Speaker 1: This is Bloomberg Wall Street Week. What's the state of
Speaker 1: corporate governance? The deficit is a real issue. The US
Speaker 1: economy continues to send mixed signals. The financial stories that
Speaker 1: cheap our world fed action to con concerns over dollar
Speaker 1: liquidity and encouraging China data. The five hundred wealthiest people
Speaker 1: in the world. Through the eyes of the most influential
Speaker 1: voices Larry Summers, the former Treasury Secretary, Star CEO, Kevin Johnson,
Speaker 1: sec Chairman j Clayton, Bloomberg Wall Street Week with David
Speaker 1: Weston from Bloomberg Radio. One story dominated Wall Street this
Speaker 1: week and the business world and the world itself. The
Speaker 1: coronavirus made its presence known even as its spread in
Speaker 1: ways detected and undetected, and the markets reacted violently, raising
Speaker 1: for some the question whether we're on the brink of
Speaker 1: another two thousand eight great recession. Something Bloomberg Wall Street
Speaker 1: we contributed. Larry Summers waited on another way I like
Speaker 1: to think about it is weird a moment like where
Speaker 1: we were after Bear Stearns. That wasn't yet where we
Speaker 1: were after Leahman, but it was a pretty critical moment,
Speaker 1: and in retrospect, the time was largely wasted, and it
Speaker 1: would have been better if we had acted much more promptly. Uh,
Speaker 1: I don't think there is uh time to lose. To
Speaker 1: help us sort out the reaction from the overreaction, we
Speaker 1: convene now our Wall Street Week Round Table with Bob
Speaker 1: Diamond of Atlas Merchant Capital. Bob, of course, was the
Speaker 1: CEO of Barclays in the aftermath of the Great Financial Crisis,
Speaker 1: and Rick Reader of black Rock, where he is Chief
Speaker 1: Investment Officer for Global fixed Income. But he's not just
Speaker 1: a bond guy. He also is lead portfolio manager for
Speaker 1: black Rocks multisector fund. So Rick, Bob, welcome. Good to
Speaker 1: have you here. Bob, let me start with you still.
Speaker 1: I think he took over Barkers in two dozen ten
Speaker 1: or so, so just just as we were getting into
Speaker 1: the Great Financial Crisis. What are the differences and similarities?
Speaker 1: I mean, Larry was careful and saying, we're not yet
Speaker 1: the layman, but we may be a bar certains. I mean,
Speaker 1: there's similarities in terms of fear, but I think there
Speaker 1: are more differences. I mean, two thousand and eight was
Speaker 1: a banking crisis, it was a liquidity crisis, it was
Speaker 1: a solvency for many institutions in financial services, and you know,
Speaker 1: particularly in the US today, I don't think we could
Speaker 1: have a stronger banking system from capital levels and all
Speaker 1: the way through. UM. And I think right now, obviously
Speaker 1: it's a health crisis number one, but in terms of
Speaker 1: the impact and the economy, my sense is that we
Speaker 1: are dramatically underestimating the impact in the near term in
Speaker 1: terms of the economy UM, and we may be overestimating
Speaker 1: the medium to long term. And that's very dependent on
Speaker 1: UM any resolution to to the health crisis. UM. I
Speaker 1: think secondly, UM, while this isn't a U, I don't
Speaker 1: think anyone would think of this as a banking crisis.
Speaker 1: One of the things we're all trying to figure out
Speaker 1: is how can the banks be part of the solution.
Speaker 1: They're definitely not part of the problem. UH. And then lastly,
Speaker 1: i'd say, David, is I think you know when I
Speaker 1: look at the fault points, UM, if I look down
Speaker 1: the road, easily envisioned a significant bounce in the equity markets,
Speaker 1: because you know, I think, UM, the near term impact
Speaker 1: on the economy could potentially unwind over time. But I
Speaker 1: think when you look at the low end of the
Speaker 1: US dollar corporate credit market. UM, I think that may
Speaker 1: be more permanent in terms of UM loss of value.
Speaker 1: So I wonder if one difference might be not very advantageous,
Speaker 1: and that is this, we had a level of cooperation
Speaker 1: even across the aisle in two eight and between fiscal
Speaker 1: and monetary authorities. Uh, that we seem to lack right now.
Speaker 1: People say we should be coordinated. It doesn't feel very
Speaker 1: accordinate to what the government's doing. Yeah, I mean, I
Speaker 1: think that's right. I mean, first, what I would say
Speaker 1: one thing, The crises tend to bring people together, and
Speaker 1: so I think you'll see a bit more of that
Speaker 1: by your right here before you haven't really seen that. Listen,
Speaker 1: I think you know what people like to grain us
Speaker 1: in the markets. We like to grasp on a history
Speaker 1: because it gives us a pretty good playbook for how
Speaker 1: to think about this going forward. But you know, it's
Speaker 1: interesting every time you'll have one of these disruptions, it's
Speaker 1: different than the one before, and they're usually the reason
Speaker 1: why they're so potent in terms of at the markets
Speaker 1: is you can't really go back and say, how did
Speaker 1: this play out before? The things that are significant are
Speaker 1: I mean this is an exogenous shock of of significant proportion. Listen,
Speaker 1: We've never seen this before. We have people working in
Speaker 1: different offices, what is liquidity? How do people interface with
Speaker 1: one another? And that is really uncertain, So you know,
Speaker 1: we've got to work through that part of it. But
Speaker 1: I think what Bob said is right. It's not a
Speaker 1: it's not a leverage problem per se. And the other
Speaker 1: thing that I think is significant about this one and
Speaker 1: part of why we'll talk about you need that coordination.
Speaker 1: You need fiscal policy. The markets are not going to
Speaker 1: stabilize until you have something tangible from a fiscal policy
Speaker 1: point of view. Listen, the economy up to this point,
Speaker 1: and it's different regionally. Europe was still I would argue
Speaker 1: more about in terms of in terms of growth. The
Speaker 1: US economy was actually surprisingly this late in whatever whatever
Speaker 1: business cycle there is, it was particularly strong. You look
Speaker 1: at hiring, you look at where we were from a
Speaker 1: housing point of view, Retail sales was good, and even
Speaker 1: even manufacturing was was doing okay in a secular decline.
Speaker 1: Now it's like, how do you get from here to there?
Speaker 1: And how do you get to the other side. Listen,
Speaker 1: I'm more enthusiastic about I agree with Bob said, there's
Speaker 1: going to be some permanent tail to it, particularly in
Speaker 1: the credit markets. But this is something we've got a bridge.
Speaker 1: What is a really deep slowdown in the economy, and
Speaker 1: you have some sense that particularly Asia, particularly China and
Speaker 1: the US, there is some real vibrancy of those economies.
Speaker 1: We just got a bridge from here to there, and
Speaker 1: that is uncertain how we get there. Well. Are you
Speaker 1: worried that the markets are not responding in ways you
Speaker 1: might have expected? We had last week the FED cut
Speaker 1: fifty basis points, market went down. They didn't like it
Speaker 1: at all. This week we had to FED step up
Speaker 1: on liquidity and injective quiality. Initially reacted and then they
Speaker 1: came off again. Are you're worried that maybe the buttons
Speaker 1: that we're pushing or neck in the reaction we would expect.
Speaker 1: Yes and no. So I think it's a tale of
Speaker 1: two sides. I completely agree with what Rick said is
Speaker 1: what we need more than anything right now, if if
Speaker 1: we're correct that the near term impact and the economy
Speaker 1: is going to be severe, we need fiscal stimulus, and
Speaker 1: particularly in Europe. Having said that, um, I think what
Speaker 1: the ECB and the Bank of England have done in
Speaker 1: terms of providing liquidity, making sure banks have money to lend,
Speaker 1: particularly in Europe, with the banks are nowhere near as
Speaker 1: healthy as they are in the US um more asset
Speaker 1: acquisition programs, and in the case of the UK UM
Speaker 1: both Governor Karney and incoming Governor Bailey have reduced one
Speaker 1: of the buffers so that banks have more capital to
Speaker 1: lend to small businesses. So being focused on getting the
Speaker 1: right fiscal stimulus in the right areas and getting bipartisan
Speaker 1: support is critical. Okay, we are going to be back
Speaker 1: with our continuings. Bob Diamond and Rick Reader coming up.
Speaker 1: Can the central banks save us again? This is Bloomberg
Speaker 1: Wall Street Week with David Weston from Bloomberg Radio. ECB
Speaker 1: President Christine Lagarde is in the middle of a full
Speaker 1: blown crisis just four months into her job, with investors
Speaker 1: and businesses outing on her to avoid the worst of
Speaker 1: the economic damage to come from the coronavirus, so she
Speaker 1: announced a similar package this week, including a billion euros
Speaker 1: and quantitative easing over the rest of the year and
Speaker 1: ramping up liquidity and lending capacity, but leaving rates where
Speaker 1: they were In this week's contributors take Stephanie Flanders, Bloomberg's
Speaker 1: senior executive editor for Economics, takes us through the highs
Speaker 1: and the loans. Christine the Guard was very calm and
Speaker 1: deliberate in her press conference, which was a very unusual
Speaker 1: one to look at because the room was half empty.
Speaker 1: I think most of the reporters who were normally there
Speaker 1: had either not been able to travel to Frankfurt's or
Speaker 1: were working from home and were submitting many of their
Speaker 1: questions online. But the President of the European Central Bank
Speaker 1: announced what she called a surgical, comprehensive set of measures
Speaker 1: to help the Eurozone economy through the impact of the coronavirus.
Speaker 1: There was a big new long term lending program for banks,
Speaker 1: ideally aimed at them helping small and medium sized businesses
Speaker 1: affected by the virus. Along with that, there was some
Speaker 1: word from the regulator side of the eu CB that
Speaker 1: they were going to soften up some of their regulation
Speaker 1: of banks, perhaps to to make those banks more relaxed
Speaker 1: about the impact that that help for small and medium
Speaker 1: sized businesses might have on their balance sheets. And you
Speaker 1: had an expansion of QUEI, of the bond purchasing program
Speaker 1: of the European Central Bank, which we think will be
Speaker 1: oriented towards corporate lending, corporate debt, not government bond. What
Speaker 1: you clearly didn't see was the ECB follow the FED
Speaker 1: and the Bank of England in cutting the key policy rate,
Speaker 1: which is already though at minus not point five percent.
Speaker 1: That was possibly because they didn't think that would make
Speaker 1: much difference, and I think also they would point to
Speaker 1: the fact that the interest rate on that new lending
Speaker 1: for banks was actually going to be below the policy
Speaker 1: Rate's going to be a quarter of a point below,
Speaker 1: not point five. So in a sense, the rate has
Speaker 1: been cut for that kind of lending, it just hasn't
Speaker 1: been extended to the rest of the Eurozone economy. You know, investors,
Speaker 1: we saw, we're not we're not overwhelmed initially by what
Speaker 1: the ECB had announced. But actually Christine Legard herself said
Speaker 1: the CV was not the only actor in this story.
Speaker 1: What was going to be crucial, she repeated, was a
Speaker 1: coordinated fiscal effort from Eurasone governments to confront this crisis.
Speaker 1: And I think we've seen that generally. The idea that
Speaker 1: we have to see not just that the grown ups
Speaker 1: are in charge, if you like, but that they're really
Speaker 1: in top of, on top of the kind of micro
Speaker 1: measures and expenditures that are going to be needed to
Speaker 1: help cushion the blow of this crisis. We've seen that
Speaker 1: a bit from Italy. The UK had the good luck
Speaker 1: this week to have a budget schedule for this week,
Speaker 1: so we've seen a lot of quite decisive fiscal action
Speaker 1: from the UK, from other governments and specifically from Germany.
Speaker 1: Not so much that was a contributor to take from Loomberg,
Speaker 1: Stephanie Flanders. We're back now with Bob Diamond and Rick
Speaker 1: Reader for more of our roundtable discussion. So this was
Speaker 1: not a bazooka were you used or next shark? And
Speaker 1: is it enough? So? I thank you. Think we're beyond
Speaker 1: the idea of monetary policy comes to save the dime.
Speaker 1: And I think people compare this to the eighties or
Speaker 1: nineties when interest rates were significantly higher. When you move
Speaker 1: right down you can have a real effect. There's no
Speaker 1: interest rates are not symmetric when you reach the lower bound.
Speaker 1: When you get to zero, you hurt pension funds, insurance companies,
Speaker 1: individuals when you get to negative interest rates. So with
Speaker 1: Christine Legard did there were some benefits there t L
Speaker 1: t r Oh was good. You're getting at targeted lending,
Speaker 1: which I think is a big deal. Listen, I think
Speaker 1: what you said is right. This has got to get
Speaker 1: to the fiscal side. This has got to get the
Speaker 1: only way you're gonna get velocity in the system. You
Speaker 1: need to get innovation, you need to get equity investment,
Speaker 1: and fiscal will do that. So, Bob, you worked over
Speaker 1: in London. You know the London system very well. Did
Speaker 1: they show everybody the way it's supposed to be done
Speaker 1: this week? Because they had the Bank of England club
Speaker 1: with the right cut and they brought out their budget
Speaker 1: at the same time, it seemed to be quite coordinated.
Speaker 1: I thought that the response from the Bank of England
Speaker 1: and the joint presentation from Governor Karney and Governor elect
Speaker 1: Bailey was very thoughtful. UM, very effective. I think, well,
Speaker 1: I think it will be very effective. Um and UM.
Speaker 1: I think both UM allowing one of the buffers to
Speaker 1: be removed from the bank so that they can get
Speaker 1: more lending into the real economy. I thought they're liquidity
Speaker 1: measures um. And if you think back to the financial
Speaker 1: crisis in two thousand and eight, those types of things
Speaker 1: weren't done at that time, so I think it is helpful.
Speaker 1: But I'll come back to the point wheck and I
Speaker 1: have been making it now Christine leguard Um, we need
Speaker 1: fiscal stimulus as well. What about the backing offense of
Speaker 1: the reserve corners of the banks, because they also did that.
Speaker 1: There's talking about that here as well. I mean, everybody
Speaker 1: think I think I thinks it was a good thing
Speaker 1: to designate what we did make the bank stronger. We
Speaker 1: need him right now. But should we be backing off
Speaker 1: some for the time being. Yeah, I mean the regular
Speaker 1: star dynamic is really said. But you think about what
Speaker 1: happened in the in the off the run treasury market.
Speaker 1: I've never seen that before the bidas spread. Some of
Speaker 1: the off the run treasuries was multiple points. That is,
Speaker 1: that is a function of the banking system getting gummed up.
Speaker 1: You look at companies that are drawn on their bank
Speaker 1: long etcetera. When the banks don't have the ability to
Speaker 1: get in there. You need to do that, and by
Speaker 1: the way, can be in the short term nature. You
Speaker 1: don't need to do permanent change, but you need the
Speaker 1: bridge the dynamic where you're getting more liquid in the
Speaker 1: system and you're getting a better functioning environment. Some regulatory
Speaker 1: relief would be really helpful. Is liquidity more important than
Speaker 1: actually the interest rate right at the moment, for example,
Speaker 1: for the Fed, are they better off really just injecting
Speaker 1: dollars into the system. And I think, uh, my opinion,
Speaker 1: just one of many opinions, is we used a bullet
Speaker 1: we didn't need to use with the rate cut here
Speaker 1: UM recently, UM, I don't think that Governor Powell wants
Speaker 1: to go to negative interest rates. I don't think the
Speaker 1: UK wants to go to negative interest rates. And we
Speaker 1: used a bullet. What is really impressive is the bazooka
Speaker 1: they used in the repo markets. And you know, one
Speaker 1: of the businesses that we've invested in, South Street Securities
Speaker 1: is an independent UM broker dealer, a non bank holding
Speaker 1: company that does US Treasury and mortgage repo I see
Speaker 1: in that business. The liquidity in the short end of
Speaker 1: the market has never been more robust in I think
Speaker 1: since two thousand and eight and two thousand nine than
Speaker 1: it is now. Because your recalled, David that during UM
Speaker 1: Dodd Frank there were changes to open market operations that
Speaker 1: the New York Fed could operate in and a lot
Speaker 1: of that is being um um kind of taken back
Speaker 1: a little bit, and we're seeing much more activity from
Speaker 1: the fed UH to ensure that liquidity and the repo markets.
Speaker 1: And I think, you know, for the functioning of the
Speaker 1: short end of the curve, I think it's enormously helpful.
Speaker 1: And I think you're spot on. I think that's been
Speaker 1: more important than the than the right cut. So that
Speaker 1: that did act this week to injecttion liquidity. But was
Speaker 1: it enough, Yes, I mean that was it was, It was,
Speaker 1: it was. It was inspiring in terms of the amount
Speaker 1: they did. And when you put that sort of liquidity
Speaker 1: and you know, you were starting to see pressures in
Speaker 1: the mortgage market. Listen, the mortgage market. When you bring
Speaker 1: interest rates down, mortgage is supposed to come down in
Speaker 1: a parallel way, if not more so. Mortgage rates Actually
Speaker 1: we're moving higher. While was that the case? The system
Speaker 1: is gummed up? You need to provide better funding, which
Speaker 1: was what happened. You need to provide better liquidity. And
Speaker 1: the other thing that I don't think people consider enough.
Speaker 1: When you put liquidity in the system, it takes pressure
Speaker 1: off the dollar. We operate in a global financial system
Speaker 1: when you take pressure off the dollar. It takes it
Speaker 1: makes it easier for emerging market. So it's emerging markets
Speaker 1: go and in act policy on their on their own.
Speaker 1: That is a really big deal. Liquidity gets in the
Speaker 1: system and it's got it's got a real velocity to it,
Speaker 1: and they addressed it, and they had to do it.
Speaker 1: But you were seeing some cracks in the mechanism, and
Speaker 1: you can't buy other assets. You can't buy equities, you
Speaker 1: can't buy credit until the core asset, the wrist free rate,
Speaker 1: is solved. And it's the it's the number one used
Speaker 1: of collateral in the world. It's what we build. I
Speaker 1: was called the fan of dispersion. Until you know where
Speaker 1: the wrist free rate is, I can't build my models
Speaker 1: to how do I think about all the way down
Speaker 1: to equity and and so you have to fix that
Speaker 1: asset and they did. Okay, we're gonna be back with
Speaker 1: our contributors. This is Wall Street Week. This is Bloomberg
Speaker 1: Wall Street Week with David Weston from bloom Bird Radio.
Speaker 1: The one thing everyone seems to agree on is the
Speaker 1: ultimate source of the market turmoil. It's that we don't
Speaker 1: know how or when the coronavirus crisis will end. Most immediately.
Speaker 1: We need a treatment such as the gilead ebola drug
Speaker 1: that they're trying out right now in Washington, But ultimately
Speaker 1: it's a vaccine that the world needs, and that is
Speaker 1: going to take some time. Although this is the fastest
Speaker 1: we have ever gone from a sequence of a virus
Speaker 1: to a trial, it still will not be any applicable
Speaker 1: to the epidemic unless we really wait about a year
Speaker 1: to a year and a half. But eighteen months seems
Speaker 1: an awfully long time to wait right now, which leads
Speaker 1: some to ask whether our combination of science and technology
Speaker 1: could get us there faster. Welcome now, someone who's trying
Speaker 1: to do just that. Dave Turk is a vice president
Speaker 1: of technical computing IBM Cognitive Systems, and he joins us
Speaker 1: now for a second opinion on what could be done
Speaker 1: about the coronavirus. So, Dave, welcome, it's good to have
Speaker 1: you here. Thank you. So explained to us a exactly
Speaker 1: what's being done, what's IBMS roll in this thing? How
Speaker 1: could we actually maybe get a vaccine a bit sooner.
Speaker 1: So the largest supercomputer in the world is Ochrid's National Laboratory,
Speaker 1: constructed by IBM and this system has a capability of
Speaker 1: merging concepts of artificial intelligence with standard mathematical representations of problems.
Speaker 1: So what we do is when we look at the
Speaker 1: possibilities of efficacious treatment for something like corona looking for
Speaker 1: a virus, what you want to do is you want
Speaker 1: to follow a lot of different paths because you don't
Speaker 1: know which path will be the one that pays off.
Speaker 1: So in particular at Oakridge, they've looked at eight thousand
Speaker 1: different compounds and with a supercomputer they've called that down
Speaker 1: to seventy seven compounds in just two days. So those
Speaker 1: seventy seven compounds then go into a wet lab where
Speaker 1: they begin doing the experimentation on to see if they
Speaker 1: work or not. So how do you get from there
Speaker 1: to a vaccine? I mean, are you basically understanding the
Speaker 1: mechanism by which the virus works. It's it's a variety
Speaker 1: of things done in concerts. So you look at things
Speaker 1: sort of in our time, you know, a second, a minute,
Speaker 1: a day, but a lot of the modeling goes on
Speaker 1: extraordinarily small pieces of time tend to the minus fourteen
Speaker 1: you know, at atomic level, atomic kind of clock speed,
Speaker 1: and you begin to build up your understanding of the
Speaker 1: systems by operating simulating things at every one of those
Speaker 1: time steps, then aggregating them up to clock time where
Speaker 1: we're generally used to, and then looking at that over days, weeks,
Speaker 1: etcetera tremendous amount of compute power that's just a molecule
Speaker 1: by itself. Then you look at it in concert with
Speaker 1: the disease, then you look at it in concert with
Speaker 1: the human organism, and you begin to look at the
Speaker 1: interplay of all these factors to understand what the probabilities
Speaker 1: are of having a successful event. Has this ever been
Speaker 1: done before? So yes. In fact, IBM worked um with
Speaker 1: some of the previously emergent new strains of flu uh
Speaker 1: the last h one and one thing I think that
Speaker 1: came out of Mexico. We used our technology at that
Speaker 1: time to do some modeling of the evolutionary pathway of that.
Speaker 1: So if you look at flu viruses and the flu
Speaker 1: shots that you get every fall, it's a matter of
Speaker 1: looking scientifically at what's going on, but also predictively at
Speaker 1: how that virus will evolve over the course of time,
Speaker 1: and you take a shot at where the puck is
Speaker 1: gonna be, and then you build your virus for that
Speaker 1: and hope for the best. So it's a complicated mathematical
Speaker 1: construct that you need to examine. So I won't hold
Speaker 1: you to this because I'm sure there's no noble answer
Speaker 1: to it. But in success, if it worked perfectly, could
Speaker 1: you take time off that eighteen months? And if so,
Speaker 1: how much I think they're I think there are a
Speaker 1: couple of ways to look at this. One is, in
Speaker 1: the absence of the computer, you're basically throwing um darts
Speaker 1: at a dartboard in the dark, and so you don't
Speaker 1: know if you're even close to the target. So what
Speaker 1: we've done is we've winnowed that down quite dramatically. So
Speaker 1: now the lights are on, you know where the dartboard is,
Speaker 1: you know what the darts are in your hand, and
Speaker 1: you can start taking a shot at it. That's a
Speaker 1: tremendous advantage for the sign to working on this. The
Speaker 1: eighteen month is a lot of it is human trials
Speaker 1: and so on, so it's not going to do so
Speaker 1: much to compress that time span. But what it has
Speaker 1: done is it's really accelerated the starting step. So instead
Speaker 1: of waiting for a year to come up or two
Speaker 1: years or three years with that set of seventy seven
Speaker 1: we've got in a couple of days. That's a big
Speaker 1: step forward. Who owns this technique? Who's the I P
Speaker 1: in this? So so the I P is all being
Speaker 1: generated by the scientists involve UM. The Power nine technology
Speaker 1: which underscores the computer is all IBM. The ownership of
Speaker 1: the system is Zokridge National Lab is an agent for
Speaker 1: the Department of Energy. Have you tried this for other
Speaker 1: medical applications besides virus? As you said, you did it
Speaker 1: with the H one N one Mexico. Are you trying
Speaker 1: it with other medical applications? You know, we haven't. We
Speaker 1: have a group called Watson Health inside of IBM that
Speaker 1: looks at the amalgamation of artificial intelligence techniques with technologies
Speaker 1: like Power nine to bring that to bear on a
Speaker 1: variety of problems, whether it's cancer other kinds of medical issues.
Speaker 1: This same technology, though, has been using industrial sector. It's
Speaker 1: used for fintech, it's used for the design of airplanes, cars,
Speaker 1: um problems in computational chemistry and one of the very
Speaker 1: rich areas as material science. Material science percolates through our
Speaker 1: economy and the ability to understand how these different materials
Speaker 1: are working on how to invent new materials is a
Speaker 1: critical dimension to how you drive the economy forward. Same
Speaker 1: technology can be used for that really fascinating good luck
Speaker 1: on the coronavirus, and it works for all of our sakes. Okay,
Speaker 1: thanks not a Dave tour of IBM. If you missed
Speaker 1: an episode of Bloomberg Wall Street Week, full episodes are
Speaker 1: now available on YouTube, the Bloomberg Turtle and on Bloomberg
Speaker 1: dot com. This is Wall Street Week. This is Bloomberg
Speaker 1: Wall Street Week with David Weston from Bloomberg Radio. The
Speaker 1: coronavirus didn't just hit stocks and bonds. It hit oil
Speaker 1: prices as well as markets anticipated in demand shock emanating
Speaker 1: out of China and in OPEC tried to do something
Speaker 1: about it, publicly calling out Russia for production cuts it
Speaker 1: hadn't agreed to. Russia declined in Saudi Arabia declared a
Speaker 1: price war that took oil prices down the most since
Speaker 1: two thousand and eight. We're joined now by a Wall
Speaker 1: Street Week contributor who did her graduate work on energy
Speaker 1: at Oxford and worked at Shell before going on to
Speaker 1: the World Bank Carlisle and then founding her own firm,
Speaker 1: Rock Creek Group. She comes to us today from Washington,
Speaker 1: and then Sari Bashels sounding great to have you with us.
Speaker 1: Thanks for being with us, So give us a sense
Speaker 1: form your take. Just stick with Russia and in Sari Arabia. Now,
Speaker 1: what happened, it was all out war. And normally with OPEC,
Speaker 1: when you have these kinds of statements, somebody backs off
Speaker 1: really quickly within twenty four to eight hours. So what
Speaker 1: happened this week was highly unusual. And when you couple
Speaker 1: that with everything else that we've been talking about today,
Speaker 1: it is truly all out war. So it's not just
Speaker 1: an oil war. It's like an all out war on
Speaker 1: the economy. And the amount of money that got taken
Speaker 1: out for oil producers with this shock with oil prices
Speaker 1: going down to the twenties and now sort of hovering
Speaker 1: around the low thirties has not really happened, as you said,
Speaker 1: for a very long time. Up who was shooting at
Speaker 1: home in this war? It was a Russia shooting at
Speaker 1: Satura Arabia, Satura Arabia shooting at Russia, or was Russia
Speaker 1: shooting in the United States. So it was supposed to
Speaker 1: be both of them shooting at the United States. Trying
Speaker 1: to kill the shale business in the US once and
Speaker 1: for all. And it's interesting given the timing they chose.
Speaker 1: Two things I think are important. One, will this be
Speaker 1: the worst time in the U S economy That might
Speaker 1: lead actually some protection of our own shale industry, which
Speaker 1: might not have happened if they had done it at
Speaker 1: a different time. And too, it has caused a major
Speaker 1: falling out, at least to the eyes of the beholder,
Speaker 1: between two great autocrats in the world. So it is,
Speaker 1: you know, not clear who's going to blink first. It
Speaker 1: seems like neither is going to blink. The other group
Speaker 1: that was supposed to other country that was supposed to
Speaker 1: really get hurt was of course Iran, which already UM
Speaker 1: is in a very bad situation. But I think there's
Speaker 1: always been a subsidiary effort to kill that industry as well.
Speaker 1: But I think the main main effort was to get
Speaker 1: the shell industry to basically kill over so UM Asan
Speaker 1: is the expert, I loved listening to this. I think
Speaker 1: from someone who's not an expert in that area and
Speaker 1: outside watching this UM, you know, you kind of have
Speaker 1: the impression that you can't make this stuff up. We
Speaker 1: have this crisis in the world right now around Corona coronavirus,
Speaker 1: and we have this political game going on between Saudi
Speaker 1: Arabia and uh in Russia with profound implications on economies
Speaker 1: around the world. You just can't make this stuff up.
Speaker 1: What happens to show producers, I said, if it was
Speaker 1: turning at them, I mean, you really see them under
Speaker 1: an awful lot of financial stress and strain right now.
Speaker 1: A lot of them were leveraged. You saw some of
Speaker 1: the yields, how y'eld yield really blow out there? So
Speaker 1: what happens to the shell exactly? So they already were overleveraged,
Speaker 1: and I think this is this is a huge problem
Speaker 1: for them, and that is why what happens with some
Speaker 1: sort of assistance through credit markets to the biggest shell
Speaker 1: producers will be really key to keeping them up and alive.
Speaker 1: At the same time, I think, as Bob is saying,
Speaker 1: what is really interesting is why would Russia and Saudi
Speaker 1: Arabia do this at this time. The second thing that
Speaker 1: is very unusual at this time, by the way, is
Speaker 1: that normally, when you have such a big oil price
Speaker 1: shock to the downside, you have people driving more, you
Speaker 1: have people using more energy, and you have emerging markets
Speaker 1: and oil importers actually have a big uptick in their
Speaker 1: stock or in their currency. Given the crisis that's going on,
Speaker 1: we're not seeing any of those. So it's not just
Speaker 1: the shell producers that are hurting, but it's really the
Speaker 1: global economy. So I think when you think about credit,
Speaker 1: David Um and I mentioned this earlier in the show,
Speaker 1: that the proliferation of credit since the crisis, with lower
Speaker 1: interest rates QUE one q E two UM, what we
Speaker 1: have seen is a doubling of the amount of leverage
Speaker 1: loans outstanding today. It's it's something like one point three trillion.
Speaker 1: There's four times as much triple B the lowest rated
Speaker 1: bonds out in the market. And I think we've been
Speaker 1: wondering what is the match that will that will kind
Speaker 1: of start this and Um, what's happening to the economy
Speaker 1: as a result of coronavirus might be that. And I
Speaker 1: think one of the fault lines is going to be
Speaker 1: in the energy sector, particularly the intersect energy sector in
Speaker 1: the US is Afsana said. Um, that's where leverage is
Speaker 1: very high, and that's where the business prospects and the
Speaker 1: cash flows are dropping. Most quickly. So we happen to
Speaker 1: think that um, um, we're going to see um quite
Speaker 1: uh quite lower values in below investment grade debt across
Speaker 1: the US dollar corporate market, but particularly in energy. So
Speaker 1: normally when you have that, there's a shake a bankruptcies.
Speaker 1: Let's be frank. What happens and assets go up for sale.
Speaker 1: Are the majors in a place to come in and
Speaker 1: buy some of that? I think? I think what we're
Speaker 1: gonna have to see is is significant consolidation and um.
Speaker 1: Otherwise we're going to see a number of bankruptcies. But
Speaker 1: one of those two things is going to happen. And
Speaker 1: I do think that the majors are very very healthy
Speaker 1: right now. So do they have the capacity from a
Speaker 1: from a capital structure point of view? Yes, do they
Speaker 1: have the willingness? Um? I'm not enough of an expert
Speaker 1: in that sector to know. So you are what's gonna happen? Well, Well,
Speaker 1: I think two things. One is that um, the other
Speaker 1: people that are getting hurt and we'll get hurt even
Speaker 1: more people who lent to the shaling dis tree. So
Speaker 1: there's not going to really be um sort of Andy's
Speaker 1: silver lining for them. UM. I agree that there might
Speaker 1: be some There will be consolidation. It may not necessarily
Speaker 1: be the big oil majors, because the oil majors, just
Speaker 1: before this happened have been trying to diversify their sources
Speaker 1: of energy away from oil and gas and away from
Speaker 1: hydrocarbons into more renewable energy. So it would be really
Speaker 1: interesting as they weigh the cost of shell versus the
Speaker 1: cost of renewable energy, which way they go. But most
Speaker 1: of them are starting to call themselves energy companies versus
Speaker 1: oil and gas companies. So that's something interesting to watch.
Speaker 1: You've been in the forefront of that move. You've been
Speaker 1: very outspoken about that. What effects might this oil price war,
Speaker 1: particularly if they continues for any period of time, have
Speaker 1: on that dynamic? Does that put off the date for
Speaker 1: people to invest in the renewables? Actually think that process
Speaker 1: is um sort of ongoing. You had one point six
Speaker 1: trillion go into renewables um since two thousands sixteen, another
Speaker 1: maybe ten trillion going in over the next few years,
Speaker 1: and what is I think the forces of renewable energy
Speaker 1: is one reason that we have seen as oil prices
Speaker 1: have gone down, they don't bounce back. You remember when
Speaker 1: we had the incident with refinery in in Saudi Arabia,
Speaker 1: oil prices went up, but then they really did go
Speaker 1: down pretty fast right after. The forces that are at play,
Speaker 1: between the forces um that climate change has created, as
Speaker 1: well as the geopolitical issues that we're seeing right now
Speaker 1: in front of us, as well as having had a
Speaker 1: really nice weather winter season, all of them are forcing
Speaker 1: the oil producers to really panic. So I think looking forward,
Speaker 1: it's going to be much less focus on oil and gas,
Speaker 1: and at least oil and maybe more focused on natural gas,
Speaker 1: including local US natural gas and shell gas, as well
Speaker 1: as renewables. Bob, can we afford the United States to
Speaker 1: lose the shale industry? I mean not to say we'd
Speaker 1: lose it all together, but I mean, going back in
Speaker 1: the history, then Vice President George Herbert Walker Bush went
Speaker 1: to the Southeast and said, you can't let the price
Speaker 1: go too low because you'll wipe out my domestic industry.
Speaker 1: We have President Trump just this week saying, you know what,
Speaker 1: local gas presidents, that's a good thing. That's like a
Speaker 1: tax cut. He sort of likes it. You know. I
Speaker 1: think Assana brought up the right the right issue, which is,
Speaker 1: you know, the majors have the capital to take part
Speaker 1: in that, but they don't have the willingness for all
Speaker 1: the reasons that she she spoke on so well, Um,
Speaker 1: I think secondly, Um, the the you know, when you
Speaker 1: look at the impact of this on the high yield
Speaker 1: bonds or the corporate bonds that support so many of
Speaker 1: those activities, the banks US don't have the capacity because
Speaker 1: of capital rules that were introduced post two thousand eight
Speaker 1: to really be part of the solution. So what we're
Speaker 1: gonna need is we're gonna need private capital which is
Speaker 1: targeted for this area, or some kind of a government program.
Speaker 1: I doubt we're going to see a government program in
Speaker 1: this in this area, So it's really about private capital, Bob.
Speaker 1: Don't you think at this time they might consider a
Speaker 1: government program again for the geo political reasons, you know,
Speaker 1: just to be in um, this situation a work created
Speaker 1: by the Saudis and the Russians at the most inopportune time.
Speaker 1: Don't you think if the circumstances, um, we're different, obviously
Speaker 1: there would be no chance of a government bailout. But
Speaker 1: don't you see the government playing a bigger role and
Speaker 1: trying to make us energy sufficient, self sufficient. So you're thinking,
Speaker 1: is it because the the the origin of this was
Speaker 1: the political battles happening between Saudi Arabia and Russia. It
Speaker 1: gives the government a chance and and I see your point. Yeah,
Speaker 1: I see your one. Okay, many thanks to Wall Street Reek.
Speaker 1: Contribute to osany Bachelaus coming to us from Washington. Thank
Speaker 1: you so much to Bob Diamond. This has been another
Speaker 1: edition of Bloomberg Wall Street Reek. See you next week.