Surveillance: Post-Virus Recovery with Dudley

Bloomberg dot Com, and of course on the Bloomberg. The debt market is, of course with thermometer here and someone looking at what we're doing in fiscal stimulus and building out as a gentleman from the Massachusetts Institute of Technology, of Courses service to the world, at the International Monetary Fund under Madame Legarde as their head of Economic research, and now at the Peterson Institute, we're thrilled to bring

to you now Olivier Blanchard. Professor Blanchard, you've written of whatever it takes, and that means the issuance of debt. Should we fear an issueance of trillions and trillions of dollars of American and indeed global debt. I think we don't have the choice, is the answer. We basically have to do whatever it takes, indeed to make sure that we fight epidemic and that we protect the people who we did need protection. Although it put bankruptcies for the

most part so we'll have to spend it. Now what happens next, even the well goes to part we don't succeed in fighting the virus, which I think is they are micly scenario in which case, you know, having that it will be the least of our poems. But in the scenario which I believe in which we may have to increase the ratio of that to g d P by ten to thirty for I think we can well uh sustain it. The reason is that interest rates, as

you know, have verre extremely low before the crisis. I even though now and we'll probably remain almost sure, you remain very lowful for the you know next size ten years, which means that at those rates you can actually carry that side levels of the teachers, the government and not be in trouble. The interest payments are very small. So I think we have to do it. We don't have

a choice, and I think it will be okay. Olivia President drag the former ECP president, wrote in the Financial Times in the last couple of weeks that we needed to see a big, big transfer of risk onto the government's balance sheet and it needed to happen quickly. And we're seeing that worldwide Olivia, Can we recognize some of the risks associated with that? What are the risk the downside risk that you're thinking about as we come out

of this health crisis. After governments have put forward their balance sheet and transferred massive amount of risk from the corporate sector, from the household sector onto their own balance sheets, they think in general, transferring risk from the private sector to the public sector is the thing to do when day's risk and you want to put it somewhere. The reason is that the government has a tool of the

private sector doesn't have. In the prior tector cannot just increase prices on what it sells in order to get more revenues, will sell less, so it really doesn't have much much room to adjust to a high that the government has that room, it's not a pleasant one, but it can increase taxes, it can decrease spending, and it can do it on the scale that you know, no private actor or combination of private actors can do on

their own. So it seems to me that's exactly the right thing to do in the right thing to the right way to think, which is you want to transfer the risk to the of the acceptor. In normal times you don't want to do this because you want people to be aware of the risks are taking. But in this case, nobody is guilty of having made the virus come. This is an unexpected event. It's not the result of that behavior, in which case, yes, you want to transfer

the risk to the public sector. Olivia. Perhaps people are not responsible for the virus. But there has been some behavior that some people think has been bad or imprudent in terms of borrowing a lot of money, hyper level reaging up balance sheets and using that cash to buy back shares or pay out dividends or pay out private equity. Uh pay out And I'm just I'm wondering where do

you draw the line. I mean, I'm talking about FED New York FED, the former New York FED President Bill Dudley, and his comment basically, this creates incredible moral hazard in

central banks and governments should not bail everyone out. Do you agree, Yeah, you don't want to bail it out of their way of firms which we are going to go fast before independence of the crisis that were I mean I think that you know, most terms were responsible and it was probably okay to actually issue that given how cheap it was, but Bobby, some firms went too far and those terms absenter crisis would probably have gone

day up. You don't want to say both now. The problem so, in fact is what you want to do is basically make sure that you know the effects of the crisis, that no more is what you basically take on as as as as a sake. Now it's very difficult to do. So you basically have to use some anket method of the time being in which you're probably going to save some firms we should not be saved in order to save those which need to be saved. You know, this is exactly the savings getting money to

the people. Ideally, you want to give money to the people who actually really needed to basic key going buy bread and food next week. But let's say difficult. So what we have which is not best, which is not good but probably best, is these checks that we're going to send. Some of these checks are going to go to people absolutely do not need it. Okay, it's the

same thing for firms. So yes, I don't think there's anymore has it involved at this stage, but there's a possibility that we are going to help firms which probably should not have been helped small costs. Today if you're just joining us with us, Olivier Blanchard of the Pearson Institute, Professor Blanchard, you've been out to watch at the i m F. When crisis occurs, Ms Gorgyav is going to have her hands full, to say the least our emerging markets.

Now in the dynamics there of crisis different than previous crises or is it the same old, same old for beleaguer em economies because webs common this time is with respect to financial crisis, which the capital is a capital outslows, and there's always the data for a country to basically capital leaves either have very large appreciation and which you have dollar that it becomes incredibly expensive. Banks find themselves short of funds. So that's common that has to be

dealt with. But you add to this the original cause, which is the virus, and many of these countries just don't have the technical equipment and human equipment to deal with the virus. They don't have the money. And in addition you have these incredibly stupid oil price war which clearly is kind of a blessing for countries which import oil, but the catastrophy for those with show exported. So it's uh, it is really a perfect storm for many of these countries.

And what worries me is that, you know, we saw obsessed with our one contribute, which I understand that we're going to be reluctant. I'm afraid to actually do what's needed to help them. So you know, for example, the development of the virus in Africa is something which scares me, Olivia.

I think it scares many people. A mutual friend of ours, Muhammadalaran, has been on this program so many times over the last few weeks talking about the dynamic of sudden stops cascading through the global economy, and typically a dynamic we typically associate just with emerging markets, and now we've got this global phenomena of a sudden stop taking over the global economy. Olivia, have you spent any time trying to

get your hands around what that means for policymakers worldwide? Yeah, I think it's a difference for advance to colmis You're right that we see we don't see sudden stops in advanced to colmies, but we see large capitals when investors decide to get out of the market in an advanced ecarmy, I think the central bank and largely just go in

and buy. That's really not a possibility for many of these, uh emerging market or developed I mean, you know we say emerging market, I think developping carmich are believe, but once which are going to settle the most. No, it is a situation in which they need outside help. Otherwise, you know, everything goes to help. And the IMP is working very hard on trying to mobilize money, mobilize farms

and help these countries. But I suspect many of them and conceptually what should happen is that the money should be given to fight the virus. It should be given, not lent, because you know this is something that that that they have to fight. Then even leaving this out, some countries are going to be an economic trouble and will they will have to come to the FONT for programs, and I hope they emerged that the PHONE has the

means to actually offer these programs. Olivia risk getting in trouble here with my producer for going too long, but I have to pick you up on that. Are you saying the IMF should offer grants and not loans and not not gleam shouldn't be offered to advanta. So all those ways of doing this, but should think of a form of the gifts the IMF. Maybe you can't do it. May have some programs which bisically have concessional landing, which is so concessional it's nearly gives. But no, it's a

work of via. It's the job of the im AT, the world back and governments themselves. Olivia Blanche had always great to get your thoughts, particularly on a morning like this morning. Olivia Blanche at that the Peterson Institute, City of Fellow right now is the former president of the New York Photo Reserve System, William Dudley Bill, thank you so much for coming on today. Bob mcteerre at Dallas a good number of years ago wrote up a beautiful summary of cham Peter in his speech on America, on

our Economy and on our Spirit. And a great part of schaum Pater's courage was to say we could allow for failure. That was codified in forty eight but became religion in the modern age. Do we still have that religion? Are we allowed to fail anymore? Or do we have a multidecade workout in is an alternative. Well, I think we're allowed to fail, but we don't want to have failures occur all at the same time, because that's catastical, catastrophic for the economy and for households and in America.

So the you know, the idea is you don't want to have a systemic failure. You find to have individual firms fail from time to time, but systemic failure imposes so much cost that everybody else it's probably unacceptable. Bill. Where do you draw the line between systemic and idiosyncratic? I mean this goes to the column that you wrote that starts with a pretty bold statement that the FED can't and shouldn't rescue everyone. Many companies will fail, especially

highly leveraged ones. Are these all idiosyncratic? Well, I think the issue that's different for non investment grade businesses is that they chose to be highly leveraged. You know, this is not a situation which they find themselves because of the coronavirus. They decided to be highly leveraged because they thought that that would increase their return on equity, but in fact, in this current environment is going to be

pretty catastrophic for them. The reason why I explored this issue is if you look at the what the FET has done to date and what the Congress has done. Uh, there's a lot of aid being to support markets broadly, but there is not any aid for the non investment grade portion of the corporate corporate market, corporate debt market, and so the question is should there be There's also not much of support for the municipal debt market. Should

there be? I think there is a strong case to for more support for the municipal debt market because state and localities are going to be under a tremendous amount of train. But should there be aid for the non investment grade corporate debt market when these companies chose their their capital structures. That's the question I'm poisoning with all this debt that we're piling out. It's the same question I asked Professor Blanchard. Let me ask Professor Dudley right now.

Is the way to get beyond this crisis with our trillions of dollars of FED action and fiscal actions such is to issue bonds and paper to essentially pay off on a pandemic over say fifty years. Well, I think you're right that what's going to happen is that people are going to end up with more debt and it's going to take time for them to manage that debt.

That's probably why, even though we will eventually have an economic recovery, recovery probably won't be as powerful as some people hope, because after the pandemic, people are going to have a lot higher debt burdens than they had going in. So you were justifying why the FED is not necessarily extending credit or backstopping parts of the MUNI and high old bond market. I want to go back to your original point though, where you said you have to draw

a line under systemic risks. At what point will a massive defaults in these more highly leveraged areas becomes systemic? I mean, just putting moral hazard aside. How risky is that? Well, I think that's a very difficult decision to to to make. Uh. Obviously, you know, you look at the financial crisis in two thousand eight two tho nine, there was a lot of credit that the FETE extended, but they know they never went anywhere close to the non investment grade corporate sector.

So I think, you know, just like they discriminated them between a one P one rated commercial paper and lower rated commercial paper. I think that will probably be to make that same determination this time. Now, look, it's not up to the FET. I mean, if Congress and the Administration and decide that they want the non un investment grade sector of the corporate bond market supported, then I say the FED would do what it needed to make

that happen. But it would be expensive. You know, the Congress is authorities to four four billion dollars of Treasury money to support FED lending. Uh. If that is leveraging, that money tend to once, that's four and a half billion dollars of firepower. But if you start to extend into the riskier areas of the credit markets, you're not gonna be a leverage that tend to one. You're gonna

have to have more Treasury money for every dollar of life. Yeah, Bill, one final question, and I don't want you to give away the linen in your knowledge right now if you're New York FED. But without question, the New York Fed monitors the emerging markets monitor monitors off your acclaimed and historic desk, the global markets. What do you look for in e M? What are the symptoms that the New York Fed looks for in the markets of em is

they head towards a crisis? Well, I think that one thing you're gonna be looking for is what's happening to capital. Is capital staying put in the emerging markets or everybody pulling their capital out of the emerging markets. If you have a really strong capital flight out of emerging markets,

that's going to put them on even more stress. Bill Dudley, thank you so much, greatly appreciated today writing for Bloomberg Opinion important essay on creative destruction and the failure that may be coming down to fact Surveillance has committed to giving you the best in conversation Olivier Blanchard with us earlier this morning and now joining us with Golden Sachs their advisory director and senior investment strategist, Abby Joseph Cohen Abbey.

We all want to know what you think about the markets and my need to get into stocks to be about three years or five years. But the great thing you're considering now is this changing relationship of the United States and China. Catherine man Over at City Group x O E c D has spent years on this dysfunction. How dysfunctional is this relationship right now, we don't really know, Tom. It's a wonderful question, but there's so much that is happening,

shall we say, in the shadows. The one thing that does seem clear is that at the outset of this pandemic, the United States has been caught somewhat flat footed because

of the very weak response at the federal level. And one of the things that the world had come to expect for the last several decades is that when there was a global problem, for example, health problems, the United States almost always took the lead, um whether it was a bowl it was most recently, even though the United States was not the nation most primarily affected, we took the lead in terms of the science and also in terms of the aid that went to the various nations

that were afflicted. One of the things that may be happening right now is that China may be moving into that sort of position. Uh, The United States has not been particularly helpful to the point, at least to other nations, but we're seeing that China is providing scientific assistance and also material I think it's interesting that some of the face masks and ventilators that are now on order for use in the United States and hopefully they come in

time our order from China. So abby, is this something you know the US has had this? I guess with the current administration of America first, is this kind of just a I guess the byproduct of that America First type of mentality. I think that slogan is somewhat misleading. Um. We have been a global leader and one of the sources of our strength since the end of the Second

World War has in fact been these alliances. They have been trade alliances, they have been national international science alliances, and so on. And the United States has really stepped away from that leadership position, particularly in the science field. If you take a look at the budgets that were presented, um, just as the pandemic was beginning, UH, the administration requested percent less in funding for these various functions of the US federal government, UM than we had been spending. We

also know about the withdrawal from the Paris Climate Accord. UM. The United States notably withdrew a good deal of its funding for the w Health the w h O, the World Health Organization, just as the pandemic was getting underway.

This is non consistent with a long term pattern of US behavior Eavy Joseph cohone and the time that we have left with you, I have to go back to two thousand and eight, where you were known as the nation's pinata because you were optimistic about equities, optimistic about America, optimistic about a recovery from the crisis, and you took a lot of hits. Can you share that same optimism in the midst of this crisis, Well, let's correct the

record a little bit calm, and that was Uh. The optimism had to do with a long term for the US economy. Uh. In fact, in two thousand and eight, early on I took criticism for not being sufficiently optimistic. But let's talk about what's happening now in the future. I think for those people who take a long term view UM one might want to look at some of the declines in share prices as a long term opportunity.

But I think before we actually get any sort of meaningful rally going, they're going to be at least three or four UM preconditions. One has to be that the health crisis itself is under control and that we have some sense of where that's going. The second is we need confidence in the people who are making decisions on policy. I think thus far, the FED and many other central banks have really shown a lot of gumption. UM. They've

moved early, They've moved UH in a large order. I think fiscal policy thus far in the United States has has also moved in the direction. The third thing we're going to need to see UM is not the economic and earnings recovery itself, but some sense that we UM are, you know, approaching a bottom. Keep in mind that in the financial crisis, March two thousand nine represented the bottom of the stock market, but the recession didn't end until

June two thousand and nine. So it's very keen, very important to pay attention to valuation, what's priced in not

just two equities, but also fixed income and commodities. UM. I think that a lot of individual investors are probably not as keenly aware as they should be in terms of what's happening in terms of the dislocations in the fixed income markets right now, and we're going to have to resolve those as well, because when we think about financial structure, it's not just the equity of a corporation, it's also what's going on in terms of their credit.

So I mean, just quickly here, give us your sense of I'm in the financial stimulus, the fiscal stimulus that we're starting to see here, the first two trillion likely to be followed on with another two trillion. Is that the way to go? I mean, I guess the girl question is how much should be cash to consumers versus support for businesses? How do you view that? Yeah, there are many people who have done some excellent work on this, including the people at the Brookings Institution who have looked

at this line by line. What I would basically say is a lot of this money really needs to be targeted. I think the initial pain is going to be on our consumers. You know, the reported unemployment rate over the next few months could be as high as fifteen percent. That will be only part of the story. Use six,

which is the broader measure. It includes discouraged workers who can't even look for a job, that could be as high as twenty five And so I think that money that goes directly to consumers is going to be terrifically important, as will be the options and opportunities we give to smaller medium businesses. Now, whether that's in the form of a grant forgiven loan. Uh, there are the various vehicles

that are being discussed. I think this is going to be important, and the FED has made it clear that they're going to try to provide as much liquidity as they can. At this point. It's not a question of the price on that liquidity, the cost of credit, but really the availability. One of the other things that institutional investors are watching carefully is the health of the nation's banks.

Were very fortunate that because of the tough love which followed the financial crisis two thousand and eight two thousand nine, our banking system was in much better condition going into this economic and health crisis. But we're also watching things like revolver loans um you know, our customers of the banks drawing down the credit lines that they have, and we'll be watching that carefully as well. Addy, Joseph Cohen, thank you so much for your commitment to Bloomberg surveillance,

who greatly appreciate it. She's of course with Goldman. Say John, we've got a guest here to get the conversation going on this April one, this day of societal just grimness. There's an other way to put it. What I love about Michael, is this synthesis of all that's going on. I think it's a really timely conversation. Well, let's start the conversation right now with Michael Shower, market Field ass in Management, Chairman of Portfolio Management. Michael, fantastic to have

you with us. We start Q two. You know, typically i'd say, what have we learned from Q one? We've learned so much, Michael, how do you apply to Q two? Um? You know, I don't think much changes with a with a change of the day. I mean, I think there's only one question that really matters, which is which is how long does it take in the US for us

to get this virus under control? And you know, can you have some normalization of day to day activity in the middle of this quarter at the end of this quarter. You know, there's a huge difference between, you know, between those two between those two dates. And I'm not myself that bothered at the new tone coming out of the White House. You know, maybe it was the turn they

could have had four or six weeks ago. I think that that we're at a time of great fluidity on the medical front, and the medical this time is to a large extent going to drive the economic front. Michael, you're acclaimed for your study of commodities. We didn't even mention in our opening words here, but the commodity space continues to implode along with massive em tension. How does that resolve itself? It's really energy which has which has imploded.

You know, I would say industrial medals were weak last quarter, but not you know, not not not historically weak. UM. I am somewhat stunned at the willingness of the Saudi Arabians to go down this path at this particular point in time. UM. I mean it's possible that they managed to stay with that path. UM. You know, in which case, I think you're going to see h a fairly rapid reduction of capacity in in food oil production ues. You'll

see a large and rapid wave of bankruptcy. It's also possible that, you know, Saudi Arabia, it's it's self destabilizers and and you have a you know, a sudden reversal of those forces. But you know, outside of energy, UM, we don't have a ton of excess production at normal demand levels in the industrial medals. UM. And if activity, particularly in Asia starts to pick up, um, you know, I don't think it's a disaster short term for for the industrial medals and probably part in the end of

the bottoming process. All right, Michael, there perhaps is a little bit more visibility when you look at the supply and demand dynamic within metals and with an oil taking a bigger picture though, to John's point earlier about the fact that if you don't know when you can leave your house next, how can you figure out where earnings are going to go, where production is going to go,

when demand is going to pick back up. How are you feeling heading into the second quarter given some of the pessimistic call that we've seen, given a lack of visibility, You know, I think confused. I think it's a it's probably a reasonable word. Um Look, I don't think anybody does know, but you know, I think we can say a couple of things. I think we can say that, you know, a normal there's something normal about where we are today. But a normal crisis starts with delinquency and

ends up with a liquidity crisis. This time it's exactly the opposite way around. You know, we had a massive liquidation in the first quarter, which triggered a sort of traditional liquidity crisis. That particular risk has been ameliorated by the actions of the SAD and other central banks, and so now we're going to have to work our way through a a an accelerated and deep, but in some senses traditional traditional delinquency crisis. And my feeling is that

the it's not going to be even and distributed. You know, this time around, the sort of peak delinquency is actually going to be in in privately held service service enterprises, in in in urban centers, which in a in a traditional cycle like two thousand and eight, was the most stable part of the economy. I'm not sure that the this is catastrophic in the end for more traditional industrial activity.

And globally, I think you're going to see a fairly wide dispersion between Asia, which looks to be ahead of this medically, and where societies are functioning somewhat normally. Until all Asia is dealing with is a deep economic risk um. And you are from the United States, where where day to day activity is turned on its head um and the whole concept of contract law and civil liberties is somewhat up in the air. So as they say, it

is remarkably uncertain time with that uncertainty is unevenly distributed. Michael, let's unpack some of that. And the start of this comment, you talked about where we're seeing a sign of success with central banks. Let's build on that just a little bit more. Whereas he's seeing signs of success in the last couple of weeks, signs of progress on the central bank effort. You know, I think that all of the

major central banks have done a lot to directly stabilized markets. Now, all that does is soft of the blow of margin calls in a sense, the the the it's it's been a sort of you know, a series of margin calls followed by a massive clean up operation lead lead by the Federal Reserve. What that doesn't do is tell you whether an individual, in an individual piece of paper, is money good or not. Um. You know, I think in

the investment grade space, um. You know, the sort of massive wave of cash raising does in the end reduce the risk of short medium term you know, short to

medium term delinquency. But I think you're going to continue to have pockets of financial markets the FED activity doesn't quite cover, and those those pockets I think are going to be very very difficult to you know, you know, you know, you know, to function within but but as I say, it's it's exactly's the exact opposite of two thousand and eight, where we've spent you know, two to three years of delinquency ended up in a liquidity I says.

This time around, I think a lot of the liquidity crisis is behind us, and we're left with the question which unfortunately can't be answered, which is, you know, at what point of corporate cash flow's going to be sufficient to cover obligations. Thank you so much, Michael Show greatly appreciate it. With market Field Asset Management, we are advantaged to speak to David Rubinstein, of course, peer to peer.

His conversations have been great. You've heard me speak for years about how they move from week to week through his season of really piercing conversations. There's a point where you lean forward. One of the things you can do with David Rubinstein is lean forward into someone who some suggest could be a presidential candidate on the order of Dwight David Eisenhower from another time and place. David Rubinstein joins us now on it's important and timely conversation with

General Maddis. You were bold David. I mean there you are asking him about presidential aspirations. Did he uh? Did he buck you down to private? Well? Um, he's the person I had not really met before I met him just about an hour before the interview occurred. We did it in front of a large group in Dallas. UM. He said, obviously a very modest man in many respects, and somebody that I greatly admire. Can you hear me somebody that I greatly admire. I did ask him if

he was interested in politics. He really doesn't have an interest in that. UM. I interested asked him if he uh would say anything about President Trump that he hadn't said, and he's very very cautious. Um. Many people have criticized him for not saying anything critical of President Trump, but I admire him for what he's done. He's basically said, when you leave the government, you shouldn't criticize the administration you served. That's his principle. And so he's not going

to say anything critical of President Trump. And not that he should say something, but he he doesn't want to get into that. So he's avoided that controversy. UM. Clear that he resigned because of the Syriam mess. But Uh, he's not gonna say anything publicly about that at this point. So, David, how did he characterize his time as Defense Secretary. Well, he wasn't looking for the job. He had already retired, as you know, in the Obama administration. He was back

out west where he's from. Um, he took the job because he thought it was his obligation to service country. I think he felt he could do a good job. I think he was pleased with the job that he had when he had it. But he obviously had some disagreements with President Trump, and obviously those led to his resigning. But he's held himself up to a very high standard. There's not been one hint of anything he said privately

or publicly that's critical of President Trump. People know he disagreed on the Syria policy, but he is not going to say anything as long as President Trump is in office that would be critical of President Trump in my view. Uh. He we were talking about a book that he's come out with. It's co authored and it really deals with many things in his career, but not things relating to his service as Secretary of Defense. So much. Um, he's had an incredible career, David. He is a prodigious reader.

You and I are familiar with this, and of course, with your philanthropy to the nation, you've been able to acquire some of our truly resonant books along the way. How did you talk to him about the religion he has of reading, reading, reading. He's a man whose life

is basically military and reading and thinking. He um came close to getting married but did not get married because the woman he was probably gonna marry didn't want to be dedicating herself to a career or life of somebody was in the military the whole time, and he didn't think that was fair either. I did ask him if, now that he's out of the military, what he considered getting married, and he laughed and said, well, he's open

a proposal, so maybe somebody will. UM asked him if he's interested in getting married, But his interest in reading is serious. Um. He has an incredible collection of books that he really knows quite well can out. And I would say he's a very cerebral general. Very often you don't think of generals uh in that way. You might think of him as a of a George Pattent type

uh kind of general. I mean a general Patton kind of person who's, you know, a hard charging kind of person and not as maybe as intellectual as as General Madis is. Madis is quite intellectual. So, David, what do you think the future is for former Secretary Madist. I don't see him running for office. It's not his personality. I think if another president asked him to serve in some other capacity, I suspect he would, But he's now

just about seventy years old. I don't see him wanting to go back in and serve as a cabinet secretary again. So I'm sure um some people might consider him for a future role. He could be Secretary of Defense again. He could be Secretary of State, but I think he's he's done with that in my view. David reuben Stein, thank you so much. Pure to Piero. David Rubinstein entirely conversation with General Maddest look for that a Bloomberg Television

and Bloomberg Radio. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast, you can always catch us worldwide. I'm Bloomberg Radio