Fed Cannot Cross Red, Dark Line To Support Junk Debt: Booth

What more can and will it do? And Paul, one area where people are looking at is could the Federal Reserve expand its bond purchasing program beyond investment grade debt to include some junk rated debt? And it raises some serious questions about moral hazard as well as just credit risk. Yeah,

it's interesting. Remember we had Iver Jersey from Bloomberg Intelligence on I would say more than a week ago, where he was the first one to kind of just said, uh, they just think could double too close to ten billion dollars. And then I've heard that number echoed by others as well. Yeah, echoed and then expanded upon with some saying it could reach twelve million dollars in the not so distant of future.

One person who has been tracking all of this very closely and has the inside view when you talk about working at the at the Federal Reserve, is Daniel de Martino Booth, who joins us now. She did work for the Dallas Federal Reserve and currently has her own firm where she analyzes all things credit and beyond. And I'm just wondering, given the fact that Daniel de Martino Booth CEO of of of Quill Intelligence, what's your perspective in terms of what more the Federal Reserve can do? Well?

I think right now, this guy's the limit went back during the financial crisis when I was inside the FED, the purchase of corporate bonds was debated and and and refute it. It was decided at the time that that was crossing the line, and and in fact, I think DoD Frank tried to make sure that the line was never crossed again because it specifies that the FED cannot

extend credit to borrowers that are insolvent. But the work around the bypassing of the Federal Reserve Act via a special purpose vehicle at the Treasury effectively means that because the loss goes to taxpayers, and because the paper doesn't sit on the Fed's balance sheet, the FED can buy whatever it wants. So, Danielle, so give us a sense of kind of where you think, Um, what more you would expect the FED to do? Here? We finally have some fiscal stanleus and we can talk about that in

the moment. But staying with the Fed, what's what's the next steps for the Fed? Well, you know, I think it'll be interesting to see what we do and do

not hear out of today's minutes at two pm. Um. You know, some people don't realize that the cares act Um actually allows Jerome Powell to use his judgment to determine whether or not Federal Open Market Committee meetings and emergency meetings applied to the Sunshine Act, which requires divulgence afterwards in the form of some for some form of minute.

So in that we're not going to see that the minutes will or will not hint at whether the FED is going to cross that investment grade to junk line. And that is you've ys just put a report out that was on the Bloomberg terminal. That is where everybody's focus is right now. I've even gotten questions as to whether or not the FED can put a time stamp on fallen angels and come in after the fact, and by triple B debt that has already been down graded, if it if it was downgraded after March. These are

fascinating things running around. But if you look at one thing, and that's the compression that we've seen in junk bond yield, I think the market has moved on to concluding that the FED is actually going there next and potentially stocks via e t s, as the Swiss National Bank and the Bank in Japan already do. So what's the argument for the federers are stepping into jump bonds here? I don't think there is an argument. I think I think

it crosses a very dark red line. I'm writing about this today in fact um, there's a reason that that dog Frank specifies that the FED cannot extend credit to

borrowers quote unquote bars that are insolvent. But but okay, I guess on on the counter side, you could say the Federal Reserve is looking to prevent systemic defaults across the board that could end up wiping out pensions as well as insurance companies and municipalities and whoever else, and that a lot of these companies would have been viable if they hadn't been closed down man mandatory closed down based on the government's policies. What would you say to

that argument. I'm certainly sympathetic to that idea, But the fact of the matter is of major shops across Wall Street. Morgan Stanley put it out a few weeks in fact, before the coronavirus outbreak hit, that of triple B bonds were effectively junk rated. So I think the rot has been in the bond market industries long before uh this

emergency broke out. And for that reason, and especially given the sheer size of the ten trillion dollar uh US corporate bond market, there's plenty that the Fed can do with companies that are deemed as being viable and solvent. All right, Daniel, let's switch over to fiscal policy. We got the two trillion dollar UH plus policy recently. That looks like Congress is working on something perhaps as large

as another trillion dollars of fiscal stimulus. Is that enough? Well, you know, right now it's a matter of chasing time. We don't know if it's enough because the money hasn't gotten into the hands of companies that are truly insolvent and viable, and that would be a lot of the smaller businesses that are in something of a holding pattern hoping to get through the paperwork morass and get that

money delivered to them. So you can listen to all you want at press conferences about increasing the amount of funding available, but you actually have to get the cash in the hands of the small businesses, and I think that that is what's critical at this juncture. How worried are you, Danielle about an increase in consumer defaults UM. I think that it depends on how long you can push forbearren Stout and whether or not there's a second wave of the virus even as the United States makes

plans to come out of this UM. So it really will be a matter of how long the federal government is able to provide forbearance. But that just applied to mortgages. Look, we've got there are car companies that are extending thirty days at a time at this point on auto loan UM. There's credit card defaults that are going up. A new survey out of the New York Fed stated that quite a few Americans right now are are concerned that they

can't make it past three months without defaulting on their debts. So, you know, we we entered the COVID nineteen crisis with sub prime auto loan delinquencies at recessionary level. So I think it's it's a bit naive to say that we're not going to see um more uh more more households falling into arrears in the days and weeks to come, especially given we're seeing so much stress come out of

households that make more than a hundred thousand dollars. Right, Danielle di Martino Bouth, thank you so much for joining us. We as always appreciate your thoughts and commentary. Danielle's the CEO and director of Intelligence at Quill Intelligence. She's also a former advisors that Dallas Dallas Feder Reservant. She is a Bloomberg opinion columnists, so she is quite busy. Lisa really liked her comments about you know, you know, the

consumer credit is going to be an issue. It's not just mortgages here, We're going to see it across the credit spectrum. Uh And the longer people are out of work, the bigger obviously the bigger the issue will be for the economy. I was struck by a common idea that markets are forward looking, and Paul, I'm struggling to understand how markets look forward when there is no guidance and when a growing number of companies are scrapping any guidance or expected to do so. And this is sort of

one of the main conundrums. How do you invest at a time of such little visibility? Joining us now as Phil Orlando, somebody who always has a view and has been really right repeatedly when it came to some bullish calls over the past few years, chief equity market strategist for Federated Hermes, joining us from Westchester, Phil, how do you deal with this conundrum, the fact that we have very little visibility into the future as far as corporate

earnings or the economy. This was a question that we addressed ourselves in the early stages of this UH market down thirty in in five weeks, the sharpest decline from a record high to a bear market in history. And UH technicals weren't making any sense, fundamentals weren't making any sense, and as you said, with h forty some odd states closed and with something in the neighborhood of a quarter to a third of the global population sheltering in place,

S and P five, our companies have withdrawn guidance. So what do you as an investor to do? What we do it is created an alternative methodology for analyzing what was going on. And not to be too simplistic about it,

but I call it my three legged stool. And what we did is is we needed to get our hands around three issues monetary policy, fiscal policy, and social policy in order to gauge the trajectory of this disease and what might the implications be on the economy and the financial markets and and so far, I think the work that we've done here has given us a sense directionally

how this thing is going to play out. So, Phil, I'd like to go to maybe that third leg of the stool that you were talking about, which is kind of consumer consumer behavior. You know, we're gonna get get another really brutal jobless claims number tomorrow, We're gonna get incredible record unemployment here very soon. How do you think the consumer and consumer behavior is going to come out

of this thing? On the other side, I think we're gonna be fine, because what what this situation, This, as disastrous as it is, is not the Great Recession of oh seven oh nine or the bursting of the tech bubble in O to oh three. This was a forced shutdown of the economy based upon the ultimate Black swan, an exogenous medical shock that we didn't do this to ourselves. This just sort of happened. And so we're all doing the right thing, which is, you know, locking down and

sheltering in place. And we did it in March, and we're gonna do it in April. And if the trajectory of the illness and the mortality plays out the way we think it will, um, then we're going to start to slowly reopen things at some point early in May. And the equity market is a forward looking discounting mechanism, is at least in our view, is saying, Okay, as we get into the second half of this year, you've got this enormous pen up demand, uh that is going

to start to be fulfilled. People have been depriving themselves of uh, you know, Tomahawk, rib I steaks and nice bottles of cabernet for a couple of months and we haven't seen a show or a ball game, and and we're gonna want to do something and I think the consumer is going to start to come back. Um, you know, illness permitting in the second half of this year. Phil, it sounds like you're pretty polish. Is that accurate? That is accurate. Um. As we look at the three paths

that this thing could take. There's the L shaped recovery where you just go straight down and there's no recovery, you just you're in a deep procession for a couple of years. We put the probability of that at about ten percent. There's the V shaped recovery where you come straight down, which has happened, and then you go straight back up and everything's fine after a couple of rocky months. Um,

we've got about a ten percent probability on that. Our base case is sort of a U shaped recovery where we're going to bounce around here a couple of quarters of negative GDP, but then the market and the economy are going to come back strong in the second half of the year. But the key issue here is we've got to see the trajectory of the illnesses and the mortalities peak. Now our best gas based upon our analysis was that that was going to happen in Holy Week,

and this is Holy Week, and and so and and. Frankly, I gotta tell you, we're we're pleased with what we think we're seeing here in the metropolitan area, which is, you know, sort of the uh, the the epicenter of

the entire world. Yeah, just just about thirty seconds. Given the fact that we're seeing statistics that nearly a third of US apartment renters didn't pay any of their April rent, that more than a million workers in the retail sector have been furloughed, what makes you think that American consumers will be in a position to spend the way they did before this. Well, I think from a policy standpoint,

monitoring fiscal we've thrown everything at it. Uh. You look at the extension of unemployment insurance, the additional six hundred dollar weekly bonuses on top of of regular benefits. Uh, the fact that I think landlords recognized that they're not going to be collecting any rents for the next couple of months. I think all of that is sort of built in to to what are going to be disastrous numbers March April, probably through the balance of the second quarter.

But I think the spirit of the American people and the desire to get back in the game is going to allow us to start to come back to life in the second half of the year. Philorlando, thanks so much for joining us. We appreciate that. We hope your optimistic view proves correct. Philo Orlando, chief equity market strategist for Federated Hermes about eighty nine billion dollars under management, so he's certainly talking for a lot of money, joining

us on the phone from Westchester and Lisa. Phil has always been bullish, always been optimistic. Key's you know, during this bullmarket he has been absolutely spot on here. I think the real question I have is, you know, has consumer behavior changed or at least not just the near term and maybe even the intermediate term, And how's that going to affect the economy and spending habits going forward. And so we'll have to see, because that's really a big,

big issue going forward. Part of that two trillion dollars of fiscal stimulus that was approved last week includes cash directly for consumers. The question is will it be enough and will it arrive quickly enough for that. We turned to Greg McBride. He's the chief financial analyst at bank rate dot com. They did some recent survey work on that. Greg, thanks so much for joining us on the phone. What

did your survey tell you? But it really shows how badly so many Americans need this money, and I think that's evident by the fact that of those that expect to receive a payment say it's somewhat were very important to their near term financial well being. And also when we see how people plan to use that money, Uh, we're going to use it for monthly bills, forty one

sent that they would use it for day to day essentials. Um, there's some overlap there because it was you could pick more than one, but I think you know, those were heading shoulders above things like adding to savings and paying down debt. So I think that really illustrates that even those that are still working, they don't have much of a cushion, and if they're concerned about the sustainability of their employment or income going forward, that this is going

to be a valuable cushion. Greg. I was struck by your report. It showed, yes, it's a cushion that's valuable, but it's not nearly a big enough cushion, and The study that banquet dot com did showed that thirty one percent of US adults who participate receiving a stimulus check believe that it would not be enough to sustain their financial well being for one month. So is it going to be ineffective when this money actually does get to consumers given the fact that it hasn't even gotten to

any of them yet, was it worth it? Well, I mean, I'll leave me whether it's worth it up, I think that's something we can evaluate in hindsight. But you know, I think for those that have been furloughed or laid off, have suffered an income disruption, the timing is critical because it can really bridge the gap between the last paycheck and the first unemployment check. You know, a lot of people are in that limbo right now. Um, And so the timing I think is is you know, really really

important to that. But you know, it's not going to be a panacea by any means. And and you know, when we look at the economic fallout from this, the financial pain that households feel is something that's going to be with us for a long time. I mean it's going to be measured in months and years, not something days. And weeks, so long after the state at home orders have been lifted, there's gonna be a financial hangover the a lot of households are going to continue to deal

with for some time thereafter. So it sounds like from your survey that the respondents feel like there needs to be more, Is that right? Yeah, I mean, and I think a lot of that is just you know, we you know, we've only really kind of touched the tip of the iceberg on unemployment. Ten million people have filed for nemployment in the last two weeks. That's just those that have been able to file. We know there are more that haven't even been able to get through yet.

Um and you know, unfortunately, more layoffs to come. So uh yeah, I think there's a recognition of that on the part of consumers and even coming into this, you know, there were a lot of households that you know, it wouldn't take much to kind of put them off the rails financially. You know, we found a forty one percent

of Americans. This is back in January, which seems like a lifetime ago of Americans at that point could afford an unplanned expense of a thousand dollars and pay for it out of their savings, just so um, you know. And that was at a point where unemployment was at a fifty year low, and obviously things have really changed

dramatically since then. So, Greg, this is an interesting kind of development, given the fact that the American consumer was praised as being the bedrock of the recovery that we saw for a decade that came crashing to a halt in the past month or two. And I'm wondering going forward, how able some of these consumers will be to go

back to their previous spending habits. I mean, we were speaking with Phil Orlando earlier in the show Federated her Veys, and he was saying he expects that when this all does lift, everybody will want to run back to Disneyland or go out and to get a big steak. Is that going to be feasible given the destruction to the balance sheets and a lot of households. I think they're You're gonna see two different extremes. I mean, yes, there

are going to be those that have cabin fever. In the first place, they're headed as the airport or uh, you know something. They want to you know, get out and kind of resume normal life and you know they're they're still employed that you know, they're they were able to do that, But there are going to be millions that are still unemployed and or that get re employedment at a lower level of income, and they're not going to be able to generate the same level of spending

that they had in the past. And uh, you know that's coming out of the last prossession. The recovery was one that had a you know, very slow growth trajectory. You know, depending upon how long we see elevated unemployed this time around, you know, we could see something similar. So, Greg, are you looking at you know, mortgage debt, credit card debt? What are you looking at for as it relates to the consumer, Well, you know, in terms of monthly payments,

because people have been able to refinance at lower rates. UM, the stream on the budget in terms of monthly payments as a percentage of income is some of the lowest that's been in thirty five years. The actual debt is bigger, but you know, people have lessened the pain of those

monthly payments by virtue of of low interest rates. Uh. Fortunately, with widespread forbearance and payment relief options, UM there are ways that people can buy themselves selves some valuable time, getting a forbearance on that mortgage or the car loan, you know, those big ticket items that really carve a big hole out of the monthly budget, and that could

be critical. I mean, if if you're only seeing an income disruption for a couple of months, being able to get a reprieve on that mortgage or car loan for a couple of months could really make a big difference. And uh, you know, and being able to to sort of resoom normally from a financial standpoint, you know. Once we're giving me all Claire. Greg McBride, thank you so much for being with us. Greg McBride, chief financial analyst for Banquet dot Com. Time to check in with Bloomberg Opinion.

Now we're joined by opinion columnists. Take him covers all things technology for Bloomberg Opinion, and we're gonna talk about Zoom. Here's the stock that's just about doubled uh since the pandemic, uh really crossed our desk. Here is people go more and more to remote learning, but now there's some concerns about security of those streams. Hey, thanks so much for joining us. Give us the latest on what's going on with Zoom. I know it's being sued for fraud and

mounting security concerns. What's going on? So I think there is on legitimate cristim prisons for what they've done. Um, their marketing has been overly aggressed. They've been misleading with this term end end encryption, so they're getting a lot of scrutiny for that. Actually used this less robust form of encryption called a less security, which is used by many web services like Gmail. So I think they might get fined for that. So let's just take a bit

testep back. Zoom got a lot of interest over the past few years as people thought about the possibility of a greater shift to an online workplace that's been accelerated by the COVID nineteen related shutdowns. Now Zoom finds itself the subject of some unwanted scrutiny in addition to an

incredible surge and popularity. Can you just give us a sense of the liability aspect of this, aside from the legal areas of just you know, people moving away from the platform or perhaps looking to regulate it more closely. What's the latest I think, like I said, they might get fined on this kind of aggressive marketing they've done. But I also think some of the blame has been overblown.

They've been getting a lot of crissystem over this zoom bombing thing, where people panters, pranksters get into these calls. But I think most of that is due to people not enabling these spasic security features like passwords, waiting room, invitation only meetings which weren't weren't enabled by default, And now Zoom has enabled these security features by default to stop these things. So it's almost like if I put my cell phone out there on the Internet, like I'm

gonna get prank calls. So Zoom A lot of the users a Zoom. It was mainly used for enterprise customers before this great surge over the last few weeks, and I think that some of the blame might be overblown there. All right, So Tay, So what can Zoom really do here? I mean, is it just some new software, some new encryption? What can they do? So they already said that they're going to do the end to end decryption is gonna take a few months. This morning they hired the former

security chiefs of Facebook. That's look at all the practices and try to improve their software for laws, but a lot of it is just educating people on how to use these security features there are already there, um, and they really gave Mede that mistake. They didn't see the change in nature the user base from enterprises consumers over the last two weeks. Now Zoom is literally the most popular app on the App Store. It went from ten million users December in March, so it's like more popular

than TikTok these days. So they really need to recognize it's a different moment for them. They they really make the best, easy to use, high quality software that everyone wants to use, because it's so much for their competitors, and they really need to realize that they have to do a better marketing and education for their customers. Paul I will say full disclosure. I'm having a zoom uh passover sater tonight with my excited family and my nine year old eight year old. I guess he still is uh.

He has been having Zoom calls with his friends. UM. He sets up little meetings with his friends all the time. I am wondering though, when it comes to an official capacity, when it's not a passover sater um A good Friday event with your family or if it's your eight year old. Our office spaces moving more to Microsoft and some of these other platforms perhaps that offer a greater degree of security and perhaps have thought this through a little bit more.

Take so, offices are moving to Microsoft. Teams. Um, New York City actually banned Zoom for the teachers over last weekend. So there is a move by some to move towards Microsoft and Google. But I'll say again, is that people a lot of enterprises still want to use Zoom because it works better. Um, there's less lagged, higher reliability. So I think over the next thirty and ninety days they'll get through this. They'll probably come out with better security, uh,

in terms of encryption. And I think actually the company deserves some praise too because providing this enormously helpful service that's enabling hundreds of maize of people to kind of hope in these difficult circumstances. Um, it's providing a sense of community and social socialization that people really need right now. So, UM, they have some issues, They're going to fix those issues and we'll see what happens. Take him, thanks so much

for joining us. Take him Bloomberg opinion technology columnists, and you can find all of his work and the work of all of Bloomberg Opinion on Bloomberg dot com, slash opinion and on the terminal O P I n GO. So you look at that chart of Zoom technologies Leasa, it's just extraordinaries, just kind of puts. I mean, had a great i PA, one of the good IPOs from nineteen in a year where there weren't a whole lot

of them. And then you know, just around the kind of the end of the uh, you know, it's just started to really really rock it up over the last several months, and it's pulled back here on some of these security concerns here, but clearly, as Tay was just mentioning, it's probably the best one out there, the best technology out there. Well, it's easiest to use. I don't know, it's been really interesting to figure out, how do you have you know, video calls and conferences with your family

for Easter? I mean, how are you guys thinking about this so or anything to people together? You know, it's you know, FaceTime is for is popular, but Microsoft got a product out there, but Zoom seems to have really taken off and again, as Time mentioned, it's just a really good, easy to use technology. Um, but they've got to get that security thing right. And also, you know, when you're having a family affair on one of these platforms, you have to kind of have an agenda and treat

it like a meeting. Otherwise it's complete bedlam and everyone talks at once, you don't know what's going on, and everyone just sort of ends up smiling at each other until it's time to say goodbye. That's something I've noticed. 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. Paul Sweeney, I'm on

Twitter at pt Sweeney. I'm Lisa abram Woids. I'm on Twitter at Lisa A. Bramwoyd's one before the podcast, you can always catch us worldwide. I'm Bloomberg Radio