This Market Looks A Lot Like Q2 2008: JPM's Bob Michele

that Bloomberg dot com. In response to the economic impacts from the coronavirus, the Federal Reserve is stepping up and stepping in in a big way, supporting liquidity the market, not just buying treasuries, but also going into the corporate bond market to get a sense of what that means for the credit markets. Who welcome Bob Michael. Bob is a chief investment officer and head of Global fixed Income, Currency and Commodities at JP Morgan Asset Management. Bob, thanks

so much for joining us. So as we take a look at what the Fed is doing here and its support of the markets and liquidity in the markets, what do you make of their moves into the corporate credit market. Good morning, Paul, I take some moves into the corporate market, and also let's not forget into the municipal market and into parts of the non agency mortgage market where critical and necessary. So I applaud it um. They had to

keep those markets functioning. They couldn't allow what was happening in those markets where they were effectively frozen with very little trading going on because they were perceived to be outside of any kind of central bank safety net, to continue to operate that way. So I think it was

a good first step, Bob. The FED has said that they are going to delve in THEO into the corporate debt market, they have yet to actually do so, and I think it's interesting that yesterday FED Chair J. Powell indicated they were willing to go further, and yet they haven't even taken the first steps when it comes to actually implementing it. In the credit markets. Do you think the market's gotten ahead of itself piling into junk bonds, in particular with the expectation that they'll be back stopped

by the FED. Yeah, I think so. And when you think about what the FED is doing, they're going to buy UH fallen angels or companies that were rated investment grade towards the end of March that may drop into the high yield market. I think that's smart because those are companies that were running basically investment grade financials before the crisis. The crisis isn't their fault, and you're putting

too much pressure on the rating agencies. You're effectively telling the rating agencies without being able to buy uh fallen angels, that they could be leveling a death sentence on these companies. So they took that away. But when we look at their support of the high yield market, we estimate that it will be roughly ten of the high old market. Uh. It's not a lot. Uh. It will keep the high yield market functioning, but it also doesn't prevent high yield

companies from defaulting. I think you're going to see a rise in the fall rates for a prolonged period of time. So, but here's what I'm struggling to understand. Yesterday after FED Chair J. Powell's press conference, about half a billion dollars flowed into h y G or at least that was the total amount of flows yesterday into the biggest US high old bond et F which by is the broad market, not just fallen angels. And you said that you do

think the market's gotten a little ahead of itself. So does that mean that you're selling high old bonds here? What does that mean in terms of your positioning? Well,

it means a lot of things. I think a lot of the market got confused when he said there would be a new term sheet on the Men's Main Street lending facility, and most investors took that to mean that the leverage limit that was put in place might be relaxed or eliminated, which we then broaden out the coverage to more highly levered companies in a broader array of of the universe. After all, they our employers, and I

think people initially went to that. We step back and say, hang on, in this market, you've got to take every company and you've got to stress it. And we do multiple stress tests trying to think, you know, how, how how deep could the recession go for how long? Where does it peak? And unemployment? We do things like a shutdown for nine months and unemployment peaking at over and then see what a company's balance sheet could look like, could it withstand it? Do they have access to capital?

And by the way, when you run that kind of stress you find a lot of companies even though they may have access to capital at that point in time, Actually it doesn't make sense for them to do additional borrowing because they'll realize at the other end of this their ability to pay back all that debt won't be there. The market's got to start to realize that just because there's access to lending and borrowing doesn't mean companies will continue to take on another turn of leverage. At some

point they'll realize they can't service it. So, Bob, given you know the backdrop for your economic outlook at JP Morgan Investment Management, asset management, how much risk are you guys willing to take right now? A very moderate level of risk in fixed income. The core of our portfolios are invested along the theme of co invest with the central banks. What they're buying, you buy. That's a pretty

good safety net, at least for liquidity around you. Then roll up your sleeves and and look at what falls outside of that safety net, in in the corporate space, in the security space, in the muni space, and see who can withstand an extended period of a shutdown UH and high unemployment UH. And you find out that there are some companies out there, there are some industries that can, but there are awful lot that can't. I'm just wondering, Bob,

what's your base case. You said you're looking at potential stress cases of nine months, just quickly here, what's your base case for the economy? Well, our base case is that that you don't return to normal um for a while, and that we will see unemployment peak at over and then as you start to get to the end of

you're down to about nine percent. Now, that may seem great relative to a peak of over but let's not forget that during the financial crisis, unemployment peak at ten percent, and we know what kind of pain it was to try to recover from that. So there's a lot of hardship ahead. This feels to me like the second quarter of two thousand and eight, where the first quarter was horrible.

There were policy responses um and and the market immediately became optimistic, and then the horror of what had actually happened starts to hit into the data. Bob Michael with a pretty bleak assessment. Bob, You've been right many times.

It's always a pleasure speaking with you. Bob Michael, Chief investment Officer and head of Global fixed Income, Currency and commodities at JP Morgan Asset Management, saying invest alongside the FED, don't go into much riskier credit, and really the idea that this reminds him a lot of the second quarter of two thousand and eight when people said bear Stearns was an anomaly, and then of course in September the

levant moment. It is the story of the year and a story that continues, and that is that big tech continues to outperform. Facebook actually had been under pressure among the big tech names ahead of yesterday's earnings report, but they blew expectations out of the water and actually even pointed to some stability and ad revenue there's airs up

four point six percent. To help make sense of all that we've learned and the advertising model of a new era, Laura Martin joined us now senior media analyst with Niedem and Company. And I want to ask Laura, just starting with the Facebook and the Google earnings or Alphabet earnings that we've gotten, do you get this sense that the tech giants will somehow win out from this period of time in the long term and in terms of consolidating

viewers and consolidating ad revenue. Um the answers yes, because of their their balance sheet strength. So, uh alphabet balance sheet had over a hundred billion dollars of cash and they had positive free cash flow of five point four billion in the first quarter. Facebook, which is a much smaller company, had seven point five billion dollars of free cash flow and they have sixty billion dollars on the

balance sheet. Both come of nuts cash um. Both companies are paying all of their hourly workers, all the people who aren't coming to work, and Facebook said they're still going to hire ten thousand people this year, which means these companies are going to persist even if they go into cash losses. They will not go bankrupt. They will have access to capital, mostly their own, and therefore they

will survive when some of their competitors will go under. So, Laura, I was looking, I was, you know, looking at some of the guidance or some of the commentary from Facebook last night, and they're talking about April advertising revenue being kind of flatish for the first a few weeks of April versus last year. I found that really hard to believe given what's going on out there in the economy.

How do you think ad revenue for even even the digital media companies over the next you know, several months will look well. So I don't know if you remember Paul back to their I p O about of their revenue came from something called app installs, which was like a legion. Remember Zenga Games and Farmville and all that stuff where they would get like a buck if you spent five bucks. Well, that's what's happened a now is they have literally not talked about let's call that direct response,

which is what that's called. In ten quarters, all they do is talk about advertising for small and large businesses. So yesterday, the reason they're flat is because thirty of their revenue is up and it is those app installs or that direct response, and they have really downplayed that verdict that like that kind of advertising. But that is what's boy in them, and it's the same thing that boyd snap right those snap also thought dr open It's ad revenue in April was up because so much of

their revenue is up. But at Facebook, what we're seeing is a floor created by these app installs, this direct response, and the fact that when there's a target market, they don't sell keywords like Google sells travel. Well if travel disappears they can't sell a travel keyword to a jeweler or to something, you know, a healthcare worker. But that's

not true if Facebook. If Facebook is trying to target everybody listening to you today, all the smart people listening to you at a and suddenly traveled like the four Seasons in Budapest, stops advertising. That's okay. They can sell all of us to the jeweler or two of game app because we're the same demo. So what we're getting is a better auction result at Facebook, whereas keywords are siloed and therefore they're just having zeros in some categories

for keywords over at Google. So, Laura, how much of this dominance has already been priced into Facebook. It's a good question. I mean, the fact it's up means fifty of us didn't really under the fifty analysts that cover it, didn't really understand the business model. Similarly to Google, their robustness up ten percent yesterday meant that despite the forty people that cover Google, we didn't understand how their business model worked. I mean, you saw YouTube was up revenue

in the first quarter. So part of what's happening is we make assumptions based on what they disclose over ten quarters, and then when COVID pushes on those business models and they perform differently, we start asking questions about why that is, and we learn more about what's underlying theo's business models, like the fact that direct response is still thirty of

Facebook's advertising and Google is zero direct response. So laard Lea's switch hears just a little bit and talk about some of the big media companies that you've got that you've been covering for so long. How do you think this new world that we're in, maybe this new normal that we may be going into, is going to impact the big media companies if you changed kind of your

outlook at all. So I think what we're waiting to see here, Paul is, as you know, TV has bought well in advanced local spots three weeks in advanced national spot like a year in advance. So we're actually expecting to one to be more robust for the old media companies.

But without live sports, there's a big revenue down draft because that's twenty um depending on the season of total advertising, and it deferred, you know, obviously hurts YESPN most and Fox lease because they don't really have UM Basketball, which is the current season. So I'm looking for the impact of live sports, which I don't think is a long term impact. I'm looking at disconnect from the TV ecosystem, which hurts most of these companies in their subscription revenue line.

And then I'm interested in what they say about the upfront because normally, as you know in May, about inventory is bought in May for the next year. Will no one's making new season episodes, so we're not going to have actually a false season unless people go back to work,

like actors go back to work in fall. So I'm very interested to see with the eight billion dollars that is normally committed in the upfront in May, if we're not going to have programming in the new U semester, the new fall season, I'm interested in what they say about that. Laura, just about a minute here, But I'm wondering whether this will shift the dominance to online advertising

in terms of spending. I know that the thirty second ad has been resilient in terms of being and commanding the highest price, but is that going to shift with more of the budget going to online providers. So Facebook specifically said they're seeing no offline budgets moving into their world. Everything they're seeing was a pre existing budget that had automated controls, and as CPMs have fallen by sixteen Senate, Facebook, those budgets step up. Um Also, Google asserts that it

will hasten the you know, the adoption of digital. But I just think it's too early to tell. And then COVID literally happened the first week in March, right, that's when they said they all hit a wall the first week in March, and it's now round numbers the second week in April. So I think it's too early to see. I think consumer behavior might be easier to predict. Consumers are going to use the commerce for consumers may use

digital outlets more. But on the advertiser slide, I just don't think advertisers can react in four weeks to it's happening in a pandemic. Laura Martin, thanks so much for joining us. We always appreciate getting your thoughts on the media and digital landscape. Laura Martin, senior media analysts for Needham Company, joining us on the phone from Los Angeles.

We appreciate that. So at least I think you know the kind of the takeaway here is, boy, these digital media companies, they were strong going into this pandemic, and it looks like they're coming stronger on the way out. Yeah. I just have to wonder about consolidation. And I've read a number of lawyers who have commented saying that they don't think the antitrust regulators are going to be that harsh on big tech looking to acquire competitors that might,

you know, we otherwise going out of business. Yeah, because going into the pandemic, the big tech was clearly under the regulatory microscope, and maybe that has been shift a little bit, which could again be a benefit for the big tech. Yesterday, FED Chair J. Powell sounded about as somber as a FED chair could get. He had a pre need doubt, a dire outlook for the US economy, and rightly so, given the fact that ten years of job gains has been more than wiped out in just

six weeks. Joining us now is someone with intimate knowledge of both the Federal Reserve and the Treasure Department. Nathan Sheets, chief economist for Pejim fixed Income Joining us now, Nathan, so glad to have you on with all of your insights.

I want you to give us a sense of your thoughts on the Fed's efforts to backstop corporate debt, in particular, because FED Chair J. Powell had an opportunity yesterday to send expectations straight and say the Fed isn't going to delve deeper into junk he did not do that, and in fact so that they were prepared to do more and the net effect was more money into junk bonds.

What's your take, well, J. Powell was categorical that the Federal Reserve is prepared to bring the full force of its balance sheet to bear in supporting the financial markets generally. But I think, as your questions suggests, there are remaining questions about various pockets of the market and in uh, in reality, how aggressive is the Federal Reserve going to be?

And I have to say that as I've seen some of the soundings from the Federal Reserve about its core por purchase programs, it has left me with some questions.

For example, before a company is eligible to have its bawns purchased, even on the secondary market, it looks like it's going to have to fill out a form and and make a number of attestations to the Federal Reserve, and I think it's an open question and say, how many how many firms are going to be willing to do this and where is it going to leave the corporate bond markets relative to the headline that the FETE is buying. So I think there are real questions about

the Fed's efforts in that particular space, where broadly they're committed. UH, they'll they'll do what's necessary, they'll use all the tools, but certain corners of the markets. I think we still have a lot a lot to learn about how far they're willing to go. So, Nathan, you mentioned tools in the toolbox, what else realistically can the Fed dude going forward if this pandemic is longer than perhaps currently anticipated.

So qualitatively, in terms of supporting the markets, I think that they are bringing to bear uh the lion's share, maybe maybe the totality of what they have. UH. They are prepared to buy aggressively. They're keeping rates low. UH, they're expanding their balance sheet in a very significant way. But quantitatively, I think that we can see uh meaningful

further increases in the size of the balance sheet. And then in addition, UH, the Congress is allocated over four hundred and fifty billion dollars to the Treasury to backstop federough Reserve facilities, and less than half of that money has been allocated to date. And most of those facilities that I was suggesting the corporates an example of this,

are not even up and running yet. So I would say Job one for the Fedough Reserve is to get these facilities up and running and then to make sure that they are actually meeting the needs in the markets. Uh and UH from there if if those needs end up being greater, the FED has plenty of additional firepower to bring to bear, given its balance sheet and that war chest with the Treasury. So Nathan, let's go there

to that main Street loan program. We've got some news today saying that the FED plans to expand the parameters for potential applicants and and build former New York FED president had a great column about this yesterday, talking about how difficult it will be for the FED to thread the needle. Here, just do if you had a chance to look at the at the news today and kind of give us a sense of what it means in terms of which businesses will be able to access this.

I did see this, and I think your analogy to threading the needle is exactly right. So, on the one hand, moving into this space is very difficult for the FED and that they're taking onto their balance sheet potentially a broad range of heterogeneous collateral that they're not really that

familiar with. On the other hand, the needs in this space are tremendous and that many of the firms that are eligible for this facility are the high yield issuers and high yield companies that are just absolutely being pummeled. So then the question is how do you do line a facility that meets their needs well at the same time, uh it doesn't make the FAD feel too uncomfortable given

its uh it's roast tolerance. And I think what we saw in this revision today was an effort to fine tune it and to make it more attractive to small borrowers, and that they cut the minimum loan size from a million dollars down in down to five hundred thousand. It added a new class of loans that would be eligible and specifically companies that are deemed to be somewhat riskier. But another concern is that for many of the larger

firms that are eligible. The maximum loan size is pretty small, so there are there are many constraints on this thing. We saw the fad kind of move in this direction, but it remains to be seen how big and how aggressive this facility is going to be. I think this, along with the corporate program, is the big question. Mark and Nathan, thanks so much for joining us. To really

appreciate your thoughts and commentary. Nathan Sheets, chief economists and head of macroeconomic research at p JIM Fixed Income, joining us here with thoughts on the FED and all the programs that are out there at Lisa as Uh Nathan was suggesting, it's I think right now the key issue for the market is actually getting those programs up and running, getting the cash into the marketplace. We will have more on that coming during the remainder of the show. This

is Bloomberg. It's time to check in with Bloomberg Opinion. We're joined today by Opinion commas Liam Denny giving us some thoughts on a couple of things I want to look at with you. Liam. First, Tesla reported some numbers last night, the stocks up five. I'm looking at the stock here. Boy just had an extraordinary up a hundred percent this year just extraordinary. What are some of the key takeaways for you, Liam from what we heard from

Elon Musk and company. Well, for me, you know, it all comes down to the numbers, which which tend to get obscured. Um, you know during the actual theater of Tesla's earnings call um. This is the third quote unquote surprise profit from Tesla in a row. The first one was announced back in October and since Vince then, um, you know, those three gap profits have added up to

the princely some of two million dollars. Now. In the meantime, the company's value has surged by I think it's up about a hundred and twenty billion dollars also, so there is still this fundamental disconnect between Tesla's valuation and the

actual results that it's producing. And I actually think, um, you know, the results we got carried some pretty um, pretty serious portents of of what's going to happen in the current quarter, all right, before we dig into what's going to happen at current order shares a Tesla up nearly five percent, and this comes after Elon Musk pulled an Elon Musk when on one of his tantrums uh. During the Tesla earnings call talking about some of the stay at home orders. We have a clip of that.

Why don't you take a listen to say that they cannot leave their house, um, and they will be arrested if they do. This is this is a this is a this is fascist, This is not democratic, This is not freedom. Give people back the god freedom. That was Elon Musk coming out against orders that have been said to save possibly thousands, if not millions of lives in order to prevent the spread of the pandemic. I don't want you to weigh in necessarily on your views and

social distancing and some of the policies. I'll save you that, Liam, But I do want to get a sense of what we can expect it from Tesla going forward, whether it really does have the hope of the entire auto industry

at a time when oil prices are plunging. Well, I think the first thing to say is, you know, if I was running a company that have been built on the back of billions of dollars of subsidy and was pivoting strongly to a market run by the Chinese Communist Party, I'm not sure I would necessarily wrap myself in the flag of libertarianism. Um. I think what this speaks to is really anxiety at Tesla because it is very much

a momentum company and a momentum stock. And I think any car manufacturer will tell you that if you have a plant where the utilization suddenly drops to zero, that starts with a serious impact on your profits in cash flow pretty quickly. Now, going back to the first quarter results, it's worth remembering that Tesla didn't really shut down its main Fremont factory until the very last week of March.

So when we look at the cash burn, which was something like million dollars, you have to remember that that was in the context of a quarter where actually the plant was running virtually all of it. So I think in the second quarter, particularly with the lockdowns being extended into next month, um, we're going to see some really serious cash burn in the second quarter results. And so I think, Um, you know, Musque's comments about fascism really speak to a deep need on the part of the

company to actually get that plant reopened. So that's kind of where I wanted to go. Liam. Is there any sense of when that plant will be reopened? It's not like they have plants all over the world, like some of the big three automakers, for example, they can kind of shift production. They're kind of dependent pretty you know, significantly on that Freemont plant. Yeah, that's true. I mean the Chinese plant is getting back up and running, but

that's that's a new plant. It can't offset what's happening in the US anytime soon. UM. As for when the other plant opens, I mean, right now, your guess is as good as mine. Right, it depends on when California lifted stay at home orders. Um. And then of course it will take a little time for the plant to get back up to speed. And then with we we shouldn't ignore the other side of this, which is demand.

I mean, these are high priced items in a US economy with you know, thirty million people of far for unemployment as the deep damage is being inflicted on incomes worldwide. UM. So I think you know, this isn't something that's going to go away quickly. Liam about twenty seconds here, I'm just wondering shifting gears to the oil majors. Do you think that any of the major oil companies will preserve

their dividend after this route? I think the US companies will try the hardest to preserve it because you know, after a decade of really poor returns, it's it's it's really the only thing that investors have to hang onto now. The the UK majors had the highest dividend yields of all of them, and so I had a really strong

signal to cut. All the companies are facing a very challenging environment or whether they're having to balance spending versus dividends, but I think the US companies will hold out the longest. Liam Denning, thank you so much for taking the time to day Liam Denning, energy Mining and Commodities columnist with Bloomberg Opinion, talking about that Elon Musk doing Elon Musk, Yeah, yeah, putting it yet putting it frankly into a more serious

perspective here, which is it speaks to his desperation. This is a momentum company, and the momentum for now is still with us. Thanks for listening to the Bloomberg Penl podcast. You can subscribe and listen to interviews at Apple Podcast or whatever podcast platform you prefer. I'm Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Abram Woits I'm on Twitter at Lisa Abram wohits one before the podcast. You can always catch us worldwide. I'm Bloomberg Radio