Surveillance: Expansionary Programs With Kocherlakota

missoo O doing granular work on oil. Paul, just just simply to your research note for this weekend and to Monday, what part of this collapse are you most focused on. Well, we're obviously following the end of the lockdown, but as you know, some of the data, for example out of Japan is headed in the wrong direction completely. But as you know, the overall problem here is a demand one and generally or less, as you also note on focus

far too much on the supply side. The fact is that demand here is is so low relative to anything we've previously seen before. It's just a major major problem managing the market. That's why we've seen negative prices. It's a physical challenge to manage the market and that's manifesting itself very clearly in the tape, Paul, are we going to see negative prices again on the June contract? It depends if people are dumb enough to get caught again.

I think once you do go into that negative situation um where you know you've got to get out for any price in order to avoid taking delivery of the crude, you could notionally go to any kind of price, you know, sort of day before. I think what happened here wasn't so much the USO. It was more c T a S. Commodity trade advisors who have to get out the day before settlement and not allowed to hold a physical position, And I think they were probably the sellers that caused

us to go to minus forty. Once you break loose into that sort of territory, obviously you can go just about anywhere. It's not if you like a totally real price, but it's certainly showing you that there's a massive problem with managing oil physically at the moment. I'll try carefully here, really carefully if I can. But some people in the all patch are obviously very unhappy with the price action.

Continental Resources Harold Ham came out and asked for a probe into what he thinks suggests might be manipulation in

the commodity market. Paul, it made me wander and I asked this question with the greatest respect for anyone working in the industry industry, but whether any of these owners of say Continental and others too have had the reality check about what's about to happen and the support that they may or may not get from the government, well, I think they would definitely slow to recognize the scale of the problem. I wouldn't single out any particular name

for this. I think the industry in general couldn't quite believe what was happening. Obviously, it was an incredibly quick event. I mean we went from sailing along fairly normal at sixty dollars a barrel on the first of the year to a total and after collapse within three months. That occurred over the course of about two weeks, so I'm not surprised they were they were called short. However, you know, very early we were calling for negative prices seeing how

bad the problem would be. And I'm surprised, for example, someone like Concho Phillips it was quite slow to cut. I mean, they've got there now, but it was it was not as quick a response as we expected from the industry given the severity of the downturn. I think that we have been a bit negatively surprised by how slow it seems it's going to going to be to get out of this unfortunately. Um and that you know, I'm sympathetic obviously, it's a very difficult situation to manage.

I think, just to build on that point, there also was a probe by the CFTC into other trading that was revealed yesterday by Bloomberg and possible manipulation. And there's a real question here how much was some of the turmoil stemming from people with advanced knowledge of negotiations out of Russia, etcetera, versus a lack of an awareness of the reality or perhaps denial of the reality that's still

is being denied to this day. Well, you know, that's the crazy thing about the whole situation with with OPEC is that there's really no limitation on insider trading. I mean, I guess the CFTC can try and go after people, but the reality is this is an active cartel that's trying to manipulate the market. And also, Paul, just reflect on if anyone that's ever been to Vienna or spoken to someone that's been to Vienna and watched how this

meeting operates. The idea that some information slipped through the cracks, I mean, come on, it doesn't surprise me at all. I would say that it's an active competition to be first to give the inside information. But you know that's the wild west of the oil market, and you know, the regulator I think, can yell at the Russians or the or the Satis or whoever. I'm not tingling anyone else across the board an active attempt to manipulate the market.

I mean it's quite open, Paul. There ever was a four masure, This is it, and I get to a sovereign, Well, it's funnesced to take its lumps and move on. What does Saudi Arabia do, What does Kuwait do? What does Nigeria do? How do they affect a force masure in

their core economy? Well, I think you can see clearly what's happening strategically through the Saudi official selling prices right and what we saw here, interestingly, I think very much post the President Trump's President Trump's intervention was that prices were raised by Saudi Arabia to the US to reduce their sales to the US, but at the same time they maintained a very aggressive pricing into Asia, which by the way, the next day was matched, if not undercut,

by Iraq, where I think one of the big tensions in the market today is the Saudi versus Iraq uh stroke Iran price competition into Asia, which is very interesting in terms of what they can actually do that that's been a major question, and this is very you know, I've taken the OPEC meeting was it's it's very much rearranging deck chairs on the Titanic insofar as you're going to have to cut whether you like it or not.

A very good example being Nigeria tom where they've just simply been able to unable to sell their all because there's no market and m and that's obviously what we saw with the negative price as well. It's it's just an epic challenge because as you know, the ord industry is efficient and it runs with relatively low inventory. This just surpasses any capacity to actually manage the oil shorts

of shutting down production. The Saudis are in good shape in that regard because they're so heavily invested with such a sophisticated oil system that they can just turn a volume knob and change their production. Others, you know, such as Nigeria and such as produced in the Permian, they're going to find it more difficult to do an orderly shut there. What price does the cartel need to break even out a fiscal basis just the stability of their governments?

What price do they need on a ended basis? That's fairly well reported by the I M. F. Tom. So you'll see about seventy two eighty for sauity, about forty to fifty for Russia. I read a hundred and fifty for Algeria. You know, one of the one of the amusing conceptual things I've highlighted is what do you think to break even is? For the US Government's probably about a thousand dollars a barrel based on the current epit. But but now in all seriousness there's an issue there.

Of course, the Saudis will tell you they have the capacity to raise death um, you know, so they can run at a depthosit obviously, and as you know that cash brain even as closer to ten dollars a barrel,

they can get along. Since I'm hugely stabilizing. I mean, this is going to really cause problems in many places, and I think Russia is probably the most interesting, you know, in terms of the difficulties they're going to face financially, there are and obviously as another major candidate for serious prominence. Let's do this again, Paul, thank you, thank you. Someone

from the zoo just really really appreciate it. Right now, you'd like to digress over to the equity market, John, Lisa and I all looked at our one on one case and said, let's get somebody on who can give us confidence forward. Sevida Supermannian advises for the Bank of America, where she's had of equity and quantitative strategy as well. Sevina, what is the quantitative observation right now? What is the mathiness right now you're focused on? Yeah, no, it's a

great question. So I think there's a couple of things going on. I think from a stock perspective, what we're noticing is that the dispersion of stocks has actually increased

to close to record levels. So what this means is that stocks are behaving very very differently from one another um, which suggests that there's UM increasing alpha to be made or increasing performance money to be made um from stock selection rather than just buying or selling the market, or buying or selling sectors or broad slabs uh um of companies.

So I think this is a different environment from what we've been in for for you know, the bulk of this bull market, where stocks have been very correlated and um and have behaved very similarly. Uh So I think that's one trend that's that's very different. And then I think the thing that's worth pointing out is it for

equity investors, time is actually the best barbitrage opportunity. And what I mean is if if you just extend your time horizon on US equities, there's a very unique characteristic of stocks where you know, if you look at tenure returns of U S stocks, they have very rarely been negative less than four percent of the time, which compares very favorably to commodities, which you know, commodities returns have

been negative of the time over ten your periods. So I think that the key here is pick stocks and extend one's time horizons. Because obviously we're in a rough patch right now. Okay, let's say I do that, extend the time horizon. And then as you a pretty basic question,

do I need to pay attention to earning season? You know, I think earning season is important in the short term, and and again, you know, I think that's what's driving the dispersion between stocks, is that we're seeing, you know, even within consumer staples, some companies are doing better than others depending on what their retail channels are. Um. You know, if you sell outside of the grocery store, you're not doing as well. If you sell in a grocery store,

you're doing well. So I think that there are definitely, um, you know, kind of themes that were that we're seeing across earning season. But but you know, I think that even earning season is relatively opaque, so very few companies

are actually offering forward guidance. In fact, the bulk of companies have just stopped talking about earnings guidance for the year because we are in a little bit of a um, you know, kind of an opaque period in terms of how long this business shutdown last um, you know, kind of what what the what the impact is going to

be on earnings. So, you know, I think the earning season is important in terms of picking stocks, But I actually don't see it as giving us much of a guide for how to navigate the next few few quarters. How much is buying stocks here a bet on the

Federal Reserve back stopping the market? Yeah, I mean I I personally think that that upside is in the market because we've essentially heard say they're going to buy almost anything, and um, you know, they're they're buying as the classes that they had previously never touched, like high yield bonds. So I think that that the good news from the set is our in the stocks and they've provided a

backstop against a major liquidity meltdown. But from here, I think the real bet that we're making in buying or selling stocks is that the crisis is contained within let's call it the first half, and that this is a short, kind of a sharp economic recession with either a V or a you know, kind of a reasonable U shaped recovery. Um. I don't think what's priced in is uh, you know, a double U shaped recovery if you will, or you know, another um onset of COVID nineteen later in the year. Um,

So I think that would be downside risk. And I also think that the market is actually discounting at this point a relatively aggressive recovery on it. On the economic front, I mean, what worries me is that the pe ratio of the SMP five is right back up to its February peak levels because earnings have come down but prices are still relatively high. Um So, I think that that's the risk, is that that a lot of the good policy news is likely to be in the market. Savina.

I'm struggling to understand. If everybody is looking past earnings and past the horrible and getting worse economic data, do these jobless claims that we're all focused on matter. Yeah. I mean, I think employment has historically been a lagging indicator, so, you know, and I think that again we we kind of are forecasting us fairly uh employment scenario. I think our economists are forecasting tem percent unemployment by the end

of the year. Um So, so I think that employment will while it does, you know, kind of points to newer term stresses, doesn't necessarily impact normalized earnings as much. I think what it does show, though, is that there might be a reticence amongst consumers coming out of this to you know, return to buying big ticket items or even home home home purchases UM. Given that that consumer competence has seen such an extreme shock cevida, how does

MidCap and small cap resolve itself? Is it through combinations? Is it how do they jump start their entrepreneurial you know, the pulse the process. Yeah, yeah, it's a great question. I think small caps, I mean, I think we will will be likely to see consolidations given how cheap small caps are today. I mean, the sector is treating at the low recessionary levels UM and the gap between large and small is the widest we've seen and you know,

in in multiple decades. So I think that this is a This is an environment where large companies can buy smaller traps stocks for up for a song. I think the real risk though, for smaller companies is whether they survive this UM this downturn, because as you know, smaller companies are much more GDP sensitive, so you know, large caps have a lot more um you know, kind of staying power. Uh. But I think that that's the risk for the overall assets. Are you are you predicting whether

the storm are you predicting a roll up phase? I mean there was a period what twenty years ago where you know, we rolled up the specialty chemical industry over three cups of coffee on the July weekend. I mean, is that what we're heading for? I mean, I think we couldn't see that. We could see more heavy M and A activity once we get a little bit more clarity on on the length of this downturn. Um. But I think that these large and small right now are

just boarding cash. They're not doing anything. They're suspending buy backs, you know, some of them are suspending dividends, and companies seem to be very very conservative in terms of cash and capital allocation. But I think if we get to a point where there's a little bit more clarity on how long this fall lasts and whether it's you know, there's potential to contain this crisis, that's when you start

to see the consolidation. But I was embolish on on an M and A cycle um sometimes exact Sevida, thank you so much, Savida Superbanian with the Bank of America.

Right now, the former president of the Minnieapples Fed at Rochester, Nariannicata Lakota, joins us, Professor, I want to go right away to the mathiness of your work, and that is that so much of our belief and research is based on smooth curves on glide pass odd models that are comfortable and at times some would even say elegant or beautiful. We've just had the mother of all jump conditions, exogenous shocks. How does that change your belief in models? Hi, Tom,

thanks for having me on. I think models are still very useful for trying to organize your thinking about what you're you're likely appropriate responses to to to economic conditions. Obviously, this was an event that was not forecast by economists, but now once we're in the event, I think that modeling and can help you with framing what how to think about what should be done. And I think it's been helpful for my former colleagues in the Federal Reserve as they as they try to try to figure out

what to do next. One thing that they have done is being incredibly aggressive, and for the most part, people have cheered them. American confidence in the FEDS leadership right now is the highest since a green Span era. If you take a look at the latest Gallop poll, I'm wondering they're going forward about the to say, the politicization of the Federal Reserve based on some of the fiscal stimulus type of efforts they've been doing. What's your expectation. Yeah,

I think that's a great questions. I think that, Um, what we've seen in this recession. UM, I'm gonna call it that because I think go to we're in is that there's been a lot of coordination between Treasury and the FED and implicit coordination between Congress and the Fed. UM. So, for example of that is set up a facility whereby they're going to be willing to lend directly to corporations. That's basically they're using their ability to create government liabilities money, uh,

in order to finance a physical intervention by Congress. I suspect we're going to see a lot more of that as we go forward. Um, it's clear that the American public is comfortable with this, it's or that Congress is comfortable with it. Um, it's clear the FED is comfortable with it. What that's going to mean I think in terms of politalization, you know, it's I think that's a good question. I I worry about that certainly. How do you get the genie back in the bottle? We asked

Vice Chairman Clara to this question. And many others have been asked the same question down there, out there somewhere, I get, would you just let the debt run out? Or or do you find a way to actually do what many would say as responsible and just pull it

in a little bit. I think that, uh, it's very difficult to put the genie back in the bottle unless people perceive a cost to having all this debt um As long as interest rates remain low, as long as inflation remains low, I think that you're going to see Congress and the FED continue to feel comfortable with with

with these kinds of expansiony programs. Professor, you could argue that if the Fed's balance she gets to twelve twilli in the near term, which isn't a crazy estimate, that it won't matter if borrowing costs from beIN low to your point, and if everything just keeps chucking along, that they'll look like the hero. So why would they become a more political body at that point? I think the issue is that what is the role of FED in

terms of fighting fighting recessions? The traditional role for the FED is simply, Uh, procession comes along, We're gonna cut interest rates if we see inflation on the horizon, we raise interest rates. That's a pretty simple technocratic position. Now, I think the FED is in the business of Okay, which kind of program should we be financing for Congress? Well, that's a that's a much more political kind of job. And I think the issue is whether or not we

want a group of as as Americans. We want a group of unelected technocrats to to have that have that power. As you say, right now, they're the heroes. But I I think that this is uh creates risk for the institution going down the road. Certainly, That's why I wanted to go there. This is so important, Professor CATCHA Dakota. Is the risk to the institution? What is your action plan for Chairman Powell now as a former member of the institution to maintain the integrity of the FED? What

does he need? Does he need to get out of the speaking circuit, or does he need to, you know, do the Today Show. What's what's his best practice? Well? I don't think I need to give any advice to to uh uh to cheer Powell about to handle pup. He's done a fantastic job, I think in terms of communicating about what the FED is doing. Why it's doing it.

Um I think that's one of the most striking differences I see between where the FED is today as opposed to where it was in two thousand and eight, where it was also doing I think, things to save the US economy, but not communicating as effectively as as Powell has done. Um. No, I think it's really this question that that you asked about, how do you get the

genie back in the bottle? You can't do it in in May, but I think you have to be some thinking what are guidelines for using thirteen three going four? You know this this uh clause in the Federals are back that seems to say, well, the fake can do anything it wants too, as long as your country sectory signs on yeah, this is This has been wonderful, professor, Thank you so much. Snaria the Cutchler Code of Folks, the former president of the Many atmos feer now at

the University of Rochester. We want to continue our discussions now on what we're all experiencing with this pandemic and just so many that is the doctors and indeed the nurses on the front lines. I spoke today with Jason Farley. He's Johns Hopkins University in their Department of Nursing, and the professor is truly expert on infectious diseases. Here is Professor Farley right now. The vaccine studies are and looking

at what we call faith on vaccine studies. The type of studies are really looking at the safety um and whether whether or not we actually see a response, So it does the mean system respond to the vaccine, So that's not testing epicac and meaning is it effective at preventing the virus from occurring if we have the vaccine? So those studies come next, and really importantly that will That's why we're continuing to project timelines of at least twelve,

if not eighteen months UM away. Dr Farley, the raging debate this morning is in your wheelhouse. You are one of the nation's experts on Staphylococcus aureus methicillin in all the resistancies and hospitals. The arch fear of medical experts is a secondary bout of this virus down the road. Explain the likelihood and how it will demonstrate if we get a virus come September or December or been into

two thousand one. Yes, certainly, well we're looking at estimates of antibody right now that are that are emerging that suggests that five cent of the population, for example, the data out of Seattle and the Washington State that suggests that five percent of the population may have been exposed and recovered. So the first question obviously it does those antibodies being recovered from lead to any form of attenuation

or protection in the future. The second question is is if that's so, that still leaves of the population to what we would say are immunologically naive, meaning no prior

exposure and recovery. So, in other words, if if we roll back social distancing too fast, we continue to propagate virus in the community, that then subsequently leads us into the season of cold and flu, which is you know, like you said, September and on in the United States, at least in in in the northern hemisphere that that timeline.

Then we also get other respiratory viruses we emerge being such as influenza, and it complicates our scenario, as we mentioned by the CDC director Robert Redfield, because then clinicians are conceding a patient with respiratory symptoms and scratching their heads saying well, is this flu? Is this coronavirus? Is this you know, anotherblem with that become. We know how to treat flu obviously, we know how to diagnose it. We know how to prevent complications in most circumstances, not

all UM. Yet transmission UM parameters and dynamics do affect the way we may respond. So again we're we're concerned about co occurring respiratory viruses in the same season, which will complicate the things making and we it's not exactly that we don't anticipate coronavirus to return during the fall. We absolutely expect a second wave of infection UM to occur. We've already seen it around the world in various sights.

That has to be emerged UM from Jason Farley with Johns Hopkins University, their professor of nursing, just fascinating there on his wheelhouse infectious disease as well. Turning our attention now to Washington, d C. And the debate over immigration, the President Donald Trump signing an executive order just yesterday to temporarily curb the issuing of new green cards for would be permanent residents in the United States, and Tom with the labor market heading the way it is, I

imagine this is just the beginning. I would suggest the professionals I speak to on this are absolutely stunned at the action. They don't have a strong opinion about it, you know, the actual what we're gonna see the next couple of weeks, but they are stunned by the action here. John Lieber joins us, would you raise your group to

uh cover the territory here? John just very simply on immigration and the president's desire here over six zero sixty days, how many American jobs will he protect in that time? Very few? I mean, I think this is not necessarily about protecting jobs immediately. I think this is more about setting up the dynamic and setting up the immigration issue to create a contrast with Joe Biden for the election in the fall. Immigration is basically shut down in the country.

They're not processing these applications, are not processing green cards. There's exemptions in here for temporary workers. Um, they didn't cover the each one B program. I mean, there's just a lot dis order doesn't do. And it's only for sixty days. So at the end of the sixty days, you know, they got to look at it again and say, are we going to extend this or is this worth fighting for? So that's where we are, sixty one days out. What would you suggest happens. I think that they're probably

going to extend this. I think that the president if you look at the grouch that typically support immigration restrictions, they've been used warm on the president's announcement um. But I think the president also has a business instituency to think about folks who need these immigrant workers and rely on them, especially in the agriculture of sector. But you know, to the accept this is readily for the political base, you've got to think that they're going to find a

way to make this last longer than sixty days. Perhaps, John Lieber, I'm sorry, we're living this every day. They exempted medical workers, agricultural workers, and radio presenters from what I think. It's just great how they did that, and then for full transparency, just so the audience does know

this is a process I'm going through. So I won't be offering a judgment on this particular policy, just as an observation, though, John, you can see how this is going to be a huge focal point ahead of a little bit later this morning, we'll have an extra four point five million dollar jobless claims four point five million jobless claims according to the estimate, that would take us

to near twenty five million in five weeks. This is going to be a big debate, and I just want to jomp from your perspective because you've got to read the political tea leaves. This is how the president is setting himself up for November. Does he manage to bring the left with him? Did the left come in on this topic or do they go south of the otherwise? I think if you look at Joe Biden's immigration plan, um, it's a lot like Barack Obama's immigration plan, but even

more liberal. We think that you've got the possibility of um uh amnesty for workers that are already here, the possibility of more workers coming in under the plan. So I think that where the Democratic Party is is certainly far to the left of President Trump. But you're right, this is a sensitive issue and in times of high unemployment, the issue the issue immigration is going to be politically charged.

So I think the president the President did this because he understands this is an issue that excites as voters, and you know they're fighting over the same voters in a couple of key battleground states in November. So but but where the Democratic Party is not, where President Trump is, that they're going to have to oppose this. We'll find some you know, say, therefore, some sensible policies that would

allow immigrants to come in where needed, or something like that. John, I was struck as I was researching this issue last night. I was struck by the pushback the President Trump is getting within the further right parts of the Republican Party, basically saying this doesn't go far enough by any stretch of the imagination that if it is going to be extended, it would have to be increased, and all of the

exemptions render it basically toothless. How moderate is this on some levels within the framework of the Republican range of President Trump. I mean, the reality is that the greatest cure if you don't like immigration, the best cure for too many immigrants coming to your country is a higher employment rate, because that's what draws people to this country. So you're going to see immigration numbers dropped dramatically throughout the course of this year at the job market collasses.

In terms of how moderate and extreme this composal is, I mean, it's you know, we don't usually ban green card for people, so I'd say it's a fairly extreme, but it's not nearly as far as some of his kind of principle organized supporters want to see, which is why I think that going down the road, you know, this all came together pretty fast over the course of forty eight hours. You may see this expanded in consultations with business leaders and heavily affected groups, and of course

the Trump campaign. M Johnny Leavir, thank you so much with your ratio group today on this important political issue. 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.