JPM's Kelly: Expect Another Wave Down In Stock Market

never been wider. As everyone tries to be an armchair epidemiologist, and the epidemiologists themselves throughout their arms and say we have no idea and to get a sense though of what may be expected in markets based on different outcomes. That seems to be the increasing focus. Joining us right now, David Kelly, chief Global strategist at JP Morgan Asset Management, which has two trillion dollars of assets under management. David, thank you so much for being with us. I want

to start there, the wide range of outcomes. Can you give us your your sort of optimistic case and your pessimistic case based on what we're seeing right now in the data. Yeah. Well, I think the first thing is to recognize that in the baseline UM, this disease is not going away. We have succeeded in stabilizing it. We have flattened the curve, but it's really just a plateau

more than a curve. And so running it about you know, twenty five cases a day, running at between two thousand more fatalities a day, and it'll probably keep doing that. Under a base case. Now, a good outcome would be a better treatment UM. We have seen some treatment options one or two UM companies are certainly one approved for emergencies, but there are other treatments out there, and doctors are

getting better in terms of protocols. If you can push that mortality rate down, then maybe people feel a little bit more comfortable about getting back to normal, and I think you may see that UM later on this year. UM. On the other hand, you know, a more negative outcome is one in which mortality is just refused to go down significantly and the vaccines to eight So you've gotta you know, we're talking about maybe they'll get a vaccine by the end of the year, maybe it will be

distributed by the first quarter, but that's a lot. There's a lot of if a lot of things have to go right there, and if we don't have a vaccine until late one, and we can't and don't push down mortalities, then it's very hard for everybody to get back to normal. And so this could be, you know, this could be

a U shape procession rather than a V shape procession. So, David, in your scenarios, I mean, were you factor in the fact that there might be a second wave, a third wave, that we're hearing it from a lot of scientists that that is not only possible but probably likely. Well's the problem is the first wave has to crest. I'm I'm actually a little bit mystified by all this talk about

a second wave. I've seen no I've seen evidence in New York City, yes, that that after a horrific two months, the number of fatality has gone down, But it looks to me like the number of new cases has not already gone down by much nationally um And we're relaxing, we're relaxing social distancing, and if that happens, I suspect that the case load really won't come down that much. So it's not so much about a second wave. You

just never go rid to the first one. I mean if if the first if you say that, you know, people say that the first wave is done, but we're still running at over a thousand people dying every day, then that's you know, three d sixty thousand people a year. UM, it's you know, and and that's you know, if it's a thousand people a day. So UM, I do think there could be I think we could continue to see, um a heavy case load because we think that only

about two percent of the American population right now is infected. UM. That means a vast majority of people have not been infected and are vulnerable to infection. So you know, to me, it's not a matter of a second wave, it's a matter of can we get the first wave to actually

question and come down. And this is the question that epidemiologists and and and scientists of all types are trying to figure out, and they themselves can't really understand necessarily the path here From an investment strategy perspective, how are you advising clients at a time of such huge differentials wirth respect to the virology here? Well, I think the first thing to recognize that the markets come back a

long way. I mean we were down thirty four peter the trough, and given the size of the recession, that's you know, that's not an unreasonable market reaction. But we're not only down about so I think that there is we are vulnerable to some correction here. I think in the long run, we will get a vaccine, we will get out of this. And I do think that in

the long run US stalks may do okay. But I think there's people need to be prepared for a second correction, a second wave down in the market, as people's more optimistic views on this virus sort of petering out go away. So I think that's the first thing. And beyond that, I think you've got to figure out what's going to weather this recession well and what's going to thrive in

the rebound um. And then the last thing I'd say is international stocks are still getting cheaper and cheaper relsive to US stocks, and the one region of the world that has done well and getting past this is East Asia, and I do think that people ought to take advantage of that and make sure they've got enough allocation to countries like um, you know, Korea, Taiwan, Australia and and so forth in this in this pandemic, David, are you one of those folks that are concerned that this the

financial marks, particularly the risk on markets, are being artificially supported by what has been a very very aggressive federal reserve and central banks globally. Uh. Well, I think that has been a problem for a long time. I can't full the central banks right now. There is nothing else to do but to throw money at this problem and to try and maintain liquidity. So I have no problem

with the policy right now. I do think there's is requires a level of real discipline when the economy does come back to remove that support, even if it hurts the economy a bit, because there is a danger at the end of all this, at all this liquidity, if we don't mop it up again, Um, you could cause inflation and higher interest rates down the road and we want to avoid that. But for the moment, yes, I

do think the market has been supported by that. But I wouldn't say that that that makes a wrong policy. Just real quick here, David, I'm wondering, is there any

as a class you really like right now? Well? I do like, um, emerging market equities for for the long one I think that's important, and then the other thing is um Just to look at those companies, things like technology, um, utilities, healthcare, those sectors that can weather a long pandemic recession, I think they're probably underappreciated relative to some of those more cyclical bounce back sectors which may be still doing too well.

Given that, I do think this is going to be most likely a U shape rather than a V shaped procession. Dr David Kelly, chief Global Strategist for JP Morgan Asset Management, thank you so much for joining us and giving us your global perspective. Time to check in with Bloomberg Opinion

that we're joined by Shinali Bask. She sat down earlier today with Bloomberg Opinion columnist Peter Orzak, who's head of Lozard's financial advisory practice and a former Obama administration budget chief, to talk about the potential for a cascade of bankruptcies

resulting from the pandemic. Let's listen in Well, look, if if unemployment remains elevated for an extended period of time, and especially if there is not additional rounds of government stimulus, we're going we're at some significant risk of cascading bankruptcies where the bankruptcy where bankruptcy at at one firm then infects another firm, uh, and then that infects a third firm, and so on and so forth, and that can do a lot of damage to the economies. That was Peter

or Zak, head of Blizard's financial advisory practice. Shanelli Bosta, Bloomberg Wall Street correspondent joins us. Now, So, Shnally, I mean, there is really a risk here. We're starting to see more and more stories crossing the tape here. So as you talked to your contacts, including Mr or Zach, I mean, I guess they're just kind of preparing for what is

probably a lot more to come, that's for sure. And what Peter had said this morning was that he could see a potential cascade of bankruptcies where issues with one company can really lead to an issue with another company to another company. He's also has written earlier this year that supply chains are being very heavily impacted by this coronavirus, which could lead to a big consolidation of the supply chains.

And I see a lot of banks right now dealing with supply chain financing and issues that are interconnected with these firms, and so these are not just standalone issues, is what I'm saying. And this idea of cascading bankruptcy is quite scary. Well, and I want to go a little bit further, just in terms of what we've already seen. Hurts,

for example, is teetering on the brink of bankruptcy. Got to stay from some of its creditors, but there's a concern that, for example, it will have to liquidate some of its inventories of cars in order to make good on its debt. That's leading to concerns about the valuations of cars which goes to dealers. I mean, has anyone talked about the uh, the sort of interconnected nature in terms of tipping point into some sort of critical moment?

Is anyone talking about what that would look like? So the thing that's hard about this critical moment, and at least I'm really glad you brought up the value of cars and the value of homes and the value of all the things that are underlying in the economy that nobody wants to talk about yet. And the thing is a lot of people don't expect that the economy will

reopen and full. They think it will take a long time, and somebody like or Zach actually thinks that there will be intermittent closures continuing from now and therefore much more stimulus needed in further rounds. So that idea of value of the things underlying our economy nobody knows. But people are a little too exhausted with the current crisis to deal with what that might look like. So it's interesting,

shal Is. We talked to Peter Orzag from lazardes are they talking about ramping up some of their staffing and some of the restructuring departments h advisory departments. Well, it's funny that you mentioned advisory because Lazard is also one of the biggest merger advisors in the world, and mergers are virtually nil. There's not a lot able to happen right now. Uh, the idea of hiring bankers for Lazard and a lot of its peers is a really tough one.

But restructuring really is a place that's propped up right now and a place that they are seeing activity, but it's not enough activity to really offset the places that even a place like Lazard is losing revenue, which is

those large scale deals. One thing that Peter Orzag was talking about was additional stimulus, and I'm wondering where and how they would like to see this deployed, given the fact that we've already seen a tremendous amount poured in through the p p P through checks given to people around the country. So speaking of checks, there's some really great graphics that we've had come out through Bloomberg News to show exactly where all of the money is going

for the next wave of stimulus. Or Zach in particular had mentioned that state and local governments are going to be a really important place to direct a lot of this aid. That has been a point of content Chin as we know, we all remember what Mitch mccollin all said, even if the prospect of the difference local government's going bankrupt, that's something a lot of these restructuring artists really deal

with as well. But paychecks into the hands of people faster seems to be the consensus, because if you don't have people spending in the economy, then you don't have an economy. Remember yesterday, Lisa, we had Jim Millstein tell us that he was worried that people will turn around and realize the investor class was saved first by all of the federal reserves actions to save credit markets and that the investor class later may have to pay for it.

Thank you so much. We really appreciate you taking the type, she Dolly Blassa as a Bloomberg Wall Street correspondent. This has been one theme of really steady yields. You see this both on the treasury side as well as the corporate debt side. Is a growing number of investors factor

in Fed stimulus, uh and and and bond purchases. Weighing in on that as somebody who has an intimate knowledge of the Federal Reserve, and that would be Eric Stein, and I'm really glad that we have him co director of Global Income at Eaton Advance Management, because I want to put into perspective the financing plans that the U. S. Treasury Department has, Eric Stein, we are experiencing a three trillion dollar expected issue ins in the second quarter by

the US Treasury Department. How much will this cause yields to go up? Given the dynamic that we're seeing in markets right now? First, a lot of you know, first off, thanks certainly for having me on. You know, three trillion, it is a huge number and only sounds huge. It is huge, But um, you know, the FED has basically to me kind of underwritten market functioning in the US

treasury market and also underwritten a lot of supply. And so given that the FEDS you know, has rates now effectively a zero just a touch above zero, a lot of programs you're mentioning some in the credit market, quantitative easing, so buying treasuries, and that helps absorb that supply. In addition, and despite the fact we've seen you know, markets rally really over the past you know, five six weeks or so, there still has a lot of uncertainty out there of

the world and fear and whatnot. And that also helps to keep keep treasury yields low. So it's not only the FED, but the FED certainly has a very big part in in you know, the stability as you mentioned before, of US treasury yields. So Eric, you mentioned, you know, we're kind of at that zero bound with interest rates. I'm looking at the ten year here trading at zero points six six. So looking at something like the tenure, do you think the FED has any appetite for that

part of the curve to be at or below zero? Uh? No, So it's it's interesting. It's a great question. You know that that would be a negative or really inverted yield curve. So, you know, it's a big debate that I have my colleagues that eat advance management. Does the shape of the yield curve matter? Personally, I'm squarely in the camp that that yield curve shape does matter. It's a market signal. Yes, it can be manipulated by the Fed or others, but

it is a market signal. And so I think having an inverted yield curve, which if short end rates were a touch above zero in the tenure was negative, there'll be issues with the banking sector. I think there's issues from a market confidence perspective and whatnot. So I think the FED likes very low treasury yields, but they also like a positively sloped yield curve. How concerned are you

about a lack of liquidity and the treasury market. I'm hearing that it's actually starting to worsen a little bit as a federal reserve has net purchases that exceed issue. It's so far, Uh, you know, how big of an issue is that? So, I mean it depends to be what type of of you know, less liquidity are you see you know you've heard about for years, let's say in Japan and the JGB market, where there's certain jgbs that don't trade in a particular day because the b

O J owned such a large portion of those. I don't I don't think we're not seeing that in the US with the treasury market and the Fed. Uh and then you know, to me, we're certainly not back to what we were in mid March when uh, you know, the treasury market, the on the run off, the run spreads, and the treasury repall market really you know, on the

backbone of the fixed income market. But I think the backbone of global financial markets is the U S Treasury and the treasury repo market that effectively wasn't functioning in mid March. It's a lot better today. So certainly, if you're active in one particular security and you're trying to trade that, you know, um, having the FED purchase more than than the issue and supply can cause some issues. But I think we're far away from where we were

in the middle of March. So Eric, where are you and the good folks eating vance kind of doing your work right now? Where you seeing some value some opportunities. Yeah. So look, I think you know, eating vance management on the fixing some side, we're very much a you know, a credit credit shop, whether it's municipal credit, corporate credit,

sovereign credit, securitized credit. And you know, on one hand, uh, you know, doing credit investing is challenging right now given you know, we don't know, you know, economy is obviously quite weak now likely should be some opening up in some recovery, but the trajectory of that is very uncertain, you know, the length of how long, whether or not we get a second wave of coronavirus and need to shut things down again. Lot of uncertainty and so um.

You know, I think that makes it challenging. At the same time, you have FED you know, FED backstop and FED support, which I think is helpful to the credit markets. So I think, you know, certainly parts of the bank loan market and the high yield market that we're you know, selling off a lot of high loan somewhat in February and all those asset classes into the kind of middle or end of March. Uh, they certainly rebound a lot.

But I think in the corporate credit markets, you still you see some value um, you know, still certainly there and loans high yield UM. You know, emerging markets that we focus on on the Global Income team, that that I co run um value there. But obviously emerging markets also have their own set of challenges um, you know, given given the health outcomes in some of these countries. But even I think some of the worst fears from a couple of weeks ago, even in emerging markets are

a little less concerning than they were. But but they're still going to be challenges for sure. We're speaking with Eric Stein, co director of Global Income and EAT in vance, and previously you worked on the market's desk of the Federal Reserve Bank of New Orc, which was very much in focus. They are expected to start buying e t f s that own credit in the next few days and then follow that up with their program to actually

buy initial issuance of corporate debt. Do you think the market has gotten ahead of itself in terms of its expectations for FED purchases given that will just be a fraction of the overall market. Look, look, I think I think the FED is is the signaling effect is quite powerful, um, and so certainly the details of the programs, you know, matter it's something that we're discussing it eat advance and

constantly getting questions. You know, one of the detail is going to be out and when the fedge announced this. You have to understand that it takes the FED sometime to announce a lot of their programs just given the nature of that institution, particularly new programs. Programs they're dusting

off from O eight are a little bit easier. But but to me, the most important thing is that the FED is shown that the programs will adapt, they will change, typically multiple times, and so you know, the Fed's goal is not to you know, get asset markets back to where they were before the coronavirus, but their goal is to keep credit flowing in the totonomy and so of the extent that you know, if markets were to reverse significantly from here, to me, the FED would would very

much adjust the programs and get markets continuing to function. So, you know, while we might not see further gains when the FED actually does some of these purchases, because I would agree a fair about a large amount is already priced in UM. You know, I think sometimes investors need to separate both the signal from the actual purchases and what we've seen really in central banking and the FED. But think about the e C B um, you know,

back to the last crisis. A lot of times, if anything's words can be more powerful and the actual actions, assuming that the market thinks that the central banks in this case the FED are credible with those words. Eric, earlier this morning that Lisa and I were talking about bankruptcies and the number that's starting to grow in or were going to see a you know kind of a wave,

a cast heading wave of bankruptcies out there. What what's your sense of credit quality out there as you kind of look across your portfolio where some of the areas

that concerned. Yeah, look, look, I certainly think, you know, bankruptcies are going to go up from from you know, there were very low levels, you know, for the most part in most corporate sectors, you know, since the financial crisis of of you know, oh seven or eight oh nine, and you know, other than some of the challenges and need let's say the energy sector in fifteen and sixteen, um,

you know, and obviously idiosyncratic bankruptcies here and there. So so I think that you know, they're for sure going to go up. You know, to me, the question is how long does that last? And also does it become more socially acceptable for more and more entities to default. I think if that were the case, that would be um, you know, problematic, um, you know, for credit markets and

for the economy at large. If it's just the sectors that are you know, either had their issues kind of coming in to the coronavirus shocks, such as the energy sector for sure, it's been exacerbated by the UH no one traveling UM or sectors like you know, airlines or rental cars or whatnot where it's uh you know, those are massively affected due to social distancing and quarantine that

we're seeing. For sure, you know, the there's gonna be bankruptcies, there's gonna be credit events in those in those sectors. So I think we're gonna see it. And you know, if you go back in history, actually there are years sometimes you have better returns and credit markets in years when there are some bankruptcies, assuming it's priced into the market even than you know, years where where there are bankruptcies. But for sure, um, you know, it's gonna be something

to focus on. Hey, Eric, thanks so much for joining us. We appreciate your time. Eric Stein, co director of Global Fixed Income and eat Vance. They've billion dollars under management. Rental car company Hurts entering into some agreements with some of the lenders to try to buy some more time to stave off bankruptcy. To get the latest, we welcome Eliza Ronald's Hannon. She's a high yield and distress credit reporter for Bloomberg News. Liza, thanks so much for joining us.

Give us the latest here on hers. How close is this company to filing for bankruptcy? Well, it has negotiated just a two and a half week forbearance, so I mean it's very close. There's always sort of that hail Mary, that they'll be able to that any given company will be able to strike a deal with creditors at the last minute to avoid Chapter eleven. But you know, Hurts is very much already drawing up the documents, was prepared to file last night if it did not get um

the forbearance from creditors. But now it has two and a half more weeks during which lenders have agreed not to for close on its assets, not to demand a liquidation of an enormous lead of cars, for instance. But I think that it's still likely that this time will be used to hash out an agreement that will take place in bankruptcy, because at this point it's just really tough to imagine a company with this complex of a

capital structure unwinding everything outside of court lessa. Can we take a step back and talk about the business model of the rental car companies right now? It's not just Hurts. Avis has also come under pressure, but it Hurts is under more given their finances heading into this about two thirds of the business stems from air travel. You fly somewhere,

you rent a car to get around. And I'm wondering how much was this really an issue of the pandemic and how much is this a Hurt specific issue of them adding too much debt at a time of uncertainty given uber and lift and just a changing backdrop there. Right, it's a little bit of both. But I think this is really one of the first companies that we've seen that might file bankruptcy almost entirely because of the COVID pandemic fallout. I mean, Hurts has been levered up and

somewhat struggling for a couple of years. I mean, it's been sort of on people's watch list, but it's debt has traded at par it has not been a distressed company in that sense um and it's brought in a lot of revenue despite all of its dead It's been able to stay afloat. So unlike some of the companies we've been go bankrupt in the past months or so, which really were fully distressed before COVID, and this really

puts them over the edge. Hurts would represent one of the first um or really the first company too end up in bankruptcy pretty pretty explicitly because of the kind of just global shutdown that the that the COVID pandemic has caused. Like you said, you know, it relies a whole lot on travel, and so it's one of a whole number of companies in the travel sector or adjacent to the travel sector that we're now seeing come under

real hardship. So Eliza has hurt since some of the other rental companies, have they received fiscal stimulus from the federal government or they are they expecting it um or they want those industries that did benefit a little bit, that's a good question. They have not received any any sort of stimulus or bailout yet. Um, there are, They've

been in communication with the Treasury Department. We really don't know too many details on that, but I think like any other company, they're very hopeful that any day now there could be some additional bailout or rescue signance thing that they would that they would qualify for. But no, they have not gotten any any sort of that assistance yet, and so that's kind of been make or break Eliza.

There's a question as a growing number of companies file for bankruptcy, how much has already been priced into debt markets. In other words, are we seeing creditors getting crammed down and forced to swallow bigger losses than they were expected or are they already budgeting for this. That's a great question. Uh, it really depends on the company. So any of the companies that have already been distressed before the crisis, uh

that it has been priced in. And you've see some really sophisticated hedge fund um owners of the debt and lenders, so they're they've bought in low and they actually are poised to make a lot of money in a restructuring, especially if they end up with some equity control um.

But in a situation like HURT, So this is where you're gonna see a lot of people getting hurt because by the time that they would have wanted to sell out things, things went bad so fast in terms of the like enhanced pressure that that travel related companies have come under. So it happened way too fast for anyone to get out at a reasonable level, and they will

take a really big hit and it and hurts. Like like some of the retailers that we've seen for bankruptcy recently, the biggest problem is that this fleet of collateral they have, their their assets are collateral on their debt, and for retailers that is inventory, apparel, uh, you know, things like that, and for Hurts, it's it's it's huge fleet of cars. And the scariest part is that they can't liquidate those

assets to repay creditors during this pandemic shutdown. So one of the reasons, you know, one of the priorities for Hurts right now is trying to hold off on having to sell all its used car fleet during a period where you know, the cars would fretch really low fire sale princes um and not even repay let it back. That's a big concern for a lot of people. Eliza roynalds Hannon, thank you so much for being with us. Eliza ronalds Hannon, hy yield and distressed credit reporter for

Bloomberg News. Thanks for listening to the Bloomberg pen 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 A. Bram Woits one. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio