Bloomberg Wall Street Week: Rieder & Diamond

in the world. Through the eyes of the most influential voices Larry Summers, the former Treasury Secretary, Star CEO, Kevin Johnson, sec Chairman j Clayton, Bloomberg Wall Street Week with David Weston from Bloomberg Radio. One story dominated Wall Street this week and the business world and the world itself. The coronavirus made its presence known even as its spread in ways detected and undetected, and the markets reacted violently, raising for some the question whether we're on the brink of

another two thousand eight great recession. Something Bloomberg Wall Street we contributed. Larry Summers waited on another way I like to think about it is weird a moment like where we were after Bear Stearns. That wasn't yet where we were after Leahman, but it was a pretty critical moment, and in retrospect, the time was largely wasted, and it would have been better if we had acted much more promptly. Uh,

I don't think there is uh time to lose. To help us sort out the reaction from the overreaction, we convene now our Wall Street Week Round Table with Bob Diamond of Atlas Merchant Capital. Bob, of course, was the CEO of Barclays in the aftermath of the Great Financial Crisis, and Rick Reader of black Rock, where he is Chief Investment Officer for Global fixed Income. But he's not just a bond guy. He also is lead portfolio manager for black Rocks multisector fund. So Rick, Bob, welcome. Good to

have you here. Bob, let me start with you still. I think he took over Barkers in two dozen ten or so, so just just as we were getting into the Great Financial Crisis. What are the differences and similarities? I mean, Larry was careful and saying, we're not yet the layman, but we may be a bar certains. I mean, there's similarities in terms of fear, but I think there

are more differences. I mean, two thousand and eight was a banking crisis, it was a liquidity crisis, it was a solvency for many institutions in financial services, and you know, particularly in the US today, I don't think we could have a stronger banking system from capital levels and all

the way through. UM. And I think right now, obviously it's a health crisis number one, but in terms of the impact and the economy, my sense is that we are dramatically underestimating the impact in the near term in terms of the economy UM, and we may be overestimating the medium to long term. And that's very dependent on UM any resolution to to the health crisis. UM. I think secondly, UM, while this isn't a U, I don't think anyone would think of this as a banking crisis.

One of the things we're all trying to figure out is how can the banks be part of the solution. They're definitely not part of the problem. UH. And then lastly, i'd say, David, is I think you know when I look at the fault points, UM, if I look down the road, easily envisioned a significant bounce in the equity markets, because you know, I think, UM, the near term impact on the economy could potentially unwind over time. But I think when you look at the low end of the

US dollar corporate credit market. UM, I think that may be more permanent in terms of UM loss of value. So I wonder if one difference might be not very advantageous, and that is this, we had a level of cooperation even across the aisle in two eight and between fiscal and monetary authorities. Uh, that we seem to lack right now. People say we should be coordinated. It doesn't feel very accordinate to what the government's doing. Yeah, I mean, I

think that's right. I mean, first, what I would say one thing, The crises tend to bring people together, and so I think you'll see a bit more of that by your right here before you haven't really seen that. Listen, I think you know what people like to grain us in the markets. We like to grasp on a history because it gives us a pretty good playbook for how

to think about this going forward. But you know, it's interesting every time you'll have one of these disruptions, it's different than the one before, and they're usually the reason why they're so potent in terms of at the markets is you can't really go back and say, how did this play out before? The things that are significant are I mean this is an exogenous shock of of significant proportion. Listen, We've never seen this before. We have people working in

different offices, what is liquidity? How do people interface with one another? And that is really uncertain, So you know, we've got to work through that part of it. But I think what Bob said is right. It's not a it's not a leverage problem per se. And the other thing that I think is significant about this one and part of why we'll talk about you need that coordination. You need fiscal policy. The markets are not going to stabilize until you have something tangible from a fiscal policy

point of view. Listen, the economy up to this point, and it's different regionally. Europe was still I would argue more about in terms of in terms of growth. The US economy was actually surprisingly this late in whatever whatever business cycle there is, it was particularly strong. You look at hiring, you look at where we were from a housing point of view, Retail sales was good, and even even manufacturing was was doing okay in a secular decline. Now it's like, how do you get from here to there?

And how do you get to the other side. Listen, I'm more enthusiastic about I agree with Bob said, there's going to be some permanent tail to it, particularly in the credit markets. But this is something we've got a bridge. What is a really deep slowdown in the economy, and you have some sense that particularly Asia, particularly China and the US, there is some real vibrancy of those economies. We just got a bridge from here to there, and

that is uncertain how we get there. Well. Are you worried that the markets are not responding in ways you might have expected? We had last week the FED cut fifty basis points, market went down. They didn't like it at all. This week we had to FED step up on liquidity and injective quiality. Initially reacted and then they came off again. Are you're worried that maybe the buttons that we're pushing or neck in the reaction we would expect. Yes and no. So I think it's a tale of

two sides. I completely agree with what Rick said is what we need more than anything right now, if if we're correct that the near term impact and the economy is going to be severe, we need fiscal stimulus, and

particularly in Europe. Having said that, um, I think what the ECB and the Bank of England have done in terms of providing liquidity, making sure banks have money to lend, particularly in Europe, with the banks are nowhere near as healthy as they are in the US um more asset acquisition programs, and in the case of the UK UM both Governor Karney and incoming Governor Bailey have reduced one of the buffers so that banks have more capital to

lend to small businesses. So being focused on getting the right fiscal stimulus in the right areas and getting bipartisan support is critical. Okay, we are going to be back with our continuings. Bob Diamond and Rick Reader coming up. Can the central banks save us again? This is Bloomberg

Wall Street Week with David Weston from Bloomberg Radio. ECB President Christine Lagarde is in the middle of a full blown crisis just four months into her job, with investors and businesses outing on her to avoid the worst of the economic damage to come from the coronavirus, so she announced a similar package this week, including a billion euros and quantitative easing over the rest of the year and ramping up liquidity and lending capacity, but leaving rates where

they were In this week's contributors take Stephanie Flanders, Bloomberg's senior executive editor for Economics, takes us through the highs and the loans. Christine the Guard was very calm and deliberate in her press conference, which was a very unusual one to look at because the room was half empty. I think most of the reporters who were normally there had either not been able to travel to Frankfurt's or were working from home and were submitting many of their

questions online. But the President of the European Central Bank announced what she called a surgical, comprehensive set of measures to help the Eurozone economy through the impact of the coronavirus. There was a big new long term lending program for banks, ideally aimed at them helping small and medium sized businesses

affected by the virus. Along with that, there was some word from the regulator side of the eu CB that they were going to soften up some of their regulation of banks, perhaps to to make those banks more relaxed about the impact that that help for small and medium sized businesses might have on their balance sheets. And you had an expansion of QUEI, of the bond purchasing program of the European Central Bank, which we think will be

oriented towards corporate lending, corporate debt, not government bond. What you clearly didn't see was the ECB follow the FED and the Bank of England in cutting the key policy rate, which is already though at minus not point five percent.

That was possibly because they didn't think that would make much difference, and I think also they would point to the fact that the interest rate on that new lending for banks was actually going to be below the policy Rate's going to be a quarter of a point below, not point five. So in a sense, the rate has been cut for that kind of lending, it just hasn't been extended to the rest of the Eurozone economy. You know, investors, we saw, we're not we're not overwhelmed initially by what

the ECB had announced. But actually Christine Legard herself said the CV was not the only actor in this story. What was going to be crucial, she repeated, was a coordinated fiscal effort from Eurasone governments to confront this crisis. And I think we've seen that generally. The idea that we have to see not just that the grown ups are in charge, if you like, but that they're really in top of, on top of the kind of micro measures and expenditures that are going to be needed to

help cushion the blow of this crisis. We've seen that a bit from Italy. The UK had the good luck this week to have a budget schedule for this week, so we've seen a lot of quite decisive fiscal action from the UK, from other governments and specifically from Germany. Not so much that was a contributor to take from Loomberg, Stephanie Flanders. We're back now with Bob Diamond and Rick Reader for more of our roundtable discussion. So this was not a bazooka were you used or next shark? And

is it enough? So? I thank you. Think we're beyond the idea of monetary policy comes to save the dime. And I think people compare this to the eighties or nineties when interest rates were significantly higher. When you move right down you can have a real effect. There's no interest rates are not symmetric when you reach the lower bound. When you get to zero, you hurt pension funds, insurance companies,

individuals when you get to negative interest rates. So with Christine Legard did there were some benefits there t L t r Oh was good. You're getting at targeted lending, which I think is a big deal. Listen, I think what you said is right. This has got to get to the fiscal side. This has got to get the only way you're gonna get velocity in the system. You need to get innovation, you need to get equity investment, and fiscal will do that. So, Bob, you worked over

in London. You know the London system very well. Did they show everybody the way it's supposed to be done this week? Because they had the Bank of England club with the right cut and they brought out their budget at the same time, it seemed to be quite coordinated. I thought that the response from the Bank of England and the joint presentation from Governor Karney and Governor elect Bailey was very thoughtful. UM, very effective. I think, well, I think it will be very effective. Um and UM.

I think both UM allowing one of the buffers to be removed from the bank so that they can get more lending into the real economy. I thought they're liquidity measures um. And if you think back to the financial crisis in two thousand and eight, those types of things weren't done at that time, so I think it is helpful. But I'll come back to the point wheck and I have been making it now Christine leguard Um, we need

fiscal stimulus as well. What about the backing offense of the reserve corners of the banks, because they also did that. There's talking about that here as well. I mean, everybody think I think I thinks it was a good thing to designate what we did make the bank stronger. We need him right now. But should we be backing off some for the time being. Yeah, I mean the regular star dynamic is really said. But you think about what happened in the in the off the run treasury market.

I've never seen that before the bidas spread. Some of the off the run treasuries was multiple points. That is, that is a function of the banking system getting gummed up. You look at companies that are drawn on their bank long etcetera. When the banks don't have the ability to get in there. You need to do that, and by the way, can be in the short term nature. You don't need to do permanent change, but you need the bridge the dynamic where you're getting more liquid in the

system and you're getting a better functioning environment. Some regulatory relief would be really helpful. Is liquidity more important than actually the interest rate right at the moment, for example, for the Fed, are they better off really just injecting dollars into the system. And I think, uh, my opinion, just one of many opinions, is we used a bullet we didn't need to use with the rate cut here UM recently, UM, I don't think that Governor Powell wants

to go to negative interest rates. I don't think the UK wants to go to negative interest rates. And we used a bullet. What is really impressive is the bazooka they used in the repo markets. And you know, one of the businesses that we've invested in, South Street Securities is an independent UM broker dealer, a non bank holding company that does US Treasury and mortgage repo I see

in that business. The liquidity in the short end of the market has never been more robust in I think since two thousand and eight and two thousand nine than it is now. Because your recalled, David that during UM Dodd Frank there were changes to open market operations that the New York Fed could operate in and a lot of that is being um um kind of taken back a little bit, and we're seeing much more activity from the fed UH to ensure that liquidity and the repo markets.

And I think, you know, for the functioning of the short end of the curve, I think it's enormously helpful. And I think you're spot on. I think that's been more important than the than the right cut. So that that did act this week to injecttion liquidity. But was it enough, Yes, I mean that was it was, It was, it was. It was inspiring in terms of the amount they did. And when you put that sort of liquidity and you know, you were starting to see pressures in

the mortgage market. Listen, the mortgage market. When you bring interest rates down, mortgage is supposed to come down in a parallel way, if not more so. Mortgage rates Actually we're moving higher. While was that the case? The system is gummed up? You need to provide better funding, which was what happened. You need to provide better liquidity. And the other thing that I don't think people consider enough. When you put liquidity in the system, it takes pressure

off the dollar. We operate in a global financial system when you take pressure off the dollar. It takes it makes it easier for emerging market. So it's emerging markets go and in act policy on their on their own. That is a really big deal. Liquidity gets in the system and it's got it's got a real velocity to it, and they addressed it, and they had to do it. But you were seeing some cracks in the mechanism, and

you can't buy other assets. You can't buy equities, you can't buy credit until the core asset, the wrist free rate, is solved. And it's the it's the number one used of collateral in the world. It's what we build. I was called the fan of dispersion. Until you know where the wrist free rate is, I can't build my models to how do I think about all the way down to equity and and so you have to fix that asset and they did. Okay, we're gonna be back with

our contributors. This is Wall Street Week. This is Bloomberg Wall Street Week with David Weston from bloom Bird Radio. The one thing everyone seems to agree on is the ultimate source of the market turmoil. It's that we don't know how or when the coronavirus crisis will end. Most immediately. We need a treatment such as the gilead ebola drug that they're trying out right now in Washington, But ultimately it's a vaccine that the world needs, and that is

going to take some time. Although this is the fastest we have ever gone from a sequence of a virus to a trial, it still will not be any applicable to the epidemic unless we really wait about a year to a year and a half. But eighteen months seems an awfully long time to wait right now, which leads some to ask whether our combination of science and technology could get us there faster. Welcome now, someone who's trying

to do just that. Dave Turk is a vice president of technical computing IBM Cognitive Systems, and he joins us now for a second opinion on what could be done about the coronavirus. So, Dave, welcome, it's good to have you here. Thank you. So explained to us a exactly what's being done, what's IBMS roll in this thing? How could we actually maybe get a vaccine a bit sooner.

So the largest supercomputer in the world is Ochrid's National Laboratory, constructed by IBM and this system has a capability of merging concepts of artificial intelligence with standard mathematical representations of problems. So what we do is when we look at the possibilities of efficacious treatment for something like corona looking for a virus, what you want to do is you want to follow a lot of different paths because you don't know which path will be the one that pays off.

So in particular at Oakridge, they've looked at eight thousand different compounds and with a supercomputer they've called that down to seventy seven compounds in just two days. So those seventy seven compounds then go into a wet lab where they begin doing the experimentation on to see if they work or not. So how do you get from there to a vaccine? I mean, are you basically understanding the mechanism by which the virus works. It's it's a variety

of things done in concerts. So you look at things sort of in our time, you know, a second, a minute, a day, but a lot of the modeling goes on extraordinarily small pieces of time tend to the minus fourteen you know, at atomic level, atomic kind of clock speed, and you begin to build up your understanding of the systems by operating simulating things at every one of those time steps, then aggregating them up to clock time where we're generally used to, and then looking at that over days, weeks,

etcetera tremendous amount of compute power that's just a molecule by itself. Then you look at it in concert with the disease, then you look at it in concert with the human organism, and you begin to look at the interplay of all these factors to understand what the probabilities are of having a successful event. Has this ever been done before? So yes. In fact, IBM worked um with some of the previously emergent new strains of flu uh the last h one and one thing I think that

came out of Mexico. We used our technology at that time to do some modeling of the evolutionary pathway of that. So if you look at flu viruses and the flu shots that you get every fall, it's a matter of looking scientifically at what's going on, but also predictively at how that virus will evolve over the course of time, and you take a shot at where the puck is gonna be, and then you build your virus for that and hope for the best. So it's a complicated mathematical

construct that you need to examine. So I won't hold you to this because I'm sure there's no noble answer to it. But in success, if it worked perfectly, could you take time off that eighteen months? And if so, how much I think they're I think there are a couple of ways to look at this. One is, in the absence of the computer, you're basically throwing um darts at a dartboard in the dark, and so you don't know if you're even close to the target. So what

we've done is we've winnowed that down quite dramatically. So now the lights are on, you know where the dartboard is, you know what the darts are in your hand, and you can start taking a shot at it. That's a tremendous advantage for the sign to working on this. The eighteen month is a lot of it is human trials and so on, so it's not going to do so much to compress that time span. But what it has

done is it's really accelerated the starting step. So instead of waiting for a year to come up or two years or three years with that set of seventy seven we've got in a couple of days. That's a big step forward. Who owns this technique? Who's the I P in this? So so the I P is all being generated by the scientists involve UM. The Power nine technology which underscores the computer is all IBM. The ownership of the system is Zokridge National Lab is an agent for

the Department of Energy. Have you tried this for other medical applications besides virus? As you said, you did it with the H one N one Mexico. Are you trying it with other medical applications? You know, we haven't. We have a group called Watson Health inside of IBM that looks at the amalgamation of artificial intelligence techniques with technologies like Power nine to bring that to bear on a variety of problems, whether it's cancer other kinds of medical issues.

This same technology, though, has been using industrial sector. It's used for fintech, it's used for the design of airplanes, cars, um problems in computational chemistry and one of the very rich areas as material science. Material science percolates through our economy and the ability to understand how these different materials are working on how to invent new materials is a

critical dimension to how you drive the economy forward. Same technology can be used for that really fascinating good luck on the coronavirus, and it works for all of our sakes. Okay, thanks not a Dave tour of IBM. If you missed an episode of Bloomberg Wall Street Week, full episodes are now available on YouTube, the Bloomberg Turtle and on Bloomberg dot com. This is Wall Street Week. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. The

coronavirus didn't just hit stocks and bonds. It hit oil prices as well as markets anticipated in demand shock emanating out of China and in OPEC tried to do something about it, publicly calling out Russia for production cuts it hadn't agreed to. Russia declined in Saudi Arabia declared a price war that took oil prices down the most since

two thousand and eight. We're joined now by a Wall Street Week contributor who did her graduate work on energy at Oxford and worked at Shell before going on to the World Bank Carlisle and then founding her own firm, Rock Creek Group. She comes to us today from Washington, and then Sari Bashels sounding great to have you with us. Thanks for being with us, So give us a sense form your take. Just stick with Russia and in Sari Arabia. Now,

what happened, it was all out war. And normally with OPEC, when you have these kinds of statements, somebody backs off really quickly within twenty four to eight hours. So what happened this week was highly unusual. And when you couple that with everything else that we've been talking about today, it is truly all out war. So it's not just an oil war. It's like an all out war on

the economy. And the amount of money that got taken out for oil producers with this shock with oil prices going down to the twenties and now sort of hovering around the low thirties has not really happened, as you said, for a very long time. Up who was shooting at home in this war? It was a Russia shooting at Satura Arabia, Satura Arabia shooting at Russia, or was Russia shooting in the United States. So it was supposed to

be both of them shooting at the United States. Trying to kill the shale business in the US once and for all. And it's interesting given the timing they chose. Two things I think are important. One, will this be the worst time in the U S economy That might lead actually some protection of our own shale industry, which might not have happened if they had done it at a different time. And too, it has caused a major falling out, at least to the eyes of the beholder,

between two great autocrats in the world. So it is, you know, not clear who's going to blink first. It seems like neither is going to blink. The other group that was supposed to other country that was supposed to really get hurt was of course Iran, which already UM is in a very bad situation. But I think there's always been a subsidiary effort to kill that industry as well. But I think the main main effort was to get the shell industry to basically kill over so UM Asan

is the expert, I loved listening to this. I think from someone who's not an expert in that area and outside watching this UM, you know, you kind of have the impression that you can't make this stuff up. We have this crisis in the world right now around Corona coronavirus, and we have this political game going on between Saudi Arabia and uh in Russia with profound implications on economies around the world. You just can't make this stuff up.

What happens to show producers, I said, if it was turning at them, I mean, you really see them under an awful lot of financial stress and strain right now. A lot of them were leveraged. You saw some of the yields, how y'eld yield really blow out there? So

what happens to the shell exactly? So they already were overleveraged, and I think this is this is a huge problem for them, and that is why what happens with some sort of assistance through credit markets to the biggest shell producers will be really key to keeping them up and alive. At the same time, I think, as Bob is saying, what is really interesting is why would Russia and Saudi

Arabia do this at this time. The second thing that is very unusual at this time, by the way, is that normally, when you have such a big oil price shock to the downside, you have people driving more, you have people using more energy, and you have emerging markets and oil importers actually have a big uptick in their stock or in their currency. Given the crisis that's going on, we're not seeing any of those. So it's not just the shell producers that are hurting, but it's really the

global economy. So I think when you think about credit, David Um and I mentioned this earlier in the show, that the proliferation of credit since the crisis, with lower interest rates QUE one q E two UM, what we have seen is a doubling of the amount of leverage loans outstanding today. It's it's something like one point three trillion. There's four times as much triple B the lowest rated

bonds out in the market. And I think we've been wondering what is the match that will that will kind of start this and Um, what's happening to the economy as a result of coronavirus might be that. And I think one of the fault lines is going to be in the energy sector, particularly the intersect energy sector in the US is Afsana said. Um, that's where leverage is very high, and that's where the business prospects and the

cash flows are dropping. Most quickly. So we happen to think that um, um, we're going to see um quite uh quite lower values in below investment grade debt across the US dollar corporate market, but particularly in energy. So normally when you have that, there's a shake a bankruptcies. Let's be frank. What happens and assets go up for sale. Are the majors in a place to come in and buy some of that? I think? I think what we're gonna have to see is is significant consolidation and um.

Otherwise we're going to see a number of bankruptcies. But one of those two things is going to happen. And I do think that the majors are very very healthy right now. So do they have the capacity from a from a capital structure point of view? Yes, do they have the willingness? Um? I'm not enough of an expert in that sector to know. So you are what's gonna happen? Well, Well, I think two things. One is that um, the other people that are getting hurt and we'll get hurt even

more people who lent to the shaling dis tree. So there's not going to really be um sort of Andy's silver lining for them. UM. I agree that there might be some There will be consolidation. It may not necessarily be the big oil majors, because the oil majors, just before this happened have been trying to diversify their sources of energy away from oil and gas and away from hydrocarbons into more renewable energy. So it would be really interesting as they weigh the cost of shell versus the

cost of renewable energy, which way they go. But most of them are starting to call themselves energy companies versus oil and gas companies. So that's something interesting to watch. You've been in the forefront of that move. You've been very outspoken about that. What effects might this oil price war, particularly if they continues for any period of time, have on that dynamic? Does that put off the date for people to invest in the renewables? Actually think that process

is um sort of ongoing. You had one point six trillion go into renewables um since two thousands sixteen, another maybe ten trillion going in over the next few years, and what is I think the forces of renewable energy is one reason that we have seen as oil prices have gone down, they don't bounce back. You remember when we had the incident with refinery in in Saudi Arabia, oil prices went up, but then they really did go

down pretty fast right after. The forces that are at play, between the forces um that climate change has created, as well as the geopolitical issues that we're seeing right now in front of us, as well as having had a really nice weather winter season, all of them are forcing the oil producers to really panic. So I think looking forward, it's going to be much less focus on oil and gas, and at least oil and maybe more focused on natural gas, including local US natural gas and shell gas, as well

as renewables. Bob, can we afford the United States to lose the shale industry? I mean not to say we'd lose it all together, but I mean, going back in the history, then Vice President George Herbert Walker Bush went to the Southeast and said, you can't let the price go too low because you'll wipe out my domestic industry. We have President Trump just this week saying, you know what, local gas presidents, that's a good thing. That's like a

tax cut. He sort of likes it. You know. I think Assana brought up the right the right issue, which is, you know, the majors have the capital to take part in that, but they don't have the willingness for all the reasons that she she spoke on so well, Um, I think secondly, Um, the the you know, when you look at the impact of this on the high yield bonds or the corporate bonds that support so many of those activities, the banks US don't have the capacity because

of capital rules that were introduced post two thousand eight to really be part of the solution. So what we're gonna need is we're gonna need private capital which is targeted for this area, or some kind of a government program. I doubt we're going to see a government program in this in this area, So it's really about private capital, Bob.

Don't you think at this time they might consider a government program again for the geo political reasons, you know, just to be in um, this situation a work created by the Saudis and the Russians at the most inopportune time. Don't you think if the circumstances, um, we're different, obviously there would be no chance of a government bailout. But don't you see the government playing a bigger role and

trying to make us energy sufficient, self sufficient. So you're thinking, is it because the the the origin of this was the political battles happening between Saudi Arabia and Russia. It gives the government a chance and and I see your point. Yeah, I see your one. Okay, many thanks to Wall Street Reek. Contribute to osany Bachelaus coming to us from Washington. Thank you so much to Bob Diamond. This has been another edition of Bloomberg Wall Street Reek. See you next week.