Surveillance: Markets Not Pricing Risk, Coronado Says

It became a three day fund filled derby for us talking about the dynamics of our economics system at the zero bound. We didn't know then we'd be near a record low in the thirty year yield. We didn't know then we'd be a near seventeen hundred on gold. We didn't know then there would of course be this tragedy of a virus in China. To make sense of it with a really important FED confab today in New York.

It's Julia Cornado of Macro Policy Perspectives, and you are perfect to talk to about the fear that's out there among public officials messaging we are the world happy Happy. Jim Bullard's over on the Death Star right now with Joe, Andrew and Becky. Everything's fine, Bologny, it's a Bullard regime change. Clarida Galli Girtler. The science of monetary policy, what's the science in two thousand twenty. Well, that's exactly what they're

trying to figure out. I mean, they they It's a tricky communication challenge, especially at moments like this when there's a real threat to the out Okay, but the difference here is we're getting yeah, yeah, yeah from Clarida John who else will we talk to? Mike McKee's got messed today. Well, because you don't want to be the hair on you have your hair on fire, as a central bank, have your hair on fire. Speak Well, I don't think that we know the extent to which this is. It is

not contained. The virus is not contained. It's spread to Korea. It's definitely causing damage in Japan. Uh So we we and we don't yet know when it's going to stabilize. There are projections that are stabilize by the end of

the quarter at zero bound, we're very close. What did the optionality these bankers have that affects every one of our listeners, right So I think it's interesting time to have this conversation because, on the one hand, we know that the monetary policy officials are running out of tools.

On the other hand, what we saw last year was that they can have a powerful impact with a few rate cuts, right, a few rate cuts, a little turn in the balance sheet, and all of a sudden, the sentiment like switched pretty hard, and the housing market responded, commercial real estate responded. So there is some Amma laughed. They did keep the train on the tracks last year. But if the shock is big enough, obviously you hit the zero or bound pretty quickly. Yeah, I agree with

you here and not Stice. That's the story. And Jimny, it's not on the brink of contracting Japan. We're already there on the brink of recession. Let's talk about the other two biggest economies in the world, the number three and four. We can have them in recession by the middle of this year, can we do? We could? And And the question then is is it a recession that is sort of technical in nature in the sense that we've already stabilized the virus and we know everything is

on its way back. That would be less worrisome. Then if there is sort of knock on effects to sentiment and that's spilling over into um services. And yeah, and I think this is key for the market, for this bullmarket to finish. A whole range of things can happen, but two of them that stand out to me. Either we lose faith in the ability and willingness of central bank is to act. Muhammad Andy has made that point

very well over the last couple of weeks. All we start to see that tension, that weakness in manufacturing appearing services, damage the consumer, hit the labor market, then we've got a problem in America. How far away from even thinking about that scenario, Well, we've been pretty far. I mean, it's been actually a little worrisome that markets haven't been reactive to information that suggests risks. We've had almost no pricing of risks, So that means we have further to

fall if in fact there is a materialization that's meaningful. Well, and that's exactly where I wanted to go. Sort of this tension. Is there too much complacency? We were talking earlier about this question. We've got the yield curve, the two tens yield curve at the narrowest level since the last year, almost inverting yet again. And yet you have borrowing costs for the top rated companies at record lows.

What will another FED rate cut do to stimulate the economy given how low borrowing costs already are and the fact that asset prices are already so high right again. And I think that highlights like there was a little bit of ammo last year. They used it to address that worry middle of the year. Now we have If we have that same worry return, you have less ammunition. And I do think there's a lot of complacency in

in market pricing right now. Julia, I'm gonna go to a line from I'm Clarida Gali Girdler twenty one years ago. It is then possible to represent the baseline model in terms of the I S curve, the real economy curve that relates the output gap to the real interest rate. There isn't a real interest rate. They wrote this paper when there was unimaginable imagine we have negative that where we are where we are, it's not that is not

a roadmap anymore. Where are the new tools? So so I think it's been to me a little bit disappointing that in this policy review that the FED hasn't sort of endeavored to think a little bit more outside the box. We need there are a trillion let me help, is a trillion dollar deficit outside the box enough? Well? I mean the deficit is may need to expand more if we get hit with the real shock is John is a policy tool now thirty two. Look, financial conditions matter,

and the FED responded to them quickly. I think what the FED really responded to though, in eighteen December eighteen was what happened in the credit market when the primary shut down the high yield We didn't say that. They always take credit as a much more material signal than the equity market fluctuation. So I think you're exactly right. In December there was nothing trading in credit markets, and

that was a very meaningful signal for the FED. And they what do you do when you have limited ammunition? You look to Japan their experiencing right now, it's yield curve control right now. Isn't that the next stop for this federal reserve beyond q WA? Well they they're already talking about yield curve control, so yes, But I think

there are other ideas out there. In the economics world, like automatic stabilizers, some kind of fiscal monetary coordination where you you know you you actually get to the problem, which is lack of demand. The transmission through financial markets is getting less and less powerful as we go on. As as as everybody knows that rates are going to stay low, they don't need to respond to every wiggle and rates, right, so you get less of a delta

into housing into durable consumer spending. What you need is direct cash to consumers. Is that what you're recommending? Yes, can you make it up today? We start writing some checks. Great to see it. Yeah. That was One of the the great bias we have is towards broader strategists that have had the courage to go narrow in their earlier career. And Mr Leabovitz of JP Morgan Asset Management, Johnny has

done that. Here the charm of really focusing on small in MidCap equities at one point, which is way different than saying we have a buy an apple, you bring him in now. David Lebovitz, JP market Strategists Microsoft. This market where a lot of people are focused and the big caps, I think is where most people are looking at the moment. Where we've bid up some of these

massive names. The Economist, the front cover for this weekend is just some robotic bulls with the logos of Microsoft, Apple, Google, Amazon, Facebook, and the headline big text to trillion dollar bill run. And of course the bears said, this is the agument, that front page, this is the monument. Why is it not the monument? So I think a couple of things. First of all, when everybody tells you it's the moment, it's very rarely the moment. So I would just I

would just start with that as a disclaimer. Um. In addition to that, you know, we see a lot of differences today in in the makeup of the tech sector, particularly from a fundamental standpoint, relative to what we saw during the tech bubble in the late nineties. And I think perhaps the most important thing is just when you look at the relationship between market capitalization and contribution to overall earnings growth, it's much more balanced today than it

was during the tech bubble. I mean, during the tech bubble, these companies had no earnings. You were you were buying an idea. Today those earnings are coming through a little bit more. But what I would say is what gives me a little bit of pauses. A lot of these big tech names, right, they're the ones that are keeping

the rest of the tech sector afloat. You know, if you think about the way that when one of these big tech firms spends money that trickles down into the broader tech sector and coming back and wearing my small and MidCap analyst hat. You know, if if something happens to these big names, they're not necessarily going to bear the full brunt of of that. It's going to be the smaller names that they've been keeping afloat through their

through their various spending. What's fascinating that, David, is the amount of people that use this term secular growth story. I want to be in the secular growth stories. Some of these companies are old enough to have ever had a cyclical test, yet we have that this faith that they are the seculic growth story. They are almost the havens I dare I say. I remember when a guest came on my program and said that Amazon will say haven. Is that how some people are treating this just queuing

off low rate, low yields. Looking at some of these big secular growth stories and bitten up software, I think I think that that's a big part of it. And you know, when when we look at the direction of travel, and I'm sympathetic to the secular argument, you know, you look at the labor market, you look at the increasing use of automation, that clearly benefits the tech sector more than it benefits other parts. You know. That said, I think that it's important not to get ahead of ourselves.

And one of the things that's happening in tech more broadly, right, if we zoom out away from the public markets and think about happening on the private side of the equation. You know, you're seeing a lot of VC twop deals. You're seeing a lot of sponsor to sponsor deals. They don't really care about the earnings. All they care about is the revenue. And that makes me a little bit

uncomfortable about the retroctor. I want to I want to flip what you're saying on its head, which is what you're saying is the gains in big tech might mask the vulnerability of smaller tech companies, but it might also mask the underperformance of other companies within the entire rest

of the U. S economy as well. And I'm struck by this figure that John Author has put out that if you exclude the big five, Microsoft, Apple, Facebook, Alphabet, and Amazon US earnings were down significantly in the fourth quarter. If you look at the Russell two thousand, it's continuing to underport perform. The SMP five hundred. Is the rally, the two trillion dollar rally, and big Tech masking some

serious underlying weakness. I think it absolutely is. And one of our big concerns looking ahead at is actually how the earning story plays out. Um. If you look at the eleven gifts sectors today, there are only four of them that are seeing margins expand. Right, Financial saw margins expand in the fourth quarter because of a favorable base effect. Staples are seeing their margins expand, Utilities are seeing their margins expand, and then tech is seeing its margins expand.

The rest of the market is seeing profits come under a pretty significant amount of pressure. Yet you still have consensus looking for eight to nine percent earnings growth in which I just can't square that circle. What are your clients doing? I mean, part of your job is to go out and talk to the troops, and by that I mean the clients. We did the backdrop here of the Morgan Stanley Trade and you're talking to more substantial people at JP Morgan. Great, what are they actually doing

with their money besides telling you they need more Apple? Yeah. So I think what's most interesting, the most interesting trend that we've seen over the past couple of quarters is primarily a phenomenon in the institutional world, so pensions, endowments, foundations, and what we're seeing a lot of folks do is is look at the world today, look at their portfolios. Not necessarily be keen to add more equity, beata to their overall allocation, but they look at fixed income and

they're not getting paid. Come on, they're gonna making their actual assumption and their assumptions going down right now, they're under And John, this goes back to Jeff, you and the wall of money out there. You will be yes, these people are desperate at their actuarial underperformance. Plus Bruce Chasmas and Michael Faroli, you're gonna tell them the actual assumptions coming down as well. That pressure is immense, isn't

exactly it is? And so what we're seeing a lot of people do because again, you know, adding high yield to get that income is just going to increase your overall sensitivity to equities. So we're seeing more and more people adopt things like real estate and infrastructure and transportation strategies as a source source of both diversification and yield within portfolios. You know. The flip side of that is when I talked to a lot of retail clients, everybody

feels pretty good. Market was up thirty percent last year. Nobody really seems to remember what happened in December of eighteen. Yet, coming back to the profit story, we're seeing earnings begin to drive brilliant, folks. What you're hearing from Julia Cardano back to back with David LEVINWOZ is just outstanding. Okay, great is Apple, Amazon and the others? John and the cover of the economists this week. Are they under owned

by institutions? I think that they're probably not under owned by institutions because more and more institutions that I speak with are are indexing their large cap public equity exposure. I mean, it's very difficult to add alpha in that market. I mean, there are what north of twenty analysts that cover Apple. There's there's no stone that goes that goes left up. Just mentioned three Greek letters, can he stay pain trade? In last year, equity markets just kept going higher, exactly,

despite all the outflows. Equity markets kept going high, and the biggest risk wasn't a downside risk, it was upside risk. And the coals you needed to get right the policy coal and the cola multiples any different. I I don't think it is. You know, I think that one of the things that's been supporting this market as of late is an idea that a the coronavirus issue is is in fact transit to worry and be whoever ends up

in the White House this fall. You know, when we look at governments more broadly around the world, the fiscal taps are staying open. So if there's no inflation, policy remains accommodative on the monetary side, and if the fiscal taps continue to flow, that's a pretty good environment for equity markets overall. Tommy, you asked if institutions under owned

big tech. I was struck by a Wall Street Journal story yesterday about Warren Buffett's apple steak, and it's more than double to seventy nine billion dollars since he began buying in sixteen. He basically capitulated he still can't put in anyone of any of his money to work. But he said, I didn't go into Apple because it was a tech stock, but rather for its brand and capital return strategy. They have so much cash they can keep pouring it through investors here. So is that the underpinning here?

I mean used to be in small cap, in MidCap where there was no share by that no dividend growth? Is that the mother of all underpinnings here in two thousand twenty, they use of cash that Leasta alludes to, I think it is. We actually just released a paper last Friday on how corporations have been using cash and thinking about investment spending versus R and DV is dividends

versus buy backs. And the way that we're really informing ourselves and driving our own strategies this year is by focusing on this concept of total shareholder yields, so dividends plus buy backs. Right, everybody always wants to know what do you like more value or growth? Frankly, I think you can own both. The financial sector pays a six

and a half percent total shareholder yield. Tech is paying you a four percent total shareholder yield, and you don't have that downside risk if rates do move higher that you're getting from utilities and staple John from Coventry emails in and says, what should I do with Uber? That's you know that what he said? That what he said you management Global market strategy Cornado, David levitts back to back, right down. Johnny ends to jump in here with the

new slow we get lucky again. Jonathan Fenby joins us. His book on France is absolutely authoritative. I read it cover to cover, stunning history for Americans, all this on the European distinction. That's a sidecar transaction for him versus what he does with China. His monographed John three years ago, will China Dominate the century? Was absolutely definitive. And that's a little bit of an appoint a question right now is China is a bit distracted? Wonderful to bring in

Jonathan Fambi now Ts Lombard, chairman of China Research. Jonathan, fantastic to have you with us on the program. Muhammedan Amon has talked about these sudden stop dynamics, and I'm interested to see how you think some of these things will cascade through the global economy in the coming months.

How are you thinking about that at the moment, John, Well, the the outbreak of the virus, the coronavirus has come really as you know, it's it's a big, big test for the leadership in China and it's having pretty wide effects there obviously in China itself but now increasingly outside China, and for the leadership she's in thing the first priority is to show that they can sow, they can save the protect the nation, you know, prevent this virus taking

yet more lives and so on, and bring things under control. But that comes with as we now are seeing a heavy economic price in the terms of the lockdown, the quarantining, the closed factories, particularly after the lunar New Year, and the disruption to the supply chains which globally depends so much on China and which are very very complicated, very complex um go both in and out of China, and to rebuild those is going to be a major element. So we're going to have a slow down in growth,

probably quite serious in the first quarter. Depends how long obviously it is before industry gets going again, and that will lead to a stimulus package undoubtedly by the leadership. It won't be as big as too oh nine, which was mega, but it will be very considerable. It's already starting, and that will then in turn raise questions about the debt level in China and whether they're going to give

up the attempt at de leveraging. So the whole series of choices and policy issues at the moment which is going to affect markets worldwide. Let's pick up on some of the issues that you've put out there at the moment. On the one hand, containing the virus, on the other hand, stabilizing the economy, and somewhere in between social instability issues as well, Jonathan, how does that fit into these two issues? Absolutely?

And control, Controlling China, the Chinese society and that's one point four billion people, of course, has always been a major priority of the current leadership under Shijin thing Um, and that attempt to bring about stability, as it's called, in the face of consider a lot of public uncertainty and happiness, but also a certain degree of public anger which has been manifested through social media. At the way the virus has been combated is going to cause quite

a big political problem. And we've already seen sting sending in trusted left tenants to take over key positions in the most affected areas of China. Jonathan, it's interesting that we had Tony Chris Ansia and from PIMCO earlier, and he wrote in a recent report that the general resilience that we've seen in equities demonstrates the existence of a new global monetary order, highlighted by the prominent rule that the PBOC now plays as a circuit breaker for world markets.

Do you think that that is an accurate characterization? Well, it's that that depends on how effective the PBOC measures the easing measures which they've undertaken, together with US mentions taken by the government, how effective that will prove in buying up the economy in China, And frankly, with the degree of uncertainty around at the moment, this is something

we have to watch and wait and watch. John. I I look at your expertise on China, the making of the history of China and and all that you've written. I guess it's you know, they had a script and the script has been derilled. If they don't get the v shape recovery, even if it's delayed by two three four quarters, what's the FENDI timeline where the script begins to fall apart. For President g Well, the difficulty is

next year is a very important historic year. It's the hundredth anniversary of the foundation of the Chinese Communist Party, and this was due to be a great celebration of how China under the Communist Party has built itself up and was a model for the world to set alongside that of the Western the United States. And that will be a big political problems. I think they're gonna throw everything at it if it turns out to be a

U shape or even more an L shaped. For the rest of this year, there's going to be a really major policy decision taking that's going to have to be taken in Beijing, which will affect the whole world. John Femby, we want you to fall back on economics, finance, and investment. Right now, you're expert on France. The lethargy of Europe as well, let's call it eurosclerosis. The yields are there, the negative rates are there, the yields are there this

morning in the United States. What is the yield structure of Europe signal to you, well, that Europe is Europe is still pretty sluggish. It must be said eurosclerosis. I

don't know that I go quite that far. And to link in with what we were saying earlier, of course, a lot of European companies are pretty dependent on components and inputs from China, not just in selling into China, but also in components in themselves, and the uncertainty I think that's around at the moment is going to put a premium on what I've seen as safe haven's gold.

Obviously we've seen the movement in gold and that this will mean strength for the dollar still and Europe is really floundering a bit, I think in the present situation. Although there are some bright spots. You know, French unemployment has come down to go to to France, but Germany, which is the motor so much in Europe, is really in a in a state of economic uncertainty and political they don't know where they're going. Just pouring through the

data this morning, it's a great shame. You get a real sense the domestic demand in Europe was just started to pick up before it smacked around the head by what is happening in China. Jonathan was looking through the p m s and they're really quite nuanced, and we pour over all of these different sub indices. Delivery times lengthened in Germany, but when they calculate the headline number, the supply delivery times index is then inverted and you

end up in this really weird situation in Europe. Today we're almost half of the indexes. Month on month gain for German manufacturing was attributal attributable to a deterioration its supply delivery times. It's pretty clear that we're standing to see some supply chain disruption. John, can you assume at this point would your base case be that Germany is heading into recession or is it still too early? It's still probably too early, but it's heading towards a recession

that I'd say towards rather than into recession. Um And the politics come in here because one with the present uncertainty with the ruling party of the c DU after mercle, what's going to happen on her designate ancestor having stepped down? Quite a nasty fight going on among other contenders for the leadership. We're not going to get any clear political decision on the economy, I think. And although President Macro and France has high ambitions, France can't take up that

durban role. So we're in a real period of uncertainly, which, as you absolutely rightly say, the link with China, both China as an export market, but also, as I was saying earlier, China as a source or vital source in the European supply chain is going to leave us in considerable uncertainly for months ahead and perhaps on into the end of the year. It sounds like the next book, the next treatment from Jonathan Fanbi, Thank you so much.

With t. S Lamber, I focused on the FED, focus on the ECB two meetings coming up just a month away, to focus on all of that, and police to say, tiny crescenzi in the building here in our studios. Pimco market strategist, port folio manager and member of the firm's investment committee and monitor Tonye the message to the clients calling you up and worrying, what'd you tell him? Well, Uh, that meant much of what you've seen in the financial markets.

Both the decline went in markets and risk assets when the news of the outbreak occurred, and then the subsequent snap back tell you several important things about markets that will persist beyond the coronavirus story. Let me give you the two negatives and the one positive that brought it back. The one big negative is that markets are worried and

anything could bring this worry about into the surface. That economic growth globally is so close to stall speed that anything that comes along and weakens it could easily tip economies like you saw in Japan with a minus six plus print plas quarter into into into recession to negative territory. That's number one. Secondly, markets were are worried and they will have to persistently worry about this, that central banks can't do much about weakness and economic growth and running

out policy tools. In fact, today out of monetary policy form in New York, which my Chael McKee from Bloomberg will be at. The main topic will be Michael McKee. Of course he has a sheet of paper. I want to make sure I get the topic right. The main article that will be discussed by Lyle Brainer from the Fat and Bostick is um monetary policy for the next procession because what is it that they would do so

on the Corona coronavirus issue. Uh, it just brings to the surface these worries about policy buffers, not only from the monetary authority, but the fiscal authority. But here's the the what broad markets back and is enabling markets to look through this all. And it's something monumental, and it's a new global monetary order. With two central banks in the world, the the US Central Bank and the Chinese Central Bank can be circuit breakers to to weakness in

global economic activity. And here's the central bank, the PBOC that is perfectly positioned because it's the problem is in China to address the issue. Is in no way position to help it out. Tony, the problem on my screen is one twelve percent of our listeners we got we have to forty two listeners. Okay, thank you, good morning. But Tony, what's important here? This is really important. Our listeners are getting crushed by essentially record low real rates.

I get it that there's a policy conference of Brainard and Clarida and the rest of them, and Master will be there and Michael McKee will be there. That's all blah blah blah for the elites. What about the people out there getting crushed by this low rate regime. They shouldn't look to the monetary authority. That should look to the fiscal authority, or look to a dividend growth structure. Right,

Amazon is a dividend grower. Dividends are for the SMP five hundred around two percent, and the tax taxation on dividends is better than a taxation on uh. Interesting come generally speaking for most individuals, individuals can are you the

equity straight? Yet for safety of principle, one must be in bonds, of course, but they should listen claim they should look to the disclaimer too about Mr Bloomberg, but continue we have to say that, of course, but it is true because we are hiring the capital structure, as they say. But the if, if, if, the if citizens savers were to look to the two politicians, they should say,

why don't you do something about academic growth? Low interest rates aren't doing it, so why don't you do something transformative? Perhaps so when we travel into New York City from New Jersey, maybe do what the Senator to Chuck Schumer wanted and build that second tunnel, at least the Penn Station, the busiest commuting rail station in the country. We should do things like that pet project. John. He talks about

it every single day. We talked about the municipal bonds, and he says, how about raising some money for that, you know, across states personal very for US Staten Island is we crossed the Verrizonta Bridge, which was the largest suspension bridge built in the world at the time. Ur, maybe we could have a nice tunnel. It's a tour of the five boroughs, John, we just save this. Can we talk about a cyclical outloo a pimcut the you mentioned a couple of minutes ago. Let's get back to

the we're close to stall speed. That was the outlook. We've gone beyond that now in places like Germany. Are you worried that maybe you need to revise your cyclical outlook for twenty Well, PIMCO, in a week and half we'll have another cyclical forum. We held help have them quarterly, so we'll see what we conclude. The early view is that based on p m iyes purchasing manager in disease, that there's a rebound was underway before the coronavirus issue

began to hit the world economy. We will be questioning whether or not we think that that that that thesis holds for the second half of the year. Probably it probably will because of the notion that central banks are coming to the rescue again, but we are questioning again the extent to which they can help. Well, let's talk about the degree to which people will respond to central

banks coming to the rescue. It took about eighteen months of targeted stimulus from China to finally start seeing some results. Do you have that much faith than the policy Mike is still well. One could say turns of policy levers in China that they have formidable resources to to help the economy there, but there's still a lot of worry about demand destruction. It can pull the fiscal policy lever

in ways that no nation can. And remember it has three trillion dollars built up in what's called what are called international reserves from US buying stuff that's has made in China, and so we can use that money wisely and to invest and to to promote economic growth. Tony is good to see terrible answers. I gave terrible incent You could no one could see see the listener couldn't see that. I'm using my hands to talk like camera on you at some point, Tony, thanks for dropping by

Tony CRESCENTI. The PIMCO market is trying to just put folio manager and member of the firm's investment committee. We've got just an incredibly busy day in economics and in New York. It is a celebration of the smartest Confest going with us Michael McKee, who does all the things he can works worldwide. Here today we're gonna get to Philip Laneer John is acutely interested in your interview with

Mr Lane of the e c B as well. But but Mike McKee, you know, I look, I look now at this confest today and it just seems way more important than it usually is. Well, the Chicago Booth School puts on a conference every year, one day conference, oddly in New York rather than in Chicago. But it's all about central banking and basically all of the countries UH and Wall Street's biggest name economists, and most of the Federal Reserve, and as UH we saw with Philip Lane,

many central bankers from around the world attend. And John, what's so important about this is it sort of that we've run out of ideas conference and that's why Mr Lane is originally gentle. What ammunition do they have left, especially at a time when we're worried about it growth scare in China, so I think the coronavirus is the focus for central bankers worldwide at the end. At the end of the day, let's take a listen to what

e CB Chief economist Philip Lane had to say. Like everyone else, I think the base cases a v tape. So I mean number one is let's see how quickly the spread of the virus is contained. Um. The sooner that happens, then the more confidence that this would be indeed something that is mostly in quarter one, maybe spilling over into quarter two. But you know, from our perspective, I mean, our our main focus is on the year end,

going into next year and the year after. So for us as Montrey policy makers, if this is indeed contained, even if there is a hit in terms of the initial weeks of twenty, if the recovery happens as we expect, then in terms of the medium term policy challenge, it remains something that is not going to change our base case. But it's definitely downside risk until we see the containment, until we see the recovery. After that we have to keep a close eye. Well, one of the big issues

is this could be supply chain disruption. Monetary policy can't fix that, So what are the odds of the ECB would take any action. Well, this goes back to again, any supply chain disruption, if it's a matter of weeks, doesn't change the medium term path for the economy. So really we think the main mechanism, by the way, is obviously through Chinese amount with lower spending in China because of the what has been necessary to contain the virus.

Obviously spending levels in China are different than they would have been. The supply chain scenario does exist. We're tracking it, we look at it. But so long as these are delays in delivery of goods us so long as these remain temporary and nature, then it's it's not a dramatic issue for for the medium term horizon. E CB Chief Economist Philip blind Nest sitting down with marcol McKay. Lucky to have my with us in the studio here in New York. Back at the end of Mike President Mario Droi,

former president Mario Dronk. He was talking about things being temporary, transitory, and then in that's cut right, somebody stock your week. Why is this so different? Why is this economic situation we face right now so different to what we faced eighteen months or so, AGUN investors have been basically trading on patterns, and the pattern has been that we get an event that scares people, it lasts for a few weeks, it goes away, so you buy the dip, and that's

seems to be the prevailing psychology on Wall Street. We're into our fourth week now or fifth week now of the coronavirus, and we wake up the headlines today saying, oh no, wait, it's worse, and so now we're starting to see maybe some concern that this is a Blacker swan. Then people had thought it's hard to know, and as Philip was saying, it's very hard for economists UH and central bankers to get their hands around what it actually means. And it's not really showing up in the data yet.

The only data we've seen that had a major UH that that has shown it is you look at something like the German p M I s which you were talking about, the sub indexes supplier delivery times they go they get longer, usually when demand is high. In this case, they're getting longer because the supplies aren't coming in from China to build the things that the Germans are selling to other people, and so there is a sign that

something is coming, but it's not there. It's a crazy quirk of the data because it's the delivery times Lengthen the sub index drops below fifty, then they invert it as they compute it into the headline number. So you get this boost to German manufacturing p m I that seems to be largely from supply side constraints. And this

is the problem going forward to Mike. When do we actually start to get a hands around the data, when do we know what this actually coming about the time We're going to start to get trade data coming in, and we'll see some impacts. Particularly look at the Asian trade data that comes in South Korea, Thailand, Uh, places like that which are deeply integrated into the Chinese supply chains. Um if they if they show some real damage, then

you can expect it only to spread. Thanks for Japan, looks terrible recession, looks thoughts on and some of this has been South harm and now the Chinese story is just gonna make it worse. It's well, it's it's bad for them because not only do they have the supply chain issues, but Japan is the biggest destination for Chinese tourists, and so probably the only place worse off in that sense is Macau with all the casinos closed. Uh. The Japanese are definitely going to be hurt by this, Michael.

This thing in New York at the Intercontinental today is a huge celebration of academic thought. And I'm gonna go back to yelling two thousand and sixteen on toolkit past, present in future. Not only can we not count the tools in the tool kit or not figure out how to use the tools in the tool kit, I don't

think there's a confidence in the tools right now. What tools are in the toolkit for all these fancy economists, well depends on which central bank you're talking about, But for the Federal Reserve, they're basically focused on QUEI and forward guidance, and they're more focused on forward guidance than

anything else at this point. The idea is that you do buy things, buy more uh more um bonds in que but the announcement effect is gone, the surprise effect is gone, and you've got a ten year sitting at you know, one point five percent roughly, so you're not going to get a lot of bang for that buck. So let's let's let's be a speculative here. We can do that in a Friday Michael one nine five on a thirty year bond, John, how negative is that real yield?

Speaking of your one PM show today? Where is it? Not? Just not the two percent? So it depends on which deflator you use. Great, you can use you know too. So you are looking at a negative real rate for for thirty years and allow Brainerd's world and Richard Clarence world in Professor Lane's world. Could anybody use any of these models with a negative real yield? I don't see

any of that in the literature. It makes it more difficult. Um, that's why they're looking at the I mean, one of the things that's in the back pocket of the FED is yield curve control. I know you've talked about that before. Um. The idea that you say you're just gonna buy X number of bonds of a certain tenor and you know you're you're you're gonna say here's the price instead of going out and buying it in the open market. Um, and then that caps a yield. That's one idea they

could do. The FED is ruled out negative rates. The the FED Reserve cannot buy stocks legally in writing, they can't be the Swiss national bad they cannot. I don't know. And there is a legal question about whether the Fed could even do negative rates legally if they wanted to, but they say they don't want to. Meanwhile, there's a balance of risk here. On one hand, you have financial assets which are near record highs or record high valuations.

You've got corporate bond yields falling to record lows, and so people say, financial conditions are easy, we don't need another rate cut, we don't need more stimulus. On the other hand, you're seeing the lowest income earners finally seeing the gains in this cycle, the economic cycle, and there's a fear of stymying that since it takes so long to get that going. Which is a more important factor for the Fed to look at right now? Well, probably I throw in the third factor is what would do

any good? Uh? In either case, the Fed is obviously made the decision to let the economy run to try to benefit people. For Wall Street, every problem can be solved by the Central Bank. It rained last Thursday, they should cut rates. Cutting rates isn't going to help if you have a supply chain problem because it's the is set up to increase demand, not supply, so they may they they lean towards doing nothing because there isn't a

lot they can do. Although you would say this point in the credit cycle, we're actually starting to see consumer debt pick up. You're starting to see Morgan Stanley with their move or Goldman Sachs push into consumer lending as the next spot of profitability. Could there be a theory that finally, as a greater proportion of the United States gains more confidence, goes out and borrows, it sort of

reignites the economic cycle. As anyone talking about that. Sure, Um, there's a lot of people are uh, and the more optimistic of the economists are saying, you know, we had a dip. We had a not an end of the economic cycle, but a sort of reset also sort of in the way you have a correction in the financial markets. The economic cycle corrected with all the recession fears last summer, and now we're starting a new Uh. Hard to measure that because the numbers aren't really supporting it, except for

the job growth numbers. But we're not seeing a dip either. So at this point, uh, you know, the one thing I would say is our Matt Bows, whom you all know and love here put together a great chart yesterday added up household and business debt, and it is not expanding at the same pace it did the previous psych I don't care Bruins Stanley Cup bound. I would hate

to make a prediction. Well, here's the problem, Tom, You know as well as I do, that they're in line to win the President's Trophy, which means they have the best record in the league at the end of the season, and everybody who wins the President's Trophy loses the Stanfing Cup. So at this point you gotta hope they fall back just a little bit. I'm going to do that to balance out the football talk earlier. That thing that's soccer talk.

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 Keene Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio S