Don't Refinance Your House Just Yet, Rates Going Lower

Bloomberg dot com. Everyone seeming to have a race to the bottom in the face of the coronavirus threat, which raises a question is this going to support risk assets or does it signal a shift downward in the global economy that will ultimately be bearish for anything that relies

on growth. And joining us here as Carra Kadonna, chief US economist for Bloomberg Economics, as well as Damian Sassaur, chief Emerging markets credit strategist for a Bloomberg Intelligence Carl, I want to start with you, what do you think the Bank of Canada saying that the coronavirus represents a material negative shock to the Canadian and global outlooks. I would agree completely with that type of assessment. So we're seeing a supply shock, and then the question is how

big is the demand shock that accompanies it. Then when you see canceled the air fairs and conferences being canceled, that's the tip of the iceberg of things of being restricted. And then you know, as we get more tests conducted here in the US and actually get a better handle on what the case count is, UH, then you're going to see knock on effects in terms of you know, potential schools being closed and that sort of thing, and social distancing and quarantines will have a negative impact on

the economy. So the FED knows that it's medicine takes a while to kick in, and so it's jumping out there and acting now so that hopefully some of the medicine will be flowing by the time we start to see more severe impacts. Is a medicine enough damien to UH to prompt people to go into emerging markets? Is that where they should go now? So basically I would say no. I mean, cal makes a great point where we're talking about this is supply disruption, but in emerging markets,

we have to look at it and reverse. We have to say, what does the supply disruption mean on demand for U S dollars? What's a payment disruption? Look like right, And so you know they of Apple, Apple basically is now funding all of its key suppliers, most of which are based in Southeast Asia, trying to help them through the coronavirus and through this divide. Yeah. Um, eventually they're going to run out of ammunition to continue helping them.

Then they go those those suppliers are gonna have to turn in where they're gonna have to turn to local banks and central banks, and then you start to see stress and funding markets and that's becaust simply put, they need dollars in order to pay their huge dollar debtloads that they're basically incurring right now. And my concern is that yesterday's FED cut was not one design to necessarily

stimulate the US economy. It was more designed to uh respond to some of these bottlenecks and stresses that we're seeing in the global financial market and that could manifest itself in a lot of different ways and and J. Powell was very clear about that during his press conference that you know, they need to take preemptive action to provide some buffers to the economy from financial stresses but also from economic stresses and the very supply shock that

Damian describes for a m also becomes a demand shock. If we look at the China p m I numbers over the weekend and then some private numbers were released after that, it showed a worse stoppage in the Chinese economy than what we saw during the global financial crisis.

And so for Chilean's exporting copper and Australians exporting iron ore and coal, UH, that shock becomes a real demand shock they have to contend with, which is why we saw Australia cutting rates earlier this week, Canada today, and a couple other central banks piling in as well. The one thing I'll just throw in here is a footnote.

The FED has a vast network of business contexts, both financials and non financials, right so as they're assessing what's happening at key economic shock events like a blizzard or a hurricane or the current situation, they're talking to those business contacts and getting a better sense of what's happening on the ground. They're not waiting for it to show

up in the economic data. And I think contacting those business businesses UH in the various districts led them to a conclusion that this is a real shock that has to be contended with. I mean, when we have to remember here is that post global financial crisis, Basil three was designed with the premise that it's really financial, non operating deposits that are slippery, that can come and go

as they please. This is not that this is a hit on operating deposits at banks, which if you look at your high quality liquid as the portfolios and your LCR ratios. I'm not going to go into the What it means is that this is not something that Basil three was designed to prevent. So despite you have these swap lines in with central banks and all this other stuff, it's really gonna weigh on bank reserves if this persists

for that much long. Okay, so let's take a step back, because what we're really talking about is how much are we seeing financial market stress in addition to potential economic stress to come. And I think that that's been very unclear to people who are watching the market saying, look, this is a potential economic shock, but the banks are in good shape. Damian, are you saying that's not true.

I'm saying that the banks are in good shape. I'm just saying that a lot of the buffers that have been put into place, we're not really ready to contend with something like this, a real supply disruption on the operating level. And so, you know, you just look at Governor Karrel's recent speech, you know where he was talking about opening up the discount window. I mean kind of pre essent in the world we're living in right now.

And then you take in conjunction with that, Carl, you know, just the fact that you know there is the market now you see library spreads privately, you know, you just see that the markets are starting to price in the promise of quant easing could come. Well, but this raises a question about the Fed's impact here. And people think of it as mostly able to stimulate through the financial system, through the banking system. What can the effect be on the real economy? How can we start to look for

the medicine being felt to the real economy. Sure, well, there's important psychological impacts from this, Right, So when we look at the financial market shock, the wealth effect, which which is true for both households and corporates of a decline in the SMP. Right, we can compare this to very recent history. In in Q four, we had a correction in the smp UH and there was a very visible negative consequence for consumer spending in the following couple

of quarters. In the same thing for business investment trends. Right, if you're a business in your stock is getting pummeled, You're you're probably gonna hesitate before you take some aggressive investment measures and go out on a limb on new projects and whatnot. So the Fed stepping in to lower

rates reduces your financing cost. Also, it helps to stifle that risk off trade because it's a lot less appealing to park money into uh you know something uh R rating a return close to Fed funds now compared to two days ago. And we're gonna be hearing from St. Louis FED President James Bullard coming up in just about five minutes here with Kathleen Hayes of Bloomberg Television, who will be will be broadcasting that live. What are you

hoping to hear from Jim Bullard, Damien Well? I would like to hear a little bit more about what was the reason. I mean we didn't get much from share Powell yesterday. I mean he was very tight lipped. I'd like to see a little bit more um color as to you know, what was this, what was the real intention here? I think, you know, we heard moral hazard, those words ballied about yesterday time and time again. How you know, what does the FED know that we don't know? Right?

And so I think a lot of those questions are very real, and like you said, the psychological impact of that can be devastating if the FED is intended, and given the Fed's designed to keep you know, uh, you know, inflation low and employment full. Carl Well, I'm looking to hear from Jim Bullard how he would expect to proceed from here. So we've seen a fifty basis point cut. I think that we're going to see more. So my team is looking for two more five basis point cuts

at the actual meetings. Not not emergency moves, but certainly if the narrative starts to get away from uh, you know, uh reality or from a rational expectations here, then the FED would have to be aggressive once again. So just kind of hearing what he thinks is the appropriate response from policy makers more broadly, not just monitoring policy makers. No one, including the FED has the illusion here that this is a problem that can be fixed by the

FED alone. So sorry, just one last thing. Don't refinance your homelans just yecause rates are going lower. Damian Sasaur with a prediction. Damien Sassaur of Bloomberg Intelligence, car Kadada of Bloomberg Economics, thank you both so much for being with us. How significant is the disruption from coronavirus fears?

This has been one of the big questions that people are trying to grapple with and price in the markets as we game out a scenario in which there could be some sort of downturn recession, not recession, temporary V shaped you shape. Joining us here is Shelley Banjo, Asia tech reporter for Bloomberg. Had been living in Hong Kong right now. Where are you living? We're camped out in

our parents and my parents house in Dallas, Texas. Okay, So can you give us a sense before you decided to leave of what it was like in Hong Kong as the fear of coronavirus swirled in sure. So, Hong Kong, I think is a really interesting case because if you look at it right now, the cases are actually quite lower percentage wise compared to China UM and so it seems like a lot of these draconian measures are working, and yet it's not. It's not the greatest place to

want to be right now. So a few weeks ago we uh Bloomberg shut down their offices as as well as many other businesses. Schools were closed. Um, and we have an eighteen month old child, and so we decided, you know what, it's very difficult to be in a tiny apartment with a young child when playgrounds and playrooms and things like that are closed. So we decided to um, go to Dallas and stay with my parents for a little while. Okay, And can you give us a sense

before that of just sort of the fear factor. Are people staying inside? I mean it sounds like restaurants where they open. Was everything just sort of closed? Yeah, at the time, there were a fair amount of grocery stores and um and restaurants that were open. But it was right around then we started seeing people do runs on toilet paper. That was like a really big thing in Hong Kong. People started a rumor that there wasn't gonna

be enough toilet paper, and then everybody rushed. Um. You'd see lines outside of the pharmacies every single morning as soon as they opened up, and got a new shipment in for hand sanitizer masks and things like. Okay, so looking forward, can we get a sense of how quickly things have come back online and how much of a template this is for what we can expect potentially here if it continues to spread. Well, schools are still closed and a lot of businesses are still closed. Some of

the businesses have kept open throughout this entire thing. Um, grocery stores are still being stocked. Um, you know, people can now get toilet paper again. So people are happy about that. Life goals now, But what about when it comes to technology production? What it you know, that was one of the big questions with manufacturing and supply chains.

So it's a completely different story. In mainland China, where most of the production is, the lot of the supply chains have started slowly opening up again, uh slowly, uh you know, slowly adding production workers, but they're nowhere near uh act capacity or um you know, bringing their workers over and um they've reopen factories, but then they need to quarantine their workers for a few weeks to make sure that as they travel to wherever the factory is

from their hometowns, that they haven't contracted the virus, so factory production is still you know, um not you know normal. So there's been a lot of criticism around the Chinese response to the coronavirus, lack of transparency, numbers changing. How does the response from the Trump administration compare? Well, I think that the Trump administration had a fair a bit of more time to kind of decide what their response

was going to be. Uh So, you know, I think that it is something important to take to take seriously. You know, you get a lot of questions like is

this panic? Are people panicked? But you know what, this is a really important thing to take seriously, and so I don't think it's a panic at all all right, and going forward, just based on how quickly things are sort of getting back to normal within Hong Kong, does it give you optimism a sense that things can come back online pretty quickly, or does it give you a sense of sort of a little bit of an ominous sense going forward? I think Hong Kong is still in

a holding pattern. I don't think things are starting to come back online yet. And so until uh, schools um open, businesses won't open, and until businesses won't open, you know, everybody's kind of working from home and productivity does slow. Um. And so I think the uncertainty has driven a lot of people out of Hong Kong altogether, and so it has a big pet population in Hong Kong. I think a lot of those people are gone and aren't going to come back. Um. So we're going back. Um, we're

planning on going back right now. UM, so we'll see any sense when. I don't know yet when. And what about your ex pet friends. Uh, A lot of people I know left and are not coming back. And they're not coming back just because they think that this uncertainty is going to happen again. Yeah, And Hong Kong has a special uh circumstance of dealing with the protest for the last six months before that, and so the economy has really is in a recession. And h it's hard

to see mainland Chinese tourists coming back. It's hard to see um, you know, tourism just generally coming back. And uh, you know people who are living there, uh, you know want to be there, and you know they but if businesses closed and shut down, then people are not gonna have jobs and they're not going to be able to go out and spend and it's hard to see how Hong Kong's economy comes back in the short term. Well, Shelley Banto, it is great to see you in person,

however unfortunate under the circumstances. Shelley Banjo, Asia tech reporter for Bloomberg News, normally based in Hong Kong, here in New York City with US super Tuesday was quite a day for Joe Biden with some decisive wins, particularly in South Carolina, becoming the candidate for Bernie Sanders to beat.

Just crossing the terminal, UH, Michael Bloomberg, majority owner and founder of Bloomberg LP was dropping his presidential or suspending, i should say, his presidential candidate campaign and endorsing Joe Biden. And this comes after Clobachar and Pete Puttag dropped out and also went behind Joe Biden. They're also are reports that Elizabeth Warren, Senator is reassessing her campaign, so it appears that the field is getting narrowed down to Bernie

Sanders and Joe Biden. I want to bring in Rick Davis, partner at Stone Court Capital of Bloomberg Politics contributor UH and someone with incredible experience of both when it comes to politics, and when it comes to Joe Biden. Rick, what I'm curious from your perspective, how important is it that there is a narrowing down of the field at this point. Oh, I think thank you Lisa for first of all for having me, and uh, I think it's

critically important. I mean, one of the lessons we've learned recently in two thousand and sixteen is when various elements of the party, in this case the Republican Party, divide their vote amongst multiple candidates, it allows, you know, what was at one point in time a French paniate, Donald Trump, to be able to win not only a group of primaries, but the actual nomination without ever going above And so I think the Democrats partly have allowed the winnowing process

to occur. I mean, that's why we go to Iowa, New Hampshire. It's not for the weather this time year. And uh. And you you see the natural progression of events and the egos have been put aside and uh, and you can tell the Democrats are united in one thing primarily that is the defeat of Donald Trump. And that is what's motivating people like Mike Bloomberg to suspend his campaign to rally the troops around Joe Biden on the part as you mentioned of Amy Klobuchar and Pete Bout.

I mean, these are all things that had a major impact leading up to Super Tuesday and will after Super Tuesday. I think it's it's fair to say that this is now a very simple campaign against two people, um, Joe Biden, who represents the center and the establishment of the Democratic Party, and Bernie Sanders, who wants a revolution, and and voters are going to get to decide that. And believe me, that is a fair choice, right. I mean, they're there,

they got play is chuse from there? Well, Rick, as a former Republican strategist, former manager of Senator John McCain's campaign for president, I'm wondering, how worried you here, Republicans being from here, how worried President Trump should be about the momentum that these two candidates are getting this early

in the race or not. Well, if I were Donald Trump and his campaign, I would be very worried about a couple of things I saw last night on Super Tuesday, and one of them, principally is the gravitational pull that Joe Biden has with white suburban voters, especially women. UM. We know that these are the same voters that helped Donald Trump win an election against Hillary Clinton and UH, and we know that they abandoned the Republican Party at large UH in two thousand eighteen in the mid terms.

You could chalk that up to parties in power had bad mid terms. UM, but the fact that they rallied around Biden's campaign and states like Tech, this in Minnesota and throughout the South, and and really on a national basis, um propelling his victory in states that he had really no business to be winning from from just a tactical perspective, UM, that ought to give the Republicans and Donald Trump some pause that they're not doing a job of pulling those

those those suburban women back into their fold. And they seem excited about Joe Biden. Just looking forward, Bernie Sanders still very much in the race. So it's Bernie Sanders and Joe Biden. How concerned are you about a contested

contested nomination or contested h yeah, convention? Yeah, less so now right, I mean one of the things that you had to watch on Super Tuesdays, whether or not candidates like Mike Bloomberg, Elizabeth Warren could um could accumulate enough delegates to want to be power players at a convention.

In other words, you know, the group at large to accumulate enough delegates to keep Bernie at least you know, that was conventionalism, right how you stopped Bernie um Um yesterday before Super Tuesday and and they didn't write, I mean, they did not score enough victories or accumulate enough delegates on Super Tuesday to be a factor right to where they could actually stop someone from getting the magic number

delegates before the convention. And so it is much more likely in a two person race that you now look like you have that one of them is going to prevail. And uh, but I would say, right now, it's too soon to tell who that's gonna be. Rick is real quick here, I'm wondering what type of candidate Joe is likely to pick for a vice president. Could it be uh, someone on the left on at Sanders and Warren type side, or is he going to stick to his his guns

and sort of stay centrist. You know, I think a lot of that's going to determine what the state of the race is this summer. Right, the Democrats have an early convention at the end of July. UH, that's when they will be forced to have to make a decision on who the vice presidential running mate will be. And they will look at what they need to score a victory, because that'll be the number one thing, is how do

we actually win? And then they will want someone paired up with them, with Joe Biden if he's a nominee, to help him govern. When Joe Biden was selected, UH, the running mate of Barack Obama, Barack Obama had a fifteen point lead over John McCain. Believe me, I remember I was running that campaign, and and he had the luxury of knowing that it's highly likely that he was

going to win. So he wanted to pick someone he got along with, you know, that was friendly, that would uh complement his skill set, and Joe Biden was that guy. Joe Biden never added a single vote to the Obama campaign, but he was a great governing partner. That's gonna be interesting to see if that's the option forward. Rick Davis, Unfortunately, you've got to leave it there. Thank you so much

for taking the time. Rick Davis, partner at Stone Court Capital as well as former Republican strategist and former manager of Senator John McCain's presidential campaign. 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 Woyds. I'm on Twitter at Lisa bramwo

wits one. Before the podcast, you can always catch us worldwide on'm Bloomberg Radio