Why Stocks Are Rising While Economy Crashes: Paul Krugman

percent decline in the SMP. The markets kind of carved back or clawed back about half that and for a lot of investors that seems a little bit unusual given or incongruous with the data we're seeing, the economic data, the jobless data, UH and the data that we're certain to see over the coming days, weeks, and months. To get a sense of kind of how that's really playing out in what the relationship is there between the equity

markets and the economic environment. We welcome Paul Krugman, Distinguished Professor of Economics at the City University of New York. He's also a New York Times columnist and Nobel Laurea Paul, thanks so much for joining us again. A lot of our listeners, a lot of investors are not sure whether or how to square it with what's going on in the economy, the pain that they're seeing the economy, yet the stock market seems to be pretty solid. Yeah. Well,

the first thing to say is that stock market. As I like to say, there are three rules about the stock market and the economy, which is that the stock market is not the economy. The stock market is not the economy, and the stock market economy. Um. And actually, beyond the fact that there's a whole lot of psychology in the market, and uh, all those kinds of things can move stocks, Um, there's the simple fact that, um, there there's another market that is much more closely linked

to economic prospects, which is the bond market. The bond market has been telling us something very clearly. If you look at at long term interest rates, you see that that um, the ten year is falling from almost actually a little over three um at at the beginning of twenty nineteen and uh well over two percent that you know, not not very long ago to to you know, frash number percent now thirty year rates down by half since uh, since last fall. UM, So the bond market is signaling

economic weakness. UM. That has a bearing on stocks because you know, bonds are the alternative to stocks. A stock is a claim on future profits, not just profits in the next year, profits some ways into the future. And if you're going to discount those future profits at a much lower rate because interest rates are down, uh, that's an upward push for stocks. So once you take two account, the full and interest rates, it's not so peculiar that

stocks are held up pretty well despite these calamitous economic numbers. Paul, is what I'm hearing from you support of the Fed bottle the idea that the lower the interest rates, the more people will just be pushed into stocks because the relative earnings that you get ultimately proved that they become

attractive regardless of what the economy it seems to be showing. Yeah, I mean that's not I mean that's sort of obvious, right if you think about there are stocks are competing with with other assets, uh, and for money they you can't tell what a stock is worth until you tell me what what are the alternatives? Um? And the alternatives are are actually looking pretty grimply. Uh, the markets just

saying there's there's just not much yield. Well, although you say it's kind of obvious, and yet we see that the earnings yield is falling dramatically on stocks as they cut their dividends and they cut their payouts, uh just in general and share buybacks because they are running out of money. So at what point is getting your money back a preferable outcome than risking it with a company that faces a very bleak outcome. Well, there's a Remember the earning deal on bonds is also very long. Now

again it's really long term bonds. It's half what it was before the coronavirus hit, and so um you would expend. Remember also that for the value of the stock depends a lot on expected future uh yields, not just this year, but three, four or five, maybe even ten years out. So they it's really is not that peculiar. Um what the old The question is, at what point do people say, all of these yields are so low that I'm going

to I'm scared and I'm just gonna go into cash. Um. And that's that actually was happening for a couple of weeks in March. We had a point there where everything froze, where bond prices and stock prices both fell, where UM where corporate bonds were selling at the deel on corporate bonds shot up because people were afraid of default and the and the stocks created UM that came to a pretty abrupt end UH in late March, and stops be bounded, making up you know, something like half the losses that

they've experienced. But that's the story. The As long as people are not afraid of a real financial crisis, and at the moment that that fear has receded, UM, then it makes sense for stocks to hold up pretty well despite a truly ghastly real economy. Talking about the real economy, Paul, we've seen obviously the second quote of expectations are for just crushing, crushing contraction in g d P. But then I guess the real discussion becomes to what extent and

over what time period will the US economy recover. We've had to fed very aggressive, we've had fiscal stimulus from Congress and more likely to come. How do you think the recovery plays out? I won't ask you to give me a letter of V or W rn L or anything. But how do you think this is going to play out? Actually, I will give you it's not a it's not a letter. It's a swoosh right, very step, very steep decline and then a climb the only which is clearly going to

be much slower than the crash. Um and Uh, it's the question of how fast that rise uh is going to be is actually one of the hardest things. We we really don't have experience with this that the we Uh, you can tell stories that go in all directions. I have no confidence at all in in any prediction, including my own, on this. Uh. You know, on the one hand, there could be pent up demand, um, people raring to go. On the other hand, Uh, there's probably a lot of

financial damaging taking taking place down businesses. Business can't come back if the business has gone under. Uh, consumers maybe wanting to rebuild their balance sheets after after the beating they've taken in at the peak of the crisis. UM. And we'll also the the epidemiology is how the uncertain You said, well, we're going to be ready to go back to business, are we? I mean everything I see so is that Um, if you take out new York, which had a very steep peak in cases and is

now falling. The rest of the country things are still getting worse, and so your guess is really as good as mine. It's used to certain they can't count on a rampid recovery. Flying blind is the way a lot of analysts have put it, and that's definitely how I feel right now. Paul Krugman, Distinguished Professor of Economics at the City A University of New York, and New York Times columnist Nobel laureate and uh, really really helpful insights

into this issue. Joining us on the phone from New Jersey. We are expecting a truly horrific jobs data figure on Friday when we get the April jobs numbers. Were expecting more than twenty million jobs to have been lost, and we saw a numbers similar to that this morning from the ADP report. It is time for Bloomberg Opinion. We are joined today by Bloomberg Opinion coms Tera la Chapelle. She covers all things on the entertainment, telecommunications and deals

front for Bloomberg Opinion. So Tara, thanks so much for joining us here. We had, you know, highly anticipated numbers out of Disney last night, and boy, it seems like they're key businesses really bore the brunt of you know, what's happening to the US economy resulting from this pandemic. What kind of stood out for you as you looked at the results last night, Well, if you look at the park, the Theme parks division, they're operating income and

just that business was down fifty eight percent. And if you recall, that's for the quarter ended March thirty one, So that was only the beginning of this crisis, which means this quarter is going to be a lot worse um, and that drove down Disney's overall net income by ninety

one percent. So it wasn't really surprising to see that, given that we know so much of Disney's different businesses have been affected and closed because of these lockdowns, but it was still really just momentous to look at those numbers and be like, Wow, we haven't seen something like

this from Disney for a really long time. Can you just talk a little little bit about the breakdown in terms of where Disney gets revenues, in terms of how much Disney Plus could actually pull with respect to revenues it brings in. So Disney Plus has been a bright spot, but when you look at the numbers, I mean they're not that impressive yet because you know, it's still losing money. It's it's nowhere near the level of these other businesses.

Their Disney is still very dependent on their media network, the advertising money they get from that, their theme parks. Of course, they're films that get released to movie theaters, so they're still very much tied to that. However, you can see that bob Iger as he was preparing for retirement, was trying to set up Disney for a future where streaming is going to play a much bigger role. And they have been hoping to get to sixteed and ninety

million subscribers globally for Disney Plus by the year. They're already almost at sixty million now, so you can see that, you know, this is doing better than they expected. It can't carry the weight of Disney, but I think it definitely is a bright spot in something investors are at least like while they have this and it is the future, so maybe that's an opportunity there. Hey, tera did was there any clarification on the call last night of what

Bob Eyre's role is. I mean, you know, it's been an on again, off again for years about whether he was, you know, when when he was gonna retire. He surprised everybody by retiring a couple of months ago, kind of right in front of this pandemic, which I think surprised a lot of people, and Bob Speck was elevated the CEO role, and then there's some announcement that Bob was kind of coming back and taking more hands on roles.

So is there any clarification last night? See didn't address it head on, but I think there was kind of an unspoken message. When the earnings call began, Bob Iger kicked it off with some introductory remarks on just how he sees the business and how he's still really optimistic about the future and so on. But then from there the new CEO, Bob Check He handled all the questions along with their chief financial officer, and we didn't really

hear from Igor the rest of the evening. So I think that was a Disney's way of saying Check is the CEO. But I do think that Eiger, as executive chairman, is perhaps being a little bit more hands on than a chairman normally would and I think maybe his focus while Chapeck is, you know, all his attention has to go to the theme parks right now and getting those back open. I think maybe Eiger is focusing on the content side and making sure Disney Plus doesn't get thrown

off course by all of this. One thing I was wondering about Terra the dividend. They said they were not going to pay it for the second half of the year. Do we have a sense of how long they will suspend the dividend as the theme parks are struggling to reopen. It sounded like they were going to reassess it in about six months, So I think this was it wasn't something they necessarily needed to do, but it just seems like a smart move. They're trying to conserve their money

right now. You know, they have lots of workers that are fur allowed at the moment, but as so their costs are lower than they would be. But as they get these parks back up and running, they're trying to figure out how many people they need to staff and what the effects of that are going to be relative to the lower volume of visitors that they're going to be allowing in. So I think they're just going to have to reassess that down the road. There's also a

question of executive compensation. There's been some political ire over the fact that there still aren't packages incentive packages for some of the top executives, even though there is this absolute demolition of their balance sheet. Any word on that. You know, this has been an ongoing issue for Disney even before this crisis. Tiger's pay has been increasingly controversial, and you know, now with them furloughing so many workers, and I think this could be, you know, something that

makes its way back into the news again. They really haven't talked much about it other than doing the same things that other companies are doing with cutting you know,

executive pay and things like that. But you know, as time wears on those employees that they had been paying even though they weren't working at the park, that's going to you know, they're going to stop doing that, and that's to be something that becomes a little bit more controversial when these executives are obviously still making lots of money. Tera La Chapelle, Bloomberg Opinion Columnists, thank you so much

for being with us. Definitely, Paul, that's been a political hot button issue, especially as the company cuts half of its employees tied to the theme parks. I'm just wondering what would you make of the earnings. Yeah, it's interesting, kind of as expected, but just decimated. And they're gonna be even worse this coming fiscal quarter because I kind of a full quarter of the park shutdown and no

film and entertainment, and so it's gonna be tough. But I think the I think what most investors are saying is, you know, this is a world class brand, and when we do get to the other side of this, uh, this is a brand that once again start generating returns for shareholders. I think that's kind of what we're seeing in the stock today. It's up about three percent today,

but still down about year to date. Yeah, there's also this idea that the entire environment is giving some wind to its Disney Plus offering and making it a real competitor for Netflix. So if they can hang on to the subscribers, is that could be a potential boon to them. On the other side of this, As we were just talking about with Terry La Chappelle, Disney Plus and Netflix have been some of the few bright spots in an

otherwise bleak time for companies and employees alike. Meanwhile, theater companies like a MC are struggling to survive all this leading to the question how much will the media landscape change in the wake of this pandemic? Joining us now someone with a front row seat to all of the changes over media, which is Terry Quaja. He was former global head of Media Mergers and Acquisitions at City Group and Credit suitees First Boston, more than twenty years of experience.

Currently founder and Chief executive Officer of Luma Partners Investment Banking in New York. Terry, as you surveil the landscape right now that seems to be under a dramatic change, what will it look like on the other side? Good morning,

Lakes are a great debe with you. You know we have this What's going on right now is this bizarre dichotomy between we normally connect time stent media with advertising opportunity, and we've got this saving that has taken place because here we are in COVID in lockdown, and consumers across the board are consuming more media almost across every conceivable uh category, more TV, more digital um uh and and what's interesting is yet at the same time, advertising is down.

And and when I say these changes are taking place, we're watching way more TV, way more digital, uh, you know, spending more time on our funds, and yet advertising is down thirty just in the course of the last two months. So this dichotomy between time spent and and revenue from

advertising is pretty material. I think post COVID we have to look to see what of these patterns are are you know, we'll stick are more permanent than others because we should presume that when things get back to normal, the sort of advertising opportunity should rematch with time spent, so we should get rid of that tasm. Then the

question is what will consumption look like? And I think, uh, in large part, you can assume that the impacts of COVID have been not to necessarily change our patterns permanently, but rather accelerate the trends that we were previously seeing. So, for example, the shift from linear television to cutting the chord and watching via streaming, that will likely accelerate post COVID. Um the enhanced listening of podcast the consumption of podcast

media will likely enhanced post COVID. And then there's a two question marks uh, like around terrestrial radio. What you tell me what the work from home patterns change post COVID, and I'll tell you, but the implications of drive time and therefore listening of terrestrial radio. So some of them we know for sure are accelerance and trends that were

already happening pre COVID. Others are more jump ball, Terry, I know you're really on the front lines and dealing with a lot of the digital advertising ecosystem here the buyers and sellers of digital advertising. Do you think one of the trends will be maybe an acceleration of advertising dollars from traditional media, whether it's broadcasting, cable, television, print and so on, to the digital, to the facebooks, to

the Googles of the world. Is that just gonna be accelerated, Yeah, no question right if we you know, at times of crisis, that tends to create intellection points right on existing trends. If we look back at the financial crisis ten years ago,

what happened was media spending. Every single category went down except for one search Search ad spend went up during the last recession, which is and and and that is a function of the fact that advertisers retreat towards performance when when times get tough, right, so UH brands spend spend on you know, garnering impressions without necessarily it leading

to the direct sale of a product. Tends to be thought of as more discretionary in nature, So when economic times turned down, you sort of siphon off that some of that spend, whereas what you do keep spending on are the things that keep driving your business. So the tighter the connection between the spend on media in advertising and the results of driving actual new customers, those are the channels to which you will migrate to in downtimes,

and those tend to be searchers. I mentioned performance ads on Facebook and other similar channels. Terry. There's also a question of who will remain after this crisis is over all. We've seen from AMC to leaters for example, are struggling UH to stay afloat as no one can go to the movies and actually see them in a theater. There is also a question about mergers and acquisitions. Do you expect a rash of deals and consolidation in the near future.

So I think what this crisis does, obviously for growth companies is it puts a cash constraint on You've seen almost most companies, you know, cut their guidance, downsize their their workforce in preparation to withstand and whether this storm, because we just don't know the total extent of the impact or how long it will take, but absolutely this will create sellers, right, companies that need to find a home.

And again the continuation or perhaps acceleration of a trend that we had witnessed and you we all had talked about on a prior program where it's inevitable that this will then cause some companies to want to sort of panic is probably too strong a word, but certainly seek an exit. And then on the back end of this, when things come back, I think we will get in whatever it is, three months, six months, nine months of a deal hiatus, and I actually do believe we'll see

a tremendous amount of strategic activity take place. So I'm actually contemplating the end of this year and into two thousand twenty one as being a very active time for deals in media. So Barry, we Terry, we just had Disney report last night, and you know, the silver lining, I guess if there was one, was the Disney plus and all the streaming businesses uh doing pretty well. You know, people I guess are sampling a lot. Now we're all quarantined,

we're sampling all the streaming products out there. How many streaming services do you think will ultimately uh shake out in this market? Yeah, it's a good question, Paul. I think if you look at the survey data, you know, people suggest that you know, sort of earns itself out in and around uh three to five you know subscription services, And of course it's a function of you know, what

what the nature of those services and how comprehensive. I think of it more in terms of the total economic bundle. So the are pro the average revenue per user, what what the average American pays for their cable bundle is approximately a hundred dollars a month. Uh. That translated into a streaming world is about half of that, about fifty

dollars a month. So if you think of you know, Netflix plus, maybe you know an HBO Mac subscription, maybe you've got you know, sling, is some one of these comprehensive v m v p ds to give you a bundle of channels you'll all add up to in that sort of range. So it's it's materially. Hey, Terry, thanks so much for joining us. We really appreciate your thoughts in your perspective. You're right on the front lines here of the media space, the digital media space, a transformation

of linear media to digital media. Terry Kawasha, founder and CEO of Luma Partners Investment Banking. They target that whole digital media space and at least we've seen this transformational shift of ad dollars from traditional media to digital and and Terry and as firm er right there dealing with all those companies on the front lines. We appreciate that

this is Bloomberg. The story Paul, that really really cried out to me this morning, written by Sean Donnon and Joe Doe, talking about the layoffs that we're seeing in unprecedented numbers across America. There is a question are we moving from a temporary wave of layoffs to something much more permanent and uh and and nefarious when it comes to a longer term recovery. Shaan donn and senior trade

reporter for Bloomberg, joining us. Now, Sean, how much have you seen by way of evidence that a lot of the layoffs that we're seeing right now are going to

be permanent. Yeah. Well, I mean the story of the jobs market in the US right now is the story of a lot of cases of the data that we don't have, right I mean, it's it's we know that these jobs numbers we're going to get on Friday are going to show us that they're huge layoffs in in in April, but they're not going to really answer one of the key questions, which is what we set out to answer here or address here, and that is how many of these layoffs are temporary and how many are permanent?

And what we're seeing in the notices that companies are filing with state authorities around the country. You can dig into these what are called Warren notices and places like Ohio, Wisconsin, Washington State, California, all over the place, and you read those letters and more and more companies are starting to use the word at least uh, at least indefinite and often permanent. And that is scary for anyone who's hoping

for a V shaped recovery in the U S economy. So, Sean, I think I'm guessing you know, when you're reporting a lot of what you found is that the companies really just don't know, you know, how this virus is going to play out? Is there going to be a second wave? I mean, are most companies that you looked at were they Are they still clinging to the hope that there this will be a relatively you know, yes, it will be a brutal contraction in g d P in the

second quarter, but that in fact will be relatively brief. Look, I think everyone's clinging to that hope. Uh And we've seen Kevin Hassett go out there this morning and the President do this a number of times, talking about the possibility of a real rebound in the third quarter of this year. But what you're starting to see in these layoff notices this company saying I can hope, but I'm looking at my order book, I'm looking at demand and what I'm expecting ahead, and that looks like a much

slower recovery than what I'm hoping for. And therefore I'm going to start cutting costs and I'm going to start laying off people. And one of the companies we mentioned in here is is you know, these are these are not short term decisions. These are these are in some

cases companies that have long histories. One of the companies we look at in this story is the Michigan Maple Block Company, which goes back to eight teen eight one in the Michigan town of Potoski, four hours north of Detroit, and it is laying off and shutting down, and that means fifty six workers are are done and will be done by by by the end of the by the early July, and that is, you know, the beginning of the third quarter that that we're talking about that we're

hoping for that recovery. So you see those layoffs and again those and those layoffs in the case of Michigan Maple aren't showing up yet in the in the broader economic data because they haven't happened yet. But that company is shutting down and it's just saying it can't do anymore. You look at the auto supply chain company. I talked to al Udine, which makes lightweight aluminum chassis components. They sell to all the major carmakers, and they're looking at

forecast for the auto market right now. Going into this crisis, we were expecting the US to sell some sixteen million cars this year. Now people talking about more like eleven or twelve million. That's just a huge robin demand through the rest of the year for this company's products, and what are they doing. They're responding by laying off two fifty people in Michigan and in Georgia the foundry that they have there, and that those are permanent layoffs, those

back to work. I'm struck by the regions and the industries that you keep mentioning Michigan, the rust belt in general, and these are industrial companies, and I'm wondering how much this is an accelerating a trend that we had seen for years, frankly, which is a shift away from industrials that maybe will be solidified with a much smaller industrial

footprint in the United States going forward. Yeah. Look, I it's hard to tell where we're going to come out of this, right, I mean with this is a once in a not just a once in a generation, it's once in the century event. And in many ways economically, uh, some companies will be able to come through this and and be more robust and maybe even gain market share. But you look at the steel industry, You look at Aluminum ALCA shutting down a big smelter out in in

Washington State, layoff people. You look at the auto industry. Uh, and what's going to happen there. You look at coal miners. One of the companies that we talked about in this is runs a coal mine in Billsville, Ohio, and ten

people are going to be laid off there. It's hard to to you know, we think oftentimes about the impact on on travel or hotels and restaurants and and so onto this crisis and the things that we're not going to do anymore, but this is really hitting industrial America and it's a major crisis for industrial Sean Donna, thanks

so much for joining us. Really a compelling story. You and Joe Doe put out just a really interesting story about the real impact that we're seeing in terms of behind the employment numbers that we talked about every week. Sean Donna and senior trade reporter for Bloomberg and Lisa.

Sean's story just kind of brings back to, you know, to the flour once again, if we ever do forget about it, that when we talk about these employment figures, that job was claims every week that there are you know, real companies, real people, real communities, you know, really being impacted by what's happening as a result of this coronavirus.

In terms of the economic activity, yeah, I would say that the political implications too are vast, considering that these are some of these swing states and some of the ones that were hardest hit after the last crisis and look like they're at the epicenter of this one once again.

The exactly right as we come up to a presidential election period, certainly some issues for the candidates to think about is this will be front and center obviously for this upcoming election, the pandemic and how elected officials have reacted. This is Bloomberg. 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. Bramwods One. Before the podcast, you can always catch us worldwide on Bloomberg Radio.