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Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.

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Speaker 1: Along with my co host Lisa A. Bramowitz. Each day

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Speaker 1: we bring you the most important, noteworthy, and useful interviews

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Speaker 1: for you and your money, whether you're at the grocery

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Speaker 1: store or the trading floor. Find the Bloomberg p m

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Speaker 1: L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com.

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Speaker 1: You know that you have. Treasury had issued a statement

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Speaker 1: yesterday saying that if the Federal Reserve ceases to reinvest

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Speaker 1: some or all of its maturing Treasury securities, Treasury would

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Speaker 1: likely need to increase the amount of borrowing from the public,

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Speaker 1: and under the planned officials would increase both Treasury bill

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Speaker 1: and Treasury nominal coupon auction sizes. Here to tell us

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Speaker 1: more about this potential process is Chris Whalen. He is

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Speaker 1: the chairman of Whalen Global Advisors, and he is the

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Speaker 1: author of a new book entitled Ford Men From Inspiration

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Speaker 1: to Enterprise. Chris Whalen, thank you for being with us.

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Speaker 1: Maybe just comment on what the Treasury Secretary with the

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Speaker 1: Treasury Department rather is putting out in a statement that

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Speaker 1: they're just going to have to increase borrowing in order

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Speaker 1: to make up for the runoff that or the lack

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Speaker 1: of buying from the federals arve. Well, of course, pim M,

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Speaker 1: thank you for having me on. By the way, the

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Speaker 1: government has been subsidized by the FED. That's been the

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Speaker 1: primary you know, benefit of quantitative easing and all the

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Speaker 1: rest of this. It hasn't really helped the private economy.

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Speaker 1: It's been mostly a subsidy program for indented governments. So absolutely,

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Speaker 1: if the FED is no longer buying uh, treasuries, if

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Speaker 1: they're no longer buying all of the agency issuance in

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Speaker 1: the mortgage market, which they are today, Uh, then yeah,

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Speaker 1: obviously the markets would have to support that issuance. You know, Chris,

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Speaker 1: it seems like we don't hear that much about the

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Speaker 1: relationship or discussions between the Treasury Department and the Federal Reserve,

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Speaker 1: I mean, how much they're coordinating or not. I mean,

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Speaker 1: because as you were saying, the Fed's bomb buying program

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Speaker 1: certainly acted as a support to valuations and suppress borrowing

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Speaker 1: costs for the US government. Now though not only is

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Speaker 1: the is the FED considering allowing its balance sheet to

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Speaker 1: run off, but the Treasury came out today with a

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Speaker 1: statement saying that they are seriously considering longer dated, ultralong

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Speaker 1: dated treasuries, possibly selling fifty or one hundred year bonds.

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Speaker 1: I mean, do you think that there's an increasing tension

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Speaker 1: between these two agencies? No, no, absolutely not, because the

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Speaker 1: Fed is the alter ego of the Treasury. This is

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Speaker 1: why it's not allowed to do business directly with the Treasury.

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Speaker 1: When they buy and sell debt, they have to go

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Speaker 1: through a dealer because otherwise it would be the snake

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Speaker 1: eating its tail. Right, Um, the FED doesn't make money.

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Speaker 1: They only incur expenses. So whatever they earn off their

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Speaker 1: portfolio in terms of interest, right, they subtract or operating

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Speaker 1: expenses and they remit that back to the Treasury is

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Speaker 1: essentially their forgiving that debt. So Congress pretends that this

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Speaker 1: is income, but it's really not. It's it's simply another phase,

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Speaker 1: like a Hindu god, of of our government, one being

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Speaker 1: the Treasury, the other being the Federal Reserve system. But

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Speaker 1: they are back to back there one entity that the

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Speaker 1: in economic terms, and you know who's written beautifully about

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Speaker 1: this is a good friend Bobby's andvice than a Cumberland advisers,

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Speaker 1: you know, he worked at the Atlanta FED. He knows

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Speaker 1: this subject cold and when people talk about the FED

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Speaker 1: making money, he just laughs because they clearly don't understand

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Speaker 1: the relationship. Chris, one of the things that I know

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Speaker 1: that my colleague Lisa has Lisa Brahmas has been following

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Speaker 1: has been the increase in charge in charge offs for

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Speaker 1: subprime automobile loans and also the increase in provisions that

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Speaker 1: such as Capital One have had to put aside in

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Speaker 1: order to well with and that has to do also

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Speaker 1: now with credit, with revolving credit or credit card loans.

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Speaker 1: I'm wondering if you could speak to that issue. Do

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Speaker 1: you see this as part of a largest cycle trend. Yes,

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Speaker 1: Credit costs generally bottomed out in two thousand fourteen or

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Speaker 1: early two thousand fifteen, So both for bondholders PIM and

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Speaker 1: for banks, the cost of credit is going up. We

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Speaker 1: had again a FED induced boom in consumer credit UH

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Speaker 1: and also another asset classes and so now we're going

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Speaker 1: to see the result of that. Whenever you have a

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Speaker 1: period of really low rates, when the central banks are

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Speaker 1: out trying to make things easy for debt ors, you

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Speaker 1: hide the cost of credit, and when you pull back

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Speaker 1: on that and you try to normalize the market, you

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Speaker 1: start to see the costs in terms of the faults,

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Speaker 1: and certainly in autos you're going to see that. So, Chris,

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Speaker 1: when I talk to analysts about this particul uller increase

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Speaker 1: in consumer charge offs, uh, they all say, this does

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Speaker 1: not appear to be a systemic risk at this point. Um, First,

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Speaker 1: do you agree with that? But second, if it's not,

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Speaker 1: are there specific companies that you're watching that could suffer

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Speaker 1: disproportionately from this deterioration in consumer credit. Well, the companies

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Speaker 1: who are really on the front lines with autos or

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Speaker 1: the private less source. These are companies that would buy

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Speaker 1: cars from the automakers and turn around at least them,

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Speaker 1: but they own the residual risk. In other words, if

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Speaker 1: that car is not worth dollars when it comes back

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Speaker 1: on the lease and they have to sell it for

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Speaker 1: eight team, they lose to grant. So the smaller players

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Speaker 1: who have done the below prime lending, they're pulling back.

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Speaker 1: They saw the losses go up and they're starting to

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Speaker 1: take less risk. This means that General Motors Forward all

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Speaker 1: the rest of them can sell fewer cars because there's

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Speaker 1: less credit in the system. That support the inventory. Right.

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Speaker 1: So the real issue to me is the banks are

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Speaker 1: going to get more careful. Clearly, bond holders are also

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Speaker 1: unnoticed now and they're going to demand better terms, higher

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Speaker 1: coupons and you know, in consideration for the losses. But

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Speaker 1: they're the non banks, I think, the smaller players who

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Speaker 1: have predominated in the subprime sector. They're going to pull

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Speaker 1: back a lot, the auto nations and the rest of

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Speaker 1: them because they just can't sit there and take losses

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Speaker 1: every quarter. They're gonna try and adjust supply it demand

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Speaker 1: and as you see the the retail pricing for used

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Speaker 1: cars is reflecting this. It's you know, there's too much

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Speaker 1: product out there. And as they say, you know, we

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Speaker 1: got back to record levels over five years thanks to uh,

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Speaker 1: you know, thanks to the FED, and they it helped

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Speaker 1: save the automakers. If they don't run at least seventy utilization,

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Speaker 1: they're not making money. You know, it's costing them cash.

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Speaker 1: So the whole system was driven by credit. And again,

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Speaker 1: you know, there are many bubbles and this is just

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Speaker 1: one of them. And the who's the Fed desperately trying

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Speaker 1: to make something happen. But you know, the economy, population

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Speaker 1: growth is half flat. Yeah. Chris Whalen, thank you so

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Speaker 1: much for joining us. Chris Whale and as chairman of

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Speaker 1: Whale Global Advisors in New York. He is also the

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Speaker 1: author of a new book Ford Men, From Inspiration to Enterprise. So,

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Speaker 1: as we keep talking about Puerto Rico is moving to

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Speaker 1: restructure it's seventy billion dollars of debt in a bankruptcy

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Speaker 1: like proceeding that will happen in the US. To get

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Speaker 1: more details on how this may proceed, let's bring in

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Speaker 1: Michelle Caski, who covers all things Puerto Rico for us

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Speaker 1: here at Bloomberg News. And Michelle, can you give us

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Speaker 1: a little bit of a sense of how expected or

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Speaker 1: not this pretty rapid move to a Title three restructuring happened.

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Speaker 1: It does seem very rapid, although um, they've been negotiating

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Speaker 1: for a while with creditors, it wasn't getting anywhere, you know,

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Speaker 1: some At some moments it looked like maybe, um, something

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Speaker 1: would happen m or that they were actually making some progress.

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Speaker 1: But unfortunately, um, they just they didn't reach that common ground.

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Speaker 1: And the governor to today announced that the Federal Control

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Speaker 1: Board would file. He requested that they would file and

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Speaker 1: we just have UM just a few moments ago, UM,

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Speaker 1: it was filed in court. Well, and I'm looking at

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Speaker 1: the letter that Governor Ricardo Rossello UH filed and he

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Speaker 1: actually highlighted the stay, the fact that UH, Puerto Rico's

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Speaker 1: immunity to lawsuits was lifted earlier this week and that

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Speaker 1: that expiration was really what pushed them into having to

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Speaker 1: file for this forrastructure. Definitely, without that legal stay, UM,

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Speaker 1: then Puerto Rico faces UM lawsuits from creditor seeking repayment

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Speaker 1: considering that Puerto Rico has not been paying on its

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Speaker 1: debts and UM there's also existing lawsuits out there that

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Speaker 1: could move forward. So in order to get additional protection

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Speaker 1: from UM new and existing lawsuits, Title three does offer

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Speaker 1: Puerto Rico. That what does Title three offer the people

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Speaker 1: of Puerto Rico, Well, like you have mentioned, it does

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Speaker 1: offer them a more orderly process to restructure the the

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Speaker 1: seventy billion that they want to reduce and UM, and again,

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Speaker 1: the the creditor lawsuits are suspended UM during a Title three.

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Speaker 1: So let's talk about the legal bills because I know

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Speaker 1: that you reported several years ago that the bills at

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Speaker 1: that point for Puerto Rico were already in the excess

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Speaker 1: of sixty million dollars. That was just a beginning salvo,

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Speaker 1: and I'm sure that they have only continued to mount.

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Speaker 1: Does it mean that Puerto Rico will have to pay

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Speaker 1: less in legal fees if there is a restructuring that's

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Speaker 1: in a more orderly bankruptcy type of way, or is

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Speaker 1: that not part of this picture? Well? I think either

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Speaker 1: way with or without a title three, Um, Puerto Rico, UM,

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Speaker 1: you know, needs to pay their lawyers, and they will

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Speaker 1: be they will be um needing this outside legal help.

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Speaker 1: And it's going to be very costly. All right, it's

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Speaker 1: gonna be we know this is gonna be very very costly.

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Speaker 1: It already is very very costly. Will this allow the

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Speaker 1: Puerto Rican I was trying to get it with the people.

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Speaker 1: Will this allow the Puerto Rican commonwealth to focus on

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Speaker 1: fixing the economy, which then will supposedly create revenue, tax

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Speaker 1: revenue that will be able to support the commonwealth, because

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Speaker 1: otherwise this is like a uh you know there, it's

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Speaker 1: like a double track reality. You've got one group over

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Speaker 1: here and then you've got the people who are actually

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Speaker 1: living the problems of Puerto Rico on the other side. No, definitely,

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Speaker 1: I mean that is that that is their Their biggest

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Speaker 1: challenge right now is to get economic activity going again

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Speaker 1: on the island. They need that and hopefully the you know,

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Speaker 1: the court will see that as well. And um, have

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Speaker 1: they enacted anything. I mean, for example, one of the

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Speaker 1: reasons that Puerto Rico is in such dire straits as

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Speaker 1: the federal government granted a triple tax free UH status

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Speaker 1: for municipal bond investors. Plus they gave huge tax breaks

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Speaker 1: to the pharmaceutical industry to manufacture their products there. Sure,

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Speaker 1: I mean the new governor, I mean, his plan is

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Speaker 1: he wants to increase tourism on the island. He wants

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Speaker 1: to um have the private sector more involved in in

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Speaker 1: hiring and and taking over some, um, some of the

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Speaker 1: programs that the central government has been doing. He definitely

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Speaker 1: wants to increase job creation in the private sector and

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Speaker 1: to reduce the government's pay payroll. Michelle, I'm not seeing

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Speaker 1: much of reaction in Puerto Rico bonds. Why is that? Well, remember,

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Speaker 1: the news just came out. The headlines first came out

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Speaker 1: at about ten forty and so it's only been about

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Speaker 1: an hour and we don't typically see as much active

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Speaker 1: trading in municipal bonds as you would see in for instance,

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Speaker 1: the stock market. Um so, but we will see some

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Speaker 1: some trading today and um in the past couple of days, actually,

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Speaker 1: Puerto Rico bonds have been trading up in price. And

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Speaker 1: what I've been hearing from people as they believe that's

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Speaker 1: because of the medicaid money that the island did receive

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Speaker 1: from from Congress. I just want to say, just breaking

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Speaker 1: across the bloomberg that assured Guarantee and MBI a drop

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Speaker 1: their legal cases against Puerto Rico after this latest filing.

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Speaker 1: So it seems like, uh, this is moving toward the

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Speaker 1: direction a lot of people thought was inevitable. Right, the

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Speaker 1: game of chicken maybe actually over by now. How long

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Speaker 1: is this going to take? Michelle? Oh gosh, I mean

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Speaker 1: today the governor was saying that it could take years. Um,

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Speaker 1: you know it. It all depends on how in what

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Speaker 1: a judge can do. Can you bring everybody together? Um?

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Speaker 1: And he or she can can that pon that judge

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Speaker 1: you so much, Michelle Casky. Yeah, I was just gonna

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Speaker 1: it into perspective, the unemployment rate for Puerto Rico is

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Speaker 1: over eleven and a half percent. Just to get that

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Speaker 1: information out there a lot of problems. Yeah, Michelle Casky

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Speaker 1: is our Puerto Rico reporter for can be doing this

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Speaker 1: for a long time. It's not going to be over.

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Speaker 1: But there's so much money at stake, and as you

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Speaker 1: keep pointing out, and rightly so, Paim, there are a

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Speaker 1: lot of people at stake as well. Well. You have

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Speaker 1: people at universities who wonder whether they're gonna be able

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Speaker 1: to get a job when they graduate. We want to

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Speaker 1: take a moment to let you know about something new

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Speaker 1: Bloomberg dot com. Slash lens. What do Filipino President Rodrigo

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Speaker 1: Dutarte have in common with egypt General Abdela l c

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Speaker 1: C and Turkey's President Richie Urigon. Well, here to tell

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Speaker 1: us is Eli Lake. Eli Lake is a columnist for

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Speaker 1: Bloomberg View. He can be followed on Twitter at Eli

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Speaker 1: Lake and Eli Go ahead, tell us what do these

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Speaker 1: three world leaders have in common? Well, they've all been

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Speaker 1: courted by President Trump. Uh. In slightly over the top

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Speaker 1: rhetoric for an American president. Um. You know, in the

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Speaker 1: case of Duterte, you've got somebody who who's boasted about

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Speaker 1: um an absolutely vicious campaign against his nation's drug dealers. Um,

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Speaker 1: and has basically admitted that this sort of vigilante campaign

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Speaker 1: its results in the extradicial, extra judicial killings of drug dealers. Um.

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Speaker 1: You know, he has widely seen as a sort of

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Speaker 1: scoge from the world stage. And yet in the phone

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Speaker 1: call over the weekend, Trump invited him to the White House. UM.

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Speaker 1: You know. In in the case of Urdawan, the president

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Speaker 1: of Turkey, you know, he has been driving Turkey into autocracy. Uh,

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Speaker 1: you know, over a period of several years now. But

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Speaker 1: last month there was a referendum that consolidated his power

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Speaker 1: and could keep him in office until, you know, for

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Speaker 1: the next dozen years. Uh. This was widely condemned by

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Speaker 1: people who care about Turkey's democracy, and Trump called up

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Speaker 1: after the referendum results came in to congratulate him. Um,

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Speaker 1: so all of this sort of an example of how

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Speaker 1: he has buttered up these authoritarians. Yeah, Eli, you wrote

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Speaker 1: a column. I love the title, Trump decides to make

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Speaker 1: it springtime for despots. Uh, you know, talking about all

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Speaker 1: of these overtures too widely feared and frankly reviled, certainly

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Speaker 1: by human rights organizations leaders but who have sort of

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Speaker 1: autocratic rule. That said, in this column, you point out

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Speaker 1: that it does not appear that there is necessarily a

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Speaker 1: strategy behind these overtures by President Trump. And you know,

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Speaker 1: can we just chalk this up to shock value and

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Speaker 1: you know, headlines that are going to get a lot

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Speaker 1: of clicks. Well, there may be there may be strategies

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Speaker 1: that say, um, you know, in the case of dot

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Speaker 1: really bad guy, very repressive for danger to the Philippines.

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Speaker 1: But somebody who under the last year of Obama really

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Speaker 1: did threaten to come out of the US Alliance orbit

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Speaker 1: and into China's embrace that would be very bad for

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Speaker 1: US strategically. Um, you know, you could argue that Trump

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Speaker 1: is trying to sort of woo him back in this

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Speaker 1: fairly unconventional way. What I would say is that you

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Speaker 1: basically forget our values and our principles as a as

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Speaker 1: a as a liberal democracy in order to work practically

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Speaker 1: with countries like the Philippines when they have less than

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Speaker 1: ideal leaders. And it's Trump's style to sort of be

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Speaker 1: over the top in both directions. When he really doesn't

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Speaker 1: like something, he uses hyperbolic rhetoric in one direction. When

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Speaker 1: he decides he likes somebody, he used a hyperbolic language

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Speaker 1: in the other direction. We're all kind of getting used

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Speaker 1: to that, um you know, more than a hundred days

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Speaker 1: in now. But at the same time, it is a

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Speaker 1: troubling trend, and I thought it was important to sort

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Speaker 1: of highlight it. Eli, would you have any idea why

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Speaker 1: he castigates the allies of the United States, such as Canada, Mexico, Germany,

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Speaker 1: even NATO. Well, you know, it's a little bit of

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Speaker 1: a mixed bag. I have also heard that Trump does

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Speaker 1: talk a lot with justin Trudeau. He has a lot

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Speaker 1: of communications with Theresa May of the United Kingdom, and

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Speaker 1: even recently he's had, you know, a few phone calls

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Speaker 1: with angel Angelo Merkel, who he showed up when she

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Speaker 1: visited early in his presidency, wouldn't shake her hand. Um.

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Speaker 1: But I think you know, this gets back to some

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Speaker 1: of his you know, longstanding uh campaign Radican worldview. Um.

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Speaker 1: And this is something that he's been talking about for

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Speaker 1: like twenty thirty years, which is that he deals with

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Speaker 1: the United States kits uh screwed on trade fields. And

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Speaker 1: so this is something that's really the top of his

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Speaker 1: mind in a way that we haven't seen in recent

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Speaker 1: modern presidents, where you know, the idea that we would

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Speaker 1: have these free trade deals was not debated really between

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Speaker 1: the two major parties, with the exception of maybe Ross

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Speaker 1: Perrot and NAFTA. But he was member an independent candidate. Well,

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Speaker 1: Trump's the president now, and this is he he represents

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Speaker 1: the world view we associate with guys like pack you

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Speaker 1: cat and and others. Let's say, um, you know, um,

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Speaker 1: the global economy hurts a lot of Americans and we

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Speaker 1: just about that. Well, Eli, when you talk with people

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Speaker 1: in Washington off the record, do you hear more support

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Speaker 1: for alliances with some of these UH countries that have

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Speaker 1: been otherwise shut out by virtue of their being good

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Speaker 1: trade partners regardless of their humanitarian policies. It depends. I mean,

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Speaker 1: what's interesting here is that UM a lot of Democrats

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Speaker 1: and liberals really jumped on the decarc comments in Urdawan

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Speaker 1: UM from Trump. But you know, if you go back

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Speaker 1: ten years, the major criticism of George W. Bush was

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Speaker 1: that he was too much of an idealistic ideologue when

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Speaker 1: it came to the U S. Roland spreading democracies, and

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Speaker 1: this is one of the impulses that got us into

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Speaker 1: the Iraq War. So we've seen such a dramatic shift

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Speaker 1: in the Republican Party in a decade on this that

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Speaker 1: I think a lot of people do have whiplash. I

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Speaker 1: would say that the Trump approach where it seems like,

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Speaker 1: you know, it doesn't even factor in his public comments

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Speaker 1: at times, although I was told by my gla On,

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Speaker 1: the spokesman for the National Security Council, that he does

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Speaker 1: bring up human rights issues in private with some of

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Speaker 1: these leaders, like the Egyptian General l cc um. But

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Speaker 1: in that in that respect, I think that we're sort

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Speaker 1: of still looking for a bit of a middle ground.

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Speaker 1: And what we've seen is that even in the first

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Speaker 1: hundred days, Trump has shown that he's willing to evolve

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Speaker 1: his position. Just look at what he's done on China

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Speaker 1: and Russia. Um, he's pretty much flip flop those countries

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Speaker 1: in his mind in some ways. Um. So there is

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Speaker 1: a chance, I think where you could sort of see

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Speaker 1: some of this rhetoric maybe calm down. But I think

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Speaker 1: the other real prospect theories that we just have to

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Speaker 1: adjust for the fact that we have a president who

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Speaker 1: pops off, says what's on his mind doesn't always go

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Speaker 1: here with our far with the rest of his government's

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Speaker 1: foreign policy. But you know we're gonna have to adjust

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Speaker 1: for that. Well, well, thanks for helping us adjust to it.

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Speaker 1: Eli la is a Bloomberg View contributor. Remember to read

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Speaker 1: his most recent column, Trump decides to make it springtime

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Speaker 1: for Despots. That's on Bloomberg View dot com. Thanks for

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Speaker 1: listening to the Bloomberg P and L podcast. You can

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Speaker 1: subscribe and listen to interviews at Apple Podcasts, SoundCloud, or

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Speaker 1: whatever podcast platform you prefer. I'm pim Fox. I'm on

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Speaker 1: Twitter at pim Fox. I'm on Twitter at Lisa Abramo.

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Speaker 1: It's one before the podcast. You can always catch us

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Speaker 1: worldwide on Bloomberg Radio