Structural Changes To Society Will Reshape Post-Virus Economy

The question is is it enough. Francis Donald, managing director, chief Economists and head of macro Strategy at Manual Life Investment Management, joins us to lend her thoughts. So, Francis, thanks so much for joining us. We're starting to get some initial details about this stimulus plan. What is your early read as to kind of the scope and scale

of this plan. Well, like almost every data point in policy move, we get unprecedented, huge, massive, But just like every other policy we've seen from other governments, it's not going to be enough to prevent a massive dislowcation in this economy. We are still going to experience a recession what I call it compressed recession in a very short period of time. This passage is about mitigating just how bad that might be and preventing it from creating other

spillovers that last an extended period of time. So for me, this doesn't really change how I think the next three months ago. It does give me more hope that by the year end we have seen a little bit more of that recovery. I'm not in V shaped recovery. I'm in U shaped recovery. I'm not sure how much the distinction matters. It's good news, it's not a savior. So a lot of people are looking ahead to initial jobless claims tomorrow. A lot of economists are just throwing up

their hands and saying, we don't know. I mean, this seems unprecedented. The range of outcomes is so wide that it's very hard to make a forecast. What are you looking at? To give you some sort of compass through this period? We have to look at a lot of different alternative data sets, things I've never looked at before, like subway ridership. How many people are They're looking at open table reservations, looking at surveys that we maybe haven't

seen before. This is really difficult to forecast, and there's a reason why the set through up its hands and said we're not giving you the summary of economic projections. Basically, the only way to do forecasting here is to take an economic model and break it, push through a bunch of assumptions that are based on just various scenarios, and hope it gives you some point forecast. But that is

false precision. What we need to be doing now is thinking about the progression, the quarter by quarter progression, and how does anything that happened in the next three months create longer term damage. I do think we need to realize that we can't and we probably will not unwind all of the damage that we see in the next three to six months, that there are structural changes that are coming from this, and most importantly, a lot of the policies that were put in place monetary and fiscal

are not going to be unwind unwounded three months. So we kind of have to distinguish here between what's going to rebound and what isn't. That conversation is so much more important than what is the GDP hit, what is initial jobs claim is going to be? So what do you think some of the structural changes might result out of this Friensis. The biggest one is if I'm opening a company right now, I'm thinking twice three times about do I want to global supply chain. We haven't just

had one hit to global supply chains. The paraffs who've now had a second entirely different one. So if I'm opening a company, I'm thinking, yeah, maybe, And you have to pay for domestic labor, which is more expensive, but that's a form of insurance. I also think that we're going to get a sense that people can work remotely

and do not need to travel into downtown cores. That could change housing markets, It can change the way companies operate, It can change the push towards new and better technologies for remote working. These are the types of conversation that we need to have. Um of course, the biggest one is we have now, you know, expanded the sets balance sheet to something unprecedented. We now have deficits that will

blow out across the entire world. And I don't think you're going to have anyone who says we shouldn't have spent that amount of money. So even our notions of what's the appropriate rule of a central bank and how much money should government spend is going to change as well. Francis, That's exactly where I wanted to go, this idea that the deficit is now going to double to where it was.

You've got helicopters dropping money, You've got the FED basically saying we'll buy whatever you want with expectations at the Fed's balance sheet, which already is at a record high now is going to at least double in the next twelve months, if not far sooner than that, to more than nine trillion dollars. At what point is this inflationary versus deflationary, So eventually that will create some inflation. And this is why I think we're seeing a steeper curve.

It's why you're going to hear people say I'm a seller of the thirty year that inflation is coming. Um. This is why you're going to see people who like gold in this type of environment. But for the meantime, particularly in the next six months, we're going to have to deal with demand destruction, and in my view, that demand destruction it's going to be so much more powerful than any sort of inflationary dynamics that come from these policies. We also have a very strong US dollar, and that

is a deflationary force. I don't think that strong US dollar is going to unwind significantly this year. So yes, do we need to think about inflation. Absolutely, Do we need to think about it in the next twelve months or even twenty four months, I don't think so. So. Francisk you're talking about you more of a U shaped recovery, do you? In fact? And I think that we will see a recovery in the third quarters that can be

pushed out maybe more to the fourth quarter. This could be a lower for longer type of hit to the second quarter. I suspect you're going to see some seeds of the recovery by the third quarter, and by that I mean you will see shops open back up and some rehiring activity. Are we truly back online? Do we start to see an economy that even resembled where we were in January? Probably not till the fourth quarter. You know, we have a supply shock and then we have two

types of demand shocks. Here. We have forced closures, which means even if you want to buy a latte at the coffee shop, you can't, And then you have this other type of demand shops, which is just confidence based, which is saying, you know, even if the store is open, I'm too afraid for my personal safety to go outside the house. Right now, a lot of these can be cleared up. Supply chains are already coming back online out

of China. That's good news. You can press a button and or sign a paper and open up a segment of the economy. But it's probably going to take a little bit of time before we have people who are generally happy to go to concerts through movies. Again, that's the more of a confidence shock. Those are really difficult to forecast. But you know, just thinking it true, I don't think we're all going to be going around shaking

hands by June Francis. Just real quick here, I'm wondering how much of the economy is still online that's getting discounted, basically that the American business community hasn't gone to zero as people shop online and uh and order stuff online. Yeah right, And we see a variety of different types of companies that are hiring because there's a segment of this economy that isn't just holding place, but it's going

to re accelerate. And what they're seeing is just like you know, the full weakness of the economy isn't going to redown. I suspect the strength in those particular industries, everything from telecom to online shopping. They're not going to lose all of this stump either as we continue to have the structural shift. So certainly we're going to see

some front loading activity in March. Wash grocery store sales for March, they're gonna be through the roof, um, but it's going to be substantially offset by the significant amount of downward pressure we have from small businesses, restaurants, job losses, um. Those are going to significantly outweigh Francis Donald. Thank you so much for being with us. Frances Donald, chief economists and head of macroeconomic strategy for MANU Life Asset Management.

Joining us on the phone from Toronto really interesting to try to forecast what the society might look like on the other side of this. We don't know how long it's gonna be, Paul, but they're us seem to be a feeling things are going to be very different in certain ways at least. Yeah, absolutely, and again her economic outlook more of a U shaped recovery than some of the V shaped recoveries. That we've seen come out of

Wall Street. Over the last three or four days, we've been hearing consistently about some of the growing strains on the health care system, particularly in New York City and Javit Center being outfitted with hundreds of beds in order to accommodate the influx of expected patients. Joining us now someone with a lot of experience planning and existing within this type of ecosystem. Dr Lena When, emergency physician as well as a public health professor towards Washington University previously

serving as Baltimore as Health Commissioner. Dr When, thank you so much for being with us. I want to just get a sense of a state of play. How close are we in New York City and some of the other epicenters to a an Italy type situation where we end up with just hundreds of people dying a day. Well, if you talk to any of our frontline healthcare providers in New York and in other epicenters around the country, they will say that we are already at this breaking point.

We are already seeing our hospital system stretched to capacity. And what's extremely worrisome is that our healthcare providers for on the front lines don't even have the basic equipment that they need in order to protect themselves, which frankly is something that I never thought we would see in

this country. I mean, it was just two months ago that we saw the images emerging from China of nurses who had to reuse their masks for several days at a time, doctors whom had to fashion their own gowns out of garbage bags. And now we're seeing this playing out all over the country. First we're ratcheting masks, then we're going to run out of doctors, and then we're also going to run out of hospital beds and I see you bed and other critical capabilities that will keep

patients alive. I mean, I hate to present this dire picture, but this is what's happening in our country due to

lack of preparedness. But all is not lost. We do have an opportunity to ramp up production dramatically in this country through a coordinated national effort, and we need everyone to continue to do their part to do social distancing and other measures that can reduce the rate of transmission in these epicenters, but as critically in other parts of the country, to to prevent every part of our country from turning into the China and Italy scenario that we

have seen playing out so dr when there has been some growing discussion over the last week or so that perhaps it's time to think about getting in the country quote unquote back to work and perhaps kind of open up the economy somewhat. From your perspective on the healthcare side, how do you view that? I mean, I understand the desire to get back to normal, because frankly, right now life is not normal at all. It's not imaginable compared to where we were a month ago or two months ago.

But we also have to look at the reality of where things are. We can't navigate based on our wish list. We have to navigate based on the reality and what the reality is that we have this urgent need to stabilize our health care system. We have an urgent need to ramp up testing because unless we do that, we have no idea of where we actually are. We have case counts every day of the number of people who are infected, but we don't know how accurate these counts are.

In fact, basically every public health expert I know thinks that these counts are far off because we just don't have the testing capability to understand what's happening in our country. So unless we can shore up our health care system, unless we can get real data about what's going on, we can't let up on really the only effective intervention that we have at this time, which is social distancing. I wish that this were not the case. Don't get me wrong. I wish that we had testing up and running.

I wish that our hospitals were not overflowing. But given the situation that we're in, we can't let up, or else we are going to have tens of thousands of people die, maybe even more because of our own in action. Dr when I'm wondering right now, we're looking at a recommendation that anyone from New York quarantine themselves for fourteen days if they travel outside of this state. How prevalent is your estimates is the research currently is the virus

in the United States beyond New York? In other words, if some of the hot spots are contained, will that be enough to sort of stave off a crisis situation the rest of the United States. It's a great question. I think the answer is that we don't know, because we don't know the true prevalence in other communities, but there's reason to believe that you can do both of

these things at the same time. So mitigation efforts, meaning mitigation in these hotspot areas as well as containment in areas that probably are not yet so affected, although very likely they are much more affective than we think, but still there is a chance at that, and I think as long as there's a chance, we should be trying to do both, trying to to um do every day we can to both to the healthcare system in these hot spots and to reduce the rate of of transmission

in other areas too. Dr Lena When, thank you so much for joining us. We really appreciate your learned perspective on this issue. Dr Lena When is an emergency physician and public health professor George Washington University. She previously served as Baltimore's health commissioner. So, Lisa, still, I think what we're hearing from Dr When is that, obviously we are still at the relatively critical stages here, particularly in some of the hot spots, so perhaps a little bit premature

I think about opening up the economy. There was a story that caught my attention this morning about how New York hospital workers are basically foregoing tests to see whether they have the virus. If they don't have symptoms, they're being told just to come to work because a they're needed and be there aren't enough tests, and it just sort of highlights the fear felt by a lot of

people currently in the healthcare system. And I will tell you personally, I've spoken to people who are nurses in this situation, and it is a frightening situation at this point, and it's expected to peak in about two weeks, so a lot of concern about whether people who could potentially be saved will be able to saved, as well as the lives of a lot of the people who are on the front lines as hospital workers. Our next guest Hans Olsa, and he'sa chief investment officer food Shary Trust

company in Boston with about fourteen billion dollars under management. Hans, thanks so much for joining us. What do you make of the market performance of the last couple of days? Are just kind of forming maybe a little bit of a bottom here? Is this just a dead cat bounce? No, I think we're in the very early stages of a bottom.

Formation here with the Setter reserves action being joined by the Congress's actions, I think we have the conditions now to start to put a double line underneath this episode. So I think we're in the early stages. There's definitely um some some probably shockingly difficult headlines will have to deal with in the week ahead, but most important, I think we've got the beginnings of a base being formed.

You know, there's a question here how you get some conviction at a time of such lack of conviction when it comes to economic forecasts. I'd love to get your sense. How do you gain a sense of assurance behind your call that we're getting stability and it's time to perhaps buy well. I think you have to look at the credit market, because in our commercial lives, the sort of the well spring of all the activity starts with credit, right with money changing hands and the ability to get

credit to to transact UH. And you know, what we've seen over the last week or so is severe dislocation. We're right out through right cross the credit landscape, and what we're starting to see now is some normalization beginning to happen in that that space, whether it be UH yield spreads on investment grade bonds or high yields starting to come down. Once that we start to get a return of normalization there, that will flow through to the equity markets, and I think they're both happening at the

same time at the moment. So, Hans, one of the areas that's been a little bit troubled obviously in the credit side of the business is the mortgage markets. What's your take on what's going on there and kind of what the response has been from the FED. I think the Fed's efforts have been really good, uh in addressing the primary markets. We need to get into the secondary markets, especially in commercial back uh, commercial back mortgage paper and

the like. I think there needs to be some help there on the part of the set of reserve there. They need to basically supply capital to that part of the market so that um uh, some liquidity is there and we get a sort of beginning of a return to normal trading. It's not there yet. There's still some distress sellers and liquidations occurring. But if the FED turns, it's considerable resources there that will start to tamp down as well. Hans. We're speaking with Hans Olsen, chief Investment

Officer a fiduciary trust company in Boston. Hans, I'd love to get your sense of how you go about buying in this situation, given the fact that it's very hard to depend on any actual data that we've previously relied on, like earnings or estimates, to get a sense of what the financial picture is. Yeah, I think that's a two part process. One you have to sort of look through

to the other side of this. So if we if we fixate on the data that we see in front of us right now, we're always two to three weeks behind the curve and uh, you know, whether it's the p M I like only actually with the p M I, some of them are just beginning to to to reflect the UH sort of the severity of the draw down. But I think if you focus through to UH and and to a recovery, when we get a return to a bit of normalcy, then I think it's just a

matter of having exposure. It's really more of a beta play than it is trying to pick an individual stock here or there. Things have sold off so so systemically, and in some cases in such a disorderly way. Uh, just exposure to markets now in the base formation is I think the first step into a successful um re emergence of this from this period son for the brave of heart that are willing and able to look to the other side of this, where should they be looking? Well,

I think the US is the first place. And we we have liked international names for for some time, UM, but it's hard to imagine the global economy emerging from this global slowdown, of this global crisis without the US leading the way. We tend to be the most vibrant uh and most creative economy. Uh. And you know it would it would be a break with history for US to come out of a global slowdown without the US leading the way. So I think the US is the first place to be. I think credit is beginning to

look pretty interesting. Uh. I think I would go credit first and then equities second, just because credit has to recover before equities can recover. So if you have incremental money UM, splitting it between those two sectors of the capital markets would seem to me to be a good idea.

All right, So we're in credit because we've seen an out performance in the past couple of days, and investment grade as a federal reserve backstops that as a class, but high yield has continued to underperform as people expect the default rate to spike in the wake of the of the shutdowns. The places that we're looking at right now haven't pulled the trigger, but we're doing the work on would be levered loans those are down trading in

the seventies. Now on those are applying implying default rates and recovery rates that probably won't come to pass, give and all the extraordinary efforts on the part of the Central Bank and now Congress, and then once that starts to catch a bid, I think we'll see a bit of a recovery and high yield already, though high yield oh a s is down from the peak that achieved just a couple of days ago. So Hans, it's interesting the looking out to the other side. Are there sectors

in the economy that you would look at? Would you look at the ones that got really crushed, whether it be leisure or the airlines, transports, that type of thing. I think that for for us, where we would look first would be various, Like um um industrials actually is pretty good. Picking in technology, although that hasn't sold off as much energy. Some of the top names, and energy might make a lot of sense here. They have the wear with all the balance sheet, of the depth of

business and the access to resources. UH. In order to lead out our way out, we start to get a bid for for energy prices, so it would be energy, it would be health there, it would be UH. Financials at some point here in the States are going to look pretty interesting. So some of the areas that have gotten hit harder. But it's but focusing really on the larger companies in that in those sectors, because those are

the ones that will lead out. In an environment like this, it's hard to see how the smaller companies lead us out of this. Hans Olson, thank you so much for being with us, and take care of yourself. Hans Olsen as chief investment officer, a fiduciary trust company in Boston. Volatility markets a little bit of weak this year today after that tremendous and historic rally yesterday, was at the start of something new or just a bear market bounce. We have Aaron Dunne, co director of Value and Equity

Investing and portfolio manager at Eaton Vance with us. Aaron, thanks so much for joining us. Give us your thoughts of kind of what we're seeing in the market over the last several days. Obviously tremendous volatility, but what are some of the themes you're looking at. Well, I thank you. You've gone through a couple of weeks here where you've had a lot of technical issues in the market, whether it be sort of UH leverage calls, et cetera, that

are exacerbating massive moves in the market here. UM. I think more technical factors have been driving the market. What I think we're starting to see, though, is a little bit more of a an attention to fundamentals. And it's really what we're trying to uh shift, you know, to sift through for ourselves in terms of UM, how we come out on the other side of this. And you know,

this is an unprecedented time. It's a downturn that many struggle to foresee, UM and so I think it's sifting through the winners and losers on the other side of this. I don't think it's gonna be UM back to business as usual in a month or two. I think there's gonna be some lasting impacts. And I think the UM the American public is probably UH at some point here We're gonna get very anxious to get out and get

back to life as normal. So, um, sort of looking at that and saying, who are who are the big winners here? Uh? And maybe a little bit of a new world who are some you know that? I think we're going to struggle once we get on the other side of this, Aaron, That's exactly where I wanted to go. I was looking at some of your research ahead of this, and you were saying, don't look at the next round

of earnings. It's no longer a leading indicator. Look beyond that, but it enters the realm of theory, of sort of philosophy of what will sort of be the most missed aspects of people's lives. So how do you cope out kind of handicapping the big winners on the other side when you really cannot look at the number is to determine that? Now, Yeah, I think the numbers are so

in flux that you know the next quarters earnings. I mean you had basically half a quarter in the books if it's the calendar quarter earnings, and we had Nike come out today that had some excellent results driven by the rebounded Shauna and some of the online UH sales they were able to book. I think that's one differentiator for retail companies. UM. For us, we look we want to really look at because the current environments in such

flux and earnings numbers are in such flows. In a company with a calendar quarter that has a call in late April, I don't know that there's a ton of informational value and what they're going to report right, they're gonna say it's really challenging. UH. We want to make sure we have liquidity to make it through. UH don't know when people are you know, really gonna go back to life as usual. So there is some fundamental look here on what liquidity looks like. And that's one thing

we've also been very focused on. We like to own quality companies with with low leverage UH at eaton bands, and so we're looking at make sure our companies have plenty of liquidity to get to other side of this. And so some some things we're looking at our you know, very liquid, well capitalized retailers UM looking at derivative plays on on the other side of this, so UM, you know, maybe not owning capital intensive airlines or cruise ships. We're

not really interested in going there. We're not interesting something that's gonna get a bail out. But there's some derivative plays on the other side of this that are interesting. Um, you know. I think one example one is we look at as as uh plain vanilla as this. Maybe we look at corrugated box manufacturs, right, I mean Amazon is still delivering, Um, They've announced a big increase in employee based so plays like that where you can see some

fundamentals that come back much quicker. They actually go through this with smooth sailing. Stuff like that I think is extremely interesting here and looking at kind of two what layer this year when the market looks forward, what is what's normalized earnings number? Look like? That's how I think you sift through today's environment. To the other side of this is looking at what the impacts are today, but

look at what the impacts are. Two is going to really embed a lot of upside in portfolios today and go along a lot of pajamas because that's what people are doing right now, exactly exactly. So Aaron as co director of Value Equity Investing, how's value done in this market route? It's been very tough, and I'll tell you why.

It's I mean, I think we were looking at coming into this, you had really a couple of years where growth outperformed value massively, and that's because you had these big growth tech companies that excellent balance sheets, and so in our view, as we went through last year and in early this year, the market got very narrow in a lot of these big tech company and then look how big Apple was in the index. Look how big um some of these other companies were in the index.

Um they you know, they grow so much of the upside relative to the rest of the market. The value benches tend to be very uh have much more of a cyclical grouping. And that's happened over the last couple of years is energies falling more into value. You know, materials have fallen more industrials, So the value bench tends to be very um more a little more cyclical. Now have let's have more exposure to defensive groups like utilities, reads,

et cetera. So if you look at performance of values, say versus growth, if that's your comparison, values and performed growth quite a bit um. But I also think that's the opportunity here is a lot of these spaces that have really been um decimated. Have the opportunity to sort of, uh to rebound the most on the other side of this, as we get a little more visibility and the cyclical work every here. Aaron Done, thank you so much for being with us. Take care of yourself and your family.

Aaron Done, co director of Value Equity Investing in portfolio manager at Eaton Advance. Talking about the road forward, how you even start to sort of game out what might be the other side, Paul, I mean, honestly, the concept of even collective working and the concept of exercise. I mean, you just have to wonder how much we'll go back to the same versus be fundamentally changed. Yeah, it's really it's gonna be interesting to see how we all come out on the other side of this. 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 Woids. I'm on Twitter at Lisa A. Bramwoit's one before the podcast. You can always catch us worldwide on Bloomberg Radio three.