Jul 7, 2020, 1:42 PM ETConference Presentation, Panel

Restarting the Economic Engine

Milken InstituteErik Schatzker, Todd Boehly, Charles W. Scharf, Kerry Healey, David Hunt, Charlie Scharf

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The global economy is projected to endure nine to twelve months of psychological distress, with a "slow road back" recovery expected to take a couple of years rather than a rapid V-shape rebound.
Economic downturns have bottomed out, triggering a "flywheel" effect as organizations rebuild, though earnings are anticipated to be difficult in the second quarter with a slow, non-linear build-out in the third and fourth quarters.
Unemployment is expected to remain at least double pre-crisis levels for an extended period, with hopes that it will peak in the second or third quarter before recovery begins in the fourth quarter.
Capital markets recovered significantly faster than the 2008-2010 crisis, with necessary moves executed in less than six weeks, contrasting with the 12-15 months previously required.
Investment grade companies initially faced borrowing concessions of 25 to 50 basis points, while Triple-B companies eventually secured rates cheaper than pre-pandemic levels after facing liquidity constraints.
Large corporations have utilized bond market capital to bolster balance sheets, but many smaller businesses lack the resources to sustain operations despite access to capital.
A "round two" of stimulus is considered necessary as current time-bound measures like PPP run out while the recovery phase extends, with experts estimating an additional $2 trillion in fiscal action is required to protect Main Street.
State and local governments face dramatic revenue losses this summer, necessitating service cutbacks; New York City officials are considering cutting 22,000 civil service jobs to save $1 billion due to tax drops.
The financial industry provided approximately $80 billion in additional credit in March alone, though many needy businesses remain unable to access existing stimulus programs due to implementation issues.
Capital distribution is expected to improve by shifting from high-cost transaction models to more efficient "bits and bytes" distribution, potentially leveraging digital transformation to disrupt legacy complexities.
Technological capabilities have improved dramatically, with testing results now delivered in 15 minutes compared to 15 days previously, though the process remains a trial-and-error effort lacking effective execution.
Baseball operations may resume with specific protocols limiting clubhouse personnel to 65 people and utilizing on-site testing, with fan returns expected to be gradual and potentially starting with distributed seating replacing stuffed animals.
Care levels for ventilators have improved significantly, leading to a shift in market sentiment where holding long positions in ventilator manufacturers is no longer viewed as favorable.
Coin Star is recovering linearly at approximately 4% per week after bottoming in late April, with projections to return to previous levels by August 1.
The SPAC market is expected to continue growing, serving as a replacement for parts of the traditional private equity model and providing institutional capital for valuations extending into 2022, 2023, and 2024.
Landlords are expected to evolve into "land partners" through collaborative lease structures allowing revenue-based payment deferrals, while businesses prioritize essential operations and rethink inventory levels.
Cash is not expected to generate meaningful returns again, with yield curves projected to start at zero, fundamentally altering how rates of return are calculated relative to the 10-year benchmark.
Wells Fargo expects spending to surge upon state openings, with approximately one-third of loan customers on forbearance plans choosing to resume payments.
Behavioral compliance regarding social distancing and mask-wearing is viewed as essential for the foreseeable future and the key factor for safe reopening, rather than government mandates.
The US federalist system is expected to perform better than centralized models by allowing flexible, state-by-state experimentation, though significant disparities exist in access to capital for minority-owned businesses.
Approximately 41% of Black-owned small businesses have closed due to insufficient capital access, with 40% of minimum wage jobs disappearing in mid-April, disproportionately impacting low-income communities.
Proposals include investing $10 to $50 billion in subordinated capital into thousands of African-American owned banks to address unequal venture capital distribution, which currently gives 1% to Black-owned businesses and 2% to women-led ventures.
Public trust is expected to rise if business leaders address long-term disparities and make statements of principle, though some surveys indicate only a slight current increase contingent on such actions.
New regulation may emerge to address leverage and supply chain flaws, though broad regulatory limits on debt or inventory are viewed as potentially dangerous, with antitrust revamping seen as preferable to heavy regulation.
The retreat of banks from global intermediation is identified as a negative trend that may reduce capital market stability, while a robust private credit market is viewed as a positive factor for system resiliency.
Current equity market prices are believed to be overvalued as they price in a sharp V-shaped recovery that is not anticipated, with the speaker questioning the relevance of valuations relative to future earnings.
Digital transformation is expected to become essential for business continuity, allowing companies to avoid the survival challenges faced in similar crises ten years ago.
Eldridge Industries is actively buying revolvers and investing in live entertainment assets possessing real intellectual property, while the CLO market is expected to evolve with managers defending financing at LIBOR plus 200.
Experts argue that the 2013 "taper tantrum" was not a significant event, and current market behaviors differ from past crises due to the rapid execution of financial moves.
The recovery process involves managing complex organizations and large groups of people, necessitating significant debate regarding operational approaches and the potential for long-term behavioral changes.
State and local governments require federal assistance to manage plummeting revenues, a role the federal government has not played to this extent before, with a need for flexible and long-range policy.
Infrastructure initiatives and significant funding are recommended to drive spending and create short-term jobs, particularly as the economy faces a "slow return" of human behavior to stadiums and concerts.
The global economy will experience a period where organizations evolve out of the pandemic crisis, with experts noting that the world is not returning to normal and normalcy will be achieved quite some time hence.
Business leaders are expected to be vocal in expressing the need for further assistance as stimulus programs expire, with a belief that bipartisan cooperation is necessary to target money to those in need.
The financial industry is committed to using resources to help individuals and corporations without conducting experiments on employees, while the private credit market allows for loss-sharing outside of bank balance sheets.
40% of minimum wage jobs disappeared in mid-April, and 41% of Black-owned small businesses have closed due to insufficient capital, highlighting the need to address education, healthcare, and capital access in low-income communities.
Japan's pandemic handling is attributed to consistent individual compliance, contrasting with the US reliance on prescriptive government policies rather than fostering belief in individual choice.
Wells Fargo hopes unemployment will peak in the second or third quarter, with a recovery beginning in the fourth quarter into the following year, though current stimulus programs are deemed inadequate for the scale of the crisis.
The efficiency of capital distribution is expected to improve, potentially shifting from high-cost transaction models to more efficient "bits and bytes" distribution, and the development of the SPAC market is expected to continue.
Investment grade companies initially offered bonds with new issue concessions of 25 to 50 basis points, though many eventually could not borrow money as quickly as expected, while Triple-B companies found borrowing opportunities at rates cheaper than pre-pandemic levels.
Large companies have used capital raised from the bond markets to bolster their balance sheets, which has helped support their stock prices, whereas smaller businesses lack the resources to sustain operations.
The development of the SPAC market is expected to continue, serving as a replacement for parts of the traditional private equity model, with SPACs expected to provide institutional capital for future valuations looking at the world in 2022, 2023, and 2024.
Ackman recently announced a $3 to $6 billion SPAC, utilizing a strategy of buying long-dated warrants to avoid immediate dilution, and cash is not expected to ever generate a meaningful rate of return again.
Eldridge Industries is actively buying revolvers and investing in live entertainment assets possessing real intellectual property, while the CLO market is expected to evolve as managers trade positions and defend financing at LIBOR plus 200 compared to previous LIBOR plus 100.
Surveys currently indicate a slight increase in public trust, contingent on business leaders making statements of principle and leveling the playing field, and the business community can rebuild trust by addressing long-term disparities in access to capital.
A "new round of regulation" may emerge to address flaws in leverage, inventory levels, and supply chains to prevent moral hazard, though broad regulatory limits on debt or inventory levels across all industries could be potentially dangerous.
Most large companies are continuing to perform well due to access to capital markets, whereas smaller businesses lack the resources to sustain operations in the current environment, and there is a belief that public sentiment favors a response from civic leaders.
The federal government is expected to be called upon to help states and municipalities that will suffer plummeting revenues, a role it has not played to this extent before, and landlords are expected to evolve into "land partners" through collaborative lease structures.
The pandemic has taught businesses to prioritize essential operations over daily distractions, potentially leading to a rethinking of inventory levels, and the existence of a large and robust private credit market is viewed as a positive factor for system resiliency.
The retreat of banks from global intermediation is a negative trend that may reduce the long-term stability of capital markets, and heavy regulation is expected to stop innovation and increase the market share of industry leaders.
The speaker believes the 2013 "taper tantrum" was not a significant event and questions the relevance of current valuations relative to future earnings, and current equity market prices are believed to be overvalued as they price in a sharp V-shaped recovery.
Earnings are expected to be difficult in the second quarter, with a slow, non-linear build-out expected in the third and fourth quarters, and Wells Fargo hopes unemployment will peak in the second or third quarter, with a recovery beginning in the fourth quarter into the following year.
The economy can be made more equitable by addressing interconnected issues of education, healthcare, and access to capital in low-income communities, and 40% of minimum wage jobs disappeared in mid-April, disproportionately impacting low-income communities.
The US federalist system is expected to work better than highly centralized systems like the UK's because it allows for flexible, state-by-state experimentation and learning, and leaders are expected to be vocal in expressing the need for further assistance as current stimulus programs begin to expire.
Politicians on both sides are expected to come together to determine where money can be targeted to those in need, and investing 10 or 50 billion in low-cost subordinated capital into thousands of African-American owned banks is proposed as a practical step.