Expert: This is going to be the sharpest, deepest, and in some sense, telegraphed recession

Great Hill Capital Chairman Thomas Hayes joins Seana Smith on The Ticker to discuss how the coronavirus could impact the U.S. economy moving forward.

Video Transcript

SEANA SMITH: Let's talk about the coronavirus and its impact on employment. We've been talking about this all week. It's no surprise that numerous, millions of people could be out of a job if they aren't already, very soon.

We have restaurants and bars closing. Retail shops are not opening their doors because they don't want to spread the coronavirus. There were two banks out with notes today that really caught our attention. They were from Goldman and from Bank of America.

And they were both warning that we could see two to three million job losses just this week alone. And we have Julia La Roche standing by. And Julia, I know you're digging into this story. And this is quite a dire warning from both Goldman and from Bank of America.

JULIE LA ROCHE: Yeah, that's right, Seana. And keep in mind, the Goldman Sachs know that 2 to 2 and 1/4 million figure came out yesterday. That was Jan Hatzius at Goldman Sachs.

And today, we have Michelle Meyer, the chief economist at Bank of America, who, yesterday, said the US has already been pushed into a recession because of the coronavirus, said that her forecast is for 3 million initial unemployment insurance claims for the week of March 21.

Now, keep in mind, that is-- that report will come out next Thursday. And that's the week that ends this coming Sunday. The initial jobless claims that we saw this week jumped to 281,000 up from 211,000, just a week prior. So if this goes to that level-- you're talking about that 2 million level that Goldman's referencing or the 3 million level-- that would be the highest surge on record for the initial jobless claims report.

Now, Michelle Meyer, she writes in the note that their forecast is based on a compilation of news reports, which show roughly 200-- sorry, 20,000 applications have been filed over 19 states through Wednesday.

So they're extrapolating that data to come up with that 3 million figure that I referenced earlier. And this also comes at a time when we have that "New York Times" report this week, that the Labor Department was discouraging states from making precise jobless figures public ahead of the weekly report.

But yes, as you're referencing earlier, we are seeing a real economic impact, whether it's the foreclosures, the layoffs, the furloughs, whatever you want to call it, hitting industries, one of them hitting the hospitality industry, the restaurant industry, which, keep in mind, as Michelle Meyer notes, a lot of these workers-- they are hand to mouth workers.

And so that has a negative multiplier effect on the broader economy. She also makes some forecasts as it relates to the unemployment rate, that they expect a spike in the unemployment rate to 6% during the second quarter. She also projects that it will peak at 6.3% in the third quarter and hit a monthly peak of 6.4%.

And Bank of America also expects a meaningful reduction in the number of average hourly hours worked, forecasting that it will fall to 33.9 hours in the second quarter, down from 34.4 hours that were recorded in February. So we are continuing to see-- or I guess, we're waiting at this point what the data is going to look like.

But you're talking about real dire forecasts coming out of two very respected firms from two very respected economists. Seana, back to you.

SEANA SMITH: Yeah, Juliana. Those numbers really are staggering. I want to bring in Tom Hayes of Great Hill Capital, a chairman there. And Tom, when we take a look at some of those numbers from Goldman and Bank of America, this record spike in unemployment that we could see-- and we also got some of those predictions for a contraction year in the second quarter, I mean, anywhere between a 10 to 24% contraction. Does this line up with what you're thinking that we could see?

THOMAS HAYES: Well, there's no question this is going to be the sharpest, deepest, and, in some sense, telegraphed recession in the sense of the depth of what's happening here. And you know, when you can't get a grip on the fundamentals, you have to look at other models.

One of the models that I looked at, believe it or not, was the 1917 and 1918 Spanish flu, which was much more dramatic than what we're dealing with now. 3% of the global population died on that, 50 million people.

And what was interesting was it was first known as an epidemic in early 1917. By December 1917, the Dow Jones Industrial Average had crashed 33%. That was the bottom.

The worst part of what became a pandemic was 10 months later in 1918, October 1918. So in other words, the market discounted the worst before it actually happened. And the market had actually recovered m % off of the 33% bounce. By the time you had the worst month, the most deaths were in October 1918.

So we've discounted a tremendous amount of pain. The Dow dropped about 32.5%, peak to trough. We'll see how we close today. And no one-- and I mean absolutely no one can pick the bottom whatsoever.

So the framework in how we're looking at things, Seana, is, if you owned an apartment building that paid you rent for the last 10 years, every single month, 100 unit building, and you knew it was going to pay you for the next 20 years, but for the next one to six months, you may get absolutely no rent whatsoever, would you be willing to sell that at a 50% discount to another investor today? And for most people, the answer is no.

And how we're thinking about it-- again, you can't pick the bottom in the market. But some of the most high quality companies in the market are trading at this type of discount. So for instance, Wells Fargo's down 52% in the last few weeks. It yields 7%.

These dividends might get cut. But do you think Wells Fargo, a year two years, three years out is going to do 52% less business than they did last year? Probably not.

I understand there are other concerns embedded in that pricing. United Technologies is down 56%. These are not speculative companies that, you know, you're playing a growth story. These are companies that have been around for decades and are going to be around for decades to come.

JP Morgan, down 42%, yields 4.3%, best in class. Are they going to do less business two years from now than they did last year, and so on and so forth? Pfizer down 27%, yields 4.7%.

So basically, how we're thinking about it, Seana, is, on red days, down days, we're starting to nibble in building positions in high quality stocks, fully understanding that this can go lower if-- if the case curve gets worse.

But if we're on more of a trajectory like South Korea, China, Singapore, parts of Japan, then, with all the stimulus coming, $1 to $2 trillion of fiscal-- the Fed has increased its balance sheet, by the way. This isn't really being covered.

$950 billion since August, over half of that's come in the last week and a half. So the support is there. The key is going to be the case curve as to when these things play out over time. But we're slowly, judiciously, and cautiously nibbling on selective value on down days.

- Well, speaking of selective values-- so obviously, the health care sector is being severely impacted by this. In fact, recently, the World Health Organization, their officials are saying to not downplay the number of coronavirus cases and deaths because it is overwhelming health care systems across the world. So for investors looking at the health care sector, what's the move?

THOMAS HAYES: Well, that's a tricky question. Again, nothing is absolutely certain because we can't extrapolate perfect information right now. But you know, I think-- like I shared some of the drug stocks-- you know, at Pfizer, for instance, is down 27%. AbbVie is down materially.

So if you look out 12 months, 24 months, are people going to use 30% less medication in 24 months or 36 months than they're using today? And if the answer is probably not, then that might be something that you can start to add.

That's how we're thinking about it. It's not what we're recommending. But that's what we're doing.

DANIEL HOWLEY: Tom, Dan Howley here. I just got a question regarding people's retirement funds. What do you think that they should be doing right now? Now, I know everyone constantly says, OK, the market's obviously tanking.

There's big issues. Don't look at your retirement. Don't freak out. Just ride it out for the long run. But is there any kind of fine tuning that they could do to improve their outcome when all of this, eventually, is over?

THOMAS HAYES: Yeah, that's a great question, Dan. You know, I-- I run a long short equity books. That's not my core competency. But what I will say, I am on the board of a pension commission in town here in Connecticut.

And one of the things that we like to do in these periods of dislocation is rebalance. So that would effectively put you in a position where you're taking profits from what's moved up, which maybe government bonds have moved up, and you're reallocating it back to the percentage that you would-- defined in your strategy, your long term plan, maybe into equities so that you're buying those more inexpensively for the long term.

So you may want to check in with your financial advisor and say, does this make sense to, potentially, rebalance some of the portfolio at this point? You know, if you have a 5, or 10, or 15 year horizon, this is probably just a blip in the road. And you probably want to hang tight. And if you're adding every single month, that's a good thing.

You're buying less expensively for the long term. If you're coming up on retirement much sooner, than, you know, definitely have a conversation with your financial advisor and have some things in safer positions so that you can have access if you need the income in the short term, the next 12, 24 some-odd months.

SEANA SMITH: All right, Tom, Great Hill Capital. Thanks for joining us today.