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Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Lee.

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Speaker 1: We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. Joining

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Speaker 1: us now, Mike Wilson, markin Stanley, chief US equity strategist,

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Speaker 1: joining us on the fun fantastic to have Michael with us.

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Speaker 1: Might let me just begin with a line of yours

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Speaker 1: that comes from your team and your research. COVID nineteen

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Speaker 1: may simply be the accelerant for a cycle that was

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Speaker 1: already on its way to ending your thoughts, Mike, Yeah,

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Speaker 1: I think that's you know, our main message over the

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Speaker 1: past month actually is that we actually think that this

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Speaker 1: correction we're going through now is just a continuation of

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Speaker 1: the correction that really began almost two years ago. Okay,

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Speaker 1: and you guys are familiar with our work on the

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Speaker 1: rolling bear market, the consolidation call, and quite frankly, the

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Speaker 1: fourth quarter of last year was a false breakout that

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Speaker 1: was orchestrated by extraordinary liquidity. And sure, the fundamentals we're

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Speaker 1: trying to bottom. But as you all know, and you know,

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Speaker 1: we wrote about it, a lot of other people wrote

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Speaker 1: about it. You know, the market's got way ahead of

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Speaker 1: the fundamental recovery that was apparent, and so it was

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Speaker 1: a liquidity driven rally in the fourth quarter. And that's fine,

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Speaker 1: and you know that trapped a lot of people, including

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Speaker 1: us to some degree. And you know, now we're back

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Speaker 1: to reality, which is that the cycle was already moving

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Speaker 1: in this direction and it all you know, this is

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Speaker 1: the way, this is the way recessions happened, right you.

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Speaker 1: You have a host of headwinds and I'll just go

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Speaker 1: through a few of them. We had the margin pressure,

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Speaker 1: you know, from the fiscal stimulus, and that's been that's

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Speaker 1: been the crux of our call for the last two years,

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Speaker 1: is that we're actually still in an earnings recession in

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Speaker 1: the US for the average company. The second one was

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Speaker 1: the tariffs, which are still in place. By the way,

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Speaker 1: they haven't really gone away. They've just been, you know,

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Speaker 1: not getting worse. Of course, we had a federal reserve

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Speaker 1: that you know, went the distance on tightening two years ago.

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Speaker 1: They did a tremendous amount of tightening via both the

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Speaker 1: balance sheet and rates, and that works with about a

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Speaker 1: two year lag, and so we're kind of right back

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Speaker 1: on schedule. And and but nobody ever knows what the

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Speaker 1: event is going to be. That kind of pushes you over.

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Speaker 1: But to look at the virus, or quite frankly, the

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Speaker 1: price war in in oil markets, which is I think

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Speaker 1: even a bigger deal potentially for credit markets. You take

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Speaker 1: the two of those together, and you know, in conjunction

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Speaker 1: with what's already a headwind for you know, in the

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Speaker 1: global economy and the US economy, and you have the

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Speaker 1: recipe for just finishing the cycle. And I think markets

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Speaker 1: have appropriately started to discount down and we've done a

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Speaker 1: lot of damage in the last month. I mean stocks

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Speaker 1: were down overnight, you know, from p to trough. So

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Speaker 1: we're there and we're in a process of doing that.

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Speaker 1: And so today we're having a giant rally hopes for

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Speaker 1: fiscal Eton. This is how bottoms are made. It will

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Speaker 1: all happen on one day. It's gonna take you know,

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Speaker 1: it's gonna take time, you know. And by the way,

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Speaker 1: you know, policymakers, this is exactly what they typically do.

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Speaker 1: They throw out a suggestion to the market and say, hey,

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Speaker 1: how about you know, a fifty basist going emergency cut,

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Speaker 1: the market doesn't like it, Oh, how about this? How

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Speaker 1: about that? And then eventually, you know, we find a

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Speaker 1: level that you know, supports where we are. So Mike

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Speaker 1: Lease is gonna want to ask you about credit and

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Speaker 1: just the moment, I want to understand from your perspective,

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Speaker 1: is there not a fiscal response that could be unvowed

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Speaker 1: today that would be sufficient in your rise to extend

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Speaker 1: this cycle. I don't think we can extend. I think

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Speaker 1: we have to get away from this idea about extending

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Speaker 1: the cycle and let's talk about how do we now

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Speaker 1: deal with the downturn and protect the next cycle. Okay,

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Speaker 1: that's that's that's my mindset. And we don't know, we

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Speaker 1: don't know if we're gonna have a recession right now,

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Speaker 1: but good grief, I mean every cater we look at

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Speaker 1: suggests that's what the market expects at this point. I mean,

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Speaker 1: that's what the bond market has been telling us for

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Speaker 1: quite frankly, for two years. And then this extraordinary move

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Speaker 1: we've seen in the last month, which exceeded anything in

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Speaker 1: our dreams in terms of how low we would go.

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Speaker 1: I mean, I think it's you know, I think the

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Speaker 1: markets have basically spoken, and and so now policy choices

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Speaker 1: should be about how do we make sure we don't

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Speaker 1: get stuck, okay, in a trap where you know, we

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Speaker 1: end up with rate at these levels in perpetuity and

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Speaker 1: you know we're in a situation where the US looks

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Speaker 1: like Japan Europe. That's not our view, by the way,

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Speaker 1: we don't think that we are going to end up

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Speaker 1: in that situation. But you know, that's what policymakers should

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Speaker 1: be thinking about. How do we how do we kind

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Speaker 1: of get the next cycle going. What's the investor playbook

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Speaker 1: given the fact that there is a lot of uncertainty

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Speaker 1: about what this bottom will look like, and given the

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Speaker 1: fact that we're going to get some policy response, I

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Speaker 1: think the mark well, first of all, the play our

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Speaker 1: playbook has been to be much more defensively oriented. You

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Speaker 1: are in our sector preferences, right, So we've been playing

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Speaker 1: for this now for almost two years. We've we've been

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Speaker 1: over what utilities and staples because those are always the

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Speaker 1: sectors that do well at the end of a cycle.

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Speaker 1: I mean clearly, things like software and technology that are

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Speaker 1: defensive that they've done really well too, because they're they're

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Speaker 1: geared to lower interest rates and there's somewhat defensive business models,

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Speaker 1: so it doesn't have to be pure defense. But my

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Speaker 1: point is is that the playbook has been to be

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Speaker 1: more defensively oriented in your positioning, whether it be long

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Speaker 1: duration or long defensively oriented sectors away from cyclical areas.

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Speaker 1: And I would argue we're in the eighth inning of that.

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Speaker 1: I mean, this has been going on now for a

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Speaker 1: long time. So the playbook now is to think about

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Speaker 1: when do I want to play for the next cycle

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Speaker 1: and get more cyclically geared, and that would be things

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Speaker 1: like you know, consumer discretionary and banks and materials and

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Speaker 1: early cycle sectors. I think it's premature to do that.

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Speaker 1: We're getting closer. I'm like going to catch up with

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Speaker 1: this morning, busy morning on now for the whole team

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Speaker 1: over at Morgan Stanley. We appreciate your time. Morgan Stanley's

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Speaker 1: Mike Wilson, that chief US equity strategistic Who do you

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Speaker 1: turn to in a given crisis like this when you

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Speaker 1: look at the different shocks that we've seen, And one

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Speaker 1: would be a gentleman who re affirmed a style of

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Speaker 1: writing linking history and in this case in the hydro

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Speaker 1: carbons and that of course is Daniel Jorgan's surprize that

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Speaker 1: in itself was extraordinary. Far more important was only seven

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Speaker 1: years later he followed up with The Commanding Heights, which

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Speaker 1: is a definitive look at how we have vaulted from

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Speaker 1: World War Two forward in our capitalism. We're thrilled that

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Speaker 1: Daniel Jorgan could join us today with I H S

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Speaker 1: as well. Dr Jorgina, thank you so much for finding

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Speaker 1: time with us. Is this a set of crises that

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Speaker 1: we get over, like the end of a IRUs or

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Speaker 1: Russia and Saudi Arabia meeting together to get to a

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Speaker 1: more stable oil price, or do you send some permanence

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Speaker 1: in our in our lives due to the set of crises.

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Speaker 1: I think that it's a that at some point you

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Speaker 1: can imagine the Russians and the Saudis getting together again.

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Speaker 1: But right now this is a grudge match that's going

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Speaker 1: on between the two countries. The Saudis of price cut

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Speaker 1: their prices and oil particularly aimed at the Russia's market

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Speaker 1: in Northwest Europe. So it's really two shocks at the

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Speaker 1: same time. One is an unprecedented demand shock resulting from

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Speaker 1: the virus, and then it's this declaration of battle for

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Speaker 1: market share, and we've had those before, but we've never

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Speaker 1: had this together. Is the OPEC imperium over is you

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Speaker 1: wrote of in the prize twenty nine years ago? Is

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Speaker 1: the cartel broken? Well? I think I mean, at the

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Speaker 1: end of the day, it's what a few countries want

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Speaker 1: to do and whether how they want to use it.

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Speaker 1: And I think the fact that they recognize that they

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Speaker 1: needed to create this OPEC plus make a deal with

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Speaker 1: Russia tells you how the world has changed right now.

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Speaker 1: It's really instead of the OPEC imperiments the Big three,

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Speaker 1: it's what happens to Saudi Arabia, Russia, and what happens

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Speaker 1: to the world's largest oil producer, which is the United

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Speaker 1: States down I'm sure you've lost count the amount of

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Speaker 1: times over the last few decades that we've declared the

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Speaker 1: death of OPEC, but we seem to be doing it again. Shale, though,

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Speaker 1: is a game changer. I'm trying to understand where the

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Speaker 1: greatest tension is right now. Is it between Saudi Arabia

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Speaker 1: and Russia or between those two countries and US Shale.

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Speaker 1: I think it's one for Saudi Arabia. It's between Saudi

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Speaker 1: Arabia and Russia, right now, I think the Russians have

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Speaker 1: their sights on US shale because of the tremendous growth,

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Speaker 1: losing market share to it, and I think that they

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Speaker 1: see the US now using its muscle energy and want

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Speaker 1: to counteract ave. So the Russians have always over the

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Speaker 1: last several years been more alarmed by the growth of shale.

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Speaker 1: It seemed to me that the Saudis had d of

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Speaker 1: accommodated themselves to this is the new reality. I'm just wondering, Dan,

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Speaker 1: going forward, does this ultimately destroy demand for oil or

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Speaker 1: actually increased demand for oil? And I asked, because people

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Speaker 1: were talking about peak oil demand in the next decade

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Speaker 1: as renewable start to gain online, and does this actually

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Speaker 1: give oil a longer shelf life because it's cheaper. Well,

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Speaker 1: I think it Normally would say that this would mean

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Speaker 1: that demand, you know, you get prices like this, demand

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Speaker 1: should really go up. That's what we've seen before. I

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Speaker 1: think the difference here is the virus. I mean, what

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Speaker 1: started this whole thing was this unprecedented demand shock. In

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Speaker 1: the first quarter of this year, we think oil demand

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Speaker 1: is almost four million barrels a day lower than it

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Speaker 1: was in the same quarter last year, and that that

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Speaker 1: that is going to continue. And you know, we see

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Speaker 1: the markets responding very positively as you've been talking this

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Speaker 1: morning to the talks of the stimulus coming out of Washington.

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Speaker 1: But keep in mind, and this is what really weighs

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Speaker 1: in my mind. You have low gasoline prices, they don't

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Speaker 1: really matter if schools are closed, if you've canceled your

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Speaker 1: next two trips and you're working from home, you're not

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Speaker 1: going to see that up uptick in demand. And so

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Speaker 1: I think when the Russians, in particular, we're looking at

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Speaker 1: the market, they were seeing this virus spreading across North

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Speaker 1: America and across Europe and demand continuing to be week

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Speaker 1: going in at least going into the beginning of the summer.

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Speaker 1: So that's what's different I think about this time. And normally,

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Speaker 1: normally a prices like this would be great for demand

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Speaker 1: and it would be a stimulus to the economy, but

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Speaker 1: not with the other things that are going on right now.

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Speaker 1: But Dan just sort of pushing it forward longer term.

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Speaker 1: Is there any longer lasting implication for oil? Is sort

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Speaker 1: of the benchmark use of for energy going forward from

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Speaker 1: this coronavirus plus war between Saudi Arabia and Russia. Well,

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Speaker 1: I think that going to your your question, I mean

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Speaker 1: we still see demand continuing to grow into the twenty

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Speaker 1: surgies in oil, which I know is not what other

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Speaker 1: people see. But looking at population grows an economic growth,

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Speaker 1: I think that, um, you know this, this pandemic, when

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Speaker 1: let's call it what it is, a pandemic, will end

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Speaker 1: and it probably ends around you know, at least you

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Speaker 1: hear public health authorities saying maybe somewhere in the second

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Speaker 1: or third quarter, at that point you'll see the rebound.

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Speaker 1: But when you have a whole country like Italy shut down, uh,

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Speaker 1: that is that contributes to the demand shock. People are

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Speaker 1: not doing a lot of driving in Italy. Right now,

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Speaker 1: we welcome all of you worldwide, including in Italy with us. Daniel,

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Speaker 1: you're going to buy us, of course, the author of

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Speaker 1: the prize, the quest and also the Commanding Heights. You

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Speaker 1: have a brilliant section in the Commanding heightstand you're going

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Speaker 1: to where Churchill marches off to Potsdam and marches back

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Speaker 1: to massive electoral defeat. I mean the tumult of populism.

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Speaker 1: Right now. We have a president today who's going to

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Speaker 1: commit fiscal stimulus with his fellow Republicans on the hill.

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Speaker 1: I guess, how have we come to a point where

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Speaker 1: creating fiscal support to any given nation, any given economy

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Speaker 1: is so diff the call that wasn't the case across

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Speaker 1: your book the Commanding Heights, And now we have this

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Speaker 1: embedded austerity. Where did it come from? Well, I think

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Speaker 1: I think it looks like embedded austerity until you look

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Speaker 1: at the budget deficits across the around the world and

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Speaker 1: uh rate that against GDP. But I think that what

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Speaker 1: you're pointing to, I mean, certainly there's you know, we've

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Speaker 1: seen a kind of loss of confidence in markets, and

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Speaker 1: I think if we pick up on the Commanding Heights,

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Speaker 1: we're really seen as a test of of of globalization

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Speaker 1: as it's developed. As I wrote about it in Commanding

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Speaker 1: Heights and in the in the people talked about decoupling

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Speaker 1: from China. We have really discovered from this how coupled

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Speaker 1: we are with China, how interconnected this economy is. And

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Speaker 1: going to your point, Tom, it's the question of international coordination.

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Speaker 1: In two thousand and eight we had a lot of

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Speaker 1: very clear international coordination going on. It's harder at the

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Speaker 1: time because of the kind of populism and nationalism you're

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Speaker 1: talking about, and yet yeah, you need it. This is

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Speaker 1: exactly what Philip Hilda ran A black Rock said today,

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Speaker 1: John Ferrell. The lack of coordination here is critical. It's

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Speaker 1: been a massive problem, and I think OPEC speaks to

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Speaker 1: the much broader issue of a lack of coordination in

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Speaker 1: the places we expect it at times like this. Dan,

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Speaker 1: you've touched on globalization. I think it's critical. This issue

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Speaker 1: of national security has been thrown around so much over

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Speaker 1: the last few years. But when you start to find

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Speaker 1: out just how much you depend on one country to

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Speaker 1: supply things like pharmaceutical ingredients, we've got a problem, haven't we, Dan, Well, absolutely,

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Speaker 1: I mean we're you know, although we're scrambling to make

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Speaker 1: masks here by the way, which are a petrochemical product,

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Speaker 1: all those and mass we find out that the bulk

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Speaker 1: of them and a lot of medical supplies come from China,

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Speaker 1: and I think people didn't realize just how interconnected these

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Speaker 1: supply chains are and the stress on them and what's happening.

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Speaker 1: Tankers were tens and tens of thousands of containers are

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Speaker 1: in the wrong place or their right there's nothing to

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Speaker 1: put back in them. So that's where I think this

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Speaker 1: is really a test of globalization on top of everything else, Dan,

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Speaker 1: You're gonna thank you so much for joining us today,

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Speaker 1: Dr Jurgen. Of course with the prize. And even though

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Speaker 1: it's twenty nine years old, John No, no, you used

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Speaker 1: to walk around on campus because it was cool with

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Speaker 1: Da Battis at the time. For our listeners to haven't

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Speaker 1: read this book. I mean, if you will take from Amazon,

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Speaker 1: it will come in a very very large ball, as

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Speaker 1: is the Community Nights as well. Dan, You're gonna of

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Speaker 1: course the more modern the quest as well. Philip Bill

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Speaker 1: the brand of black Rock, and Stephen Major of HSBC,

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Speaker 1: their global head of fixed income research, and Philip, what

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Speaker 1: I want to do a show a chart which you know,

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Speaker 1: something I've used over the years with Bill Gross and

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Speaker 1: frankly I should use it with Steve Major. This is

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Speaker 1: one of the great calls of all time. Think Eisenhower

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Speaker 1: in the fifties up to the moment of Paul Volker

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Speaker 1: and then the great great disinflation and what is so

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Speaker 1: true along the way here and credit Sueez to me

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Speaker 1: always said Steve Major, the best best idea. Rates are

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Speaker 1: gonna go up. Rates are gonna go up. Rates are

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Speaker 1: gonna go up. You get you get the theme here.

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Speaker 1: Rates are gonna go up, Rates are gonna go up,

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Speaker 1: and now we're down here at an imaginable low interest rate,

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Speaker 1: something that Stephen Major has absolutely nailed like no other

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Speaker 1: strategists at no other house. We're thrilled to Steve Major

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Speaker 1: could join us with Dr Hildebrand this morning. Steve Major,

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Speaker 1: the cry is out there, rates are gonna go up.

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Speaker 1: Why aren't they? Well, the first reason is we can't

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Speaker 1: afford them to go up. And part of the explanation

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Speaker 1: for low yields over the years has been the excessive debt.

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Speaker 1: So it's a question of servicing costs. The the economy,

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Speaker 1: both the public and private set to combined, cannot afford

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Speaker 1: to have higher rates. The the latest shock in the

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Speaker 1: form of the virus as maybe accelerated an inevitable shift

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Speaker 1: towards a weakening economy and even a recession. So for

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Speaker 1: now rates are stuck close to the zero bound in

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Speaker 1: the US and negative elsewhere. At the moment, all we're

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Speaker 1: waiting to see is the central banks responding or even

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Speaker 1: reacting to what's already happened. That the interest rates are

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Speaker 1: an outcome from what's come before. It's not like they're

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Speaker 1: actually leading anything within there will be the new disinflation.

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Speaker 1: Many people are writing about this demand shark, this supply shark,

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Speaker 1: and the idea of an aggregate disinflation. Will we see

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Speaker 1: rates drive ever lower? Will we see negative interest rates?

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Speaker 1: For example, in the United Kingdom, well, negative rates have

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Speaker 1: been evident for the last deck aid in real terms,

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Speaker 1: so every big country has had deep negative real rates.

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Speaker 1: The US was the outlier in two thousand and eighteen

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Speaker 1: with the rate hikes, which now with hindsight looked like

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Speaker 1: a massive policy mistake. So negative real rates for the

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Speaker 1: last decade has been normal. The UK has had deep

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Speaker 1: nominal negative real rates. In Switzerland and Denmark you have

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Speaker 1: minus seventy five. I mean the direction of travels quite clear.

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Speaker 1: M d CB isn't going to be hiking rates this week,

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Speaker 1: is it? Obviously the mover is down. But Stephen, we'll

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Speaker 1: get back to that in a second. You know, looking

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Speaker 1: at the real yields, you know got negative US on

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Speaker 1: the tenure US, but actually is the yield going to

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Speaker 1: go negative? It's not the real but just is it

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Speaker 1: going to go negative this year? Well, in the US,

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Speaker 1: um it looks like there's a strong resistance to negative

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Speaker 1: policy rates and negative yields in the UK. Yesterday, we

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Speaker 1: know that the market traded negative, but we're a long

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Speaker 1: way from negative policy rates. The resistance to negative rates

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Speaker 1: is quite strong, and there's a big banking lobby out there,

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Speaker 1: and there's the existence of cash that for now is

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Speaker 1: a big barrier to go in negative. But never say never,

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Speaker 1: maybe for the next cycle. Did you agree with that?

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Speaker 1: Who certainly would never say never? Yeuh, that's a that's

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Speaker 1: a good dictim I mean, look, from a macro perspective,

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Speaker 1: something has to change for rates to change. As steven

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Speaker 1: she said, the rates are not low because central banks

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Speaker 1: put them there, but because of macro phenomena. So what

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Speaker 1: could change. Demographics aren't going to change. Productivity could in

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Speaker 1: principle change. You know, we don't fully understand why productivity

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Speaker 1: has been solo. So we could see at some point

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Speaker 1: a jump in productivity, or we could see a major

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Speaker 1: shift in policy. But something has to change for the

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Speaker 1: rate outlook to change. And as I said earlier, if

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Speaker 1: you look at the inflation forecast for a very long

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Speaker 1: time to come measure in years, the market right now

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Speaker 1: does not expect that. I mean, this is such an

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Speaker 1: interesting discussion, and what Steve Major said there and then

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Speaker 1: this is what we always hear from a brave guy

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Speaker 1: like Steve Major. Dr Hilda Brand is the banking lobby

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Speaker 1: who is the blame? I mean, you're a connected guy.

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Speaker 1: Who is the banking lobby out there dictating what policy

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Speaker 1: should be two institutional policy holders as you were at

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Speaker 1: this SISS National Bank. Did these guys calling up means

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Speaker 1: there a special phone. There's not a special phone. But

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Speaker 1: I certainly went through my bruising exchanges with some CEOs.

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Speaker 1: But at the end of the day, you know, I think, um, look,

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Speaker 1: nobody likes when the environment makes you job difficult. So

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Speaker 1: I have some sympathy for bankers, but they also need

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Speaker 1: to recognize that again, as Steve said, you know rightly,

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Speaker 1: this is not the low interest rate environment. Is it

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Speaker 1: difficult for banks? Yes? Was it caused by policy makers? Know?

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Speaker 1: It is a result a consequence of demographics of savings.

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Speaker 1: These are global phenomena, which is why we have low

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Speaker 1: interest rates throughout the world. So bankers need to also

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Speaker 1: brush up on their macs a little bit and understand

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Speaker 1: why we are where we are. Steve major. I mean,

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Speaker 1: this is such a delicate conversation, as you say, there's

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Speaker 1: a banking alabbya out there. I mean, they've observed negative

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Speaker 1: interest rates in Europe and basically the Anglo Saxon world

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Speaker 1: is saying no, Anglo American world is saying, no, we

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Speaker 1: don't want to do that. Are our mechanisms any better

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Speaker 1: than negative interest rates? Well, you might notice that I

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Speaker 1: worked for a bank, and the concern I have is

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Speaker 1: that the central banks do not set the policy rates

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Speaker 1: so banks can make money and pay bonuses. They set

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Speaker 1: policy rates for the real economy. So that's why there's

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Speaker 1: that tension there. Obviously, negative rates and very flat curves

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Speaker 1: are not very good for banks, but everyone knows that.

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Speaker 1: Um so, so the alternative so interesting, and that's why

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Speaker 1: the market has moved on to start debating about yield

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Speaker 1: curve control. As we've seen in Japan. We've had caps

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Speaker 1: in place in the US throughout history. People will remember

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Speaker 1: financial repression from war, bonds and consoles in the UK,

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Speaker 1: so people are thinking along these lines. Um I think

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Speaker 1: QUE is not an obvious next step either, because the

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Speaker 1: more central banks do QUE, the more pressure they put

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Speaker 1: on the banking system. Because of the reserves that are

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Speaker 1: created and that and that's quite unproductive for banks. So

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Speaker 1: so I think the next step needs to be a

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Speaker 1: little bit more creative. And that's why over the years

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Speaker 1: people have started to talk about all these alternative policies

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Speaker 1: and and you know, helicopter money has been suggested, etcetera.

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Speaker 1: I was going to ask you about that, Stephen, what

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Speaker 1: would it take for the FED to use helicopter money

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Speaker 1: or any other central bank? Actually, well, we know back

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Speaker 1: in yeah, we're back in two thousand and sixteen, we

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Speaker 1: wrote papers about this and it was that it was

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Speaker 1: at the time what we called the elephant in the

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Speaker 1: room that and in fact it was wrong. We we

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Speaker 1: got completely wrong sided. And there is a danger sometimes

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Speaker 1: people like me could get too gloomy. I am actually

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Speaker 1: worried that in two thousand and twenty we might be

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Speaker 1: on the verge of some kind of paradigm shift and

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Speaker 1: so more of a secular kind of shift. And and

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Speaker 1: that's a big worry because you don't know it's happened

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Speaker 1: until afterwards. So helicopter money, in its various guys has

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Speaker 1: shown some except it has been shown around the world.

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Speaker 1: In Hong Kong, something similar was tried recently. Although it

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Speaker 1: was funded out of reserves, it was funded, so it

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Speaker 1: wasn't the purest form. But but you know, there are

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Speaker 1: many proposals that have been around for a few years

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Speaker 1: and I think that we'll see them try it. You go,

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Speaker 1: I'm loving this conversation, folks. Steve Major where this is HSBC,

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Speaker 1: and Philip hilden Brand of Black Rock as well. Dr

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Speaker 1: hilder Brand, let me go to you on the paradigm

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Speaker 1: shift which is called Japanification. How close are we to

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Speaker 1: UM exporting Japanification and importing it into Europe and for

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Speaker 1: that matter, into America. Is it a paradigm shift where

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Speaker 1: we become like Japan. Well, we're about to see the

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Speaker 1: cb UM is redoing their projections, the economic projections that

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Speaker 1: you know, I'm sure some of them, as they work

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Speaker 1: through them in the next governing Council will imply or

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Speaker 1: suggest that we are going to go back to recession

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Speaker 1: or environment. So the reality is the escape out of

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Speaker 1: this uh low interest rate environment, the escape out of

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Speaker 1: zero rates, you know, has not happened. There was some

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Speaker 1: hope early in the year that we could be set

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Speaker 1: up for it, but certainly with this sharp and potentially

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Speaker 1: deep in pact of the coronavirus. I think that story

429
00:24:02,440 --> 00:24:04,919
Speaker 1: is over. We all need to reassess, and so do

430
00:24:05,040 --> 00:24:08,000
Speaker 1: central banks. I don't think you can throw up your

431
00:24:08,040 --> 00:24:09,840
Speaker 1: hands and say that's just the way it's going to be.

432
00:24:10,520 --> 00:24:12,440
Speaker 1: We need to learn from history. We need to think

433
00:24:12,440 --> 00:24:16,720
Speaker 1: about creative ways to respond, and most importantly, we need

434
00:24:16,800 --> 00:24:20,399
Speaker 1: this aggressive and coordinated response. I think you know Step

435
00:24:20,480 --> 00:24:22,440
Speaker 1: is right to point out to some of the flaws,

436
00:24:22,960 --> 00:24:26,160
Speaker 1: deep flaws around the sort of purest form of helicopter money.

437
00:24:26,240 --> 00:24:28,720
Speaker 1: Certainly that is not where we want to go. But

438
00:24:28,800 --> 00:24:30,720
Speaker 1: I do think what we need to have is a

439
00:24:30,760 --> 00:24:34,600
Speaker 1: way to basically for fiscal policy to work directly to

440
00:24:34,760 --> 00:24:38,679
Speaker 1: consumers and households. That is the key right now in

441
00:24:38,720 --> 00:24:41,960
Speaker 1: this in this sort of natural disaster paradigm, because if

442
00:24:41,960 --> 00:24:44,679
Speaker 1: you don't have that, just to hope that it somehow

443
00:24:44,720 --> 00:24:48,360
Speaker 1: works through the financial system isn't gonna work. Samese. If

444
00:24:48,359 --> 00:24:50,760
Speaker 1: they can't pay their rent because they have no customers,

445
00:24:51,520 --> 00:24:53,960
Speaker 1: there's no place to go for them in the capital markets.

446
00:24:54,440 --> 00:24:57,080
Speaker 1: We have to be realistic. The only way a good

447
00:24:57,080 --> 00:25:00,560
Speaker 1: business can survive if the customers has certainly gone suddenly gone,

448
00:25:00,600 --> 00:25:03,120
Speaker 1: because they can come to the store is if they

449
00:25:03,160 --> 00:25:06,480
Speaker 1: get direct financial support. When you talk about decisive policy

450
00:25:06,520 --> 00:25:09,119
Speaker 1: action now, is in the next two weeks or is

451
00:25:09,160 --> 00:25:12,680
Speaker 1: it a month? I mean the timeline seems very crucial here. Yeah,

452
00:25:12,720 --> 00:25:15,000
Speaker 1: I think it has to step up or you know,

453
00:25:15,040 --> 00:25:17,960
Speaker 1: it has to begin immediately. Look, I'm not a medical expert,

454
00:25:17,960 --> 00:25:20,840
Speaker 1: but most of the medical expertise that I read and

455
00:25:20,880 --> 00:25:23,080
Speaker 1: studies suggest that this is going to be with us

456
00:25:23,119 --> 00:25:27,439
Speaker 1: for some time measured in months, not weeks. So I

457
00:25:27,480 --> 00:25:31,600
Speaker 1: think it's it's a matter of sustained support for some time,

458
00:25:31,720 --> 00:25:35,240
Speaker 1: and if we do that, this will prove to be temporary.

459
00:25:35,400 --> 00:25:37,359
Speaker 1: I think that's the key. You know. One of the

460
00:25:37,359 --> 00:25:39,520
Speaker 1: things I learned in the crisis, and Tim Guydner was

461
00:25:39,560 --> 00:25:42,159
Speaker 1: a great advocate of this, don't ever assume when you

462
00:25:42,200 --> 00:25:44,840
Speaker 1: have a problem that everything else stays the same. This

463
00:25:44,920 --> 00:25:47,480
Speaker 1: is where government action comes in and can make a difference.

464
00:25:47,480 --> 00:25:50,280
Speaker 1: So if we want this to be temporary, which by

465
00:25:50,359 --> 00:25:53,440
Speaker 1: nature it should be, provided we have the right response

466
00:25:53,440 --> 00:25:57,000
Speaker 1: on the medical side, then we need aggressive and bold

467
00:25:57,200 --> 00:26:01,639
Speaker 1: direct support through the fiscal channel, and monitored policy can

468
00:26:01,720 --> 00:26:04,520
Speaker 1: can be a piece of a coordinated approach, but it's

469
00:26:04,520 --> 00:26:08,879
Speaker 1: a limited piece by definition, because a it's exhausted or

470
00:26:09,000 --> 00:26:12,639
Speaker 1: nearly exhausted, and B it's really not per se the

471
00:26:12,760 --> 00:26:15,840
Speaker 1: right the right way to to deal with the natural disaster,

472
00:26:16,800 --> 00:26:19,320
Speaker 1: which is what this effectively is. Phil Thanks so much,

473
00:26:19,359 --> 00:26:22,040
Speaker 1: philipill the brand of Black Rock. Stephen Major of HSBC,

474
00:26:31,920 --> 00:26:34,119
Speaker 1: You're not Meridith Sumpter does. It's great she brings in

475
00:26:34,200 --> 00:26:37,560
Speaker 1: the Chinese headlines. I know when you asked single time

476
00:26:37,680 --> 00:26:40,359
Speaker 1: to do that and she killed it. It's a really

477
00:26:40,359 --> 00:26:42,639
Speaker 1: different view from Washington. You write a group head of

478
00:26:42,720 --> 00:26:45,359
Speaker 1: research strategy, Meredith Saves. So great to have you with

479
00:26:45,440 --> 00:26:47,720
Speaker 1: us on the phone. Let's just start with a pretty

480
00:26:47,720 --> 00:26:50,679
Speaker 1: simple question. President Shakes turning up in Wuhan, is that

481
00:26:50,760 --> 00:26:54,240
Speaker 1: just a p our event. It's not just a pr

482
00:26:54,359 --> 00:26:58,480
Speaker 1: event for the external audience. It's also a leadership event

483
00:26:58,560 --> 00:27:02,199
Speaker 1: for the domestic audience as well. This is she trying

484
00:27:02,200 --> 00:27:07,760
Speaker 1: to own the crisis and putting an underscore below his

485
00:27:07,880 --> 00:27:11,320
Speaker 1: view that this is the ultimate test of not only

486
00:27:11,359 --> 00:27:17,199
Speaker 1: his leadership ability, but of the Communist Party's governance ability.

487
00:27:17,800 --> 00:27:22,080
Speaker 1: He's responding to what was criticism with his handling of

488
00:27:22,119 --> 00:27:25,600
Speaker 1: the virus early on and not showing up when his

489
00:27:25,720 --> 00:27:28,800
Speaker 1: premier Lee Ka Chong did so this is in part

490
00:27:29,480 --> 00:27:35,800
Speaker 1: to boost his domestic standing and try to boost fragile

491
00:27:35,840 --> 00:27:40,240
Speaker 1: confidence at home that China might be getting ahead of

492
00:27:40,320 --> 00:27:42,679
Speaker 1: where the virus is going there. Meredith, can we just

493
00:27:42,720 --> 00:27:45,439
Speaker 1: take a step back away from just the progression of

494
00:27:45,440 --> 00:27:47,600
Speaker 1: the virus? Will it come back? Won't it come back?

495
00:27:47,960 --> 00:27:50,720
Speaker 1: And get a sense of how damaging the one to

496
00:27:50,880 --> 00:27:53,080
Speaker 1: punch to China is Right now, the idea that the

497
00:27:53,119 --> 00:27:57,399
Speaker 1: supply chains got uh disrupted completely by the shutdown of

498
00:27:57,440 --> 00:28:00,800
Speaker 1: the Hubei district, but then also now have a slow

499
00:28:00,840 --> 00:28:03,320
Speaker 1: down and global growth as Italy shuts down in a

500
00:28:03,320 --> 00:28:08,160
Speaker 1: growing number of nations quarantine entire sections of their countries.

501
00:28:08,680 --> 00:28:11,320
Speaker 1: How difficult will it be for trying to recover from this.

502
00:28:11,880 --> 00:28:14,680
Speaker 1: It's going to be incredibly difficult. But I think what

503
00:28:14,680 --> 00:28:18,640
Speaker 1: what what's key here is not so much the Communist

504
00:28:18,640 --> 00:28:21,960
Speaker 1: Party leadership. They're not as concerned about how they're necessarily

505
00:28:21,960 --> 00:28:26,240
Speaker 1: going to recover. They're still much more focused on containing

506
00:28:26,359 --> 00:28:29,959
Speaker 1: new outbreaks, and so the political priorities there is not

507
00:28:30,640 --> 00:28:33,680
Speaker 1: let's restart the economy quickly. It's more so, let's make

508
00:28:33,680 --> 00:28:36,320
Speaker 1: sure that we are on top of containment, and if

509
00:28:36,359 --> 00:28:40,080
Speaker 1: that means a much slower recovery period will deal with that.

510
00:28:41,160 --> 00:28:43,320
Speaker 1: Is that really the case, because actually some people are

511
00:28:43,360 --> 00:28:46,160
Speaker 1: saying one concern is they're going to ramp up factories,

512
00:28:46,520 --> 00:28:49,520
Speaker 1: uh too quickly that it will reignite another spread. Is

513
00:28:49,560 --> 00:28:52,160
Speaker 1: that is that a false narrative? No? No, I think

514
00:28:52,200 --> 00:28:54,840
Speaker 1: that's actually that's quite an accurate narrative. And I think

515
00:28:54,840 --> 00:28:58,360
Speaker 1: that the Communist Party leadership as well as local leaders

516
00:28:58,800 --> 00:29:02,440
Speaker 1: are quite nervous out the opening of factories and about

517
00:29:02,600 --> 00:29:05,280
Speaker 1: the spread of workers across countries. They want to get

518
00:29:05,280 --> 00:29:09,120
Speaker 1: ahead of new outbreaks that could that that could throw

519
00:29:09,160 --> 00:29:13,800
Speaker 1: off their ability to to well manage the crisis Emeritithumter,

520
00:29:14,200 --> 00:29:16,800
Speaker 1: the President stunned the world and took away the tariffs,

521
00:29:16,840 --> 00:29:20,720
Speaker 1: looking for a bilateral approach there from the Chinese as well.

522
00:29:20,720 --> 00:29:23,840
Speaker 1: What would be the effect on the economies? Not as

523
00:29:23,880 --> 00:29:26,680
Speaker 1: great as an effect as both leaders would like. And

524
00:29:26,680 --> 00:29:29,600
Speaker 1: and frankly, look, and this is we have the world's

525
00:29:29,640 --> 00:29:32,800
Speaker 1: too largest economies that are increasingly at the center of

526
00:29:32,840 --> 00:29:36,200
Speaker 1: this global disruption. But it's much bigger than just the

527
00:29:36,320 --> 00:29:39,640
Speaker 1: US and China. And look, we we've had global crisis before,

528
00:29:40,080 --> 00:29:43,160
Speaker 1: but this time it's different. This is not what we

529
00:29:43,200 --> 00:29:46,200
Speaker 1: saw in with the committee to save the world from

530
00:29:46,200 --> 00:29:48,760
Speaker 1: the Asian financial crisis. Nor is it two thousand eight

531
00:29:49,160 --> 00:29:53,400
Speaker 1: where we saw significant coordinated action across core economies to

532
00:29:53,520 --> 00:29:57,080
Speaker 1: save off the absolute worst of that global financial crisis.

533
00:29:57,560 --> 00:30:01,800
Speaker 1: What is marking the global response is more so a

534
00:30:01,880 --> 00:30:06,240
Speaker 1: lack of meaningful coordination amongst global leadership at the very

535
00:30:06,280 --> 00:30:08,280
Speaker 1: top to get ahead of where we are, to get

536
00:30:08,280 --> 00:30:10,720
Speaker 1: ahead of the crisis from both a health and a

537
00:30:10,840 --> 00:30:14,160
Speaker 1: market standpoint. And this is really resulting in a lower

538
00:30:14,280 --> 00:30:18,080
Speaker 1: confidence by the public and by investors in the global

539
00:30:18,160 --> 00:30:22,320
Speaker 1: leader's ability UH to stave off further spread of the

540
00:30:22,400 --> 00:30:25,400
Speaker 1: virus and its related economic and growth cost Well, not

541
00:30:25,600 --> 00:30:27,520
Speaker 1: if there's reasons not to have that confidence. I mean,

542
00:30:27,560 --> 00:30:29,720
Speaker 1: I look at the situation in China right now. There's

543
00:30:29,720 --> 00:30:32,160
Speaker 1: some people who think the w h O are afraid

544
00:30:32,240 --> 00:30:35,480
Speaker 1: of criticizing China publicly because they might lose access to China.

545
00:30:35,880 --> 00:30:39,120
Speaker 1: There are some people who think economists are basically high

546
00:30:39,160 --> 00:30:42,479
Speaker 1: bowling their estimates for the economy because they're afraid of

547
00:30:42,520 --> 00:30:44,959
Speaker 1: losing access to China. Just how much of a problem

548
00:30:45,000 --> 00:30:50,120
Speaker 1: is that Transparency has been a core of of the

549
00:30:50,320 --> 00:30:55,520
Speaker 1: complications of understanding the severity of the crisis in China.

550
00:30:56,000 --> 00:30:58,960
Speaker 1: And it's caused that country to be back footed and

551
00:30:59,040 --> 00:31:02,160
Speaker 1: its initial handle of the spread of the virus. I

552
00:31:02,200 --> 00:31:04,960
Speaker 1: think also, though, what's really at play here is is

553
00:31:05,000 --> 00:31:07,800
Speaker 1: not just what's happening in China, but you you really

554
00:31:07,880 --> 00:31:10,240
Speaker 1: hit the nail on the head, Jonathan. You have a

555
00:31:10,400 --> 00:31:13,960
Speaker 1: w h O in a fragmented global environment that is

556
00:31:14,000 --> 00:31:17,120
Speaker 1: playing much more of a guiding role. It is not

557
00:31:17,280 --> 00:31:21,240
Speaker 1: as authoritative as one would think for an international body

558
00:31:21,320 --> 00:31:24,440
Speaker 1: that is trying to direct country governments to make the

559
00:31:24,520 --> 00:31:27,840
Speaker 1: right choices, to do the right things that would that

560
00:31:27,880 --> 00:31:31,480
Speaker 1: would be able to enable this public health crisis to

561
00:31:31,560 --> 00:31:34,800
Speaker 1: abate faster than it is. And the result is we

562
00:31:34,840 --> 00:31:38,800
Speaker 1: have a scattershot approach of how country governments are trying

563
00:31:38,800 --> 00:31:41,600
Speaker 1: to deal with the crisis, and that's resulting a lot

564
00:31:41,600 --> 00:31:44,960
Speaker 1: of confusion. It's resulting in a lot of inefficiencies, and

565
00:31:45,040 --> 00:31:49,520
Speaker 1: it's essentially elongating uh the spread of the virus and

566
00:31:49,560 --> 00:31:54,840
Speaker 1: the related economic crisis that we're dealing with. Meredith thanking

567
00:31:54,880 --> 00:31:56,720
Speaker 1: there in China, and of course it redounds back to

568
00:31:56,800 --> 00:32:12,000
Speaker 1: Washington's a Bacheli's japes. Satage General's head of US Right Strategy.

569
00:32:12,320 --> 00:32:14,800
Speaker 1: She joins US now so Batric Great to catch up

570
00:32:14,800 --> 00:32:18,040
Speaker 1: with you treasury yields while through some aggressive targets that

571
00:32:18,080 --> 00:32:20,040
Speaker 1: you started at the start of the year. Where are

572
00:32:20,080 --> 00:32:22,520
Speaker 1: you now? UM? I think EF have made a very

573
00:32:22,520 --> 00:32:25,200
Speaker 1: good point, which is it's really hard to sort of

574
00:32:25,200 --> 00:32:28,000
Speaker 1: look at this market from a fundamental perspective. Yes, we

575
00:32:28,040 --> 00:32:31,200
Speaker 1: had a massive rally yesterday. We're giving up some of

576
00:32:31,240 --> 00:32:34,560
Speaker 1: those games today. But it's really hard to look at

577
00:32:34,640 --> 00:32:38,280
Speaker 1: deals and say and sort of affirmatively say where things

578
00:32:38,320 --> 00:32:41,400
Speaker 1: should trade. What the bond market is now pricing in

579
00:32:42,200 --> 00:32:45,560
Speaker 1: is for zero interest rate policy and looking past that,

580
00:32:45,720 --> 00:32:49,680
Speaker 1: the potential for quantity of easing or forward guidance or

581
00:32:49,760 --> 00:32:54,320
Speaker 1: more extraordinary measures coming from the Federal Reserve. So any

582
00:32:54,440 --> 00:33:00,680
Speaker 1: volatility in risky assets translating to games in the bond market.

583
00:33:00,960 --> 00:33:04,960
Speaker 1: The great call you've had, combined with the suck gen caution,

584
00:33:05,880 --> 00:33:10,200
Speaker 1: calls for an important reassessment right now. Have you brought

585
00:33:10,280 --> 00:33:14,800
Speaker 1: in your house call on disinflation and sluggish real GDP growth?

586
00:33:15,200 --> 00:33:20,440
Speaker 1: Have you brought that in evermore so? UM? Again, if

587
00:33:20,880 --> 00:33:24,640
Speaker 1: the move in a break even seems like it's again

588
00:33:24,680 --> 00:33:26,880
Speaker 1: a little bit too over them, But it's really hard

589
00:33:26,920 --> 00:33:31,520
Speaker 1: to know. If we start seeing UM oil prices declined

590
00:33:31,560 --> 00:33:34,160
Speaker 1: to new loads or below thirty, you'll start you're talking

591
00:33:34,160 --> 00:33:38,280
Speaker 1: about more of a financial stability risk. Break evens below

592
00:33:38,320 --> 00:33:41,440
Speaker 1: a hundred is very troubling. Um, I'm sure the set

593
00:33:41,480 --> 00:33:45,440
Speaker 1: is being very close attention to that. But broadly speaking,

594
00:33:45,560 --> 00:33:48,600
Speaker 1: what the bond markets are reaffirming is our call for

595
00:33:48,640 --> 00:33:51,760
Speaker 1: a recession this year. And now this is not just

596
00:33:52,120 --> 00:33:55,200
Speaker 1: a US reception. It's looking more like a global recession

597
00:33:55,800 --> 00:33:58,560
Speaker 1: and a global decline in in in bond yields. So

598
00:33:59,720 --> 00:34:02,880
Speaker 1: the the policy prescription has to come from sort of

599
00:34:03,640 --> 00:34:06,560
Speaker 1: coordinated action globally. I'm looking at the moving every study

600
00:34:06,640 --> 00:34:09,080
Speaker 1: to break evens at least, it's real simple. Yeah, break

601
00:34:09,120 --> 00:34:12,960
Speaker 1: evens a spiked down to indicate significant disinflation guestiment. These

602
00:34:12,960 --> 00:34:16,000
Speaker 1: are tenure break evens. But on a moving every study,

603
00:34:16,239 --> 00:34:19,799
Speaker 1: the vector has been disinflation since two thousand thirteen. Yeah.

604
00:34:19,840 --> 00:34:22,280
Speaker 1: And the implication here is that, yes, the federal reserve

605
00:34:22,320 --> 00:34:24,200
Speaker 1: is going to drop to zero and it's not gonna matter.

606
00:34:24,280 --> 00:34:26,440
Speaker 1: That They're gonna try to go as as low as

607
00:34:26,440 --> 00:34:29,600
Speaker 1: they can go, at least out within modern history, and

608
00:34:29,719 --> 00:34:32,800
Speaker 1: it's not gonna work. I'm just wondering what that means

609
00:34:33,040 --> 00:34:35,880
Speaker 1: for treasuries as an asset class going forward. JP Morgan's

610
00:34:35,920 --> 00:34:39,040
Speaker 1: Bob Michael came on with US yesterday yesterday afternoon and

611
00:34:39,080 --> 00:34:42,400
Speaker 1: said that frankly, treasuries will not act as a haven

612
00:34:42,440 --> 00:34:45,960
Speaker 1: asset class going forward just because we've reached a certain

613
00:34:46,040 --> 00:34:50,320
Speaker 1: lower bound for the time being. Do you agree? Um?

614
00:34:50,440 --> 00:34:52,200
Speaker 1: I agree with that view, And I think that that's

615
00:34:52,200 --> 00:34:54,600
Speaker 1: really the risk, right, is that you're starting to see

616
00:34:54,600 --> 00:34:58,799
Speaker 1: a gradual Japanification of the U S curve. So you know,

617
00:34:58,840 --> 00:35:01,360
Speaker 1: once you start getting closer and closer to the to

618
00:35:01,480 --> 00:35:03,879
Speaker 1: the zero lower bound, it's going to be very, very

619
00:35:03,960 --> 00:35:06,840
Speaker 1: hard for treasuries to actually act as that safety of

620
00:35:06,880 --> 00:35:10,839
Speaker 1: an asset. It's uh, you know, and that's ultimately the risk.

621
00:35:10,920 --> 00:35:13,120
Speaker 1: And and as you point out earlier, I think the

622
00:35:14,160 --> 00:35:17,560
Speaker 1: fact that central banks um easing even back to the

623
00:35:17,640 --> 00:35:19,439
Speaker 1: zero lower bound is not going to do a lot

624
00:35:19,560 --> 00:35:24,000
Speaker 1: for inflation expectations is also troubling. I mean, the trajectory

625
00:35:24,040 --> 00:35:27,960
Speaker 1: for inflation globally, not just in the US and US actually,

626
00:35:28,120 --> 00:35:31,320
Speaker 1: you know, CPI has held up pretty well even in

627
00:35:31,360 --> 00:35:33,880
Speaker 1: the last couple of years, but it's the global inflation

628
00:35:33,920 --> 00:35:38,239
Speaker 1: picture that's been dragging US inflation expectations lower. And it's

629
00:35:38,560 --> 00:35:41,200
Speaker 1: not clear that policy can do a whole lot to

630
00:35:41,400 --> 00:35:44,480
Speaker 1: reverse that. BAA fantastic to catch up with your Sabata's

631
00:35:44,520 --> 00:35:47,840
Speaker 1: jappest Stage General's head of US right Strategy calling for

632
00:35:48,000 --> 00:35:49,680
Speaker 1: much lower yill to the start of the year, and

633
00:35:49,760 --> 00:35:53,040
Speaker 1: wow it she turned out to be right. Thanks for

634
00:35:53,160 --> 00:35:57,520
Speaker 1: listening to the Bloomberg Surveillance podcast. Subscribe and listen to

635
00:35:57,719 --> 00:36:02,800
Speaker 1: interviews on Apple Podcasts, st Cloud, or whichever podcast platform

636
00:36:02,880 --> 00:36:07,160
Speaker 1: you prefer. I'm on Twitter at Tom Keene before the podcast.

637
00:36:07,280 --> 00:36:10,760
Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio