Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Lee.
Speaker 1: We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. Joining
Speaker 1: us now, Mike Wilson, markin Stanley, chief US equity strategist,
Speaker 1: joining us on the fun fantastic to have Michael with us.
Speaker 1: Might let me just begin with a line of yours
Speaker 1: that comes from your team and your research. COVID nineteen
Speaker 1: may simply be the accelerant for a cycle that was
Speaker 1: already on its way to ending your thoughts, Mike, Yeah,
Speaker 1: I think that's you know, our main message over the
Speaker 1: past month actually is that we actually think that this
Speaker 1: correction we're going through now is just a continuation of
Speaker 1: the correction that really began almost two years ago. Okay,
Speaker 1: and you guys are familiar with our work on the
Speaker 1: rolling bear market, the consolidation call, and quite frankly, the
Speaker 1: fourth quarter of last year was a false breakout that
Speaker 1: was orchestrated by extraordinary liquidity. And sure, the fundamentals we're
Speaker 1: trying to bottom. But as you all know, and you know,
Speaker 1: we wrote about it, a lot of other people wrote
Speaker 1: about it. You know, the market's got way ahead of
Speaker 1: the fundamental recovery that was apparent, and so it was
Speaker 1: a liquidity driven rally in the fourth quarter. And that's fine,
Speaker 1: and you know that trapped a lot of people, including
Speaker 1: us to some degree. And you know, now we're back
Speaker 1: to reality, which is that the cycle was already moving
Speaker 1: in this direction and it all you know, this is
Speaker 1: the way, this is the way recessions happened, right you.
Speaker 1: You have a host of headwinds and I'll just go
Speaker 1: through a few of them. We had the margin pressure,
Speaker 1: you know, from the fiscal stimulus, and that's been that's
Speaker 1: been the crux of our call for the last two years,
Speaker 1: is that we're actually still in an earnings recession in
Speaker 1: the US for the average company. The second one was
Speaker 1: the tariffs, which are still in place. By the way,
Speaker 1: they haven't really gone away. They've just been, you know,
Speaker 1: not getting worse. Of course, we had a federal reserve
Speaker 1: that you know, went the distance on tightening two years ago.
Speaker 1: They did a tremendous amount of tightening via both the
Speaker 1: balance sheet and rates, and that works with about a
Speaker 1: two year lag, and so we're kind of right back
Speaker 1: on schedule. And and but nobody ever knows what the
Speaker 1: event is going to be. That kind of pushes you over.
Speaker 1: But to look at the virus, or quite frankly, the
Speaker 1: price war in in oil markets, which is I think
Speaker 1: even a bigger deal potentially for credit markets. You take
Speaker 1: the two of those together, and you know, in conjunction
Speaker 1: with what's already a headwind for you know, in the
Speaker 1: global economy and the US economy, and you have the
Speaker 1: recipe for just finishing the cycle. And I think markets
Speaker 1: have appropriately started to discount down and we've done a
Speaker 1: lot of damage in the last month. I mean stocks
Speaker 1: were down overnight, you know, from p to trough. So
Speaker 1: we're there and we're in a process of doing that.
Speaker 1: And so today we're having a giant rally hopes for
Speaker 1: fiscal Eton. This is how bottoms are made. It will
Speaker 1: all happen on one day. It's gonna take you know,
Speaker 1: it's gonna take time, you know. And by the way,
Speaker 1: you know, policymakers, this is exactly what they typically do.
Speaker 1: They throw out a suggestion to the market and say, hey,
Speaker 1: how about you know, a fifty basist going emergency cut,
Speaker 1: the market doesn't like it, Oh, how about this? How
Speaker 1: about that? And then eventually, you know, we find a
Speaker 1: level that you know, supports where we are. So Mike
Speaker 1: Lease is gonna want to ask you about credit and
Speaker 1: just the moment, I want to understand from your perspective,
Speaker 1: is there not a fiscal response that could be unvowed
Speaker 1: today that would be sufficient in your rise to extend
Speaker 1: this cycle. I don't think we can extend. I think
Speaker 1: we have to get away from this idea about extending
Speaker 1: the cycle and let's talk about how do we now
Speaker 1: deal with the downturn and protect the next cycle. Okay,
Speaker 1: that's that's that's my mindset. And we don't know, we
Speaker 1: don't know if we're gonna have a recession right now,
Speaker 1: but good grief, I mean every cater we look at
Speaker 1: suggests that's what the market expects at this point. I mean,
Speaker 1: that's what the bond market has been telling us for
Speaker 1: quite frankly, for two years. And then this extraordinary move
Speaker 1: we've seen in the last month, which exceeded anything in
Speaker 1: our dreams in terms of how low we would go.
Speaker 1: I mean, I think it's you know, I think the
Speaker 1: markets have basically spoken, and and so now policy choices
Speaker 1: should be about how do we make sure we don't
Speaker 1: get stuck, okay, in a trap where you know, we
Speaker 1: end up with rate at these levels in perpetuity and
Speaker 1: you know we're in a situation where the US looks
Speaker 1: like Japan Europe. That's not our view, by the way,
Speaker 1: we don't think that we are going to end up
Speaker 1: in that situation. But you know, that's what policymakers should
Speaker 1: be thinking about. How do we how do we kind
Speaker 1: of get the next cycle going. What's the investor playbook
Speaker 1: given the fact that there is a lot of uncertainty
Speaker 1: about what this bottom will look like, and given the
Speaker 1: fact that we're going to get some policy response, I
Speaker 1: think the mark well, first of all, the play our
Speaker 1: playbook has been to be much more defensively oriented. You
Speaker 1: are in our sector preferences, right, So we've been playing
Speaker 1: for this now for almost two years. We've we've been
Speaker 1: over what utilities and staples because those are always the
Speaker 1: sectors that do well at the end of a cycle.
Speaker 1: I mean clearly, things like software and technology that are
Speaker 1: defensive that they've done really well too, because they're they're
Speaker 1: geared to lower interest rates and there's somewhat defensive business models,
Speaker 1: so it doesn't have to be pure defense. But my
Speaker 1: point is is that the playbook has been to be
Speaker 1: more defensively oriented in your positioning, whether it be long
Speaker 1: duration or long defensively oriented sectors away from cyclical areas.
Speaker 1: And I would argue we're in the eighth inning of that.
Speaker 1: I mean, this has been going on now for a
Speaker 1: long time. So the playbook now is to think about
Speaker 1: when do I want to play for the next cycle
Speaker 1: and get more cyclically geared, and that would be things
Speaker 1: like you know, consumer discretionary and banks and materials and
Speaker 1: early cycle sectors. I think it's premature to do that.
Speaker 1: We're getting closer. I'm like going to catch up with
Speaker 1: this morning, busy morning on now for the whole team
Speaker 1: over at Morgan Stanley. We appreciate your time. Morgan Stanley's
Speaker 1: Mike Wilson, that chief US equity strategistic Who do you
Speaker 1: turn to in a given crisis like this when you
Speaker 1: look at the different shocks that we've seen, And one
Speaker 1: would be a gentleman who re affirmed a style of
Speaker 1: writing linking history and in this case in the hydro
Speaker 1: carbons and that of course is Daniel Jorgan's surprize that
Speaker 1: in itself was extraordinary. Far more important was only seven
Speaker 1: years later he followed up with The Commanding Heights, which
Speaker 1: is a definitive look at how we have vaulted from
Speaker 1: World War Two forward in our capitalism. We're thrilled that
Speaker 1: Daniel Jorgan could join us today with I H S
Speaker 1: as well. Dr Jorgina, thank you so much for finding
Speaker 1: time with us. Is this a set of crises that
Speaker 1: we get over, like the end of a IRUs or
Speaker 1: Russia and Saudi Arabia meeting together to get to a
Speaker 1: more stable oil price, or do you send some permanence
Speaker 1: in our in our lives due to the set of crises.
Speaker 1: I think that it's a that at some point you
Speaker 1: can imagine the Russians and the Saudis getting together again.
Speaker 1: But right now this is a grudge match that's going
Speaker 1: on between the two countries. The Saudis of price cut
Speaker 1: their prices and oil particularly aimed at the Russia's market
Speaker 1: in Northwest Europe. So it's really two shocks at the
Speaker 1: same time. One is an unprecedented demand shock resulting from
Speaker 1: the virus, and then it's this declaration of battle for
Speaker 1: market share, and we've had those before, but we've never
Speaker 1: had this together. Is the OPEC imperium over is you
Speaker 1: wrote of in the prize twenty nine years ago? Is
Speaker 1: the cartel broken? Well? I think I mean, at the
Speaker 1: end of the day, it's what a few countries want
Speaker 1: to do and whether how they want to use it.
Speaker 1: And I think the fact that they recognize that they
Speaker 1: needed to create this OPEC plus make a deal with
Speaker 1: Russia tells you how the world has changed right now.
Speaker 1: It's really instead of the OPEC imperiments the Big three,
Speaker 1: it's what happens to Saudi Arabia, Russia, and what happens
Speaker 1: to the world's largest oil producer, which is the United
Speaker 1: States down I'm sure you've lost count the amount of
Speaker 1: times over the last few decades that we've declared the
Speaker 1: death of OPEC, but we seem to be doing it again. Shale, though,
Speaker 1: is a game changer. I'm trying to understand where the
Speaker 1: greatest tension is right now. Is it between Saudi Arabia
Speaker 1: and Russia or between those two countries and US Shale.
Speaker 1: I think it's one for Saudi Arabia. It's between Saudi
Speaker 1: Arabia and Russia, right now, I think the Russians have
Speaker 1: their sights on US shale because of the tremendous growth,
Speaker 1: losing market share to it, and I think that they
Speaker 1: see the US now using its muscle energy and want
Speaker 1: to counteract ave. So the Russians have always over the
Speaker 1: last several years been more alarmed by the growth of shale.
Speaker 1: It seemed to me that the Saudis had d of
Speaker 1: accommodated themselves to this is the new reality. I'm just wondering, Dan,
Speaker 1: going forward, does this ultimately destroy demand for oil or
Speaker 1: actually increased demand for oil? And I asked, because people
Speaker 1: were talking about peak oil demand in the next decade
Speaker 1: as renewable start to gain online, and does this actually
Speaker 1: give oil a longer shelf life because it's cheaper. Well,
Speaker 1: I think it Normally would say that this would mean
Speaker 1: that demand, you know, you get prices like this, demand
Speaker 1: should really go up. That's what we've seen before. I
Speaker 1: think the difference here is the virus. I mean, what
Speaker 1: started this whole thing was this unprecedented demand shock. In
Speaker 1: the first quarter of this year, we think oil demand
Speaker 1: is almost four million barrels a day lower than it
Speaker 1: was in the same quarter last year, and that that
Speaker 1: that is going to continue. And you know, we see
Speaker 1: the markets responding very positively as you've been talking this
Speaker 1: morning to the talks of the stimulus coming out of Washington.
Speaker 1: But keep in mind, and this is what really weighs
Speaker 1: in my mind. You have low gasoline prices, they don't
Speaker 1: really matter if schools are closed, if you've canceled your
Speaker 1: next two trips and you're working from home, you're not
Speaker 1: going to see that up uptick in demand. And so
Speaker 1: I think when the Russians, in particular, we're looking at
Speaker 1: the market, they were seeing this virus spreading across North
Speaker 1: America and across Europe and demand continuing to be week
Speaker 1: going in at least going into the beginning of the summer.
Speaker 1: So that's what's different I think about this time. And normally,
Speaker 1: normally a prices like this would be great for demand
Speaker 1: and it would be a stimulus to the economy, but
Speaker 1: not with the other things that are going on right now.
Speaker 1: But Dan just sort of pushing it forward longer term.
Speaker 1: Is there any longer lasting implication for oil? Is sort
Speaker 1: of the benchmark use of for energy going forward from
Speaker 1: this coronavirus plus war between Saudi Arabia and Russia. Well,
Speaker 1: I think that going to your your question, I mean
Speaker 1: we still see demand continuing to grow into the twenty
Speaker 1: surgies in oil, which I know is not what other
Speaker 1: people see. But looking at population grows an economic growth,
Speaker 1: I think that, um, you know this, this pandemic, when
Speaker 1: let's call it what it is, a pandemic, will end
Speaker 1: and it probably ends around you know, at least you
Speaker 1: hear public health authorities saying maybe somewhere in the second
Speaker 1: or third quarter, at that point you'll see the rebound.
Speaker 1: But when you have a whole country like Italy shut down, uh,
Speaker 1: that is that contributes to the demand shock. People are
Speaker 1: not doing a lot of driving in Italy. Right now,
Speaker 1: we welcome all of you worldwide, including in Italy with us. Daniel,
Speaker 1: you're going to buy us, of course, the author of
Speaker 1: the prize, the quest and also the Commanding Heights. You
Speaker 1: have a brilliant section in the Commanding heightstand you're going
Speaker 1: to where Churchill marches off to Potsdam and marches back
Speaker 1: to massive electoral defeat. I mean the tumult of populism.
Speaker 1: Right now. We have a president today who's going to
Speaker 1: commit fiscal stimulus with his fellow Republicans on the hill.
Speaker 1: I guess, how have we come to a point where
Speaker 1: creating fiscal support to any given nation, any given economy
Speaker 1: is so diff the call that wasn't the case across
Speaker 1: your book the Commanding Heights, And now we have this
Speaker 1: embedded austerity. Where did it come from? Well, I think
Speaker 1: I think it looks like embedded austerity until you look
Speaker 1: at the budget deficits across the around the world and
Speaker 1: uh rate that against GDP. But I think that what
Speaker 1: you're pointing to, I mean, certainly there's you know, we've
Speaker 1: seen a kind of loss of confidence in markets, and
Speaker 1: I think if we pick up on the Commanding Heights,
Speaker 1: we're really seen as a test of of of globalization
Speaker 1: as it's developed. As I wrote about it in Commanding
Speaker 1: Heights and in the in the people talked about decoupling
Speaker 1: from China. We have really discovered from this how coupled
Speaker 1: we are with China, how interconnected this economy is. And
Speaker 1: going to your point, Tom, it's the question of international coordination.
Speaker 1: In two thousand and eight we had a lot of
Speaker 1: very clear international coordination going on. It's harder at the
Speaker 1: time because of the kind of populism and nationalism you're
Speaker 1: talking about, and yet yeah, you need it. This is
Speaker 1: exactly what Philip Hilda ran A black Rock said today,
Speaker 1: John Ferrell. The lack of coordination here is critical. It's
Speaker 1: been a massive problem, and I think OPEC speaks to
Speaker 1: the much broader issue of a lack of coordination in
Speaker 1: the places we expect it at times like this. Dan,
Speaker 1: you've touched on globalization. I think it's critical. This issue
Speaker 1: of national security has been thrown around so much over
Speaker 1: the last few years. But when you start to find
Speaker 1: out just how much you depend on one country to
Speaker 1: supply things like pharmaceutical ingredients, we've got a problem, haven't we, Dan, Well, absolutely,
Speaker 1: I mean we're you know, although we're scrambling to make
Speaker 1: masks here by the way, which are a petrochemical product,
Speaker 1: all those and mass we find out that the bulk
Speaker 1: of them and a lot of medical supplies come from China,
Speaker 1: and I think people didn't realize just how interconnected these
Speaker 1: supply chains are and the stress on them and what's happening.
Speaker 1: Tankers were tens and tens of thousands of containers are
Speaker 1: in the wrong place or their right there's nothing to
Speaker 1: put back in them. So that's where I think this
Speaker 1: is really a test of globalization on top of everything else, Dan,
Speaker 1: You're gonna thank you so much for joining us today,
Speaker 1: Dr Jurgen. Of course with the prize. And even though
Speaker 1: it's twenty nine years old, John No, no, you used
Speaker 1: to walk around on campus because it was cool with
Speaker 1: Da Battis at the time. For our listeners to haven't
Speaker 1: read this book. I mean, if you will take from Amazon,
Speaker 1: it will come in a very very large ball, as
Speaker 1: is the Community Nights as well. Dan, You're gonna of
Speaker 1: course the more modern the quest as well. Philip Bill
Speaker 1: the brand of black Rock, and Stephen Major of HSBC,
Speaker 1: their global head of fixed income research, and Philip, what
Speaker 1: I want to do a show a chart which you know,
Speaker 1: something I've used over the years with Bill Gross and
Speaker 1: frankly I should use it with Steve Major. This is
Speaker 1: one of the great calls of all time. Think Eisenhower
Speaker 1: in the fifties up to the moment of Paul Volker
Speaker 1: and then the great great disinflation and what is so
Speaker 1: true along the way here and credit Sueez to me
Speaker 1: always said Steve Major, the best best idea. Rates are
Speaker 1: gonna go up. Rates are gonna go up. Rates are
Speaker 1: gonna go up. You get you get the theme here.
Speaker 1: Rates are gonna go up, Rates are gonna go up,
Speaker 1: and now we're down here at an imaginable low interest rate,
Speaker 1: something that Stephen Major has absolutely nailed like no other
Speaker 1: strategists at no other house. We're thrilled to Steve Major
Speaker 1: could join us with Dr Hildebrand this morning. Steve Major,
Speaker 1: the cry is out there, rates are gonna go up.
Speaker 1: Why aren't they? Well, the first reason is we can't
Speaker 1: afford them to go up. And part of the explanation
Speaker 1: for low yields over the years has been the excessive debt.
Speaker 1: So it's a question of servicing costs. The the economy,
Speaker 1: both the public and private set to combined, cannot afford
Speaker 1: to have higher rates. The the latest shock in the
Speaker 1: form of the virus as maybe accelerated an inevitable shift
Speaker 1: towards a weakening economy and even a recession. So for
Speaker 1: now rates are stuck close to the zero bound in
Speaker 1: the US and negative elsewhere. At the moment, all we're
Speaker 1: waiting to see is the central banks responding or even
Speaker 1: reacting to what's already happened. That the interest rates are
Speaker 1: an outcome from what's come before. It's not like they're
Speaker 1: actually leading anything within there will be the new disinflation.
Speaker 1: Many people are writing about this demand shark, this supply shark,
Speaker 1: and the idea of an aggregate disinflation. Will we see
Speaker 1: rates drive ever lower? Will we see negative interest rates?
Speaker 1: For example, in the United Kingdom, well, negative rates have
Speaker 1: been evident for the last deck aid in real terms,
Speaker 1: so every big country has had deep negative real rates.
Speaker 1: The US was the outlier in two thousand and eighteen
Speaker 1: with the rate hikes, which now with hindsight looked like
Speaker 1: a massive policy mistake. So negative real rates for the
Speaker 1: last decade has been normal. The UK has had deep
Speaker 1: nominal negative real rates. In Switzerland and Denmark you have
Speaker 1: minus seventy five. I mean the direction of travels quite clear.
Speaker 1: M d CB isn't going to be hiking rates this week,
Speaker 1: is it? Obviously the mover is down. But Stephen, we'll
Speaker 1: get back to that in a second. You know, looking
Speaker 1: at the real yields, you know got negative US on
Speaker 1: the tenure US, but actually is the yield going to
Speaker 1: go negative? It's not the real but just is it
Speaker 1: going to go negative this year? Well, in the US,
Speaker 1: um it looks like there's a strong resistance to negative
Speaker 1: policy rates and negative yields in the UK. Yesterday, we
Speaker 1: know that the market traded negative, but we're a long
Speaker 1: way from negative policy rates. The resistance to negative rates
Speaker 1: is quite strong, and there's a big banking lobby out there,
Speaker 1: and there's the existence of cash that for now is
Speaker 1: a big barrier to go in negative. But never say never,
Speaker 1: maybe for the next cycle. Did you agree with that?
Speaker 1: Who certainly would never say never? Yeuh, that's a that's
Speaker 1: a good dictim I mean, look, from a macro perspective,
Speaker 1: something has to change for rates to change. As steven
Speaker 1: she said, the rates are not low because central banks
Speaker 1: put them there, but because of macro phenomena. So what
Speaker 1: could change. Demographics aren't going to change. Productivity could in
Speaker 1: principle change. You know, we don't fully understand why productivity
Speaker 1: has been solo. So we could see at some point
Speaker 1: a jump in productivity, or we could see a major
Speaker 1: shift in policy. But something has to change for the
Speaker 1: rate outlook to change. And as I said earlier, if
Speaker 1: you look at the inflation forecast for a very long
Speaker 1: time to come measure in years, the market right now
Speaker 1: does not expect that. I mean, this is such an
Speaker 1: interesting discussion, and what Steve Major said there and then
Speaker 1: this is what we always hear from a brave guy
Speaker 1: like Steve Major. Dr Hilda Brand is the banking lobby
Speaker 1: who is the blame? I mean, you're a connected guy.
Speaker 1: Who is the banking lobby out there dictating what policy
Speaker 1: should be two institutional policy holders as you were at
Speaker 1: this SISS National Bank. Did these guys calling up means
Speaker 1: there a special phone. There's not a special phone. But
Speaker 1: I certainly went through my bruising exchanges with some CEOs.
Speaker 1: But at the end of the day, you know, I think, um, look,
Speaker 1: nobody likes when the environment makes you job difficult. So
Speaker 1: I have some sympathy for bankers, but they also need
Speaker 1: to recognize that again, as Steve said, you know rightly,
Speaker 1: this is not the low interest rate environment. Is it
Speaker 1: difficult for banks? Yes? Was it caused by policy makers? Know?
Speaker 1: It is a result a consequence of demographics of savings.
Speaker 1: These are global phenomena, which is why we have low
Speaker 1: interest rates throughout the world. So bankers need to also
Speaker 1: brush up on their macs a little bit and understand
Speaker 1: why we are where we are. Steve major. I mean,
Speaker 1: this is such a delicate conversation, as you say, there's
Speaker 1: a banking alabbya out there. I mean, they've observed negative
Speaker 1: interest rates in Europe and basically the Anglo Saxon world
Speaker 1: is saying no, Anglo American world is saying, no, we
Speaker 1: don't want to do that. Are our mechanisms any better
Speaker 1: than negative interest rates? Well, you might notice that I
Speaker 1: worked for a bank, and the concern I have is
Speaker 1: that the central banks do not set the policy rates
Speaker 1: so banks can make money and pay bonuses. They set
Speaker 1: policy rates for the real economy. So that's why there's
Speaker 1: that tension there. Obviously, negative rates and very flat curves
Speaker 1: are not very good for banks, but everyone knows that.
Speaker 1: Um so, so the alternative so interesting, and that's why
Speaker 1: the market has moved on to start debating about yield
Speaker 1: curve control. As we've seen in Japan. We've had caps
Speaker 1: in place in the US throughout history. People will remember
Speaker 1: financial repression from war, bonds and consoles in the UK,
Speaker 1: so people are thinking along these lines. Um I think
Speaker 1: QUE is not an obvious next step either, because the
Speaker 1: more central banks do QUE, the more pressure they put
Speaker 1: on the banking system. Because of the reserves that are
Speaker 1: created and that and that's quite unproductive for banks. So
Speaker 1: so I think the next step needs to be a
Speaker 1: little bit more creative. And that's why over the years
Speaker 1: people have started to talk about all these alternative policies
Speaker 1: and and you know, helicopter money has been suggested, etcetera.
Speaker 1: I was going to ask you about that, Stephen, what
Speaker 1: would it take for the FED to use helicopter money
Speaker 1: or any other central bank? Actually, well, we know back
Speaker 1: in yeah, we're back in two thousand and sixteen, we
Speaker 1: wrote papers about this and it was that it was
Speaker 1: at the time what we called the elephant in the
Speaker 1: room that and in fact it was wrong. We we
Speaker 1: got completely wrong sided. And there is a danger sometimes
Speaker 1: people like me could get too gloomy. I am actually
Speaker 1: worried that in two thousand and twenty we might be
Speaker 1: on the verge of some kind of paradigm shift and
Speaker 1: so more of a secular kind of shift. And and
Speaker 1: that's a big worry because you don't know it's happened
Speaker 1: until afterwards. So helicopter money, in its various guys has
Speaker 1: shown some except it has been shown around the world.
Speaker 1: In Hong Kong, something similar was tried recently. Although it
Speaker 1: was funded out of reserves, it was funded, so it
Speaker 1: wasn't the purest form. But but you know, there are
Speaker 1: many proposals that have been around for a few years
Speaker 1: and I think that we'll see them try it. You go,
Speaker 1: I'm loving this conversation, folks. Steve Major where this is HSBC,
Speaker 1: and Philip hilden Brand of Black Rock as well. Dr
Speaker 1: hilder Brand, let me go to you on the paradigm
Speaker 1: shift which is called Japanification. How close are we to
Speaker 1: UM exporting Japanification and importing it into Europe and for
Speaker 1: that matter, into America. Is it a paradigm shift where
Speaker 1: we become like Japan. Well, we're about to see the
Speaker 1: cb UM is redoing their projections, the economic projections that
Speaker 1: you know, I'm sure some of them, as they work
Speaker 1: through them in the next governing Council will imply or
Speaker 1: suggest that we are going to go back to recession
Speaker 1: or environment. So the reality is the escape out of
Speaker 1: this uh low interest rate environment, the escape out of
Speaker 1: zero rates, you know, has not happened. There was some
Speaker 1: hope early in the year that we could be set
Speaker 1: up for it, but certainly with this sharp and potentially
Speaker 1: deep in pact of the coronavirus. I think that story
Speaker 1: is over. We all need to reassess, and so do
Speaker 1: central banks. I don't think you can throw up your
Speaker 1: hands and say that's just the way it's going to be.
Speaker 1: We need to learn from history. We need to think
Speaker 1: about creative ways to respond, and most importantly, we need
Speaker 1: this aggressive and coordinated response. I think you know Step
Speaker 1: is right to point out to some of the flaws,
Speaker 1: deep flaws around the sort of purest form of helicopter money.
Speaker 1: Certainly that is not where we want to go. But
Speaker 1: I do think what we need to have is a
Speaker 1: way to basically for fiscal policy to work directly to
Speaker 1: consumers and households. That is the key right now in
Speaker 1: this in this sort of natural disaster paradigm, because if
Speaker 1: you don't have that, just to hope that it somehow
Speaker 1: works through the financial system isn't gonna work. Samese. If
Speaker 1: they can't pay their rent because they have no customers,
Speaker 1: there's no place to go for them in the capital markets.
Speaker 1: We have to be realistic. The only way a good
Speaker 1: business can survive if the customers has certainly gone suddenly gone,
Speaker 1: because they can come to the store is if they
Speaker 1: get direct financial support. When you talk about decisive policy
Speaker 1: action now, is in the next two weeks or is
Speaker 1: it a month? I mean the timeline seems very crucial here. Yeah,
Speaker 1: I think it has to step up or you know,
Speaker 1: it has to begin immediately. Look, I'm not a medical expert,
Speaker 1: but most of the medical expertise that I read and
Speaker 1: studies suggest that this is going to be with us
Speaker 1: for some time measured in months, not weeks. So I
Speaker 1: think it's it's a matter of sustained support for some time,
Speaker 1: and if we do that, this will prove to be temporary.
Speaker 1: I think that's the key. You know. One of the
Speaker 1: things I learned in the crisis, and Tim Guydner was
Speaker 1: a great advocate of this, don't ever assume when you
Speaker 1: have a problem that everything else stays the same. This
Speaker 1: is where government action comes in and can make a difference.
Speaker 1: So if we want this to be temporary, which by
Speaker 1: nature it should be, provided we have the right response
Speaker 1: on the medical side, then we need aggressive and bold
Speaker 1: direct support through the fiscal channel, and monitored policy can
Speaker 1: can be a piece of a coordinated approach, but it's
Speaker 1: a limited piece by definition, because a it's exhausted or
Speaker 1: nearly exhausted, and B it's really not per se the
Speaker 1: right the right way to to deal with the natural disaster,
Speaker 1: which is what this effectively is. Phil Thanks so much,
Speaker 1: philipill the brand of Black Rock. Stephen Major of HSBC,
Speaker 1: You're not Meridith Sumpter does. It's great she brings in
Speaker 1: the Chinese headlines. I know when you asked single time
Speaker 1: to do that and she killed it. It's a really
Speaker 1: different view from Washington. You write a group head of
Speaker 1: research strategy, Meredith Saves. So great to have you with
Speaker 1: us on the phone. Let's just start with a pretty
Speaker 1: simple question. President Shakes turning up in Wuhan, is that
Speaker 1: just a p our event. It's not just a pr
Speaker 1: event for the external audience. It's also a leadership event
Speaker 1: for the domestic audience as well. This is she trying
Speaker 1: to own the crisis and putting an underscore below his
Speaker 1: view that this is the ultimate test of not only
Speaker 1: his leadership ability, but of the Communist Party's governance ability.
Speaker 1: He's responding to what was criticism with his handling of
Speaker 1: the virus early on and not showing up when his
Speaker 1: premier Lee Ka Chong did so this is in part
Speaker 1: to boost his domestic standing and try to boost fragile
Speaker 1: confidence at home that China might be getting ahead of
Speaker 1: where the virus is going there. Meredith, can we just
Speaker 1: take a step back away from just the progression of
Speaker 1: the virus? Will it come back? Won't it come back?
Speaker 1: And get a sense of how damaging the one to
Speaker 1: punch to China is Right now, the idea that the
Speaker 1: supply chains got uh disrupted completely by the shutdown of
Speaker 1: the Hubei district, but then also now have a slow
Speaker 1: down and global growth as Italy shuts down in a
Speaker 1: growing number of nations quarantine entire sections of their countries.
Speaker 1: How difficult will it be for trying to recover from this.
Speaker 1: It's going to be incredibly difficult. But I think what
Speaker 1: what what's key here is not so much the Communist
Speaker 1: Party leadership. They're not as concerned about how they're necessarily
Speaker 1: going to recover. They're still much more focused on containing
Speaker 1: new outbreaks, and so the political priorities there is not
Speaker 1: let's restart the economy quickly. It's more so, let's make
Speaker 1: sure that we are on top of containment, and if
Speaker 1: that means a much slower recovery period will deal with that.
Speaker 1: Is that really the case, because actually some people are
Speaker 1: saying one concern is they're going to ramp up factories,
Speaker 1: uh too quickly that it will reignite another spread. Is
Speaker 1: that is that a false narrative? No? No, I think
Speaker 1: that's actually that's quite an accurate narrative. And I think
Speaker 1: that the Communist Party leadership as well as local leaders
Speaker 1: are quite nervous out the opening of factories and about
Speaker 1: the spread of workers across countries. They want to get
Speaker 1: ahead of new outbreaks that could that that could throw
Speaker 1: off their ability to to well manage the crisis Emeritithumter,
Speaker 1: the President stunned the world and took away the tariffs,
Speaker 1: looking for a bilateral approach there from the Chinese as well.
Speaker 1: What would be the effect on the economies? Not as
Speaker 1: great as an effect as both leaders would like. And
Speaker 1: and frankly, look, and this is we have the world's
Speaker 1: too largest economies that are increasingly at the center of
Speaker 1: this global disruption. But it's much bigger than just the
Speaker 1: US and China. And look, we we've had global crisis before,
Speaker 1: but this time it's different. This is not what we
Speaker 1: saw in with the committee to save the world from
Speaker 1: the Asian financial crisis. Nor is it two thousand eight
Speaker 1: where we saw significant coordinated action across core economies to
Speaker 1: save off the absolute worst of that global financial crisis.
Speaker 1: What is marking the global response is more so a
Speaker 1: lack of meaningful coordination amongst global leadership at the very
Speaker 1: top to get ahead of where we are, to get
Speaker 1: ahead of the crisis from both a health and a
Speaker 1: market standpoint. And this is really resulting in a lower
Speaker 1: confidence by the public and by investors in the global
Speaker 1: leader's ability UH to stave off further spread of the
Speaker 1: virus and its related economic and growth cost Well, not
Speaker 1: if there's reasons not to have that confidence. I mean,
Speaker 1: I look at the situation in China right now. There's
Speaker 1: some people who think the w h O are afraid
Speaker 1: of criticizing China publicly because they might lose access to China.
Speaker 1: There are some people who think economists are basically high
Speaker 1: bowling their estimates for the economy because they're afraid of
Speaker 1: losing access to China. Just how much of a problem
Speaker 1: is that Transparency has been a core of of the
Speaker 1: complications of understanding the severity of the crisis in China.
Speaker 1: And it's caused that country to be back footed and
Speaker 1: its initial handle of the spread of the virus. I
Speaker 1: think also, though, what's really at play here is is
Speaker 1: not just what's happening in China, but you you really
Speaker 1: hit the nail on the head, Jonathan. You have a
Speaker 1: w h O in a fragmented global environment that is
Speaker 1: playing much more of a guiding role. It is not
Speaker 1: as authoritative as one would think for an international body
Speaker 1: that is trying to direct country governments to make the
Speaker 1: right choices, to do the right things that would that
Speaker 1: would be able to enable this public health crisis to
Speaker 1: abate faster than it is. And the result is we
Speaker 1: have a scattershot approach of how country governments are trying
Speaker 1: to deal with the crisis, and that's resulting a lot
Speaker 1: of confusion. It's resulting in a lot of inefficiencies, and
Speaker 1: it's essentially elongating uh the spread of the virus and
Speaker 1: the related economic crisis that we're dealing with. Meredith thanking
Speaker 1: there in China, and of course it redounds back to
Speaker 1: Washington's a Bacheli's japes. Satage General's head of US Right Strategy.
Speaker 1: She joins US now so Batric Great to catch up
Speaker 1: with you treasury yields while through some aggressive targets that
Speaker 1: you started at the start of the year. Where are
Speaker 1: you now? UM? I think EF have made a very
Speaker 1: good point, which is it's really hard to sort of
Speaker 1: look at this market from a fundamental perspective. Yes, we
Speaker 1: had a massive rally yesterday. We're giving up some of
Speaker 1: those games today. But it's really hard to look at
Speaker 1: deals and say and sort of affirmatively say where things
Speaker 1: should trade. What the bond market is now pricing in
Speaker 1: is for zero interest rate policy and looking past that,
Speaker 1: the potential for quantity of easing or forward guidance or
Speaker 1: more extraordinary measures coming from the Federal Reserve. So any
Speaker 1: volatility in risky assets translating to games in the bond market.
Speaker 1: The great call you've had, combined with the suck gen caution,
Speaker 1: calls for an important reassessment right now. Have you brought
Speaker 1: in your house call on disinflation and sluggish real GDP growth?
Speaker 1: Have you brought that in evermore so? UM? Again, if
Speaker 1: the move in a break even seems like it's again
Speaker 1: a little bit too over them, But it's really hard
Speaker 1: to know. If we start seeing UM oil prices declined
Speaker 1: to new loads or below thirty, you'll start you're talking
Speaker 1: about more of a financial stability risk. Break evens below
Speaker 1: a hundred is very troubling. Um, I'm sure the set
Speaker 1: is being very close attention to that. But broadly speaking,
Speaker 1: what the bond markets are reaffirming is our call for
Speaker 1: a recession this year. And now this is not just
Speaker 1: a US reception. It's looking more like a global recession
Speaker 1: and a global decline in in in bond yields. So
Speaker 1: the the policy prescription has to come from sort of
Speaker 1: coordinated action globally. I'm looking at the moving every study
Speaker 1: to break evens at least, it's real simple. Yeah, break
Speaker 1: evens a spiked down to indicate significant disinflation guestiment. These
Speaker 1: are tenure break evens. But on a moving every study,
Speaker 1: the vector has been disinflation since two thousand thirteen. Yeah.
Speaker 1: And the implication here is that, yes, the federal reserve
Speaker 1: is going to drop to zero and it's not gonna matter.
Speaker 1: That They're gonna try to go as as low as
Speaker 1: they can go, at least out within modern history, and
Speaker 1: it's not gonna work. I'm just wondering what that means
Speaker 1: for treasuries as an asset class going forward. JP Morgan's
Speaker 1: Bob Michael came on with US yesterday yesterday afternoon and
Speaker 1: said that frankly, treasuries will not act as a haven
Speaker 1: asset class going forward just because we've reached a certain
Speaker 1: lower bound for the time being. Do you agree? Um?
Speaker 1: I agree with that view, And I think that that's
Speaker 1: really the risk, right, is that you're starting to see
Speaker 1: a gradual Japanification of the U S curve. So you know,
Speaker 1: once you start getting closer and closer to the to
Speaker 1: the zero lower bound, it's going to be very, very
Speaker 1: hard for treasuries to actually act as that safety of
Speaker 1: an asset. It's uh, you know, and that's ultimately the risk.
Speaker 1: And and as you point out earlier, I think the
Speaker 1: fact that central banks um easing even back to the
Speaker 1: zero lower bound is not going to do a lot
Speaker 1: for inflation expectations is also troubling. I mean, the trajectory
Speaker 1: for inflation globally, not just in the US and US actually,
Speaker 1: you know, CPI has held up pretty well even in
Speaker 1: the last couple of years, but it's the global inflation
Speaker 1: picture that's been dragging US inflation expectations lower. And it's
Speaker 1: not clear that policy can do a whole lot to
Speaker 1: reverse that. BAA fantastic to catch up with your Sabata's
Speaker 1: jappest Stage General's head of US right Strategy calling for
Speaker 1: much lower yill to the start of the year, and
Speaker 1: wow it she turned out to be right. Thanks for
Speaker 1: listening to the Bloomberg Surveillance podcast. Subscribe and listen to
Speaker 1: interviews on Apple Podcasts, st Cloud, or whichever podcast platform
Speaker 1: you prefer. I'm on Twitter at Tom Keene before the podcast.
Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio