U.S. Recovery Not Likely Until End of Q3: Bart Van Ark

The Conference Board Consumer Confidence Index decline sharply in March, following an increase in February. Help us walk through the numbers. Who welcome Bart van Arc. He's a chief econmist at the Conference Board. Bart, thanks so much for joining us. What are the March data show? Well at them at at a good level of the overall consumer Confidence Index. Of course, the index is showing a drop from und thirty two point six in February two twenty in March.

That perhaps it is not as you to drop as you might expect, but it is important that when we look at the responses to this survey, most of these responses were still coming in in the sort of early half of March, and a majority even in the first week of March. So this was before the COVID crisis was announced to be a global pandemic, and the US

wasn't really strongly affected. However, if we look belon beyond the or below the aggregant number, particularly on expectations, we saw already a very significant weakening from hundred and eight to eight point two in March, so that's a big decline.

So even in early March, consumers were already getting very concerned about the outlook and obviously that we'll only have strength and over the last few weeks, well, this has been an unprecedented period on a lot of different levels, one of which is just the speed of which this has hit and changed the whole economic backdrop. So it's sort of it is difficult to cling to some of the previous leading indicators when you look at some of the indicators in real time. We saw the jobless claims

last week. We're expecting more data on that front. We've gotten regional FED measures coming out showing one dire picture after another. It's the most likely economic scenario that you see going forward. Oh, I think, so, first of all, when we look at the index wherret stands now, I think we'll see significantly more declines happening over the next few weeks and months. Uh, even compared to the financial crisis,

we're not yet at that low point, you know. At that time, the expectations index dropped at some point of the thirty and we're still at a t a. So there's still a very long way to go in terms of declining confidence going forward. The really couple of scenarios now to your question, leads out on sort of where we're going. Really a couple of scenarios to think about now.

One is indeed that we will see this very deep contraction happening for at least a not a month, if not perhaps six weeks or two months, but then see a fairly strong v bound kind of recovery. Most of the forecast are still sort of working on that scenario that we will be able to begin to open up the economy again over the summer. Still leaves the question what will happen after the summer in the case of

researchens of cases. But I have to say that I think it's actually more likely that, uh, you know, the contraction may continue well into the third quarter. Um, it's very likely that you know, you know, containment measures and social distancing measures will continue even if the economy opens up. A lot of that will remain in place. Businesses have to be prepared for a lot of regular free pressure from authorities about under what conditions that can open up

in order to avoid the spread of the virus. So I think this is really a much longer period. Therefore, even the third quarter may still be a fairly weak quarter, and you may not really begin to see recovery in the economy of any significance until the final quarter of the year. So bart, give us a your assessment kind of the fiscal stimulus we've seen me at the two trillion dollar bill, and now there's talk of another two trillion dollar perhaps infrastructure bill. How how do you expect

that to impact the economy. Well, it will of course help to sort of, um, you know, put the bottom into the decline here. Um. You know, some of this money will go to small businesses who are sort of in immediate need of an end of support. If they don't get that trenencial support, they will have to close down. Uh, and that would make it much more difficult for them to actually open up again. Wants to recovery start. So

I think we'll see some effects there. It will not necessarily excelerate growth now, but it will have these businesses to be able to recover again once we get through this crisis. The other part is to support to unemployment and to income. Again, low income households will need the money in order just to be able to pay their

basic expenses. UH. Sort of in the medium income level, it's very likely as long as people can pay their basic expenses and their mortgages and everything else, that will put you know, extra support into savings because they will be prepared for more difficult times to come. And therefore some of these effects on the consumption site may be delayed and we will not begin to see anything of that really picking in into the second half of the year.

Bart when we talk about the consumer at accounts for about two thirds of the American economy, and there was a survey out from bank Rate that I was looking at this morning showing that more than half of Americans are reducing their consumptions even online uh in response to the coronavirus crisis. Just to show up enough capital heading into this period, how big of a recession. Do you

think the US is going to have this year? Oh well, whatever way with the finery recession, this is going to be a recession, whether it is multiple months of contraction or uh, you know, a level of GDP by the end of the year, which can be you know, between five and seven percent lower than what it was at the beginning of the year. So this is a This is a big recession, and it's bigger than what we've seen in two oh eight and and and two oh nine.

But it's a very kind of unique recession in terms of recent history because basically what happened here is the economy has been shut down. Uh, that's where we are right now at the moment. This is primarious supply shock because you know, people just can't go anywhere. But gradually that supply shop will turn into a demand problem and that this at once. Once we can begin to open the economy, the real question is how quickly can that consumer come back online? When? When? When? When are they

ready to start spending again? Are they allowed to be spending, to be able to go out to the shops and the restaurants and everything else, And how willing are they to spend because they're taking a big hit at the moment, and they are being told that if they're not careful, they have researchers of cases later in the year. So I think people will be cautious in order to uh to uh to to to start spending again, and I think therefore again the recovery will be a difficult recovery

in a slow one. Bart van Ark, thank you so much for being with us, Bart van Ark, chief economists at the conference board time to check in with Bloomberg. Opinion were joined by opinion Calumust Julian Lee. It covers off things oil for Bloomberg Opinion joining Julian, thanks so much for joining us. We've seen this incredible decline in crewde We've got you know, w T I crede about twe barrel right now. I know it's supplying, I know it's demanded. Give us a sense of how much of

each is really driving oil down here. I think at the moment it's it's mostly demand. Um. You know, we've had the Saudis and the Russians threatening to open the taps, and we're starting to see some of that oil perhaps beginning to move, particularly out of Saudi Arabia. They seem to have boosted shipments to storage tanks that they lease in the Mediterranean. Um, we're seeing a little bit of an increase in shipments going towards the United States, but

none of that oil has arrived yet. What we're really seeing at the moment at least, is a response to a collapse in demand. Um. You know, there are estimates that demand this week is down by about twenty six percent globally. That's as if the entire United States, Canada, Mexico, all of Central America, and all of the Caribbean stopped using any oil at all. Well, it's kind of what

it feels like. I mean, you look up and there are no airplanes in the sky, and you look out on the street here and there are no cars going by except for except for the horrible whale of ambulances which we've been hearing as people are suffering throughout the city. I'm just trying to understand how much pain has been priced in, given the fact that we're running out of storage and that Saudi Arabia seems to have no intention of stopping with the production. I think obviously a lot

has been priced in. I mean, as you said, we're seeing you know, w T I down around twenty bucks the barrel. But some of the inland crews that are finding it difficult to access storage space are are even now trading in single digits UM. So there are there are a lot below the the international benchmarks UM. And you know, we're as you say, we're not seeing any end to the pressure. We're not seeing any significant nuptick

in in road traffic. UM. We're not seeing any of the airline starting to talk about getting some of their fleet flying again. In fact, some of the you know, the biggest low cost carriers in Europe have grounded their entire fleets in the last couple of days. So we're really not yet seeing any pickup in demand. And we still have this this wave of additional oil that has been promised or threatened making its way towards consumers who don't want it. So, Julian, we had President Trump speak

with Mr Putin yesterday. Any sense of what they talked about or whether there can be any movement there on a part of Russia, UM, I haven't got any detailed sense of what they talked about. I mean we were hearing that they talked about energy and they talked about the virus and responding to it. UM. My own take on it is that nobody is going to act unilaterally. Russia isn't going to do anything if it doesn't see

other people, um sort of playing their part. And I think those other people include the United States, m Saudi Arabia and Russia. Both see that their actions over the last four or five years have helped to spur a doubling of US oil production, and quite frankly, I think their view is that this is too big um for anybody to deal with on their own. We're all in this together. Um. If we're going to come back, we're all going to come back, and that has to include

American oil producers too. Julian, if we could take a step back and talk about what happens when this period of time is over, do you foresee the destruction and demand being something with permanent ramifications, people going to other sources of energy or changing their habits, or do you think that once things get back on track, the economy is globally start recovering, we're gonna see oil bounce back up a barrel, maybe even sixty dollars a barrel. I

certainly think we're we're going to see a recovery. Whether it's a complete recovery, I think is too early to tell yet. But I think that if this is a relatively short term disruption, and if if things are picking back up off the off the floor by you know, even the autumn or or the end of this year, I don't think that's long enough for people to have fundamentally changed their habits. People are going to go back to driving, They're probably going to go back to flying

to the extent that that restrictions allow them to do. So. Um, I think it takes a a long term disruption for people to really change their habits. I I don't know of anyone at the moment who's saying, oh, I'll never fly again, or I'll never travel overseas again. So I think things will come back. What the industry is going to look like when that happens, in the ability to meet that rising demand, I think it's going to be another question. Julian Lee, thank you so much for being

with us. Julian Lee Limbercampeian columnists covering all things oil related. It was the worst month for US equities, frankly for global equity since two thousand and eight, Europe fair to even worse. Emerging market bonds had their worst month, worst quarters since The superlatives continue and as an investor, there's a question do you buy the dip as so many have been conditioned to do over the past decade, or is this time different as the entire economic landscape has

profoundly shifted. Scott Clemens, chief investment strategist at Brown Brothers Harriman, joining us from Pittsburgh. Scott, thank you so much for being with us. I want to start there. How much do you think it is time to buy the dip? And how much are we still reeling from an economic shock that we cannot get our arms around and may

not be fully priced in? Good morning, Lisa. I think the economic shock has been so quick and the markets have certainly reflected that that just in the past week or so, investors are beginning to sort of gather their thoughts about this. I'm not sure if we formed the bottom last week or not. You're never sure until well

after the fact. I would say for investors focused on the long term, this kind of market disruption does provide a good opportunity, may not be the best, doesn't mean the market won't move lower, but it does provide a good opportunity to raise your allocation to equities. So Scott's give us a sense here we've seen the Federal Reserve Act really, I think pretty admirably here. Quickly they're out in front. One could argue, you know, using a lot

of the tools in their toolbox. Give us a sense of what the FED has done from your perspective, Well, Paul, they've thrown the entire to two thousand and a playbook at the market. The differences. They've done it in about three weeks, whereas in two thousand and eight it took them three or four months to do it. If you look back at where FED policy was on the first day of March of the year, thirty one days ago, it is astonishing how much that they have done and

and I think it's working. I think we can give them credit. The kind of volatility and spread widening that we saw on fixed income markets, even in the highest quality, shortest duration fixed income markets five or six days ago, has begun to wash out. I think it's a good sign that the Fed last week did when we use the word only a hundred and fifteen billion dollars of repurchased operations. That's down from half a trillion in each

of the two previous weeks. Doesn't mean we're out of the woods yet, but FED policy is working to help financial markets function more effectively. All right, So let's talk about how people are investing. We have seen a rush of cash which has been basically preserved or hoarded, we should say, over the past few weeks, cash flooding into the investment grade corporate bottom market. Is the FED backstops

those securities. I'm just wondering whether you're eating that and you're recommending people boost their allocations to that area slowly. I don't think that it's time to back up the proverbial truck, because as as you've continually reported on, there's probably more bad news to come, both on the economic front and on the healthcare front as well. So we are guiding our clients at Bromer this's harement to take

advantage on a slow basis. If there is money that they're willing to put into the markets or rebalancing, that should be done back to an asset allocation policy to do so over time, and by overtime I mean several months or maybe several quarters as well. Cres is a crisis that's still in the very early days. We are

finding opportunities throughout equity markets. I would say in fixed income, it's probably more in non investment grade or distressed debt where investors should tread carefully, but those were the real opportunities will begun to arise. You just reported on Carnival spond offering them maybe an example of that kind of opportunity. Wait, wait, wait,

hold on one second. I'm not going to let you get away with other words you're saying by Carnival three year bonds with a coupon of twelve and a half, you're all in. No, I'm not all saying that. I'm saying about the example of a kind of opportunity. To see a lot more of that come. Taking advantage of that for careful and cautious and patient investors is probably a good idea. Carnival is just the earliest example of

that kind of trend. So, Scott, So a lot of people are here trying to sense over the last several days, has the market bottom did we see that last week? Or is it forming a bottom or is it typical of just a little bounce in what is a longer term bear market. How do you think about that? Historically? I go back and look at our experience in two thousand and eight, and I know that there are a

lot of differences. There always are differences in the particulars, but the common theme is human emotion in the battle between fear and greed, and that's playing out again. Recalling two thousand and eight, that a lot of the FED policy and fiscal policy was in place by early October

of that year. The market responded. There were in October early November two separate rallies in the market, only for the market to bottom out at a lower level than a lower level, before ultimately finding a bottom in March of two thousand and nine. So it is not uncommon to have these kind of relief rallies within a longer term bear market. So we're cautioning investors not to get too carried away with the rally that we've had over

the past couple of days. Scott, if you just take a look at the balance of the calls and the emotion that you get from investors that you deal with from clients, is the balance more heavily waited to fear or is it more heavily waited to greed, or at least the sense of buying the dip always has worked. We have a dip, let's get out there and buy, you know. But it depends on what you mean by work. The longer term, your investment time horizon is the easier it is to say, yes, this is a time to

put money in the market. So we went back and looked at the hypothetical unluckiest investor ever. What if you had allocated capital to the market at the peak of the dot com bubble. What if you had bought into equity markets the day before Lehman Brothers declared bankruptcy Charlie Brown levels of unlucky investing timing, And yet with both of those time frames, ten or fifteen years down the road, with a bad entry point, investors had still doubled or

tripled their money. So the answer to whether or not this is the time to get into the markets or not depends on the individual investor's temperament and time horizon more than it does on calling a bottom in the market itself. Scott Clemens, thank you so much for joining us. Really appreciate that. Scott Clements, UH Chief Investment strategies for Brown Brothers, Harriman giving us his thoughts on the market,

and interesting headline just crossing it the Bloomberg Lisa. President Trump calls for two trilliant infrastructure package in the next relief bill. Yeah, this sort of is interesting. It's called it comes after Nancy Pelosi, how speaker always reportedly in talks to get together a second round of a fiscal bay out in the near future. President Trump, it seems like is weighing in trying to push that more into

the infrastructure realm. Both are not mutually exclusive, right, but it does raise a question about whether we're going to get some sort of you know, w p A or c c C or you know, targeting back to the nine thirties and some of the public works programs that stemmed from that period of time. Are we going to see a redux of this and it's going to give fire to some of the infrastructure proposals that were out

there well before anything about COVID nineteen was on the scene. Poll. Yeah, absolutely, And I think it's a prompt discussion of how much capital, how much cash should be put in the hands of consumers, particularly those that have been that have lost their jobs, versus how much aid should be given to companies versus how much should be potentially put in for infrastructure. So that will likely again that debate. And also how much does the economy need to be stimulated after the bailout?

Key questions? Exactly right, exactly right. So looking at the markets here, we have a little bit of green on the screen, a little bit of stability, Lisa and I think we'll call it that right here. So but markets are up just slightly here. We'll have more coming up. This is Bloomberg. If you listen really closely, you can hear the helicopters hovering above you, ready to drop some cash.

That is sort of the feeling out there is the US government passes one stimulus effort or bailout effort, if you want to call it that, that will deliver checks two Americans already in the works. He's get another one. And the question that I have been having persistently is

is this inflationary or deflationary? Ira Jersey has a very strong view on this, chief US interestrate strategist for Bloomberg Intelligence, and I want to continue the conversation because a lot of people are struggling here thinking that normally when you print money that is inflationary, Why is the bond market saying the exact opposite. Yeah, I think for two reasons.

I think one is that the quote unquote helicopter money that you just mentioned is really just replacing income and revenues that are going to be lost by a lot of businesses globally, because the way that money gets into the economy is the Federal Reserve creates base money, right or any central bank creates what's called base money, and then banks go out and then lend money to other people, to their to their customers, and that's how money flows

into the system. In an environment like this, you're not creating um a lot of new money and a lot of loans that are going to be used to expand businesses. These are just going to be used to keep businesses afloat. So it's not necessarily uh inflationary where you're going to see hyper inflation, but it's designed in many ways to reduce the worst case deflation scenarios, and and the market's kind of pricing for that because we're not pricing for um for consumer prices to go down a lot for

a long period of time. So it's basically we're expecting UM prices to go down very quickly now, but then rebound to you know, some level of like one and a half percent UM a couple of years from there. So I talk to us a little bit about the liquidity that we're seeing in the marketplace that was really a concern a couple of weeks ago. Uh, give us a sense of kind of where that is right now?

Are the markets functioning UM? I guess you know, you know, well at this stage, well, I would say they they're functioning better UM. And they were certainly last week and the week before, but they're still not to where they were, say a month ago, um in in late February, when you were able basically to buy or sell a significant

amount of risk. One of the reasons for that UM is at this point is actually the opposite problem that we had two weeks ago, which is UM you know, two weeks ago, basically bank balance sheets, banks were and dealers were unwilling to take a lot of risk onto their books one way or the other, whether they were short rates or long rates. Now, with the Federal Reserve purchasing, you know, hundreds of billions of dollars of treasury securities from the dealers every week. Um, dealers are not left

with a lot of securities on their balance sheets. So you've actually seen a couple of auctions that were under subscribed. So basically dealers didn't even offer enough bonds into these auctions for the FED to buy all of them. So, um, yeah, you're in an environment now where um, there's actually it's much easier to sell bonds, for sure, because the Feds buying almost every bond that they can find. Um. But

at the same time, it's, uh, it's not normal market function. Yeah, but it's not normal market function when you see the Fed's balance sheets spike upwards. It's now about five and a quarter trillion dollars. Uh. That de leveraging period, the shrinking of the balance sheet happened for about two minutes there. I'm just wondering, I wrote. We talked about this last time.

Given the renewed assumptions and the expectations around the fiscal rescue efforts and beyond, how big is the central banks balance sheet couldn't get eventually in this year or in the near future. Yeah, So so the FED balance sheet, you know, our our expectation is for it to basically double this year from where it was a couple of weeks ago, and then um, you know, well more than

double um over the next couple of years. And a big reason for that though, um, And we have to revise that too now because the FED actually just came out with a new program this morning where it's going to allow UM for in central banks to repo their treasury bonds. So that's going to expand the balance sheet even further. Um. So it's gonna get big, right, It's gonna be a ten trillion dollar number, easy, um, if not more, that's technical, Paul, it's gonna carry on, carry on.

So so one of the you know, but but the size of the Fed's balance sheet, even though it's gonna be really large, it's gonna be very variable and and a lot of the programs that they're designing now are

naturally going to go away. So it's likely you know that, well, we might spike the Fed's balance sheet over the next year or so to you know, ten, eleven, twelve trillion dollars, but then it might naturally come back down to seven or eight billion dollars just because um, they're gonna own all these treasuries and probably hold them for a long

period of time, probably forever, quite frankly. But some of these other programs, like the REPO programs and the like, those will naturally shrink as the economy improves, hopefully, you know, come two. So what's next for the federal reserves that they have any tools left in their toolbox, but they have a lot of little tools, certainly for funding, I think, you know, basically implementing the programs that have already been announced.

I think is has to be the next thing. Remember, we haven't most of the programs that were announced last week have not yet been implemented. So things like the commercial paper funding program that's not going to be uh probably started until next week or the week after. You

have the corporate bond buying program. And importantly, and I think this is the single biggest one for the overall health of the economy, is that main street funding facility, so the small and medium sized enterprise facility run between the Treasury, the Small Business Administration and funded by the Fed. That program has to get going, and has to get going quickly if we're gonna see a a V shaped kind of recovery over the next year. If not, then it's going to be much more of a you in

my opinion. Alright, Jersey, thank you so much for joining us. Really appreciate your thoughts here our Jersey chief US interest rate strategist for Bloomberg Intelligence joining us on the phone. Thanks for listening to the Bloomberg pen 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 Woyds. I'm on Twitter at Lisa A. Bram Woyits one before the podcast.

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