WEBVTT - Surveillance: Market Plunge With El-Erian 0:00:06.320 --> 0:00:12.960 Ye, Welcome to the Bloomberg Surveillance Podcast. I'm term Keene 0:00:13.480 --> 0:00:17.560 Jay Lee. We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:28.040 Bloomberg dot Com, and of course, on the Bloomberg good 0:00:28.080 --> 0:00:30.360 friend of mine, a good friend of the program, of course, 0:00:30.400 --> 0:00:32.280 and a gentleman then ignored the happy talk of the 0:00:32.320 --> 0:00:34.280 v shaped recovery in the middle of February when the 0:00:34.320 --> 0:00:37.440 equity market was hitting all time highs. A gentleman who said, 0:00:37.479 --> 0:00:40.840 do not buy that deep when many people ventured back 0:00:40.840 --> 0:00:43.600 in as we got that initial correction, I'm pleased to 0:00:43.640 --> 0:00:46.760 say he joins us now. Mohammad al Arian, Alliance chief 0:00:46.800 --> 0:00:51.440 economic advisor and Bloomberg opinion columnist. Mohammed, Let's begin with credit. 0:00:51.520 --> 0:00:53.600 Why is that so much of a bigger focus on 0:00:53.600 --> 0:00:56.280 a morning like this morning, Because it is the way 0:00:56.320 --> 0:01:00.600 in which the disruptions will transmit who are not just 0:01:00.800 --> 0:01:05.200 market segments, but the real economy. Credit has been vulnerable 0:01:05.240 --> 0:01:08.480 because it has been very decoupled from the underlying fundamentals. 0:01:08.959 --> 0:01:11.479 So when you shock it, as it's being shocked right 0:01:11.520 --> 0:01:18.320 now by a combination of no economic anchor, no technical anchor, 0:01:18.360 --> 0:01:21.280 and no policy anchor. What you're going to get is 0:01:21.520 --> 0:01:27.240 a liquidity price gapping and the closure of the primary 0:01:27.400 --> 0:01:30.160 issuance market. The primary has been seized that for a 0:01:30.160 --> 0:01:32.280 couple of weeks. It opened a little bit last week. 0:01:32.560 --> 0:01:34.720 Let's some pick some of these different themes. I want 0:01:34.760 --> 0:01:36.960 to start with the parallel that we can draw at 0:01:37.000 --> 0:01:42.040 the moment. Clearly we've gone beyond December. It's fifteen sixteen, 0:01:42.160 --> 0:01:43.840 the last time we had a crude route and a 0:01:43.880 --> 0:01:47.320 growth shark. Is that a decent playbook for you right now, Mohammed? 0:01:47.440 --> 0:01:51.200 Or is this radically different? It is decent because that 0:01:52.160 --> 0:01:55.200 fall in oil prices was triggered by the same thing 0:01:55.680 --> 0:01:58.559 that this one was, which is the decision of Saudi 0:01:58.560 --> 0:02:03.080 Arabia to no longer play the swing producer role in 0:02:03.160 --> 0:02:07.360 an attempt to imposet discipline on other oil producers. So 0:02:07.400 --> 0:02:12.160 the cause is the same. However, the context is more difficult, 0:02:12.240 --> 0:02:16.359 first because global demand is slipping very quickly, and second 0:02:17.000 --> 0:02:22.560 because now you need to Russia two turn around in 0:02:22.600 --> 0:02:25.400 a very humiliating fashion. So this one is going to 0:02:25.440 --> 0:02:27.600 be a little bit trickier for Saudi Arabia to achieve 0:02:27.680 --> 0:02:31.200 what is trying to achieve Muhamadalarian with his folks with aliens, 0:02:31.200 --> 0:02:33.520 and of course writing for Bloomberg Opinion, of course joining 0:02:33.560 --> 0:02:37.440 Cambridge University here in the Autumn Folks. One of the 0:02:37.480 --> 0:02:39.280 books you can read in this if you want to 0:02:39.280 --> 0:02:42.680 grab onto something is Dr Larian is The Only Game 0:02:42.720 --> 0:02:45.400 in Town. Look for the movie fourth of July two 0:02:45.440 --> 0:02:49.400 thousand twenty two. I believe Dicaprios in that movie Dr 0:02:49.520 --> 0:02:52.400 Larian in the Only Game in Town. Let me quote 0:02:52.400 --> 0:02:56.240 from chapter one. Like ancient doctors who tried to explain 0:02:56.280 --> 0:03:00.959 the causes of diseases while knowing nothing about germs or acteria, 0:03:01.120 --> 0:03:05.160 academics sought to describe the functioning of developed economies, etcetera. 0:03:05.400 --> 0:03:09.480 The great Ferdinando Giuliano who writes for Bloomberg Opinion as well. 0:03:09.760 --> 0:03:12.520 How are we doing with the germs and bacteria this morning? 0:03:12.600 --> 0:03:16.239 How are our institutions doing and understanding where we are? 0:03:17.639 --> 0:03:20.799 But I'm starting to wake up to where we are? Um, 0:03:20.840 --> 0:03:25.720 But they are having to play massive catch up. Tom, 0:03:25.760 --> 0:03:28.080 You and I have been discussing this for years. We've 0:03:28.120 --> 0:03:32.919 overrelied on central banks. Central banks themselves got caught hostage 0:03:33.040 --> 0:03:37.440 by markets. We lost a lot of policy flexibility, and 0:03:37.520 --> 0:03:41.080 most importantly, we did not invest in what genuinely produces 0:03:41.160 --> 0:03:44.320 economic growth, so we have massive catch up to play. 0:03:44.480 --> 0:03:47.960 It might be done, but it requires a complete change 0:03:47.960 --> 0:03:51.440 in mindset. The single most important question Dr Larion at 0:03:51.480 --> 0:03:54.520 Davos was John Faraoh to a guy running a hedge fund, 0:03:54.880 --> 0:03:57.320 and he said, the sickle the cycles out there, the 0:03:57.360 --> 0:04:01.480 boom bus don't function the same at zero bound. We're 0:04:01.480 --> 0:04:04.040 more at the zero bound than we were in January. 0:04:04.720 --> 0:04:08.080 In Switzerland, we're at the zero bound. Does a cyc 0:04:08.160 --> 0:04:12.800 locality of the financial system still work? Oh? Absolutely, and 0:04:12.800 --> 0:04:14.880 you're gonna see it. We're gonna overshoot on the way 0:04:14.920 --> 0:04:18.760 down because technicals are now in control. And the big 0:04:18.880 --> 0:04:21.839 risk is not only do we converge quickly to the 0:04:21.880 --> 0:04:25.560 most sluggish fundamentals from elevated asset prises, but we overshoot 0:04:25.600 --> 0:04:29.000 them so well. Cycles were never dead. I think we 0:04:29.160 --> 0:04:32.920 got complacent in so many ways, And the last eight 0:04:32.960 --> 0:04:35.960 weeks illustrate to you how complacent we became. You had 0:04:36.000 --> 0:04:38.760 that comments out of Davos. We had a G twenty 0:04:38.839 --> 0:04:43.680 meeting in which the coronavirus was hardly discussed. And now 0:04:43.720 --> 0:04:46.560 we're all waking up to the realities on the ground. 0:04:46.680 --> 0:04:49.479 Can we just talk about the economics affair just very quickly, 0:04:49.480 --> 0:04:52.200 Mahabted's something you've written about over the weekend, and I 0:04:52.200 --> 0:04:53.800 think it's something that would be of interest to our 0:04:53.839 --> 0:04:58.360 audience as well. Walk us through that dynamic. It's very simple. 0:04:58.440 --> 0:05:01.799 When you are taking out of your comfort zone, behavioral 0:05:01.880 --> 0:05:06.320 scientists will tell you two reactions are most likely paralysis 0:05:07.240 --> 0:05:10.240 and insecurity. And we are being taken out of our 0:05:10.279 --> 0:05:13.640 comfort zone by the coronavirus, which means that we are 0:05:13.760 --> 0:05:17.559 paralyzed in terms of economic activity, which means we become 0:05:17.600 --> 0:05:23.040 so insecure that we become two risker verse. We exaggerate 0:05:23.600 --> 0:05:29.040 the probability of getting sick, and that results in demand 0:05:29.560 --> 0:05:33.400 and supply destruction. I remember where the outset of this 0:05:33.520 --> 0:05:36.560 coronavirus sphere. I told you guys on the radio, and 0:05:36.600 --> 0:05:38.760 I remember exactly where I was. I was at an 0:05:38.760 --> 0:05:41.839 airport when I told you. Remember the notion of economic 0:05:41.960 --> 0:05:47.880 sudden stops. It doesn't occur in modern based economies. It 0:05:47.920 --> 0:05:51.760 occurs mostly in fragile and sales states. But when it occurs, 0:05:52.400 --> 0:05:56.359 it is particularly dangerous because it destroys both demand and 0:05:56.440 --> 0:05:59.760 supply and that is what we're living through right now. Mohammed, 0:06:00.040 --> 0:06:02.919 Let's talk about the salve to that culture of fear, 0:06:02.960 --> 0:06:05.760 that fear that we see pervading through markets, that we 0:06:05.839 --> 0:06:07.800 see when you go to the grocery store and you 0:06:07.839 --> 0:06:10.440 see pure l being hoarded behind the counter with a 0:06:10.480 --> 0:06:13.479 sign that says only three per customer. I want to 0:06:13.480 --> 0:06:16.280 talk about the FEDS role and Boston Feds. Rose and 0:06:16.360 --> 0:06:20.120 Gren on Friday came out and hinted at the potential 0:06:20.160 --> 0:06:22.080 for the FED to engage in e c B and 0:06:22.160 --> 0:06:26.520 Bank of Japan style asset purchases, saying, in a situation 0:06:26.520 --> 0:06:29.440 where both short term interest rates conten your treasury rates 0:06:29.480 --> 0:06:32.160 approach the zero lower bound, allowing the FED to purchase 0:06:32.240 --> 0:06:35.440 a broader range of assets could be important. Do you 0:06:35.520 --> 0:06:39.479 foresee the possibility of the FED buying corporate bonds and stocks? 0:06:39.520 --> 0:06:45.440 From here? I foresee whatever it takes policy approach that 0:06:45.680 --> 0:06:49.360 is gonna be both in central banks and government agency. 0:06:49.400 --> 0:06:52.599 But having said that, it's important to understand what the 0:06:52.640 --> 0:06:57.960 FET can and cannot do. The set can support balance feets. 0:06:58.480 --> 0:07:02.200 It can do so, it can put money in people's 0:07:02.240 --> 0:07:06.320 hands and support balances. It cannot restore the type of 0:07:06.360 --> 0:07:10.720 confidence needed for economic activity to pick up. So the 0:07:10.760 --> 0:07:17.760 FED has to understand that it's using policy ammunition in 0:07:17.800 --> 0:07:20.960 a very ineffective way, and it's got to make a 0:07:21.040 --> 0:07:23.480 judgment as to when to use it. I was against 0:07:23.480 --> 0:07:25.400 the fifty basis point cut last week. I thought it 0:07:25.440 --> 0:07:27.560 would do nothing at all and it would take away 0:07:27.600 --> 0:07:31.920 policy flexibility. That's what happened. The most important thing for 0:07:31.960 --> 0:07:35.800 the said and this major responsibility to the system is 0:07:35.840 --> 0:07:40.320 to laser like focus on market market functioning, understand how 0:07:40.400 --> 0:07:45.680 markets are functioning, better understand market technicals, and address the 0:07:45.800 --> 0:07:49.000 pockets of liquidity that are going to arise and that 0:07:49.160 --> 0:07:51.640 risk becoming systemic. That is what the fact you're doing. 0:07:51.720 --> 0:07:54.600 It should not be trying to flood the system in 0:07:54.640 --> 0:07:57.480 a way that's gonna end up being very inefficient and 0:07:57.640 --> 0:08:01.680 use up flexibility that we will need. Eater on Muhamdalarian 0:08:01.720 --> 0:08:04.200 with us and he will continue with this in moments. 0:08:04.240 --> 0:08:05.880 Will have in a couple of minutes, I should say, 0:08:06.000 --> 0:08:09.560 scheduled to Francisco, blanche a Bank of America and oil done. 0:08:09.560 --> 0:08:12.640 What is at a general state, but that's the moving crude, 0:08:12.640 --> 0:08:15.480 but the move in future obviously we're limited down so 0:08:15.520 --> 0:08:17.160 we can get you an early read on the SMP 0:08:17.280 --> 0:08:20.600 five hundred through the spider SMP five ETF, and we 0:08:20.640 --> 0:08:23.360 are now session lows down a little more than seven 0:08:23.480 --> 0:08:26.520 percentage points. I'd also know the German two year as well. 0:08:26.680 --> 0:08:29.320 Point nine seven five is one of those global litmus 0:08:29.320 --> 0:08:32.200 paper thirty year bond a little better in the last 0:08:32.240 --> 0:08:33.760 twenty minutes. Why don't you pick it up, John and 0:08:33.800 --> 0:08:36.520 Dr Man. Many people today, of course, will draw parallels 0:08:36.600 --> 0:08:39.040 between now and two thousand and eight, and obviously for 0:08:39.080 --> 0:08:41.520 many people we are nowhere near that situation. It was 0:08:41.520 --> 0:08:44.720 a different world. But you just as concerned about corporate 0:08:44.760 --> 0:08:47.440 bannon sheets as you were about the household balad sheet 0:08:47.720 --> 0:08:52.760 back then. I'm no drawn. I mean, ironically, this is 0:08:52.760 --> 0:08:55.840 not two thousand and eight, which is both good and bad. Um, 0:08:55.840 --> 0:08:57.760 It's not two thousand and eight in a good sense 0:08:57.880 --> 0:09:01.120 because I'm not worried about the bank, and therefore I'm 0:09:01.120 --> 0:09:04.199 not worried about the payments and settlement system. Remember, the 0:09:04.200 --> 0:09:07.319 payments and settlement system is the nerve center of any 0:09:07.440 --> 0:09:11.440 modern based market economy. If that is no longer functioning, 0:09:11.600 --> 0:09:14.120 everything will stop. And that was the reality of two 0:09:14.120 --> 0:09:18.679 thousand and eight. So there's a good way that we're 0:09:18.720 --> 0:09:20.520 not similar to two thousand and eight. But there's another 0:09:20.559 --> 0:09:22.960 way we're not similar to two thousand and eight, which 0:09:23.000 --> 0:09:26.560 I worried about, the extent of global policy coordination is 0:09:26.640 --> 0:09:30.680 much lower. And whether it's the coronavirus, whether the whether 0:09:30.720 --> 0:09:35.040 it's the excessive reliance on liquidity, whether it is markets 0:09:35.040 --> 0:09:37.680 that have been miss priced for a long time, this 0:09:37.880 --> 0:09:43.160 is a global problem that requires collective actions. So the 0:09:43.320 --> 0:09:45.520 bad thing really to through thousand and eight is that 0:09:45.559 --> 0:09:48.560 we're not going to get a London summit quickly that 0:09:48.600 --> 0:09:52.400 will allow to put an economic bottoming. We need advances 0:09:52.440 --> 0:09:54.480 on the medical side, and that's going to require a 0:09:54.520 --> 0:09:58.400 lot better global coordination. Mohammed. When does the sell off 0:09:58.400 --> 0:10:01.439 that we're expecting to deepen in the high old bond 0:10:01.480 --> 0:10:04.280 market in credit markets more broadly, when does it become 0:10:04.320 --> 0:10:11.560 a buying opportunity when you get distressed levels. So I'm 0:10:11.600 --> 0:10:14.520 excited in a sense that as much as the next 0:10:15.280 --> 0:10:18.760 as the immediate peered ahead is going to be very treacherous, 0:10:19.559 --> 0:10:23.359 as much as that we are going to have massive opportunities. 0:10:23.679 --> 0:10:26.559 But understand where these opportunities are going to arise, They're 0:10:26.600 --> 0:10:30.840 not going to arise by buying a passive index and 0:10:30.920 --> 0:10:33.000 just betting on the whole marketplace. It's going to be 0:10:33.160 --> 0:10:36.800 very selective. It's going to be in distressed credit, it's 0:10:36.800 --> 0:10:39.280 going to be instructured credit, it's going to be in 0:10:39.320 --> 0:10:42.719 relative value, and it's going to be in good companies 0:10:42.800 --> 0:10:46.880 with strong balance sheets, high cash that are trading at 0:10:47.040 --> 0:10:50.480 bargain prices. That is where the opportunities are going to arise. 0:10:50.679 --> 0:10:53.840 It's going to start selectively, and then when when we 0:10:53.920 --> 0:10:58.760 start seeing high probability of medical advances to contain the 0:10:58.800 --> 0:11:02.719 spread of the virus, an increase immunities, vaccine, then we're 0:11:02.720 --> 0:11:06.079 going to establish a bottom for the more general interesting 0:11:06.480 --> 0:11:08.960 through in the index. By mommed before we let you go. 0:11:09.160 --> 0:11:11.480 Just the final question. Tom brought up your book The 0:11:11.480 --> 0:11:13.079 Only Game in Town, And I know you were running 0:11:13.120 --> 0:11:14.800 up a new addition and I was looking forward to 0:11:14.800 --> 0:11:16.200 it coming out later this year. Do you need to 0:11:16.200 --> 0:11:19.560 rewrite the start all over again and get back to it. Yeah, 0:11:19.640 --> 0:11:21.320 you know, it's a pain because the book is coming 0:11:21.320 --> 0:11:24.400 out in just a few weeks. And the reason why 0:11:24.520 --> 0:11:26.560 I wanted to bring it out because when it came 0:11:26.559 --> 0:11:29.679 out in sixteen it was too early. My timing was 0:11:29.800 --> 0:11:33.680 way too early. People didn't realize what happens when you 0:11:33.720 --> 0:11:38.120 rely excessively on central banks, that we were planting many 0:11:38.200 --> 0:11:44.840 seeds of future economic and financial malaise. So so that's 0:11:44.840 --> 0:11:47.480 why I wanted to bring it out again. Um, when 0:11:47.520 --> 0:11:50.840 people have realized that that's where we are. But the 0:11:50.880 --> 0:11:54.559 coroner virus pressed fast forward on everything. Mamma got to 0:11:54.600 --> 0:11:56.120 catch up with you and looking forward to the release 0:11:56.440 --> 0:11:57.960 in a couple of weeks time. I hammad all are 0:11:58.040 --> 0:12:01.120 in the alliance is chiefly can advise and Bloomberg opinion 0:12:01.360 --> 0:12:13.760 columnist on the road ahead. Do you want to guess 0:12:13.800 --> 0:12:15.760 on the phone, I'm pleased to say, is Francisco Blanche 0:12:15.760 --> 0:12:18.800 Bank for America the lower head of commodities and derivatives research. 0:12:19.080 --> 0:12:21.559 What a pleasure privilege to have Francisco with us on 0:12:21.600 --> 0:12:24.240 the show in the morning, like this morning. Francisco, let's 0:12:24.240 --> 0:12:28.080 talk about the potential the Opeque glass together with Russia. 0:12:28.240 --> 0:12:29.840 You can get back together at some point in the 0:12:29.840 --> 0:12:35.200 near future and strike a deal. Um, hey, John, thanks 0:12:35.240 --> 0:12:38.520 for having me on the show. Um, I'm not sure. Um, 0:12:38.760 --> 0:12:40.920 I'm not sure if they'll they'll come in and have 0:12:40.960 --> 0:12:43.760 a deal anytime soon, because it's not clear what the 0:12:43.840 --> 0:12:47.600 russianale behind this last move has been um. I think 0:12:47.640 --> 0:12:50.960 the Russians were very reluctant to cut the supply uh 0:12:51.120 --> 0:12:54.199 to begin with, to deal with this virus UM. They 0:12:54.240 --> 0:12:58.480 made their position very clear to the Sudies. The Sudies, um, 0:12:58.520 --> 0:13:00.360 I wanted to kind a million a half barrel today 0:13:00.400 --> 0:13:03.000 are supplied. That's the proposal to Helen Table last week. 0:13:03.520 --> 0:13:06.800 And ultimately that either the talks broke down, which is 0:13:06.800 --> 0:13:10.400 what possibility, or maybe the Russians uh swaite houses and 0:13:10.440 --> 0:13:12.599 convince them that maybe you know, it's also about to 0:13:12.640 --> 0:13:15.240 let the market running course and and ultimately clean up 0:13:15.240 --> 0:13:18.040 the US shell sector. Uh. That both have been wanting 0:13:18.040 --> 0:13:20.120 to do it for a while, and I guess this 0:13:20.320 --> 0:13:22.840 is the opportunity has ever I see in all the 0:13:22.880 --> 0:13:26.480 research knows this morning from the sophisticates like yourself, Francisco, 0:13:26.559 --> 0:13:31.400 everybody's talking about hedge exposure. Forget about like Russia loses, 0:13:31.600 --> 0:13:36.080 somebody wins, Brazil loses whatever that kind of macro maologna is. 0:13:36.559 --> 0:13:41.480 Explain the hedge exposure right now? Who loses the most 0:13:41.640 --> 0:13:45.160 when you see a twenty move in something that's supposed 0:13:45.200 --> 0:13:50.200 to be certain? Well, uh, I mean I think I 0:13:50.240 --> 0:13:52.560 think the people that will probably end up listening a 0:13:52.559 --> 0:13:56.680 lot this is those that have hedging mismatches. So there 0:13:56.679 --> 0:14:01.959 could be trading houses UM, traders, UH, potentially some some 0:14:02.000 --> 0:14:06.160 broken dealers have exposure to this. UM. The principal exposure 0:14:06.200 --> 0:14:08.240 that is not if you're a broker, which if you're 0:14:08.240 --> 0:14:12.680 a broke dealer, UM and UM, and it could also 0:14:12.760 --> 0:14:15.000 be I mean and and Frankly, the biggest losers are 0:14:15.000 --> 0:14:17.880 going to be the oil companies themselves that have not hedged. 0:14:18.440 --> 0:14:21.640 And remember a lot of companies were underheaded because at 0:14:21.640 --> 0:14:24.240 the end of last year we had something called the 0:14:24.320 --> 0:14:27.440 Phase one US China trade deal, which was supposed to 0:14:27.440 --> 0:14:30.720 put the global economy back on track. We were supposed 0:14:30.760 --> 0:14:34.080 to see a restocking cycle of manufactured goods. We were 0:14:34.080 --> 0:14:37.480 supposed to see a stronger economy. And I think a 0:14:37.520 --> 0:14:39.840 lot of people may have actually just lightened up on 0:14:39.840 --> 0:14:42.520 their hedging heading into the first half, which which and 0:14:42.560 --> 0:14:44.680 those are the ones that are gonna be heard the most. Now, 0:14:44.680 --> 0:14:49.160 who benefits UM, I think it's gonna be consumers benefiting here. Obviously, 0:14:49.200 --> 0:14:51.400 consumers in many parts of the world are are not 0:14:51.480 --> 0:14:55.040 really traveling that much because of the coronavirus but if 0:14:55.080 --> 0:14:56.880 you are able to travel, you're going to get a 0:14:56.880 --> 0:14:59.960 pretty good deal with with the drop in fuel prices 0:15:00.040 --> 0:15:02.880 that we're saying right now. Francisco, I'm looking right now 0:15:03.080 --> 0:15:06.320 at the cash bond market, the high yield bond market, 0:15:06.320 --> 0:15:09.120 which actually opened it eight on Wall Street, and we're 0:15:09.120 --> 0:15:12.160 seeing just some violent moves in the shale debt. We're 0:15:12.160 --> 0:15:17.240 looking at forty moves lower, huge, huge kinds of shifts, 0:15:17.240 --> 0:15:20.600 And I'm wondering going forward, is this going to reshape 0:15:20.600 --> 0:15:24.600 the shale industry profoundly and actually curtail production in the 0:15:24.720 --> 0:15:28.760 US for the longer term. Um So, I think the 0:15:28.760 --> 0:15:31.920 answer to those questions, both of those questions is yes, 0:15:32.040 --> 0:15:34.560 we will see a car talent of production and we 0:15:34.560 --> 0:15:37.640 will see a profound impact on the industry. Remember, this 0:15:37.760 --> 0:15:42.320 industry has been already UM hit in all fronts. During 0:15:42.360 --> 0:15:48.360 the industry, UH probably wasted about a hundred dollars of 0:15:48.520 --> 0:15:51.680 investor money, both in terms of equity and debt issuance, 0:15:52.320 --> 0:15:56.000 So very few investors actually want to own any any 0:15:56.120 --> 0:15:59.080 energy to begin with. Um And I think this this 0:15:59.600 --> 0:16:04.680 last low is going to hurt the particularly the levered players, 0:16:04.680 --> 0:16:08.520 the smaller players, those you mentioned high yield remember high 0:16:08.560 --> 0:16:11.600 yields UH characterized not only because it has a wider 0:16:11.600 --> 0:16:14.720 differential to investment great debt, but also because has shorter maturity. 0:16:15.280 --> 0:16:17.640 Um So, a lot of this death is due in 0:16:17.680 --> 0:16:20.960 the next twelve eighteen months, and that's that's gonna that's 0:16:20.960 --> 0:16:22.280 gonna come to the front. And then the other thing 0:16:22.320 --> 0:16:24.400 that's gonna happen is banks are probably gonna look at 0:16:24.480 --> 0:16:29.160 their reserve based lending practices and reduced the money that 0:16:29.200 --> 0:16:33.880 they land um that they lend the the the oil 0:16:33.920 --> 0:16:38.160 and gas developers against their assets. So so we're gonna 0:16:38.240 --> 0:16:40.800 see a very meaningful reduction in capital right to where 0:16:40.840 --> 0:16:44.120 we were a month ago, which was already pretty bad. 0:16:44.800 --> 0:16:47.400 RecA San Francisco, just to jump in with, we're exploring 0:16:47.440 --> 0:16:50.320 different parallels. Just give me a snapshot of where we 0:16:50.320 --> 0:16:53.520 are right now. The supply demand dynamic just quite simply 0:16:53.520 --> 0:16:56.400 compared to where we were in fifteen sixteen when we 0:16:56.440 --> 0:16:59.080 saw these kind of things plank out, Now in days 0:16:59.160 --> 0:17:04.080 similar worse. What is it right now? Um So, So, 0:17:04.160 --> 0:17:06.720 I think from a demand standpoint, this is definitely way worse. 0:17:07.320 --> 0:17:09.480 We're going to see a global demand construction this year, 0:17:09.560 --> 0:17:12.920 most likely for oil and UH, and we haven't seen 0:17:12.960 --> 0:17:14.639 one since put us on eighth plus and nine. So 0:17:14.680 --> 0:17:17.000 in terms of demand, it looks a little more like 0:17:17.280 --> 0:17:20.040 eight or nine than definitely on it does like fifteen 0:17:20.000 --> 0:17:23.520 and sixteen. From a supply standpoint, it's unclear how much 0:17:23.520 --> 0:17:26.680 this audis are going to be ramping up supplies here. Um, 0:17:26.880 --> 0:17:30.680 they've aggressively is counted their crewed and uh, and there 0:17:30.760 --> 0:17:34.040 is talk about South increasing production over ten million barrells 0:17:34.080 --> 0:17:36.320 a day, maybe over eleven million dollars a day. There's 0:17:36.320 --> 0:17:40.560 different numbers they're throwing around, but but you know, definitely, Uh, 0:17:40.680 --> 0:17:43.399 it's going to be it's going to be almost just 0:17:43.440 --> 0:17:45.359 as battles fifteen sixteen. It's almost in a way it 0:17:45.480 --> 0:17:47.919 is a combination of eight and fifteen and sixteen pretty 0:17:47.920 --> 0:17:49.760 bad for oil prices. That's when we think we could 0:17:49.760 --> 0:17:52.439 go back into the twenties year for brand. What is 0:17:52.440 --> 0:17:56.119 the ramifications going back into the twenties for brand and 0:17:56.160 --> 0:18:01.119 the equivalent seated West Texas Intermediate For America's will independence 0:18:01.119 --> 0:18:07.439 do we sacrifice that is Permian Basin shuts down? Um, well, 0:18:07.640 --> 0:18:11.040 we will definitely see a pullback in in supplies, and uh, 0:18:11.080 --> 0:18:14.359 it will hurt American's energy independence. But here's the good news. 0:18:15.040 --> 0:18:18.000 We know we can create America's energy independence again at 0:18:18.040 --> 0:18:20.640 prices of forty forty five floors barrel, which are still 0:18:20.720 --> 0:18:25.560 very very good for consumers. So um. While as while 0:18:25.600 --> 0:18:30.439 as I'm certainly concerned about the industry and certainly concerned 0:18:30.440 --> 0:18:33.560 about the potential fallout of this move, I will also 0:18:33.640 --> 0:18:37.600 say that that that if prices were to rise lords barrel, 0:18:38.080 --> 0:18:40.720 we will get the industry back back up and running. 0:18:40.760 --> 0:18:45.359 So so I think, I mean, I think that it's, um, 0:18:45.400 --> 0:18:47.840 it's definitely gonna be a blow against the U S 0:18:47.920 --> 0:18:52.119 energy independence story. Um, But but it's the blow that 0:18:52.280 --> 0:18:55.280 is is manageable for consumers. Um. The question we have 0:18:55.359 --> 0:18:57.160 to ask ourselves is going to be a big blow 0:18:57.200 --> 0:19:00.160 to some states in particular like Texas and Oklahoma. Who 0:19:00.200 --> 0:19:02.280 was the last time or do they have a more 0:19:02.280 --> 0:19:04.280 diversity of economy and they can hand a little better. 0:19:04.600 --> 0:19:06.880 So that's that's I think a big, big question mark 0:19:06.880 --> 0:19:10.120 out there. This has been wonderful. Franstance, good Burns, thank 0:19:10.119 --> 0:19:20.920 you so much, greatly greatly appreciated with Bank of America. 0:19:21.640 --> 0:19:23.760 Let's bring a John Raith show, UBS, head of UK 0:19:23.920 --> 0:19:26.359 rate Strategy, joined us on the phone. John fantastic to 0:19:26.359 --> 0:19:28.240 have you with us. I was up waiting for the 0:19:28.280 --> 0:19:30.800 bond market to open up last night and just wow 0:19:31.080 --> 0:19:33.920 to see the long end come in forty three basis 0:19:33.960 --> 0:19:36.720 points and dropped like a stone beneath one percent your 0:19:36.760 --> 0:19:40.480 first stage, John, I mean, this is just a colossal 0:19:41.119 --> 0:19:44.760 flight to safety going on everywhere. Um. We haven't seen 0:19:44.800 --> 0:19:47.439 anything like this, of course in the past, and um, 0:19:47.440 --> 0:19:49.760 and the reasons are well understood. You know, we're seeing 0:19:49.760 --> 0:19:53.159 a perfect storm essentially, which is forcing huge waves of 0:19:53.200 --> 0:19:57.320 money into the bond markets. Front end yields now everywhere, um, 0:19:57.359 --> 0:19:59.879 sort of crashing down towards zero or even well but 0:20:00.040 --> 0:20:02.800 low in certain markets. And as a result, money now 0:20:02.880 --> 0:20:05.320 sort of flooding further down those yeel curves as as 0:20:05.800 --> 0:20:07.760 you know, investors run for cover. So that's you know, 0:20:08.520 --> 0:20:11.359 everything going into the bond markets and pushing these yields 0:20:11.359 --> 0:20:13.600 to unprecedented levels. John, Lisa and I have been talking 0:20:13.640 --> 0:20:16.120 about what we're modeling in the bond market. What are 0:20:16.119 --> 0:20:20.520 we modeling now, zero race on FED funds, recession perhaps inevitably, 0:20:20.520 --> 0:20:23.000 what are we talking about now? Yeah, I mean we're 0:20:23.040 --> 0:20:24.920 we're rapidly heading there. Certainly if you look at the 0:20:24.920 --> 0:20:27.600 sid funds features. John, You know, you can see that 0:20:27.720 --> 0:20:31.160 the markets anticipating the rate getting very close to zero 0:20:31.240 --> 0:20:34.280 in in fairly short order, as it is um in 0:20:34.320 --> 0:20:37.240 the UK. Clearly in the Eurozone we're already well into 0:20:37.280 --> 0:20:40.840 negative territory and markets expecting to go deeper into that. 0:20:40.880 --> 0:20:42.480 I think one thing that's different. You know, we have 0:20:42.640 --> 0:20:45.000 seen short yields at these levels in the past. If 0:20:45.000 --> 0:20:47.560 you look at see your treasuries for example, for all 0:20:47.600 --> 0:20:50.840 the sort of headlong fall, we're still fifteen basis points 0:20:50.920 --> 0:20:53.639 or so above the levels we got to back in 0:20:53.760 --> 0:20:57.080 sort of two thousand and eleven UM. What's different is 0:20:57.160 --> 0:20:59.719 these long yields. They've never been down at these levels um. 0:20:59.800 --> 0:21:02.160 And it is a sign that the markets think, essentially 0:21:02.160 --> 0:21:04.439 it's going to take even longer for any sort of 0:21:04.480 --> 0:21:06.880 recovery to build, and so people are happy to buy 0:21:06.920 --> 0:21:09.600 longer bonds at these levels as well. John, What does 0:21:09.640 --> 0:21:14.040 your world tell central bankers? Just very simply, if we 0:21:14.119 --> 0:21:19.440 impute deflation in disinflation is suggests they're far far behind. 0:21:20.080 --> 0:21:22.440 What does it tell them? And can we see central 0:21:22.440 --> 0:21:27.880 bank action this morning? I mean, it's it's certainly possible, Tom, 0:21:27.880 --> 0:21:29.840 But I think what it tells them, or rather what 0:21:29.920 --> 0:21:34.199 they'll use the market moves more precisely to tell fiscal 0:21:34.240 --> 0:21:37.520 authorities is that they have done or are expected to do, 0:21:37.600 --> 0:21:39.399 in the case of those who haven't already reached the 0:21:39.800 --> 0:21:42.840 zero lower bound, everything in their power. You know, they 0:21:42.840 --> 0:21:45.520 will cut raps to the floor if if they haven't already, 0:21:46.200 --> 0:21:48.560 they will engage in more asset purchases. But when yields 0:21:48.560 --> 0:21:50.280 are at these levels, it's telling you, I think that 0:21:50.320 --> 0:21:52.680 they have run out of road, or that they don't 0:21:52.680 --> 0:21:56.880 have tools which are going to materially change the trajectory here. Therefore, 0:21:56.880 --> 0:21:59.320 the focus needs to turn to governments and the ability 0:21:59.359 --> 0:22:02.520 of fiscal the seed to try and um well at 0:22:02.520 --> 0:22:05.360 this stage, pushing the expected impact on demand, and then 0:22:05.400 --> 0:22:07.320 try and sort of lift these economies and get them 0:22:07.359 --> 0:22:09.480 moving forward again. I want to pick up exactly on 0:22:09.600 --> 0:22:12.000 that point, the idea that the market is implying that 0:22:12.119 --> 0:22:15.240 central banks around the world are out of about of tools. 0:22:15.320 --> 0:22:18.280 Tom John, I'm looking right now fed funds futures pricing 0:22:18.320 --> 0:22:22.080 in basically zero interest rates in the United States over 0:22:22.080 --> 0:22:24.719 the next few meetings, and it's quickly coming in. And 0:22:24.720 --> 0:22:27.359 I'm looking meanwhile at the fact that the yield curves 0:22:27.400 --> 0:22:30.840 are just collapsing. We are seeing an absolute flattening. The 0:22:30.880 --> 0:22:34.159 implication here, John, no inflation, This is not going to 0:22:34.240 --> 0:22:36.600 work period. So I think that's what we're seeing off 0:22:36.600 --> 0:22:39.280 the back of another massive move lower in crude. And John, 0:22:39.280 --> 0:22:40.720 there's another thing we've got to think about to the 0:22:40.760 --> 0:22:43.400