WEBVTT - Surveillance: Time for Governments to Try MMT? 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jay Lee. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.160 Bloomberg dot Com, and of course on the Bloomberg. Let's 0:00:27.160 --> 0:00:30.200 bringing Jack aveline, shall we Crescent Wealth Advises, c I 0:00:30.480 --> 0:00:34.440 O and founder as well. Fantastic to catch up with you, Jack. 0:00:34.800 --> 0:00:36.959 Walk us through what you're seeing in terms of policy. 0:00:37.360 --> 0:00:40.239 Is it enough to deliver a circuit breaker for this 0:00:40.560 --> 0:00:47.159 very volatile liquid market? Yeah? It uh, well we're waiting. Um, 0:00:47.200 --> 0:00:52.080 you know, obviously monetary policy it was pretty factive, reasonably 0:00:52.120 --> 0:00:57.080 effective in creating the money market liquidity. Um, you know, 0:00:57.480 --> 0:01:00.720 maybe going off with a few bumps, but um, all 0:01:00.760 --> 0:01:03.000 in all I think is it's pretty steady, and so 0:01:03.080 --> 0:01:05.600 we did learn a lot at the last crisis. Now, 0:01:05.720 --> 0:01:11.760 of course, all eyes are on fiscal the fiscal policy, 0:01:11.920 --> 0:01:16.800 and you know, President Trump's talking about a trillion um. 0:01:16.840 --> 0:01:20.280 You know, my back of the envelope estimate that is, 0:01:20.360 --> 0:01:25.960 if if this is essentially call it six weeks of 0:01:26.319 --> 0:01:31.039 you know, utter stand still, um, than that equates to 0:01:31.160 --> 0:01:35.720 about call it a two trillion of g D p um. 0:01:35.760 --> 0:01:39.200 If you assume that maybe third a third of the 0:01:39.280 --> 0:01:44.399 economy is actually still operating, then maybe this is about 0:01:44.440 --> 0:01:50.720 one point three trillion um to fill that gap um. 0:01:51.000 --> 0:01:53.280 And you know, where does it come from? It's possible 0:01:53.600 --> 0:01:57.560 this could be that modern monetary theory that's been you know, 0:01:57.640 --> 0:02:00.720 bouncing around. Well, there's a question about the school response. 0:02:00.760 --> 0:02:04.600 In the meantime, monetary policymakers have urgently been trying to 0:02:04.680 --> 0:02:09.760 prevent a financial crisis from unfolding. As the author of 0:02:09.800 --> 0:02:13.519 a book, Reading Minds and Markets, Minimizing risks and Maximizing 0:02:13.520 --> 0:02:15.919 returns in a volatile global marketplace. It was published in 0:02:16.000 --> 0:02:19.720 July two thousand nine, very apropos At this moment, which 0:02:19.800 --> 0:02:23.320 is probably the most volatile time in markets in history, 0:02:23.760 --> 0:02:27.480 I'm wondering, have we actually managed to stave off a 0:02:27.560 --> 0:02:31.240 financial crisis or the wild moves we're seeing evidence that 0:02:31.280 --> 0:02:33.880 we are seeing things absolutely spiral out of control on 0:02:33.919 --> 0:02:37.720 the market side. Well, I think part of the you know, 0:02:37.760 --> 0:02:40.359 a good deal, I should say, of the selling that's 0:02:40.400 --> 0:02:44.080 going on is forced selling. That the fact is that 0:02:45.240 --> 0:02:49.079 there are you know, I'm going to say probably call 0:02:49.160 --> 0:02:54.799 it three to four hundred billion of institutional funds managed 0:02:55.320 --> 0:03:00.239 UM in a programmatic way. Where volatility goes up, risk 0:03:00.280 --> 0:03:03.800 has to come down UM. You know, if you know, 0:03:03.840 --> 0:03:09.720 puts get essentially assigned, then the items have to be 0:03:09.760 --> 0:03:15.680 sold um, you know, and so there there's UH option writing, 0:03:15.880 --> 0:03:20.120 there's risk parity UM, and then there's just out an 0:03:20.120 --> 0:03:24.360 out leverage UM, which has been you know, certainly benefited 0:03:24.639 --> 0:03:28.400 these managers for the last several years. And I think 0:03:28.480 --> 0:03:31.679 that's really exaggerated a lot of the moves. Jack, how 0:03:31.760 --> 0:03:35.160 far in that leverage unwind are we? Do you have 0:03:35.200 --> 0:03:40.120 a sense of that? I I really don't, UM, you know, 0:03:40.600 --> 0:03:43.440 just because of these volatile were we still have these 0:03:43.600 --> 0:03:47.960 enormously volatile sessions. So it's really hard to gauge you know, 0:03:48.000 --> 0:03:52.040 how much of this is UM you know, is through 0:03:52.120 --> 0:03:54.440 I would say from a risk parity point of view, 0:03:54.960 --> 0:03:58.640 you know, does does the VIX get much higher than eighty? 0:03:59.040 --> 0:04:01.960 You know, because it's not necessarily the level, it's the direction. 0:04:02.000 --> 0:04:06.480 Now because assuming that all risperity traders have you know, 0:04:06.680 --> 0:04:11.360 essentially adjusted to a VIC saved UM, you know, perhaps 0:04:11.920 --> 0:04:14.400 if it just stays at that level and comes down, 0:04:14.560 --> 0:04:18.039 maybe most of that behind us Jack, I believe great 0:04:18.120 --> 0:04:20.279 cat show. You're joining us on the market in the 0:04:20.320 --> 0:04:26.800 United States just brings a bauchari jasurists today as general 0:04:26.880 --> 0:04:29.520 head of US Right Strategy, it's a bout of fantastic 0:04:29.520 --> 0:04:31.120 to have you with us on the program. Walk us 0:04:31.120 --> 0:04:33.320 through what you think is the biggest driver right now. 0:04:33.440 --> 0:04:36.320 Is it people just selling what they can not necessarily 0:04:36.320 --> 0:04:39.560 what they want. Is it some big technicalish out technically 0:04:39.560 --> 0:04:42.320 issue out there, the illiquidity that we're experiencing in some 0:04:42.520 --> 0:04:44.960 really really big parts of the market, or is this 0:04:45.040 --> 0:04:46.520 just supply risk? What is it for you at the 0:04:46.560 --> 0:04:49.200 longer end of the curve. Well, I think it's a 0:04:49.240 --> 0:04:51.680 combination of all of the above. UM. I think the 0:04:51.760 --> 0:04:54.120 last of liquidity, in my opinion, is the number one 0:04:54.200 --> 0:04:57.839 reason for this erratic moves. That would say in treasuries, 0:04:57.880 --> 0:05:00.160 because it's it's off twenty basis points one day and 0:05:00.160 --> 0:05:03.880 then it rallies fifteen basis points the next. Um. If 0:05:03.920 --> 0:05:06.839 you are a corporate bond investor, for instance, you're not 0:05:06.960 --> 0:05:08.919 able to sell your corporate bonds, you're going to sell 0:05:09.480 --> 0:05:12.919 perhaps other liquid assets. You have to be able to 0:05:12.960 --> 0:05:16.960 meet your margin requirements or other purposes. Um. There's also 0:05:17.120 --> 0:05:21.000 a lot of UH you know, demand for dollars broadly 0:05:21.040 --> 0:05:24.520 speaking from a variety of market participants, and and the 0:05:24.560 --> 0:05:27.960 first thing that they can sell is the most liquid 0:05:27.960 --> 0:05:30.760 asset they have. The other fact that, like you pointed out, 0:05:30.960 --> 0:05:34.680 is also tangible risk of higher deficits. But I, generally 0:05:35.400 --> 0:05:39.120 and not I would be emphasize the bond vigilante characterization 0:05:39.320 --> 0:05:42.960 because in my opinion, over time it's the e c 0:05:43.120 --> 0:05:45.400 B as well as the FED and all global central 0:05:45.440 --> 0:05:48.240 banks are doing q E. The trajectory has to be 0:05:48.360 --> 0:05:51.720 for for yields to gradually move lower. So there's been 0:05:51.760 --> 0:05:54.480 really no correlation in the last you know, two decades 0:05:54.880 --> 0:06:00.200 between higher deficits and higher treasure yields. There's a question here. 0:06:00.279 --> 0:06:03.160 You talk about the fundamentals, you talk about the lack 0:06:03.240 --> 0:06:06.039 of liquidity. The lack of liquidity certainly has gotten the 0:06:06.040 --> 0:06:08.200 attention of the Federal Reserve, and they've tried to step 0:06:08.240 --> 0:06:11.279 in to try to stave that off by buying additional bonds, 0:06:11.320 --> 0:06:14.360 particularly on the longer end of the curve. Why has 0:06:14.400 --> 0:06:18.680 that not been helping more? That's a very very good questions. So, 0:06:18.720 --> 0:06:21.920 because the lack of liquidity that I'm talking about is 0:06:22.200 --> 0:06:26.719 has to do with the post crisis regulatory environment where 0:06:27.240 --> 0:06:30.400 balance sheets for dealers, who are typically the ones that 0:06:30.440 --> 0:06:35.000 are disinter mediating this risk has shrunk, so they're very 0:06:35.080 --> 0:06:39.840 very careful about taking on risk um they have both 0:06:40.320 --> 0:06:43.680 both on the repost side as well as on the 0:06:43.720 --> 0:06:47.839 cash side, they're not able to rapidly grow their bound sheet. Also, 0:06:47.880 --> 0:06:50.559 there's an issue of price discovery. When there's erratic moves 0:06:50.560 --> 0:06:53.520 in the markets, it's very hard for market makers to 0:06:53.560 --> 0:06:56.919 be able to know exactly where whereas things straight so 0:06:56.960 --> 0:06:59.599 they tend to make the bid offers a lot wider 0:06:59.600 --> 0:07:02.680 than they normally would. And adding to this problem is 0:07:02.720 --> 0:07:05.240 the fact that people are working from home. There's not 0:07:05.400 --> 0:07:08.760 that same levels of information flow that you would see 0:07:08.760 --> 0:07:11.520 in a trading floor that on any given day that 0:07:11.640 --> 0:07:15.680 you've seen right now. Bad for somebody who is hearing 0:07:15.880 --> 0:07:18.800 these words that that that the treasury market is dysfunctional. 0:07:18.880 --> 0:07:21.880 This is the seventeen trillion dollar market. It's crucial to 0:07:21.960 --> 0:07:26.160 the entire global market. Can you give a little perspective 0:07:26.320 --> 0:07:29.440 about just why that is? Just sort of how crucial 0:07:29.480 --> 0:07:32.160 it is for the volatility in the treasury space to 0:07:32.480 --> 0:07:37.000 decline in order for everything else to stabilize. I must 0:07:37.000 --> 0:07:38.920 say I've been in the bond market for over two 0:07:38.920 --> 0:07:42.480 decades and I've never seen this kind of volatility and 0:07:42.720 --> 0:07:46.680 wide bit offers in the in the treasury market. So 0:07:46.800 --> 0:07:51.280 I think it's extraordinarily important that the treasury market actually 0:07:51.320 --> 0:07:54.960 functions properly. As you might know, we've had uh you know, 0:07:55.160 --> 0:07:58.040 flash rallies in the past, and the Treasury has been 0:07:58.160 --> 0:08:01.880 very closely monitoring PRISA and in the bond market. But 0:08:02.040 --> 0:08:04.840 you know, the treasury market is your go to market 0:08:04.960 --> 0:08:10.080 for for safe haven. So if you're an investor that 0:08:10.080 --> 0:08:12.559 that wants to get out of risky acids and and 0:08:12.840 --> 0:08:15.480 purchase a safe haven as that you're going to flock 0:08:15.520 --> 0:08:20.840 towards treasury. So it's extraordinarily important that this market functions, uh, 0:08:20.880 --> 0:08:22.960 you know, very efficiently. And you're seeing that this is 0:08:23.000 --> 0:08:25.800 not just in the in the cash or TC markets. 0:08:25.920 --> 0:08:28.560 You're seeing a liquidity in the futures market as well, 0:08:28.600 --> 0:08:31.560 which is which is also somewhat troubling. So about you 0:08:31.680 --> 0:08:33.280 just to wrap things up on the regulatory side, you 0:08:33.320 --> 0:08:35.120 mentioned some of the regulation. I just wonder what you 0:08:35.120 --> 0:08:37.600 think should be done. We just had a Bloomberg terminal 0:08:37.640 --> 0:08:40.360 subscriber right into me, and we've had a lot of 0:08:40.360 --> 0:08:42.640 people writing with some really really good thoughts on things, 0:08:42.640 --> 0:08:45.000 and I think this resonates with what you're saying. As 0:08:45.120 --> 0:08:48.760 volume goes up, volatility goes up, the risk managers will 0:08:48.800 --> 0:08:51.559 force you to shrink the disposition. So in effect, it 0:08:51.640 --> 0:08:55.600 forces less liquidity every time there's a crisis. So volo up. 0:08:55.679 --> 0:08:58.800 Guess what risk managers tap you on the shoulder, pull 0:08:58.880 --> 0:09:01.240 back your positions. Look it, he gets worse every time 0:09:01.280 --> 0:09:03.720 we get into this situation and spatial I just wonder 0:09:03.720 --> 0:09:05.559 what we can do about that, to cut that break, 0:09:05.679 --> 0:09:09.680 break that link, get a circuit breaker in there. Well, 0:09:09.720 --> 0:09:11.640 I think that the FAN has done it's part a 0:09:11.640 --> 0:09:15.280 little bit by providing the primary dealer facility as well 0:09:15.320 --> 0:09:18.359 as uh, you know, some of the other report facilities 0:09:18.360 --> 0:09:21.800 that should provide liquidity to directly the primary dealers and 0:09:22.080 --> 0:09:26.439 depository institutions. But beyond that, I would argue that the 0:09:26.760 --> 0:09:30.200 supplementary lavage ratio requirements and the lavagator requirements that have 0:09:30.240 --> 0:09:33.680 been imposed in the PROS post crisis period has also 0:09:34.600 --> 0:09:37.840 vastly limited the dealer's ability to be able to take 0:09:37.880 --> 0:09:41.280 on very large positions. This is also an issue in 0:09:41.360 --> 0:09:45.000 corporate bonds, where the vocal rule is very much in play. 0:09:45.040 --> 0:09:48.800 So there's there's clearly a lot of good rules that 0:09:48.840 --> 0:09:51.920 were put in place after the financial crisis, uh to 0:09:52.040 --> 0:09:56.680 avoid excessive risk taking among dealers, but that's also hurting 0:09:56.679 --> 0:10:01.320 in an environment like this where you have primary dealers 0:10:01.520 --> 0:10:05.240 are sort of your conduit for disintermediating risk. It's a 0:10:05.280 --> 0:10:07.320 bauta great to get your thoughts. Thank you very much 0:10:07.320 --> 0:10:09.920 for joining US avantea Jappi there stay at General's head 0:10:10.200 --> 0:10:15.120 of the US right strategy. I want to bring in 0:10:15.240 --> 0:10:20.160 Nathan Shakes paging fixed income economists and macro economic research 0:10:20.200 --> 0:10:22.679 and Nathan fantastic to catch up with you. Let's just 0:10:22.720 --> 0:10:24.640 get your thoughts on a claims number to eighty one 0:10:25.040 --> 0:10:27.079 direction to travel not pretty. How bad you expect this 0:10:27.120 --> 0:10:30.080 to get in the coming weeks. Well, I think your 0:10:30.120 --> 0:10:35.160 folks have really nailed. A seventy uh increase in a 0:10:35.240 --> 0:10:41.599 week is enormous, and uh, my expectation is that that 0:10:41.880 --> 0:10:46.000 narboro will continue to rise. The question is how high 0:10:46.679 --> 0:10:50.760 and that this is really our first gauge on just 0:10:51.120 --> 0:10:54.679 how badly the really economy is going to be hit 0:10:54.760 --> 0:10:57.200 by this saying. And I think you know to me, 0:10:57.240 --> 0:10:59.760 it feels like we're we're standing on the edge of 0:10:59.760 --> 0:11:02.680 it best and we just can't see the bottom. This 0:11:02.800 --> 0:11:06.880 is this is a very scary juncture, Nathan. This is 0:11:06.920 --> 0:11:09.439 a very scary juncture, and it's a lot of scary. Uh. 0:11:09.600 --> 0:11:11.440 There are a lot of people who are very worried 0:11:11.520 --> 0:11:14.920 about their own financial well being. They are seeing themselves 0:11:14.920 --> 0:11:17.800 get laid off in mass and there's a question will 0:11:17.840 --> 0:11:20.600 the jobs return? Do we have a sense of that? 0:11:20.640 --> 0:11:23.800 I mean, is there sort of a trajectory here where 0:11:23.800 --> 0:11:26.920 we could see a rapid increase the number of those 0:11:27.000 --> 0:11:30.600 unemployed and then it all comes back online. So I'm 0:11:30.800 --> 0:11:35.679 uncomfortable that the jobs will return some day. But that's 0:11:35.720 --> 0:11:40.319 the problem is we don't know when that day is, uh, 0:11:40.360 --> 0:11:43.440 And and how do we get from here to there? 0:11:43.559 --> 0:11:46.839 That's really the key question now as I say that, 0:11:46.840 --> 0:11:50.920 that is also a question that fiscal policy can help answer. 0:11:51.440 --> 0:11:54.560 This is this is where fiscal policy can be the 0:11:54.600 --> 0:11:58.160 most powerful. So these ideas that are being floated to 0:11:58.800 --> 0:12:04.920 significantly in freeze unemployment benefits great idea to help these people, Uh, 0:12:05.160 --> 0:12:10.559 ideas to buffer those that have lost wages, great ideas. 0:12:10.600 --> 0:12:12.520 And I think at a time like this it even 0:12:12.520 --> 0:12:16.480 makes sense as they're considering to just mail people mind. 0:12:17.080 --> 0:12:19.960 But fiscal policy is going to be the key to 0:12:20.120 --> 0:12:23.240 building this bridge from where we are today to that 0:12:23.480 --> 0:12:27.040 someday when the jobs return. Couldn't agree more, Nathan. And 0:12:27.080 --> 0:12:28.839 at the moment, there's a line that's going around in fact, 0:12:28.880 --> 0:12:31.000 over the last couple of weeks, perfection is the enemy 0:12:31.000 --> 0:12:33.240 of the good. We need this fast. It doesn't need 0:12:33.280 --> 0:12:36.080 to be perfect, we just need this quickly. Do you 0:12:36.120 --> 0:12:39.000 anticipate this will get done quickly enough to address some 0:12:39.080 --> 0:12:42.000 of the issues that you're worried about right now? Mitch 0:12:42.080 --> 0:12:46.600 McConnell told his caucus there was some pushback on the 0:12:46.600 --> 0:12:50.720 bill that they approved yesterday. He said, just gag and 0:12:50.920 --> 0:12:54.080 vote for it and worry about fixing it later. So 0:12:54.280 --> 0:12:57.600 I think that I think that the Congress, the political 0:12:57.679 --> 0:13:00.960 system is very much now in a place where we've 0:13:00.960 --> 0:13:03.400 got to get something done. It's got to be big, 0:13:03.559 --> 0:13:06.680 and it's got to be quick. And uh, I would 0:13:06.720 --> 0:13:09.560 expect that we'll see something on the order of a 0:13:09.600 --> 0:13:13.440 trillion dollars of fiscal stimulus. Let's stay over the next 0:13:13.480 --> 0:13:16.880 week or ten days, could even be faster, Nathan. There's 0:13:16.880 --> 0:13:20.160 also a question about the psychological impact the staying power 0:13:20.240 --> 0:13:22.840 that that has on an economy When you have tons 0:13:22.920 --> 0:13:27.160 of thousands, uh perhaps a million people ultimately according to 0:13:27.240 --> 0:13:30.959 some estimates, who lose their jobs in short order, What 0:13:31.040 --> 0:13:34.640 does that do to the economy longer term in terms 0:13:34.679 --> 0:13:38.839 of consumer spending and saving raids and household formation. I mean, 0:13:39.160 --> 0:13:41.640 do you have a sense of how long lasting the 0:13:41.640 --> 0:13:46.360 psychological impact could be? You know, in in some sense, 0:13:46.480 --> 0:13:49.760 I would say that we are still dealing with the 0:13:49.960 --> 0:13:56.040 psychological ramifications of the global financial crisis now, more than 0:13:56.080 --> 0:14:00.480 a decade later. And I think that this app episode 0:14:00.920 --> 0:14:03.640 that we're going through now again, depending on how long 0:14:03.720 --> 0:14:06.840 lived it is, how the virus evolved, is going to 0:14:06.920 --> 0:14:12.079 leave a signature in people's thinking. And I think it's 0:14:12.160 --> 0:14:16.880 underscoring to them that the world is a risky place. Now. 0:14:16.920 --> 0:14:21.160 What exactly that means for the economy going forward, I 0:14:21.200 --> 0:14:24.360 think is an open issue. But on the margin, I 0:14:24.400 --> 0:14:27.440 think everyone will for some time be a little more 0:14:27.440 --> 0:14:31.160 cautious and recognize that there are broad classes of risks, 0:14:31.560 --> 0:14:34.680 some that are evident, in some that like like this 0:14:34.800 --> 0:14:38.080 virus that just kind of emerge out of nowhere. Nathan, 0:14:38.200 --> 0:14:40.200 We're lucky to have you this morning because your economists 0:14:40.240 --> 0:14:43.560 that sits around some really really great fixed income portfolio 0:14:43.600 --> 0:14:46.720 managers like Greg Peters, like Mike Collins, like others over 0:14:46.720 --> 0:14:49.440 a PGIM and I just wonder when you all bang 0:14:49.480 --> 0:14:51.680 your heads against each other over the last couple of 0:14:51.720 --> 0:14:54.320 weeks many times, I'm sure how you're thinking about the 0:14:54.400 --> 0:14:57.000 key economic question at the moment. Two weeks ago, three 0:14:57.040 --> 0:14:59.680 weeks ago, the happy talk of a V shaped recovery 0:14:59.760 --> 0:15:02.360 still dominated a lot of Wall Street. That's gone really 0:15:02.360 --> 0:15:05.520 really quickly. Now they still talk of eventually coming out 0:15:05.560 --> 0:15:08.200 of this okay, But I think the downside risk that 0:15:08.240 --> 0:15:11.200 we keep coming back to them this particular program is 0:15:11.240 --> 0:15:13.600 will this episode spark a period of defaults and de 0:15:13.720 --> 0:15:15.680 leveraging that it's going to stick with us for a 0:15:15.720 --> 0:15:18.720 long time and long after this health crisis fate. When 0:15:18.720 --> 0:15:21.160 you will get together Nathan on that issue, what comes 0:15:21.160 --> 0:15:24.400 out of the other side of that conversation, Well, h 0:15:24.720 --> 0:15:29.480 for some time we've been quite worried about about debt 0:15:29.600 --> 0:15:33.920 levels and the risks that they might pose for de 0:15:34.160 --> 0:15:37.760 leveraging going forward, and our senses at these high levels 0:15:37.800 --> 0:15:42.360 of debt are an element that's contributing to these historically 0:15:42.400 --> 0:15:46.320 low interest rates now obviously right now there's a lot 0:15:46.400 --> 0:15:51.000 of crisis related factors that have dragged rates down even lower. 0:15:51.560 --> 0:15:56.680 But those de leveraging incentives flowing from this recognition that 0:15:56.720 --> 0:16:00.000 the world can be risky. I think they're with us 0:16:00.440 --> 0:16:05.000 for quite some time. And uh, and you know that 0:16:05.000 --> 0:16:09.200 that that V shaped recession that you describe is feeling 0:16:09.240 --> 0:16:12.600 so last week. You know, this week, I think we're 0:16:12.640 --> 0:16:16.120 hoping for you, and Uh, I worry the next week 0:16:16.160 --> 0:16:20.120 we may be thinking more in terms of the now, Nathan, 0:16:20.200 --> 0:16:23.520 I'd love to dig more into the idea of deleveraging. 0:16:23.760 --> 0:16:26.640 John is really right to keep bringing it up. There 0:16:26.680 --> 0:16:30.080 is a question of how it looks. Does it look 0:16:30.160 --> 0:16:33.000 like companies being more prudent and not doing as many 0:16:33.080 --> 0:16:37.720 shared by backs and perhaps curbing certain types of executive compensation, 0:16:37.920 --> 0:16:40.960 or does it look like bankruptcies and defaults? And those 0:16:40.960 --> 0:16:42.720 are two very different outcomes. Do you have a sense 0:16:42.720 --> 0:16:49.320 of that? It depends critically on how severe the economic 0:16:49.400 --> 0:16:54.560 circumstances are. If if if we go through a period 0:16:55.280 --> 0:17:00.640 here where CHDP falls sharply and that continues for several quarters, 0:17:01.560 --> 0:17:04.800 I think we will see some corporate defaults. I think 0:17:04.840 --> 0:17:08.720 that that's uh, that's unavoidable against fiscal policy can be 0:17:08.760 --> 0:17:12.280 helpful in providing a safety net for some of those 0:17:12.320 --> 0:17:16.400 firms and maybe delaying uh that process. But if this 0:17:16.480 --> 0:17:19.760 is extended, I think we're going to see firms pushed 0:17:19.760 --> 0:17:22.720 to the edge and maybe maybe beyond. If it's a 0:17:22.800 --> 0:17:28.440 shorter term uh development that we're dealing with here, then 0:17:29.040 --> 0:17:31.600 maybe firms will have a little bit more time and 0:17:31.680 --> 0:17:35.280 they can do the gentle kinds of leveraging like you described, 0:17:35.440 --> 0:17:41.000 of maybe reducing share by backs, um being a little 0:17:41.000 --> 0:17:47.040 bit more cautious in terms of of mergers and acquisitions policy, 0:17:47.280 --> 0:17:50.600 maybe being a little more cautious on dividends and that 0:17:50.720 --> 0:17:53.720 kind of thing. But uh, it depends on where the 0:17:53.760 --> 0:17:56.719 economy is headed. But you know, it is pretty clear 0:17:57.000 --> 0:18:00.760 and even before this episode, that's the corporate it's got 0:18:00.760 --> 0:18:04.000 the message that they had too much leverage and needed 0:18:04.040 --> 0:18:06.600 to bring it down. Nthan Now that definitely needs a 0:18:06.760 --> 0:18:09.800 Nthan Shakes page and fixed income economists great to catch 0:18:09.840 --> 0:18:11.320 over the knighte and my best to the tame over 0:18:11.440 --> 0:18:17.560 a page. There's a question going forward of what stock 0:18:17.600 --> 0:18:20.520 investors are pricing into the market, and I want to 0:18:20.560 --> 0:18:23.480 read you this quote from Sam Stovall Chief Investment Strategies 0:18:23.480 --> 0:18:26.600 a CFR, A research in a Bloomberg News story recently, 0:18:26.680 --> 0:18:29.400 what most investors are worried about is that a recession 0:18:29.600 --> 0:18:32.440 is a foregone conclusion, and what we don't know is 0:18:32.480 --> 0:18:34.760 the severity of the recession, whether it will be another 0:18:34.840 --> 0:18:38.239 great recession or a shallow swoon. Sam joining us now 0:18:38.359 --> 0:18:40.719 by phone, Sam, can you give us a sense right 0:18:40.880 --> 0:18:46.280 now of what stocks are pricing in which of those scenarios? Well, 0:18:46.320 --> 0:18:48.720 good morning, Lisa and Paul. I guess the question could 0:18:48.760 --> 0:18:53.720 be what stocks are not pricing in the worst case scenario? UM. 0:18:54.359 --> 0:18:56.480 A lot of people want to know just how bad 0:18:56.600 --> 0:19:00.080 could it get? And if you look to valuate, and 0:19:00.280 --> 0:19:03.000 you look to the fact that even though SMP capital 0:19:03.080 --> 0:19:06.720 i Q consensus estimates are still pointing to a positive 0:19:06.800 --> 0:19:09.920 two thousand and twenty UH, it's down from a near 0:19:10.000 --> 0:19:12.639 eight percent growth at the beginning of the year. And 0:19:12.760 --> 0:19:16.400 if you look to recessions since World War Two, basically 0:19:16.520 --> 0:19:19.560 we have seen on average about a ten percent decline 0:19:19.760 --> 0:19:23.040 in earnings. So if we were to see a hundred 0:19:23.040 --> 0:19:25.960 and forty eight dollars on the SMP five hundred, not 0:19:26.040 --> 0:19:28.680 a hundred and sixty eight dollars and if we went 0:19:28.760 --> 0:19:32.080 down to a pe of ten times, which is where 0:19:32.200 --> 0:19:35.119 we went in two thousand and eight, one could make 0:19:35.160 --> 0:19:37.560 the case that we end up with a fifty six 0:19:37.640 --> 0:19:41.360 percent bear market, so rivaling that of oh seven through 0:19:41.400 --> 0:19:46.960 oh nine. So how much further do we have to go? Well, 0:19:47.400 --> 0:19:50.240 looking at those kind of numbers, you know we're down 0:19:51.160 --> 0:19:55.760 right now, so it's almost a doubling of what we've declined. 0:19:56.920 --> 0:19:59.520 All right, Sam, So what are you thinking about? You've 0:19:59.560 --> 0:20:01.960 been in the mar It's a long time, Sam, give us. 0:20:02.000 --> 0:20:05.680 I mean, this is clearly unprecedented times pandemics. This is 0:20:05.800 --> 0:20:08.120 nothing we learned in business school. This is nothing we've 0:20:08.640 --> 0:20:11.800 seen in markets before. What is your gut view of 0:20:11.920 --> 0:20:15.439 kind of what's happening out there? Well, good, good way 0:20:15.480 --> 0:20:21.280 of asking that. I think investors should embrace history over hysteria. UM. 0:20:21.720 --> 0:20:24.040 When I look to what has happened in the past, 0:20:24.160 --> 0:20:27.840 we went from a all time high to the to 0:20:27.920 --> 0:20:31.639 climb threshold in twenty two calendar days, which was almost 0:20:31.720 --> 0:20:35.920 twice as quick as the second most rapid decline UM 0:20:36.280 --> 0:20:40.520 history would then imply, but not guarantee, that UH swift 0:20:40.680 --> 0:20:44.480 tends to be shallow that on average, those bear markets 0:20:44.560 --> 0:20:48.480 that did occur the most quickly ended up being down 0:20:48.680 --> 0:20:54.440 anywhere from down to the UH just barely a bear 0:20:54.560 --> 0:20:59.000 market registration. Also, when I look to a rolling fifteen 0:20:59.080 --> 0:21:02.399 day percent change change in the intra day high and 0:21:02.520 --> 0:21:05.800 low of the market, we are second highest only to 0:21:06.200 --> 0:21:10.080 October late October of two thousand and eight. So we 0:21:10.280 --> 0:21:14.360 surpassed the U. S. Treasury debt being downgraded in two 0:21:14.440 --> 0:21:18.639 thousand and eleven. We surpassed the capitulation that took place 0:21:19.080 --> 0:21:22.320 UH in the end of the O two bear market UM. 0:21:22.560 --> 0:21:25.840 And basically, I think we're at an extreme in terms 0:21:26.000 --> 0:21:30.159 of volatility, which could imply that we are probably close 0:21:30.280 --> 0:21:34.280 to this crescendo bottom. Yeah, essentially you mentioned the volatility. 0:21:34.280 --> 0:21:36.200 I'm just looking at the VIX on my Bloomberg terminal 0:21:36.280 --> 0:21:40.760 screen here eighty one point six seven. Just extraordinary levels 0:21:41.119 --> 0:21:44.359 on the VIX. So Sam, to the extent that you know, 0:21:44.440 --> 0:21:48.480 let's look towards the the other side of this virus 0:21:49.160 --> 0:21:53.480 pandemic crisis. Where where do you think investors when we 0:21:53.600 --> 0:21:58.440 do get there, where should they be looking? Initially? Well, 0:21:58.520 --> 0:22:00.960 the first question is what makes think that we could 0:22:01.000 --> 0:22:04.160 actually be getting close to a bottom? UH. Well, first 0:22:04.240 --> 0:22:08.679 off is from an economic perspective, we're still only calling 0:22:08.800 --> 0:22:12.439 for one quarter of GDP decline. Of course, it's going 0:22:12.520 --> 0:22:14.840 to be a steep one. We think that when the 0:22:14.920 --> 0:22:17.639 numbers finally come out, will be up one percent in 0:22:17.680 --> 0:22:20.280 the first quarter, mainly because of a lot of hoarding 0:22:20.359 --> 0:22:23.479 that is being taking place. Second quarter, however, we're going 0:22:23.520 --> 0:22:26.120 to take it on the chin with a five percent decline, 0:22:26.640 --> 0:22:31.400 but then see a dramatic bounce up six point four 0:22:31.480 --> 0:22:34.639 percent in Q three and four point four percent in 0:22:34.840 --> 0:22:39.480 Q four. UM looking to a simple screening of those 0:22:39.600 --> 0:22:44.040 companies where we have BY or strong BY recommendations PE 0:22:44.240 --> 0:22:48.600 ratios below that of the market, yet have high SMP 0:22:49.160 --> 0:22:54.000 earnings and dividend quality rankings meaning consistency of raising earnings 0:22:54.040 --> 0:22:56.760 and dividends. You've got a lot of names that are 0:22:56.840 --> 0:23:03.160 fairly comfortable with investors. Comcast, Disney, General Mills, Tyson, Amera, Prise, CBS, 0:23:04.119 --> 0:23:08.040 Health Cor, etcetera. Uh So these are companies like if 0:23:08.080 --> 0:23:10.800 you're an investor who wants to wear both a belt 0:23:10.880 --> 0:23:15.959 and suspenders. Uh these could be goodbyes going forward. If, however, 0:23:16.080 --> 0:23:17.879 you say no, I want to go for those that 0:23:17.960 --> 0:23:21.560 have fallen the most, because history says those that were 0:23:21.640 --> 0:23:25.119 worst end up becoming first. Uh. That is true that 0:23:25.320 --> 0:23:28.760 when the bottom does occur, usually those priced to go 0:23:28.840 --> 0:23:31.320 out of business but did not are the ones that 0:23:31.480 --> 0:23:34.440 tend to recover the most. We're speaking with Sam Stove, 0:23:34.440 --> 0:23:37.600 all c f R, A chief investment strategists, and here 0:23:37.880 --> 0:23:41.200 we were basically flat, certainly on the NASDAC when we opened, 0:23:41.560 --> 0:23:44.480 but seven minutes into the trading day here in New York, 0:23:44.880 --> 0:23:48.560 and we see the gravitational force is lower. The SMP 0:23:48.800 --> 0:23:52.600 now down one point ninety two points is the level there, 0:23:52.640 --> 0:23:55.960 the nastack down eight tens of a percent at sixty two, 0:23:56.000 --> 0:23:59.200 And we're looking at at this sort of uncertainty Sam, 0:23:59.440 --> 0:24:01.760 that you're talking thing about about the depth of the 0:24:02.320 --> 0:24:06.159 potential recession, about just how long lasting it will be, 0:24:06.760 --> 0:24:09.840 as well as which areas are going to get hit hardest. 0:24:09.920 --> 0:24:12.080 And I'm wondering on the other side of this, and 0:24:12.160 --> 0:24:15.280 I do want to focus on that, just because markets 0:24:15.359 --> 0:24:18.560 do try to price in some sort of future. Um, 0:24:18.840 --> 0:24:22.560