ASH BENNINGTON: Welcome to the Real Vision daily briefing, where our team of journalists analyze the most important events of the day within the framework of the key Real Vision themes-- that's macro, liquidity, market structure, and crypto. We cover it all.
ASH BENNINGTON: I'm Ash Bennington, here with the daily Real Vision coronavirus update. It's Friday, March 27, 2020. I'm reporting from New York City, which is now the epicenter of a global pandemic. The global confirmed case count is now 586,473, and it's on pace to exceed 600,000 by the end of the day. Yesterday, there were over 2,700 deaths globally, bringing the total death count to 24,068.
The US reported over 17,000 new cases yesterday, the biggest daily increase we've seen in any country since the inception. The US now has more total cases than any country in the world.
I'm Ash Bennington from the New York bureau, this has been the Real Vision daily coronavirus update. Please stay safe.
ED HARRISON: Happy Friday, Raoul. I'm here in the DC area, you're there in Little Cayman. You have to move as little as possible, by the way, because I know that you have terrible internet there.
RAOUL PAL: Yeah, the worst internet. It's kind of got like 1 meg of upload speed, which is why everyone keeps complaining about the quality of my videos. But I literally am on an island of 140 people in the middle of nowhere.
ED HARRISON: It does look good, though, compared to what I've seen in the past. So let's hope that the internet gods are with us here.
RAOUL PAL: Yeah. Who knows, maybe everyone on the island is having a siesta or something right now, so they're not using Netflix.
ED HARRISON: You know, the market gods were with the market-- at least the equity markets-- for the majority [AUDIO OUT], but we ended on a down [AUDIO OUT]. --that equity markets were down like 3% today, QQQ down, the S&P was down, we also saw the Dow. What do you make of that? First of all, what do you make of the rally up, which is like 20%, and then this pullback today?
RAOUL PAL: Well, look. Having gone through many of these similar-- not an event of this magnitude, but similar kind of market panic response mechanism-- so you have the panic, you get the response. So we waited for the monetary response, then the fiscal response. That was all done, the market rallies, and then it kind of says, OK, well what's next?
ED HARRISON: Right.
RAOUL PAL: It's the uncertainty that tends to roll the market over. I mean, my view is, probably, that it might go down further again, even though many market participants are saying hey, listen, there's some probably really good bargains out there now, some good opportunities, if you think there's a return to normalcy even over the next three months. You know, something less bad than this means that the stock market probably rises.
So that's kind of how I think of it, and i think people in the market are the same. They're kind of saying, listen, the governments have done everything they can, so let's give it a chance, I guess.
ED HARRISON: Well yeah--
RAOUL PAL: What do you think?
ED HARRISON: Well, yeah. I was playing it out. I was saying, you know-- because I talked to some of the bulls in the past. I'm trying to one guy, from Federated Investors, who I spoke to, who had a price target that was maybe 6% to 7% above where we started the year. He was saying it wasn't going to be a blow-off the way it was last year, but still-- you know. And people were talking about 19 times S&P earnings on a 195 figure.
The numbers that people come up with to justify where we are, you have to peg that down, at least for this year. And then you're saying to yourself, OK I'm just discounting this year, and then I'm going to get into next year. But to me, the discount that we're getting to this level right now is a best-case scenario. Meaning that if we get out of this in six weeks, and we start to fire on all cylinders, and we a U-shaped recovery because of that, and growth comes completely back, that's where we are right now.
If it's worse than that, you know, levels have to go down from there. Because then you're talking about L-shape, where it's not just the one-year hiccup in S&P earnings, but it's a second year. And then you have bankruptcies and all sorts of other things that go into--
RAOUL PAL: Yeah. And I think the key point is, for investors, is you don't need to worry about that next phase yet. We're kind of just, you need to worry about, are we at the, somewhere around the place where we might have a more constructive market price action for a period of time. Because it's very difficult to know, are we going to go for the big deflationary credit crunch credit events? Or do we have a slow, smoother glide up?
You know, it's very difficult to tell at this point. I know my bias is, and different people have a different bias in this equation. But I think right now, it feels that yes, there's going to be some more volatility. But over the next month or two, it feels that hearing, speaking, to a lot of people who are big allocators of capital, there's going to be some money put to work.
ED HARRISON: Right. Now, you know, for me, the question then becomes, how much of what we've seen thus far was a liquidity-driven liquidation followed by a technical rally, versus any discounting whatsoever of the fundamentals? Because the sense that I get is that, during this past week, at a minimum, all of the fundamental news was discounted.
I was talking to Roger about this yesterday, when we had the jobless claims-- 3.28 million, which was double the amount that the median estimate was, and yet the market rallied. So I don't really think that that's happen, going forward.
RAOUL PAL: Again, the market knows that we've got terrible data now, right, so that's all in the price. There's almost no data that could come out that could upset the market, because we've all gone, we have no idea. This is the worst economic data set we're ever going to say in our lifetimes, or maybe in all recorded history, so that's in the price. What's not in the price, that I keep raising, is what happens a few months out?
If growth stays negative because of a number of factors, such as the coronavirus still rolling around the world with closings, shutdowns of different cities, or travel restrictions, or whatever it may be, a change in the human psyche that dampens growth. Let's say the baby boomers are much more nervous now because they would think, I don't want to go out, I don't want to spend money. I'm losing my money in the markets, right. Anything that dampens consumption, and let's say, keeps growth subzero on a year-on-year basis, well then we've got a different issue, because then we start to get a solvency crisis.
So that is my whole thesis is, we really don't know that next bit. But any economic data, now, is all well and good. It's the next bit where the expectations matter. Because half the market-- I would say 90% of the market-- is going to go for the usual, it'll be OK, we'll be out, and the monetary stimulus, and fiscal stimulus, means we should be in a boom by the end of the year. Well, I think there's a risk of something much more insidious happening.
ED HARRISON: Well, when you say that, immediately what comes to mind is what I would call the Japanification of the world. And that is, is that, Japan needed a massive catalyst in order to make the demographic bust a hole. And you did see rallies, 25%, you know, but then you had lower highs, consistently, as you went through that. I mean, it could well be that, when we talk about-- people talked about secular stagnation.
The only thing that stopped it from happening was this blow-off that we had, this debt bubble, if you will. And now, that's perhaps not possible. That we're entering a new paradigm where it's a Japanification of the world. We've reached the zero lower bound, and the demographic issues are going to come into play.
RAOUL PAL: And what's your hunch, Ed? What does the world look like in six months from here?
ED HARRISON: Yeah, so I mean, I'm thinking about it in terms of, OK, let's say that you have a best-case scenario. And I'm completely discounting the V, because I don't think that the period between entry and exit is enough to make it a V, it's going to be more of a U at some point. So then the question becomes, this particular point, this part of it, how much can you get back up to the initial trajectory?
And the sense that I get is that it's going to take at least a little while to get up to the initial trajectory in a best-case scenario. If you think about supply chains, and you know, how they've changed dramatically over time. If you think about the hysteresis of massive unemployment, and then reemployment, and how that inhibits people's ability to have productivity after the fact. To me, what that says is, it's not a U. It's not going to come right back up at a delayed time. It's going to be a somewhat L-shape.
And then the question becomes, how L-shaped is it going to be? How long is it, in terms of coming back to where we used to be? We might not even get there for a very long time.
RAOUL PAL: Yeah. And the length of the L, I think that's a great point. The length of the L, to me, is a matter of how big a debt crisis you can have. If you can write off a bunch of the debts in this whole mess, and let's say, do the usual recession-- 18 months to two years-- then you have a chance of getting out the other side and whatever. But my guess is, in the world of central bank intervention, you end up with a flatter line for longer, which doesn't have the extremes, because they stop the extremes. But what you get is, without having the extremes, you don't get the upside, as well.
So it's going to be-- it's fascinating, what the US, particularly is going to look like. Because don't forget, Europe and Japan have been like that for a while now. I mean, the European stock market peaked back in 2000, and Japan, 10 years before that. So these are-- [AUDIO OUT] I know people don't, can't, believe that could happen in the US, but it's kind of one of my things.
It will also be interesting in countries which have these huge pension systems, like Australia. The superannuation system in Australia, that has been a big driver of their markets, too, you know? I just-- I just think the world may change after this.
ED HARRISON: You know, so the real question is-- I mean, because let's put it this way, we were just talking about a best-case scenario. Remember, we weren't talking about a worst-case scenario, we were talking about a best-case scenario. And what we came out with is, there's no V, because you know, the gap between when we enter and exit out of the coronavirus period means, by definition, you're going to have a U. It's not going to be, you know, two weeks and you're done. China had two months and they're trying to recover, so that's where we are. And then the question is, is it a U or an L?
So then, the next question has to be what's a more reasonable, or even a worst-case scenario? When you were talking about the bust, immediately, what I thought of is, I thought of triple-Bs, high-yield, small businesses in particular. So that's where the debt crisis comes into play.
RAOUL PAL: And I also think of it this way, is, look-- the US GDP is down 25%, let's say, this quarter. So 25% quarter-on-quarter equates to-- I did the maths, and I think it's, let's say, $1.6 trillion, right, loss of GDP. And then their asset markets have lost whatever they've lost-- a few trillion here and there. So I kind of look at the $4 trillion-plus stimulus package, and basically, it's just papered-in the cracks. I don't see, yet, something that could even help further than that. So again, that increases the odds, to me, of this downside scenario that's not even a comfortable L, but a more toxic L environment.
The one thing that was also interesting to me this week is the movement in the dollar. I don't know if you've been following this, but you know, I was very much in the dollar's rallying camp, and the dollar exploded because of the shortage, the funding shortage. And then the swap lines came, and then suddenly It came through to the market today, and we've had-- I mean, I've never seen the dollar kind of do this.
ED HARRISON: Right.
RAOUL PAL: Such a huge, vast, range. I mean, it shows you how broken the system still is, a bit.
ED HARRISON: So what does that mean in terms of where we go from here, especially in what I would call, a more real economy crisis situation? Where does the dollar go when you have a real economy situation, especially to the degree that it's talking about emerging markets, and what I would call the need for dollars? You know, a real economy need for dollars around the world.
RAOUL PAL: I don't think it goes away, Ed. I just think this alleviated-- if you can imagine, it was like a kettle with the lid on, and the swap lines just kind of released it, but the water's still boiling, right? And the dollar shortage is still there, but the swap lines just alleviated what happened last week. So that's all I think it is. I think the point being is, swap lines are just loans, so they still have to get paid back. So that doesn't help a great deal.
And as you rightly say, these are emerging markets, and they are corporations and not banks. The swap lines go from central banks to banks. You've got to get the banks to lend to corporates, which they don't want to do. So I don't think that that issue is going away yet. But it's just the volatility-- it's very hard for people running portfolios to deal with volatility in all of these asset classes like this.
ED HARRISON: So you know, my thesis, then, on this-- on all of this, and extends to equity markets as well as the dollar-- is that what we saw was what I would call a classic liquidity crisis, very much concentrated in the financial sector-- financial actors and market actors. And the Fed did what it did in 2007 and 2008, and they flooded the market with liquidity. So that ended the initial shock, which we could call a Lehman, Bear, Stearns type of shock. We didn't have a Bear Stearns, we didn't have a Lehman Brothers.
But now we're about to enter a second phase where we're still in lock-down. That lock-down's going to last, at least through, let's say, you know, mid-May, early June. And during that time, the real economy impacts, where exactly what we're talking about in terms of the shortage of dollars is going to come into play. And so the same dynamics that we had from a financial perspective, then becomes a real economy. And that's when I believe markets will start to tune-in to that problem.
RAOUL PAL: That's 100% my core thesis as well. I think that the real economy is going to struggle from this, and there is no quick recovery. And they're hugely indebted, and they're going to have to start defaulting en masse. And I think the more [AUDIO OUT] for the time [AUDIO OUT], whether it's foreigners defaulting or locals defaulting. Let me just change my microphone back. I don't know why my microphone--
ED HARRISON: Yeah. Right before it changes it, you drop out. And then it's like, OK, now we want to give you the bad microphone again. I don't know what your computer's doing.
RAOUL PAL: I don't know why it does it. So anyway, the point being is that it is a real economy that we're going to see the hit from later, we just don't know anything. Everyone's at home, nobody knows anything. Nobody knows what their business orders are going to be like in three months time. We don't know [AUDIO OUT] really long hair because we can't get a haircut anywhere and we're still sitting, speaking on Skype. We have literally no idea.
My guess is, it's going to be a rolling version of what we're in. I mean, how fast does New York get over this? Well, it's a long time. I mean, this is a huge crisis going through New York right now. And the US has got a lot more of this virus to have to deal with because of its slow start. So you know, the economic impacts of that are not just domestic, it's also foreigners. Think of the global supply chains, think of world trade.
So it will trade is falling-- which it is-- and if it stays negative, because let's say Brazil is out of the global economy, then India is out, then the US is out, then whatever, there will not be enough dollars, because it's conducted in dollars. And if you stop trade, there won't be enough dollars.
ED HARRISON: So what do you do in that case? Do you, in terms of a relative value proposition, where is there relative value to be had in that universe? I'll give you an example of how I'm thinking about this. You know, I've talked to a number of different people who talk about the relative value of Europe over the United States.