WEBVTT - Surveillance: We're Headed For a Recession, Wilson Says 0:00:05.720 --> 0:00:12.960 Yeah, welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 0:00:13.480 --> 0:00:16.960 Jay Ley. We bring you inside from the best in economics, finance, 0:00:17.040 --> 0:00:23.520 investment and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.200 Bloomberg dot Com, and of course on the Bloomberg Let's 0:00:27.200 --> 0:00:29.800 bringing Jane finally shout, we run a backhead of effect strategy. 0:00:29.880 --> 0:00:32.320 She finds in from London Chinese. Fantastic to have you 0:00:32.400 --> 0:00:34.560 with us. Let's just reflect on what the fattest to 0:00:34.600 --> 0:00:36.400 live and what's still to come through the next couple 0:00:36.400 --> 0:00:38.920 of weeks. Your thoughts please, well, I think really yeah, 0:00:39.440 --> 0:00:42.000 we can see by the reaction of the markets this morning, 0:00:42.040 --> 0:00:44.240 and I don't think that there is enough. And really, 0:00:44.240 --> 0:00:48.440 as long as this news remains such that we keep 0:00:48.479 --> 0:00:51.600 on getting an increase in the number of coronaviruses, and 0:00:51.680 --> 0:00:54.120 both the Europe and the US at the market is 0:00:54.120 --> 0:00:56.160 going to assume that the real economy, or the out 0:00:56.200 --> 0:00:57.640 of the real economy is going to get to carry 0:00:57.680 --> 0:01:01.120 on worse need and therefore um that the central banks 0:01:01.120 --> 0:01:03.800 are going to have to do more monitor fiscal policy too. 0:01:03.840 --> 0:01:06.360 Of course, a lot more is gonna have to come 0:01:06.400 --> 0:01:08.160 from there, but I think one thing that that was 0:01:08.319 --> 0:01:11.640 in particular missing perhaps from from the FEDS announcement, and 0:01:11.720 --> 0:01:14.960 this was the concerted in the concerted action that was 0:01:14.959 --> 0:01:18.360 announced yesterday was coordinated with DCB, and like the japan 0:01:18.400 --> 0:01:19.920 and the b o E and the SMB. Now these 0:01:19.920 --> 0:01:23.199 are all G ten central banks, and we've had new 0:01:23.280 --> 0:01:26.399 cheaper swap line provisions for the for the for the 0:01:26.480 --> 0:01:29.000 G ten. But there are going to be concerns about 0:01:29.280 --> 0:01:32.640 corporates outside of the GTN area. What's going to happen 0:01:32.640 --> 0:01:35.240 with them? What if they cannot get a hold of dollars. 0:01:35.280 --> 0:01:37.680 We've seen since the middle of last week really that 0:01:37.800 --> 0:01:41.320 the blowout in in in cross country basis what for 0:01:41.319 --> 0:01:44.160 instances of the pressure in the money market. And of course, 0:01:44.200 --> 0:01:45.920 if we go back to two thousand and eight, we 0:01:45.959 --> 0:01:49.880 saw the FED announced other emergency measures a commercial paper 0:01:49.920 --> 0:01:54.000 funding facility and then the commercial paper funding facilities through 0:01:54.800 --> 0:01:58.040 the limited company that was that was set up to 0:01:58.160 --> 0:02:03.440 provide um for facility whereby companies outside of the detail 0:02:03.560 --> 0:02:07.360 could could sell to the Federal Bank of New York 0:02:07.440 --> 0:02:10.280 commercial paper and get all liquidity that way. And I 0:02:10.320 --> 0:02:13.200 think the market will be demanding that the fedders something 0:02:13.320 --> 0:02:16.359 extra like in two thousand and next to really reassure 0:02:16.520 --> 0:02:18.720 the markets that there is going to be ampled on 0:02:18.760 --> 0:02:20.720 the liquidity in and at least that way it will 0:02:20.760 --> 0:02:24.280 be one thing less I think for many corporates to 0:02:24.320 --> 0:02:28.280 worry about. Jane yesterday, around five pm Eastern time, when 0:02:28.280 --> 0:02:30.720 we got the response from the federals or of the 0:02:30.760 --> 0:02:34.840 Hunter basis point rate cut, the futures markets for US 0:02:34.880 --> 0:02:37.720 equities weren't open yet, and we looked for the to 0:02:37.760 --> 0:02:40.760 get some kind of initial read on the market response. 0:02:41.000 --> 0:02:44.000 At the currency markets, and they've been going crazy, the 0:02:44.040 --> 0:02:49.200 OSSI dollar in particular, really sinking to a post crisis low. 0:02:49.240 --> 0:02:52.200 And I'm trying to understand the volatility that we're seeing. 0:02:52.639 --> 0:02:56.120 Is this just a complete vacuum of information, or is 0:02:56.160 --> 0:02:59.640 this a structural issue that's affecting all markets for some 0:02:59.680 --> 0:03:03.040 reason and creating a real dearth of liquidity that's potentially 0:03:03.040 --> 0:03:07.040 really problematic. Um well, I think perhaps there's there's a 0:03:07.120 --> 0:03:09.200 number of factors. I think first of all, you know, 0:03:09.240 --> 0:03:12.079 looking at looking at the AUSSI, looking at some other currencies. 0:03:12.080 --> 0:03:14.200 What we see here is is dollar strength. So there 0:03:14.280 --> 0:03:17.560 is a scramble really to get hold of dollars, and 0:03:17.560 --> 0:03:20.600 this is because, of course the dollar dominates the global 0:03:20.639 --> 0:03:23.760 payment system and people need dollars. But I think apart 0:03:23.760 --> 0:03:25.760 from that, I think the other signals that we're getting 0:03:25.880 --> 0:03:28.440 is is that the type of crisis that we have 0:03:28.639 --> 0:03:30.960 here and now, the type of crisis. Of course, it's 0:03:31.000 --> 0:03:33.720 not a financial crisis. It is something to do with 0:03:33.880 --> 0:03:37.920 the real economy. And yes, loans might be cheaper, but 0:03:38.000 --> 0:03:39.880 if you are an airline, or if you're in the 0:03:39.920 --> 0:03:42.400 tourism industry, or if you're a certain type of retailer, 0:03:42.440 --> 0:03:44.880 et cetera, it doesn't mean to say that you're going 0:03:44.880 --> 0:03:47.360 to have customers coming through your door this morning. And 0:03:47.400 --> 0:03:49.720 so from that point of view, we can really see 0:03:50.360 --> 0:03:54.400 the the the shortfalls. Really a monetary policy, it cannot 0:03:54.480 --> 0:03:57.840 put demand back into the shops given the type of 0:03:57.840 --> 0:04:01.120 crisis that we have, so monetary polar see just has 0:04:01.200 --> 0:04:04.720 its limits. And therefore, you know, we do need this 0:04:04.800 --> 0:04:08.160 fiscal type of support, maybe are concerted type of fiscal 0:04:08.320 --> 0:04:12.480 response to try and reshort, reassure the firms that are 0:04:12.520 --> 0:04:16.440 most acutely affected by this that their businesses can sustain 0:04:16.520 --> 0:04:20.479 through this crisis and that they won't lose all of 0:04:20.520 --> 0:04:23.440 their employees because immediately if you lose all your employees, 0:04:23.600 --> 0:04:25.599 you have this knock on effect. You have this multiplier 0:04:25.600 --> 0:04:27.680 effect with those people who lose their jobs and they 0:04:27.720 --> 0:04:29.680 don't go to the shops and they don't they don't buy, 0:04:30.000 --> 0:04:33.159 and you suddenly have this potential for this really sharp 0:04:33.240 --> 0:04:36.200 down or shops slow down in in activity jam. We 0:04:36.240 --> 0:04:39.679 can't handicap this deep into the unknown, impossible to model. 0:04:39.839 --> 0:04:41.880 Most of the people listening to this program will agree 0:04:41.880 --> 0:04:44.080 with you on all of those things. Where we can 0:04:44.160 --> 0:04:46.560 have a discussion is how you think the dollar will 0:04:46.600 --> 0:04:49.360 behave in the environment like the one we're about to enter. 0:04:50.200 --> 0:04:52.440 There were doubts when times were good over the last 0:04:52.480 --> 0:04:54.360 couple of years about what would happen in the next 0:04:54.360 --> 0:04:56.920 downturn and how the dollar would behave. Would it maintain 0:04:56.920 --> 0:05:00.520 those risthma againing characteristics? Would we buy the dollar when 0:05:00.600 --> 0:05:03.160 things got bad? Can we say with some confidence that 0:05:03.160 --> 0:05:06.000 that's still the case, The dollar will still be that 0:05:06.120 --> 0:05:10.599 currency people flee to. Yes, I would agree with that, 0:05:10.640 --> 0:05:12.240 and I would go a bit further, and I'd say 0:05:12.440 --> 0:05:15.640 that the market has no choice but to buy the dollars. 0:05:15.640 --> 0:05:17.360 If you think about the dollars position as a as 0:05:17.400 --> 0:05:21.440 a global transactional currency, no other currency comes close. It's 0:05:21.480 --> 0:05:25.200 plain and simple. If you are in India and you 0:05:25.240 --> 0:05:27.560 need to buy oil, you need to have dollars. If 0:05:27.560 --> 0:05:29.440 you need to buy all with any other commodities, you 0:05:29.520 --> 0:05:32.760 need to have dollars. And this is why if you 0:05:32.800 --> 0:05:35.120 look now at the money market, if you look at 0:05:35.400 --> 0:05:37.640 a cross cluncy basis what you will see that they 0:05:37.640 --> 0:05:40.240 blew out in the middle of of of last week. 0:05:40.520 --> 0:05:42.560 And this is the sign that that banks were willing 0:05:42.600 --> 0:05:44.919 to pay more to get hold of their dollars. Corporates 0:05:44.920 --> 0:05:49.440 are potentially right now looking around making sure that they 0:05:50.040 --> 0:05:54.960 have access to dollars through their banks, through their funding 0:05:55.000 --> 0:05:59.240 lines um and banks are looking to see, oh my goodness, 0:05:59.520 --> 0:06:01.159 how many of these funding knowes do we have open? 0:06:01.320 --> 0:06:03.840 What what could be the potential at draw down of 0:06:04.160 --> 0:06:07.760 dollars from US So dollars in a in a crisis 0:06:08.279 --> 0:06:12.159 is where the shortages usually are. And the fact that 0:06:12.200 --> 0:06:14.279 we have these signs really sin at the beginning of 0:06:14.560 --> 0:06:16.960 since the middle really of last week, of the blowout 0:06:17.440 --> 0:06:20.320 in demand for dollars is where the crisis is. Well. Jane, 0:06:20.320 --> 0:06:22.120 thinking about how that's reflected in the price of G 0:06:22.320 --> 0:06:24.599 ten right now, quite clearly there will be some exceptions 0:06:24.600 --> 0:06:27.000 to that dollar strength roll the Japanese yen and the 0:06:27.000 --> 0:06:29.600 Swiss frank too, where people have really been punished and 0:06:29.640 --> 0:06:31.719 it's been brutal to try and get a clear direction 0:06:31.800 --> 0:06:34.919 on euro dollar over the last month meant to be 0:06:34.960 --> 0:06:37.240 some real equidity there, some depth, and it's been really 0:06:37.279 --> 0:06:40.160 really choppy. At one point it was about just trading 0:06:40.160 --> 0:06:42.760 the possibility, the potential that Europe would go into a downturn. 0:06:42.839 --> 0:06:45.320 That was the standard February. Then it was about unwinding 0:06:45.400 --> 0:06:48.200 some big, big traits going back home to the Euro 0:06:48.279 --> 0:06:50.359 of that which your funding currency. You're a bit up 0:06:50.400 --> 0:06:53.880 towards one fifteen and now negative again in and around 0:06:53.880 --> 0:06:56.479 those kind of levels. Jane, walk me through the dynamics 0:06:56.520 --> 0:07:00.400 that are going to shape the Euro in the coming months. Well, 0:07:00.680 --> 0:07:03.200 I think really the the euro, the euro dollar exchange, 0:07:03.279 --> 0:07:06.000 it has probably misled a few people in terms of 0:07:06.040 --> 0:07:09.039 dollar strength. I think if you if you look broad based, 0:07:09.080 --> 0:07:11.240 if you look through a huge range of currencies, you 0:07:11.280 --> 0:07:13.000 will see the dollar strengths there and that the Euro 0:07:13.040 --> 0:07:15.440 has given misleading signal. And I think this is because 0:07:15.440 --> 0:07:18.880 of what you've just described. There were the the euro 0:07:18.960 --> 0:07:20.760 with the negative interest rate had been used as a 0:07:20.960 --> 0:07:23.840 funding currency, and they of course reversed and people cover 0:07:23.880 --> 0:07:25.880 their shorts and the euro went higher. But I think 0:07:25.920 --> 0:07:28.880 if we look at what we have in Europe now 0:07:28.880 --> 0:07:31.920 in terms of fundamentals, I don't think they're particularly good 0:07:31.960 --> 0:07:34.720 for Europe. So, for instance, UM, if you look at Italy, 0:07:35.080 --> 0:07:40.640 and clearly the coronavirus situation in Italy is extremely worrying. There, 0:07:41.400 --> 0:07:43.560 without a shadow of a doubt, given that the countries 0:07:43.560 --> 0:07:46.160 in in shutdown, and given that there there is no 0:07:46.240 --> 0:07:49.840 sign yet that those cases have peaked, the economic backdrop 0:07:50.160 --> 0:07:52.800 can be worrying. People will be starting to worry already 0:07:52.800 --> 0:07:55.160 worrying about the Italian banks. For instance. If we move 0:07:55.200 --> 0:07:58.760 on to Spain, the situation there's worse than UM. If 0:07:58.800 --> 0:08:00.760 we go through France and they in the situation, that 0:08:00.920 --> 0:08:03.680 also worsening. So we can pick out a number of 0:08:03.720 --> 0:08:08.400 European countries and we see fundamentals getting getting worse. So 0:08:08.480 --> 0:08:11.760 from that point of view, UM, I don't think the 0:08:11.760 --> 0:08:14.600 euro has got an awful lot about it right now. 0:08:14.680 --> 0:08:19.600 So given that the dollar is being brought broadly because 0:08:19.600 --> 0:08:23.320 it is a global payment system currency, I do think 0:08:23.360 --> 0:08:27.520 that your a dollar can slip. However, I think if 0:08:27.560 --> 0:08:30.280 you want to see where the dollar strength is, you 0:08:30.320 --> 0:08:31.960 should look away from your a dollar and you should 0:08:31.960 --> 0:08:34.640 look at a broad basket of currencies, and that's where 0:08:34.640 --> 0:08:37.120 you see the dollar strength. Jane got to catch up 0:08:37.160 --> 0:08:39.200 here this morning. I appreciate your time. Jane Foley, their 0:08:39.240 --> 0:08:42.480 Rabbit bankhead of FX strategy, went in on the Fett 0:08:42.559 --> 0:08:48.960 decision and on global currency markets. Credit very much in 0:08:48.960 --> 0:08:51.480 the driving seat at the moment. Let's bring in Mike Wilson, 0:08:51.559 --> 0:08:54.800 shall wait a guiding light for times like this. The 0:08:54.880 --> 0:08:57.800 team at Morgan Stanley, the chief US equity strategist, joined 0:08:57.880 --> 0:08:59.640 us on the phone. Now, Mike, fantastic to have you 0:08:59.679 --> 0:09:02.400 with us. Your cool, your message to your clients on 0:09:02.400 --> 0:09:05.000 the morning like this morning. Well, look, first of all, 0:09:05.360 --> 0:09:08.600 the panic is, you know, happening in financial markets, and 0:09:08.600 --> 0:09:10.600 I think for good reason. I mean, there's a health 0:09:10.640 --> 0:09:12.440 crisis and it's scared, and I think I want to 0:09:12.520 --> 0:09:15.480 just first start by saying, we're talking about financial markets, 0:09:15.480 --> 0:09:17.560 but you know, there is a health issue, so we 0:09:17.600 --> 0:09:19.440 just want to make sure we're sensitive to that in 0:09:19.480 --> 0:09:23.000 all of our commentary because it is a personal tragedy 0:09:23.040 --> 0:09:25.839 in some cases. So let's let's focus on you know, 0:09:25.880 --> 0:09:28.200 what the markets have already been telling us for quite 0:09:28.200 --> 0:09:31.120 a while. And we think this is uh kind of 0:09:31.120 --> 0:09:33.040 where our view might be a little bit different than others, 0:09:33.080 --> 0:09:35.920 is that we think we were heading towards kind of 0:09:35.920 --> 0:09:41.160 a recession. Anyways. We clearly had no idea virus or 0:09:41.200 --> 0:09:42.719 you know, an oil price shock was going to be 0:09:42.840 --> 0:09:45.040 the final kind of thing that tips us over. But 0:09:45.080 --> 0:09:47.880 there's always something, and so now we are heading towards 0:09:47.880 --> 0:09:52.160 a recession, probably globally US as well, and in the 0:09:52.160 --> 0:09:55.000 markets are quickly discounting that from a from a period 0:09:55.080 --> 0:09:57.840 by the way, when none of that was being discounted, 0:09:57.920 --> 0:09:59.559 you know, several months ago, so that it's just been 0:09:59.600 --> 0:10:02.680 that's why been so violent, and we're getting to some 0:10:02.760 --> 0:10:06.200 very interesting price levels for for assets that you know, 0:10:06.240 --> 0:10:10.000 for longer term investors are attractive and we will get 0:10:10.000 --> 0:10:11.959 through this. Uh, you know, we think that. You know, 0:10:12.000 --> 0:10:15.319 obviously the actions last night, you know, people are disappointed 0:10:15.320 --> 0:10:18.120 perhaps that the FED can do it, but the reality 0:10:18.160 --> 0:10:20.480 is that FED can't do anything about the virus, right, 0:10:20.520 --> 0:10:22.480 so they're going to do what they can, which has 0:10:22.480 --> 0:10:25.520 provide liquidity to markets that they function. And then when 0:10:25.559 --> 0:10:28.319 we can get past this and look forward again, to 0:10:28.760 --> 0:10:31.640 the recovery, then you know, liquidy will be in place, 0:10:31.640 --> 0:10:33.720 and then we can stabilize and move forward. So this 0:10:33.800 --> 0:10:36.839 is the time for clients to not do anything rash, right, 0:10:36.840 --> 0:10:39.720 It's not a time for for people to sell everything 0:10:39.720 --> 0:10:42.440 and panic. We've we've already had that client in a 0:10:42.440 --> 0:10:46.520 straight line, and so that's pretty much a waterfall decline. Uh. 0:10:46.559 --> 0:10:48.840 To have another waterfall decline on top of that would 0:10:48.840 --> 0:10:52.200 be historically unprecedented. Even in the you know, the twenties 0:10:52.200 --> 0:10:57.200 and thirties or areas like that usually get some relief. Okay, 0:10:57.200 --> 0:10:58.959 so we are expecting that at some point. The two 0:10:58.960 --> 0:11:01.960 things I'm focused on right now, UH, to tell me 0:11:02.040 --> 0:11:05.160 that maybe the worst is getting behind us is the 0:11:05.200 --> 0:11:08.640 treasury market, which has been the guiding light to tell 0:11:08.720 --> 0:11:11.400 us all along that growth was continuing to slow. And 0:11:11.400 --> 0:11:14.120 I think it's interesting. That's not it's not a guarantee, 0:11:14.200 --> 0:11:18.000 but it's interesting. The treasury yields are not making new loads, uh, 0:11:18.040 --> 0:11:19.920 and did not make new loads last week either, and 0:11:20.080 --> 0:11:22.240 later in the week when things really kind of came apart. 0:11:22.760 --> 0:11:25.240 So I think that's important. UM. I will continue to watch. 0:11:25.240 --> 0:11:27.559 That will also tell me that the treasury markets functioning, 0:11:27.880 --> 0:11:30.600 which is important, and that's the FEDS concern in this hue. 0:11:30.679 --> 0:11:32.800 But we're gonna need more fiscal and I think so 0:11:32.880 --> 0:11:35.679 that's the other thing I'm really watching is how more 0:11:35.720 --> 0:11:38.800 how much more aggressive can politicians get in the short 0:11:38.920 --> 0:11:41.280 term to uh, you know, to indicate that they are 0:11:41.280 --> 0:11:43.800 going to do more fiscal policy because monetary can't do 0:11:43.880 --> 0:11:47.280 this on its own. So last week you told myself 0:11:47.320 --> 0:11:49.560 from John and Tom that this was a time to 0:11:49.600 --> 0:11:52.840 start adding back risk that this is actually potentially a 0:11:52.880 --> 0:11:56.040 buying opportunity. Goldman sachs Is David Couston came out over 0:11:56.040 --> 0:11:58.200 the weekend with reports saying that the SMP five hundred 0:11:58.280 --> 0:12:01.680 could fall another twenty six percent from Friday's closed to 0:12:01.720 --> 0:12:04.959 two thousand if the economic fallout from the coronavirus deepens. 0:12:05.000 --> 0:12:08.439 Why do you not think that's the case. Well, that's 0:12:08.440 --> 0:12:11.040 always a possibility. Of course, it's a possibility, right, But 0:12:11.640 --> 0:12:15.120 you know, we think that this has been I think 0:12:15.120 --> 0:12:17.280 where we're a little different perhaps in some others, is 0:12:17.320 --> 0:12:19.960 it we think this correction that we're going through right 0:12:20.000 --> 0:12:23.920 now is part of a bear market that began two 0:12:24.000 --> 0:12:26.840 years ago, right, And if you're if you're really objective 0:12:26.880 --> 0:12:28.960 about what's been going on the average stock and the 0:12:29.000 --> 0:12:31.840 average market has really gone nowhere for two years. And 0:12:32.320 --> 0:12:35.280 this is kind of a finishing move. It's ending in 0:12:35.320 --> 0:12:37.720 the recession. That's the way it typically works. Now we 0:12:37.760 --> 0:12:39.720 have to we have to get into that recession and 0:12:39.760 --> 0:12:42.880 people have to acknowledge that. But if you can't tell 0:12:42.920 --> 0:12:46.120 me that, you know, markets haven't been discounting a pretty 0:12:46.120 --> 0:12:48.600 meaningful slowdown now for the past couple of years. That's 0:12:48.600 --> 0:12:51.240 why we've been trading very defensively. That's why treasuries are 0:12:51.280 --> 0:12:55.480 already you know, at record low levels, even before the 0:12:55.559 --> 0:12:59.160 virus hit and before the oil price. The clients, I mean, 0:12:59.160 --> 0:13:03.360 we've we've had signals all along, and so all we're 0:13:03.400 --> 0:13:06.480 telling folkuses is that this is how things, this is 0:13:06.520 --> 0:13:10.560 how moves kind of finish. Okay, the time to get 0:13:10.600 --> 0:13:14.040 really defensive was two years ago, uh, in terms of 0:13:14.080 --> 0:13:17.600 like being overweight treasuries, being overweight defensive areas and whatnot, 0:13:17.679 --> 0:13:20.440 and and those types of strategies have worked extraordinarily well 0:13:20.480 --> 0:13:23.559 over the last two years. And so now if you 0:13:23.600 --> 0:13:25.120 were set up that way, now is the time to 0:13:25.160 --> 0:13:29.160 start thinking about re risking, understanding that it's going to 0:13:29.160 --> 0:13:31.920 be extraordinarily volatile in the next month or two is 0:13:31.920 --> 0:13:35.360 going to be extraordinarily whippy. It's gonna be extraordinarily dangerous 0:13:35.400 --> 0:13:37.800 to be trading this okay if I were advising people 0:13:37.840 --> 0:13:40.760 to do. But if you're in a diversified portfolio and 0:13:40.800 --> 0:13:45.559 you've had some defensive securities, you've probably actually done okay 0:13:45.600 --> 0:13:48.600 over this period. Mike, really thoughtful stuff. I appreciate your 0:13:48.600 --> 0:13:51.000 time this morning and wishing the best to your team. 0:13:51.000 --> 0:13:53.280 And those are Morgan Stanley as well. Mike Wilson. There, 0:13:53.320 --> 0:13:59.480 Morgan Stanley, Chief US Equity Strategists. You hope some trade 0:13:59.480 --> 0:14:01.160 in the equity are gonna used to be funded bunder 0:14:01.200 --> 0:14:05.120 bond investor. No more. This is about protecting ratings and 0:14:05.200 --> 0:14:08.280 meeting coupon payments. And we'll get to that right now, 0:14:08.280 --> 0:14:09.800 and we can do it with Goes and Distant found 0:14:09.800 --> 0:14:12.800 a b CO head of fixed income Goes and fantastic 0:14:12.840 --> 0:14:14.840 to have you with us on the phone. Let's start there. 0:14:15.559 --> 0:14:18.920 Default risk. Let's just start with something extreme, the extreme tale. 0:14:18.920 --> 0:14:20.520 It was talked to me about default risk at a 0:14:20.560 --> 0:14:24.200 moment like this. Well, look, I think we are an 0:14:24.240 --> 0:14:28.200 unprecedented times. John. You know we've we've spent the past 0:14:28.880 --> 0:14:32.000 decade plus talking about how the next downturn is not 0:14:32.040 --> 0:14:34.000 going to be a two thousand and eight. Al Right, 0:14:34.040 --> 0:14:36.760 we keep on especially cautioning, you know, younger investors that 0:14:36.840 --> 0:14:39.680 don't remember the last recession before two thousand and eight, right, 0:14:39.840 --> 0:14:42.320 don't remember all one on two, and the next downturn 0:14:42.400 --> 0:14:44.720 is not going to be two thousand and eight. The 0:14:44.760 --> 0:14:47.440 reality is that you know, well, of course it's not 0:14:47.480 --> 0:14:49.360 going to be a two thousand and eight. The impact 0:14:49.400 --> 0:14:51.440 could very well be two dozen and eight if we 0:14:51.480 --> 0:14:53.760 don't get a response on the fiscal side. You know, 0:14:53.800 --> 0:14:58.680 the the for certain industries, the economy is essentially shutting down, 0:14:59.560 --> 0:15:02.400 and that is, if we don't get the proper response 0:15:02.400 --> 0:15:04.520 on the fiscal side, we will see the faults in 0:15:04.640 --> 0:15:08.360 certain sectors spike. This is exactly what fixed what credit 0:15:08.360 --> 0:15:11.760 investors worry about. We worry about that left tail. We 0:15:11.800 --> 0:15:16.640 worry about over levered companies, right for whatever reason, their 0:15:16.640 --> 0:15:20.840 business their top line being shut down, not being able 0:15:20.840 --> 0:15:22.960 to generate free cash flow to be able to meet 0:15:23.000 --> 0:15:25.880 their debt obligations, and that is going to be an 0:15:25.880 --> 0:15:29.160 increasing concern, and that's why you've seen a lot of 0:15:29.200 --> 0:15:32.920 stress in the credit markets over the past couple of weeks, guess, 0:15:33.000 --> 0:15:35.360 and this quote came from making over a city group. 0:15:35.440 --> 0:15:38.200 He right the following. With so much credit provided outside 0:15:38.200 --> 0:15:41.440 the banking system, it's very difficult to implement a system 0:15:41.440 --> 0:15:45.440 wide payments freeze which ensures all obligations are simply rolled over. 0:15:45.480 --> 0:15:48.720 The consequent timing of conditions has a tendency to cascade 0:15:48.720 --> 0:15:51.400 through the rest of the system. This is an important point. 0:15:51.680 --> 0:15:53.160 I've been beating the drum with you, guess, and we 0:15:53.200 --> 0:15:55.160 need a fiscal response, and we need to quick. But 0:15:55.240 --> 0:15:57.440 there's going to be limits on how much this can cover. 0:16:00.280 --> 0:16:03.520 But look, I think, look, we're seeing who knows what 0:16:03.560 --> 0:16:05.240 the fiscal response is going to be, but we are 0:16:05.280 --> 0:16:10.160 seeing a lot of interesting proposals being floated out there. Um, 0:16:10.240 --> 0:16:12.920 you know, the easy one is helicopter money, Right, we 0:16:13.080 --> 0:16:16.360 just write a check to everybody. The problem with that 0:16:16.480 --> 0:16:19.560 is it ends up not being targeted to the places 0:16:19.600 --> 0:16:22.640 that I mean. It helps the consumer obviously, and there's 0:16:22.680 --> 0:16:25.800 a lot of value to that. We're seeing some unconventional proposals. 0:16:26.040 --> 0:16:28.800 You know, maybe you start saying the government should be 0:16:28.800 --> 0:16:32.119 the buyer of last resort, should prop up certain industries, 0:16:32.120 --> 0:16:36.440 should you know, basically guarantee that airlines fill seats and 0:16:36.480 --> 0:16:41.400 if they don't, they the government hands them the revenue. Um. 0:16:41.600 --> 0:16:44.600 There's other kinds of proposals that are being floated around there. 0:16:44.920 --> 0:16:48.080 You know, it's it's it's gonna take some creative thinking 0:16:48.160 --> 0:16:50.440 and it's going to have to happen fast, because what 0:16:50.480 --> 0:16:52.720 we're seeing right now is I heard you say it earlier, 0:16:52.800 --> 0:16:56.320 John fear is taking over. Um. We are shutting down 0:16:56.400 --> 0:16:58.920 large segments of the economy, and it's going to have 0:16:59.000 --> 0:17:02.640 to be a fiscal response. It's great that monetary policy 0:17:02.680 --> 0:17:04.679 is doing what they can, and they're supposed to do 0:17:04.720 --> 0:17:07.240 what they can, but this is not a demand problem. 0:17:07.240 --> 0:17:11.400 This is the supply problem, and it requires a different response. Grishan, 0:17:11.920 --> 0:17:14.800 we're talking about credit, and we should just say there 0:17:14.840 --> 0:17:16.600 is sort of a dual shock here too, at the 0:17:16.600 --> 0:17:20.080 oil complex in particular getting hit as oil prices decline, 0:17:20.400 --> 0:17:23.440 and I'm wondering though the technical action. I want to 0:17:23.480 --> 0:17:26.119 go from the fundamental to the technical picture. E t 0:17:26.280 --> 0:17:30.359 fs in particular saw unprecedented outflows in the past few weeks, 0:17:30.520 --> 0:17:32.720 and people are worried about a spiral that these that 0:17:32.840 --> 0:17:34.919 these e t f s are being traded frequently for 0:17:34.960 --> 0:17:37.679 liquidity and that as their prices go down, they have 0:17:37.760 --> 0:17:41.480 to sell underlying assets. The sales end up driving prices 0:17:41.520 --> 0:17:45.520 down even further and the cycle goes. How close are 0:17:45.560 --> 0:17:49.000 we to that? You know, it's interesting we're seeing that 0:17:49.080 --> 0:17:51.720 in the E t F. I will counter that we're 0:17:51.800 --> 0:17:54.320 not seeing yet is in fun flows, which is an 0:17:54.400 --> 0:17:59.240 interesting dichotomy. You know, past sell offs of this, even 0:17:59.280 --> 0:18:03.440 of lesser magnitude, and this we saw much more panic 0:18:03.600 --> 0:18:05.840 from the end investor in mutual funds, both in the 0:18:05.960 --> 0:18:08.400 US and offshore. And I'm not saying we're not seeing 0:18:08.400 --> 0:18:10.280 any apples, of course we are, but it's not of 0:18:10.280 --> 0:18:14.240 the magnitude we saw previously. And I think that's interesting. Um, 0:18:14.960 --> 0:18:18.159 it's been, it's it's been kind of orderly. And if 0:18:18.200 --> 0:18:20.280 you look at you know, one of my favorite topics, Lisa, 0:18:20.560 --> 0:18:24.439 is the relationship between high yield and equities. And you know, 0:18:24.800 --> 0:18:26.920 with equities being down, you know, they were down I 0:18:26.920 --> 0:18:30.440 guess percent from the peak with the rally back on 0:18:30.440 --> 0:18:32.560 on Friday, I gets down twenty two or something like that, 0:18:32.600 --> 0:18:35.560 and we'll probably back down and we open. You know, 0:18:35.640 --> 0:18:38.360 hi yields down about twelve percent from the peak, roughly half. 0:18:38.400 --> 0:18:41.520 That's typically what you see, so the price actually indicates 0:18:41.760 --> 0:18:44.560 that it's somewhat orderly there. Actually, even before the rally 0:18:44.560 --> 0:18:47.720 on Friday, liquidity was okay in the high yield market, 0:18:47.960 --> 0:18:50.240 stuff was down, So it's it's becoming orderly. You know, 0:18:50.280 --> 0:18:55.000 at some point, if the outflows are are sufficient, whether 0:18:55.080 --> 0:18:57.880 it's from ETFs or it's from kind of real money 0:18:57.960 --> 0:19:00.960 mutual funds, that could cause a problem in liquidity. And 0:19:00.960 --> 0:19:03.199 that's something that we're looking at very carefully. You know, 0:19:03.440 --> 0:19:06.720 the fact that it was difficult to sell off the 0:19:06.840 --> 0:19:10.639 run treasury back on Thursday, something that wasn't the case 0:19:10.760 --> 0:19:12.680 even in the worst time of oh eight is something 0:19:12.720 --> 0:19:15.480 that is concerning to us and should be concerning to 0:19:15.560 --> 0:19:18.040 most market participants, guess. And let's talk about that and 0:19:18.080 --> 0:19:20.359 what the Fed can do to have alleviate some of 0:19:20.400 --> 0:19:22.080 that stress. Right now? What can they do it? They're 0:19:22.080 --> 0:19:27.000 doing enough. I look at that they've they've done, you know, 0:19:27.080 --> 0:19:30.640 they've announced two things since that happened on Thursday, and 0:19:30.720 --> 0:19:33.440 that's the question. We'll see, we'll see what happens today. Um, 0:19:33.480 --> 0:19:36.000 they're doing everything they can. They're they're opening up the window, 0:19:36.040 --> 0:19:40.359 they're buying, they're buying back treasuries across the curve that 0:19:40.440 --> 0:19:44.080 has helped. Uh. But that's that's the danger of the 0:19:44.119 --> 0:19:46.840 market when you when even the thing that's supposed to 0:19:46.880 --> 0:19:50.560 be the most liquid market in the world is experiencing 0:19:50.800 --> 0:19:55.080 liquidity issues. UH. That should raise concerns and there might 0:19:55.119 --> 0:19:57.159 have to be more action that has to be taken. 0:19:57.800 --> 0:19:59.320 Guess you don't want to finish with just a quick 0:19:59.320 --> 0:20:01.440 word on portfile a construction, and I'll try and keep 0:20:01.480 --> 0:20:03.440 this as simple as possible for the majority of our 0:20:03.480 --> 0:20:06.800 audience that may not be moll straight professionals. You've always 0:20:06.840 --> 0:20:10.080 compared for me, at least when we've talked historically speaking 0:20:10.200 --> 0:20:12.879 about how credit performs in a downturn as part of 0:20:12.880 --> 0:20:15.960 a portfolio, and how equity performs in that downturn too. 0:20:16.600 --> 0:20:19.600 Walk me through that historically and how you think that 0:20:19.720 --> 0:20:23.560 may or may not be the same this time around. Yes, so, 0:20:23.640 --> 0:20:28.240