We Are In Uncharted Territory, Says Goldman’s Abby Cohen
Abby Joseph Cohen, partner and chief U.S. investment strategist at Goldman Sachs and Co. (Photographer: Ramin Talaie/Bloomberg)

We Are In Uncharted Territory, Says Goldman’s Abby Cohen

The global economy is in uncharted territory, says Abby Cohen, among the most noted voices on Wall Street. And while central banks around the world have moved aggressively over the last two to three weeks, fiscal responses have been widely variable and it’s not clear whether enough has been done in terms of the aggregate amount nor whether they’re properly targeted, notes the advisory director and senior investment strategist at Goldman Sachs.

In this interview, she discusses the speed and intensity of the crisis, those most impacted by it, the scope of a global recovery and her outlook on global financial markets.

Watch the full interview here

Below is the edited transcript.

This is an unprecedented crisis. Have you seen anything like this in your lifetime? The reason I ask is because if we don't understand the scale of this, we probably will not be able to craft the right recovery.

I think that you are right to be asking those questions. Normally economists and company analysts work with certain tools. One of those is always a model of what has happened in past history. I don't think there is any direct historical precedent. The other thing that we also depend upon is an understanding of where we currently are with regard to economic and company performance. There too, we don't have good information. Then, of course, what will the future look like? There are so many areas of uncertainty at this point.

The first and most important is the path and pattern that this disease will pave not just in the United States, but also around the world. And not just now but also in the coming months and year or two. The second thing we don't know but we have more information now than we did previously, is what would governments do to try to offset the impact. So, for example we do know that central banks around the world have moved aggressively over the last two to three weeks. Also in the past week or two we see that national governments are also instituting national fiscal policies. But these are widely variable and its not clear whether enough has been done in terms of the aggregate amount nor whether they're properly targeted.

So the bottom line answer to your question is, we are indeed in uncharted territory but we are trying the best we can, trying to figure out the best possible information that we can find.

I’m trying to understand the identifiable impacts. Do you see this crisis leading to a far more severe job crisis across the world, and one that impacts midsize businesses, versus any other previous economic crisis?

Clearly, the one area of the economy where we have the most up to date information is on jobs. This is because we do get weekly data in the United States on new claims for unemployment insurance. The information thus far is quite discouraging. It appears that we have lost in the United States alone; something like 10 million jobs just over the last two weeks.

What is so unprecedented about that situation is not just the severity but how very quickly this has developed. And because of that we must take care not to assume the patterns we’ve seen in the past will persist.

One of the assumptions we are making is that the unemployment rate in the United States may move to double digit levels; let’s say something of the order of 9 or 10 percent on a reported basis. But it is the invisible unemployment that becomes more troubling. These are the workers who get counted as employees but perhaps aren’t working for as many hours as they might like. And It also includes the so called discouraged workers who are so disappointed in terms of the job prospects that they're not even looking.

One big concern that I have outside the United States is that we will see an even more dramatic impact on the income of average workers and below average income workers, than we will for the nation overall.

In the United States, for example, we know that much of the impact has occurred in households with a below average income. These tend to be workers who were paid on an hourly basis and many of them don't have health insurance. One of the things we will be watching for carefully is whether these are also the people who have been most afflicted by the disease itself.

Speed and intensity also characterise the response to this crisis. But will conventional monetary and fiscal tools work?

Well, I certainly hope that some of them do work. I hope that most of them do work. Although, this crisis has come about much more quickly from an economic standpoint than did the did the financial crisis of 2008-2009. Some of the tools and some of the lessons from a decade ago may be applicable here as well. So, for example the central banks very quickly have pulled out some of the lending facilities that they were struggling to develop 10 years ago.

We are also, here in the United States, fortunate that the regulatory regime for banks, which became much tighter 10 years ago, gives us a more stable banking system now. Although many banks maybe decide or may be told to not distribute dividends or not re-purchase shares, their balance sheets are nevertheless in a good condition. The concerns about balance sheet liquidity instead fall into several other sectors, but fortunately not the banking sector. The one area that we will be watching very closely are the mid and small size businesses - SMEs. The banks that normally serve these kinds of businesses tend to be smaller banks and the regional banks. That's why it's so important that the Federal Reserve has stepped in when it did, to basically say that they provide and stand ready to provide the liquidity that may be needed.

One concern we have looking around the world is whether other banking systems are sufficiently stable to provide the liquidity that might be needed to the non-financial sectors in their nation.

India, being a case in point. On the flip side - the
global economy is going into this crisis in very different circumstances than it did the GFC in 2008. Interest rates are far lower, central bank balance sheets far bigger, global GDP growth far lower... than in 2008. What are the limits to which monetary and fiscal policy can push? Should we prepare for widespread negative rates for instance?

There are obviously already negative rates in a number of countries, especially if you look at those rates adjusted for inflation. I will add somewhat parenthetically that, we don't really know what inflation is right now. So we're not quite sure what those real interest rates are.

But to me, the question is not the cost of capital...it is the availability of the capital.

That's why what central banks have done to this point is so important and also why the fiscal policy initiatives we've seen in some countries are also important - in which the national governments are saying that they will back the lending particularly to small businesses and to individuals.

What we will need to be watching over the course - is the duration of this initial phase or the first cycle of the Covid disease, and whether we can get the economies restarted afterwards. To know this question and the answer to this question will be important and will depend upon good medical testing. If we find, for example, that significant portion of the population in the city or the region are already carrying antibodies to the Coronavirus, we may be able to get varying portions of the economy restarted and that will give us more information about the duration of this very dramatic reduction in economic activity.

That might work on a local or regional basis, but what happens to international trade, international travel? After all, this is a global crisis sans global leadership. Unless of course, you count the Fed as the central banker of last resort.

You raise a very interesting question, and this is somewhat out of my area of expertise. But nevertheless, let me proffer the following. You are correct that this is a global crisis and not just on the economic level but also on the health level. And in our transnational world, the travel for commerce - it's very hard to stop anything at the border; be it the border of a nation or in the case of the United States - a state or a county or a city.

Which is why broader leadership is required. The central banks and other multi-lateral economic institutions may be able to help us coordinate economic policy. But it would be enormously helpful if there would be better coordination of health policy and health data as well. We have not yet seen that. This is quite disappointing, of course.

The implications of this... to jumpstart a somewhat global recovery? Because right now we're seeing Western governments rollout large fiscal programs, but the fiscal response in developing countries has been rather muted. If we don't have global leadership, we might have a very disjointed global recovery. Is that a key concern?

It is very much one of my concerns. If I take it to the local level, looking at the very same factors just within the United States, we do know that the disease does seem to be affecting certain communities in a much harder way. So, if we sample those communities with greater density of living quarters, industries with greater density of working space, and also the availability of good medical care...are all playing a role in the disease spread and severity. If we take that to a global level, clearly, big problems are suspected. And in many of the nations that would be most afflicted, we will have the worst outcome. But we also will have the least amount of testing and knowledge and data. This, I think will impact the global recovery.

If I take a very colloquial view and look at just the United States, many of our most afflicted workers are in the service sector. The service sector is by nation largely local and domestic. So, in the United States we may see a recovery a little sooner than the global recovery. But here again, I think it will be very contingent upon the test readings that shows that a certain percentage of the population has already been exposed and has developed antibodies, and perhaps expected treatments available.

A vaccine I presume is 12 to 18 months into the future. But before that, if we can show that there is already a good deal of herd immunity, in which 60 percent and more and more population has already developed anti bodies, we might be able to go back to work. But, again it assumes that we have data to show that. That the tests are done because without confidence in that by the public, many workers will be reluctant to go back to work and many parents will be reluctant to send their children back to school.

Your view on the impact of this across financial markets. The pandemic crisis has erased more than $18 trillion from the value of global equities year to date, bringing the world’s stock market capitalisation down 20 percent. IIF data shows that outflows from emerging markets are at $62 billion - roughly twice the size of outflows recorded at the peak of the global financial crisis. How will this play out on equity and debt markets in the months to come?

I'm glad that you brought up the question to include debt. In recent years, particularly in the developed economies, there has been a very significant increase in the use of debt capital, as opposed to equity capital and that has had to do with the cost of debt capital, which has been low because of low interest rates. We can measure what's happening in the public equity markets most easily. So that is often the one area that is discussed the most, as opposed to what is happening in the private markets, both in debt and equity.

One of the things that we are watching carefully has got to be valuations. That is a starting point for us. For example, what should a stock or a stock market be priced at and that is relevant not to how much it may have declined in price but rather how is it positioned relative to the prospective earning and the prospective revenue of a particular company or a group of companies.

To be quite honest, we don’t have a good forecast at this point. Please think about the comments that I made a few minutes ago, about not having a forecast for when this economy will truly recover, and the pace at which it will recover. Obviously, there are many people who are trying to estimate that, but there is not as much confidence in those numbers as we would normally have.

The other thing that investors are looking for is a better sense of the progression of the disease itself and the third thing is the path and steps to be taken by governments. This falls into several categories. We’ve discussed monetary policy and fiscal policy. We have not fully discussed health policy. And I think that in many different countries, it will be the combination of confidence in all of these things that will be helpful establish a bottom in markets, both for equity and for debt.

In summary, track equity and debt flows but track health data more importantly. And take it each day as it comes?

We are trying to give our clients visibility on all the different moving pieces. As always, forecasts that we provide for an economy or a market are only best when viewed in a 3 to12 month time horizon.

The opportunity that we are seeing in all markets now, is enormously substantial. Although the VIX is only half, and I say that with some humour - “only half” of what it was, it is still about triple of what it was before the beginning of this health crisis.

And with that sort of volatility, I think only people who are very comfortable trading, and by that I mean professional traders, are looking in the very short term. Most others are well considered to be thinking long term.

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