American Consumers Weakening Even Before Virus: DB's Slok

Bloomberg dot com. I am so excited for this next next conversation because there has been one economist who has uniquely been focused on the consumer, on the health of the balance sheets of Americans for frankly years, and now his research is all that much more poignant. Torsten Slock, Deutsche Bank chief economists joining us now and Torsten, you sent out a chart this morning that was pretty stark. It was global discretionary consumer spending a one percent decline

in two weeks. Can you give us a sense towards and of what we have seen so far in terms of the economic impact and what it might say if you extrapolate it further given the all the closures and shut down to the way of the coronavirus. Yeah, I mean, the unfortunate thing is that we went into this with the liquacy rates and consumer loans already going up. We have seen a particularly auto loans the liquacy rates go

up for several years. This has to do with loans were given to people who unfortunately were not able to pay their auto loans on time, so that meant that the dilquaty rate had already been slowly moving higher on a number of different consumer loans. So this of course is now the backdrop for the chart that I sent out that you're mentioning exactly that we're beginning to see

quite a significant drop off in discrestionary spending. And this resonary spending basically means everything from cars to washers and dryers, to furniture to electronics, things that normally require financing or things that are normally bigger purchases. The nuance, of course is that with many people working at home, you could expect to see some categories of consumer durable goods, meaning electronics and computers and other things that could be doing better.

But adaly speaking, this chart specifically showed for restaurants. We have seen and this is more on the anecdotal side, but we've seen a number of indicators begin to show that the unfortunately, the global consumer and this is not only a US phenomenon, The global consumer is importively stepping pretty hard on the brakes when it comes to discursion or spending, and that is of course not particularly good news when you think about the overall picture for the

global economy. So Torsen. Over the weekend, we've seen a lot of forecasts come out economic forecast about US economic impact with obviously a significant contraction in the second quarter, but most of them have a pretty swift rebound INCUS three and four, suggesting a little bit of the type of scenario where do you come out on what the economic impact could be here? Yeah, this is afterlutely critical,

and this is also critical for markets. I mean, what will the other leg of this v or even whatever, If it will be a you, what will that look like? The fear we have is that it will be a muted rebound. And the muted aspect comes essentially from the fact that once we are on the other side of the virus, if there are fears that the virus is not quite defeated everywhere in the world, if they're fears that some countries still have it, if there fears that

it might still be in some emerging markets. Then you do begin to wonder but one of them. The implications of course also for travel, not only traveled globally, but even travel domestically. What are the implications in terms of how people think about what the longer term planning is in terms of vacations, the longer term planning in terms

of businesses doing things. So the reason why the reason to be somewhat cautious about the second leg of the v or the leg and the second leg of the move higher is that we will probably come out more scarred as consumers on the other side, and corporates will quite frank. We probably also come up most card where everyone will have higher stavings and you, as you know too well, if you have higher stavings, that means that consumption will also be muted. If you have higher savings.

For corporates, that also means that cap expending is also going to be muted. So the risks are that the rebound here is going to be more nuded and more limited relative to the speed with which we are folding. At the moment we're speaking with Torsten Slock, you economist at Deutsche Bank, and Torsten You've done a lot of work about the fact that a lot of American households don't have an extra four hundred dollars to cover emergency expenses.

You've also talked about how the lower wage workers are going to get harder hit by the disruptions caused by the coronavirus. And I'm just wondering going forward, do you have a sense of whether the fiscal stimulus currently being bandied about in Washington, d C. Adequately gets money to the people who would need it in order to continue their lifestyles and at least cushion the blow a little bit to get back to the kind of recovery that

you're looking for hoping for on the other side of this. Yeah, this is absolutely a key question from a follcastic perspective, both of the economy and for markets. The problem is, as you know, and as you just mentioned that you look at the fit data about of the population would not be able to come up with four hundred dollars

if they had an emergency expense. Data from two thousand nineteen shows that a roughly half of US households don't have an emergency savings account, and that means that they don't have a savings account with money put aside if there is some unexpected expenses. And if you also look at the distribution of this, it is distributed more among

lower income households. And if you also then look at the issues in terms of age distribution, it is also distributed more in terms of the younger people and the younger generations who don't have savings. So it will certainly

have a significant impact distributional terms on the consumer. What we're going through here, and to your question about the package that's being discussed, we need to see exactly how the design is as you cover so well, this is still being debated, but it is pretty clear that they're from a market perspective for every day then we don't get a solution, then there is a risk that this will be a deeper slowdown simply because something is needed

right now. And if you go back and look at what happened in two thousand nine, then when the Congress voted on sending checks out to consumers, it took two months from the bill was voted on until the checks actually arrived, and two months forward from today. That brings you too late may that's a very very long period for consumers while they still have to pay their bills on their rent, the mobile phones, the groceries, everything that's

going on. And that's why the discretionary spending does get a bit lower priority in that scale of things. Is it already too late? I wouldn't say it's too late, but I mean, as as we all know, and if you take the statistic into account that they have, the US households really only had their checking account and the

money that they had in that. And if you are so unfortunate that you lost your job through this, and you so unfortunately you don't have any savings, I mean, we have a rent payment coming off here and April the first, and maybe we'll be able to get through that. But the longer that we had to go through rent payments and payments and mobile phones, the more the more cautious and more hesitant and reluctant the US continuers probably get. So that's why the more confidence how US households and

markets can get that package is coming in. It's coming sooner, run and later. I do think that that will be very sumportive, of course importantly for markets, but most importantly ultimately for the US economy. Torsten slack. Thanks so much for joining us. We really appreciate your perspective. Torsten slock Is, Deutsche Banks chief Economists. Well, certainly the news of the morning is the Federal Reserve unvailing unlimited quantitative easing to

aid for businesses and states. To get some details, we welcome our good friend Michael McKee, international economics and policy correspondent for Bloomberg. Mike, thanks so much for joining us. What are the salient details here of what the Fed announced this morning. I think the most important is the unlimited que and the fact that they're starting this week by basically doing that six billion dollars in treasuries in

mortgage securities every day this week. That dwarfs anything we saw during the quee one, two and three period, so they are going all in on that. And then the fact that they're buying corporate bonds. Now they're setting up a special purpose vehicle. The idea is keep these things off the FEDS books. Technically they're not allowed to buy corporate paper, so by setting up a special purpose vehicle they can sort of get around that. And you mentioned

that the FED is is putting up for this. It's also the Treasury Department in the corporate bond programs and the asset back program. The Treasury is taking an equity stake in that as well, so they're working together on that. And one important thing to keep in mind is that if the stimulus bill puts more money into the Exchange Stabilization Fund at the Treasury, as it's sort of scheduled to do, they can ramp these up even farther and

by even greater amounts. So the FED and Treasury working together to do as much as they can to try to take some of the pressure off in the markets. So the feders are really sort of reinstating some of the crisis era programs. The program you were talking about is telf right the term Asset BacT Securities Loan Facility that they're reinstating, and basically, uh, the idea here is to create a way to lever up to free up cash based on existing loans and securities that are held

on dealers and investors balance sheet. I'm trying to understand the credit risk that the FED is taking on here. Yes, this is providing more cash to the system. Are they also essentially bearing the credit risk for these instruments too? Well? The special purpose vehicle will at least for the corporate

bonds bear the credit risk. They are insisting that what you can put up is got to be investment grade, but they're going down to triple B minus, so they're they're willing to take, um, you know, some risk that some of this stuff may fall if the corporation is ultimately downgraded then um the TALF program is triple A rated assets, so they're taking as little credit risk as possible. They have a requirement in the new Dodd Frank law that they can't lose money. Basically, they can't put financing

at risk. So they can only go so far with that, and that's one of the reasons you have the Treasury involved in this taking the first trunch of risk. Hey, Mike. In terms of scope at scale, how does this action compared to two eight? They've gone beyond uh, two thou eight and in two ways, one in size there are more programs now buying more things, and also in speed. There has since two thousand eight been a doctrine sort of developed an economics called optimal control, which is a

nur the term for go big, go fast. When you're facing a crisis, throw everything you've got at it as quickly as possible to get ahead of it, and don't chase it down the market, you know, don't chase the market down. And so that's what they seem to be applying here. They seem to be all in on that if we do everything we can now, it will put

a floor onto the markets. Obviously, the floor is going to depend on what your outlook is in the markets for how long this is going to go on, But the FAN is signaling it's going to do everything possible is out. Does it have anything left? Uh, it doesn't have a whole lot left unless it could take on more credit risk. I'm not sure what else they could buy. They're pretty much buying every asset except equities, which they're legally over here. If they want it, they could have it.

They come get it. Yeah, we'll have a flea market sale. They can buy that. But the Fan is doing everything they can do now. There. They did mention that they're going to set up a main street lending program, but we don't have any details on that. It does seem to be tied to whatever comes out of Capitol Hill,

and we'll see how that works. There was some thought at the FED that they didn't really want to be in the position of being the lender to main Street because they don't have the bureaucratic set up to do it. That banks would be better off doing that, and banks could be funded directly through the fiscal program. But it may be that the Fed is going to have a

role here. Michael McKee, thank you so much for for breaking it down for us, and we'll continue to get details and we'll bring them to you, but definitely throwing the kitchen sink at it. The Federals are trying to cut out ahead of what will inevitably be a really difficult time in the economy. Michael McKee, International Economics and Policy correspondent for Bloomberg. Really amazing the speed and the scope to which they are acting. Perhaps they learned from

the last time around. It does not help anything to be slow, certainly when Congress is not passing their bill in the fashion that everybody would like. Let's bring out our good friend, Kid Jukes, Global ffex Strategist for Society is General kit Thanks so much for joining us. We know you're busy talking with your clients, keeping in touch with the market. Give us a sense of you know, We've seen the dollar, the d X, Y and next just rallies so dramatically over the last couple of weeks.

What's your sense about kind of the currency markets right here? Um, that they're comments today than they've been, which doesn't mean they calm um you, last week was a mad scramble for for dollars. We know, we know the dollars the world's global currency. We know there's a lot of folks who have dollar assets that they financed with short term dollar liabilities. Whether they're boring and lending dollars from Americans or not, doesn't matter. They need them, and they needed

them immediately. That the FED has, you know, along with Pizza's mother in law's as Incinc. Whoever think he had involved in this particular exercise, that they were very quick to expand the group of central banks that they do swap arrangements with to get more dollars more widely into the system. They seem to have calmed down the domestic front end of the money market. Um, but it's a

huge problem. So so on any given day we look at it and you know, I couldn't promise you that we wouldn't start feeling dollars tight again later this evening, you know, before I go home. But but today, um,

as the FED has ramped up yet again. You know that the dollar is a little bit lower against something against the euro and the and the end the currencies that are still it's a lot weaker by the way, against things like you know, the Norwegian chrona for example, which is sort of getting itself out of gael But it's it's still um. The weakest currencies are sort of half related to that, which are the ones which are

um most all sensitive. So some of the emerging market currencies a week week, generally the oil sensitive currencies, um, they have you know, they have a whole problem of their own really with the collapse and in all prices gave them this kind of unique double wemmy. But but the FED is doing a fantastic job of of of doing more than the ECB did when they did whatever

it takes. If if everything is bigger than that, then then then this is where we are, and it could I think most of the people who I was speaking with over the weekend agreed with you, but they still

felt rather catastrophic. And I'm wondering from your perspective, there is a feeling out there a very big fear that all of the borrowing, the leverage that was built into the system, with especially emerging markets borrowing in dollars and corporates around the world just borrowing as much as they could do things like you know, share buy backs and pay out dividends, that the FED can't stop this, and that possibly fiscal stimulus can't either, and the system just

needs to kind of exhaust itself before people can really start to reassess the damage. Do you think there's any credence to that view. I'm worried about that being true, and I think central banks can can get to gross with this that you know, I mean, there's a there's a problem that comes later, which is that if you know, if if if the if. Corporate America for example, has re levied itself since the financial crisis, so there's even

more leverage than there was last time. Um. Is it great that we all get sorted out with infinite, infinite free short term money to make everything okay? Um? You know we we we do actually have to clean the system out, so but but I don't think we need to clean this out in the middle of a human crisis. Thanks that's not a useful piece. So I do think that we will that we will get through. But but

you're right, it's enormous, you know. I mean again over the weekend, you know, the kind of the charts that were being floated around. We're all armageddon ones in terms

of how bad some of these things. Outflows from outflows from bond funds, from ets, the weakness that we were seeing in things, and um, what what I what I think though, if there's a chromos comfort is that what we've learned over several cycles now it is to to go in large, not worry about inflation um and society up later, but but go in and really make sure that the financial system doesn't make the economic problems and the real life problems worse than they have to be already.

I think they'll succeed. But I am not anising other than anxiously staring at screens all like the rest of us. Yeah, Kit Jukes, thanks so much for joining us. We really appreciate you taking some time out of your busy day. Kit Jukes, global effects strategist for Society General, joining us on the phone again. The d X Y index off a little bit less than one percent but has been so strong over the past couple of weeks, Lisa, as investors just flocked to the you know that the US dollar, Yeah,

you know. Frankly, I'm getting a little bit of confidence today that gold is up, it spot world is up because there was a fear last week that everything was broken, with bond yields rising and gold prices falling in this idea that you could just sell whatever you can and there wasn't really a bid for anything other than cash or dollars on the other side of it, And there

does feel like there is a different tone today. The question is whether it'll be enough to really lubricate the system and get people to have conviction going into risk your credit at a time of a really uncertain economic backdrop. There's a question, Paul. A lot of people, particularly wealthier individuals, had been getting rather cautious in the months leading up

to the coronavirus induced disruption that we've seen recently. There is a question of how they got cautious moving more into real estate, whether they have the cash to actually start deploying it, and whether they're starting to get perhaps a little bit more I don't want to say bullish, but starting to pick over some of the rubble in amid this sell off. Joining us now as someone with a very unique an important perspective on this, Michael Sonnenfeldt,

chairman and founder of Tiger twenty one. It's a pure organization of ultra wealthy individuals that come together and share their investing strategies and views. Has seven members more than seventies seven billion dollars in assets. Michael, I remember last time we spoke with you, you were talking about how there is an increasing focus on real estate. Can you give us a sense of how some of the members of of of of your organization or position heading into

this and what they're talking about right now? Sure, well, everybody is obviously sucked into their homes and gone through a transformation of being virtual, so that's new for everybody. Going into this are members which are not just wealthy, their entrepreneurs. It's a subset of people with certain levels of wealth, but because of entrepreneurs that allows them to think about this quite differently. And for the last year

people been getting nervous about the market. But of course nobody could have anticipated the coronavirus, nor the Russia uh Saudi Arabia oil debacle. It's sort of like having a tsunami and an earthquake at the same time. So will While real estate has remained tops for our members at

about of assets, it's actually come down as well. They had taken chips off the table over the last year and maintain very strong cash reserves at twelve percent so that they're not forced to sell at a bottom like this, but have enough living expenses so that they can power through or survive to the best of ability. But obviously there's a lot of devastation all around. Michael, what are your clients thinking here as to you know, kind of

the duration here? Are they thinking kind of police's question, maybe time to maybe look at certain names or certain asset classes. Are they take any boy, this could be a much longer, lower for longer type scenario. So I don't think there's any one view. It's a collection of views. And our members who are typically in groups that meet in person now are meeting virtually. We've shifted the organization completely to virtual meetings on a dime, so to speak.

Um and obviously some members are looking for opportunities. A number of us traded shorts at the first sign of coronavirus of the market, and that trade has turned out to be very good. But you almost in most cases the profits from those shorts has simply offset the clins in the portfolio because you can't liquidate private equity and real estate in a month, and that's where we have

a large concentration. But as to timing, I think everybody understands this is this is totally unique and the the medical issues, the health issues are likely to peak within three to six months, as has happened everywhere else. But when you have the kind of economic dislocation, the question is how long will it take for the economy to bounce back? And the only insight that we have is typically it takes less time. Most people say ten years. This could be returned in two to three years, but

it's not going to be in six months. Michael, I want to go to your point about the real estate investments, that there were some chips taken off the table ahead of this, but that still was uh a significant holding or the biggest holding of your members. Tom Barrick, real estate investor, said in a Bloomberg Television interview that the U s commercial mortgage market is on the brink of collapse, the predicted a domino effective catastrophic economic consequences if the

industry isn't basically back stopped by the government. I'm wondering whether any of your members are I guess in technical parlance, freaking out right now and trying to liquidate as much of their holdings as they can, uh in the face of what could be even more pain. Yeah, So you have to distinguish between the equity the real estate equity market and which is not a liquid market other than if you own it through reeds, and the commercial credit market,

where there is more liquidity. Most of our members real estate exposure is in owning buildings directly or through private partnerships limited partnerships. And you know perfect example is, UH, my partner and I developed a Coals department store, meaning we own the land and Coals built their own building on the land. That was a rock solid triple net lease. But right now, UH, Coals is shut at their doors.

They have no revenue, so they're not going to pay their rent and if they not, they haven't stopped yet. But if they don't pay their rent, then how do you pay the mortgage? And so you have this cascading effect So what Tom is talking about is unless there's help for the rent payers, you'll have this cascading effect that the landlords can't make their debt payments, and that's where all hell breaks loose. So Michael, just real quickly, what do your members think the government needs to do here?

The government first of all needs to act decisively. Members, I think largely expect a bail out, uh, and they really would like to kind of leadership nationally that is calming that we've seen from FDR as an example during the war. And hats off to Governor Cuomo who seems to have really taken the lead in the kind of

communications and straight talk that is calming to people. Uh. People really would like to see a steady hand and an optimistic but realistic assessment about how to get through this. Michael Son and felt, thanks so much for joining us. We always appreciate your unique opinion on investing across a whole series of asset classes. Michael Son and fell as a chairman of Tiger twenty one with a unique group of investors, Ultra high net worth investors tend to have

some unique ways to look at the markets. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa Abram Boyd's I'm on Twitter at Lisa A. Bram Woyds One. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio