Surveillance: The Fed Needs Fiscal Help, Dudley Says

peak capitulation? Yeah, no idea. So we asked someone, Gina Martin Adams joins us now Bloomberg Intelligence chief equity strategist joint Gina jointing us on the phone, Gina, fantastic to catch up with you. Let's talk about that. If we've seen full on capitulation, yeah, with a VIX eight, I'd like to think we have halfway. Yeah, one way. Think we looked back at history on a number of measures, and I think that between breath and volatility, you're seeing

signs of potentially peak panic. Usually that peak panic creates some degree of a bottom in stocks. It doesn't mean that we're going to hit the price bottom precisely. And as a matter of fact, when we look at history, look at things like the vix peeked in the Fall of eight, for example, and we didn't actually find our bottom. Until March of two thousand nine, UM, the percentage of stocks trading above their fifty day moving average has fallen

below one percent on the s MP five hundred. That on average occurs at peak panic, but proceeds on average the bottom and stocks by about thirty days. So it doesn't mean that peak panic necessarily is bottom, but it does usually indicate the early signs of the bottoming process beginning. I think we're there. It's just a matter of time before we reach our full on bottom. The technicals have obviously been horrible. I mean, you know, we've broken through

every cyclical support line that we have. We've now broken through the secular support line for the bullmarket trend. We've kind of got really weak support at mods to look forward to next. UM. That said, after sort of peak panic moments, your twelve month returns are always positive and usually positive by double digits. So investors with some degree of patients thinking about averageing you in in environments of

peak panic are likely to be rewarded over the long term. So, Gina, as you speak, I'm picking up at a couple of themes charts history. All these things that people are saying are no longer relevant to the current situation that we have, because this is an unprecedented situation where the global economy is literally shutting down for an unknown period of time.

How do you get conviction on what to even look at based on history, based on technical levels, based on the fact that we don't know what the earnings are going to be at these companies. We don't know when people are actually going to start going out again and going to restaurants and buying stuff in stores. Yeah, well, these are the same things, Lisa, that you hear in

every new crisis. So you know, while people will say charts are irrelevant it, while people will say we can't find evaluation bottom, we don't know where earnings are headed. That's the type of commentary that you here in peak panic, where people are, you know, scared of where things are headed. Yes, this crisis is different, but recall the Great Financial Crisis was also very different, and everyone was panicking and completely

uncertain as to where things will go. September eleven, clearly a major attack on US soil had never happened created panic in that environment as well. We didn't know what the outcomes were going to look like. So as much as we want to say this time is different. It's not different in that it's just a new version of

a crisis that we have to content with. Um. Yes, we don't know where earnings are headed, and there is a complete information vacuum with respect to the fundamental outlook, and that's going to continue away on confidence and sentiment. But there are very reliable indicators and lessons that we can get from the market itself to give us some guy and I believe that we find that in every crisis, even though every crisis is brand new and something we

haven't dealt with before. Let's talk about history just a little bit. JP Morgan crunching the numbers in the same way. I'm sure your team is down at Wauchen and the last three recessions seeing pe multiples of ten point one, point eight and ten point two. Just walk me through the current multiple right now, and how on earth we get our hands around what the looks like for that

current multiple. Yeah. So what typically happens is investors look at the forward multiple as most indicative of the environment and where we're going to bottom. The trouble was looking at that multiple in the environment that we're at right in right now, is we truly have no indication of where earnings are headed over the next twelve months. UM

guidance is completely dried up. We're not going to get a lot of indication of where the forward multiple will bottom until probably the first quarter earning season, when we hurdle what is going to be the worst earnings UM number that we've seen all cycles in the most most likely. When I look at the market, I like to look at the trailing multiple UM, and I like to look at that because it's more indicative of where pricing actually

is in the equity market. And what we find is the trailing multiple has fallen below fifteen for the first time since two thousand thirteen. Uh, if you exclude the biggest of the big tech stocks, it's below thirteen. So we certainly have seen UM pretty considerable repricing in the

equity market. What's appropriate for a multiple, Well, you would say, given the extent of the balance sheet movements by the FED as well as the rate reduction to now zero, a multiple north of nineteen is actually appropriate considering monetary policy. Do I think that investors are going to pay nineteen times trailing earnings in an environment of super questionable earnings

right now. Probably not. Nonetheless, it does suggest that there is more support to the equity market than is currently being embedded in prices, and will probably track back toward that number over the course of the next twelve months. I think the equity market is absolutely now pricing in

a worse than average US procession. When I use that trailing multiple number and I take at times the current and I back into an earning number from the current price on the index, we're pricing in at least decline in earnings over the course of the next twelve months. Gina, it's some unbelievable stats. Appreciate your time this morning, Gina. Martin Adams there, Bloomberg Intelligence Chief Equity strategistic. We get a few on the Fed. We can do that with

Bill Dudley. What a privilege this morning, the Bloomberg opinion columnists and of course former New York Fed President Bill fantastic to have you with us. Just publishing your Bloomberg opinion column help us define whether the Federal Reserve and its latest moves are successful or not because some people, many people, in fact, defining that success by what happens or what does not happen In financial markets help us

do that a little bit more effectively. Bill, I think that people have to understand that this time is very different than the financial crisis, because this is about a big shock to demand in the economy, and the Fed Reserve can't do much about that. What they can do is take steps to ensure that the markets continue to function. That can take steps to ease try to to support financial markets more broadly. But the demand shock caused by

the coronavirus is something that the FED can't address. That's what this is why this is so different than the financial crisis. The financial crisis was about a housing boom going bust, but then that causing stress in the financial system, and that stress in the financial system made the economy much worse. When the FED intervened after Lehman's failure, that will actually help support economic conditions because it actually allowed

financial markets to continue to function. This time, all the FED can do is do its best to keep financial markets working, but that doesn't do anything about the demand shock, and the demand shock is very large and it's likely to be persistent. Well. There's also a question though about the tactic that the Federal Reserve took. Very few people would criticize the FED for taking as aggressive in action as they did, just because of the degree to this shock.

Some people saying though they didn't go far enough in terms of reopening their commercial paper lines and trying to provide some corporate funding support. What's your response to that. Well, I think they're assessing what's going on in terms of the functioning of other markets, like the commercial paper market,

like the corporate bond market, like the securitization markets. But the bar to providing support to those markets is quite a bit higher than what they FED announced on Sunday evening because those those requires of emergency unavailability of credit, uh what are called only allowed under what the Federal Reserve Act is called Section three, and they require, uh,

the agreement of the Secretary of the Treasury. So I think I'm sure they're looking at it, and I'm sure that they will respond if they do that as necessary. But the bar to the emergency learning facilities is it's quite high relative to what they announced on Sunday. Bill, I want to do something a little bit different with this interview. Let's pretend you back in the New York

FED and I'm a competent lawmaker. I know some people will struggle to imagine that, But let's pretend that's the case, and I've got access to the Blomberg terminal and dropping across the terminal just now as a headline, and this has actually just happened that three months dollar library is up. Just have a sixteen basis points, the biggest jump since two thusday and eight. And I say to your bill two thousand night, that sounds scary. What does that headline

actually mean? Can you just unpack that and really simple terms, Bill, what is going on? I think you have to see how much stress you're actually seeing in funding markets. So labrary, the labrary spread during the financial crisis got out to three fifty basis points over over treasuries over the federal funds rate. We've had seen some widening so far during this period, but nothing like what we saw about that last time. But obviously this is an indicator of stress.

So you want to look at the library rate, You want to look at the foreign exchange swap rates, want to look at what's happening in the commercial paper markets, both to rates and tenors the average majority of the commercial paper market, and the FED is gonna have to do what's necessary to keep these markets functioning. I'm sure that they're looking at it very closely, and if if things continue to deteriorate in those markets, I'm sure they'll respond. Bill.

There is a question though. The Federal Reserve did unleash a pretty big stimulus on Sunday evening in lieu of their meeting this week, and that didn't really ameliorate the stress. We saw the biggest sell off yesterday since stocks we continue to hear reports about a lack of liquidity and treasuries. What's your response to people who say it hasn't helped. This means the FED basically is impotent in addressing this current crisis. I think it's too strong to say it

hasn't helped. Let's imagine the Fed had done nothing. I really think things would be in a better circumstances than we find ourselves today. I mean, the problem fundamentally is the Feds. FED does not have the right tools for the job. What we need is fiscal paul. These stimulus supports incomes to underpin demand. Right what we're having is a very significant demand shock, and that's going to cause

a large drop in income for households and businesses. Only the Congress and administration can provide the kind of fiscal support that supports incomes prevent the initial shock from cumulating to an even bigger shock as we look further down the road, Can we just stand with a little bit on a regulatory relief effort, perhaps bill in the coming weeks.

Quite clearly, some big companies are drawing down credit lines, and quite clearly what we'd like is the financial system robustly able to step in and support some of these companies as they look for a little bit more help.

But how can we do that on the regulatory side, Well, I think the FED is going to be basically looking at things like the capital requirements and the liquidity buffer requirements and saying, hey, we have these buffers, but these buffers are there to be used in times of stress. So I think the Federal Reserve will be more willing to allow banks to draw down their liquidity and capital buffers. The problem is that you know, banks may be reluctant

to do so in a time of incredible stress. Uh, it's going to be scary to basically run closer to the edge. So even if the FED says we're allowed, we're gonna allow you to uh to run at a lower capitalization rate relative to your total assets. We're going to allow you to run with smaller liquidy Buffer's possible

that banks may be reluctant to do that. So just to find a question, you and I did a brilliant segment a couple of weeks ago, a couple of months back, actually on whether they current operation from the FED when they were buying aggressively at the front end of the curve and te bills to help alleviate some of the stress outsewhere that it wasn't q A and you pushed back quite hard. Now they buy it through the curve.

Can we call this q A now? Well, I think once you're once the FED starts to buy longer duration assets, I think that you have to call that quantitative easing. But I think the motivation here isn't so much to push down long term treasure yields and long term agency mortgage backed security. It's basically to improve the functioning of these markets by basically provide a source of demand. So people who need to sell long term treasuries there's a

buyer now the FED. I think it is more about market functioning gring to catch up of you, to get your thoughts on this market. Really really important conversation with a Bloomberg opinion columnist and of course former New York Fed President. Let's bring a count recoday, Bloomberg Economics Chief US Economists, Carl, I'm sure you've been trying to model what a mess we're in right now. Talk to me about how fiscal stimulus could really shout things in a

month's ahead. Sure, absolutely so, looking back to the Dudley interview in the prior sentiment. Technically, and it's not worth having a debate whether it's qui or not. But the Fed is taking market stabilization measures. They're not looking to stimulate the economy, and so there is a case to be made that as big as it is and as far out on the duration curve as it is, it's still not designed to accomplish what QI is designed to acomplished.

These are a reserve management operations on a management on a massive scale to keep the lights on in the tursury market. As we turn the page then to fiscal stimulus, right, that's going to be what's required to lift the economy and to put some numbers around this, uh, last year twenty nineteen, the economy grew by about eight hundred and thirty billion dollars. So when you talk about that same price tag you just mentioned from Social Secretary Minuching, it's

basically matching growth in the economy from last year. So this is the appropriate scale of the response. Now, the next challenge is delivery mechanism. As we learned in two thousand and eight two thousand and nine, often shovel ready projects weren't so shovel ready in elegant solutions got bogged down in bureaucracy and other technicalities. So the priority at the moment should be to use something that is tested and true, and that boils down to one of two options.

The first one is the payroll tax holiday, which basically huts your contribution into Social Security from six point two possibly all the way down to zero. It also could reduce your employer's contribution to Social Security, so by making workers cheaper, from the employer's perspective, they're less likely to lay those workers off. Meanwhile, every worker in the US who's paying into Social Security would feel that they basically

got a six percent raise. The other approach is just a mass mailing of stimulus checks, which sounds like it should be faster. But when we did this in the past, back in o W E O nine, the legislation passed in February and the checks started arriving between May and July. That's still a pretty long gap for a stimulus to arrive in the economy. So a payroll tax holiday, we could declare that effective April one, start of the second quarter. Uh and so's it comes in as a trickle initially,

but it does arise more rapidly. Carl, There's a criticism that if you give individuals in the United States more money, they're not going to necessarily go out and spend it because they're not allowed to go out and spend it. They're actually quarantined or self isolating or whatever else in

order to prevent the spread of the coronavirus. So, how is the government's effort really getting more liquidity to the businesses that might otherwise become insolvent if there isn't some sort of liquidity line to get them through this period of time. Well, absolutely, we need a multi pronged measure. So we need unemployment benefits for those individuals who lost their job. We need some kind of support for those

who have a significant curtailment of ours. Businesses obviously need to have access to lines of credits so they can make their payments. A lot of communities are adopting foreclosure and eviction moratoriums, so you need a wide array of approaches here. But also what matters ultimately is the price tag.

And so if you need a big price tag to match those numbers that I laid out a moment ago eight hundred billion ish, uh, then you need a delivery mechanism for that, and it's going to have to either be stimulus checks or payroll tax holiday. That doesn't mean that's the only solution. You obviously have to take a macro approach, the blunt force approach of a fiscal stimulus that I described, but you also need the micro approach looking at all these different nuances, certain industries and certain

sectors that are particularly at risk. Account In the sixty seconds we have left, is the Fed done here or is the more work to do? I think there's more work for the Fed to do. What they've done is really ensure that the treasury market is behaving in a

deep and liquid trading fashion. But they'll they'll need to at some point to probably look into commercial paper and other credit measures like tarp and tels that we saw on the financial crisis, and then at some point down the road they also need to think about what stimulus would actually look like col GRT to catch up with you can get down that Bloomberg Economics Chase US economist.

They take in the days ahead, initial jobless claims coming out in a couple of days, and for me, look, this is going to be one of the most important data points on the planet in the next few weeks. Just how much damage is being done to the labor markets. Weigh in on that a place to say. Francis Donald, Manual Life Investment Management, Global chief economist and head of macro Strategy, joins us. Now, francis great to catch up with you. You'll few on the data going into this

real huge economic shock. Well, this isn't a good starting places that we were hoping for a strong January February so that we could say Q one was fantastic. You do will be one of the worst contractions we've ever seen, and we can pop back up if we have fundamental strength. But seeing this weakness in February is fairly disconcerning I will say there are some sizeable upward revisions to January data here, and that's going to filter through into GDP.

But all this data really needed to tell us was that we were in a strong starting place before Corona hit. Unfortunately, it's telling us the opposite, which is that there was already deterioration. So for those who are teetering on the edge of are we going to get a recession or not um, this particular data, I think is probably going to cement the view that we weren't strong enough to avoid you know, you know, scizeable contraction and then another

contraction after that. Francis, this is important. So you're saying that this data is pivotal in shaping that view because it gives you a sense of the momentum or lack there of, heading into this period of time. Is that right? Well, the whole argument behind why the US was more insulated to the coronavirus, let's forget that the health component installation. What I mean is that the view was the US consumer has great jobs, strong wage, games, good savings rate,

and low debt payments each month. So in order to slow the consumer, you have to imagine a shock that suddenly keeps them at home when otherwise they would be outspending. And the coronavirus is exactly this type of shock that makes so damaging to the US economy. But this argument that the U. S consumer was fundamentally strong before the coronavirus hit, I think is on shaky ground as we see the state to come in. We knew job openings

were contracting perly aggressively. We were already my team already expecting initial jobless claims to trickle upwards in this period. I think what we're going to see in a lot of this February data is that the perception of a strong starting point is maybe not as solid as many initially believed. Francis. This goes to the discussion and frankly, the conviction that a lot of people have that a recession is unavoidable at this point in the United States

and is increasingly the base case. The question is just now, how deep and how long? What are you looking at to determine the answer to those kinds of parameters. Here, I'm watching the National Bureau of Economic Research and their lead Robert Paul, who was on the wire yesterday saying we may not need to see exactly two quarters of negatives back to back growth that we may do to

change this definition of what a recession is. My base case is not necessarily that we see two quarters of negative growth, but that Q two is such a severe contraction that we see the damage to the economy typically felt over a prolonged recession within a three month period. It that would be somewhat unprecedented, But it also means we may need to rethink this concept of what a formal recession is. What makes us put those grave our

stripes on all of our charts. That means to be seriously questioned, is it really two quarters of back to that growth that's negative that makes a recession or is it the extent of job losses that we see. We really need to be reevaluating that, And if we re evaluate that my senses, we will see something very equivalent to a very large recession that may occur in a

shorter period of time. Francis. Some people worry though, that it will trigger a huge banity leveraging that will just go on for quite a while beyond the effects of the particular health crisis that we're going through at the moment. What do you have to say about that at the moment, Francis. So you have those kind of conversations with clients, Oh, of course, we're not talking just about you know, think about it. This is an evolution of three types of recession.

We started off with concerns about a supply shock because China had fallen. That was what I call the level one recession supply side. Then we of dawn and this is where we are now, to a supply and demand side shock that would create a more pronounced recession environment. That's where we are now. But the level three type of recession. Again I'm just coming up with these terms myself, but a level three recession would be a credit crisis or a liquidity crunch that creates more of a financial

crisis type of environment. Now we're not there yet, and the set provided a lot of tools that are helping liquidity and funding in that market. We saw that evidence in the market yesterday. But there is absolutely scope. And what this market is telling us right now is they're not willing to bring the probabilities of a financial crisis down to zero. It's going to take a while for

us to do that. I think we need to see a little bit more from the set in order to help us get to the conclusion that financial crisis type recession is completely out of the picture. Meanwhile, people are looking to the federal government for some sort of fiscal stimulus, including the Federal Reserve, with federal officials coming out and saying we don't have the tools to address this. We

are hearing about eight hundred and fifty billion dollar proposal. Uh. Stephen Minution, Treasury Secretary, is trying to expedite through the Senate. Right now. I'm wondering the concept of a payroll tax. How much does that edify the consumers as they try to figure out how to make up miss paychecks and how to make rent during this period. Well, it works if you have a job. If you don't have a

job because you've been laid off, it doesn't work as well. Um. What we need to see in order to prevent this from escalating really quickly is support to businesses um. And when I say quickly, I mean within a couple of weeks, not something that wakes and waits until your tax refund comes through. What we have to prevent is imminent layoffs, and we have to prevent imminent defaults and on that point, we're talking about a matter of one to two months, so that money has to come in fast and furious.

It means to be specifically targeted towards preventing this from escalating to a more severe recession. Right now, my biggest concern is twofold. How do we make sure that we don't see the default race rise really aggressively, and how do we make sure that layoffs don't come too hard

and too fast all at the same time. Francis Senator Romney proposing an idea that typically would associate with the left, which is handing people checks a thousand dollars, get the cash in hand all up front, and help them pay some of the commitments that will still be there, the obligations that will still be there at the end of the month, regardless of what happens to their jobs, in regardless of what happens to the companies they work for.

These bills will come to is that the best way of attack in this It is one way right gives people the cash as quickly as possible. But it underscores to me how interesting, you know, even just two months ago, things like m m T and universal basic income word taboo tacket topics that only a small segment of economists were discussing. But now the concept of unlimited deficit spend and u b I our front and center from all

political wavelengths. This crisis is acting as an accelerant on a variety of economic and social movements, and so quickly that we're now seeing changes to the way businesses are operating, how customers work, how we think about government spending. This is not a change that will reverse if Q three magically produces a plus point five GDP number. This is a change in the way that our economic systems will operate, and I suspect this is a somewhat permanent change in

the way we think about these issues. Francis always appreciate and enjoy catching over you. Stay safe, won't you? My best to you, Wall Francis Donald their Manual Life Investment Management, Global chief Economist and head of macro Strategy. 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