Citi Private Bank Chief Investment Officer David Bailin joins Yahoo Finance’s On The Move panel to address why reopening businesses slowly will be more efficient for the economy.

Video Transcript

JULIE HYMAN: Let's talk more about the debate about reopening. We're joined by David Bailin. He is Citi Private Bank chief investment officer. David, it is good to see you. I hope you're well.

And as we talk about this reopening, what do you think the markets are pricing in at this point? Because there is a lot of chatter now that perhaps stocks have bottomed.

DAVID BAILIN: Well, if they've bottomed, they did so at S&P 2,100 and change. And now we're at S&P at 2,800 and change.

And so what the market is pricing in now is a very enthusiastic outlook. And what I mean by that is that it's presuming that the markets open up relatively quickly, that the economies, globally and regionally, return to very robust states very quickly, and that we have a relatively short and relatively deep recession that lasts really till the end of this year.

And in many ways, the market which normally looks out six months, in my mind, is actually looking out 18 months. It's actually almost pricing in a vaccine. And the reason I say that is that when you take a look at what's actually going to happen as economies reopen, they're going to have to have testing, including serological testing about people who've got antibodies, they're going to have to be able to record where people are and go so that they can control the disease as the economy reopens, and they're going to have to do that in a coordinated fashion.

So when we put together our economic projections, for example, for this year, we actually presume that unemployment in the United States would go up to almost 25% for a very brief moment. That's unemployed, furloughed, people out of work voluntarily would go up to that kind of number.

We talked about the idea that there would be fewer than 50% of the flights internationally that existed three months ago would exist at the end of December. So when you put together a much more realistic view about what reopening the economy is and you compare that to where stock markets are today, you realize that stock markets are very fully valued.

ADAM SHAPIRO: I am curious, though. You're skeptical about the way in which governments will open their economies and how the market reacts. What you see playing out here between the governors and the Trump administration, are we being set up for a mistake that could cause markets to reaction negatively in a big way?

DAVID BAILIN: Yes. And a quick answer to your question is that we are. And let me give you a good example of that.

So when you look hard at the data, you realize that if you were to leave the lockdowns in place till May 15, as an example, broadly across the country, and maybe even to May 30, then the amount of Americans that would have been exposed to the coronavirus, that actually would have been exposed would be about 5%. That's all that would have been exposed, 5% of 300 million people. The remainder would not have been exposed.

But by leaving the lockdown in place for a long period of time, the number of residual cases that would be available in the United States, live coronavirus cases, would be very small. And therefore, the government's ability to manage those cases would be very high, using testing and monitoring.

If you take the opposite case and you actually reopen the market now sooner, you have more live cases of coronavirus in the population. And you have less or fewer controls available in terms of testing. So that's the tension between the governors and the president. And it sounds like the president wants to reopen the markets sooner, but the risk that's there is considerable. That risk, which is that the disease would return in significant quantities in the United States, is not currently priced into the market at all.

- And David, just looking at the relative winners, I guess you could say, during this time period, whether they're the e-commerce players, the delivery service providers, we've also heard some interesting commentary about whether business travel will be forever changed. How are you anticipating the kind of wins we see right now really lasting? Or do you expect that this is almost a contained sort of environment where conditionally these companies seem to be doing well?

- I got it.

DAVID BAILIN: So I think we have to divide that question into a couple of pieces. If we knew that we had a vaccine for this virus today and we did not have a pandemic, it is very easy for me to see the economy, the global economy, doing very, very well under those circumstances, because the amount of stimulus that's been applied globally today totals $8 trillion. We think it's going to be over $10 trillion when all is said and done. And post the coronavirus, that will be a very healthy environment for business and individuals to operate in.

Prior to that vaccine, I feel the data suggests the opposite, which is that this is going to have to be a very conservative time to manage the health risks that really are going to predominate relative to the economic risks.

The second question that you asked about are winners and losers. Clearly if you were to take a look at e-commerce, that is going to be a winner. It's an accelerant to what's going on. Digital payments will be accelerated. Pretty much everything to do with communication-- communication speed, 5G, anything to work from home, flexible work, all will be accelerated.

There will be accelerated destruction as well. And that destruction will take place in areas like retailing. And I'm not just talking about big box retailing. I'm talking about medium-sized and Main Street retailing, because there isn't going to be capital or the desire to reopen a lot of the stores that are going to shutter due to the coronavirus and the absence of capital, even with government programs. Restaurants will be the same-- a lot of openings and closings.

One of the big concerns, for example, we have right now is about bankruptcies. What if the government was to be hit with several million bankruptcies across all the states of companies that want to reorganize or liquidate? We clearly don't have the capacity to deal with that right now.

So this interim period of time has an enormous amount of friction associated with it. But what the market is saying is it's a finite period of time. And when you look beyond that finite period of time, there's reason to be optimistic. And I think those are the dichotomies of what we're dealing with.

And that's what this is. It's an exogenous shock. It is not an intrinsic recession. And so it is very different than what we're typically used to, certainly any time over the last-- since World War II.

JULIE HYMAN: David, I want to ask you about that friction amongst your clients in particular, because you're in charge of setting investment strategy for private bank clients. In other words, high net worth clients. We have heard a lot of reporting about how this pandemic has been affecting the most economically vulnerable in this country the most.

But I am curious about the cushion of more wealthy individuals, because they own businesses, too, that are being affected. And so if there's any insight you can give us into sort of what they are experiencing right now I think would be helpful for folks.

DAVID BAILIN: A lot of Citi Private Bank clients are entrepreneurs and own very substantial businesses and are very much impacted by all of the things that you've been talking about now for a couple of months. They have the same issues with their employees-- employee health, the ability to operate their businesses under these environments. Many of them are in businesses that are fundamental-- delivery of food, manufacturing of food, delivery of communication services, all sorts of industries that mirror the economy that we have here.

And our clients are global. So some of them actually don't even benefit from some of the discussion and safeguards that we take for granted here in the United States. The robust discussion that's going on here is not taking place all around the world.

So as clients, they're very much in the same boat that we are. And one of the things that I can tell you is that the fact that the US passed the bill that it did, the fact that the US has the Fed doing what it's doing is extremely different and supportive relative to what would be going on in many Latin American countries, and certainly in some countries in South Asia, as an example. So it really depends upon where you are.

When I separate that into the investment side of the business, most of the wealthy clients have core portfolios. And I would hope all of us would have a core portfolio. And one of the great things about going through this crisis with them as opposed to 2008 is that they've learned that you don't touch that core portfolio. You leave it. You keep it invested. And you add to portfolios when difficulties happen. And we've seen that happen substantially in many ways over the course of the last several months.

Interestingly, I would argue that retail investors have similarly become more savvy, because if you think about how fast the market went down through the middle of March, you would have expected to see capitulation, even further declines. And yet, you've seen an enormous snapback in markets. So obviously, retail investors have actually taken to heart the idea of buying on dips.

What makes this an unusual dip is that there is a possibility of bad outcomes, that the market is not pricing in there, which would be the resurgence of this disease anywhere in the world, in Asia, in Europe, United States, Latin America.

And you're already seeing in Singapore the need for much more aggressive steps in order to manage their post-COVID economy. They have a large outbreak right now and are taking very significant steps to reduce restaurants and store hours and things like that in Singapore right now.

So I think there's a lot of complexity out there. For the average investor, the key thing is the quality of the portfolio. And the kind of properties that do well in these environments are those that have strong balance sheets, that have the ability to generate revenue across the cycle, and ultimately will take advantage of the fact that when we recover, they'll be in as good or a better competitive position. Now, I think you can identify those.

DAN ROBERTS: Hey, David. Dan Roberts here. Thanks for joining us.

Speaking of complexity, let's end on this briefly. I want to make sure we ask you about the PPP program. The SBA, the Small Business Administration, has said just an hour ago that we are already at about $250 billion of the $349 billion that has been allotted being approved or dedicated to loans. Now, the SBA hasn't shared numbers on disbursement, how much of that money has actually been sent out.

I've been working a story this morning about that. And the people I've spoken to who have actually received their PPP funds went through smaller banks. There's obviously been a lot of coverage and criticism of the big banks, including you guys, for the difficulties and tech problems with getting the system up and running. So while we have you, I'd ask what you can say about Citi's participation in the PPP program, whether the system is up for Citi, any stats you could share, or to what extent Citi has approved a number of these small business loans and sent any out.

DAVID BAILIN: So as chief investment officer, I get the brilliant ability to tell you that I don't know the answer to some of your questions. I do know that as of last week, as of last Thursday, all of the systems were up and running and highly functional within the bank. And I know that they've been processing thousands and thousands of loans. I know that that's true for our competitors.

Our goal in all of this is to facilitate the processing of these goals. It's to deliver our best capabilities on the part of the government programs. That's why having a strong bank and a major strong banking system is so important. And that's why having healthy banks is so important.

So my view is that what Citi is doing is all that it can. I'm watching our competitors the same. I think that if I was advising you, I would ask the question a week from today, which is, how many loans have been processed? How many loans have been funded? How many come from large banks? And I think what you'll find overwhelmingly is that when we're out a week from now, that the large banks will have done their job because of their large footprints.

So I can't speak to what's going on today, but I can tell you that I know that as of last week and late last week, we were in full processing mode across the entire bank.

JULIE HYMAN: David, be well. It's good to see you. Thank you for your perspective.

David Bailin, chief investment officer at Citi Private Bank.