Markets Tanking On Leadership Deficit In Washington: Schenker

spread of the coronavirus continues to extend. To Paul over the economic outlook globally, investors are really looking towards central governments for some type of fiscal stimness. It can't just be lower rates. And in fact, today the UK announced the thirty nine billion dollar stimulus package. That's hours after the Bank of England cut interest rates. So the UK doing their part. The question now for markets is what will be the US response. To get a sense of that,

we welcome our good friend Marty Shanker. He's a chief content officer for Bloomberg News. He joins us here in our Bloomberg Interact or Broker studio. So, Marty, it seems like today, maybe even yesterday, the market's been sitting there saying, Okay, United State, its government, where is our fiscal response here? We've seen the FED through the emergency rate cut. We're probably gonna get more rate cuts coming up, But what's the fiscal response? What do you think is going on

down in Washington. Well, Paula, I have to say, it's not necessarily as a stimulus deficit. It's more of a leadership deficit. Uh. We were talking before we went on the air about the TARP experience that in two thousand and eight, when basically the markets were telling the government to get its act together, and in fact it did um and by all accounts, that helped rescue the financial system from ruin. Uh. You are not getting a sense of that kind of leadership out of Washington. And it's

both the White House and Congress. It's not just a Donald Trump issue. So we saw over in Europe. We saw in England there was a coordinated effort between the central Bank there that cut cut rates by fifty basis points in emergency ray cup. But that also opened up a way to to give bridge loans to businesses suffering in the wake of the coronavirus induced slow down. What

are people hoping for from President Trump and from Congress. Well, I think that they want a uh you know, there's this notion of micro targeted responses, but it's more a series of micro targeted responses for small businesses that have to close down to be able to get credit. It's also uh, the ability to make sure that people get paid if they're forced to be at home for caregiving

or because their self quarantining themselves. So I mean it's what what they really need is a bipartisan agreement on which kind of measures the government should take and for people to put aside their partisan difference differences and come up with a rational plan. The problem is that Washington

has become so dysfunctional. There were reports that Donald Trump will refuse to sit down with Nancy Pelosi because of the impeachment vitriol, that that created such bad feelings between the two of them, which is ridiculous in a situation like that. But I think you're seeing that in the markets.

So we have heard, I guess of a payroll tax cut, and have you heard anything out of Washington that gives you confidence that we may have a tarp like product or you know, kind of piece of legislation that would really be on accompassing and really address the issues that you just outline. Well, I don't get a sense, and I mean, we're all sitting in New York at the same feeling that there is not that sense of urgency because of the uncertainty over the effects of the virus.

We've never seen anything like this before, but there is definitely no indication right now. Congress is UH scheduled to adjourn um this Friday, and the optics of the Congress leaving town um without having done anything UH to promote some sense of stability is just breathtaking to me. Meanwhile, this is an election year and we are getting the campaign ramping up on both the part of former Vice President Joe Biden as well as Bernie Sanders, and Biden

is becoming the very clear front runner. Is getting very difficult to see how we are going to see a Bernie Sanders Democratic candidates. I would say it's virtually impossible. Okay, it's virtually impossible. So what's the playbook going forward? How likely is it? Have we heard anything about Bernie Sanders perhaps conceding and having his supporters go behind Biden. I don't have any reporting of my own. I just have you know. My guess is that Bernie Sanders is definitely

going to stay in this race through next Tuesday. He will absolutely be vigorous in the debate Sunday night. I think it's an important that you do that. Yeah, a number of the surrogates of Bernie Sanders are making the point that Joe Biden has not been vetted. Um in

that kind of situation. When you have one on one Bernie Sanders against Joe Biden without a studio audience, which is what's going to happen this Sunday, you will get a very granular examination of policy differences, and I think Joe Biden's ability to explain those differences is going to

be a major issue. People are not that focused on the election per se, and some of the issues that they have been harping on him in gun control a very big issue, and yet hard to sort of make that an issue, and people are holding up and quarantining themselves. How important is it for the Democrats to come up with some sort of cohesive either strategy with respect of the coronavirus or message or or something on that front. Well,

I would say it's actually one step above that. It's a question as we discussed leadership, and I think that the Democrats their strategy is they need to obviously defeat Donald Trump, but they need to do it by contrasting their approach as leaders of a government entity. And I think Joe Biden, his ability to stand above the fray and show real presidential quote unquote leadership is what's going to carry the day for him. The election is still seven eight months away, and a lot could happen in

those seven or eight months. So, uh, this this, it seems to me it will be a Biden Trump race and it's going to be the ability of people to perceive leadership that's going to determine who is our next president. So how much of a risk is this the President Trump? This coronavirus because one could argue to date we haven't necessarily seen the leadership from the White House that perhaps is needed. Well, this is the you know a number of people, I'm not invented this. This could be the

Katrina moment for Donald Trump. If he is not able to get control of this situation, it could do him as presidency. All those people who want to change may actually opt for the change being back ending the chaos. And that is what I think this race is going to boil down to. Marty. You've you're a chief content officer, You're the person at the top. How many times have you washed your hands today? Uh? Well, I've been using the purel. I've been I've I think I've washed my

hands every hour. And I was just talking to the attendant in the men's room here and he says, they are going through the soap faster than you can ever remember. Everybody's hands, Well, I mean, I think that's a very good thing. They're they're they're kind of raw. Everyone's hands are kind of a little cracked because people are just scrubbing. Is that they're about to go into surgery. Marty party Shanker, thank you so much for being with us. Marty Marty Shakers,

chief content officer for Bloomberg. Well, it seems to be a race as to how quickly Wall Street strategists can

downgrade their expectations for earnings. The latest Goldman Sachs chief strategist for US Equities, David Coston said the eleven year old bullmarket u S Stacks is about to become history, and he now predicts that earnings will drop at least twelve percent in each of the next two quarters due to plunging oil prices, as well as the spread of the coronavirus and people staying at home and not traveling.

The question is how do you invest right? I mean, this does expect sort of a decline in equities going forward. How long do people expect it to go on for? Is this a time to be buying or just to get out of the market. And Bill Smead has tons of experience with all of this, is the CEO and chief investment officer at SMED Capital Management, which has more than two billion dollars of assets that are management. Joining us from Seattle, Bill, I'd love to get your thoughts

around that. How do you sort of reframe your investing assumptions based on the events over the past month or so. Well, thanks for having us, and this is a great time to think about those kinds of long term things that

are the most important. So what what we feel this is from an investment standpoint is the exacerbation of a trend that's been in place for a good five to ten years, which is that the anemic economy UH scenario where people don't want to own uh, companies that are tied closely to the main street on the ground economy and instead want to own the successful technology companies that that have uh don't seem to have any be impacted

by where people are. Right, if you're stuck at home, you might still be sitting on your Facebook, UH, maybe more than even even normal. So so we from a from a historical standpoint, this looks to us like Paul Volker tightening credit in when bonds were already so oversold and so miserable. The bond market had been terrible for thirty years, and incomes Paul Volcan and he titans credit and bonds get slaughtered. Stocks were already cheap, they got

slaughtered again. Uh. And and Y two K. The Y two K thing caused people to buy a whole bunch of technology stuff in and get really excited about technology right before the end. And in this particular case, you know, growth investments have been doing dramatically better. Value holds most of the stocks that are economically sensitive. Therefore, what's getting punished the most at the end of a major trend

is the thing that was already cheap. So Bill, is there a valuation point here for the market that you think investors should be kind of keeping their eye on to try to get a sense of where the bottom might be. Well, that's a great question if historical situations like this have any merit in analyzing. And remember you're talking about an exogenous event that no one could see coming. And then uh, Saudi Arabia took out the Amazon playbook and decided to UH use their their UH position to

undercut everyone else's price and put them out of business. Uh. Those two things happened. In other words, of Saudi Arabians would have never been able to do this if the coronavirus had not greatly affected demand around the world for oil and gas right now. So so so these two

just completely wild, historically unusual things are hitting simultaneously. So what you should expect is that that investments you make now in in the areas that people are the most afraid of right now are likely to produce the highest returns over the course of the next ten years. And the investments that they run back to immediately and have sold way less that that they they've they've got the most confidence in are highly unlikely to be the best

investments of the next ten years. Are you basically saying

by stock cell bonds. Well, first of all, uh, you know, mathematically a tenure treasury has zero chance of investment success in the next ten years unless you consider point seven percent return UH and investment success if if someone's retirement goals get matched with point seven percent return, or a pension planner and endowment works at point seven that so that's d o A. Right, this is the antithesis of the treasuries were percent to start the year and went

to fifteen percent. Bond investors got slaughtered. But those third percent bonds for thirty years were one of the best investments you could possibly make, even though you had to get abused for a while, uh, in the first year that you owned them. All Right, that's the nature. That's the nature of this, uh, the courage to own things that will do well over ten years but make you feel like a fool in the short run. And talking

about just the pain. Uh. The market has rolled over, taken a leg lower even still with the SMP now down more than four percent and the down Paul down four and a half percent as we sit here, Yeah, looking at the vix here out six points to fifty three. You talk about fear in the marketplace of Bill, that's kind of a good example here. So just real quick, Bill, what are some of the things. What's your bottom line

advice to your clients and your investors right here? Well, first of all, for people that are going to be investors for the next thirty years, especially people that have been, uh you know, have been sitting on the sidelines, to begin some kind of dollar cost averaging here looks like, uh, it would be a fantastic idea because the virus itself is no matter what the ultimate totals are, and we all we all feel terrible because we you know, we we hate that anyone would would die from this, but

we will kind of have a really strong feel within thirties sixty days what the total of this is going to be. And at the point that starts to decline, that's when investors will get their legs back underneath them. So so yeah, so that our our view. So we're gonna have to leave it at that, Thank you so much.

Phil Smead Smead Capital Management. One of the narratives that I've been hearing about and people are looking for some sense of capitulation in the market is just wait for the retail investors when they start dumping stock, that's when you know it's over. Our next guest maybe says, maybe not so sure. Eric Falchun a senior et analysts for Bloomberg Intelligence. He joined us here in a Bloomberg interactor

Brooker Studio. So, Eric, what's the et F world telling me about how the individual retail investor has been looking at this market altility? Look? I mean it was just like was a great snapshot because et s were big at that point and they took in money every month. And these are e t f s like Vanguard, SWAB and the Ice shares Core series. What we do is in our flow data, we separate out spy I w

M because those are used like pseudo futures. They get the traders committed out of those things like a hotel. So those flows can contaminate or overshadow the rest of the e t F so we separate them out. So we look at those e t f s used by advisors and allocators. They continued to take in money. Um could that's the chart I'm looking at for. If that goes negative, I think it's time to worry. But over the years, whenever that as long as that's positive, I've

tended to just take a deep breath. Although this sell off does feel just a little more severe than remember Q four was pretty rough. Um. So I'm looking at those numbers and I'm seeing that for the most part, um investors are continuing. And there's really two main reasons for this. One is this the Internet has spread information.

People are sharing information with each other. They've read a lot of education on how timing the market's almost impossible to win, So there's education on not biting, not taking the bait of a of a red on the screen. The second thing is advisors have moved from a broker model where a mutual fund pays them, to a fiduciary model where they get a percentage of the client assets. Once you move to the fiduciary model, you're with your investor shoulder to shoulder. And now one of their biggest

value propositions is called behavioral coaching. So what they're saying is one of the reasons you need me is because I'm going to talk you off the ledge. So with these advisors acting like as a major buffer, and in the past the broker might want to turn the account because they get kicked back from the mutual funds. So I think the retail investor is a much stronger, more disciplined retail investor than in Bygone is Eric. I'm glad

you're here. I really am. I've always too good. I mean, when you know, I can always expect this kind of take from you, which I think is totally important and sort of like a gut check or reality check. You know, here's the narrative, and this is why everything is just fine, and ETFs are functioning well and people aren't freaking out and they're not running for the exits that said, are we I'll present the other side. That's my nickname. Like

for him, it's everything is fine guy. I will say though, that there is a question, first of all, of whether the real shifts and allocations are going to be the real issue here. Basically, are we going to see people move there for one case, or change your allocations or sort of become more risk off and risk averse, And that that's really the type of tweaking and changing that's really going to have an effect on markets. It's not going to be this. Possibly. What I would look for

is this look for active mutual funds. Those are owned by older investors rumors, and they largely were probably put in there by a broker, so they might have less loyalty shorter time horizon. I'm watching those flows. You could see some selling pressure if we saw if we see major flows in two thousand eighteen, Uh, same thing. Um, we saw five billion come out of active mutual funds. That's a lot. We don't have data showing quite the same in this recent self, but it could get bad.

That would be one and a lot of those people have the four one case you're talking about. In terms of the younger I think they're rebalancing into equities because remember how you like this chart that shows equity net fund flows have been negative over the past couple of years, and you're like, what's going on? What's going on there? Isn't bearish. It's that people are taking off the equities a little because they're rebalancing back, and a fixed then

comes to trying to keep a percentage allocation to equities. Now, if equities sell off, that percentage goes down. You may even see them rebalanced into equities. But yes, there's gonna be some panicking. Of course, not everybody's like this. I just think the core of the retail investor is much stronger than than people give them credit for, really valuable. And I could go for another ten minutes. We didn't even get to h BYG. We didn't even get to the high bond e t f s, which have seen

really big outflows and really big discount to navs. Actually, and and and THEUNI one, the MUNI one h y D had a seven percent discount. Our MUNI analyst Eric Kazawski says, that's a leading indicator. Look for the bonds to catch up. So if you see a discount, that's probably bad. Seconds. Eric, we could talk for ten minutes. I wish we could, Eric valtun As we will senior et F analyst Bloomberg get intelligence joining us here in our interactive broker studios. It's sort of like a game

of Whackable Where do you look first? Do you look at the coronavirus, the progression of the disease where it's spread, at the fiscal response to it, or do you look at the price of oil which is down yet again today now thirty three dollars and thirty seven cents of barrel traded on the n imax as the price war wages and and engrages on I should say between Saudi

Arabia and Russia. Let's focus on that right now. And we're lucky to have Dr Ariel coh and senior fellow at the Atlantic Council Founding Principle of International Market Analysis. Uh And also he of course is a frequent contributor to this show, joining us from Washington, d C. Can you give us a sense, Ariel, of just how long this price war can go on before we see a complete rearranging of the oil producing nations in terms of both their economies as well as their power relative to

each other. Well, let's start with the last part of what you said. I think the rearrangement is underway. The week part. The weak players such as Venezuela, Iran, Libya, which is in the middle of a civil war, are all too hurt, whereas UM the United States shale patch, which has high production costs, really needs to re examine uh it's capex. Its capex is high because shale wells last only eighteen months to twenty four months as opposed

to conventional wealth. So our production in the shale patch is somewhere between thirty and sixty dollars, whereas in Saudi Arabia it's around ten dollars or less or and in Rush it varies greatly depends on a structure and a location, from ten of fifteen dollars for established fields too as high as sixty and more dollars a barrel cost UH in Arctic offshore continental shelf. But so the ones with the longest um um breathing space for this war, the

Saudis on the Adham. The Saudis have also higher balancing point for their budget. They need something like seventy dollars a barrel price UH to balance their budget. So it's a very very complicated competition, and I think at least a quarter the Saudis are trying to force the Russians to the negotiating table as well as to force some of our shale production to shut down because they're losing money when the oil price is so low UH. In the worst case scenario, if the coronavirus causes a global

recession UM, it can go two or three quarters. So hopefully god willing, by the end of the year at worst case scenario or Q one one, we will see

an improvement. So Dr Colin when this news broke that Saudi was essentially starting this price were ramping up product, and I was really shocked because I just when I kind of did the math and thought about the near term costs for the potential longer term gains, i e. Weakening some of the weaker players the most, notably maybe the U S shail business, the math just didn't seem to work. Were you how surprised, if if at all, were you about what's going on with Saudi Arabia now Russia? Yes,

but I would um say differently. I would say the Russians were the ones who started this war. The Saudis UH proposed a cut UM one point five million barrels and the Russians didn't agree to that UM and UH Rosa, the Russian state oil company H the Beheamoth was upset because the US is sanctioning UH them for UH selling Venezuela oil. UH. There's also friction between Rosneft, the Russian national world champion in Saudi Arabia, competition for markets in

India and Eastern Europe. So the blood between Moscow and the Riad was bad. UH. And the ones who fired the first shot are the Russians. Keeping in mind that they are really upset that the United States managed to surpass both Russia and Saudi Arabia as being a number one producer of oil at thirteen million barrels a day. Harriel, you testify in front of Congress. You've consulted UH with the Senate, the House Judiciary committees. I'm trying to understand what the U S response is to all of this.

If anything, given the fact that Russia's aggression and frankly anger was really directed at the U S shail patch, UH, we can continue limit Russian ability to develop uh it's offshore oil resources, which are quite considerable. I'll remind our listeners that Russ, the same RUSSNEV that destroyed the OPEC plus agreement between Russia and Saudi UM was the one that several years ago UH did uh An agreement was exon getting excens technology to develop its offshore resources. So

that's important for them. Russian oil basins are mature. They don't have a lot of new UH and cheap reserves to develop whatever is greenfield in like eastern Siberia, uh It's um in the middle of nowhere was no infrastructure. UH they need new pipelines and in the long term they have another problem because of the global warming. The tundra, the paramaufrost is melting, and a lot of Russian pipelines, both oil and gas would start to sink, So that

would require a huge capex. So even the Russians the oil prices, and one one more thing, they said they have six years, six years UH to sustain oil prices at twenty five dollars a barrel. Yes, they have reserves, they have hundreds and twenty five billion UH in the National Oil Fund UH and whatnot. But I do not believe for a moment that this UH low oil prices, let's say five to thirty will sustain itself for more than one year. DOCTA. Ariel Cohen, thank you so much

for joining us. We always appreciate your perspective on global markets. Dr Ariel Cohen. He's a senior Fellow at the Atlantic Council, also founding Principle of International Market Analysis based in Washington, d C. 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, Lisa bram Boyd's I'm on Twitter at Lisa Abramo. It's one before the podcast.

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