WEBVTT - Mnuchin: Following Law In Seeking Return of Fed Funds 0:00:01.360 --> 0:00:04.120 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, along 0:00:04.120 --> 0:00:06.200 with my co host of Bonnie Quinn. Every business day 0:00:06.240 --> 0:00:10.360 we bring you interviews from CEOs, market pros, and Bloomberg experts, 0:00:10.400 --> 0:00:13.600 along with essential market moving news. Find the Bloomberg Markets 0:00:13.600 --> 0:00:17.000 Podcast on Apple podcast or wherever you listen to podcasts, 0:00:17.000 --> 0:00:21.920 and on Bloomberg dot com. Let's bring in a fearsome 0:00:22.000 --> 0:00:25.240 tosome right now, we have salehams in US Treasury Reporter 0:00:25.320 --> 0:00:27.520 on the phone from Washington, d C. With US AT 0:00:27.520 --> 0:00:31.240 in studio Michael McKee, International Economics and Policy correspondent. If 0:00:31.240 --> 0:00:32.960 you hadn't guest, of course, you want to talk about 0:00:33.000 --> 0:00:36.280 the little back and forth let's call it between the 0:00:36.320 --> 0:00:40.080 Treasury and the Federal Reserve. So see, yeah, let's get 0:00:40.080 --> 0:00:43.320 the skinny from you. First, Treasures Actory Steve Manuten asked 0:00:43.400 --> 0:00:47.640 for funds back unused funds. Was it really necessary to 0:00:47.680 --> 0:00:49.239 ask for them back? Would they have just sort of 0:00:49.280 --> 0:00:52.760 reverted at some point? I mean, that's an absolutely fair 0:00:52.800 --> 0:00:55.360 point to make. The Secretary said that he was merely 0:00:55.440 --> 0:00:58.840 following the law that the Cares Act as it was written. 0:00:58.880 --> 0:01:00.520 He was in the room when it was in cobbled 0:01:00.520 --> 0:01:03.080 together that it did play that that those funds need 0:01:03.120 --> 0:01:05.440 to be returned to Congress. UM, you could make a 0:01:05.440 --> 0:01:07.640 case to say that he should not have done anything 0:01:07.680 --> 0:01:09.760 and just let that money revert back. But at the 0:01:09.800 --> 0:01:13.080 same time, I've heard from some UM experts that the 0:01:13.120 --> 0:01:17.000 Tradure Department seeks not to make any market sensitive announcements 0:01:17.040 --> 0:01:19.119 in December or too late in the year, or any 0:01:19.160 --> 0:01:21.560 kind of big moves because of the lack of liquidity 0:01:21.560 --> 0:01:23.760 and markets, and so I think they were also fear 0:01:23.840 --> 0:01:26.440 that not saying anything or letting this sort of surface 0:01:26.480 --> 0:01:30.000 on its own late in December would have shaken up 0:01:30.040 --> 0:01:34.160 markets more than it needed to. Mike, what do you 0:01:34.480 --> 0:01:37.360 what's just summarized for us the response from the FED 0:01:37.520 --> 0:01:40.960 and what you think the FED will do going forward. Well, 0:01:41.000 --> 0:01:43.080 the FED basically said, we don't want to give up 0:01:43.080 --> 0:01:45.759 the money, we don't want to end these programs. And 0:01:46.319 --> 0:01:49.080 what was unusual is not that they feel that way, 0:01:49.080 --> 0:01:52.400 but that they so expressly said it so quickly after 0:01:52.480 --> 0:01:57.280 Secretary of Minution released his letter to them. Uh. The 0:01:57.360 --> 0:02:01.480 FED is obviously a government bureaucracy on the one hand, 0:02:01.520 --> 0:02:05.680 and blowth to give up powers, but also their feeling 0:02:05.800 --> 0:02:11.280 is the Secretary got it backwards that the Secretary was saying, 0:02:11.760 --> 0:02:15.440 we don't need these anymore because we've brought down spreads 0:02:15.560 --> 0:02:18.520 because the loans have kept the markets open, and the 0:02:18.560 --> 0:02:21.200 feed is saying yes, but it's the fact that they 0:02:21.240 --> 0:02:24.320 exist that's keeping the markets open, and so you have 0:02:24.400 --> 0:02:28.120 run a risk if something goes wrong that the market 0:02:28.200 --> 0:02:31.440 sees up again the capacity for intervention of the confidence 0:02:31.440 --> 0:02:37.840 as well, that engenders Michael um, what will the Federal 0:02:37.880 --> 0:02:43.320 Reserve do? I mean, is this a political motivation on 0:02:43.360 --> 0:02:45.320 the part of Treasure Secretary Minution? I mean, he won't 0:02:45.320 --> 0:02:49.120 be Treasure secretary next year. There's a lot of speculation 0:02:49.200 --> 0:02:52.200 about what the point of it was, and there doesn't 0:02:52.200 --> 0:02:55.800 seem to have been a real strong point to do 0:02:55.880 --> 0:03:00.880 it yesterday. Whether he's carrying out the president's wish to 0:03:00.919 --> 0:03:03.440 sand bag the Biden administration or not, we don't know. 0:03:03.919 --> 0:03:07.840 The FED will probably go along. Uh. They do have 0:03:08.240 --> 0:03:12.880 the ability to tap the Exchange Stabilization Fund. All this 0:03:12.960 --> 0:03:15.600 money that Congress appropriated went into the e s F, 0:03:15.680 --> 0:03:17.120 and they've pulled the money out of there and then 0:03:17.160 --> 0:03:20.760 give them If the money is repurposed, then they'll still 0:03:20.760 --> 0:03:23.239 be about seventy four billion dollars that they could use, 0:03:23.800 --> 0:03:26.079 which is more than they've spent. I mean, they only 0:03:26.120 --> 0:03:29.200 spent about billions, so they probably have enough money to 0:03:29.400 --> 0:03:31.560 deal with things. What they wouldn't be able to do 0:03:31.680 --> 0:03:35.080 is start up a whole new round of programs should 0:03:35.080 --> 0:03:37.600 the economy go pear shaped in the first quarter or 0:03:37.640 --> 0:03:41.240 something like that. The other question is what would Treasury 0:03:41.280 --> 0:03:42.880 do with the money? And remember we're not talking about 0:03:42.920 --> 0:03:46.200 the four billion, because they've spent about a hundred billion 0:03:46.280 --> 0:03:49.120 of it, so we're maybe talking two hundred and sixty 0:03:49.120 --> 0:03:51.480 billion or so that would go back. Congress has to 0:03:51.560 --> 0:03:55.400 officially appropriate that. And so the other suspicion is that 0:03:55.440 --> 0:03:58.840 what Manucha was doing was trying to jump start negotiations 0:03:58.880 --> 0:04:02.760 with the rational Democrats by saying, you know, we can 0:04:02.880 --> 0:04:05.000 all agree, here's a pot of money that's not being used. 0:04:05.040 --> 0:04:08.040 Let's just get it out to some money. Well, so, Celia, 0:04:08.400 --> 0:04:11.960 based upon your exclusive interview with Treasury Secretary Stephen the Nuchin, 0:04:12.520 --> 0:04:16.320 do you think that he and the Treasury are prepared 0:04:16.360 --> 0:04:18.719 to move forward on this and act on this or 0:04:18.880 --> 0:04:22.360 was this more posturing? Do you think I don't think 0:04:22.400 --> 0:04:24.480 this was posturing. He was very clear in the letter 0:04:24.520 --> 0:04:26.520 and in the press release. In his comments to me, 0:04:26.680 --> 0:04:28.800 that he is following the law, he is doing what 0:04:28.920 --> 0:04:31.360 was expected to be done. He pointed out that when 0:04:31.400 --> 0:04:34.240 the half trillion dollars was put into the e FF, 0:04:34.400 --> 0:04:37.640 Democrats were saying that this is Stephen the Nation Flush Fund, 0:04:37.680 --> 0:04:40.039 and now they're criticizing him for returning that money as 0:04:40.040 --> 0:04:42.560 the law says. The other point to be made is that, 0:04:42.600 --> 0:04:45.320 as Mike points out, is that the e FF has 0:04:45.360 --> 0:04:48.120 another roughly seventy five billion dollars that it has nothing 0:04:48.120 --> 0:04:50.160 to do with Congress, and that money can be very 0:04:50.240 --> 0:04:53.160 quickly activated but the Treasury and Fed Department if the 0:04:53.240 --> 0:04:55.680 markets do need it. Um. But the other thing is, 0:04:55.720 --> 0:04:59.240 you know, he Schary Secretary Monution has never fully understood 0:04:59.240 --> 0:05:01.440 how to works of Congress. So I have to at 0:05:01.480 --> 0:05:03.800 least put it out there in wonder if he had 0:05:04.040 --> 0:05:06.279 made this announcement but also had been able to say 0:05:06.320 --> 0:05:10.039 that he had already spoken to Mitch McConnell, Kevin McCarthy, 0:05:10.120 --> 0:05:13.400 maybe even Nancy Pelosi's that I've got this money was 0:05:13.520 --> 0:05:15.200 and we are going to try to put this into 0:05:15.200 --> 0:05:17.720 the economy. You couldn't get anything else, and maybe it 0:05:17.720 --> 0:05:20.760 would have had a different reaction to it right, and 0:05:20.839 --> 0:05:22.800 also just the very fact that if the FED didn't 0:05:22.839 --> 0:05:25.159 know this was coming and so unusual, I mean, wouldn't 0:05:25.160 --> 0:05:26.760 you have thought that there would be a heads up 0:05:26.839 --> 0:05:27.960 given that there was going to be some kind of 0:05:27.960 --> 0:05:31.880 announcement that might impact markets. Mike, Well, I think the 0:05:31.960 --> 0:05:34.360 FED knew it was coming, because they reacted so quickly, 0:05:34.400 --> 0:05:37.400 and they don't put out statements that fast unless they 0:05:37.440 --> 0:05:39.760 already knew what was going to happen. So I presume 0:05:39.839 --> 0:05:42.560 that the Treasury Secretary and the Fed German had spoken 0:05:42.600 --> 0:05:46.240 about this, and Manugent had given Paul the bad news, 0:05:46.600 --> 0:05:50.000 and so the FED was prepared, certainly to get in 0:05:50.120 --> 0:05:52.279 the Treasury's face like that. They would have had to 0:05:52.279 --> 0:05:54.880 have a discussion about whether there's a good idea and 0:05:54.920 --> 0:05:58.159 why do we want to do it and stuff like that. Silely, 0:05:58.279 --> 0:06:01.160 do we have any sense of timing this may roll out? 0:06:01.200 --> 0:06:02.920 I don't recall this happening in the past. I'm just 0:06:02.960 --> 0:06:05.240 not sure how this is going to going to go 0:06:05.279 --> 0:06:09.240 in terms of timing. Well, I mean, the programs, by law, 0:06:09.279 --> 0:06:12.000 they spend it onto some thirty one, though sometime by 0:06:12.040 --> 0:06:14.599 then you know that money has to be returned to 0:06:14.880 --> 0:06:17.839 Congress and taken out of treasuries, not only the Exchange 0:06:17.839 --> 0:06:21.320 Stabilization Fund. But it cannot just rest in Treasury General 0:06:21.320 --> 0:06:24.040 Service account. It has to be given back to compers. 0:06:23.839 --> 0:06:25.919 I'm thinking sometime by the end of the year, and 0:06:25.960 --> 0:06:28.600 we should really ask why so little of it was used, Mike, 0:06:28.640 --> 0:06:31.120 I mean, yes, there's other benefits to having money in 0:06:31.160 --> 0:06:33.920 a part lying there, but actually use of this Why 0:06:34.000 --> 0:06:36.840 why did not more get used? Well, there's two aspects 0:06:36.839 --> 0:06:39.000 to what they were doing. One was opening the markets, 0:06:39.080 --> 0:06:43.640 and by cutting rates to zero and opening the primary 0:06:43.640 --> 0:06:48.279 and secondary credit facilities, just that act alone reassured markets 0:06:48.279 --> 0:06:51.239 that there was a lender of last resort at work, 0:06:51.440 --> 0:06:54.680 and so spreads came down without them spending a lot 0:06:54.680 --> 0:06:56.800 of money. They did by in the secondary market, but 0:06:56.839 --> 0:06:59.479 they never bought in the primary market. And then the 0:06:59.560 --> 0:07:02.400 other was the lending programs, particularly main Street in the 0:07:02.480 --> 0:07:07.680 municipal facilities, and they the main Street facility took so 0:07:07.720 --> 0:07:11.480 long to set up that it didn't have a lot 0:07:11.520 --> 0:07:15.400 of utility, in part because the companies that could get 0:07:15.440 --> 0:07:18.800 loans got loans and those who couldn't. The banks didn't 0:07:18.800 --> 0:07:21.280 want to make loans to anyway because they felt they 0:07:21.280 --> 0:07:25.520 couldn't handle the debt. Municipal facility has a penalty rate 0:07:25.600 --> 0:07:28.440 on it in a fee, and so the when the 0:07:28.480 --> 0:07:31.840 FED acted, spreads came down in the muni market and 0:07:31.880 --> 0:07:34.280 it was cheaper just to directly borrow than to go 0:07:34.360 --> 0:07:36.680 through the FED. So that's why they didn't use a 0:07:36.720 --> 0:07:38.720 lot of the money. But again the FED are used. 0:07:38.880 --> 0:07:41.120 If we hadn't had the money in the first place, 0:07:41.360 --> 0:07:45.080 then the spreads, et cetera wouldn't have come down. Fascinating. 0:07:45.320 --> 0:07:47.800 Selia Molson, thank you so much for joining us. Siliamilson, 0:07:47.920 --> 0:07:51.720 u S Treasury reporter, fascinating story she has for Bloomberg News, 0:07:51.720 --> 0:07:55.520 and of course Michael McKee, international Economics and Policy correspondent 0:07:55.600 --> 0:07:57.600 joining us as well for this fascinating story that was 0:07:57.600 --> 0:08:01.440 certainly the news of the warning hasn't really moved markets 0:08:01.480 --> 0:08:06.440 all that much. We'll remember, back in the early days 0:08:06.520 --> 0:08:09.560 of the pandemic, we're talking V shape or U shape 0:08:09.760 --> 0:08:13.440 or maybe an L shaped. Then K shaped came into 0:08:13.840 --> 0:08:16.880 the discussion as well. Well. Here we are eight months, 0:08:17.000 --> 0:08:19.000 nine months into this, let's see where we are with 0:08:19.120 --> 0:08:22.280 the economy and the rebound. We can do that with 0:08:22.360 --> 0:08:26.520 Lindsay Piegza, Chief economists for Stiple Financial lindsay, thanks so 0:08:26.560 --> 0:08:29.760 much for joining us here. As we stand here, you 0:08:29.800 --> 0:08:34.080 know in late November, eight months into this pandemic, we've 0:08:34.120 --> 0:08:36.880 seen what the Fed can do, We've seen the stimulus. 0:08:37.360 --> 0:08:40.199 What's your outlook for the next six to twelve months 0:08:40.320 --> 0:08:42.880 here as we try to gauge the shape of our 0:08:42.920 --> 0:08:46.120 rebound here, Well, I do think it's important to know 0:08:46.200 --> 0:08:49.400 that the U s economy rebounded at a record case 0:08:49.720 --> 0:08:52.200 in the third quarter, more than offsetting the decline that 0:08:52.240 --> 0:08:55.120 we saw on the second quarter, at least from percentage terms. 0:08:55.200 --> 0:08:58.240 But going forward, it does appear that the US economy 0:08:58.320 --> 0:09:03.000 is already beginning to lose momentum, particularly on the consumer front. 0:09:03.360 --> 0:09:05.600 Retail sales up just a couple of tents of a 0:09:05.600 --> 0:09:08.360 percentage point, the latest report coming in about half of 0:09:08.440 --> 0:09:12.920 expectation and also representing a multi month low. So we 0:09:13.000 --> 0:09:16.200 do have some concerns about this waning momentum, not to 0:09:16.320 --> 0:09:19.680 mention the rising risk of a second round resurgence of 0:09:19.720 --> 0:09:22.480 the virus and subsequent policies put in place then to 0:09:22.559 --> 0:09:25.760 help stem the spread of the virus. UH continuing to 0:09:26.080 --> 0:09:32.120 support elevated joblessness, business closures, really undermining or potentially undermining 0:09:32.280 --> 0:09:35.000 the improvement that we have seen in the third quarter. 0:09:35.480 --> 0:09:38.120 So we do expect growth to slow markedly going into 0:09:38.160 --> 0:09:39.920 the end of the year, and as we turned the 0:09:39.920 --> 0:09:43.320 corner into the new year, potentially, depending on the depth 0:09:43.320 --> 0:09:46.960 and duration of this second round resurgence resurgence, we could 0:09:47.000 --> 0:09:50.600 see growth fall back into negative territory, sparking a second 0:09:50.720 --> 0:09:54.080 round recession. So right now, the risk to the economy 0:09:54.120 --> 0:09:56.840 are certainly to the downside. Yeah, I mean that would 0:09:56.840 --> 0:09:59.800 be very very, very difficult to pull ourselves out of. 0:10:00.000 --> 0:10:02.960 And Z at that point, would it be just necessary 0:10:03.000 --> 0:10:04.880 for Congress to you know, I mean, what would we 0:10:05.040 --> 0:10:09.360 even talking helicopter money at that point? Well, I don't 0:10:09.360 --> 0:10:12.000 know if necessarily we need helicopter money, but but we 0:10:12.040 --> 0:10:15.000 certainly do need some sort of artificial support. Remember that 0:10:15.040 --> 0:10:17.560 this isn't a market crisis. This is a health crisis, 0:10:17.920 --> 0:10:21.160 and we're talking about millions of individuals losing their jobs, 0:10:21.240 --> 0:10:25.959 losing their businesses, income revenue opportunities through no faults of 0:10:26.000 --> 0:10:29.760 their own, but rather through the government's direct design. And 0:10:29.840 --> 0:10:34.040 so right now that this is not a normal scenario 0:10:34.160 --> 0:10:37.520 by any means, we do in fact needs some continued 0:10:37.640 --> 0:10:40.800 artificial support that being said, we want to make sure 0:10:40.840 --> 0:10:43.680 that any additional aid or relief that comes down the 0:10:43.679 --> 0:10:48.480 pipeline is used smartly and reaches those individuals or small 0:10:48.520 --> 0:10:52.400 businesses that it is intended for. So, what is in 0:10:52.440 --> 0:10:54.760 your base case, Lindsay's as you think about the remainder 0:10:54.800 --> 0:10:57.120 this year and more importantly going into next year. Is 0:10:57.160 --> 0:11:00.320 there some fiscal stimus. If so, what kind of eyes 0:11:00.360 --> 0:11:03.200 and what kind of timing are you thinking about. So 0:11:03.320 --> 0:11:05.920 we are factoring in a fifth round stimulus package, but 0:11:05.960 --> 0:11:08.920 we're looking for something more muted around one trillion dollars. 0:11:08.920 --> 0:11:11.080 And it's amazing that we're talking about a muted level 0:11:11.080 --> 0:11:14.199 of expenditures around one trillion, But I mean that in 0:11:14.320 --> 0:11:17.560 compared to the initial proposal from Democrats looking for two 0:11:17.600 --> 0:11:21.000 plus trillion, and of course relative to what goop senators, 0:11:21.040 --> 0:11:24.000 we're looking for less than a trillion, much more a 0:11:24.080 --> 0:11:27.160 much a much smaller, much more targeted package. So we 0:11:27.200 --> 0:11:29.160 do think it will be somewhere as struck in the 0:11:29.200 --> 0:11:32.679 middle around that trillion dollar mark. The timeline for that 0:11:32.840 --> 0:11:35.679 is likely to be in the first quarter. Right now, 0:11:35.720 --> 0:11:39.239 it does seem that officials on both sides, both Republicans 0:11:39.240 --> 0:11:44.640 and Democrats, are more concerned about really uh marking a 0:11:44.679 --> 0:11:48.520 political victory or at least as not acquiescing to the 0:11:48.559 --> 0:11:52.040 demands of the other side, So really playing politics as 0:11:52.080 --> 0:11:55.960 opposed to getting down into negotiations trying to reach some 0:11:56.120 --> 0:11:59.200 sort of middle ground in order to get this much 0:11:59.240 --> 0:12:02.360 needed aid to individuals and businesses. Is that what's going 0:12:02.360 --> 0:12:04.360 on with the Treasury secretary as well, that it's more 0:12:04.440 --> 0:12:09.160 politics that he's asking the FED to return unused funds. Well, 0:12:09.160 --> 0:12:11.400 I don't know, and necessarily if it's politics or if 0:12:11.440 --> 0:12:14.200 it's a different way of viewing these programs, remember they 0:12:14.200 --> 0:12:18.120 were always intended to be temporary, and he's not terminating 0:12:18.120 --> 0:12:20.360 them early. He's simply saying that he'll allow them to 0:12:20.440 --> 0:12:22.840 run out at their scheduled time at the end of 0:12:22.880 --> 0:12:26.920 the year. That being said, you could certainly reagnitiate those, 0:12:27.200 --> 0:12:29.599 reignite those at that started the year, or leave it 0:12:29.640 --> 0:12:34.040 to the Biden administration once they are presumably sworn in 0:12:34.040 --> 0:12:38.480 in late January, to reignite those lending programs. In the meantime, 0:12:38.600 --> 0:12:42.400 the FED is not being left without additional tools. The 0:12:42.440 --> 0:12:46.840 Federal Reserve certainly could implement additional forward guidance, yield curve targeting, 0:12:47.320 --> 0:12:50.120 ramp up asset purchases, so they still have a number 0:12:50.120 --> 0:12:53.439 of tools in their tool belts. But to the Fed's point, 0:12:53.520 --> 0:12:55.880 we have heard from a number of officials that they 0:12:55.920 --> 0:12:59.960 would rather have all of the possibilities still on the tape. 0:13:00.040 --> 0:13:03.320 Will given that the economy is in such a fragile position, 0:13:03.360 --> 0:13:06.640 and given that we are facing a second round resurgence 0:13:06.640 --> 0:13:09.000 and potential second round lockdown as we look out to 0:13:09.040 --> 0:13:11.320 the end of the year. Hey, lindsay, just real quickly 0:13:11.360 --> 0:13:13.680 twenty seconds, what's your view of the labor market given 0:13:13.679 --> 0:13:16.600 that we may be going into some more lockdowns. I 0:13:16.600 --> 0:13:19.640 think the labor market is increasingly fragile. We have seen 0:13:19.720 --> 0:13:22.920 massive job layoffs, and while we have recaptured about half 0:13:22.920 --> 0:13:24.600 of the job's loss at the start of the year, 0:13:24.920 --> 0:13:28.200 if we see more and more business closes, closures, that 0:13:28.280 --> 0:13:32.160 will result in further layoffs, temporary layoffs, you name it, 0:13:32.240 --> 0:13:35.520 further wage losses, which will only compound the difficulties that 0:13:35.520 --> 0:13:38.880 we've seen in the consumer sector. And lindsay, just one 0:13:38.960 --> 0:13:41.160 last thing, your run rate for GDP through the end 0:13:41.160 --> 0:13:43.800 of the year. An incident next year, I think the 0:13:43.880 --> 0:13:47.840 US GDP is going to struggle to maintain a sustainable 0:13:47.920 --> 0:13:50.679 level nearer that two percent that we saw heading into 0:13:51.520 --> 0:13:55.440 with very low single digit growth, if not falling back 0:13:55.480 --> 0:13:58.320 into negative territory, if in fact we do see a 0:13:58.360 --> 0:14:03.960 second round locksown even as I can down light lockdown scenario, Lindsay, 0:14:03.960 --> 0:14:07.480 thank you so much for that. M. Lindsay, Vaga's managing 0:14:07.520 --> 0:14:10.960 director in chief economists at Stevel. Nikolas there with I 0:14:11.000 --> 0:14:12.920 guess some good news and some bad news. I mean, 0:14:12.960 --> 0:14:15.760 it really is a kind of a mixture. It's a 0:14:15.840 --> 0:14:18.280 tough situation to have to read, and I don't envy 0:14:18.280 --> 0:14:20.080 the job of those who have to put all this 0:14:20.240 --> 0:14:25.120 into models. Well, one financial term that has come into 0:14:25.160 --> 0:14:29.320 my vocabulary at least during this pandemic has been corporate zombie. 0:14:29.320 --> 0:14:33.600 And apparently corporate zombie is a company that it's not 0:14:33.640 --> 0:14:36.480 even earning enough to cover their interest expense. And there's 0:14:36.480 --> 0:14:41.040 some notable names that are quote unquote corporate zombies. Boeing, Carnival, 0:14:41.200 --> 0:14:44.040 Delta Airlines, even Exxon Mobile. Let's get a little bit 0:14:44.120 --> 0:14:46.560 smarter about this issue, and we could do that with 0:14:46.600 --> 0:14:50.920 Brian Schapada, debt markets columnist for Bloomberg Opinion. Brian, thanks 0:14:50.920 --> 0:14:54.600 so much for joining us here. Corporate zombies. So this 0:14:54.680 --> 0:14:58.320 is really a thing. It is, Um there's one point 0:14:58.360 --> 0:15:00.800 for a trillion of that you used to mention the 0:15:00.840 --> 0:15:04.560 criteria that my Bloomberg News colleagues were looking at earlier 0:15:04.560 --> 0:15:08.040 this week, which is trailing twelve month operating income versus 0:15:08.040 --> 0:15:11.000 interest expenses. So the idea basically is that if you 0:15:11.000 --> 0:15:13.720 don't even make enough to cover your obligations, they're not 0:15:13.920 --> 0:15:15.840 really in a position to hire more people. You're not 0:15:15.880 --> 0:15:18.680 really in a position to invest in more opportunities to grow. 0:15:19.240 --> 0:15:22.400 So these are companies that are kind of hobbling along 0:15:22.560 --> 0:15:27.280 and getting by through ultra cheap borrowing costs. So there's 0:15:27.320 --> 0:15:31.080 a risk there that they'll hamstring the economic recovery here 0:15:31.080 --> 0:15:34.960 out of the coronavirus pandemic. Yeah, what is the thinking 0:15:35.120 --> 0:15:37.320 of these companies that they'll just keep going as long 0:15:37.360 --> 0:15:40.720 as they can and the you know, this is a 0:15:40.800 --> 0:15:44.040 good offer. Well, one of the things that that that 0:15:44.080 --> 0:15:45.880 we really try to look at me in my Bloomberg 0:15:45.920 --> 0:15:49.600 Opinion colleagues was there's a variety of companies that are 0:15:49.600 --> 0:15:52.040 in here, right, So you talk about things like Axon Mobile, 0:15:52.160 --> 0:15:55.840 ge Boeing. I mean those are pretty big companies, right, 0:15:55.880 --> 0:15:58.440 And I mean they're kind of value place at at heart. 0:15:59.040 --> 0:16:01.480 You also have growth companies that are you see companies 0:16:01.520 --> 0:16:06.400 like Beyond Meat, Spotify, Uber, even Maderna are technically corporate 0:16:06.480 --> 0:16:10.520 zombies under this criteria. UM, but they have a reason 0:16:10.560 --> 0:16:13.320 for that, right They're not necessarily focused on profitability right now. 0:16:13.360 --> 0:16:15.800 They're trying to grow UM. So it's a bit of 0:16:15.840 --> 0:16:18.160 a mixed bag. But there are certainly some industries where 0:16:18.600 --> 0:16:19.960 you kind of look at it and you think that 0:16:20.000 --> 0:16:24.000 the the outlook, isn't it pretty bleak? So Brian, early 0:16:24.440 --> 0:16:27.000 in my career, I was a corporate finance banker where 0:16:27.040 --> 0:16:29.840 I made loans to media companies. In my job as 0:16:29.880 --> 0:16:31.800 a low man on the totem pole, the team was 0:16:31.880 --> 0:16:33.840 to build a spreadsheet and to make sure there is 0:16:33.960 --> 0:16:37.440 enough cash flow to support the interest uh and even 0:16:37.440 --> 0:16:40.640 the debt service principle. And if the special little cell 0:16:40.760 --> 0:16:43.160 came up red I either wasn't enough cash flow to 0:16:43.200 --> 0:16:45.720 support the interest, we didn't make the loan. How are 0:16:45.760 --> 0:16:50.200 these guys coming back to the market. What are creditors thinking? Well, 0:16:50.240 --> 0:16:52.360 I mean the credit markets are wide open right now, 0:16:52.480 --> 0:16:54.840 so I think that there's not a lot of there's 0:16:54.840 --> 0:16:57.360 not a lot of concern there's this feeling that for 0:16:57.400 --> 0:17:01.840 certain companies, especially that the federal government will step in 0:17:01.880 --> 0:17:05.840 if necessary, that they're too systematically important, thinking more of 0:17:06.080 --> 0:17:08.680 Boeing in that in that instance. But you also really 0:17:08.680 --> 0:17:12.680 have other companies like the movie theater chains for example, 0:17:13.280 --> 0:17:17.320 My bombing colleague Tara la chappelle um wrote about them, 0:17:17.320 --> 0:17:20.199 and they really made kind of a blunder in the 0:17:20.200 --> 0:17:23.840 past few years, kind of really you know, expanding these 0:17:23.880 --> 0:17:26.560 movie theater facilities, making all these acquisitions is taking out 0:17:26.560 --> 0:17:29.280 a lot of debt, and now there's a real question 0:17:29.320 --> 0:17:33.440 about their going concerned uh status in a way, because 0:17:33.640 --> 0:17:35.439 who wants to go back to a movie theater right 0:17:35.440 --> 0:17:39.040 now when especially there's all these streaming services that are competing. 0:17:39.160 --> 0:17:41.920 So there are certain industries that are really coming under pressure. 0:17:41.960 --> 0:17:45.199 But for now, I think there's a feeling that investors 0:17:45.240 --> 0:17:48.560 just are piling into corporate credit. Um we'll see if 0:17:48.560 --> 0:17:51.120 that changes at all with the shutdown of the Fetes facility, 0:17:51.200 --> 0:17:53.480 but it's been wide open for a long time, and 0:17:53.520 --> 0:17:55.280 of course that's what all the serious debt guys are 0:17:55.320 --> 0:17:57.720 waiting for right there. Some of them are already invested 0:17:57.720 --> 0:18:00.560 in some of these companies that we're finding a difficult 0:18:00.840 --> 0:18:03.679 to get loans, but others are waiting for them to 0:18:03.680 --> 0:18:07.160 be even in more trouble, at which point they'll help 0:18:07.200 --> 0:18:10.120 them through some kind of a bankruptcy process and we'll 0:18:10.160 --> 0:18:14.720 still see companies return, but they'll just be leaner and miner. Right. Yeah, 0:18:14.720 --> 0:18:16.200 that's a great point. I mean, you think about the 0:18:16.240 --> 0:18:19.280 distress of debt investors out there, Howard Marks and and 0:18:19.280 --> 0:18:22.359 and his ILK. I mean, they're all they've raised a 0:18:22.400 --> 0:18:25.399 lot of money for distress credit funds and they're kind 0:18:25.400 --> 0:18:28.080 of waiting for the next shoot drop here. So to 0:18:28.119 --> 0:18:30.360 the extent that some of these companies do come under 0:18:30.400 --> 0:18:33.040 even further pressure and may be locked out of the 0:18:33.119 --> 0:18:36.199 more traditional credit markets. I do think that there's a 0:18:36.240 --> 0:18:40.560 lot of money out there waiting for uh, for liquidation 0:18:40.560 --> 0:18:43.800 as type yields, you know, ten percent or higher, hing 0:18:43.960 --> 0:18:46.160 being able to turn things around and and and lock 0:18:46.200 --> 0:18:48.879 in a really nice profit there. Well, you know it's 0:18:48.920 --> 0:18:51.159 interesting when I was an equity analysts, say, all we 0:18:51.200 --> 0:18:53.200 had to do was just tell a nice rosy story 0:18:53.240 --> 0:18:55.320 about a year or two them the road, and that's 0:18:55.320 --> 0:18:57.359 all you needed to do to sell stock. Whereas these 0:18:57.400 --> 0:19:01.400 credit analysts, uh, that's these are tough folks, they look 0:19:01.400 --> 0:19:03.520 at the numbers, and if the numbers aren't there, you know, 0:19:03.560 --> 0:19:07.280 they really put this wait a second, go back and 0:19:07.760 --> 0:19:10.040 say that again. All you have to do is tell 0:19:10.080 --> 0:19:15.359 a rosy story that was absolutely absolutely and I always 0:19:16.400 --> 0:19:18.920 you know it's gonna be great two years down the road, 0:19:18.920 --> 0:19:21.400 Biden stock now. But in the interim, for the credit folks, 0:19:21.440 --> 0:19:24.160 they gotta make interest payments and principal payments and things 0:19:24.200 --> 0:19:26.560 like that. So are you getting a sense, Brian, that 0:19:26.640 --> 0:19:30.439 the standards within the credit markets are are you know, 0:19:30.480 --> 0:19:34.399 getting dangerously lax? I mean, I think I think that 0:19:34.400 --> 0:19:38.000 that's been kind of the assumption for a while. Um, 0:19:38.080 --> 0:19:41.680 with the FED being kind of in the in the markets, 0:19:41.840 --> 0:19:46.640 there was this expectation that things wouldn't quite get so bad. Um. 0:19:46.680 --> 0:19:48.760 You sort of look at share prices to your point 0:19:48.800 --> 0:19:51.399 about equity. Um, you take a little bit share prices 0:19:51.440 --> 0:19:54.520 on some of these companies and they've rebounded quite dramatically, 0:19:54.680 --> 0:19:57.760 and there will be some that survived. I mean, my 0:19:57.760 --> 0:20:01.600 my colleagues there. How Zach wrote about Darden restaurants and 0:20:01.640 --> 0:20:05.399 Olive Garden, and there's a feeling that there will be 0:20:05.440 --> 0:20:09.440 a return to dining out once uh, once people feel comfortable, 0:20:09.480 --> 0:20:12.119 and there's a vaccine. That's not something that's going away 0:20:12.520 --> 0:20:17.119 anytime soon. But retailers may season gap, they might have 0:20:17.160 --> 0:20:18.919 a bit more struggle. And it's kind of just this 0:20:19.000 --> 0:20:22.760 question of whether COVID has exacerbated friends that had been 0:20:22.800 --> 0:20:25.280 happening for a long time. You talk about the retail 0:20:25.280 --> 0:20:27.760 apocalypse that's been a thing for a long time and 0:20:27.800 --> 0:20:32.600 people's vocabulary versus something that was more of just a 0:20:32.640 --> 0:20:36.000 shock to the system. Thinking about restaurants and dining out, 0:20:36.000 --> 0:20:38.439 there is a huge trend towards doing more of that 0:20:38.440 --> 0:20:41.720 that's suddenly reversed this year, Brian, just briefly, because we're 0:20:42.160 --> 0:20:45.560 you know, only about a minute left. This returning money 0:20:45.600 --> 0:20:48.120 to the treasury or returning unused funds to the treasury, 0:20:48.160 --> 0:20:50.080 and you explain it to the labors and are there 0:20:50.119 --> 0:20:52.320 actual funds sitting somewhere that need to be you know, 0:20:52.440 --> 0:20:56.680 carded off from one place back to the treasury. Kind 0:20:56.720 --> 0:20:59.600 of Um, you can think about it that way. I 0:21:00.040 --> 0:21:02.600 yet that there's just funds that are fear marked that 0:21:02.680 --> 0:21:04.639 can't be re earmarked. I mean, it's kind of just 0:21:05.240 --> 0:21:07.520 it's kind of a mess. But basically, the Fed has 0:21:07.600 --> 0:21:11.520