I Can't Remember A More Difficult Time For EM: Bill Rhodes

Bloomberg dot com. I am so pleased to say we are going to focus on emerging markets, assets and the nations themselves with somebody who has been a pivotal player in many of the restructuring is done throughout the developing world over the past number of decades. Bill Rhodes, Senior Advisor for City who helped in the nineteen eighties and nineties negotiate a lot of the rescue financing packages in the developing world. Currently President, chief executive officer of William

Rhodes Global Advisors. Bill, always phenomenal to have you on the show. And I want to start with the coronavirus and its impact, the humanitarian impact on emerging markets. We don't talk about it that much. What do you glean as you travel? As you talk? You know, whether it's travel virtually or talk with your contacts as far as how how prevalent the virus is and how damaging it's been.

First of all, it's great to be on you with you guys, Lisa, and I think the impact is going to be substantial on most parts of the emerging markets. I think, UH, we're already seeing this UM in UH in Latin America, UH, in case of Brazil, it's hitting Mexico. And of course in Asia we've you know, we've seen a lot of it because it started in in China, migrated to South Korea, and I must say the South Koreans have done the best job of getting testing out

there and controlling it. But some of the economies UH in Southeast Asia are also being hit very hard. India, UH, you've had a second wave in UH, in Singapore, Malaysia. So I think that in countries like Turkey, in the Middle East and others are being hit. So I think this is delayed reaction. The area that people are most concerned about at this point is Africa because they don't have the hospitals UH and they don't have the health

systems in place. UH. And so I think that the emerging markets are going to be hit particularly hard, much more than the developed markets that we've seen today. So it's interesting. Bill. Let's focus a little bit on Latin America. UM, where is some of the big risks there? You know, some of the issues you highlight about Africa in terms of health care and sanitation, so once a lot of that applies to many parts of Latin America. What are

you most concerned about? Well, I think the situation in Brazil. It's the largest country and the president boll Conaro doesn't want to admit that there's a problem, and he's battling with his own uh, with his own Congress and many of the governors, and the fear there because it's a country of two hundred fifteen twenty million people, and the fear there is that this thing could get out of hand. And of course they've been going through a period of

difficulty in an economy for the last five years. UH, And so I think this this could be a very difficult situation. UH. You also have the impact of the Venezuelan refugees all throughout Latin Americas, some five million of them, which exacerbates the situation because a lot of them bring things like millary and other things with them, and so

it's a it's a real problem. I was earlier this year, I was in Trinidad in Guyana, where you have a lot of Venezuelan refugees, and also northern Brazil in the state of Roraima. Venezuela as a complete disaster area in the sense that the health system completely has collapsed already under Maduro, and what could happen there is could be a real humanitarian crisis with COVID nineteen in a place

like Venezuela. So if you ask me what country I'm most concerned about in the sense of the hit, it's probably Venezuela as far as the impact on the most number of people, who would be Brazil. So I'm curious the the answer in the developing world. In the developed world, I should say, has been to socially distance shutdown. Businesses and governments are just flooding people with money, are trying

to in order to stave off the economic damage. What has the response been like, both financially as well as socially in some of these developing markets, particularly in Latin America. Well, I think that we're still I think unfortunately at the early stages you know, I did this op ed on

the eighth of April. UH talking about my concerns is that the markets were underestimating the dangers of of COVID nineteen because to me it smells somewhat of the Spanish flu problems of eighteen nineteen and twenty, where the first Browns gave people the feeling that it was all over and they and the real hit came in the second round, second and third rounds, and and so there's real concern

that the worst is yet to come. So Bill, we haven't really necessarily it's a kind of in country by country and even within the United States, state by state, focusing on efforts to get this under control. Is there a mechanism for a kind of a global response, because I think about some of these emerging markets and I'm just not sure they can do it on their own.

I think that's very correct. Well, I can't. And what I advocated my up ed was sort of a recreation of the spirit of Gordon Brown when he put together UH the G twenty Countries um as a response to the global economic crisis at that time when he was Prime Minister in two thousand nine, was heading the G twenty and I think the I m F, World Bank were all involved in that, but I think this is much more serious. And you see they're talking about uh

suspension of debt payments. Uh, you know for the most needy country these UH, the I m F, the World Bank, and UH, the G twenty has talked about that through the end of the year. But that's not going to be sufficient. And then you have you have the aid that for instance, the Europeans and the US have been giving these countries drive along and they're now in this strap situation. We're speaking with our good friend Bill Rhodes. Bill as a president CEO of William Rhodes Global Advisors,

whose former chairman at City Bank. We're talking about the outsized effect likely to have on emerging markets from the coronavirus and Bill, does there really need to be a global response to help out some of these emerging markets which may have, you know, limited capabilities to kind of take care of their own populations. I think, without a doubt there needs to be something more done than the

G twenty is done. I think the I m F and World Bank are looking at announcing additional programs, although they are now talking about programs that they've never done before, and so you have to have a united response through the G twenty rather than a one off type situation. And uh, then just to change it for a moment, when you take a look at the EU and U and the e C, you know, it's the situation that

the EU is going through. Who have been major suppliers of aid to a lot of these countries, they are in a difficult situation themselves. I mean Spain's had over twenty one deaths, Italy very similar, and they are struggling to keep the EU together and talking about a rescue package for those countries of a trillion to a trillion

and a half euros. Uh. And this type of thing will also help the emerging markets because uh, that will push I think the G twenty to do more if their own economies are being taken care of to help the emerging markets. But this is the most difficult period I can remember for the emerging markets in my lifetime, in your lifetime, I mean more even in the Latin American crisis. More even in the Latin American crisis, Asian

financial crisis, uh, any of them. Because this is coming out of nowhere and a lot of these countries uh leaves you and I have discussed with Paul in the past. Um have borrowed very heavily in foreign currencies uh to support their economies and with a strong dollar, Uh, this is gonna be a real problem. So I think you're gonna have a wave of debt restructurings are also going to hit the emerging markets, and they're going to be

very very difficult because the creditors themselves have problems. So we're in for a very very difficult strain period, uh, you know, with without a doubt. And then of course a number of these countries are royal exporters that has oil up uh, you know Brazil, I could run through them, a number of countries in Africa and they're going to be hard hit because of the collapse in the price the price of crude, the price of oil. So all told, it's going to be very difficult period for the emerging

markets in the immediate future. There's also a question of China's role in financing some of the developing worlds. We've heard. I mean, they don't report the numbers, but there are billions of dollars of loans that China has extended throughout that entire world. How does that complicate efforts to restructure

some of these debts. I think it's a very important point, Leads, because you know, the one Belt of One Road UH program which Shijunping has been pushing for the last seven or eight years, has led hundreds of billions of dollars to these countries, and a lot of the terms are not clear. And one of the concerns is UH is how the Chinese are going to push these countries to repay, and so far the Chinese haven't announced any sort of program of debt forgiveness. They're talking about taking assets in

these countries or stretching it out. The other thing, which since you mentioned China, which I think we have to keep in mind, is remembering the great recession the country and you have to give them their due. That helped pull the world out of what could have been a great depression was China because they pushed anywhere from eight hundred billion to a threeion dollars UH into the markets. Because their financial system was very strong on commodities, UH

in particular benefited construction UH. This is why Brazil and a number of the emerging market countries were able to get through because they were able to sell their commodities to China. The Chinese, because of their high debtload, are no longer in the position themselves to pull the world out, So we can't look any for any particular savior at this point. That's why the work of the G twenty needs to be UH needs to be worked out in an orderly fashion because no one country is going to

pull us out. So Bill, I kind of always when I think about emerging markets, you know, people tell me the I m F is there, but I always feel like the I m F is fairly limited in their resources, and it will come down to the G twenty or maybe even the United States of America. How do you think the US will What do you think the U s will have to do here as we think about

the emerging markets in terms of support. Well, it's that's a good question because it's not clear where Trump stands on this, where President Trump stands on this, And you're right about the I m F, even with the additional resources they're trying to put in UH. One of the suggestions had been they go back to the idea of having a special drawing rights, But so far the G seven countries haven't agreed to that, including the United States, which which would beef up uh their ability to help

these countries. Uh So the United States is very key. The two countries, let's say, the three entities are key to the revival of the emerging markets are the United States, China, and the EU. Pul Rhodes, thank you so much for being with us. We always love hearing your insights. A really important time to be getting them. Banker to the World Bill Rhodes, author of the book That is A Banker to the World. I recommend you read it. It

is a fascinating read. He is also the president, chief executive officer of William Rose Global Advisors and a senior advisor to a group. I mean, it's really, uh an amazing perspective to have Paul, given his the restructions that he's been involved with in a number of different places. Right now, we are looking at emerging market currencies that

have been clawbered. I mean, this has been a really rough year for them as the dollar has remained ascending, although you are seeing a little bit of a reprieve from that now, so at least I'm looking at gold. We've been spending a lot of time looking at oil or the past few days, but gold just continues to march higher, up another one point three percent today to seven dollars per ounce. A very good looking chart as well. Everett Millman, precious metals strategist for Gainesville Coins, joins us

on the phone based in Gainesville, Florida. So every thanks so much for joining us here. Give us the story behind this nice looking chart for gold. Yeah, thanks for having me on. Paul um. Well, the conventional wisdom over the past two decades or so has been don't fight the Fed, right it. In this case, not fighting the

Fed means having exposure to gold. Um. The huge heap of stimulus that has come from the Federal Reserve and other central banks is definitely a tail wind for gold right now, and the amount of that stimulus and added liquidity are only expected to grow in the coming months. Um. So, we've seen really a repricing of assets in terms of relative value to one another, and gold has emerged from

that as the biggest beneficiary. Now. If you consider that the last time that the dollar, the d X Y index was consistently around a hundred as it is right now, back in two thousand seventeen, gold was trading below hundred. Uh so we've rallied quite a bit in a short amount of time. Gold has definitely picked up some ground on the dollar and on other assets. But I wouldn't be at all surprised to see some near term weakness given how fast this rally has come. That's interesting near

term weakness. I was looking at some reports a lot of people bullish over the medium term Bank of America raising it's eighteen month gold priced tar get to three thousand dollars and ounce, which is more above where it is currently trading. I'm just wondering, Everett. A lot of people think of gold as a hedge against risk off periods of time. It has not behaved in a predictable

manner on a day to day basis. In that way, it also is considered a hedge against inflation, and right now, inflation is nowhere to be found in interest rate traders projections if you take a lookout five ten years. So what's the argument for gold on a theoretical level, right? Um, We've absolutely seen that these intra day moves have been rather noisy. It's been a bit of a roller coaster ride, and I think that has to do with some of the patterns we've seen that are in parallel to UM.

What the Federal Reserve dating two thousand eight to try and rescue the economy, they followed a very similar playbook in terms of scope and scale, and we've seen that volatility has been elevated and gold has traded in a wider range all that huge draft of stimulus, at some point down the road we would expect to be rather inflationary and that would be gold positive UM. But as I said, the near term weakness is still a possible

concern given this wide volatility UM. Remember that as recently the last summer less than a year ago, gold futures hadn't cracked above thirteen sixty an ounces in almost seven years, So these these are levels that we haven't seen in quite a while. I think there will be some consolidation following that. And something else that I've been taking note of is that algorithmic traders and some automatic rebalancing in portfolios during these risk off situations could trigger some more

sell off and gold UM. And the most recent data from the CMME shows that a significant amount of activity in gold futures UM, as much as possibly two thirds has been driven by the algos and that suggests that the volatile swings for gold may not be over UM. One of the lessons that we've learned from two thousand eight is that gold tends to shine brightest once the

economy starts recovering from a crisis like this. So I think once we get some recipite from the coronavirus pandemic or on the other side of this, that is when I will be most bullish for gold over the medium term. So Everett, I look at the year to day performance spot gold up about twelve and a half percent. Then I look at another metal, silver, and I thought I'd see something similar, but no, it's off almost here today.

What's the story on silver? We could see at least for a short period of time, silver kind of decoupling from gold. UM as we look at the gold of silver ratio is still well above one ten I think close to one thirteen UM. That's obviously a historical extreme, but it's been pretty durable, this gap between gold and silver, and it challenges some of our assumptions about whether or not silver will continue to follow gold in terms of safe haven demand. We may not see silver prices catch

up with gold until later this year. Because of its sensitivity to the health of the industrial sector, that really doesn't bode well for silver until the global economy start to reopen um. So that is what I'll be looking for in terms of silver, you know, reclaiming some of its precious metal status because otherwise right now it has

behaved much like an industrial metal. Interesting, Everett, as we talk about oil, and really the focus in the commodity space has been on oil and how the physical presence of it is not desired right now. How is the physical commodity of gold and silver trading in comparison with

futures contracts. That is a fantastic question. Um. We've seen that those physical markets over the counter market have become a bit on moored um from paper trading, and that's because you do have two different sets of motivations for those market participants. UM. In gold futures, on one side, you have a lot of institutional players. They are basically chasing the short term price dynamics of gold. But in

the physical market you have almost the opposite motivation. You have retail buyers who um, they want to buy and hold physical to keep for the long term. So this spread that we've seen between future and spot prices, it is unusually wide. It means that arbitralge is not functioning normally and price discoveries perhaps a bit impaired. But two things should help alleviate that and we should see that

spread come back into a more normal range. Once the reopening of several government mints in Canada, Western Australia, the RAM refinery in South Africa, and as of yesterday the West Point branch of the U S Mint is also resuming operations. And then secondly, the flexible CME gold futures contracts should also clear up some of those logistical backlogs that are causing that gap between futures and spot. Everett Milman, thank you so much for being with us, and all

my best to you. Everett Milman, precious metal specialist at Gainesville Coins. Talking about the future of gold in the near as well as the medium term at least, I'm looking at some of these airline stocks. We've been talking about them really since the beginning of the crisis. Really one of the first groups to get hit and get hit the hardest delta year to date. These are all year to date numbers Delta down, six, United down, seventy,

American down, nearly sevent of just getting decimated. We had some numbers out of Delta. Let's get the latest. We welcome Bloomberg Intelligent Senior aerospace analyst George Ferguson has been covering the space for decades. George, thanks so much for joining us. What did we learn here from Delta with the numbers? A good morning. I think what we learned is that, UM, the way forward is very unclear, I

think is what we learned. And they burned a bit more cash than we had expected, working very very hard to bring down cash burn every day. They think they can get themselves to fifty million dollars of cash burn per day by the beginning of May, which I thought it was quite interesting. UM, and they confirmed when asked about Ford lookings, they confirm that we continue, I think, in the direct quote from Delta management, we continue to bounce along the bottom about five of what we did

last year. You know that that's the that's a number of people at flying this year, just people that absolutely have to fly. Demand is about zero. So demand zero. The question is and when and when? The discussion on the earnings call is not about earnings at all, but just how they can stay alive for the foreseeable future. Do we have a sense of how long the big airlines can continue to bleed cash until the economy gets back up to at least even half pace or a

fraction of what it once was. Yeah, so Delta, Delta did actually, you know, give their their give a sense for how long they thought they could survive. And I actually thought that was actually also something quite interesting. They thought they could survive until the end of the year or you know, we'd have to dig deeper into some of those assumptions. They definitely have to raise some more money, uh, just to hit their target for where they want to be for cash at the end of the second quarter.

But you know, yeah, I think in the next for two Q and three Q, the discussion is really going to be at all the major airlines about how much they can get cash burned down. I'm gonna say they told us thirty three percent of their employees that to make sure that number was right, took voluntary leave, right, So they're really trying to lay off that labor costs pretty hard and get cash burned down. Remember, Delta, though, was one of the one of the better position airlines

going into the downturn. They were investment grade. They've been digging through the balance sheet to find anything and everything that they could use for collateral for loans um and so that means that if they can survive an end of the year, others others can't. So George, give us a sense, just a snapshot, how the industry did in terms of fiscal stimus, getting money, uh support from the government.

What they've gotten and what maybe they're still trying to get. Yes, so Delta said they gotta I think it was two point seven billion dollars then already. I mean, really where we are? And I think it's very interesting as you look at the industry. You know, the government has provided them grants and they provided them an opportunity for loans, and the grants are really just support the payment of employees for the next two quarters. And so everyone is

lined up to take the grants. Why wouldn't you, um and the but the loans and again those are discovered employee costs. The loans they could take out for five years um. But for those five years plus an additional year a year after the loans has been paid off, they can't pay dividends, they can't buy back shares, and they have to limit employer compensate sorry, employee compensation, especially

for highly compensated employees. People over three million dollars get sort of specific caps, and so we're sort of seeing a number of them. It looks like Southwest, it looks like Delta, it looks like United contemplate these loans from

the government but not takes them yet. They have time to take them, and I think they're trying to figure out again how bad this downturn is going to be, because none of us really know whether they can weather the storm without these loans, whether there's other loan opportunities in the marketplace so they don't have to hem themselves in with those you know, returned to return cash to

shareholder sort of options as well as employee compensation. So there's more money coming, potentially billion loans to the industry. I'm not sure they all want to take it. George Ferguson, thank you so much for being with us. I'm sure a year ago, if we thought that we would be having this conversation, it would have thought I have been a fictitious or absolutely out of the question, and yet here we are George Fergusons, here are Space defense and

Airlines analyst for Bloomberg Intelligence. Delta, which has been one of the stronger players, consistently shares down six per cent year to date, even as they say they can survive through the end of the year, and presumably at some point there will be a resurgence in global demand for travel, although for right now it's basically nothing. Right now, let's switch gears and talk about those markets. We can do that with Samir Samana. Samir, senior global market strategist for

Wells Fargo Investment Institute. Wells Fargo has at one point six trillion dollars under management. He's based in San Francis, St. Louis. Actually, Samir, thanks so much for joining us. So let's just start. You know, the markets have been extraordinarily volatile. Let's just start with oil. What did you make of the performance of oil and the tremendous volatility, the negative pricing that

we've seen in oil this week? Sure, you know oil, you know, at least the front month contract that went negative for you know, very brief period of time was really impacted by you know, storage shortages that then, you know, lead to a lot of futures holders basically realizing that you know, they're gonna either have to take physical delivery or they need to you know, probably get out of the contract, which is what led to um those negative prices.

You know. I think oil, you know, some of the out month contracts, is probably one of the few markets released right now, UM that most accurately reflects kind of what's going on with COVID nineteen and just how quickly stoppage and economic activity that we've seen that will only slowly resume. Now again it should trade at positive levels, but I think it is telling you, um that the recovery will be you know, neither swift, um and uh you know you know the divot won't be all that

shallow alright, so severe, let's let's start there. What are the good folks at Wells Fargo? What's kind of your base case for kind of how this economy will shake out? Mean, I don't hear the V recovery spoken about too much recently. I think most people are kind of thinking about some kind of U shaped recovery or might last several quarters or maybe even something even more dire. What what's the

folks that was farther thinking. Sure, so we would say, you know, the second quarter will probably be the worst quarter from a growth standpoint, and then that third quarter will be you know, verty bad, but maybe not as

bad as the second quarters. Things slowly start to come back online UM, and then hopefully by the fourth quarter of this year, in first quarter next year, there's some stability and you know, we think there will be some payback, you know, especially on the you know, the earnings front for corporations UM by the end of next year. So hopefully that's how it works, you know. As far as whether it takes a U shape or you know, I've heard some people refer to it as a swoosh UM.

You know, it's still kind of to be seen. It. It will depend, you know, mainly on how quickly teams come back online, you know, whether there's a reduction the fall of new cases and one of these additional stoppages UM. But I think probably the takeaway is UM second quarter will probably be the worst of it, and then we'll start to see hopefully a slow recovery by the end of this year that will pick up steam in the next year. Interesting. So we we've had a really sharp rebound.

Just talking about the US equity markets here, a really sharp rebound off of that what was about at you know, peak to trough pull back that we saw back in March. Do you think it's the snapback rally has been too much too soon, or do you kind of figure it's kind of the beginning of a bottoming process for the equity markets. So it's a little of both. You know, we would say, you know, this is part of the

bottom of process. You tend to have kind of the big draw down, and then you tend to have and equally spectacular and kind of snap back, right, which which kind of sucks everybody back in and makes them think that, you know, well, the initial draw down was the one that you know, maybe wasn't right, and you know, we're kind of off to the races. And what folks will realize in the coming months and quarters is that the bottoming process is more of a marathon than a sprint.

And what you tend to have as kind of the second and the longer phase of the bottoming process is the one where you spend quite a bit of time in a wide vollical range trying to figure out one what the exact economic and earnings outlook looks like, and then to what valuation level or multiple you may want to pay on those earnings. So we would kind of settle in here, and we think, you know, right here in the hundred undred that we've seen the last few days,

it's probably the upper end of the range. It's probably pretty close to fair value. So here we would be pulling back on lower quality areas like energy, materials, industrials, um emerging market equities, developed market equities, small cap equities.

This is the time to kind of pair back if you were lucky enough to get in close to the lows, and then you kind of wait until we see hopefully in our opinion of level at least out of hundred, because before you know, we get below we're not sure we see a whole lot of value in chasing these markets, and and really, um, as you get closer to fifty, that's where you maybe want to kind of pick up steam in terms of buying areas such as information technology,

communication services, consumer discretionary financials, and then large heaven MidCap equities in the US. All right, Sam, so we've seen the Federal Reserve be fairly aggressive. I would call it on some of their movements here in terms of injecting liquidity into the marketplace, we're starting to get we've we've gotten some fiscal steaming. This looks like we're gonna get another package in the next uh several days. Is this something that the markets have to have? An absent and

aggressive fiscal stimulus. You're less confident in the ability of the market to kind of bottom here and maybe start building. You know, I appreciate what the Southern and Congress have done. It probably removes some of the left tail, some of the downside scenarios that could play out are probably removed by their actions, by their swift actions. Um. That being said, you know again, you know they can't quite you know, manufacture of vaccine out of thin air, or make folks

go out after work or go out on weekends. I mean, it is a great example right where you know, there's good data now that shows during the week you know, things are back to where they were, you know, prior to the coronavirus. But then when you look at weekend levels of activity, they're only you know a tent for

you know of where they were pre coronavirus. And what that shows you is you know, people are are you willing to go to work in order to get a paycheck, But what they're not willing to do is spend discretionary time or money outside the home quite yet. And that's you know, what makes a large part of the U. S economy and so um, the FED will support offset prices. They will help provide a little bit of a bridge

to the other side of this. Um. That being said, you know, much of that volatility will come from what we see as just again a real impairment in the short run in terms of consumption. Hey, Samir, thank you so much for joining us. To really appreciate your commentary and your thoughts. Samir Samana, Senior Global market strategist at Wells Fargo Institute. 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. Why it's I'm on Twitter at Lisa Abram woits one before the podcast. You can always catch us worldwide. I'm Bloomberg Radio