Surveillance: Mass Transit Recovery With MTA's Foye

Make Swallick element Sacks joins us now, Mike Friday, What did Friday change for you as you look ahead to the weeks and months ahead through I think that Friday was just an example of a continuation of the impact of government policy, so big impact on the TESCO, big impact of monetary policy, that the rally can continue because the level of support from the government has been so significant, creating an enormous amount of cash that is really looking

for a reason to get invested. I think that when you look at the employment report and the discussion you've had earlier today about the questions in the number, we're a long ways away from getting American workers back to work in a very meaningful way. So the job situation is going to be one that is going to continue to be an issue for the next six months to a year, and so I wouldn't necessarily call victory with

regard to the job picture. I think we have a long long way to go, and I think what you're seeing right now in markets is the more the impact of um UH significant significant policy liquidity, more so than confidence in in in reopening. The policy effort is clearly were the federal reserved objective was to divorce financial conditions from the real economy. We've done that. I think a lot of people looking at the date to Mike and trying to work out whether the economic conditions catches up

with where financial conditions has taken us. Is that a challenge for the next couple of months or a challenge for the turn of the year. UH. That is the number one, two, and three questions regard to how you think about financial markets here and UM at Goman Sacks. But we did last week we have a daily forum where we get together all different investors. We brought in our multi asset people are fundamental equity investors as well as fixed income and had kind of a cage match

around this topic. And the conclusion that we came to is that Number one the financial conditions that have been supported by the FED and by uh by governments through fiscal policy will dominate in the near term, but in the long term it's going to be earnings and jobs that are going to matter. And I think that it's too early to call victory with regard to where earnings

are gonna end up. I think a lot of investors are saying that, you know, we're going to jump back in one to the earnings that we saw in We have a long, long way to go, and I think that there's a lot more repair that has to happen in the economy that we really don't know how companies are going to react to a different state of of of of a global economy when we have a UH issue, a medical issue that's going to be so significant to

change the way that we do business. So our view right now is that for the near term, policy wins stay long risk assets, but over the longer term it's going to be all about earnings and jobs. Michael Swell, I want to go to your work with Goldman Sachs and before that with Freeman fbr Is well with your expertise and mortgage backed securities. A lot of rents aren't

being paid. A lot of commercial real estate of every gradation isn't going to work out, And there's all the loans and the fancy derivative instruments off the back of that. Are you troubled at all by a pending real estate crisis in the nation because rents are not being paid? Um? I would say that the residential picture is going to

be correlated to the job picture. So if we expect to continue to get America back to work and we can drive the true unemployment rate below ten, we're likely not to have a housing more get issue, whether on the price issue or whether on the rent issue. Uh. And So I think in terms of housing, we we don't have oversupply like we had to oversupply in two thousand seven, and we don't have um too much leverage in the system. We've kind of fixed the very very

high LTV loan situation, the interest only loan situation. We we don't have borrowers that our leverages they were before. We're really going to be dependent upon jobs. So I think if we continue to see jobs improve, we don't have a housing market issue. I do think in the commercial real estate market there's a lot of adjustment that has to occur. There's gonna be a decent amount of restructuring of loans, there's gonna be some defaults, obviously on

the retail side. But if you look at the commercial real estate market, there's a big debate there. If we think that we're going to see a lot of companies move out of UH, move out of major hubs, major cities, and and and and diversify their their exposure, having a negative impact on commercial real estate, the other side of that is, in a socially distant world, you're finding the companies are actually looking for more square footage to be able to bring workers back in a a in a

safe way. So we actually think that the commercial real estate market is one that has has still has a lot of opportunity. If we see reopening of the economy, like the equity market is telling you, you ought to see stabilization in the commercial real estate market. And if you look in the world that we live in, not in the direct commercial real estate market, but in the commercial real estate securities market, we have not seen a

significant recovery in pricing there. If we see the economy get back like the equity market is telling you, we think there's gonna be a lot of opportunity in some of the mezzanine securities and commercial mortgage backed security to be able to our an equity like returns. Mike, I'm just wondering. You were saying, is it time to stay risk on? And certainly a lot of people have been

risk on. If you look at HILED bonds in the US, they've gained twenty two percent since late March, and we've seen three and a half billion dollars flow into the biggest high old bond et F in the past week alone. Don't fight the FED, but you can front run it. Has the FED already been front run fully? Or are there further opportunities here? I don't think fully. I still think there's going to be a lot of demand for

US credit related assets. Keep in mind, it's not just front running the FED, but we're in a global interest rate environment where there are no interest rates. We're basically zero around the globe, and the US credit market still is a market that offers investors yield. Demand for yield is very, very significant, and I think people will continue to view not only the US treasury market, but also the US corporate credit market as in general safe haven,

so I do think there's more room to run. However, more broadly around the question around risk assets and where we go from here. In the short term, we do think that policy zero rates are going to driver risk assets higher from here, but that's not gonna last forever.

In the end, it's going to be about earnings. And so in our discussion last week, our cage match around where we go from here and have risk guests that's gone too far, we definitely came to the conclusion that this is going to be a winners and losers market, both on the equity side and the credit side, and it's time to think a little bit about moving away from just kind of being long beta and really focusing on the types of companies that will be the survivors

and will gain market share. And so we do think active management will be a very important part of future returns versus just the beta they might. We just want to know who wins a cage fight, a Golment sacks, How does that work out out of the awakened when that plays out. I'm six ft five pounds, so I'm the biggest person. Who I I was? I was win? Um who win the the the answer is short term risk. On long term, long term, it's going to really rely upon earnings, and that the data that we have so

far is irrelevant to the longer term macro picture. Stay tuned. Follow what's going on in China, Follow what's going on in South Korea in terms of reopening, and what's going on with consuming or what's going on with corporate earnings in those countries, because those will be leading indicators for what goes on here. Mike Swell, fantastic work has always

always appreciate your time. So Mike Swell, that of Gallman Sacks joining US now and RITA cent of Energy aspects and ridascent is outstanding at the dynamics of supply and demand. Em Rita, I want to dovetail your wonderful narrow work with those that take a more geopolitical strategic work because it folds in. If OPEC plus members and let's go with OPEC, if they cheat, how does that affect your world of the minutia of supply and demand? Him a

morning tom Um. I think in terms of the question you asked about compliance, Um, if the cheat, which by the way, we are ressuming in our balances we just cannot see how Iraq, Nigeria, Kazakhstan, given their fiscal broader fiscal issues, they just is so cash up will comply. It just means that the rebalancing takes longer. It is simply that supplies are now falling faster than demand. We've been saying this right from the start, that the stock

draws will start from early June, and they have begun. Um. But the more these guys cheat, it just means that the overall supply number the reduction from OPEC plus will be less than what the headline numbers suggests. MENA. I'm

struggling to understand the supply demand dynamic right now. A lot of people saying that the promised cuts of OPEC plus and the potential enforcement of them, which has been a challenge for years, that that has been the main driver of some of the recent price gains, and other people raise the concern that the shale patch is slowly starting to bring rigs back on. How much is this the story and how much is demand still the main driver here? How quickly the global economy can get back

up to speed. I think you're exactly right, um, I think the global demand I at least in our view, is still very much the key riper. We did fall to record low levels in terms of demand. Now we are recovering um and that just means that you do need higher supplies now. I still stand by the problem we have in the market in you oil, that is, the data is opaque, The data is very lagged. We still don't know just how much we fell by. So if we don't know how much we fell by, but

the markets assumed we would hit tank tops. I remember talking to you guys about that, but we never did. Because it may be demandedn't fall by as much as expected, even though it was very very weak, and because of negative prices, supplies fell tremendously, and that's what caught us to overshoot to the downside. In some respect, we have overshot to the upside right now, but we do need that some of that supply back because now refineries are

bringing back production and demand is rising. I still think we've gone a bit too far because the demand is fragile. Supplies from the US are going to start to come back, so you know, it's not like a slamdown that of course prices should be from here. I'm rated do you find the supply in the United States is more elastic when prices roll over aggressively than when they rally. Yes, I think that the rate of change is absolutely the

critical thing. But you know the main thing I will say for right now, especially because you ask about the US and in relation to gasoline demand, it's unemployment on our all our economic models. That's the biggest driver, even more so than prices. I just want to fit in a final question as well. I'm rating New York City reopening. I think we're all trying to get our hands around

how quickly demand recovers. This is a slow, slow process for New York City, but going global to the United States beyond China, where we have at least the longer data set, what's the recovery and demand look like at the moment? I'm rated for these economies reopening. I mean, if you believe that the demand felt by about million barrels per day at the bottom, which was in April, we have easily recovered about ten to twelve million barrels per day in May alone, and right now we believe

global all demand is about ninety million barrels. But they give ortake again China parts of China actually back above last year's levels because the government has um it's basically driving a big stimulus package. Europe isn't. US isn't. It's going to take a long time, particularly in the aviation sector. But yes, economies are opening up around the world because lockdown simply isn't sustainable for growth in the medium. Tom, I'm really sent ad energy aspects. I'm very fantastic to

catch up with you to get your thoughts. As always, we're going to do a lot of this through this week of Bloomberg surveillance, market analysis, and there's no one better to coalesce all of these emotions, intentions, and Daniel Morris sees with BNP Perry, but with market strategy as well. Daniel, we have come so far, so fast in this equity market. How do you restructure? How do you reframe on the Monday morning in June. Well, I think it depends on the attitude that you had before we got all the

news and we've been in the camp. I think, like a lot of people, it had been too much, too soon, and if we got more and sooner than we had before, you've either capitulated or you've just become that much more nervous and unfortunate. We're probably to stop much more nervous.

I mean, certainly the data was good, it's helpful, but when you try to think about how things are going to be three and six months from now, and in particular when you look at earnings forecast for the end of the year, there still seems to be a fairly significant disconnect that if anything has gotten bigger. Okay, I totally take that point in the chart of the earnings disconnect is known by anybody listening and watching this program. Great, Then what it comes down to a central bank support?

Did that go away over the weekend? Well, I guess it comes down to how what's the mechanism for that central bank support? I mean, if we think about low interest rates, right, we've had that for for a very long time. The increase in money supply, you know, certainly there's no lack of liquidity, but I don't think it's

necessarily that that's strugging up to market. So on the margin, guess it comes back to if you do have any kind of setback, if there's any disappointments when we get into the fall and increase in infections and concerns about the reimposition of the lockdowns. You know, we will come back inevitably either to the question, you know, how much more consentral banks do when they've already done so much, and or if it's been the need for further fiscal stimulus.

At some point, we've got to worry about the death that's being issued. So I think if there is one good thing that has come out about this, and I think you alluded to it a bit sooner, you know, we may not now get as much stimulus in the next rounds from the US as you would have thought before given this data. And you know, I really actually think that is a good thing, because it is because

the data is better, so you don't need it. And then also again we are going to have to worry about the dead levels at some point, and at least on the margin, that's not quite as big of a

problem as you might have feared. Dan. A lot of people say that the rally in stocks hasn't been entirely driven by FED stimulus, but just the fact that Facebook, Amazon, My or soft Apple have all done well in this environment with a push to the digital and if you look at the combined capitalization of the top five holdings in the S and P it has doubled since two

thousand thirteen. How much can we see this rotation into the other sectors that are less loved, given the fact that we're not clear on how much of a fundamental recover we have that in the economy. Yeah, I think it's exactly the right way to be thinking about it. And I would actually divide up the market and probably three different bins. So one, you certainly have technology, which we all understand is going to be a long term winner from the pandemic. But at the same time we

also appreciate that valuations have gotten very high. Just by one measure of price to book for the sector is eight times, which is the all time high for the sector. So even if you know, we love those growth prospects, you're paying a lot for that right now. So without question of vulnerability, at least in the near tom poor technology. I think the other part where we've seen those parts of the market that had massively the underperformed until recently.

You think anything around tourism, uh and leisure and so on, you know, a pretty significant opportunity there for those sectors to rebound. Now, maybe not sustainably because a lot of this will come down ultimately how optimistic we are about getting a virus excuse me of vaccine and when. But you know, from evaluation point of view, that's clearly an opportunity.

And then I think the other risk we need to keep in mind are exactly those defensive sectors that have done well, but have done well because we've been living under lockdowns because we haven't had a vaccine. And as that starts to ease, these sectors, which have also become quite expensive, aren't going to see that long term earning support the way you see in technology. So you think around, say the market excusing the hypermarkets, you think about, you know,

cleaning supplies and any other defensive sectors. I think that's probably the other key vulnerability that you need to keep in mind when you're looking at your portfolio. Dan, is the market right now pricing in a second wave? I think that the questions to fold, so when will there be a second wave? And I think most people are pretty sure that there will be. I mean, it certainly seems likely, but it's trying to anticipate then what the

response is going to be. And I think there's at least there there's some ground for optimism that even if there is a second wave, the economic impact won't necessarily be so great. I think there's two reasons for that one.

You know, as opposed to the first wave, we know this one is coming, or at least we can anticipate it, so we'll be more prepared, you know, hopefully hospitals will be ready, we'll have you know, better capability around tracking and tracing, so hopefully we can have a more focused, targeted response to whatever increase we do see, and we won't need to have nationwide lockdowns where we've had so far. So again, the economic impact will be hopefully much less

than we saw in the first round. And I think the second thing that certainly changed over the last couple of weeks is to some degree you could argue the media attention has shifted a bit. It's not every day on the front page, seven on the TV about the pandemic. And you think about the psychological impact to that, you know,

people's desire to consume, to go out. If by the time we get to the autumn, if the media attention has faded someone, I think that will be at least beneficial in terms of psychology, even though it's with our questions are going to be a very serious health health issue. People maybe may not feel quite so concerned and stressed about the environment, and therefore you will have on the margin a greater propensity to consume in a way that we haven't seen over the last several months. Night, and

we've got to leave you that down. Always great to catch out with you, Mike down mars that have been prepared on this market. One of the great things that is true is we take it for granted. And what we take for granted is very simply the getting around of New York. It can be seventy thod plus people, It can be by any means of conveyance, but it looks a lot easier than it actually is. Patrick Foy is with us on this day of reopening for New York City. We welcome in and across this nation and

to a worldwide audience. He is a small job as chief executive Officer of the MTA, the Metropolitan Transit Authority. Patrick, congratulations on getting to this point in this pandemic. It has been an extraordinary effort. Give us an update on the last two months. What surprised you about what needed to be done in this City for the m t A first. Thanks for having me. It's not a surprise, but I am awe struck uh and overwhelmed by the job that the m t A operating folks did subways, buses,

metro North Long Island Railroad, bridges and tunnels. They were literally heroes, moving hero uh. The pandemic has obviously had the epicenter has been New York City and the New York New Jersey region UH, and the losses, whether fatalities, nous is economic damage had been extensive. But the MTA workforce has done a tremendous job. The second thing that strikes me, obviously is the precipitous decline in ridership, which

paradoxically in this context is a good thing. It was New Yorkers responding to Governor Cuomo's directive and suggestions directive by executive order with the force of state law, but also his suggestions that the way to minimize the number of cases and fatalities UH in New York, New York City and New York State was for people to stay home and not ride public transit except for first responders

and essential employees. And New Yorkers answered that call happily today we're restoring full service on the subway services good this morning. Last week we did a physical survey of about the nearly fifty thousand customers, and mass compliance, which is now a part of state law, was the most important that our customers. Sorry, the most important thing our customers can do is to wear masks to protect themselves and their co commuters, and our and our employees. And

that is an impressively high number. In one we want to drive higher. How are you going to police usage of mass I'm on a train, I'm on a bus, and there's that one idiot, those two idiots without a mask. How do you police that? So here here's an answer to that question. First, we're starting from a good place, which is compliance. I spent forty minutes in Grand Central Terminal this morning. Uh and frankly, the customer compliance look

higher than that. What the m t A is doing this morning in subway stations throughout the entire system is distributing this week two million masks. We've got a million masks donated by the state and the city each. We've got MTA employees and volunteers from both the state and the city, and the MT a helping distribute those masks. So the most important action that can be taken by our customers is wearing masks. A pretty good start. We're

gonna monitor it and report it coming forward. On top of that, we are disinfecting every subway car, every bus, every Metro North and Long Island Railroad, commuter rail at least once a day, and in the case of subways and busses and commuter rails multiple times a day. We're disinfecting our stations, all of them at least twice a day.

We had asked a couple of weeks ago the great news that ultra violet see white, according to research by Dr David Brenner at Columbia University, kills the COVID nineteen virus. And we're piloting that right this week, last week, this week, and next week on subways and buses, will roll it out to Metro North Railroad. Beyond that, we're also looking at anti microbials, which promised to have the ability to

eradicate the COVID nineteen virus. Also to do that and months after application, Mr Foy, let me bring in my colleague Lisa. Lisa, Well, Terry, you know one thing that I'm struggling to understand is how quickly ridership has to get back up to near where it was in the past in order for the m t A to remain solvent without federal government help or additional borrowing perhaps through

the FEDS new facility. So at least a great question. Obviously, in the Care's Act, the m t A received over three point eight billion dollars the Heroes Act, which was passed by a Speaker Pelosi, and both of those wheel great thanks and have to acknowledge the work that Senator Schumer and the New York Congressional delegation did on a bipartisan basis. Like every transit agency in the country and

around the world, ridership has the client precipitously. That's the flip side obviously of New Yorkers, and responding the Governor Cromos directive and request that people stay home today is an important day, phase one of the recovery of New York. We expect that anecdotally. First of all, we're providing really solid, reliable subway and bus service. Uh this more ing there have been no delays reported. We see mass compliance at a very high level, and we believe that ridership is

is headed higher. Obviously, we are in the phase one, significantly below the ridership in pre pandemic days. We and every other transit agency you're gonna require federal aid to get us through. About half of our revenue is based on fairs and tolls. The other half is on a package of dedicated taxes and subsidies which are economically sensitive or transaction UH based the FEDS action last week on

the municipal liquidity facility is important. Governor Cuomo is dedicated the named rather the m t A as one of the revenue bond issuers in the state of New York that it's eligible for an NFL applications. Thank you so much, Patrick Foy, the chair and CEO of the m t A. We really appreciate your being with us and we hope that you come back in order to provide us with an update as to how the reopening doesn't go. 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