Fed Did Exactly What They Needed To Do: JPM's Michele

Just walk us through your reaction, your thoughts in response to what's happened in the last hour and twenty minutes. Yeah, I think it's it's been quite stunning, but I feel it was the fair and appropriate move by the FED to step in here. You cannot stand back and watch what's going on and say we're going to wait for the data. The markets were telling us that this is an anticipatory event. We know that the virus will spread and the FED should be doing something. I thought it

was a very good press comp friends. I thought the fifty basis point cut was the right amount to do, and I think he positioned it correctly where he said it cannot slow the rate of infection, it cannot fix the broken supply chain, but it will boost household and business confidence and it can avoid a tightening in financial conditions. UM. So I'm happy and relieved that the FED stepped in here, um and did something. But has it changed the strategy?

You and I were kicking around some ideas of her email about an hour or so ago on the Bloomberg and just one line from you, Bob just jumped out to me, this is a good bounce to sell high yield, Bob. Why because we know that that the supply chain is broken. We know that there are some industries, travel and leisure in particular, that are going to be impacted. But what about all the suppliers to those industries? Do we understand that? What about the insurance entery? Do we know how long

economies will be closed? All of those things draw put a question mark around what corporate profitability will look like for the next several quarters. And I'd rather cash in the chips now and wait it out. Well, I think this is so important, folks. I can't convey enough the polarity across the research screens that we have. We are hugely advantaged by the smartest people on Wall Street, including

Mr Michael, and they are split over this emergency. Ray Bob Michael to me, it devolves down to real g d P or maybe some other metric you may like, and that the FED has a look a guess of forecast of a really grim and sustained couple quarter g d P. Have you people modeled that out yet? Can you say it's a negative GDP or flat flat flat flat for X number of quarters? You can't because right now the data in the US looks ay, But the news as it comes out progressively is more school closing.

The infection rate continues to accelerate in the US. These are problems. We know it leads to quarantining. We know it leads to a shutdown of the economy. That's the only thing you can do. Now. What the FED has done is it's paved the way for lower cost funding across the system. That takes some of the pressure off. I want to see what happens at the SPA next. That's the entity that's going to make loans too. Small businesses is the right number, I don't think so. Do

they have a war chest of a hundred billion? They could drawn we need to see how these things play out. There an awful lot of question marks that that lay ahead for us. The FED cannot be one of these question marks, and it stepped in and did exactly what they needed to do. I mean Jana was framing is earlier with Bunny Quinn. I mean you get the nominal GDP would just say a one percent run rate on

g d ps two for sent inflation. That does not get it done for this American economy and the responsibilities of Bob Michael has it is bank Well, Bob, I think you've touched on something massively important. It's how we help short to medium size, small to medium sized enterprises

through a massive one off temporary, potentially temporary shock. And I say temporary with a big asterisk on top of it, because it might not be because if we don't deploy the right tools, all of a sudden, you end up with a economic shock that would otherwise be temporary becoming something a lot darker, because people need to lay off staff because they can't get a bridge through to the

middle of the year. For me, it's just about how do we get that bridge to the middle of the year when the health christis crisis passes and we have a clearer path towards recovery. We've had the rate cup, Bob, what do you want to see more of? Well, I think we've seen the roadmap, unfortunately from China, which is a month and a half ahead of us, and it is small businesses, the small mid sized enterprises that run

out of cash in one month or two months. It's something like a third to two thirds of s mmes run out of cash in a couple of months. So we know when economic activity shuts down, they don't have operating cash to keep going. How we get money to them is important. Is it the s p A or our banks incentive to land and and how do you backstop the banks to be able to do that. That's what we need to see. That's what makes this temporal.

If we can extend credit into the system and wade through the slowdown that's coming over the next couple of quarters. But you absolutely do not sit there as the Fed and do nothing. Thank you your powder dry. That's some of the silliest commentary I've heard, Lisa Banner is the tape giving away. It's a correlated giveaway negative negative for the yen is trying to find new weakness and look at the tenure yield. Yeah, that's where exactly where I wanted to go. Right now, we're looking at a tenure

yield one point oh three. Just plummeting and really look at the equities right now, absolutely, Lee, really read across the screen. Down now down one point seven SMP, down one point five percent. Bob, you thought that this was an appropriate policy reaction based on the market reaction right now? If it holds through the end of clothes, which is a big if, given how wippie things have been, how can you say that this isn't the market saying it's a policy misstep, using up ammunition now at a time

when it's not the correct response to the issue. I don't see what harm this has done. You've just lowered the cost of funding across the system consumers. We've seen this last year with the seventy five basis point cut in the Fed funds rate. It led to an acceleration in mortgage reeflies. Fifty basis points will have a similar effect. Invalidates the current rate environment. I think it's all positive. I think one of the things that may have done

is validated. There are legitimate concerns out there. This is the said, and policymakers do not at all of you this as any kind of v shaped event. It's are you with the bottom of the you lengthening out of it. So I don't think it's a policy mistake at all. I think the markets are waking up to the reality that there is a significant problem that lies ahead for the US economy that's going to last more than a month or so. So I'm just had a record low print on the US tenure yield. Your all time low

now one zero, two eight three. We're just off it at the moment, but all time lows on tenure yields, the bit coming into the bond market quite phenomenal again with down thirteen basis points. I mean, and you know, Bob Michael has answers that go on forever. We went down a hundred points just on Mr Michael's last answer. I know how much times well, I hates our points, but I've got to tell you because everyone uses it, it kind of what the public matters. I mean, what

do you see, Michael? Your ecology got a Paul suns and we talked to Liz and Son. Is it Josh Schwab, You've got a different institutional view. What are institutions doing about Michael now down six d points? What are you observed in the last week. Well, I think one of the things this fifty basis point cut has done is it re steep in the yield curve from three months to tenure. Now that's evaporating very quickly, but we had been inverted. Re steepening it is going to bring in

money from overseas. The negative yielding markets are going to find it to their advantage to come in and buy intermediate bonds in the US, high quality investment grade and be able to hedge it back to their base currency with very little cost associated with that. So I would expect overnight money to come pouring in from overseas into the US market generally. So I'll let you do the

tenure yield. John Herman just publishes with his great acuity and grant larity, fu mg F you f u f G m u F GEM cut me some slack m u f G Securities America's and he really emphasizes another two rate cuts, highlight the risk of another two rate cuts in the second quarter of this year. So he's on the big watch as well. I want to look also though it just forward break even rates and the

idea of what this means for future inflation. They're not increasing materially, and to me that speaks exactly to Bob's point, John, this idea that this isn't necessarily stimulus so much as an acknowledgement of a reality that perhaps was not being acknowledged by markets previously. Yeah, I've been saying this for a number of weeks now affect a number of months. This market has just price the FED as follows. We believe you you're going to give us a lower rates,

will price that. But we'll price it right the way through the curve because guess what, we don't believe it's gonna work. We don't believe it's going to end up with higher inflation expectations, and we don't believe you're going to be in a position to hike at any time anytime soon. Down A wrote inter day tenure yielder record

low moments ago one point zero to eight zero. Will watch that Jared's around negative and then joan across the pond because we're going to be doing a cable a special edition at twelve noon and today, I'll pull on a British accent and the two year yield there's zero point to three? Zero point to three? Yeah? Is governor currently on a negative rate? Watch to come up Bob Michael's life. He's got a bit of space before he

gets the negative rates. But certainly I think a lot of people are looking for a twenty five basis point card for me the other side of the Atlantic. I want to tell you a story. The thirty year yield end of eighteen, the thirty year yield three forty three, three forty three and right now one sixty four. And Bob Michael a friend of ours. I remember it was Mike Collins over at PGIM A couple of years ago. I said to him, in ten years, how will we view this bond market looking back ten years where we

think these low yields were ridiculous? And I remember him turning round him and saying, you will wish you had bought a thirty year with a three handle, because you're never going to get it again. Bob Michael, these kind of yels do we have to live with them? Now? Is this it? Yeah? I think we're we're stuck living with them for a while. Um. I think all the things that have been disinflationary, the demographics, the globalization of manufacturing and supply, UM and and the impact of technology

aren't going away anytime soon. I don't know what it's going to take. It may take some huge fiscal stimulus. Bob Michael of JP Morgan Asset Management. Always a pleasure. Thank you so much for being with us. Well, Dan Skelly here, Dan, what do you think of this? Well? Look, I think this is the first time that you're seeing a potential conflict or disruption that could affect the consumer. Right when you go back, you think about the last

ten years of this upmove in the markets. We have the energy collapse in fifteen, We've been going through a US profits recession for the last eighteen months. Frankly, neither of them has really affected the consumer. And so I think the FED is making this emergency move, as you mentioned, the first time really since oh eight, to have an intermeding move because they're concerned in terms of what this virus, what this trend, this issue, this conflict could mean towards

the used consumer. And then there are so many risks at play here. And I caught up with Waking fouls of PIMCOT around about an hour ago, right before the fifty basis point cut from the FED, and he said, we faced the very real risk of a services led recession. And that's not a risk we've had to face for much of the last ten years because a lot of it has come out of China, a lot of it

has been driven by manufacturing, exactly right, Jonathan. So if you look back at fifteen sixteen, the positive externality of an energy recession is low gas prices net positive for the consumer. Energy China n e M slowing down, and the US profits recession has not impacted the U S consumer. So it is a risk. It's not Morgan Stanley's base

case right now. I think the FED certainly is adding some support and some frankly, some hope that they can support markets in the economy from here, but frankly, rates were already low. Yep. But this is exactly my question.

I mean, what signal does it send to the world if the FED has an emergency of fifty rate fifty basis point rate cut and equities don't rally, which we're seeing them whip around and not maybe even doing so, given the fact that the FED is doing so ahead of what could be exactly, as you say, a consumer led reception, so that this was exactly my fear when we saw the emergency rate cut earlier today, was that the market would rally and then you'd see a pullback,

and frankly, you're seeing it right now. It also follows yesterday's five percent move. So what I would just say is, if you just zoom out for a second, you think about what's transpired for the last couple of weeks. Frankly, to have the market sell off ten percent and seven trading sessions fastest teen percent correction and market history is unprecedented.

And what we typically see if you go back thirty or forty years, Lisa, you have these events, these risk events, whether it's terrorism, whether it's DIZ, whatever it is, you typically get a first low made, you get a potential short term snap back, and then within months, the history shows you typically get a retest of the lows, and so that's likely the case in this scenario as well. We're gonna hear from US companies in April and May what the earnings impact is, so that could potentially be

the retest of the low. We've seen the last couple of weeks. It's so interesting here in Den Skelly with Stanley Uh. This warning is the ambiguities that are out there. Dennis Gartman just sent me a love note and he's been dead on on gold, and not only gold, but in the end he makes clear that he tilts towards this is inflationary, just as many people are saying it's disinflationary. What does Ellen Center say? So we're more in the

camp that we're gonna see modest inflation this year. We've actually uh seen the potential for the coronavirus to impact global growth to the tune of two and a half percent inflation correlate with that. I don't personally think you're gonna see a massive spike U. I mean, look at what's happening with commodity prices as well. So it's hard to make the case that you're gonna see a huge spike in inflation here in our a lot of moving parts re Lisa. Yeah, and I'm struggling to know, Dan,

what do you tell clients when they call you right now? Sure? So two things. One is in the near term, expect higher volatility. Right prior to the last couple of weeks. We saw the most placid, steady, straight up rallies in September, and we all knew that wasn't likely to sustain, given

it was mostly boosted by liquidity from the FED. And so what I would say is, in addition to the coronavirus fallout, you've got geopolitical and u S, domestic political cross currents ongoing today and focus of course as well. So the case for rising volatility near near term is there. The second thing, however, we say, is we are still amid a secular bull market. And I made this point the last time I was fortunate to be with you

a couple of weeks ago. But the point is we think we're in a twenty year bull cycle in that type of time frame, and the precedent shows from a T two to ninety nine you can have near term pullbacks. Look at the last ten years. We've had three drawdowns in ten years, each of which was a massive buying opportunity. So near term, expect more vol Longer term, we still think we're halfway through a twenty year up movie. Coming

the house for you. For you guys at Molgan Stanley, I remember was to a kind of a little bit more capital to the story abroad. Has that changed? Look, Jonathan, we've seen international names and international equities performed better to the downside in the last couple of weeks, which I think illustrates how crowded the growth trade had gotten. Um And so we still like advocating, frankly, to that space. We wouldn't make it a an aggressive overweight today. We

want to gradually get into it over time. It's gonna take time, frankly to play out. It's not like a light switch going off, you know. And and frankly, that's the trend. If you look back this decade, it's been a US led market. If I go back to the decade prior to that, from two thousand and two thousand nine, it was an international led market. So typically these transitions

take time to play out. What are return is gonna look like over the next decade or so, given the fact that we've got benchmark yields at record lows, how much do we have to lower our returns of expectations even further? Yeah, So we've annualized fourteen percent compounded returns in the SMP the last nine or ten years, which, as you know, is twice the average, so it's unlikely that you're gonna repeat that magnitude of US perforemans we've

got over the next five or six years. We've got US returns averaging around four and a half percent UH, and we've got international returns and e M returns doing slightly better than that because the valuation starting points are so much lower. Where we could see a surprise to the upside in brief is if we see a bigger pickup in productivity and demographic led growth in the US.

This is the story that frankly, not a lot of people are are talking about, and Ellen Zanner from our economics team has actually led the way talking about how the demographic shift from the savers to the millennials in the next five detain years could lead a big pickup in growth. So maybe that adds some optionality. Lisa, let me paint a picture here. Over here on the wall of monitors that we have here at Bloomberg Radio Worldwide, is an American flag, and I fed a reserve flag

and the assembled Michael McKee is not there. He didn't take the golf string down, didn't They didn't anticipate this happening to he didn't you know we'll have someone there. It's a it's a very crowded room with huge anticipation. This goes way beyond Lisa, way way beyond what you'd see at a two pm FED me. My question is, how are they going to thread this needle and say they are trying to be proactive but the U S

economy is still strong. How are they going to send the signal that they needed to do a fifty basis point rate cut which has frankly uncleared direct consequences on the actual problem, but also say that we're not going to see a material slowdown. I mean to John, I mean that's the action that we're seeing today in equities with people not clear on what the message is here, because if this is a consumer driven downturn, not a great time to buy stuff. Think he's just going to

stand scale. He has been sitting along here, who is with Morgan Stanley Wealth Management? What was your impression? I would say it's become apparent to Jonathan's point that the FED doesn't want financial conditions to be the third risk

that derails the cycle. So when you think about the scenario today, it's a consumer potential risk, it's a corporate risk, particularly it pertains to travel, leisure, those sectors, and so I think they just bought time with trying to put a put under the financial conditions risk being the third Chris and Frankly, I would just add to that the FETE is not the only game in town. The G seven met today, so we talked about the FETE and what the initiatives they've taken. Keep in mind, this issue

started in China. China has signaled that they're willing to step in with potential fiscal stimulus to support the global economy as well. Jim Bianco joining us now president founder of Bianco Research in Chicago. And Jim, what was a reaction to this fifty basis point right cut? Better wait than never. I think that this was inevitable that they had to do it. I actually thought they were going to do it yesterday, and um, I think it was

the right move. There's a question about, as Damian Sassa of Bloomberg Intelligence points out, moral hazard, right, I mean the idea that the Federal Reserve will come in and deliver an emergency rate cut if markets correct. What's your response to that? If the markets correct? All the way back to new highs. I think they should take it back. I think what we have to recognize is not only our careers, but maybe in our lifetimes. What's happening now

is unprecedented. What I mean is none of the economic data matters right now, none of what we think matters right now. What we're betting on is what's going to happen in two or three weeks. Are we going to see the number of cases in the United States run the path that we've seen in South Korea, Italy, Iran, China up into the thousands. Are we going to see widespread school closure? Are we going to see millions of two working families have to force to leave one parent home?

Are we going to see massive disruption to the economy? And I think that the answer is that is a very real possibility. So the FED getting ahead of that makes sense. Now. If fortunately it doesn't come the past, or hopefully it doesn't come the past, we could say, look, we dodged a bullet, and we could take it back. But right now, if the answer is we're gonna wait antil we hit the brick wall, it's too late. We have to start breaking now, or start adapting now before

we run into that wall. Right now, I'm looking at equity as they've been whipping around uh and now they're little changed after being up more than one percent and down almost as much as that. I'm trying to understand, though, what this does. I mean, what does a fifty basis point rate cut actually do, both from financial markets as well as from the underlying economy when money already is

practically free. I think, if, if, if, if, What I fear, what I think the market feared with the one of the biggest down weeks ever last week, is that we are coming into a period of huge disruption. Then you have to adjust your standards. All the FED is doing is managing the decline. They're trying to say, look, we know that maybe this is an unusual circumstance that the recession starts in March. It starts in March with the huge disruption that spills into the second quarter marches enough

to throw the quarter into negative GDP. We're just managing that decline. And in an era with hundreds of inverse ETFs leverage gtfs, the ability of a market route is very high. So if you want to come in and quote, keep the speculators honest by creating a short squeeze along the way. Otherwise we're going to keep repeating what we saw last week. Is what is what the other thing is. So no, they're not in the business of trying to fix this. They're not in the business of trying to

put the market at new highs. They're in the business of trying to manage the decline. So if you put it in that respect, now, like I said, maybe it doesn't come to pass, Maybe the fears that we have about the disruption of economy doesn't come to pass. They can reverse all this, and I don't think that would be a problem. There's a big question, though, what's the signal to markets of this fifty basis point rate cut.

If what you're saying is true, that the FETE is just pricing in a new reality today at a time when this has the potential to seriously throw the market into the economy into recession. I mean, does that mean that equities are a cell here? Uh? We can mean that. I think you gotta back up and remember, as I said at the top, the bond market priced in a rate cut literally for yesterday. In fact, I was out talking about that they're all set for a rate cut yesterday.

It didn't happen yesterday. Then there was talk that it was going to happen before the open today, and then it came thirty minutes after the open. So what the said delivered is merely what the market wanted. So they didn't surprise the market anyway, maybe only in the timing that it came after the close, I mean after the open. Once the open came, we thought they were done for the day, but apparently not. But I do think that

what they gave the market is what it expected. The market is fearing this type of scenario, and so they're not going to create any kind of backlash. They're just kind of going along with what we all fear might happen. We're speaking with Jim Bianco, President and founder of Bianco Research. I'm so glad to say that walking by we have John Farrow and Tom Keene Blueberg Surveillance hosts, and he dragged off the streets. It's lunchtime and we're gonna have

lunch in the radio booth. And you know, this has been something we were wondering. When the G seven statement came out this morning, it did not preclude some sort of action and certainly we did see this action come out, and I'm curious from your initial reactions, Uh, Tom, what was your sense when this came across It was an easy decision. I mean, you go twenty five or fifty basis points, and they certainly gave the market what they like. The ramifications of this into the future need to be

thought out by everyone. Everybody will weigh in, and they'll be essays written and all that. As I just mentioned to John writing and bring capital. What's so important to me here is the nominal take think Michael Darted and King Partners. That's not just the real economy and adding in a new low inflation, but what's that animal spirit of the top line g d P. There's a psychological response to all of this as well. I think we're in a really, really delicate moment, and Jim, I'd love

to have you weigh in on this. If we get adverse price action in the face of actual cuts, there's a real risk that the narrative gets away from Shairman pal Hair. The last thing the FED needs to do today is reinforced the argument that's already out there that they don't have a role to play here is that the risk at eleven o'clock. Jim. I think that is a risk that the FED has, but it's a risk

that they have to take. I think that the idea that the FED is going to wait until they get data, We're gonna wait till we see a bad pair of report, or a bad retail sales report, or diving consumer confidence.

This will be over at that point that you're talking about, Lady April or May that they would probably get confirmation in the data if this virus spreads to the point that we think so getting ahead of this, I think what Paul could say that the presser is we know what, we know what we're off fearing is going to come. We're acting and if it doesn't come, we could do a nine am fifty basis point hike on the backside, That's what I wanted to bring up. Do you think

the FED could actually reverse this? What is the precedent for them being able to reverse this high rates and not cause a disruption. But there's no precedent for EXISTI happened in the first place. We are cutting rates in anticipation of something that we have absolutely no evidence that has happened. But we have a good feeling based on what we've seen in other countries with the amount of virus growth will happen. So this is completely unprecedented territory.

So it's an appropriate move in that regard. And if you play up that, yeah, and the backside of it is we could hike rates, We're just gonna go right back to where we were at UM one hour ago. That's all you would be saying is when we high rates if this scenario of massive virus growth in the United States does not come the pass. Just to bring you some insert in some of the price action out there. Of course, risk assets looking for a bit here off the back of a surprise rate cut fifty basis points

from the Federal Reserve. Just caught up with Bob Michael over at JP Morgan Asset Management shot him a quick message. He fired back he was looking for a fifty basis point cut. Here's the quote from Bob Head of fixed Income at JP Morgan Asset Management. This is a good bounce to sell high yield. The knock on effects of economy shutting down have yet to be fully understood. It's not just the services sector and travel, etcetera. It's all the supplies to those industries, the data is going to

be distorted for the next few quarters. That's the view off the back of a fifty basis point cut, and Jim and I just wonder how many other big players in this market will feel the same way. I think all of them should. I think if you look at

what's happened in Japan, South Korea, Italy, Iran, China. As I said earlier, it would almost be a baseline scenario to assume that when we get into late March, you've got thousands of cases in the US, all the schools in the New York City area are closed, and hundreds of thousands of two working family parents have to leave one home to take care of your kids, can't set him a daycare. That's again a group of people again, so that is a massive disruption for an economy if

we're going that route. And all we've got to say that we're not going to go that route at this point is wishful thinking. We can hope, and I certainly hope we don't go there, but that's what we're betting. Are not betting up, but that's what we're fearing and reacting to that anticipation, Like I said, there's never been another scenario like this before. Lisa Brahmo with Stephen Stanley

published the Damer's pierrepon. His note is scathing. He calls the cut terribly inconsiderate, terribly ill considered, excuse me, terribly ill considered. He makes very clear they're playing stock market. Uh. And that tones out there, John writing and bring Capital felt much the same as uh, Mr Stanley, And you know, this is the arch debate that's going on now between Bob Michael, a JP Morgan and what we're hearing from a select economist to say, just wait a minute, what's

the effect here? Why are we doing this? I have to also wonder again this this is not a financial market crisis akin to what we saw in two thousand and eight, where there is a banking issue, and typically the Federal Reserve has the most direct contact with the banks. But I wonder, uh, you know, to what extent people will view this as a negative, will actually weaken the banking system by reducing net interest margins at a time when they need to be increasing some of their lending.

I do have to wonder about that. At least I'm not worried about the banks and I don't. But but Jim, I want to jump in on the following and then you can briefe some life into the conversation. To my worry is that an economic shock becomes a financial one because they don't deploy the right tools to address all

of this. That if you don't have small and media sized enterprises in this very moment off the back of a really big demand shock, then they're going to come out the other side of this in a couple of months in really bad shape. Yeah, I agree that that is the concern. But um, if I can go into the weeds real quick for you, remember the repos support that the FED was doing that we used to make a lot of noise about. Well, today the amount of repos support that that that the dealers asked the FED

broke all the records. Today. They oversubscribed the overnight, they oversubscribed the term repo, and they asked for well or a hundred billion dollars of support. That's not happened that we've oversubscribed both of them in the same day. All of a sudden, there's a tremendous need for liquidity from the banking system. Now, I'm not gonna tell you, I

know why, but I didn't expect this to happen. But nevertheless, something else is going on here that all of a sudden, the dealers are demanding huge amounts of liquidity in the market that might have had some play in this, and maybe it's a question to ask Chairman Paul at the press conference. Thanks for listening to the Bloomberg pl 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 Wohits. I'm on Twitter at Lisa Abram Wohits. One before the podcast, you can always catch us worldwide. I'm Bloomberg Radio