Surveillance: Value Investing With Herro

the micro theory of demand in oil? I think you know demand is equally listening to be the worst month for the month seen probably ever for the old market. But the good news is that we are going to come out of this. And you know you also aute social distancing measures Europe and the US, so it should

get better from here. And say, can we just get your thoughts on what is happening with some of the indexing around the crude market and whether you think we've seen a total failure of some of these products to actually track your market, because what I'm saying on the screens today, it's just a big distortion. It's because of what's happening with single a t F. Yes, and you know we've seen this in two thousand eight as well,

which is not the first time. And back then the w t I can tangle wide and out to eight dollars, which is actually why we had said for this year. UM. As soon as you know, the demand had collapsed and we could see these fund flows coming in because a lot of retail investors think this is a good time to go long oil because it's quote unquote cheap, but then they don't realize they can tangle and the amount

of money they're losing holding every month. And of course now everybody is aware of these ets and everything prepositions, UM, and you know this is this is going to be with us for a few more months. The good thing is the US so for instance, came out yesterday said that distributing the positions all the way through June one. So they are taking some action. But there's just way

too much retail length at the funk Rida. I'm struggling to understand why the July w t I contract is more than eighteen dollars a barrel, even the fact that we're going to face the same issue come next month. What's going to change? First and foremost they are trying to distribute it to you know, even for the main contract, for instance, hundred percent of their positions were there in Maine,

whereas now they're distributing it. It's more like and then they're distributing a further twenty percent down the curve and all the way through to June. The pressure will be less, even though there will be some pressure. Also, some of the e t s has been forced to close out a lot of the Bank of China products for instance, that lost a billions of dollars because of the w T I moved to negative curtory. They no longer allows the trade, so I think that helps. But also buy July.

Physical fundamentals will be a lot better. Supply supplies have started to turn lower, demand is starting to turn higher. We should start to see drafts from Tune onwards. Of course, it doesn't mean we are anywhere close to rebalancing. That's going to take years, but at least we're moving in the right direction. I guess I'm struggling to understand the idea of hope that continues in the oil markets, sort of idea, the hope that the supplied demand dynamic will

get better and the oil prices will stabilize higher. Fitch Ratings put out a prediction yesterday saying that high yield energy bond and loan defaults, that the rate will increase to seventeen percent and eighteen percent respectively with respect to bonds and loans, and this presumed nearly thirty dollars of barrel type of pricing. Is this low balling the potential defaults given where we are, I would agree, And I think that's exactly why I don't think it's the hope

in terms of the rebalancing. I think you know, we've been arter all the way through, even with the open puffcot. We didn't think that would have been enough, But now we do see supplies are finely turning and turning faster just as demand is going to start to recover again.

No one is saying we're going to be in balanced for a code eighteen months to two years, but we are starting to see millions of barrels for their production being shut in the US bankruptcy, as to your point, will be a lot higher than some of these estimates, because right now there's very few with any producers that are making any money at each part and Rachel, let's get out to talk to me about what that environment looks like. Off the back of the price shark that

happened eighteen months ago. I think back end of twenty one into twenty two gets very interesting because it's not just a supply losses that we are finally starting to see now, it's also the potentially semi permanent losses to reservoirs that we see because of the shutdowns of the scale that we are going to see in the coming week. We've never seen this before. No country other than South Arabia will probably come out of this unstage in the

sense that they will lose production on a permanent basis. Okay, I want to know what the nations do, and really, I mean, this is our great and you are so expert at supply demand, etcetera, etcetera. They can't sustain Brent Coranny, Brent Prenty for brententy eight whatever versus their structure of fiscal and social demands. Which countries are you most following, not for the drama of collapse, but they're just they're

gonna be hugely challenged. Nigeria Iraq would be the two top onns for us UM and yes, you know there's a lot of written interpreach about Albi Arabia and Russia. But again they two have reserved, they can get out and even raise capital if if they need. But they are acts better for bed but for US Nigeria Russia for sure, and then the story Nigeria and Iraq for sure. And then of course there are a lot of the Latin American countries which believe of very pot and read.

This has been wonderful. Thank you so much. I'm ready to send with us and of course with the energy aspects, just extraordinary. This morning news at a few are this morning thanks getting a break on leverage limits. The so called leverage ratio will be relaxed under an EU proposal announced today. We are lucky on this program to have an exclusive interview with the European Commission Vice President Varis Dombrowski's that is always great to catch up with you, sir.

Let's talk about it. Why did you make this decision this morning? Well, uh, indeed, European economy, as economies across the world, are hit by the coronavirus crisis, and we need to come with a also economic response to this crisis. Because uh, last majority of not all EU member states will experience severe recessions this year, so we need to provide necessary stimulus to the economy. We are doing UH this through major stimulus UH fiscal stimulus, relaxing our state rules,

monetary stimulus. But we are also looking at our banking sector rules, so utilizing existing flexibility in our prudential rules and also coming with a targeted amendments on the capital requirements regulation to UH facilitate bank lending capacity to the real economy. So basically, what we are doing to the large extent, we are following the decision of the Buzzle comedy to postpone implementation of so called Buzzles three rules.

But year, for example, you mentioned specifically a leverage ratio. This is exactly one one of the decisions that are following up Puzzles. We all want banks to be able to finance the economy. We people listening to this program right now they're wondering why we want risky European lenders

to be holding less capital. What's the answer to that. Well, first of all, we are not proposing that banks are holding less capital because when we discuss finalization of Basil three, there were additional requirements which were agreed internationally which were to gradually set in and what Basil Committee has decided internationally is now to postpone the introduction of those additional requirements. And by the way, United States are also taking advantage

of this Basil decision. From that point of view, it's part of coordinated international response. Mr Dobrawski, were honored that you with us today, John, and I love seeing you and Davos and that I am meetings and such and absolutely fascinated when you, with your heritage of leadership in Europe,

believe we will finally see bank consolidation. Your job is extremely difficult, Madame Leguard's job is extremely difficult, and the only solution is a consolidation within countries and a consolidation across borders. When will we begin to see that? Well, actually, uh, this is a process which we are already seeing that. If you look across you Member States, we see this

process of banking sector consolidation gradually happening. Not that it's some kind of you know, regulatory aim of the European Commission to force bank mergers, but I would say also the additional prudential rules which have been introduced internationally and which you are implementing in Europe are facilitating this and we are gradually seeing also this process of banks that

the consolidation. Unfortunately in Europe we saw also another process of banking uh sector, banking, lending, banking activities becoming more national, so less than European and there we want to under the expendency. So we want to have a banking sector which is across active across the EU, and the same goals with a capital market sectors. That's, for example, why we are now working on our next stage of our capital markets junion projects. The answer is often more Europe.

Intriguing to me that when it comes to the debt, the answer is never more Europe. The north of Europe, the Netherlands and the like do not want their mutualization. There are many people outside of Europe looking right now at European officials getting together and trying to come up with the plan to offset the pain in the European economy.

Has helped me understand that help our audience understand that why we are still no closer to share debt in the euro sign Well, first of all, it's worth nothing that already was a measures which had been taken in Europe. We already have provided a response fiscal response liquidity support of the scale of three points for brillion euros. This is uh the e USE largest ever response to the crisis.

So this is something which is already Yea, this is so this is so important, lattis this is so so important what John brings up and I know you've done three trillions as well. Our American audience wants to know what you in class regularly believe will be the mutualization of debt in Europe. Do you have any optimism that could occur? Well, actually, uh, what I was referring now

is immediate crisis response. Currently, we are working on the EUSE recovery plan which will base will be based on h ambitious EU budget for the next seven years, so called multi annual financial framework, and we will come with a sort to say classical U multi annual budget, and there will be additional recovery fund which we propose, which among other things, will be financed as a joint borrowing

through the European Commission in Financial Markets. So we'll be UH raising financing jointly at the European level to finance our European response to the crisis and to finance economic recovery. But as we gotta leave it there, we wish you the best. We wish you're the best, of course, Varriston broad skates. European Commission Vice President David Harrold Harris Associates what the World's great international and value investors. David, the

charts are measured by standard deviations. What that means, folks, is one or two standard deviations is within the realm of normal, and then you get outside that. And right now, the differential between growthiness and value e nous has never been more of a deviation. Have you ever seen it like this, David? Have you ever seen the love of growth in the lack of value? Have you ever seen it like this? Now the closest beef come with late oh eight, early oh nine, But other than this, I

haven't seen it. And to me, it actually is a great cause for excitement because when you get such a price anomaly, and the price anomaly is the ignorance of value of businesses, the ignorance of what a business is priced at. And we know fundamentally what makes a company valuable is its cash flow stream, and so eventually this will come back to us. So to me, the greater

the spread is, the better the future looks. There are a set of there, David, this is important as a beautifully answered by the way, there's a set of catalysts that get you to that word eventually. Are they instigated by investors or are they instigated by corporate action when officers and board members say, wait a minute, why are

we so cheap? It's probably all of the above. And what I think eventually happened is investors begin to see, say, the light at some end of the tunnel, whatever is the trauma that has caused the huge dichotomy between valuations um In in O eight oh nine, it was the Great Financial Crisis, and when people began to see a stabilization of the global economy, you saw that spread between growth and value narrow because people thought, well, okay, these

businesses are gonna be okay, they're going to get through the cycle. Today we have the same type of price movement, but amplified and with a different cause. And the different cause was it was a medical affliction. Um And when people begin to see the light of at the end of the tunnel. For this, I also believe that you will see that. And at the same time, companies also become frustrated um and they begin to do things to try to realize value, whether that means selling an asset

that isn't reflected in their valuation. We see this in our own portfolio. Take a company like CNH is going to separate into two businesses, off road and on road. You know, off road being tractors and construction equipment, on road being trucks and components. So we see companies when they do become frustrated, they'll hate steps, and whether it's to crystallize the value of a business, change in management, stock repurchases, or dividend distributions, they will take steps. So

I think it's both those things. But the big move will probably come when people realize they're under exposed and the most undervalued assets. And as they're so undervalued, it doesn't take much to get them up and going again, it's a very small door to enter, and when a lot of money begins to flow into that door, the door the door size gets much bigger. So, David, given the volatility that we've seen just in the last three months, where are the sectors that you're seeing the most value

or the most mispriced assets. You know, the funny thing is is that it's just a continuation to what we've seen, uh in twenty eighteen in particular, twenty nineteen was kind of a break here. Uh and then that same value verse growth. Take consumer discretionary industrials, European financials, they're what really got hot bard during this crisis, and safety eCOM mers technology, this is what really really did well. So only there wasn't really a change. There was just an

opening of the magnitude of the spread. And the volatility on any given day was actually like something I've never seen. Um, we had a stock in our portfolio, Ashtead. One day, it opened up down, the day before it was down fifteen, and it closed up over ten percent. I mean these are just huge intra day forget about intra week in tra mont intra day price movements. Now I will say it's settled down. I mean you could see the vix went from a high of eighty and now it's just

over thirty. So we are starting to see a little bit of calm return to right. So what does that mean for the banking and the financials. I mean, we've got a number of people in a life somewhere. News of Bloomberg opinion was on today basically saying, David, if if Europe can't figure out how to consolidate banking now, when are they going to do it? Are you just check chopping at the bid over the next two years

of what financial will do well? I think the financials in Europe will do well only because they've been beaten up so bad. I mean, you were able to buy the quality of the sector. Let's take a BNP perry a week ago for just overt of book value. In the last great financial crisis, it didn't trade that low, and one would argue they're much safer investments today given

their capital positions. Uh in the financial crisis for four or five to day or so, you have safer banks trading at lower prices because I believe the big pockets of money played you know, the same the same game plan, the same pitch were instability were in fear short of you know, European financials, and they moved as a bucket and so to us as kind of marksmen were able to pick and choose the quality and by those that have really sold down, which we believe are and sustainable

levels The reason why I believe it's so unsustainable a of the low price. You have the strong balance sheet, and see believe it or not, even with the lower negative race, you've seen resilient earnings. You've seen earnings behave because there are other lovers that the managements have been able to pull to protect their earnings. And so this is why we've remained exposed in these areas and we're very excited about the future prospects of our portfolios. It's

really really hurt us. We had a terrible first quarter. The damn thing about the Packer draft radio would go to the Packers, Why did you take your quarterback? That's a really really why. I don't know. I kind of understand why we took our quarterback. I'm not sure why we took that quarterback. Okay, energy is you know, talk about value, but boy, that's just you get it's so much risk in that space. How are you viewing energy

right now? I mean, I think there is a lot of risk and energy, but if you look at the short term, it's hard to believe that the normalized price of oil is twelve dollars and thirty one since that's what it says on my screen right now. However, I will say this, so I think in the near term there is opportunities UM because oil is oversold. I think oil is significantly oversold in the short term, but in the medium and long term well, in particular to me,

it's hard to make a case given supplying demand. Uh. Now, gas, of course, it is a little bit of a different story, because gas I think has continued use. As long as you could get guests to the market. You know, it's it's relatively clean and transports clean and burns clean um, and it's very low price. And as as long as you could have access to pipelines and and l n G and this type of thing, I think guess could

be a very good business. I worry about oil because I think demand for refined products or the medium and long term will continue to go down, and I think that the supply, at least at this stage, there's just so much of it UM. But I think at this price you have an opportunity if you're a trader, but

that's not necessarily we are. We do have some exposure in our international portfolios of the s novis UM, but we we don't have a lot of energy at at Harrison, there's some where where we believe there's a good management teams and good production profile. It's good production costs and good balance sheets. But you've got to be there. So David's look at this market here. How concerned are you that this time? And I've been talking about, you know,

for you know, the longest time. It's really centered on a small number of names. I mean, I'll call it fang plus or whatever other moniker you want to It just doesn't seem healthy for the market for all. How much of the concern is that for you? Well, it's a very good point because and it hasn't been healthy for us as long term value investors. It's been terrible

for us. And I think this actually gives pause us, gives us a pause to be optimistic because eventually we believe the market will spread out and those names which do have a good fundamental value characteristics value by US defined as low price, high quality, but are being ignored just because they're not in that narrow sector which you describe.

So if you're an index holder, or a passive holder, or a holder of these assets which have been loved now for the better part of a decade, I would be slightly worried if you're someone like ourselves, who are positioned for when this love turns to like and at some point maybe dislike. We believe we are very well positioned and we'll be happy for when that day comes, when we have a more dispersed, uh disbursement of valuation within the market. David Harrold, thank you so much. With

Harris Associates greatly greatly appreciated. This morning. On the edge of Exuberance, we welcome the Laureate of Yale University, Robert Schiller, who we always talked to when we can. I want to go more philosophical here, Professor Schiller, and that is to speak of your quiet book that didn't make the press of exuberance, and this, that and the other thing,

and that is finance and a good society. The clear observation of Republicans and Democrats is Europe and the United Kingdom are figuring out how to come to the aid of their citizens in a less clumsy manner than America. How do we get to that point in America or do we even want to get to a European model of a good society. I don't know if we want to go ho hog into a European model. But I think that it is true that our free market orientation

sometimes has us missed essential roles of the government. At a time like this, people have contracts to pay money like rent or or interests on corporate debt. Uh, that there should have been something in those contracts that allowed for a circumstance like this, but there isn't. The government is a risk manager of last resort. It comes in and does common sense things that uh, if the ideology

supports it. And I think that we could learn something from Europeans, uh that there's you know, no no free market contract and anticipate everything, and uh, we do have to have some interposition of government authority. And this is a time like that. So, professor, just in the last ten eleven, twelve years, investors have had to deal with two extraordinary shocks, first the financial crisis and now this pandemic.

Are you concerned that investors just when you think about individual investors, that their psyches maybe permanently altered here as they think about risk, as they think about, you know, how to invest their capital longer term. I wouldn't use the word permanently, but maybe for years. Yeah, the psychologists talk about something about the aspect heuristic, and that is a tendency for people when they're frightened by something. Uh to to this here extends to many things in their lives,

even things that are unrelated to it. So this endemic has scared us. It has us wondering whether we will survive another couple of weeks. That's quite a scare. And it's going to affect other other other things like the stock market or the housing market. We'll see about these things, yeah, Professor Schiller, one more question, if we could, and too short a visit today, how does exuberance come back? There's lots of people pushing against Robert Schiller right now saying

exuberance is gone. And yet you and I know your study of history is always in every case exuberance returns. How does it do that? How does it do that? This is one of the mysteries of human psychology, that that it's called the animal spirits. Uh you, there's a desire for adventure and as a desire, an optimistic bias that comes back eventually. Uh yeah. So, and after we had the stock market coming really right back up and like nineteen thirty six or so, almost all the way

up in real terms. Uh, it's it's thanks again. So uh, these things are still not fully understood, but it does have something with the human spirit. Robert Shuler, thank you so much. He is the Nobel Laureate of Yale University. We have done so many different stories of this great pandemic, and we think all of the medical professionals we've dealt

with worldwide. At the Johns Hopkins University in at their hospital is someone who is not so much expert on infectious diseases or virology, but expert on the people that do this every day, and that of course is the nurses. Nisa Ernest is with Johns Hopkins and here's our conversation

with Miss Earnest on the state of nursing. There has been a tremendous response throughout our health system as well as many other health systems to really get out and aggressively test the community and follows some of the ideas that we've learned from the other errors of the world

that have been tackling coronavirus. And they said, there have been a number of reports of you know about ventilators, the use of ventilators, whether they're good or not, One of the things that's also come in Europe is the fact that actually, because there's a shortage frontline medical workers, that you're retraining others to try and do these very difficult procedures at times. How is that going? That is very interesting? It's actually going very well. It was very

difficult in the beginning. You know, the profession of medicine is very protocalized and it's not necessarily very agile, so you would have to change not only your skill set but your mindset in order to provide the safest, highest quality patient care. You bring up a really good topic. We have what we call proning team. We have found that proning, which is a physical maneuver that's very common in i'm an endoscopy. We do it all the time with patients that are sedated in order to get them

more oxygenation. And we found that by proning patients early and often, we reduced the use of ventilators in a lot of our patient care areas. You're one of the rarest things out there. You were out in the real world doing terrible jobs, and then you finally got a real job in nursing along in your Surrey Sheraiton Johnson and Johnson and others. I want you to talk about the nursing profession now, how our nurses is an industry going to come out of this pandemic. They've got to

be changed after what we've all observed. Where will nursing be in two years, in five years, in ten years. That's a great question, and I was actually thinking about that when I was driving in. You're right, I have a business background. I came into nursing as a second career. One of the things that this pandemic is showing us is that nurses are going to take a very different role two years, five years, ten years down. Nursing is

what I call very silent work. No one really knows what we do, and I think this pandemic has shown the world what we do and what we do well. Nursing are incredibly innovative and creative, and they're also very very good at maintaining high quality patient safety standards. Yeah, but when did I get respected in the system. And I'm not only talking about nursing folks, I'm talking about the interns and residents, the people in the trenches of these hospitals. It seems like, am I right? They're the

last ones to get paid. When does that change? You know, I can't answer the pay question. I can tell you what is interesting here, and I'm speaking specifically for Hopkins. One of the things that Hopkins has done is recognize an honor every employee in this organization who comes in every day to provide some type of care, either direct patient care or indirect patient care. One of the other things that this pandemic has shown us is that, you know,

we're a big institution. We're no different than a lot of other health care institutions were big. We're lumbering. It takes years to make a decision. This pandemic has shown us that you're right there are There are people right at the front line who make excellent decisions in a very short period of time that make a huge difference in a patient outcome. Yes, Sir, Ernest the Johns Hopkins University. That has been a joy to speak some of their

officials each and every day. I hope very much on the reopening of the Economy Tomb Governor Andrew Cuomo, so that it could be a case for reopening some regions of New York, at least in May. It is the Empire State folks, and we have been thrilled to speak often on Bloomberg surveillance with a Lieutenant Governor of the Empire. Kathy Hokel joins this. Kathy, I picked up the daily news this morning and I just wanted to see it. There,

you know, New York dropped dead. I mean, that's again the tone forty five years on in Lashington, the President saying in New York dropped dead, explained to our audience coast to coast, how New York contributes to the federal uh pot of money. New York State, our residents contribute times billion dollars more the settled government to fund their operations, more than we get back in services. And I am

like an official now. I was formerly an attorney on the staff of Daniel Pettrick Boyhan back in the and he released this report every single year to show how New Yorkers subsidized the rest of the nation and therefore made an argument that we should be able to get more money coming back to us. But now more than ever, you think about the fact that we have been the

epicenter of this pandemic. We have had to incur cost we've had, our businesses are hurting, and the federal government should look at that record realize that states like Kentucky take more money than they put in, and we give more money. So why are we being having this conversation give us money now, we need your help. Okay, that John Farrell's a good question. They're on testing in where

we are where it's every state for himself. I'm looking out, Lieutenant Governor on two of New York State people jogging around Central Park. I mean two are going to get tested. That seems absurd. Well, we want those testing rates being much higher. And that's why when President Trump met with Governor Como just succested we go today. Our governor made a very contelling case to say, Okay, you say you don't want to have anything to do with testing. How

about if we split it. New York State will run the testing, will do the collection, sites, will gather the examples, will get out the results. But we don't have the components to do that testing. We don't have access to the international supply chain where we agents and vials and swabs are being manufactured in places like China. Can you help us settled government at least have a supply chain and a repository to send US states like New York so we can ramp up from twenty thousand tests today

two over forty. And that's exactly what we're striving for, so we can do better. We just don't have the re agents and other components to be able to do it. We want to do it absolutely. We think it's going to make a huge difference in people's sense of security as we start reopening the economy. Lieutendant Governor. Just fast forwarding beyond the testing and reopening, I'm wondering about the

fate of New York City as a metropolitan center. I've read an increasing number of stories about businesses rethinking plans to open offices in the city and the possible exodus of families moving to the suburbs, and beyond, how realistic is that? How big of a threat? How do you talk about that? We have been down and out before in New York City. You think about nine eleven, and at the time, people said, why would any tourists ever come back here? Clearly we are a terrorist target. Why

would anyone anyone want to live in Manhattan. We came back stronger, better, more vibrant than ever before. Hurricane Sandy wipe how you flooded the New York City subway system. You know, creating and you know breaking havocs throughout Long Island. We know how to rebuild, built stronger, with more resiliencies. So I believe that what we're tasks right now is to reimagine a better New York, create a better New York State. And I'm involved with that with the Governor

as we speak. And then look, the Governor John Farrell moved to her top of the market. It's almost really isn't this morning? After that, Sirius suggested from from Kathy. Kathy, let me follow up on something important place, How do you reopen in New York City if you're not aligned with New Jersey and neighboring states. We will be aligned,

you know, absolutely. This is some in the governor initiated with our neighboring governors over a month ago, this tri state coalition that expanded to seven states, where we don't want to do anything at odds with another neighboring state because there's so much synergy in that tri state area. In particular, people live in New Jersey, they work in New York, and vice versas stained with Connecticut. So the governors have really been enlightenment and this does not happened before,

but it has been this incredible collaboration. But we talked about the fact that if each is open in one area, should they be open elsewhere? What about schools, what about transportation systems, what about opening up businesses? So I think New Yorkers and people living in that region should feel it's confidence that there will be intense coordination among our administrations. Make sure that we're not working a cross purposes from

each other. That that doesn't accomplish anything. You open up the bars in New York and not in New York City, people are gonna go to New York and let's just let's understand human nate here and that's then that just expands the spread of New York City is not ready to open. So that's why it's really important what they're doing,

and that will make the difference. Well, I'm listening to what both states are saying at the moment, and Governor Cuomo has been quite clear about slowly looking at reopening some regions in New York. In May, Governor Murphy of New Jersey essentially saying flat out to the stay at home order will remain in effect and its entirety until further notice. Are you saying there's no daylight between the two governors at the moment, Cathy. I'm talking about regionally.

New Jersey is in close proximity to New York City, the metropolitan area, which is not ready to open yet. The governor talks about opening regionally, he's talking about something like Erie County is very like Erie County, Western New York, which is literally a seven hour drive from New York City. So no one will you do, you know, one from New York City is going to hop into a facility and visit Erie County. It's just geography doesn't make sense.

But that's we're talking about the far reaches of the states that really have a dramatically lower number of positive cases hospitalizations and are more prepared to open up. And that's what I'm focusing on now as you speak. My focus, designated by the governor a week ago when he came to Buffalo, was to charity the reopening plan for the outside downstate areas right in New York and Central New York on a different timetable altogether. It is the Empire

State Lieutenant Governor. Thank you so much for joining Bloomberg Surveillance. This morning, John Greats catch up with the Lieutenant Governor on a regular access to get the update on the real connected. 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.