Surveillance: Market Sell-Off with Weinberg

global growth? In US growth? Well? US growth, We think the U. S economy is doing well enough and domestic demand to outweigh the slow down in world trade, the contraction of world trade that we're actually seeing some numbers. Well, we're talking about world trade being down about half a percent year over year world global exports and that's only happened five times before in the last fifty years. So

it's a notable event. US GDP growth around two point to two point three percent, largely driven by domestic demand with exports being weak. Europe dead flat right now, but on the decelerating what's your global number? I was stunned to Davos how people are some of them are framing under three percent global real economic growth, folks, that is unusual,

to say the least. Yeah, the the I m F has I think two point nine, and that's a big markdown, but they have a boom going right back up in the next forecast period in right back up to three point three three point four percent, which is still a low number, but not as terrifying as two point nine. And of course what I say is when I every time I read an I m F forecast for an economic recovery, I say to myself, you know, on a basis of what you know, what's going to drive the

world economy back? And it's not going to be monetary policy, it's not going to be fiscal policy, So I guess it's just going to be animal spirits. And of course missing from Davos was any explanation at all for the decline in world trade. None. So if you can't tell me why it's happening, and I can't tell you why it's happening, how can you tell me that it's over? So I'm on the gloomy side tom for the world. Well,

let's talk about how frati the recovery actually has. Then, column whether something like what we see at the moment. Plank in China can really knock us off course. Well, if it turns into a big thing, it could knock us off course. But when I listened to to Lisa run down her argument, I have to say to her, you know, you know, I don't know you. I don't know anything about this disease. Nobody does. Nobody knows the extent to it, nobody knows how far it's going to go.

So we can't happen if it got to be really serious. All right, Or let's look at the changes in uh and that the government has introduced. Okay, so they've extended the holiday period now to February second, so they've shut down the friday after a ten day holiday break where very few people were going to come back to work anyhow, and where a lot of firms weren't going to reopen anyhow, and then a weekend, so we really don't have a

big dent to production. And of course, what we've learned in the past is when we have disasters and things like this, not only does the economy snap back quickly in the subsequent quarters, but the loss of output is less than you expect because a lot of the economy continues to to to act, to be active even though people are at work. We make utilities, we buy food,

you know, the trains still run, and so forth. In this case, the trains may not run, but the point being that the hit may be smaller than the market is currently pricing in. I say maybe, because maybe tomorrow will have some serious medicine that says, this is the scariest thing since what were you talking about before tom flu epidemic. Maybe we'll get something, but for the moment, we just don't know the extent of it. So I like Lisa's hypothesis that says that people were ready to

take profits anyhow this catalyzes it. But I can't make myself jump into the camp that says this is the end of world trade. Now China gets locked down for a month, that's a different story. That's a big hit to the to anyone's sitting around this table saying this is the end of world trade. I think you, folks, is going the right thing. No one around this table is going to pretend to be a doctor over the next several months or for however long this place out.

What you focus on is the potential disruption to cities and the measures that the Chinese will take to stop this epidemic from spreading, and what we see so far a major cities effectively shutting down, banning travel. We see holidays being extended, and she pointed out quite rightly, it's the traditional time of the year. Whether that happens anywhere, it might just go on for a little bit longer. Walk us through our audience what they should be focused

on in the coming weeks. Not pretending to be a doctor, but looking at the economics of all of this. So let's be an economy. So Wuhan is a city of eleven million people. It's bigger than New York. It's bigger than London, it's bigger than Paris, it's bigger than pretty much any other city except for others in China. But in a country of one point for a billion people, all right, it is a piece of a much larger puzzle, right,

Shanghai is a bigger deal. But they're not shutting down, although there are sporadic reports of some companies are not coming back to work. So with Wuhan by itself in Hubei, which is sixty million people, roughly the population of France, still within a one point four billion person econ me, it will make a dent. But will it derail the economy and throw it into a recession. I don't think so.

In two thousand three, the stars outbreak caused the estimated decline in the GDP of China about one percent in the one quarter. In one quarter, one percent to cline in GDP, and then it got back the next quarter. If you look at the four quarters from the fourth quarter of two thousand into the third quarter of two thousand and three, there's no discernible deviation of the pattern of GDP from what the season will suggest. To be clear, eight hundred people died. More than that, it was much

more virulent than what we are currently experiencing. Of course, we don't know how this is going to involve. If it transpires in the same way, do you think that it could materially throw the global economic recovery? Of course, I'll just be you know, very crass about it. Eight hundred deaths, all right, is not going to throw the world economy off course, all right. It's it's a tragedy

for the people involved. But at the end of the day, and I'm not a doctor, I don't play one onto v but you look like it's not how many people die, it's the measures the Chinese take to stop people from dying and shutting down Wuhan is an exceptional and it sounds brutal in the economist perspective. That's what the focus is, right and my focus is that Juhan is a big city, but in the scope of all of China and all of the world, I don't think it's enough to throw

the train off the track. Carl Ainberg, thank you so much. With high frequency economics, and you know, Drew Armstrong was just brilliant this morning. With Max Neeson as well. We have trying to bring you perspective on the virus in Wuhan. We've had some wonderful comments from China. China this morning for a news standpoint really shut down with the holidays and all that. So we've gone global Withdrew Armstrong and Macneeson and right now from Geneva, Switzerland are single best

World health organization. Expert Tom Millier joins us UH this morning. What are they doing at the World Health Organization today? Not only in Geneva, Tom, it's spread out across their world. What's there to do list in the Geneva Afternoon. Well, Um, the head of the w h OH right now is actually in China and Wuhan at ground zero, UH, meeting with people and uh, I mean showing that she's Uh. This is the top of the agenda right now. The biggest thing is collecting data to be able to map

out the spread of the epidemic. What they really need is data not just on when the cases were reported, but data on when the symptoms, the onset of the symptoms started. Uh. And they need more complete data because any change in the number of reported cases or the number of deaths change changes the mortality. Right, do we know do we know the virology of the virus? My experiences, the mutate et cetera. And it's really hard to actually know what you're talking about. Do we have a handle

on what the actual virus is? Not exactly there. That's what they're still trying to do because I in order to make any sort of treatment for the virus, they need to understand it more better. Thomas, there's also a question about the reaction in China. One of the most alarming reports that really got up markets in jitters was this idea that China doesn't have enough equipment. Isn't necessarily separating out patients with the coronavirus from other patients in

hospitals just because they don't have the space. How effective has the containment process been in China, you know, regardless of the quarantine that's keeping an entire city in their homes. Yeah. Well, there's a lot of criticism about the policy because it could be that it just is too late. Uh. And I mean it's such a draconian policy, uh, keeping fifty million people in the in their places, uh, that it's raising a lot of issue. I mean, there's a lot

of issues there. Um. So far they well China is trying to actually build new hospitals as we speak in Wuhan, uh. And so it's really a game of catch up, and and they don't have the facilities that they that they ideally would have at the moment. Thomas, you know better than we do about the w h O. And there is some criticism of the World Health Organization at the moment and their reluctance to declare what we're seeing playing out at China and worldwide at the moment as a

public health emergency of international concern. Thomas whole are they're holding off one and two? What would happen if they do make that declaration this week? Well, it's they've said that they might decide. I mean, when they delayed making the decision, they said that they'd probably meet again within the next ten days. The thing is, it's a really

political process. The w h O deal better with the scientific side of things, And what they're scared of is that countries, if they declare it UH an international public health emergency, that some countries might enact barriers to travel and trade that are more stringent than necessary. Right now, I'm wondering about the efficacy of other countries response to

this virus. In other words, is there any evidence that the spread of it to a number of different nations around the world is actually causing inter country spreading person to person, not within China, but say in Vietnam or so in Korea. Yeah, so far, the evidence is really limited.

Of of of the thirty some cases that have been UH, the thirty UH cases reported abroad, almost all of those were actually people who had been in Wuhan, and so so far there really isn't evidence that it's really going person to person outside of China, Tom, Thank you so much. Tom Aline with Bloomberg News in Geneva, Switzerland, with his true focus on the world health organization right now joining us with Society General Kitchus joins us on these strong

correlations of the market. Kit, I'm observing that how correlated is this move off a Chinese disease, Chinese virus? It feels pretty correlated. It felt this morning as if it was just a single story stalks down. Um. Yeah, say favoring currency is strong, anything trade China sensitive or oil sensitive? Um week equities moving in the same way. Well, we'll see what happens when your equity market really gets going

in Casha this afternoon. But it feels as if it's a knee joke reaction that's not correcting at the moment. Within that the bond market, where we're back to October. Lowe's John you'll know better than me on this in terms of spread dynamics as well. Is there an opportunity in bonds because you've made if you believe in low interest rates, you've made so much of a year's move in a matter of days and weeks. I mean, how do you adjust tactically to the celebration of a year's move.

You you remain bullish, but you don't go and invest your entire life savings right in them. Right, there's get Look, I think we'll get ten your note. You are to back down to UM certainly the other side of one and a half percent at some point at the back end of this year. But um, you know, then if you think that we're going to move from you know, it's from I don't know, you know, one on a quarter to one and three quarters instead of one and three quarters to two, then then you know we've got

another leg down. But we've done half to move and that's probably the way to think about it. But but it will take evidence in the United States that um, that the economy is is feeling this. Otherwise, you know, we're going to see money continue to go looking for certainly lower rates, lower yields in the sort of in some of some of the markets in the Far East,

because growth is going to be definitely impacted. We can speculate how much this might affect the US, but the Chinese economy is going to it's going to feel this for a while. And I think it also probably puts paid to hopes of some people that you might get German government tending yields back in the positive territory or anything like that, that we're going to be stuck in negative territory for months. Let's talk about it, kid, because

this is important. The recovery that we have seen very young, very fragile, and we see it in the EFO out of Germany today. German business confidence really not terrific. Just how fragile is that recovery in Europe and is it vulnerable to be knocked off course? But what you see playing gat in China right now? Kid? Yeah, yes, I mean, you know, again at the bare minimum, and we're going

to lose a certain amount of time. You know, it could be a short period of time and then things get more respect to normal and the Chinese are more likely to ease monetary policy, more likely East fiscal policy on the back of this over time. But um, the momentum was just trying to shift back towards Germany, getting away from the hits from trade, from Chinese weakness, from from the auto downturn, and from the from the diesel scandal and all of those things. Was trying to feed

themselves through the system. It's just going to take longer to get out of that now, and I think that's um that that puts a dampener on on everything. KIT. It's also this whole transpiring of the coronavirus and its spread is putting a damper on the whole weaker dollar story. And we're seeing the dollar the strongest since December ninth, three straight days of strengthening emerging market currencies having a

bigger three day decline since November. How much does this potentially torpedo the consensus bet heading into the emerging market currencies would finally would perform in a significant way this year. UM. We we've been nervous about the outlook for emerging market currencies this year because we've got a a federatively gloomy view about how the year is going to progress for

the U S economy. Emerging markets to get money really flowing into them need a combination of of of yields seeking so low rate environment plus a kind of the US economy that does okay, it grows something like a consensus at one point eight percent this year. UM. This this sort of ups the anti on the USPS and otherwise emerging markets are going to have a really rough time. If the U. S economy looks as if it's growing significantly more slowly than that as well, as you know,

that'll offset any of this kind of flow in. So I think I mean, to me, the jury was out in the sense of the market was taking an optimistic view of the global economic outlook this and that was feeding into a bit of relief free m But I think that's in trouble now. Kids who are boom bust debate at doubles that we are in John and I of course drive us forward in the coming days and weeks here as well into what we see this morning, a two or three percent equity correction yields or they

are two yearield one point four four seven zero. Can you hedge now? Is it is it efficacious to sit around a pro room and actually structure hedges where you either take in a premium or you pay out for the cost of doing the hedge. Um. Yes, it seems to me wise to take to take some hedges at this point because risk assets might be correcting today, but

they're still pretty pretty expensive. Um. And you know, and in a sense, I mean the part that the high correlations mean that you know, the kind of that the hedge is become almost simpler in the sense that someone's gonna show me what clever hedging looks like in this environment. But I would certainly want to have bonds in my portfolio for this, for this risk, for the same job

to one government debton interest rate exposure. UM, I wouldn't want a currency portfolio that had no Japanese yeen in it, even if I've been very frustrated for the whole of January so far, you know, I would want to continue to have those things because um. And at the end of the day, though, you know, the reason that we've kind of feel as if the cycle is less less significant is that the answer to everything is to ease monetary policy even further, and that gets equacy market to

stabilize spreads. The stabilize gets defaults and heart of the manager at really low rate, and so we stretched the cycle out, and so the danger then comes back into the danger in those valuations directly and indirectly. John, that was the theme we heard. It is just so easy to cut rates, you know, it's it to be Trumpian, and to cut it gets harder when you start to run out of space, that's for sure. And the ECP

has run out of space. Let's talk about Italy, shall we kit ten year Italian bond yields down eighteen basis points and the Euro doing nothing? Why? Um, what the Euro? Once upon a time, Once upon the same we had models where we put BTP bunts breads into into the Euro and so it would have it high. I don't think that that works when the heart of the Euro is that it's much more trade sensitive in the United States, much more. It's more China sensitive the United States. So

it's bad news here. So we're we're weighing these two things against each other. Of you know, a piece of news from the Far East that definitely is euro dollar negative against piece of domestic news in Italy that that at least in terms of the bond market reaction is Euro positive. And look at the thirteen basis point falling Greek yields, by the way, as they have a rerating. So um, and those two outweigh each other. So you you you trade, you trade European politics at the momentum

in the bond market. Um. And that's that's where that's where you do. In the I think in the currency market, you are short the Euro against again or short the Euro against the Swiss Frank but not you don't you don't know, you don't buy it. I'm fred kid, you thank you so much, greatly appreciate it. With society in general. Why don't you bring it? You know, do you want to get football out of the way first thing? We should probably do that first in work. I imagine that's

what he's fired up about. In Shepherds Pantheon macro Economics, founder of Chief Economist, also of Newcastle. I can tell you bre exclusive on this program couple of months back that Ian gave up his season ticket to his beloved Newcastle United, and the latest news coming out of the Wall Street Journal over the weekend that the Saudis are interested in buying his beloved Newcastle United. First reaction in Shepherds and Please, my first direction is out of the

frying kind into the fire. Really, you know, we're gonna potentially exchange one terrible owner for another which is backed by a man of shall we say, questionable character. So I'm not thrilled, you know, thrilled. There's a character to this, folks. For American audience, Newcastle, it's it's fun to watch. I don't know what I'm talking not east of the country. Why are they different. Saint James's part is just this phenomenal stadium with this incredible fans, like a Wrigley Field thing.

But Ncass United have been a yo yo club over the last ten years or so, and I'm sure em would echo that they dropped down a leave they come back up. But the fans have always filled out the stadium no matter what. In the nineties, almost won the league a couple of times, I think second place in a premiership in the late nineties e and but until this year, as you say, something changed, people like yourself said, we've had enough about people didn't renew the season tickets.

They've just had enough of this appalling ownership. So everyone has been rooting for a chain. Just just if you'd given us a list of potential owners, you know I have been some probably wouldn't have been top of the list.

It definitely wouldn't have been top of the list. I do have to wonder on a daylight today, I'm sure that that football is getting you excited, but I also think I'm looking right now at the NASDAC and it's poised for its biggest daily decline if it continues nearly down two percent of the year, and we were talking

about a one percent decline on Friday. Our economic it's interesting you more than football today or do you feel like today the sort of scare that's going on with the coronavirus doesn't affect the economics complex to the degree that people seem to be implying by the price action. Yeah, I mean this to me is a combination of a fear based sell off and also an excuse to take profits after the run that we've had in the markets

over the last few months. So you know, if the market had been flat for the last three months, I suspect the sell off will be rather smaller on the back of the virus story. But you know, we've had a big run up, so this is an opportunity to to take come at, detect and profits and and regroup. So this is not an economic story at all. I mean from an economic perspectives, you know, the US actually

have just upgraded my US forecasts. I'm I'm feeling a bit more cheerful about substantially appord right where you wanted to go. And of course this ties in whether your colleague free of Beamish as well reframe the Pantheon growth forecast for the United States and then free as work

for China. What's your statistic now for the United States. Yeah, well, so you know, I've just moved up my number for this year to two percent from one and a half, which which might not sound like a huge increase, but actually two percent is not far off the growth rate that we've seen in the post crash era. We've been a little bit stronger than that, so that you know, I've got some discounting and some hit from the trade war,

but most of it I think has been absorbed. And then to your point about you know, a phrase's view about China, you know, eventually we are going to see a turnaround there. You know, you can see it in the p m I s and obviously we get the next manufacturing p m I is out of China later this week. They're certainly not going down anymore. The cash in the unofficial p m I from China shot up in the last few months. We need to see that

coming through in the hard data, that's for sure. But you know, you can't look at those China numbers now and say that things are still going down and eventually that that ought to be transmitting to some extent to the rest of the world as well, including the US, even though of course, you know, the tariffs are getting the way they're they're a barrier to prevent that prevents full transmission of China's incipient upturning into the US, but

they don't, they don't completely stop it. So you know, I do think we're probably at the low now for the US Business surveyor the I S M and the p M I which have been terrible, but I think we're probably at the low. And my guess is that the consumer is going to keep chugging on and the housing markets looking pretty great, so I put my numbers higher. And what that means ultimately is that the labor market

probably continues to tighten. And I'm kind of looking at unemployment getting towards three percent by the end of the year, which in a normally that would have the FED raising rates, but let's narrow that, you say, in the vicinity of three point zero percent, Yeah, by the end of the year, Yeah, yeah, which would be the lowest mid Well yeah, I'm going

to say. Got back to Eisenharg J and I literally can't frame that the FED is consistently underestimated how low and unemployment could go without inflation or wages accelerating considerably, and in if you point out the reaction function has shifted, we could see a test of a two handle and a FED that doesn't even bludge. Well certainly not this year,

that's for sure. I mean, I think what they would like to do is is just carry on the way they're said up now, which is to say we need a material change in the outlook to do anything, and then go away, you know, from from June and come back in December. But my point is that they might come back in December after the election, which they don't want to be involved in, come back after the election

and say, well, hey, actually three percent unemployment. You know that that's nobody's idea of sustainable, especially if it still looks like it might go even further down, which you know, three months ago look very unlikely because the business surveys all the employment numbers that weakened substantially in the surveys, and the hard day to haven't followed, and so it looks to me like business is kind of I don't know that they overestimated how bad the hit was going

to be, and actually they all growth to me, maybe you can hang around one, in which case an employment will go down. Your optimistic view of the U S economy as a direct odds of what we're seeing today in the bond market, with yield curve flattening to the most the narrowest of the year, and you're seeing yields steadily lower. What is the market getting wrong that you're getting right? Oh? You know, I don't think the market

got anything wrong today. You know this this is a fair sell off inequities, and that money's got to go somewhere, so you know, it just always goes into treasuries in this environment. We simply don't know how bad this coronavirus

thing is going to be. My my, my gut feeling, my my guests, I mean, you know, I'm not an epidemiologist, but my guess from what I've been reading is that actually this isn't going to be as as bad as stars was back fifteen years ago or so um, and that we're going to see a substantial rebound in stocks within the next couple of weeks, and that, of course, I think we'll then drive treasury eels back up again. If I thought heels were going to stay down here and it was going to be a much worse thing

than to be a different story. But I'm pretty optimistic. What does the investment dynamic look like? You know, Johnny, I I think back to Davos and it really wasn't discussed all that much. Ian Shepherdson, you know, Okay, there's a pickup. Does investment pick up? Yeah? Well, some of it does. Um. You know, the residential component I think is going to grow double digit um. You know, for for a while. It's the business component that's that's likely

to continue to be the drag. But I think that the real point here is that it's not anything like as big a drag as it looked like it was going to be a few months ago. So again, like the peril numbers have been posed in the surveys have suggested so so of the Capex orders numbers, they're not great. You know, let's be clear, they're not great. But the surveys back in the fall, we're telling us we should

expect the mouthdown and that just really hasn't happened. So, you know, from a from a market perspective, you had these bad things that haven't happened. You've had the FED easing rates, You've got the FED buying sixty billion of treasury bills every month through until the second quarter of the earliest UM. That's a lot of liquidity and a

lot of relatively good news on the macro front. So you know, as I said, once the once there's some clarity on the coronavirus story, I think the market rebounds substantially. I don't really see it peaking until the middle of the year, at which point I think the FED will probably stop their build purchases. In Shepherdson, thank you so much for being with us in Shepherdson Pantheon macroeconomics founder

and she's economist. Right now into Iowa into the start of the political season, it's good to speak to the gentleman that was a former economic advisor to Vice President by Jared Bernstein is someone the conservatives read to get an authoritative view, a more balanced view on liberal and conservative economics, and of course he is on the edge of legendary in UH Washington, Jared, what I find so interesting, and this was a huge topic in Davos, is can

the Democrats move to the middle. Do you perceive there will be a shift at some point where Democratic party economics moves over to the middle. I think that the middle itself has moved. But if you grant that, then I think the answer is yes. I think the middle today is not the same middle it was even ten

years ago. Mainstream Democrats like Joe Biden or Hillary Clinton, Uh, you know, Amy klobaschar Pete Boudha judge, they feel differently about things like trade agreements, fiscal policy, UH, inequality, debt, and deficits than they did uh ten or years ago. However, the difference between them and the and the more UH liberal branch is that they believe it's going to take incremental policies to get there. You can't leap frog, you

know the reality. I think it's where they're coming from. So, Jared, how do you think the Democrats, whoever the candidate is, will run against the Trump economy? That is a super big challenge, and the Trump economy will unquestionably be a tale when who are the president? Uh, they'll run against it by pointing out that the Trump economy, UH, its benefits are highly unequally distributed. Uh. There are people in places who've been left behind. Even now, in our record

longest mansion. Of course, the manufacturing sector and blue collar workers there in folks Trump said he would directly help has has really performed quite badly, in no small part as a function of the trade war, which has Trump's fingerprints all over it. So we'll make a big distinction between macro and micro. So, speaking of that trade deal, the Phase one trade deals, you know sent you in

our rear view mirror here. Given given us some perspective here, how would you view and characterize the Phase one trade deal. I thought it was a big nothing burger, pretty undercooked one at that. I don't really believe that the the that the Chinese is going to comply in terms of what it's going to purchase. I think the enforcement mechanisms are very clugy and complex. The fact that they did nothing on currency, uh, seems like a big strike against it.

So I just don't think there's much there. And I suspect that reality wolf like then and I think market have have been partially reflected that as well. Jared, you've stayed away from the politics. You've always written just a straight economics and it's it's an economics with great respect for labor and for what I'm gonna call the tradition

of democratic politics. The Atlantic has been on fire, and they had a wonderful article a few days ago on the educated elite of the Democratic Party and they've left touch with how they're gonna get elected across a broad America. And then Derrick Thompson writing in The Atlantic boomers have socialism? Why not millennials. This is a really really interesting article on the left. I say, this is great respect heared. Can the Democratic Party get comfortable with the senator from Vermont?

You know, it's a great question. And I was a friend of mine was pointing out just how well Bernie Sanders did in He won fifty percent in Iowa, he won six in New Hampshire. Obviously that's the next door neighbor of his um. He's actually not uh posting those kinds of numbers now. But it's a bigger field, so

I think it's an open question. My kind of working hypothesis is that one of the problems a lot of Democrats, especially the folks you're talking about, faces that we live on Twitter and the Twitter verse is just a non real kind of atmosphere where I think where democratic politics are. I think the country even primary voters are more moderate than you get if you just hung around social media.

So are they moderate to the point where when Elizabeth Sanders or Bernie Sanders talks about Elizabeth Warren and Bernie Sanders talks about, uh, you know, kind of universal healthcare medicare for all, I mean, did they do you think the electric is really ready for that? And maybe the economics of that. I think the electorate is ready for that and ready for universal coverage. I think the difference

is how fast the electorate us to go there. So people get spooked when you tell them they're going to lose their employer coverage, and yet people really like the idea of universal coverage and a much broader government role. So I think where uh, some of the more moderate paths resonate more at least with me, is not in where they're ultimately going, but in the speed in which

they get to get there. I'm not sure that even the Democratic electorate, even the primer, believe you can leap fraud from where we are to a system that's very different quickly, and that a more incremental approach may be more realistic. Jared Bernstein, thank you so much. Thrilled to have him on today, Mr Bernstein, of course writing off and you see him in the Washington Post, particularly writing up with Dean Baker, Senior Fellow at the Center for

Budget and Policy Administration. Of course, working with Vice President Biden a number of years. They go Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or which for a podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio