WEBVTT - Software Will Be Near-Term Tech Outperformer: Wedbush's Ives 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penl Podcast. I'm Paul swing you, 0:00:05.360 --> 0:00:07.720 along with my co host Lisa Brahma wits. Each day 0:00:07.760 --> 0:00:10.280 we bring you the most noteworthy and useful interviews for 0:00:10.320 --> 0:00:12.560 you and your money. Whether at the grocery store or 0:00:12.600 --> 0:00:15.520 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.560 --> 0:00:18.000 podcast or wherever you listen to podcasts, as well as 0:00:18.000 --> 0:00:21.119 at Bloomberg dot com. Right now, let's take a look 0:00:21.239 --> 0:00:24.960 at technology. We have earning a season about to begin 0:00:25.200 --> 0:00:28.400 in earnest tomorrow with the banks releasing their numbers, and 0:00:28.440 --> 0:00:31.120 then following that will be a whole host of industries 0:00:31.120 --> 0:00:35.159 and companies including technology. Uh will technology lead us out 0:00:35.159 --> 0:00:37.960 of this crisis? In terms of the market when the 0:00:38.000 --> 0:00:40.240 market really starts to move up, we've seen a nice 0:00:40.240 --> 0:00:43.879 rebound here. Where will technology be? There's nobody better to 0:00:44.040 --> 0:00:47.640 chat about technology and tech stocks than Dan Ives, managing 0:00:47.680 --> 0:00:50.280 director for equity research at What Bush Securities, that joins 0:00:50.320 --> 0:00:52.559 us on the phone. Dan, thanks so much for joining us. 0:00:52.920 --> 0:00:55.160 Give us a sense of just over to pass month 0:00:55.280 --> 0:00:58.240 or so as the markets have gyrated? How is big 0:00:58.280 --> 0:01:02.440 tech performed? Book? And it's great to be here. Big 0:01:02.480 --> 0:01:05.920 Tech I think is performed as well and maybe even 0:01:05.959 --> 0:01:09.320 better than anyone could have thought in light of the pandemic. 0:01:09.400 --> 0:01:11.840 I think what you're starting to see is the stronger 0:01:11.880 --> 0:01:14.800 getting stronger on the other side of the dark valley, 0:01:14.880 --> 0:01:18.440 the Amazon's, the Microsoft's, some of the large tech players 0:01:18.520 --> 0:01:22.160 that like Facebook included, and I think investors they're looking 0:01:22.200 --> 0:01:24.600 onto the other side of dark valley. In other words, 0:01:24.680 --> 0:01:27.840 where are these stocks? Where are the valuations in a 0:01:28.080 --> 0:01:32.240 normalized or at least a new normal two thousand twenty 0:01:32.280 --> 0:01:34.959 one numbers right in the next quarter or two. And 0:01:34.959 --> 0:01:38.040 that's why you're seeing a flock to tech stocks, especially 0:01:38.120 --> 0:01:41.120 even in some of these more defensive plays like a Microsoft. 0:01:41.800 --> 0:01:43.840 So one thing that you wrote in a note was 0:01:43.880 --> 0:01:47.520 that the pandemic will further catalyze the massive shift to 0:01:47.600 --> 0:01:51.400 cloud computing. And I'm wondering to what degree that's already 0:01:51.440 --> 0:01:55.320 priced in and where isn't it right now? Yeah, I 0:01:55.360 --> 0:01:58.120 think it's it's starting to get priced in, maybe on 0:01:58.200 --> 0:02:00.760 a Microsoft and some of the larger tech players like 0:02:00.760 --> 0:02:04.559 an Amazon with the a WSPS, I do not think 0:02:04.600 --> 0:02:08.560 it's priced in. Really across software, I think you're you're 0:02:08.600 --> 0:02:11.959 gonna see some of these software names forget just the 0:02:12.080 --> 0:02:15.919 zooms and the slacks and some of the core applications 0:02:15.960 --> 0:02:19.400 like citrics, but underneath a lot of the stacked names, 0:02:19.440 --> 0:02:23.080 the infrastructure, the tech stack, which is really application and 0:02:23.280 --> 0:02:26.720 sass cross software. I think those are names that we 0:02:26.760 --> 0:02:29.360 continue to see, uh. You know, I think from a 0:02:29.440 --> 0:02:33.440 rereading perspective go higher as I think you see more 0:02:33.480 --> 0:02:37.480 investors go to those names in terms of the cloud stack, 0:02:37.520 --> 0:02:39.960 and I think software is going to be a bigger 0:02:40.080 --> 0:02:43.320 outperformer over the next three to six months in our opinion. 0:02:44.320 --> 0:02:46.680 So Dan, one of the things that's one of the 0:02:46.680 --> 0:02:50.079 concerns that's been heightened not just with the pandemic here, 0:02:50.400 --> 0:02:52.680 but also the trade tensions with China months ago, which 0:02:52.720 --> 0:02:55.320 seems like a lifetime ago. Is a whole concept of 0:02:55.360 --> 0:02:59.359 supply chain. Um, how do you think the tech supply 0:02:59.560 --> 0:03:03.400 chain uh may change as a result of again depending 0:03:03.720 --> 0:03:08.000 the continuous trade attentions for China, but also uh, the 0:03:08.080 --> 0:03:12.880 pandemic here. Yeah, I think the pandemic it's highlighted, as 0:03:12.919 --> 0:03:15.120 we've talked about many times even last year with the 0:03:15.200 --> 0:03:19.840 US China trade wars, just how heavily exposed US tech 0:03:19.919 --> 0:03:24.880 or broader tech Semi's smartphones is to the supply chain 0:03:24.960 --> 0:03:28.800 across Asia, and as much as there's tough talk, I 0:03:28.880 --> 0:03:32.720 just don't see that dramatically changing over the next two 0:03:32.760 --> 0:03:36.280 to three years. Because we talked about there's comings Like Apple, 0:03:36.400 --> 0:03:39.280 they made their bed in China in terms of fox 0:03:39.360 --> 0:03:43.520 Con that's that is iPhone production. So ultimately, I think 0:03:43.560 --> 0:03:45.240 if you look at that and semmis, you can still 0:03:45.280 --> 0:03:48.880 see some production potentially moved to Vietnam and other parts 0:03:48.880 --> 0:03:52.120 of Asia, but at least for the foreseeable future, I 0:03:52.160 --> 0:03:55.240 do not see dramatic changes to the supply chain. The 0:03:55.280 --> 0:03:59.080 one thing I will say in why of this dark environment, 0:04:00.200 --> 0:04:03.560 you are starting to see some bright spots on the 0:04:03.600 --> 0:04:06.600 supply chain, which I'm starting to normalize, I think quicker 0:04:06.640 --> 0:04:10.640 than expected by call it early to mid May. So 0:04:10.800 --> 0:04:12.640 that's actually where I was going to go. People have 0:04:12.680 --> 0:04:16.160 been talking about the pitfalls of having a global supply chain. 0:04:16.360 --> 0:04:19.080 What about the benefits as China reopens, right, I mean 0:04:19.360 --> 0:04:22.200 we saw better deliveries than expected, or you're expecting better 0:04:22.240 --> 0:04:26.159 deliveries with Tesla and with Apple you're starting to see 0:04:26.200 --> 0:04:28.760 some of the factories rev backup. Is it's actually a 0:04:28.800 --> 0:04:32.120 benefit at this point? Yeah, And I think right now 0:04:32.279 --> 0:04:36.920 is us or European consumers are locked down in their 0:04:36.960 --> 0:04:41.720 houses focused on essentials. In China, they're buying iPhones and 0:04:41.760 --> 0:04:47.920 Tesla's and I think it speaks to one of the 0:04:47.920 --> 0:04:51.479 factors that's helping the likes of an Apple a Tesla 0:04:51.600 --> 0:04:54.599 because a gig of three in China. It is some 0:04:54.800 --> 0:04:57.440 of that diversification. And you're not just seeing from a 0:04:57.480 --> 0:04:59.920 supply chain in terms of protesting gig of three and 0:05:00.040 --> 0:05:03.840 for Apple, you're also thinking from a demand perspective. And 0:05:04.320 --> 0:05:07.680 I do think that's something where when you get back 0:05:07.680 --> 0:05:10.920 to the earlier about tech, one of the things that's 0:05:10.920 --> 0:05:13.719 helping some of these companies is what they're seeing in 0:05:13.800 --> 0:05:18.040 the supply chains was demand throughout China, which I could 0:05:18.040 --> 0:05:20.919 tell you're starting to rebound pretty significantly even over the 0:05:20.960 --> 0:05:25.120 last two to three weeks. So Dan talk to us 0:05:25.120 --> 0:05:27.000 about Tesla a little bit here. I mean, it just 0:05:27.160 --> 0:05:29.880 the concerns, I mean, you know, the issue I'm wondering 0:05:29.880 --> 0:05:32.720 if the consumers are going to be changing their behavior 0:05:32.800 --> 0:05:35.320 coming out of this pandemic, and one of the areas 0:05:35.320 --> 0:05:37.080 that people are thinking about it's just kind of the 0:05:37.200 --> 0:05:39.320 role of the automobile. How's Tesla doing through all of 0:05:39.360 --> 0:05:41.919 this look, and I think you've seen in the stock, 0:05:42.080 --> 0:05:45.479 especially coming off the better than expected delivery numbers which 0:05:45.480 --> 0:05:48.799 were reset lower a few weeks ago for one queue. 0:05:49.800 --> 0:05:52.520 You know, bulls in Tesla are looking on the other 0:05:52.520 --> 0:05:55.640 side of this, not the next quarter or two, but 0:05:56.080 --> 0:05:59.320 in terms of ev demand, and Tula was really starting 0:05:59.360 --> 0:06:02.440 to game more more esteem, not just in China but 0:06:02.520 --> 0:06:05.520 across Europe. I do think when you talk about just 0:06:06.160 --> 0:06:10.360 the horrific unemployment and just what you're seeing just across 0:06:10.400 --> 0:06:13.520 the consumer landscape, you are seeing a slow down and 0:06:13.640 --> 0:06:16.240 you'll see that. I mean, just put numbers around it. 0:06:16.800 --> 0:06:19.000 The street originally was at five thirty or five and 0:06:19.160 --> 0:06:22.440 fifty thousand units for Tesla. Now we're close to four hundred, 0:06:22.560 --> 0:06:26.080 four hundred k. But part of why a stock like 0:06:26.200 --> 0:06:30.160 Testa continues to outperform is because investors feel like it 0:06:30.240 --> 0:06:33.080 can navigate it. They obviously raise the cash to get 0:06:33.120 --> 0:06:36.120 through it from aquity perspective, and on the other side 0:06:36.160 --> 0:06:38.920 of this could start to thrive from an e V 0:06:39.200 --> 0:06:42.560 perspective in terms of some of the demand turns. Dad, 0:06:42.640 --> 0:06:46.000 just real quick here, I'm wondering how the drop off 0:06:46.000 --> 0:06:48.960 an oil prices will affect EVY demand given the fact 0:06:49.560 --> 0:06:52.520 that it's a lot cheaper to fill up your car. Yeah, 0:06:52.520 --> 0:06:55.440 it's definitely. Uh, that's definitely a headwind for e V. 0:06:56.200 --> 0:07:00.839 Now some argue Tesla is more have fun, Like I 0:07:00.920 --> 0:07:05.440 still believe that's a called five percent headwind in terms 0:07:05.480 --> 0:07:08.480 of just what you're seeing on oil prices and gasoline prices, 0:07:08.600 --> 0:07:12.040 especially for new entrants like you're seeing Detroit focus more 0:07:12.080 --> 0:07:15.200 and more on the battery side and e V in 0:07:15.480 --> 0:07:17.800 terms of what's happening to win one gas. That is 0:07:18.040 --> 0:07:21.840 an ultimate headwind for e V players. Although you look 0:07:21.880 --> 0:07:24.200 at Tesla and what Musk has been able to do, 0:07:24.720 --> 0:07:26.920 you know, much better than feared, and that's why you 0:07:26.960 --> 0:07:30.600 see the stock rallying even in this dark environment. Den 0:07:30.600 --> 0:07:33.480 i'ves thank you so much, of course, uh Dan Ives 0:07:33.520 --> 0:07:40.240 of wet Bush Securities, Managing director of Equity Research. There's 0:07:40.240 --> 0:07:43.800 an incredible and growing dissonance between the economic data that 0:07:43.800 --> 0:07:47.240 we're getting with an increasing amount of jobless claims that 0:07:47.280 --> 0:07:51.200 defy any historical precedent, and then markets, which last week 0:07:51.240 --> 0:07:54.440 had their best rally since nineteen seventy four in the 0:07:54.520 --> 0:07:58.080 United States, and it's led Goldman sack strategies to actually 0:07:58.160 --> 0:08:03.480 revise their estimate it's for year end SMP levels upwards, 0:08:03.480 --> 0:08:06.920 saying that they really have faith in the fiscal and 0:08:07.000 --> 0:08:09.920 the in the monetary policy stimulus that we're seeing. And 0:08:09.920 --> 0:08:11.880 this really raises a question, how much can you just 0:08:11.920 --> 0:08:15.920 put blind faith in stimulus at a time when companies 0:08:15.960 --> 0:08:18.960 are flying blind when it comes to earnings and growth 0:08:19.000 --> 0:08:21.800 and profitability. Joining us now, we're so lucky to have 0:08:22.000 --> 0:08:25.000 Hugh Johnson, Chairman and Chief investment officer of Hugh Johnson 0:08:25.040 --> 0:08:27.920 Adviser is based in Albany, and Hugh, how much do 0:08:27.960 --> 0:08:31.480 you have conviction in the stimulus that we're seeing out 0:08:31.480 --> 0:08:34.520 of Washington, d C And the Federal Reserve at this 0:08:34.600 --> 0:08:37.760 point to continue to prop up equity valuations despite the 0:08:37.800 --> 0:08:42.240 big black hole that is forecasts from companies. Well, we 0:08:42.360 --> 0:08:44.839 had a positive response last week. You know, when I'm 0:08:44.880 --> 0:08:48.440 asked a question like that, I have to an uh 0:08:48.480 --> 0:08:52.840 answer honestly, Lisa and say, I really don't know. I 0:08:52.920 --> 0:08:56.079 am a bit skeptical because I'm not sure to addresses 0:08:56.520 --> 0:09:00.360 really well the demand side of the sequaya. And but 0:09:00.440 --> 0:09:03.320 what I'm asked the question is it gonna work or 0:09:03.400 --> 0:09:06.080 is it not gonna work? I really have to turn 0:09:06.120 --> 0:09:09.360 to investors and investors tend to get it right. They 0:09:09.400 --> 0:09:11.680 tend to assess what the outcome is going to be 0:09:11.720 --> 0:09:14.480 in the answer we got last week is that the 0:09:14.559 --> 0:09:17.760 stimulus that we're getting is going to have some impact. Now, 0:09:17.960 --> 0:09:21.760 it's not going to have any impact on the second quarter, 0:09:21.880 --> 0:09:24.720 the current quarter, which is going to be the most 0:09:24.800 --> 0:09:29.080 dismal quarter we've ever seen with g DP being down 0:09:29.120 --> 0:09:33.680 around twenty But the real question isn't the second quarter. 0:09:33.800 --> 0:09:37.120 The real question is third and fourth quarter. And I 0:09:37.200 --> 0:09:40.120 might add first two quarters of two thousand twenty one. 0:09:40.600 --> 0:09:43.960 And I think the answer has to be unbalanced based 0:09:43.960 --> 0:09:47.400 on what I saw from investors last week. Is let's 0:09:47.440 --> 0:09:50.640 say it's going to be a positive impact, or we 0:09:50.720 --> 0:09:53.440 may turn the corner, maybe not the third quarter, but 0:09:53.600 --> 0:09:58.120 by the fourth quarter will have positive economic growth. So 0:09:58.280 --> 0:10:00.880 you give us just a sense of how you think 0:10:00.920 --> 0:10:04.960 this federal stimulus is going to really ripple through the economy. 0:10:05.080 --> 0:10:07.679 Is are we going to see it on main street, 0:10:07.720 --> 0:10:11.040 the small and midsized businesses, the consumers, as Lisa mentioned 0:10:11.040 --> 0:10:13.440 that job losses. Are we going to see that impact 0:10:13.480 --> 0:10:19.080 the real economy? Uh, to some extent, it's gonna I 0:10:19.080 --> 0:10:22.280 I don't know it's gonna be that significant. Take a 0:10:22.320 --> 0:10:24.480 look at the p p P program and some of 0:10:24.480 --> 0:10:27.800 the numbers that we're seeing. They're assuming that we get 0:10:27.960 --> 0:10:31.960 enough banks, and assuming the banks get organized, and assuming 0:10:32.000 --> 0:10:36.000 the banks can make those loans with two small businesses, 0:10:36.520 --> 0:10:39.480 and those loans are going to turn into grants. The 0:10:39.520 --> 0:10:42.839 demand is right through the roof. Now, what are those 0:10:42.880 --> 0:10:45.880 businesses gonna do? Well. One of the things they're gonna 0:10:45.920 --> 0:10:49.040 do where they're supposed to do is to keep the 0:10:49.040 --> 0:10:54.800 current employees employed and hopefully that helps. That's going to 0:10:54.960 --> 0:10:58.520 help some, but it's not going to help much until 0:10:58.559 --> 0:11:00.920 we get again to the third the fourth quarter when 0:11:00.960 --> 0:11:04.600 we look at the second quarter numbers. As Lisa was 0:11:04.600 --> 0:11:09.920 was suggesting, the claims numbers, the loss of jobs in 0:11:10.000 --> 0:11:15.400 the second quarter, Uh, the unemployment rate itself, Uh, they're 0:11:15.440 --> 0:11:18.520 gonna be really bad reading, as bad reading as you've 0:11:18.559 --> 0:11:22.200 ever seen. But third quarter we might see some results. 0:11:22.200 --> 0:11:25.319 And there are other programs from the federal government. Um, 0:11:25.480 --> 0:11:28.160 you know that I think we'll have some positive impact 0:11:28.200 --> 0:11:34.360 that loans for example, to municipalities, counties and cities that 0:11:34.559 --> 0:11:37.719 qualify and you've got to be kind of big to qualify, 0:11:37.800 --> 0:11:40.400 that might help them through some tough times. When their 0:11:40.440 --> 0:11:45.280 revenues from taxes are gonna be just about nonexistent. So 0:11:45.360 --> 0:11:47.800 it'll help, It will help some, it'll get us through 0:11:47.840 --> 0:11:50.960 a tough period. But the real key is we've got 0:11:50.960 --> 0:11:54.880 to have businesses come back to work and start to work. 0:11:54.920 --> 0:11:57.480 And I think we'll start to see that, not in 0:11:57.520 --> 0:12:00.520 the second quarter, but probably the third quarter, receive some 0:12:00.760 --> 0:12:03.720 results in the third. Going across my fingers anyway, so 0:12:04.040 --> 0:12:08.280 you're buying stocks right now, Well, that's a good question 0:12:08.320 --> 0:12:11.760 to know. That's in some ways it isn't it. It is. Yes, 0:12:11.880 --> 0:12:16.360 we are buying up, but we're still maintaining our meaningful 0:12:16.440 --> 0:12:20.680 sort of a meaningful allocation to equities. We did trim 0:12:21.440 --> 0:12:25.160 our allocation equities. We cut back international, we cut back 0:12:25.200 --> 0:12:28.320 small and mid camp. If an investor comes to us 0:12:28.360 --> 0:12:31.240 and says i've got a fifty percent target for stocks, 0:12:31.559 --> 0:12:35.000 we're right around that fifty mark. We're not down at thirty, 0:12:36.000 --> 0:12:39.040 which we'd be if we were really barrish or worried. 0:12:39.320 --> 0:12:43.559 We're still around fifty. But if you look carefully at 0:12:43.559 --> 0:12:47.080 the portfolio, you'll see two things. You'll see one, it's 0:12:47.080 --> 0:12:51.559 a very defensive portfolio. It emphasizes overweights. If you may 0:12:51.880 --> 0:12:55.120 things like health care, utilities, staples, so things that do 0:12:55.200 --> 0:12:58.800 well in a bear market. It overweights stocks with dividends 0:12:58.800 --> 0:13:03.040 in them. That's its defensive portfolio. But if you look carefully, 0:13:03.480 --> 0:13:07.240 you'll see we're starting to consider that. Look, this bear 0:13:07.360 --> 0:13:10.840 market is gonna end maybe third quarter, maybe first quarter 0:13:10.920 --> 0:13:13.520 two thousand twenty one. And when we end a bear 0:13:13.640 --> 0:13:16.520 market and start a bull market sometime maybe in two 0:13:16.559 --> 0:13:20.160 thousand twenty one, hopefully stocks that are gonna work are 0:13:20.240 --> 0:13:23.679 the same old ones that always work, and that's technology, 0:13:23.840 --> 0:13:28.840 consumer discretionary stocks, industrials, and materials. Will start to add 0:13:28.920 --> 0:13:32.080 a little bit of that now, but not much. We're 0:13:32.480 --> 0:13:36.320 let's say, staging in staging and all right, just like 0:13:36.400 --> 0:13:39.520 Tom Keene staging into the markets. Hugh Johnson, Chairman and 0:13:39.600 --> 0:13:43.240 Chief investment officer, Hugh Johnson Advisers, based in Alby, New York, 0:13:43.240 --> 0:13:46.280 giving us his thoughts as to the market again expecting 0:13:46.480 --> 0:13:49.240 at least a really really dismal second quarter in terms 0:13:49.240 --> 0:13:52.120 of earnings, in terms of GDP growth. And then the 0:13:52.200 --> 0:13:55.200 question is in everybody's mind right now, is to what 0:13:55.320 --> 0:13:59.600 extent does the economy and does corporate American global economy 0:14:00.080 --> 0:14:01.840 come back? Is it kind of in the third fourth 0:14:01.920 --> 0:14:05.200 quarter or is it something that's pushed out into That's 0:14:05.200 --> 0:14:07.200 when investors are trying to get a sense of Right now, 0:14:10.400 --> 0:14:13.079 there's a big question about the Federal Reserves new bond 0:14:13.120 --> 0:14:17.520 purchasing program, in particular their focus on junk debt, a 0:14:17.600 --> 0:14:20.040 real big question. For the first time ever, they're delving 0:14:20.080 --> 0:14:24.080 into blow investment grade credit. Just how low will they go? 0:14:24.320 --> 0:14:27.720 Is it's just a temporary effort meant to stave off 0:14:27.720 --> 0:14:30.640 some of the fallen angels Joining us now as R J. Gallo, 0:14:30.920 --> 0:14:35.240 senior portfolio manager a fixed income at Federated Hermes joining 0:14:35.320 --> 0:14:38.120 us are j. I'm wondering from your perspective, we saw 0:14:38.160 --> 0:14:40.920 the biggest rally, the biggest one day rally in junk 0:14:41.000 --> 0:14:44.840 debt on Front Thursday since the late ninety nineties. Do 0:14:44.880 --> 0:14:48.240 you think it's overdone? I think it's overdone. That's a 0:14:48.280 --> 0:14:52.800 great question. UM. I think right now the markets are 0:14:53.040 --> 0:14:56.800 all markets. It was a great week for for equities 0:14:56.800 --> 0:15:01.120 to write um. Risk assets are responding to the fact 0:15:01.160 --> 0:15:03.520 that the second derivative, the rate of change, the rate 0:15:03.520 --> 0:15:06.560 of change in new cases, continues to head in a 0:15:06.640 --> 0:15:11.360 in a friendly direction, and so uh riff taking is 0:15:11.480 --> 0:15:15.600 coming back. The FED significantly accelerated that by opening up 0:15:15.600 --> 0:15:18.520 their buying programs to include how your corporate debt, which 0:15:18.560 --> 0:15:22.880 is a stark change from Federal Reserve history by any metric. 0:15:23.440 --> 0:15:29.440 Um The sharp move was dramatic. Our our traders were 0:15:29.880 --> 0:15:32.920 recounting dramatic market conditions sharply higher. You can see an 0:15:32.920 --> 0:15:35.080 e t F, you can see it in bonds. I 0:15:35.120 --> 0:15:38.000 think the goal of the FED has been all along 0:15:38.520 --> 0:15:41.840 to make market functioning less of an issue, and by 0:15:41.880 --> 0:15:45.160 every metric, whether you're looking at weekly rates and munis, 0:15:45.160 --> 0:15:47.600 whether you're looking at commercial paper rates, whether you're looking 0:15:47.680 --> 0:15:50.120 at bill rates, they've all moved in a direction to 0:15:50.120 --> 0:15:55.520 say markets are functioning better. Treasuries, unis, corporates, etcetera. Now 0:15:55.680 --> 0:16:00.760 the focus looking forward will be the broader fundamentalifications on 0:16:00.880 --> 0:16:05.240 credit defaults, downgrades, etcetera. So a little over down, a 0:16:05.240 --> 0:16:08.440 little emotional, maybe, but I think we're facing with a 0:16:08.560 --> 0:16:10.600 face with a lot of uncertain team. We're moving beyond 0:16:10.680 --> 0:16:13.480 the point where markets were dysfunctional, now to the point 0:16:13.520 --> 0:16:16.480 of assessing fundamentals as we go through likely U shaped 0:16:16.480 --> 0:16:20.120 economic recovery. You're saying, you know that there is a 0:16:20.200 --> 0:16:23.560 support here, there's a question about fundamentals, what are you 0:16:23.600 --> 0:16:27.200 expecting r J when it comes to default and how 0:16:27.280 --> 0:16:30.080 much of that has been priced in? Well, first of 0:16:30.080 --> 0:16:33.440 on the fundamentals, I think there's a high level of uncertainty, 0:16:33.480 --> 0:16:35.960 and you can see it in Bloomberg's own data. You 0:16:36.080 --> 0:16:38.760 do the e CFC for those in front of a 0:16:38.840 --> 0:16:42.920 terminal UM the economic forecasts, and the median forecast for 0:16:43.000 --> 0:16:46.200 Q two GDP is a loss negative twenty two point. 0:16:47.200 --> 0:16:51.320 The range is as high as a lot of decline 0:16:51.320 --> 0:16:55.600 of six, with some still suggesting a high of a 0:16:55.600 --> 0:16:58.880 little bit of growth. So a huge level uncertainty exists 0:16:59.160 --> 0:17:01.920 and and it Yeah, I almost hate the phrase markets 0:17:01.960 --> 0:17:05.200 don't like uncertainty. I think it's a silly phrase. Markets 0:17:05.240 --> 0:17:08.280 don't like high levels of uncertainty and shifts in the 0:17:08.359 --> 0:17:10.840 level of uncertainty in short periods of time. There's always 0:17:10.880 --> 0:17:14.159 uncertainty about the future. It's when it's extreme intense and 0:17:14.280 --> 0:17:17.240 wide and right now it's extreme intense and why so 0:17:17.280 --> 0:17:20.880 it spread? Are are why there was a sharp sell off, 0:17:20.960 --> 0:17:23.760 especially in March, as markets were dysfunctional and the recession 0:17:23.760 --> 0:17:26.919 was setting in UM. We believe that there will be 0:17:26.960 --> 0:17:30.119 elevated default rates. We haven't put a number on it 0:17:30.200 --> 0:17:34.359 because I think there's sharp discrepancies across sectors. Uh. In 0:17:34.400 --> 0:17:36.480 addition to the recession, we had the oil price war 0:17:36.560 --> 0:17:39.520 that now seems to be calming down somewhat. UM. I 0:17:39.520 --> 0:17:42.680 think safe to say as a firm, we went into 0:17:42.760 --> 0:17:45.800 this crisis underweight high yield, not because we thought COVID 0:17:45.880 --> 0:17:47.480 nineteam was going to get as bad as it has, 0:17:47.760 --> 0:17:51.000 but because valuation had gotten extraordinarily tight not and it 0:17:51.040 --> 0:17:53.760 wasn't compensating you for the uncertainties of the future. Those 0:17:53.840 --> 0:17:57.199 uncertainties became profound and very difficult. As we now know, 0:17:57.720 --> 0:18:00.119 we've been actually starting to add to our way how 0:18:00.240 --> 0:18:04.440 yield our multi sector portfolios. Although we still remain slightly underweight. 0:18:04.640 --> 0:18:08.159 Why because of the uncertainties I just described. The fundamentals 0:18:08.160 --> 0:18:11.040 are still unclear, The sector ramifications are going to be 0:18:11.119 --> 0:18:14.640 vast and divergent. Oil in particular is a tough one UM, 0:18:14.720 --> 0:18:17.199 and so we still think some caution is warranted. But 0:18:17.320 --> 0:18:20.840 over time, as some of that uncertainty stades, as evidenced 0:18:20.840 --> 0:18:23.920 by falling vix and and and just the passage of times, 0:18:23.960 --> 0:18:26.959 we see real data as opposed to fear of set data, 0:18:27.080 --> 0:18:29.679 then I wouldn't be shocked if we continue to incrementally 0:18:29.680 --> 0:18:32.560 move and get more constructive on how yell based upon 0:18:32.680 --> 0:18:36.720 valuation and as we see things unfold. R J, what 0:18:36.840 --> 0:18:40.399 is what is your expectation for credit quality across your portfolio? 0:18:40.440 --> 0:18:42.360 I mean it's we're just in obviously the very very 0:18:42.359 --> 0:18:44.880 early stages here, but you know, if some of those 0:18:44.880 --> 0:18:48.600 GDP numbers come to fruition really going to be a 0:18:48.680 --> 0:18:50.320 pressure on a lot of balances. How are you thinking 0:18:50.359 --> 0:18:55.199 about that? Well, the interesting thing is that everybody in 0:18:55.200 --> 0:18:58.440 the market, whether they're in your role covering the market 0:18:58.480 --> 0:19:01.320 from an analytical or journalistic standpoint or from our role 0:19:01.680 --> 0:19:05.800 as being investment managers, we've never quite seen something as 0:19:05.800 --> 0:19:08.840 profound as this. We've had a global financial crisis. I 0:19:08.880 --> 0:19:12.080 was around for that, We were around for the other 0:19:12.119 --> 0:19:14.159 recessions up in the in the business one way or 0:19:14.160 --> 0:19:18.440 another since nine. But nobody in the business has seen 0:19:20.000 --> 0:19:22.160 decline in g d P. Uh. You know, I think 0:19:22.200 --> 0:19:26.080 GDP contracted that its seasonally adjusted annirate of eight three percent. 0:19:26.160 --> 0:19:29.640 I think it was uh during the two thou procession, 0:19:29.960 --> 0:19:33.400 so this could be like three times deeper um. But 0:19:33.440 --> 0:19:36.320 what's different about then and now is that this was 0:19:36.560 --> 0:19:40.719 in response to an exogenous shock, not an indogenous financial crisis, 0:19:40.720 --> 0:19:43.119 which too much leverage in the housing bubble was an 0:19:43.240 --> 0:19:46.880 endogenous financial crisis back then. So if we can ramp 0:19:47.000 --> 0:19:50.639 back up with the huge amount of policy support, the 0:19:50.680 --> 0:19:53.480 two point three trillion in the Carra's Act, the FEDS 0:19:53.560 --> 0:19:57.240 myriad of programs from high yield to immunis to treasury, 0:19:57.320 --> 0:20:01.840 the mortgages, UM, if these cushions are are strong enough 0:20:02.320 --> 0:20:05.639 to give us enough of a bounce UM, then you 0:20:05.720 --> 0:20:08.960 have to believe that that the bottom will be this quarter, 0:20:09.160 --> 0:20:12.959 the quarter we're currently in UM two three is debatable 0:20:13.359 --> 0:20:15.320 whether we have a little bit more of a contraction 0:20:15.359 --> 0:20:18.920 in the in the economy or not. The debatable prospect. 0:20:19.320 --> 0:20:21.639 But over times you start to reintroduce, and if the 0:20:21.760 --> 0:20:26.240 virus behaves reasonably well as we do reintroduce economic activity 0:20:26.280 --> 0:20:28.560 of all kinds of sorts that right now is largely 0:20:28.600 --> 0:20:31.480 been tabled in many areas, UM, then you have to 0:20:31.480 --> 0:20:33.600 believe that that this is like a big bridge loan 0:20:33.680 --> 0:20:35.960 to the economy, The Cares Act, the Fed, it's all 0:20:36.000 --> 0:20:38.359 a big bridgelander the economy to try to get us 0:20:38.359 --> 0:20:41.000 to a better day. Will it work? Will it not work. 0:20:41.440 --> 0:20:44.560 Not totally clear. There's clearly optimism in the markets over 0:20:44.560 --> 0:20:47.440 the last week that it will work. UM. Back to 0:20:47.480 --> 0:20:49.920 the original question, that might have been a little bit overdone. 0:20:50.000 --> 0:20:52.080 We we have yet to see the earnings destruction. We 0:20:52.119 --> 0:20:55.840 have yet to see the fundamental data downgrades are coming. 0:20:56.640 --> 0:21:00.440 Um defaults will be rising. I think it's very difficult 0:21:00.480 --> 0:21:02.640 to sitting here and start pinpointing which names and which 0:21:03.359 --> 0:21:06.000 which individual sectoris and which you anticipate them. But it's 0:21:06.000 --> 0:21:08.639 obvious that some sectors are more challenge than others. And 0:21:08.640 --> 0:21:10.920 this is what you have an analyst staff for. This 0:21:10.960 --> 0:21:13.280 is the time for active management. This is, you know, 0:21:13.359 --> 0:21:15.560 Federated an active manager. We're not a passive manager. We 0:21:15.560 --> 0:21:18.120 don't run bond index funds. Sorry, Ari Gally, once again, 0:21:18.160 --> 0:21:20.159 working to just cut in right now. We thank you 0:21:20.200 --> 0:21:21.680 so much for your commentary. Right now, we're gonna go 0:21:21.680 --> 0:21:24.639 to New York State Governor Andrew Cuomo. And that was R. J. 0:21:24.680 --> 0:21:31.600 Gallas and your portfolio manager. Federate Attorney's time for Bloomberg Opinion. 0:21:31.640 --> 0:21:34.720 We're joined by Bloomberg Opinion columns Liam Denning. He covers 0:21:34.760 --> 0:21:37.640 all things on the energy front and land. We had 0:21:37.760 --> 0:21:43.080 over the weekend UM. This agreement by OPEC plus about 0:21:43.119 --> 0:21:46.480 ten million dollars ten million barrels per day cut in production. 0:21:46.520 --> 0:21:49.480 President Trump just tweeting just this morning that maybe as 0:21:49.600 --> 0:21:52.119 much as twenty million barrels a day. What do we 0:21:52.160 --> 0:21:54.600 know about disagreement and does it what does it really 0:21:54.600 --> 0:21:57.720 mean for the global oil markets? I mean, I've I've 0:21:57.720 --> 0:22:02.320 always characterized this agreement as really OPEC plus and certain 0:22:02.320 --> 0:22:06.639 other players, including President Trump, you know, really trying to 0:22:06.680 --> 0:22:11.840 get ahead of UM what is actually just an inevitable issue, 0:22:11.880 --> 0:22:14.920 which is that they're going to have to cut supply. 0:22:15.240 --> 0:22:18.679 If if demand is down by you know, roughly a 0:22:18.760 --> 0:22:23.240 third by some estimates, then that means, you know, refiners 0:22:23.240 --> 0:22:26.880 stop buying crude oil because customers aren't buying it. And 0:22:26.960 --> 0:22:31.000 that means if you're a producer and refiners aren't taking it, 0:22:31.040 --> 0:22:32.760 you have to find a place of store it, and 0:22:33.600 --> 0:22:36.480 you know, we could be running out of storage current 0:22:36.600 --> 0:22:39.400 rates UM, you know, sometime within a month or two, 0:22:39.560 --> 0:22:43.080 and that's when prices would you crash into single digits. 0:22:43.080 --> 0:22:47.840 So this disagreement to cut is I see as as 0:22:47.920 --> 0:22:50.720 kind of a veneer of control on a on a 0:22:50.800 --> 0:22:55.240