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Speaker 1: Welcome to the Bloomberg PENL Podcast. I'm Paul Swinge. You,

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Speaker 1: along with my co host Lisa Brahma wits each day

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Speaker 1: we bring you the most noteworthy and useful interviews for

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Speaker 1: you and your money. Whether at the grocery store or

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Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple

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Speaker 1: podcast or wherever you listen to podcasts, as well as

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Speaker 1: at Bloomberg dot com. Well markets are trying to clawl

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Speaker 1: back a little bit of the sharp sell off we've

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Speaker 1: experienced over the past couple of days, but obviously the

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Speaker 1: concern is still out there about the coronavirus as it

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Speaker 1: spreads outside of China and what it might due to

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Speaker 1: global GDP growth going forward. Our next guest can give us,

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Speaker 1: i think, a really unique insight as to what's going

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Speaker 1: on on the ground in China what it could mean.

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Speaker 1: Patrick Shavanak is economic advisor for Silver Crest Asset Management.

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Speaker 1: Joinings us here on o Bloomberg Gliming three Studio. Patrick,

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Speaker 1: You've got a long history with China thirty years. You

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Speaker 1: actually lived in China, uh for ten years. Give us

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Speaker 1: your sense of how you think this virus is playing

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Speaker 1: out first in China because we've got some it's been there,

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Speaker 1: we've got some data points there, and then maybe as

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Speaker 1: it spreads outside of China. Right now, there's a disconnect

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Speaker 1: between the numbers in China which seemed to suggest that

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Speaker 1: things are under control and the growth rate is slowing UM,

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Speaker 1: and the numbers outside of China which are spiking UM.

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Speaker 1: And so whether that means that China is actually over

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Speaker 1: the hump on this or whether it sheds some doubt

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Speaker 1: on the validity of Chinese numbers, we're gonna have to see.

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Speaker 1: But you know, there's a lot of hope out there

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Speaker 1: that China is going back to work, at least outside

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Speaker 1: of Wuhan, that that will free up some of the

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Speaker 1: supply chains that could create an an economic crunch. Uh.

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Speaker 1: I think it remains to be seen whether that's going

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Speaker 1: to play out as advertised, because there are a lot

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Speaker 1: of people who are holding back and still concerned that

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Speaker 1: this premature. So there have been a number of stories

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Speaker 1: trying to or game what the potential economic impact could be,

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Speaker 1: and honestly, they should all just have economist sitting around shrugging,

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Speaker 1: because you know, there's no way to really understand what

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Speaker 1: the implications could be of something that we don't know

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Speaker 1: that much about, and we don't have that much transparency

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Speaker 1: or visibility into and could progress. I mean, there's so

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Speaker 1: many unknownes. As an economic advisor to people who are

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Speaker 1: actually making bets, what are you saying? Okay? So, so

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Speaker 1: what we're saying to investors is this, We're not We're

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Speaker 1: not taking the bear case or the bull case. And

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Speaker 1: what I mean by that is, um, you know, Bulls

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Speaker 1: right now are saying, Okay, this is going to push

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Speaker 1: this going to be a disaster, is gonna push us

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Speaker 1: into a recession. Bears are saying, which gonna be a disaster,

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Speaker 1: is gonna push us in recession? Bulls are saying, don't worry,

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Speaker 1: this is all under control. It's going to pass. You know,

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Speaker 1: we for the past year have been saying that there

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Speaker 1: are a number of things that have happened or could

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Speaker 1: happen that have slowed the US economy, could slow it

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Speaker 1: further and could even cause a recession. Knowing that, however,

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Speaker 1: this is not a market that is gorging on risk

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Speaker 1: in a relative sense. Um, when you look at relative valuations,

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Speaker 1: safe harbors are very expensive right now, and they've been

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Speaker 1: expensive for throughout this recovery. But they but they are

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Speaker 1: even more expensive now you look at the tenure um treasury.

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Speaker 1: So when you look at relative valuations, actually it favors

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Speaker 1: staying exposed to risk. But you've got to understand what

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Speaker 1: you're taking on when you're doing that, that it means

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Speaker 1: that you are going to be exposed volatility. There are

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Speaker 1: things that can happen, and you need to ask yourself

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Speaker 1: to what extent am i able and willing to ride

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Speaker 1: out a recession if it happens um in order to

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Speaker 1: gain those those higher returns over your investment time horizon. Now,

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Speaker 1: because because nobody can you know, we always say nobody

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Speaker 1: can time the market. Nobody can time this disease, and

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Speaker 1: no exactly know how long it's going to go on,

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Speaker 1: how broad it's going to spread, with the impact is

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Speaker 1: going to be. So so rather than try to do that,

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Speaker 1: you know, you look at the relative valuations and say,

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Speaker 1: you're being paid to take risk over the long term,

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Speaker 1: but how much risk can you really accept? And you

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Speaker 1: need to make an a esthment of what that really is. So, Patrick,

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Speaker 1: what are you in the camp that says, okay, if

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Speaker 1: things do get a little bit more dicey from an

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Speaker 1: economic perspective, growth perspective, that the FED can save us. No,

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Speaker 1: I don't think it has a silver bullet. I think

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Speaker 1: it can help in some ways. I said the same

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Speaker 1: thing about a trade war. Um. You know, the FED

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Speaker 1: cutting rates did help boost certain aspects of the U

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Speaker 1: s economy. In particular, it turned around the housing market, um,

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Speaker 1: which is seeing a real rebound from where it was

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Speaker 1: a year ago. But um, but it didn't really help

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Speaker 1: manufacturing that much in terms of the worries about tariffs.

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Speaker 1: And in the same way, it's not going to cure

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Speaker 1: if there really is kind of rolling lockdowns, not just

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Speaker 1: in China, but in places like Italy, throughout Europe, South Korea,

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Speaker 1: Japan of the global supply chain, then you know, the

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Speaker 1: FED can maybe help alleviate some of that. But but

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Speaker 1: it's not gonna it's not going to turn that around.

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Speaker 1: But I think that sort of building on Paul's point,

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Speaker 1: there is the relative valuation case for riskier assets. Is

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Speaker 1: that predicated on yields remaining this low and going lower? Um? No,

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Speaker 1: I think that. I mean it's it's predicated on the

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Speaker 1: idea that that we're at a relatively low inflation, relatively

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Speaker 1: low interest rate environment going forward for the next several years,

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Speaker 1: and I think that there's an argument to be made

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Speaker 1: that for a variety of reasons that well predate any

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Speaker 1: kind of epidemic, that that that was that that was

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Speaker 1: going to be uh the game going forward? All right?

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Speaker 1: So for your model right now, UM, at Silver Crest,

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Speaker 1: what's your GDP kind of outlook for the next you know,

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Speaker 1: several quarters? Is aren't that recession word out there for you?

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Speaker 1: It's possible, and it was possible throughout last year because

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Speaker 1: of the trade war. Um, but I would say, you

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Speaker 1: know what, Okay, so what are my estimate for GDP?

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Speaker 1: If this year was two percent? That was before any

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Speaker 1: kind of epidemic took place. Um. You know, what are

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Speaker 1: we seeing already? Um? The first hint, you know, the

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Speaker 1: the January numbers in the US economy really quite good. UM.

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Speaker 1: So going into February, what are we seeing. We've just

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Speaker 1: got the first real taste of what it might be,

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Speaker 1: which is the the market p M I flash and

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Speaker 1: that showed the US economy going into mild contraction led

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Speaker 1: by services, which is interesting because manufacturing has been the

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Speaker 1: thing that has been weighing down the US economy over

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Speaker 1: the past half year or so. Now it's actually services uh,

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Speaker 1: tourism and transport uh going into contractions. So and and

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Speaker 1: what what we're also seeing is that on the manufacturing side,

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Speaker 1: the supply chain disruptions are there, but companies so far

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Speaker 1: are managing that by drawing down inventories, are realocating inventories.

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Speaker 1: But that can't last forever, especially if China remains closed

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Speaker 1: for business, and if that extends to other countries throughout Europe,

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Speaker 1: throughout Asia. Do you still when you say go into risk,

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Speaker 1: is that go into US equities or is that to

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Speaker 1: go into European equities? I think you want to be

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Speaker 1: diversified when it comes to that, because you don't, I mean,

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Speaker 1: you don't just want to be saying one risk um,

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Speaker 1: but certainly the and then you know, let me give

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Speaker 1: you an example. I mean, there are places that are

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Speaker 1: risky around the world, are prosin as risky around the world,

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Speaker 1: like the Middle East, uh where, but the risks are

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Speaker 1: entirely different. They're not US recession risks, they're not even

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Speaker 1: global recession risk. There are other types of risks. So

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Speaker 1: so you want to be diversified with any different kinds

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Speaker 1: of risks. But but that said, even when it comes

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Speaker 1: to us recession risk. Um, you are now being paid

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Speaker 1: quite well over the course of say the next three

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Speaker 1: to five years to accept the prospect of going through

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Speaker 1: a recession with your equities and coming out the other end. Um.

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Speaker 1: And unless you're able to time that, you know, and

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Speaker 1: I'm not. But if you're simply somebody who's saying, should

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Speaker 1: I be for the next three or five three to

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Speaker 1: five years in a safe harbor or in equities, I

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Speaker 1: would say you want to be allocated towards equities, recognizing

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Speaker 1: that you need may need to buckle up. Patrick Shavannick,

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Speaker 1: Economic advisor to Silver Crest Asset Management, joining us here

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Speaker 1: in our interactive broker studios. Thank you And as he says, uncorrelated,

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Speaker 1: I think levings bonds. Uh, that's that's highly uncorrelated right now.

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Speaker 1: And a really interesting story as they teater on the

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Speaker 1: potential insolvency there. Well, Disney dropped the bomb last night,

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Speaker 1: surprising someone say, shocking news that Bob Eigre, the longtime CEO,

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Speaker 1: well regarded CEO, is stepping down. Um, and that Bob Chepe,

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Speaker 1: who leads the theme parks, is that going to take

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Speaker 1: over immediately as ceo uh Tara las Chapelle, Entertainment, Telecommunications

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Speaker 1: and Deal's columnists for Bloomberg Opinion, joins us here in

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Speaker 1: our Bloomberg Interactive Broker studio tear it You're at with

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Speaker 1: a really great column today on this news. Did it

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Speaker 1: surprise you as much as it surprised me? Oh my gosh.

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Speaker 1: I saw the email hit my inboxer on four pm

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Speaker 1: yesterday and the subject line was Bob Shapick to be

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Speaker 1: named Disney CEO, and my mouth was just gaping, and

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Speaker 1: I'm like, what, you know? I had these sort of

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Speaker 1: negative thoughts raced through my mind, as I'm sure other

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Speaker 1: people did too, Like the abrupt nature of it made

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Speaker 1: me wonder, you know, is either sick? Is there some

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Speaker 1: sort of me too moment that's about to unfold once

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Speaker 1: again in Hollywood? And of course none of that ended

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Speaker 1: up being the case, at least as we know right now,

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Speaker 1: but just how abrupt it was, and who he chose

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Speaker 1: as the CEO wasn't necessarily who a lot of people

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Speaker 1: thought was the top pick. So I think it just

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Speaker 1: caught people off guard. And I certainly was left just thinking, wow,

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Speaker 1: and you know, what is this going to mean? So

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Speaker 1: I guess a lot of investors thought that Kevin Meyer,

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Speaker 1: the executive who runs the direct to consumer business which

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Speaker 1: includes Disney Plus and Hulu and ESPN plus the streaming business,

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Speaker 1: is what a lot of people feel like are the

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Speaker 1: future of the Walt Disney Company, that he might get

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Speaker 1: the nod here. What do you think? How do you

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Speaker 1: think that's played out here? It's really interesting because I

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Speaker 1: read Iger's memoir last year, Right of a Lifetime, he

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Speaker 1: published in September, and throughout the book he kept talking

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Speaker 1: highly of Mayor, very few mentions of Bob Chapek, who

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Speaker 1: is a really long time executive of Disney and I

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Speaker 1: think probably a good choice for CEO. But it was

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Speaker 1: just interesting that he wasn't mentioned that often, and in

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Speaker 1: the acknowledgements of the book, Igre even called Mayor um

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Speaker 1: like the best strategic partner you could ask for, basically,

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Speaker 1: and just that word partner. It just made me feel like,

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Speaker 1: you know this, this guy is definitely the next in

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Speaker 1: line for when I retires, which his retirement date was

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Speaker 1: supposed to be next year. So when it was chair Peck,

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Speaker 1: it makes you wonder, is there some backstory here? Is

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Speaker 1: this going to create some friction. You know, I don't

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Speaker 1: know what's going to happen now. If you take a

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Speaker 1: step back, it's sort of surprising because you think the

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Speaker 1: streaming business is the future for Disney. That's sort of

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Speaker 1: how they put it out there, that seems to be

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Speaker 1: the future of media, and yet their theme park business

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Speaker 1: has done reliably well at the same it just seems

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Speaker 1: odd that they wouldn't put so one in charge who

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Speaker 1: specializes in what seems to be the future of media,

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Speaker 1: right yeah. I mean, if Disney is signaling to investors

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Speaker 1: that Disney Plus and streaming are the future of the

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Speaker 1: company and that's why they're plowing all this money into it,

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Speaker 1: and you know, earnings are going to take a hit

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Speaker 1: from this this year, that they're thinking this is worth

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Speaker 1: it because this is the new Disney. And then to

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Speaker 1: name someone CEO who really hasn't worked on that side

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Speaker 1: of the company, who has come from the theme park side,

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Speaker 1: who for a long time ran the home video business

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Speaker 1: and the consumer products division, it does send a little

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Speaker 1: bit of a confusing message, though. I think that's why

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Speaker 1: this transition period may be really important. I is going

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Speaker 1: to stick around for the next twenty two months, um

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Speaker 1: as executive chairman. It sounds like he's going to have

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Speaker 1: this sort of amorphous role where he's helping on the

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Speaker 1: creative side of the business. So it feels like he

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Speaker 1: put all the strategic assets in place that he wanted

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Speaker 1: and now he's handing them over to Chapeck to run

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Speaker 1: while I make sure that they keep that sort of

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Speaker 1: creative prowess. And it comes at an interesting time, right,

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Speaker 1: because Disney has all these theme parks world why they

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Speaker 1: have the cruise ships, they have their movie theater business.

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Speaker 1: You know, they rely on movie theater attendance. And so

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Speaker 1: at a time when coronavirus is potentially you know, entering

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Speaker 1: that pandemic stage and the CDC is warning what's going

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Speaker 1: to happen in the US, You're gonna have a guy

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Speaker 1: in charge of Disney who really knows that business well.

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Speaker 1: And then I isn't sort of the face of any

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Speaker 1: of those challenges. He gets to go out on that

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Speaker 1: high note. I think, what do we know about Bob

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Speaker 1: because he's not really well known. Maybe it's a certain investors, yes,

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Speaker 1: but the public now, he's not well known. He hasn't

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Speaker 1: done a whole lot of public interviews and stuff. But

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Speaker 1: He's definitely well respected and and well liked inside and

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Speaker 1: outside the company, So I think people are probably comfortable

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Speaker 1: with the decision, but they were just more taken by

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Speaker 1: surprise by the timing of it and the way it happened,

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Speaker 1: and that there was no mention of Kevin Mayer, who

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Speaker 1: is obviously really important to the company if he's running

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Speaker 1: the streaming business, and it remains to be seen whether

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Speaker 1: he sticks around and what happens there. But I think,

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Speaker 1: you know, it wasn't so much the choice of Bob

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Speaker 1: Chapeck that was an issue. I think people are probably

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Speaker 1: you know, comfortable with that decision, and it sounds like

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Speaker 1: Igor and the board had been preparing for this for

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Speaker 1: a while and said that he was the top candidate

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Speaker 1: for quite some time. So they seem really comfortable with

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Speaker 1: and I don't think investors will be bothered by that,

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Speaker 1: but they just want to know, you know, is there

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Speaker 1: a bigger story to this? And looking at Disney shares

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Speaker 1: there now at the lowest since April of last year,

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Speaker 1: and I'm just wondering, what do you think the main

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Speaker 1: question that investors want answered right now? I think, you know,

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Speaker 1: is Disney going to be successful in streaming and how

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Speaker 1: because you know, even though they've signed up twenty six

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Speaker 1: million customers for Disney Plus, they're not really going to

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Speaker 1: be making a lot of money on that service for

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Speaker 1: quite some time. And there's going to be all these

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Speaker 1: new competitors coming out, so to replace the profit stream

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Speaker 1: that they get from their traditional media business is going

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Speaker 1: to be really hard to do. And also, you know,

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Speaker 1: they had that huge year last year in the in

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Speaker 1: the theaters with Avengers Endgame being the highest grossing film

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Speaker 1: of all time. How do they top themselves? And so

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Speaker 1: I think that those are the questions. And you know,

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Speaker 1: Bob Chapeck, he's going to have a lot to a

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Speaker 1: lot of work to do now. Eiger put a lot

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Speaker 1: of things in place for him, but they're at this

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Speaker 1: inflection point and you know what is Disney Yep, exactly right.

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Speaker 1: I also think Lisa, just respond to your question. I

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Speaker 1: think some of the near term weakness has been the

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Speaker 1: coronavirus because the parks in Shanghai and Hong Kong have

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Speaker 1: been shut down for a month, and um, that's a

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Speaker 1: costing them money their cruise ships. Is Tara's mentioning maybe

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Speaker 1: even the domestic parks as well. Although looking at their

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Speaker 1: shares they're down more than twelve percent year to date,

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Speaker 1: so it's been it's been kind of a rough ride

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Speaker 1: after a pretty good year. Yeah, exactly right, So interesting

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Speaker 1: news coming out at Disney. Terror La Chapelle, thanks so

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Speaker 1: much for joining us real appreciate your opinions. You can

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Speaker 1: read all of Terror's work on Bloomberg dot Com, Slash

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Speaker 1: Opinion and O P I N Goso all the other

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Speaker 1: great work coming out of Bloomberg Opinion, Terris Chica's Entertainment,

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Speaker 1: Telecommunications and deals for Bloomberg Opinion. Well, our friends at

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Speaker 1: Bloomberg Business Week have done it again with another fantastic cover,

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Speaker 1: When the Bull Market Gets Weird. It's a strange story

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Speaker 1: about the world of message boards and stock trading folks

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Speaker 1: and kind of the impact they can have on individual stocks,

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Speaker 1: maybe even the markets. Lu cab Across, asset reporter Bloomberg News,

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Speaker 1: joins us here on a Bloomberg Interactive Broker Studio. You've

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Speaker 1: heard him here before. He is the author of that

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Speaker 1: cover story for Bloomberg Business Week. What's going on in

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Speaker 1: the world of Reddit and message boards and all that stuff.

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Speaker 1: So it's a it's a kind of it's a fun story,

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Speaker 1: and that this is the what we've been waiting for.

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Speaker 1: In a sense, it's to the return of retail to

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Speaker 1: the market. However, in a world where a lot of

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Speaker 1: shares do you cost you know, for instance, Tesla has

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Speaker 1: surpassed nine dollars this year Amazon while north of that figure, UH,

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Speaker 1: the ability of some retail investors to actually buy a

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Speaker 1: share is fairly limited. So what do we do. We

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Speaker 1: can we can buy these options. We can buy these

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Speaker 1: kind of moonshot bets for much much cheaper that have

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Speaker 1: nonlinear payoffs, and you know, it can be exponential. There's

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Speaker 1: been ten percent day daily gains and some of these

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Speaker 1: uh in the event that, you know, the underlying does

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Speaker 1: rise sufficiently. So what's been going on is that there

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Speaker 1: have been a few stocks that the online community of

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Speaker 1: Wall Street Bets as a subredit has really latched onto,

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Speaker 1: and you've seen underlying activity, call activity in those names

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Speaker 1: go absolutely parabolic, and you've seen very very outsized moves

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Speaker 1: in those shares at the same time. So names like Tesla,

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Speaker 1: names like Virgin Galactic, names like Lumber Liquidators, plug Power,

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Speaker 1: which is a fun example because it's literally you know,

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Speaker 1: what's what's old is new again. That was a dot

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Speaker 1: com bubble favorite, so, uh it's and they also think

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Speaker 1: that this kind of activity, the call buying, is also

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Speaker 1: sufficient to uh make their prophecied gains come about because

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Speaker 1: what they're doing and buying a call all if you

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Speaker 1: buy it from a dealer. A dealer is not in

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Speaker 1: the business of taking directional risk. So dealer will say, hey, like,

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Speaker 1: I'll yes, I'll write the call for you. We'll we'll

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Speaker 1: get that done. But I don't want that exposure. So

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Speaker 1: dealer rates a call by stock that's known as delta hedging,

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Speaker 1: and if the underlying continues to go up, you have

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Speaker 1: to adjust your delta hedge and buy Even more so,

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Speaker 1: when they read about this dynamic and A and A

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Speaker 1: piece that we wrote about tessela options, they kind of

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Speaker 1: extrapolated this to the unreasonable degree that if we buy

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Speaker 1: enough calls, these will never go down. So I'm looking

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Speaker 1: just the concept that they're that's great. I'm taking a

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Speaker 1: bigger step back. I mean it is, it's fascinating. But

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Speaker 1: if you take a big step back someone who's not familiar.

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Speaker 1: Nine hundred thousand users are on this Reddit forum are

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Speaker 1: slash Wall Street bets or are slash wsb um. Who

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Speaker 1: are these people? It's a it's very tough. I don't

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Speaker 1: want to mis gender the community, but it would uh,

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Speaker 1: it would seem to be a lot of a lot

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Speaker 1: of males, a lot of males in the let's call

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Speaker 1: it eighteen to thirty five demo, and it's uh, it

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Speaker 1: would be locker room culture. I think to say it

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Speaker 1: would be putting it putting it very kindly. So I

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Speaker 1: mean this harken. This reminds me of kind of the

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Speaker 1: the day trading boom of I don't know, ten or

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Speaker 1: fifteen years ago, and that kind of suggested, all right,

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Speaker 1: this is the top of the market. When these you know,

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Speaker 1: individuals are getting in and bidding up stocks to crazy levels.

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Speaker 1: This might mark the top. What's the thought there? I mean,

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Speaker 1: could have could have happened, could have been I mean,

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Speaker 1: we're we're in a down draft now, we're off the peaks,

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Speaker 1: that this could have been the perfect blow off top

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Speaker 1: signal that we were looking for in the event that

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Speaker 1: we uh continue to extend to the downside and the

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Speaker 1: stock market. What I think is definitely different this time

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Speaker 1: is the how localized A lot of this euphoria is

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Speaker 1: like yeah, sure, stocks in general around the world, we're

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Speaker 1: having a great January, but and you were starting to

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Speaker 1: see just in general retail flow is purely into stocks

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Speaker 1: come back, but the localized nature of how just certain

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Speaker 1: names were really seeing the activity and really getting pushed

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Speaker 1: whereas you know, back in the day it was just

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Speaker 1: everything getting pushed in, people piling into everything. That's what

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Speaker 1: kind of sets us apart and makes it look a

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Speaker 1: little less scary. Also, you know, this was barely getting

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Speaker 1: off the ground. Retail was Retail involvement was really just

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Speaker 1: only starting to come back when we've run into a

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Speaker 1: bit of difficulty getting higher in the general market here.

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Speaker 1: So it you know that that trend could have some

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Speaker 1: staying power in the event that we're able to resume

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Speaker 1: an up trend. The user names soul train, RNs on

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Speaker 1: whole Grand or really catchy right recently unearthed. I'm just

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Speaker 1: wondering how much time do you spend on these on

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Speaker 1: this forum. Actually, this is not the subreddit I frequent

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Speaker 1: the most often. The My subreddit choice is Spoiled Survivor.

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Speaker 1: I like to, you know, try and get hints on

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Speaker 1: with Survivor. Players might be voted off the island next

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Speaker 1: and read it also fairly a depth. Seriously, Oh yeah,

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Speaker 1: there's how much time do you spend on that one?

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Speaker 1: That would that would I'd be embarrassed to say how

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Speaker 1: much time I spend on it, But well, all Street bets,

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Speaker 1: this has been more of a job for me just

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Speaker 1: because it was. It was in mid January when I

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Speaker 1: was noticing just some Tesla calls go off. Tesla was

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Speaker 1: having a great week, but the c seven hundred strikes

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Speaker 1: that were about to expire in two days and would

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Speaker 1: have required Tesla to rally about two days, those are

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Speaker 1: sharing to see a lot of activity, and I was

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Speaker 1: just like, what the heck is going on here? What

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Speaker 1: in the world? Who could possibly want something like this?

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Speaker 1: This is absolutely nuts, And that trail led me to

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Speaker 1: to Wall Street Bets. Yeah, I remember, and you wrote

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Speaker 1: a story about it, and it was a fantastic story

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Speaker 1: in your Business Week's cover story. Also fantastic. Lucawa Bloomberg,

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Speaker 1: cross asset reporter and correspondent for Survivor and the Potential

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Speaker 1: Next Ejected contestant, I'm struck by a story today on

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Speaker 1: the Blue re Terminal trying to explain sentiment behind today's

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Speaker 1: blip upward in equities, they say, blip because one percent

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Speaker 1: move following the drops that we saw in the past

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Speaker 1: few days, looks relatively sanguine in terms of the severity. Yes,

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Speaker 1: blip like um one quote here an investors saying. Investors

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Speaker 1: are saying, Okay, we have gotten a correction done. We've

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Speaker 1: traded off the headlines. Now let's wait and see where

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Speaker 1: the facts come in. Someone who's scouring the facts Brad Setser,

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Speaker 1: Senior Fellow for International Economics at the Council on Foreign

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Speaker 1: Relations and senior advisor at EXANTE Data, with extensive experience

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Speaker 1: with the US Treasury Department and beyond tracking international flows. Brad,

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Speaker 1: you know it would be really good without a sense

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Speaker 1: of the data in terms of the slowdown currently in Asia.

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Speaker 1: How was the data looking leading up to this period

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Speaker 1: of time. Well, the trade data, particularly the US CORD

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Speaker 1: data in Q four was very weak. Uh. US imports

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Speaker 1: from China we're down, let's say, year over year in

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Speaker 1: Q four, largely in because of the still substantial tariffs

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Speaker 1: that Emini bows over the previous twelve months. Uh. There's

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Speaker 1: been some shift in supply chains to Vietnam to Taiwan,

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Speaker 1: but the scale of the shift and supply chains is

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Speaker 1: actually fairly modest. I think the data in Q four

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Speaker 1: was telling us much more about trade destruction than trade diversion.

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Speaker 1: And I think, you know, we're gonna obviously get another

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Speaker 1: quarter of uh significantly less trade because China has largely

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00:22:43,800 --> 00:22:46,679
Speaker 1: been shut down. That doesn't tell us very much about

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Speaker 1: the more fundamental forces reordering supply chains. It just tells

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Speaker 1: us that there was a true exogenous shock from the coronavirus.

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Speaker 1: So bred what data what's the data telling us about

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Speaker 1: the economic impact on China right now from the virus?

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Speaker 1: You say it's you know, effectively shutdown. We've seen numbers

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00:23:03,960 --> 00:23:06,640
Speaker 1: that maybe half a production shutdown. I'm not sure kind

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00:23:06,640 --> 00:23:09,359
Speaker 1: of where that number comes out. But what do we

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00:23:09,400 --> 00:23:11,520
Speaker 1: think is going to be the ultimate impact on the

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00:23:11,520 --> 00:23:13,800
Speaker 1: economy of China. I mean, I think it's going to

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00:23:13,880 --> 00:23:19,760
Speaker 1: be a very substantial slowdown. All the data for you know,

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00:23:19,880 --> 00:23:24,919
Speaker 1: coal burning coal, from burning coal to density of of

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00:23:25,040 --> 00:23:29,920
Speaker 1: transportation is running closer to the lows of the Chinese

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00:23:29,920 --> 00:23:32,720
Speaker 1: New Year than to where it typically would be. That

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00:23:32,760 --> 00:23:35,000
Speaker 1: doesn't mean China is completely shut down, but it means

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00:23:35,040 --> 00:23:38,920
Speaker 1: it's operating well below capacity, you know, And to state

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00:23:38,960 --> 00:23:42,000
Speaker 1: the obvious in a typical week, you generate two or

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00:23:42,040 --> 00:23:44,800
Speaker 1: so of the your economic output for the year, and

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00:23:44,840 --> 00:23:49,200
Speaker 1: so the longer China is operating AT's ay fifty capacity,

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00:23:49,640 --> 00:23:54,800
Speaker 1: the bigger the fall and output. So I think increasingly

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00:23:54,880 --> 00:23:59,359
Speaker 1: forecasters are predicting not just a quarter on quarterfall in

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00:23:59,480 --> 00:24:02,360
Speaker 1: Chinese out put, but a year or year over year fall.

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00:24:02,480 --> 00:24:05,120
Speaker 1: So the output in Q one of this year would

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00:24:05,119 --> 00:24:08,960
Speaker 1: be below that of Q one of last year. Now,

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00:24:09,119 --> 00:24:14,040
Speaker 1: to put that in contact, remember that the Chinese economy

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00:24:14,080 --> 00:24:17,040
Speaker 1: in Q one is typically ten smaller than it is

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00:24:17,080 --> 00:24:21,240
Speaker 1: in Q four, so there's a naturally a wide range

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00:24:21,240 --> 00:24:24,680
Speaker 1: of seasonal variation. The problem is that this wasn't anticipated.

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00:24:25,200 --> 00:24:27,800
Speaker 1: We weren't prepared for it, and so there's going to

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00:24:27,920 --> 00:24:32,360
Speaker 1: be more more disruption in supply chains, and it will

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00:24:32,400 --> 00:24:35,480
Speaker 1: be a challenge to maintain income when people aren't working.

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Speaker 1: You said trade destruction more than trade diversion. That's what

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Speaker 1: you observed from the data coming out of the fourth quarter.

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Speaker 1: Does that actually help the United States remain a little

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Speaker 1: more insulated from a breakdown and supply chains related to China.

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Speaker 1: I don't think the particulars of Q four mean that

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00:24:56,160 --> 00:24:58,840
Speaker 1: the US is more instutted. I think it is. It

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00:24:59,000 --> 00:25:02,040
Speaker 1: is that you know, the US to a significant degree,

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00:25:02,440 --> 00:25:05,320
Speaker 1: as an economy that produces we we we we spend

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00:25:05,320 --> 00:25:08,440
Speaker 1: most of our time producing services for each other, and

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00:25:08,560 --> 00:25:13,400
Speaker 1: so the relatively modest share of manufacturing and US output

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00:25:14,000 --> 00:25:17,960
Speaker 1: UH and the relatively modest importance of Chinese demand to

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00:25:18,040 --> 00:25:20,600
Speaker 1: the U. S. Economy both mean that the US is

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00:25:20,760 --> 00:25:25,080
Speaker 1: relatively insulated, more insulated than say, Europe, certainly more interested

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00:25:25,440 --> 00:25:28,399
Speaker 1: insulated than most of Asia from the direct effects of

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Speaker 1: the disruption in China. Obviously, what we are not insulated

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00:25:31,920 --> 00:25:34,320
Speaker 1: from would be an outbreak of the virus in the

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Speaker 1: United States. Is there any good data that you've seen

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00:25:37,520 --> 00:25:40,119
Speaker 1: on what the economic impact could be if we do

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00:25:40,200 --> 00:25:41,880
Speaker 1: get what a lot of people feel like is an

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00:25:41,920 --> 00:25:46,760
Speaker 1: inevitable outbreak here in the US. Look, I I would

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00:25:46,760 --> 00:25:50,080
Speaker 1: think that you might see a UH. You know, I

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00:25:50,080 --> 00:25:52,199
Speaker 1: think it depends on the scale of the outbreak. It

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00:25:52,240 --> 00:25:55,440
Speaker 1: depends on the location of the outbreak. But if significant

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00:25:55,520 --> 00:25:57,960
Speaker 1: parts of the U. S. Economy shut down for a

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00:25:58,000 --> 00:26:00,840
Speaker 1: couple of weeks, which you know you would in a

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00:26:00,880 --> 00:26:04,800
Speaker 1: bad scenario, see obviously, that would produce a quarter over

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00:26:04,880 --> 00:26:08,639
Speaker 1: quarter contraction. Again, I wouldn't put too much emphasis on

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00:26:08,720 --> 00:26:13,680
Speaker 1: that just because that is the natural result of people

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00:26:13,720 --> 00:26:17,560
Speaker 1: staying at home as a precautionary measure. It doesn't indicate

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00:26:17,640 --> 00:26:21,000
Speaker 1: any loss of the economy's potential, but it does create

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00:26:21,040 --> 00:26:24,120
Speaker 1: a short term problem for demand if people aren't working

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00:26:24,160 --> 00:26:26,560
Speaker 1: in our pain. When you were working at the U. S.

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00:26:26,600 --> 00:26:32,119
Speaker 1: Treasury from two, you dealt with Europe's financial crisis, UH,

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00:26:32,200 --> 00:26:35,800
Speaker 1: Puerto Rico's debt crisis, a number of other financial shocks.

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00:26:36,359 --> 00:26:38,960
Speaker 1: Is there anything you can take away from that experience

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00:26:39,000 --> 00:26:42,760
Speaker 1: and apply to what we're experiencing now in terms of

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00:26:43,000 --> 00:26:46,320
Speaker 1: the tipping point for when something becomes more than a

497
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Speaker 1: temporary disruption. Well, I think you you actually end up

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00:26:51,720 --> 00:26:56,040
Speaker 1: going back to first principles. Uh. You can't stop what

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00:26:56,160 --> 00:26:58,680
Speaker 1: you might call the supply shock. The fact that in

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Speaker 1: order to limit the bread once the virus is established

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00:27:02,960 --> 00:27:06,960
Speaker 1: in a particular community, quarantine measures are necessary, and that's

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00:27:07,000 --> 00:27:09,960
Speaker 1: going to reduce output. What you can do is limit

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00:27:10,040 --> 00:27:13,280
Speaker 1: the second order effects, so you can provide people who

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00:27:13,320 --> 00:27:15,879
Speaker 1: can't go to work even though they want to work,

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00:27:16,680 --> 00:27:19,240
Speaker 1: with income. You borrow a little bit of money, you

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00:27:19,280 --> 00:27:22,960
Speaker 1: distribute it, so you can protect the economy from entering

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00:27:23,000 --> 00:27:28,720
Speaker 1: into a self sustaining downward cycle and buffer what is

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00:27:28,760 --> 00:27:31,880
Speaker 1: inevitably a short term shock. It's actually really important because

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00:27:31,880 --> 00:27:34,400
Speaker 1: Hong Kong is essentially deploying helicopter money right now. They're

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00:27:34,440 --> 00:27:38,640
Speaker 1: essentially passing out to two individuals. Is that the right prescription? Yeah,

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00:27:38,640 --> 00:27:41,960
Speaker 1: I mean if you all experience the kind of shock

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00:27:42,400 --> 00:27:45,320
Speaker 1: that Hong Kong as experiencing. Remember, Hong Kong is a

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Speaker 1: tourism dependent economy, a travel dependent economy, a trade dependent economy,

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00:27:51,920 --> 00:27:55,800
Speaker 1: and travel between China and Hong Kong is essentially shut down.

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00:27:55,840 --> 00:27:58,680
Speaker 1: That has an economic impact, and Hong Kong is rich.

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Speaker 1: The government has no shortage of budget buffers, and this

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00:28:02,760 --> 00:28:05,280
Speaker 1: is the time to use them. Brad Setzer, thanks so

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00:28:05,320 --> 00:28:07,760
Speaker 1: much for joining us to really appreciate your thoughts on this.

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Speaker 1: Brad Setzer is the Steven A. Ten Amount Senior Fellow

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00:28:10,440 --> 00:28:13,680
Speaker 1: for International Economics at the Council Foreign Relations and also

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00:28:13,720 --> 00:28:17,280
Speaker 1: a senior advisor at Exante Data. Thanks for listening to

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00:28:17,320 --> 00:28:19,720
Speaker 1: the Bloomberg P and L podcast. You can subscribe and

523
00:28:19,800 --> 00:28:22,920
Speaker 1: listen to interviews at Apple Podcasts or whatever podcast platform

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00:28:22,960 --> 00:28:26,040
Speaker 1: you prefer. I'm Paul Sweeney, I'm on Twitter at pt Sweeney.

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00:28:26,119 --> 00:28:28,560
Speaker 1: I'm Lisa Abram Woyds I'm on Twitter at Lisa Abram

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00:28:28,600 --> 00:28:31,879
Speaker 1: woyds One. Before the podcast, you can always catch us worldwide.

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Speaker 1: I'm Bloomberg Radio