Surveillance: Recession Will Be Deep But Brief, Nielsen Says

do if you're an investor? Will listen to this from Jeffreys. The FED is in danger of making the skill set of investors in credit redundant if the game only becomes front running the next area of debt the FED is going to buy. Let's have that conversation right now, shall we with Jim care and Morgan Stanley Investment Management Fixed

income portfolio manager. Jim great to catch up this, sir, Your thoughts on that quote high yield looking dicey, with crude rolling over looking okay, with the said ready to step in. Yeah, So you know, for me, this is a question of of insolvency issues and liquidity problems. So one of the things that we've said over and over and over again is that with the coronavirus is there's created some liquidity problems. We don't want them to turn

into a solvency problem. But I do understand the moral hazard aspect of if you are in a business that is a very hypercyclical business, like an energy style business UM, and that's obviously going to be a large percentage of the high yield universe, and if it takes high yield lower, do we always need the FED to come in and run and support it. And I think that the answer is it depends do we want to have oil companies in the US? How important is that into the future?

And then how do you triage that you do you pick the best or do you have a way of determining what metric is you know which companies should survive and which shouldn't. Look in the i G Market's what we said is as of March twenty two, if your investment grade UM and your triple B minus are better you felt, and if you fall all the way down to double B minus, the FED will still support those bonds.

So yes, there is a little bit of regulatory arbitrage here where if these sectors do start to come under a fair amount of pressure that this might create some fed or some type of government support facility. Um. I think what's important is that that gets triage to just the strongest. It can't just be ubiquitous cover all blanket of Oh, don't worry, We're just gonna buy high yield

no matter what, or energy sector no matter what. I think the more important aspect of this is that there has to be a triage ast to which companies get the benefit and which don't. All right, so we're talking should, let's talk will, and let's talk positioning, and a lot of people that I've spoken to are saying, perhaps the

rally and jump bonds has gotten a little ahead of itself. Jim, do you agree, Well, I mean it did for technical reasons, just because the double B minuses are going to be bought, you know, with fallen angels from from the investment grade space. So so yes, I I would agree that it took the whole index up. Is a large chunk of it that is very, very vulnerable to the energy sector. So a phrase that we use is which securities are inside the tent and which securities are outside of the tent.

The securities that are outside of the tent are which means the tent of policy support, which a lot of it is the high yield sector, in particular in in in the energy sector. And when you see oil prices fall this way, this is going to create a lot of stress. So I don't know that the FED can actually do very very much about this because look what's going on here is we have a drop in global demand. OPEC is not what it used to be in terms of regulating oil prices. So we go back to oil

being a boom bus business like it always was. You know, you have oil run up to very very high prices and a lot of people get in the business and then it goes crashing down, a lot of people fall out of the business. And it's a very highly cyclical commodity that was you know, pretty much kept in check by OPEC for a long period of time, but now that's gone. So at this point now it's just the real true supplying demand and dynamics, which can be brutal.

Um So investors beware, if you're going to buy, make sure you get a good enough discount to actually take this risk. And that's the key. But in the interim. I think that there are some companies, and it's tied to employment as well, that might need some solvency support at at this point, Jim Karen, you mentioned inside the tent are retirees inside the tent? So that's a great question, right, So so retirees per se are are not necessarily right,

so we're talking about sectors in specific securities. But you're right, Tom, Tom, we we can extend this out to moral hazard lengths and say, okay, who should be saved, who shouldn't be saved? And once we get started, when do we stop? And I'm I'm I'm very very much in favor of free markets, and I'm also you know, very much in favor of what the FED does to stabilize markets as well. So what's also critical is that this is temporary and it's targeted.

So temporary and targeted are are two things that need to be there. And also there has to be a triage of you know, stronger balance sheets and you know, there's gotta be a cut offline where if if you had a strong balance sheet and that you're being unduly affected because of the coronavirus, then then that's you know, then then maybe you should get some support. But if it's just that, hey, you're in a cyclical business and somebody invested in this business, then you know you're gonna

you know, you took the risk, and that's what this is. UM. So there are gonna be losers and they're gonna be some winners, um. And that's our job is to try to figure out what sectors are gonna be the winners and losers. At the start of the year, Gym, to be clear with the audience, you were far more conservative versus the rest of the street and became far more constructive versus the rest of the street over the last

month or so. Behind this market rip that we've seen over the last several weeks, can you talk to us about why you're so willing to price in a better future when the data around us tells us a story of gloom and do for the next several months. Yeah, I mean, effectively, we're looking forward right and we're trying to figure out what the market's discounting and how much

is actually in the price right now. And and look, the biggest piece of the puzzle that's still missing is what the path of this viruses and and doesn't create another shutdown in the economy and what have you. But if we go on the operating assumption that it doesn't, and if we start to look towards recovery, then we can start to look at certain asset classes. I'm in fixed income, so I'm gonna look at places like investment grade.

I'm gonna look at some of the higher uh credit qualities within securitized and even some of the double ds within high yield, and the healthcare sector and industrial sector and paper packaging and you know other things of of of of that area that I think are more real broad economy stories. And I think that when I look at the high yield index, or when I look at the investment grade index and I watched spreads go out to almost four d basis points over to me, that's

too much. Now recently spreads have come in you know, quite uh, you know, quite significantly, and maybe it's gone a little too far and it might set back. But the point is is that as long as we start to stabilize and we get the third quarter recovery, fourth quarter recovery writing off the first and second quarter, then I think that earnings start to come back in default

risks ultimately start to fall. High yield default risks are in double digits, low double digits, like twelve, depending on who you talk to in which ratings agencies that you're looking at. Um, that may be a relevant statistic if we look at the energy sector, but it might not be relative when we look at it very idiosyncratically named

by name, bond by bond. And that's why it's so important right now, Jonathan, that we start to think much more idiosyncratically, much more of a stock picker or bond pickers type of a market as opposed to broad index plays. Is if you buy the index, you're gonna buy a large chunk of things you just don't want. So to be selective is a lot more, is a lot more of what this market is calling for. Jim. It's why to catch you have they set Jim keron that Morgan

standing investment management, fixed income portfolio manager. It would be important to go to the optimist in Europe who's so gloomy now I can't believe we let him on air. Eric Nielsen joins us with UNI Credit, usually very optimistic, and Eric, I was thunderstruck by your note and your caution and the European economic experiments through two thousand twenty. What's the distinction here? Why are you so much gloomier

than others? Because I think the shut down by governments, this is a man made recession for good reasons, obviously for the health reasons. But this is something we've never seen before, that that I'm aware of. And if you just go through the sectors and think about what basically has been shot down, I find it impossible not to conclude that we at least get a few months of

very very deep contraction earty percent of there about. And if you get that, even with a strong recovery in the second half of the year, you get these kind of average GDP numbers were forecasting for Europe thirteen percent down, the US ten percent down. It's almost impossible not to get these tower numbers. The e CP is coming in big, acting quite aggressively. Can you explain to me why the Italian bond market is moving in the other direction on

the morning like this morning? No, I can't really, but it is ultimately as you said just before I got on that, that it is a revival of this fear about the euro Zone. Um. I think it is misplaced, but to be honest, I find the Italian government is not doing itself a favor by by sounding so anti European at a time when the e CP is buying all the debt I mean days. This is the debt issue is not an issue at the time, right because the e c P is there and that is common death.

So it's so I I fail to see the excitement. And again, as you said, I mean the actual interest rates are absurdly though the speccal widening, but but the buns are deep negative, right, So so that sustainability for me is not a big risk here. Just to clarify, so you don't think that the concept that the euro region will break up or that there won't be some sort of backstab to the currency in its existence. You

think that those worries are overblown and not realistic. But you do think that the responses will be insufficient to stave off a very deep and prolonged recession within Europe. Is that correct? Uh? Yes? On to the last step, and you said, I don't think this resertain is going to be long. It's going to be deep, but very brief. So we're talking about a quarter or two and then we probably hopefully see some growth again, and and and then.

But I don't think we get back to normal until you know, we get a vaccine or the privtical treatment or something of the disease. Obviously, but I but I, but I don't think it's a deep and long one and get debt to GDP ratios will will rise significantly. But guess what if you're paying one or two percent on your debt in a hundred and seventy of the GDP or whatever doesn't cost you more and what a

dred percent cost you a few years ago? Right? It depends how this market is going to treat you, though, Eric, And that's not up to you or I, although you might have some influence on that. Looking at the situation, back to normal, what's normal for Italy? And I don't mean to sound snarky, but as we know, it is something very near to stagnation, not much growth at all.

We could have a debt to d DP balance of water a hundred and fifty percent, let's say, when we come out of this, Eric, in a place like Italy, do you not worry that those kind of numbers could spark that kind of aggressive repricing of Italian debt, because let's be clear, Italian debt is not exactly being treated like developed market debt in an environment like this one. It's something like a hybrid between E M and d M. And if the debt fundamentals go against you, Eric, do

you know how quickly this can unravel? Yes? This I agree with. This is so I think you put your finger exactly in the right spot. The number one issue for Italy is where growth goes once we are through the trough. If you assume that the that they recover broadly along other European countries, even if I like half of US and lower than others like they've done before, I don't see the big drama. But if Italy were to underperform more substantially and for some period time, we

have a problem in our hands. But until then, and this is certainly for the next year or so, the e cps there and buying basically everything. You're right. If investors say you know what, we don't, weally can and I am not persuasive enough to to tell them otherwise. If they leave, then Italy faces the same problem as every single country or company person face this that needs to refinance this debt. You can't do it if people don't want to buy your debt period right, whispers over

the weekend Eric Nielsen of worries of inflation. Somewhere out there, inflation will reign supreme Bologne. We've got deflation and disinflation right now. How pronounced will the deflation and disinflation be? Given your forecast, I don't think Tom, that it's going to be that pronounced, because again my forecast is a is a quarter or two and that doesn't drive inflation or deflation longer term. I'll say this. For sure, we get big relative price changes, and I think we have

always start to see them now. But the big debate out there is whether all the money printing in Europe and America elsewhere would be inflationary or deflationary. Um Obviously, normally money printing will ultimately become inflationary. But I don't think that to risk either really, And the reason is that I think on every government, both in America and in Europe are still not doing enough to overpower this slowdown, So so beyond risk very little inflation for the next

few years. It's a measurement of percent of GDP, and I totally take your point. Arc but on a percent of GDP, what's the appropriate ratio if two or four percent of GDP is not getting it done? Sorry, this is got to the dead or to the deficit. To what the amount of fiscal stimulus there? You know, it's measured quickly. As they're doing two percent or four percent of GDP, what's the appropriate all in number? Right? Rule

Team Tom? Yeah, the rule of thumb is that if you get hit by by an external shock of a type, you should do a fiscal stimulus as a percent of GDP roughly equivalent to the drop in GDP. That's a multiplan right now. Remember, while Italy is only doing a little bit, they are doing about twenty percent of GDP in guarantees for companies, so that counts for quite a lot. Also, so you keep you trying to prevent the liquidity crisis

from becoming a solvency crisis in the corporate sector. So that's so it's so I still think they're doing too little. And and as we speak, they're working feverishly as we know in Rome on another package of fiscal stimulus. So so more is coming. Yeah, Eric, just taking a step back, you said, do you think that this is going to be a very deep but short recession. I'm wondering when

John says, what's the new normal? And I'm wondering not just for Italy but the entire Eurozone when it comes to the unemployment rate, which already was a lot higher than the one in the US heading into this last year, it was seven point six percent on average for the euro Zone forecast for this year, but obviously going to be much higher. What's the new normal for unemployment in Europe?

In Europe, Oh God, this is a tough one and I don't know the answer, but I think the the so we very roughly estimate that once we have through this deep through we may have coughed maybe a quarter percentage points of potential growth in Europe because companies will fail unfortunately that shouldn't fail, and that will lift the

natural unemployment level a bit, now, can I? Just before we get onto this, also remind you the key reason for the very big difference in unemployment in Europe and in America over the last few years is that in Europe we have had a massive inflow into the labor market. People wanted to get jobs but didn't get them fully, particularly in Spain and some other Southern European countries where in America you have had people leaving the labor market.

So if you adjusted for that, go tend back ten years back or something that changes in the in the labor mark size, then it's actually actually quite similar. To be honest, we're gonna leave it there. I have you and the family are doing well. Great to catch out with you this morning, Eric Nelson, that you need gradic Croup Chief Economist. An update is we've tried to do each day from our medical community, the experts that have helped us during this pandemic. One of them is Joshua Sharfstein.

He is at the Johns Hopkins University Bloomberg School of Public Health. Of course we must mention Mr Bloomberg is founder of Bloomberg GELPI and also this television and radio UH network as well. It was fun to talk to him today about the improvements that we're seeing in this pandemic.

Curious Professor Joshua Sharfstein, what we had seen UH recently in the United States is a plateau, and that is good news because we would clearly were worried about having so many people with severe disease from COVID that it would overwhelm the healthcare system, and there's no question that

the healthcare cooks them. In several places such as New York City has been pushed really up to the brink, but been an amazing medical response and extra beds and ventilators and staff coming in, and it looks like the line there is more or less holding, and these hospitals are not getting a lump. So that is a very good news. However, UM, it does not mean that, you know,

it's all over. It means that really the long term battle is beginning, and UM, it's very important that not only the current restrictions continued long enough for Peter to really begin to decline, but also that, UM, we have a strategy for slowly reopening the economy. I had a family member over the weekend, Professor Sharfstein, who took the information of a nurse of about age forty dying. Why

are nurses dying? Why are doctors dying? While this has been seen all around the world, including in China and Italy and Spain, and it may have to do with the fact that they were exposed to a very large amount of virus. Perhaps before UM, you know, it was known that there was coronavirus in their area or when they were UM unable to get adequate protective equipment, and the amount of virus someone's exposed to generally can influence how well people can fight off the infection. So that's

one possible reason why. The other reason is um that there's a certain randomness to the virus Um. There are people in the community who seem um completely at low risk based on what we know, but done the last they get seriously ill or even die. So you know, this is not a guaranteed harmless infection for anyone. Could this be genetic? I know there are a number of studies, um Josh about whether you have a pre genetic position for the virus to get worse. Where are we on

that it's possible. I haven't seen any like compelling data specifying which, you know gene Sometimes there are variations in the immune system that can predict vulnerabilities to infection, So you know, I think that would be very interesting if if it's uncovered. I know you were saying that we need to be vigilant against a new surge of cases as we start to lift restrictions. What would be the

right way to do this? Do you take a state and the state reopens and you see what happens, or do you look at another country or or you know countries and states comparable in and how they response has been, how the lockdown has been in the number of deaths and infections. So I think there are two things, and there's been a couple of day good reports but have been put out, including why the jumptop and interpare Health

Security UM. And the first thing is you have to think about what are the conditions to reopening, what do you want to have in place before we reopen? And the second thing is how do you go about it? And in that first category, what do you want to have in place? Adequate testing, which we don't really yet have to really be able to test people who are sick, even mildly ill UM, as well as enough testing for high risk places like nursing homes. You certainly want to

see cases declining substantially for fourteen days UM. You want to you need the public health capacity to respond to positive cases, and you need to make sure that that healthcare system that's been pushed to the brink in some areas, that's really bumped back so that you're able if things go get worse to handle the challenge, and then you got to think about how you're going to open up. And it's not going to be flipping the switch back on.

It's going to be slowly turning the dial. And you need to really think through, um, what comes first, what comes second, what comes third, and then between needs stage waiting to make sure that you're not sparking at searching cases. And you know, um, there's some things that may be able to come first, like if they're work places where people don't get it anywhere near each other, um and uh, but then I think that are going to come later, like a big indoor concert that may come the late involved,

So you really need to be thoughtful about that. I think you're starting to see in the United States brainwork being discussed like governor um, and I think that will be the load mop to people. Joshua Sharfstein, Professor at the Bloomberg School of Public Health, JOHNS Hopkins University, with Francine Laque and myself this morning as well. Most most informative right now Gideon Rose with us with a monthly review of his wonderful magazine Foreign Affairs. Anybody that listens

to this show knows. I adore the magazine, particularly that the fonts actually big, so you can read it with these old eyes this time around. A wonderful important issue on the fire next time and the course this is

on the climate change, your climate catastrophe debate. With that said Gideon Rose in his team of lead with a spectacular foreign affairs website looking at the pandemic, getting I want to get one question in on your wonderful new issue before I know Paul wants to get up to date with your thoughts on the pandemic, and that is with the collapse and oil prices, isn't it that much

harder to affect climate change? So in one sense absolutely to all sorts of projects that we're based on the economic hiability or doing other kinds of things are are set back and there's less change and so forth. On the other hand, what we are seeing in real time is a great public education lesson in the consequences of mass small changes in individual behavior. There are environmental consequences

and actions comparable to hand washing or mask wearing. And just as people now understand the logic but that connects their individual behavior to their personal health, that could easily become something that makes climate policy more plausible in the future, because we now understand global problems needs to be addressed globally, and we understand that our connection to that global problem

and the consequences everybody. Whether that will translate into actual political behavior, probably not in the short term, but in the longer term, this will make constructive action to prepare for and solve crises more likely to happen, rather than less. I believe even with climate so giddy, and I guess one of my concerns as I think about climate change in the world we're living in now, it's it takes a big, big I guess it just gets put on the back burner in a big way. People are just

trying to survive. They're trying to deal with this virus. They're trying to think about what it means for their lives, what the post coronavirus world looks like. And I'm concerned that, you know, climate change, even with the younger generation where it's they're really passionate about it, it makes peop put on the back burners. Are concerned that it loses some

of the momentum. So I think that obviously would be true for a lot of the activism, and and I think what you're talking about is something that many people fear. But as our issue points out, as the articles in to point out, what really matters now is not mass collective action, is not mass political pressure even which is not really going to materialize, but wise policy two basically change the course to flatten the curve of the climate

disaster that's looming. And that kind of stuff is equivalent to the public health measures we would have wanted our authorities to take in the months and years before the real pandemic hit. And those kinds of things can still happen. If why is technocrats get entrusted with power, Gideon, I'm looking at it right now now. There was the shots of l A this week, and I saw out in the Twitter sphere and there was a wonderful, hilarious shot that with the way the error is cleaned up with

this pandemic, you can see Sydney from New York. That was hilarious that I'm looking out right now. Get into a pretty fancy view of a crystal clear New York. I mean, we're getting a lesson right now in this Within all of the research you do at Foreign Affairs What is holding us back from the common sense here is just market functions. Isn't it that the hydro carbon

like engines still are cost effective? You're absolutely corrective. You are market failures that can be addressed through wise public policy at the local and the national and the international and global level. And what we lay out in the

magazine is a whole variety of things. You have will Bill Nordhouse Nobel Prize winning economists explaining why you need to go to a club membership model for international agreements rather than the sort of one who currently have that allow free riding, And you have everything from that to why but businesses and individuals and new but most importantly, if you think of this basically as do we want to empower going forward the people like Foucher and Birks

and the ones who we think of as good public health technocrasts. There are people like that on climate as well, and there are policies that could be followed now that don't involve shutting down the entire world. The question is will we be able to direct government action, scientific research and policy to do the equivalence of surging on testing in climate related areas, to do the equivalence of development

of vaccine, speeding up for climate related green technologies. You could have a massive government program that would be worthwhile, not simply as a jobs program or as a politically correct thing, but as something that generated the kind of solutions to the crisis that could have head off the worst outcome. That's what I'm hoping for, whether we'll see

it or not as anybody's guests. So getting in all the wonderful reporting of Foreign Affairs magazine, what is kind of the takeaway from some of the government response to this virus? It's kind of you know, you go from China for just a complete lockdown to the U S, which it seems to be state by state by state, and some of the European economies have been differing in there. I guess their severity of their locks down. What's kind of the takeaway that you're seeing here as this situation develops.

That's a great question. You know. I was rereading the issue and all of our coverage of pandemics before this appearance, and I managed to depress myself even more because the more I look around, the more I see UH government failure and leadership failure in so many areas in so many regions at so many levels. And yes, of course there are wonderful cases of successes, and we all want

to be like South Korea. But what's notable about the South Koreas and places like that, at a few of them that there are, it's how few they are and how unrealizable you could imagine that being uh in uh in a place United States and so many countries have done badly. But I'm now wondering the really interesting question is not who's gonna do well, it's whose regime is

so brittle that it will not survive the crisis. Here on Bloomberg, you understand that there are a lot of companies have had a lot of debts that were zombie companies or problem companies, and those are the ones who are gonna be the biggest casualties of the crisis economically, because they're not going to be strong enough to survive. Lots of regimes are going to be facing a reckoning when their publics finally embrace the full cost of what's

happening and how poorly their leaders performed. And when that happens, some regimes will be able to desmond and the new themselves, and some won't. And that's the interesting thing to watch. Everybody is going to do badly. Whose regime will survive the win and wing that will come now that the tide has run out. Always Eclectic Air Magazine has a wonderful article from two from Another Time and Play Secretary Baker and Secretary Schultz in their team uh in in

the Aged View, a view from the Washington Consensus. How do they treat the new populism, the death of multilateralism we've seen in James Baker and George Schultz's world Well, uh Baker and Schultz, writing with Ted Holsted, argue that you can actually seed climate change as an opportunity, not just a threat, not just a problem, because the United States is already at the forefront of green technology and has the kind of system that could generate the answers.

And so they argue using government constructive lead to advance and build on the American lead and make the United States a pioneer in the center thing. By the way, we have an article and the same issue by John Podesta and Todd Stern, who handled climate policy in the Obama administration, arguing for a whole set of what policies would make sense for a climate that is broadly in sync. So you have buy partisan support for a kind of policy that would be a constructive climate policy that would

not involve self sacrifice and austerity. But it's possible, but positive change. Well getting in a rose. Congratulations on an important issue in climate change. In your website on the pandemic has been absolutely superb Foreign Affairs Magazine. 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