PGIM's Tipp: Virus Won't Likely Send US To Recession

at Bloomberg dot com. I think the big issue here is we've got equity markets off, you know, roughly fiftent over the last seven trading days, just an extraordinary trade down in the equity markets and financial markets. The question I think now for a lot of investors is will the central bankers try to come in and stop the carnage. There's absolutely nobody better to talk to about this issue than Robert Tip. He's a chief investment strategist in Ahead of Global Bonds for p G I M fixed income.

He has crossed the river from the Jersey side, joining us here in a Bloomberg eleven three oh studio. So, Robert, what will the Fed do? When will they do it? And will anybody even care? I think people will care because there is a fundamental situation where uncertainty is rising, and activity levels, especially abroad already in the world's biggest driver of growth, China, have been seriously impacted. Uh. You know, bottom line numbers like GDP and so on, those will

come out much later. But auto sales, for example, we're down spectacularly, manufacturing, electricity usage and so on, and now the cases around the world are kind of that a geometric increasing stage, and so there is going to be a shock. The FED is away from their mandate, which is not on the maximum employment side they're find there,

but inflation is persistently away from target. This morning we had their preferred indicator of inflation, the PC print, and if anything, that is moving systematically further away from their target on the downside. So it would seem like there's a great case for them to make an insurance cut pretty much at any time. And uh that could be helpful because what we're seeing now is a tightening of

financial conditions. Granted, financial conditions were very easy a handful of weeks ago, but you know now it's going to make a difference going forward. Uh, financial conditions tightening, making whatever is going to happen that would uh materialize in terms of a weekend economy weakening, economy worse. So I think there's a pretty good argument for them to do

that now. Whether this is like that transition where they're hiking way too late and it took them a little bit of time to to change the rhetoric around and they really exacerbated things with that rate hike, or they'll have a quicker turn. Uh, it remains to be seen. But the initial indications are are not that good. But hopefully they'll get the signal from the market quicker this time. And Jim Bullard coming out this morning and sort of taking a rather sanguent tone about the sell off and

not necessarily signaling the rate cut that people were expecting. Nevertheless, you are seeing in the Fed funds futures market to full rate cut. It's being priced in frankly before June h and three rate cuts before the end of the year, four rate cuts by the beginning of next year. So if the Fed doesn't capitulate, the market just seems to be moving further and further away from them. I just want to ask you, though, how much will that loosen conditions?

How much will that entice you as a portfolio manager to go out and buy risk your debt at these levels, right, I think it will make a big difference. And when you look at what happened after August of last year was the most recent incident of where the market got way ahead of the fat in terms of expectations for ease on concerns about downside risks that you know, once the underlying situation had stabilized, investor confidence returned, and this

time it didn't require the FED. But once that confidence returned, the market will ease up and we'll take these rate cuts out of the market after they cut maybe you know once and you can have a recovery and risk and so on. So do you expe spreads to retest their lows the extra yield that investors earned over benchmark rates on high yield and investment grade credit? Do you expect a lot of tightening later in the year an

incredible outperformance there. I think that this correction is the same as the corrections we've had over the last handful of years. This is this is not going to be the beginning, I would guess, of a major crisis in terms of a bear market in that goes on for a year or two. This is probably something that's going to be more measured in weeks or months after which we go back to an environment it's not a feel

good environment for people. It's a very slow economic growth backdrop. UM. But the down shifting of risk free interest rates around the world, which is still kind of happening on a secular basis, it's not been fully priced yet on the coronavirus, is accelerating that those low discount rates are gonna then fuel refuel that search for yield, and that is going to pull the spreads in and UH and boost returns on higher fixed income. But you have to get past

this first. So I'm looking at the two year, you know, zero point nine percent, a ten year one point one six percent or zero percent rates reasonable to discount at all. I think in the short term that's that's not where we're headed, unless this turns into a major economic crisis and the FED is forced to go into panic mode. UM. But I think that the range has really continued to shift lower. We have the FED would like to maintain a zero lower bound. They should be able to do that, UM.

But the top end of the rate cycle has gone from twenty you know, back in eighty down to nine three quarters in nine to six and a half in two thousand to the mid twos last year, and that's the new high water mark for Fed funds. And it's going to be a zero to three range on the Fed funds and probably a one and a half central tendency for the tenure treasury. Yeah. Well, right now, I just want to say, we're looking at spreads on Highel debt for four point six percent and the first two

point six percentage points over benchmark rates. Literally one word answer Bob Michael of JP morgan As Management saying he sees them going up to six dred before it's a buying opportunity. Where's the sort of tipping point you know, I don't know where that's going to be. I would guess it's lower and uh and before it turns. But that you know, it is going to be a bond pickers market. Right. There will be areas of trouble, but in the long term, I think spread product is attractive.

Robert Tip, thank you so much as always, and I wish I had an hour with you. We would have such a great time. Yes, well, I mean this is such an interesting market. Robert Tip, Chief Investment Strategies, of PJIM Fixed Income. Well, that's a coronavirus spreads outside of China's first to the Middle East and then the other parts of Asia than uh, the European continent with Italy. The concerns is how prepared is the US for a potential outbreak of the coronavirus here in the US. To

help us answer that, we welcome Dr Philip Chan. He's a CEO and president of Cytosorbents Corporation that trades on Nastack symbol ct s O. Up thirty six percent today, up eight five percent year to date. Uh. Dr Chan, thank you so much for joining us here in our Bloomberg Interactive Broker's studio. Just from your expertise in the healthcare industry, just give us a sense of kind of how you think the US is prepared for what might be an outbreak of the coronavirus. Well, thank you very

much Paul Lisa for having me on the show. Um, I think to basically put my comments though in perspective, just to give you a little bit of background about my company. Citos Orbans is a medical device company that specializes in blood purification to treat deadly inflammation often associated with life threatening infection such as influenza, factoral pneumonia, virus

infections potentially like coronavirus, etcetera. UH. Cytosorp is approved in the European Union, has accumulate more than eighty thousand uses over fifty eight countries UH and has generated about twenty

three million in sales last year. The cold goal of Cytosaur is to control the deadly inflammatory response that these viral illnesses and bacterial illnesses often generate that can then lead rapidly to organ failure and death of patients from the failure of organs like the heart, the lungs, and the kidneys. Now, in the United States, we are not yet approved. We're still an investigational product, but we are actually in a process. We're in the regulatory process of

trying to get approved here in the United States. So in terms of your question about how prepared are we, I think coronavirus COVID nineteen represents a very unique challenge because one we've never seen it before, It's a novel infection. No one has immenity to it. There are no antiviral agents that are approved to treat it, and there are no vaccinations approved also to treat it. And the problem with this virus is that it's kind of an insidious virus.

It lays dormant UH and people remain asymptomatic for up to fourteen days. They may have it, they may be spreading it all over the community, but they would never know that they have it, and so only until they start manifesting the common symptoms of fever, cough, and and just UH shortness of breath and fatigue that they know

that they have it. So this is why, all of a sudden you see these massive outcroppings of virus happening all over the world, and so in the United States, I think that we need better ways to prevent the spread, and I think the initiatives that we heard about recently, the two point five billion dollars that are going towards this,

will be helpful. But prevention and controlling the spread of this outbreak is key, but also is controlling the deadly complications of lung failure and shock and other things that currently we have no approved therapies to treat today, and that's what Citosorb is doing our product. Have you had conversations with the government about expediting UH the accreditation of

your product given what the threat is. Yeah, we've had a longstanding dialogue with MAY many agencies throughout the US government. In fact, we've gotten more than twenty nine million dollars in grants and contracts towards our technology over the years because of that. But we have been in touch, most recently with BARDA, for example, that is leading the charge

against developing potential countermeasures against UH coronavirus. We have we are still in the early stages of those discussions, but UM our hope is that UH they understand the fact that there are no approved treatments for this illness and that one of the hallmark features of what is killing people is this out of control immune response, and that is what we are very well positioned to do. Do you. Are you aware of any patients that may have been as part of the treatment outside of the US, may

have been prescribed or using your product. So the product again has been used in more than eighty thousand cumulative treatments to date, but we don't have any indication that it's yet been used for coronavirus since it is so new. I think some of the exciting news that we announced today is that through a partnership with China Medical System

Holdings Limited in China. UM that we have now UH that hospitals in the Wuhan, China area have now received our Cytosaur product and are well positioned to potentially use

this on act on patients with coronavirus infection. We just did the training just very recently of key physicians in those hospitals in the United States, So I can tell you that when we had the swine flu epidemic that the intensive care units, which receives the sickest of the sick patients of the hospital and we're cito survice typically used, were inundated with patients. And UH that is really a key concern should this uh, should this outbreak turn into

a full blown pandemic. But I think that UM to put it into perspective. You know, flu this year has already infected thirty million people in the United States alone, killing eighteen thousand people. Right, that's one in two thousand people have died from the flu here in the United States, And even though it was considered a fairly severe outbreak, it's not the worst we've seen. One year when the swine flu outbreak, eighty people died here in the United States,

so compare that to coronavirus. It is still the major health concern today. Dr Philip Chan, thank you so much for being with us. Dr Philip Chan, CEO and President of Psyto Sorbins Corporation. Right now, we are looking at a market that has been clying back from some of its earlier losses, although it really is whipping around. NASDAC now had been briefly positive, now down nine tenths of a percent. The key, uh, the key issue here is a lack of conviction, a lack of understanding of the

threat that we're dealing with. Michael Tiedenman joining us now chief executi of Officer of Titamin Advisers with billion dollars of assets under management. Michael, there are a lot of calls saying that recession is now likely in the United States, if not globally, as a result of the spread of the coronavirus. Is that becoming your base case? First of all, thank you for having me on such a quiet week. We it's not our base case, but there's no question

there's gonna be short term economic impact. What you're really we think the lasting impact will be on lower quality higher lever's businesses that had less room coming into this less room for air. Higher quality businesses with great balance sheets will obviously have an impact, certainly one they can

sustain and earn their way out of inventories. You also have to remember, depending on how short this is right now, things are moving so quickly as inventories run off, then you're gonna begin in seeing some supply chain issues that people have been worried about. The big delta going out to three or four weeks will be if demand people stop going in restaurant, if it really if there's a shift,

dramatic shift of US service demand and consumer activity. So one of the things that we've been discussing this morning is kind of the market seems to be really pricing in three maybe four rate cuts by the Federal Reserve over the next twelve months. How do you think that Fed's going to try to address what has been a supply issue today but could morph into you know, a demand issue. There's only so much they can do, but I think they will, they will be sensitive to it.

I think they're obviously going to be speaking with a lot of corporations and CEOs and the leven idea of any pressures that are throughout the economic system. But I don't think it's that's not that that's a blunt tool when you need a lot of other tools possibility deal with something this. How many frantic phone calls have you fielded from your clients saying should I sell everything? We've

had a few, um, but only a few. I think there's always an inverse correlation between phone calls incoming from clients and directions of markets. So this is pretty extreme, but it's been very quick. You know, it's this really a five day dramatic sell off, So it's it's coming. But there's also just a lack of information that everyone has. That's the real issue is that no one can Investors won't make a decision until they understand exactly what their

analysis is. Traders have one decision, sell or short, so you've got this sort of one community of people that have a very easy decision to make. In longer term investors are looking in the market that you know, after a fifteen percent corraction, it's still pretty fairly valued. You know, we were here a month ago talking about growth expectations being h we're too high. That seems like a good

protection every day. But so the investing base is going to sit and watch and wait, and that doesn't help market short term. So what do you tell those folks who call you up frantically? Um, is it kind of just kind of the we're long term investors here, you know,

don't panic, you know, we we do. Luckily, we begin trimming some of our equity positions in Q four exclusively because evaluations, and we always have hedges on, but we actually avalued the hedges not to do the coronavirus just because cost of protection and evaluations in at the end of January. So we have some some good narrative to tell our clients and that there's some protective elements of

our portfolio. But ultimately, quality assets survived periods like this, lower quality assets are challenged, and the corporate credit market with gearing and really the high yield market, there's a big imbalance there that this maybe that's that bears watching. That would say that's the one thing that we're going to keep an eye on over the next couple of weeks and months. So the FED very much in focus

today as people ramp up their rate cutting expectations. Charles Retzky over at Missoojo Security is putting out a note talking about the last time the FED actually had an inter meeting rate cut was February two and eight. We know what happened after that, UM, But I am wondering from your perspective, is that a sure bed and well that support markets? The FED comes out and does what the what what traders are certainly pricing in, which is more than two rate cuts by June. I think the

news flow will still dominate markets. It will be helpful, clearly, it's always helpful. But I think ultimately the the information that is gathered either incrementally positive information about the virus, greater understanding new rules UH and maybe containment of spread, that will have a much more pronounced and back to markets or the converse. So again, I think a monetary

tool is helpful. It's certainly helpful of corporations or that are levered and have you know, real interest rates and all of a sudden they may have a sharp drop from the demand. But I think the news from this, it's all about this right now. So how do you typically in your I mean, you can think back that the fourth quarter of eighteen or certainly going back to

the financial crisis. But when you see markets falling like this again in fifteen six, just in seven trade days, um, it's kind of that falling knife analogy comes here, and you don't want to be the person catching that falling knife. Do you wait for a day or two of green on the screen before you say, okay, I think this thing might have found bottom. Generally well, from a trading standpoint, three huge down days, high volume days, that's generally a

capitulation point. Um. And we're we've seen some of that. I don't think we've seen enough of that candidly, but we're not traders. In the end of Q for eighteen, we saw that as a non fundamental We disagreed with the market analysis that we're entering our session. That's why we added risk exposure at that time. Today where everyone's

in a huge void of information. Every you know, you're seeing cancelate this week alone, you look at the news flow about cancelations and people banning, you know, corporations not allowing people to fly out of the country, mean, etcetera. It's expanding. Schools are being getting emails about my kids preschools, and you know, so all this stuff is very fluid. Um. It's uh, it's no, this is not what people are

trained analyze. Ultimately, Michael, just lastly to wrap it all up and put a sort of a bow on the day. Today is another day to find a haven investment. What's the best haven big side? Yea, we have such a negative forward view and treasury, so it's been the best haven and gold we own gold. We think that is just but that's not a trade. We think that's just a generally a good asset to have in the mix. So you're basically, uh, putting cash in a mattress and

sleeping as well as you possibly. Yeah, I never agreed with the cash is trash quote that came out a couple of months ago. Every great long term investor always has a little liquidity when things like this happen. Interesting, Okay, Michael Teaman, thanks so much for joining us. Michael Taman is a chief executive officer for Team Advisors, twenty one billion dollars under management, so lots of capital in the marketplace, joining us here in our Bloomberg in Direactive broker studio.

The message to the Federal Reserve today is we don't care what you say. We are expecting for rate cuts by the end of January. That at least is the impression from markets joining us now to discuss. Brian Schappato is a Blueberg opinion columnist covering all things debt related, and Brian, I'm looking right now, it's nearly a full four rate cuts by the end of January currently priced.

And this comes even after Jim Bullard, the Fed's Jim Bullard came out earlier today and basically said, yeah, I guess we'll cut if it's a pandemic, but you know it's too early to know, which wasn't comforting to markets, right. Yeah, the base case is still for keeping policy on hold and for the federal reserve. Not from markets. No, from I mean, I mean markets, like people are hedging effectively for rates hitting the zero bound, like by mid year

at this point, which is just kind of nuts. I mean, obviously you've got a hedge, so you don't necessarily the rates to hit zero by then, but I mean it's just kind of crazy. Um, the Fed is not willing to appease the market. It's at least not to this extent. I think it's just a massive market meltdown in a freak out right now, and people are just buying things up, and that's of course causing the pricing to look like

there's going to be a lot of cuts. But I mean people talk about inter meeting cuts like happening over the weekend or on Monday morning if stocks keep falling. I just don't see that at all. So but Brian one could argue with a cynical mind, like we have some cynics around. He just pointed to who are Wadio on radio that this is a friend who maybe has responded to the markets, maybe more than they should have. Um still though, you think they're gonna be focusing on

the data. Yeah, I mean Robert Kaplan said it's a Fox Business today. He said, I will make a decision on a rate cut by March seventeenth, eighteenth, which is their meeting. And I expect a rate cut at the March meeting. I mean, I don't unless the markets somehow rebound tremendously. I think they would lose a lot of credibility if they don't do anything. But for them to

do something extraordinary right now doesn't seem likely. It's not like I think pretty much everyone conclude that one rate cut will not solve the coronavirus, right, and it's unclear whether it's kind of comical. I mean, I mean, I mean, it's unclear whether anybody out there who's pounding the table for a rate cut. I mean, if you've got a basis rate cut this afternoon, would you be buying stocks? I'm not sure. Well, this actually is a really interesting question.

What will it take for people to go in buy stocks by risk or debt? I mean you came into the studio and you said, you know, people have been saying they're just waiting for an opportunity to buy the dip here it is. I'm not going to fall I'm not going to catch this falling knife. What do they have to see? What are the people you're talking to saying? Yeah? I mean, it sounds like people just want some clarity around how uh you know, elected officials are gonna get

their hands around the coronavirus. And there's nothing that the Fed canoe again. I mean, they have a few options. They can either go back to quee and they're still already buying treasury bills. So for all those who said, oh, you know, they're buying treasury bills and that's causing the stock market to melt up. I mean, they're still doing that but doesn't really matter right now, or they can cut rates, and neither of those things provides any certainty

around the coronavirus front. You see Mick Mulvaney come out today and say it's possible schools will have to close in the US and people get really freaked out, like they don't want their daily lives to be affected by this. And even if borrowing costs are the cheapest they've ever been, uh, that's not going to really resolve that concern. So, I

mean that kind of goes to the issue. I think what we're seeing maybe in some of this accelerating risk off field, it's just every day is you know, there's another potentially big shoe to drop, and that is, you know, a spread within the U S which we really haven't seen yet. That's the headline risk that I think a lot of traders probably don't want to deal with its hold on a second, do you think that the market that for at the market, that the economy isn't starting

to prepare for that? I mean, how many people have you known who've been stockpiling food? Answer to your question is no, I don't think the market is discounted. UM A spread a material spread in the US. But I think that potentially what I think that's just kind of

what the market is telling is maybe. And the thing is is you saw Christine Lagarde yesterday come out and say, even on the E c B side, we don't see it necessary monetary policy responses yet, and that you know, she oversees Italy obviously, and Italy has had quite an outbreak over there. So even even people who are overseeing economies that have been hit by this are saying this is not a monetary policy issue. I don't know what

you want from US, UM. And that's gonna be really interesting for markets to digest because to the point about last year's rate cuts, I mean, they effectively backstopped a trade war, and trade war could have been stopped by elected officials and this cannot necessarily be so the Fed used a bunch of ammunition on a problem that could be resolved by people relatively easily. UM. And this is gonna be a lot harder branch about it. Thanks so much for joining us. We appreciate your thoughts. We know

you are busy. Uh here you can read Brian's a great opinion, work at on the Terminal at O P I n Go, and on Bloomberg dot com slash Opinion. 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 Woy. It's I'm on Twitter at Lisa abram woits one before the podcast. You can always catch us worldwide on Bloomberg Radio