WEBVTT - This Market Looks A Lot Like Q2 2008: JPM's Bob Michele 0:00:02.680 --> 0:00:05.360 Welcome to the Bloomberg Penl Podcast. I'm Paul swing you 0:00:05.400 --> 0:00:07.720 along with my co host Lisa Brahma Waits. Each day 0:00:07.760 --> 0:00:10.280 we bring you the most noteworthy and useful interviews for 0:00:10.320 --> 0:00:12.560 you and your money. Whether at the grocery store or 0:00:12.600 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.560 --> 0:00:18.000 podcast or wherever you listen to podcasts, as well as 0:00:18.000 --> 0:00:22.840 that Bloomberg dot com. In response to the economic impacts 0:00:22.880 --> 0:00:26.160 from the coronavirus, the Federal Reserve is stepping up and 0:00:26.239 --> 0:00:29.160 stepping in in a big way, supporting liquidity the market, 0:00:29.520 --> 0:00:31.760 not just buying treasuries, but also going into the corporate 0:00:31.800 --> 0:00:34.000 bond market to get a sense of what that means 0:00:34.159 --> 0:00:37.120 for the credit markets. Who welcome Bob Michael. Bob is 0:00:37.120 --> 0:00:39.880 a chief investment officer and head of Global fixed Income, 0:00:39.920 --> 0:00:43.080 Currency and Commodities at JP Morgan Asset Management. Bob, thanks 0:00:43.120 --> 0:00:45.479 so much for joining us. So as we take a 0:00:45.520 --> 0:00:47.680 look at what the Fed is doing here and its 0:00:47.720 --> 0:00:51.080 support of the markets and liquidity in the markets, what 0:00:51.159 --> 0:00:55.360 do you make of their moves into the corporate credit market. 0:00:56.720 --> 0:01:00.400 Good morning, Paul, I take some moves into the corporate market, 0:01:00.600 --> 0:01:04.360 and also let's not forget into the municipal market and 0:01:04.560 --> 0:01:09.440 into parts of the non agency mortgage market where critical 0:01:09.680 --> 0:01:13.880 and necessary. So I applaud it um. They had to 0:01:13.959 --> 0:01:18.400 keep those markets functioning. They couldn't allow what was happening 0:01:18.400 --> 0:01:21.920 in those markets where they were effectively frozen with very 0:01:21.920 --> 0:01:25.640 little trading going on because they were perceived to be 0:01:25.840 --> 0:01:29.440 outside of any kind of central bank safety net, to 0:01:29.560 --> 0:01:32.200 continue to operate that way. So I think it was 0:01:32.240 --> 0:01:35.440 a good first step, Bob. The FED has said that 0:01:35.480 --> 0:01:37.520 they are going to delve in THEO into the corporate 0:01:37.520 --> 0:01:39.760 debt market, they have yet to actually do so, and 0:01:39.800 --> 0:01:42.400 I think it's interesting that yesterday FED Chair J. Powell 0:01:42.840 --> 0:01:45.280 indicated they were willing to go further, and yet they 0:01:45.319 --> 0:01:47.280 haven't even taken the first steps when it comes to 0:01:47.319 --> 0:01:49.920 actually implementing it. In the credit markets. Do you think 0:01:50.240 --> 0:01:53.480 the market's gotten ahead of itself piling into junk bonds, 0:01:53.520 --> 0:01:56.200 in particular with the expectation that they'll be back stopped 0:01:56.200 --> 0:02:00.960 by the FED. Yeah, I think so. And when you 0:02:01.000 --> 0:02:03.760 think about what the FED is doing, they're going to 0:02:03.840 --> 0:02:09.320 buy UH fallen angels or companies that were rated investment 0:02:09.360 --> 0:02:13.120 grade towards the end of March that may drop into 0:02:13.200 --> 0:02:16.840 the high yield market. I think that's smart because those 0:02:16.880 --> 0:02:21.160 are companies that were running basically investment grade financials before 0:02:21.200 --> 0:02:24.680 the crisis. The crisis isn't their fault, and you're putting 0:02:24.720 --> 0:02:28.760 too much pressure on the rating agencies. You're effectively telling 0:02:28.800 --> 0:02:34.480 the rating agencies without being able to buy uh fallen angels, 0:02:34.520 --> 0:02:37.400 that they could be leveling a death sentence on these companies. 0:02:37.440 --> 0:02:40.560 So they took that away. But when we look at 0:02:40.600 --> 0:02:44.160 their support of the high yield market, we estimate that 0:02:44.320 --> 0:02:48.000 it will be roughly ten of the high old market. Uh. 0:02:48.080 --> 0:02:50.400 It's not a lot. Uh. It will keep the high 0:02:50.480 --> 0:02:54.840 yield market functioning, but it also doesn't prevent high yield 0:02:54.880 --> 0:02:59.079 companies from defaulting. I think you're going to see a 0:02:59.240 --> 0:03:03.400 rise in the fall rates for a prolonged period of time. So, 0:03:03.440 --> 0:03:06.120 but here's what I'm struggling to understand. Yesterday after FED 0:03:06.200 --> 0:03:09.800 Chair J. Powell's press conference, about half a billion dollars 0:03:09.960 --> 0:03:12.000 flowed into h y G or at least that was 0:03:12.040 --> 0:03:16.000 the total amount of flows yesterday into the biggest US 0:03:16.240 --> 0:03:19.560 high old bond et F which by is the broad market, 0:03:19.560 --> 0:03:21.600 not just fallen angels. And you said that you do 0:03:21.680 --> 0:03:23.520 think the market's gotten a little ahead of itself. So 0:03:23.600 --> 0:03:26.320 does that mean that you're selling high old bonds here? 0:03:26.400 --> 0:03:29.960 What does that mean in terms of your positioning? Well, 0:03:30.000 --> 0:03:33.040 it means a lot of things. I think a lot 0:03:33.080 --> 0:03:35.960 of the market got confused when he said there would 0:03:36.000 --> 0:03:39.440 be a new term sheet on the Men's Main Street 0:03:39.560 --> 0:03:44.720 lending facility, and most investors took that to mean that 0:03:44.760 --> 0:03:47.800 the leverage limit that was put in place might be 0:03:47.880 --> 0:03:52.440 relaxed or eliminated, which we then broaden out the coverage 0:03:52.960 --> 0:03:57.000 to more highly levered companies in a broader array of 0:03:57.000 --> 0:04:01.360 of the universe. After all, they our employers, and I 0:04:01.400 --> 0:04:06.280 think people initially went to that. We step back and say, 0:04:06.360 --> 0:04:09.400 hang on, in this market, you've got to take every 0:04:09.440 --> 0:04:11.440 company and you've got to stress it. And we do 0:04:11.520 --> 0:04:15.320 multiple stress tests trying to think, you know, how, how 0:04:15.320 --> 0:04:18.440 how deep could the recession go for how long? Where 0:04:18.480 --> 0:04:21.440 does it peak? And unemployment? We do things like a 0:04:21.480 --> 0:04:26.320 shutdown for nine months and unemployment peaking at over and 0:04:26.320 --> 0:04:28.960 then see what a company's balance sheet could look like, 0:04:29.040 --> 0:04:32.200 could it withstand it? Do they have access to capital? 0:04:32.600 --> 0:04:34.760 And by the way, when you run that kind of 0:04:34.800 --> 0:04:37.760 stress you find a lot of companies even though they 0:04:37.800 --> 0:04:40.440 may have access to capital at that point in time, 0:04:40.839 --> 0:04:44.400 Actually it doesn't make sense for them to do additional 0:04:44.480 --> 0:04:47.720 borrowing because they'll realize at the other end of this 0:04:48.120 --> 0:04:51.480 their ability to pay back all that debt won't be there. 0:04:51.960 --> 0:04:55.160 The market's got to start to realize that just because 0:04:55.240 --> 0:05:01.360 there's access to lending and borrowing doesn't mean companies will 0:05:01.400 --> 0:05:05.040 continue to take on another turn of leverage. At some 0:05:05.120 --> 0:05:08.880 point they'll realize they can't service it. So, Bob, given 0:05:09.040 --> 0:05:12.320 you know the backdrop for your economic outlook at JP 0:05:12.440 --> 0:05:16.240 Morgan Investment Management, asset management, how much risk are you 0:05:16.240 --> 0:05:22.080 guys willing to take right now? A very moderate level 0:05:22.160 --> 0:05:26.360 of risk in fixed income. The core of our portfolios 0:05:26.480 --> 0:05:29.200 are invested along the theme of co invest with the 0:05:29.279 --> 0:05:32.960 central banks. What they're buying, you buy. That's a pretty 0:05:32.960 --> 0:05:37.040 good safety net, at least for liquidity around you. Then 0:05:37.160 --> 0:05:40.360 roll up your sleeves and and look at what falls 0:05:40.920 --> 0:05:45.320 outside of that safety net, in in the corporate space, 0:05:45.440 --> 0:05:48.640 in the security space, in the muni space, and see 0:05:48.920 --> 0:05:53.120 who can withstand an extended period of a shutdown UH 0:05:53.160 --> 0:05:57.239 and high unemployment UH. And you find out that there 0:05:57.279 --> 0:06:01.040 are some companies out there, there are some industries that can, 0:06:01.520 --> 0:06:05.400 but there are awful lot that can't. I'm just wondering, Bob, 0:06:06.040 --> 0:06:09.280 what's your base case. You said you're looking at potential 0:06:09.279 --> 0:06:12.040 stress cases of nine months, just quickly here, what's your 0:06:12.040 --> 0:06:16.080 base case for the economy? Well, our base case is 0:06:16.120 --> 0:06:20.680 that that you don't return to normal um for a while, 0:06:21.080 --> 0:06:25.640 and that we will see unemployment peak at over and 0:06:25.680 --> 0:06:28.080 then as you start to get to the end of 0:06:29.560 --> 0:06:32.520 you're down to about nine percent. Now, that may seem 0:06:32.680 --> 0:06:36.720 great relative to a peak of over but let's not 0:06:36.839 --> 0:06:40.880 forget that during the financial crisis, unemployment peak at ten percent, 0:06:41.480 --> 0:06:43.479 and we know what kind of pain it was to 0:06:43.560 --> 0:06:46.800 try to recover from that. So there's a lot of 0:06:46.839 --> 0:06:50.880 hardship ahead. This feels to me like the second quarter 0:06:51.040 --> 0:06:54.880 of two thousand and eight, where the first quarter was horrible. 0:06:55.040 --> 0:07:01.080 There were policy responses um and and the market immediately 0:07:01.200 --> 0:07:05.799 became optimistic, and then the horror of what had actually 0:07:05.880 --> 0:07:10.080 happened starts to hit into the data. Bob Michael with 0:07:10.240 --> 0:07:13.800 a pretty bleak assessment. Bob, You've been right many times. 0:07:13.880 --> 0:07:16.320 It's always a pleasure speaking with you. Bob Michael, Chief 0:07:16.360 --> 0:07:18.880 investment Officer and head of Global fixed Income, Currency and 0:07:18.880 --> 0:07:24.520 commodities at JP Morgan Asset Management, saying invest alongside the FED, 0:07:25.240 --> 0:07:29.320 don't go into much riskier credit, and really the idea 0:07:29.880 --> 0:07:32.200 that this reminds him a lot of the second quarter 0:07:32.240 --> 0:07:34.720 of two thousand and eight when people said bear Stearns 0:07:34.800 --> 0:07:38.440 was an anomaly, and then of course in September the 0:07:38.560 --> 0:07:44.040 levant moment. It is the story of the year and 0:07:44.080 --> 0:07:46.520 a story that continues, and that is that big tech 0:07:46.560 --> 0:07:50.960 continues to outperform. Facebook actually had been under pressure among 0:07:51.000 --> 0:07:54.320 the big tech names ahead of yesterday's earnings report, but 0:07:54.400 --> 0:07:57.120 they blew expectations out of the water and actually even 0:07:57.160 --> 0:08:00.440 pointed to some stability and ad revenue there's airs up 0:08:00.440 --> 0:08:03.720 four point six percent. To help make sense of all 0:08:03.720 --> 0:08:06.800 that we've learned and the advertising model of a new era, 0:08:07.080 --> 0:08:10.080 Laura Martin joined us now senior media analyst with Niedem 0:08:10.120 --> 0:08:12.880 and Company. And I want to ask Laura, just starting 0:08:13.160 --> 0:08:16.440 with the Facebook and the Google earnings or Alphabet earnings 0:08:16.440 --> 0:08:19.320 that we've gotten, do you get this sense that the 0:08:19.360 --> 0:08:23.080 tech giants will somehow win out from this period of 0:08:23.120 --> 0:08:27.000 time in the long term and in terms of consolidating 0:08:27.120 --> 0:08:32.880 viewers and consolidating ad revenue. Um the answers yes, because 0:08:32.920 --> 0:08:37.720 of their their balance sheet strength. So, uh alphabet balance 0:08:37.760 --> 0:08:40.320 sheet had over a hundred billion dollars of cash and 0:08:40.360 --> 0:08:43.200 they had positive free cash flow of five point four 0:08:43.280 --> 0:08:46.840 billion in the first quarter. Facebook, which is a much 0:08:46.880 --> 0:08:50.560 smaller company, had seven point five billion dollars of free 0:08:50.559 --> 0:08:53.480 cash flow and they have sixty billion dollars on the 0:08:53.520 --> 0:08:57.520 balance sheet. Both come of nuts cash um. Both companies 0:08:57.520 --> 0:09:00.440 are paying all of their hourly workers, all the people 0:09:00.440 --> 0:09:03.000 who aren't coming to work, and Facebook said they're still 0:09:03.000 --> 0:09:06.680 going to hire ten thousand people this year, which means 0:09:06.800 --> 0:09:09.680 these companies are going to persist even if they go 0:09:09.720 --> 0:09:12.679 into cash losses. They will not go bankrupt. They will 0:09:12.679 --> 0:09:16.000 have access to capital, mostly their own, and therefore they 0:09:16.000 --> 0:09:19.760 will survive when some of their competitors will go under. So, Laura, 0:09:19.800 --> 0:09:22.000 I was looking, I was, you know, looking at some 0:09:22.040 --> 0:09:25.000 of the guidance or some of the commentary from Facebook 0:09:25.080 --> 0:09:28.160 last night, and they're talking about April advertising revenue being 0:09:28.200 --> 0:09:31.080 kind of flatish for the first a few weeks of 0:09:31.120 --> 0:09:33.200 April versus last year. I found that really hard to 0:09:33.240 --> 0:09:36.439 believe given what's going on out there in the economy. 0:09:36.640 --> 0:09:39.640 How do you think ad revenue for even even the 0:09:39.679 --> 0:09:43.640 digital media companies over the next you know, several months 0:09:43.800 --> 0:09:47.199 will look well. So I don't know if you remember 0:09:47.240 --> 0:09:49.920 Paul back to their I p O about of their 0:09:49.960 --> 0:09:52.520 revenue came from something called app installs, which was like 0:09:52.559 --> 0:09:56.000 a legion. Remember Zenga Games and Farmville and all that 0:09:56.000 --> 0:09:57.599 stuff where they would get like a buck if you 0:09:57.679 --> 0:10:00.840 spent five bucks. Well, that's what's happened a now is 0:10:01.040 --> 0:10:04.719 they have literally not talked about let's call that direct response, 0:10:04.720 --> 0:10:07.600 which is what that's called. In ten quarters, all they 0:10:07.600 --> 0:10:10.600 do is talk about advertising for small and large businesses. 0:10:11.360 --> 0:10:15.480 So yesterday, the reason they're flat is because thirty of 0:10:15.520 --> 0:10:20.560 their revenue is up and it is those app installs 0:10:20.600 --> 0:10:24.120 or that direct response, and they have really downplayed that 0:10:24.360 --> 0:10:27.840 verdict that like that kind of advertising. But that is 0:10:27.840 --> 0:10:29.599 what's boy in them, and it's the same thing that 0:10:29.640 --> 0:10:33.520 boyd snap right those snap also thought dr open It's 0:10:33.760 --> 0:10:37.480 ad revenue in April was up because so much of 0:10:37.520 --> 0:10:41.000 their revenue is up. But at Facebook, what we're seeing 0:10:41.120 --> 0:10:45.680 is a floor created by these app installs, this direct response, 0:10:46.200 --> 0:10:49.600 and the fact that when there's a target market, they 0:10:49.600 --> 0:10:54.520 don't sell keywords like Google sells travel. Well if travel 0:10:54.600 --> 0:10:57.959 disappears they can't sell a travel keyword to a jeweler 0:10:58.440 --> 0:11:01.240 or to something, you know, a healthcare worker. But that's 0:11:01.240 --> 0:11:04.199 not true if Facebook. If Facebook is trying to target 0:11:04.240 --> 0:11:07.040 everybody listening to you today, all the smart people listening 0:11:07.080 --> 0:11:09.800 to you at a and suddenly traveled like the four 0:11:09.920 --> 0:11:14.320 Seasons in Budapest, stops advertising. That's okay. They can sell 0:11:14.360 --> 0:11:17.200 all of us to the jeweler or two of game 0:11:17.240 --> 0:11:20.280 app because we're the same demo. So what we're getting 0:11:20.400 --> 0:11:24.880 is a better auction result at Facebook, whereas keywords are 0:11:24.920 --> 0:11:28.599 siloed and therefore they're just having zeros in some categories 0:11:28.600 --> 0:11:31.800 for keywords over at Google. So, Laura, how much of 0:11:31.840 --> 0:11:37.760 this dominance has already been priced into Facebook. It's a 0:11:37.760 --> 0:11:40.200 good question. I mean, the fact it's up means fifty 0:11:40.240 --> 0:11:42.840 of us didn't really under the fifty analysts that cover it, 0:11:43.200 --> 0:11:46.440 didn't really understand the business model. Similarly to Google, their 0:11:46.559 --> 0:11:50.319 robustness up ten percent yesterday meant that despite the forty 0:11:50.360 --> 0:11:54.079 people that cover Google, we didn't understand how their business 0:11:54.120 --> 0:11:57.160 model worked. I mean, you saw YouTube was up revenue 0:11:57.160 --> 0:12:00.200 in the first quarter. So part of what's happening is 0:12:00.559 --> 0:12:05.000 we make assumptions based on what they disclose over ten quarters, 0:12:05.040 --> 0:12:08.400 and then when COVID pushes on those business models and 0:12:08.440 --> 0:12:12.600 they perform differently, we start asking questions about why that is, 0:12:12.720 --> 0:12:17.080 and we learn more about what's underlying theo's business models, 0:12:17.120 --> 0:12:19.719 like the fact that direct response is still thirty of 0:12:19.760 --> 0:12:24.320 Facebook's advertising and Google is zero direct response. So laard 0:12:24.360 --> 0:12:26.360 Lea's switch hears just a little bit and talk about 0:12:26.360 --> 0:12:28.040 some of the big media companies that you've got that 0:12:28.120 --> 0:12:30.840 you've been covering for so long. How do you think 0:12:30.880 --> 0:12:33.280 this new world that we're in, maybe this new normal 0:12:33.320 --> 0:12:36.360 that we may be going into, is going to impact 0:12:36.840 --> 0:12:38.880 the big media companies if you changed kind of your 0:12:38.920 --> 0:12:42.920 outlook at all. So I think what we're waiting to 0:12:43.000 --> 0:12:46.360 see here, Paul is, as you know, TV has bought 0:12:46.400 --> 0:12:49.520 well in advanced local spots three weeks in advanced national 0:12:49.600 --> 0:12:52.560 spot like a year in advance. So we're actually expecting 0:12:52.640 --> 0:12:56.360 to one to be more robust for the old media companies. 0:12:56.679 --> 0:12:59.960 But without live sports, there's a big revenue down draft 0:13:00.000 --> 0:13:04.559 because that's twenty um depending on the season of total advertising, 0:13:05.080 --> 0:13:08.880 and it deferred, you know, obviously hurts YESPN most and 0:13:09.120 --> 0:13:12.360 Fox lease because they don't really have UM Basketball, which 0:13:12.360 --> 0:13:15.079 is the current season. So I'm looking for the impact 0:13:15.120 --> 0:13:16.960 of live sports, which I don't think is a long 0:13:17.040 --> 0:13:20.479 term impact. I'm looking at disconnect from the TV ecosystem, 0:13:20.520 --> 0:13:23.720 which hurts most of these companies in their subscription revenue line. 0:13:24.000 --> 0:13:26.200 And then I'm interested in what they say about the 0:13:26.280 --> 0:13:30.760 upfront because normally, as you know in May, about inventory 0:13:30.840 --> 0:13:32.640 is bought in May for the next year. Will no 0:13:32.679 --> 0:13:35.640 one's making new season episodes, so we're not going to 0:13:35.720 --> 0:13:39.080 have actually a false season unless people go back to work, 0:13:39.320 --> 0:13:41.839 like actors go back to work in fall. So I'm 0:13:41.960 --> 0:13:45.120 very interested to see with the eight billion dollars that 0:13:45.240 --> 0:13:48.040 is normally committed in the upfront in May, if we're 0:13:48.080 --> 0:13:50.880 not going to have programming in the new U semester, 0:13:51.120 --> 0:13:52.959 the new fall season, I'm interested in what they say 0:13:53.000 --> 0:13:55.280 about that. Laura, just about a minute here, But I'm 0:13:55.320 --> 0:14:00.760 wondering whether this will shift the dominance to online advertising 0:14:00.800 --> 0:14:03.160 in terms of spending. I know that the thirty second 0:14:03.200 --> 0:14:06.280 ad has been resilient in terms of being and commanding 0:14:06.320 --> 0:14:08.640 the highest price, but is that going to shift with 0:14:08.720 --> 0:14:13.280 more of the budget going to online providers. So Facebook 0:14:13.360 --> 0:14:18.520 specifically said they're seeing no offline budgets moving into their world. 0:14:18.679 --> 0:14:21.480 Everything they're seeing was a pre existing budget that had 0:14:21.560 --> 0:14:25.840 automated controls, and as CPMs have fallen by sixteen Senate, Facebook, 0:14:26.120 --> 0:14:30.200 those budgets step up. Um Also, Google asserts that it 0:14:30.240 --> 0:14:35.600 will hasten the you know, the adoption of digital. But 0:14:36.080 --> 0:14:37.600 I just think it's too early to tell. And then 0:14:37.680 --> 0:14:40.600 COVID literally happened the first week in March, right, that's 0:14:40.640 --> 0:14:42.120 when they said they all hit a wall the first 0:14:42.160 --> 0:14:44.760 week in March, and it's now round numbers the second 0:14:44.760 --> 0:14:47.880 week in April. So I think it's too early to see. 0:14:48.120 --> 0:14:51.760 I think consumer behavior might be easier to predict. Consumers 0:14:51.800 --> 0:14:54.200 are going to use the commerce for consumers may use 0:14:54.240 --> 0:14:57.400 digital outlets more. But on the advertiser slide, I just 0:14:57.480 --> 0:15:00.120 don't think advertisers can react in four weeks to it's 0:15:00.160 --> 0:15:03.400 happening in a pandemic. Laura Martin, thanks so much for 0:15:03.560 --> 0:15:05.920 joining us. We always appreciate getting your thoughts on the 0:15:05.920 --> 0:15:09.120 media and digital landscape. Laura Martin, senior media analysts for 0:15:09.320 --> 0:15:12.200 Needham Company, joining us on the phone from Los Angeles. 0:15:12.240 --> 0:15:13.880 We appreciate that. So at least I think you know 0:15:13.880 --> 0:15:16.560 the kind of the takeaway here is, boy, these digital 0:15:16.560 --> 0:15:20.000 media companies, they were strong going into this pandemic, and 0:15:20.040 --> 0:15:23.200 it looks like they're coming stronger on the way out. Yeah. 0:15:23.240 --> 0:15:26.520 I just have to wonder about consolidation. And I've read 0:15:26.520 --> 0:15:31.040 a number of lawyers who have commented saying that they 0:15:31.080 --> 0:15:33.640 don't think the antitrust regulators are going to be that 0:15:33.800 --> 0:15:38.240 harsh on big tech looking to acquire competitors that might, 0:15:38.680 --> 0:15:41.000 you know, we otherwise going out of business. Yeah, because 0:15:41.360 --> 0:15:44.120 going into the pandemic, the big tech was clearly under 0:15:44.160 --> 0:15:47.280 the regulatory microscope, and maybe that has been shift a 0:15:47.280 --> 0:15:49.520 little bit, which could again be a benefit for the 0:15:49.520 --> 0:15:57.160 big tech. Yesterday, FED Chair J. Powell sounded about as 0:15:57.200 --> 0:15:59.680 somber as a FED chair could get. He had a 0:15:59.720 --> 0:16:02.800 pre need doubt, a dire outlook for the US economy, 0:16:02.800 --> 0:16:05.960 and rightly so, given the fact that ten years of 0:16:06.040 --> 0:16:08.760 job gains has been more than wiped out in just 0:16:09.080 --> 0:16:12.040 six weeks. Joining us now is someone with intimate knowledge 0:16:12.040 --> 0:16:14.960 of both the Federal Reserve and the Treasure Department. Nathan Sheets, 0:16:15.160 --> 0:16:18.920 chief economist for Pejim fixed Income Joining us now, Nathan, 0:16:19.360 --> 0:16:21.880 so glad to have you on with all of your insights. 0:16:22.280 --> 0:16:25.200 I want you to give us a sense of your 0:16:25.280 --> 0:16:29.359 thoughts on the Fed's efforts to backstop corporate debt, in particular, 0:16:29.400 --> 0:16:32.920 because FED Chair J. Powell had an opportunity yesterday to 0:16:32.960 --> 0:16:35.720 send expectations straight and say the Fed isn't going to 0:16:35.760 --> 0:16:37.640 delve deeper into junk he did not do that, and 0:16:37.680 --> 0:16:39.480 in fact so that they were prepared to do more 0:16:39.960 --> 0:16:42.560 and the net effect was more money into junk bonds. 0:16:42.760 --> 0:16:48.800 What's your take, well, J. Powell was categorical that the 0:16:48.800 --> 0:16:53.160 Federal Reserve is prepared to bring the full force of 0:16:53.280 --> 0:16:59.680 its balance sheet to bear in supporting the financial markets generally. 0:17:00.320 --> 0:17:04.320 But I think, as your questions suggests, there are remaining 0:17:04.440 --> 0:17:09.800 questions about various pockets of the market and in uh, 0:17:09.880 --> 0:17:14.120 in reality, how aggressive is the Federal Reserve going to be? 0:17:14.640 --> 0:17:17.800 And I have to say that as I've seen some 0:17:17.960 --> 0:17:22.520 of the soundings from the Federal Reserve about its core 0:17:22.600 --> 0:17:26.359 por purchase programs, it has left me with some questions. 0:17:26.480 --> 0:17:31.000 For example, before a company is eligible to have its 0:17:31.080 --> 0:17:35.920 bawns purchased, even on the secondary market, it looks like 0:17:36.080 --> 0:17:39.280 it's going to have to fill out a form and 0:17:39.280 --> 0:17:43.880 and make a number of attestations to the Federal Reserve, 0:17:44.480 --> 0:17:46.760 and I think it's an open question and say, how 0:17:46.760 --> 0:17:50.480 many how many firms are going to be willing to 0:17:50.520 --> 0:17:54.000 do this and where is it going to leave the 0:17:54.000 --> 0:17:57.760 corporate bond markets relative to the headline that the FETE 0:17:57.880 --> 0:18:01.640 is buying. So I think there are real questions about 0:18:01.720 --> 0:18:06.879 the Fed's efforts in that particular space, where broadly they're committed. UH, 0:18:07.080 --> 0:18:10.280 they'll they'll do what's necessary, they'll use all the tools, 0:18:10.480 --> 0:18:13.160 but certain corners of the markets. I think we still 0:18:13.160 --> 0:18:15.840 have a lot a lot to learn about how far 0:18:15.920 --> 0:18:18.760 they're willing to go. So, Nathan, you mentioned tools in 0:18:18.800 --> 0:18:23.200 the toolbox, what else realistically can the Fed dude going 0:18:23.240 --> 0:18:29.160 forward if this pandemic is longer than perhaps currently anticipated. 0:18:30.359 --> 0:18:35.600 So qualitatively, in terms of supporting the markets, I think 0:18:35.600 --> 0:18:40.040 that they are bringing to bear uh the lion's share, 0:18:40.160 --> 0:18:45.040 maybe maybe the totality of what they have. UH. They 0:18:45.080 --> 0:18:51.679 are prepared to buy aggressively. They're keeping rates low. UH, 0:18:51.800 --> 0:18:55.840 they're expanding their balance sheet in a very significant way. 0:18:56.880 --> 0:19:01.840 But quantitatively, I think that we can see uh meaningful 0:19:02.000 --> 0:19:05.480 further increases in the size of the balance sheet. And 0:19:05.520 --> 0:19:09.399 then in addition, UH, the Congress is allocated over four 0:19:09.520 --> 0:19:13.360 hundred and fifty billion dollars to the Treasury to backstop 0:19:13.400 --> 0:19:17.560 federough Reserve facilities, and less than half of that money 0:19:17.600 --> 0:19:21.119 has been allocated to date. And most of those facilities 0:19:21.160 --> 0:19:23.480 that I was suggesting the corporates an example of this, 0:19:23.920 --> 0:19:26.760 are not even up and running yet. So I would 0:19:26.800 --> 0:19:29.760 say Job one for the Fedough Reserve is to get 0:19:29.840 --> 0:19:33.399 these facilities up and running and then to make sure 0:19:33.480 --> 0:19:36.720 that they are actually meeting the needs in the markets. 0:19:37.040 --> 0:19:41.480 Uh and UH from there if if those needs end 0:19:41.520 --> 0:19:46.120 up being greater, the FED has plenty of additional firepower 0:19:46.160 --> 0:19:49.000 to bring to bear, given its balance sheet and that 0:19:49.119 --> 0:19:51.960 war chest with the Treasury. So Nathan, let's go there 0:19:52.040 --> 0:19:54.240 to that main Street loan program. We've got some news 0:19:54.240 --> 0:19:57.320 today saying that the FED plans to expand the parameters 0:19:57.440 --> 0:20:01.480 for potential applicants and and build former New York FED 0:20:01.480 --> 0:20:04.320 president had a great column about this yesterday, talking about 0:20:04.320 --> 0:20:07.000 how difficult it will be for the FED to thread 0:20:07.040 --> 0:20:10.200 the needle. Here, just do if you had a chance 0:20:10.240 --> 0:20:12.440 to look at the at the news today and kind 0:20:12.480 --> 0:20:14.240 of give us a sense of what it means in 0:20:14.320 --> 0:20:16.760 terms of which businesses will be able to access this. 0:20:17.760 --> 0:20:21.399 I did see this, and I think your analogy to 0:20:21.520 --> 0:20:25.000 threading the needle is exactly right. So, on the one hand, 0:20:25.440 --> 0:20:30.119 moving into this space is very difficult for the FED 0:20:30.200 --> 0:20:33.679 and that they're taking onto their balance sheet potentially a 0:20:33.800 --> 0:20:39.120 broad range of heterogeneous collateral that they're not really that 0:20:39.320 --> 0:20:44.000 familiar with. On the other hand, the needs in this 0:20:44.200 --> 0:20:48.000 space are tremendous and that many of the firms that 0:20:48.000 --> 0:20:52.480 are eligible for this facility are the high yield issuers 0:20:53.400 --> 0:20:58.080 and high yield companies that are just absolutely being pummeled. 0:20:58.400 --> 0:21:00.200 So then the question is how do you do line 0:21:00.240 --> 0:21:02.760 a facility that meets their needs well at the same time, 0:21:03.240 --> 0:21:06.720 uh it doesn't make the FAD feel too uncomfortable given 0:21:06.800 --> 0:21:09.359 its uh it's roast tolerance. And I think what we 0:21:09.440 --> 0:21:13.000 saw in this revision today was an effort to fine 0:21:13.160 --> 0:21:18.720 tune it and to make it more attractive to small borrowers, 0:21:18.800 --> 0:21:22.800 and that they cut the minimum loan size from a 0:21:22.840 --> 0:21:26.520 million dollars down in down to five hundred thousand. It 0:21:27.160 --> 0:21:30.280 added a new class of loans that would be eligible 0:21:30.640 --> 0:21:34.760 and specifically companies that are deemed to be somewhat riskier. 0:21:35.080 --> 0:21:38.520 But another concern is that for many of the larger 0:21:38.720 --> 0:21:43.200 firms that are eligible. The maximum loan size is pretty small, 0:21:43.560 --> 0:21:46.120 so there are there are many constraints on this thing. 0:21:46.200 --> 0:21:48.560 We saw the fad kind of move in this direction, 0:21:48.720 --> 0:21:50.720 but it remains to be seen how big and how 0:21:50.760 --> 0:21:53.520 aggressive this facility is going to be. I think this, 0:21:53.640 --> 0:21:56.359 along with the corporate program, is the big question. Mark 0:21:57.040 --> 0:21:58.680 and Nathan, thanks so much for joining us. To really 0:21:58.720 --> 0:22:02.639 appreciate your thoughts and commentary. Nathan Sheets, chief economists and 0:22:02.680 --> 0:22:06.399 head of macroeconomic research at p JIM Fixed Income, joining 0:22:06.480 --> 0:22:08.880 us here with thoughts on the FED and all the 0:22:08.920 --> 0:22:12.080 programs that are out there at Lisa as Uh Nathan 0:22:12.160 --> 0:22:15.040 was suggesting, it's I think right now the key issue 0:22:15.480 --> 0:22:18.440 for the market is actually getting those programs up and running, 0:22:18.480 --> 0:22:21.880 getting the cash into the marketplace. We will have more 0:22:21.880 --> 0:22:24.480 on that coming during the remainder of the show. This 0:22:24.640 --> 0:22:30.080 is Bloomberg. It's time to check in with Bloomberg Opinion. 0:22:30.119 --> 0:22:33.719 We're joined today by Opinion commas Liam Denny giving us 0:22:33.760 --> 0:22:36.159 some thoughts on a couple of things I want to 0:22:36.160 --> 0:22:40.159 look at with you. Liam. First, Tesla reported some numbers 0:22:40.200 --> 0:22:43.680 last night, the stocks up five. I'm looking at the 0:22:43.720 --> 0:22:46.480 stock here. Boy just had an extraordinary up a hundred 0:22:46.520 --> 0:22:49.680 percent this year just extraordinary. What are some of the 0:22:49.760 --> 0:22:52.520 key takeaways for you, Liam from what we heard from 0:22:52.520 --> 0:22:57.240 Elon Musk and company. Well, for me, you know, it 0:22:57.280 --> 0:22:59.800 all comes down to the numbers, which which tend to 0:22:59.840 --> 0:23:04.200 get obscured. Um, you know during the actual theater of 0:23:04.520 --> 0:23:10.560 Tesla's earnings call um. This is the third quote unquote 0:23:10.600 --> 0:23:15.480 surprise profit from Tesla in a row. The first one 0:23:15.600 --> 0:23:19.720 was announced back in October and since Vince then, um, 0:23:19.760 --> 0:23:23.359 you know, those three gap profits have added up to 0:23:23.800 --> 0:23:29.600 the princely some of two million dollars. Now. In the meantime, 0:23:29.680 --> 0:23:33.399 the company's value has surged by I think it's up 0:23:33.440 --> 0:23:38.280 about a hundred and twenty billion dollars also, so there 0:23:38.359 --> 0:23:42.639 is still this fundamental disconnect between Tesla's valuation and the 0:23:42.720 --> 0:23:47.480 actual results that it's producing. And I actually think, um, 0:23:47.520 --> 0:23:51.639 you know, the results we got carried some pretty um, 0:23:51.800 --> 0:23:54.440