they're going to
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  Speaker 1: be hard hit because of the collapse in the price
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  Speaker 1: the price of crude, the price of oil. So all told,
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  Speaker 1: it's going to be very difficult period for the emerging
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  Speaker 1: markets in the immediate future. There's also a question of
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  Speaker 1: China's role in financing some of the developing worlds. We've heard.
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  Speaker 1: I mean, they don't report the numbers, but there are
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  Speaker 1: billions of dollars of loans that China has extended throughout
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  Speaker 1: that entire world. How does that complicate efforts to restructure
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  Speaker 1: some of these debts. I think it's a very important point, Leads,
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  Speaker 1: because you know, the one Belt of One Road UH
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  Speaker 1: program which Shijunping has been pushing for the last seven
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  Speaker 1: or eight years, has led hundreds of billions of dollars
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  Speaker 1: to these countries, and a lot of the terms are
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  Speaker 1: not clear. And one of the concerns is UH is
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  Speaker 1: how the Chinese are going to push these countries to repay,
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  Speaker 1: and so far the Chinese haven't announced any sort of
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  Speaker 1: program of debt forgiveness. They're talking about taking assets in
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  Speaker 1: these countries or stretching it out. The other thing, which
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  Speaker 1: since you mentioned China, which I think we have to
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  Speaker 1: keep in mind, is remembering the great recession the country
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  Speaker 1: and you have to give them their due. That helped
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  Speaker 1: pull the world out of what could have been a
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  Speaker 1: great depression was China because they pushed anywhere from eight
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  Speaker 1: hundred billion to a threeion dollars UH into the markets.
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  Speaker 1: Because their financial system was very strong on commodities, UH
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  Speaker 1: in particular benefited construction UH. This is why Brazil and
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  Speaker 1: a number of the emerging market countries were able to
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  Speaker 1: get through because they were able to sell their commodities
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  Speaker 1: to China. The Chinese, because of their high debtload, are
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  Speaker 1: no longer in the position themselves to pull the world out,
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  Speaker 1: So we can't look any for any particular savior at
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  Speaker 1: this point. That's why the work of the G twenty
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  Speaker 1: needs to be UH needs to be worked out in
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  Speaker 1: an orderly fashion because no one country is going to
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  Speaker 1: pull us out. So Bill, I kind of always when
• 10:42
  Speaker 1: I think about emerging markets, you know, people tell me
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  Speaker 1: the I m F is there, but I always feel
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  Speaker 1: like the I m F is fairly limited in their resources,
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  Speaker 1: and it will come down to the G twenty or
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  Speaker 1: maybe even the United States of America. How do you
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  Speaker 1: think the US will What do you think the U
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  Speaker 1: s will have to do here as we think about
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  Speaker 1: the emerging markets in terms of support. Well, it's that's
• 11:02
  Speaker 1: a good question because it's not clear where Trump stands
• 11:05
  Speaker 1: on this, where President Trump stands on this, And you're
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  Speaker 1: right about the I m F, even with the additional
• 11:11
  Speaker 1: resources they're trying to put in UH. One of the
• 11:13
  Speaker 1: suggestions had been they go back to the idea of
• 11:16
  Speaker 1: having a special drawing rights, But so far the G
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  Speaker 1: seven countries haven't agreed to that, including the United States,
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  Speaker 1: which which would beef up uh their ability to help
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  Speaker 1: these countries. Uh So the United States is very key.
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  Speaker 1: The two countries, let's say, the three entities are key
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  Speaker 1: to the revival of the emerging markets are the United States, China,
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  Speaker 1: and the EU. Pul Rhodes, thank you so much for
• 11:41
  Speaker 1: being with us. We always love hearing your insights. A
• 11:44
  Speaker 1: really important time to be getting them. Banker to the
• 11:46
  Speaker 1: World Bill Rhodes, author of the book That is A
• 11:50
  Speaker 1: Banker to the World. I recommend you read it. It
• 11:52
  Speaker 1: is a fascinating read. He is also the president, chief
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  Speaker 1: executive officer of William Rose Global Advisors and a senior
• 11:59
  Speaker 1: advisor to a group. I mean, it's really, uh an
• 12:01
  Speaker 1: amazing perspective to have Paul, given his the restructions that
• 12:05
  Speaker 1: he's been involved with in a number of different places.
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  Speaker 1: Right now, we are looking at emerging market currencies that
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  Speaker 1: have been clawbered. I mean, this has been a really
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  Speaker 1: rough year for them as the dollar has remained ascending,
• 12:17
  Speaker 1: although you are seeing a little bit of a reprieve
• 12:19
  Speaker 1: from that now, so at least I'm looking at gold.
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  Speaker 1: We've been spending a lot of time looking at oil
• 12:27
  Speaker 1: or the past few days, but gold just continues to
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  Speaker 1: march higher, up another one point three percent today to
• 12:32
  Speaker 1: seven dollars per ounce. A very good looking chart as well.
• 12:37
  Speaker 1: Everett Millman, precious metals strategist for Gainesville Coins, joins us
• 12:42
  Speaker 1: on the phone based in Gainesville, Florida. So every thanks
• 12:45
  Speaker 1: so much for joining us here. Give us the story
• 12:47
  Speaker 1: behind this nice looking chart for gold. Yeah, thanks for
• 12:52
  Speaker 1: having me on. Paul um. Well, the conventional wisdom over
• 12:56
  Speaker 1: the past two decades or so has been don't fight
• 12:58
  Speaker 1: the Fed, right it. In this case, not fighting the
• 13:01
  Speaker 1: Fed means having exposure to gold. Um. The huge heap
• 13:05
  Speaker 1: of stimulus that has come from the Federal Reserve and
• 13:07
  Speaker 1: other central banks is definitely a tail wind for gold
• 13:10
  Speaker 1: right now, and the amount of that stimulus and added
• 13:13
  Speaker 1: liquidity are only expected to grow in the coming months. Um. So,
• 13:17
  Speaker 1: we've seen really a repricing of assets in terms of
• 13:20
  Speaker 1: relative value to one another, and gold has emerged from
• 13:23
  Speaker 1: that as the biggest beneficiary. Now. If you consider that
• 13:27
  Speaker 1: the last time that the dollar, the d X Y
• 13:29
  Speaker 1: index was consistently around a hundred as it is right now,
• 13:33
  Speaker 1: back in two thousand seventeen, gold was trading below hundred.
• 13:37
  Speaker 1: Uh so we've rallied quite a bit in a short
• 13:39
  Speaker 1: amount of time. Gold has definitely picked up some ground
• 13:42
  Speaker 1: on the dollar and on other assets. But I wouldn't
• 13:44
  Speaker 1: be at all surprised to see some near term weakness
• 13:48
  Speaker 1: given how fast this rally has come. That's interesting near
• 13:52
  Speaker 1: term weakness. I was looking at some reports a lot
• 13:54
  Speaker 1: of people bullish over the medium term Bank of America
• 13:58
  Speaker 1: raising it's eighteen month gold priced tar get to three
• 14:01
  Speaker 1: thousand dollars and ounce, which is more above where it
• 14:05
  Speaker 1: is currently trading. I'm just wondering, Everett. A lot of
• 14:07
  Speaker 1: people think of gold as a hedge against risk off
• 14:11
  Speaker 1: periods of time. It has not behaved in a predictable
• 14:15
  Speaker 1: manner on a day to day basis. In that way,
• 14:17
  Speaker 1: it also is considered a hedge against inflation, and right now,
• 14:21
  Speaker 1: inflation is nowhere to be found in interest rate traders
• 14:25
  Speaker 1: projections if you take a lookout five ten years. So
• 14:29
  Speaker 1: what's the argument for gold on a theoretical level, right? Um,
• 14:34
  Speaker 1: We've absolutely seen that these intra day moves have been
• 14:37
  Speaker 1: rather noisy. It's been a bit of a roller coaster ride,
• 14:40
  Speaker 1: and I think that has to do with some of
• 14:42
  Speaker 1: the patterns we've seen that are in parallel to UM.
• 14:46
  Speaker 1: What the Federal Reserve dating two thousand eight to try
• 14:49
  Speaker 1: and rescue the economy, they followed a very similar playbook
• 14:53
  Speaker 1: in terms of scope and scale, and we've seen that
• 14:55
  Speaker 1: volatility has been elevated and gold has traded in a
• 14:58
  Speaker 1: wider range all that huge draft of stimulus, at some
• 15:02
  Speaker 1: point down the road we would expect to be rather
• 15:05
  Speaker 1: inflationary and that would be gold positive UM. But as
• 15:09
  Speaker 1: I said, the near term weakness is still a possible
• 15:12
  Speaker 1: concern given this wide volatility UM. Remember that as recently
• 15:16
  Speaker 1: the last summer less than a year ago, gold futures
• 15:19
  Speaker 1: hadn't cracked above thirteen sixty an ounces in almost seven years,
• 15:23
  Speaker 1: So these these are levels that we haven't seen in
• 15:26
  Speaker 1: quite a while. I think there will be some consolidation
• 15:29
  Speaker 1: following that. And something else that I've been taking note
• 15:31
  Speaker 1: of is that algorithmic traders and some automatic rebalancing in
• 15:36
  Speaker 1: portfolios during these risk off situations could trigger some more
• 15:40
  Speaker 1: sell off and gold UM. And the most recent data
• 15:43
  Speaker 1: from the CMME shows that a significant amount of activity
• 15:46
  Speaker 1: in gold futures UM, as much as possibly two thirds
• 15:49
  Speaker 1: has been driven by the algos and that suggests that
• 15:52
  Speaker 1: the volatile swings for gold may not be over UM.
• 15:55
  Speaker 1: One of the lessons that we've learned from two thousand
• 15:57
  Speaker 1: eight is that gold tends to shine brightest once the
• 16:00
  Speaker 1: economy starts recovering from a crisis like this. So I
• 16:03
  Speaker 1: think once we get some recipite from the coronavirus pandemic
• 16:07
  Speaker 1: or on the other side of this, that is when
• 16:09
  Speaker 1: I will be most bullish for gold over the medium term.
• 16:12
  Speaker 1: So Everett, I look at the year to day performance
• 16:14
  Speaker 1: spot gold up about twelve and a half percent. Then
• 16:16
  Speaker 1: I look at another metal, silver, and I thought I'd
• 16:19
  Speaker 1: see something similar, but no, it's off almost here today.
• 16:23
  Speaker 1: What's the story on silver? We could see at least
• 16:28
  Speaker 1: for a short period of time, silver kind of decoupling
• 16:31
  Speaker 1: from gold. UM as we look at the gold of
• 16:33
  Speaker 1: silver ratio is still well above one ten I think
• 16:37
  Speaker 1: close to one thirteen UM. That's obviously a historical extreme,
• 16:42
  Speaker 1: but it's been pretty durable, this gap between gold and silver,
• 16:45
  Speaker 1: and it challenges some of our assumptions about whether or
• 16:48
  Speaker 1: not silver will continue to follow gold in terms of
• 16:51
  Speaker 1: safe haven demand. We may not see silver prices catch
• 16:54
  Speaker 1: up with gold until later this year. Because of its
• 16:57
  Speaker 1: sensitivity to the health of the industrial sector, that really
• 17:01
  Speaker 1: doesn't bode well for silver until the global economy start
• 17:04
  Speaker 1: to reopen um. So that is what I'll be looking
• 17:07
  Speaker 1: for in terms of silver, you know, reclaiming some of
• 17:11
  Speaker 1: its precious metal status because otherwise right now it has
• 17:14
  Speaker 1: behaved much like an industrial metal. Interesting, Everett, as we
• 17:18
  Speaker 1: talk about oil, and really the focus in the commodity
• 17:20
  Speaker 1: space has been on oil and how the physical presence
• 17:24
  Speaker 1: of it is not desired right now. How is the
• 17:26
  Speaker 1: physical commodity of gold and silver trading in comparison with
• 17:31
  Speaker 1: futures contracts. That is a fantastic question. Um. We've seen
• 17:35
  Speaker 1: that those physical markets over the counter market have become
• 17:38
  Speaker 1: a bit on moored um from paper trading, and that's
• 17:42
  Speaker 1: because you do have two different sets of motivations for
• 17:45
  Speaker 1: those market participants. UM. In gold futures, on one side,
• 17:48
  Speaker 1: you have a lot of institutional players. They are basically
• 17:52
  Speaker 1: chasing the short term price dynamics of gold. But in
• 17:55
  Speaker 1: the physical market you have almost the opposite motivation. You
• 17:58
  Speaker 1: have retail buyers who um, they want to buy and
• 18:01
  Speaker 1: hold physical to keep for the long term. So this
• 18:04
  Speaker 1: spread that we've seen between future and spot prices, it
• 18:07
  Speaker 1: is unusually wide. It means that arbitralge is not functioning
• 18:11
  Speaker 1: normally and price discoveries perhaps a bit impaired. But two
• 18:15
  Speaker 1: things should help alleviate that and we should see that
• 18:18
  Speaker 1: spread come back into a more normal range. Once the
• 18:22
  Speaker 1: reopening of several government mints in Canada, Western Australia, the
• 18:26
  Speaker 1: RAM refinery in South Africa, and as of yesterday the
• 18:28
  Speaker 1: West Point branch of the U S Mint is also
• 18:30
  Speaker 1: resuming operations. And then secondly, the flexible CME gold futures
• 18:35
  Speaker 1: contracts should also clear up some of those logistical backlogs
• 18:39
  Speaker 1: that are causing that gap between futures and spot. Everett Milman,
• 18:43
  Speaker 1: thank you so much for being with us, and all
• 18:44
  Speaker 1: my best to you. Everett Milman, precious metal specialist at
• 18:47
  Speaker 1: Gainesville Coins. Talking about the future of gold in the
• 18:50
  Speaker 1: near as well as the medium term at least, I'm
• 18:55
  Speaker 1: looking at some of these airline stocks. We've been talking
• 18:57
  Speaker 1: about them really since the beginning of the crisis. Really
• 18:59
  Speaker 1: one of the first groups to get hit and get
• 19:02
  Speaker 1: hit the hardest delta year to date. These are all
• 19:04
  Speaker 1: year to date numbers Delta down, six, United down, seventy,
• 19:08
  Speaker 1: American down, nearly sevent of just getting decimated. We had
• 19:11
  Speaker 1: some numbers out of Delta. Let's get the latest. We
• 19:14
  Speaker 1: welcome Bloomberg Intelligent Senior aerospace analyst George Ferguson has been
• 19:18
  Speaker 1: covering the space for decades. George, thanks so much for
• 19:22
  Speaker 1: joining us. What did we learn here from Delta with
• 19:26
  Speaker 1: the numbers? A good morning. I think what we learned
• 19:30
  Speaker 1: is that, UM, the way forward is very unclear, I
• 19:35
  Speaker 1: think is what we learned. And they burned a bit
• 19:38
  Speaker 1: more cash than we had expected, working very very hard
• 19:42
  Speaker 1: to bring down cash burn every day. They think they
• 19:45
  Speaker 1: can get themselves to fifty million dollars of cash burn
• 19:50
  Speaker 1: per day by the beginning of May, which I thought
• 19:54
  Speaker 1: it was quite interesting. UM, and they confirmed when asked
• 19:59
  Speaker 1: about Ford lookings, they confirm that we continue, I think,
• 20:03
  Speaker 1: in the direct quote from Delta management, we continue to
• 20:07
  Speaker 1: bounce along the bottom about five of what we did
• 20:12
  Speaker 1: last year. You know that that's the that's a number
• 20:14
  Speaker 1: of people at flying this year, just people that absolutely
• 20:18
  Speaker 1: have to fly. Demand is about zero. So demand zero.
• 20:24
  Speaker 1: The question is and when and when? The discussion on
• 20:28
  Speaker 1: the earnings call is not about earnings at all, but
• 20:31
  Speaker 1: just how they can stay alive for the foreseeable future.
• 20:35
  Speaker 1: Do we have a sense of how long the big
• 20:37
  Speaker 1: airlines can continue to bleed cash until the economy gets
• 20:41
  Speaker 1: back up to at least even half pace or a
• 20:44
  Speaker 1: fraction of what it once was. Yeah, so Delta, Delta
• 20:49
  Speaker 1: did actually, you know, give their their give a sense
• 20:52
  Speaker 1: for how long they thought they could survive. And I
• 20:54
  Speaker 1: actually thought that was actually also something quite interesting. They
• 20:57
  Speaker 1: thought they could survive until the end of the year
• 21:00
  Speaker 1: or you know, we'd have to dig deeper into some
• 21:02
  Speaker 1: of those assumptions. They definitely have to raise some more money, uh,
• 21:06
  Speaker 1: just to hit their target for where they want to
• 21:08
  Speaker 1: be for cash at the end of the second quarter.
• 21:12
  Speaker 1: But you know, yeah, I think in the next for
• 21:15
  Speaker 1: two Q and three Q, the discussion is really going
• 21:17
  Speaker 1: to be at all the major airlines about how much
• 21:20
  Speaker 1: they can get cash burned down. I'm gonna say they
• 21:23
  Speaker 1: told us thirty three percent of their employees that to
• 21:26
  Speaker 1: make sure that number was right, took voluntary leave, right,
• 21:30
  Speaker 1: So they're really trying to lay off that labor costs
• 21:32
  Speaker 1: pretty hard and get cash burned down. Remember, Delta, though,
• 21:35
  Speaker 1: was one of the one of the better position airlines
• 21:38
  Speaker 1: going into the downturn. They were investment grade. They've been
• 21:42
  Speaker 1: digging through the balance sheet to find anything and everything
• 21:46
  Speaker 1: that they could use for collateral for loans um and
• 21:49
  Speaker 1: so that means that if they can survive an end
• 21:51
  Speaker 1: of the year, others others can't. So George, give us
• 21:55
  Speaker 1: a sense, just a snapshot, how the industry did in
• 21:58
  Speaker 1: terms of fiscal stimus, getting money, uh support from the government.
• 22:01
  Speaker 1: What they've gotten and what maybe they're still trying to get. Yes,
• 22:06
  Speaker 1: so Delta said they gotta I think it was two
• 22:08
  Speaker 1: point seven billion dollars then already. I mean, really where
• 22:12
  Speaker 1: we are? And I think it's very interesting as you
• 22:14
  Speaker 1: look at the industry. You know, the government has provided
• 22:18
  Speaker 1: them grants and they provided them an opportunity for loans,
• 22:22
  Speaker 1: and the grants are really just support the payment of
• 22:25
  Speaker 1: employees for the next two quarters. And so everyone is
• 22:28
  Speaker 1: lined up to take the grants. Why wouldn't you, um
• 22:32
  Speaker 1: and the but the loans and again those are discovered
• 22:37
  Speaker 1: employee costs. The loans they could take out for five
• 22:40
  Speaker 1: years um. But for those five years plus an additional
• 22:45
  Speaker 1: year a year after the loans has been paid off,
• 22:48
  Speaker 1: they can't pay dividends, they can't buy back shares, and
• 22:53
  Speaker 1: they have to limit employer compensate sorry, employee compensation, especially
• 22:57
  Speaker 1: for highly compensated employees. People over three million dollars get
• 23:01
  Speaker 1: sort of specific caps, and so we're sort of seeing
• 23:05
  Speaker 1: a number of them. It looks like Southwest, it looks
• 23:09
  Speaker 1: like Delta, it looks like United contemplate these loans from
• 23:14
  Speaker 1: the government but not takes them yet. They have time
• 23:17
  Speaker 1: to take them, and I think they're trying to figure
• 23:19
  Speaker 1: out again how bad this downturn is going to be,
• 23:21
  Speaker 1: because none of us really know whether they can weather
• 23:25
  Speaker 1: the storm without these loans, whether there's other loan opportunities
• 23:28
  Speaker 1: in the marketplace so they don't have to hem themselves
• 23:31
  Speaker 1: in with those you know, returned to return cash to
• 23:36
  Speaker 1: shareholder sort of options as well as employee compensation. So
• 23:41
  Speaker 1: there's more money coming, potentially billion loans to the industry.
• 23:45
  Speaker 1: I'm not sure they all want to take it. George Ferguson,
• 23:48
  Speaker 1: thank you so much for being with us. I'm sure
• 23:50
  Speaker 1: a year ago, if we thought that we would be
• 23:52
  Speaker 1: having this conversation, it would have thought I have been
• 23:54
  Speaker 1: a fictitious or absolutely out of the question, and yet
• 23:58
  Speaker 1: here we are George Fergusons, here are Space defense and
• 24:01
  Speaker 1: Airlines analyst for Bloomberg Intelligence. Delta, which has been one
• 24:06
  Speaker 1: of the stronger players, consistently shares down six per cent
• 24:10
  Speaker 1: year to date, even as they say they can survive
• 24:13
  Speaker 1: through the end of the year, and presumably at some
• 24:15
  Speaker 1: point there will be a resurgence in global demand for travel,
• 24:18
  Speaker 1: although for right now it's basically nothing. Right now, let's
• 24:26
  Speaker 1: switch gears and talk about those markets. We can do
• 24:29
  Speaker 1: that with Samir Samana. Samir, senior global market strategist for
• 24:33
  Speaker 1: Wells Fargo Investment Institute. Wells Fargo has at one point
• 24:36
  Speaker 1: six trillion dollars under management. He's based in San Francis, St. Louis. Actually, Samir,
• 24:42
  Speaker 1: thanks so much for joining us. So let's just start.
• 24:46
  Speaker 1: You know, the markets have been extraordinarily volatile. Let's just
• 24:49
  Speaker 1: start with oil. What did you make of the performance
• 24:53
  Speaker 1: of oil and the tremendous volatility, the negative pricing that
• 24:56
  Speaker 1: we've seen in oil this week? Sure, you know oil,
• 25:01
  Speaker 1: you know, at least the front month contract that went
• 25:03
  Speaker 1: negative for you know, very brief period of time was
• 25:05
  Speaker 1: really impacted by you know, storage shortages that then, you know,
• 25:10
  Speaker 1: lead to a lot of futures holders basically realizing that
• 25:13
  Speaker 1: you know, they're gonna either have to take physical delivery
• 25:16
  Speaker 1: or they need to you know, probably get out of
• 25:18
  Speaker 1: the contract, which is what led to um those negative prices.
• 25:22
  Speaker 1: You know. I think oil, you know, some of the
• 25:24
  Speaker 1: out month contracts, is probably one of the few markets
• 25:26
  Speaker 1: released right now, UM that most accurately reflects kind of
• 25:30
  Speaker 1: what's going on with COVID nineteen and just how quickly
• 25:34
  Speaker 1: stoppage and economic activity that we've seen that will only
• 25:37
  Speaker 1: slowly resume. Now again it should trade at positive levels,
• 25:41
  Speaker 1: but I think it is telling you, um that the
• 25:43
  Speaker 1: recovery will be you know, neither swift, um and uh
• 25:47
  Speaker 1: you know you know the divot won't be all that
• 25:50
  Speaker 1: shallow alright, so severe, let's let's start there. What are
• 25:54
  Speaker 1: the good folks at Wells Fargo? What's kind of your
• 25:55
  Speaker 1: base case for kind of how this economy will shake out? Mean,
• 26:00
  Speaker 1: I don't hear the V recovery spoken about too much recently.
• 26:05
  Speaker 1: I think most people are kind of thinking about some
• 26:07
  Speaker 1: kind of U shaped recovery or might last several quarters
• 26:11
  Speaker 1: or maybe even something even more dire. What what's the
• 26:14
  Speaker 1: folks that was farther thinking. Sure, so we would say,
• 26:18
  Speaker 1: you know, the second quarter will probably be the worst
• 26:20
  Speaker 1: quarter from a growth standpoint, and then that third quarter
• 26:23
  Speaker 1: will be you know, verty bad, but maybe not as
• 26:26
  Speaker 1: bad as the second quarters. Things slowly start to come
• 26:28
  Speaker 1: back online UM, and then hopefully by the fourth quarter
• 26:32
  Speaker 1: of this year, in first quarter next year, there's some
• 26:34
  Speaker 1: stability and you know, we think there will be some payback,
• 26:37
  Speaker 1: you know, especially on the you know, the earnings front
• 26:40
  Speaker 1: for corporations UM by the end of next year. So
• 26:43
  Speaker 1: hopefully that's how it works, you know. As far as
• 26:46
  Speaker 1: whether it takes a U shape or you know, I've
• 26:49
  Speaker 1: heard some people refer to it as a swoosh UM.
• 26:52
  Speaker 1: You know, it's still kind of to be seen. It.
• 26:54
  Speaker 1: It will depend, you know, mainly on how quickly teams
• 26:56
  Speaker 1: come back online, you know, whether there's a reduction the
• 26:59
  Speaker 1: fall of new cases and one of these additional stoppages UM.
• 27:03
  Speaker 1: But I think probably the takeaway is UM second quarter
• 27:06
  Speaker 1: will probably be the worst of it, and then we'll
• 27:08
  Speaker 1: start to see hopefully a slow recovery by the end
• 27:11
  Speaker 1: of this year that will pick up steam in the
• 27:13
  Speaker 1: next year. Interesting. So we we've had a really sharp rebound.
• 27:18
  Speaker 1: Just talking about the US equity markets here, a really
• 27:20
  Speaker 1: sharp rebound off of that what was about at you know,
• 27:23
  Speaker 1: peak to trough pull back that we saw back in March.
• 27:27
  Speaker 1: Do you think it's the snapback rally has been too
• 27:30
  Speaker 1: much too soon, or do you kind of figure it's
• 27:33
  Speaker 1: kind of the beginning of a bottoming process for the
• 27:35
  Speaker 1: equity markets. So it's a little of both. You know,
• 27:38
  Speaker 1: we would say, you know, this is part of the
• 27:40
  Speaker 1: bottom of process. You tend to have kind of the
• 27:42
  Speaker 1: big draw down, and then you tend to have and
• 27:44
  Speaker 1: equally spectacular and kind of snap back, right, which which
• 27:47
  Speaker 1: kind of sucks everybody back in and makes them think that,
• 27:49
  Speaker 1: you know, well, the initial draw down was the one
• 27:51
  Speaker 1: that you know, maybe wasn't right, and you know, we're
• 27:54
  Speaker 1: kind of off to the races. And what folks will
• 27:56
  Speaker 1: realize in the coming months and quarters is that the
• 27:59
  Speaker 1: bottoming process is more of a marathon than a sprint.
• 28:02
  Speaker 1: And what you tend to have as kind of the
• 28:04
  Speaker 1: second and the longer phase of the bottoming process is
• 28:07
  Speaker 1: the one where you spend quite a bit of time
• 28:09
  Speaker 1: in a wide vollical range trying to figure out one
• 28:13
  Speaker 1: what the exact economic and earnings outlook looks like, and
• 28:15
  Speaker 1: then to what valuation level or multiple you may want
• 28:18
  Speaker 1: to pay on those earnings. So we would kind of
• 28:20
  Speaker 1: settle in here, and we think, you know, right here
• 28:23
  Speaker 1: in the hundred undred that we've seen the last few days,
• 28:27
  Speaker 1: it's probably the upper end of the range. It's probably
• 28:29
  Speaker 1: pretty close to fair value. So here we would be
• 28:32
  Speaker 1: pulling back on lower quality areas like energy, materials, industrials,
• 28:37
  Speaker 1: um emerging market equities, developed market equities, small cap equities.
• 28:41
  Speaker 1: This is the time to kind of pair back if
• 28:44
  Speaker 1: you were lucky enough to get in close to the lows,
• 28:46
  Speaker 1: and then you kind of wait until we see hopefully
• 28:49
  Speaker 1: in our opinion of level at least out of hundred,
• 28:52
  Speaker 1: because before you know, we get below we're not sure
• 28:55
  Speaker 1: we see a whole lot of value in chasing these markets,
• 28:58
  Speaker 1: and and really, um, as you get closer to fifty,
• 29:01
  Speaker 1: that's where you maybe want to kind of pick up
• 29:03
  Speaker 1: steam in terms of buying areas such as information technology,
• 29:07
  Speaker 1: communication services, consumer discretionary financials, and then large heaven MidCap
• 29:12
  Speaker 1: equities in the US. All right, Sam, so we've seen
• 29:15
  Speaker 1: the Federal Reserve be fairly aggressive. I would call it
• 29:19
  Speaker 1: on some of their movements here in terms of injecting
• 29:22
  Speaker 1: liquidity into the marketplace, we're starting to get we've we've
• 29:25
  Speaker 1: gotten some fiscal steaming. This looks like we're gonna get
• 29:27
  Speaker 1: another package in the next uh several days. Is this
• 29:30
  Speaker 1: something that the markets have to have? An absent and
• 29:33
  Speaker 1: aggressive fiscal stimulus. You're less confident in the ability of
• 29:37
  Speaker 1: the market to kind of bottom here and maybe start building.
• 29:41
  Speaker 1: You know, I appreciate what the Southern and Congress have done.
• 29:44
  Speaker 1: It probably removes some of the left tail, some of
• 29:46
  Speaker 1: the downside scenarios that could play out are probably removed
• 29:50
  Speaker 1: by their actions, by their swift actions. Um. That being said,
• 29:53
  Speaker 1: you know again, you know they can't quite you know,
• 29:57
  Speaker 1: manufacture of vaccine out of thin air, or make folks
• 30:00
  Speaker 1: go out after work or go out on weekends. I mean,
• 30:03
  Speaker 1: it is a great example right where you know, there's
• 30:05
  Speaker 1: good data now that shows during the week you know,
• 30:08
  Speaker 1: things are back to where they were, you know, prior
• 30:11
  Speaker 1: to the coronavirus. But then when you look at weekend
• 30:14
  Speaker 1: levels of activity, they're only you know a tent for
• 30:17
  Speaker 1: you know of where they were pre coronavirus. And what
• 30:20
  Speaker 1: that shows you is you know, people are are you
• 30:24
  Speaker 1: willing to go to work in order to get a paycheck,
• 30:27
  Speaker 1: But what they're not willing to do is spend discretionary
• 30:30
  Speaker 1: time or money outside the home quite yet. And that's
• 30:34
  Speaker 1: you know, what makes a large part of the U.
• 30:36
  Speaker 1: S economy and so um, the FED will support offset prices.
• 30:39
  Speaker 1: They will help provide a little bit of a bridge
• 30:41
  Speaker 1: to the other side of this. Um. That being said,
• 30:44
  Speaker 1: you know, much of that volatility will come from what
• 30:46
  Speaker 1: we see as just again a real impairment in the
• 30:48
  Speaker 1: short run in terms of consumption. Hey, Samir, thank you
• 30:51
  Speaker 1: so much for joining us. To really appreciate your commentary
• 30:54
  Speaker 1: and your thoughts. Samir Samana, Senior Global market strategist at
• 30:58
  Speaker 1: Wells Fargo Institute. Thanks for listening to the Bloomberg P
• 31:03
  Speaker 1: and L podcast. You can subscribe and listen to interviews
• 31:05
  Speaker 1: at Apple Podcasts or whatever podcast platform you prefer. I'm
• 31:09
  Speaker 1: Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa Abram.
• 31:12
  Speaker 1: Why it's I'm on Twitter at Lisa Abram woits one
• 31:14
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• 31:17
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