WEBVTT - Can Fed Fight the Virus? 0:00:12.880 --> 0:00:16.040 Hello, and welcome to What Shows Up at Bloomberg Weekly 0:00:16.079 --> 0:00:20.000 Market Podcast. I'm Sarah Ponzec, reporter on the Cross Asset 0:00:20.000 --> 0:00:22.479 team and on Mike Reagan, a senior editor on the 0:00:22.520 --> 0:00:25.080 Markets team. This week on the show, it was certainly 0:00:25.120 --> 0:00:28.479 one for the record books. As the coronavirus continued to 0:00:28.520 --> 0:00:31.840 spread around the globe, Treasury yields plunged to all time lows, 0:00:31.880 --> 0:00:35.760 the tenure below one point three for the first time ever, 0:00:36.240 --> 0:00:38.879 and by one measure, stock volatility surpassed that of the 0:00:38.920 --> 0:00:42.720 fourth quarter route in with the SMP five falling into 0:00:42.760 --> 0:00:47.600 a ten correction, and Sarah, I supposed, should we conclude 0:00:47.640 --> 0:00:49.800 the episode with the craziest thing I saw in markets? 0:00:49.800 --> 0:00:52.320 Should we continue that tradition? I think we should continue 0:00:52.360 --> 0:00:55.440 that tradition. Yeah, we have a couple of columns this week, 0:00:55.480 --> 0:00:58.040 we have someone who waited on Twitter, so we have 0:00:58.080 --> 0:01:00.240 a lot a lot to go around. I boy up 0:01:00.240 --> 0:01:04.360 stain this week it is, But you know, I kind 0:01:04.360 --> 0:01:07.480 of feel like Michael Jordan's when he retired from basketball. 0:01:07.480 --> 0:01:09.119 He just got he was so good and it's so 0:01:09.120 --> 0:01:11.000 good at winning. You went every week. You might have 0:01:11.080 --> 0:01:14.080 got four week off. Give the rest of us a 0:01:14.160 --> 0:01:16.240 chance Yeah, he went and played baseball. I might go 0:01:16.319 --> 0:01:20.240 switch to the rational sane market. Yeah, I don't know, Okay, yeah, 0:01:20.240 --> 0:01:22.600 because that's so exciting that and also I totally blank. 0:01:22.640 --> 0:01:25.080 I could not find I even contacted Vil Donna. Are 0:01:25.120 --> 0:01:27.440 are crazy in a week like this. I'm shocked that 0:01:27.600 --> 0:01:30.520 you blanked and you couldn't find something that really Uh 0:01:30.680 --> 0:01:33.480 says a lot about how good you're actually are at 0:01:33.520 --> 0:01:36.639 finding crazy every Sorry it's crazy this week. Yeah. Luckily 0:01:36.680 --> 0:01:39.080 today we have some great guests here with us to 0:01:39.120 --> 0:01:41.800 help make sense of all of it. Yeah. Absolutely, joining 0:01:41.880 --> 0:01:44.440 us for the first time. We're very excited to have her. 0:01:44.480 --> 0:01:47.920 She is the chief fixed income strategist at Charles Schwab. 0:01:48.120 --> 0:01:50.480 Cathy Shones, Welcome to the show. Thanks for having me 0:01:50.960 --> 0:01:54.320 and coming back to the show. A real favorite of 0:01:54.360 --> 0:01:56.920 the what Goes Up fans out there. Uh, this guy 0:01:56.960 --> 0:01:59.560 actually has his own fan club. It's not a club, 0:01:59.600 --> 0:02:03.880 it's one person, that's one guy, but he's very vocal. 0:02:03.920 --> 0:02:09.040 So so Eli Panamey. If in fact, that is your 0:02:09.040 --> 0:02:11.799 real name, and I'm pretty sure it's not your real name, Uh, 0:02:11.840 --> 0:02:14.680 this one's for you. But this is Chris Nag, Executive 0:02:14.800 --> 0:02:17.760 editor of Bloomberg News, he's going to tell us to 0:02:17.919 --> 0:02:20.840 the decimal point when this stock market correction will end. 0:02:20.880 --> 0:02:23.480 Isn't that correct? That We're going to reveal that later, 0:02:23.480 --> 0:02:25.800 So stick around for that. But Cat, I wanted to 0:02:25.840 --> 0:02:28.080 start with you. I know, this is the type of 0:02:28.120 --> 0:02:32.960 week where I my heart goes out to strategists who, uh, 0:02:33.000 --> 0:02:35.880 the ink is barely dry on your year head forecast, 0:02:36.120 --> 0:02:42.799 and BOYD does everything change quick? Right? Yeah? I hate 0:02:42.840 --> 0:02:44.640 to bring it up, but I want to give you 0:02:44.680 --> 0:02:46.960 credit for one thing that was in your original forecast 0:02:47.040 --> 0:02:49.760 that I find very interesting, and that was you were 0:02:49.919 --> 0:02:54.840 underweight how you'll debt junk bonds basically, and uh because 0:02:55.880 --> 0:02:58.640 do you foury in that particular as a class I 0:02:58.680 --> 0:03:02.760 think was eye popping, uh, leading into this coronavirus episodes. 0:03:02.800 --> 0:03:05.520 I mean razor thin spreads. Um, yes, there were some 0:03:05.560 --> 0:03:09.240 green shoots in the economy, but it just seemed it seemed, uh, 0:03:09.280 --> 0:03:10.880 you know, to you for it to be to be 0:03:10.919 --> 0:03:13.560 really good, too good to be true. So I'm just wondering, 0:03:13.600 --> 0:03:15.040 you know, if we could start with that sort of 0:03:15.040 --> 0:03:17.960 notion that high yield. I feel like it's time to 0:03:18.000 --> 0:03:21.080 really worry about high yield. Looking at the spreads on 0:03:21.120 --> 0:03:23.840 the Bloomberg Barkley's Index. I think they were like three 0:03:24.080 --> 0:03:27.919 forty basis points a week ago up to and that 0:03:28.040 --> 0:03:32.679 sort of rapid widening of spreads is pretty alarming. How 0:03:32.760 --> 0:03:36.640 far does it go? I mean, is this um economic 0:03:36.720 --> 0:03:39.160 damage from this virus enough to start worrying about sort 0:03:39.160 --> 0:03:42.920 of defaults and and massive downgrades and that sort of thing. Well, 0:03:42.960 --> 0:03:47.120 we were worried before this happened, partly because the economy 0:03:47.360 --> 0:03:50.400 was already showing signs of slowing down a bit, and 0:03:50.440 --> 0:03:52.960 the spreads were so tight that there was no margin 0:03:53.120 --> 0:03:55.560 for air. And that was the reason for our underweight 0:03:55.640 --> 0:03:59.880 you know, why why buy those bonds and get so 0:04:00.040 --> 0:04:03.120 little yield and take so much risk um And our 0:04:03.200 --> 0:04:07.160 concerns really centered around a couple of industries, energy being one, 0:04:07.560 --> 0:04:10.320 which has been in sort of a secular decline now, 0:04:10.840 --> 0:04:15.000 and also the corporate profits were not rising. We look 0:04:15.040 --> 0:04:20.240 at the actual corporate profits, not the ones that the 0:04:20.279 --> 0:04:23.640 management likes to talk about, So we actually look at 0:04:23.680 --> 0:04:27.880 the real ones, like the items left in yeah, exactly, 0:04:28.080 --> 0:04:31.800 and those have been sort of deteriorating for quite some time, 0:04:32.360 --> 0:04:35.560 and corporate leverage going up at the same time. And 0:04:35.600 --> 0:04:38.719 then when you look at the asset class. You look 0:04:38.720 --> 0:04:41.680 at the loan part of the asset class, because most 0:04:41.680 --> 0:04:43.760 of these issuers have not only how you bonds, they 0:04:43.760 --> 0:04:46.600 have loans as well. And you look at the loans 0:04:46.600 --> 0:04:50.000 and about seventy of the loans now are covenant light, 0:04:50.160 --> 0:04:54.720 meaning there's not much protection for investors. So even before 0:04:54.880 --> 0:04:58.800 this happened, the risk of rising defaults or problems with 0:04:58.880 --> 0:05:02.320 refinancing if should we hit you know, a speed bump 0:05:02.640 --> 0:05:05.440 was there. Obviously we didn't know this would be the 0:05:05.480 --> 0:05:08.120 speed bump or where it would come from. But when 0:05:08.160 --> 0:05:12.280 you're priced for beyond perfection, it just made sense to 0:05:12.320 --> 0:05:14.840 us just stand back and say we don't want a 0:05:14.880 --> 0:05:17.360 part of this until it's more attractive. So we've seen 0:05:17.440 --> 0:05:20.400 high old spreads widening now at the widest level since August. 0:05:20.440 --> 0:05:22.520 I believe also there have been many reports out this 0:05:22.560 --> 0:05:25.960 week about bond offerings drying up in the United States 0:05:26.040 --> 0:05:30.200 in Europe. Is that something we could potentially expect to 0:05:30.240 --> 0:05:33.680 continue or to worsen, particularly if we do see this 0:05:33.760 --> 0:05:36.640 virus spread around the globe, And it's really hard to 0:05:36.760 --> 0:05:39.680 estimate exactly what the fallout is going to be. Yeah, absolutely, 0:05:39.680 --> 0:05:42.320 I mean it's not unusual for high yield spreads to 0:05:42.320 --> 0:05:45.400 to jump a couple of hundred base points pretty quickly 0:05:45.440 --> 0:05:49.640 when things go south. Um, so currently at over they're 0:05:49.640 --> 0:05:51.799 just back to the long term averages, right and even 0:05:51.880 --> 0:05:54.880 like they're under value right now, So we could go 0:05:54.960 --> 0:05:57.720 to five hundred or five fifty over. I mean this 0:05:57.839 --> 0:06:01.360 is maybe now we made I to move from underweight 0:06:01.480 --> 0:06:05.040 to at least neutral. We might start looking for attractive 0:06:05.040 --> 0:06:09.360 opportunities where they exist. But with all the uncertainty about 0:06:09.440 --> 0:06:12.839 the virus and what impact it will have, Um, it's 0:06:12.839 --> 0:06:15.120 probably too early to jump in there with both feet 0:06:15.400 --> 0:06:18.320 right and the on the flip side of that spread. Obviously, 0:06:18.360 --> 0:06:21.280 the treasury yields are just as start mentioned. Uh what 0:06:21.400 --> 0:06:25.520 are we blow? Are we blow on the tenure? I mean, 0:06:25.560 --> 0:06:29.880 real yields are negative? Now? Um, how low can they go? 0:06:30.000 --> 0:06:34.479 I mean we've heard people sort of uh prophesies about oh, 0:06:34.720 --> 0:06:37.760 don't be surprised if we see negative yields in the US. 0:06:37.839 --> 0:06:41.400 I mean, could we really uh contemplate such a it 0:06:41.480 --> 0:06:44.640 could happen? Um in our view? You know, you you'd 0:06:44.680 --> 0:06:47.599 probably have to have a situation where we were going 0:06:47.680 --> 0:06:51.200 into a global recession and the FED was not keeping 0:06:51.279 --> 0:06:53.719 up by lowering short term, they could go to zero 0:06:54.160 --> 0:06:57.320 and maybe stay there, and in the worst case scenario, 0:06:57.440 --> 0:07:01.679 you could see two five tenure yields go negative. That's 0:07:01.720 --> 0:07:06.400 not a forecast, but it's not beyond comprehension, right, but 0:07:06.520 --> 0:07:09.000 you'd still see the sort of the bill yields that 0:07:09.080 --> 0:07:11.840 front end of the curve positive, you think. I think 0:07:11.960 --> 0:07:15.000 the FED would really really like to not go to 0:07:15.120 --> 0:07:18.200 negative rates because of the impact on the banking system 0:07:18.280 --> 0:07:22.560 and just mechanically, you know, money market funds, and that 0:07:22.720 --> 0:07:26.080 hasn't been entirely successful where it has been done. Now. 0:07:26.400 --> 0:07:29.480 You might get some argument from European Central Bank on that, 0:07:29.560 --> 0:07:32.040 but I think by and large are some question marks 0:07:32.080 --> 0:07:35.280 as to whether it's really an effective strategy. Never say never. 0:07:35.400 --> 0:07:37.760 I think they might if if we were really in 0:07:37.760 --> 0:07:41.840 a deflationary environment. But um my bias is to say 0:07:41.880 --> 0:07:45.640 that that's really kind of a small probability event. Stepping 0:07:45.680 --> 0:07:47.600 back and taking a little bit of a wider view 0:07:47.960 --> 0:07:50.160 when we're trying to figure out what the coronavirus might 0:07:50.200 --> 0:07:53.480 actually mean for the global economy, be constantly here that 0:07:53.560 --> 0:07:56.800 it's going to cause supply shocks. Also, it does now 0:07:56.880 --> 0:08:00.160 appear that it will cause demand shocks as well, if 0:08:00.240 --> 0:08:03.320 people can't get out of their houses or go to work. 0:08:03.720 --> 0:08:06.520 I mean, in that scenario, sure many people can get 0:08:06.520 --> 0:08:09.080 the ball market saying the ball market is screaming for 0:08:09.120 --> 0:08:11.760 the FED to ease once again, I mean, what help 0:08:11.800 --> 0:08:14.920 would that actually even do in this scenario. Yeah, and 0:08:15.080 --> 0:08:19.080 I think it has pretty widely accepted that adding liquidity 0:08:19.080 --> 0:08:22.440 in this environment probably isn't going to cure the cure 0:08:22.520 --> 0:08:25.360 the disease, produce a vaccine, or make people go to 0:08:25.400 --> 0:08:29.640 the movies or the grocery store. Having said that, though, um, 0:08:29.720 --> 0:08:32.959 I think one thing it does is it's a signaling device, right. 0:08:33.040 --> 0:08:35.200 It says, Okay, we're on it. It's sort of the 0:08:35.240 --> 0:08:38.000 whatever it takes that we got out of draggy in Europe, 0:08:38.080 --> 0:08:41.840 that we're going to provide support and liquidity. And if 0:08:41.880 --> 0:08:45.480 financial conditions continue to tighten, which you know, the credit 0:08:45.559 --> 0:08:48.960 spread story is part of that, they can loosen financial 0:08:48.960 --> 0:08:52.240 conditions a bit by lowering rates and that can help 0:08:52.280 --> 0:08:55.120 on the margin. But I think part of the hesitancy 0:08:55.160 --> 0:08:57.560 we're hearing from FED officials is they know that there's 0:08:57.600 --> 0:08:59.960 only limited impact they can have, and they don't want 0:09:00.120 --> 0:09:02.559 use all their tools if this thing is going to 0:09:02.679 --> 0:09:06.800 pass in six weeks or something. I wonder if quantitative 0:09:06.840 --> 0:09:09.280 easing would sort of come back on the table before 0:09:09.480 --> 0:09:13.080 even as your percent fed rate, you know, especially aimed 0:09:13.080 --> 0:09:14.760 at the corporate market. You know, if we do see 0:09:14.760 --> 0:09:18.280 that deterioration, I suppose that's a possibility as well. I 0:09:18.280 --> 0:09:22.439 think they probably are discussing right now what what possible 0:09:22.520 --> 0:09:26.440 tools they could use. UM, it's pretty obvious from public 0:09:26.480 --> 0:09:29.720 statements that as of at least yesterday they did not 0:09:29.920 --> 0:09:32.920 have a quorum for even a rate cut, because there's 0:09:33.160 --> 0:09:35.400 a number of officials coming out and saying, oh, it's 0:09:35.440 --> 0:09:38.320 too early to tell. So I think before they start 0:09:38.360 --> 0:09:40.960 signaling any change in policy, they need to get everybody 0:09:41.040 --> 0:09:43.160 on board as to what they want to do and 0:09:43.280 --> 0:09:45.839 what their reasoning is going to be. Chris, come on 0:09:45.920 --> 0:09:48.120 in here, because full disclosure, we record as a Thursday, 0:09:48.160 --> 0:09:49.760 and as of right now, the SMPS on track for 0:09:49.760 --> 0:09:52.000 its worst week since two and granted that we can 0:09:52.000 --> 0:09:54.800 do thousan eight was much worse, but still that says 0:09:54.840 --> 0:09:58.520 something about the velocity of what we've seen. Why is 0:09:58.559 --> 0:10:01.080 it do you think that we are seeing such this 0:10:01.240 --> 0:10:04.800 dramatic and fast downturn. A couple of things come to mind. 0:10:04.840 --> 0:10:07.160 One is it's exactly what we're discussing right now that 0:10:07.200 --> 0:10:09.480 it's not clear that the FED, as it has every 0:10:09.480 --> 0:10:11.679 other time something like this has happened for the last 0:10:12.160 --> 0:10:14.840 x amount of yours, has some has some blueprint for 0:10:14.840 --> 0:10:17.160 for reversing anything. It really is not in the business 0:10:17.160 --> 0:10:22.680 of curing new viruses, to put it mildly. And the 0:10:22.720 --> 0:10:24.280 other thing I think you have to look at in 0:10:24.320 --> 0:10:28.480 the stock market is the slope downward somewhat reflects the 0:10:28.480 --> 0:10:32.040 slope up where we had an enormous orgy of bullishness 0:10:32.520 --> 0:10:36.000 over the previous four or five months. You uh look 0:10:36.040 --> 0:10:39.680 at tech stocks basically parabolic rise rises. You had a 0:10:39.679 --> 0:10:44.120 lot of um individual investors jumping into the market. Just 0:10:44.200 --> 0:10:46.960 comes right after all of the brokerage is cut their 0:10:47.320 --> 0:10:50.040 cut their commission rates to zero. A lot of hedge 0:10:50.040 --> 0:10:53.840 funds get in it. And part of any reversal like 0:10:53.920 --> 0:10:56.240 this is going to be what it's reversing. And it's 0:10:56.280 --> 0:11:00.120 reversing basically a steep rally, and it's coming one right 0:11:00.120 --> 0:11:05.280 after another, and it looks becauses it to look very bad. Sorry, 0:11:04.679 --> 0:11:08.120 I gotta I'm gonna talk with Eli after this. I'm 0:11:08.160 --> 0:11:10.160 gonna I'm gonna wait for that to somehow up here 0:11:10.160 --> 0:11:13.800 in one of the stories that go out, what's going 0:11:13.840 --> 0:11:15.720 to be yours? Now? That would be a good head on, 0:11:16.080 --> 0:11:18.520 But you know, uh, say the FED. I mean, and 0:11:18.640 --> 0:11:20.800 you look at the futures market, FED fund futures, they're 0:11:20.840 --> 0:11:22.760 pricing what two or three rate cuts by the end 0:11:22.800 --> 0:11:26.120 of the year already. Um, it doesn't seem to a 0:11:26.120 --> 0:11:28.160 matter of the stock market. I mean, would that signal 0:11:28.200 --> 0:11:31.400 from the FED, if if whoever sup next on the 0:11:31.400 --> 0:11:34.480 FED speaking circuits, you know, pretty much signal that rates coming. 0:11:34.679 --> 0:11:36.200 I mean, who knows if that would work in right 0:11:36.280 --> 0:11:38.240 on one thing, I would say we mentioned QUWI, and 0:11:38.320 --> 0:11:40.559 in the minds of a lot of stock investors that 0:11:40.640 --> 0:11:43.959 are not necessarily most expensive minds in the world, QUI 0:11:44.160 --> 0:11:46.560 has been going on for the last five months that 0:11:46.640 --> 0:11:51.200 they're can They're they're convinced that the I are just 0:11:53.800 --> 0:11:57.120 which I get. But at a psychological level, again, we're 0:11:57.160 --> 0:11:59.520 not talking about necessarily the brightest bulbs in the tree. 0:11:59.559 --> 0:12:02.000 They really the idea that the FED has been doing 0:12:02.040 --> 0:12:05.520 something to stimulate the economy through its repo actions is 0:12:05.600 --> 0:12:07.920 pretty much lodged in. So you have a bunch of 0:12:07.920 --> 0:12:10.600 people who are like, wait, what happened to all of 0:12:10.640 --> 0:12:12.720 all of that stimulus we thought we were getting. So 0:12:13.040 --> 0:12:14.640 in a way, it kind of it's kind of a 0:12:14.640 --> 0:12:16.600 little bit of a laboratory for whether or not stimulus 0:12:16.640 --> 0:12:19.080 would work. I think in my nursing home there there's 0:12:19.160 --> 0:12:22.120 debate over whether the repo actions were Kui will will 0:12:22.160 --> 0:12:26.360 be raging on forever, And I gotta say, I'm I'm 0:12:26.440 --> 0:12:28.520 kind of one of those those dumb stock guys where 0:12:28.520 --> 0:12:31.839 I get it. It's not the same as Kuwi, But Kathy, 0:12:32.320 --> 0:12:34.200 they're gonna have to keep up with this, with these 0:12:34.200 --> 0:12:37.160 repo actions longer than they expected, I think, now right, 0:12:37.200 --> 0:12:41.360 I mean, and you know, basically what they're doing in 0:12:41.400 --> 0:12:44.720 the repo market, you know, intentional or not, it's bringing 0:12:44.800 --> 0:12:48.679 those money market rates, you know, lower than inflation, turning 0:12:48.679 --> 0:12:52.679 them negative on a on a real basis. Usually what 0:12:52.720 --> 0:12:55.600 they're doing is keeping the Fed Funds rate in the 0:12:55.679 --> 0:13:00.400 corridor that they established, So um the is in the 0:13:00.440 --> 0:13:04.880 balance sheet at the short end is really not stimulus 0:13:04.920 --> 0:13:09.839 to the economy, is not quee. It's simply to manage 0:13:10.000 --> 0:13:13.480 the Fed Funds rate in the area that they want 0:13:13.520 --> 0:13:17.960 to keep it in. So the misinterpretation of that was 0:13:18.040 --> 0:13:21.560 pretty widespread. The one thing I will say is when 0:13:21.600 --> 0:13:25.160 they did quee, a couple of things happened. Long term 0:13:25.240 --> 0:13:29.160 rates went up because it built up inflation expectation. That 0:13:29.200 --> 0:13:32.520 didn't happen this time. And secondly, they told us they 0:13:32.559 --> 0:13:35.800 were doing que They were it's a signaling thing, and 0:13:35.840 --> 0:13:38.280 they were trying to get people to be you know, 0:13:38.440 --> 0:13:41.560 bullish and and risk taking. And this time they said, 0:13:41.640 --> 0:13:43.800 now we're just trying to keep the FED funds rate 0:13:43.840 --> 0:13:46.520 in a range, and it's all plumbing. And the market 0:13:46.840 --> 0:13:49.319 ran with the story that they like. But we'll say 0:13:49.640 --> 0:13:52.360 a few emails landed in my inbox this week pointing 0:13:52.400 --> 0:13:54.800 to the fact that, yeah, this is a horrible week 0:13:54.800 --> 0:13:56.680 in the stock market, but if you look at the 0:13:56.760 --> 0:14:00.120 level of the Fed's balance sheet hasn't been increasing as 0:14:00.160 --> 0:14:02.800 quickly as possible. And now Cathy is plowing her eyes. 0:14:03.080 --> 0:14:05.640 But you know, I'm looking at it from that sort 0:14:05.679 --> 0:14:09.360 of lizard brain stock market guy, right. I mean, you 0:14:09.400 --> 0:14:13.240 had you had cash interest rates money market mutual funds 0:14:13.240 --> 0:14:15.960 at about two and a quarter above the rate of inflation. 0:14:16.040 --> 0:14:17.480 You bring them back down, so I don't know what 0:14:17.520 --> 0:14:19.520 they're right now, one and a half or so. I mean, 0:14:19.560 --> 0:14:21.840 and maybe not be similar to the economy. I feel 0:14:21.840 --> 0:14:24.000 like it is stimulative to the stock market to some degree. 0:14:24.040 --> 0:14:27.120 You see that those balances, Uh you know, I see 0:14:27.160 --> 0:14:29.400 I keeps a running tally of money market bounces that 0:14:29.440 --> 0:14:32.240 had been going up and up, and it kind of plateaued. Um. 0:14:32.440 --> 0:14:37.520 So can they still sort of unwind these repo operations 0:14:37.560 --> 0:14:39.720 like they had planned in the spring. Oh, you know, 0:14:39.840 --> 0:14:42.560 I think so. Um. I think they want to keep 0:14:42.600 --> 0:14:47.000 it going through tax time. But we heard Jamie Diamond 0:14:47.040 --> 0:14:50.120 come out and say that the his bank will now 0:14:50.280 --> 0:14:52.920 use the discount window, which is one of the reasons 0:14:53.000 --> 0:14:56.440 that things were, um not working properly, is because they 0:14:56.480 --> 0:14:59.280 were reluctant to use the discount window because the stigma 0:14:59.320 --> 0:15:02.400 attached to it after the financial crisis. So if he's 0:15:02.480 --> 0:15:06.200 reversing that policy, there'll be less need for them to 0:15:06.240 --> 0:15:09.240 inject liquidity. I'm thinking back to two thousand eighteen and 0:15:09.320 --> 0:15:12.800 imagining JP Morgan staying we're gonna tap the discount window 0:15:12.920 --> 0:15:16.440 to alleviate the stigma. Stigma, and Bear Sterns going, yeah, 0:15:16.560 --> 0:15:21.440 us too, We're gonna do it to alleviate the stigma. Yeah, 0:15:21.600 --> 0:15:23.720 thinking back to when Jamie Diamond said we could see 0:15:23.720 --> 0:15:29.240 four percent on the tenure now we're talking about I 0:15:29.240 --> 0:15:31.080 also want to get your take because if we look 0:15:31.080 --> 0:15:33.720 at the curve, we're seeing an interesting divergence, whereas if 0:15:33.760 --> 0:15:36.480 you look at the spread between three month tenure yields 0:15:36.720 --> 0:15:39.560 now pretty deeply inverted once again, and in a way 0:15:39.560 --> 0:15:43.360 we've seen a re steepening in two's tens. What what 0:15:43.520 --> 0:15:45.440 is the message here if you can actually take away 0:15:45.440 --> 0:15:48.440 any coherent message at this point from the curve. Yeah, 0:15:48.480 --> 0:15:51.000 I think there is a question of what's what's actually 0:15:51.040 --> 0:15:53.480 being signal and what's sort of a consequence of all 0:15:53.560 --> 0:15:57.160 the various things going on. Um, the three months ten year, 0:15:57.240 --> 0:15:59.880 I think is telling you that the market thinks the 0:16:00.040 --> 0:16:02.600 fat is too tight, and the market expects the fad 0:16:02.640 --> 0:16:06.360 to cut rates, and we've had an interpretation at the 0:16:06.400 --> 0:16:08.080 long end of the curve that this is a deeply 0:16:08.200 --> 0:16:12.720 deflationary event. Now, sometimes supply shocks are traditionally supposed to 0:16:12.720 --> 0:16:15.680 be inflationary, but I think, um, the assumption is this, 0:16:15.760 --> 0:16:18.720 suppose supply and demand and you're seeing crude oil prices 0:16:18.800 --> 0:16:21.680 crash and other commodity prices go down, and the assumption 0:16:21.760 --> 0:16:24.240 is that demand is going to shrink as well. So 0:16:24.320 --> 0:16:28.400 it's been very deflationary and that's pulled down long term rates. 0:16:28.440 --> 0:16:32.560 The belly of the curve, which had been actually inverted, 0:16:33.200 --> 0:16:35.120 is just kind of lagging behind now. So I'm not 0:16:35.480 --> 0:16:38.240 I'm not using the two stan as a great signal 0:16:38.320 --> 0:16:42.240 from here. I wonder what weight and CPI cruise ship 0:16:42.280 --> 0:16:49.600 pricing has in a yeah, but uh, one thing A 0:16:49.680 --> 0:16:53.000 story I helped that on the bonds team before this 0:16:53.080 --> 0:16:57.840 real risk off episode started, was basically about how thin 0:16:58.000 --> 0:16:59.840 like we were talking about how thin spreads were. Ye, 0:17:00.040 --> 0:17:04.159 not just in corporates, in in munies. Everywhere you look 0:17:04.160 --> 0:17:07.800 you have Greek tenure yields below one percent, Italian tenure 0:17:07.880 --> 0:17:10.200 yields below one percent, and you know, the spread to 0:17:10.440 --> 0:17:13.159 German buns pretty much the lowest they had been in 0:17:13.520 --> 0:17:16.800 the past decade or so. And back for America, their 0:17:17.080 --> 0:17:20.520 weekly fund manager survey came out and I forgot. I 0:17:20.520 --> 0:17:23.480 think it was like the second biggest risk that people 0:17:23.720 --> 0:17:29.119 saw was quote unquote the bond bubble popping um. Obviously 0:17:29.560 --> 0:17:31.760 we've got other risks to worry about now, but I mean, 0:17:32.520 --> 0:17:35.360 do you believe there was a bond bubble? And if so, 0:17:35.520 --> 0:17:38.080 I mean, how do you explain and even if you 0:17:38.080 --> 0:17:40.240 don't think it's a bubble, how do how does one 0:17:40.720 --> 0:17:45.120 think about why there was so much money coming into 0:17:45.119 --> 0:17:48.400 the bond market when the stock market was also doing well. 0:17:48.760 --> 0:17:50.760 I mean, it just is it as simple as they're 0:17:50.760 --> 0:17:53.400 just being this savings glued around the world, this sort 0:17:53.400 --> 0:17:56.880 of record long economic expansion and just too much investor 0:17:56.920 --> 0:18:00.439 capital looking for places ago. I think that that's the 0:18:00.480 --> 0:18:03.479 main thing that's going on. I mean, I've been asked 0:18:03.520 --> 0:18:09.680 about the bond bubble literally since and and someday all 0:18:09.720 --> 0:18:13.600 those people predicting it will be right, yeah exactly if 0:18:13.600 --> 0:18:19.080 they're still alive, Yes, exactly. But you have the secular trends, right, 0:18:19.359 --> 0:18:23.840 the aging demographics around the world, and um, the savings 0:18:23.840 --> 0:18:29.080 glut and decline in inflation inflation expectations, So that's that's 0:18:29.080 --> 0:18:32.000 a bit. You have an overhang of debt, which actually 0:18:32.040 --> 0:18:35.399 depresses economic activity to some extent, and then you have 0:18:35.480 --> 0:18:39.399 this tremendous demand for yield, I mean just incredible um 0:18:39.440 --> 0:18:43.320 demand for yield from pension funds, insurance companies, you know, 0:18:43.400 --> 0:18:47.679 you name it, individual investors, and it's almost like you 0:18:47.800 --> 0:18:51.040 get so low that people have to buy more just 0:18:51.160 --> 0:18:54.840 to get the income that they need. And so UM, 0:18:54.880 --> 0:18:57.960 I think that those are the main drivers. And the 0:18:58.000 --> 0:19:01.080 expectation that the central banks will not be able to 0:19:01.160 --> 0:19:04.040 raise rates anytime soon. Well that I do want to 0:19:04.040 --> 0:19:05.720 bring it back to the stock market because in a 0:19:05.720 --> 0:19:08.000 way there is a bright side to the sell off, 0:19:08.080 --> 0:19:13.400 and that being maybe the normalization of valuations. So now 0:19:13.440 --> 0:19:16.879 the SMP trading around it's average over the last five years. 0:19:16.880 --> 0:19:19.040 But isn't there a sense that we're going to have 0:19:19.119 --> 0:19:21.479 to see the e and earnings estimates come into I mean, 0:19:21.480 --> 0:19:23.919 we've already heard from a good amount of companies, but 0:19:23.960 --> 0:19:26.320 shouldn't that list only grow? Yeah, you're talking about the 0:19:26.359 --> 0:19:31.080 valuation versus forward estimates. Estimates, Um, they do look much. 0:19:31.440 --> 0:19:34.879 We're talking Thursday. On Thursday, which was the scene of 0:19:34.960 --> 0:19:38.280 one of the more harrowing selloffs of the last ten years. 0:19:38.320 --> 0:19:41.480 This morning and they got down to sub seventeen, which 0:19:41.560 --> 0:19:46.000 you're right, is about average. Certainly, you lose the easy 0:19:46.080 --> 0:19:49.679 criticism the markets over valued when that's true. But exactly 0:19:50.080 --> 0:19:52.600 those earnings estimates have to come true, and the whole 0:19:52.640 --> 0:19:55.359 point of the sell off is that they probably won't 0:19:55.440 --> 0:19:57.520 as a result of devirus into the degree that they won't, 0:19:57.760 --> 0:20:00.560 that's what everyone's in the stock market who thinking about 0:20:00.560 --> 0:20:02.520 such things as trying to figure out like what is 0:20:03.200 --> 0:20:07.439 snarrowing supply chains and dimming consumer markets? What does that 0:20:07.520 --> 0:20:11.880 do to that estimate? If the estimate falls at all, 0:20:12.200 --> 0:20:15.679 then things start to look expensive again. Yeah, it's to be. 0:20:15.840 --> 0:20:18.080 And I hate to make the two thousand and eight comparison, 0:20:18.119 --> 0:20:19.800 even though I guess we are in the worst week 0:20:19.840 --> 0:20:23.040 since two thousand April. To me that the kind of 0:20:23.040 --> 0:20:26.960 eerie similarity is not just people cutting forecasts. Uh, not 0:20:27.160 --> 0:20:30.920 companies cutting forecast, but literally just were withdrawing them and saying, 0:20:31.040 --> 0:20:34.240 not getting another number, we can't replace this. Um. It's 0:20:34.280 --> 0:20:36.680 almost like I forget which bank it was that came 0:20:36.680 --> 0:20:38.679 out in two thousand and seven and said we just 0:20:38.720 --> 0:20:41.880 simply can't price these mortgage bonds. Um. So is that 0:20:42.040 --> 0:20:46.639 sort of information vacuum? Uh? Kind of the biggest worry 0:20:46.720 --> 0:20:49.160 right now? I think it is. I mean, earnings estimate. 0:20:49.280 --> 0:20:51.560 Estimating earnings even the best of times is a pretty 0:20:52.280 --> 0:20:56.080 feudal endeavor. The Bloomberg column This a few years ago 0:20:56.119 --> 0:20:58.240 pointed out that by far the best indicator of what 0:20:58.280 --> 0:21:01.120 earnings will be next year, better than animal views, strategist views, 0:21:01.160 --> 0:21:03.960 what companies say is what they are this year, it 0:21:04.000 --> 0:21:06.600 comes much closer to being an accurate estimate of what 0:21:06.640 --> 0:21:09.480 they are in subsequent years. I think the two thousand 0:21:09.480 --> 0:21:12.720 and eight comparison, while a little bit extreme, is the 0:21:12.800 --> 0:21:16.199 right one, because what happened in two thousand seven is 0:21:16.200 --> 0:21:19.240 it It never really looked like valuations got out of control, 0:21:19.240 --> 0:21:23.000 because no one really looks at valuations the year after 0:21:23.160 --> 0:21:26.600 the earnings the earnings. UH stocks fell a ton in 0:21:26.640 --> 0:21:28.840 two thousand and they never there never looked like any 0:21:28.920 --> 0:21:30.479 kind of valuation. But but if you look at two 0:21:30.480 --> 0:21:33.960 thousand seven prices versus two thousand eight earnings, which ends 0:21:34.040 --> 0:21:37.440 up being the key comparison, stocks are priced like eighty times. 0:21:37.640 --> 0:21:40.399 That's why more or s you had so often the 0:21:40.400 --> 0:21:54.520 stock market. I'm not saying that's happening. I do wonder though, 0:21:55.080 --> 0:21:58.800