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Season 2, Episode 10, Transcribed: Coronavirus Crisis Continues, Expect ‘Rolling Recessions’

Moderator 0:02
Welcome to the Contrarian Investor Podcast. We give voice to those who challenge the prevailing sentiment in global financial markets. This podcast is for informational purposes only. Nothing on this podcast should be taken as investment advice. guests were not compensated for the appearance, nor do they supply payment in order to appear. Individuals on this podcast may hold positions in the securities that are discussed, listeners are urged to educate themselves and make their own decisions. Now, here’s your host, Mr. Nathaniel E Baker.

Nathaniel E. Baker 0:36
The situation around the corona virus continues to escalate. Markets are apparently at the whim now of policymakers in the US who are debating a congressional bailout of sorts to help the public in the US as well as corporations. And to that extent, I have a guest today, Rachel Ziemba. She is the founder of Ziemba Insights here in New York and a professor at NYU. Among other things that she’ll tell us about later.

Before we roll the tape on that I wanted to remind you of the first ever contrarian investor virtual conference that is taking place on Monday, April 25. At 4pm after the markets close, this is still happening as it is a virtual conference that requires no in person interaction. To find out more you can go to the website and read about it there. There is a early bird special on tickets that is still available at the time of this recording, but those are going pretty quick Quickly, but to take advantage of those just go to the website This is something I am doing in partnership with ValueWalk. We have a couple of hedge fund managers already signed on to discuss some ideas. I believe these are going to be short ideas very timely as an exclusive for people who attend this virtual conference. So check out contrarian slash event. And here is today’s podcast. Enjoy.

Rachel Ziemba You are the founder of Ziva insights, a professor at NYU, and a geo economic and country risk expert. We are here of course to talk about the corona virus, which is wreaking havoc in financial markets and to the global economy. Of course, the health issues are paramount and we hope everybody stays healthy or gets health He, as the case may be, but for our purposes and now having you on the podcast, I wanted to get your views a little bit on your assessment of the economic impact of this coronavirus.

Rachel Ziemba 3:15
Thanks for having me on the podcast. It’s time you know, given the unfolding interlinked crises that we’re now experiencing, it’s an ideal time to sort of recognize what we know and what we still don’t know. What we know is that the economic impacts of not only the virus but the mitigation policies are incredibly dire. From day one when it was or not day, one, maybe day 30 as it was evolving in China. What became clear to me as an economist was that this was very different than past health crises and pandemics as soon as China put 50 million people on lockdown and shut down economic activity in Wuhan province that of course has manifested to rolling, lockdowns, quarantines and shut down quite a lot of economic activity around the rest of the world, even as the Chinese economy is reviving. So this has been, you know, economists like myself, until recently engaged in a debate over was this more a demand shock or a supply shock? I think it’s very clear now it is a very deep demand shock for oil and commodities for a wide range of goods, and also a shift in demand. And so I think this is going to mean some form of of rolling, rolling recessions. every data point we look at right now almost looks historic and are not reflecting the situation on the ground today. Even this from a week ago. You had several hundred thousand people filing for unemployment. When we think ahead to next week, it will probably be even greater. These will be people who still have cost to pay bills to pay, they might be sequestered. But their bills are not sequestered. And so that’s why the measures we’ve seen in the global from global policymakers are so important to keep element individuals and elements of the economy on a lifeline, so that we can try to evolve so that we can try to kill the virus, right? We’re shutting down parts of the economy to try to kill the virus, that obviously has collateral damage, but having millions and millions of people dead would be not only a massive human cost, but a major economic one.

Nathaniel E. Baker 5:48
Of course, yeah. And the question is, a recession, as you know, as any economic student knows, is two consecutive quarters of negative GDP. So we’re now in March, we’re still the first quarter. Do you think that this tips the first quarter GDP, at least in the US into negative territory? You mentioned rolling recessions? And then are we looking at a negative GDP in the second quarter as well? Just based on what we’ve seen so far?

Rachel Ziemba 6:22
Good question. I think there’s a good chance we might not actually see negative growth in the first quarter. Over the course of the quarter I’ll be very different activity. The US is not a country, some countries they release monthly GDP statistics. Here, private sector, individuals do factor it out. But we will see all the economic indicators. Now going into January, things were relatively decent parts of the economy were still pretty decent in February. You know, retail sales for February, were not actually that strong. But you know, they were sort treading water. March is obviously going to be a very month, perhaps for all sorts of elements beyond, you know, beyond those involved in the supply the online sale supply chain for basic goods. So when we think about what’s a recession here in the US, not only is it a two quarter, two quarter consecutive growth is a sort of a three hand use. But the NBR, who dates recessions also looks at depth of peak to trough loss of jobs, and looks at a variety of macro indicators. So there are some examples of recessions that are shorter than two quarters. And so it’s highly likely when they do date, the start of the recession. It might well be starting in February. You know, we’ll see depending on the different data, you know, I think what’s unique, perhaps In my mind about this episode is that this is a very sharp downward adjustment. And, you know, again, some of that is is by design. This wasn’t planned or anticipated, but it is a policy response to try to avoid significant loss of life. Yeah. So I think this is one of those cases where I would be less hung up on the semantics of Is it a recession or not and just what’s the pain but but to your other question, which I realized that I dodge? What about q2? Yeah, I think q2 is going to be painful as well. In you know, in the US, but also in in some other parts realistically in the US, public health experts of which I am clearly not one, either. But I feel like we we’ve all been trying to understand more so that we can create our shorter videos, which is all we can do under the circumstance. But public health experts say that for some of these lockdowns and shelters in place and other measures, this might be a story of months, not weeks, schools might well be closed through the end of this school year. There’s also there is a scenario of new rounds of closures in the fall. But let’s hope that that’s not the case. So I think if we’re looking at it on a global level, and you know, q1, China clearly had a major contraction. We know that from the data, Europe, which was barely out of recession from last year, they were treading water. This is obviously you know, not only Italy, but France, Germany, the United Kingdom, all sort of facing some of those shutdowns and and the United States. And now I think we’re also moving to a number of other emerging markets and some countries in the southern hemisphere that are doing maybe should border lockdown. So and then I think you add on to that the balance sheet impacts of the the recession and financial stress that we’re seeing. One thing I think that was surprising, I’m sure you noted it and your guests have talked about it was was how little financial markets reacted to the crisis initially, well, right when it was in China, even then it probably would have had a meaningful impact on forward earnings. But you know, people look past it. That was overly optimistic, obviously, even from an economic perspective. I think we have to think about well, what happens with individuals who are losing their jobs now? Or companies that are struggling to pay their bills? And will they rehire and bounce back in the same way? Will all the activity events, conferences travel, going out to eat? Is that going to be rescheduled? Or is it Just going to be and when it comes back, or when we reach a new normal, will it be? It probably won’t look like the old normal. Some of the sectors of demand might shift.

Nathaniel E. Baker 11:13
Yeah, yes. On some very important metrics there. The one question that I have before we talk about the potential recovery is just how deep does this thing go? This is very much unprecedented. As you mentioned, I don’t think we’ve none of us have seen anything like this. Certainly post World War Two. I can’t think of anything like this where the entire global economy not all at once but in enrolling as, as you said, been shut down. And where all economic activity has basically ground to a halt. So how deep are we looking here? What types of things are you looking at, to kind of get a sense of just what the fallout will be and what the damage will be.

Rachel Ziemba 12:01
Yeah. So I mean, obviously, we look at other examples like, well, in the get go when it was more mild, we looked at, you know, sort of other epidemics like SARS, to think about the sectors that would be most affected. And that from very early on, it was clear that wasn’t a very useful comparison. And then I think comparison shifted to the global financial crisis, which many of us can remember either from a trading perspective or living through it. That of course, was different because it started out It started out as a leverage, you know, a leverage based crisis that then had a meaningful real economy impact right, and we didn’t know the uncertainty of demand. And so it created economic loss here. It really is a starting from economic you know, a health and economic and competence and other shock in a planned shutting down for a time of major parts of the economy. One does look at examples like, you know, what can we learn from some years in the Great Depression? What can one learn from, as you say, the ramp, you know, the ramp up and ramp back down in certain countries in after the Second World War. But I also think one of the things that’s important is the drivers of economic growth, the contribution of economic growth is quite different. We are now in many economies, a much more service driven economy. And I think even you know, and we’ve known that, but what this crisis manifest to me is, it’s a real divergence within the service economy, I mean, ever will hurt. But those people and you know, I, I work in a service industry, obviously providing you know, economic Market Insight. That’s a service that can be delivered from my home.

Nathaniel E. Baker 14:00
It currently is as we speak

Rachel Ziemba 14:05
As with so many people, there are others who were in segments that maybe it’s less easy to deliver from their home, but they’re still doing it in person services, travel experiences, the kind of thing that consumer advocates said everyone wanted to buy, particularly millennials, that’s not available. So I think what what the examples I look at, I tried to put together past examples, and then think about plausible scenarios. But I tell you, it’s a very hard time to, to forecast. And I think any economic forecast that’s out there needs to have pretty wide error bands. Yeah. And and I think they need to be seen as indicative, rather than necessarily realistic. So what So what can we do in this circumstance? I think what you know, we can highlight, you know, what are the kind of cases catalyst we watch for to see whether some of these dynamics are bottoming out. On the economic side, we think about how much policy initiatives might make a difference, because policymakers are no longer are not asleep at the wheel, right, which is good. Maybe sufficient insufficient, but but necessary measures. And then I think we think about what what’s the what are some of the ways in which consumption patterns production patterns might change. And, and that’s, I think that’s the kind of thing we have to do. And then we also I think, have to watch for weak links financially and otherwise, we’re now at a point where we’re now at a point where the Federal Reserve is rolling out measures faster, you know, sort of Fast and Furious almost every day or several times a day. Some of them are measures that were creating the global financial crisis, but that’s a function that they’re worried about blow ups and Worried about this massive demand for dollar dollar liquidity manifesting across the globe. And so the risk is that starting from the demand shock through to financial channels through to a wave of insolvencies, will, will will further damage balance sheets and make it harder to rollback.

Nathaniel E. Baker 16:25
Yep. And then that would create a whole crisis that feeds on itself as people rush to cash. And we saw that in 08/09. And to some extent, we’ve we’re already seeing it now. To that point, you’re a country risk expert. What are some areas of risk that you are looking at here that we may not have accounted for, and that may make the worst case scenario potentially even worse than people are figuring right now.

Rachel Ziemba 16:54
So one area that I’ve been focusing on a lot is the implications of the Oil, the oil price collapse. What that means to, well, both parts, you know, sort of countries that are reliant on those revenues, but also regions within countries, including even the United States that are highly reliant on these on these cash flows. There’s a whole wide range of political and balance sheet risks that manifest on the energy side. Of course, all the crisis conditions have been exacerbated by the oil conflict and posturing and decisions by Russia and Saudi Arabia, to if anything adds supply at a time when demand is collapsing. But But I bring this up because of course, you have a number of oil rich countries, Algeria, Iraq, obviously sanction countries like Iran and Venezuela, who are very vulnerable and have an opportunity to undermine regional stability. You also have it dynamic and maybe this is less country risk and financial risk. But you also have a real question mark, throughout financial markets, the corporate bond market, and and more generally. So it’s probably too a little bit too early to say all of the national security implications of not of having weak, sort of weakened balance sheets in countries that were already struggling to give their citizens basic, basic support.

Because like Nigeria, places like Iraq and elsewhere, but I do think that there will be meaningful, you know, meaningful costs, we might see another resumed wave of protests, such as you know, as the story 2019 and the like. And then I think it’s also important to note that unlike in past cases, where the oil price fell sharply, it’s not clear the demand you know, it’s not clear Who is going to help very much now? There are clearly still people driving, if only to go to drive in testing facilities in this country. But I think one of the biggest there’s there’s a reckoning coming. Another kind of element that I think is concerning, is the way in which this conflict is exacerbated the US China knology economic and broader competition. Now, I mean, it’s it, of course, it would be affected by it. I mean, this was a health crisis that the first cases were in China. China’s hiding of information attempt to suppress information clearly made it worse for China worse for the globe, made it harder to treat. Now, the unfortunate thing is we’ve seen other countries also react behind the curve and not be as transparent as we’d like. The danger I see right now is after having seated you know, after having seen started this after having exacerbated this crisis early on. Now we see China taking a victory lap. Yeah, I see that neither the US position on this nor the Chinese position on this. Neither Nero said neither has clean hands here. And so I do think there will be an increased sort of ramp up the other broader concern. I think more generally, you know, we, you know, we might yearn for the days of looking back and thinking about trade wars and export controls and technology conflict. It’s very clear that the response to this crisis has been not only to increase border it make it more difficult for people to cross borders. But last I look, there’s some research that said that over 50 countries had put export restrictions on selling key medical equipment needed for tour You know, it could be involved in treating the disease personal project. equipment, ventilators and the like, and that might be at an individual level of rational decision. health systems need to secure it. But it does make it harder to treat what is actually a global a global crisis. And I would say that some of the policies that for example, the US, the US continues with around keeping import tariffs high, and the like, made us less resilient. So I would watch not only what’s done right now, in the next couple days, weeks months on these issues, but also, how does this feed into nativist policies and desires to supply chains? I think it’s very wise for the US and other countries to say, how do we avoid being reliant on one supplier? How do we build in redundancy, how do we stockpile enough but I do get as an economist who He gets a little worried about managed trade. I get a little bit worried when the policy responses, well, let’s just build up everything and revive our manufacturing sector. So I think we all these issues are going to be lasting issues that not only impact how we weather this sort of crisis today, but the next the next months and years.

Nathaniel E. Baker 22:21
Yeah. Is this the end of globalization? Rachel, this actually predates the crisis. There’s been some writing about it. Globalization was already in retreat.

Rachel Ziemba 22:31
Yeah. So I mean, globalization, as you’re saying that has really been under, you know, under question under strain I, I don’t think it’s the end of globalization. But I think we’re already in a point where there’s redefinitions, reconsiderations and a lot more government involvement. In addition to my work for financial sector clients, I do some policy analysis for Think Tank called the Center for New American Security. spend a lot of time thinking about exploitation. polls and other and sanctions and trying to think about how use of some of these measures which are, in fact, you know, sort of government’s trying to mediate, you know, mediate markets and globalization, how those might better serve, lobby. So US national security interests, but also, but but also a range of other objectives. I think it changes the types of globalization that we have. And I think it definitely ups the ante for those who are native us and isolationists and others. But what I take away from this incredibly sad health health crisis, is that locking one’s doors does not solve all of the problems. This is a global crisis. And in fact, a policy response that relied too much on a perception That closing the borders would mean there was no inflows of the disease and being unwilling to sort of accept that there was a community spread and local generation I think, put the US, the US behind the curve in in tackling it. So I think as you say there has already been a been a challenge. There are I would think still Chow. There’s still issues that require global solutions. And that’s, you know, I think that’s going to be an important testing thing to watch. Now, obviously, in the next couple of days as policymakers try it may try to coordinate a bit more.

Nathaniel E. Baker 24:42
Yeah. All right, cool. I want to take a short break, and then we’ll come back and get some more views from you, Rachel.

Moderator 24:53
You’re listening to the Contrarian Investor Podcast. You’re on iTunes, Spotify, Stitcher, and other places. podcasts are found, subscribe and supply and almost rating. We on social media search for Contrarian Investor Podcast on Twitter and Instagram. You can find us on LinkedIn as well go to forward slash Contrarian podcast. We want to hear from our listeners, email your thoughts to feedback at constrain a repository of all podcast episodes and materials is available on our website Now back to the program. Here’s Mr. Baker.

Nathaniel E. Baker 25:35
Welcome back, Rachel Ziemba. This is the segment of the show where our guest tells our listeners a little bit about her background and how she came to this stage of her career. So I’m sure we’re all curious to hear about this. And so why don’t you just take away Take it away and fill us in?

Rachel Ziemba 25:56
Sure. So my background becoming sort of a political economist. On the one hand, maybe was a bit of a birthright that I tried to shake. My father’s professor of finance runs a runs a smaller equity futures fund. My mother is an economist, I wanted to do very different things that I had decided that history and other kinds of social sciences where I wanted to be, I didn’t really want to do a lot of economics work. But you know, we talked about all these things growing up. But as I went through college, and even, you know, I found myself more and more interested and puzzled by certain economic arguments. And so I went off and spent time as an intern in the, you know, in a couple of state in a couple of embassies for the US. And I found myself kind of facing economists who are making strong arguments about different policy decisions. I said, Well I better learn more about this. So I can know whether my visceral reaction to the right and wrong is correct. Or, you know, to be able to fight fire with fire, so to speak. And so then I went off to, to Oxford and studied political economy. And I did a lot of work on the politics of dollarization and exchange rate policies. This was the, you know, the early 2000s. And you had financial crises in Argentina and Turkey, and well, are many, you know, many other countries. And so I wanted to know, why does somebody take on another country’s currency? And what does that what does that mean? You know, obviously, lasting elements. And so from there, you know, obviously, by that point already into sort of trade policy, and the way of using the historical background that I developed to try to understand how it impacted today’s policy decisions how to institutions matter how and the like. And then I started my career working in international economic development, mostly in the Middle East working with small projects, mostly for the Canadian government. But I said, you know, we’re doing small projects for individuals, and we were helping them. You know, we were helping local academics to do economic analysis, but I sort of felt that I, it was sort of too small. And we were making things only on a micro level, I mean, doing very important work, of course, and so I decided I still wanted to do internationally relevant work. And I had the opportunity, the hubris to apply to work for Roubini global economics, Nouriel Roubini in 2006. I applied for a job and sort of was at the firm throughout the whole ride before, during and after the global financial crisis helped really sort of build out some of the market and macro kind of capabilities and and spent about a decade working there trying to understand both the risks that we weren’t seeing upside and downside and what it might mean for markets. About two and a half years ago, I decided it was time to time to go after. And but I said, Well, what are the things that I like most about the work I do? I like being able to think short and long term. I like having policymaker. I like connecting policy, academia and markets and investors. And so that’s what I try to do now. I have a small consultancy that works with mostly by side investors, who do a lot of work with some some governments, you know, more, you know, sort of briefing and also tried to, I learned a lot from my students and it You and elsewhere, they test my preconceptions in a way that even some of my investor clients don’t. And so that’s where I try to kind of keep giving new, you know, sort of new ideas.

Nathaniel E. Baker 30:14
Mm hmm. Very interesting. So as a student of history, I’m curious. We’ve talked about this already a bit, how this is unprecedented, etc. Nevertheless, people like to bring historic parallels in, if only to put things into context a little bit. We’ve heard comparisons to 2008 we’ve heard 1987 a lot, at least when markets are concerned. My caveat there is that this is exactly like 1987 iF 1987 happened four times in one week, but that aside, of course, 1929 gets a bit of airplay here in the 30s. What would you say is the most apt historical parallel?

Rachel Ziemba 30:55
Yeah, so I actually think the problem is, is that there isn’t a most apt historical parallel, which is, I know dodging your question. Because I think we are seeing similarities. And policymakers are trying to respond and use all of those examples that you’ve mentioned as cautionary tales. Hmm. Why are we sort of trying to lock down and flatten the curve and the like, we are using examples at a sort of city. And I mean, we’re using examples from epidemiological literature over, you know, over a century, but we’re also using examples of, you know, why did St. Louis fare better than, you know, Philadelphia under you know, in the Spanish flu, um, we are sort of, we are looking and saying, well, we learned about feedback mechanisms in the global financial crisis. And let’s use those tools again, because we can see points of stress manifesting. And on the one hand, it means that some of those policy responses can be enacted more quickly. Quickly, but it still means that but but this is something the scale of it is is much greater. I think one of the biggest challenges is actually the instantaneous financial market effects. I’ve been struck over the last couple of weeks by how much it’s both helped and hurt that there’s instantaneous information on Twitter, on social media as well as in the markets and have wondered myself what 2008 would have been like if Twitter you know, Twitter was a meaningful, you know, actor obviously, it did exist, I believe, but I mean, I personally wasn’t on Twitter until about 2010.

Nathaniel E. Baker 32:49
I was an early adopter. 2008 Sorry, go on.

Rachel Ziemba 32:51
Yeah, yeah, no, but um, but you know, I mean, there was lots of information feeding around other social media platforms, but there is a degree of Information and movement flow. And that’s that has, I think, helped and hurt. There are ideas we might, we might want to think about from past examples of even thinking about, is there a time for an extended if not bank holiday, but market holiday? You know, I have a certain sympathy, you know, for that. So I think all of this means that it’s cliche to say that we’re in uncharted waters, right. But I think that we are. So I think the best we can do is say, Well, what can we learn to not to? I mean, we seem to be making our own mistakes. When the hope is that we don’t make, you know, more, but I think the best thing we can do is to look at a range of these past examples and say, Sure, that’s not a full example. But what worked well, and how can we try to apply it and then what are those same mitigating policies we might need to put into effect To avoid further cascades. So one of the things for example, that’s so important about the degree of fiscal and credit and other support that’s going into going into that that’s materializing at this point or may materialize, is to try to, for example, keep businesses and households that are most affected on lifeline. Now, when we first started thinking about some of this a few weeks ago, the focus of who’s affected has probably dramatically expanded, right? This is not just about people who are being who are looking for sick leave to stay at home because they might be exposed. This is about people who are in whole industries that are moribund, hopefully they won’t actually die, but are being put into put on life support in the hopes of avoiding further further infection as a society. So that’s where and then This is where I think Unfortunately, the US has there many ways in which the US has less resiliency than some of its peers. Right? So both questions around health insurance and the health system, the cost, it means sort of for individual families, but also, but also the fact that there isn’t a systematic unemployment insurance system that covers a lot of increasingly precarious sort of precarious workers. We have examples of people who’ve been furloughed rather than fired and therefore they’re not eligible for benefits. We also know and there plenty of other countries where people don’t save and have cash on hand, but the statistics of how many Americans have would struggle if they had an unanticipated bill of $400. Right. So I think a number what Congress is trying to do, and the more sort of systematic. It is in both trying to provide some lifelines to a range of small and large companies that are affected, but also individuals, that’s going to say a lot on our ability to keep things running at a low level today, but also what we’re going to be able to do in in the future. And those are among the lessons that we learn from some of the past crises.

Nathaniel E. Baker 36:27
Yeah. So there’s been some talk, hopeful talk, optimistic, optimistic talk about a V shaped recovery, which, by the way, I’m not entirely sure those ever happen. But who knows, or if they do, then it maybe wasn’t that big of a drop to begin with, and it’s only, you know, viewable in retrospect, but nevertheless, these opinions, very well argued, many of them do persist. It sounds from your Take that you are a little bit less optimistic. And you view this. But you think that the trough of this thing is going to present persist a little bit longer than a pure V shape? Right?

Rachel Ziemba 37:18
I think that’s probably true. So I think when I look at historical context and look at V shaped recoveries, often those we’ve seen those say, in individ, some countries that say, like, say in the global financial crisis, there were countries that had a relatively V shape. But the global economy definitely didn’t and the countries that tended to be able to have a V shaped recovery either hadn’t had a maybe they’ve had a sharp shock, but they had policy space to adjust to it. You know, think about China for example, well, financial crisis that was able to Turn around and do masses of credit stimulus in particular, had its own costs eventually. And that was a measure that helped a number of those countries, especially commodity export or supplying China. There are a number of other emerging markets that had a lot of fiscal policy space that they used. A lot of those don’t have that space anymore. But, you know, again, all the literature would say that a crisis that has a financial component tends to take longer to recover from and partly because they, you know, just for a range of reasons, I’m cautious, but this is the self imposed nature of parts of the financial shock here, to try to avoid a worse even worse outcome mean that some of it mechanically might Sort of bounced back. There are countries that might be more able to do that, again, China is maybe one of those because you didn’t have a lot of you didn’t have a lot of job loss. Mm hmm. A lot of forbearance for companies to keep their staff on hand. And now you do have some additional demand. Even in China, I don’t think it’ll be exactly be shaped because they rely on demand from the global economy, including some of these countries that are on lockdown. Now, the more medical equipment associated medical equipment, protective technology ventilator is anything that China can produce, people will buy well in excess of what they would would have demanded before. But there’s a wide range of other products that they will not be demanding in the same in the same amounts. I think we’re more likely to face so the the extent of the trough I think does depend on How long we keep these restrictions in place? Right, that in itself is reliant on health care, you know, sort of on health outcomes, the spread of the virus and the like. But I think what’s more like what’s likely when they are lifted? You know that there will be a slower rebuilding of inventories, some restaurants and firms and the like, will have ended up going out of business. Yeah. Some will be shifting into new areas. And there’s also a possibility for a W. Speak, I’m not maybe not at the global con, I mean, the most likely trigger of a W shape in which there is you know, the downturn and then a move back up and then a renewed downturn is of course, if there’s a major recurrence of the virus and you just shut things back down in the fall. But you also could see it individual country level. Bit of a W story, China that is now ramping back up. If well, either they face a recurrence or if they face a challenge, where demand for a range of their products is less extensive. Be something, something to watch. And again, and I know I’m speaking a lot about sort of China’s policy space, there are policy tools that they have available that other countries find more difficult to use. But those two come with costs, right. They have exacerbate some of the debt levels that companies face has been an even greater reliance on state run companies in China as a response that’s good for emergency response. It’s less good for sustainable growth going forward, and less good even for the sort of small and medium sized enterprises that account for a lot of employment in China. So I think As this has deepened, and I for one, you know, saw some of the, you know, I saw some of the negative implications, but the speed and depth of this has and, you know, surprised me. I think there are clearly structural changes that will materialize, some of which we don’t know yet. And that’s going to mean, that’s going to make it harder to think about what, you know, real valuations sort of should look like.

Nathaniel E. Baker 42:30
Yeah. You mentioned China. I mean, most of China’s economy still is manufacturing. It still is an export economy. Mostly, I would think, to the US and Western nations. So with all of the its clients, if you were kind of shutting down their economies, how much of a V shaped recovery can China really expect to have?

Rachel Ziemba 42:54
Yeah. So I think that’s a that’s a concern now, some element so if You think about the sort of timeline here. In some ways, the economic impacts of the China shut down were a little harder to see, as it really ramped up right before the Lunar New Year, which is a period of time where China normally Chinese factories shut for a week or two, you know, usually about two weeks, because there’s the week of the holiday. And then there’s some other travel time. And so a lot of buyers in the US and elsewhere, they pre order ahead of time, because they know it’s going to take you know, there’s going to be this lag as opposed to ordering all the time. So I mean, you’re right that manufacturing and especially exports is still an important part of China’s economy. But it’s important to note that actually, China now over 50% of China’s economy is services, internal tourism that of course has been completely stalled. Uh, you know, sort of retail and e commerce and and increasing. I mean, they still don’t export a lot of services aside from tourism, right. until quite recently, you could go to any major tourist destination in the world and see an increased number of China, you know, sort of Chinese tourism, and particularly the case, it was particularly the case in parts of Southeast Asia elsewhere. These were really important to a flows of funds for places like the Philippines and elsewhere. Is that that’s obviously, you know, how much other countries can help. So I do think that there will be segments, the the demands will shift and that’s one of the reasons why I think there’s a risk for China, that there’s a bit of a slightly less aggressive w that couldn’t wise I mean, the downturn is unlikely to be as strong as you know, as you know, sort of shutting down so much of the economy for You know, sort of for a couple of months, but I do think that that will sort of feed through you know, and then there are, you know, China is among the countries maybe that can benefit a little bit from this oil price collapse. True. Add some, some storage MB do a variety of things. But yeah, I think it’s going to be a difficult The more I think about it, it’s and I have been over the last couple of weeks or the last couple of days really, it’s it’s going to be a difficult 2020 and then I think it raises interesting questions about what the growth kind of rate in 2021 looks. So I think more generally across the global economy, some of the question mark is, how much as as balance sheets deteriorate, and you have some insolvencies, and and the like, what are we what are we sort of What are we left with? The optimistic view? You know, I think this has been, you know, probably, you know, I feel like I’ve obviously been talking a lot about a lot of negatives that we face. And I think that’s right. One of the almost maybe optimistic things I would point two is that we are now at a point that on the brink, there are a number of policies that were floating around there in the global economy that the crisis has facilitated. You have European countries that weren’t ready to think about fiscal stimulus even though they had space. But using that space, they’re not there yet, but starting to think about consolidating and issuing you know, purpose determine European bonds and the like. We have in the United States, maybe only temporarily, with some understanding of how do you how do you support people with with basic income. You also have a recognition At least in crisis time, there is not a challenge of issuing more debt, if it’s used in a way that is not inflationary and can maintain growth or avoid a worse outcome. You know, um, there’s a lot of talk in the economics profession and the like about modern monetary theory. Right. Not a full subscriber of that. But I do think that as long as your bar, you know, as long as you’re borrowing for things that are going to give a better return than your rate of your rate of capital, and they are going to be productivity enhancing or avoid a worse outcome. I think that’s I think that’s open. So there are a number of taboos that have been at least temporarily shattered. Mm hmm. An A B, was the policy mix. going forward? Yeah.

Nathaniel E. Baker 47:56
I’m wondering here as we’re speaking, you mentioned China. It’s probably a non starter to ask if there are any countries in the world, certainly major economies that are sheltered from this. As you know, every single country in the world is part of this global supply chain, in one way or another, I mean, name a country and we can talk about it either exports to China or it’s a beneficiary of China, you know, you look at the Philippines and Thailand and other places in Southeast Asia. But, you know, as I think as an investor here, looking for places to park my cash globally, other than maybe Antarctica, which I don’t think issues bonds, where else might somebody are any off the top of your head, or is there are there any other places that might be a little bit more sheltered from this than others?

Rachel Ziemba 48:51
Yeah, so So I actually think and there are challenges oddly enough for right now. China’s not one of the worst places in the world. And still I would go for sort of things that are protect, you know, sort of government guaranteed, you know, on the bond side and and otherwise. Some of I mean, I think in this sort of environment you want to go places where balance sheets whether on the corporate side or sovereign side are relatively strong. That doesn’t mean that they’re, you’re completely sheltered. I do tend to think I’ve had some debates with people in the last week about is this the kind of environment that decarbonisation and ESG goals go completely out the window, or I haven’t heard much of ESG this month? I gotta tell you, I think in earlier rounds, maybe not this week, but in earlier rounds of the big sell off, I think there was probably some there were some data points that I saw, some slight you know, outperformance of a stronger ESG you know, ESG sort of components that be said and we could have a whole other conversation about all the challenges of what’s the what’s the ESG or the divergence and how people are defining those economic, environmental, social and governance indicators. And all the information asymmetry is the materialize. But I do think that entity countries and companies that have sort of have strong governance have relatively stronger, you know, sort of cash flows, have stronger balance, you know, sort of longer, sort of liability structures, and sort of more more resilience are better places to be. But the time for that is probably it might be too soon.

Nathaniel E. Baker 50:46
Or too late.

Rachel Ziemba 50:47
Oh, you mean to move into them? Well, I’m just saying that I think, I guess what I’m saying is, I think even in relatively strong, you know, sort of relatively strong assets that there’s probably still More sort of flight to liquidity and quality and the relative outperformance. You know, people who put their money into zoom a couple weeks ago are doing pretty well. Yeah.

Nathaniel E. Baker 51:11
even look at a company like Kroger’s. Right, which has also done very well. Clorox has done well, there’s a bunch of these little little things here. So that there are I guess those are indications that some things do. Okay. Whether people have the cash to move into them now is of course, another question, as is the case of, as is the question of how much more upside there may be. Anyway, that’s pretty much all the time we have here. Rachel, thank you so much for joining us. Thank you all for listening and closing, why don’t you tell our listeners how they can find out more about you and where to see your work?

Rachel Ziemba 51:48
Sure. Thanks for having me. Now. It’s been a real pleasure. So people can find me on on my company’s website. and on Twitter at @REZiemba and look forward to being in touch with you and please feel free to be in touch to tell me what I missed and what what I should be watching.

Moderator 52:46
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Season 2, Episode 8, Transcribed: Assessing Economic Damage From Coronavirus With Political Economist Marc Chandler

Moderator 0:02
Welcome to the Contrarian Investor Podcast. We give voice to those who challenge a prevailing sentiment in global financial markets. This podcast is for informational purposes only. Nothing on this podcast should be taken as investment advice. Guests were not compensated for their appearance, nor do they supply payment in order to appear. Individuals on this podcast may hold positions in the securities that are discussed. Listeners are urged to educate themselves and make their own decisions. Now, here’s your host, Mr. Nathaniel E Baker,

Nathaniel E. Baker 0:35
Marc Chandler, you are an economist, and you have a website, mark with a “c.” And I want to talk about your background later. But the first the thing that is kind of vexing everybody, obviously, these days is this Corona virus. And of course we hope everybody stays healthy. But beyond that, what people are trying to figure out now is the economic and earnings impact that is coronavirus is going to have in the US and across and across the globe. And so I’m very pleased to have you on the podcast to hopefully put into context a little bit, what types of things we’re seeing economically. how bad the damage you expect to be, how quickly we should rebound or could rebound. And yeah, just your general take on things from an economic perspective.

Marc Chandler 1:33
Sure, thanks. Yeah, what a shocker. Hmm, you know, all the things that we thought about, like what could hurt us. Many people, I mean, pandemics, Sandys, viruses. Of course, this is like, they make great Netflix series. But at the end of the day, I think that I’m hesitant to call it a black swan event. Because it’s like the third or fourth kind of virus we’ve gotten in recent years, I think about SARS. I think about MERS, even, you know, so. So on one hand, I think we’re ill prepared for this kind of shock. And ill prepared socially, institutionally and psychologically, I think that this is this is the real thing. I mean, if we’ve been saving money for a rainy day, this is a rainy day. This is the emergency that we’ve that we probably haven’t seen so much in our lifetimes. I know people talk about some man, some very clearly man made and specifically man made disasters like World War One, World War Two. in our lifetimes, you think about these other big events, maybe 9/11 here in the US, but this and maybe even some of us still have a scar tissue from the global from the great financial crisis. Well, we don’t know nine, but this is bigger and bigger than bigger than these bigger than these kind of events that we’re familiar with. I think the closest thing can be the Spanish flu, early part of the century. So so the First thing I’d make is that a lot of people I think are confused, because we kind of talk ourselves into this into these like myths. And one of these myths is that the Fed kills economic recoveries. And that that’s the cause of the last few sessions we’ve had. And I look at those other recessions, great financial crisis, the tech bubble, and it seems that loan crisis earlier in my career, these are financial crises that lead over to an economic crisis and have a business cycle. But this what we’re dealing with now, this is an economic crisis, it’s going to spill over and hitting the financial sector. So what we’ve seen around the world but also in the US, central bank’s ease monetary policy, so they cut interest rates, buying assets, like the QE versions that we saw before, but other countries are doing their own versions of it. And we’ve got the federal the federal government, slowly responding. I think at first the US was very far behind the curve still in denial. I think we were in denial up to about two days ago. So until like March 13 or so. And I think that I think that sort of now I think we’re getting more serious. And, you know, a couple weeks ago when Congress was proposing about an $8 billion spending package, it was criticized for having a lot of ideological goodies in it. And now, as of this morning, the White House to Treasury Secretary Mnuchin is talking about an 850 billion dollar package. So this is like we’re going on to war footing.

Nathaniel E. Baker 4:35
Okay. Do you think there’s It sounds like you think this response is appropriate by policymakers and by central banks? Is that a fair assessment?

Marc Chandler 4:43
Yeah, I really think that they’re very slow. What they’re doing is they’re going to things like for example, the Federal Reserve increasing its repo operations. They’ve gone from like very small to 500 billion offering at a time and it turns out the market Doesn’t need that much it doesn’t want that much. And so there is an attempt to shock at all, and maybe not get the money directly to people themselves. And there’s some talk now of like a universal basic income like a one off, check, cut to all all adults $1,000, you get money into people’s hands directly. And it’s the same problem with some of these other operations, that that the banks still intermediate. So the Federal Reserve, or government might give large institutions access to capital, but then people have to borrow it from these institutions. And these institutions might have other other thoughts to do with their money.

Nathaniel E. Baker 5:36
Yeah, not to mention the fact that people can’t really go out and spend money even if they want it to seeing how all restaurants bars and retail outlets are effectively closed. I suppose they could order things on online. But one would think that the the outcome would maybe not be quite what was desired, especially when you look at small and local businesses, right. A lot of these individually owned businesses, these mom and pop little places that you walk into off the street, in towns and cities across the country across the world, not to mention the gig economy and the workers in that sector. But all that aside. So as far as an economic shock to the system, you mentioned historic parallels. And I’m, I’m apt to agree that this is a little bit different than the other cycles that we’ve seen in our lifetime. At least, this is something that was caused by an exogenous shock. Prior to this, the economy, at least in the US, if you believe the economists and if you go beyond and you look at all the data was seemingly healthy, you know, you had unemployment at very low levels. You had manufacturing was was doing okay. consumption was was fine housing, you know, pretty good. And this after 10 years of expansion, so, what do you make of the argument that this was an exogenous shock the underlying economy is still in good shape. And that once this thing is clear and everybody goes back to work, we’ll have a nice one of these V shaped recoveries, right? Where things just kind of like, bounce right away. What do you make of that argument?

Marc Chandler 7:15
Yeah, no, I’m, you know, grew up in Chicago. I’m a Cubs fan and

Nathaniel E. Baker 7:20
Okay, well say no more. Yeah. Hey, you guys won the World Series too finally so

Marc Chandler 7:24
Once, yeah. But I think there’s like a sense of optimism, you know. I think I mean, I think there’s some good reason to be optimistic. And here’s how I sort of look at it. You know, I have I did some work a master’s degree in American history. And I know in the beginning of the Civil War, the North was very slow to get going to get onto war footing. But when it got on war footing, it really you know, the wheels turn quite, quite strongly. Same thing about World War Two, us a bit slow. We got the we got the industry in the war effort, and there was no turning back. Same thing with the space race. The Soviet Union is actually ahead of the US for a while. And I think that, so for me, that’s the important thing that’s going to happen is that finally, and I think belatedly the wheels, which by I mean, the US machinery, industry, government, the central bank, everybody is going to be reeling together. And when those wheels begin turning, I think we’ve got to see all kinds of things like today, for example, the first vaccination for humans is being tested in Seattle. And so of course, we got it, we got to get our own way in the regulations and everything that prevent this from coming to the market very quickly. But I just think about the the the virtue of the United States decentralization, which means that every state has a State University, and almost every State University has a hospital, and these hospitals have researchers, decentralized. You got a lot of brainpower behind this. And so I know this might sound to some of you international viewers as like this is a typical American like technical logical optimism, and there is an element there. But you know, when it comes to selling books online, maybe is it first mover advantage, but when it comes to fighting this Kovac 19, maybe the sooner the last one as an advantage. And by that, I don’t mean of course, we haven’t seen the whole world get it yet Africa is only beginning. But it looks like the US is behind Asia by maybe more than a month behind Europe by a couple of weeks. And so maybe this is going to give us slow to start. We have our own challenges here. Number of hospital beds per hundred thousand people and doctors and all those kind of things. But I do think that the wheels are getting turning is slow to come out of the block, but they are moving. And so I think that could be I think there’s good reason to be optimistic. They’re just like the markets overshot on the upside. And I’m kind of one of those people that thought that almost any measure of valuation that I’m familiar with, showed the market was like just outrageously expensive. And now maybe the markets got outrageously cheap. And maybe things get cheaper first before I mean, I know some people are looking at to say, I think we dip below that 19,000, the Dow today, you know, the kind of downturn we’re expecting is really going to be a couple things. One is going to be compressing earnings. And so we investors have to make that adjustment. But sometimes the markets get it wrong. And I think that the markets are huge aggregator of information. And right now the information needs to aggregate. It’s, it’s not quite there. Some of the things we need is when will When will this peak is that? does one become immune to it after one gets it? What happens when China now is going to Chinese economy is going back? People are going back to work. You can see that traffic’s going up. Pollution is going up again, what happened if there’s another outbreak of the virus. And so and same thing like with the Spanish flu, they pushed it back this spring, summer months, we saw less, less transmission of it, and then it comes roaring back that next winter. And so I think there’s my sense would be that in rates are going to have to stay low for the rest of this year, we if we do get a V shaped recovery in the economy, is it just a one quarter and a pent up demand to go out to drinking or buying some goods? Like you say this has been a historically long expansion, a lot of pent up demand was already was sort of already been spent. So I think that maybe get this one quarter big bounce back. But what is the growth potential in the US economy? And so growth potential, we think of it as like, how many working age people you have, are employed, and what’s the productivity? And so I think that that’s really like the speed limit of the economy. You know, you look at the speed limit, then you can of course, put some high octane fluid called fiscal stimulus or other measures. But what is the speed limit of the economy, it really has a lot to do with the population growth and workforce growth because productivity tends to be at like, it doesn’t change all that much from quarter to quarter, though can change over a period of time. So bottom line, here is Get population growth of about 1%. of productivity about 1%. I think the speed limit that is around 2%.

Nathaniel E. Baker 12:07
So what camp Would you say that you’re in from an economic perspective? Are you in the in the in the camp of the V shape? Or do you think that this is going to be much more profound and longer lasting, and have wider ranging effects than people are maybe accounting for right now?

Marc Chandler 12:24
Yeah, sure. That’s a good question. I do think that we get a little V shaped recovery. So q3 or q4 should be very strong. But I’m also the camp that says that there are some serious like distributional issues in the US they will limit growth, that, that even if we have a strong bounce back in the economy, we still have a that might not there’s going to be some fundamental changes to how we do business. I think that people are just feeling a freedom. I think you know that the BLS, the Bureau of Labor Statistics says about 30 million Americans can work from home. And I think some of us who some some people who do experience I think they see a freedom, and maybe even a boost of productivity, because you got to cut out that commute time. So I think I think one of the other things, I think, especially for people are looking at the markets. One of the things I think I’ll come from this isn’t money itself, the coins and notes we keep in our pocket. This is a this is a, this is like a contagious vehicle. And I think it will help accelerate the move to and I’m not talking about the cyber currencies like Bitcoins. I’m talking about the digital currencies if central banks will come out with and I think you’ll see a china really taking a lead on this. They already have a lot of patents, they’re already moving in that direction. I think this will accelerate that move to official digital currencies.

Nathaniel E. Baker 13:47
Do you even need that though, because all the electronic commerce that happens now, you can do anything with your credit card. I mean, even here in the US, which by the way is far behind Asia, when it comes to point of sale transactions with these credit cards if you’ve ever been to China or other parts of Asia, you know, but but even still, you can still use your credit card in, you know, here in New York, you go into a bodega, you can use it. Sometimes they try to make you charge at least five bucks or something or I went into one the other day, and they they said there was no minimum, but they charged me 50 cents, because I was only buying two things or something. But the point is that you can, you can make these, you can use this now you don’t even really need cash. And also further to that I saw a tweet. Just yesterday, I think that somebody was talking about how she had gone into a store and they said, No more cash only credit cards. And you know, she was she was very concerned about this. And I replied her and I said Well, to be honest with you, I’d be more concerned if it was the other way around. Because, you know, as long as we can use our credit cards, and as long as all that infrastructure is still working, where you can process things you can pay for things online, you can pay for things. We can’t go into stores anymore, but on the Delivery apps, right? Everything could just kind of keep humming. Whereas once that shuts down and you need cash, you’ve got bigger problems, right? So yeah,

Marc Chandler 15:08
yeah. So say for me that the problem with the credit cards is that the kind of utility businesses pay a few percentage points and their profits. Ultimately, it’s based on a bank, a bank. And so we want to somehow we want to create a digital currency. But I think to your point, though, China’s really done it through a mobile apps. So I think we have to find an american way to do it, because so many people are not banked, and I relatively new to that. But I fully agree with you that that the CIO was looking at like, what are they going to be the changes on the other side of this crisis? And I think one of those changes is moving in whether it’s more like your idea of a greater reliance on credit cards, or figuring out maybe I think that like the thinking has to progress where, you know, during the in the 19th century, early 20th century, what were utilities they were the electrical Water gas coming into your house, maybe in this new age. Maybe there’s other things that are utilities, like access to like a credit or debit card, maybe it has to be that the central bank has to keep the account instead of the local bank. So that really redefines the purpose of banks, like banks have a utility function, and they have a casino function, let the investors deal with the casino function, maybe the utility function should be taken away from them. So, like the postal savings like they do in Japan, so I can see a lot of things. I guess my point really is that, yes, this is a probably a short term shock, major shock to the global economy. But there are some things that probably going forward are going to change society. So this becomes one of those before and after moments.

Nathaniel E. Baker 16:47
Very interesting. Okay. Marc Chandler, I want to come back and ask you some more about your background, and some more ideas for investors going forward. But let’s first take a short break.

Moderator 17:02
You’re listening to the Contrarian Investor Podcast. You’re on iTunes, Spotify, Stitcher, and other platforms where podcasts are found. Subscribe and supply an honest rating. We on social media search for Contrarian Investor Podcast on Twitter and Instagram. You can find us on LinkedIn as well go to forward slash contrarian podcast. We want to hear from our listeners email your thoughts to feedback at contrarian a repository of all podcast episodes and materials is available on our website Now back to the program. Here’s Mr. Baker.

Nathaniel E. Baker 17:43
Okay, welcome back. Marc Chandler. This is the section of the podcast where we’d like to introduce our guests a little bit more closely and have him or her describe his or her background to listeners and tell us basically, where they’ve come from and And how they came out to be this at this stage of their careers, I guess. So why don’t you take it away? And tell us about about that?

Marc Chandler 18:08
Yeah, so I guess my background is probably very surprising to many people. Maybe the most interesting thing, so I grew up in Chicago, but I went to my family made the access to the suburbs, and I was always very politically aware. And I organized a strike in high school and got kicked out of high school. I tried so even though I have two master’s degrees, I don’t have a high school diploma. Okay. And so I guess I guess, this kind of experience is really like a critical I think for like, the kind of mind that you want for someone like myself my job as a strategist, having to like doubt everything. be skeptical of it is like they surely believe like nothing they see and only or you should believe like Nothing you hear and only half of what you see. Hmm and so a very skeptical mind especially skeptical about authority and authority doesn’t just mean the government but it means any concentration of power. And so I also read about the same time I got kicked out of high school. And this also illustrates another thing about my who I am is I was working at I come from a lower middle class background and I had a work in high school I was working at Burger King and lost that job because I tried to unionize it and as you probably know, there’s no Union as eight other countries have unionization fast foods Americans don’t. And I yeah, I lost that battle and I ended up having to I worked at frozen ice cream and frozen yogurt shop.

Nathaniel E. Baker 19:46
Did you try to unionize them too?

Marc Chandler 19:48
No. too small, but but I ended up I hadn’t really thought thoroughly out and I and it turned out that like I didn’t have a clue what I was gonna do that winter ice cream shop closes down So, I ended up going to Burger King and promising I won’t cause you any trouble yet. So, but I so I go to college and it’s funny a lot of colleges accept students who are you know, you have to take the AC t test or the SH t test. You have to like have you you have to have your head on straight to some extent. But you don’t need a high school diploma to get to a lot of colleges, universities, especially these days where they were actually more at ability they’d like yeah, the sheepskin. So anyways, I have a background undergraduate and undergraduate school. I studied what I thought were the social sciences that’s really what I wanted to study people how they think and from people from but as anthropology sociology, I really tend to do undergraduate I focused on political science at the School of North Central just in decal in North Central is in Naperville, Illinois outside of Chicago. I still I have two majors one was political science and the other words what they call it humanities, religion, history philosophy, and I was turned out From a teacher who still is a professional, he teaches at Rutgers now in American history. And I liked it so much I studied with his professors. I went to Northern Illinois decal to get a master’s in American history, I really focused on two things. One was Frederick Douglas, who was a slave. And the challenge is how do you fight a system that’s backed by law? In the sense of slavery, it took three Amendments of the Constitution to get rid of slavery. So how do you find a system that has the authority of the law behind it, I thought, in my own mind, that’s what I was gonna have to do. And then, studying American history, naturally took me into modern foreign policy, America’s like, was born at the age of empire, and all these sort of fancy itself as an empire itself of some sort. And so I studied American foreign policy. And that’s what took me into international relations where I did another master’s degree in what I thought was political economy. And I thought, that’s what the Original thinkers like about capitalism like Adam Smith political economy. So I looked around at the time, this is a early 80s. And what school has a good program in international relations, political economy? Well, it turns out the two schools did. One was Princeton, the Woodrow Wilson School, and the other was the University of Pittsburgh to Graduate School of Public and International Affairs. I, of course, apply to both of them. And in the effort for Princeton, the Woodrow Wilson School you had to write a position policy paper. And, again, what would like policy paper Be it was why Brazil should declare a unilateral moratorium on their debt? Hmm. A very unpopular. I don’t know if that topic, my point of view, or might be my writing ability kept me back. I wasn’t accepted at Princeton, as I went to the University of Pittsburgh, and lo and behold, what they thought of political economy. That’s how politics screws up the economy. It was like It was a libertarianism slash, what sort of classical liberalism, minimal state governments only screw things up. So I, when I got out of school then two master’s degrees, I knew what unemployment was, but I didn’t know what it meant for like the markets. And so the one thing I could do, I thought was right, I used to write for underground newspapers that got incorporated school newspapers. I used to like this comic called for the dissent from the Supreme Court and always be like finding something to like, hold up what might be good against what’s perfect. And so I found a job looking through the newspapers, I didn’t know people in the industry or anything like that. But for me, I had already I appreciate how the currency markets the dollar was in the middle of a huge rally when I got into graduate school, and I had a job at the Florida Chicago Mercantile Exchange as a reporter, covering the currency futures, and T Bill eurodollar futures. And occasionally I’d have to like this was the first set of question As to Radio Shack, trs 80. S is small screen, and I used to have a phone hookup cradle it put the handheld phone into this cradle to make sure it got to the signal to send it to my editor. So I did that for a few years. And I realized about like, why the markets how the markets really work. The market is reward people who have an opinion, you don’t have to be right. You need an opinion, you need to have some way to synthesize the news. And what does this mean? So to answer the question about what does this mean, and why is this important? What should I do? And so, I became an analyst at Dean Witter Reynolds at a time before was bought by Morgan Stanley. And then I did a stint at a hedge fund for a while that blew up when the Europeans widen out the currency ranges to 6%. And I did this I did a whole thing for a bunch of large banks, Deutsche Bank, HSBC, and I spent the last 1314 years at Brown brothers Harriman and old fashioned partnership bank Value Investing, they were actually the custodian as a function. That’s how I got involved. A custodian being the back office for a lot of mutual funds and asset managers who needed to transact, make the currency transactions. People are like, you might have a 401k you have some money in a fidelity bond fund or a Matthews Asian fund. So brown brothers would sort of act as a custodian for this and into the currency transactions. So I was able to deal with them I create the largest s&p 500 companies, the largest asset managers, but for me, the problem was it is I think, a challenge for many people in their careers. Now, is that progress technological progress means that couple things it means that largely a lot of the large asset managers have a artificial intelligence using algorithms to execute a trades people are people like us who are bringing money to the to the to the asset managers, we are not we see the problem with the equity fund managers, the active fund managers and many of us are choosing passive index funds. These people needed less less people like me, we I was able to add less value. And I’m still committed to adding value when I can and so I joined this boutique. About a year and a half ago Bannockburn, global forex small group of people offices, there’s like one or two person offices throughout the country. And instead of helping the large asset managers and the the wholesale market institutions, Bannockburn really helps us small and medium sized businesses, and I can add a lot more value to them. It’s much more challenging. The third like David Goliath stories give you an example, the large asset managers and the large companies, they buy foreign exchange, they depress the foreign exchange as a spread between the bid and the offer. And these clients the largest players in the market, if you look at your screen is four points four places on the other side of the decimal point, but there’s really a fifth one for the wholesale market. With small and medium sized businesses are paying. So we’re talking about for these large businesses, then we’re talking about a thousandth of a penny spread. Between the bid and the offer, the small and medium sized businesses are talking to these days, they’re paying three sometimes 4%. Because it treated like there’s a wholesale and retail price for money, and I spent most of my career on the wholesale, sales wholesale side. And now I’m trying to help retail, get those institutional capabilities, institutional pricing, institutional analysis. And so I’m finding a sort of latent career finding new ways to add value. Interesting.

Nathaniel E. Baker 27:39
Yeah, and speaking on podcasts is certainly one and people with with your background, a diverse set of educational and professional experiences and having you know that rebellious streak especially is something that, you know, I very much look for when I’m having people on the show to kind of, as the name suggests, presented contrary View. Right? So what is your what is something that you think that we’re all missing here in the market and economies? You we talked before about how this is a big event? Obviously, you know, you go back through your history, I mean, it’s, you know, it’s pretty funny at the outset of this thing. Maybe not funny, but everyone was saying, well, this is an exogenous shock the economy isn’t okay shape, and nobody but that and that’s true, but World War One was also an exogenous shock, right? And that changed everything right? I mean, in 1914, you had kings and queens running around Europe right and you know, that was all thrown overthrown pretty much and at least in Germany and Russia, etc. But you know, you had countries created out of out of nothing, you had all kinds of you know, women’s right to vote. You really that that changed everything the whole colonial system was kind of didn’t wasn’t ended then but it was certainly kind of put on life support and then World War Two, pretty much ended it. But the point is that we have these major events in our lives 911 people said was going to be one certain ways it was you can’t fly like you did before 911. What other types of things and this gets us maybe off track a little bit and more into the realm of society, but nevertheless, I do think we should address it and what types of changes do you think might be coming down here and what might be created as a result of this whole Corona crisis?

Marc Chandler 29:26
Yeah, good question. I said that, you know, the, during the great financial crisis, Bernanke, he said something like, it says something to the effect, like there’s no atheists in a foxhole. There’s no ideologues in a crisis. And I think that this public health crisis reveals, in a very profound way, the problems with the minimal government, the libertarian type of point of view here, and I think it’s like you know, for many years we’ve been saying, you know, as a country in the US, and the emphasis on individualism, serve civic responsibilities. civic duty, this seems to be like suckers pay out like you try to get out of jury duty. You look out for yourself. And I think that I think that a crisis like this makes us I mean, I think those kinds of things leave us ill prepared for this kind of crisis. Social, I mean, we’ve like really dissolved social trust language has been debased. And I think that it cost us as a society, our ability, our resilience, and so I hear you that like, you buy a good stock and bad things happen and the stocks gonna sell off. You do the right thing, and sometimes you still get punished. But I think, but but I think what happens is that you buy like a value, something that you could buy something of value, it might still get hit. But we’re not talking about sort of like what they talked about when you’re getting in a boxing match or something that how much of it’s not like, how hard you get hit, it’s how hard of a punch you could take and still come back on how resilient you are. And I’m afraid that for me, I think that’s one of the things that have come from this is the In this minimal state, the the I mean, what are we what are what are those people called who who are like not political appointees are just like bureaucrats who do their job. And they really the deep state. Is this hill you have to like demonize is the EU is really the the biggest threat to America really the Federal Reserve? Is it really, and so. So I think one of the things they’re going to have to change, I think in order for us to be more resilient, is that some kind of sense of civic duty or civic responsibility? The idea of these, you see these pictures on social media, people say 25 or so going to the bar still thinking that they’re like immune, it is some kind of Boomer remover, no social responsibility. And I think they’re saying the same thing for I mean, it’s not just like, I don’t want to say millennials in that, but I think that we’ve we’ve eroded the sense of, of community. And a lot of it’s not like one thing has caused it but a lot of different forces. I think about a Robert putnams book, why we bow alone. Like what happened to the 50s and 60s, people belong to a lot of these bowling leagues, and now we don’t anymore. What’s happening? I see someone else, you know, I see you got the headphones on. And I see I sometimes make a mental count when I’m in the subway, how many people in my subway car have headphones on? And it didn’t really I just kind of ironic, it seems to me like, part of it. modernity is dead. Lately, it’s like, in my book called politically kind of tomorrow I talk about this as sort of custom made but mass produced, produced music, but we can custom make the decisions we want to listen to. We can watch those shows we want to watch if anything can be like individualized or we get other benefits of being mass produced as far as costs and everything. And so maybe this uh, maybe this, this covert 19 crisis just shows us the extent of which this atomization of society has other consequences when we have to deal with group problems. Everything I was gonna say about the market economy itself is that I put it like this that, you know, oftentimes I find in my reading and talking with people that they see some problem with the market economy. 19th century you could have capitalism, slavery was so important for industrial capitalism, you couldn’t have capital without slavery. And then if women got to vote, their goes to household. And all the, and we told that for a while, you know, we, you know, when people were much younger, say 3040 years ago, we were kids used to go swimming in the Hudson River in New York, and then a large company polluted it. And do we still pay that price for that? And the idea was, well, he had to pollute, because otherwise if you got if you were green, you couldn’t make any money. Right. And now, I think that we’ve seen that capitalism has this resilience, that the problems that people point to can be addressed the process I see is that sort of like at some people, you know, some people I know their biggest weakness comes out of their biggest strength. It can’t just be reformed away. It’s a much more nuanced type of problem. And I’d say that about capitalism. I think that we’ve reached a stage in capitalism, where I think it’s like the Midas like King Midas and Greek mythology. Everything we touch turns to gold. We are wealthier beyond our imaginations. And we have so much money we don’t know what to do with it all. So we look for create new assets like bitcoins to absorb some of this like a carbon trap. I think that capitalism has produced a surplus, you know, people these days we think about like things like high cholesterol, heart disease, what are these caused by? It’s caused by too much of a good thing. Most of our problems seem to me to be too much of a good thing pollution, the vapid melting of the equator or the sorry, the, the Antarctica and the snow caps. What is happening is too much Have a good thing too many cars too much carbon dioxide. And so I worry that this that this age that we’re in is one of surplus and the most troubling surplus is that of capital. before the crisis hit, we’re looking at something like $15 trillion or so of negative yielding bonds. There’s a story about this, you know that pork prices jumped in China, there’s a story about a guy who’s taking a half a pig home to his family, and the back you know, you drive you drive his motorcycle had a half a pig, and he was hijacked. And the hijackers let him keep the motorcycle. Okay, so we live in this world of, of incredible surplus. And when things are not in surplus, when things are in surplus, we understand it right? The price of oil has dropped because there’s a lot more supply than demand. Well, there’s nothing special about money. Money operates I think the same way. The reason that we have negative interest rates are so low interest rates is not because the central banks are are buying up bonds and this year that the reason we have low interest rates is partly because growth is low. growth potential is low inflation is low, but ultimately, because we have too much money too much, right? It wants this zero they want they have to safety over investment.

Nathaniel E. Baker 36:18
But then wouldn’t higher interest rates kind of be a solution to that? Because if you put the right if you if you increase the savings rate, and you give people reasons to save money versus spend it and circulate it out there, wouldn’t that be one way to deal with it?

Marc Chandler 36:32
There’s a higher interest rates to like lock that money up, like another carbon trap, like locked that money up. So in fact, in the realm of circulation, we can do things like that, but it’s not like I say, itself. So what happens is the banks that have more money, and what do they do with that money? They use that to speculate they leverage that. So yeah, so I’m not sure that like boosting savings rate, I think like boosting consumption for people I mean, there’s so many people that have, I think it was like 30% of Americans don’t have like $400 in the bank. Yeah, we want we want them to be consuming like you were me, Mike. Mm hmm. Right,

Nathaniel E. Baker 37:12
Okay. One other thing here is that, you know, you seem to win when it comes to the central banks. And I’m not going to be one of these people who says we should abolish the Fed and go back to a gold standard and do all that. But on some level, you have to see, especially if you go back into the recent economic history here. And you look at what starting with the Greenspan fed, and how they flooded money in the early 2000s, to respond to 911 and then kept interest rate rates way too low for way too long, which created the housing bubble. And then the Bernanke, he came in and started to raise rates gradually, and that caused the bubble to burst. And then you had the great financial crisis. And then you had you QE QE QE infinity which then created this 10 year? Everything bubble One could say. And now you’re back to zero again, after these latest cuts. On some level isn’t, couldn’t you make the argument that this is all created by Central Bank missteps starting with the Greenspan fed, and that there should perhaps be some level of accountability of the fed to the voters? You know, the central bank, we call it a central bank. I mean, and it effectively is, but as you know, this wasn’t created until 1914, or making 15. Right? And there was a need to do this at the time, right, because you kept having these bank grants and stuff, but nevertheless, there’s not really anything in the constitution for this. And the Fed kind of operates as its own little thing. It’s funded actually by the banks, right. As you know, it’s not funded by taxpayers. It’s something that people get wrong quite a bit. So On some level, there’s like a first the fact that they have misstepped over the last 20 years, and then also the fact that yeah, that they’re not really accountable as a government body. And maybe maybe they should be and maybe there should be as a way for voters to vote out the chairman or something like that. I don’t know. I’m just throwing it out there. But there’s some level of accountability. Right. I mean, what do you think of all that?

Marc Chandler 39:24
Yeah, no, I think you raise a good point. I think this is very much like, for me, like, very true to, to the American like what America’s contribution to political philosophy, right, and that is distrust. So the Europeans would say something like, I think was Lord Acton power corrupts. absolute power corrupts absolutely. I think the American version of it is power corrupts, so let’s hold it. Let’s democratize it and hold it accountable. Right. And I think that’s the American answer is much more pragmatic. On the other hand, there are parts of the government, they are not so answerable to voters directly and important branches. I think about the Supreme Court. When the Constitution was written, even senators were not elected by people but were elected by state houses. And so. So I so I think that for me, I’d say that the way that the central bank works in our society is its is its job is really to look out for the system as a whole, to make sure that system as a whole for capitalism, if that’s socialism by any means. They want to make sure capitalism works out not for any individual capitalist, industry or capitalist person, but for capitalists as a whole. And that really is a is a requires some work in the financial sort of financial space we have in the direct economy. So they’re really for the bank’s money supply and interest interest rates. To your point, if I think that if you ask me if there’s a fancy fed made mistakes, I’d say sure. There’s private sector make mistakes. Sure. Is there any way to avoid this probably not. How to make the central bank more accountable. I’m not sure I’m not sure that the best way to make it accountable I think they’re things like that we that we have in other things, term limits, perhaps three terms, three, six year terms, was maybe too much for Mr. Greenspan, maybe, maybe one term was too small. For Yellen. I’m just doing it out to meet it. So maybe some term limits to reach your point about accountability. I’m not sure how to do it. I mean, part of the problem is that in other countries, I can’t think of a central bank that is directly accountable. But I could see how you could have extra is supposed to be someone aboard a governor who’s supposed to be representing the interest of community banks.

Nathaniel E. Baker 41:41
Right. Yeah, exactly.

Marc Chandler 41:44
So I can see how I can see there’s ways to like get it more representative without necessarily letting people vote on the next chairman.

Nathaniel E. Baker 41:51
Yeah, Or maybe you have something I mean, the president right now appoints the Fed. The Fed president, right. I don’t know anything about him. I probably should know more about it. governors are appointed. And you have all these local Feds right. And

Marc Chandler 42:04
essentially, the governors are appointed by the President with the approval of the Senate. But the local banks should have they rise up to the local bank or the local bank, like the New York Fed or the St. Louis Fed, they’ll pick one of their own if someone who they want at a local level of the President, I think tends to be approved by the FOMC. I’m not sure if that’s a law or not. But I think that typically, and that’s why I like say the New York Fed is so important, because if the feds execution desk, and a chair or the head of the New York Fed, sometimes could go to the Fed or be the chairman of the Fed.

Nathaniel E. Baker 42:35
Right. Right. Yeah. And probably making them directly accountable to voters is perhaps completely insane. But just because of the level of knowledge they need to have, but, you know, right now, it’s tied so closely to the executive branch, right to the to the President. And, you know, the Supreme Court vote works like that. But maybe there’s another way to do maybe there’s a Senate Banking Committee, I don’t know, but you know, maybe not. Maybe it works fine. Maybe Maybe like you said, just some trimming around the edges.

Marc Chandler 43:02
Nobody It is true that they’ve tried to do other things to try to make them accountable, like having the chairman obligated to give to do about twice a year to the before testified before Congress, or even the press conferences. To your point. It was incredible for years other central banks, we have press conferences. And and this is so for me, like when I say no credit should be what should go like wasted. I think it’s one of the things we get is like you pointed about a woman’s right to vote and things. I think every when we have a big crisis, we extend the franchise. Vietnam was a crisis for society standard franchise. I want in my book this politically kind of tomorrow, I try to anticipate the extension of a franchise, who would it go to 16 year olds, lower the age by two years. Here’s why they did it in Scotland for the referendum, because a lot of important issues are about the future. And I know you say about 16 year olds, they’re not mature enough. Same thing people said about 18 year olds, but also 16 year olds when they’re not going to vote too high, too high. numbers.

Nathaniel E. Baker 44:01
Yeah, but then well, that’s the case. Why don’t we just make it 12 year olds are not gonna vote nine numbers either, right? Yeah.

Marc Chandler 44:06
Yeah. No, I think I think that you could say that 16 the government says, you can. You’re at an age in which you’re allowed to drive a killing machine called a car. Yeah, that 16 year old suicide of an age of maturity or something like that. So about what I see happening is like it like this. I say the Scottish referendum. It was about the future. 16 was the right to vote in some states. Try and some of us primaries 17 year olds get to like to vote in the primaries, and if they can’t vote in the general election. So I think like we should be trying to think creatively, but extending the franchise, take advantage of this crisis, while officials sort of like have to like they know that we sort of have an agreement the same way that Chinese people do think that the leaders have to deliver the goods as a rising living standard, so that our children live better than we do, but that that dream is being lost. And I think the political and economic elite know that anti bias and bread and circuses don’t count now, extended franchise. Even the white house right now is talking about a version of UBI that universal basic income 70 every adult $1,000 or something like that. This is an incredible time we’re going through it. There’s only ideological like, holds don’t work. So I’m hopeful that out of this crisis comes new, like civil liberties.

Nathaniel E. Baker 45:24
Hmm. That’s a nice way to end. Mark. In closing, why don’t you just let our listeners know where they can find you on the line and elsewhere?

Marc Chandler 45:33
Sure. So I have a, I have a blog, you mentioned our mark to market. I update that six days a week, at least once a day institutional level analysis that I’m providing to our clients as well. And I’m also on Twitter in terms of social media called mark making sense. I know it sounds kind of egomania, but that’s what it was. My first book was called Making Sense of the dollar. And a young woman working for me, Margaret Kepner, who is brilliant, well ahead of her time, knowing how important social media was going to be. And yeah, she hooked me up. So we went and sat with some marketing. So mark making sense at mark making sense on Twitter, so feel free. I’m on LinkedIn as well. And I like having dialogues with people. That’s how I learned. And and I don’t know, you know, I think it’s sort of like what Mark Twain said. I said he did. I’m sorry, it was a Thomas Edison. He said he did fine. He and fail. He found 10,000 ways it didn’t work. And so I think that’s why I think there’s some of us who have been around the markets a long time, gray hair, a lot of scar tissue, and but happy to happy to learn new things.

Nathaniel E. Baker 46:42
Very good. Okay, wonderful. Well, that’s a good way of closing. Thank you, Mark. thank everyone for listening. And thank

Moderator 46:48
Thank you for listening to the Contrarian Investor Podcast. We hope you enjoyed this episode. To subscribe to this podcast. Simply open your favorite podcast software and search for contrarian investor. Follow us on social media by searching for contrarian investor on Twitter and Instagram. Send us your thoughts on feedback at We look forward to speaking to you again next time.

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Season 2, Episode 10: Coronavirus Crisis Continues, Expect ‘Rolling’ Recessions

With Rachel Ziemba, Geo-Economic and Country Risk Expert

Rachel Ziemba joins the podcast to discuss the continuing, and intensifying economic impact from the coronavirus.

It’s become clear that the crisis has caused a demand shock that will likely bring “rolling recessions” in its wake. The most likely scenario appears to be for a “W-shaped” recovery. In the meantime, there is still a lot that go wrong.

Content Segments

  • The demand shock, shift in demand, and rolling recessions (4:27)
  • Unique characteristics of the coronavirus crisis (7:57)
  • Oil and oil-producing countries may be at most risk. Sino-U.S. relations can be expected to suffer (16:35)
  • Background on the guest (25:55)
  • Discussion of historical parallels: some similarities, but there is no precedent (30:16)
  • The unlikely prospect of a “V-shaped” recovery (36:26)
  • How deep might the trough be? (39:55)
  • Are there any safe harbors from this? (47:57)

For more information on the guest:

Not intended as investment advice.

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