Sherman Show hosts Jeffrey Sherman and Sam Lau are joined by returning guest Jeff Mayberry as they try to assess how macroeconomic fundamentals stack up versus U.S. market prices. Among other issues in this June 3, 2020, discussion, Messrs. Sherman, Lau and Mayberry talk about COVID-19 trends in the U.S., noting that much of the good news was driven by decreased cases in the New York City tri-state area; if there are any positive indicators to be found in noisy jobless numbers; and whether the month’s data points back some of the more optimistic projections for the economy’s recovery.

Some have interpreted a recovery in personal mobility data and rising TSA travel as positive signs for an economic rebound. Mr. Sherman, however, voices some skepticism. While TSA travel activity has marked improvements month to month, year-to-year the figures are way down, with TSA reporting travel numbers 90% below those of 12 months ago. Gasoline consumption is also down year-over-year.

They also review the massive quantitative easing initiatives by the Federal Reserve and the reaction of the markets that have been targeted. There has been zero interest from companies, notes Mr. Sherman, who points out that jawboning about the programs is having more of an impact than participation in the programs.

The Sherman Show hosts Jeffrey Sherman and Samuel Lau are joined by Bart van Ark and Erik Lundh, economists at The Conference Board, a leading non-profit think tank and economic forecaster. Dr. van Ark is Chief Economist and Executive Vice President at The Conference Board. Mr. Lundh is Senior Economist. Among other issues in this May 28, 2020, discussion, Dr. van Ark and Mr. Lundh talk about how the unique circumstance of the present economic downturn – due to the exogenous shock of COVID-19 rather than a classic weakening of the business cycle – necessitates a different approach to modeling how to investigate possible futures for the U.S. economy. They foresee three main possibilities: a gradual U-shaped recovery, which they consider the most likely; a rapid recovery; and a W-shaped event in which a too-rapid recovery triggers a second wave of COVID-19 cases, prompting more social-distancing policies.

Other eventualities include the possibility the present supply-side shock becomes a more classical demand-side recession. That’s an open question still being debated at The Conference Board. “But certainly,” Mr. Lundh says, “the longer businesses stay shut, the longer the economy stays shut, the more income impact there is, the higher the probability that this is going to have second-order impacts and this turns into a longer-term, more-difficult-to-recover-from recession.”

Some observers have taken heart from the latest initial jobs claims report and the fact that The Conference Board’s Consumer Confidence Index halted its free fall in May. However, Dr. van Ark strikes a skeptical note regarding those data points as well as the improvement registered in the Consumer Expectations Index for the future. “There are three expectations components,” Dr. van Ark notes, “business conditions, employment and income. All the improvement in expectations in May was due to business conditions…. When it comes to employment, it’s true that there were more consumers who think that there will be more jobs available than less, but it didn’t really improve a lot compared to what it was last month. But the big news is on the income side. On the income side, we actually saw more consumers being negative about income than positive. That’s been quite unique. You rarely see negativity outpacing positivity.”

Among other ideas discussed during this episode, the hosts and guests note that Federal Reserve interventions today have almost made so-called Modern Monetary Theory a reality, much of the expansion of the money supply as measured by M2 is going into savings rather than consumption, and the increasingly confrontational relationship between the U.S. and China.

For more Conference Board podcasts, please visit: https://conference-board.org/podcasts

Gregory Whiteley Tours the Treasury Market

Gregory Whiteley, head of DoubleLine’s U.S. government debt team, delves into the strange new world of Treasury securities, a market today priced by quasi-permanent manipulation by the Federal Reserve rather than markets. Among other topics, Mr. Whiteley and podcast hosts Jeffrey Sherman and Samuel Lau discuss the wild ride of March and the danger of Fed’s underwriting moral hazard in the private sector in this episode of The Sherman Show, recorded the morning of May 20, 2020. While the current state of the economy, markets and monetary policy leaves much to be desired, Mr. Whiteley does see one bright point: contrary to indications in corners of the derivatives markets, he takes Jerome Powell at his word: the Fed is set against negative interest rates. Mr. Whiteley sees the Fed focused on the short end of the Treasury yield curve and not that concerned with absolute yields at the long end.

Mr. Whiteley began his career in the salad days of Salomon Brothers before joining the team of Jeffrey Gundlach two decades ago. Like Messrs. Sherman and Lau, Mr. Whiteley became part of the original team which launched DoubleLine under Mr. Gundlach’s leadership in 2009.

After Samuel Lau and Jeffrey Sherman march through their mid-week macro-market-monetary menagerie, DoubleLine CLO analyst Joe Mezyk returns to the Sherman Show to discuss the state of the $750 billion market of collateralized loan obligations. In the wake of the market dislocations due to economic shutdown and massive intervention by the Federal Reserve, Mr. Mezyk observes a tale of two worlds in CLO Land. On one hand, there are securitized bonds backed by “good companies [which] will have the liquidity to ride out this pandemic.” On the other hand, generous liquidity is “putting extra debt on zombie companies.” In this juxtaposition of fundamental economic crunch and engineered liquidity boom, Mezyk discusses the “opportunities to pick through the ruble and find things we like.”

Bill Campbell on Global Bond Markets over the Near and Medium Term

In this episode of the Sherman Show, recorded the morning of May 6, 2020, Sam Lau does the weekly macro and market update; then DoubleLine’s Bill Campbell joins the Sherman Show to discuss the global markets. Mr. Campbell organizes the discussion by timeframe, for he sees the near-term risks giving way to a very different picture in the medium term, and by region, including breakouts for Europe, emerging markets and China. As he tells Mr. Lau and co-host Jeffrey Sherman, Mr. Campbell warns that risk managers may be misdiagnosing today’s investing conditions.

“We’ve been in a late-cycle phase for several years, and we’ve been waiting for the crisis that would take us into the cyclical downturn. In 2018, it was the Fed over-hiking interest rates. In 2019, it was trade. Then finally in 2020, we get the COVID crisis,” Mr. Campbell says. “And now, people have pulled out the cyclical playbooks and said, `OK, the government has come in and given a bridge loan to a lot of businesses and to individuals to try to get us to 2021.’ And then if we look out, and there’s GDP and activity repair, maybe there are a lot of good investments. I think that cyclical playbook needs to be used with an element of caution this time around. There are some serious structural changes happening in the global economy” outside of the business cycle. Among these are the rebalancing of the global supply chain away from U.S. dependence on China, changing work behaviors and consumer preferences in response to the COVID-19 pandemic, and the buildup of U.S. debt to the point of constraining economic activity. “These are big structural items that may disrupt that the cyclical playbook,” he says. Furthermore, the “full stop,” government-ordered shutdowns around the world, he notes, are different from the cyclical downturns of the past. Another medium-term factor: the Federal Reserve has injected a massive dollars into the financial system, not only via quantitative easing, but also by extending its dollar swap lines and repo facilities, including to emerging market central banks.

In contrast to rebounds in U.S. equities and corporate credit, emerging markets have less policy power to cope with crises, including the COVID-19 pandemic and related economic shock. “Emerging markets are a derivative play on growth,” Campbell says. They “need to have those growth prospects for investors to get excited to deploy capital.” Emerging markets in fact have been hit by three shocks: the COVID economic shock, the collapse in industrial commodity prices, and record outflows of foreign capital. One EM debtor Mr. Campbell likes: Peru (for its stable currency policy).

In developed markets, central banks and governments appear to have room in the near term for further monetary and fiscal action. However, looking out to the medium term, Mr. Campbell warns the debt load threatens “to hamper the ability of global growth to rebound back to the levels of even pre-crisis.” Europe faces an interesting crossroads this summer. In response to a lawsuit brought by German businesses against the European Central Bank’s asset purchase program, Germany’s constitutional court this week ruled that the ECB must explain how the program is “proportional,” i.e., not intruding into the domain of fiscal policy. The ECB has three months to respond. Mr. Campbell cautions against treating Berlin as a rubber stamp. If the German court is dissatisfied with the ECB’s answer, he believes it could stop the Bundesbank of purchasing Bunds (the sovereign bonds of Germany). This would seriously crimp ECB’s ability to implement quantitative easing. In the near term, Mr. Campbell’s developed market positioning favors investments which he thinks can weather another leg down in the risk markets. This includes “avoiding Italy completely” and exposures to the Japanese yen and to Australia while hedging out that country’s currency.

Ken Shinoda Joins This Week’s Market Round-Up with His Review of the Housing and Mortgage Sectors

DoubleLine Portfolio Manager Ken Shinoda, appears as a guest on this episode of The Sherman Show to explain the state of the housing market and housing finance system in the wake of the national economic shutdown. This episode is part of the podcast’s weekly round-up of the major markets, including equities, fixed income and commodities; monetary and fiscal measures; and the macroeconomic data.

In their macro and markets round-up, podcast hosts Jeffrey Sherman and Samuel Lau comment on the big disconnect between the sharp rebound in stocks, which has lifted the Nasdaq Composite Index into positive territory year-to-date, versus economic data telling a story of malaise. In particular, Sherman points out the deep hit to personal consumption in the first quarter – trouble which will carry over into the month of April.

A veteran of DoubleLine’s mortgage-backed securities team, Mr. Shinoda walks listeners through the mechanics for the mortgage servicing systems for loans in pools of Agency mortgage-backed securities (Agency MBS) and for those of non-Agency (aka private label) mortgage-backed securities. He also reviews the price action of non-Agency MBS, which initially declined, although much less due to fears over rising delinquencies than to forced selling by mortgage real estate investment trusts and hedge funds. Mortgage REITs and some hedge funds were caught in a vicious cycle of margin calls, deleveraging, forced selling and declining asset prices, he notes. The non-Agency market has since bottomed and partly rebounded. It will be a couple months before data on mortgage remittance clarifies the default picture. However, Mr. Shinoda says the data on forbearance requests (whereby homeowners seek to miss payments with the idea of later making up those payments) so far paints a picture which should be manageable by the mortgage servicers. Mr. Shinoda also reviews rental collections within the multi-family housing market. Here too, the rise in missed collections appears to be manageable thus far.

This episode of The Sherman Show was recorded on April 29, 2020.

For these extraordinary times, The Sherman Show has been producing weekly reviews of the financial markets, macroeconomic data, fiscal actions by the U.S. government and monetary actions by the Federal Reserve. In this episode, recorded the morning of April 22, 2020, hosts Jeffrey Sherman and Samuel Lau and guest Jeff Mayberry also discuss in depth the causes and lessons of the unprecedented April 20 negative price settlement for the May contract on West Texas Intermediate crude oil at $37 per barrel (after marking an intraday low of -$40). They also try to clear up misinformation about the causes of the negative pricing, particularly in social media where some critics have wrongly blamed the market dislocation “financialization” of commodities trading by exchange-traded funds and exchange-traded notes. The true cause, Mr. Lau argues, was the confluence of a supply glut, perhaps years in the making, demand destruction by the economic shutdowns ordered by governments in response to the COVID-19 pandemic and lack of access to oil storage facilities for buyers of May contracts to take physical delivery of oil. If those conditions remain in place by the time of future expiry dates, Mr. Lau suggests, WTI contracts could settle at negative prices again. “Will the buyers, the people who actually go long into the expiry and take delivery, are they going to continue to demand the negative price?” he asks. “I think it’s very possible if we still have … the surplus tied to storage concerns.”

Andrew Hsu, a DoubleLine Portfolio Manager who trades and constructs portfolios from nearly all major sectors of the securitized asset universe, explains on The Sherman Show the basics of this market and its revisions in the wake of the present economic crisis. In response to the economic shock of the government-ordered COVID 19 lockdowns, as Mr. Hsu explains, the Federal Reserve implemented asset purchases and other measures which supported not only investment-grade corporate bonds but in some cases below-IG corporate securities. Fed support of securitized assets, aka structured product, has been limited to bonds rated AAA, whether in Agency mortgage-backed securities (Agency MBS), which by definition enjoy principal guarantees by the U.S. government, or private-label securitizations of credits such as auto loans, student loans, credit card receivables and other cash flows in addition to residential and commercial mortgages. Thus below AAA, especially in the mezzanine/high yield areas, of structured product, investors expect high loss severities and so buyers want significant discounts to par. This episode of The Sherman Show, hosted by DoubleLine’s Jeffrey Sherman and Samuel Lau, was recorded on April 16, 2020.

In a discussion recorded the morning of April 8, 2020, Sherman Show co-hosts Jeffrey Sherman and Samuel along with returning guest Jeff Mayberry conduct a tour d’horizon of stocks, gold and bond markets and a review of the macroeconomic and stimulus fronts. They ponder the long-lasting effects of the lockdown after it ends. They discuss how the Federal Reserve is using its balance sheet and the meaning of the curious rise of Treasury yields despite $100 billion of daily asset purchases by the central bank. They also consider the prospects for a revival of inflation given the trillions of dollars spending coming out of Congress for President Trump’s signature.

Jeffrey Sherman, Deputy Chief Investment Officer of DoubleLine Capital, and Samuel Lau are stepping up the frequency of episodes of The Sherman Show to address the extraordinary changes in our post-COVID 19 world. In this episode, the co-hosts are joined by Jeffrey Mayberry, portfolio manager and fellow member of DoubleLine’s Macro Asset Allocation Team. They discuss the state of the bond, stock and commodity markets, the raft of interventions by the Federal Reserve and U.S. government to stave off an economic depression and what may lie ahead.