Western Asset Sifting For Opportunities Amid Credit Rubble

at Bloomberg dot com. There's been a lot of focus on credit markets of late, due to some of the big disruptions that we saw in pricing, and then the Federal Reserve coming in and saying that for the first time ever, it would buy corporate bonds through a separate entity financed by the Treasury Department managed by black Rock, giving a floor to a market that at one point

was in free fall. Joining us now to talk about where the opportunities or potential future pitfalls continue to be as Mike Buchanan, he's deputy Chief investment Officer at Western Asset Management with more than four hundred billion dollars of assets under management. Mike, I'm so glad we're gonna get

a chance to talk with you. Can you give us a sense of a lay of the land, in other words, how effective how as a federal reserve been in back stopping the highest rated companies from facing default going forward. Thanks LEAs and thanks for thanks for having me on UM. You know, I think just the announcement alone UM that they would be for the first time ever, as you said, buying credit UM in one to five years investment grade

credit UM. The action itself that hasn't even really taken place yet, but just the announcement of that has gone a long way to restoring stability in the market, restoring order in the market. You've seen a bounce from you know where we were a couple of weeks ago, but make you know, no, no, no confusion here that March was a brutal, brutal month UM second worst month ever for the high yield market UM, worst month ever for investment grade corporate credit. So we've had a bounce UM.

But when you look at valuations where they are UM, you know, still look at least on a history oracle basis quite cheap UM. And I think the actions, not only that the fed of of buying corporates, but the Care Act, the accessibility for corporates to access two loans UM, as well as just the the overall stimulus and relief package. I think all those things have gone a long way to bridging a gap to hopefully what will prove to

be a turning point in this in this horrible virus. So, Mike, how do you guys just you know, take a look at the market here. I mean, I know you guys have been in a fixing come business a long time. I mean are you do you tend to to step back and and let the market play or you try

to go in here and try to find some opportunities. Yeah, I mean, you know, we're we're always looking for opportunity, and in markets like this, UM, even if you're not outright adding risk because of all the dislocations, there's always relative value trades that you could be doing. There's always, uh, you know, one company issue where you could sell to fund the purchase of another one that perhaps you have a higher level of conviction and you think that offers

better risk adjusted returns UM. So you know these dislocations, UM, you actually have seen volume trading volume increase UM. So you hear a lot about illiquidity and markets have become less liquid. However, the amount of inquiry, the amount of desired trading is up substantially, um, and we're trying to take advantage of that. We're you know, looking all over both in high yield and investment grade credit and as

well as other spread sectors just to find the best opportunities. UM. But I think all this, you know, you have to start with that high level of you know what, what is your view on the path of the virus, because we know that's going to dictate how we emerge from this this quarantine and shelter in place economy, and by association, just how rich or cheap risk assets currently are. Let's let's stick with the concept of market liquidity for a second and pack a little bit of what you just say.

There is a lot of concern around the trillions of dollars of triple B rated debts investment grade rated debt, but at the lowest here the potential for it to get downgraded to junk, thus igniting forced selling on the part of investment grade bond managers. We have seen some

fallied angels, pretty sizable ones recently. How concerned are you about that pressure creating some fire sales, creating a lot of downward pressure on prices in the investment grade space, and frankly also in the high yield spaces, those names try to get absorbed into the pool of debt that's existent. Yeah, I mean, it's it's a great question. And UM, you know, we we we're seeing firsthand the early phases of that

with UM. You know, with certain issuers that are very you know, almost a hundred billion that's going from investment grade credit into high yield credit UH in April alone, UM and what UM you typically see and this isn't always the case, and I think this time, you know, could certainly play out different it, but investment grade holders are are proactive. They don't just simply wait for the

event of the downgrade or index inclusion. They are always looking at UM, Okay, what do we need to do over the next two weeks, what do we need to do over the next month. So oftentimes you see UH selling that actually occurs prior to these issuers going into

the benchmark. So with what we saw over the past couple of weeks is some of those fallen angels that we're going in this month actually hit their loads a couple of weeks ago, and you started to see some high yield buying UM I think it's really important for UH, for investors to be looking at relative value. So, you know, Western asset, we have two different teams, investment grade credit and high yield credit, but they're very cohesive. They work together.

And the idea of comparing relative value for a fallen angel and looking at it relative to what we see perhaps in the high yield market, that could give us a good UH template to work with in terms of Okay, do we want to buy now do we want to wait until it goes into the index? UM. So there's there's a lot of dynamics that work there. But again, I think that risk that you highlighted is very real,

and it's not just for corporate credit. UM. The longer we're in this type of shutdown economy, UM, you know, that has real ramifications for for municipal credit, UM, for sovereign credit. So there's a lot of ways to look at this. There's a lot of things to think about. And again it goes back to what we talked about earlier. It's how long are we going to be in this type of economy and when will we start to see some improvement in the path of the virus. So, Mike,

let's just kind of go there to that backdrop. A lot of Wall Street firms out with some very dire GDP numbers quarterly this year, with the second quarter being particularly ugly, but then some have kind of bouncing back in what might be called a v shape recovery in three and four. What's kind of the backdrop that's the of pends your out look there at Western Yeah, I think we would agree. I mean it's you're seeing everyone trip over themselves to downgrade growth forecast for you know,

for the for the second quarter. UM, it's going to be ugly. We all know that. UM. You've you've seen a virtual uh you know, halter drop in demand almost nothing in certain industries. So the second quarter numbers, you know, early third quarter, um, you know, are going to look pretty brutal, and first quarters as well. UM. I think the Fed and the Treasury have gone a long ways to bridging the gap. I think they've bought time, UM,

and that's really important. I think the way that the markets priced right now, UM, there is probably I would say it's hard to really gauge, you know, what consensus view is, but I think it's generally that um, you know, the virus is brought under control by late second quarter, perhaps early third quarter, UM called third quarter maybe a transition and quarters people start going back to work. And then by the fourth quarter, UM, you're you're starting to

get some of that bounce from pent up demand. So we know that the time between now and then is going to be pretty ugly. And I think you know, again, the Fed and the Treasury, they they've done policy in general, has done a great job of bridging that gap, right, Mike Bichannan, thanks so much for joining us. We appreciate your thoughts as always. Mike Bichannon's a deputy Chief investment officer for Western Asset Management, a four and sixty billion

dollars under management, mostly in the fixed income side. They're based in Pasadena, so I think, but Mike was suggesting least a little bit more of a U type recovery, and I think that's kind of maybe where the markets evolving from a V to you hopefully not to an L. I. I can't keep track. Are we in a W exactly?

So we'll see, but interesting, but that's clearly people trying to just get a handle kind of on the path of the coronavirus and the timing associated with it, because that will obviously drive where the kind of how the economy is able to open up again. On the other side, given all the uncertainty that we have and certainty as it relates to timing of this virus any impact on the global economy, we welcome Peter Kenny, founder of Strategic

Board Solutions. Peter, thanks so much for joining us. UM. You know, give us a sense of kind of how you're viewing markets here from a thirty foot view level. Yeah, Paul, good morning UM. You know, first of all, interestingly, UM first day at Q two UM smps down two UM and it seems to be holding the level, which I think is extremely interesting because given all of the negative news and given the negative breath of the market, to be holding at UH what could end up being a

very important technical level is significant. Of course, the Dow, the NaSTA, CAN, Positi sp are all lower, and global markets are lower, and clearly Q two is shaping up to be a very very tough quarter at least for

April UM. But so far the markets are doing better than frankly I was expecting this morning, Peter, I think a lot of people are thinking that Howard marks his latest memo kind of outlined how there's still a lot of optimism baked into current valuations and equities if you just look at, for example, the multiples that are baked

in here. I'm wondering there seems to be a push pull here of the money being pumped into the system by central banks globally and frankly by government's globally, mixed with the idea that we have a complete global shutdown and production and activity in an unprecedented way. Can government money overwhelmed that and be the predominant driver here? Well, that that at the end of the day, that that's it.

You just put your finger on on the real The conversation is government money, government liquidity, whether it comes in the form of fiscal or monetary policy, is it up to the task of really addressing in an efficient manner the risks inherent in the market that is in the

stage is early stages of a global shutdown. So I mean, investors, markets, the global economy are all being held hostage by this COVID nineteen pandemic, and the federal governments, not just in the United States, and as you accurately point out, globally, are doing everything conceivable to address this shutdown, this this tightening up of credit. Um, there really is no other option. Um,

that's all we can do. And hope that in time that what is being thrown at this finds traction with investors, investors find opportunity in that and begin to once again take that it, you know, take on that sense of there's a risk worth taking in the market. I think

we'll find that. And oddly, and in a very counterintuitive sense of things, this morning, the fact that the SMP has remained at in spite of the fact that it's trade fractionally lower on an all morning is significant because it's saying it's telling us that there there is a bit of a risk appetite in the market, as counterintuitive

as that may seem. Well, Peter, this is sort of the theoretical idea I've been struggling with for a couple of days now, this idea that you have governments around the world printing cash, printing money as quickly as they can through their central banks and through their government spending, and yet inflation expectations are coming down. In the past, this has been consistent, however, asset inflation has been real, and I'm wondering at what point this will trickle into,

at the very least asset price inflation. Yet again, yes, right, well, frankly, I think that policymakers on both sides of that equation, fiscal and monetary, are looking for inflation, whether it be an asset inflation or otherwise. Any inflation would be welcomed frankly and expected given every form of economic modeling. This level of cash generation and liquidity being forced through the system should absolutely should provide for some sort of inflationary

lift two markets. That's the idea. Do we get it? I think we do get it, Lisa, I think we do get it. But there is a drag. There's a lag between fiscal monetary policy and accelerated liquidity being pumped through the system and markets and investors willing to step out of the risk offen into the risk on and start taking advantage of that opportunity, because it is an opportunity, all right. So, Peter, if you are willing to look past to the other side, where do you think investors

should tread first? Okay? So I think there are two basic DCCs which you have to sort of get your head around looking past this. For first of all, is it a V shape or is it a U shape? Um. I think it's something in between. But I don't think that this lasts longer than three quarters in terms of the ability of the economy to find real sustainable even if it's marginal but sustainable economic expansion. So I'm actually optimistic. On the other side of this, I think there's two

basic themes that you can go with. One is growth and the other is a less growth centric and more of a given in centric, very very low beta sort of portfolio. I like both. I tend to be on the on the former rather than the ladder in terms of I tend to be a more of a growth of investor, and I think there's huge opportunity UM in cloud, huge opportunity in cloud, huge opportunity in in retail online, and I have remained very, very convinced. So that's a

big part of the future for investors. Peter Kenny of the Strategic Board Solutions founder joining us from New Jersey really insightful. A lot of push pull cross currents at a time, and a lot of people are flying blind. This is bloomberg well. As the coronavirus continues to spread and shuts down large parts of the economy. One of the questions is what's going on in the world of real estate. To answer that, we welcome Best Friedman Cheese

as CEO of Brown Harris Stevens, based in New York City. Best, thanks so much for joining us. So what is going on in the world of real estate? Has that completely shut down as well? Yeah? Hi, good morning, Hi, Parhi Lisa, how are you? Um, you know, it has I mean, we we had a really we closed March, and the numbers were very good for March, but that was business from a different market. And now because you know, agents

cannot show properties. Um, well, you know, the market has completely slowed, has been completely hated because we're still able to do some closings and we're still you know, agents are still getting calls from you know, consumers, but it has slowed down incredibly, Yes, and we expected to slow further into April. Bus heading into this the New York City a real estate market was already slowing. We saw declines and prices pretty much across the board, particularly the

luxury sector and the larger apartments. And I'm just wondering how much this is going to just accelerate those declines. Yeah, I think this is definitely accelerating those declines. Uh, you know, for speaking about new developments, I mean all of those, every project is stopped, they can't continue work, they can't do you know, showing the sites are closed. Um. So I think that it's going to take a little while for it to pop back. Um. But I think that's

just being aggravated by all of this. So best given word, I mean, interest rates are historically low. Um. But the reality is, I mean this is are you can or that this calls into question New York as a real attractive place to own real estate, to live in, that type of thing, given that we are one of the epicenters. No, I mean, listen, this is not permanent. Remember the virus

is hopefully a temporary saying. The question is when is the peak which people experts are saying, and I'm listening to the experts that we have another week or two until we hit the peak, and then once we get this under control, the uncertainty goes away and we're back to business. I mean, this is not forever and ever. I mean, this is a virus that needs to be uh.

We hopefully will have some sort of cure, vaccinations, something that helps, but right now people are concerned for their lives, and until we get that under control, you know, you're not going to have calmness. And consumer morale is low right now, but it should be. If people wanted to go out there and shop, I'd be worried. You know, it's not go ahead. I'm sorry, No, it's fine. I

mean best if you take a step back. I've talked to a number of people who are wondering about a flight from the City's basically saying, look, if we're gonna get pandemics, if this is gonna happen again, why do we want to be in a concentrated area with lots of people who are breathing all over each other. Why not go somewhere where there's a lot of open space. You got a yard, you can get away from people,

social distance all you want. And I'm just wondering, I mean, do you expect that kind of flight away from New York City in response to this a sort of an existential threat. I mean, listen, you were you guys lived through nine eleven. I was here as well, and there was for a few months after that people were afraid. They're like, should we leave New York City. I'm afraid there's gonna be another bombing. We're gonna you know, we're a target. And what happened is came January, the market

went crazy. People believed in this city and they still believe in this city today. We are the most resilient city in the world. And I don't believe people are going to want to just move to the suburbs because of this. We love to be together, we need each other. We just need to get it under control. So I don't think that that's going to be the result of this at all. We love to be we love to be together. Just Paul, don't breathe on me. That's right exactly.

So that's what do we do. What do you think is going to happen from the international buyer that's been such a big supporter of the luxury market, particularly in New York City, You know, I think that has that had slowed down anyway, as Lisa had indicated, UM, but I think, you know, I'm hoping that morale will come

back over the summer. But you know, that has been a big question mark for everyone because we have seen a flow down of that for over a year now, and um, it's been more domestic that's been buying the high end luxury stuff, and so you know, I I don't know. I mean, that's for me, it's anybody's gas at this point, I don't know. There's also a question how quickly the New York City housing market will recover. Do you have a sense of that? I mean, I understand we have to wait and see what the virus

brings in terms of just the virology of it. But do we have a sense of, once we have that kind of under wraps or there's some kind of solution, how quickly it'll take. Yeah. I mean, I think second quarter is going to be very challenging for all of us because all the you know, businesses slowed and people

aren't gonna be writing much new business. And then hopefully third quarter is when we start to see I think economists have been talking about this sort of v shaped recovery, you know where things kind of jump, you know, drop off a cliff and then pop back up. I'm hoping that we're going to see something like that because we had a lot of pent up demands and I'm hoping that we pop back up come let's say September, after the summer that the market gets back to its regular business.

Best give us a sense of how things are in the mortgage market. We've seen some real stress in the mortgage market over the last couple of weeks. Yeah, they. I spoke to a colleague at Wells recently and he told me that that environment is also very challenged. He's not really originating many loans. You know, people are slowed down incredibly. Um he's giving advice to people because rates

are really low and people are doing some refives. I mean, now it's a good time to do a refinance if you'd like, but to originate a new loan for a new purchase has really slowed down, and I think that's going to be challenging for a lot of people in the mortgage industry. Definitely. The one plus is that the Hampton's um at least I had mentioned. I mean, because people do want to get out of the city because of the density and they don't want to be close

to each other. You know. That rental market, Our environment there has been crazy. We can't keep anything on the market there. People. Everything has been rented. So that's one plus, I guess in this environment. Yeah, Actually, I've been hearing anecdotes of people who try to rent a house out there, and it's just the rates are absolutely outrageous and I'm just trying to figure out is that going to have

lasting power? Is this also just sort of a temporary, da jerk, get me out of here for the moment kind of thing that will fade as time goes on. Yeah, I think it's you're seeing a knee jerk, Like everybody is trying to get out of the city, and if they don't have a place, you know, upstate, they want to go to the Hampton's or if they have a house there, they're going there. So I think people are trying to take a little bit advantage of the fact that there's a real demand to have like a house,

especially if you have children. Um, if you're stuck in a very small space, we all know that that could be challenging. Wheelbarrows if you if you do wheelbarrows up and down the hallway, it's really effective. And I'm also forcing them to run up and down the stairs. Amazing that as well. Yeah, dumping jags, alexas Uh, you work out seven minute workouts, highly recommend best freedomen to every day. Yeah,

I do them with my kids best. Fred Ben, chief executive officer of Brown Harris Stevens in New York, join you guys to talk about the real estate market. It is amazing that creative ways that uh that you have to you have to try to make sure that they get out their energy. I'm telling you wheelbarrows are great because they also don't create noise for the neighbors downstairs, so it's it's great. It's for the upper body, really good, hold their legs, make walk up and out until they

cantymore is great. One of the themes of this entire coronavirus induced shutdown that we're experiencing globally has been the shift and the acceleration in the shift to the cloud to online business transactions and delivery, and the question of Amazon's role very much front and center, is They've become a lifeline for so many households to just get basic

food and other staples. Joining us now Alex Webb of Bloomberg opinion columnist in London, and Alex, there's a question here as we look at Amazon's role, which they have made sure to maintain and said they were going to hire a many more employees, of whether they continue on their premise of delivering cheaply and quickly at a time when they are actually the main way that people are

getting supplies that they need. Yeah, the issue is to here that there have been a significant number of complaints from their employees about the working conditions in that fulfillment sentence. We've seen a strike badist more one um in Catn Island. We've got Whole Foods employees, Whole Foods of course a unit of Amazon. Sorry, um, you know, essentially striking as well.

They're actually claiming the six days, but it is a is a protest and they've been strikes in Italy, not restricted to those countries, they have been a plaintuff where and their argument is that we we're filling a crucial service right now, but actually we're not being protected as well as we think we should be. And what it means to us is that we often don't really question

how we're getting these deliveries. You know, we we've heard we click something on Amazon, Amazon's website and next day, um, it arrives on our doorstep, and often that has human cost, and that cost has probably been potentially been accentuated in the current situation. So Alex do we have a sense of how Amazon is performing just in terms of the basic functions of delivery right now, they have sort of restricted their warehouses too, only particularly in crisis countries like Italy,

the only taking essential goods. Now, that doesn't necessarily mean they're not delivering essential goods, but it means they're not replenishing them in their warehouses, so it might be harder

to get hold of some of those things. And ultimately, you know, there is a lot of expectation from the anis community covering the company that there will be a significant uplift in um in demand for e commerce offering, and that seems to be reflected in the statements in the company, which you know, Jeff Bezos CEO has said they're going to hire hundred thousands more employees in this

period to try to meet demand. You know, I was struck by a Well Street Journal story yesterday talking about how the employees at Amazon have so much more leverage than ever before, and not just Amazon, but EPs and a lot of the other businesses that are on the front lines, and we're employees actually still have to go to work and face off with the potential of getting the virus, and it talked about how Amazon now gives its employees in the US and Canada two dollars more

per hour. Now there are more sickly benefits. There's a feeling that the shift toward better employee treatment will lead to consumers having to pay more. How much more are we expecting to look at? So I actually I am sorry, but I just fundamentally disagree with that premise. Uh. If anything, Amazon is in a far stronger position than right now than it was a month ago, because there are so many more unemployed people and that means they are far

greater scope. As we saw with the guy who kicked up the the fast with Amazon insat n you know, it's responseful kind of rallying the protest lost his job because Amazon, We'll hire something else. There is three million people out of a job in the US right now. You know what, Alex, I'm really glad that you're saying that, because that is one side of the equation there the employee, uh that actually still is the employer that's having actually

um higher in spray. At the same time, you are seeing them make more concessions to their workers to keep people coming in, and you're seeing absentee rates climb, So at what point does that power shift back to the employees. I mean, the concessions they're making a temporary they're saying, we'll pay you two dollars an hour, um. I think at the moment it's still the under April UM. They're

changing over time pay as well. You know, these are temporary measures which we don't know if they're going to carry on in the long term. Now, my personal view is that we as consumers are responsible here for actually perpetuating this. We Amazon has done quite well and sort of grooming us to expect that stuff should turn up

the next day. We don't ask about the cost and um And itself going to really afford to do that because it has a cloud business which is hugely profitable and that subsidizes the loss making or low margins on the e commerce side. But that's very hard for anyone else to compete with. You know, other companies do not have the benefit of that's hugely profitable cloud business. Um and yet so yet they're trying to compete with Amazon

on the delivery front. And what we see is across the board a reduction in the in the kind of uh, you know, rewards that their employees are able to get the hard work Sweb. Thank you so much for joining us. Alex is eat European Technology Calmness for Bloomberg Opinion joining us from London and Lisa. I think that's a great discussion you and Alex we're having just kind of who has the leverage here, um in the case of Amazon, you know, the workers versus Amazon. Uh, there's certainly a

strong case to be made on both sides. Look, Amazon has already come out and said you can expect your deliveries to be delayed, right, how many people are are protesting or how many people have for you know, Fresh Direct and other delivery service. It's come under a lot of strain, are trying to look for other avenues because it's so overwhelmed that it can't actually deliver in any

reasonable amount of time. It just raises a question, right, this leverage for the workers is a temporary or are they going to be forced to continue, especially as we see the walkouts continue to percolate throughout the country as far as workers at Amazon. 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 Wits. I'm on Twitter at Lisa A. Bram Wits. One before the podcast, you can always catch us worldwide. I'm Bloomberg Radio