WEBVTT - Surveillance: Growth Is Likely To Slow, Kudlow Says 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jai Ley. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:28.320 Bloomberg dot Com, and of course on the Bloomberg Tiffany Wilding, 0:00:28.720 --> 0:00:31.960 you have to brief portfolio managers at PIMCOT. There are 0:00:32.280 --> 0:00:35.800 some shell shocked, others I'm sure are finding this opportunistic. 0:00:36.080 --> 0:00:40.800 What is your message to fixeding managers at PIMCO this morning? Well, so, 0:00:40.920 --> 0:00:42.600 I think you kind of have to put the whole 0:00:42.960 --> 0:00:46.400 you know, coronavirus situation in perspective, um, and that is 0:00:46.440 --> 0:00:49.640 to be humble about it, because I know, you know, historically, 0:00:49.880 --> 0:00:53.040 you know, instances like this. Ultimately, you know the you know, 0:00:53.080 --> 0:00:56.400 the virus subsides at some point, and when that happens, 0:00:56.480 --> 0:01:00.680 you have economic activity that rebounds rich turns to normal. 0:01:00.920 --> 0:01:03.520 But there's a lot of uncertainty around the path to 0:01:03.600 --> 0:01:07.520 get there. Um. The depth of the type of disruption 0:01:07.640 --> 0:01:11.280 and the how long that disruption lasts is very uncertain UM. 0:01:11.280 --> 0:01:13.800 And it's certainly possible you know that this could you know, 0:01:13.880 --> 0:01:16.959 push the US and and other developed market economies into 0:01:17.000 --> 0:01:20.440 recession before we get the ultimate rebound. Okay, well, PIMCO 0:01:20.480 --> 0:01:22.080 had a brilliant call on this. I'm not going to 0:01:22.160 --> 0:01:25.080 give you all the credit that that PIMCO deserves, but 0:01:25.120 --> 0:01:28.360 you were certainly part of a team that was exceptionally 0:01:28.440 --> 0:01:32.440 cautious I'm g d p Uh into eighteen months ago 0:01:32.520 --> 0:01:38.840 and into twelve months ago, You're where you thought you'd be, right, Um, yeah, 0:01:38.880 --> 0:01:40.840 I mean, so you know, we were. We were more 0:01:40.880 --> 0:01:43.840 cautious on on the potential impact of you know, the 0:01:43.880 --> 0:01:47.080 trade war um, and we called it a window of 0:01:47.160 --> 0:01:50.480 weakness late last year. Um, you know, because we thought 0:01:50.520 --> 0:01:53.920 that could you know, disrupt manufacturing um in the US. 0:01:54.040 --> 0:01:57.559 We ultimately got the trade deal, um, which we thought 0:01:57.600 --> 0:02:00.840 was a little bit better. Uh So, coming into the coronavirus, 0:02:00.920 --> 0:02:03.440 actually things the initial conditions in the U. S economy 0:02:03.440 --> 0:02:06.320 were actually you know, looking somewhat better, as were they 0:02:06.440 --> 0:02:08.560 in the rest of the world. Um. You know, actually 0:02:08.560 --> 0:02:12.760 global manufacturing growth looked like it was stabilizing and maybe 0:02:12.800 --> 0:02:15.040 even rebounding, led by China. And now, of course all 0:02:15.080 --> 0:02:17.520 of that, uh you know comes into question now that 0:02:17.600 --> 0:02:21.720 we have you know, this coronavirus outbreak. So Tiffany, The 0:02:21.720 --> 0:02:23.840 FED you know, is trying its best, I guess is 0:02:23.840 --> 0:02:25.920 a great way to a good way to kind of 0:02:26.240 --> 0:02:29.359 phrase it. You know, with that intromediing and intermeding rate 0:02:29.360 --> 0:02:31.080 cut earlier this week, what do you think the FED 0:02:31.160 --> 0:02:33.239 is going to do going forward? And is there much 0:02:33.320 --> 0:02:36.720 it can do? Um? Well, you know we so if 0:02:36.720 --> 0:02:38.560 you look at one way to think about this is 0:02:38.600 --> 0:02:40.880 just to look at historical precedent and if you look 0:02:40.919 --> 0:02:43.400 at the emergency rate cuts are intermeding rate cuts that 0:02:43.440 --> 0:02:46.160 we've seen, um, you know over called you know, since 0:02:46.240 --> 0:02:50.960 the early nineties, we've had seven instances of them, um, 0:02:51.000 --> 0:02:56.200 each of them. The meeting directly after that intermeding rate cut, 0:02:56.320 --> 0:02:58.760 the FED also cut um. You know. So I think 0:02:58.760 --> 0:03:02.760 by that historical precident, we should absolutely expect a cut 0:03:03.240 --> 0:03:05.320 at the meeting in March. You know. One thing that 0:03:05.360 --> 0:03:07.880 I thought was interesting was that the you know, before 0:03:07.880 --> 0:03:10.919 the blackout period which actually starts tomorrow, we had several 0:03:10.919 --> 0:03:13.280 speakers overnight. They didn't really push back against the current 0:03:13.280 --> 0:03:15.520 market pricing, you know, which which is pricing in a 0:03:15.560 --> 0:03:18.160 probability that they could even cut fifty again, um. And 0:03:18.160 --> 0:03:20.400 you know, certainly that would be consistent with historical precedent 0:03:20.440 --> 0:03:23.440 as well. What is the efficacy to our listeners of 0:03:23.480 --> 0:03:26.320 a hundred basis point rate cut over three cups of 0:03:26.320 --> 0:03:30.760 pimcoat coffee? What's it mean? Yeah? Well, you know, I 0:03:31.000 --> 0:03:33.680 think certainly and the Federal Reserve understands this. You know, 0:03:33.720 --> 0:03:36.080 monetary policy is not going to stop the spread of 0:03:36.080 --> 0:03:39.520 the virus. It's not going to be particularly effective against 0:03:39.560 --> 0:03:42.600 supply chain disruptions that we expect. But what monetary policy 0:03:42.640 --> 0:03:45.200 can do, you know, and and and Powell talked about 0:03:45.200 --> 0:03:48.440 this is monetary policy can try to create conditions that, 0:03:48.480 --> 0:03:51.600 instead of exacerbating an economic shock, um, you know, they 0:03:51.840 --> 0:03:54.080 try to buffer it. So what tends to happen when 0:03:54.080 --> 0:03:56.360 you have a growth shock is that can lead to 0:03:56.440 --> 0:03:59.680 market panic, It can lead to tighter financial conditions, bank 0:03:59.760 --> 0:04:02.840 pull banks pulling back on credit, um, you know, and 0:04:02.880 --> 0:04:06.720 that ultimately exacerbates exacerbates the economic sharks. So I think 0:04:06.720 --> 0:04:09.560 the Fed wants to try to set conditions to where 0:04:09.840 --> 0:04:12.040 they do it doesn't do that, it's going to be 0:04:12.200 --> 0:04:14.600 we'll get to next week. Keivity Welding, thank you so much. 0:04:25.839 --> 0:04:28.640 Let's talk about the virus. The number of cases globally 0:04:29.040 --> 0:04:31.360 nearing a hundred of thousand. More infections have now been 0:04:31.400 --> 0:04:35.599 reported in the United States, in Germany, and in South Korea. Finally, 0:04:35.680 --> 0:04:39.880 Clighorn of the Palladium Group, he is the health director 0:04:39.960 --> 0:04:43.800 that joining us now from Washington to discuss all of this. Finally, 0:04:43.880 --> 0:04:46.200 let's talk about what we know and what we don't know. 0:04:46.760 --> 0:04:49.159 What we know is that we don't have enough test kids, 0:04:49.520 --> 0:04:53.640 and by extension, therefore, we don't know exactly how many 0:04:53.640 --> 0:04:56.760 people have got the virus, how fast it's spreading, what 0:04:56.880 --> 0:05:00.919 the delta is. What can you tell us, Well, that's 0:05:01.000 --> 0:05:04.760 exactly correct, thank you. Um, we don't have enough test 0:05:04.800 --> 0:05:07.280 gits in the US. We don't seem to be able 0:05:07.320 --> 0:05:11.279 to operationalize enough test gits to get them to the 0:05:11.400 --> 0:05:13.960 right people. What do I mean by that, Well, we 0:05:14.000 --> 0:05:17.440 need to understand how many people are being exposed, how 0:05:17.480 --> 0:05:20.960 many people have acquired the infection, how many people developed 0:05:21.000 --> 0:05:25.360 clinical symptoms, and then how many people developed severe disease. Obviously, 0:05:25.400 --> 0:05:28.479 the last step is how many people die. And in 0:05:28.520 --> 0:05:31.480 the US, the last estimate I've seen is that we've 0:05:31.560 --> 0:05:35.560 only done about fifteen hundred tests so far, and there 0:05:35.560 --> 0:05:38.520 have been quite a lot of missed opportunities. UH. In 0:05:38.600 --> 0:05:42.920 order to get to a broader implementation of testing so 0:05:42.960 --> 0:05:46.240 that we have a much better picture of the epidemiology 0:05:46.279 --> 0:05:49.839 off this virus in the country. Doctor. It's wonderful to 0:05:49.839 --> 0:05:52.159 have you with us in particularly with your decades out 0:05:52.160 --> 0:05:55.200 of Johns Hopkins University and your direct work with the 0:05:55.240 --> 0:05:58.520 government facilities. I'm not going to mince words, doctor, and 0:05:58.560 --> 0:06:01.640 You've been very delicate out this. There is a party 0:06:01.680 --> 0:06:04.400 of the ways between the President of the United States 0:06:04.800 --> 0:06:08.680 and the people like you representing the institutions of science 0:06:09.000 --> 0:06:11.720 in the government. How do we get this fixed by 0:06:11.800 --> 0:06:15.359 Monday morning? How do we get the virologists to be 0:06:15.480 --> 0:06:19.839 front and center and advising the public given the messaging 0:06:19.880 --> 0:06:24.320 we're seeing from the executive branch. Well, one way is 0:06:24.360 --> 0:06:30.800 to activate mechanisms that are tried and tested by for example, 0:06:30.880 --> 0:06:35.240 the Ebola Academic where we have a platform in a country, 0:06:35.279 --> 0:06:39.240 and the US of course does have such a platform. Uh. 0:06:39.279 --> 0:06:42.880 It's called the One Health Platform. It's a whole of government, 0:06:43.839 --> 0:06:49.320 very articulated system from top to bottom, where the government 0:06:49.360 --> 0:06:53.240 in charge, the executive branch as well as branches of 0:06:53.279 --> 0:06:57.800 government that have responsibility for health and safety, are coordinated 0:06:57.880 --> 0:07:01.480 with state governments and local government wants and there is 0:07:01.520 --> 0:07:05.520 a plan of action that allows people to take actions 0:07:05.720 --> 0:07:09.600 without doing it on their own. And this is something 0:07:09.600 --> 0:07:13.040 that we have not seen in the last few days 0:07:13.120 --> 0:07:18.480 in the US. We definitely need more coordination. As I said, uh, 0:07:18.560 --> 0:07:21.320 the ability to test people is a critical part of 0:07:21.480 --> 0:07:25.040 understanding the epidemiology off of virus. I mean this is 0:07:25.160 --> 0:07:27.559 very important, folks. Just to give you the local field 0:07:27.680 --> 0:07:30.680 ard our world headquarters. Two of our major prep schools 0:07:30.680 --> 0:07:34.120 collegiate in the Spend school are actually closed today. Is 0:07:34.160 --> 0:07:36.920 they clean those buildings and we all have our you know, 0:07:37.000 --> 0:07:41.840 individual local community stories. Dr I look at the complexities 0:07:41.880 --> 0:07:44.120 of the test kit. It's c d C and I 0:07:44.120 --> 0:07:47.520 don't want to get into a discussion of RNA or 0:07:47.640 --> 0:07:51.880 DNA dynamics, which your expert in. How complex are the 0:07:51.920 --> 0:07:57.040 test kits? How easy are they to replicate, manufacture in 0:07:57.040 --> 0:08:02.040 introduce to the public. Well, these tests are are viral 0:08:02.120 --> 0:08:06.600 nucleic tests. That is, they're actually looking for proteins that 0:08:06.680 --> 0:08:10.480 are in the virus and using a method called PCR, 0:08:10.560 --> 0:08:14.440 which is poliminaries chain reaction. So essentially you take some 0:08:14.560 --> 0:08:18.480 human tissue which comes from your nose, your mouth, your throat, 0:08:18.600 --> 0:08:23.000 your tra chia and you subjected to this test where 0:08:23.040 --> 0:08:27.440 you're looking to amplify these bits of viral RNA. So 0:08:27.480 --> 0:08:31.160 it's an r T PCR tests. Uh. The results should 0:08:31.160 --> 0:08:34.120 be available in twenty four hours. The problem is we 0:08:34.200 --> 0:08:39.040 have not licensed or leveraged the private sector enough to 0:08:39.200 --> 0:08:43.679 get enough test kits out to the American public. And 0:08:44.000 --> 0:08:48.439 this is in stark contrast to for example, China and 0:08:48.640 --> 0:08:52.160 South Korea. South Korea has done over a hundred thousand 0:08:52.200 --> 0:08:56.439 tests to date. Uh, they're using their own homegrown tests. 0:08:56.920 --> 0:08:59.600 R T PCR is actually not that hard to do. 0:09:00.400 --> 0:09:03.640 You simply have to have the facilities to get the 0:09:03.679 --> 0:09:06.120 primers made and to get them out to the people 0:09:06.120 --> 0:09:09.360 who can run the tests. Now, a new step occurred 0:09:09.480 --> 0:09:13.280 over the last couple of days where private sector developed 0:09:13.440 --> 0:09:16.240 tests can in fact be used, and that is going 0:09:16.280 --> 0:09:20.720 to rapidly increase the number of tests available in the US. 0:09:22.240 --> 0:09:25.920 Doctor our countries with universal healthcare more capable of dealing 0:09:25.960 --> 0:09:29.720 with dealing with this far ast than those that don't. Well. 0:09:29.800 --> 0:09:32.680 I think in terms of planning, we mentioned planning that 0:09:32.760 --> 0:09:35.520 the idea is to do enough risk assessments so you 0:09:35.559 --> 0:09:38.839 can plan appropriately and and and then to have a 0:09:38.920 --> 0:09:44.160 risk communications strategy that avoids fear and confusion, which is 0:09:44.200 --> 0:09:47.000 what you get when you don't have an articulated plan. 0:09:47.840 --> 0:09:49.760 And we you know, some of the volatility in the 0:09:49.800 --> 0:09:55.760 stock market we're seeing represents fear and volatility. And uh so, 0:09:56.080 --> 0:10:01.719 in order it for um systems health system to respond appropriately, 0:10:02.000 --> 0:10:04.880 they must have as part of that plan identified the 0:10:05.000 --> 0:10:07.520 number of rooms, for example, in I c U s 0:10:07.880 --> 0:10:11.680 that can provide the kind of complex respiratory care for 0:10:11.840 --> 0:10:14.760 patients who have severe disease and who are at the 0:10:14.840 --> 0:10:18.120 risk of death. These are primarily older people who have 0:10:18.200 --> 0:10:24.280 concomitant illness and who developed pneumonia after they become infected. Now, 0:10:24.320 --> 0:10:27.719 in many countries, even highly developed health systems that are 0:10:27.800 --> 0:10:31.400 single payer health systems like the UK, if you had 0:10:31.480 --> 0:10:35.120 a sustained epidemic over time, it would really stress the 0:10:35.240 --> 0:10:38.319 system so that you would have to bring into play 0:10:38.520 --> 0:10:42.320 new new respiratory I see us. The problem in the 0:10:42.360 --> 0:10:45.600 US is we are a system of systems, so as 0:10:45.600 --> 0:10:47.920 far as I know yet, we do not have a 0:10:47.960 --> 0:10:52.440 coordinated plan for an expanded epidemic where we would need 0:10:52.920 --> 0:10:56.480 more respiratory I see us. But this is wonderful because 0:10:56.480 --> 0:10:58.559 of time. I've only got one more question, and I'm 0:10:58.559 --> 0:11:02.560 gonna be very delicate here. I'm at home with my daughter, afterthought, 0:11:02.640 --> 0:11:05.600 and we're washing our hands with soap and water, singing 0:11:05.720 --> 0:11:08.280 happy birthday. I mean, that's what has come down to 0:11:08.440 --> 0:11:12.400 this weekend. Let me go to the most jinguistic racist 0:11:12.520 --> 0:11:17.040 idea right now floating around to get our viewers worldwide 0:11:17.320 --> 0:11:21.120 through the weekend. The number one thing collapsing in America 0:11:21.360 --> 0:11:25.800 are Chinese restaurants. Would you order Chinese take out this weekend? 0:11:25.800 --> 0:11:28.360 Would you go into a Chinese restaurant? I mean, if 0:11:28.400 --> 0:11:31.760 that's the height of the paranoia we're facing right now, 0:11:32.040 --> 0:11:34.640 I want to hear from you, as a Johns Hopkins expert. 0:11:34.880 --> 0:11:40.040 Can I take Chinese takeout this weekend? Yes? You should one, 0:11:40.160 --> 0:11:43.400 because you're helping the economy too. Because the very notion 0:11:43.440 --> 0:11:46.920 of just having Chinese food and increasing your risk for 0:11:47.280 --> 0:11:52.320 coronavirus is to me borders on racist. So I think, yes, 0:11:52.400 --> 0:11:54.640 you should have Chinese food. I hope it's good Chinese 0:11:54.679 --> 0:11:57.760 food that you're going to have. Uh, and lather up 0:11:57.880 --> 0:12:02.080 because twenty seconds with soap and water, the secret is 0:12:02.200 --> 0:12:06.320 in the lather So if you don't up, Yeah, it's 0:12:06.360 --> 0:12:10.400 those bubbles that break down micro organisms. That's great. That's 0:12:10.440 --> 0:12:12.280 good to know it will be your guy and I 0:12:12.360 --> 0:12:16.120 have to write so dcor, this has been extremely valuable. 0:12:16.160 --> 0:12:18.920 We look forward to speaking to you again. Drygaring with 0:12:19.000 --> 0:12:32.520 Palladium Group is their health director. Hugely informative place decide 0:12:32.559 --> 0:12:35.240 that why aren't get on the bond market now? Jeff Rosenberg, 0:12:35.280 --> 0:12:38.080 City of PM on black Rock Systematic Fixed Income Team, Jeff, 0:12:38.120 --> 0:12:42.080 fantastic to have you with us. Your first take place. Well, 0:12:42.120 --> 0:12:44.240 I think you said it. It's you know, the most 0:12:44.679 --> 0:12:48.280 um you know, irrelevant payroll report we've had in a 0:12:48.280 --> 0:12:50.520 long time. I'd love to talk about the payroll report 0:12:50.520 --> 0:12:53.400 because it's some good news and as you said, it 0:12:53.480 --> 0:12:57.080 doesn't really matter. It's backward looking. It does remind us 0:12:57.080 --> 0:13:00.920 of how strong the economy was going into this coronavirus. 0:13:00.960 --> 0:13:03.280 But this this information is dated. That's why it's not 0:13:03.360 --> 0:13:05.760 market moving. I guess what you can say is at 0:13:05.840 --> 0:13:07.839 least it's not bad news. If it was bad news 0:13:07.920 --> 0:13:11.120 into the coronavirus fears, who knows how the panic might 0:13:11.240 --> 0:13:15.080 have accelerated. But this is a reminder of the strength 0:13:15.120 --> 0:13:18.280 of the economy going into the shock. What we had 0:13:18.440 --> 0:13:22.400 last week was the monetary policy response. I mean, obviously 0:13:22.400 --> 0:13:24.360 we had it this week, but last week's declines in 0:13:24.400 --> 0:13:28.960 the equity markets prompted this week's monetary policy response. This 0:13:29.080 --> 0:13:33.240 week's equity market response, next week's story is the fiscal 0:13:33.320 --> 0:13:36.079 policy response, and that's what we're gonna be talking about. 0:13:36.120 --> 0:13:39.560 I think we're gonna move to that conversation because there's 0:13:39.600 --> 0:13:42.760 a very limited amount of what monetary policy can do, 0:13:43.160 --> 0:13:45.520 and it's gonna be much greater about the focus on 0:13:45.559 --> 0:13:51.400 fiscal policy. If we get a strong, coherent, robust response, 0:13:51.480 --> 0:13:54.160 I think that could be very beneficial. But to the 0:13:54.200 --> 0:13:57.080 earlier question, we don't know what the demand side shock 0:13:57.360 --> 0:14:00.680 is to the supply from this supply side shock, but 0:14:00.760 --> 0:14:03.440 you need a fiscal policy response to to address that. 0:14:03.480 --> 0:14:06.440 Monetary policy is limited. Jeff, to your point about momentum, 0:14:06.480 --> 0:14:08.280 and this is something that Jim was talking about too, 0:14:08.280 --> 0:14:11.040 that the momentum was there in the U. S economy 0:14:11.080 --> 0:14:14.080 before this shock. Why does that matter? What does that 0:14:14.160 --> 0:14:16.600 tell you in terms of the shape of the recovery 0:14:16.679 --> 0:14:19.720 and the scope of the recovery. Well, it tells you 0:14:19.800 --> 0:14:24.080 that you you have the ability to limit the damage 0:14:24.120 --> 0:14:27.120 to the economy because you're dealing with a shock from 0:14:27.120 --> 0:14:30.120 a position of strength as opposed to dealing with a 0:14:30.160 --> 0:14:33.240 shock from a position of weakness and a position of 0:14:33.320 --> 0:14:36.440 vulnerability from a fundamental economic perspective. Now, I think what's 0:14:36.440 --> 0:14:39.280 going on in terms of the financial markets is that 0:14:39.320 --> 0:14:44.040 you had a shock from a fundamental economic perspective to 0:14:44.160 --> 0:14:47.920 a financial market that was very vulnerable. You had complacency, 0:14:48.000 --> 0:14:50.800 you had valuations at very high levels, you had very 0:14:50.800 --> 0:14:53.960 little cushion, So a lot of the drop is coming 0:14:54.080 --> 0:14:56.440 from very high levels. If we think about it from 0:14:56.440 --> 0:14:59.040 the fixed income perspective, a lot of the widening and 0:14:59.120 --> 0:15:02.840 credit spread is coming from very tight levels. You're getting 0:15:03.080 --> 0:15:06.000 big moves and spreads, but the levels that you're at 0:15:06.040 --> 0:15:10.560 are hardly anything near recessionary type levels. They're getting you 0:15:10.560 --> 0:15:13.960 back into kind of fair value, mid mid expansion kind 0:15:13.960 --> 0:15:16.440 of level. So there was a bit of over uh. 0:15:16.480 --> 0:15:19.240 If you look at the delta, the change looks very aggressive, 0:15:19.240 --> 0:15:21.440 but it's coming from a very tight level. So financial 0:15:21.480 --> 0:15:25.160 markets were a bit more vulnerable, the economy was much 0:15:25.200 --> 0:15:27.720 more resilient. You can make the argument that stocks are 0:15:27.760 --> 0:15:32.160 not pricing in a recession pe multiple still very high. Bonds, however, 0:15:32.320 --> 0:15:34.800 are do you think that bonds are overdone, that they're 0:15:34.840 --> 0:15:37.840 over bought at this level. No, I I think you 0:15:37.880 --> 0:15:40.800 gotta be careful about, you know, bonds pricing in a 0:15:40.840 --> 0:15:46.120 recession versus bonds pricing in a pre emptive policy reaction. Uh, 0:15:46.160 --> 0:15:50.359 and in some sense forcing that preemptive policy reaction. That's 0:15:50.400 --> 0:15:52.840 the kind of strange world that we're in, is that 0:15:53.120 --> 0:15:56.160 is that financial conditions matter so much to the FED 0:15:56.760 --> 0:16:00.600 that the bond market reaction is in anticipation ation of 0:16:00.800 --> 0:16:03.320 the FED reacting to financial market conditions, and so the 0:16:03.360 --> 0:16:05.720 bond market is kind of previewing where the Fed is 0:16:05.720 --> 0:16:07.360 going to go. We saw that this week with fifty 0:16:07.400 --> 0:16:10.280 basis points. You're seeing it again with another fifty basis 0:16:10.320 --> 0:16:15.000 points anticipated. So you know, does that predict recession? Not sure? 0:16:15.040 --> 0:16:18.520 Does it predict policy response absolutely? And then the question 0:16:18.600 --> 0:16:22.120 is is the combined policy response again monetary and fiscal, 0:16:22.400 --> 0:16:25.960 enough to forestall the recession. Jeffrey Rosenberg with us, of course, 0:16:26.000 --> 0:16:28.560 with his wonderful strategy work at Black Rocket. Of course, 0:16:28.600 --> 0:16:31.440 the mathematics of Carnegie Mellen as well. Jeff I want 0:16:31.440 --> 0:16:33.600 to go Matthew right now. I've got a fancy log 0:16:33.680 --> 0:16:37.000 chart of two year yield. The abruptness, the first derivative 0:16:37.040 --> 0:16:41.520 moves a second derivative acceleration that we're seeing has been extraordinary. 0:16:41.560 --> 0:16:44.840 The Greek letter for this is gamma. Should our listeners 0:16:44.960 --> 0:16:48.400 care about gamma? Does does the abruptness of all these 0:16:48.480 --> 0:16:52.600 moves really matter forward? Well, you know, there's a lot 0:16:52.640 --> 0:16:57.840 of technical aspects to financial markets that encourage this rate 0:16:57.880 --> 0:17:03.960 of change and acceleration. At a conversation, another terminology for 0:17:04.040 --> 0:17:07.600 gammas convexity. You have a lot of convexity in the market. 0:17:07.640 --> 0:17:11.600 I mean, this is a remarkable world where you know, 0:17:11.760 --> 0:17:17.200 the the financial people want to talk about uh, the virus, 0:17:17.480 --> 0:17:20.680 but the but but but you can have the doctors 0:17:20.720 --> 0:17:25.000 wanting to talk about refinancing their mortgages. And so when 0:17:25.280 --> 0:17:29.080 you're refinancing your mortgage, what you're getting is a lot 0:17:29.119 --> 0:17:32.320 of that gamma in the market. It's a huge marketplace, 0:17:32.359 --> 0:17:34.520 it has a lot of dynamics, and it's one of 0:17:34.560 --> 0:17:39.119 the factors behind the accelerated move. Certainly, there's a fundamental factor, 0:17:39.160 --> 0:17:42.320 which is the expectation for policy change, but it gets 0:17:42.560 --> 0:17:47.400 exacerbated by these technical factors of a demand for duration. 0:17:47.680 --> 0:17:49.960 When the rest of us are going to look at 0:17:49.960 --> 0:17:52.720 this as an opportunity to refinance our mortgages, when we 0:17:52.800 --> 0:17:58.200 do that, the demand for replacing that interest rate risk 0:17:58.600 --> 0:18:00.800 drives these rates even or so there's a lot of 0:18:00.800 --> 0:18:02.640 that going on in the bond market. That's just quickly 0:18:02.680 --> 0:18:04.560 from me. My final question, just picking up on the 0:18:04.600 --> 0:18:07.280 pace of this move two mondays ago, the higher session 0:18:07.320 --> 0:18:10.359 for the two year yield on the thirty year yield 0:18:10.400 --> 0:18:11.880 is south of that right now in the two years 0:18:11.920 --> 0:18:14.520 now only forty six basis points. When things move this quick, 0:18:14.520 --> 0:18:16.160 and I want you to take me inside the tentacles 0:18:16.160 --> 0:18:21.359 in the market. When things move this quick, the things bright. Well, 0:18:21.400 --> 0:18:25.240 that's the question of financial vulnerabilities, right and and you 0:18:25.280 --> 0:18:28.120 know in the in the rate market, part of that 0:18:28.280 --> 0:18:31.880 rate hedging, that's a very liquid market. It's a very 0:18:31.920 --> 0:18:36.440 liquid market. It's a functional market, and it's not breaking, 0:18:36.640 --> 0:18:39.600 but it's it's bending. And when I say bending, it's 0:18:39.680 --> 0:18:43.280 accelerating the moves in terms of the breakage of the market. 0:18:43.320 --> 0:18:46.560 Where you have greater vulnerabilities is really in different parts 0:18:46.560 --> 0:18:49.720 of the fixed income market where you see liquidity and 0:18:49.840 --> 0:18:53.840 cash flows and difficulties of refinancing. That's a bit what 0:18:53.920 --> 0:18:58.040 the preempt of monetary policy is partly to address. Let's 0:18:58.080 --> 0:19:01.000 make sure there's ample amounts of look quidity. There's no 0:19:01.200 --> 0:19:05.680 technical defaults because someone can't get access to liquidity. And 0:19:05.800 --> 0:19:08.240 you certainly see that in a global perspective when you 0:19:08.240 --> 0:19:11.240 look at, say, for example, the Chinese response and the 0:19:11.520 --> 0:19:17.200 fiscal monetary policy response to ensure that small medium enterprises 0:19:17.240 --> 0:19:21.520 are getting access to rolling over as they're having a 0:19:21.560 --> 0:19:24.880 short term cash flow issue. So those policy interventions can 0:19:24.960 --> 0:19:30.919 help in those circumstances prevent markets from breaking and exacerbating 0:19:30.960 --> 0:19:33.720 losses where they otherwise wouldn't need to occur. Mr Rosenberg 0:19:33.800 --> 0:19:36.160 with us. He is a senior portfolio manager of black 0:19:36.240 --> 0:19:40.320 Rock and their systemic fixed income team. Jeff, I want 0:19:40.359 --> 0:19:42.760 you to go short term systemic right now. I call 0:19:42.800 --> 0:19:46.280 it the trust market, folks. This is well inside the 0:19:46.359 --> 0:19:49.800 two years space. It is a trust of overnight money. 0:19:49.880 --> 0:19:52.199 It is a trust of three day money, it is 0:19:52.240 --> 0:19:55.320 a trust of ninety day money. How's the trust market doing, 0:19:55.400 --> 0:20:00.280 Jeff Rosenberg? Um, I'm not sure. I'm totally fall allowing 0:20:00.600 --> 0:20:05.040 uh that. But if you're talking about short term confidence, 0:20:05.480 --> 0:20:09.000 short term confidence is evidenced by the short term paper 0:20:09.040 --> 0:20:12.640 market into the weekend. Yeah. I mean, look, the short 0:20:12.720 --> 0:20:15.520 term markets are are fine. There's a there's a demand 0:20:15.520 --> 0:20:18.360 for cash, there's a there's a flight to quality, there's 0:20:18.400 --> 0:20:21.280 a flight out of risk. That's what the markets are saying. 0:20:21.920 --> 0:20:27.399 That's uh, a normal expected reaction to a lot of 0:20:27.480 --> 0:20:29.560 panic and a lot of uncertainty and a lot of 0:20:29.760 --> 0:20:33.520 risk that people have had in their in their equity portfolios. 0:20:33.560 --> 0:20:36.760 And we looked at equity allocations over the last five 0:20:36.840 --> 0:20:39.200 years from you know, some of the data sources that 0:20:39.560 --> 0:20:43.720 provide you kind of aggregate holdings. Everybody's equity allocations have 0:20:44.080 --> 0:20:47.280 drifted higher, uh, not a huge amount, but they've been 0:20:47.320 --> 0:20:50.639 willing to drift higher because it's been a great fundamental 0:20:50.680 --> 0:20:54.399 market and you have this outside shock that no one predicted, 0:20:54.760 --> 0:20:56.320 and you came into it. As I was saying in 0:20:56.359 --> 0:20:59.919 the earlier section, you know, the economy came into it resilient, 0:21:00.080 --> 0:21:03.000 but financial markets came into it vulnerable. And so what 0:21:03.080 --> 0:21:05.680 you're having here is a forced rebalancing. And then as 0:21:05.720 --> 0:21:09.399 part of that forced rebalancing, the beneficiaries are our cash 0:21:09.480 --> 0:21:11.920 and safe haven assets and bonds. As we're as we're 0:21:11.920 --> 0:21:15.040 clearly seeing and and you're also seeing that now in 0:21:15.160 --> 0:21:19.000 terms of the relative underperformance of higher risk segments of 0:21:19.040 --> 0:21:22.440 the equity markets. With the exception of some weird days 0:21:22.520 --> 0:21:26.520 last week, you're seeing that again today. Reads, utilities, interest rates, 0:21:27.040 --> 0:21:31.879 bond proxies doing better. That's all, you know, normal behavior, 0:21:32.440 --> 0:21:35.760 but it is reflective of this de risking portfolio. And 0:21:35.800 --> 0:21:38.159 it goes, Lisa, right to where your wheelhouse. As we 0:21:38.280 --> 0:21:40.359 do this, folks of the futures back over to negative 0:21:40.400 --> 0:21:43.040 ninety four. Lisa, that's right to the spread study you've 0:21:43.080 --> 0:21:46.480 been looking at all week. I'm just wondering, from your perspective, 0:21:46.680 --> 0:21:48.440 do you think that the corollary for this is two 0:21:48.480 --> 0:21:52.720 thousand seven No, no, and and and really, guys, let's 0:21:52.720 --> 0:21:55.560 not do this. Let's not panic people. Uh, In in 0:21:55.600 --> 0:21:58.280 that way that what happened in two thousand seven eight 0:21:58.359 --> 0:22:00.520 was very unique. And why you saw that happen in 0:22:00.840 --> 0:22:04.080 commercial paper markets and in the credit markets was because 0:22:04.080 --> 0:22:08.200 the center of the crisis was in the financial system. Right, 0:22:08.600 --> 0:22:11.479 let's calm people down a little bit rather than rilling 0:22:11.520 --> 0:22:15.960 them up. This financial system is much more resilient to 0:22:16.560 --> 0:22:20.600 an external shock of coronavirus than to an external shock 0:22:21.000 --> 0:22:24.920 of subprime mortgages, which was an external It was central, 0:22:25.280 --> 0:22:27.680 and it broke the financial system. And that's why you 0:22:27.720 --> 0:22:31.080 saw the commercial paper markets blow up and create more 0:22:31.160 --> 0:22:35.399 panic and more uncertainty. Those markets are resilient, they're operating 0:22:35.400 --> 0:22:39.560 as they should, They're reflective of flight to quality. But 0:22:39.680 --> 0:22:42.879 the issues and the concerns are not there. The issues 0:22:42.880 --> 0:22:46.439 and the concerns are with the uncertainty over what a 0:22:46.560 --> 0:22:50.480 virus does to economic activity. We're all feeling it in 0:22:50.560 --> 0:22:53.040 terms of we're getting emails from our schools. Are they 0:22:53.040 --> 0:22:56.240 shutting down our companies where we're working. That's where the 0:22:56.280 --> 0:22:59.640 panic is. Let's not panic people in other areas where 0:22:59.680 --> 0:23:02.879 there is into panic. Those markets are working well. There's 0:23:02.880 --> 0:23:06.719 more resilience. We will get through this once the uncertainty 0:23:06.760 --> 0:23:09.480 of how bad the impact of the economy is, and 0:23:09.520 --> 0:23:11.679 as I said earlier, we're gonna need a little bit 0:23:11.720 --> 0:23:14.600 of help from our policymakers, and we're going to get 0:23:14.640 --> 0:23:17.800 it in terms of a fiscal policy response that will 0:23:17.840 --> 0:23:21.080 be robust and will help to offset the demand side shock. 0:23:21.359 --> 0:23:23.480 And we'll wake up and we'll see what the payroll 0:23:23.520 --> 0:23:26.520 report is reminding us of, which is, Hey, we came 0:23:26.560 --> 0:23:30.280 into this with a pretty resilient account and resilience will 0:23:30.320 --> 0:23:33.000 be our source of strength when this uncertainty pass. Half 0:23:33.040 --> 0:23:36.080 a million jobs in ninety days is and excuse me, 0:23:36.080 --> 0:23:38.879