WEBVTT - US Trade Threats To China Are More Bark Than Bite: McDonough Samara Lenga 0:00:05.920 --> 0:00:08.840 Welcome to the Bloomberg P and L Podcast. I'm Pim Fox. 0:00:08.880 --> 0:00:11.640 Along with my co host Lisa Brabowitz. Each day we 0:00:11.720 --> 0:00:15.240 bring you the most important, noteworthy, and useful interviews for 0:00:15.320 --> 0:00:17.920 you and your money, whether you're at the grocery store 0:00:18.079 --> 0:00:20.840 or the trading floor. Find the Bloomberg P M L 0:00:20.960 --> 0:00:34.479 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Fears 0:00:34.560 --> 0:00:37.640 of a trade war between the US and China have 0:00:38.479 --> 0:00:41.680 subsided a bit. Here with US is Mike McDonough, chief 0:00:41.720 --> 0:00:46.760 economist for financial Products at Bloomberg. Mike, I want to 0:00:46.840 --> 0:00:50.720 start with the news that the Trump administration is urging 0:00:50.840 --> 0:00:54.720 China to lower tariffs on cars and open its markets 0:00:54.800 --> 0:00:58.280 to you as financial services. This this comes as part 0:00:58.320 --> 0:01:01.440 of talks to resolve uh, the rise in trade tensions. 0:01:01.680 --> 0:01:03.120 What do you make of this? I mean, how much 0:01:03.160 --> 0:01:06.640 credence can we put in some of these measures coming 0:01:06.640 --> 0:01:09.800 to pass? Uh? You know, I think that there there 0:01:10.000 --> 0:01:14.319 is a willingness from China to um implement some of 0:01:14.360 --> 0:01:16.520 these changes. But I think the timeline that may be 0:01:16.600 --> 0:01:19.440 President Trump has in mind and the timeline that China 0:01:19.480 --> 0:01:21.320 may have in line maybe where you have a difference. 0:01:21.360 --> 0:01:23.240 But that doesn't mean there can't be some sort of 0:01:23.319 --> 0:01:26.080 compromise in some of these areas. You know, it's an 0:01:26.120 --> 0:01:30.080 interesting Trade in China is an interesting topic because it's 0:01:30.200 --> 0:01:33.360 one area where a lot of leaders around the world 0:01:33.760 --> 0:01:37.480 may actually agree with President Trump. Uh. And when you 0:01:37.480 --> 0:01:39.480 you look at this situation, the problem is it looks 0:01:39.480 --> 0:01:43.000 like President Trump really wants some sort of short term 0:01:43.360 --> 0:01:46.679 gain that he could show. Look, I did this victory victory, 0:01:46.760 --> 0:01:49.840 a very short term victory, which this is kind of 0:01:49.840 --> 0:01:52.000 the damaging aspect of it. Right, nobody's going to win 0:01:52.040 --> 0:01:54.040 from a trade war. The especially the US will get 0:01:54.120 --> 0:01:57.120 hit especially hard if there were a trade war. But 0:01:57.560 --> 0:02:00.480 you know, we're missing this opportunity to have a sort 0:02:00.520 --> 0:02:03.400 of multilateral approach where we joined together with a lot 0:02:03.400 --> 0:02:06.080 of the other countries that China's trading with and and 0:02:06.160 --> 0:02:08.320 go through the w t O or more traditional mether 0:02:08.800 --> 0:02:13.760 um uh channels. Uh. And it's that that's someone unfortunate. 0:02:13.840 --> 0:02:16.240 But I do think there could be some short term 0:02:16.320 --> 0:02:21.840 compromise on certain things. So, Mike, I'm looking at equity 0:02:21.919 --> 0:02:25.640 markets today, Dow Jones off its earlier highs, but still 0:02:25.720 --> 0:02:28.480 up about one and a half percent, and you could 0:02:28.520 --> 0:02:33.040 see a green across the screen throughout the US indices. UM. 0:02:33.160 --> 0:02:36.000 People could attribute various reasons for this, but one of 0:02:36.040 --> 0:02:38.520 them could be that these that the potential for a 0:02:38.600 --> 0:02:42.079 trade war has gone down, right, that that there has 0:02:42.120 --> 0:02:45.240 been a softening in the discussion around China and the US. 0:02:45.240 --> 0:02:50.600 Our markets being too complacent in taking the words from 0:02:51.040 --> 0:02:54.720 Treasury Secretary Minution and the Chinese officials for saying that 0:02:54.760 --> 0:02:57.360 they're making some progress here. You know, I don't think so. 0:02:57.400 --> 0:03:00.000 I think when you look at really since President Trump 0:03:00.040 --> 0:03:02.120 was elected, there's a lot of reasons that markets have 0:03:02.160 --> 0:03:04.160 been going up. But the two big macro ones. One 0:03:04.280 --> 0:03:07.079 is the expectation that the Feds going to be very 0:03:07.080 --> 0:03:10.640 gradual and normalization, and the second important input was that 0:03:10.680 --> 0:03:14.240 there wasn't going to be any major disruption to international trade. 0:03:14.520 --> 0:03:17.240 I think many times now we've seen Rehderick get really 0:03:17.560 --> 0:03:20.920 hot on a bunch of topics out of out of Washington, 0:03:21.360 --> 0:03:24.200 this now being trade, and then the action though had 0:03:24.200 --> 0:03:26.880 the follow through has been a fraction of what the 0:03:26.919 --> 0:03:29.560 original rhetoric indicated it might be. So I think we 0:03:29.600 --> 0:03:31.399 could be seeing another case of that. So I think 0:03:31.720 --> 0:03:35.360 the market taking this, uh, this new input into consideration, 0:03:35.440 --> 0:03:38.080 and it might say that it overreacted. The market may 0:03:38.120 --> 0:03:41.160 have overreacted a bit last week, uh, and is now 0:03:41.240 --> 0:03:43.920 kind of normalizing to the reality of the situation. Well, 0:03:43.920 --> 0:03:47.680 so that what do you have to see before you 0:03:47.720 --> 0:03:50.760 would bet on the idea of a trade war heating 0:03:50.840 --> 0:03:53.760 up materially more than what we've seen in the past, 0:03:53.760 --> 0:03:55.360 But you would you would need to see action, not 0:03:55.440 --> 0:03:57.800 just words, right, You would need to see actual tariffs 0:03:57.800 --> 0:04:01.080 being implemented on a wide swim off of goods, not 0:04:01.320 --> 0:04:05.360 you know, not very targeted, relatively small uh, tariffs that 0:04:05.440 --> 0:04:07.480 don't have that much of an impact on the US 0:04:07.600 --> 0:04:10.520 or Chinese economy, like steel are aluminum tariffs don't have 0:04:10.600 --> 0:04:12.920 a major and they're not They're bad, and I don't 0:04:12.960 --> 0:04:15.520 think they're a good thing to have occur, but they're 0:04:15.520 --> 0:04:17.760 not going to have a major impact alone on either 0:04:17.800 --> 0:04:20.200 of the U s or the or the Chinese economy. 0:04:20.520 --> 0:04:22.480 So um, you know, just sort of shifting a little 0:04:22.480 --> 0:04:27.840 bit from China to Canada and Europe. The steel and 0:04:28.040 --> 0:04:32.640 aluminum tariffs that we talked about so extensively weeks ago, Uh, 0:04:32.880 --> 0:04:35.640 can we now write them off? Is largely non existent. 0:04:35.760 --> 0:04:38.640 Since everybody's gotten an exception. Well, this is another this 0:04:38.720 --> 0:04:41.080 is another example of what I was talking about, where 0:04:41.080 --> 0:04:44.200 the rhetoric is really high, really hot. Uh, and then 0:04:44.240 --> 0:04:47.560 when you actually see the implementation, it's a fraction of 0:04:47.600 --> 0:04:49.720 what was originally indicated would happened. So I mean, I 0:04:49.720 --> 0:04:52.360 wouldn't write anything off yet we don't know what's going 0:04:52.400 --> 0:04:54.359 to happen. You know, you're one tweet away from the 0:04:54.400 --> 0:04:57.440 markets being very concerned. Again, well, but this is my point. 0:04:57.520 --> 0:05:00.640 Are we or our markets going to learn to ignore 0:05:00.680 --> 0:05:05.240 those tweets as all bark and no bite. Uh hasn't 0:05:05.279 --> 0:05:08.080 happened so much yet. I think eventually the market could 0:05:08.080 --> 0:05:10.560 get desensitized to tweets. I guess it matters what the 0:05:10.560 --> 0:05:13.240 tweet says. Uh, it matters is it a new target, 0:05:13.279 --> 0:05:16.159 is it a new idea? Um? Is their indications of 0:05:16.200 --> 0:05:18.760 a follow through? Does you know if if there is 0:05:18.800 --> 0:05:21.960 a tweet that targets another country, does that country then 0:05:22.040 --> 0:05:25.600 respond with their own not tweet necessarily, but their own 0:05:25.600 --> 0:05:28.960 communication that indicates that this could but could then escalate. 0:05:29.000 --> 0:05:30.360 So I think there's a lot of factors you need 0:05:30.400 --> 0:05:32.560 to look at. Maybe a tweet in and of itself 0:05:32.600 --> 0:05:36.200 about steeler aluminum tariffs or um some of these Chinese 0:05:36.240 --> 0:05:38.560 tariffs might not have the same impact it had last week, 0:05:38.880 --> 0:05:40.880 but um, you know, you still got to be on 0:05:40.880 --> 0:05:42.640 the lookout for it and see what happens in the 0:05:42.680 --> 0:05:45.160 aftermath of that tweet. Mike mcdonna, thank you so much 0:05:45.200 --> 0:05:48.799 for being with us. Mike mcdonot, Chief economist for financial 0:05:48.839 --> 0:06:06.400 Products at Bloomberg. We've talked a lot about ETNA recently 0:06:06.720 --> 0:06:09.800 in light of a CBS bid to buy Etna. But 0:06:09.839 --> 0:06:13.839 there's another side of Etna, the Etna Foundation, that has 0:06:13.920 --> 0:06:18.440 been studying what makes a community healthy, what impact the 0:06:18.480 --> 0:06:22.279 opioid epidemic has had on the nation, and going forward, 0:06:22.520 --> 0:06:25.719 what can make the nation in a better position health wise. 0:06:25.800 --> 0:06:28.880 Dr Garth Graham joins me now. He's president of the 0:06:28.880 --> 0:06:32.440 ETNA Foundation, which is based in Hartford, Connecticut. Uh. The 0:06:32.480 --> 0:06:37.360 Etna Foundation just released its inaugural Healthiest Communities rankings. So 0:06:37.480 --> 0:06:39.560 who's healthy, who's healthiest in this in this kind of 0:06:39.640 --> 0:06:41.640 well so, you know, based on this ranking, we saw 0:06:41.680 --> 0:06:44.440 a lot of communities in Virginia and Colorado that trended 0:06:44.480 --> 0:06:47.120 to the top of the list. What's important to understand 0:06:47.200 --> 0:06:50.360 here with what we're publishing is that health you know, 0:06:50.400 --> 0:06:52.320 we only spend a couple of hours a year in 0:06:52.360 --> 0:06:54.920 the doctor's office. At the most, health is defined by 0:06:55.000 --> 0:06:57.880 everything else, all the stuff that's happening in the community. 0:06:58.160 --> 0:07:01.560 You know, where you can get fresh fruits and VEGTA, bikeability, walkability, 0:07:01.680 --> 0:07:04.800 safe housing, making sure that um, you know, you can 0:07:04.880 --> 0:07:07.719 do all the things environment ere we breathe. So what 0:07:07.839 --> 0:07:10.720 we try to really define with this ranking is a 0:07:10.720 --> 0:07:15.800 common concept UM that your zip code defines your health 0:07:15.800 --> 0:07:19.440 more than your genetic code UM. And really by looking 0:07:19.480 --> 0:07:21.600 at all of those factors within a zip code, that 0:07:21.640 --> 0:07:25.760 really influences how long people live. So I'm just wondering, 0:07:26.000 --> 0:07:29.480 when a community is determined to be healthy, does that 0:07:29.520 --> 0:07:34.400 mean that they can enjoy lower insurance premiums in uh 0:07:34.440 --> 0:07:38.600 in tandem with nicer lives. And conversely, if you live 0:07:38.640 --> 0:07:41.880 in an unhealthy community, are premiums higher. Well, you know, 0:07:41.920 --> 0:07:44.400 I'm not sure there's a wanton one connection with the premium. 0:07:44.400 --> 0:07:46.920 I think there's if you're living in a community and 0:07:47.000 --> 0:07:51.560 that community lacks healthcare access and you are healthier unhealthier 0:07:51.600 --> 0:07:53.520 because of that community, you're going to spend a lot 0:07:53.560 --> 0:07:56.360 more in healthcare. And so remember there's a difference between 0:07:56.400 --> 0:07:59.560 health and healthcare. Health is when we are living a 0:07:59.640 --> 0:08:01.280 healthy I be able to do all the things we 0:08:01.320 --> 0:08:03.160 want to do. Health Care is when you're sick and 0:08:03.160 --> 0:08:04.960 you got to go to the doctor's office and get treated. 0:08:05.320 --> 0:08:07.200 But we want to emphasize is how do you make 0:08:07.200 --> 0:08:09.960 people healthier in general? And how do you make sure 0:08:10.000 --> 0:08:12.120 that they can enjoy their lives, enjoy their aspiration, and 0:08:12.240 --> 0:08:15.680 enjoy their goals. And you know that's intrinsically linked to 0:08:15.760 --> 0:08:19.760 the strength of the community around them. So perhaps when 0:08:19.840 --> 0:08:21.880 you have to rely on the healthcare system, it's when 0:08:21.920 --> 0:08:26.080 you are sick. Although a number of people are believing 0:08:26.200 --> 0:08:27.880 or sort of having faith in the idea that they 0:08:27.920 --> 0:08:29.480 will never get sick. Because there was a story on 0:08:29.480 --> 0:08:33.160 the Bloomberg today looking at how a number of Americans 0:08:33.200 --> 0:08:37.199 are dumping insurance because the premiums are going up. How 0:08:37.280 --> 0:08:39.120 much have you noticed this trend and can you can 0:08:39.280 --> 0:08:42.880 connect that to the healthy healthiness of community? So I 0:08:42.880 --> 0:08:46.720 think in general, UM, we tend to overestimate how healthy 0:08:46.800 --> 0:08:49.600 we are. UM And I think truth be told again, 0:08:49.800 --> 0:08:51.920 we have to understand what are the kinds of things 0:08:51.920 --> 0:08:54.000 that goes into making us healthy. I mean, if we 0:08:54.040 --> 0:08:56.600 think about the day that we spend, we spend the 0:08:56.679 --> 0:08:59.360 day interacting with family, with friends, and going out into 0:08:59.360 --> 0:09:02.560 the environment, and those components of how we build that 0:09:02.760 --> 0:09:07.280 social and community infrastructure really defines what makes us healthy. 0:09:07.640 --> 0:09:09.880 And again understanding just how much time you know, I'm 0:09:09.880 --> 0:09:13.480 a I'm a physician by training, by practice, and you know, 0:09:13.640 --> 0:09:16.880 all the vast majority of health occurs outside of the 0:09:16.920 --> 0:09:19.600 doctor's office, and a lot of that health is local. So, 0:09:19.679 --> 0:09:22.840 like politics, all health is local. And so understanding what 0:09:22.880 --> 0:09:26.520 are the components of local health UM that are making 0:09:26.520 --> 0:09:31.240 communities healthier? Dr Graham, what's the responsibility of the healthcare 0:09:31.360 --> 0:09:34.320 community with respect to the opioid epidemics and so a 0:09:34.320 --> 0:09:38.440 lot of people think that it started with prescriptions of 0:09:38.480 --> 0:09:44.560 oxycodone and other types of hard pain killing medications. Yeah, 0:09:44.600 --> 0:09:48.440 so the health the opera emidemic is multi factorial. We 0:09:48.520 --> 0:09:51.880 see challenges across the economic spectrum. There's no doubt though 0:09:51.920 --> 0:09:55.120 that communities that are hardested are those communities where folks 0:09:55.120 --> 0:09:58.800 of labs, jobs and infrastructure and issues around mental health 0:09:58.800 --> 0:10:03.160 and addictions start to take more of um compounded tone. 0:10:03.600 --> 0:10:06.319 And so you know, understanding just how we treat that 0:10:06.559 --> 0:10:09.840 entire community and also understanding that the line to recover 0:10:09.960 --> 0:10:12.800 for addiction is giving people hope, an opportunity, and so 0:10:12.880 --> 0:10:15.920 understanding that when we build that community infrastructure that makes 0:10:15.920 --> 0:10:18.760 that community stronger, we then have people if they survive 0:10:18.800 --> 0:10:21.440 on the locks an operiod overdose and they get a 0:10:21.480 --> 0:10:23.720 locks own or an operiod reversing treatment, they go back 0:10:23.760 --> 0:10:27.720 into a healthier community and healthy infrastructure. So again, all 0:10:27.720 --> 0:10:30.960 health is still defined as those components of local activity 0:10:31.320 --> 0:10:33.680 that make both a family and a community is stronger. 0:10:33.840 --> 0:10:39.080 As a practicing doctor, what have you learned about people 0:10:39.120 --> 0:10:43.520 who use opioids, perhaps even patients of your own, that 0:10:44.200 --> 0:10:47.080 perhaps might challenge some of the conceptions that people have 0:10:47.760 --> 0:10:49.960 about Yeah, you know, one of the things that I 0:10:50.080 --> 0:10:55.760 learned is it really does cross all lines, all geographic lines, 0:10:55.880 --> 0:11:00.080 alsocio economic lines, um, all different kinds of different mean 0:11:00.240 --> 0:11:02.479 is that you would not have expected to be impacted. 0:11:02.840 --> 0:11:04.800 One of the most troubling things that many of us 0:11:04.840 --> 0:11:06.959 have seen in both clinical and public health, and you 0:11:07.040 --> 0:11:10.960 see reflected in the CDC data, is that the impact 0:11:10.960 --> 0:11:13.679 that is happening on the youngest and most vibrant folks 0:11:13.720 --> 0:11:16.680 within our community. And understanding that what we're doing is 0:11:16.960 --> 0:11:19.960 what's happening here, is that it's not just you know, um, 0:11:20.240 --> 0:11:22.679 folks who are in their twenties and thirties, but even 0:11:23.040 --> 0:11:26.199 filtering down into younger folks within teenage years. And so 0:11:26.240 --> 0:11:28.520 the recent CDC data points to the fact that the 0:11:29.160 --> 0:11:32.160 decrease in life expectance in national that we're nationally that 0:11:32.240 --> 0:11:34.440 we're seeing has a lot to do with the impact 0:11:34.480 --> 0:11:37.000 that opiates are having on our youngest and most vibrant 0:11:37.320 --> 0:11:40.640 And that's why you know, through efforts that we're doing 0:11:40.679 --> 0:11:43.760 in the end a foundation tackling opiated epidemic, investing in 0:11:43.800 --> 0:11:46.880 local communities, but also others across the board, we really 0:11:46.880 --> 0:11:49.080 have to understand about the future of our country. Is 0:11:49.080 --> 0:11:53.680 there any crossover between the ETNA Foundation and the healthcare provider? Yeah? 0:11:53.720 --> 0:11:57.400 So you know, ETNA Foundation is a philanthropic arm of Enna. 0:11:57.520 --> 0:12:01.200 So we invest again the local community and we invest 0:12:01.280 --> 0:12:03.680 in We have a Healthy Cities and Counties Initiative where 0:12:03.679 --> 0:12:06.160 we work. We work with fifty cities and counties across 0:12:06.160 --> 0:12:09.319 the board to deal with local issues impact in those communities. 0:12:09.600 --> 0:12:12.720 So we we are the arm that helps expand the 0:12:12.760 --> 0:12:16.360 reach of our organization into local communities. Do you share 0:12:16.400 --> 0:12:19.120 the data that you collect with the healthcare community? No, 0:12:19.240 --> 0:12:22.439 So most of our funding are with partners and grantees 0:12:22.880 --> 0:12:26.160 um So they may be state based organizations or even 0:12:26.559 --> 0:12:29.400 local nonprofits and their data is their data. We just 0:12:29.440 --> 0:12:31.720 help support them do work in the community. I mean, 0:12:31.760 --> 0:12:34.880 does sort of look to your work to determine how 0:12:34.920 --> 0:12:38.280 to sort of set pricing and determine how to sort 0:12:38.280 --> 0:12:41.680 of view American health. No, we're a separate entity and 0:12:41.800 --> 0:12:44.679 not a part of the business arm in terms of 0:12:45.040 --> 0:12:50.520 um UH, that intersection between pricing and economics. That being said, 0:12:50.559 --> 0:12:53.080 as part of the foundation as broad an enterprise, I 0:12:53.080 --> 0:12:56.080 think we're all committed to this issue of building local, 0:12:56.160 --> 0:12:59.040 healthy communities and trying to invest in communities, go as 0:12:59.120 --> 0:13:01.240 local as we can, and find those partners who can 0:13:01.240 --> 0:13:04.959 impact change. Dr Graham, just real quick, where are we 0:13:05.120 --> 0:13:08.600 in the opioid epidemic? So, you know, for the past 0:13:08.840 --> 0:13:12.280 couple of years as a country, as a nation, we've 0:13:12.360 --> 0:13:16.760 seen our life expectancy decline, primarily driven by the impact 0:13:16.800 --> 0:13:20.480 of the opioid epidemic on the younger population. I think 0:13:20.520 --> 0:13:23.600 many folks have said that, you know, over the next 0:13:23.720 --> 0:13:27.360 couple of years, is this continues to have that impact, 0:13:27.360 --> 0:13:29.720 it will no longer be a bullet, it will be 0:13:29.720 --> 0:13:32.240 a trend. So I think right now we're seeing we're 0:13:32.240 --> 0:13:34.040 in the midst of the epidemic. I think we are 0:13:34.440 --> 0:13:37.360 as a country, as a community, UM, I think fighting 0:13:37.400 --> 0:13:40.040 for the lives of our youngest and most vulnerable. And 0:13:40.080 --> 0:13:42.080 so I think the next couple of years, depending on 0:13:42.120 --> 0:13:44.760 how we can come together, whether it be government or 0:13:44.800 --> 0:13:48.280 public government, privac sector, I think we'll define where we go. 0:13:48.840 --> 0:13:52.079 Dr Garth Graham, President of the ETNA Foundation, which is 0:13:52.120 --> 0:13:54.880 based in Hartford, Connecticut, thank you so much for being 0:13:54.920 --> 0:14:11.920 with us. The high old bond market is often thought 0:14:12.000 --> 0:14:15.160 of as the canary in the coal mine for distress 0:14:15.280 --> 0:14:20.160 in financial markets. Right now, it is not signaling any distress. 0:14:20.240 --> 0:14:23.120 Joining me right now. Ken Monahan, co director of high 0:14:23.160 --> 0:14:28.240 Yield at a MOONDI pioneer overseeing more than fifty billion dollars. Uh. 0:14:28.480 --> 0:14:31.520 You know, can I want to focus a little bit 0:14:31.640 --> 0:14:34.960 not on high yields, but on investment grade because there's 0:14:35.000 --> 0:14:38.000 a question, as we see all of these mergers and 0:14:38.040 --> 0:14:42.840 acquisitions going on in investment grade UH, Corporate America, how 0:14:42.840 --> 0:14:45.240 many of these deals will end up in the high 0:14:45.240 --> 0:14:48.040 old bond market. Well, it at least it's something we're 0:14:48.040 --> 0:14:50.480 concerned about, are thinking about going forward. If we look 0:14:50.520 --> 0:14:54.680 at the uh M and A activity in the bond 0:14:54.760 --> 0:14:57.600 market right now, there's about two d and fifty billion 0:14:57.680 --> 0:15:00.840 dollars of transactions to be financed this year, and that's 0:15:00.920 --> 0:15:02.560 off of a number last year that was about a 0:15:02.640 --> 0:15:05.720 hundred and seventy five billion. So you think about headline names, 0:15:05.720 --> 0:15:09.280 We've got the Courier acquisition of Dr Pepper, We've got 0:15:09.320 --> 0:15:12.400 the Signat acquisition of express Scripts, We've got the General 0:15:12.440 --> 0:15:15.600 Mills acquisition of Blue Buffalo. There's a lot of transactions 0:15:15.640 --> 0:15:18.160 going on a lot of these companies if you look 0:15:18.200 --> 0:15:22.120 at them post the acquisition or sporting leverage ratios which 0:15:22.480 --> 0:15:24.560 look much more like a high yield company than an 0:15:24.600 --> 0:15:27.800 investment grade company. And I think the rating agencies thus 0:15:27.800 --> 0:15:31.040 far have been giving uh these companies a little bit 0:15:31.080 --> 0:15:33.800 of leeway to get their houses in order through synergies 0:15:33.840 --> 0:15:37.160 and assets sales post acquisitions before they make any final 0:15:37.240 --> 0:15:40.760 pronouncements on ultimate rating action. Well, yeah, you can see that. Fitch, 0:15:40.800 --> 0:15:45.080 for example, has Etna on a rating watch negative after 0:15:45.200 --> 0:15:49.400 CVS agreed to acquire the company. I'm just wondering, as 0:15:49.400 --> 0:15:53.280 a high yield debt investor, how do you play in 0:15:53.840 --> 0:15:57.840 debt that gets downgraded from investment grade to high yield 0:15:57.920 --> 0:16:00.960 after an acquisition, do you buy? Do you sell? I mean, 0:16:01.000 --> 0:16:04.400 what's what's your move? Well, you know, we certainly look 0:16:04.440 --> 0:16:06.640 at it, you know, and there's a lot of investors 0:16:07.000 --> 0:16:08.640 in the high yeld space that would say, okay, well 0:16:08.640 --> 0:16:11.520 it's now entered my index or my benchmark, I need 0:16:11.560 --> 0:16:13.520 to be invested in it, and we don't happen to 0:16:13.560 --> 0:16:15.920 look at it that way. We'll be much more selective 0:16:15.920 --> 0:16:19.120 there that there things that we will buy that happened 0:16:19.160 --> 0:16:22.000 to be now or what we call fallen angels formally 0:16:22.040 --> 0:16:24.480 investment grade companies that fall into the hig yield space, 0:16:24.680 --> 0:16:27.160 and there's a lot we ignore. We just don't think 0:16:27.200 --> 0:16:30.160 that they were inappropriately valued. I guess another question is 0:16:30.240 --> 0:16:33.080 you have at one point three trillion dollar US high 0:16:33.120 --> 0:16:37.440 old bond market. Let's say some of the record volume 0:16:37.680 --> 0:16:41.480 of triple B companies corporate debt, some of it gets 0:16:41.520 --> 0:16:43.640 downgraded all of a sudden. You could see this universe 0:16:43.640 --> 0:16:47.480 of high yeld debt expand dramatically with a limited number 0:16:47.520 --> 0:16:50.800 of investors. Could you see spreads? Could you see yields 0:16:50.840 --> 0:16:53.840 blowout in response in the high led bond market? Well, 0:16:53.840 --> 0:16:56.440 we certainly did. When General Motors and Ford enter the 0:16:56.520 --> 0:16:58.680 High Yield Index a number of years ago. Is a 0:16:58.800 --> 0:17:03.480 matter of fact, a number of the designers of benchmarks 0:17:03.520 --> 0:17:07.600 reacted as a result. They went from having benchmarks that 0:17:07.680 --> 0:17:11.520 were we called unconstrained constraints, so they limited the amount 0:17:11.760 --> 0:17:14.920 of that anyone issuer could represented the index to two 0:17:14.960 --> 0:17:18.880 percent because Ford and General Motors, because they were such 0:17:19.000 --> 0:17:22.680 large issuers, actually overwhelmed the hih yield marketplace. Now, I 0:17:22.720 --> 0:17:26.320 don't think any of the transactions we mentioned, like Dr Pepper, 0:17:26.520 --> 0:17:28.400 not that we're suggesting that's going to get into high 0:17:28.480 --> 0:17:33.000 yield necessarily, that any of these transactions themselves would overwhelm 0:17:33.040 --> 0:17:35.520 the marketplace or the indices to the degree that it 0:17:35.560 --> 0:17:38.520 did with Foreign General Motors. But it certainly would be 0:17:38.600 --> 0:17:41.280 if if if a number of these companies were ultimately downgraded, 0:17:41.320 --> 0:17:43.680 it would be a significant shift in the market. Let's 0:17:43.680 --> 0:17:47.960 talk about the supply demand dynamic. In another way, There's 0:17:47.960 --> 0:17:50.439 been a lot of talk about foreign investors, who are 0:17:50.440 --> 0:17:54.320 one of the major buyers of US credit stepping away. 0:17:54.440 --> 0:17:58.199 I'm wondering, from your vantage point, how significantly is this 0:17:58.280 --> 0:18:01.800 the case. Yeah, well, um, you know a Mundi Pioneers, 0:18:01.800 --> 0:18:05.159 a global firm UH, and we have global clients, and 0:18:05.240 --> 0:18:08.680 we certainly had seen a lot of inflows UH from 0:18:08.960 --> 0:18:12.160 UH non US investors into the corporate credit market, both 0:18:12.200 --> 0:18:15.120 investment grade and high yield UM. So whether we're looking 0:18:15.160 --> 0:18:18.399 at Asian investors and European investors, we seem to have 0:18:18.440 --> 0:18:22.320 seen that slow somewhat this year. UM. Whether that changes 0:18:22.440 --> 0:18:25.840 or not, it's unclear, but clearly the hedging costs, the 0:18:25.920 --> 0:18:29.800 cost of hedging back to one's native currency, have increased 0:18:30.400 --> 0:18:32.720 over the course of two thousand and seventeen and into 0:18:32.720 --> 0:18:34.960 two thousand and eighteen, and we think that's at least 0:18:34.960 --> 0:18:40.280 one factor UH that's impacting investors overseas investors willingness to 0:18:40.359 --> 0:18:43.520 buy corporate credit in the United States. So the risks 0:18:43.560 --> 0:18:47.159 are clearly rising, whether it's the risk of downgrades from 0:18:47.200 --> 0:18:52.560 mergens and acquisitions, whether it's the foreign bid declining for 0:18:52.720 --> 0:18:56.159 US corporate credit. And yet a lot of high yield 0:18:56.200 --> 0:19:00.800 debt has gotten sold, including from Tesla and Uber companies 0:19:00.840 --> 0:19:05.080 that are burning through cash. What do you make of that? Well, historically, 0:19:05.080 --> 0:19:07.400 if you look at the high yield marketplace, it has 0:19:07.800 --> 0:19:12.440 financed technology companies, but most technology companies that have had 0:19:12.560 --> 0:19:15.680 has financed have been companies that have been much further 0:19:15.760 --> 0:19:19.720 along in their business cycle UM, where there was let's 0:19:19.760 --> 0:19:22.800 say a software company, where there was a certainty or 0:19:22.920 --> 0:19:27.640 a consistency with cash flows. The problem with uh Tesla's 0:19:27.840 --> 0:19:30.119 or the Ubers of the world. These are companies that 0:19:30.160 --> 0:19:32.160 are still very much of the building portion of their 0:19:32.200 --> 0:19:36.200 business cycle, and therefore they've got large negative cash flows. UM. 0:19:36.280 --> 0:19:38.560 That makes them much more difficult to finance in the 0:19:38.600 --> 0:19:42.200 credit markets, and that's why historically those businesses have been 0:19:42.240 --> 0:19:44.919 financed with equity and sometimes that they've gone to the 0:19:44.960 --> 0:19:48.480 debt markets, they've used convertible bonds rather than high yield bonds. 0:19:48.520 --> 0:19:52.600 So have you been buying their loans? Um? We generally 0:19:52.640 --> 0:19:55.359 don't like to comment on specific companies, but we've been 0:19:55.440 --> 0:19:57.960 much more cautious about the technology sector. Why don't we 0:19:57.960 --> 0:20:01.000 be very very diplomatic. Is there any any sector that 0:20:01.080 --> 0:20:03.720 you're particularly bullish on. Well, we've been more bullish on 0:20:03.760 --> 0:20:06.240 the housing market. UM continue to be that we think 0:20:06.280 --> 0:20:09.199 that there is still some value there. We've been bullish 0:20:09.200 --> 0:20:11.600 on the steel industry and we've been bullish on it 0:20:11.720 --> 0:20:15.280 prior to what's gone on with regards to some of 0:20:15.280 --> 0:20:18.720 the trade barriers that were put up recently by the 0:20:18.720 --> 0:20:21.800 White House. Uh, and we think that those are two 0:20:21.800 --> 0:20:24.600 sectors that will continue to benefit given the current state 0:20:24.640 --> 0:20:28.080 of the economy. As you pointed out early in our conversation, UM, 0:20:28.200 --> 0:20:30.080 the high yield market, which has often thought of as 0:20:30.080 --> 0:20:32.880 the canary in the coal mine, hasn't been singing this time. UM. 0:20:32.920 --> 0:20:35.800 We don't think that the that the fundamentals are actually 0:20:35.800 --> 0:20:39.720 pretty strong still. So what'll you have to see to 0:20:39.840 --> 0:20:46.359 change that too? You know? Uh. Business cycles, as we know, 0:20:46.440 --> 0:20:49.200 generally don't end because they get they die of old age. 0:20:49.240 --> 0:20:53.919 They die because companies start doing more foolish things. So 0:20:53.960 --> 0:20:55.639 you worry about the M and A side, which we 0:20:55.760 --> 0:20:58.200 just talked about, UM, and then you worry about how 0:20:58.240 --> 0:21:01.719 aggressive that the central Bank will be. And the FEDS 0:21:01.720 --> 0:21:06.200 obviously is beginning to not necessarily take away the punch bowl, 0:21:06.240 --> 0:21:07.920 but maybe they put a drain on the bottom of 0:21:07.960 --> 0:21:10.360 it and they're beginning to take some of the liquid out. Um. 0:21:10.400 --> 0:21:12.359 If the e c B moves as well, maybe that 0:21:12.440 --> 0:21:15.359 becomes more more troublesome, but we don't think that happens 0:21:15.359 --> 0:21:17.720 this year. FED is dimming the lights in the bar 0:21:17.880 --> 0:21:19.639 Ken Monahan, thank you so much for being with us 0:21:19.720 --> 0:21:23.359 co director of High Yield at a Moundi Pioneer, which 0:21:23.400 --> 0:21:27.880 oversees more than fifty billion dollars of assets from Durham, 0:21:27.920 --> 0:21:32.520 North Carolina. Definitely an interesting time, especially with the proportion 0:21:32.640 --> 0:21:36.600 of triple B rated debt in the investment grade market 0:21:36.600 --> 0:21:40.600 being the highest it's ever been, raising the issue of 0:21:40.760 --> 0:21:59.320 what happens if some of this gets downgraded. As part 0:21:59.400 --> 0:22:03.800 of the spending bill that was passed last week in Congress, 0:22:04.520 --> 0:22:08.639 a particular type of fund, business development funds, were allowed 0:22:08.840 --> 0:22:13.040 to incur more leverage to boost returns. Here joining us 0:22:13.040 --> 0:22:15.320 now to talk about that and other things affecting the 0:22:15.320 --> 0:22:19.520 middle market space. David Dulham, President of Gladstone Investment Corporation 0:22:19.760 --> 0:22:23.280 based in McLean, Virginia. David, thank you so much for 0:22:23.359 --> 0:22:26.399 being here. First, can you lay out what the change 0:22:26.720 --> 0:22:29.000 was that was made? And it was sort of slipped 0:22:29.040 --> 0:22:32.560 in to the bill that was passed last week. Surely 0:22:32.640 --> 0:22:37.120