Surveillance: Accurate Virus Testing With Pekosz

They've made a choice now to go with familiar names like Dahlio, like Lobe, and like Howard Marks as well. Troy Gayski joins us the engineer from m I T Troy Gayski, How are you and Mr Scaramuchi gonna engineer forward with Dahlia, Lobe, Marks and the likes. What will be different now versus the debacco of the last twelve months. Yeah, well, don't know about twelve months, but certainly in March. But thanks,

not great but great to hear talk to you as well. John, has been too long, but no, so look, I think you know any process, you have to evolve, and you have to try to use information that perhaps was the president at the time and you know, look at the reality is is we fully expect a recovery, and the primary way we're going to play that is through distress credit, both distress structure credit, whether it's rmbs or to a much lesser extent CMBs and cellos, or whether it's through

good old fashioned distress restructuring. And you know, one of the things that will be different is well we'll have more exposure to larger managers that have a much more stable capital base and much more staying power if we do get another laid down that some people expect in the fall. I mean, we're pretty certain the economy's bottoming and markets have bottomed, but clearly we could be wrong.

And managers, whether it's Howard Marks or or Dan Loebe or Josh Freeman Canyon, I mean, these are multi cycle distress investors that have done a tremendous job. And that's always been where you've gotten your best returns coming out

of any economic dislocation. And as you guys know, like we always say that, you know, every cycle is different, but every cycle is the same um and and so you could argue that for some unknown reason, you know, the returns and distressed won't be as attractive as they were in the past. But if you look at the divergence between equity markets and credit of all stripes right now, it's as large as it's been, you know, since the

financial crisis, if not larger. So on a go forward basis, that's where you're gonna get your best risk a jested returns and doing it with managers that have strong hands that can uh, you know, restructure individual companies or favor structured credit versus corporate is the is we think the way to go. But we'll still maintain a healthy exposure to smaller midsized managers that are laser focused on a

few particular niche themes. Try. I understand the argument that stocks and credit are diverging in ways really haven't been seen historically. However, there are some real reasons for this. I mean, when we talk about the equity advance, we're talking about the big tech names that stand to benefit

from the current environment. When you talk about some of these credits, what some of these credits, you're talking about commercial mortgage backed securities, residential real estate, and big cities that are going to be profoundly changed by this entire episode. Isn't there some real reason for why some of these assets are selling off, and also some reason for why

some of these equities are gaining right now. Oh yeah, No. Look, as you know, there's the real economy, there's corporate fundamentals, and then there's capital markets. And to your point, you know, equity markets are becoming less and less reflective over time of the real economy. Uh So, uh that being said, you I don't think anyone could actually argue that the

equity rebound has been driven by improving fundamentals. For the majority cases, particularly where multiples are the equity rebound has been driven by massive expansion of monetary supply after suffering a tremendous draw down. UM. Our primary focus will be on residential UH single family credit as opposed to uh CMBs. We will have a little bit of that exposure. We agree with you that clearly the fundamentals in hospitality are

lodging in retail are very problematic. UM. But at the same time, you know, multifamilies hung in there exceptionally well, you know, a lot of the benefit of the p p P and more importantly, enhanced unemployment has allowed has allowed renters to continue to make their payments at a pretty shocking rate. Now everyone expects it's going to deteriate further in May, but so far, so good. So you know, within commercial real estate you have to be very specific

to sector when you're doing your forward analysis UM. And in terms of residential housing, look, I mean, you know, coming into this, we had the best most pristine mortgage credit in at least a generation in terms of debt to GDP or debt to income UM if you looked at mortgage servicing costs, and so obviously there's been deterioration forbearance requests have gone up substantially UM in the markets, pricing in about a fifteen percent total forbearance requests with

somewhere between two and five percent ultimate foreclosures UM. But as the economy recovers, we may end up with much less home price declines than were initially expected, particularly given you know, again when you think through the ramifications of ultra loose or hyper loose monetary policy, you know, the likelihood of a material loss of property value and residential

housing is fair fairly low. I mean, we're modeling out down ten percent, but there are many forecasters I think it's going to be closer to flat or only down five. And when you have LTVs that are as low as they were coming into this um, even in the event of a foreclosure, which would happen you know, say two, your recovery value much higher. So you know, when when we think through uh, you know, let's call it non

vanilla structured credit or non vanilla credit. Residential how Z is clearly going to be a big winner as well multi family commercial real estate. We think those sectors have the most upside by far. And then you know, back to the conversation with regard to Lobe or a Mars or a or a Josh Freeman, I mean they're they're also very focused on corporate credit, right and when you think of the four team percent for twelve month of

fault rates is going to be in high yield? Do you think of these seven or eight percent it's going to be present in levered loans. You know, that's going to provide them ample supply to do good old fashioned distress restructurings. Which again, if you look at the last two cycles or even the H. W. Bush recession, um that that was the most profitable hedge fund strategy by far.

So I think a lot of people will be sitting here thinking why do you want to pay a hedge fund so that when the photo reserves stepped in and the distressed opportunities aren't anything like they were after all oh nine. Well, look, I mean, I don't know which analysis one would suspect or suggest isn't as great as

at the end of eight or O nine. Admittedly there there won't be the same returns to high yield or distressed as you did post immediately after the Lehman failure when spreads hit their wides, but spreads it tighten in quite substantially prior to O nine, and you still have spectacular returns UM. And then back to your direct point. Look,

the if you think of um where high yield is today? Right, So say you're an investor and you want to buy credit, Well, you're more than likely going to buy it through high yield. You're you're in an eight percent effective yield, which to your point is much tighter than it was coming into oh nine. Um, your your law suggested yield is basically minus two the next twelve months when you adjust for defaults.

So the better opportunity is going to be in the companies that get kicked out of the ETFs or get downgraded out of the indices that have to go through restructurings. As long as you're careful and avoid too much energy exposure, you know, that's where you'll have the high teens or low twenty type returns. Whereas to your point, if you're just sticking to liquid vanilla on the un ETFs, it's being much harder to put up a tract of returns the next several years. Truck, I ask you, thank you

so much. Thanks Skybridge Capital, greatly appreciated. There's a math to it in the heritage of Society General and their derivatives effort, their math centric effort as well, and of course that's scene in their rate strategy with Sobrado Rajapa who joins us right now, Sobrad, I'm gonna cut to the chase on a Friday, John can ask all the fancy questions with Lisa. The real yield, phenominal yield, John

is a real yield coming back. I don't know. Hopefully, careful negotiations, if we get things back together, hopefully we can bring it back. Saying broad, I get distracted. I want you to give me the levels. I'm ten year in thirty year where you really break into a sweat. Where's the ten year level that matters? Lower yield, where's the thirty year bond yield, lower yield, where things really fall apart um, I'd be concerned, especially in the tenure,

if we break through forty basis points. I feel like that, to me is a low that we've seen that's far during the crisis that I think the market can manage. But I think anything below that the market there definitely be a little bit of a concern over how bad this can get, and that you know, that would be um, you know, a new paradigm shifting mappin in because what I think currently the markets pricing in is exactly what set share pouse that which is a range of possible outcomes.

I would say that's broader disagreement on virtually every topic of discussion, whether it be the direction of rates, inflation, inflation expectations, and now you're starting to see that even the equity market, there's very little agreement on the future

direction of how things are headed. So I would argue that the of the markets are basically pricing in a range of possible outcomes, and you're seeing that born out in some of the pricing we're seeing in the bond market sobadre You could take a look at the low yields and say this is negative, it's a commentary on low expected inflation. You could also say it's a positive because the US has to buy a borrow a lot a lot of money and they're doing it at record

low costs. Next week twenty year bond issue is the first one since the nineteen eighties, is expected to come with a yield of one point zero nine percent. Why aren't we seeing a fifty year or a hundred year issuance from the US. Well, because there's really no natural buyer or fifty hundred year bonds in the US. I mean the alan community or the asset liability managers in the US like pensions and insurance companies typically don't want

to buy very very long duration bonds. So really it's it's a question of where the demand's going to come from, and from the studies that the Treasury has done um as well as the the Advisory Committee. Really the sweet spart for issuing more is in the twenty years factor, because that's really where insurance companies can step in and and take down some of the supply. Speaking of taking down the supply SEVTRA, how much of this supply will

the FETE be buying? Um. The set typically doesn't buy on their own issues, but they have been sort of buying at a piece of VOT, say anywhere between seventy ten billion on average for the last couple of I just mean in terms of scize evat, not of course, not participating in the primary market. I just mean in terms of size. Once they start buying these treasuries, in terms of the supply versus how much the feed will be buying, will they be buying more than than is

actually supplied by the treasury um. That's a very good question because it's you know, the set has been extraordinarily careful and not sort of showing its card. They have not told us or pre announced the the size of the asset purchases and for how long they're going to continue to purchase. I think the broad consensus is that if asset purchases were intended to provide the quidity, they've

already accomplished that. So maybe they're continuing to sort of have skin in the game to keep interest rates low so that you don't see a pop and yields with the uh, you know, they're you just to buy your name hit the markets, brot. I got like four questions here, but I'm gonna go right to where you were. I still don't understand how a central bank effects yield curve control,

which is what you're talking about. They're showing they're not they're hiding their cards because they're trying to control movements. I get that maybe that's a precursor to yield curve control. Do you have confidence at sock Chin that any central bank and quote unquote control the yield curve? Well, I think some of the you know, I mean the US

for instance, or Japan or even Europe. I think that you know, you have the luxury of being a reserve currency, and you know, people are always going to flock to safe haven assets, and there's a lot of credibility for these these large governments and in central banks. So I think for these countries, you know, there's the FED policy and FED actions, We're going to keep a lid on treasury or it really depends on you know, the credit worthiness of the country, and that's really where you tend

to see yields move high. I just don't think that's going to happen in the US, Savadra Rajapa of Society General. You've nailed it again and again when it comes to expecting guilds to go lower before the pandemic, when a lot of people expected them to start heading higher. I want to ask you about the political ramifications for the Federal Reserve as it essentially monetizes the debt of the United States. As the former chief economist of PIMCO said,

we've had a merger of monetary and fiscal policy. We've broken down the church and state separation between the two. How consequential is that a you know, it's it's it's quite consequential, and it's meaningful at the current time, UM that the Fed is intervening because you know, we've had, as you know, a very unprecedented rise and deficits in

a very short period of time. You know, three point four trillion for physically or twenty and you know two trillion plus for fiscal or and this is just as of now. We're not accommodating new plans that are put forth by UM the House. And you know, I mean to the odds of that passing are probably low, but definit gro only rise from here, not you know, go lower over the next couple of years. So in that context,

you know, FED support is extraordinarily welcome. But I think, you know, we're going to look back at this and and pass judgment. But in my opinion, I feel like the FETs doing the right thing to support the broader economy. I think a lot of people feel the same. Wise a better of course, you'll always get people criticizing the FEED and often on that side of things. But yeah, I think they've done a brilliant job stepping in and really alleviating some of the financial pain on the financial

condition side. Just to wrap things up and build on what Tom said, the Bank Japan did a brilliant job of capin a tenure yield in Japan, and they don't really need to participate much in the bond market now to do it. When you think of yield curve control, is that what you're thinking could happen in the United States what we've seen play out in Japan. Absolutely, I think that that's really the the the the important feature.

It says, what I desire out of yota control is that you know, the communication channel works just as effectively, so the seed doesn't have to uh, you know, continue to buy assets and and and blow up its balance sheet. I mean, as we all know, during the post crisis period, it took the FED a long time, over ten years before it could start thinking about unwinding its balance sheet. If anything, it started raising rates before it started unwinding it's it's balancy. This was a debate earlier on on

what they should do. First, they shouldn't mind the balance. She did then raise rates, but then they landed up raising rates and then gradually unminding its bound. She is the balance. She gets to be too large, and the aspiration of ever bringing it back down is going to is going to fail. So I think the yield curve control from that perspective is a great tool because the communication channel tends to work just as effectively as as the as as actually going out and purchasing uh, you know,

treasuries to keep yields low. So um, I think that that's when you know, once they've done exhausting uh, once they've done bump purchasing as much as they can, I think that they will they will try to employ yield curve control subaal fantastic to catch up with you this morning, My best to you and yours er the whole of the same as sok Gen sabatras Jampa there the head of US Right Strategy sat as General Andrew holln Holst a city joining us now place to site to get

the lightest on his perspective, and they have few out for a city group. Andrew, your first take off the back of this dice of place. Yeah, wow, this is just more evidence of how deep this contraction is in April in particular and in Q two overall. You know, I think really what we're thinking about now is not so much the April data where we knew we were going to see these big contractions. And yeah, I've been looking at this number of anything even bigger than what

has been forecast. Um. But the question that is where do we go from here? Um? Can we rebound off of the very very negative numbers that we're seeing for April and for Q two? Andrew, I was so shocked I forgot to bring in, and John saved me and brought you in because I'm looking at these numbers and they're absolutely shocking. From where you sit with Katherine Mander. They change the political debate in Washington Yeah, it's so interesting. Right.

We have a large fiscal package that's being debated right now, and I think the numbers do matter. I think the activity numbers matter. I think the jobless numbers matter a lot as we're thinking about unemployment insurance and what we're doing to top of incomes which are obviously being very very deeply impacted by this. So that the debate is probably going to continue to play out over over weeks, but certainly the I can data place into that, Lisa, I just got the control group in Folks. This is

the number. I look at the retail sales Folks is like jobs claims. Tons of data comes out. The control group is taking out the goofy stuff, gasoline, building materials, um all sorts of different things, spam. It takes out spama. Yes, the retail control group. We went from minus two percent, Lisa, to a survey minus five and we clocked in with a minus fifteen percent. That says it all. It's brutal, it's depressing, and I gotta say, if any del Judas every time he gives one of these data reads, you

can feel the weight of these numbers on his voice. Andrew, a lot of people saying, we will get a big recovery when people can go out and spend. And yet, as we saw from the Chinese data overnight, it's not that simple. People aren't that willing to go to restaurants how quickly. As John was saying, how quickly can we rebound based on what we are seeing in China, Yeah, I think it's definitely not that simple for categories like restaurants, for categories like travel, and it's not that simple for

the economy overall. I think we are seeing some positive signs in the US now. We're watching a lot of high frequency data that we don't usually watch daily data on things like gasoline demand, on things like driving their people driving their cars, um what we're hearing from auto dealerships or that are reopening as they're seeing a similar amount of demand to what they saw before the COVID

nineteen downturn. So I mean, very very early days on this, but I think they'll do this this very differential effect where you'll see some industry some sectors that come back quickly, and other travel staurans are good examples where that could

be a much longer story. Andrew, there was a story in the Wall Street Journal this morning, the headline coronavirus finishes the retail reckoning that Amazon started, and talked about the expectation for about a hundred thousand stores to close over the next five years, bankruptcies to surge among brick and mortar retailers. How much does this accelerate that trend? Yeah, I think we'll see a big acceleration of that. That.

That was one of our initial thoughts when stores started closing, is I think we all knew, we all expected that there would be further brick and mortar closing of stores in coming months and coming years. Now that you were forced to close down, there's just gonna be a lot of store owners to say it doesn't make sense to reopen again. So we've seen the shift online, we've seen shift away from brick and mortar. Definitely accelerate that substantially.

I mean, Tom, we've been talking about this for years. This is what we've been seeing on the avenues of New York City. In Manhattan, if you go high enough up on Lexington, in fact, if you come down towards Midtown, we've seen shut store fronts for long time. I totally agree, But Andrew, what's so importantly, here is when the facts change. Politicians change. At eight thirty this morning, six minutes ago,

did the facts just change for our August politicians? Again, I think it's probably more the labor market that's going to matter. And in some ways that's that's that's a good way of looking at it, because you really want to think about what is the negative impact that this is having on individuals? And we know that it's huge. We know it's huge from the jobless claims data, we know it's huge from the jobs reports that have come out already. So um so again, I think the economic

data matter. Does you know one retail sales reading change significantly? The political calculus, I'm not sure we can make that stapent. The two things that I think market participants are going to really have to grapple within the months to come. Andrew quite clearly, quite clearly, will get some sequential month on month improvement as we work our way through summer. That's clear to everybody. How do you establish the limit to that sequential month a month improvement, the limits of

the over will recovery, the limits of normalizing. How do you get your hands around that? Yeah, I think that's what we really need to be watching day by day and week to week. So so some of this is related to how different policies ease, how quickly some activity is allowed to return to normal. And I think what we're thinking about more and again in the context of the Chinese data, for instance, is how quickly do behaviors change or not change, And so that's again it's gonna

be very different for different sectors. And I can see things like auto demand is a good example. We could actually have increased auto demand because maybe more people want to be driving their cars instead of using public transport. Um you know, there's to be various shifts in the makeup of economic activity, so we have to be watching that.

But how quickly does behavior go back to something that looks more close to normal, I think right now is very uncertain and something we have to be evaluating in real time. I was struck by a survey by open Table showing that one in every four US restaurants will go out of business is due to the pandemic. And I'm just struck with what's going to take up all the space that all of these restaurants and retail stores currently do. Andrew, and I know you're saying cars could

be a bright spot. Is there anything else that's a bright spot? Yeah, I think there is a large amount of reallocation that's going to occur. So this is certainly not good news for any of the you know, perhaps it could be as much as a quarter like that service suggested of restaurants that are going out of business, But there is just a large shift that's going on in that sector, you know, like we were talking about

in other sectors. So you know, you may have less of the smaller restaurants UM and more restaurants that are offering more to go service. You always see pizza go every for instance, UM, which is which is increasing UM. Now it's still a costly process for the economy to go through that reallocation process. M. But you know, ultimately those storefronts will be occupied again, it just might be

different businesses. Andrew, nobody's listening to the show this morning, so I'm on, I'm not embarrassed to ask this question, But how are you going to amend your gross US forecasts off of this dramatically worse retail report? Does this bring your your judgment in by tenths of a percentage point or does it bring it in by full percentage points. So we said back in March that forecast changes are in general going to be in the percentage point week

to week. So I think that's really what people should be thinking about. With these numbers, you're essentially getting, you know, what would usually be, you know, month's worth, if not a year's worth of economic data in terms of change to the forecasts, and just one of these numbers, so we can easily move our forecasts by percentage points with any one number that's coming out for April. John, this is just shocking. I can't convey how unimaginable that Control

Groups Statistic is. Just breaking down the numbers tell O thirteen major categories decreasing let by seventy eight point eight per central clothing store, sixty point six percent. Decline at electronics and applying stores. Really not pretty. The only category that recorded again, Tom, just to point out non store sales of course, online Amazon et cetera increased eight point

four percent. I don't want to get in a shout fest on politics, but I would defer everybody to Dr Hooper in his esteemed experience or Katherine Manett City Group, Hooper Deutsche Bank. John on three trillion dollars to them, to those people in a lot of money. I mentioned that Jennifer Rome of UCL in London today, the great viroologists there, andrews Pecos Johns Hopkins University and of course

at the Bloomberg School of Public Health there. I should mention Mr Bloomberg as a founder of Bloomberg Lpters Radio, this television property as well and as a philanthropist to his Johns Hopkins University. And I was talking to Dr Rome about Andrew Pekosh and the idea of testing it in the view forward of how we judge our virology in America. Let's listen. A few things came up yesterday in terms of the efficiency of testing and the accuracy

of testing. UM. I'll emphasize something that I've tried to emphasize before. UM the test matters, but who gives the test and who is also important. And one has to understand that just because someone has a test for COVID nineteen doesn't mean that it's an accurate. Testing doesn't mean that it's being performed accurately. And I think you know, we have to think about moving to a different way of monitoring for disease UM as we're trying to open

up the economy. We're no longer going to be chasing cases. We want to get ahead of the cases. We want to find individuals who are ill and then start testing the people who come in contact with so we can identify them earlier, quarantine them, and limit the spread of the virus in that way. How do we do that in America? With our social history? The public health interventions UM are difficult. It's very clear to me and my family actually how difficult this has been. But these are

the necessities. UM. What other countries have have demonstrated is if you loosen these public health parameters and you're not ready to institute large amounts of testing in a very different way than we're doing it now, then you'll see these bounce backs. And we do risk the the the the the the the chance to UM to recover quickly. Now, if we fall back and go back into three or four weeks of public health, of of stay at home UM, that effect of the economy will be much greater than

trying to slowly come back into it. Right now, Dr Pecosh, what do we know about antibody testing? I mean, I know I keep on asking about it, but it seems key to know how what percentage of the population have had this and whether they're immune. When will we actually have a clearer picture What are some of the testing or schemes out there. Yeah, you're absolutely correct in terms of asking this question, because it will be one of the things that has the potential to really change the

way we approach this. Uh, the the the outbreak. UM. There seems to be lots of data coming out from many different places showing that most people who are infected with the COVID nut with COVID nineteen do have antibody responses, so their body responds UM. They have decent levels of the antibodies that we think are the protective antibodies. So so far things are looking good in terms of how

people are responding immunologically to the infection. UM. What we really need to know now is how long these responses are going to last. Are they going to fade in a few months or are they going to stay for a year or longer UM. And we also need to monitor these people who are antibody positive to see if

they can become reinfected. That will be the proof that says that some of these antibody tests are actually telling us what we want them to tell us, which is that if you're antibody positive, you won't be able to be infected or at least very easily with the virus. Do we have any idea of, you know, whether the antibody test is positive, how long you're immune to this virus. Is it something that we'll just have to live with.

Is this the kind of seasonal flu that you know that we will see kind of you're you're in and you're out in various mutations. Right now, the virus hasn't seen a large amount of people who have immunity to it UM, So what do I mean by that there's so many of us that have no immunity to it that the virus is easily finding those people and infecting those people um Somewhere Over time, as more and more people get infected, it's going to start seeing people that

have antibodies to the virus. And the big question then is will this virus respond like influenza does, and mutations will accumulate and the virus will find a way to get around that immunity, or will it respond to the ways that some of our other more classic viral infections like measles does, and you will continue to be protected from infection and the virus won't be able to infect you.

So that's the big question that we want to ask about the about the virus, and again that's another question that's gonna take some time for us to get an answer to. Andrew Pecco. So the Johns Hopkins University just a brilliant conversation there. Thanks for listening to the Bloomberg Surveillance Podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide.

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