WEBVTT - China Beige Book: Could See China Growth Under 2% 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penl podcast on Paul Swing You. 0:00:05.360 --> 0:00:07.760 Along with my co host Lisa Brahmas, each day we 0:00:07.880 --> 0:00:10.399 bring you the most noteworthy and useful interviews for you 0:00:10.520 --> 0:00:12.600 and your money, whether at the grocery store or the 0:00:12.640 --> 0:00:15.960 trading floor. Find a Bloomberg Penil podcast on Apple podcast 0:00:16.120 --> 0:00:18.040 or wherever you listen to podcasts, as well as at 0:00:18.040 --> 0:00:21.240 Bloomberg dot com. Well Leland Miller, a chief executive officer 0:00:21.239 --> 0:00:24.079 of China beige Book International, has nailed at time and 0:00:24.079 --> 0:00:27.880 again when it comes to looking at preliminary data coming 0:00:27.920 --> 0:00:32.639 out of Chinese companies, nonofficial data and estimating the increase 0:00:32.720 --> 0:00:36.000 or decrease in activity ahead of the official pm MY 0:00:36.120 --> 0:00:38.440 data that we got out of China that was incredibly 0:00:38.560 --> 0:00:41.720 ugly record weakness that we saw in the manufacturing sector. 0:00:42.000 --> 0:00:43.600 Leland Miller was saying that that we were going to 0:00:43.640 --> 0:00:46.000 see a contraction in the Chinese economy in the first quarter. 0:00:46.320 --> 0:00:49.600 That seems almost to be an uncertainty. The question now 0:00:49.840 --> 0:00:53.360 is going forward, how quickly can China ramp back up 0:00:53.400 --> 0:00:57.000 production and get supply chains working again. Leland Miller joins 0:00:57.040 --> 0:00:59.480 us here at our Interactive Broker Studios. So do you 0:00:59.520 --> 0:01:02.760 have a set based on preliminary data luland of how 0:01:02.840 --> 0:01:06.920 much we're seeing manufacturing come back online from China. Yeah, 0:01:06.959 --> 0:01:10.760 we're we're seeing firms go back to work, we're seeing 0:01:10.800 --> 0:01:13.839 workers show up. So we're seeing a trend towards firms opening. 0:01:13.840 --> 0:01:15.640 But the question is how productive are they are they 0:01:15.640 --> 0:01:19.160 actually being? Um, you know, there's a there's a real 0:01:19.240 --> 0:01:21.000 question about this. You know, when we break down the 0:01:21.080 --> 0:01:22.720 data to how many firms are open, to how many 0:01:22.720 --> 0:01:25.679 are working in normal operations, the ratio is very low. 0:01:26.160 --> 0:01:28.160 It's better than it was two weeks ago. Uh, And 0:01:28.200 --> 0:01:30.480 we're and we're you know, we're tracking this data every 0:01:30.480 --> 0:01:33.200 single day as it comes in, but this is China's 0:01:33.240 --> 0:01:35.120 not back to work yet. What we do know is 0:01:35.160 --> 0:01:38.800 that Beijing has given us their bad data that will 0:01:38.800 --> 0:01:41.040 be the low no matter what happens. And asteroid could 0:01:41.080 --> 0:01:42.840 hit Beijing at this point, and they're going to report 0:01:42.840 --> 0:01:45.440 better data going forward. And so the question is how 0:01:45.520 --> 0:01:47.680 much of this going back to work will be a 0:01:47.680 --> 0:01:50.440 cover for rising p M s and A and a 0:01:50.480 --> 0:01:53.360 better GDP number and better industrial production number when the 0:01:53.440 --> 0:01:56.840 underlying reality doesn't doesn't reflect that. And I think we're 0:01:56.880 --> 0:01:58.920 just waiting to see that because China is going back 0:01:58.960 --> 0:02:00.720 to work, but we don't know whether they're going back 0:02:00.720 --> 0:02:03.480 to growth. So is this literally, as I think about 0:02:03.600 --> 0:02:07.040 China going back to work, is it literally moving millions 0:02:07.040 --> 0:02:10.200 of people who are on their lunar holiday in their 0:02:10.280 --> 0:02:13.720 villages back to the city's, back to the factories and 0:02:13.760 --> 0:02:15.400 getting them working again. Is that kind of what we're 0:02:15.400 --> 0:02:17.280 talking about. That's a big chunk of it. So what 0:02:17.320 --> 0:02:20.760 we're seeing right now in some cases are buses being 0:02:20.880 --> 0:02:24.600 filled with micro workers who are being driven with police 0:02:24.760 --> 0:02:29.079 escorts from certain cities back to where they're needed. Uh. 0:02:29.240 --> 0:02:32.720 Jent Paying wants growth back at all costs, and so 0:02:32.760 --> 0:02:35.680 they are they are going to restart factories come hell 0:02:35.720 --> 0:02:38.120 or high water. But the question is again is you know, 0:02:39.120 --> 0:02:41.280 is this are we back? You know? Is this? Is 0:02:41.280 --> 0:02:43.160 this going to stay this way? Are the firms gonna 0:02:43.160 --> 0:02:44.680 be able to operate this way? Do they have the 0:02:44.720 --> 0:02:47.480 inputs to be able to build going forward? And none 0:02:47.480 --> 0:02:49.360 of this is clear at all yet. There was also 0:02:49.400 --> 0:02:52.280 a story that caught my attention about the potential to 0:02:52.400 --> 0:02:58.679 fudge data by having factories actually run electricity without necessarily 0:02:58.720 --> 0:03:02.160 having the workers to do the work. Are you seeing anything? 0:03:02.160 --> 0:03:05.360 I mean does that seem like a dominant type of 0:03:05.400 --> 0:03:08.799 development or just sort of a one off example. It's 0:03:08.880 --> 0:03:13.880 very Chinese. Look, the the Beijing has been doing things 0:03:13.919 --> 0:03:16.320 like this for years. And the reality is, and we've 0:03:16.360 --> 0:03:19.960 been warning people for years on this, electricity production is 0:03:20.000 --> 0:03:22.079 not a gauge of the Chinese economy. There's a lot 0:03:22.080 --> 0:03:24.520 of reasons for this, but the major reason is is 0:03:24.520 --> 0:03:26.000 that as soon as you came out with the lead 0:03:26.040 --> 0:03:28.919 Cut Young index, uh, you know, a number of years ago, 0:03:30.360 --> 0:03:32.680 the Chinese understood people were using that as a barometer, 0:03:32.760 --> 0:03:34.880 and they started manipulating the data. So what we've been 0:03:34.920 --> 0:03:36.560 trying to explain is that if you're out there using 0:03:36.560 --> 0:03:38.480 the lead Cut Young Index thinking you've got a brometer 0:03:38.520 --> 0:03:41.040 on economy, you're just listening to the Chinese story like 0:03:41.080 --> 0:03:43.400 any other piece of data. But this is actually really 0:03:43.440 --> 0:03:45.640 important because a lot of people have turned to soft 0:03:45.720 --> 0:03:50.600 data satellite images electricity production as a way to engauge 0:03:50.680 --> 0:03:53.600 the activity levels in China because they don't trust the 0:03:53.680 --> 0:03:57.120 official data. You're saying that this is also potentially fudged 0:03:57.320 --> 0:04:00.120 or being manipulated. What do you look at them for 0:04:00.160 --> 0:04:03.080 a reliable gauge? Well, look, we when we started trying 0:04:03.120 --> 0:04:05.800 to figure out different ways of tracking the economy. We 0:04:05.840 --> 0:04:08.680 went through all the different you know, obviously official data 0:04:08.720 --> 0:04:10.560 is tainted, but then looking through all the sort of 0:04:11.040 --> 0:04:12.880 private data sources, and what we found is that if 0:04:12.880 --> 0:04:16.120 you don't collect the data yourself and it's being used 0:04:16.120 --> 0:04:18.320 on a broad enough scale, the Chinese figure this out 0:04:18.400 --> 0:04:19.960 and they start manipulating it. You know, this is not 0:04:20.000 --> 0:04:22.320 some sort of conspiracy theory. It's very smart on the 0:04:22.480 --> 0:04:25.000 on on Beijing's bath, they want to make sure they 0:04:25.040 --> 0:04:27.720 control the narrative. So all these things, whether it's rare 0:04:27.920 --> 0:04:31.200 rail cargo, whether it's electricity, whether it's whether it's other 0:04:31.240 --> 0:04:33.200 bits of data. Uh that you know, they want to 0:04:33.240 --> 0:04:35.680 control the narrative, which means they're going to control the data. 0:04:35.960 --> 0:04:39.040 And that's why we just got around to collecting it ourselves, 0:04:39.080 --> 0:04:41.720 because we figured out unless you take Beijing out as 0:04:41.720 --> 0:04:45.640 the intermediary, you cannot trust the data, particularly in a crisis. 0:04:45.839 --> 0:04:50.160 All right, so let's talk about China slowly getting back 0:04:50.240 --> 0:04:52.440 to work. Give us a sense of how you think 0:04:52.480 --> 0:04:55.000 this might ramp here on the mid first quarter into 0:04:55.040 --> 0:05:00.000 second quarter and maybe the ultimate impact on for China. Right, Well, 0:05:00.080 --> 0:05:03.239 so what the Chinese idea is to have everything bottom 0:05:03.240 --> 0:05:06.039 out in February and to have more workers come back 0:05:06.040 --> 0:05:08.440 in and be able to announce much better uh much 0:05:08.520 --> 0:05:10.920 matter data in March and April, and then have if 0:05:11.160 --> 0:05:13.760 not a v V recovery maybe but you know, just 0:05:13.960 --> 0:05:16.640 a nice steady recovery that shows the competence of the party. 0:05:17.200 --> 0:05:20.000 The problem is one, we don't know whether the outbreak 0:05:20.040 --> 0:05:22.120 has actually been contained, so there are medical issues that 0:05:22.160 --> 0:05:24.760 we can't we we can't understand yet. The second is 0:05:24.920 --> 0:05:27.240 this is now spreading around the world and that hits demand, 0:05:27.560 --> 0:05:29.120 So you have a lot you know, you have a 0:05:29.200 --> 0:05:31.240 hit to demand domestically as well as it hit to 0:05:31.279 --> 0:05:33.279 production domestically, and then you have a hit to global 0:05:33.320 --> 0:05:37.159 demand is hitting tourism, this is hitting all kinds of 0:05:37.160 --> 0:05:42.520 of of of companies that are normal buyers of Chinese goods, 0:05:42.560 --> 0:05:44.760 and so the idea that they're going to have a 0:05:44.800 --> 0:05:46.919 bounce back in demand, I know that's what the narrative is. 0:05:46.960 --> 0:05:49.760 I know that's what they're aiming for. This now depends 0:05:50.200 --> 0:05:52.840 as much on what's happening outside of China as what's 0:05:52.839 --> 0:05:58.719 happening inside China. How low could growth go in China? Well, 0:05:58.880 --> 0:06:01.440 what will they announce. I won't announce a number less 0:06:01.480 --> 0:06:03.800 than say, you know, if we had a full on 0:06:03.880 --> 0:06:07.440 global outbreak, they'll still announce four percent plus GDP. What 0:06:07.520 --> 0:06:09.880 could it go? Look, I think that you could have 0:06:11.400 --> 0:06:15.280 Q one contraction. You could have Q one barely positive growth, 0:06:15.400 --> 0:06:18.800 and then you know you're back to your barely positive growth, 0:06:18.800 --> 0:06:22.000 and then your normal numbers um are are probably around 0:06:22.120 --> 0:06:24.800 three at a normal times. I mean, you could have 0:06:25.160 --> 0:06:27.600 one or two percent growth for the year if things 0:06:27.600 --> 0:06:30.640 were really bad. The Chinese would never announce that. But 0:06:31.000 --> 0:06:32.960 the reality is if things got much worse, you could 0:06:32.960 --> 0:06:35.320 see you could see growth under two percent. Certainly, How 0:06:35.360 --> 0:06:38.000 much of a problem, if at all, is this crisis 0:06:38.040 --> 0:06:43.440 for presidency? He's he's having a rough year or two. Yeah, 0:06:43.560 --> 0:06:46.760 Like Hong Kong and trade war and and and coronavirus. Uh, 0:06:47.040 --> 0:06:48.920 I think this is more dangerous than all of them, 0:06:48.960 --> 0:06:53.320 because because this goes to vulnerabilities of the party. It 0:06:53.440 --> 0:06:56.160 is not a mystery outside of China, but also inside 0:06:56.200 --> 0:06:58.200 of China that the reason that spread like it did 0:06:58.520 --> 0:07:01.599 is because officials lied in, covered it up, and and 0:07:01.680 --> 0:07:03.400 did a bunch of things you're never supposed to do 0:07:03.520 --> 0:07:06.240 when you've got an illness starting to spread. And this 0:07:06.320 --> 0:07:07.560 is not a mystery. I mean, you see it on 0:07:07.600 --> 0:07:10.160 we chat, you see it in domestic conversations. So the 0:07:10.240 --> 0:07:12.880 question is, how can they throw enough junior people under 0:07:12.920 --> 0:07:16.680 the bus, redeem the senior officials in terms of the 0:07:16.880 --> 0:07:20.400 wonderful response, and and sort of redeem the party's role 0:07:20.440 --> 0:07:22.040 in this. And one of the things you're seeing and 0:07:22.120 --> 0:07:24.800 you're going to see going forward is China is already 0:07:24.840 --> 0:07:28.679 starting to sell itself as the global authority on pandemic control. 0:07:28.960 --> 0:07:30.560 You know, will help you out here. We don't need 0:07:30.560 --> 0:07:33.360 any favorites United States, Iran, you want our help, it'llly 0:07:33.400 --> 0:07:35.400 you want our help, We're here, we show you how 0:07:35.440 --> 0:07:38.120 to do it right. It's a it's a clever narrative. 0:07:38.560 --> 0:07:41.560 It's ridiculous, but it's a clever narrative narrative. Leland Miller, 0:07:41.640 --> 0:07:43.880 as always, we appreciate your commentary. When it comes to 0:07:43.920 --> 0:07:46.240 all things China, we learned so much. Leland Miller is 0:07:46.280 --> 0:07:48.840 the chief executive officer of China based Book International. My 0:07:48.960 --> 0:07:51.800 go to person for things on China, which is, uh, 0:07:51.840 --> 0:07:54.360 you know, you have to really dig under the hood. 0:07:54.400 --> 0:08:02.760 There a lot of questions surrounding the markets right now. 0:08:02.760 --> 0:08:06.040 A key one is how long will the effect of 0:08:06.080 --> 0:08:09.600 the shutdown that we saw in China effect manufacturers in 0:08:09.680 --> 0:08:12.800 the United States will affect supply chains. There's no one 0:08:12.840 --> 0:08:15.680 better to talk about that than Brooks Sutherland, Bloomberg opinion 0:08:15.680 --> 0:08:19.160 columnist cover enjoining us here in our interactive Broker Studios. 0:08:19.360 --> 0:08:21.120 I want to start with the data that we got 0:08:21.120 --> 0:08:25.040 out today showing that manufacturing declined more than people expect 0:08:25.040 --> 0:08:28.200 to the United States in the month of February. I'm 0:08:28.280 --> 0:08:32.600 trying to understand as people game plan this out, do 0:08:32.640 --> 0:08:35.040 we have a sense of how long it will take 0:08:35.480 --> 0:08:38.320 for supply chains to get ramped up manufacturing to get 0:08:38.400 --> 0:08:41.480 ramped up once we have a sense of stability here. 0:08:41.960 --> 0:08:43.920 I do think with that I s M number, the 0:08:43.960 --> 0:08:46.679 headline is somewhat of a misnumber there, because if you 0:08:46.720 --> 0:08:49.040 look at what's bumping that number up, part of it 0:08:49.080 --> 0:08:51.840 is a lengthening out of delivery times, and typically that's 0:08:51.840 --> 0:08:53.560 supposed to be a good thing. It means demand is 0:08:53.600 --> 0:08:56.920 so strong that suppliers are struggling to meet that. In 0:08:56.960 --> 0:08:59.160 this case, it is likely an issue with people just 0:08:59.200 --> 0:09:01.480 not having the parts that they need because they're not 0:09:01.520 --> 0:09:04.000 able to get them from various different parts of the world. 0:09:04.320 --> 0:09:06.520 So to me, this says that the worst is yet 0:09:06.559 --> 0:09:09.079 to come for manufacturers, that you'll likely start to see 0:09:09.400 --> 0:09:12.200 some of the aftershocks from the supply dick chain disruption 0:09:12.320 --> 0:09:14.480 later on in the second quarter. So correct me if 0:09:14.480 --> 0:09:15.839 I'm wrong, Brooke. But is I think back to the 0:09:15.920 --> 0:09:17.400 list just a few weeks ago, when we were in 0:09:17.440 --> 0:09:20.440 the thick of earnings, you know, other than Apple and 0:09:20.440 --> 0:09:22.240 maybe a couple of the companies that were calling out 0:09:22.240 --> 0:09:25.760 the coronavirus as a reason to change their auto we 0:09:25.760 --> 0:09:27.920 didn't or did you, Did we hear much of anything 0:09:27.920 --> 0:09:30.000 from your industrial companies that you come No, not really, 0:09:30.040 --> 0:09:32.400 which is interesting because their earning season came a little 0:09:32.440 --> 0:09:34.280 bit earlier, and so at that point in time, most 0:09:34.320 --> 0:09:37.880 of the outlooks didn't really include any impact from the coronavirus. Now, 0:09:37.960 --> 0:09:40.560 the exception was Emerson Electric, which did come out at 0:09:40.559 --> 0:09:42.520 the end of last week and said they're increasing their 0:09:42.559 --> 0:09:45.960 expectation of the revenue hit from coronavirus to as much 0:09:45.960 --> 0:09:48.400 as a hundred and fifty million. It had been, you know, 0:09:48.800 --> 0:09:51.720 significantly lower just a few days before when they had 0:09:51.760 --> 0:09:53.959 held their investor day conference. So this sort of shows 0:09:54.000 --> 0:09:56.480 you just how fast moving this is UM Now. I 0:09:56.520 --> 0:09:59.600 do think you'll probably start to hear some guidance updates 0:09:59.600 --> 0:10:02.120 from these companies in the coming weeks. Uh. You know, 0:10:02.200 --> 0:10:04.960 g E is set to report its outlook on Wednesday, 0:10:05.000 --> 0:10:06.920 and so certainly we'll be keeping an eye on that 0:10:07.000 --> 0:10:10.600 for any guidance there, particularly around the coronavirus. But you know, 0:10:10.880 --> 0:10:13.920 I think the key issue for the manufacturing side is 0:10:14.400 --> 0:10:16.800 this supply chain disruption. But I do think you can 0:10:16.880 --> 0:10:18.720 look at some of these other companies a sort of 0:10:18.720 --> 0:10:20.440 a tell as to what we might see. I mean, 0:10:20.440 --> 0:10:22.440 if you think about a company like three M. On 0:10:22.480 --> 0:10:24.720 the one hand, they make face masks, which they're seeing 0:10:24.760 --> 0:10:27.199 a huge spike in demand. On the other hand, they 0:10:27.200 --> 0:10:29.640 make components for the electronics industry, and we did have 0:10:29.679 --> 0:10:32.480 Microsoft come out and warn about supply chain disruptions for 0:10:32.520 --> 0:10:36.240 its Windows PC unit. UM. Honeywell is another company that 0:10:36.320 --> 0:10:39.439 makes personal protective Year, but it also supplies components to 0:10:39.559 --> 0:10:42.280 the aerospace industry, and that is a much bigger, much 0:10:42.280 --> 0:10:45.160 more profitable business for that company. And I do think 0:10:45.520 --> 0:10:49.480 there's a risk of pretty significant downturn in aerospace when 0:10:49.520 --> 0:10:51.719 you talk about supply chain. So just think about how 0:10:51.800 --> 0:10:55.080 China is trying to get everybody back to factories and 0:10:55.160 --> 0:10:58.959 demonstrate that they are ramping up production. How do we 0:10:59.000 --> 0:11:02.200 have any precedent historically of how long it takes to 0:11:02.320 --> 0:11:05.400 get things back up and running and supply chains working 0:11:05.400 --> 0:11:07.679 as they had been. I don't know that we do, 0:11:07.760 --> 0:11:09.600 because I think what we've seen is that the response 0:11:09.640 --> 0:11:11.680 here has been so much more dramatic than what we 0:11:11.760 --> 0:11:14.040 saw with Stars in two thousand and three. And part 0:11:14.080 --> 0:11:16.160 of the reason for that is that China didn't account 0:11:16.200 --> 0:11:18.440 for as much as the of the world's supply chain 0:11:18.480 --> 0:11:21.160 at that point in time. But I think about Cafe Pacific, 0:11:21.480 --> 0:11:24.240 so they've cut about seventy of their capacity. And I 0:11:24.280 --> 0:11:26.720 saw one analyst report this morning saying during Stars that 0:11:26.840 --> 0:11:30.400 was So that's a really significant shift as you think 0:11:30.440 --> 0:11:32.960 about sort of the magnitudes of the response here and 0:11:33.000 --> 0:11:34.880 how we come back from this. But it's not just 0:11:35.200 --> 0:11:38.199 China anymore. Now we're dealing with Europe. Now, we're possibly 0:11:38.240 --> 0:11:41.600 dealing with the U S and maybe even travel restrictions domestically. 0:11:41.600 --> 0:11:43.240 I mean, we just don't know. And as if you 0:11:43.280 --> 0:11:45.839 start thinking about how you get parts from point A 0:11:45.960 --> 0:11:47.920 to point B, there's a lot of obstacles and a 0:11:47.960 --> 0:11:50.200 lot of unknowns, and so I think this is going 0:11:50.240 --> 0:11:52.520 to take a while for companies to bounce back from 0:11:52.679 --> 0:11:54.880 So Brooke. While we have you here, um Boeing. I 0:11:54.920 --> 0:11:56.640 saw a story that they're out there hiring a lot 0:11:56.679 --> 0:11:59.200 of people for the seven thirty seven Max. Does that 0:11:59.400 --> 0:12:02.120 suggect that that maybe they're close to getting this thing 0:12:02.200 --> 0:12:04.040 back in the air, you know, I think they want 0:12:04.080 --> 0:12:07.480 to be prepared because I think to shut down a 0:12:07.559 --> 0:12:12.320 manufacturing line for an aircraft is a really significant step 0:12:12.640 --> 0:12:14.080 for them to do that. I mean, they put that 0:12:14.120 --> 0:12:16.480 off as long as they possibly could, and that a 0:12:16.520 --> 0:12:18.960 big reason for that was a concern about having the 0:12:19.040 --> 0:12:21.920 labor there to be able to manufacture the planes once 0:12:21.960 --> 0:12:24.320 they do restart that. And there's also a lot of 0:12:24.360 --> 0:12:27.000 steps involved here with once the Max is on grounded, 0:12:27.040 --> 0:12:29.480 you have to get all of those planes ready to 0:12:29.520 --> 0:12:32.320 fly again. We've already seen you know, potential issues with 0:12:32.360 --> 0:12:35.200 that or bowing and said they've found you know, debris 0:12:35.320 --> 0:12:37.120 and some of the fuel tanks, whether that be like 0:12:37.280 --> 0:12:39.800 rags or you know, sort of leftover tools, and so 0:12:39.880 --> 0:12:41.760 they have to make sure that all of that gets fixed. 0:12:42.000 --> 0:12:43.880 And you have to bring these planes out of hibernation. 0:12:43.920 --> 0:12:46.520 I mean that takes time, that takes people, that takes effort. 0:12:46.600 --> 0:12:49.720 So look, I mean I think Boeing is progressing towards 0:12:49.760 --> 0:12:52.800 getting this plane ready to fly, but there are niggling 0:12:52.880 --> 0:12:55.040 issues that keep coming up and you know that may 0:12:55.080 --> 0:12:56.719 take a little bit of time to work through. There 0:12:56.760 --> 0:12:58.720 was a important the Seattle time not too long ago 0:12:58.760 --> 0:13:02.160 about the risk of this timeline potentially slipping a little bit. 0:13:02.160 --> 0:13:04.040 Now we're not talking about major shifts like we saw 0:13:04.280 --> 0:13:06.640 the course of last year, but there is potentially a 0:13:06.760 --> 0:13:09.160 risk there. What is the latest date? Do we have 0:13:09.240 --> 0:13:12.240 a date for? Boeing is stuck with mid But what 0:13:13.360 --> 0:13:15.720 means maybe there's some wiggle room there in terms of 0:13:15.720 --> 0:13:18.240 your definition. So all right, thank you very much brook Sotheran, 0:13:18.280 --> 0:13:20.360 and thanks so much for joining us. She covers all 0:13:20.440 --> 0:13:23.160 things industrials for Bloomberg Opinion. You can read her work 0:13:23.320 --> 0:13:26.160 excellent work on Bloomberg dot Com, Slash Opinion or if 0:13:26.200 --> 0:13:28.360 you're on a terminal O P I N go for books, 0:13:28.360 --> 0:13:31.400 work and all the other work from a Bloomberg Opinion. 0:13:31.880 --> 0:13:47.560 She joins us here in our Bloomberg Interactive Broker Studio. Well, 0:13:47.600 --> 0:13:50.480 despite the risk on field to the equity markets. Treasury 0:13:50.559 --> 0:13:53.120 yields continue to grind lower. We got the two year 0:13:53.200 --> 0:13:57.240 down about eleven basis points to zero point eight four percent, 0:13:57.360 --> 0:14:00.600 just extraordinary levels on treasuries. To get a sense of 0:14:00.679 --> 0:14:03.760 where yields could go. We welcome r J. Gallo. He's 0:14:03.760 --> 0:14:06.640 a senior portfolio manager, head of the Missable Bond Investment 0:14:06.679 --> 0:14:09.760 Group ahead of the Duration Committee for Federator Hermes. They 0:14:09.800 --> 0:14:13.760 have about eleven point seven billion under management. They're based 0:14:13.800 --> 0:14:16.400 in Pittsburgh. Of course, r J, thanks so much for 0:14:16.679 --> 0:14:20.080 joining us once again. All right, so we the coronavirus 0:14:20.160 --> 0:14:23.920 is there, it's spreading. Markets are trying to discount the impact. 0:14:24.200 --> 0:14:27.000 I guess one of the next issues for the market 0:14:27.080 --> 0:14:29.440 to really get a handle on is when will the 0:14:29.480 --> 0:14:31.880 FED cut and how much will they cut? What are 0:14:31.920 --> 0:14:36.560 your thoughts, well, I think it's pretty clear that this 0:14:36.760 --> 0:14:41.600 central bank, under the leadership of Powell as well as 0:14:41.640 --> 0:14:46.560 his most recent predecessors, have been eager to be proactive 0:14:46.760 --> 0:14:50.160 in the when faced with crisis or challenge, Yelling put 0:14:50.200 --> 0:14:52.600 off a plan tightening because markets got really volved all 0:14:52.600 --> 0:14:57.240 the way back. I think it's BERNANKI certainly got very aggressive. 0:14:57.280 --> 0:15:01.320 He's the one who sort of pioneered que all um 0:15:01.400 --> 0:15:04.480 Inen tightened maybe more than the markets would have liked, 0:15:05.400 --> 0:15:07.640 maybe more than was perhaps needed at the time, and 0:15:07.720 --> 0:15:11.720 quickly reversed course. So I don't think they are inertial. 0:15:12.200 --> 0:15:14.360 And I think the statement that came out last week 0:15:14.400 --> 0:15:17.480 from Powell indicates that the FED will move. Um. I 0:15:17.520 --> 0:15:20.040 don't know if in a textbook sense everybody agrees they 0:15:20.040 --> 0:15:23.440 should move, but I don't think it hurts anything. Uh. 0:15:23.480 --> 0:15:26.640 They can't cure the virus, they can't produce a vaccine, 0:15:27.000 --> 0:15:30.120 but they can help cushion the blow economically by lowering 0:15:30.120 --> 0:15:32.640 short term rates in such a way as to help 0:15:32.640 --> 0:15:37.640 bolster somewhat interest rate sensitive sectors that otherwise wouldn't get 0:15:37.640 --> 0:15:39.680 the boost from lower rates. So I think they are 0:15:39.680 --> 0:15:42.720 going to ease the three eases almost four eases that 0:15:42.760 --> 0:15:46.600 are on the work now seems extreme to me, but 0:15:46.720 --> 0:15:50.880 I know some highly respected research firms and research areas 0:15:50.880 --> 0:15:53.840 in the marketplace names everybody knows, UH suggests they're going 0:15:53.880 --> 0:15:55.880 to cut hunter basis points. So there's you know, there's 0:15:55.920 --> 0:15:59.680 your basis point eases. UM. I wouldn't be surprised if 0:15:59.720 --> 0:16:01.920 it'll be less than that. So yeah, Deutsche Bank and 0:16:01.960 --> 0:16:05.000 Coleman Sacks primarily among them, coming out with analysts saying 0:16:05.320 --> 0:16:07.520 they expect for rate cuts or a hundred basis points 0:16:07.560 --> 0:16:10.280 of cutting. I will just note that as you see 0:16:10.320 --> 0:16:14.120 stocks rally, the number of expected rate cuts is coming 0:16:14.160 --> 0:16:18.720 down precipitously. UH four year end now at just about 0:16:18.760 --> 0:16:21.840 a little over three full rate cuts by the end 0:16:21.960 --> 0:16:24.400 of January next year, so coming down. And I want 0:16:24.400 --> 0:16:26.960 to talk about that. How much do you think this 0:16:27.080 --> 0:16:31.680 erodes FED credibility if basically stock sell off and everyone 0:16:31.720 --> 0:16:34.400 looks to them to just cut rates to prop up valuations. 0:16:34.400 --> 0:16:37.080 I mean, is that the single data point that the 0:16:37.080 --> 0:16:41.280 FED is looking at this point? I actually don't think 0:16:41.440 --> 0:16:43.960 it is. I think that the FED cares very much 0:16:43.960 --> 0:16:48.920 about financial conditions. You all provide the Financial Conditions Index. Uh, 0:16:48.960 --> 0:16:51.280 it's on everybody's terminals. Have people have a terminal in 0:16:51.360 --> 0:16:54.840 front of them. UM, it's now down uh negative one 0:16:54.880 --> 0:16:58.760 standard deviation. UH. The FED wants markets to work. They 0:16:58.760 --> 0:17:02.000 want capital to be provided at reasonable prices. UH. They 0:17:02.000 --> 0:17:05.440 don't want gapping or volatile markets UH to to present 0:17:05.440 --> 0:17:08.760 a headwind to economic expansion. And the Financial Conditions Index 0:17:08.960 --> 0:17:11.760 sort of looks at volatility and valuation and tries to 0:17:12.320 --> 0:17:15.720 um you know, quantify if you will, that tricky measure 0:17:15.760 --> 0:17:18.480 of financial conditions, and they've clearly contracted with all that's 0:17:18.520 --> 0:17:21.359 gone on so rapidly over the last couple of weeks. UM. 0:17:21.400 --> 0:17:24.040 It's not just the stock market, the high yield corporate 0:17:24.040 --> 0:17:27.240 markets UH certainly slowed down, and I think the deals 0:17:27.280 --> 0:17:29.960 got pulled last week. There's no planned issuance at this point. 0:17:29.960 --> 0:17:33.040 I don't think that's a challenge to the Federal reserves 0:17:33.040 --> 0:17:36.240 overall framework that they want functioning of financial markets. So 0:17:36.480 --> 0:17:39.240 the easy isn't just to target a stock price or 0:17:39.280 --> 0:17:42.040 avoid a loss. I think it's to make sure that 0:17:42.080 --> 0:17:46.600 the financial UH flows in the economy don't grind to 0:17:46.680 --> 0:17:49.800 a halt. Twelve years ago when the financial crisis was 0:17:49.840 --> 0:17:52.960 starting up, it's when those financial flows ground to a halt, 0:17:53.320 --> 0:17:55.920 When when the provision of liquidity, when the transactions and 0:17:56.000 --> 0:17:58.720 repo markets, when the issuance of bonds ground to a halt, 0:17:59.080 --> 0:18:03.000 there was a clear sign of deeply challenging problems that 0:18:03.080 --> 0:18:04.960 the Fed needed to act to. I don't think we're 0:18:05.000 --> 0:18:06.719 there right now. I think that we have a more 0:18:06.800 --> 0:18:10.720 robust financial UM system right now, much better capitalized banks, 0:18:11.320 --> 0:18:14.440 sharp moves in markets are challenging for many, but financial 0:18:14.440 --> 0:18:18.240 prices changing does not beget a financial crisis. Um. The 0:18:18.359 --> 0:18:21.240 feds willingness to ease, on the other hand, is more 0:18:21.320 --> 0:18:24.040 looking at how the financial markets are sending a signal 0:18:24.040 --> 0:18:26.200 how the real economy will react in a public health 0:18:26.240 --> 0:18:29.280 crisis of a magnitude we have not seen if this 0:18:29.359 --> 0:18:31.639 gets as bad as people think it might. A highly 0:18:31.640 --> 0:18:36.600 transmissible virus that has a mortality rate that's somewhere around 0:18:36.640 --> 0:18:39.080 five to ten times the influenza which we did with 0:18:39.119 --> 0:18:42.440 every year. Um, there are stark steps that are being taken. 0:18:42.480 --> 0:18:44.440 Look what China did. They shut down cities worth fifty 0:18:44.480 --> 0:18:48.919 million people. That real economic consequences are very profound. So 0:18:48.960 --> 0:18:51.600 the Fed's easing isn't just to sort of blow the 0:18:51.600 --> 0:18:55.199 stock market, uh back up. It's it's to try to 0:18:55.240 --> 0:18:57.840 cushion the blow from an economic standpoint of all of 0:18:57.880 --> 0:19:00.760 the measures that may emerge in the United States as 0:19:00.880 --> 0:19:03.240 testing takes place. We're going to see many more cases 0:19:03.240 --> 0:19:06.160 in this country, and you're gonna see school district shutting down, 0:19:06.400 --> 0:19:10.000 you'll see less travel, you'll see events shutdown. That's what 0:19:10.040 --> 0:19:12.320 the FEDS reacted to. R. J. Gallow thank you so 0:19:12.400 --> 0:19:14.440 much for being with us. R J. Gallo, senior portfolio 0:19:14.480 --> 0:19:17.200 manager and a head of the Unicipal Bond Investment Group 0:19:17.560 --> 0:19:25.760 as well as the Duration Committee it federated. Hermes Let's 0:19:25.760 --> 0:19:28.560 shaft gears a little bit talk politics. Former Vice President 0:19:28.880 --> 0:19:31.719 Joe Biden had a landslide win in South Carolina over 0:19:31.720 --> 0:19:34.840 the weekend, and of course tomorrow is Super Tuesday. To 0:19:35.080 --> 0:19:37.840 put it all in a framework, we welcome Wendy Schiller. 0:19:37.920 --> 0:19:40.520 She's a professor of political science and public policy at 0:19:40.520 --> 0:19:43.320 Brown University in Providence, Rhode Island. Wendy, thanks so much 0:19:43.400 --> 0:19:47.280 for joining us. Let's start with Saturday. What really changed 0:19:47.320 --> 0:19:51.480 in the Democratic Party on Saturday? If anything? Well, I 0:19:51.520 --> 0:19:54.119 think two things came out of South Carolina. One is 0:19:54.160 --> 0:19:57.439