WEBVTT - Relief Money Is Flowing Into Small Businesses: ConnectOne CEO 0:00:02.640 --> 0:00:05.360 Welcome to the Bloomberg Penl podcast. I'm Paul swing you 0:00:05.360 --> 0:00:07.680 along with my co host Lisa brahma Witz. Each day 0:00:07.720 --> 0:00:10.280 we bring you the most noteworthy and useful interviews for 0:00:10.320 --> 0:00:12.520 you and your money, whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:18.000 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:21.640 at Bloomberg dot com. We've seen that federal government step 0:00:21.720 --> 0:00:25.040 up with some significant fiscal stimulus. A lot of that 0:00:25.200 --> 0:00:28.560 is geared towards small business loans and actually getting money 0:00:29.200 --> 0:00:31.960 to these small businesses that need it the most. And 0:00:32.000 --> 0:00:33.920 a key part of that is the banks that will 0:00:33.920 --> 0:00:37.479 actually get the capital into the local marketplace. To get 0:00:37.479 --> 0:00:39.360 a sense of how that's all playing out, we welcome 0:00:39.440 --> 0:00:42.720 Frank Sor and Tino. Frank is the chief executive officer 0:00:42.760 --> 0:00:46.400 of Connect One Bank that's based based on Englewood Cliffs, 0:00:46.479 --> 0:00:49.040 New Jersey. Franks, thanks so much for joining us. So 0:00:49.320 --> 0:00:52.600 we're really early days in terms of getting some of 0:00:52.600 --> 0:00:55.840 this fiscal stimulus money into the marketplace, where you understand 0:00:55.880 --> 0:00:58.560 there's been kind of a bumpy start to it all 0:00:58.600 --> 0:01:01.120 from in terms of the banks and getting coordinated with 0:01:01.120 --> 0:01:04.600 the government. What's been your experience, so good morning and 0:01:04.640 --> 0:01:09.960 thank you. Um, yeah, you know, bumpy start. I guess 0:01:09.959 --> 0:01:13.000 that may be partially true, but um, you know, think 0:01:13.040 --> 0:01:15.640 about the scale and size of this program. Think about 0:01:15.640 --> 0:01:19.360 how it compares to any other program that you know 0:01:19.360 --> 0:01:21.679 would go through, like the Defense Department to go do 0:01:21.880 --> 0:01:25.640 something huge like this. I think they're doing pretty good. Actually, 0:01:25.640 --> 0:01:28.160 I think the SBA has done a fantastic job. I 0:01:28.160 --> 0:01:30.720 think the banks are doing a fantastic job. And I 0:01:30.760 --> 0:01:34.280 believe that here we are two weeks from or two 0:01:34.319 --> 0:01:36.200 weeks and a couple of days from the signing of 0:01:36.200 --> 0:01:39.520 the President's bill, and money is already flowing out into 0:01:39.560 --> 0:01:43.240 the into the small business pands. So yes, there's a 0:01:43.280 --> 0:01:47.720 backlog of applications. Banks are working as quickly as they can, 0:01:47.880 --> 0:01:51.760 but money is flowing into small business plands. And Frank, 0:01:52.080 --> 0:01:54.559 it's the money is flowing from your bank as well. 0:01:54.600 --> 0:01:57.200 And can you just give us a sense of the 0:01:57.360 --> 0:02:00.840 demand for these loans from small business is that you've 0:02:00.880 --> 0:02:03.920 seen and and and how many have been saved and 0:02:03.960 --> 0:02:08.520 able to maintain their staffs as a result of the loans. Well, 0:02:08.560 --> 0:02:11.239 we have business small business owners that when we notified 0:02:11.280 --> 0:02:15.360 them that they were approved. They just they almost break 0:02:15.440 --> 0:02:18.040 down in that, you know, with with joy that they 0:02:18.040 --> 0:02:22.000 are now able to keep their employees on staff, be 0:02:22.080 --> 0:02:25.840 able to pay them. As we're dispersing funds. I can't 0:02:25.840 --> 0:02:28.800 tell you how many text messages and emails we're receiving 0:02:28.840 --> 0:02:32.120 from clients from all over telling us how this is 0:02:32.280 --> 0:02:36.959 saving their livelihood for their business and in turn how 0:02:37.000 --> 0:02:41.760 good they feel about saving their employees livelihood and their 0:02:41.800 --> 0:02:43.839 ability to put food on their table and pay their 0:02:43.840 --> 0:02:46.240 rent and do what they need to do. So I 0:02:46.240 --> 0:02:49.239 think this program is critical at this moment in time. So, Frank, 0:02:49.280 --> 0:02:51.720 do you, from your perspective just in your local markets, 0:02:51.760 --> 0:02:54.280 do you think it will be enough or do you suspect, 0:02:54.280 --> 0:02:58.079 given the demand that you're seeing, that Congress should and 0:02:58.160 --> 0:03:01.480 perhaps maybe likely to come back with some more. Yeah. 0:03:01.520 --> 0:03:03.480 I believe Congress will come back for more. I think 0:03:03.520 --> 0:03:07.440 there will be demand for more than they I do 0:03:07.600 --> 0:03:10.760 believe that it is doing the job that it needs 0:03:10.800 --> 0:03:14.360 to do, and it is helping to float the economy 0:03:14.600 --> 0:03:17.160 through the next you know, for the last couple of 0:03:17.240 --> 0:03:20.280 weeks and through the next few weeks. I think if 0:03:20.280 --> 0:03:23.600 we think this is going to go on beyond May then, Yeah, 0:03:23.639 --> 0:03:25.240 I think they're going to need a lot more, But 0:03:26.000 --> 0:03:29.799 for right now, I think between this this current draft 0:03:29.840 --> 0:03:33.799 of billion plus what they're contemplating in the new bill 0:03:33.840 --> 0:03:36.760 of two hundred and fifty billion should be sufficient. So 0:03:36.800 --> 0:03:40.080 that's on the small business side. You have a long 0:03:40.280 --> 0:03:43.120 history in the mortgage market, in the housing market, in 0:03:43.160 --> 0:03:47.360 the building market, and there isn't growing concern that that 0:03:47.440 --> 0:03:52.760 particular market is suffering disproportionately without necessarily a clear backstop 0:03:52.840 --> 0:03:56.960 from the government, particularly for mortgages that are not backed 0:03:57.000 --> 0:03:59.600 by Fannie and Freddie May. What are you seeing on 0:03:59.800 --> 0:04:03.640 that up front? How concerned are you there? It's going 0:04:03.720 --> 0:04:06.040 to be a concern as we move through the next 0:04:06.120 --> 0:04:09.400 phase of this right right now where everyone's focused on 0:04:09.760 --> 0:04:13.120 stabilizing where we are today, but if you can think out, 0:04:13.640 --> 0:04:16.200 you know, sixty days, ninety days, or even a year 0:04:16.200 --> 0:04:19.719 from now, and people start applying for mortgages and there 0:04:19.800 --> 0:04:24.240 was this huge business disruption um and by the way, 0:04:24.240 --> 0:04:25.960 I think that you know, constructions come to the halt, 0:04:26.000 --> 0:04:28.600 which is also an issue, but the but the disruption 0:04:28.640 --> 0:04:31.120 that's gone on and people's financial lives is going to 0:04:31.200 --> 0:04:34.240 have to be reconciled at some point. And it probably 0:04:34.320 --> 0:04:38.560 will have some negative effects of the market. So that's 0:04:38.600 --> 0:04:40.160 kind of where I want to go. Based upon your 0:04:40.160 --> 0:04:44.559 discussion with your customers and your clients, are you getting 0:04:44.600 --> 0:04:46.840 a sense that, boy, this is really gonna have some 0:04:47.080 --> 0:04:51.039 long lasting implications for you know, business cycles and maybe 0:04:51.080 --> 0:04:55.800 even consumer psyche in terms of demand. Well, I think 0:04:55.839 --> 0:04:59.800 the Fed is very concerned about deflation in the marketplace. 0:05:00.000 --> 0:05:02.320 And so I think that's and that should tell you 0:05:02.360 --> 0:05:04.640 everything you need to know. Right. That tells you that 0:05:04.680 --> 0:05:09.159 the consumer is probably going to move less consumption and 0:05:09.279 --> 0:05:12.360 more savings. And so what's that saying. It's saying that 0:05:12.400 --> 0:05:15.440 they're changing their psyche about how they think about the world. 0:05:15.880 --> 0:05:18.880 I think what we're doing today, I think the programs 0:05:18.920 --> 0:05:22.320 that the Federal Reserve is pushing forward today, the programs 0:05:22.320 --> 0:05:26.080 that the Administration's pushing forward, the programs that Congress is 0:05:26.120 --> 0:05:29.600 thinking about, is all to help to keep that psyche 0:05:30.040 --> 0:05:32.719 you know, where it's been and you know, keep the 0:05:32.800 --> 0:05:35.320 United States the great country that has always been in that. 0:05:35.760 --> 0:05:38.280 You know, we are a country that likes to spend, 0:05:38.360 --> 0:05:40.640 We are a country that innovates, We are a country 0:05:40.680 --> 0:05:44.320 that takes risks. And so by freeing up this capital 0:05:44.360 --> 0:05:46.919 so that people don't have to worry about that. We 0:05:46.960 --> 0:05:50.680 will minimize that disruption of the future. So, Frank, we're 0:05:50.720 --> 0:05:53.240 hearing from JP Morgan and Wells Fargo today. We're going 0:05:53.279 --> 0:05:55.279 to hear from City Group and some of the other 0:05:55.360 --> 0:05:58.480 banks throughout the rest of the week, and we're really 0:05:58.480 --> 0:06:01.560 focusing on loan loss prevent Jians. What are you seeing 0:06:01.560 --> 0:06:06.279 with respect to that at your bank? So, I think 0:06:06.320 --> 0:06:09.440 what you've seen from those larger institutions is that no 0:06:09.480 --> 0:06:13.400 one really knows, and so they've taken some certainly they've 0:06:13.440 --> 0:06:17.520 taken some general approaches to what they have modeled that 0:06:17.600 --> 0:06:20.799 they think things could be, But nobody really knows for sure. 0:06:20.960 --> 0:06:23.520 It is way too early in the game to make 0:06:23.600 --> 0:06:27.440 decisions about, you know what, what what losses may occur, 0:06:27.600 --> 0:06:30.480 who's going to be impacted, what segments are going to 0:06:30.560 --> 0:06:33.440 be hurt the most. It really depends a lot on 0:06:33.640 --> 0:06:36.800 how successful some of these programs are, how we all 0:06:36.880 --> 0:06:40.160 work together to get through this next phase to reopen 0:06:40.160 --> 0:06:43.560 the economy, how long that looks like. I think without 0:06:43.600 --> 0:06:47.520 answering those questions, I think it's difficult to really assess 0:06:47.839 --> 0:06:52.400 what what damage, If there's damage, how much damage, and 0:06:52.440 --> 0:06:55.240 what it's going to look like on the bank's financial statement. 0:06:55.880 --> 0:06:58.120 Frank Sartino, thank you so much for being with us 0:06:58.120 --> 0:07:00.160 and all my best to you through this period as 0:07:00.240 --> 0:07:03.880 you work to manage and get loans out to all 0:07:03.920 --> 0:07:06.680 of those small businesses in the path forward. Frank Sorrentino 0:07:06.720 --> 0:07:09.680 as chief executive officer of Connect One Bank, joining us 0:07:09.720 --> 0:07:16.000 from Englewood Cliffs, New Jersey, oh JP, Morgan Chase and 0:07:16.040 --> 0:07:19.400 Wells Fargo kicked off earning season for the big banks today, 0:07:19.440 --> 0:07:21.600 and I think what investors are really focusing on was 0:07:21.640 --> 0:07:26.040 those loan lost provisions. Combine those two banks set aside 0:07:26.040 --> 0:07:28.880 more than twelve billion dollars to cover the faults across 0:07:28.880 --> 0:07:31.920 the economy. So just extraordinary numbers coming out of there. 0:07:31.960 --> 0:07:33.840 To get a sense of kind of what we're going 0:07:33.920 --> 0:07:36.160 to see from the banking sector coming up, we welcome 0:07:36.240 --> 0:07:39.120 Chris Whale and chairman of Whale and Global Advisors, based 0:07:39.200 --> 0:07:41.880 in New York. Chris, thanks so much for joining us. Boy, 0:07:41.920 --> 0:07:45.640 those low lost provisions were just extraordinary. What's your takeaway, Well, 0:07:45.680 --> 0:07:49.200 I was actually too conservative in my model for the industry. 0:07:49.280 --> 0:07:52.520 I said, fine, well, double provisions this month and then 0:07:52.640 --> 0:07:55.080 double them or this quarter and then duble them again 0:07:55.200 --> 0:07:57.720 second quarter that gets up to two thousand and eight levels. 0:07:58.680 --> 0:08:01.400 But I think JP Morgan and decided to go big. 0:08:01.800 --> 0:08:04.560 I agree with what they've done. Takes a little pressure 0:08:04.600 --> 0:08:07.040 off them in the next couple of quarters because they've 0:08:07.040 --> 0:08:09.440 put a fair amount of money out there. But they've 0:08:09.480 --> 0:08:12.400 also said that they expect loss rates to be extraordinary, 0:08:12.760 --> 0:08:15.239 and and that says to me, well above two thousand 0:08:15.280 --> 0:08:17.880 and eight levels. So we're starting to use the nineteen 0:08:18.000 --> 0:08:22.680 thirties as our model simply because of the dislocation both 0:08:22.720 --> 0:08:27.440 in terms of unemployment and small and midsized enterprises, which 0:08:27.520 --> 0:08:30.600 looks to be a horror show. I think we could 0:08:30.640 --> 0:08:34.160 see a large chunk of the service sector essentially disappear 0:08:34.720 --> 0:08:37.400 simply because they don't have a lot of capital, and 0:08:37.440 --> 0:08:39.760 if you impose losses on them, you take them out 0:08:39.800 --> 0:08:43.240 of uh, you know, circulation in terms of revenue. They 0:08:43.280 --> 0:08:47.360 die and small businesses turn over quite a lot anyway, 0:08:47.760 --> 0:08:50.440 but when you put this kind of stress situation on them. 0:08:50.640 --> 0:08:53.200 The only sector of this economy that's liquid right now 0:08:53.240 --> 0:08:56.480 are basically those that are supported directly by the government, 0:08:56.720 --> 0:09:01.360 particularly the mortgage sector. But everything else is in um 0:09:01.400 --> 0:09:03.959 and I think that's going to have a real serious 0:09:04.000 --> 0:09:07.400 repercussion on GDP and how long it takes us to 0:09:07.440 --> 0:09:09.920 get through a you know that. I think a couple 0:09:09.920 --> 0:09:12.839 of observers, in fact, have suggested we may not see 0:09:13.360 --> 0:09:16.360 normal earnings, normal kind of trend earnings for a couple 0:09:16.400 --> 0:09:18.920 of years. Uh. And I think that's what the banks 0:09:18.920 --> 0:09:22.599 are telling us. What about when it comes to the 0:09:23.120 --> 0:09:26.160 health of the banks themselves, because a lot of regulators 0:09:26.160 --> 0:09:29.000 and analysts who said that the banks are incredibly well 0:09:29.040 --> 0:09:32.680 capitalized and the fact that they can put aside such 0:09:32.720 --> 0:09:36.080 a big amount for loan losses that they're expecting shows 0:09:36.120 --> 0:09:39.440 their fortitude and their fortress like balance sheets. Would you 0:09:39.480 --> 0:09:43.160 agree with that characterization? Oh very much? And I think 0:09:43.480 --> 0:09:47.520 you know, the political dialogue on this is immediately focused 0:09:47.520 --> 0:09:51.240 on the banks and the fact that they pay dividends. Um, 0:09:51.360 --> 0:09:56.360 we've already gotten most banks to or stop share repurchases, 0:09:56.760 --> 0:09:59.400 which is worth a hundred and ten billion dollars a 0:09:59.480 --> 0:10:03.320 year in terms of capital retention for the top twenty banks. 0:10:03.840 --> 0:10:08.040 That's enough that funds your reserve built by the way, Paul, So, 0:10:08.080 --> 0:10:10.760 I think that what I would tell policy makers is 0:10:10.840 --> 0:10:13.520 leave the dividends alone. You're going to deal with this 0:10:13.600 --> 0:10:15.760 on a bank by bank basis, but you don't want 0:10:15.800 --> 0:10:19.160 to cut off that cash flow to investors because there 0:10:19.160 --> 0:10:21.319 are a lot of people who depend on dividends from 0:10:21.360 --> 0:10:24.520 public companies to pay their bills. And I think it's 0:10:24.559 --> 0:10:26.880 important for us to realize that the banks are well 0:10:26.920 --> 0:10:30.240 capitalized and they have a hundred and fifty billion dollars 0:10:30.320 --> 0:10:36.240 in cash flow every quarter, earnings, share repurchases, dividends that 0:10:36.320 --> 0:10:39.239 they can draw on to meet this wave of default. 0:10:39.800 --> 0:10:41.560 And so I think that's the good news. I would 0:10:41.600 --> 0:10:44.320 agree with you, Lisa. So Chris, let's take a look 0:10:44.320 --> 0:10:46.920 at some maybe some of the regional banks. Are they 0:10:46.920 --> 0:10:49.839 in a similar position in terms of relative health of 0:10:49.960 --> 0:10:54.319 their balance sheets? Well, they deal with a smaller community typically, 0:10:54.640 --> 0:10:59.679 so they will have more idiosyncratic risk elements in their portfolio. 0:10:59.720 --> 0:11:02.880 They're not that diversified. But diversification is not going to 0:11:03.000 --> 0:11:06.520 help us this time. I think the country generally is 0:11:06.559 --> 0:11:10.600 going to see both heavy consumer default activity and we're 0:11:10.640 --> 0:11:13.280 also going to see a lot of business defaults. So 0:11:13.320 --> 0:11:15.920 the good news is, unlike two thou eight, this didn't 0:11:15.960 --> 0:11:19.239 start on Wall Street. It didn't start with subprime mortgages 0:11:19.400 --> 0:11:23.000 that nobody wanted anymore truly and something. Remember uh, this 0:11:23.040 --> 0:11:26.440 time around, it's an external shock which has taken GDP 0:11:26.679 --> 0:11:31.280 down significantly and is pushing unemployment up to ridiculous levels. 0:11:31.280 --> 0:11:34.480 I mean, you know, in credit models, unemployments your biggest factor, 0:11:34.800 --> 0:11:37.400 that's what you start with. Over the weekend, my wife 0:11:37.440 --> 0:11:39.040 kept looking at me and go, why are you in 0:11:39.080 --> 0:11:42.560 such a bad It was because I was writing my 0:11:42.640 --> 0:11:46.720 earnings note for the banks, and basically, by the second quarter, 0:11:46.840 --> 0:11:48.760 I think two thirds of bank earnings are going to 0:11:48.840 --> 0:11:53.280 be gone because of provisioning and other expenses, operating expenses, 0:11:53.640 --> 0:11:55.520 and then over time they're going to come out of 0:11:55.520 --> 0:11:57.920 the whole. So to me, I'm still very positive on 0:11:57.960 --> 0:12:00.560 the banks. I own banks, you know, Jay piece at 0:12:00.559 --> 0:12:03.400 one point two times book value this morning, so it's 0:12:03.400 --> 0:12:06.440 not like they're cheap cheap. But on the other hand, 0:12:06.480 --> 0:12:08.360 I think that the whole industry is going to have 0:12:08.440 --> 0:12:11.960 to divert income. They're not going to consume capital. That's 0:12:11.960 --> 0:12:14.760 always the misnomer in these discussions, right, They're going to 0:12:14.920 --> 0:12:17.840 use the income that they generate, the plow through the 0:12:17.920 --> 0:12:21.160 losses and they'll be Okay, yeah, when you talk about 0:12:21.240 --> 0:12:23.520 job losses, I'm just struck by the fact that nearly 0:12:23.600 --> 0:12:26.839 one in ten Americans lost their jobs in the past 0:12:26.880 --> 0:12:30.320 three weeks. And probably we're gonna get another multimillion print 0:12:30.440 --> 0:12:33.800 in the jobless claims report that we're getting out on Thursday. 0:12:34.200 --> 0:12:37.160 In the meantime, there's a question about consolidation. Does the 0:12:37.200 --> 0:12:39.880 likes of JP Morgan end up more powerful at the 0:12:40.000 --> 0:12:42.160 end of this because they do have the capacity to 0:12:42.160 --> 0:12:45.160 withstand this and that fortress like balance sheet. What do 0:12:45.200 --> 0:12:48.200 you think, Well, JP is not going to get any bigger, 0:12:48.200 --> 0:12:51.040 but they do have a lot of monopoly power. Um 0:12:51.120 --> 0:12:54.200 They are also reacting to the madness we see in 0:12:54.240 --> 0:12:59.520 Washington at the Federal Housing Finance Administration. The regulator for 0:12:59.559 --> 0:13:02.560 Fanning and Freddie mac basically came out and said that 0:13:02.600 --> 0:13:05.600 they wouldn't support the non bank servicers were the most 0:13:05.600 --> 0:13:09.559 important part of the mortgage market. Um. So JP changed 0:13:09.600 --> 0:13:12.679 their warehouse guidelines last week. They basically cut off all 0:13:12.720 --> 0:13:15.760 the non banks in terms of funding for new loans 0:13:15.880 --> 0:13:19.520 and also for servicing advances. And it's really bad. We 0:13:19.960 --> 0:13:22.240 need to get the government on track here because we 0:13:22.280 --> 0:13:24.880 don't need them saying bad things in public, and we 0:13:24.920 --> 0:13:29.079 don't need to have a regulator out attacking the institutions 0:13:29.120 --> 0:13:33.640 he's responsible for regulating and preserving. So I think we 0:13:33.720 --> 0:13:36.280 need to get everybody on the same page. The FEDS great, 0:13:36.720 --> 0:13:40.160 The other regulators, Jenny May and f h A are awesome. 0:13:40.440 --> 0:13:43.760 They've been moving heaven and earth. Um, Chris, I'm worried 0:13:43.800 --> 0:13:45.960 that the default wave we're gonna see, Lisa is going 0:13:46.000 --> 0:13:48.400 to be really big. Chris Whalen, thank you so much 0:13:48.440 --> 0:13:54.760 for being with us, Chairman of Whalen Global Advisors. This 0:13:54.880 --> 0:13:58.959 period of time so unprecedented and jarring, and its magnitude 0:13:59.040 --> 0:14:02.439 and depth has lead to a lot of philosophical musings 0:14:02.440 --> 0:14:05.880 and a lot of historical references. One that really caught 0:14:05.880 --> 0:14:10.120 my attention, Paul, was about the hobbsy and state of Man, 0:14:10.320 --> 0:14:13.480 and the and and and the West versus the East, 0:14:13.600 --> 0:14:16.400 and sort of jostle for power that we see going 0:14:16.520 --> 0:14:20.040 on and perhaps transforming at this moment as the world 0:14:20.080 --> 0:14:22.680 fights the pandemic. And I'm so glad to join us 0:14:22.800 --> 0:14:25.560 right now. I'm pleased to say John mckelthwaite, editor in 0:14:25.640 --> 0:14:29.240 chief of Bloomberg News, who wrote this column the virus 0:14:29.280 --> 0:14:32.240 should wake up the West, and John, I want to 0:14:32.280 --> 0:14:34.640 frame this from the view of an argument that people 0:14:34.680 --> 0:14:38.920 are making that China's success in fighting off the spread 0:14:38.920 --> 0:14:43.840 of the coronavirus shows that autocracies are preferable to democracies. 0:14:44.240 --> 0:14:46.880 How much of that has been borne out by what 0:14:46.920 --> 0:14:50.680 we've seen in the past few weeks and months, Well, 0:14:50.720 --> 0:14:54.520 I would argue um that high disciple. Um, I would 0:14:54.600 --> 0:14:57.800 argue very little, because I think that if you look 0:14:57.800 --> 0:15:00.720 at it, yes, I mean China has done quite well, 0:15:00.840 --> 0:15:05.240 and we should immediately put an enormous caveat against both 0:15:05.880 --> 0:15:10.120 its numbers, which people raise considerable suspicions about, and also 0:15:10.240 --> 0:15:13.920 its role in the very um starting point of the virus, 0:15:14.000 --> 0:15:16.240 where if it had had less of a police state 0:15:16.320 --> 0:15:19.560 and wuhren't more, people would have known about the virus 0:15:19.640 --> 0:15:22.640 much earlier. So China is definitely cultival than that. But 0:15:22.720 --> 0:15:25.840 in terms of the sort of secondary stage of reacting 0:15:25.880 --> 0:15:30.080 to it, yes, China does look better than the United States. 0:15:30.120 --> 0:15:33.440 But um, there the truth is there are good they 0:15:33.480 --> 0:15:38.160 are good performing autocracism, bad performance axes, good performing democracies, 0:15:38.200 --> 0:15:41.000 and bad performing boxes. If you compare China to Germany, 0:15:41.080 --> 0:15:44.080 if you can compare it to Switzerland, if you compare 0:15:44.120 --> 0:15:47.360 it um to places like Norway, if you compare it 0:15:47.440 --> 0:15:50.360 to South Korea as you prepared to Taiwan and Singapore, 0:15:50.640 --> 0:15:53.520 China does not look great. So in other words, the 0:15:53.680 --> 0:15:57.840 democracies still do it better. Um, and people who jumped 0:15:57.880 --> 0:16:01.360 towards the idea that this has been particularly for China, 0:16:01.520 --> 0:16:04.800 I would rather see it as a warning, especially to America, 0:16:05.080 --> 0:16:07.000 but you know also to that matter, to Britain where 0:16:07.040 --> 0:16:09.680 I am at the moment that you know, really if 0:16:09.720 --> 0:16:13.360 the West does not get it to government into shape, um, 0:16:13.400 --> 0:16:15.800 you know, it will lose the lead that it has 0:16:15.880 --> 0:16:20.040 held over Asia for the past four years. So John, 0:16:20.160 --> 0:16:22.160 just looking at the U S here, what's you know 0:16:22.240 --> 0:16:25.200 kind of brewing? Here is a battle between the you know, 0:16:25.280 --> 0:16:29.040 the federal government in the States, and we're seeing regional 0:16:29.120 --> 0:16:32.320 formations of coalitions, whether it's New York, Connecticut, New Jersey, 0:16:32.400 --> 0:16:35.360 or even out on the West coast with California and Washington. 0:16:35.840 --> 0:16:38.040 How do you think that's going to play out? Because 0:16:38.080 --> 0:16:40.280 it seems like that's the next big bonus contention as 0:16:40.720 --> 0:16:44.760 countries think about, including the US, about reopening the economy. 0:16:46.000 --> 0:16:47.680 So I think that's the reasonable thing. I think you 0:16:47.720 --> 0:16:50.400 can make the argument. I think most outsiders looking at 0:16:50.440 --> 0:16:54.120 the federal reaction to this would say it has been useless. Um, 0:16:54.280 --> 0:16:57.320 you know, it's there are some places which are being worse. 0:16:57.440 --> 0:17:01.120 I think maybe Italy, depending how you measure, but in general, 0:17:01.240 --> 0:17:05.000 you know, this has not been Donald Trump's finest hour. 0:17:05.960 --> 0:17:08.439 By contrast, actually, I think you can give Gavin Newsom 0:17:08.480 --> 0:17:13.080 in California some some good points. Um, you know they 0:17:13.080 --> 0:17:16.480 did with California did react much quicker. It's thought about 0:17:16.520 --> 0:17:19.280 what to do. There are still problems there self, evidently, 0:17:19.320 --> 0:17:21.960 but it's you know, the numbers there speak for themselves 0:17:22.440 --> 0:17:25.000 of some extent, and he had to do it against 0:17:25.040 --> 0:17:27.520 the background of the federal government not being very helpful. 0:17:27.920 --> 0:17:30.920 So in terms of efficacy, I think you could argue 0:17:30.920 --> 0:17:33.000 that the governors have got some right to do this. 0:17:33.600 --> 0:17:37.000 The great tragedy, of course, is that one thinks about 0:17:37.040 --> 0:17:40.000 what other presidents might have done. Is what should have 0:17:40.040 --> 0:17:44.400 happened here is that first the president should have rallied 0:17:44.440 --> 0:17:47.160 the entire country. The beauty of the federal system is, yes, 0:17:47.200 --> 0:17:50.119 you can use states to experiment, but it should also 0:17:50.200 --> 0:17:52.440 be a kind of federal It should be a federally 0:17:52.480 --> 0:17:57.040 coordinated response. What's happened instead of that Trump has used 0:17:57.280 --> 0:18:00.760 suppress compets and things to attack governors, and they have 0:18:01.000 --> 0:18:04.239 also used them to attack him. Meanwhile, it's not just 0:18:04.359 --> 0:18:07.480 in terms of what's happening inside America. The other huge 0:18:07.520 --> 0:18:09.560 tragedy for the West is that you would have hoped 0:18:10.160 --> 0:18:12.880 that America would be leading what might be described as 0:18:12.880 --> 0:18:16.600 the Western pandemic response, and that hasn't happened at all 0:18:17.359 --> 0:18:19.840 in the Even even when it came down to warning 0:18:19.840 --> 0:18:24.119 the Europeans that they were about to impose no fly zones, 0:18:24.160 --> 0:18:27.040 a lot not played, but Pope closed fly bands on 0:18:27.240 --> 0:18:30.600 European countries. You know, America did not tell its closest 0:18:30.640 --> 0:18:33.639 allies about that, and so there is such distrust at 0:18:33.640 --> 0:18:37.520 the moment. It's not working in the traditional coordinating role 0:18:37.560 --> 0:18:40.440 of the presidency in crises is not working. And this 0:18:40.520 --> 0:18:42.359 is this is one of the ramifications of it, and 0:18:42.400 --> 0:18:45.879 it's it's very sad. John, thanks so much for joining us. 0:18:45.880 --> 0:18:50.520 Really appreciated as an interesting column that you wrote. John mckelthwaite, 0:18:50.600 --> 0:18:54.280 editor in chief, Bloomberg News, joining us from Britain, giving 0:18:54.359 --> 0:19:00.679 us his thought, Well, we talked about the incredib stimulus, 0:19:00.720 --> 0:19:02.840 We've got to talk about credit and the rally that 0:19:02.880 --> 0:19:05.800 we have seen that's been a complete snap back of 0:19:05.840 --> 0:19:07.679 a lot of the losses that we saw earlier. Just 0:19:07.720 --> 0:19:09.960 to give you a sense of how big this snap 0:19:09.960 --> 0:19:14.040 back was, the extra yield that investors earned UH earned 0:19:14.240 --> 0:19:18.680 to possess junk bonds has compressed from eleven percent to 0:19:18.840 --> 0:19:22.000 seven and a half percentage points over rates in just 0:19:22.520 --> 0:19:25.320 a couple of weeks. Here there's a question hasn't gone 0:19:25.359 --> 0:19:27.600 too far? And the person to answer it is Tad Rafel, 0:19:27.680 --> 0:19:31.120 chief investment officer for fixed income at TCW with more 0:19:31.160 --> 0:19:34.680 than two billion dollars firm wide, joining us from Los Angeles. 0:19:34.800 --> 0:19:37.719 Had I'm so glad that you're the person we're speaking 0:19:37.760 --> 0:19:40.399 to right now. We've heard the Federal Reserve is going 0:19:40.440 --> 0:19:43.320 to start buying credit. But if Trainer has gotten ahead 0:19:43.320 --> 0:19:46.080 of themselves in terms of how broad and how deep 0:19:46.160 --> 0:19:49.800 and how far into below investment grade credit, the Federal 0:19:49.800 --> 0:19:53.520 Reserve will go. Of course, that's the sixty four trillion 0:19:53.560 --> 0:19:58.640 dollar question. I mean, I think the subtext is our investors, 0:19:58.800 --> 0:20:01.760 is the consensus exp patient out there that we are 0:20:01.800 --> 0:20:04.920 going to go back to January, that we're going to 0:20:04.960 --> 0:20:08.600 get a v bottom, that the health issues are going 0:20:08.600 --> 0:20:11.360 to be resolved in the relatively near term, and then 0:20:11.400 --> 0:20:15.360 we just resumed resume the historical trend line, and consequently 0:20:15.640 --> 0:20:19.360 the levels that we saw in the credit markets in January, 0:20:19.400 --> 0:20:22.480 according to that way of thinking, would be reasonably justifiable. 0:20:23.200 --> 0:20:26.480 I think that's unrealistic. I think that therefore, there is 0:20:26.520 --> 0:20:29.760 a lot of mispricing that's going on in the credit markets. 0:20:29.920 --> 0:20:33.440 And the reason that we believe that way is basically several. 0:20:33.840 --> 0:20:36.000 One reason is is that, first of all, a lot 0:20:36.040 --> 0:20:39.800 of uncertainty remains about when the global economy gets back 0:20:39.880 --> 0:20:42.680 up on its feet, and in any case, even if 0:20:42.720 --> 0:20:45.439 it does, it doesn't going to get all up on 0:20:45.480 --> 0:20:47.480 its feet at the same time. So you have kind 0:20:47.480 --> 0:20:51.399 of a rolling recession type situation where even if China 0:20:51.600 --> 0:20:54.280 is in fact getting a little bit better, other parts 0:20:54.320 --> 0:20:58.720 of the world evidently are sinking, unfortunately more so. And 0:20:58.800 --> 0:21:02.200 even if we do solve the public health problem, then 0:21:02.320 --> 0:21:05.600 we still have the reality that we went through a 0:21:05.680 --> 0:21:08.919 long and vast leveraging process over the course of the 0:21:09.000 --> 0:21:12.399 last five plus years. At least, let's say, there were 0:21:12.440 --> 0:21:15.560 a lot of excesses, and the virus, to a greater 0:21:15.680 --> 0:21:19.200 or lesser degree, isn't so much the cause of the 0:21:19.240 --> 0:21:21.520 repricing that we've seen in the credit markets, as it 0:21:21.600 --> 0:21:25.040 is also the catalyst for revealing a lot of those excesses. 0:21:25.320 --> 0:21:27.840 So I think that it's a fair statement to say 0:21:27.840 --> 0:21:31.040 that the FED has done its helicopter drops. It's certainly 0:21:31.040 --> 0:21:35.120 improved the liquidity environment. It's compressed liquidity premium. But can 0:21:35.119 --> 0:21:38.640 it fix fundamentally broken business models that are being revealed 0:21:38.680 --> 0:21:41.040 as we speak, No, it can't do that, all right, 0:21:41.080 --> 0:21:44.280 So tadd and you've been consistently I would say cautious, 0:21:44.320 --> 0:21:46.080 you know, over the last year so that we've been 0:21:46.400 --> 0:21:49.919 chatting on the fixing markets. What is your sense for 0:21:50.200 --> 0:21:52.400 defaults going forward? How do you think this is going 0:21:52.400 --> 0:21:54.280 to play out? And of course that's a I'm also 0:21:54.280 --> 0:21:55.760 asking you to kind of share with this kind of 0:21:55.760 --> 0:22:00.359 your economic outlook as well. Well. The if we begin 0:22:00.440 --> 0:22:02.800