Surveillance: We Are Likely In A Recession, Shilling Says

Let's get you to that moment, the President delivering his address. Your response as those words came out, Look, the market told you everything you needed to know that. You know, there was h too much of an element of backward looking this. There was a little bit too much self congratulation. This is a time for humility, but more importantly, this is a time for action. Um. We saw the sketches,

the outlines of it. Um. But I would suggest to you that the single most important thing that we could see as a sign of backstopping confidence in the financial markets right now would be a meeting between President Trump and Speaker Pelosi and Senator Schumer. And that's what needs to happen. Would that be enough for you? Would that be the canta cyclical circuit breaker this market, this economy

desperately needs right now. Well, you know, frankly, in you know, in an environment where volatility in every financial asset is off the charts, and you're dealing with, you know, a health emergency which we really don't fully have our hands around. To say that one thing is enough is probably not the correct thing to say, but I think it would be very, very meaningful. I want to go to the point that Muhammadalarian raises, which is are we watching an

orderly or a disorderly unraveling of the market. Is this just sort of the market pricing in a new reality with the economy or were watching a sort of the functionality breakdown? So? Uh, what we would say there is um Really until frankly, the last twelve hours, it has been relatively orderly, relatively orderly. Um. You know, you've had rallies, you know, thousand points up, a thousand points down, but

the liquidity has been there. What we've been focused on for the last several months is this whole idea that sell off was likely to be contained by the two hundred week moving average in the SMP five, which is essentially where you are now, where the futures are pricing um below that you have the potential to fundamentally alter the psychology, which could cause disorderliness. Credit is in the driving seat in a big way over the last couple of days for me, and that's been the big flip.

Over the last couple of weeks or so, we saw the primary market freeze up. Would expect that in a period of market volatility, that's exactly what happened. But to start to see things like spreads and I think you noted le sort of investment right, Spreads have doubled in Wall a weak two wakes a couple of weeks just like that rapidly. So the magnitude of the move in the pace and the move, Julian, how much does that concern you in this very moment? It really is the

single most concerning factors. Uh I was talking with Tom earlier. The issue here is that having been at all time highs in the equity markets basically a month ago, there have only been three other times where you've had this kind of volatility begin as rapidly as it has two thousand, seven oh eight, the Financial crisis, seven the stock market crash and nine and we see the Bloomberg Financial Conditions

Index force. I'll try to get that chart out on LinkedIn and Twitter here in a bid and it's measured by standard deviations. And we're not the Leaman low levels, but boy are we on our way. They are exceeding

other tensions that we've seen before. You've highlighted, Julian Emmanuel that the arch tension is a so called interest parity trade, and they just to make it a real generalized thing for you know, simple Thursday, I own some equities, leverage your own leverage, usually leveraged, and I do a treasury trade against that in along the way, I have to rehedge or reset the trade. Our people are sophisticates able to do that in this market? Are you able to rehedge?

So yesterday actually saw the first sort of breakdown in in that risk parity trade because you actually saw yields rise as the equity market was falling. Now, UM, from our point of view, the paradigm of risk on risk off has been with us for essentially a generation. It was not that way prior to UM. And I might take slight issue with what John said before, is that yes,

it was. It was part of a scary moment. But on balance, particularly if we get fiscal measures, it could be that the feedback loop of ten year yields moving higher is a What is the measure that the Secretary secretary can do, particularly with all the other Washington and political burdens. What does he do to assist too big to fail banks now attempting to affect or process their desire to re hedge. How does he help Wall Street? Well, again,

it's you know, it's it's being front and center. I would say that, you know, the Treasury sector Terry is taking his orders elsewhere, um, but you know, staying out there with with small businesses. And I would say that small businesses are more important. But come about JP Morgan is not a small business, right, No, it isn't. But the fact is that in this kind of situation, JP Morrigan's solvency is not in question. And the single sentence John from Sara Vallis's note, he's calling for a hundred

beeps and do it fast. Yeah, this big expectations. Look, there was a silver lining over the last couple of days. I know it's been very stressful for a lot of people, policymakers are starting to focus on the right things. It's happened last week. I've been disappointed that it's been late, but it's starting to happen, and that's encouraging. You took issue with something I said. I've got to follow up. Why is the feedback of high yield an environment like

yesterday encouraging? Because honestly, what you want to see, frankly, the whole concept of interest rates in the US going back to the zero bound, particularly on the long end, is very sure, Julian. But I want high yields because growth expectations are higher, inflation expectations are high. I don't want high yields because people's traits have just blown up. But and and again that that is, that is the

story of yesterday. However, we have to see if you end up again in concrete fiscal stimulus in the next several days, the appropriate reaction should be higher yields. Smart Julian, Emanuel, thank you so much. With bt I g not only inequities, but on the derivative space, as they say as well. Right now, where's Gina Martin Adams As we look at the equity market, She of course drives all of our

equity work and research at Bloomberg Intelligence. A lot of discussion here about people that own equities and they wrap a bond trade around them, dampening risk until it doesn't work. Are we at a point where a blended equity and bond trade where the equities often are leverage, borrowing money to get bigger return when it works out, Are we at a point where that trade doesn't work anymore? Yeah?

I mean, I think it depends on whether you're talking about risk parity, which is really about volatility in the asset prices, or simply about price combination. Price combination is still working right, Bonds are still rallying effectively. Yesterday might have been the beginning of a little bit of a bond sell off, but we'll see after today, after the ECB, after all the action in the any market, you could

have a reflight back in the bonds. The trouble is with parity strategies, which are really based upon the volatility of those two asset classes. You've got the move index spiking, you've got the vixendex spiking. They're both completely off the charts. That's creating a lot of trouble for anybody with a volatility focus, but when you talk about sort of the asset classes themselves, you're still seeing a benefit from having

that bond exposure. In general, it's just a very very volatile landscape, and when you're talking about ten year treasuries below fifty basis points, obviously a lot of investors get nervous. That we had for the zero bound Gina, this is

such a punishing market right now. If I told many people that in yesterday's session, before we started, yields would be higher at the long end, the curve would be steeper where a bank's going to be, I'm not sure many people would say banks would be down around about six spire. What's happening beyond just the concern about rates, Well, I think it's panic. I mean, this is just sheer panic where this morning it's definitely panic and it has

been though. I Mean, this is what's really interesting about this sell off over the last three or so weeks relative to any sell off with that we've been through, including two thousand and eight, is from the very beginning we had signs of panic. We had signs of absolute wash out and sentiment. I mean, you just don't get five percent, six percent down seven percent, down days at the beginning of a crash. That's extremely unusual. You guys

keep this going. But can I point out to the panic free that gold hasn't moved, although we can go back to so what you can not what you want to, and you can discuss the dynamics they're underpinning gold. Gina, use word panic. One reason why I always love speaking with you is that you look at the fundamentals and you take an even headed approach to what we're actually pricing in at this point, given the declines that we've seen, in the declines that were poised for today, what are

we pricing into the US equity market? We are now pricing recession in the U S We're pricing a light recession allah two thousand one. I mean, it's been so long since we had a light recession. It's really difficult for many to remember. But two thousand one was a year in which we had two quarters of negative growth. They were split apart because we were kind of climbing our way out of a slow growth period when September

eleven hit and then we had more panics. So we've done a lot of comparisons back to two thousand one. But if you look over time at your average compression and PE multiples were there over the last multiple crisis in the equity market, you get an average decline in PE of about we've had a compression, you get an average earnings drop of about four percent. So we've priced

a light recession. We have not priced something like a two two thousand nine catastrophic recession experience based on cash flow estimates of all of the analysts a Bloomberg intelligence, Does this seem appropriate? Are the levels that we're looking at right now and the declines in earnings? Uh? Is that is that accurate? You know, it's really difficult to say of it. Just to be completely honest, no one

knows how long the panic is going to last. And this is the trouble with this situation is we're not talking about rational sort of behavior. We're talking about panic behavior. We're talking about panic behavior in the real economy with the grocery store shelves somewhat empty. We're talking about panic. The behavior in try to do a primoder last night, not deliver six cases of John Courage days. Okay, a panic? And this goes to what Dr Larian said Hilarian's joining

you in the night. Nine o'clock Muhammad Larian with John Pharall, look at that on another feral property. Okay, fine, there's panic, But as Dr Larian mentions, it's orderly panic. I don't did you see yesterday within the electronics of the day, it's not an image of nine. I'm sorry. Markets are acting orderly. I don't see gap bids do I not yet, though I will see. The percentage changes are very disorderly.

So I think it depends on your perspective. Again, the way that we you know, the way that said anyway, shape or form. The way that asset prices are moving so viciously and so rapidly is akin to a two thousand eight or seven or nine. That rapidity itself is very very different, and you can clear trades in a crunch, right, there's no liquidity crunch. Nonetheless, there is this really vicious

repricing that is extremely unusual. Day to check, folks. I just want to say, in the a afternoon of seven, when you started buying shares, you didn't know for three days what you've got. I mean, I know it sounds like ancient. No, I think it's worth pointy gap. That's that's why I worry about this is why I worry about the pay word, because it is so subjective and it's I think it's important to put numbers on it in the way that you guys are doing, Genu, it's

fantastic to see you and tell it you. Let's bring in someone truly expert down this here is a city group and that is an esteemed European program put together by Villain Powder and of course by Catherine Man as well. Christian Schultz joins with a very much European perspective. Christian, what is a surprise here? Well, to us, not that much. Our focus was mainly on quee. We had hoped for a bigger increase in the purchases of government bonds in particular.

And the logic here for us was, um, this is going to be a shock to the real economies equity um so, companies are going to burn through a lot of cash um And that's not just a liquidity bill to a solvency issue. The ECB cannot give equity to companies. Governments can. So what the ECB has to do is make sure that government can socialize losses um so, create fiscal room, and that requires buying government bonds. Now the fact that they're buying private sector bonds is a bit evasive,

I'd say there. So it seems that the limits that they've set themselves to throw the three limits and have scared them away from buying more governments. And that's not good news. Is this the influence of the Germans? I mean, are you suggesting there should have been more except for German reticence? Well, the Germans, I guess, would have liked

a rate cut. M that's not happened, and that's probably not happened because the fear is that that would be worse for banks than it is good for the economy as a whole, so that it would be net negative for the economy just highlights that we had the limit for rate cuts at this point for the the for the asset purchases. Yes, indeed, I mean government buying government bonds and not something which is very popular in Germany.

Buying corporate bonds pretty more popular. So yes, indeed there's some resistance that seem EUROSWISSI stay strongest Swiss for those that are playing inside baseball at least, so we're starting to get in research and Sebastian Galley, and already he

doesn't mince words about it. He says, this shows a complete lack of coordination between the United States and the European Union, which really is the key issue here is will there be sufficient response and coordination from all central banks in order to stave off some sort of serious crisis? And right now there is a question that I have looking at this response, is it sufficient? And Christian, what's

your take? Do you think that the ECB has responded effectively to the issues at hand, well within what they can do. They probably have, As I said, it would have been better to buy more government bonds, to be more aggressive on the government bond side, because that's really what we need right now. We need fiscal space or government so that they can socialize losses that necessary and

that incluence countries such as Italy. If the additional purchases which aren't great, I mean, I'm calculating maybe twelve ten month um. If that's gear towards the private sector rather than the public, then I'm afraid that sort of misses that point that governments have to have fiscal space. Here. The phrase you just said, Christian, is why we love having you on the ability to socialize losses. That's the heart of the financial political in nexus, I should point

euro strength. All of a sudden, we did get a one thirteen print briefly one slightly stronger uh, slightly stronger euro here off this historic moment, Christian shows, what do you mean, well, I translate for us socialized losses. Well, companies also households of course, will have less income, you know, through that period where we're effectively on lockdown right now in Italy but potentially in other countries shortly. Um so that will burn down the equity that the debt liment

to remain the same. So companies are running out of equity and they're certainly it's difficult to get new equity from the markets right now, so they have turned to governments for income subsidies, and not just for bridge lawns, but literally for grants. And that requires bigger deficits. That's what I'm called socializing loss The taxpayer will have to come up for a lot of them. There, that's what you're looking for, That's what I was looking for, folks.

He's so delicate about it. Christian shows is a gentleman at Lisa This has been the conundrum for twelve years. Is it any creative destruction? However, you want to put a good morning, Mr Shape with great memories there. But I'll tell you, Lisa, all this is, and the wonderful language of socialized losses is when does the tax payer pony up? That's really what this is all about. And

ultimately it seems like that will be the answer. But there's also a question what is the role of the central bank right in terms of making sure that financial markets function versus fiscal stimulus? Christian? Based on what you've seen the lack of coordination as we've talked about globally with between the central banks and in fiscal policymakers, what are you looking to add in terms of the European economy. Are we headed towards recession? Are we already there? How

long will it last? It seems very difficult right now to avoid recession if you have the definition of two successive negative quarters, or even if we do avoid two successive negative quarters, we probably have as much decline in one quarter that we can call that recession by all means, So recession widening of the output gap, and you know, rising unemployment rates and these things, I think that would

be inevitable. Of course, right now, the hope is still that we will have some form of V shape or U shape or any kind of recovery so that we get back to the levels that we had as output at the end of last year relatively quickly, in which case, you know, the you know, the socializing of losses and the liquidity support from the central bank can be temporary. But of course there's a big risk if we don't blood losses that we will get a permanent shock and

the parablel shift in the in the GDP curve. Hugely informative. Christian Shills, thank you so much. In economics in Europe with City Group, just wonderful, the director of City Group Economics team, and we will pause. There is a small blue book of two shades of blue color put out right after Robert Frost took the part in the road and the gentleman from Amer's College, a physicist wrote a

book where he talked about good and bad deflation. And as I've written, let's chart paragraph, chart paragraph, it's the Dheimens School of economics. Say something and show it. And we're honored on this truly historic day that Dr Shilling would join us kids can't say it. Folks by the book Deflation, read it and reread it every three years, Gary Shilling? Are we in good or bad disinflation? I

think we're probably in bad uh and bad disinflation. What's the difference, Well, the addition edition is do you have do you have a high productivity which pushes down prices, you have access supply, or do you have deficient demand? And I think we're more in the deficient demand stage right now with particularly with the virus. I know DiCaprio has it rights to the book Deflation, but but if you were to write a new version of it, now, how do you full technology into that productivity and a

good disinflation versus the bad disinflation? So many of our listeners, well, I think in the long run, product that we are going to see productivity blossom things like robotics, uh, artificial intelligence and so on when they get big enough to really drive productivity. But they're still in their infancy. They're not you know, they're growing a hundred percent a year or more, but they're not big enough. You have to

really move the overall productivity needles. So I think in the meanwhile, particularly when we're looking at the at the virus and the effect. Right now, it's more the it's more of the bad deflation. The e t F sp X breaks down, Paul, we're now down seven point one percent. We just touched new weakness there for the morning below the lockdown of negative one forty on smp futures. Deutsche Bank just as a European proxy from a five point five zero to a five point four three. Where's the

euro right now? One sort of hunched as well, Paul Sweeney would be great, Gary showing So Gary, what I think people are trying to get a sense of is they try to put into context what's happening over the past couple of weeks with this coronavirus. Is trying to put this crisis in context with maybe two thousand eight. How do you compare the two Well, two thousand and eight was of course a big bubble, it was a it was a subprime mortgage. It was really a collapse

in the housing factor. Right now, what we're what we're dealing with was an economy of the world which are slow and slowing now. Of course the stock bowls are going to claim it everything was just hunky dory until the virus came along, but that it was that that's not true. It really isn't. I don't care. I was on tripley. I read your newsletter, all right, but but you but you look at you look at job openings, you look at ways increases and so on. They all

were really slipping. And of course China, China has been slipping. So the point is when you take a slow and slow slowing economy and then you create this shock of the coronavirus, that's what tips it into recession in my view, And is this kind of I guess we're past the discussion point of maybe a v shaped recession because obviously now it's appears to be more pandemic, this concern and globally,

how do you think this is gonna play out? Because we're already starting to see China get back to work, um, And so there was a two to three month type of situation. Do you expect that kind of timing here for the rest of the world. Well, I mean you do have a lag situation. I mean, first of all, China has a very different situation. They deny that it existed, and then of course then they locked down everything. You can do that with the top down society. You can't

do that in the West. So things are much more stretched out, and they want them stretched out because they haven't got enough hospital besify if they wanted the whole thing to to to peek immediately, h but then to re establish the supply change and you know, we're in a change world now. I think that the globalists, the Davos crowd, are on the way out. They have are you looking at me like that? They have to see we did that happen for years? Do I look like

the doors bow tie for you today? Because it was man of you know, western Massachusetts. You know, it's a it's a you know but but but the point is that this is a nail on the coffin of the of the globalists, the Davos crowd, and and it's really a threat to globalization because now you say, you look at drugs, where do we get your nary drugs? Will get them from China? And you say, wait a minute, this is this is uh, this is is not only sell sufficiently, this is uh, this is defense protection, this

is this is national security. And I think we're gonna have I think this is really going to change and of course that's where Trump has been all along. He's blamed everything on on immigration and imports, and it just sliper reinforces that whole feeling. So I think we're in a very very changed Worland. It's gonna take a long time for this to get reorganized. Five minutes to the Guard, five minutes to the Guard. So so do you are you forecasting a recession in and if so, how deep

do you think it could be? Oh? Yeah, I think we're probably you know, you never know where you are until you get all the data and the revisions in, but we probably are in a recession already, and I think it could. I think it could be deep. Probably not as deep as the as a sub primorias collapse real GDP decline four points h two porcent, then maybe it's more like a three percent decline, but it could.

It could be stretched out. Do we clear markets? Christian Shoals was brilliant with City Group moments ago from just the Great, great Great European economists by talking about socializing losses. You and I remember Paul's too young to remember, Continental Illinois, where we socialize losses over like what three cups of coffee, they went under, We got over it, we moved on. Was essentially we don't do that anymore, do we? Well, maybe not, but relative to Japan, we're doing let's put it. Okay,

I'll take your point. Are you going to write a newsletter this week when you're done take petting and bees where you're gonna you're gonna talk about the Japanification of Europe and now the Japanification of Missouri. Well, I I think I think we're you know there, that is, that is a good point. But but I, you know, I mean the socialization of debt. Of course, if you if you get Bernie Sanders in there, you don't worry about it's all. It's all socialized. But but yeah, there's there's

probably more of that. But I think what's probably gonna happen here is we're going to get massive fiscal stimulus. You know, you're no longer have any impediment to uh two devasits that one out that's called modern monetary theory. You know, theory always follows facts. You get the facts, then you get the theory and the ideas. You have big devasits. Interest rates come down so it don't matter.

So that pediments, so we're gonna get I think big similars, but it takes two or three years for that to actually get spent. One more question, and then we got to let you go because we had to get back to the markets before Karen Moscow gives us the full day to check and all that. And then Christine Laguard in an historic moment, what would you suggest as the best practice right now for Chairman Paul fade back in punt. I don't think. I don't think that the FED makes

much difference. Lower interests, Donald Trump, lower interest rates are not going to get supply change reestablished. They're not going to get people getting out of their their their bomb shelters and going out and spending. UM, I don't think it makes much difference. I got about fourteen more questions that were no more time, Gary showing thank you so much, really honored to have you here on this historic day.

I'll get out on Twitter and LinkedIn, folks. I really can't say enough about a seminal book of what when that book come out forty two years ago, and you know I was frost I think amous just from what I remember anyways, the book deflation, I can't say enough about it as a primer on good and bad deflation and Paul you here Dr Schilling parts there that strange word productivity. Watch you this moment with a VIC sixties seven point seven six up fourteen big figures. Is Marcus Ashworth.

We had him on earlier in the hour and we're honored that he could come back to us as well. Marcus, what I see as a parsing of bankers helping the credit markets in a credit liquidity even a solvency crisis, and am I right ignoring the equity markets? Is that how it works? Well? Funny to say that I'm just looking, I'm listening to Christine Legard. I'm I'm actually slightly wondering why I'm bothering. Um, I'm quite close to the window, but thankful it's it's solid glass so I can't shot back.

But that was that we did that without the surveillance. You have to thank PARSWENI and John Ferrell did that. Be sure there's no open window with the top market is just absolutely collapsing as um. You know, we were listened to Christine Garteller's that she's going to use all the flexibilities you can do the X and Y and Z there, but no literally no one cares. Um. You mentioned Deutsche Bank earlier. I just kind of mentioned that they didn't call a perpetual bond yesterday. Um, that bond

is now training. It's below seventy cents in the dollar, and that is an extraordinary thing if you think about and it is a perpetual bond, and you know, not read too much into it. It It was at ninety four before they announced that decision. It's now down twenty five

points since then. So just to put it into context of what's happening out there at the moment, you know, we're worrying about liquidity and the treasure market, like seriously worrying about whether or not there the US treasure and the most liquid market in the world is actually fit for purpose. And we've got a create clear decision with

the UFA Central Bank that rates can for. Marcus have got to interrupt because this dovetails beautifully with two brilliant people, Marcus Ashworth and a guy named Gartman down in Virginia. Dennis Gartman brings up the S word, which is the distance from liquidity to solvency. To make that distinction, Marcus Ashworth, how do you define liquidity where we are now versus worries of solvency, Well, it's it's a return of role than return on the capital. And I think that's exactly

what we're looking at in certain entities now. It's certainly very excellent companies in certain ways, and our trading literally as if they are in distress and mildly trouble. Companies are trading in in profit distress. And that's something which is going to think an awful long time to sort out. Look not to the two fun point here, Tom, The simple point here is the world is looking now the United States. You guys have got to do something big

and soon. I think market is expecting a said right cut, possibly eaten today, another big one, and we really really need something out of the White House with Congress Marcus. Thank you so much again, Just very kind of you to stay with us. 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