WEBVTT - PGIM Is Selectively Buying Dip In Credit: Collins (Podcast) 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penl Podcast. I'm Paul swing you, 0:00:05.360 --> 0:00:07.680 along with my co host Lisa Brahma wits. Each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 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 --> 0:00:17.960 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:22.880 at Bloomberg dot com. Right now, expressed in markets extreme 0:00:22.960 --> 0:00:25.479 stress if you look at certain credit gauges, if you 0:00:25.520 --> 0:00:28.360 look at uh, certainly the sell off that is deepening, 0:00:28.400 --> 0:00:30.520 and but really the place where you're seeing stress or 0:00:30.640 --> 0:00:34.000 or perhaps the sort of rush of cash is in 0:00:34.000 --> 0:00:36.320 the treasury market, where you're seeing the biggest one day 0:00:36.400 --> 0:00:39.240 drop in thirty year yields since two thousand and nine 0:00:39.320 --> 0:00:43.440 at least, and you're seeing just in general, everyone reprice 0:00:43.640 --> 0:00:48.239 rates closer and closer to zero. Leno Shlietiev of Bloomberg 0:00:48.280 --> 0:00:50.680 Economics here with us and and Lena. I just want 0:00:50.680 --> 0:00:53.479 to get your response to what Larry Cudlow said, And 0:00:53.520 --> 0:00:56.200 he was talking about how strong the economy was heading 0:00:56.240 --> 0:00:58.639 into this and that it will be resilient and can 0:00:58.680 --> 0:01:02.560 recover quickly. Do you were grey well, we agree with 0:01:02.640 --> 0:01:05.080 him that it will be temporary in a sense that 0:01:05.720 --> 0:01:09.400 with the current policy response, the slowdown will soon transition 0:01:09.440 --> 0:01:12.960 into a contraction, and therefore the slow down part will 0:01:13.000 --> 0:01:17.920 indeed prove temporary. But back to your question, is the 0:01:18.000 --> 0:01:21.360 economy is strong enough? Going into that, I would say 0:01:21.400 --> 0:01:25.119 that the latest payrolls report did show that the economy 0:01:25.200 --> 0:01:29.160 had some strength, and this is the key premise for 0:01:29.240 --> 0:01:32.080 us to think that we will not deep into a recession, 0:01:32.480 --> 0:01:35.679 so at least our base case scenario. But the numbers 0:01:35.720 --> 0:01:38.600 today did not uh, you know, they were not as 0:01:38.600 --> 0:01:41.760 strong as uh it was looking at the first glance. 0:01:42.120 --> 0:01:45.280 So first of all, the number was inflated by the 0:01:45.319 --> 0:01:50.440 construction sector hiring, which was mainly due to weather which 0:01:50.520 --> 0:01:53.440 was very warm during this winter. So if you see 0:01:53.760 --> 0:01:57.880 this reversing in the spring, this will exacerbate the slow down. 0:01:58.040 --> 0:02:01.720 That will cause the services to slow down as well. 0:02:01.880 --> 0:02:05.040 So I would say, yes, the economy is relatively strong, 0:02:05.120 --> 0:02:09.239 but the response should be quick and not targeted. It 0:02:09.280 --> 0:02:12.320 should be a massive response if we want to avoid 0:02:12.320 --> 0:02:14.760 the recession at least. We're also very fortunate today to 0:02:14.760 --> 0:02:16.880 have in our Bloomberg and Actor Broker studio Mike Collins 0:02:16.960 --> 0:02:19.480 joining us Mike as a senior investment officer and senior 0:02:19.480 --> 0:02:23.160 portfolio manager for p JIM Fixed Income. Uh, Mike, thanks 0:02:23.160 --> 0:02:25.680 so much for joining us here. You guys have I'm 0:02:25.680 --> 0:02:28.000 gonna call it a good jillion and one dollars under management. 0:02:28.040 --> 0:02:30.520 You see the markets on a global scale. What are 0:02:30.560 --> 0:02:33.480 you seeing today and over the past couple of weeks. Yeah, well, 0:02:33.520 --> 0:02:37.400 you're finally starting to see the capitulation phase right up 0:02:37.480 --> 0:02:40.120 until just a couple of days ago, as we're talking 0:02:40.160 --> 0:02:43.320 to our high yield traders and portfolio managers and all 0:02:43.320 --> 0:02:45.680 of our different credit sectors, and we said, listen, what 0:02:45.760 --> 0:02:47.840 can you buy cheap? And they said, there's no real 0:02:48.080 --> 0:02:50.919 force selling yet. There aren't that many opportunities as much 0:02:50.919 --> 0:02:53.240 as you would think given the widening we've seen in 0:02:53.280 --> 0:02:55.880 credit spreads. But I think that's changing a little bit 0:02:55.880 --> 0:02:59.000 on the margin here, and we're actually in the mode 0:02:59.040 --> 0:03:02.320 of looking for opera tunities to add risk here. Right 0:03:02.760 --> 0:03:04.640 to Lena's point, I mean, I think there are are 0:03:04.720 --> 0:03:08.000 a few big considerations. One, the momentum we had in 0:03:08.000 --> 0:03:11.200 the economy was really solid, and every data point we 0:03:11.240 --> 0:03:14.799 get kind of reveals the strength going into this too. 0:03:15.320 --> 0:03:17.799 There's already been a lot of monetary stimulus, and there 0:03:17.800 --> 0:03:21.360 will be more. UH. Interest rates for corporates are much lower. 0:03:21.760 --> 0:03:26.359 Leverage loan issuers and borrowers see their funding costs automatically 0:03:26.400 --> 0:03:28.800 go down right because their yields are based off liebor 0:03:29.120 --> 0:03:33.800 so they go down instantaneously right to reduce their interest expense. Three, 0:03:33.840 --> 0:03:38.080 there will be a huge UH coordinated global policy response 0:03:38.120 --> 0:03:41.520 above and beyond what we're seeing from central banks. And 0:03:41.600 --> 0:03:44.800 four these things tend to be seasonal. This isn't like 0:03:44.840 --> 0:03:47.160 OH eight where you never saw the endgame where people 0:03:47.200 --> 0:03:49.839 were worried that maybe this is a nine thirties great 0:03:49.840 --> 0:03:52.240 depression in at last ten years. Here there is some 0:03:52.360 --> 0:03:56.240 seasonal aspects to this type of virus. So UM, I 0:03:56.280 --> 0:03:58.520 would bet in six months you're gonna look back and say, Wow, 0:03:58.560 --> 0:04:01.800 I wish I bought more stuff UH in the in 0:04:01.840 --> 0:04:04.440 the February and March of of two thousand twenty, Mike, 0:04:04.480 --> 0:04:07.240 Before I dive into exactly how you buy this dip 0:04:07.280 --> 0:04:09.360 and what gives you confidence that you're not catching a 0:04:09.400 --> 0:04:12.000 falling knife, I want to take a bigger picture of 0:04:12.280 --> 0:04:15.080 question about what Larry Cudlow is talking about and the 0:04:15.120 --> 0:04:19.040 fiscal response. I mean, what is the potential risk here 0:04:19.360 --> 0:04:22.800 that there is not a sufficient fiscal response, And that's 0:04:22.839 --> 0:04:26.320 something that's temporary becomes something much more permanent as companies 0:04:26.400 --> 0:04:29.240 run out of money and are unable to finance themselves 0:04:29.240 --> 0:04:31.760 at costs that are feasible. I mean, I'm looking at 0:04:31.760 --> 0:04:35.040 American airlines borrowing costs going from less than three to 0:04:35.080 --> 0:04:38.279 more than in a matter of days. How do you 0:04:38.320 --> 0:04:40.360 sort of save off that risk? Ye? So, so there 0:04:40.360 --> 0:04:43.479 are two to me, two big risks, right. One is 0:04:43.520 --> 0:04:46.479 that you actually have a big earnings contraction here. Right, 0:04:46.760 --> 0:04:49.799 so the IBADA or cash flow part of the leverage 0:04:49.839 --> 0:04:53.440 statistic debt to IBADA really plummets, and your leverage goes up, 0:04:53.480 --> 0:04:56.240 and you do get downgrades and you did get funding stresses. 0:04:56.279 --> 0:04:59.359 There too is a liquidity risk in the markets that 0:04:59.400 --> 0:05:02.559 you do get or capitulation and people panic and get 0:05:02.560 --> 0:05:05.080 out of the markets in big size. And we really 0:05:05.080 --> 0:05:07.840 have not seen that yet. Right. We've seen some big 0:05:07.880 --> 0:05:10.599 redemptions out of et f s and high yield and loans. 0:05:11.160 --> 0:05:14.080 Investment grade credit have generally until the last day or so, 0:05:14.160 --> 0:05:17.440 seeing big inflows as their yields are at new lows 0:05:17.440 --> 0:05:20.159 and their prices are up significantly. If there's a lot 0:05:20.160 --> 0:05:23.520 of for selling, which we really have not seen yet. Uh, 0:05:23.560 --> 0:05:25.640 then people have to scramble and raise money, and even 0:05:25.640 --> 0:05:28.360 the highest quality bonds, even the best securities, go down 0:05:28.400 --> 0:05:31.240 in price because you need to sell them to raise money. So, 0:05:31.440 --> 0:05:34.800 Lena Bloomberg Economics, your base case is not a recession. 0:05:35.240 --> 0:05:37.960 What are the data points that you're looking at that 0:05:38.800 --> 0:05:41.720 could push you into recession scenario? What are the key 0:05:41.720 --> 0:05:44.400 things you guys are looking sure, So we recently downgraded 0:05:44.680 --> 0:05:47.920 growth forecast to just one percent in the first half 0:05:48.000 --> 0:05:51.080 of the year. In terms of GDP, we were above 0:05:51.160 --> 0:05:55.159 two I think just before it all started. So I 0:05:55.160 --> 0:05:59.560 think we need to look at how growth is evolving. 0:05:59.640 --> 0:06:02.719 So if we get to a stall speed for year 0:06:02.720 --> 0:06:04.840 over year growth in the vicinity of one and a 0:06:04.880 --> 0:06:09.120 half percent, that's where this is a tipping point basically. 0:06:09.160 --> 0:06:13.800 So if growth slows down below that, uh, that basically 0:06:13.839 --> 0:06:17.120 passes the point of no return and we will go 0:06:17.200 --> 0:06:20.559 into a recession. So that's why, you know, I think 0:06:21.560 --> 0:06:24.560 policy has to be more proactive. Look at what the 0:06:24.600 --> 0:06:27.680 fit did. They were proactive. They cut rates, So you 0:06:27.680 --> 0:06:29.719 didn't you weren't necessarily impressed by what you just heard 0:06:29.839 --> 0:06:35.160 absolutely not. I think it does require a massive policy response, 0:06:35.240 --> 0:06:38.200 not a targeted one. While they're looking at the data 0:06:38.240 --> 0:06:40.799 and collecting all of the data that he was talking about, 0:06:40.880 --> 0:06:42.800 you know, the FED will have to cut to a 0:06:42.920 --> 0:06:46.920 zero zero low bound and how much ammunition will they 0:06:46.960 --> 0:06:51.159 have left. So the earlier the fiscal response comes, the 0:06:51.240 --> 0:06:53.919 better it is. So I want to get your sense 0:06:53.960 --> 0:06:56.800 here because right now you talked about liquidity pressures that 0:06:56.800 --> 0:06:59.440 we haven't really seen it so far that we actually 0:06:59.440 --> 0:07:02.320 say in those to investment grade credit, the high yield 0:07:02.320 --> 0:07:05.479 bond outflows have been controlled. Trading in the market has 0:07:05.520 --> 0:07:08.920 withstood it. Today, however, we are starting to see a 0:07:08.960 --> 0:07:12.000 little bit of a different tone in markets. What are 0:07:12.000 --> 0:07:13.920 you looking for and how close do you think we 0:07:13.960 --> 0:07:17.120 are to some sort of liquidity event. Yeah, I think 0:07:17.160 --> 0:07:20.240 we're still far away from that. I mean, even this morning, 0:07:20.280 --> 0:07:24.080 we are seeing people looking for for offerings, looking for 0:07:24.160 --> 0:07:26.920 bonds to buy, right I mean, we've instructed our high 0:07:27.000 --> 0:07:30.040 yield team to really try to be aggressive here and 0:07:30.120 --> 0:07:34.200 buy our favorite higher quality high yield bonds um at 0:07:34.320 --> 0:07:37.360 much wider spreads and much lower prices. And believe me, 0:07:37.400 --> 0:07:39.480 it's been much more difficult than you would think. Based 0:07:39.480 --> 0:07:41.640 on what you see on the screens right bid offer 0:07:41.680 --> 0:07:46.600 spreads have widened, and we still see credit investors recognizing 0:07:46.880 --> 0:07:49.080 that low interest rates are probably going to be here 0:07:49.120 --> 0:07:51.440 for a long time. Right right now, the Fed funds 0:07:51.440 --> 0:07:55.080 futures market are basically pricing in zero funds rate um 0:07:55.200 --> 0:07:57.560 for the next year and a half or so. And 0:07:57.640 --> 0:08:00.840 in that environment, again, if there's a dissipation in the 0:08:00.840 --> 0:08:03.360 spread of the virus, and if there's any stabilization and 0:08:03.400 --> 0:08:06.480 growth in six months from now, that reach for yield 0:08:06.480 --> 0:08:09.160 will be will be dramatic. And you are seeing people 0:08:09.240 --> 0:08:11.360 looking to buy on these dips still in the in 0:08:11.400 --> 0:08:13.880 the credit markets, at least in the higher quality credits, 0:08:14.080 --> 0:08:17.320 and we're in that camp. So, Elena, if it is 0:08:17.480 --> 0:08:21.920 up to the central banks, we've seen the fed B preemptive. 0:08:21.960 --> 0:08:24.480 What are you saying around the world, there's our coordination there. 0:08:24.520 --> 0:08:26.960 Do you think there needs to be more? Uh? If 0:08:26.960 --> 0:08:29.720 the fiscal maybe is not on the front burner right now, 0:08:29.840 --> 0:08:32.880 I'm not a big believing that. Actually, yeah, if it 0:08:32.880 --> 0:08:35.560 gets to a credit crunch and things like that, yes, 0:08:35.640 --> 0:08:39.400 central banks will need to coordinate some sort of currency 0:08:39.480 --> 0:08:43.000 swaps and other tools they that they engaged during the 0:08:43.040 --> 0:08:46.120 financial crisis, but in terms of the policy, so we 0:08:46.320 --> 0:08:49.560 still have some ammunition left in terms of interest rates. 0:08:49.679 --> 0:08:53.000 So each central bank will do what they need to 0:08:53.040 --> 0:08:57.240 do for their respective economies, but you know, the fiscal 0:08:57.320 --> 0:09:00.640 policies again in each different and I mean, we'll have 0:09:00.679 --> 0:09:03.440 to engage. So I don't really see that much in 0:09:03.520 --> 0:09:06.000 terms of what can be done in terms of coordination 0:09:06.120 --> 0:09:09.520 rather than just agreeing that the response should be a 0:09:09.600 --> 0:09:12.320 big one. Mike, I'm struck by the idea that we 0:09:12.400 --> 0:09:15.840 are looking at bigger companies still having access to credit markets, 0:09:16.120 --> 0:09:19.120 and we're looking at the prospect of small to medium 0:09:19.200 --> 0:09:23.079 size not businesses not having the same sort of financing function. 0:09:23.400 --> 0:09:26.840 Whether banks are hoarding cash, whether their inventories go down, 0:09:26.840 --> 0:09:29.920 they have to hold more capital in order to preserve 0:09:30.000 --> 0:09:33.800 their capital buffers. I'm just wondering, from your perspective, there's 0:09:33.840 --> 0:09:36.320 been all this money raised in the private debt markets. 0:09:36.720 --> 0:09:38.920 Is this going to be an opportunity or is this 0:09:39.000 --> 0:09:41.400 going to be another risk factor as we start to 0:09:41.400 --> 0:09:44.240 see weakness in some of these portfolios. Yeah, I mean, 0:09:44.280 --> 0:09:47.200 we've definitely for a long time now been concerned and 0:09:47.280 --> 0:09:51.000 raise some concerns about the huge influx of money into 0:09:51.080 --> 0:09:55.160 private debt strategies. I think these are loans too, relatively 0:09:55.200 --> 0:09:59.839 speculative companies, pretty concentrated portfolios of loans in some k 0:10:00.000 --> 0:10:02.559 as in summer on a lever basis, And if you 0:10:02.640 --> 0:10:06.520 do actually see credit cracks in some of those portfolios, 0:10:07.080 --> 0:10:09.040 I think it could get a little bit ugly. Right, So, 0:10:09.120 --> 0:10:10.400 I think that is one of the parts of the 0:10:10.480 --> 0:10:14.160 market that's a little susceptible to to some weakness here. 0:10:14.320 --> 0:10:16.600 But again, the policy response I think will be targeted 0:10:16.640 --> 0:10:20.520 to provide liquidity and financing to some of these smaller companies. 0:10:20.559 --> 0:10:22.880 Even in China they have these things called coronavirus bonds 0:10:23.120 --> 0:10:26.520 where companies that need the capital are financing their their 0:10:26.600 --> 0:10:29.120 businesses in their capital shotfalls at really low interest rates. 0:10:29.120 --> 0:10:31.199 But is there a bigger takeaway here the idea that 0:10:31.280 --> 0:10:33.679 all of this money was raised for these private credit 0:10:33.760 --> 0:10:36.520 funds that sort of we're supposed to supplant the big 0:10:36.600 --> 0:10:39.199 banks and their lending function, and this is the time 0:10:39.280 --> 0:10:41.959 that they should be swooping in and they should be saying, 0:10:42.280 --> 0:10:44.720 we have money, we have a record amount of dry powder, 0:10:45.000 --> 0:10:48.040 let's deploy it in order to make these investments. You know, 0:10:48.559 --> 0:10:50.560 what does it say if they are not, or if 0:10:50.559 --> 0:10:53.000 they are incapable of doing so because they're trying to 0:10:53.080 --> 0:10:56.439 meet marching calls, are other sort of liquidity issues, or 0:10:56.559 --> 0:10:59.640 just frankly default in their existing portfolios. Yeah, I mean 0:10:59.800 --> 0:11:02.280 lee in my dream world, right, the FED will tap 0:11:02.360 --> 0:11:04.360 the banks on the shoulders and say, hey, guys, this 0:11:04.559 --> 0:11:07.000 is why we forced you to have so much capital, 0:11:07.080 --> 0:11:08.679 this is why we forced you to have so much 0:11:08.720 --> 0:11:11.760 liquidity and your asset qualities pristine. You should actually be 0:11:11.880 --> 0:11:14.800 supporting the economy now. Right. In all past cycles, the 0:11:14.840 --> 0:11:18.120 banks were piling onto the weakness by being forced sellers 0:11:18.440 --> 0:11:20.280 because they had all the loans and they had a 0:11:20.360 --> 0:11:22.120 lot of leverage in the system. They are not in 0:11:22.240 --> 0:11:24.480 that position. So our long running view has been the 0:11:24.520 --> 0:11:27.880 banks will not make things worse, and maybe they can 0:11:27.880 --> 0:11:30.800 actually provide support. Here on the flip side, will some 0:11:30.960 --> 0:11:34.199 of these private credit funds or these big alternative investment 0:11:34.240 --> 0:11:37.960 funds become systemically risky in a new kind of way 0:11:38.160 --> 0:11:39.880 it remembers so, so a lot of these are are 0:11:39.960 --> 0:11:42.800 locked up. These are long term pools that are locked up. 0:11:42.880 --> 0:11:45.280 That is really important. Right, This is not oh eight, 0:11:45.360 --> 0:11:47.839 This is not a global margin call about to happen 0:11:48.280 --> 0:11:51.400 even the bank loan market is owned almost largely now 0:11:51.480 --> 0:11:54.000 by c l os. This is long term money that 0:11:54.200 --> 0:11:56.679 is locked up right. They are not for sellers, and 0:11:56.760 --> 0:11:58.959 I think that's really important. I think the structure of 0:11:59.040 --> 0:12:01.000 the markets are much different than they were in a 0:12:01.080 --> 0:12:03.319 weight You don't have the inherent leverage in the system 0:12:03.400 --> 0:12:06.240 that's going to force a lot of selling and a 0:12:06.320 --> 0:12:08.760 margin calls. I think that will help lends stability to 0:12:08.840 --> 0:12:12.880 the system ultimately. Elena Larry Cutler rightfully so on Bloomberg 0:12:12.960 --> 0:12:16.040 Television talking up the strong jobs numbers two seventy three 0:12:16.040 --> 0:12:19.559 thousand jobs. Obviously that's likely to be the last jobs 0:12:19.559 --> 0:12:22.280 report that we get pre Corona crisis, if you will, 0:12:22.720 --> 0:12:25.439 what is the your outloo of Bloomberg economics for kind 0:12:25.480 --> 0:12:27.640 of how this could trend over the next several months. 0:12:28.040 --> 0:12:31.240 So we looked at the numbers just based on the 0:12:31.360 --> 0:12:35.599 financial shock before even all the quarantine measures kicking. So 0:12:36.400 --> 0:12:40.839 that implies a reduction to the average pasing jobs to 0:12:41.000 --> 0:12:44.559 something like a hundred and fifty thousand on a trend basis. 0:12:44.960 --> 0:12:50.080 But when we start seeing all the services spending slowing down, 0:12:50.160 --> 0:12:53.640 you know, people not going out, people like canceling conferences 0:12:54.040 --> 0:12:56.599 and so on. That will probably get us to the 0:12:56.720 --> 0:13:02.439 point to the replacement rate of around hundreds thousand months. 0:13:02.720 --> 0:13:06.160 So that would mean that the unemployment rate will stop 0:13:06.240 --> 0:13:09.959 falling and potentially could rise, uh, you know, causing a 0:13:10.040 --> 0:13:12.800 growth recession. Mike, just real quick here to wrap it 0:13:12.840 --> 0:13:14.520 all up and to tie it together. You said that 0:13:14.559 --> 0:13:17.280 you were selectively buying on the dip. When do you 0:13:17.400 --> 0:13:20.320 go in and just say buy everything? I mean, are 0:13:20.360 --> 0:13:23.800 we getting close to that point when you talk about capitulation? Yeah, 0:13:23.920 --> 0:13:27.599 you do it when um, you have huge blocks of 0:13:27.760 --> 0:13:31.640 bonds for sale, names you like that you own that 0:13:31.760 --> 0:13:34.200 are down five or ten points and you can actually 0:13:34.320 --> 0:13:36.400 buy them and execute. And we have not seen that 0:13:37.120 --> 0:13:39.319 at all to this point. Right, And that's when you 0:13:39.440 --> 0:13:41.920 really go in with with both feet and and maybe 0:13:42.000 --> 0:13:45.840 that will happen my senses, it probably won't my counts. 0:13:45.880 --> 0:13:47.800 Thanks so much for joining us. We really appreciate you 0:13:48.000 --> 0:13:51.320 making the trip across the river from the Jersey side 0:13:51.360 --> 0:13:53.599 over here to our Bloomberg Interactor Broker studio. Mike's a 0:13:53.840 --> 0:13:57.280 senior investment officer and senior portfolio manager for PIGIM Fixed 0:13:57.320 --> 0:14:01.120 Income and you Sliva Senior you s Economist for Bloomberg 0:14:01.120 --> 0:14:03.560 Economics both joining us here again in our Bloomberg eleven 0:14:03.559 --> 0:14:16.240 three year studio. Right now in focus, we're looking at markets. 0:14:16.240 --> 0:14:18.480 They're clawing back some of their earlier losses, so we're 0:14:18.480 --> 0:14:21.280 not seeing as steep of a decline. Actually a pretty 0:14:21.320 --> 0:14:24.400 significant pairing of the laws. Still solidly in the redd 0:14:24.520 --> 0:14:27.160 SMP down one point eight percent, nastacked down at one 0:14:27.240 --> 0:14:32.000 point seven percent. Oil however, very much in focus, with 0:14:32.120 --> 0:14:35.360 crude prices absolutely tumbling down at one point more than 0:14:35.440 --> 0:14:39.480 seven percent after OPEC plus did not come to an 0:14:39.520 --> 0:14:43.520 agreement on production cuts. OPEC, remember, agreed to production cuts alone. 0:14:43.920 --> 0:14:47.160 They went to alone, hoping that Russia would join up 0:14:47.320 --> 0:14:50.280 and do the same, but Russia did not. Joining us now. 0:14:50.400 --> 0:14:53.920 Julian Lee, Bloomberg oil strategist in London, Julian, can you 0:14:53.960 --> 0:14:55.960 just give us a sense of what we learned today? 0:14:57.560 --> 0:15:00.400 I think we've learned that this is an organization appears 0:15:00.440 --> 0:15:05.960 to be in complete disarray. Um. What OPEC said yesterday, um, 0:15:06.240 --> 0:15:11.280 sort of late afternoon, was that they were proposing a 0:15:11.680 --> 0:15:14.120 cut of one and a half million barrels a day, 0:15:14.640 --> 0:15:17.480 of which the OPEC members would take a million, and 0:15:17.720 --> 0:15:21.320 then non OPAQUE partners would take the other half million 0:15:22.200 --> 0:15:25.680 UM that cut would would last throughout the second quarter, 0:15:25.800 --> 0:15:28.680 so till the end of June. UM. They then sort 0:15:28.680 --> 0:15:32.200 of hastily got together in an informal gathering in the 0:15:32.320 --> 0:15:37.720 evening UM and issued another press statement later later in 0:15:37.800 --> 0:15:39.600 the day to say that in fact they were going 0:15:39.680 --> 0:15:41.880 to propose that this one and a half million barrel 0:15:41.920 --> 0:15:45.560 a day cut be extended to the end of t UM. 0:15:45.760 --> 0:15:49.000 None of these discussions involved Russia or the other UM 0:15:49.160 --> 0:15:53.240 non opaque members. The Russian alldminister arrived back in Vienna 0:15:53.320 --> 0:15:55.560 today for a meeting that was scheduled to start at 0:15:55.640 --> 0:15:59.680 ten o'clock UM. It eventually started at round about three 0:15:59.800 --> 0:16:02.680 p m. UM. He spent the time before that in 0:16:02.960 --> 0:16:07.240 in bilateral meetings, mostly with Saudi Arabia's or minister. We 0:16:07.440 --> 0:16:10.600 hear that in the last fifteen minutes or so the 0:16:10.720 --> 0:16:15.160 meeting has broken up without an agreement. UM. And this 0:16:15.400 --> 0:16:18.000 is I mean in some senses this is this is 0:16:18.640 --> 0:16:22.600 even worse than it sounds for for OPEC and its 0:16:22.760 --> 0:16:26.680 and its allies, because UM, their current agreement to cut 0:16:26.840 --> 0:16:30.320 two point one million barrels a day expires at the 0:16:30.440 --> 0:16:33.240 end of this month. UM. And so without an agreement, 0:16:33.680 --> 0:16:37.320 at least on paper, those two point one million barrels 0:16:37.320 --> 0:16:39.360 are going to come back onto the market. So not 0:16:39.520 --> 0:16:41.200 only are we not going to get a deeper cut, 0:16:41.320 --> 0:16:44.160 but we may well get oil coming back. So Julian, 0:16:44.200 --> 0:16:46.440 that just begs the question, how did we get here? 0:16:46.480 --> 0:16:48.800 There was a time when OPEC or OPEC plus was 0:16:48.880 --> 0:16:52.920 pretty cohesive, able to push things through. What's changed here? 0:16:54.640 --> 0:16:56.600 I think that's a very good question, and I think 0:16:56.680 --> 0:17:00.800 it's it's very unclear at the moment what has changed. 0:17:01.640 --> 0:17:05.359 Ministers and their delegates are are being very close mouthed 0:17:05.440 --> 0:17:08.840 at the moment um. They're clearly dealing with the situation 0:17:08.960 --> 0:17:12.960 that that none of them likes being in. I think 0:17:13.080 --> 0:17:16.800 that that perhaps what has changed is that there are 0:17:17.080 --> 0:17:22.560 very different views about how to deal with a crisis 0:17:22.680 --> 0:17:26.399 that is created by a collapse in demand. Um. Saudi 0:17:26.400 --> 0:17:31.840 Arabia wants to make a corresponding cut in supply to 0:17:31.960 --> 0:17:34.560 try and balance markets, to try and prop up prices 0:17:34.600 --> 0:17:38.560 a bit. The sense that we're getting coming from from Russia, 0:17:38.560 --> 0:17:41.680 and it really is only a sense um, is that 0:17:42.000 --> 0:17:45.240 they don't feel that that is perhaps the right response. 0:17:45.440 --> 0:17:48.680 That what the world needs is a period of lower 0:17:48.760 --> 0:17:53.920 oil prices hopefully to stimulate some demand, whether that is um, 0:17:54.400 --> 0:17:56.800 you know, final end user demand, or whether it is 0:17:56.880 --> 0:18:00.680 countries like China buying more oil to put into stockpiles um. 0:18:00.880 --> 0:18:05.040 And there may be a real philosophical difference around how 0:18:05.200 --> 0:18:08.760 you proceed in an environment like this. There's also a 0:18:08.880 --> 0:18:13.120 question about whether OPEC has completely lost control in every way, 0:18:13.280 --> 0:18:16.639 because ultimately, this is not a production issue. This is 0:18:16.760 --> 0:18:20.200 a demand issue, and there is going to be a 0:18:20.359 --> 0:18:24.560 decline in demand that we've seen escalate as travel gets 0:18:24.600 --> 0:18:28.200 rearranged and as global industries do start to slow in 0:18:28.240 --> 0:18:30.800 the wake of the coronavirus. I'm just wondering, from your 0:18:30.960 --> 0:18:34.959 perspective how that sort of factors into the calculus here. 0:18:35.040 --> 0:18:38.080 The idea that even if they cut production a lot, 0:18:38.640 --> 0:18:42.560 it may not make a material difference in the short run. Yeah, 0:18:42.600 --> 0:18:44.879 I think that is That is a real concern, and 0:18:44.960 --> 0:18:47.280 I think that's one of one of the Russian concerns. 0:18:47.400 --> 0:18:50.280 You know. The view is that, yes, there's going to 0:18:50.359 --> 0:18:53.959 be a very significant hit to oil demand. We can 0:18:54.119 --> 0:18:57.640 we can see that happening already. UM. But the view 0:18:57.920 --> 0:19:01.280 perhaps in Moscow is that bad as it may be, 0:19:01.840 --> 0:19:04.440 it is going to be temporary you know, this is 0:19:04.600 --> 0:19:09.560 this is not a structural um change in in demand. 0:19:09.720 --> 0:19:12.639 This is this is a response to a very specific 0:19:13.400 --> 0:19:17.560 um in this case virus outbreak. But it is something 0:19:17.640 --> 0:19:21.320 that will have an end and and demand will return UM. 0:19:21.400 --> 0:19:24.040 And I think this, this perhaps is part of the 0:19:24.119 --> 0:19:28.360 difference that is emerging. So Julian, there's a I've heard 0:19:28.440 --> 0:19:30.879 some conspiracy theories out there that this might be Russia 0:19:31.320 --> 0:19:34.520 maybe trying to put additional pressure on the US shell 0:19:34.680 --> 0:19:38.080 industry given the precarious financial position of the many of 0:19:38.119 --> 0:19:40.399 the producers there. Does that have any Does that ring 0:19:40.440 --> 0:19:43.000 true to you at all? I don't know. I mean, 0:19:43.040 --> 0:19:46.000 I I think it's always tempting to you know, to 0:19:46.240 --> 0:19:53.159 to find um conspiracies, to to build around anybody's position. Uh. 0:19:53.440 --> 0:19:58.000 You know another country that that may have desires to 0:19:58.560 --> 0:20:02.479 to cause damage to the U S shale sector is Iran. 0:20:02.640 --> 0:20:06.679 But Iran has been wholeheartedly behind output cuts. I mean, 0:20:06.800 --> 0:20:08.640 it's not going to have to make any because it's 0:20:08.800 --> 0:20:12.439 producing really only pretty much what it needs for its 0:20:12.520 --> 0:20:16.680 domestic consumption. UM. But Iran isn't trying to to engineer 0:20:16.760 --> 0:20:20.359 a collapse in oil prices to to hurt US shale. 0:20:20.400 --> 0:20:23.959 And I personally, I doubt that that's the Russian motivation. 0:20:24.760 --> 0:20:26.639 So right now I'm looking I just to reset here, 0:20:27.080 --> 0:20:31.160 Crude oil absolutely tumbling. Crude traded on the IMAX down 0:20:31.240 --> 0:20:36.320 to forty cents a barrel, That is down by three 0:20:36.400 --> 0:20:39.720 dollars and fifteen cents just today, giving you a sense. 0:20:39.800 --> 0:20:43.040 Brent traded in London at forty six dollars eighty two 0:20:43.119 --> 0:20:45.679 cents of barrel. I'm wondering, what is the lower bound 0:20:45.800 --> 0:20:50.040 here for this demand side crash that we're seeing play 0:20:50.119 --> 0:20:53.200 out across markets. Well, I think, you know, we We've 0:20:53.280 --> 0:20:56.119 had a number of analysts coming out with with all 0:20:56.200 --> 0:20:59.600 sorts of numbers UM. You know, I I've seen numbers 0:21:00.320 --> 0:21:04.320 suggesting that prices will quite easily fall below thirty dollars 0:21:04.320 --> 0:21:07.680 a barrel. I've seen, you know, people saying that we're 0:21:07.760 --> 0:21:12.080 in for a return to the collapses that we've seen 0:21:12.119 --> 0:21:14.600 in the past of of you know, really low double 0:21:14.680 --> 0:21:18.800 digits UM. And I think, you know, very much is 0:21:18.840 --> 0:21:24.320 going to depend on how individual producers respond to UM 0:21:24.440 --> 0:21:26.640 what appears to be a failure to reach a deal. 0:21:27.400 --> 0:21:30.600 Does this mean that Saudi Arabia is going to abandon 0:21:30.640 --> 0:21:32.920 its own output restraint? Are we going to see Saudi 0:21:32.920 --> 0:21:36.640 Arabia pumping more UM. That would certainly, I think, push 0:21:36.760 --> 0:21:40.880 prices down. If we continue to see restraint within OPAQ, 0:21:41.000 --> 0:21:44.439 that that may um, you know, give a little bit 0:21:44.480 --> 0:21:47.359 of support to prices. But I think that, you know, 0:21:47.520 --> 0:21:50.240 the really big issue at the moment is is just 0:21:50.520 --> 0:21:54.359 how fast um and and how widespread the collapse in 0:21:54.480 --> 0:21:56.800 demand is going to be. And that is still an 0:21:56.840 --> 0:22:00.560 evolving picture as as this virus spreads around the world. 0:22:01.200 --> 0:22:02.840 Julian Lee, thank you so much for joining us. We 0:22:02.920 --> 0:22:06.080 really appreciate your thoughts here. Julian Lee's oil strategies for 0:22:06.160 --> 0:22:18.320