Surveillance: Market Plunge With El-Erian

equity market was hitting all time highs. A gentleman who said, do not buy that deep when many people ventured back in as we got that initial correction, I'm pleased to say he joins us now. Mohammad al Arian, Alliance chief economic advisor and Bloomberg opinion columnist. Mohammed, Let's begin with credit. Why is that so much of a bigger focus on a morning like this morning, Because it is the way in which the disruptions will transmit who are not just

market segments, but the real economy. Credit has been vulnerable because it has been very decoupled from the underlying fundamentals. So when you shock it, as it's being shocked right now by a combination of no economic anchor, no technical anchor, and no policy anchor. What you're going to get is a liquidity price gapping and the closure of the primary issuance market. The primary has been seized that for a couple of weeks. It opened a little bit last week.

Let's some pick some of these different themes. I want to start with the parallel that we can draw at the moment. Clearly we've gone beyond December. It's fifteen sixteen, the last time we had a crude route and a growth shark. Is that a decent playbook for you right now, Mohammed? Or is this radically different? It is decent because that fall in oil prices was triggered by the same thing that this one was, which is the decision of Saudi Arabia to no longer play the swing producer role in

an attempt to imposet discipline on other oil producers. So the cause is the same. However, the context is more difficult, first because global demand is slipping very quickly, and second because now you need to Russia two turn around in a very humiliating fashion. So this one is going to be a little bit trickier for Saudi Arabia to achieve what is trying to achieve Muhamadalarian with his folks with aliens, and of course writing for Bloomberg Opinion, of course joining

Cambridge University here in the Autumn Folks. One of the books you can read in this if you want to grab onto something is Dr Larian is The Only Game in Town. Look for the movie fourth of July two thousand twenty two. I believe Dicaprios in that movie Dr Larian in the Only Game in Town. Let me quote

from chapter one. Like ancient doctors who tried to explain the causes of diseases while knowing nothing about germs or acteria, academics sought to describe the functioning of developed economies, etcetera. The great Ferdinando Giuliano who writes for Bloomberg Opinion as well. How are we doing with the germs and bacteria this morning? How are our institutions doing and understanding where we are? But I'm starting to wake up to where we are? Um,

But they are having to play massive catch up. Tom, You and I have been discussing this for years. We've overrelied on central banks. Central banks themselves got caught hostage by markets. We lost a lot of policy flexibility, and most importantly, we did not invest in what genuinely produces economic growth, so we have massive catch up to play. It might be done, but it requires a complete change

in mindset. The single most important question Dr Larion at Davos was John Faraoh to a guy running a hedge fund, and he said, the sickle the cycles out there, the boom bus don't function the same at zero bound. We're more at the zero bound than we were in January. In Switzerland, we're at the zero bound. Does a cyc locality of the financial system still work? Oh? Absolutely, and you're gonna see it. We're gonna overshoot on the way

down because technicals are now in control. And the big risk is not only do we converge quickly to the most sluggish fundamentals from elevated asset prises, but we overshoot them so well. Cycles were never dead. I think we got complacent in so many ways, And the last eight weeks illustrate to you how complacent we became. You had that comments out of Davos. We had a G twenty meeting in which the coronavirus was hardly discussed. And now we're all waking up to the realities on the ground.

Can we just talk about the economics affair just very quickly, Mahabted's something you've written about over the weekend, and I think it's something that would be of interest to our audience as well. Walk us through that dynamic. It's very simple. When you are taking out of your comfort zone, behavioral scientists will tell you two reactions are most likely paralysis

and insecurity. And we are being taken out of our comfort zone by the coronavirus, which means that we are paralyzed in terms of economic activity, which means we become so insecure that we become two risker verse. We exaggerate the probability of getting sick, and that results in demand and supply destruction. I remember where the outset of this coronavirus sphere. I told you guys on the radio, and I remember exactly where I was. I was at an

airport when I told you. Remember the notion of economic sudden stops. It doesn't occur in modern based economies. It occurs mostly in fragile and sales states. But when it occurs, it is particularly dangerous because it destroys both demand and

supply and that is what we're living through right now. Mohammed, Let's talk about the salve to that culture of fear, that fear that we see pervading through markets, that we see when you go to the grocery store and you see pure l being hoarded behind the counter with a sign that says only three per customer. I want to

talk about the FEDS role and Boston Feds. Rose and Gren on Friday came out and hinted at the potential for the FED to engage in e c B and Bank of Japan style asset purchases, saying, in a situation where both short term interest rates conten your treasury rates approach the zero lower bound, allowing the FED to purchase a broader range of assets could be important. Do you foresee the possibility of the FED buying corporate bonds and stocks?

From here? I foresee whatever it takes policy approach that is gonna be both in central banks and government agency. But having said that, it's important to understand what the FET can and cannot do. The set can support balance feets. It can do so, it can put money in people's hands and support balances. It cannot restore the type of confidence needed for economic activity to pick up. So the FED has to understand that it's using policy ammunition in a very ineffective way, and it's got to make a

judgment as to when to use it. I was against the fifty basis point cut last week. I thought it would do nothing at all and it would take away policy flexibility. That's what happened. The most important thing for the said and this major responsibility to the system is to laser like focus on market market functioning, understand how markets are functioning, better understand market technicals, and address the pockets of liquidity that are going to arise and that

risk becoming systemic. That is what the fact you're doing. It should not be trying to flood the system in a way that's gonna end up being very inefficient and use up flexibility that we will need. Eater on Muhamdalarian with us and he will continue with this in moments. Will have in a couple of minutes, I should say, scheduled to Francisco, blanche a Bank of America and oil done.

What is at a general state, but that's the moving crude, but the move in future obviously we're limited down so we can get you an early read on the SMP five hundred through the spider SMP five ETF, and we are now session lows down a little more than seven percentage points. I'd also know the German two year as well. Point nine seven five is one of those global litmus paper thirty year bond a little better in the last twenty minutes. Why don't you pick it up, John and

Dr Man. Many people today, of course, will draw parallels between now and two thousand and eight, and obviously for many people we are nowhere near that situation. It was a different world. But you just as concerned about corporate bannon sheets as you were about the household balad sheet back then. I'm no drawn. I mean, ironically, this is

not two thousand and eight, which is both good and bad. Um, It's not two thousand and eight in a good sense because I'm not worried about the bank, and therefore I'm not worried about the payments and settlement system. Remember, the payments and settlement system is the nerve center of any modern based market economy. If that is no longer functioning, everything will stop. And that was the reality of two thousand and eight. So there's a good way that we're

not similar to two thousand and eight. But there's another way we're not similar to two thousand and eight, which I worried about, the extent of global policy coordination is much lower. And whether it's the coronavirus, whether the whether it's the excessive reliance on liquidity, whether it is markets that have been miss priced for a long time, this

is a global problem that requires collective actions. So the bad thing really to through thousand and eight is that we're not going to get a London summit quickly that will allow to put an economic bottoming. We need advances on the medical side, and that's going to require a lot better global coordination. Mohammed. When does the sell off that we're expecting to deepen in the high old bond market in credit markets more broadly, when does it become

a buying opportunity when you get distressed levels. So I'm excited in a sense that as much as the next as the immediate peered ahead is going to be very treacherous, as much as that we are going to have massive opportunities. But understand where these opportunities are going to arise, They're not going to arise by buying a passive index and just betting on the whole marketplace. It's going to be

very selective. It's going to be in distressed credit, it's going to be instructured credit, it's going to be in relative value, and it's going to be in good companies with strong balance sheets, high cash that are trading at bargain prices. That is where the opportunities are going to arise.

It's going to start selectively, and then when when we start seeing high probability of medical advances to contain the spread of the virus, an increase immunities, vaccine, then we're going to establish a bottom for the more general interesting through in the index. By mommed before we let you go. Just the final question. Tom brought up your book The Only Game in Town, And I know you were running up a new addition and I was looking forward to it coming out later this year. Do you need to

rewrite the start all over again and get back to it. Yeah, you know, it's a pain because the book is coming out in just a few weeks. And the reason why I wanted to bring it out because when it came out in sixteen it was too early. My timing was way too early. People didn't realize what happens when you rely excessively on central banks, that we were planting many seeds of future economic and financial malaise. So so that's why I wanted to bring it out again. Um, when

people have realized that that's where we are. But the coroner virus pressed fast forward on everything. Mamma got to catch up with you and looking forward to the release in a couple of weeks time. I hammad all are in the alliance is chiefly can advise and Bloomberg opinion columnist on the road ahead. Do you want to guess on the phone, I'm pleased to say, is Francisco Blanche Bank for America the lower head of commodities and derivatives research.

What a pleasure privilege to have Francisco with us on the show in the morning, like this morning. Francisco, let's talk about the potential the Opeque glass together with Russia. You can get back together at some point in the near future and strike a deal. Um, hey, John, thanks for having me on the show. Um, I'm not sure. Um, I'm not sure if they'll they'll come in and have a deal anytime soon, because it's not clear what the

russianale behind this last move has been um. I think the Russians were very reluctant to cut the supply uh to begin with, to deal with this virus UM. They made their position very clear to the Sudies. The Sudies, um, I wanted to kind a million a half barrel today are supplied. That's the proposal to Helen Table last week.

And ultimately that either the talks broke down, which is what possibility, or maybe the Russians uh swaite houses and convince them that maybe you know, it's also about to let the market running course and and ultimately clean up the US shell sector. Uh. That both have been wanting to do it for a while, and I guess this is the opportunity has ever I see in all the research knows this morning from the sophisticates like yourself, Francisco,

everybody's talking about hedge exposure. Forget about like Russia loses, somebody wins, Brazil loses whatever that kind of macro maologna is. Explain the hedge exposure right now? Who loses the most when you see a twenty move in something that's supposed to be certain? Well, uh, I mean I think I think the people that will probably end up listening a lot this is those that have hedging mismatches. So there could be trading houses UM, traders, UH, potentially some some

broken dealers have exposure to this. UM. The principal exposure that is not if you're a broker, which if you're a broke dealer, UM and UM, and it could also be I mean and and Frankly, the biggest losers are going to be the oil companies themselves that have not hedged. And remember a lot of companies were underheaded because at the end of last year we had something called the Phase one US China trade deal, which was supposed to put the global economy back on track. We were supposed

to see a restocking cycle of manufactured goods. We were supposed to see a stronger economy. And I think a lot of people may have actually just lightened up on their hedging heading into the first half, which which and those are the ones that are gonna be heard the most. Now,

who benefits UM, I think it's gonna be consumers benefiting here. Obviously, consumers in many parts of the world are are not really traveling that much because of the coronavirus but if you are able to travel, you're going to get a pretty good deal with with the drop in fuel prices that we're saying right now. Francisco, I'm looking right now at the cash bond market, the high yield bond market, which actually opened it eight on Wall Street, and we're

seeing just some violent moves in the shale debt. We're looking at forty moves lower, huge, huge kinds of shifts, And I'm wondering going forward, is this going to reshape the shale industry profoundly and actually curtail production in the US for the longer term. Um So, I think the answer to those questions, both of those questions is yes, we will see a car talent of production and we will see a profound impact on the industry. Remember, this

industry has been already UM hit in all fronts. During the industry, UH probably wasted about a hundred dollars of investor money, both in terms of equity and debt issuance, So very few investors actually want to own any any

energy to begin with. Um And I think this this last low is going to hurt the particularly the levered players, the smaller players, those you mentioned high yield remember high yields UH characterized not only because it has a wider differential to investment great debt, but also because has shorter maturity. Um So, a lot of this death is due in the next twelve eighteen months, and that's that's gonna that's

gonna come to the front. And then the other thing that's gonna happen is banks are probably gonna look at their reserve based lending practices and reduced the money that they land um that they lend the the the oil and gas developers against their assets. So so we're gonna see a very meaningful reduction in capital right to where we were a month ago, which was already pretty bad. RecA San Francisco, just to jump in with, we're exploring different parallels. Just give me a snapshot of where we

are right now. The supply demand dynamic just quite simply compared to where we were in fifteen sixteen when we saw these kind of things plank out, Now in days similar worse. What is it right now? Um So, So, I think from a demand standpoint, this is definitely way worse. We're going to see a global demand construction this year, most likely for oil and UH, and we haven't seen

one since put us on eighth plus and nine. So in terms of demand, it looks a little more like eight or nine than definitely on it does like fifteen and sixteen. From a supply standpoint, it's unclear how much this audis are going to be ramping up supplies here. Um, they've aggressively is counted their crewed and uh, and there is talk about South increasing production over ten million barrells

a day, maybe over eleven million dollars a day. There's different numbers they're throwing around, but but you know, definitely, Uh, it's going to be it's going to be almost just as battles fifteen sixteen. It's almost in a way it is a combination of eight and fifteen and sixteen pretty bad for oil prices. That's when we think we could

go back into the twenties year for brand. What is the ramifications going back into the twenties for brand and the equivalent seated West Texas Intermediate For America's will independence do we sacrifice that is Permian Basin shuts down? Um, well, we will definitely see a pullback in in supplies, and uh, it will hurt American's energy independence. But here's the good news. We know we can create America's energy independence again at prices of forty forty five floors barrel, which are still

very very good for consumers. So um. While as while as I'm certainly concerned about the industry and certainly concerned about the potential fallout of this move, I will also say that that that if prices were to rise lords barrel, we will get the industry back back up and running. So so I think, I mean, I think that it's, um, it's definitely gonna be a blow against the U S energy independence story. Um, But but it's the blow that

is is manageable for consumers. Um. The question we have to ask ourselves is going to be a big blow to some states in particular like Texas and Oklahoma. Who was the last time or do they have a more diversity of economy and they can hand a little better. So that's that's I think a big, big question mark out there. This has been wonderful. Franstance, good Burns, thank you so much, greatly greatly appreciated with Bank of America. Let's bring a John Raith show, UBS, head of UK

rate Strategy, joined us on the phone. John fantastic to have you with us. I was up waiting for the bond market to open up last night and just wow to see the long end come in forty three basis points and dropped like a stone beneath one percent your first stage, John, I mean, this is just a colossal flight to safety going on everywhere. Um. We haven't seen anything like this, of course in the past, and um,

and the reasons are well understood. You know, we're seeing a perfect storm essentially, which is forcing huge waves of money into the bond markets. Front end yields now everywhere, um, sort of crashing down towards zero or even well but low in certain markets. And as a result, money now sort of flooding further down those yeel curves as as you know, investors run for cover. So that's you know, everything going into the bond markets and pushing these yields

to unprecedented levels. John, Lisa and I have been talking about what we're modeling in the bond market. What are we modeling now, zero race on FED funds, recession perhaps inevitably, what are we talking about now? Yeah, I mean we're we're rapidly heading there. Certainly if you look at the sid funds features. John, You know, you can see that the markets anticipating the rate getting very close to zero in in fairly short order, as it is um in

the UK. Clearly in the Eurozone we're already well into negative territory and markets expecting to go deeper into that. I think one thing that's different. You know, we have seen short yields at these levels in the past. If you look at see your treasuries for example, for all the sort of headlong fall, we're still fifteen basis points or so above the levels we got to back in sort of two thousand and eleven UM. What's different is these long yields. They've never been down at these levels um.

And it is a sign that the markets think, essentially it's going to take even longer for any sort of recovery to build, and so people are happy to buy longer bonds at these levels as well. John, What does your world tell central bankers? Just very simply, if we impute deflation in disinflation is suggests they're far far behind. What does it tell them? And can we see central

bank action this morning? I mean, it's it's certainly possible, Tom, But I think what it tells them, or rather what they'll use the market moves more precisely to tell fiscal authorities is that they have done or are expected to do, in the case of those who haven't already reached the zero lower bound, everything in their power. You know, they will cut raps to the floor if if they haven't already,

they will engage in more asset purchases. But when yields are at these levels, it's telling you, I think that they have run out of road, or that they don't have tools which are going to materially change the trajectory here. Therefore, the focus needs to turn to governments and the ability of fiscal the seed to try and um well at this stage, pushing the expected impact on demand, and then try and sort of lift these economies and get them

moving forward again. I want to pick up exactly on that point, the idea that the market is implying that central banks around the world are out of about of tools. Tom John, I'm looking right now fed funds futures pricing in basically zero interest rates in the United States over the next few meetings, and it's quickly coming in. And I'm looking meanwhile at the fact that the yield curves

are just collapsing. We are seeing an absolute flattening. The implication here, John, no inflation, This is not going to work period. So I think that's what we're seeing off the back of another massive move lower in crude. And John, there's another thing we've got to think about to the dynamic that leads a just pictured for us, for our listeners on radio, when the Fed cuts rates, we're not just adjusting the front end to that reality. We seem to be pushing it right the way through the curve.

So when the Fed comes down fifty basis points tens thirties, they start to rally too. We used to be able to generate what's called that bull steam in a way, you start to aggressively pull down the run end and you get a little bit of a lift at the back end. Why an't we seeing that this time around? Yeah? I mean, I think part of this is the view that you know that the market of concluding central banks do not have the ability to lift inflation and medium

term growth forecast. I mentioned that, See, your treasury yields are still above the levels they got to in in two thousand and eleven. At that time, ten your treasury yields were up close to two percents, a way above where we are now. Because of that all steepening, as you mentioned, John, and some trust that, you know, the measures taken by the central banks would reflate these economies that seems to have gone um and they will do

what they can. They're obviously also provide liquidity measures and try and avoid any sort of deterioration in the situation as a result of a credit runch. But ultimately, you know, as they deploy all of the tools in their in their in their ammunition box, if that isn't enough, then fiscal policy is going to have to come to the rescue sooner rather than later. Let's talk about some of

the other tools at central banks have. What are the key intervene since that we should be looking for at this point, given the fact that we are seeing stress pick up in report markets and other key areas of

the financial system. Well, interestingly, I mean, we were so happens in the UK that we've got the budget coming in a couple of days in the middle of all of this and all the measures that are being discussed now the focus has turned away from all the sort of typical you know, fiscal measures and investment and infrastructure plans and things, and towards the short term measures that are going to help in the anticipated situation confronting corporates.

That will certainly include the provision of liquidity and as I said, any survival business having access to credit at fair and reasonable prices. As the banks sort of fight on various different fronts, um, the governments are keen to make sure that doesn't get passed on through higher borrowing

cost to companies. I think the governments are going to bring in measures like giving companies longer to pay their their their taxes and addressing sort of supply chain disruption that comes about on the back of the pretent short disruption coming from the coronavirus situation. As all of these supply chains, um, you know, get get damaged along the way.

So you know, the intent is for governments to do what they can and central banks of course as well, to try and ensure that any viable companies are able to continue functioning as well as possible and don't get unfairly and you know, long term detrimentally impacted by by these sort of short term problems coming down their supply chains. And through the banking system. John, stay close for our

listeners worldwide, just tune again. We will go commercial free as much as we can over the next couple of hours. Right here on Bloomberg. Surveillance equity futures are limited down so and I have a read for you there. Where I do have a read is on the SMP five spider et F and a pre market down around about five point nine four for any of you thinking about the cash open now at nine thirty. The rules as follows the SMP five hundred. This is a level one

breach can drop seven percent from the previous close. This is after fifteen minutes, and then trading will be halted the fifteen minutes if you have a gap blow up of more than seven percent off the fifteen minutes. So just a couple of levels you've got to think about today session. The kind of things that I didn't expect to be talking about at the beginning of twenty twenty,

but here we are. They've been hugely debated over the years and rarely used, particularly at that kind of fifteen minute hall, but in today's day and age, I mean, I get it a long time ago where it was yelling and screaming on the floor and all the romance

of the exchange today it seems almost quaint. Well actually, some people are saying that it's actually exacerbated some of the price moves overnight and other markets, because you have the US market halted, and the implication to other markets is that things are so terrible that things had to be frozen, and that's sort of one concern people have. I'd let it go. Um, you know, my basic point uh with it is it's quaint and it will be tested.

It will be interesting to see what we see this morning, but the point is we will get when open the vict I haven't even correlated where the vixes. There's some good no time there over the over the weekend, but within the data check I'm looking at euroswissy one oh five eight four four. George serve els with that incredibly important note for Deutsche Bank, and you know you wonder here and that, where are the surprises going to be given these market moves? John, what's the surprise you see?

We'll come back to John Wright in a minute. The surprise for me was just saying the move in oil, not that we didn't expect the move lower of course

we did. But to see crude gap lower by thirty one percent is stunning and many of us, of course got up early for the European open this morning just to see this series of red headlines just crater through the bloomberg, the decks falling as much as seven point four percent set to went to bear market, the stocks fifty down four point seven percent set to enter a

bear market is stock six hundred the foot seat. These headlines just kept coming through the terminal at this brutal speed, And when you see things lighting up that way, I think at least it just adds to the panic of the moment, isn't it. Absolutely? Also the question is where

are the stress points? Again? I go back to, you know, what's going on in the currency markets, in particular the japan is yen very much in focus, with a dollar plunging three versus the yen, raising questions about whether this is margin trades being unwound, whether this is sort of leverage currency bets uh and and sort of when does the Japanese government step in, given the fact that their economy is not doing well and wasn't doing well ahead

of the coronavirus. Away from the major Paris, folks, and this is inside baseball. But you look at dollar yen, yeah, you look at euro yen yeah? How about something like yen Singapore dollar. It's eight standard deviations off trend. All you need to know is that's worse than a medical chart, to be honest, I mean, eight standard deviations is a huge, huge move. John, I look at these distortions in the market,

and I'm sorry central bankers have to have to. I'll give you a worse currency pair than that awaging CRONI US at the Japanese yen at one point overnight, a six percentage point move on a currency path. Unreal. Let's turn back to John right, Chann we and talk about the next central bank move. US had a UK right strategy still with us, John. On Thursday, there's an a c being meeting. Imagine President the Guard wanted a little bit more time to get a feed under the desk

and get used to her surroundings. How difficult does it hurt for her right now to get that government council on site to deploy something this Thursday? I mean unbelievably difficult, because unlike the others, although everyone's rapidly heading that way, you know they have to a large degree and has been the case for a world run out of ammunition. I mean, the markets expecting I think another sort of twenty five basis points of ETV easing over the sort

of of course of the rest of this year. But you know, given where they're starting from, it's really questionable whether that's going to have any impact on anything. They can obviously resume, step up intensify government bomb purchases, but they need to change issuer limits to be able to do that in any significant way. John, this is so important. Mark they're being overcome by events in the event is

disinflation and outright deflation. I mean, how does central banks act to the impulse of disinflation that we're living right now? This is more me Um. Well, and you know if they'd had ammunition then clearly that they would they would be under pressure to deploy in a very significant way, which is why we're pricing in what we are for the FED for example, and to a degree the Bank of England in terms of ray cuts and Kewie and

so on. As I say, the ETP is already there, so um that the sort of pressure on fiscal policy is going to be even more significant and come even earlier. There then you have the problems of course in the Eurozone of the fiscal Compact and the either unwillingness or

inability of governments to borrow within those rules. So you know, the problems there are even more intense at a time when monetary policy has its foot to the floor, and yet we are now being assailed by this perfect storm of events all pushing in the same direction in a

very severe and almost unprecedented way. I mean, it really is, you know, emergency stations for all of these central banks and governments, and in the case of the the Eurozone, the monetary policy makers are pretty much run out of road, and the fiscal policy makers are constrained are these rules. So it's it's probably an even more severe situation and

even more worrying one there than elsewhere. I would argue, John, we would saw this morning two year in five year UK rates fall below zero for the first time, and I'm wondering what is the prospect of negative rates over in the United Kingdom as well as potentially even the United States. Yeah, I mean, we had guilt yields. They're back out sort of zero or slightly above now, but we did have as you say, short to Sam guilty

eels drop below zero. They can certainly go lower. Still, you know there is this this mantra now that it's about the return of capital, not the return on capital, and short dated sovereign bonds of well rated issues are are the safest status out there, so people will keep buying them even at negative yields in this sort of environment.

When you look at the swaps, market rates are still some way above zero in the UK in the US and likely to stay there as long as both the central banks say, you know we can cut, we will cut towards zero. Going negative brings counterproductive consequences by squeezing banks margins excessively. The markets, the financial markets so far have leaved that um that line, and therefore swap rates I think have a very hard floor somewhere around twenty five basis points or so, which we're sort of rapidly

heading towards. But I don't think they can go negative unless negative policy rates becomes more realistic. I think we're still some way from that in markets like the UK in the US, John Greater catch, you appreciate your time on such a busy morning. This morning, John right there of Ubs, Gina Martin Adams running all of Bloomberg Intelligence

equity for US as well. Corporations after price and disinflation deflation as well, do they have sector to sector with your vast team that you've got, folks that takes up a football, it's like a football field of securities research. You look at your team. Do corporations have the elasticity, the malee ability to adjust to what we see on our screen? You know? I think it depends on what corporations.

Obviously energy companies are at the center of weakness, but if you look at you look at consumer staples companies, you look at healthcare companies, you look at even technology companies, it's a completely different ball game. So I think what you need to do is be a bit discerning in within your equity market exposure. Obviously, the value in high vall stocks are going to continue to suffer. Obviously the energy, some of the industrials and materials names are going to

continue to suffer. But there are potential beneficiaries. And I think over the course of this day, you're going to see some cooler heads start to prevail, and you're going to see people start to think about Okay, what do zero percent interest rates and thirty dial dollar oil prices really mean for behavior longer term and function functionally? They mean it's effectively a tax cut for the U. S. Consumer once we get through coronavirus. It's very supportive and

very stimulative. It's hard to see in an environment of panic and an environment like this, but the reality is in this cycle, we've dealt with a lot of shocks. Two thousand eleven, we had a contraction in GDP growth for a quarter. We almost had a contraction in GDP growth as well. So I do think that markets are very, very volatile in the short run, but ultimately typed. This type of panic behavior creates an opportunity for investors. What's

the panic in the bank stocks? As John was talking about, what's that implying? I mean, it's the bank stocks are also value stocks, right, values getting thrown completely out. We got and we did a little bit analysis of the momentum relative to value trade. It's very typical that what you see in an environment of markets following value stocks fall the most. It also is a function of interest rates are falling, right, the yield curve is still very flat.

Interest rates are falling, so there's an assumption that interest margin is going to get squeezed. Obviously, capital markets activity is going to be very very light for the first quarter at the very least, because there's no activity their high beta, so they also are going to fall faster than the market. So they're unfortunately just in a bad position sort of structurally. Now, big big stocks like JP Morgan, big companies like that, they're just getting diseaser babies that

are getting thrown out with the bathwater. And I'm looking John at JP Morgan, I'm trying to do the math now. I think it's down twenties something from the peak from thee on the year basis. You know, from the peak it's trading at nineties seven right now. Dividend the north of three percent on JP Morgan, on the likes of

Will's far north of five percent. Obviously, in an environment like this, the dividendials are gonna look nice because the stock is adjusting so quickly, and the dividends may well change on some of these big energy players, on some of the big financials as well. I also think it's always worth emphasizing that point. But income in equities right now,

it must look ridiculously attractive China. It is, though, I think you again have to pick your spots carefully because if you'd of segment the income stream the dividend income payers in the SMP five D, you look at the highest yielders, they're actually becoming higher and higher beta stocks. I mean many of them are energy companies. Many of them are you would qualify them as near junk the risk, right,

and that's the risk. So you want to be really careful on the divenand sustainability as you make that point. I actually don't think the financials difendstainable sustainability is an issue at all. I think it's very sustainable. The financials never took on leverage this cycle. They're very low leverage, especially relative to where they were in the last cycle. However, the energy companies are certainly at risk, and you're seeing that reflected in energy stocks. I mean, small cap energy

stocks dropped ten percent on Friday. They're going to get absolutely crushed again. What are they going to stay in business? Do they have the solveigncy liquidity issues that Lisa Bramwitz is talking about some of the small caps probably not, And we've already seen a bankruptcy and small cap energy. This year we'll probably see a couple of more because it's not sustainable. At a level of thirty dollars twenty five dollars, these companies will not be able to stay

in business. Uh, John the two year German zero point nine seven three straight down, No no capture yet, absolutely incredible. Jenne Fan Tansy to catch out with you. What a morning busy for everyone, and thank you very much for being by the Sumple impact right he out. If you're fighting for a wild card spot and you go out to the West Coast and you play the three patsy teams of the National Hockey League and you go L

L L, that's not a good thing. We thought he'd be out today, not with the virus, but just suffering with the Toronto maple Lea's Luke Kawa joins us this morning. I mean before they went out into the West Coast swing, that's supposed to be www, right, I mean, but like whenever anyone goes on the West Coast swing, they was right, Like the Penguins just did that West Coast swing right before the leaves and they went and three too. But yeah, if I if I had to stay at home with

a broken ego. I'd be at home every day. So we're we're in the office again today. Look how with us? And he was exceptionally strong over the weekend. Look, you put out a spectacular chart of the volatility of the ten year yield, and are you willing to say we're back to Lehman territory? Oh no, we're We're above that. It's like the the t y VIX, which is the it's the same construction methodology as a VIX, So it's actually measuring the volatility of the price and the ten

year note rather than rather than the yield. So you you could say just because of base effects, uh, you know, you should be thinking you're getting jump here as we approached zero. But yeah, that we got as high as essentially fourteen seven five I believe this morning. What that means in practical terms is essentially you're betting for the tenure note to move about one percentage point per day, which is just a crazy degree of volatility in bonds expected.

So yeah, that's that's happened when you draining electricity in Manhattan and loaded up the three Bloombergs this morning, what did you see on the screen. Oh, when I loaded up this morning. The main thing that saw that you know, freaked me out and is freaking and everyone out, is the the extent to which how quickly this became credic

centric concern. So last week you had a really odd dichotomy where you had cd X investment grade and high yield widening by you know, meaningful amounts, and stocks were still up. The amount of that discrepancy was very, very rare, and the last time we saw anything like everything exploded.

Like right now, if you're looking at high yield or investment grade c d X relative to its three month average, it's we're getting into the six sigmas, to which I know you folks, this is the protection of credit to false swaps against all of these troubled debt securities. And they're on a trend, and then when they get off the trend, they go out one or two standard deviations. Three is normal, four is ugly, and the medical business

six standard deviations is ugly. In this check the late Jack, well, just six sigma, isn't it. Yeah? That's that's yeah. I

I couldn't I certainly couldn't do it any better. And yeah, the this is the yeah, so like this is essentially what we're seeing is a lot of this has to do obviously with energy and energy being a focal point in the high yield universe, but the extent to which this is also in investment grade also really makes you think this is about more generalized credit stress and people kind of all jump into the same place at once.

Which makes these product weird is that everyone's loved hedging with I, G C, d X, just because you know, when everything hits the fan, you know, it has that convexity, it gets a real jump. But what the what that means though, is if is if this is the one that everyone wants to own, it also is the one that dealers are the most short. So you have the effect of buying this back just to kind of had your exposure. Let me translate this. You own something and

you want to protect. Shouldn't have guessed it, So you hedge with this fancy pants investment, great security. It's gone bad in the last twenty four hours, right, Oh it's I mean, if you've if you've hatched with this, it's gone good. Your hedge has gone good. The you know, the underlying market itself definitely not good. But you know, the hedges, the hedges performing in a way I think people would expect it to at a time like this, which, uh, you know, there are a lot of things out there

that haven't necessarily done that. So look if you as you look across asset classes here as the equities kind of limited down, uh, the yield curve below one percent for the first time ever, oil falling out of bed. Is it panic in the market right now? Is this different than maybe last week? Yeah, I'd say the main thing to watch for, like your your clear sign of panic.

And I remember this from when I was talking with Tom on the morning of February and I believe we were wondering, like, why the heck this is huge risk off. We just had the biggest one day jumping volcualty on record. Why are short term treasury yields growing up? And Tom said, oh, that's easy there. You know, they're being used as a source of funds. Once the treasury market starts to become a source of funds, then that probably means we're we're

in true, true panic. However, things look, you know, I you can't not call this panic, but things can get panicky or panicky or looking at gold here a little bit of a bid there that continues that trajectory. So that's just your traditional flight to quality. Look yeah, I mean the flight to quality message is actually used. Something you see very uniformly cross markets. If you look at factors in the equity market, what's held up the best

the profitability factor. If you look at a basket of Goldman stacks stocks that have strong balance sheets relative to the weak ones, that's at its best level since two thousand twelve. So this is where people are hiding. It to yield, and it's in quality. And although the energy companies have one in the yield, they don't have the other. Okay, well we're gonna do Here's do a data check in

the market opening. We're thrilled to Mr Kawa and his entourage will stay with us through the market opening and will continue this really sophistic gig conversation, trying to get convexity into every third minute discussion as well. Convexity, folks, is when you have to get out. It's the acceleration of trade going the opposite uh way. What you need to know right now is many of these safe havens have moved and moved abruptly forty five seconds away from

the market open. Gold up thirteen dollars sixty six ounces, and critically, Japanese yen right now is testing the strength that we saw at three a m. And somewhat near where we were at eleven pm last night in the early Asia morning. The en right now, Paul Sweeney one oh one eighty four, Yes, search for it, as Lucas is mentioning search for safe haven. We see that again

at one one eight five. Uh. It's interesting here at this looking at crewed here off even here thirty two dollars sixty seven cents for w t I right here. So clearly that supply demand issue really weighing on the markets here given the Saudi news. This is Bloomberg Radio World. Why we welcome here from New York and Bloomberg eleven three oh Sirius XM channel one nineteen Bloomberg one oh six one in Boston are special coverage today. We are commercial free, and we thank our sponsors very much for

allowing us to do this today. The Dow opens off seventeen hundred points. There's variant limit constraints as well. Paul, I'll pick it up here as you look at the data. But it's something to say, we're down five thousand plus points from where we were not that long ag Yeah, three weeks ago, Tom, we were you know, talking about we're talking about daily highst almost every day here. So what's changed here, Well, what's changed is you know that just the outlook for global GDP growth driven by the

pronuct of virus probably picked up as well. The d X why that blended index ninety four point eight zero, the yen one two rounded up euro dollar one one fourteen sixty four itself. We're down seventeen hundred, make it eighteen hundred points in the dow and we'll settle out in over the next fifteen minutes or so. The levels standard and poors five seven zero to seven seven zero and did doubt thousand thirty five right now our opening

bell always brought to you by SEI. Today's competitive marketplace

requires asset managers to become more operationally adept. See how you can transform your business with SEIS Global Platform at s e I C dot com slash i M S as well Brazilian Real looking at e M that's out the new levels four point seven seven even Turkish leer with all the idiosyncrasies there of the border and with Syria and Russia, Turkish lire a week or today, as well as six point one one Mexican pays one point one two, and I bringing up South African rand but

I can't because Mike my terminals on fire here. Well, I I can't remember if I've ever seen a negative one eight zero zero rowe, no doubt, no I have not. You know, we're down seven percent here across the equity indices right here. Uh, look as we look at the opening here a couple of minutes into it, you know again, equity markets now just kind of opening up here. How do you think? What do you think of these expectations

for on the average trading desk out there? You are they saying, hey, we gotta step in here and provide some support, or are they just kind of saying this is really outside of all of our models. Let's stay on the sidelines, unless you know, we really have to get in there. The main thing I've heard from people who I've been talking to you over the weekend, because everyone who's been anyone has been in over the weekend gaming out like what our vulnerabilities, etcetera, etcetera. That's the

main concern. Nobody is trying to get greedy right here, Like there's that line when the time comes to buy, you won't want to. That's very much the order of the day right now. Folks are mainly interested in, Okay, where's our leverage, where's our vulnerable positions that are going to be tough to exit, and let's make sure we do that now. Look, how can you stay with us for a few more minutes, Luke? You've got a pressing

day calendar as well, Apple Computer negative twenty one. That's a seven point five percent move added up over three days seven eight eleven. I'm gonna call twelve percent down

Apple Computer. How about JP Morgan is another indicator of where we are down thirteen percent uh plus nine make a ten over the last uh two days, So in three days, that's twenty two ish percent on JP Morgan as well, am I as you go with another high flyer, Luke Howard driving that big machine that he drives, Tesla down thirteen percent plus six makes an eighteen nine over the last three days. Some of the indications that we see out there in negative eighteen fifty five on the

down Paul, we haven't. We haven't captured a big yet on the opening, have we? No, we really haven't. Here Again, we've been sitting down here, you know, Tom down about seven percent here and again it's a term that we've used a little bit over the last couple of weeks, and we've heard some of our strategist talk about it, which is price discovery. Here. There's so many new variables in the marketplace, and we're seeing it on the up end down moves. Uh, kind of investors looking for some

levels here. You know, look what a flows ben in our our institutions flush with cash right now. That's been a difficult thing to get a handle on. I think you know that's Eric ball Tunas, our senior et f A strategist, can probably give you a lot better handle

on that. I I do subscribe to the theory though that in general coming into this, if you just look at kind of notional exposure uh that you would estimate through your SMPE, many's kind of the the build up in those contracts, etcetera, uh NASDAC to those were those are relatively high across the asset management space, and it does suggest you know that We were going into this a little a little happier about risk that we had been in several years. Look, you can leave. We have

a trading halt. Look here, well this is a level one trading halt. These have been put in place ages ago, and Lee is you know, not to make light about it, but this is for the good of discovering market stability in our indiscoverable pricing call, isn't it look Howard thinking. 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.