NICK CORREA: Welcome to the Real Vision Daily Briefing. I'm Nick Correa. It's Thursday, April 23, 2020. We have Real Vision's Ed Harrison and Roger Hirst standing by to give their macro analysis. But before we go to them, let's take a quick look at the latest news and markets starting with the coronavirus. As we can see here, we are still at steady levels in the daily confirmed case count globally, between 75,000 and 85,000 cases. Yet yesterday, the US made a reporting adjustment, causing a jump in total recoveries and resulting in a first for negative net active cases. We have a while to go before establishing any new overall patterns or trends in the data.

But of course, we will take the bits of good news as they come. However, our struggles are far from over. In other G20 countries, we can see that Brazil's case count is continuing to accelerate as well as Canada's and India's curve sloping upward in a somewhat parallel fashion. As of yesterday in Brazil, their confirmed case count landed them around 45,000, and their daily confirmed cases are trending upward, even as they are moving up in a staggered way. Many policymakers are relying heavily on forecasting models to create bills that will best respond to the various hurdles ahead. However, these models all vary in outcomes.

They are constructed on assumptions about the disease that are uncertain and ever-changing as new information emerges, which therein lies the difficulty of making fully informed decisions. Here we can see five different leading forecasts for the US that go through the end of May, and they are all constructed based on current restrictions and stay-at-home orders we're seeing now sustained throughout that period. According to the New York Times, the model from the Institute for Health Metrics and Evaluation is the one the White House administration has relied on and cited, and this model is constructed around the patterns other countries before the US have experienced with the spread of the coronavirus.

It doesn't depend as heavily on the information epidemiologists know about COVID-19. Other models, such as those from Northeastern and Colombia, are created based on what is known about the disease, such as its infectiousness, rate of recovery, and risk factors that could lead to more serious cases and death. Which model will be more accurate is more likely to be known in hindsight, and the uncertainty about the future will persist until we understand what is the most accurate trajectory.

In other news, Mexican state-owned oil giant Pemex today made a stand, outright refusing physical delivery to an armada of American tankers, declaring a force majeure, or act of God, as the oil mega glut continues to send shockwaves around the world. Over 100 million barrels of oil continue to be stranded at sea with no relief in sight. Many oil and gas platforms in the Gulf of Mexico have been turned offline, with yellow dots representing decommissioned platforms and blue dots representing those scheduled to be dismantled. The commodity that Pemex refused to accept, interestingly enough, was not oil, but gasoline, showing that this unprecedented oil shock is already affecting other commodities down the supply chain.

Meanwhile, the Brazilian real continues to depreciate against the dollar today, and the futures curve is pricing in at least 100 basis point cut for the year. This is very bad for Brazil, which owes over 600 billion in dollar-denominated debt. Just coming through the wire, interest rate futures have spiked, as Brazilian Justice Minister Sérgio Moro has threatened to resign just a few minutes ago, the longer end of the curve particularly affected. And lastly, Gilead, the biotech company that sent markets soaring a mere week ago on hopes of an effective coronavirus treatment, dropped sharply today as a report by the Financial Times indicates that early stage trials appear to show no major benefit from patients taking Remdesivir.

The company has rejected the report and has noted that the results were inconclusive. Regardless, markets fell almost instantly, erasing all daily gains at one point, and as of this writing, are up marginally on the day. The only positive aspect of this story is that markets still have the ability to act rationally. After rallying on horrific initial jobless claims early this morning, the Gilead report brought it back down to reality. This is the new normal in markets that are dominated by fear and hope. Now let's go to Ed and Roger for their analysis. Ed?

ED HARRISON: Thanks, Nick. It is Thursday, the 23rd of April. I am here in DC, or the DC area, and I'm talking to Roger Hirst, our managing editor over in the UK. Roger, how are you doing?

ROGER HIRST: Good afternoon. Yeah, very well, thanks. Yourself?

ED HARRISON: Good, good. So we're doing this at the European close. And as we were talking about this a little bit, there's not a huge amount of news flow in terms of the markets after the whole oil breakdown. What are you looking at in terms of the markets right now?

ROGER HIRST: I'm really focused on the really currencies and emerging markets, and particularly those things which I would think are relatively free floating. And we talked about this on other episodes, but comparing things like the US equity and corporate bond markets, which clearly are distorted by central bank activity, versus those assets where we can relatively freely express ourselves in a view on the global macro. And I think those opportunities exist in the FX markets and in certain EM markets, particularly EM bonds.

ED HARRISON: I saw I think it was last week that Russia, they were able to get away with a 100-point cut in their rate. And just recently, Brazil is doing the same thing. They're cutting their interest rates. But the Brazilian real is not doing well at all. I mean, how is that going to play out in terms of exactly what you're talking about?

ROGER HIRST: You can see that the currencies that have been moving have been those general sort of relatively weak currencies anyway. There was obviously the dogs of the last couple of years, obviously like Argentina and the Turkish lira as well. But you can add to that that nearly all the commodity currencies of the emerging markets, but also the commodity currencies of developed markets, such as Australia and Canada as well.

I think this is where you're going to see that these are-- again, we talked about cash flows, but effectively these country cash flows are going to dwindle, trickle down to a trickle, and therefore the currencies should weaken on the back of that. Because we're always fixated on the dollar index, but the dollar index is primarily the euro at 57% and then the yen and the British pound. So it's a very, very narrow expression of the dollar. I've generally been looking at the JPMorgan EMFX Index, and that has been grinding around the all-time lows over the last few weeks.

And I think it's something that Peter Brandt discussed with [INAUDIBLE], but he said, look, what you want to play here are those currencies that are already broken down have momentum on your side. That's dollar strength on your side. And you can see that in Mexico, in the South African rand, and the Brazilian real to name but three, and I think that continues. I think this is where we see that global weakness is going to be kind of exemplified is in these sorts of currencies.

ED HARRISON: And also, those are places where COVID-19 hasn't really broken out quite to the degree that it has in developed markets. I know I've heard in those three countries you talked about some cases, but elsewhere in the emerging markets it hasn't been as much of a problem. So you have sort of a double whammy, two things hitting at the same time. What does it mean for sovereign and for non-sovereign debtors there, do you think?

ROGER HIRST: Well, I think it's for both. I mean, corporate debt everywhere, I think, is under pressure. And the key thing here is obviously that the central banks of the developed markets, but particularly Europe, the US, and Japan, are intervening and will continue to intervene. It's very hard for the banks for the emerging markets to intervene because of the impact it's going to have on the currency anyway. So they're kind of stuck in a rock and a hard place is that what you want is your currency to decline, but not so rapidly that it creates rampant inflation. So you're stuck with those things. And I think ultimately, they have to let them decline because that's the natural outlet. This is the safety valve.

What I've talked about before is that in some ways, the more that the US does, the more people are attracted to the US to hide their money. So the more the US provides this liquidity, actually the dollar isn't going down. It's been grinding around these sort of levels when you look at it in the broader indices. But if you pick out one or two of the currencies, and those currencies which have that commodity headwind now, as it would be, that's just, I think, a much safer way of playing the macro than maybe being short the S&P, where you're battling against the Fed as well, even though I do think we're in a rebound phase. But you don't have that when you're playing the emerging market currencies.

ED HARRISON: Actually, I think Scott Minerd of Guggenheim, he was saying pretty much the same thing you were saying. I'm looking at a tweet that he had from April the 13th, and he's saying that, "Rich countries can drop helicopter money with relatively little consequence, but emerging market monetary and fiscal solutions will further weaken their currencies, making access to dollars even harder." So, I mean, a lot of smart investors are understanding that that's the case. But at the same time, you're between a rock and a hard place if you want to provide some level of stimulus if you're in the emerging market. So as you were saying, it's like you have to weigh the balance between the two.

ROGER HIRST: Yeah, I mean, it's interesting when they say you can drop helicopter money without too much consequence in developed markets. I think there's a pretty big beg to differ on that one. But as a first stop measure, yes, clearly, that's the case. And maybe one of the ones to look at here is the UK. I've talked about this with regard to post-Brexit, where the UK said, we're going to do lots of fiscal. That was before COVID came along.

They were going to do more fiscal. So maybe looking at the UK as one of the places where sterling should come under pressure from this because the UK will do it. It's a free floating currency. But it's not a reserve currency, so it doesn't have that safety net the dollar has. So if you want to play a developed market currency from the short side, maybe the UK is the one to look at.

ED HARRISON: When you talk about that, OK, it's not all good, you can drop helicopter money without consequence or there are going to be consequences. I'm thinking about it from the bond perspective because right before this call, we were talking about this. I was looking at a lot of different bond scenarios, in particular we talked about CLOs because there was a piece, I think it was in the FT-- let me look at it here-- that came out six hours ago saying that the ratings agencies, they placed more than 1,000 slices of debt backed by leveraged loans on review for downgrades. These are the CLOs. They're talking about the bad tranches of the CLOs. And the sense that I get is that there's going to be some pain there.

But at the same time, I think that you could have a situation where it's a baby with the bathwater type of situation, where if you're a good investor, if you really know what you're doing, then you can get in there and you can take a look at the credit and you can pick up some things that look good after these downgrades come through. So I think that we talked to Dan Zwirn, who is a distressed investor, and he says that, OK, so the Fed is all in. The ECB is now buying junk as well. Let's look at distressed. I'm a distressed investor. I think there's going to be some opportunity there. When bad things happen, not everything is going to go to zero.

ROGER HIRST: It's something which Dylan Grice has been on the platform also talking about as well, which is that these things sold off. And although they have rebounded a little bit, they've not rebounded half as much as we've seen in obviously the investment grade and certain parts of the high yield space. So you still got these really distressed opportunities there. And he did say, look, if you're going to do this, you need to have an expert on your side. Go and find someone who knows what they're doing. Firstly, do your own homework, check out the CLO market, work out that you're comfortable with it.

And if you are comfortable with the fact that there's distressed opportunities here, then go and find someone who can actually do the work for you. But I think this is the interesting thing is something that Dylan's been highlighting quite a bit, which is in these environments, often the best way to play it is actually to try and pick up the distressed assets rather than to chase the distressed assets down. Which selling equities in this environment, being short equities, if you weren't short in early February, it's going to be a hell of a game.

And something Raoul mentioned about his own experience of 2002 to 2003 is that actually the market spent more time rallying than selling off, even though overall it had a 50% decline from peak to trough. So that's the kind of environment that makes a short selling so incredibly hard, but at the same time, gives some fantastic opportunities for things which have been absolutely beaten down to buggery already.

ED HARRISON: We talked about this retracement a week ago, that is, the 50% retracement. I think we were even talking about the potential for 62%. So we've gotten to 50%. We had back to back negative days on Monday and Tuesday. But since then, the market has stabilized. It's rallying a decent amount. I mean, what do you think about the equity markets in the US, in particular where that's headed over the longer term?

ROGER HIRST: So my base case has to be with what I've been saying, which I think this is still a common or garden equity bounce. It should hit 62%. I think of all the big ones that I looked at, I think 40% of the big selloffs that I looked at, ranging from Japan, some of the biggest selloffs in US, even going back to 1929, something like 40% hit a 62% retracement and the majority of the rest got to 50%, and we're in between the two at the moment. I think it's something like 29%, 30% on the S&P. So my base case is still that we are carving out a rebound, but now it's just sort of so well-known that we could overshoot. Absolutely, we could, but that's still my base case.

But I will still maintain the view that the Fed may be bigger than I think it is, and it may have more influence than I think I would have expected that they can, and that they may therefore influence the US relative to these other assets, which I think are much more freely floating. So I would look at the S&P to rollover, but it's to kind of unwind portfolios into rather than take a brand new short position. Because there's a lot of risk in that, and I think that's such a hard trade to hold. My preference overall, though, is to go to these other countries where I think there are simpler opportunities, where you're not fighting against what is a tsunami of liquidity at the moment.

ED HARRISON: When you talk about other countries, the first thing that comes to mind is Argentina. I was talking to that with Ash two days ago, the fact that they were considering whether they were going to default, miss a payment. And actually, they did miss their payment, $500 million. And it seems like they are just playing a game of chicken because they have a number of days to make good on the payment. The question really is, is it a canary in the coal mine? Does it have any significance whatsoever for all these other countries that you're looking at?

ROGER HIRST: I think so. And something that goes back to 2008, and I remember back then you'd see something happen in a country, and everyone goes, oh, that was an idiosyncratic story, and you'd have an idiosyncratic story. The crisis in Iceland wasn't like the crisis in, let's say, Ireland, and the crises that we saw for Northern Iraq wasn't quite like the crisis that we saw in certain parts of the US capital structure. And some of these started in 2006. Northern Iraq began its bank run I think a year before we actually saw the blow up of Lehman. And all these were idiosyncratic, except they weren't.

Actually, when you get five, six, seven, eight idiosyncratic stories, you actually then realize that they're all the same thing, which was either leverage or funding or whatever they were. And I think we're going to see the same today, which is there's got to be so much stress out there, and look at the data that we got out today. We all know the data is going to be terrible, but even so, to see the French PMI for services down to 10.4 when it was expected to be in the 20s, it's still kind of like, oh, my god, these are incredible numbers.

And so when you look at that, and this is what's so hard, I think, for all of us to really get our heads around is that this is clearly a much deeper decline than any of us have ever experienced before, and it's faster than any of us have ever experienced