Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm term Keene Jay Leye.
Speaker 1: We bring you insight from the best in economics, finance,
Speaker 1: investment and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Let's
Speaker 1: turn now to the UK with Rupert Harrison, black Rock
Speaker 1: multi Asset Strategies portfolio manager, formerly of the Treasury as
Speaker 1: while working alongside the former Chance that George Osborne. Rupert,
Speaker 1: fantastic to have you with us on a program this morning,
Speaker 1: especially on a morning like this morning. Rupert, let's talk
Speaker 1: about the response from the Bank of England what may
Speaker 1: still come from Treasury a little bit later. I agree
Speaker 1: very strongly with what you've all been saying in the
Speaker 1: sense that I think this is a real demonstration of
Speaker 1: strength from the UK system. I think it shows us
Speaker 1: at maturity from the Bank of England, which is an
Speaker 1: institution that is I think comfortable in its independence, confident
Speaker 1: of its independent and therefore willing to be seen to
Speaker 1: act in a coordinated way with the Treasury. We saw
Speaker 1: some similar things in the past, the funding from lending
Speaker 1: for schemes set up in two douzen twelves. But I
Speaker 1: think it is a big advantage of having strong credible institutions.
Speaker 1: I think, as you say, it would be very difficult
Speaker 1: for the FED to do something similar. Indeed, we saw
Speaker 1: the FED deliberately separate its emergency fifty basis points cut
Speaker 1: from the G seven Finance ministers called I think largely
Speaker 1: due to wanting to avoid the perception of impositions on
Speaker 1: its independent So yes, I do think this is UKs
Speaker 1: stiticians demonstrating how you can loose confidence by coordination. RiPP
Speaker 1: Let's talk about how important it is to help SAMES
Speaker 1: in a moment like the moment we're in right now.
Speaker 1: It seems to be a big focus of the Bank
Speaker 1: of England. How do we get that focus to go
Speaker 1: beyond the UK in two places like Europe and into
Speaker 1: places like the United States. Well, look, I think that
Speaker 1: the policy community get it. I think that we will
Speaker 1: see further action in the budget in the UK to
Speaker 1: a you know, the these term funding schemes for banks
Speaker 1: with incentives to lend to SAMES there. They're similar to
Speaker 1: the kind of things we did in the UK in
Speaker 1: two thousand and twelve with funding for lending they're okay. Frankly,
Speaker 1: the banks can gain the targets, and this is not
Speaker 1: a way to guarantee that you're going to get cash
Speaker 1: to sames. You have to see finance ministries acting really
Speaker 1: to get cash to the simes in trouble on top
Speaker 1: of the band central bank actions. I think you will
Speaker 1: see that in Europe. I think it will be, you know,
Speaker 1: a combination of European wide and Frankie, you just have
Speaker 1: to going to have to wait and see national level actions.
Speaker 1: Um and I hope that we will see it in
Speaker 1: the US, but of course it's going to be a
Speaker 1: much more difficult mechanism to get agreement around that, even
Speaker 1: though the policy community I think now fully understand that
Speaker 1: that's what's needed. Let me ask you the same question
Speaker 1: I asked of our Stephanie Flanders earlier today. Did the
Speaker 1: reason we get that this action today? Was it because
Speaker 1: of Prime Minister Jansen? Was it was because we had
Speaker 1: essentially a pro Brexit vote? Was it because we have
Speaker 1: a new independence, are freethinking in the United Kingdom less
Speaker 1: attached to the European continent? No, I don't think so.
Speaker 1: I think this is because of the sort of historic
Speaker 1: patterns and working of the UK institutions. I think the
Speaker 1: Treasury in the Bank of England to have for a
Speaker 1: long time now worked well together, and I think that
Speaker 1: there is an understanding in the Treasury and the Bank
Speaker 1: that this is a time for this. You know, this
Speaker 1: is not a time for holding back. So I think
Speaker 1: you will see Chancellor Richie Sunac in the budget later today.
Speaker 1: You know, if anything, you know, doing too much, I
Speaker 1: think you will very much not want to be seen
Speaker 1: as kind of under delivering. I think it will be
Speaker 1: over delivered. Belt embraces, you know, resilience and you know,
Speaker 1: insurance against what might be become. I don't think that
Speaker 1: you know, particular to this government. I think it speaks
Speaker 1: more to a sort of historic strength of UK institutions.
Speaker 1: But of course it is very welcome to see the
Speaker 1: UK I think performing kind of well internationally compared to
Speaker 1: other countries. Going to your core, which is in staying.
Speaker 1: How does this give you conviction when it comes to
Speaker 1: putting on a trade? In other words, are you going
Speaker 1: to invest more in UK assets as a result of
Speaker 1: what the policymakers did. It's certainly at the margin makes
Speaker 1: us feel more comfortable that the UK is going to
Speaker 1: do everything possible to avoid permanent economic damage from this disruption.
Speaker 1: But frankly, you know, I think we've seen in market
Speaker 1: action over the last few days that while policy actions
Speaker 1: are welcome, you know, people of a market are very
Speaker 1: very aware that policymakers are our secondary at the moment
Speaker 1: to the sort of fundamentals of the spread of the virus,
Speaker 1: and you know, in a sense market to pay more
Speaker 1: attention to the to the negatives I when and how
Speaker 1: widely our restrictions on activity going to be. I think
Speaker 1: that it's it's about putting confidence in place so that
Speaker 1: if we do get to a peak situation where people
Speaker 1: can see beyond the peak of the virus, that's when
Speaker 1: people will take confidence from policy measures being in place
Speaker 1: to prevent permanent damage, and that's where will help see
Speaker 1: the kind of more rapid bounced back. Rupert Harrison, thank
Speaker 1: you so much with black Rock this morning, joining us
Speaker 1: after an historic moment for the Bank of England. Without
Speaker 1: question our interview of the day on this moment for
Speaker 1: central bankers, and with this and the honor of having
Speaker 1: David blanch Flower with us of Dartmouth College, of course,
Speaker 1: his public service to his very united Kingdom is public
Speaker 1: service and getting Cardiff back into the Premier League and
Speaker 1: then out again in the Premier League. We're thrilled to
Speaker 1: Professor blanch Flower could join us this morning. Uh, David,
Speaker 1: here we are. Quote. This is prudence with a purpose.
Speaker 1: It's resilience with a reason, and that reason is to
Speaker 1: fulfill the Bank of England's mission, namely to promote the
Speaker 1: good of the people of the United Kingdom by maintaining
Speaker 1: monetary and financial stability. By acting today, the Bank is
Speaker 1: ensuring that the strength of our financial system can be
Speaker 1: directed to where it's most needed in the months ahead.
Speaker 1: Mark Kearney, how do you do today? Very impressive. I
Speaker 1: was just listening to the press conference. I thought they
Speaker 1: did extremely well. Um the co ordination between the three
Speaker 1: banks the Mideast um coming on a day ahead of
Speaker 1: the UK budget, so it looked like, you know, the
Speaker 1: big boys are in charge. I thought, what was interesting
Speaker 1: reminded me of October seven, two thousand and eight. But
Speaker 1: I think Kari said it right then. The problem was
Speaker 1: the financial system causing a crisis, and he said, you know,
Speaker 1: the financial system here is going to try and come
Speaker 1: in and um support this this crisis. So I thought
Speaker 1: it was pretty impressive, the two that the governor and
Speaker 1: the new governor sitting there together. Um, I was really impressed.
Speaker 1: I mean the concern is do that what I mean?
Speaker 1: I remember in October seven six central banks cut. I
Speaker 1: was part of it. The big deal then was did
Speaker 1: they we knew things that the markets didn't know? And
Speaker 1: the question is is that true? Now? Are the more
Speaker 1: things they know that? That's the question I think on
Speaker 1: the table. Do you have a confidence with a medical
Speaker 1: crisis and an original ECB to begin with the ECB
Speaker 1: or frankly any other central bank and execute what the
Speaker 1: governor and the governor designate executed today. Well, obviously the
Speaker 1: big concern is that we're whatever is twelve years now
Speaker 1: past that crisis, and the room to maneuver for the
Speaker 1: central bank is somewhat limited. I mean, the Bank of
Speaker 1: England will cut from point seven five to point to
Speaker 1: five perhaps I thought they might go points is a
Speaker 1: big deal. What what can ECB does? I mean ECP
Speaker 1: is already negative. Christine the guard is obviously talking about
Speaker 1: this being a major problem. The room to maneuver is
Speaker 1: somewhat limited. Obviously, the coordination with fiscal policies that big
Speaker 1: to you. And the fact that this statement was made
Speaker 1: on the day when the bodies of the new Bodish
Speaker 1: Chancer that makes a statement for the budget suggests that
Speaker 1: these things are coordinated and that's going to be the
Speaker 1: problem down that, like could the ECB coordinate with other governments?
Speaker 1: What are the Germans going to say and do? What's
Speaker 1: going to happen at the at the o MC where
Speaker 1: it looks like a hundred basis points cuts already priced
Speaker 1: into the meeting next week, Danny, there's also a question
Speaker 1: of what's the roadmap here? And a lot of people
Speaker 1: are pointing to two thousand and eight, and since you
Speaker 1: have experience at the Bank of England when you were
Speaker 1: a part of their indust rates heading a Monetary policy
Speaker 1: committee as an external member from two thousand and six
Speaker 1: to two thousand nine through the crisis, is the two
Speaker 1: thousand and eight period the one we should be looking at? Well?
Speaker 1: It seems so. I mean, that's the only two cuts
Speaker 1: that I recall, Like this emergency meeting, which they very
Speaker 1: well did in secretum, there was the two meetings to
Speaker 1: fare in the Bank of England have had at the
Speaker 1: nine eleven which may may be comparable I mean the
Speaker 1: cut into a thousand and eight, the October cut. In
Speaker 1: a sense, what it signaled it was that it's more
Speaker 1: than anything. It's signaled that the central banks were on
Speaker 1: the case. It's much more to come. And I think
Speaker 1: that's what they were signaling today. I mean, they could
Speaker 1: have thrown more actively didn't do more que today they
Speaker 1: have they've sort of holding that back that they did
Speaker 1: all sorts of things about um but counter sectal buffer
Speaker 1: for the bank money for the same. So they certainly
Speaker 1: signaled there was more to come. But the issue is,
Speaker 1: well Tom was just saying what what what can they do?
Speaker 1: How much more can they do? And the concern is
Speaker 1: if this crisis, as Regard says today is comfortable to
Speaker 1: two thousand and eight that there are limits to what
Speaker 1: the policymakers can do. So, you know, I thought it
Speaker 1: was very impressive, good that they got in there, but
Speaker 1: down the road know how much they can do. Danny,
Speaker 1: are there any non traditional tools that we did not
Speaker 1: see deployed in two thousand and eight ways to sort
Speaker 1: of I think outside of the historical reference, it can
Speaker 1: the central banks to poy now well, yeah, absolutely, I
Speaker 1: mean I think Americ Rosen grinning the US right. He
Speaker 1: started to talk about the ability of the FED to
Speaker 1: broaden what it buys, not to just buy mbs and
Speaker 1: government backed securities, to broaden out what it buy. Is
Speaker 1: that's an obvious possibility that it works negative. Um, that's
Speaker 1: still on the table. But I think that I think
Speaker 1: for the listeners, I remember being brief saying central banks
Speaker 1: could buy anything, um and literally anything, So obviously I
Speaker 1: think that's on the table. Um. The possibility that QUI
Speaker 1: will broaden and extend, and as a said, it's thought
Speaker 1: about in the United States, that's the possibility of going
Speaker 1: negative exist. Now how negative, David, I've got to get
Speaker 1: squeeze us in a headline coming out of the United Kingdom,
Speaker 1: no doubt what. I'm the Chancellor as well. The United
Speaker 1: Kingdom sees this year's GDP growth one point one percent
Speaker 1: versus one point four very quickly, your professor. With that
Speaker 1: diminished g d P growth, do we also see diminished inflation?
Speaker 1: So we've got a combination a weaker growth and disinflation. Well,
Speaker 1: I think we do. But I think the mark that
Speaker 1: worries the markets will think that that at one point
Speaker 1: one percent is overly optimistic. Ian the scale of the
Speaker 1: scale of the shock that currently looks to be large,
Speaker 1: So I think that might well be very optimistic. And
Speaker 1: of course what the central Bank is going to have
Speaker 1: to do is just look through inflation, look at what's
Speaker 1: happening in the real economy, and that's what they've done today.
Speaker 1: So I think what happens to INFLA is broadly irrelevant.
Speaker 1: But it sounds totally optimistic on the part of the
Speaker 1: of the O b R and the government to think
Speaker 1: that output in the UK is going to grow this
Speaker 1: year too. Short of visit David blanche Flower of Dartmouth
Speaker 1: College here and of course has worked with the Bank
Speaker 1: of England. It is a fired up Nora Roubini with
Speaker 1: us today. His book of a Good Deck Togo was outstanding.
Speaker 1: There is there a book coming up here, you know,
Speaker 1: I'm thinking about the right thing in you want but
Speaker 1: he is going to be out next year. Okay, very good.
Speaker 1: There's there's a break slusive from Bloomberg surveillance. One of
Speaker 1: the great themes we've had here over the last number
Speaker 1: of weeks is a team that has just been dedicated
Speaker 1: in folks, really working seven days a week to get
Speaker 1: his voices and One of the voices was Jeffrey Curry
Speaker 1: of Goldman sex On Oil, who was out front of
Speaker 1: an oil war of Saudi UH and Russia and then
Speaker 1: was with us again today and with his microeconomics from Chicago,
Speaker 1: was just prodigious on these demand and supply shocks that
Speaker 1: we see. Let's discuss this now with Neral Rabini and
Speaker 1: the backdrop for me on this Neral is a visceral
Speaker 1: feeling of the old world of Saudi Arabia taking on Russia.
Speaker 1: What's your take on how anyone would take on Russia.
Speaker 1: Is it doable for Saudi Arabia to actually go after
Speaker 1: Mr Putin on oil? Well, so the Arabia going after Russia,
Speaker 1: but it's also going after the U S sail producers.
Speaker 1: Both of them are tried to sell the Arabia and
Speaker 1: I would say over time, uh, the shell gas producer
Speaker 1: maybe a bigger threat to sell the Arabia than put
Speaker 1: In and they all in Russia. The other thing in
Speaker 1: this game is that while in Russia you have to
Speaker 1: give credit to put In. That on the micro side
Speaker 1: is physically conservatives low budget deficit, low public debt, is
Speaker 1: low inflation, while the budget deficits Saudi Arabia right now
Speaker 1: is seven percent of GDP, so their break even physically
Speaker 1: it's more like eighty dollar barrel, while for Russias around
Speaker 1: fort So in this war, actually on the physical side,
Speaker 1: it's true that Saouldi have more reserves than they can
Speaker 1: run them down. But between the two, on the micropoint
Speaker 1: of view, Saudi are weaker. But of course they can
Speaker 1: play this game for a few months until the Russian
Speaker 1: is gonna come and say let's do a deal by
Speaker 1: both sides want to get rid of the shell gas
Speaker 1: producer in US, but the shell gus producing US once
Speaker 1: all goes to forty fifty, are going to be back.
Speaker 1: Even if they're back the margin. How does Germany buy
Speaker 1: from Saudi Arabia versus their long term relationship on hydrocarbons
Speaker 1: with Russia. Uh, well, you know, they have to diversify
Speaker 1: and they've decided to phase out essentially called so they're
Speaker 1: gonna do more renewable energy, but definitely they need still
Speaker 1: oil from the Middle East and they need GUS from Russia.
Speaker 1: So for Germany there's no other option absolutely So, So
Speaker 1: if we're lower oil for longer, what does that mean?
Speaker 1: You know, for the overall global GDP picture. Because you
Speaker 1: compare that, you weigh at against these you know, the
Speaker 1: issues presented by the coronavirus on the demand side is
Speaker 1: that pushes into a global recession. There's lower oil keep
Speaker 1: us from going into a global recession. How do you
Speaker 1: weigh those two? Well, if the price of oil falls
Speaker 1: because of a increasing supply, there is a price war
Speaker 1: as opposed to fall in demand. Because until now a
Speaker 1: week ago was a falling demand recession on global growth,
Speaker 1: prices were falling. That was a negative signal. But now
Speaker 1: all prices are falling because there's going to be a
Speaker 1: glass of supply from Russia and from Saudi Arabia. Then
Speaker 1: in that situation, actually I think that the impact on
Speaker 1: the global economy at the margin is positive because the
Speaker 1: marginal propensity to spend of all importers is greater than
Speaker 1: the marginal propensity to spend of the all exporters. So
Speaker 1: they all exports are gonna produce less, they're gonna do
Speaker 1: less capex, they're gonna fire some workers. But then the
Speaker 1: consumers of oil, even in country like the US where
Speaker 1: we're not any more net importer, the distributional and benefit
Speaker 1: goes to the consumer, and they hurting the producer let
Speaker 1: alone in countries like China, like India, like Japan, like Korea,
Speaker 1: like most of Europe that are net all importers. So
Speaker 1: at the margin, actually this is a war that is
Speaker 1: bad for the stock market because the stock market reflects
Speaker 1: the energy company's stocks. But for the real economy, actually
Speaker 1: collapsing all prices is a benefit at the margin. It's
Speaker 1: not going to prevent the recession because you have a coronavirus,
Speaker 1: but it's gonna make it less damaging at least for
Speaker 1: the consumers. So the strategic value here for Saudi Arabia
Speaker 1: and in Russia to kind of put pressure on the
Speaker 1: U S shale producers. That will happen. We've seen the
Speaker 1: balance sheets for these shales producers not good, so there's
Speaker 1: a lot of credit issues here. But as soon as oil,
Speaker 1: as you say, oil comes back to hour, Wall Street's
Speaker 1: gonna come right back to the shale patch and we're
Speaker 1: gonna have those guys start backed up in a year
Speaker 1: or two. I mean, so strategically the oils in the
Speaker 1: ground in the shale area. So I just you know,
Speaker 1: I just don't see the long term strategic value for
Speaker 1: what Saudi Arabia and Russia are trying to do it.
Speaker 1: Seems like the near term costs are just too much.
Speaker 1: Oh their cost But then if you can let many
Speaker 1: of these guys, especially the smaller ones going bankrupt, and
Speaker 1: many of them were over leveraged, it's going to take
Speaker 1: a couple of years until these people are gonna be
Speaker 1: able to start producing again. When you have consolidation in
Speaker 1: the shale, gus in all industries, so you have a
Speaker 1: short term loss of income, say for three four months,
Speaker 1: they get the truth by June, and then at that
Speaker 1: point many of these smaller guys are gonna be already bankrupt,
Speaker 1: and you have some reduction in product. It's not gonna
Speaker 1: be a used reduction production the United States, but you
Speaker 1: can cause enough damage that you buy yourself maybe another
Speaker 1: couple of years, but you're right. Over the medium long term,
Speaker 1: there is no way in which especially the Saudi is
Speaker 1: not along the Russians can essentially deal with the fact
Speaker 1: that we've shell gas and oil. The equilibrium all price
Speaker 1: without OPEC, it's closer to twenty, if not ten. Right,
Speaker 1: in a perfect competitive economy which there is no cartile equilibrium,
Speaker 1: all prices might be closer town. We're gonna have demand
Speaker 1: fall in the medium term because there's gonna be pick
Speaker 1: All dement and therefore all prices have to be lower. No,
Speaker 1: I got one minute left more than anybody I know.
Speaker 1: You know Milan, your Iranian Turkish. You ended up in
Speaker 1: Milan Synagogue Centrale told Jewish sense of Milan as well.
Speaker 1: What do you how do you synthesize a lockdown in
Speaker 1: your Milan? Well, it's terrible. I saw a video essentially
Speaker 1: of Saskala and Viemon zone totally empty, deserted, like a
Speaker 1: total desert. But I think the Italians are doing the
Speaker 1: right They're finally doing what China did, because in the
Speaker 1: US we are actually fudging it, pretending there's not spreading,
Speaker 1: and it's gonna get worse. In Italy. Now they're gonna
Speaker 1: realize they have to do what China did, total quarantine.
Speaker 1: You're gonna collapse the economy for a quarter. But if
Speaker 1: you can stop the contagion, then the economy is gonna
Speaker 1: recover with the monitor and physical stables. If instead you
Speaker 1: fudge that you can count down the road like the
Speaker 1: US is gonna explode in your face. So in the
Speaker 1: short time, economy is weaken ling less, but over time
Speaker 1: it's gonna weekend more so the Italians now are going
Speaker 1: China while we're still doing what Italy did a month ago.
Speaker 1: And that's a mistaken us being you. Thank you so much,
Speaker 1: of course, with New York University and his economic work
Speaker 1: worldwidetre look he pop futures minneus seventies six right now.
Speaker 1: It's a miracle. It's a miracle magic here. I don't
Speaker 1: take blame nor credit, and I've never trade. But when
Speaker 1: you blame my life, which did you blame? Are your
Speaker 1: dets a lot of snow buttter Nero being there on
Speaker 1: international you can ask you want to bring an handsome goal.
Speaker 1: I now he's very excited about jumping in, and I
Speaker 1: can see it. He said he wouldn't speak into the
Speaker 1: Bostri so his chief US Secretary strategist give money to John.
Speaker 1: Good morning, your thoughts your message for clients this morning? Well,
Speaker 1: I can I just jump in on the I mean,
Speaker 1: if you look at those of Americans who are you
Speaker 1: know on you know or you know, paycheck to paycheck,
Speaker 1: that guy is probably not going to be benefited all
Speaker 1: that much by by moving his tax returns by a month,
Speaker 1: and at least we got to find a program for
Speaker 1: those people. Do we're gonna do? We all agree apparel
Speaker 1: tax cuts just doesn't know. I think, more broadly, John,
Speaker 1: the discussion here is about whether some of these demands
Speaker 1: side initiatives on the stimulus side are going to be
Speaker 1: useless or limited in use. I don't I don't think.
Speaker 1: I don't think use. I don't think it's useless. They're
Speaker 1: gonna have an effect way after this crisis is gone. Um,
Speaker 1: But I think that these things, the narrower they are addressing,
Speaker 1: you know, displacement in the in the energy sector, leisure businesses,
Speaker 1: and displaced workers. And the benefit of being more targeted
Speaker 1: is it doesn't have to be expensive. It just has
Speaker 1: to be appropriate. Otherwise all you're gonna see is at
Speaker 1: least we'd say before is that this money is going
Speaker 1: to get saved and and it just it just doesn't
Speaker 1: have an impact. Well, I don't mind if it gets saved,
Speaker 1: and I don't mind if it gets used to pace debt.
Speaker 1: I don't expect them to go out to a restaurant.
Speaker 1: I don't expect them to get a flight. The worry
Speaker 1: we have right now is that people won't be able
Speaker 1: to make the mutgage repayments. People won't be able to
Speaker 1: make their loan repayments. And I think that I think
Speaker 1: the government has a really important role to play there.
Speaker 1: I mean, if small businesses need to make sure that
Speaker 1: they have lines of credit available to them so that
Speaker 1: if they have a hard time making payroll that the
Speaker 1: banks are going to lengths and the government can backstop that.
Speaker 1: Those kind of actions I think are critical. This is
Speaker 1: such a guy discussion, Mr Brandwich, would you please explain
Speaker 1: to the world that the number one headache right now,
Speaker 1: without question is children will be home from school. Now
Speaker 1: that totally upsets for millions of Americans, the apple cart
Speaker 1: and in so many different ways. I mean, not to me,
Speaker 1: that's far greater than anything else. Well, that is going
Speaker 1: to be the key question is if you do shut
Speaker 1: down schools will not keep people out of work, And
Speaker 1: that's an issue. But those are people often who have
Speaker 1: jobs that they go to on routine levels or even
Speaker 1: if they've got gigs. I mean, this is gonna be
Speaker 1: a serious issue. But John, I'm curious about you know,
Speaker 1: all the people have part time jobs the gig economy.
Speaker 1: Right now, I was watching I was looking at how
Speaker 1: Uber and Lift and some of the other ride sharing
Speaker 1: companies are looking at possibly compensating ride drivers if they
Speaker 1: have to self quarantine for fourteen days or take off
Speaker 1: because they're sick. I mean, how much does this expose
Speaker 1: some of the cracks that's been created by that entire infrastructure.
Speaker 1: First of all, the answer is yes, it does, and
Speaker 1: we're going to see that. But I think that the
Speaker 1: difference between this turning into a recession and not is
Speaker 1: not whether or not the economy takes a little bit
Speaker 1: of hit, but whether or not come and he has
Speaker 1: decided to lay off workers, or whether those gig workers
Speaker 1: there's enough of them that actually creates a problem. You know,
Speaker 1: if if you look at the way that recessions have
Speaker 1: worked historically, it takes a period of time for a company,
Speaker 1: especially the labor market is tight. Companies, if they think
Speaker 1: this is gonna be over in the next two or
Speaker 1: three months or whatever that period is, they're not gonna
Speaker 1: want to lay off workers if they can avoid it,
Speaker 1: and they rather take it out of profits in the
Speaker 1: near term, because hiring that worker back is going to
Speaker 1: be more expensive, and that's gonna be critical. If this
Speaker 1: lasts longer, then you have a second issue. Yes, his
Speaker 1: individuals are displaced, but but broadly, I don't think you
Speaker 1: will have that futures negative negative. And then take this
Speaker 1: recession discussion and it's all earnings, earnings, earnings for fancy
Speaker 1: guys like you right now, forget about that. What's the
Speaker 1: due to the revenue dynamic? And what is the revenue
Speaker 1: dynamic in this crisis signal to you six months out? Well,
Speaker 1: we you know, first of all, the first quarter UM
Speaker 1: is really gonna be fine. Why because we had a
Speaker 1: good January and February and even now we're just beginning
Speaker 1: to see certain things being closed down. So the first
Speaker 1: quarter earnings, you know, our estimate is is it used
Speaker 1: to be that we're gonna have six and a half
Speaker 1: percent earnings in the first quarter. Now we think we'll
Speaker 1: have one. That's not a great number, but it's not
Speaker 1: a disaster. The second quarter we think that, you know,
Speaker 1: EPs for the for the SMP is gonna be somewhere
Speaker 1: between down five and ten percent UM. But it really
Speaker 1: the question is how much longer does this does it
Speaker 1: go on? If that's all we're looking at, and you
Speaker 1: get a bounce in the second half of the year,
Speaker 1: which we think you will flat earnings this year, which
Speaker 1: is what we're calling for. It's not brilliant, but it's
Speaker 1: if that's your worst case, that's not terrible, but it
Speaker 1: has to be. Ultimately, it's how how how quickly we
Speaker 1: contain Can you model what kind of multiple you would
Speaker 1: put on those earnings at the moment? John, Yeah, I
Speaker 1: mean the multiple is gonna move, you know, Tom It
Speaker 1: keeps harping on this issue with the VIX, but it's like,
Speaker 1: it's super important if the VIX ends the year of fifteen,
Speaker 1: meaning if this thing is reasonably resolved by the middle
Speaker 1: of the one five. But if if the end of
Speaker 1: the question we're is a VIX on December thirty one,
Speaker 1: not whereas the vix on on Wednesday. But if the
Speaker 1: VIX on December thirty one is back down somewhere in
Speaker 1: that ballpark, which means that this is is now part
Speaker 1: of our history, then you're gonna have a multiple over
Speaker 1: eighteen on the market um come year end. How depending
Speaker 1: on are all of your estimates on the policy response,
Speaker 1: on the idea that we get a coherent and timely
Speaker 1: policy response in the United States, Yeah, I'm not. I'm
Speaker 1: not assuming that we're gonna get something brilliant on policy.
Speaker 1: What I am assuming and I think, but what when
Speaker 1: I talk to in stitial investors they're assuming is that
Speaker 1: the number of cases is going to rise as we
Speaker 1: test more people, and the news flow is gonna get
Speaker 1: a little bit ugly over the coming weeks. But in
Speaker 1: if we use the Chinese or Korean experience or whatever,
Speaker 1: we're gonna see in two or three months from now,
Speaker 1: the number of cases is gonna be shrinking, a number
Speaker 1: of new cases, and the market's gonna say, Okay, this
Speaker 1: thing is now under control. And if that's the way
Speaker 1: it plays out, then um, then and the multiple does
Speaker 1: rise back up? On should I get out of cash
Speaker 1: and triple average cash? What do you think? Triple leverage?
Speaker 1: But you know, I mean, do I think? I mean,
Speaker 1: we have a thirty three hundred target between now and
Speaker 1: the end of the year. You're sustaining that right now? No? No,
Speaker 1: we went from thirty six hundred to three hundred. But
Speaker 1: what I do I believe that the mark will be
Speaker 1: higher between now and the end of the year. Absolutely,
Speaker 1: do I think they will see new lows. Fay feels
Speaker 1: like December, the end of the week, at the end
Speaker 1: of the week December thirty one feels that white silm
Speaker 1: it does futures negative seventy one, down futures negative five
Speaker 1: seventy four, John, thank you so much. We're gonna say it, John,
Speaker 1: Why don't you bring in Megan Green here with some
Speaker 1: really interesting what's great about her? She's got a fancy
Speaker 1: British education as well, so she can really do the
Speaker 1: trans atlantic look. To be honest, knows you're better than
Speaker 1: anyone I speak to on a regular basis. Macan Green
Speaker 1: joining us Now, how the Kennedy say, any a fellow, Megan,
Speaker 1: Let's get straight to Europe. The ECB tomorrow, Christine Laguard
Speaker 1: coming down and telling you you leaders reportedly that if
Speaker 1: they don't act, we could have an outcome that remind
Speaker 1: us of our way. Your thoughts on that line, Yeah,
Speaker 1: I mean, I think that's pretty stark. Um. I think
Speaker 1: it's probably a bit overdone, except for where Italy is concerned, right,
Speaker 1: because Italy still has a massive debt burden, they're almost
Speaker 1: certainly in recession. They're going to go further into recession
Speaker 1: with the entire country in lockdown, and so then you know,
Speaker 1: you could get some throwback to the sovereign debt crisis. UM.
Speaker 1: But I do think that the e c D has
Speaker 1: more tools now than they had in two thousand and eight,
Speaker 1: which is a good thing. I'm just not sure they're
Speaker 1: going to use them this week, so UM, I think
Speaker 1: they'll probably end up cutting rates and they'll probably announce
Speaker 1: more QUI I don't think that will help much at all. UM.
Speaker 1: With the tool that they do have that could help
Speaker 1: as their targeted lending refinancing operations with tel tros Um,
Speaker 1: which already exists, UH, and they should use them to
Speaker 1: try to get cash exactly where cash is needed. This
Speaker 1: is a different challenge to two thousand and eight in
Speaker 1: that and TIS hasn't for all of us. Across the
Speaker 1: developed world, we were looking at the seizing up of
Speaker 1: markets um in a multi year decline and then really
Speaker 1: slow recovery this time around. A lot of businesses need of,
Speaker 1: you know, a bridge loan for a quarter or two
Speaker 1: and then they might be able to weather this, and
Speaker 1: so getting cash exactly where it's needed as difficult. I
Speaker 1: think the Teltro's could help, just because they're targeted and
Speaker 1: subsidized by the ECB, but I don't think we'll hear
Speaker 1: an announcement about it. Well, let's talk about those lending
Speaker 1: tools and talk to our listeners about the tow try
Speaker 1: if you're not familiar too familiar with ECP monetary policy
Speaker 1: over the last few years, it has been a tool
Speaker 1: that they've deployed many times under President Mario drag Megan,
Speaker 1: how can Christine the guard adapt that to address the
Speaker 1: same issue, so she could offer her teltro's at its
Speaker 1: own rate rather than at the deposit rate right now?
Speaker 1: So right now banks keep borrows needs to be at
Speaker 1: the deposit rate, which is negative, so they get paid
Speaker 1: as long as they lend onto the real economy, and
Speaker 1: so it can be targeted more specifically to lending onto
Speaker 1: the sames or to lending to small companies and distress
Speaker 1: um and then the cultural rate could be deeply negative.
Speaker 1: So essentially banks could borrow from the e c D
Speaker 1: it let's say negative two basis points, so they get
Speaker 1: paid to borrow, and then they could lend it on
Speaker 1: to distress companies at negative rates as well. So they've
Speaker 1: been a bit from a carry trade, but everybody gets
Speaker 1: subsidized by the ECB. Essentially, Megan Green, in honor of
Speaker 1: all the people listening to this who studied some of
Speaker 1: this in some books at some time. What you're discussing
Speaker 1: almost sounds like devious or affected or funny money procedures.
Speaker 1: Is there any evidence any of this will work without
Speaker 1: some form of consequence out there? Well, so you could
Speaker 1: end up with a misallocation of capital. You're right, if
Speaker 1: you're subsidizing everyone, everyone will want to borrow. So it's like,
Speaker 1: I feel like, I'm you know, central bank t ball.
Speaker 1: Everybody gets a blue ribbon, this undegree, and this isn't
Speaker 1: the first best option for anyone. And of course there's
Speaker 1: a big fiscal stimulus package would be the best option, um,
Speaker 1: but that doesn't seem to be coming down the line
Speaker 1: and the way or the size that lots of people
Speaker 1: are hoping for, particularly in the in the Eurozone. And
Speaker 1: so the e c D is kind of the second
Speaker 1: best option here. But but at least there is one, um,
Speaker 1: you know, in the US to FETs hands are really
Speaker 1: tied by Dodd Frank after the last crisis. So at
Speaker 1: least the ECB has the more for more room for
Speaker 1: reneuver Megan. I'm I'm kind of struck by by the
Speaker 1: focus right now on the public sector, the public response
Speaker 1: from politicians and uh AND and monetary policy members. You
Speaker 1: and I have talked a lot about the private investing
Speaker 1: sector and how it's exploded with respect to capital. Supposedly,
Speaker 1: there's all this dry powder on the books of private
Speaker 1: equity firms and private debt firms. Why isn't the focus
Speaker 1: on whether or not they are going to actually deploy
Speaker 1: some of that and help some companies stay in business
Speaker 1: through this period of time with bridge loans or other
Speaker 1: types of measures. Yeah, that's a great question. So for starters,
Speaker 1: I'm not sure that there is a perception that there's
Speaker 1: tons of dry powder out there in the private markets, um,
Speaker 1: partly because we just don't know what's sitting on their books.
Speaker 1: So it's possible that they don't have any dry powder
Speaker 1: at all. Um. And there's you know, for example, a
Speaker 1: lot of clos sitting out there, um that that could
Speaker 1: go under. So I think that the credit worry certainly
Speaker 1: applies to private markets as well. UM. But secondly, you know,
Speaker 1: the prive factors are in the business of making money,
Speaker 1: so um, it might be in their best interest to
Speaker 1: provide bridge loans that they're under new obligation. That's for sure.
Speaker 1: So I think what we need to see is um
Speaker 1: numbers that are so big coming out of fiscal or
Speaker 1: monetaryary authorities that are targeted to get us through these
Speaker 1: court you know, a couple of months, quarter or two
Speaker 1: where we need to get cash where it's desperately needed
Speaker 1: for individuals of corporate Megan. They're also is a proposal
Speaker 1: out by German regulators to possibly ease up on some
Speaker 1: of the capital requirements offer banks. Basically they don't have
Speaker 1: to hold us much capital if they use that money
Speaker 1: to go out and give loans to companies that they
Speaker 1: can stay in business. I'm just wondering whether banks are
Speaker 1: really and and should be in the position forget you know,
Speaker 1: extending some of the deadlines from a charities and things
Speaker 1: like that to keep people going, but to actually extend
Speaker 1: loans at a time when we could be heading into
Speaker 1: a recession and that could potentially financially weaken them. Yeah,
Speaker 1: so you raise a good point. I think it does
Speaker 1: make sense to reduce countercyclical capital buffers, and so that
Speaker 1: UK did it earlier today, Um, it makes sense in
Speaker 1: years on too, But you're right for starters, you know,
Speaker 1: it could put banks in a perilous position going into
Speaker 1: a downturn. But also it's not like the cost of
Speaker 1: borrowing has really been the issue, So it's it's not
Speaker 1: like this will make businesses desperately want to go and
Speaker 1: borrow from banks. And it's not like banks are actually
Speaker 1: obliged to go ahead and land. So there is a
Speaker 1: question about how much any of that capital is really
Speaker 1: being freed up for lending because banks get to make
Speaker 1: their own decisions even if governments lean on them. Um,
Speaker 1: So I'm not sure how much this will help. I'm
Speaker 1: not particularly worried about UM banks in this case, although
Speaker 1: European banks I am more worried about than than us. Thanks, um,
Speaker 1: But you know, I think if we're heading into a
Speaker 1: downturn anyhow, UM, it's worth trying to avoid one rather
Speaker 1: than not doing anything because you're worried that a downturn
Speaker 1: might come. And Megan, thank you so much. Mega Green
Speaker 1: with us with the Harvard County Senior Fellow. Thrilled to
Speaker 1: have her with us. Thanks for listening to the Bloomberg
Speaker 1: Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at
Speaker 1: Tom Keane before the podcast. You can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio.