Misbehaving in a Pandemic

guests will break it all down. That's right, Sarah, And of course we'll close the episode with the craziest thing we saw in markets this week. And sorry, before we get into all that, I want, I would love an update on your situation. I know you made a mad dash escape from New York. Tell us exactly what you did. You drove all the way to Florida's all right? I did? Um. So I decided I had been self quarantining in New York for quite a while, for over two weeks, so

I decided to try to make the Great escape. So I did the drive all on one day. I didn't want to go through an airport so Saturday, seventeen hours, woke up right and early. We drove all the way down to South Florida. UM. We had to stop for gas a couple of times, of course, had masks gloves in uh, certain areas that were a little bit more remote. I think people were looking at us like we were insane.

It looked like there weren't many people around. What they were going on with their lives as usual, And there we are chloroxing the entire gas station. UM. But but made it down and other than stopping at gas stations, didn't make a single stop. So now I have to self quarantine by law in Florida. So I'm quarantining for fourteen days here. UM. But I'm at least happy to have more space than my New York apartment. So how

does that work? They stopped you at the state line because of the Yeah, so at the at the at the Florida Georgia border, UM wasn't backed up at all. They didn't have to go through any traffic or weight or anything like that. But I had to go through a checkpoint. So essentially you drive through, they ask you where you're traveling from. UM. I told him I was coming from New York. So then they make you circle back around to a different checkpoint area where they make

you feel out of form. You have to give them your contact information where you will be self quarantining in case they want to check in on you, and you have to sign a form saying that you are aware that by Florida Lock, if you break the quarantine, you can be subject to a finer up to sixty days in jail. So I am quarantining, you know. I think, Sarah, you realize that my dad instincts were kicking in on this trip, and I was very worried. I thought you making it dounce, So you did. You did tell me

when you arrived safely. I appreciate. As soon as I arrived, I let you know I was worried about that trip, but glad to hear you're safe and sound, uh than quarantine. And I think um our guest is in quarantine not far from me here in New Jersey where we're basically all in quarantine. But we're very welcome to have her return to the show. She is an investment strategist at Edward Jones. Her name is Nila Richardson. Neila, welcome back to the show. Thank you, Mike. It's great to be

with you both. And how are you surviving the quarantine? Is every is the family behaving and there you Uh, you have enough supplies? You know, supplies have changed definition. Um, do we have enough of what we need? And the family is doing well. Thanks for asking me. I have two teenage boys, and so the question is not keeping them entertained. It's getting them to talk to you on a regular basis. And so you know, every so often I just check in their rooms, make sure they're they're

still function ng and and they're doing quite well. Um, they don't seem to be missing school as much as I imagined that they would be. Well now they have plenty of time to find time to speak with you and the facts. That's right. We're breaking breaking out the board games and the puzzle, so plenty to do. Well. Hey, I have teenage girls, So when I hear that teenage boys are quarantined, I'm happy about that. I hope that continues past the past the pestivirus dating things kicking in.

But no, I'm curious, you know, as an investment strategist, how do you do your job these days? You must be getting a lot of calls. A lot of people wondering is the is the bottom in the market in Is this a new bowl market we're seeing given all the stimulus that's going on. Um like me, I'm sure your clients are throwing a million questions at you at once. So what is you know? What are you saying when you answer the phone these days? Well, you're right, Mike,

we are talking to clients. Are out reach to clients and to financial advisors have has aunt up considerably over the course of the month. And that constant communication is critical because what we're focused on it is not just the markets, but the emotional reaction to the markets. And this is the time where the behavioral economics come into play. All those things that we warn about the investors do, the mistakes investors make, This is the time where they

make those mistakes right. They try to time the bottom of the market, they try to sell uh at at the peak, and along the way they miss the rally. And we've seen the markets rally over the last few days here. So we're trying to both inform them at a market level, but also make sure that their behavioral reactions are not ones that make them drail their long

term goals and that's quite a balance. So given that, uh, it's pretty certain, it's virtually certain that we know that we are now in a recession, and sure this time around it could be completely unique considering the reasons why we have seen the economy react as it has due to a spreading viral outbreak. But can you maybe just walk us through how markets actually typically react through a recession, span from from start to the point in which you

actually start seeing a recovery. Well, as you know, this recession is quite different than what's typical, and if you think about the typical timeline of of an expansion path, it's really affected by the path of inflation. We see that economies, they typically they grow for a very long time, they become overheated, consumer prices start to increase, and then there's this inflation threat that's an overhang. That's when the Fed comes with their butcher knives and tries to choke

off this expansion by raising interest rates. We're not seeing anything like that right now. What we're seeing is an economy that's not broken, but has basically put itself into a medically induced comma in order to attack a disease. And that's we've done that by social containment. And the real threat right now in terms of the economy is not inflation, it's deflation UH and the fact that that people can't work and the economy is tackling a hit

to both supply and demand. So the market reaction is actually following I think a traditional playbook. We're seeing that the markets typically lead a recession for a period of time UM and that since it's correct, before we knew the extent of this downturn and before we saw those jobless claims, the market had already reacted. Now, the key difference is the market reacted really quickly. It typically takes about nine months to see that dropped from a record

high all the way down to a bear market. That decline, this bear market happened in twenty two calendar days. I mean, the speed of the market reaction has been really unprecedented, and I think that's what's different along with the composition of this UH expansion to recession timeline. I think that's

a great analogy that medically induced coma. Neil, and I know you have an economics background, So what I think the big question I have and and maybe other people have, is that Okay, we take that patient out of that coma,

you know, and and quote unquote reopened the economy. I just can't help but wonder how long the headwinds UH to the economy last after that process, because I'm thinking, um, you know, it would be a while personally before I would be comfort will say, going to a movie theater, going to a stadium, flying on a plane, going to a hotel, all of those things until the vaccine comes, which is you know, hypothetically, I guess still probably at

least a year out. So once we do, you know, quote unquote reopen the economy, how strong do you think those headwinds will be as far as consumer behavior and getting back to that normal uh that we we were in before the virus. Well, I think there's a lot of uncertainty. I don't know about you, my can Sarah, but I want to break out of this house and go to a restaurant in a bar like nobody's business. You might see a surgeon economic activity. I would love to go to the mall in shop right now. I

would there are many things. I'm looking forward to the next Marvel movie and seeing it in a theater. So you've got that Short Hills mall near you. I can't blame you. It's a good mall. It's it's the mall I was thinking of when I said it. So, But have to think that even these activities are going to be scaled down. Yes, maybe movie theaters will reopen, but they'll be at maybe fifty capacity instead of acent capacity.

There will still respect the six ft of distance between us, at least initially, until we get enough test kits and security that people are on the other side of of of a viral outbreak and that it won't lead to this huge community contagion that we've seen. And I think in terms of the market perspective, the market has done a fantastic job of pricing and I think a lot of bad news already and that's why we can see this huge uptick and jobless claims and the market still

rally on a weekly basis. But but I don't think the market has done a very good job of pricing in a recovery or the timeline to that recovery. And I think that's the biggest risk. We're in a recession. We know it's going to be deep, but we don't know how quickly the economy gets back online, and that is the huge question mark, you know. I have seen others say that it is possible that if we do get a reopening of the economy by say June, then the season will pick up that you see in the

economy over the summer. You still might see that occur because you might see people wanting to go out um and get out of the house and really take part in some of those activities are traveling. But it's yet to be seen. And NILA's something I've been thinking about is the idea that okay, the leveling off that we have seen in some hotspots as it relates to coronavirus cases, some investors have said that's been encouraging as it relates to the idea that maybe the economy can open sooner

rather than later. But Peter Zacchini, one strategist, he pointed out to me in a colleague of mine that the reason that we're seeing this leveling off is the fact that social distancing and self quarantine is in fact working. So do you ever think about or do you get worried about this possibility that until we do have a vaccine or science develops further, that this is maybe the only way to combat the spread of the virus, which means the economy won't be able to open holy for

quite a long period of time. It it is a concern, uh, the medical progress will lead everything. You know, this is not a problem that the FED can fix, and we we saw that the FED even this week has come out with even new kitchen sink approaches to ensuring the flow of liquidity. This is not a problem that just fiscal dollars alone to consumers can fix, so that will help turn in the economy. This is a problem that it takes medical ingenuity, progress and innovation. Now that may

not just rest on a vaccine. It could be expanded testing procedures or other things that uh that the medical community, with ample help from from the FED and state governments can do to build confidence so that we can go outside and not feel threatened just going into a grocery store. And that's going to take some uh some time, I think to get over that psychology. You know. You you mentioned that kitchen sink approach from the FED. Are our communist?

Cameron christ had a funny line saying, well, yeah, it's also the coverbs, the sideboard and even a few paper plates and plastic cups they dredged up from a closet launch room. I wonder, Nila, they clearly are are doing everything under the sun, uh, to to add liquidity to the market. UM. I worry though, if there's a little bit of improvisation and experimenting experimentation here going on. I

feel like this this quote unquote whatever it takes approach. Um, it's difficult for central bankers, at least in the US, and for the government to do when the recession is caused by sort of, uh, you know, an endogenous financial system issue like say, the the financial crisis. I think you know, the public did not have a good taste in their mouth about a lot of those bank bailouts and and the various programs that went on. In this case, it seems since you know, it's this virus that was

the fault of no human as far as we know. Um, you know, this real exogenous shock to the economy that it's almost like it's it's freed the reins of the FED and the government to basically really do whatever it takes. But once we get through this, I wonder where the risk is. And you had mentioned that that the near term threat is deflation. Um, are we again going to be worrying about inflation at the other end of this um?

And I know people have been worried about inflation throughout the entire bullmarket that that just finished UM and the entire economic cycle. But is it is there any reason to believe that this time could be different, that that this will be the potential for an inflationary shock once we're through uh, you know, the the economic slump that's

being caused by the the quarantines and the isolation. Is all this liquidity and money being thrown at this problem going to come back and bite us down the line. That's a great question. I'm going to take that in part. I'll start with your your last statement on inflation. What's remarkable about this downturn is it's both a hit to demand end in a hit to supply. Now, the global hit to demand we've seen and we understand, and that's

what's deflationary. But what's inflationary is the global hit to supply. I think, I mean Sarah went to a couple of gas stations. I think gas stations are the mecca for the supply and demand shock illustration. Why I want to say that at one gas station we stopped out, We paid one seventy eight gallon. There you go, There you go. Was that the was that the low of the that

was the lowest that we should have had? You do a chart everywhere we stopped Yeah, I mean they were all very low, but yeah, a couple of couple of spots remarkable. So there you go. There's the UH, the oil price shock, the slump and demand, and then they break down into OPEC talks recently hopefully that's improving soon, which led to UH the announcement of more supply. So

that's it. But if you go into that gas station and try to buy a bottle of a pack of water, you might see eighteen dollar water for twenty four bottles. Let's how you're seeing some inflation and and and things like bullet paper and water and and and rice and basics. So if if, if, if global demand rebounds, but we still have these supply shots, you could see the dominance of of slagging demand be outweighed by the dominance of

the shock and supply, and that would be inflationary. And so there's a huge amount of uncertainty in terms of how this plays out into the recovering and then just briefly you asked, UH what we be paying for this somehow the kitchen sink approach by the Fed and by UH fiscal government sometime down the road, Well, we already know that deficits were high trillion dollars as far as the I can see every year, UH deficits are about to to search further though, in the context of low

interest rates, economists are really concerned about incentives, and when you have a kitchen sync approach, you don't think a lot about incentives UH in and doing that kind of legislation. And so that could be where the rubber meets the road. Are we changing behavior in unexpected ways by the way that we are trying to stimulate the economy in a

time of crisis. So i'd imagine, of course the inflation outlook, which is a little bit muddied at this point in time, is something you have to take it into account when thinking about how to position portfolio is going forward. But I also want to dive a little bit deeper into something you mentioned earlier in the show. Was that was you feel like the market priced in the downturn relatively well, but hasn't been as good at pricing in a recovery.

And it made me think of a chart, uh that I received from Credit Suites where they've been looking at what they call fresh estimates, where they only take into account bottom up company profit estimates that have been revised recently UM and what they looked at and what they highlighted this week was that because of the falling e and multiple expansion that we've seen this week with the rally is the fact that we're actually at now a

nineteen times multiple, matching the multiple from the February nineteenth high in the stock market. And it's been hard for me to wrap my mind abound around. But it makes me also think, do you get a sense that the market doesn't really care about earnings the idea that yeah, everyone knows this year is going to be really rough, particularly in the next two quarters as we get those results, and that instead investors in the market are looking forward too,

trying to envision what that rebound might look like. I think Steph Curry said it best if a couple of months ago we should just forget that's what that's what the markets want to do. They want to move to and they're anxious to do that, and and and so yes, I think a lot of this bad news is being dismissed. It's either already priced in or will be dismissed going forward.

But it also shows a concern because this bear market rally may have further to fall once that economic news and earnings news comes in differently than the market projects. So they eventually the market as it looks to the future, which in my mind is it's going to be anchored by the reality of the present and and still a slog to get through this year. I'm glad you brought

up Steph Curry. There was a great story in the journal about how he found himself quarantined at home and he didn't have a basketball hoop in his own driveway, so he had a order one online and it took him like five hours together. Shocking. I can't believe you didn't have its own back right, you know. Uh. I envisioned every single NBA player having their own basketball. Maybe someone just don't like working from home. I say, leave

it in the gym. Uh. You know, Neilie, you made a very I think, super important point earlier in the interview when you talked about that investor psychology. Um, I know my own uh mentality about this virus shifted dramatically this week. I had an old colleague I used to work at the Associated Press way back when, an old colleague and it's just then and uh, guy was fifty one years old, a marathon runner, one of the nicest people you'd ever meet, UM, caught this bug and died

from it. And it really sort of it was like a gut punch to me. You know, I'd kind of been dealing like I deal with every everything like this with with bad jokes, you know, and it really kind of made my head spin when you start to get sort of, um, people in your lives being affected by this rather than just watching it on the TV, watching it in the newspaper. And I'm curious about that sort of the consumer confidence element of this, uh, the investors

psychology element of this. Um. You know when you go to that when you when you're finally allowed out of your house and you go to that Short Hills mall and sorry, I don't know if you're familiar with the Short Hills Mall. To the only mall I know that has you can take a helicopter to. Um, Yeah, that's the thing. Yeah, we'll have to fly you out there. Sometimes Nil is gonna get her helicopter and pick you up and we'll go shopping. When this is all I'm

my helicopter looks like a ten year old Volvo. Don't be surprised, But I wonder, you know that first trip through the mall, how much is our people's psychology is going to be affected for for years to come? You know, are you gonna be You're gonna be doing more windows shopping than actual spending at the mall all? And you know how does that work in the in the investment

landscape to are people going to be risk adverse? Were more risk averse than they were um for quite a while at the back end of this in your opinion, Well, first of all, Mike, I'm really sorry for your last and I'm really sorry for all of these tragic stories that I've heard and that people are being touched with. I think I think this will be with us for a while. When you think about other tragedies, you think about nine eleven. It does change how you view things

and it changes how you operate. You think of those nine eleven changes in New York and Washington, d C. Where I was living at the time. It was profound the changes at the time that happened as a result of the tragedy, but over time you kind of got used to them and those changes began to blend into the background. And I expect that there will be changes made this time around. We will be different, we will

shop different, we will approach crowds differently. Over it's going to feel strange, but over time, it's going to be business as usual and it'll those changes will fade into the background. Now, the markets, there's two inclinations. We saw them play out in March. First, it was the inclination to sell in panic, sell whatever you can get your hands on, and that was the most liquid assets, and you saw that really play out in the bond markets. But there's this other impulse, which is to buy by

now it's foamo fear of missing out. So you have these two twin dramatic, extreme reactions, either to sell in mass or to buy in mass. And that's where investors can get caught up because neither of those approaches makes sense. If you're a retail long term investor, it's always about the plan. It's the plan that takes the emotion of investing and it's going to be having a plan in place, rules in place, helped by local governments in federal leadership

that makes people feel comfortable about resuming their normal economic activities. Yeah, you know, there's been so many just heartbreaking stories out there. Um, Mike again, we're both so sorry, um for your loss, but I think, uh, we're all going to be a little bit appreciative, but over the fact that it's a three day weekend and we can all hopefully get some rest and just take it all in UM and zoom

with families over over the weekend. If that's something we're all doing now, we're doing it right now as we speak. So so there you go, and hopefully no weirdos show up. I keep hearing these stories about people zooming with their class or or church group or something in some random where I think normality to to what is It's nice to know that they haven't gone away all. Well, speaking of random weirdos, I think that's our segway, Sarah, that is I was waiting for it. We're no random weirdos.

We're professional weirdos when it comes to the craziest things we've seen in markets this week. So so sorry, what do you what do you got? So I'm just going to bring it back to the kitchen sink that the FED has now given us, because it really is just pretty crazy. On on Thursday, when they made the announcement of more stimulus, that they would provide the fact that

they are now buying US high yield corporate bonds. So the announcement reads the preponderance of et F holdings will be of e T s whose primary investment objective is exposure to US investment grade corporate bonds, and the remainder will be in e T s whose primary our investment objective is exposure to US hiled corporate bonds. And what it's like, what's left now is is it just stocks with the UK in the trunk pretty much all that's left. Yeah, the junk in the trunk. But it's it's crazy, it's

pretty anazy. And what do you think about that? This kind of goes back to what I was talking about in that the potential risks and I hate to try out the old world where moral hazard from this kitchen sink approach. Um, I think clearly there's an urgent need for the FED to do this in the junk market. UM was this inevitable and is it? Does it bother you at all? I think what is being done to manage a crisis doesn't bother me, But the future does.

We've seen the FED having a lot of trouble prior to this pandemic unwinding uh, the QI that it did as a result of two thousand eight. Now they're just blowing up their balance sheet and it's hard for me to imagine a world in which the FED can comfortably unwind a lot of these assets. Now many of them are short term assets and they will just roll off.

But the FED is going to be uh, having this huge trillion dollar portfolio, I think, for for a decade or more, because it's been uh, it hasn't been able to unwind successfully, even in the best of an economic expansion. Yeah, I agree, I agree. It's it's once it's in, it's hard to take it out. I guess, so unless you, like you said, it rolls off and eventually a lot witness over the last decade. But all right, Neil, you're a veteran to the show, so I know you came

prepared with the craziest thing you saw. There's so many crazy things it's hard to just choose one. But I'm going to stick at the bond markets and I'm gonna stick with this conversation about the FED. The record level of investment grade corporate issuance that we saw this week is really outstanding. It's like the the corporate market alternative to stockpiling toilet paper. It's just just run on credit

while you can have it now, I have access. Now, you don't know what the future is, so let's just get as much as possible. And it seems that's what corporations are doing. Who I have the investment grade rating? So interesting? Um, it goes right back Mike, to to your insights about what's going to happen over the long term. Yeah. I think that's a great analogy with the toilet paper. It's amazing though, that that hunt for yield is still there, that the demand from investors is still there too to

allow this. I mean, I guess when the FED is is uh, that's buying you know. It's it goes back to why fight the WI flight the Fed? But pretty fascinating, uh phenomenons we're seeing all right? Uh, Sarah, As you know, for the crazy things, sometimes I go to the alternative asset classes. Um, and I'm going And when I say alternative asset classes, I'm not kidding this time. I'm I'm gonna.

I'm gonna take us to the exotic animal trade. Um. And I'm assuming are you are you going to bring in some tiger kings right now or you know it was coming? Have you guys watched The Tiger King? This is what I've I've been doing all quarantine long. Well I guess not really because I got through it in the matter of two days, but it's helped a couple of days out. So I think it was it was inevitable that eventually our President Donald Trump would would somehow

get involved in the tiger Kings saga. I mean that was pretty predictable that those two pass would clyde. And now there are reports out there, uh, indicating that Trump is considering pardoning uh, the Tiger King, Joe Exotic himself. UM. And like I said, this is an alternative asset class exotic animals, so it counts. I don't know if that guy from Hong Kong's in a call in and say I'm cheating again, but I'll stand by this, Sam. You're cheating.

Did did either of you see uh. At one of the press conferences, there was a reporter who asked UH President Trump about Tiger King and asked if he would consider pardoning him, and there was a nice little back and forth, some comedic RELI, what do you guys think that it was a Joe exotic pardon? Is that going to help Trump's re election chances? Having never seen the show, I'm not exactly sure what actions are being pardoned, but so I'll reserve catch it. Well, you'll have you'll have

to go watch it. Nila, It's it's pretty unbelievable. I don't know. I think has proven she might be the only one among us with some actual taste and televisions that the fact that she hasn't hasn't seen Neila Richardson, thank you so much for coming on the show to deck. Thanks for having me. It's always a delight to talk with you both. And you take care please you do what goes up. We'll be back next week. Until then, you can find us on the Bloomberg Terminal website and app,

or wherever you get your podcasts. We love it if you took the time to rate interview the show on Apple podcasts, so more listeners can find us and you can find us on Twitter, follow me at at Sara Panzac, Mike is at Reaganonymous, and you can also follow Bloomberg Podcasts at Podcasts. What Goes Up is produced by Tobra Forehead. The head of Bloomberg Podcast is Francesco Levie. Thanks for listening, See you next time.