WEBVTT - Surveillance: We Are Likely In A Recession, Shilling Says 0:00:02.600 --> 0:00:13.040 Yea. Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 0:00:13.480 --> 0:00:17.560 Jay Ley. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.720 Bloomberg dot Com, and of course on the Bloomberg Ready 0:00:27.720 --> 0:00:30.240 please to stay joining us in the studio. Julian Emmanuel 0:00:30.320 --> 0:00:33.879 bt i G Chief Equity and derivative strategist Jinian What 0:00:33.920 --> 0:00:36.559 a moment nine p m. East in time last night. 0:00:36.640 --> 0:00:39.400 Let's get you to that moment, the President delivering his address. 0:00:39.840 --> 0:00:44.519 Your response as those words came out, Look, the market 0:00:44.600 --> 0:00:47.919 told you everything you needed to know that. You know, 0:00:48.080 --> 0:00:51.400 there was h too much of an element of backward 0:00:51.479 --> 0:00:55.280 looking this. There was a little bit too much self congratulation. 0:00:55.720 --> 0:00:59.120 This is a time for humility, but more importantly, this 0:00:59.200 --> 0:01:02.200 is a time for action. Um. We saw the sketches, 0:01:02.280 --> 0:01:05.360 the outlines of it. Um. But I would suggest to 0:01:05.440 --> 0:01:09.360 you that the single most important thing that we could 0:01:09.400 --> 0:01:13.040 see as a sign of backstopping confidence in the financial 0:01:13.080 --> 0:01:16.319 markets right now would be a meeting between President Trump 0:01:16.680 --> 0:01:20.200 and Speaker Pelosi and Senator Schumer. And that's what needs 0:01:20.280 --> 0:01:22.039 to happen. Would that be enough for you? Would that 0:01:22.040 --> 0:01:25.320 be the canta cyclical circuit breaker this market, this economy 0:01:25.360 --> 0:01:30.040 desperately needs right now. Well, you know, frankly, in you know, 0:01:30.120 --> 0:01:34.160 in an environment where volatility in every financial asset is 0:01:34.200 --> 0:01:37.800 off the charts, and you're dealing with, you know, a 0:01:37.880 --> 0:01:41.199 health emergency which we really don't fully have our hands around. 0:01:41.520 --> 0:01:44.680 To say that one thing is enough is probably not 0:01:44.760 --> 0:01:46.959 the correct thing to say, but I think it would 0:01:46.959 --> 0:01:49.120 be very, very meaningful. I want to go to the 0:01:49.160 --> 0:01:52.400 point that Muhammadalarian raises, which is are we watching an 0:01:52.520 --> 0:01:55.720 orderly or a disorderly unraveling of the market. Is this 0:01:55.880 --> 0:01:58.520 just sort of the market pricing in a new reality 0:01:58.560 --> 0:02:01.280 with the economy or were watching a sort of the 0:02:01.320 --> 0:02:06.240 functionality breakdown? So? Uh, what we would say there is 0:02:06.640 --> 0:02:12.040 um Really until frankly, the last twelve hours, it has 0:02:12.120 --> 0:02:17.200 been relatively orderly, relatively orderly. Um. You know, you've had rallies, 0:02:17.760 --> 0:02:20.320 you know, thousand points up, a thousand points down, but 0:02:20.440 --> 0:02:23.480 the liquidity has been there. What we've been focused on 0:02:23.680 --> 0:02:27.040 for the last several months is this whole idea that 0:02:27.240 --> 0:02:30.040 sell off was likely to be contained by the two 0:02:30.120 --> 0:02:33.240 hundred week moving average in the SMP five, which is 0:02:33.360 --> 0:02:36.120 essentially where you are now, where the futures are pricing 0:02:36.520 --> 0:02:41.400 um below that you have the potential to fundamentally alter 0:02:41.560 --> 0:02:45.359 the psychology, which could cause disorderliness. Credit is in the 0:02:45.440 --> 0:02:47.359 driving seat in a big way over the last couple 0:02:47.400 --> 0:02:49.079 of days for me, and that's been the big flip. 0:02:49.400 --> 0:02:51.440 Over the last couple of weeks or so, we saw 0:02:51.480 --> 0:02:53.760 the primary market freeze up. Would expect that in a 0:02:53.800 --> 0:02:56.800 period of market volatility, that's exactly what happened. But to 0:02:56.840 --> 0:02:59.240 start to see things like spreads and I think you 0:02:59.280 --> 0:03:01.359 noted le sort of investment right, Spreads have doubled in 0:03:01.400 --> 0:03:03.919 Wall a weak two wakes a couple of weeks just 0:03:03.960 --> 0:03:06.840 like that rapidly. So the magnitude of the move in 0:03:06.840 --> 0:03:08.320 the pace and the move, Julian, how much does that 0:03:08.400 --> 0:03:11.640 concern you in this very moment? It really is the 0:03:11.680 --> 0:03:15.720 single most concerning factors. Uh I was talking with Tom earlier. 0:03:15.760 --> 0:03:20.919 The issue here is that having been at all time 0:03:21.000 --> 0:03:23.919 highs in the equity markets basically a month ago, there 0:03:23.919 --> 0:03:27.240 have only been three other times where you've had this 0:03:27.320 --> 0:03:31.359 kind of volatility begin as rapidly as it has two thousand, 0:03:31.480 --> 0:03:35.560 seven oh eight, the Financial crisis, seven the stock market 0:03:35.560 --> 0:03:39.280 crash and nine and we see the Bloomberg Financial Conditions 0:03:39.280 --> 0:03:41.240 Index force. I'll try to get that chart out on 0:03:41.280 --> 0:03:43.400 LinkedIn and Twitter here in a bid and it's measured 0:03:43.400 --> 0:03:46.760 by standard deviations. And we're not the Leaman low levels, 0:03:46.760 --> 0:03:49.000 but boy are we on our way. They are exceeding 0:03:49.080 --> 0:03:53.040 other tensions that we've seen before. You've highlighted, Julian Emmanuel 0:03:53.120 --> 0:03:56.040 that the arch tension is a so called interest parity trade, 0:03:56.560 --> 0:03:59.000 and they just to make it a real generalized thing 0:03:59.080 --> 0:04:03.080 for you know, simple Thursday, I own some equities, leverage 0:04:03.080 --> 0:04:06.520 your own leverage, usually leveraged, and I do a treasury 0:04:06.600 --> 0:04:10.520 trade against that in along the way, I have to 0:04:10.640 --> 0:04:16.240 rehedge or reset the trade. Our people are sophisticates able 0:04:16.320 --> 0:04:20.080 to do that in this market? Are you able to rehedge? 0:04:20.800 --> 0:04:25.320 So yesterday actually saw the first sort of breakdown in 0:04:25.320 --> 0:04:28.760 in that risk parity trade because you actually saw yields 0:04:28.880 --> 0:04:33.159 rise as the equity market was falling. Now, UM, from 0:04:33.160 --> 0:04:36.120 our point of view, the paradigm of risk on risk 0:04:36.200 --> 0:04:39.800 off has been with us for essentially a generation. It 0:04:39.880 --> 0:04:44.520 was not that way prior to UM. And I might 0:04:44.560 --> 0:04:48.200 take slight issue with what John said before, is that yes, 0:04:48.400 --> 0:04:51.120 it was. It was part of a scary moment. But 0:04:51.440 --> 0:04:56.159 on balance, particularly if we get fiscal measures, it could 0:04:56.200 --> 0:04:59.000 be that the feedback loop of ten year yields moving 0:04:59.080 --> 0:05:02.560 higher is a What is the measure that the Secretary 0:05:02.640 --> 0:05:05.479 secretary can do, particularly with all the other Washington and 0:05:05.560 --> 0:05:08.880 political burdens. What does he do to assist too big 0:05:08.920 --> 0:05:13.039 to fail banks now attempting to affect or process their 0:05:13.120 --> 0:05:18.000 desire to re hedge. How does he help Wall Street? Well, again, 0:05:18.160 --> 0:05:21.840 it's you know, it's it's being front and center. I 0:05:21.880 --> 0:05:24.960 would say that, you know, the Treasury sector Terry is 0:05:25.040 --> 0:05:29.960 taking his orders elsewhere, um, but you know, staying out 0:05:30.000 --> 0:05:32.600 there with with small businesses. And I would say that 0:05:32.880 --> 0:05:35.840 small businesses are more important. But come about JP Morgan 0:05:35.960 --> 0:05:38.640 is not a small business, right, No, it isn't. But 0:05:39.160 --> 0:05:42.719 the fact is that in this kind of situation, JP 0:05:42.920 --> 0:05:46.440 Morrigan's solvency is not in question. And the single sentence 0:05:46.520 --> 0:05:48.919 John from Sara Vallis's note, he's calling for a hundred 0:05:49.000 --> 0:05:51.720 beeps and do it fast. Yeah, this big expectations. Look, 0:05:51.720 --> 0:05:53.560 there was a silver lining over the last couple of days. 0:05:53.600 --> 0:05:55.520 I know it's been very stressful for a lot of people, 0:05:55.920 --> 0:05:59.440 policymakers are starting to focus on the right things. It's 0:05:59.440 --> 0:06:02.599 happened last week. I've been disappointed that it's been late, 0:06:02.800 --> 0:06:05.480 but it's starting to happen, and that's encouraging. You took 0:06:05.520 --> 0:06:07.600 issue with something I said. I've got to follow up. 0:06:07.920 --> 0:06:10.520 Why is the feedback of high yield an environment like 0:06:10.680 --> 0:06:16.160 yesterday encouraging? Because honestly, what you want to see, frankly, 0:06:16.600 --> 0:06:20.720 the whole concept of interest rates in the US going 0:06:20.760 --> 0:06:24.120 back to the zero bound, particularly on the long end, 0:06:24.720 --> 0:06:27.479 is very sure, Julian. But I want high yields because 0:06:27.600 --> 0:06:30.920 growth expectations are higher, inflation expectations are high. I don't 0:06:30.920 --> 0:06:33.320 want high yields because people's traits have just blown up. 0:06:33.480 --> 0:06:36.720 But and and again that that is, that is the 0:06:36.760 --> 0:06:40.520 story of yesterday. However, we have to see if you 0:06:40.640 --> 0:06:43.680 end up again in concrete fiscal stimulus in the next 0:06:43.760 --> 0:06:49.200 several days, the appropriate reaction should be higher yields. Smart Julian, Emanuel, 0:06:49.240 --> 0:06:51.560 thank you so much. With bt I g not only inequities, 0:06:51.560 --> 0:06:54.279 but on the derivative space, as they say as well. 0:07:05.600 --> 0:07:07.640 Right now, where's Gina Martin Adams As we look at 0:07:07.680 --> 0:07:10.320 the equity market, She of course drives all of our 0:07:10.360 --> 0:07:14.440 equity work and research at Bloomberg Intelligence. A lot of 0:07:14.440 --> 0:07:19.120 discussion here about people that own equities and they wrap 0:07:19.240 --> 0:07:24.840 a bond trade around them, dampening risk until it doesn't work. 0:07:24.960 --> 0:07:28.280 Are we at a point where a blended equity and 0:07:28.440 --> 0:07:33.119 bond trade where the equities often are leverage, borrowing money 0:07:33.120 --> 0:07:35.840 to get bigger return when it works out, Are we 0:07:35.920 --> 0:07:38.680 at a point where that trade doesn't work anymore? Yeah? 0:07:38.720 --> 0:07:40.480 I mean, I think it depends on whether you're talking 0:07:40.520 --> 0:07:43.360 about risk parity, which is really about volatility in the 0:07:43.400 --> 0:07:48.680 asset prices, or simply about price combination. Price combination is 0:07:48.680 --> 0:07:53.640 still working right, Bonds are still rallying effectively. Yesterday might 0:07:53.680 --> 0:07:55.160 have been the beginning of a little bit of a 0:07:55.160 --> 0:07:57.800 bond sell off, but we'll see after today, after the ECB, 0:07:58.680 --> 0:08:01.000 after all the action in the any market, you could 0:08:01.000 --> 0:08:03.160 have a reflight back in the bonds. The trouble is 0:08:03.200 --> 0:08:06.080 with parity strategies, which are really based upon the volatility 0:08:06.080 --> 0:08:09.520 of those two asset classes. You've got the move index spiking, 0:08:09.560 --> 0:08:13.840 you've got the vixendex spiking. They're both completely off the charts. 0:08:14.360 --> 0:08:16.680 That's creating a lot of trouble for anybody with a 0:08:16.760 --> 0:08:19.800 volatility focus, but when you talk about sort of the 0:08:19.800 --> 0:08:23.920 asset classes themselves, you're still seeing a benefit from having 0:08:23.960 --> 0:08:27.880 that bond exposure. In general, it's just a very very 0:08:27.960 --> 0:08:30.760 volatile landscape, and when you're talking about ten year treasuries 0:08:30.800 --> 0:08:34.720 below fifty basis points, obviously a lot of investors get nervous. 0:08:34.720 --> 0:08:36.400 That we had for the zero bound Gina, this is 0:08:36.440 --> 0:08:38.800 such a punishing market right now. If I told many 0:08:38.840 --> 0:08:42.520 people that in yesterday's session, before we started, yields would 0:08:42.520 --> 0:08:44.199 be higher at the long end, the curve would be 0:08:44.200 --> 0:08:46.719 steeper where a bank's going to be, I'm not sure 0:08:46.800 --> 0:08:48.839 many people would say banks would be down around about 0:08:48.840 --> 0:08:54.600 six spire. What's happening beyond just the concern about rates, Well, 0:08:54.640 --> 0:08:56.600 I think it's panic. I mean, this is just sheer 0:08:56.600 --> 0:09:00.120 panic where this morning it's definitely panic and it has 0:09:00.160 --> 0:09:02.079 been though. I Mean, this is what's really interesting about 0:09:02.120 --> 0:09:04.560 this sell off over the last three or so weeks 0:09:04.600 --> 0:09:06.560 relative to any sell off with that we've been through, 0:09:06.600 --> 0:09:10.080 including two thousand and eight, is from the very beginning 0:09:10.200 --> 0:09:13.160 we had signs of panic. We had signs of absolute 0:09:13.200 --> 0:09:15.240 wash out and sentiment. I mean, you just don't get 0:09:15.320 --> 0:09:18.160 five percent, six percent down seven percent, down days at 0:09:18.160 --> 0:09:21.120 the beginning of a crash. That's extremely unusual. You guys 0:09:21.240 --> 0:09:23.040 keep this going. But can I point out to the 0:09:23.080 --> 0:09:27.280 panic free that gold hasn't moved, although we can go 0:09:27.320 --> 0:09:29.720 back to so what you can not what you want to, 0:09:29.800 --> 0:09:33.280 and you can discuss the dynamics they're underpinning gold. Gina, 0:09:33.720 --> 0:09:36.640 use word panic. One reason why I always love speaking 0:09:36.640 --> 0:09:38.800 with you is that you look at the fundamentals and 0:09:38.840 --> 0:09:41.640 you take an even headed approach to what we're actually 0:09:41.679 --> 0:09:45.560 pricing in at this point, given the declines that we've seen, 0:09:45.640 --> 0:09:48.720 in the declines that were poised for today, what are 0:09:48.760 --> 0:09:51.000 we pricing into the US equity market? We are now 0:09:51.000 --> 0:09:53.880 pricing recession in the U S We're pricing a light 0:09:53.960 --> 0:09:57.160 recession allah two thousand one. I mean, it's been so 0:09:57.280 --> 0:10:00.000 long since we had a light recession. It's really difficult 0:10:00.080 --> 0:10:02.520 for many to remember. But two thousand one was a 0:10:02.600 --> 0:10:04.880 year in which we had two quarters of negative growth. 0:10:04.920 --> 0:10:07.840 They were split apart because we were kind of climbing 0:10:07.880 --> 0:10:10.640 our way out of a slow growth period when September 0:10:10.640 --> 0:10:13.040 eleven hit and then we had more panics. So we've 0:10:13.080 --> 0:10:15.640 done a lot of comparisons back to two thousand one. 0:10:15.800 --> 0:10:18.400 But if you look over time at your average compression 0:10:18.440 --> 0:10:22.520 and PE multiples were there over the last multiple crisis 0:10:22.559 --> 0:10:24.599 in the equity market, you get an average decline in 0:10:24.679 --> 0:10:28.800 PE of about we've had a compression, you get an 0:10:28.800 --> 0:10:32.920 average earnings drop of about four percent. So we've priced 0:10:32.920 --> 0:10:35.680 a light recession. We have not priced something like a 0:10:35.720 --> 0:10:40.520 two two thousand nine catastrophic recession experience based on cash 0:10:40.520 --> 0:10:43.520 flow estimates of all of the analysts a Bloomberg intelligence, 0:10:43.920 --> 0:10:46.880 Does this seem appropriate? Are the levels that we're looking 0:10:46.880 --> 0:10:50.320 at right now and the declines in earnings? Uh? Is 0:10:50.360 --> 0:10:52.840 that is that accurate? You know, it's really difficult to 0:10:52.840 --> 0:10:55.319 say of it. Just to be completely honest, no one 0:10:55.400 --> 0:10:57.600 knows how long the panic is going to last. And 0:10:57.640 --> 0:11:01.280 this is the trouble with this situation is we're not 0:11:01.360 --> 0:11:06.120 talking about rational sort of behavior. We're talking about panic behavior. 0:11:06.160 --> 0:11:08.440 We're talking about panic behavior in the real economy with 0:11:08.480 --> 0:11:12.000 the grocery store shelves somewhat empty. We're talking about panic. 0:11:11.760 --> 0:11:18.600 The behavior in try to do a primoder last night, 0:11:18.640 --> 0:11:24.440 not deliver six cases of John Courage days. Okay, a panic? 0:11:24.480 --> 0:11:27.600 And this goes to what Dr Larian said Hilarian's joining 0:11:27.600 --> 0:11:31.200 you in the night. Nine o'clock Muhammad Larian with John Pharall, 0:11:31.200 --> 0:11:34.760 look at that on another feral property. Okay, fine, there's panic, 0:11:34.760 --> 0:11:39.160 But as Dr Larian mentions, it's orderly panic. I don't 0:11:39.400 --> 0:11:43.520 did you see yesterday within the electronics of the day, 0:11:43.880 --> 0:11:47.560 it's not an image of nine. I'm sorry. Markets are 0:11:47.600 --> 0:11:52.440 acting orderly. I don't see gap bids do I not yet, 0:11:52.880 --> 0:11:57.240 though I will see. The percentage changes are very disorderly. 0:11:57.400 --> 0:12:01.280 So I think it depends on your perspective. Again, the 0:12:01.280 --> 0:12:07.920 way that we you know, the way that said anyway, 0:12:07.920 --> 0:12:11.320 shape or form. The way that asset prices are moving 0:12:11.440 --> 0:12:14.960 so viciously and so rapidly is akin to a two 0:12:14.960 --> 0:12:20.600 thousand eight or seven or nine. That rapidity itself is 0:12:20.760 --> 0:12:25.840 very very different, and you can clear trades in a crunch, right, 0:12:25.840 --> 0:12:30.480 there's no liquidity crunch. Nonetheless, there is this really vicious 0:12:30.559 --> 0:12:33.960 repricing that is extremely unusual. Day to check, folks. I 0:12:34.000 --> 0:12:36.920 just want to say, in the a afternoon of seven, 0:12:36.920 --> 0:12:39.840 when you started buying shares, you didn't know for three 0:12:39.920 --> 0:12:43.760 days what you've got. I mean, I know it sounds 0:12:43.800 --> 0:12:48.640 like ancient. No, I think it's worth pointy gap. That's 0:12:48.679 --> 0:12:50.640 that's why I worry about this is why I worry 0:12:50.640 --> 0:12:53.360 about the pay word, because it is so subjective and 0:12:53.360 --> 0:12:55.480 it's I think it's important to put numbers on it 0:12:55.760 --> 0:12:57.319 in the way that you guys are doing, Genu, it's 0:12:57.320 --> 0:13:09.920 fantastic to see you and tell it you. Let's bring 0:13:09.960 --> 0:13:12.439 in someone truly expert down this here is a city 0:13:12.440 --> 0:13:16.360 group and that is an esteemed European program put together 0:13:16.400 --> 0:13:18.920 by Villain Powder and of course by Catherine Man as well. 0:13:19.000 --> 0:13:23.920 Christian Schultz joins with a very much European perspective. Christian, 0:13:23.960 --> 0:13:30.200 what is a surprise here? Well, to us, not that much. 0:13:31.120 --> 0:13:34.560 Our focus was mainly on quee. We had hoped for 0:13:34.640 --> 0:13:38.920 a bigger increase in the purchases of government bonds in particular. 0:13:38.960 --> 0:13:41.560 And the logic here for us was, um, this is 0:13:41.559 --> 0:13:44.280 going to be a shock to the real economies equity 0:13:44.640 --> 0:13:46.640 um so, companies are going to burn through a lot 0:13:46.640 --> 0:13:48.679 of cash um And that's not just a liquidity bill 0:13:48.720 --> 0:13:52.679 to a solvency issue. The ECB cannot give equity to companies. 0:13:52.960 --> 0:13:55.160 Governments can. So what the ECB has to do is 0:13:55.200 --> 0:13:59.520 make sure that government can socialize losses um so, create 0:13:59.559 --> 0:14:03.280 fiscal room, and that requires buying government bonds. Now the 0:14:03.360 --> 0:14:07.520 fact that they're buying private sector bonds is a bit evasive, 0:14:07.760 --> 0:14:10.880 I'd say there. So it seems that the limits that 0:14:10.920 --> 0:14:13.200 they've set themselves to throw the three limits and have 0:14:13.280 --> 0:14:15.920 scared them away from buying more governments. And that's not 0:14:15.960 --> 0:14:18.360 good news. Is this the influence of the Germans? I mean, 0:14:18.400 --> 0:14:20.600 are you suggesting there should have been more except for 0:14:20.680 --> 0:14:26.280 German reticence? Well, the Germans, I guess, would have liked 0:14:26.320 --> 0:14:29.520 a rate cut. M that's not happened, and that's probably 0:14:29.560 --> 0:14:31.760 not happened because the fear is that that would be 0:14:31.800 --> 0:14:34.360 worse for banks than it is good for the economy 0:14:34.360 --> 0:14:36.800 as a whole, so that it would be net negative 0:14:36.840 --> 0:14:39.200 for the economy just highlights that we had the limit 0:14:39.280 --> 0:14:43.280 for rate cuts at this point for the the for 0:14:43.320 --> 0:14:45.760 the asset purchases. Yes, indeed, I mean government buying government 0:14:45.800 --> 0:14:48.080 bonds and not something which is very popular in Germany. 0:14:48.360 --> 0:14:51.200 Buying corporate bonds pretty more popular. So yes, indeed there's 0:14:51.200 --> 0:14:54.960 some resistance that seem EUROSWISSI stay strongest Swiss for those 0:14:55.000 --> 0:14:57.400 that are playing inside baseball at least, so we're starting 0:14:57.440 --> 0:15:00.560 to get in research and Sebastian Galley, and already he 0:15:00.680 --> 0:15:03.680 doesn't mince words about it. He says, this shows a 0:15:03.760 --> 0:15:07.720 complete lack of coordination between the United States and the 0:15:07.760 --> 0:15:10.640 European Union, which really is the key issue here is 0:15:10.760 --> 0:15:14.280 will there be sufficient response and coordination from all central 0:15:14.320 --> 0:15:18.840 banks in order to stave off some sort of serious crisis? 0:15:18.880 --> 0:15:21.400 And right now there is a question that I have 0:15:21.680 --> 0:15:26.520 looking at this response, is it sufficient? And Christian, what's 0:15:26.560 --> 0:15:29.400 your take? Do you think that the ECB has responded 0:15:29.440 --> 0:15:34.600 effectively to the issues at hand, well within what they 0:15:34.640 --> 0:15:37.200 can do. They probably have, As I said, it would 0:15:37.200 --> 0:15:40.040 have been better to buy more government bonds, to be 0:15:40.040 --> 0:15:42.200 more aggressive on the government bond side, because that's really 0:15:42.240 --> 0:15:44.280 what we need right now. We need fiscal space or 0:15:44.320 --> 0:15:46.760 government so that they can socialize losses that necessary and 0:15:46.840 --> 0:15:51.080 that incluence countries such as Italy. If the additional purchases 0:15:51.120 --> 0:15:54.720 which aren't great, I mean, I'm calculating maybe twelve ten 0:15:54.840 --> 0:15:58.920 month um. If that's gear towards the private sector rather 0:15:59.000 --> 0:16:03.320 than the public, then I'm afraid that sort of misses 0:16:03.400 --> 0:16:06.560 that point that governments have to have fiscal space. Here. 0:16:07.320 --> 0:16:09.760 The phrase you just said, Christian, is why we love 0:16:09.840 --> 0:16:14.720 having you on the ability to socialize losses. That's the 0:16:14.800 --> 0:16:19.120 heart of the financial political in nexus, I should point 0:16:19.160 --> 0:16:21.280 euro strength. All of a sudden, we did get a 0:16:21.280 --> 0:16:27.360 one thirteen print briefly one slightly stronger uh, slightly stronger 0:16:27.440 --> 0:16:30.640 euro here off this historic moment, Christian shows, what do 0:16:30.680 --> 0:16:37.640 you mean, well, I translate for us socialized losses. Well, 0:16:38.240 --> 0:16:43.640 companies also households of course, will have less income, you know, 0:16:43.720 --> 0:16:47.320 through that period where we're effectively on lockdown right now 0:16:47.320 --> 0:16:50.920 in Italy but potentially in other countries shortly. Um so 0:16:51.000 --> 0:16:54.680 that will burn down the equity that the debt liment 0:16:54.720 --> 0:16:58.040 to remain the same. So companies are running out of 0:16:58.080 --> 0:17:00.320 equity and they're certainly it's difficult to get new equity 0:17:00.360 --> 0:17:03.280 from the markets right now, so they have turned to 0:17:03.360 --> 0:17:07.639 governments for income subsidies, and not just for bridge lawns, 0:17:07.680 --> 0:17:11.239 but literally for grants. And that requires bigger deficits. That's 0:17:11.280 --> 0:17:13.639 what I'm called socializing loss The taxpayer will have to 0:17:13.640 --> 0:17:16.600 come up for a lot of them. There, that's what 0:17:16.640 --> 0:17:19.199 you're looking for, That's what I was looking for, folks. 0:17:19.480 --> 0:17:22.920 He's so delicate about it. Christian shows is a gentleman 0:17:23.400 --> 0:17:26.000 at Lisa This has been the conundrum for twelve years. 0:17:26.480 --> 0:17:30.320 Is it any creative destruction? However, you want to put 0:17:30.320 --> 0:17:33.960 a good morning, Mr Shape with great memories there. But 0:17:34.200 --> 0:17:37.040 I'll tell you, Lisa, all this is, and the wonderful 0:17:37.160 --> 0:17:40.639 language of socialized losses is when does the tax payer 0:17:40.680 --> 0:17:43.159 pony up? That's really what this is all about. And 0:17:43.280 --> 0:17:46.679 ultimately it seems like that will be the answer. But 0:17:46.720 --> 0:17:49.359 there's also a question what is the role of the 0:17:49.440 --> 0:17:52.400 central bank right in terms of making sure that financial 0:17:52.400 --> 0:17:55.960 markets function versus fiscal stimulus? Christian? Based on what you've 0:17:55.960 --> 0:17:58.560 seen the lack of coordination as we've talked about globally 0:17:58.600 --> 0:18:02.199 with between the central banks and in fiscal policymakers, what 0:18:02.240 --> 0:18:05.160 are you looking to add in terms of the European economy. 0:18:05.280 --> 0:18:07.840 Are we headed towards recession? Are we already there? How 0:18:07.880 --> 0:18:12.640 long will it last? It seems very difficult right now 0:18:12.680 --> 0:18:14.920 to avoid recession if you have the definition of two 0:18:15.480 --> 0:18:18.400 successive negative quarters, or even if we do avoid two 0:18:18.440 --> 0:18:21.800 successive negative quarters, we probably have as much decline in 0:18:21.840 --> 0:18:25.880 one quarter that we can call that recession by all means, 0:18:25.920 --> 0:18:29.760 So recession widening of the output gap, and you know, 0:18:29.880 --> 0:18:33.160 rising unemployment rates and these things, I think that would 0:18:33.160 --> 0:18:35.440 be inevitable. Of course, right now, the hope is still 0:18:35.480 --> 0:18:38.439 that we will have some form of V shape or 0:18:38.520 --> 0:18:40.760 U shape or any kind of recovery so that we 0:18:40.840 --> 0:18:43.840 get back to the levels that we had as output 0:18:43.840 --> 0:18:46.200 at the end of last year relatively quickly, in which case, 0:18:46.280 --> 0:18:48.520 you know, the you know, the socializing of losses and 0:18:48.560 --> 0:18:51.560 the liquidity support from the central bank can be temporary. 0:18:51.840 --> 0:18:53.920 But of course there's a big risk if we don't 0:18:54.160 --> 0:18:56.760 blood losses that we will get a permanent shock and 0:18:56.840 --> 0:19:01.160 the parablel shift in the in the GDP curve. Hugely informative. 0:19:01.240 --> 0:19:04.399 Christian Shills, thank you so much. In economics in Europe 0:19:04.680 --> 0:19:07.920 with City Group, just wonderful, the director of City Group 0:19:08.200 --> 0:19:23.680 Economics team, and we will pause. There is a small 0:19:24.040 --> 0:19:27.720 blue book of two shades of blue color put out 0:19:28.000 --> 0:19:30.760 right after Robert Frost took the part in the road 0:19:31.520 --> 0:19:34.720 and the gentleman from Amer's College, a physicist wrote a 0:19:34.760 --> 0:19:40.320 book where he talked about good and bad deflation. And 0:19:40.359 --> 0:19:44.159 as I've written, let's chart paragraph, chart paragraph, it's the 0:19:44.359 --> 0:19:48.679 Dheimens School of economics. Say something and show it. And 0:19:48.720 --> 0:19:52.439 we're honored on this truly historic day that Dr Shilling 0:19:52.520 --> 0:19:55.760 would join us kids can't say it. Folks by the 0:19:55.800 --> 0:19:58.960 book Deflation, read it and reread it every three years, 0:19:59.160 --> 0:20:04.560 Gary Shilling? Are we in good or bad disinflation? I 0:20:04.600 --> 0:20:08.240 think we're probably in bad uh and bad disinflation. What's 0:20:08.240 --> 0:20:11.280 the difference, Well, the addition edition is do you have 0:20:11.880 --> 0:20:15.240 do you have a high productivity which pushes down prices, 0:20:15.680 --> 0:20:18.560 you have access supply, or do you have deficient demand? 0:20:19.160 --> 0:20:21.639 And I think we're more in the deficient demand stage 0:20:21.760 --> 0:20:25.560 right now with particularly with the virus. I know DiCaprio 0:20:25.600 --> 0:20:28.600 has it rights to the book Deflation, but but if 0:20:28.600 --> 0:20:30.960 you were to write a new version of it, now, 0:20:31.400 --> 0:20:36.360 how do you full technology into that productivity and a 0:20:36.400 --> 0:20:41.600 good disinflation versus the bad disinflation? So many of our listeners, well, 0:20:41.640 --> 0:20:44.919 I think in the long run, product that we are 0:20:44.960 --> 0:20:50.920 going to see productivity blossom things like robotics, uh, artificial 0:20:50.960 --> 0:20:53.720 intelligence and so on when they get big enough to 0:20:53.800 --> 0:20:56.880 really drive productivity. But they're still in their infancy. They're 0:20:56.920 --> 0:20:58.879 not you know, they're growing a hundred percent a year 0:20:58.920 --> 0:21:00.639 or more, but they're not big enough. You have to 0:21:01.119 --> 0:21:03.760 really move the overall productivity needles. So I think in 0:21:03.800 --> 0:21:06.760 the meanwhile, particularly when we're looking at the at the 0:21:06.840 --> 0:21:09.120 virus and the effect. Right now, it's more the it's 0:21:09.160 --> 0:21:11.320 more of the bad deflation. The e t F sp 0:21:11.520 --> 0:21:14.080 X breaks down, Paul, we're now down seven point one percent. 0:21:14.160 --> 0:21:16.919 We just touched new weakness there for the morning below 0:21:16.960 --> 0:21:20.720 the lockdown of negative one forty on smp futures. Deutsche 0:21:20.720 --> 0:21:23.760 Bank just as a European proxy from a five point 0:21:23.840 --> 0:21:26.919 five zero to a five point four three. Where's the 0:21:26.960 --> 0:21:30.560 euro right now? One sort of hunched as well, Paul 0:21:30.600 --> 0:21:33.720 Sweeney would be great, Gary showing So Gary, what I 0:21:33.760 --> 0:21:35.600 think people are trying to get a sense of is 0:21:35.600 --> 0:21:38.080 they try to put into context what's happening over the 0:21:38.080 --> 0:21:40.200 past couple of weeks with this coronavirus. Is trying to 0:21:40.359 --> 0:21:43.680 put this crisis in context with maybe two thousand eight. 0:21:43.880 --> 0:21:47.760 How do you compare the two Well, two thousand and 0:21:47.800 --> 0:21:49.800 eight was of course a big bubble, it was a 0:21:49.960 --> 0:21:52.640 it was a subprime mortgage. It was really a collapse 0:21:53.080 --> 0:21:56.840 in the housing factor. Right now, what we're what we're 0:21:56.840 --> 0:21:59.400 dealing with was an economy of the world which are 0:21:59.440 --> 0:22:02.760 slow and slowing now. Of course the stock bowls are 0:22:02.760 --> 0:22:04.960 going to claim it everything was just hunky dory until 0:22:05.000 --> 0:22:07.520 the virus came along, but that it was that that's 0:22:07.560 --> 0:22:09.760 not true. It really isn't. I don't care. I was 0:22:09.800 --> 0:22:15.159 on tripley. I read your newsletter, all right, but but 0:22:15.320 --> 0:22:18.200 you but you look at you look at job openings, 0:22:18.200 --> 0:22:20.480 you look at ways increases and so on. They all 0:22:20.480 --> 0:22:24.480 were really slipping. And of course China, China has been slipping. 0:22:24.520 --> 0:22:27.439 So the point is when you take a slow and 0:22:27.600 --> 0:22:31.840 slow slowing economy and then you create this shock of 0:22:31.920 --> 0:22:35.720 the coronavirus, that's what tips it into recession in my view, 0:22:36.480 --> 0:22:38.560 And is this kind of I guess we're past the 0:22:38.560 --> 0:22:43.200 discussion point of maybe a v shaped recession because obviously 0:22:43.200 --> 0:22:47.080 now it's appears to be more pandemic, this concern and globally, 0:22:47.280 --> 0:22:48.720 how do you think this is gonna play out? Because 0:22:48.720 --> 0:22:51.840 we're already starting to see China get back to work, um, 0:22:51.920 --> 0:22:53.840 And so there was a two to three month type 0:22:53.840 --> 0:22:56.520 of situation. Do you expect that kind of timing here 0:22:56.560 --> 0:22:58.680 for the rest of the world. Well, I mean you 0:22:59.040 --> 0:23:01.400 do have a lag situation. I mean, first of all, 0:23:01.480 --> 0:23:04.840 China has a very different situation. They deny that it existed, 0:23:04.920 --> 0:23:07.280 and then of course then they locked down everything. You 0:23:07.320 --> 0:23:09.480 can do that with the top down society. You can't 0:23:09.480 --> 0:23:11.919 do that in the West. So things are much more 0:23:11.960 --> 0:23:13.800