WEBVTT - US and China Strike Framework to Ease Trade Tensions

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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<v Speaker 2>Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Chrisner.

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<v Speaker 2>The US and China have agreed in principle to a

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<v Speaker 2>framework for de escalating the trade war.

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<v Speaker 3>Now.

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<v Speaker 2>This comes after two days of discussions in London over

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<v Speaker 2>nearly twenty hours. We heard today from Commerce Secretary Howard Lutnik.

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<v Speaker 4>I think we have the two largest economies in the

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<v Speaker 4>world have reached a handshake, right for a framework. We're

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<v Speaker 4>going to start to implement that framework upon the approval

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<v Speaker 4>of President Trump and the Chinese will get their president

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<v Speaker 4>cheese approval and that's the process. So once the President's

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<v Speaker 4>approve it, we will then seek to implement it now.

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<v Speaker 2>Lutnik also said that export controls could come down if

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<v Speaker 2>rare earths and magnet licenses are resolved with China. We

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<v Speaker 2>also heard from u US Trade Rep. Jamison Greer. He

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<v Speaker 2>said the goal now is to implement the framework speedily

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<v Speaker 2>after it's been approved by both Presidents Trump and Chi.

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<v Speaker 2>In a moment, we'll get some perspective on the trade

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<v Speaker 2>war from the Bloomberg invest summit in Hong Kong. We'll

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<v Speaker 2>hear from Matthew Mitchellini. He's partner and head of Asia

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<v Speaker 2>Pacific at Apollo Global Management. But we begin here in

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<v Speaker 2>the States. Joining me now is George Schultze. He is

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<v Speaker 2>the founder and CEO of Schultze Asset Management. George, thank

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<v Speaker 2>you so much for making time to chat with us. Obviously,

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<v Speaker 2>developments in the US China trade war will be captivating

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<v Speaker 2>much of the market's attention going forward. I'm looking at

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<v Speaker 2>the e many futures contracts right now. They seem to

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<v Speaker 2>be a little subdued. Wouldn't you expect a more enthusiastic

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<v Speaker 2>positive response.

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<v Speaker 1>Well, the news so far dog coming out of London

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<v Speaker 1>is that you have an agreement to abide by the

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<v Speaker 1>prior agreement to the Geneva cord as it were. So

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<v Speaker 1>I guess it's good news because both sides are going

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<v Speaker 1>to live up to what they agreed to do previous.

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<v Speaker 1>What we're really looking for, I think what the markets

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<v Speaker 1>are really looking for, more importantly, is a bigger trade deal.

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<v Speaker 1>You know that resolves all these bigger open issues, tariffs

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<v Speaker 1>back and forth. You know whether our market's going to

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<v Speaker 1>be open with China, and and you know it'll be

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<v Speaker 1>a huge deal when it is announced. I don't think

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<v Speaker 1>that's part of this deal. This deal, as far as

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<v Speaker 1>I can tell so far, is really just an agreement

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<v Speaker 1>to agree and not breach the terms of the prior deal,

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<v Speaker 1>where China was basically opening up to allow the export

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<v Speaker 1>of rare earth minerals to the US and in exchange

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<v Speaker 1>it won certain concessions from the US. So it was

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<v Speaker 1>a de thawing of a big tariff war that had

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<v Speaker 1>gotten really out of hand. But it's good that the

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<v Speaker 1>sides are both talking and that it's good that they're

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<v Speaker 1>both agreeing to agree, And I think what's what's going

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<v Speaker 1>to happen next is most likely a broader trade deal,

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<v Speaker 1>and the fact that you have news from Mexico as

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<v Speaker 1>well is encouraging, and I think maybe the markets will

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<v Speaker 1>absorb that and react a little bit more favorably tomorrow morning.

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<v Speaker 1>But certainly a nice thawing from where we were in

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<v Speaker 1>the past, I would say, Doug.

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<v Speaker 2>Now we know there's been tremendous volatility, driven largely by

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<v Speaker 2>the uncertainty around tariff policy. We are in the middle

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<v Speaker 2>of that ninety day truce before the reciprocal tariffs kick in,

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<v Speaker 2>and that seems to be speeding up the process quite

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<v Speaker 2>a bit. Would you be more comfortable taking risk now

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<v Speaker 2>in the current environment.

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<v Speaker 1>I would say, you know, not just me, but but

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<v Speaker 1>I think investors around the world are excited about taking

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<v Speaker 1>more risk as you get you know, more of a

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<v Speaker 1>thawing in these global trade wars. It's very interesting watching

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<v Speaker 1>the negotiations. It's a multifaceted negotiation with so many different

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<v Speaker 1>countries at once. But this would be big if you

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<v Speaker 1>get a big deal with China. And you know, it's

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<v Speaker 1>been back and forth. It's created a lot of volatility

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<v Speaker 1>right now. The markets, you know, the vix is down,

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<v Speaker 1>you know, I guess below twenty in the in the

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<v Speaker 1>dark days of the early part of the you know,

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<v Speaker 1>tariff announcement announcements, things really went the opposite direction. And

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<v Speaker 1>now we've had a pretty good recovery. I think. I

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<v Speaker 1>think the worst of the trade fears, you know, related

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<v Speaker 1>to these tah wars, is really behind us. Going forward,

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<v Speaker 1>You're going to have more deals announced and more progress

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<v Speaker 1>going forward.

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<v Speaker 2>I'm imagining that the FED is going to breathe a

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<v Speaker 2>big sigh of relief too, because this has been a

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<v Speaker 2>dark cloud I think overhanging monetary policy.

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<v Speaker 1>It is, but there's this interesting dynamic between you know,

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<v Speaker 1>the Trump administration and Powell. So we shall see how

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<v Speaker 1>it gets implemented. Right now, it doesn't look like, you know,

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<v Speaker 1>any dramatic changes in Fed policy, although at least with

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<v Speaker 1>regard to interest rates, but not many people are talking

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<v Speaker 1>about the fact that, you know, quantitive quantitative tightening has

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<v Speaker 1>been reduced somewhat under Powell. So you know, the FED

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<v Speaker 1>is accommodating somewhat during this uncertain time, just not dropping

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<v Speaker 1>interest rates so dramatically as Trump would like to see.

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<v Speaker 2>So we get the CPI data on Wednesday for the

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<v Speaker 2>month of May here in the US. If what we're

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<v Speaker 2>talking about now is a little bit of relief in

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<v Speaker 2>price pressure, I would think that tomorrow's inflation print aside,

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<v Speaker 2>maybe we're going to begin to see more favorable news

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<v Speaker 2>when it comes to inflation going forward, safe better or not.

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<v Speaker 1>Possibly so. But remember if inflation does tend to be sticky,

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<v Speaker 1>I'm sure you remember, Douga, how long it took, you know,

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<v Speaker 1>to increase inflation during the times when we had very

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<v Speaker 1>you know, record low interest rates. So you know, these

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<v Speaker 1>things don't seem to happen overnight. But sure, if if

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<v Speaker 1>you get a big thaw in these trade wars. Most likely,

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<v Speaker 1>you know, the path would be downward with regard to inflation,

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<v Speaker 1>and you know, maybe that would slow the urgency, you know,

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<v Speaker 1>or at least increase the urgency that the fat can

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<v Speaker 1>maybe reduce rates from here.

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<v Speaker 2>One of the things that was popular during the Biden

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<v Speaker 2>administration insofar as investing was concerned, was the move into

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<v Speaker 2>green energy. The Trump administration, right now, we are learning,

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<v Speaker 2>intends to scrap some of those Biden era climate may

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<v Speaker 2>that may happen as soon as Wednesday, and they require

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<v Speaker 2>power plants to kind of curb greenhouse gas emissions. If

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<v Speaker 2>we see the EPA start to unwind a lot of

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<v Speaker 2>the limits and perhaps provide a little bit more fuel

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<v Speaker 2>pun intended here to conventional power generation. What does that

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<v Speaker 2>do to your thinking when it comes to kind of

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<v Speaker 2>the green energy trade, or maybe you've already been dialing

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<v Speaker 2>back from that.

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<v Speaker 1>Yeah, I think there's some interesting opportunities to short cell

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<v Speaker 1>companies that were really built up around the green energy trade. Obviously,

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<v Speaker 1>this is good for you know, regular non green energy

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<v Speaker 1>oil and natural gas. You know, remember Trump brand on

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<v Speaker 1>the drill baby, drill platform. But I think it will

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<v Speaker 1>happen the dialing back of you know, power plant emission restrictions.

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<v Speaker 1>You're also seeing it in the big beautiful bill, you know,

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<v Speaker 1>with with you know, the proposals as drafted and passed

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<v Speaker 1>from the House by the House already will reduce a

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<v Speaker 1>lot of the tax incentives for or solar companies, and

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<v Speaker 1>you know, it's really a gutting of that industry. And

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<v Speaker 1>you know, no matter which side of the earlier on,

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<v Speaker 1>it changes the dynamic tremendously for companies in those sectors.

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<v Speaker 1>So that'll be something worth definitely watching. At the minimum,

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<v Speaker 1>it's going to dramatically change business plans. But more likely

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<v Speaker 1>some of these companies that have too much debt that

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<v Speaker 1>operate in those sectors, like we saw Sonova earlier this

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<v Speaker 1>week file for bankruptcy. There is risk of bankruptcy and

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<v Speaker 1>distress for those companies that are overlevered facing that kind

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<v Speaker 1>of dramatic change.

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<v Speaker 2>So we're talking about power generation. Obviously, the demand from

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<v Speaker 2>US data centers has become a major component in this discussion.

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<v Speaker 2>We've seen very robust building nationally of AI data centers.

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<v Speaker 2>Are you a little concerned that perhaps this build out

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<v Speaker 2>has become a little too aggressive?

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<v Speaker 1>I do get a little concerned about it, Doug. I mean,

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<v Speaker 1>to be fair, I gotta admit we had a big

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<v Speaker 1>investment with Vistra com Stock and that company was really

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<v Speaker 1>benefiting from the AI you know, build out. But if

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<v Speaker 1>you look at it a step back and look at

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<v Speaker 1>the whole picture, there's only a few companies that represent

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<v Speaker 1>most of the demand for those new data centers, and

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<v Speaker 1>there is a concern. I don't think it's really been

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<v Speaker 1>fully talked about yet, but there's a concern that maybe

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<v Speaker 1>some of this is getting ahead of itself and you know,

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<v Speaker 1>maybe we have more capacity than we need ultimately in

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<v Speaker 1>these AI data centers. We saw a correction earlier this

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<v Speaker 1>year when you know, new technology was announced in Asia

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<v Speaker 1>that would maybe reduce the demand for so much energy

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<v Speaker 1>with you know, with very rapid chip computing, and maybe

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<v Speaker 1>that's just a crack on the surface or a sign

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<v Speaker 1>of worse things to potentially come.

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<v Speaker 2>George, thank you for making time to chat. That is

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<v Speaker 2>George Schultze, founder and CEO of Schultze Asset Management, joining

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<v Speaker 2>us here on the Daybreak Asia podcast. Welcome back to

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<v Speaker 2>the Daybreak Asia Podcast. I'm Doug Chrisner. Financial markets are

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<v Speaker 2>closely watching to see if the world's largest economies can

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<v Speaker 2>find a way to de escalate the trade war. Now

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<v Speaker 2>economists are saying it's already tip the global economy into

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<v Speaker 2>a downturn. For more on today's top story, we cross

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<v Speaker 2>over to the Bloomberg invest summit in Hong Kong. We

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<v Speaker 2>heard earlier from Matthew Mitchellini. He is partner and head

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<v Speaker 2>of Asia Pacific at Apollo Global Management. He spoke with

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<v Speaker 2>Bloomberg sivon Man.

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<v Speaker 5>Let's talk about just overall what we're seeing in the

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<v Speaker 5>macro outlook in the light. It seems like public markets

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<v Speaker 5>at least are really gripping themselves on over what's going

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<v Speaker 5>on with trade. How much visibility is there in the

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<v Speaker 5>private space right now, the companies that you own and

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<v Speaker 5>the investors that you talked to.

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<v Speaker 3>It's actually been the trade of volatility has actually been

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<v Speaker 3>a positive for private capital or private credit at least

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<v Speaker 3>out in Asia for a couple of reasons. Because I

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<v Speaker 3>travel around the region, and I go to Japan, I

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<v Speaker 3>go to create, I go to Australia. Before the tariffs

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<v Speaker 3>they were going to US one hundred dollars into the US.

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<v Speaker 3>They're now doing one hundred dollars and they're now doing

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<v Speaker 3>seventy dollars into the US thirty dollars somewhere else. Most

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<v Speaker 3>of that somewhere else is Southeast Asia, it's India, it's Australia.

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<v Speaker 5>Have you seen these signs of stress at least, I mean,

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<v Speaker 5>obviously tariffs that don't weigh on borrowers or anyway.

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<v Speaker 3>There hasn't a little bit on the cross border for

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<v Speaker 3>companies that are serving the US. But they're rethinking their

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<v Speaker 3>supply chains, and that's actually created an opportunity for US

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<v Speaker 3>to finance the supply chains, especially as they get overweight

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<v Speaker 3>with product and they need to put factories in different countries,

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<v Speaker 3>and so as everybody rethinks their supply chain strategy, it's

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<v Speaker 3>actually been a big positive for private capital.

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<v Speaker 5>What is that lee evaluations?

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<v Speaker 4>Then?

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<v Speaker 5>Should I assume that things should be adjusted high or

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<v Speaker 5>lower in the region.

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<v Speaker 3>It's hard to say on the equity side, because most

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<v Speaker 3>of our focus is on private credit or on senior equity.

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<v Speaker 3>But on private credit, we're still seeing good spreads and

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<v Speaker 3>we're putting a lot of money to work in Australia,

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<v Speaker 3>We're putting a lot of money to work in Southeast Asia,

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<v Speaker 3>and comparable spreads to what we're finding in the US, US,

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<v Speaker 3>in Europe.

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<v Speaker 5>There are some naysayers out there that say, you know,

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<v Speaker 5>the glory days of private credit are over. You're starting

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<v Speaker 5>to see fundamental headwinds, a global slowdown, possibly here in

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<v Speaker 5>the face of this trade war, and coming at a

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<v Speaker 5>time when public and private markets are seemed to be

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<v Speaker 5>converging in some ways, where the pricing of direct loans

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<v Speaker 5>is moving closer to public. Are the glory days over?

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<v Speaker 3>You think, well, I don't think the glory days are over,

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<v Speaker 3>And I think what the trend you're talking about is

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<v Speaker 3>direct lending or sponsor lending in the US, where it

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<v Speaker 3>is going to be a cyclical business, and it is

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<v Speaker 3>a cyclical business. But the private capital trends out here

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<v Speaker 3>are actually more structural factors benefiting our business. I was

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<v Speaker 3>shocked when I came out of here. I would have

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<v Speaker 3>not guessed that we would have had a large partnership

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<v Speaker 3>with the Japanese bank to buy assets off their balance sheet,

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<v Speaker 3>but we do because private capital out here is finding

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<v Speaker 3>the productive way to partner with banks, with companies and

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<v Speaker 3>a sponsors. So it's actually a structural factor where private

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<v Speaker 3>capitals filling a gap that the banks can't fill today.

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<v Speaker 5>Do you need to subscribe a certain premium on private

0:12:04.559 --> 0:12:08.000
<v Speaker 5>markets over public now in exchange the loss of liquidity?

0:12:08.760 --> 0:12:11.920
<v Speaker 3>For in Asia, there is less liquidity in the private markets,

0:12:11.960 --> 0:12:13.880
<v Speaker 3>and I think what you're seeing evolving in the US

0:12:14.160 --> 0:12:17.160
<v Speaker 3>there you do earn a premium for being private versus public.

0:12:17.480 --> 0:12:19.400
<v Speaker 5>Yeah, what is that gap right now?

0:12:20.200 --> 0:12:22.439
<v Speaker 3>Anywhere between one hundred and fifteen to hundred braces pas.

0:12:22.240 --> 0:12:25.199
<v Speaker 5>Okay, Okay, you know what if it is a downturn

0:12:25.280 --> 0:12:26.960
<v Speaker 5>right there's there's a lot of talk about this asca

0:12:27.000 --> 0:12:30.600
<v Speaker 5>class saw a rapid rise when global rates were essentially

0:12:30.600 --> 0:12:33.400
<v Speaker 5>as zero. It hasn't been test proven in a way.

0:12:33.520 --> 0:12:36.680
<v Speaker 5>When things slow down in the world economy, what happens

0:12:36.720 --> 0:12:37.920
<v Speaker 5>then to private credits.

0:12:38.640 --> 0:12:40.800
<v Speaker 3>Well, I think you're already seeing it. There's some recent

0:12:40.800 --> 0:12:43.920
<v Speaker 3>stats about amending extents going up, the amount of pick

0:12:44.000 --> 0:12:45.760
<v Speaker 3>going up, or the amount of pick is going up

0:12:45.760 --> 0:12:48.600
<v Speaker 3>in underlying funds. I think you're going to see increased

0:12:48.760 --> 0:12:51.920
<v Speaker 3>defaults and restructurings. But private, A lot of these private

0:12:51.960 --> 0:12:54.280
<v Speaker 3>credit lenders are going to have to look at their

0:12:54.280 --> 0:12:56.960
<v Speaker 3>book and see how they underwrote it. If you are

0:12:56.960 --> 0:13:00.800
<v Speaker 3>a twenty twenty twenty one vintage loan and you underwrote

0:13:01.040 --> 0:13:03.960
<v Speaker 3>a deal with low rates and low inflation, You're going

0:13:04.000 --> 0:13:06.080
<v Speaker 3>to have a much different terminal value and cash flow

0:13:06.120 --> 0:13:08.000
<v Speaker 3>profile when you go to refinance that loan than some

0:13:08.000 --> 0:13:09.120
<v Speaker 3>of the later vintage loans.

0:13:09.559 --> 0:13:11.480
<v Speaker 5>Something that's also a trend that's happening in Asia is

0:13:11.480 --> 0:13:15.120
<v Speaker 5>that you know some I guess as the managers are

0:13:15.120 --> 0:13:18.880
<v Speaker 5>tapping into retail investors to get into the private credit space.

0:13:19.440 --> 0:13:21.280
<v Speaker 5>I mean this is as you say, you liquid not

0:13:21.280 --> 0:13:24.960
<v Speaker 5>a know how really, how does that change the dynamics

0:13:25.520 --> 0:13:28.240
<v Speaker 5>of this market if there is a domestic or retail

0:13:28.280 --> 0:13:29.040
<v Speaker 5>investor involved.

0:13:29.040 --> 0:13:31.520
<v Speaker 3>Now, yeah, you haven't seen other than in Australia. You

0:13:31.520 --> 0:13:35.120
<v Speaker 3>haven't seen private credit managers in Asia tap that retail market.

0:13:35.120 --> 0:13:38.880
<v Speaker 3>It's really been for global product and it really depends

0:13:38.920 --> 0:13:41.240
<v Speaker 3>on the underlying manager. For us, where we buy everything

0:13:41.280 --> 0:13:43.360
<v Speaker 3>onto our own balance sheet that we buy for retail,

0:13:43.360 --> 0:13:45.880
<v Speaker 3>of that we buy for institutions, our job is to

0:13:45.880 --> 0:13:49.120
<v Speaker 3>protect that capital. But what you saw out here in Asia,

0:13:49.120 --> 0:13:51.920
<v Speaker 3>as you saw a rotation from local equities and local

0:13:51.920 --> 0:13:54.679
<v Speaker 3>real estate into private credit because you can get ten

0:13:54.720 --> 0:13:58.200
<v Speaker 3>percent yields in theory with low volatility and low default

0:13:58.240 --> 0:14:00.960
<v Speaker 3>and low default risk. In one of our flagship direct

0:14:01.040 --> 0:14:03.160
<v Speaker 3>lending products has sold very well because of that, and

0:14:03.200 --> 0:14:05.400
<v Speaker 3>they like the fact that we're buying these loans right

0:14:05.440 --> 0:14:06.160
<v Speaker 3>alongside them.

0:14:06.640 --> 0:14:08.319
<v Speaker 5>And Macha, I know you're spending a lot of time

0:14:08.320 --> 0:14:10.480
<v Speaker 5>all over the world. You're going to be about to

0:14:10.520 --> 0:14:12.960
<v Speaker 5>talk about Japan and the credit boom that we're seeing there.

0:14:13.240 --> 0:14:16.000
<v Speaker 5>In terms of geographies, where are the sort of the

0:14:16.080 --> 0:14:17.960
<v Speaker 5>untapped sort of opportunities now.

0:14:18.160 --> 0:14:20.320
<v Speaker 3>So I was in Australia yesterday talking with some of

0:14:20.320 --> 0:14:23.360
<v Speaker 3>the government officials and they have no idea where the

0:14:23.360 --> 0:14:25.800
<v Speaker 3>long duration capital is going to come to support the

0:14:25.800 --> 0:14:28.320
<v Speaker 3>industrial renaissance that we've talked about, which is a global theme,

0:14:28.600 --> 0:14:30.600
<v Speaker 3>and same thing in Japan. You look at the average

0:14:30.600 --> 0:14:33.520
<v Speaker 3>loan on a Japanese bank balance sheet, it's three years

0:14:33.520 --> 0:14:36.640
<v Speaker 3>in duration and all in yield is about one hundred

0:14:36.640 --> 0:14:39.280
<v Speaker 3>and seventy five basis points. So it's really really high

0:14:39.360 --> 0:14:42.680
<v Speaker 3>quality and really short term. And these countries are running

0:14:42.680 --> 0:14:45.200
<v Speaker 3>with fiscal deficits and they're asking themselves where does the

0:14:45.200 --> 0:14:47.520
<v Speaker 3>private capital, Where does the capital come to financi's longer

0:14:47.600 --> 0:14:49.800
<v Speaker 3>term projects, And that's where private capital is going to

0:14:49.800 --> 0:14:52.280
<v Speaker 3>step in. But I'd say right now, in Japan, Australia

0:14:52.280 --> 0:14:53.480
<v Speaker 3>and a bit of Southeast Asia.

0:14:53.520 --> 0:14:55.400
<v Speaker 5>Matt mcgaullia there, but thank you so much for joining us.

0:14:55.440 --> 0:14:57.920
<v Speaker 5>Thanks long, Matt, Matt, Michael Dy there from Apollo here

0:14:57.920 --> 0:14:59.480
<v Speaker 5>at Boomberg invest Hong Kong.

0:15:01.800 --> 0:15:05.160
<v Speaker 2>Thanks for listening to today's episode of the Bloomberg Daybreak

0:15:05.320 --> 0:15:08.720
<v Speaker 2>Asia Edition podcast. Each weekday, we look at the story

0:15:08.760 --> 0:15:13.120
<v Speaker 2>shaping markets, finance, and geopolitics in the Asia Pacific. You

0:15:13.160 --> 0:15:17.280
<v Speaker 2>can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,

0:15:17.400 --> 0:15:20.400
<v Speaker 2>or anywhere else you listen. Join us again tomorrow for

0:15:20.520 --> 0:15:24.040
<v Speaker 2>insight on the market moves from Hong Kong to Singapore

0:15:24.400 --> 0:15:28.200
<v Speaker 2>and Australia. I'm Doug Prisoner and this is Bloomberg