Stocks end near session highs after Friday's big selloff

Steven Blitz, TS Lombard Chief U.S. Economist, joined Yahoo Finance to break down the latest in the markets.

Video Transcript

MYLES UDLAND: We're joined now by Steven Blitz. He's the Chief US Economist at TS Lombard. Steven, thanks for calling in today. Let's just start, I guess, with how you see the state of play right now with respect to what the Fed has done and what the Fed hopes their actions will ultimately result in in terms of stabilizing and backstopping a lot of economic growth that right now has essentially just evaporated and likely won't come back for at least another month or more.

STEVEN BLITZ: Right. So I think the way to think about what the Fed's done is three-fold. And the main part of what they've done is really to ensure that there is liquidity in the marketplace. And that's more than simply buying all the treasuries and mortgages necessary to make sure there is a two-way market. It's extended into the corporate bond market. It's extended into ETFs, which is a easier way and a more efficient way for them to get into the corporate bond market. And in doing so, they are preventing, in effect, a problem that occurred in 2008, which was that you couldn't find value in securities, basically, that's on mortgage securities, and that just cascaded into a problem with securities not being able to be used as collateral, calls made, you've got a Bear Stearns and then you've got a Lehman.

So they're trying to keep everything in place by making sure there's liquid markets, issues of pricing. There's obviously a few holes in there. CMBS is obvious. Commercial mortgage backed securities is one that comes to mind. Government needs to think about mortgage servicers, because they're way under collateralized for what they're doing. So there are a few holes here and there. So that's job one.

Job two is something that's very different for the Fed, and something they really did not do during the last recovery-- or sorry, last recession, and it's being backed by treasury and that section 13.3, which allows them to set up these special purpose vehicles to direct lend to financial and non-financial entities. It's money that the equity is seeded by treasury, treasury takes the first 10% loss, and that basically allows the Fed using its balance sheet to blow that up at 10 to 1 leverage. So that's why people are saying with this passage of the Care Act $3,740 billion, whatever it is, it goes to lending can run through these SPVs at the Fed and turn it to $4 trillion of lending. Now, the guess is obviously the Treasury, as opposed to the Fed, will be the one directing that.

But all of this is really to prevent what's going on from cascading into and growing into a bigger problem than try to reduce the secondary and tertiary effects, like cascading defaults and things like that. None of this is stimulus in the sense that, oh, it's going to get people out spending and working.

ANDREW SERWER: Hey Steven, let me ask you about employment, because we had that stunning 3.82 million number last week. And we're going to get something again on Thursday, and everyone says it's going to be higher. I mean, some people are talking about 6 million. That's the high end. But it looks like, at the very least, it's going to be slightly more. What's your take, and how worrisome is that?

STEVEN BLITZ: Well, this is a very unusual recession, but-- from all respects. But thinking about it from a number standpoint, so we got our continuous claims in the last recession up to around I think around six and a half million people collecting unemployment insurance. But that took maybe a year to get there, OK? You're getting there immediately. So the shocking aspect of this, which isn't really a surprise considering how everything just shut down, is that you're getting to this high unemployment number immediately.

And so yeah, you'll probably get another 3 and 1/2 million, and it might end up being more. So you know, you got to judge it against the six and a half million and recognize that you're telescoping this time period over which unemployment tends to grow over time before it starts to shrink, and it's all occurring, essentially, in what seems like a 10 day period of time.

RICK NEWMAN: Steven, hey. Rick Newman here. So we have news today about furloughed workers at Macy's and Kohl's, most of the workforce there. This feels like a race against time. Like these stores are going to have to reopen by, who knows, May or these jobs are just going to be lost forever and these companies may go under. What's your sense of when furloughs actually become permanent job losses, and what are some of the triggers that will tell you we're getting there?

STEVEN BLITZ: Well, I think the key-- I think, first of all, you hit the nail right on the head in terms of what it is that this whole Care Act is about, what the Fed lending is about, which is really just to hold the worker and the firms, to hold them in, to have lending to keep them afloat until things reopen. And I would say, if we don't start seeing a reopening of the economy in May, some of this is really going to become increasingly problematic, which is a polite way of saying a lot of bigger companies are not going to reopen. We already can sense that the small, or a lot of these small local stores, restaurants, bars, service businesses are just not going to reopen. And that's-- and that already is one of the reasons why I think that people-- I think there is a sense in the marketplace, I think there's a sense among analysts, at least when I hear them on television, that, well, this is just a shut down and then it opens back up, and within a few months, we're basically back where we were beforehand and nothing's changed.

No, everything's changed. So this is a recession. However it started, it started.

The economy's not going to be down 30% this quarter, in the second quarter, and then up 30% in the third quarter. It's not going to be that quick. There's going to be a long lag in terms of behavioral changes to the point that you're making about an overhang in unemployment. So this thing is going to be a slow turn back. And I don't think people or the markets have really fully accepted yet that what's to come is not a return to what's been.

MYLES UDLAND: All right. Steven Blitz, Chief US economist at TS Lombard. Really appreciate the time. We'll talk to you soon.

STEVEN BLITZ: Sure. Thank you very much.