Surveillance: Congress Must Act Now, Swonk Says

single second. Half guestimate that you will hear over the coming days, weeks, and month will hinge on a very uncertain view of how long mitigation efforts will stay in place, and any hopes for a sharp rebound will be shaped by how well a fiscal plant is executed. And at the moment there is no agreement in Washington. That will be the folkus of this program over the next couple of hours. And joining us on the phone, I'm pleased to say is Peter Hooper, Deutsche Bank Global head of

Economic Research. Peter. First question to you, sir, just how much damage is being done every day we go without a big package from Washington. Well, good morning on Tom, Lisa, delighted to be on. Certainly, the failure of Congress to agree on a package is problematic. We we've been expecting something from the Senate in the in the in by very early this week, and this has to then make

it through the House. But no question that on on a number of fronts, rescue is certainly needed, not just to get us a recovery down the road, but to prevent major damage. Um as as the economy goes into free fall here, which it is doing in the near term, no question, the numbers are gonna be falling off a cliff as we go into this week and next. Um So we we we absolutely need we have to have unemployment insurance back stopped. Uh. Millions are going to be

out of jobs. Congress has to get it act together and beef up our unemployment surance insurance system that's in the bill needs to be beefed up even more. Uh. Number two, we absolutely have to back up backstop small business in the US and and UH and corporate debt um uh. And number three the muni market. I mean to get unemployment insurance out. States are going to have to have to borrow more muni markets frozen right now, New York State, New York City cannot bring money on

paper to the market. Um UH. In this bill that Commerce is considering, they're they're looking at putting funds into UH direct backstopping business, but also importantly most important, I think getting getting the FED system operating here? Peter, what's so important here? And thank you so much for taking time away if you were to deutsch you bank clients

this morning. What's so important here is we've watched John, Lisa and I have watched wills moved from forty billion to two billion, one trillion to trill you in an up if we now know the shock better than we did a week ago, what is the downside of a massive three, four or five trillion dollar phased in program until we figure out the virology of this virus? What's what's the so what of throwing a wall of money at this? Okay, Well, several questions you raised, Number one.

I don't think I've seen numbers yet that have accurately gotten the downside. I'll say we're coming out with a report later today that, uh, well would you do? Come on, No one's listening to the program, Peter, give us a heads up on that report later today. Well, well, the heads up is I have not seen numbers the downside

yet that are are near accurate. Okay, number one, We have no idea what accuracy is here, but reasonable guesses when you're looking at a major the whole economies being shut down, when you're looking at major states going through this, and and the spread still accelerating in the US UH. I mean, we were still assuming that this is something that's gonna last a matter of one month, two months,

three months. UH. And and how much that how much it does UH determines how far things fall in the second quarter, which is going to be tremendous, no question. We're also assuming that we begin to see some bounce, and all this UH fiscal ammunition, this bring being brought

to bear will have a major UH impact. The question is how much can we prevent the damage from a free fall in the economy by back stopping business, by back stopping households, and and the earnings losses through through unemployment insurance, and by in the in the in the very near term, in the day's ahead, getting the credit market functioning, getting the muni market functioning. I mean, we have to get the FED. I mean, the Fed is

the FED is going all out. But the FED has more that can do if it gets if it gets awhere with awful Congress, A lot of talk right now about this UH package and and four billion plus two UH to put into a facility to allow the Fed to purchase UH CORP longer term corporate bonds and munies and and that's that's critical. We've got to get that going. So right now, there are sort of dual crises here.

There's the economic crisis we're talking about, and then there's the financial crisis that a lot of people think is getting to be a much more real possibility, which speaks to the speed people are hoping that this UH stimulus will get past. How important is the speed of the passage versus the details. UH. Both are important, but speed

is now of the essence. I think given what's happening in the credit markets UM States, States are gonna this week going to see unemployment claims jump into the millions. States are going to be totally swamped on on their ability to handle this without being able to go to the market to float more debt. The Fed has to has to get the market going, has to back stop this market to allow this allow this to happen. If households, UH, you know, many households are are living paycheck to paycheck.

If if if people can't go out and buy their necessities, it's it's going to be a real problem. I mean, and then there's many firms are starting to let people go, uh if they can, if they can be backed off, if they can get the loans that are needed to tide them over. This what we think is going to be a transitory crisis. Then we prevent having many many people lose their jobs, and we have an economic system that can come back. I mean, you've put a lot of people out of work and and it's difficult of

getting things back together. The economy needs happen, it needs how quickly paid. We appreciate your time this morning, So my best to the team, won't you Peter Hoop at that to which your bank glob ahead of economic research this Thursday speaking might note down we have camp On as chief economist, the macro strategist might always great to get you on this program. Fantastic to have you with us. Your thoughts from what you've heard so far this morning, Well, John,

thanks for having me. You know, I'm encouraged here by the recent actions of the Federal Reserve. Initially it seemed like they were just totally being overwhelmed and toppled over by the huge, unrelenting surge in money and liquidity demand and actually starting Friday, we were we we it was the first day we started to see real yields fallback and the tips inflation break even market, and they've moved

lower again today. So remember from about the sixth of March, most of last week there was a huge surgeon real rates, collapse in inflation expectations, and obviously a lot of carnage UH in a broader array of credit markets. So we might be seeing the very first signs that the Fed is starting to get some traction again. It's preliminary, but

every journey starts with one step. Michael Dard, If we throw billions, hundreds of billions, trillions of dollars at this natural disaster, this verological disaster, is there any harm to the economy? I mean, don't we just pull that back over the quarters in the years once we get through this natural event. Tom, listen, if this were isolated to simply a supply side shock, it should be contractionary and inflationary. That's what a supply side shock is. If it's adverse

and an aggregate supply aggregate demand model. What these money markets are telling us is that we have an incredible adverse demand shock unfold, and that's going to require a tremendous amount of monetary and fiscal action that is sustained. That's the key here, sustained. If it's just viewed as temporary and likely to be yanked back as soon as conditions um start to to normalize, then we have the prospect of of you know, limping out of this without

a full throated V shaped recovery. That has to be the key. So the risk here is that we do too little and back off too soon. That was the mistake made after two thousand eight, and we cannot afford another lost decade for the labor market. That would be

an utter human tragedy. Mike Darta, As I was reading all the headlines and the news over the weekend, it seemed like there was a competition for the most dire prediction for the economy in the second quarter and beyond, and depression started to become a word that was used more and more frequently. A sustained UH downturn over the course of years. Do you see that as an increasing possibility or is that a little bit too far in the gloom school, I'd say only if policymakers complete at

least fail so that will be a choice. You know that that is not a destination. Um. You know that is etched into stone. We know there's a huge contraction coming that you know is unavoidable. But how quickly and forcefully recover we recover is a choice. And so that means, you know, policymakers doing whatever it takes in keeping it up until we're there. So we're going to take a huge hit in the short term. But the key now is how do we come out of this if and

when the pandemic either ends or starts to let up. Uh, And that's that's really a policy choice. So let's not make the mistakes we made in two thousand and eight, where the fear was we're doing too much. We're going to debase the dollar. There's going to be inflation utterly wrong across the board. And guess what the labor market paid the price with a ten year period before we got back to full employment. If that happens again, capitalism could be on the chopping block. So let's not go

down that path. Mike, you you raise a good point. It goes to John's point earlier about speed, about how there already has been a lot of missed opportunity here with how slow, even though they're moving really quickly, how slow Congress has been trying to pass this bill. Have they already been too late at this point? You know, I think I think they have, but you know they but they can still do good by trying to to

catch up and to get the policy mix right. So no doubt about it, I think, you know, too late across the board. Listen, just a few short weeks ago, all of us together that are on the that around the air waves. Now we're talking about the yield curve reinverting. Right, The federal Reserve came into the year with short term interest rates above long rates. That's a sign right there that policies out of whack and you are vulnerable to shocks.

So no one could have predicted the pandemic. But clearly, I think we've made some policy mistakes and you know, in the past and in the recent past, that have made us more vulnerable. But that doesn't mean we shouldn't try everything, uh in our power to make sure that we vault this economy out of what's certain to be you know, a sharp contraction, uh, back to full health within a year year and a half. That needs to be the goal, and if you can find the right

policy mix, I think we can do it. Let's hope we can achieve it. You know, better early than late, but better late than never. But for me, at the moment, Mike, the sequencing of this is already so so messy. We needed a huge ESIME support before the shutdowns. We needed ESTIME is convinced that they would get the house. They didn't lay off people. We're in the shutdown. We don't have the support that already laying off people we need to checks in a post yesterday. Those checks water a

couple of weeks away. Even if we get that past to day, hopefully we can get that quicker than that. But Mike, this is already really tough, and I'm wondering whether an economic shock has already become a credit crunch. We're there already, aren't we, Mike, Oh yeah, no doubt

about it. If you look at the commercial paper and high yield markets, we're seeing spreads there as of Friday of last week that we hadn't seen since the you know, the essentially the worst of the two thousand to two thousand seven, two thousand nine global financial crisis, and so what's happening now is expectations of collapsing nominal GDP and nominal incomes are feeding into the credit markets. So consider the Scott Sumner Market monitor is quote that nominal income

is the resources with which behave back debt. And so if you have an economic shock, demand shock, that can actually cause what looks like a credit crisis. So you know, so it's not you know, the credit markets are reflecting that in real time, but it's tied that huge collapse and inflation expectations. That's why it's important when you hear people say, oh, printing money. Yes, that's what you do here, right if you have a deflationary shock, you print money

and the risk is print enough. That was the O eight lesson. Let's not fail again, joining us worldwide and across this nation. Michael Dart of MKM Partners, Uh Michael as celebrity emails in from Coventry, England. Mrs Faraoh emails and it says more Euclidean geometry. We need it right now, Let's go I s l M right now. Michael Darted. The supply curve in this supply shock is shifted and many would suggest has become any elastic. How does the

supply shock shift back to normal supply? Well, Tom, I'll give you some So with the I s l M, I think we can think about this big shock to liquidity demand. Right, So, we were seeing real interest rates shoot up from the sixth of March until last Thursday, huge, over a hundred basis point move, you know, in in less than two weeks. That was even more forceful than what we were seeing in the dark days of oh eight. So that's like the l M curve shifting to the right.

Higher real rates and a reduction and output not what you want to see. So it looks like that might be starting to reverse it the margin. But back to what I where we started. If you tie the I s l M into the aggregate supply aggregate demand model, just a simple supply side shock should give you a contract you know, contrac action. But with inflation, that's what happens.

What we're dealing with here looks like a demand side shock, and that's why policymakers are are really going to be required to do things that are more permanent this time. If all of these actions are viewed as temporary, sure you'll put out the liquidity panic. But the risk is that the economy won't come back to full health. And you know, and that's really something that that we can avoid and that we should avoid. Michael Donna always great to get your thoughts. Shout out to the docks and

to the missus as well. Mike Data that m campotent as chief economist and Macros strategists. I would suggest the senator from Massachusetts would like to hear from the economists from Chicago. She's with Grant Thornton Diane Swack listening to Senator Warren uh this morning. Diane, the urgency is profound, and I want to go to the idea of the economic impact not in the big companies, but on the thousands of suppliers they have of you are in the

absolute crucible of that in Chicago. How beleaguered will the suppliers be in four weeks time. Well, it's important to remember they are already feeling pain in mid February as the supply disruptions coming out of China. We're compounding and so this is something kind of graph much like the infections that goes up on an exponential curve. And that's what's critical to remember is that the losses we're seeing UM. It's not just individuals. We need cash and money hands

of individuals, we need small business. But you have to deal with the whole economy, because that is where we're at. If you can only pass it for part of the economy now, then in two days pass up for the rest of the economy. But we need it hit on all sides. To blow to state and local government budgets is also extraordinary, and there on the precipice of having to deal with deep cuts at the state and local level as they're at the front lines of this crisis.

That's just not acceptable. And I sort of agree with Jonathan here is that you know, everyone's standing on their ideal ideological UM platforms is not helping us. We've got to shelve all of the ideology and help everyone. And we can't discriminate because the virus doesn't discriminate. We have to help on all sides, which is what the FET acknowledged today that you need to hit everyone. But the set is only on one aspect of the economy. Credit

markets and people don't want it. Small businesses don't want to take out loans they can't pay back, they don't want to take out loans to pay workers that they don't have anymore, and then have to pay it back if they don't have those workers anymore. Congress needs to get their arms around this and just act, even if it's just to get the first trunch out, get it out, get the second trunch out. We're talking days here, and they need to learn to vote remote because they're all

infecting each other too. Diane ats entering point there at the end, Diane, So we've over the weekend we've had a lot of the Wall Street banks come out with their GDP Outlook, where do you stand? How bad is Q two going to be? And will it be? How will there be recoveries in queues three and four? Um? I don't think there will be a recovery in three and four. In a curse, it's a moving target ross

sing on quicksand with little stability. And the way that the problem is the way that we do this, I mean I have almost to client from the banks of others are talking client. You can get all those numbers, um. And the problem is on unemployment you have a huge, certain precipitous drop in payrolls immediately, which we'll see in the unemployment claim so not everyone is is eligible for

unemployment insurance. You also have you know, when we start measuring unemployment, what does it mean when are you participating in the labor force if the whole economy is shut down and you can't look for a job, that could influence our unemployment rates. So you know, this is um I think that what we have is something you have to think of. In stages. There was the denial, the contagion, and now we're you know, into the part of dealing

with the pandemic, which is global in scope. And when we start to do with efforts of testing, tracking and trying to manage the focus our efforts more aggressively, I'm bringing up the economy that will be a slow process of ramp up and we don't get to The new economy we will emerge into will be different than the one we had before, because now pandemics are no longer just something you see in a horror movie. They are a reality. We have to manage every day and ensure

the health of our employees, our workers, and our customers. Dan, thank you so much, too short of visit will do something longer next time. Dane Swunk with Grant Thorn this morning. This is the Conversation of the day. Ben Layler is with Tara Hudson in London. He writes very short, very dense notes, and he usually has written them with a sense of optimism, a glass half full feel feel. Then I loved, loved, loved your note in the last twelve hours.

I believe it was where you really make a distinction between two thousand and eight and two thousand twenty, and you say, what's fascinating this time is you really don't want to be near the financials. You've got other places to go. Let's begin with that idea. Why are you avoiding financials? I think for a lot of reasons, you know, I think that there's a sort of the view out there. There's all about main Street, not about Wall Street. Certainly main Street leading it down, but um, there is a

transmission straight back into the financials. Yes, they've got you know, big capital buffers you know this time around, but they're still going to take quite a lot of pain here, I think, um fundamentally. Um, we've also written quite a lot about share buy backs. They've suspended show buy backs, which I don't think it's a huge surprise given the amount of support they're getting from the FED here, but they had a five percent share buy back yield last year.

They were some of the biggest buyers back of their own shares. That that's the key support that I think has gone to the whole market. But I think it's going to be especially keenly felt for financials. And and I also think we're in a world of obviously bonyals staying low for forever, and I think that's some you know, pretty difficult for financials. So I think there are, um, I think there are more attractive ways to play this

than uhother than financials. For sure. It's interesting ben looking and we've had a lot of economists come out from Wall Street with forecasts and you know, just some huge, huge declines in the second quarter. But thinking about Goldman Sacks, they have a clear V shaped outlook. You know, after a decline in GDP, U S GDP and Q two, they have gains significant double digit gains in Ques three and four. As you think about the market, how are

you thinking about how the economy will perform? Yeah, I mean, I think anyone that tells you they really know is is you know, it's been a little bit disingenuous you know, I think the base cases, uh that UM you've got you know, a V or a moderate u UM. But you know, I think the problem is I think there's two issues. I think one of the depth of that V and I think that's what's so important about this week. You know, we're going to get this terrible data on

the joblest side. We're gonna get this terrible pm MY data. And I think economists, really for the first time, we're

going to start putting hard numbers in those forecasts. We've only just begun to see those Q two trough numbers, whether it's GDP or EPs begin to come down, and I think I'm beginning to put some sort of more realistic numbers on That is really important in terms or it is a pretty requisite for us to sort of build a bottom here um, because I do think everything else is sort of beginning to fall into place a

little bit. I mean, the policy response is really beginning to accelerate, both on the monetary side and the fiscal side. And I think the technicals in terms of sentiment, in terms of how far we've fallen here um, is also capitulated. Ben they they're not in a technical basis, but on a fundamental or almost securities analysis basis, how do you dollar cost average into the barton that you can't see coming? How do you approach placing capital across the time continuum

of a barton that you can't see? Right? So I mean basically, you want to have that, um. You know, if I by looking back at all the corrections over the last thirty forty years, if you bought that average correction which was only minus, we're obviously down a lot more than that. Your twelve month return has averaged. Obviously we're down you know, an extra ten percent from there.

So I think that gives you quite a lot of potential buffer too, um uh to beginning to put capital to work at these levels I look at I can look at the sentiment capitulation as well. We have a sentiment index, which is levels that you've maybe only seen three or four times before over the last sort of twenty years. That tells a similar story. You buy in at these sorts of levels, your twelve month return is

is north. I think that gives you, um, you know, a fair amount of protection if markets continue to fall. Here there's somewhat of a buffer. Um And just to be clear, I'm not jumping in with sort of both feet here. All I'm saying is, I do think the risk reward is beginning to shift. I think people should be thinking about what to buy rather than rather than what to sell. You know, all positions are still fairly defensive, but I would be looking at those cyclical recovery traits.

Stop producing that sort of that that cyclical by list. At this point, Bed Layler, thank you so much. Not enough times for Tower Hudson. Well, he's just been wonderful with us here in the last number of weeks. 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. I'm Bloomberg Radio