PGIM Is Selectively Buying Dip In Credit: Collins (Podcast)

at Bloomberg dot com. Right now, expressed in markets extreme stress if you look at certain credit gauges, if you look at uh, certainly the sell off that is deepening, and but really the place where you're seeing stress or or perhaps the sort of rush of cash is in the treasury market, where you're seeing the biggest one day drop in thirty year yields since two thousand and nine at least, and you're seeing just in general, everyone reprice

rates closer and closer to zero. Leno Shlietiev of Bloomberg Economics here with us and and Lena. I just want to get your response to what Larry Cudlow said, And he was talking about how strong the economy was heading into this and that it will be resilient and can recover quickly. Do you were grey well, we agree with him that it will be temporary in a sense that with the current policy response, the slowdown will soon transition into a contraction, and therefore the slow down part will

indeed prove temporary. But back to your question, is the economy is strong enough? Going into that, I would say that the latest payrolls report did show that the economy had some strength, and this is the key premise for us to think that we will not deep into a recession, so at least our base case scenario. But the numbers today did not uh, you know, they were not as strong as uh it was looking at the first glance.

So first of all, the number was inflated by the construction sector hiring, which was mainly due to weather which was very warm during this winter. So if you see this reversing in the spring, this will exacerbate the slow down. That will cause the services to slow down as well. So I would say, yes, the economy is relatively strong, but the response should be quick and not targeted. It should be a massive response if we want to avoid

the recession at least. We're also very fortunate today to have in our Bloomberg and Actor Broker studio Mike Collins joining us Mike as a senior investment officer and senior portfolio manager for p JIM Fixed Income. Uh, Mike, thanks so much for joining us here. You guys have I'm gonna call it a good jillion and one dollars under management. You see the markets on a global scale. What are

you seeing today and over the past couple of weeks. Yeah, well, you're finally starting to see the capitulation phase right up until just a couple of days ago, as we're talking to our high yield traders and portfolio managers and all of our different credit sectors, and we said, listen, what can you buy cheap? And they said, there's no real force selling yet. There aren't that many opportunities as much as you would think given the widening we've seen in

credit spreads. But I think that's changing a little bit on the margin here, and we're actually in the mode of looking for opera tunities to add risk here. Right to Lena's point, I mean, I think there are are a few big considerations. One, the momentum we had in the economy was really solid, and every data point we get kind of reveals the strength going into this too. There's already been a lot of monetary stimulus, and there will be more. UH. Interest rates for corporates are much lower.

Leverage loan issuers and borrowers see their funding costs automatically go down right because their yields are based off liebor so they go down instantaneously right to reduce their interest expense. Three, there will be a huge UH coordinated global policy response above and beyond what we're seeing from central banks. And four these things tend to be seasonal. This isn't like OH eight where you never saw the endgame where people were worried that maybe this is a nine thirties great

depression in at last ten years. Here there is some seasonal aspects to this type of virus. So UM, I would bet in six months you're gonna look back and say, Wow, I wish I bought more stuff UH in the in the February and March of of two thousand twenty, Mike, Before I dive into exactly how you buy this dip and what gives you confidence that you're not catching a falling knife, I want to take a bigger picture of question about what Larry Cudlow is talking about and the

fiscal response. I mean, what is the potential risk here that there is not a sufficient fiscal response, And that's something that's temporary becomes something much more permanent as companies run out of money and are unable to finance themselves at costs that are feasible. I mean, I'm looking at American airlines borrowing costs going from less than three to more than in a matter of days. How do you sort of save off that risk? Ye? So, so there are two to me, two big risks, right. One is

that you actually have a big earnings contraction here. Right, so the IBADA or cash flow part of the leverage statistic debt to IBADA really plummets, and your leverage goes up, and you do get downgrades and you did get funding stresses. There too is a liquidity risk in the markets that you do get or capitulation and people panic and get out of the markets in big size. And we really have not seen that yet. Right. We've seen some big redemptions out of et f s and high yield and loans.

Investment grade credit have generally until the last day or so, seeing big inflows as their yields are at new lows and their prices are up significantly. If there's a lot of for selling, which we really have not seen yet. Uh, then people have to scramble and raise money, and even the highest quality bonds, even the best securities, go down in price because you need to sell them to raise money. So, Lena Bloomberg Economics, your base case is not a recession.

What are the data points that you're looking at that could push you into recession scenario? What are the key things you guys are looking sure, So we recently downgraded growth forecast to just one percent in the first half of the year. In terms of GDP, we were above two I think just before it all started. So I think we need to look at how growth is evolving.

So if we get to a stall speed for year over year growth in the vicinity of one and a half percent, that's where this is a tipping point basically. So if growth slows down below that, uh, that basically passes the point of no return and we will go into a recession. So that's why, you know, I think policy has to be more proactive. Look at what the fit did. They were proactive. They cut rates, So you didn't you weren't necessarily impressed by what you just heard

absolutely not. I think it does require a massive policy response, not a targeted one. While they're looking at the data and collecting all of the data that he was talking about, you know, the FED will have to cut to a zero zero low bound and how much ammunition will they have left. So the earlier the fiscal response comes, the

better it is. So I want to get your sense here because right now you talked about liquidity pressures that we haven't really seen it so far that we actually say in those to investment grade credit, the high yield bond outflows have been controlled. Trading in the market has withstood it. Today, however, we are starting to see a little bit of a different tone in markets. What are you looking for and how close do you think we are to some sort of liquidity event. Yeah, I think

we're still far away from that. I mean, even this morning, we are seeing people looking for for offerings, looking for bonds to buy, right I mean, we've instructed our high yield team to really try to be aggressive here and buy our favorite higher quality high yield bonds um at much wider spreads and much lower prices. And believe me,

it's been much more difficult than you would think. Based on what you see on the screens right bid offer spreads have widened, and we still see credit investors recognizing that low interest rates are probably going to be here for a long time. Right right now, the Fed funds futures market are basically pricing in zero funds rate um

for the next year and a half or so. And in that environment, again, if there's a dissipation in the spread of the virus, and if there's any stabilization and growth in six months from now, that reach for yield will be will be dramatic. And you are seeing people looking to buy on these dips still in the in the credit markets, at least in the higher quality credits, and we're in that camp. So, Elena, if it is up to the central banks, we've seen the fed B preemptive.

What are you saying around the world, there's our coordination there. Do you think there needs to be more? Uh? If the fiscal maybe is not on the front burner right now, I'm not a big believing that. Actually, yeah, if it gets to a credit crunch and things like that, yes, central banks will need to coordinate some sort of currency swaps and other tools they that they engaged during the financial crisis, but in terms of the policy, so we still have some ammunition left in terms of interest rates.

So each central bank will do what they need to do for their respective economies, but you know, the fiscal policies again in each different and I mean, we'll have to engage. So I don't really see that much in terms of what can be done in terms of coordination rather than just agreeing that the response should be a

big one. Mike, I'm struck by the idea that we are looking at bigger companies still having access to credit markets, and we're looking at the prospect of small to medium size not businesses not having the same sort of financing function. Whether banks are hoarding cash, whether their inventories go down, they have to hold more capital in order to preserve their capital buffers. I'm just wondering, from your perspective, there's been all this money raised in the private debt markets.

Is this going to be an opportunity or is this going to be another risk factor as we start to see weakness in some of these portfolios. Yeah, I mean, we've definitely for a long time now been concerned and raise some concerns about the huge influx of money into private debt strategies. I think these are loans too, relatively speculative companies, pretty concentrated portfolios of loans in some k as in summer on a lever basis, And if you do actually see credit cracks in some of those portfolios,

I think it could get a little bit ugly. Right, So, I think that is one of the parts of the market that's a little susceptible to to some weakness here. But again, the policy response I think will be targeted to provide liquidity and financing to some of these smaller companies. Even in China they have these things called coronavirus bonds where companies that need the capital are financing their their businesses in their capital shotfalls at really low interest rates.

But is there a bigger takeaway here the idea that all of this money was raised for these private credit funds that sort of we're supposed to supplant the big banks and their lending function, and this is the time that they should be swooping in and they should be saying, we have money, we have a record amount of dry powder,

let's deploy it in order to make these investments. You know, what does it say if they are not, or if they are incapable of doing so because they're trying to meet marching calls, are other sort of liquidity issues, or just frankly default in their existing portfolios. Yeah, I mean lee in my dream world, right, the FED will tap the banks on the shoulders and say, hey, guys, this is why we forced you to have so much capital, this is why we forced you to have so much

liquidity and your asset qualities pristine. You should actually be supporting the economy now. Right. In all past cycles, the banks were piling onto the weakness by being forced sellers because they had all the loans and they had a lot of leverage in the system. They are not in that position. So our long running view has been the banks will not make things worse, and maybe they can

actually provide support. Here on the flip side, will some of these private credit funds or these big alternative investment funds become systemically risky in a new kind of way it remembers so, so a lot of these are are locked up. These are long term pools that are locked up. That is really important. Right, This is not oh eight, This is not a global margin call about to happen even the bank loan market is owned almost largely now by c l os. This is long term money that

is locked up right. They are not for sellers, and I think that's really important. I think the structure of the markets are much different than they were in a weight You don't have the inherent leverage in the system that's going to force a lot of selling and a margin calls. I think that will help lends stability to the system ultimately. Elena Larry Cutler rightfully so on Bloomberg Television talking up the strong jobs numbers two seventy three

thousand jobs. Obviously that's likely to be the last jobs report that we get pre Corona crisis, if you will, what is the your outloo of Bloomberg economics for kind of how this could trend over the next several months. So we looked at the numbers just based on the financial shock before even all the quarantine measures kicking. So that implies a reduction to the average pasing jobs to something like a hundred and fifty thousand on a trend basis.

But when we start seeing all the services spending slowing down, you know, people not going out, people like canceling conferences and so on. That will probably get us to the point to the replacement rate of around hundreds thousand months. So that would mean that the unemployment rate will stop falling and potentially could rise, uh, you know, causing a growth recession. Mike, just real quick here to wrap it all up and to tie it together. You said that

you were selectively buying on the dip. When do you go in and just say buy everything? I mean, are we getting close to that point when you talk about capitulation? Yeah, you do it when um, you have huge blocks of bonds for sale, names you like that you own that are down five or ten points and you can actually buy them and execute. And we have not seen that

at all to this point. Right, And that's when you really go in with with both feet and and maybe that will happen my senses, it probably won't my counts. Thanks so much for joining us. We really appreciate you making the trip across the river from the Jersey side

over here to our Bloomberg Interactor Broker studio. Mike's a senior investment officer and senior portfolio manager for PIGIM Fixed Income and you Sliva Senior you s Economist for Bloomberg Economics both joining us here again in our Bloomberg eleven three year studio. Right now in focus, we're looking at markets. They're clawing back some of their earlier losses, so we're not seeing as steep of a decline. Actually a pretty

significant pairing of the laws. Still solidly in the redd SMP down one point eight percent, nastacked down at one point seven percent. Oil however, very much in focus, with crude prices absolutely tumbling down at one point more than seven percent after OPEC plus did not come to an agreement on production cuts. OPEC, remember, agreed to production cuts alone. They went to alone, hoping that Russia would join up and do the same, but Russia did not. Joining us now.

Julian Lee, Bloomberg oil strategist in London, Julian, can you just give us a sense of what we learned today? I think we've learned that this is an organization appears

to be in complete disarray. Um. What OPEC said yesterday, um, sort of late afternoon, was that they were proposing a cut of one and a half million barrels a day, of which the OPEC members would take a million, and then non OPAQUE partners would take the other half million UM that cut would would last throughout the second quarter,

so till the end of June. UM. They then sort of hastily got together in an informal gathering in the evening UM and issued another press statement later later in the day to say that in fact they were going to propose that this one and a half million barrel a day cut be extended to the end of t UM. None of these discussions involved Russia or the other UM non opaque members. The Russian alldminister arrived back in Vienna today for a meeting that was scheduled to start at

ten o'clock UM. It eventually started at round about three p m. UM. He spent the time before that in in bilateral meetings, mostly with Saudi Arabia's or minister. We hear that in the last fifteen minutes or so the meeting has broken up without an agreement. UM. And this is I mean in some senses this is this is even worse than it sounds for for OPEC and its and its allies, because UM, their current agreement to cut two point one million barrels a day expires at the

end of this month. UM. And so without an agreement, at least on paper, those two point one million barrels are going to come back onto the market. So not only are we not going to get a deeper cut, but we may well get oil coming back. So Julian, that just begs the question, how did we get here? There was a time when OPEC or OPEC plus was pretty cohesive, able to push things through. What's changed here?

I think that's a very good question, and I think it's it's very unclear at the moment what has changed. Ministers and their delegates are are being very close mouthed at the moment um. They're clearly dealing with the situation that that none of them likes being in. I think that that perhaps what has changed is that there are very different views about how to deal with a crisis

that is created by a collapse in demand. Um. Saudi Arabia wants to make a corresponding cut in supply to try and balance markets, to try and prop up prices a bit. The sense that we're getting coming from from Russia, and it really is only a sense um, is that they don't feel that that is perhaps the right response.

That what the world needs is a period of lower oil prices hopefully to stimulate some demand, whether that is um, you know, final end user demand, or whether it is countries like China buying more oil to put into stockpiles um. And there may be a real philosophical difference around how you proceed in an environment like this. There's also a question about whether OPEC has completely lost control in every way,

because ultimately, this is not a production issue. This is a demand issue, and there is going to be a decline in demand that we've seen escalate as travel gets rearranged and as global industries do start to slow in the wake of the coronavirus. I'm just wondering, from your perspective how that sort of factors into the calculus here. The idea that even if they cut production a lot,

it may not make a material difference in the short run. Yeah, I think that is That is a real concern, and I think that's one of one of the Russian concerns. You know. The view is that, yes, there's going to be a very significant hit to oil demand. We can we can see that happening already. UM. But the view perhaps in Moscow is that bad as it may be, it is going to be temporary you know, this is this is not a structural um change in in demand. This is this is a response to a very specific

um in this case virus outbreak. But it is something that will have an end and and demand will return UM. And I think this, this perhaps is part of the difference that is emerging. So Julian, there's a I've heard some conspiracy theories out there that this might be Russia maybe trying to put additional pressure on the US shell industry given the precarious financial position of the many of the producers there. Does that have any Does that ring

true to you at all? I don't know. I mean, I I think it's always tempting to you know, to to find um conspiracies, to to build around anybody's position. Uh. You know another country that that may have desires to to cause damage to the U S shale sector is Iran. But Iran has been wholeheartedly behind output cuts. I mean, it's not going to have to make any because it's producing really only pretty much what it needs for its

domestic consumption. UM. But Iran isn't trying to to engineer a collapse in oil prices to to hurt US shale. And I personally, I doubt that that's the Russian motivation. So right now I'm looking I just to reset here, Crude oil absolutely tumbling. Crude traded on the IMAX down to forty cents a barrel, That is down by three dollars and fifteen cents just today, giving you a sense. Brent traded in London at forty six dollars eighty two

cents of barrel. I'm wondering, what is the lower bound here for this demand side crash that we're seeing play out across markets. Well, I think, you know, we We've had a number of analysts coming out with with all sorts of numbers UM. You know, I I've seen numbers suggesting that prices will quite easily fall below thirty dollars a barrel. I've seen, you know, people saying that we're in for a return to the collapses that we've seen in the past of of you know, really low double

digits UM. And I think, you know, very much is going to depend on how individual producers respond to UM what appears to be a failure to reach a deal. Does this mean that Saudi Arabia is going to abandon its own output restraint? Are we going to see Saudi Arabia pumping more UM. That would certainly, I think, push prices down. If we continue to see restraint within OPAQ, that that may um, you know, give a little bit

of support to prices. But I think that, you know, the really big issue at the moment is is just how fast um and and how widespread the collapse in demand is going to be. And that is still an evolving picture as as this virus spreads around the world. Julian Lee, thank you so much for joining us. We really appreciate your thoughts here. Julian Lee's oil strategies for Bloomberg News, joining us on the phone from London. Boy, the headlines crossing across my Bloomberg terminal this morning just

almost too much to take in. You've got the coronavirus latest, you've got the Democratic race really heating up, and you've got better than expected actually stellar jobs numbers. Fortunate. Our next guest can help us pass through all of these things and more. Chris lou Senior fellow, University of Virginia Miller Center and also a former Deputy Secretary of Labor under President Obama, on the phone from Charlottesville. Chris, thanks so much for joining us. Let's just start real quickly

with the news today. I guess you know, this is the last piece of economic news will get kind of pre coronavirus in terms of jobs. And it was pretty darn good, wasn't It was surprisingly good? And I think people they need to take with a grain of salt, obviously. Uh, this data has collected the week of February tenth, so

that's before the first coronavirus death the United States. Before you know, airlines start cutting back flights and uh, people start canceling conferences and so this this may be I mean, all the data is lagging indicators, but this is perhaps I think, less useful, although it may be an interesting benchmark to see as this coronavirus goes on as to how far we fall from this. Yeah, well, Chris, and this is what it goes to the point of momentum heading into the downturn, and I want to talk about

how important that momentum actually is. How much will that buoy any potential ramifications from the spread of the coronavirus and subsequent business shutdowns going forward. So I have to say I was surprised by this number for a couple of reasons. I mean, we know that retail sales have been um or a lot of retailers cutting jobs. We know that Boeing, which is a huge part of the economy, continues to struggle. We know that the manufacturing sector is

sort of inching itself out of recession. And there's a lot of uncertainty in terms of UM the ability of China to make good on their Phase one trade deal. So I was expecting a much lower number. So yeah, so this number is curious to me. UM, But I think I think the issue going forward is coronavirus more like a hurricane for instance, which case there's kind of a dip in spending, a dip in UM economic productivity, and then all of a sudden you kind of come

out of that. In fact, you are rebuilding and people spend and you sort of come back out of it quickly. Or is it kind of a constant drag on the economy. And the question is is you know, with all of these businesses, you know, starting to issue earning warnings and you know, conferences and other things like that being cut back, when do employers start laying off workers? And if that happens,

then this can kind of go south pretty fast. So Chris, we in terms of governmental response, we've had to fed aggressively move here with that emergency cut, um, and you know, the market's discounting even more rate cuts coming up, maybe as soon as the next meeting. We had Larry Cutlow on Bloomberg Television earlier and Jonathan Fara from Bloomberg Television was really pressing them on maybe some fiscal type of stimulus and it Mr Carlo didn't seem to want to

go there. What do you think needs to happen from in terms of governmental response, Well, this is the problem. I mean, set rates are actually pretty low, historically low. Right now. Um, we've had you know, a trillion and a half dollars of stimulants through a tax cut, and so right now we're facing a budget deficits of a trillion dollars a year. So a lot of the normal levels you would have as a government policymaker in a time of um uh an economic downturn aren't really available

to you at this moment. And truth the truth be told. You know, if the issue is in terms of supply chains in China or people not traveling as much, it's hard to say what um stimulus package, you could get those things up and running again. Let's talk about the concept of zero over zero present overnight interest rates, because that seems to be what's increasingly being priced into markets.

Thirty year yells tumbling the most since two thousand nine. Meanwhile, we've got another fifty basis point rate cut being priced in to the feds March eighteenth meeting, And I'm just wondering, do you think this will hurt or help or or sort of on the margins? Do anything in response to this? Well, when we had to cut the other day, you know, Powell was very clear that you know, this is not going to make vaccines come out faster, It's not gonna

unstick supply chains. And I think if anything in the market view that as kind of an active panic, which I think then sent to market down even more. Um. Look, I think any kind of stimulus like that is helpful, but I'm not sure it ultimately addresses the problem here, which is there's an incredible amount of uncertainty. Um. The answers I will come from n i H and CDC and the World Health Organization, they won't necessarily come from

economic policymakers. And I think what you really need more than anything is you need to kind of a calm, stable leadership at the top of government that's kind of steering the ship through you know, increasingly turbulent waters. Chris Let's search gears a little bit too politics. It was a very very busy and important week for the Democrats.

Um down to two candidates. Now give us your lay of the land of how you think it might shape up between Bernie Sanders and Elizabeth Warren, Bernie Sanders and Liza Born. Yes, Warren's right, Um, well with you know, look, I think she did an interesting interview last night, Senator Warren, where um she didn't I'm sorry, Senator Biden, and sat that what I thought, actually, Vice President Biden, Um, I

don't think, um, this race is over anytime soon. I think we've got a couple of important states coming down the road. We've got Michigan next Tuesday, and then some really kind of key battleground states of Arizona, Florida, I

think on March tenth and so. And obviously the way that Democrats allocate delegates is on up on a kind of a threshold basis, so you can continue to rack up delegates all through this process, and we obviously have another big presidential debate coming up in about nine days, and so there's a lot of dynamics. And I think what's been sort of head spinning for all of us that have been politics a long time is how quickly the narrative has changed over the last couple of weeks.

And so I would not be surprised if it changes again, uh, you know, multiple times before we next talk. But I think this race will go you know, well into March and potentially into April if Senator Sanders is able to mount some kind of comeback. Chris, let's bring up both what's going on in markets as well as politics together. And it really is you are the perfect person to do so, given the fact that you've spent decades in

public service, including seven years in the Obama administration. What should the response be by the Democratic candidates to the escalating coronavirus to show that they can, you know, take charge and pose some sort of alternative. Well, I think this really plays right into the Vice president's hands. I mean, you know, he's trying to project normalcy, stability, competence, you know. And again, whatever you think about his policies, whatever you

think about his you know, debating style. UM, this is a person who's been in Washington a long time. One of his first key UM assignments under President Obama was managing the eight billion dollars stimulus back in two thousand nine, and his charge was to get the money out the doors fast as possible. UM, to look for shove already projects. And so he knows how to manage a crisis. UM. He knows how to up pull the different levels of

government programs to get an economy backup and running. So UM, I think this I think is perfect for him in this moment to stand as a contrast. I think, you know what even some of the president supporter would say has been a less than clear message coming out of the White House these days. Chris lou thank you so much for being with us. We really appreciated. Chris lew former Deputy Secretary of Labor and senior fellow at the

University of Virginia Miller Center. Really important to have his perspective, given his experiences decades in public service, understanding sort of the nexus of the economy and the private sector as well as governmental response at this day where we see markets unclear of how to price uh the coronavius IRUs risk other than simply by vond Well, as a coronavirus continues to spread globally, strategist economists and investors trying to

gauge out what the economic impact will be. Ultimately, the good folks at your Asia Group have some thoughts there. Robert Cohn, Director Global Strategy and Global Macro at the Your Asier Group based in New York City, joins us. Robert, thanks so much for joining us. I know you folks at your Asia Group have done somewhere kind of trying to game out some scenarios here about how the economic impact could play out. What are some of the thoughts,

What are some of the takeaways from your analysis? Well, Paul, thanks for having me on the program, And yeah, we've spent a lot of time trying to provide more clarity on the political and the economic dynamics across various scenarios. We don't pretend to have great insight into the epideam theology. We leave that to the medical professionals, but we did take three alternative paths for the virus and then looked

at the consequences of that. In the three paths, one is what we call up the nine scenario may be mislabeled, maybe just an optimistic one, which is where the virus peaks within about six weeks, and that's based on a view that China and the other frontline states are able to contain it and there's more a very active strategy across the industrial world. We then also look at two

more serious scenarios. One is where the peak in the in the propagation of the virus doesn't come to the middle of the year to something like July, and then a third pandemic scenario in which the virus really continues to spread and propagate aggressively through the end of the year.

What we find is that the political and economic dynamics are much more adverse in those second two scenarios, the July scenario in the end year scenario, And in a way it's kind of intuitive that the countries are the politics and a lot of the industrial world are still kind of focusing with on the day to day. There is a political resiliency to deal with this for a while.

UH firms can deal with supply chains disruptions for a period of time, but if this extends beyond the middle of the year, we get to we see a lot more fracturing of the politics, We see a lot more pressure on supply chains, particularly in major companies and in the front line sort of industries that are being affected, and we begin to worry a lot more about financial stress. And that's going to of course create some really big challenges for our leaders in terms of who to bail

and who to fail. Public policy will face some very tough choices in those scenarios, and so that's the direction in which we looked at in these scenarios. So, Robert, what kind of probabilities if you did at all, did you assign to these three scenarios? Are they fairly equal? Way to it? Is one more likely than the other.

At this point we try to avoid putting specific probabilities on it because at the beginning we we there's so many different views out of the scientific community and so much uncertainty now not just about the spread of the disease but also the lethality of it. What I do stress to uh to our clients though, is that you know, if you if you go back a few weeks, we were really very much focused on up a NIGN scenario.

It was easy to look at what happened in Stars and look at some of the other disease threats where the markets bounced back very quickly after the initial shock, and to be hopeful for that. And I think now a lot of the people we I talked to really are starting to focus, particularly that middle scenario, that's serious scenario in which the disease spreads aggressively through them until the middle of the year, and are paying more attention

to that. And I think what I would argue is that's not fully priced into our markets or to our political discussions. And so we are folks. We're trying to encourage people to pay more attention to that, but I am avoiding trying to put a probability on it because

I would probably get that wrong. Yeah, interesting, Robert. We had Larry Cudlow, the director of the National Economic Council, on Bloomberg Television this morning with our own Jonathan Pharaoh, and Jonathan was really pressing him on government, what the government is actually doing. I mean, we've seen the FED, you know, come to the rescue with a what we

call an emergency rate cut earlier this week. But some people are concerned that maybe the U. S. Government is not moving fast enough, maybe with some fiscal stimulus along those lines. What does what do your views there about kind of what the U. S. Government has done to date? Well, first of all, I listened to that interview and Jonathan did a spectacular job on it because he raised exactly

the right issues. I fed rate cut I think was perfectly appropriate to provide some underpinning to demand, But particularly in the serious and severe scenarios, you have to be focused on the supply side dislocations, and so then you have to ask yourself, you know, what is it we really need to be debating and preparing. Now it goes beyond, it goes beyond helping households who can't get to work and helping small and medium firms. Those are really important steps.

But we have to be debating what do we do on tariffs because lightening tariffs does in fact alleviate the supply chain pressures and allows firms to go elsewhere and get the critical supplies they're not able to get from

their main suppliers. We have to address issues like we did in two thousand and eight, of whether or not we're going to provide facilities to whole industries, particularly including large firms, and I understand the politics are tough there, but we need to be confronting those kind of issues. And while the FED has some capacity to do that, and I'm sure is thinking about that, if we get

into the extended scenarios, there are solvency questions. It's not just the liquidity, which is what the FED is supposed to deal with. It really then becomes a fiscal issue as well. And so those were the right questions to put to Larry Um. He obviously couldn't go too far, but I wish he had been a bit more forthcoming

on on the direction of travel for this administration. So, Robert, you know, in the work that you and your team did on the scenario analysis, what have we learned you know from China how this is played out in China In terms of timing, I guess we're seven or eight weeks into this playing out in China. What do we learned there? Well, one big thing we learned is that there's a fascinating and important trade off between very tough

containment and economic rejuviation rejuvenation. And as I'm sure you know, the scientists do debate whether you know, if you have a problem the city, So you just shut down the whole city. Where do you focus on identifying the cases and tracing the contacts and the treating those people in a more limited fashion. The Chinese obviously had the political will and the capacity to shut down a whole province.

They are now finding it is more difficult to reanimate UH economic activity at the end of that and get people back to work, and I think that type of tension, that's certainly one of the lessons we're learning. The other thing I think we're seeing is this issue of you know, protracted scarring of balance sheets, and this is a lesson.

I think we also learned in two thousand and eight that when you have these deep financial UH and economic crisis, however they come, and admittedly two thousand eight it was a different style of crisis that we're facing now, but I think there's a common point here that when you have that, it leaves scars on the balance sheets of households, on the balance sheets of corporations, and it does take

a long time to recover. And so the longer this goes on, but the less likely it is you can get a v UH and it's going to be a more like some other letter of the alphabet. I think even the Chinese now, and we even wrote about it today to clients, the Chinese are understanding that a V shaped recovery may not be in the cards. Hey, Robert con thank you so much for joining us. Robert Khn is a director Global Strategy and Global Macro. For you.

Raise your group out with a really interesting report trying to game out some scenarios for how this coronavirus may impact economies globally. UH markets again selling off your equity markets off over two percent, coming up, UH, Balance of Power. David Weston coming up in just moments. He will drive the conversation forward risk off day. This is Bloomberg. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or

whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Abram Woyds I'm on Twitter at Lisa A. Bram Woyds One. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio