Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg p m L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. All right,
Speaker 1: let's turn our attention now to the world of high
Speaker 1: yield bonds, and we have David Towell. He is the
Speaker 1: president and the co founder of Maglan Capital in our
Speaker 1: studios here at eleven three oh to tell us more. David,
Speaker 1: thank you very much for being here. I have to
Speaker 1: confess that, you know, I feel like I've laughed myself
Speaker 1: because in looking at the notes for your appearance, I
Speaker 1: noticed the words Covenant Light Loans And that just rings
Speaker 1: a bell, doesn't it? The Covenant Light Loans can Is
Speaker 1: there a historical connection between Covenant Light Loans today and
Speaker 1: Covenant Light light loans maybe you know two thousand and eight. Uh, certainly, Uh,
Speaker 1: you know, we we seem to oscillate now in the
Speaker 1: world of risky error assets between extremes. Uh, there seems
Speaker 1: to be a very hard push when we go risk
Speaker 1: on to the absolute lightest of restrictions on issuers UH.
Speaker 1: And then when things collapse, the tightening happens almost overnight. UH.
Speaker 1: The liquidity drives up in seconds UH and pricing comes
Speaker 1: down very very hard. What that means, I think for
Speaker 1: the investor is you need to be aware of that
Speaker 1: volatility that can exist. UM. To the downside, you need
Speaker 1: to be prepared for it and be able to weather it.
Speaker 1: Some of the best buying opportunities may come at those moments. UM.
Speaker 1: And then to the upside, do you need to appreciate
Speaker 1: uh something very simple like the supplied demand equation, which
Speaker 1: is UH. We live in a world that has UM
Speaker 1: legacy like thinking surrounding how we balance our portfolios visa
Speaker 1: v fixed income versus equities UM. And at the same time,
Speaker 1: the fixed income world is radically different uh than historically
Speaker 1: it has been. UH. There is uh lowest of low
Speaker 1: interest rates. UH. We have extremely aggressive borrowers that are
Speaker 1: fueled by private equity firms and you know, pushing for
Speaker 1: as much leverage as they possibly can, and to the
Speaker 1: extent that a certain investment doesn't work out well. They
Speaker 1: have a portfolio of other investments that are similarly levered,
Speaker 1: and they could probably go ahead and get a grand
Speaker 1: slam or a home run out of one of those
Speaker 1: in order to go ahead and compensate for a loss
Speaker 1: in their portfolio. You know, David, I really want to
Speaker 1: hate hild bonds right now because I'm looking at yields
Speaker 1: that are within a half percentage point from they're all
Speaker 1: time loads for US high yield bonds. They're not high yield.
Speaker 1: They're about five percent, which is about half of what
Speaker 1: they've been over the past three decades of an average.
Speaker 1: I mean, it's a tremendous decline. And I'm looking at
Speaker 1: spreads that are also similarly depressed uh in uh in
Speaker 1: high yield bonds in particularly and in particular, and yet
Speaker 1: I don't see any reason for this market to reverse
Speaker 1: in the near term. I absolutely agree with you. I think,
Speaker 1: I'm sorry, please finish your thought. Well, no, I just
Speaker 1: it's sort of like you know, but at the same time,
Speaker 1: it feels terrible. It's it's really annoying to look at
Speaker 1: this and say, you know, how do you find value here? Right? So,
Speaker 1: I think on relative basis, a lot of high yield
Speaker 1: managers will say what you said, which is we're doing
Speaker 1: good relative to the risk free rate, although we've never
Speaker 1: seen the risk premium this narrow. But at the same time,
Speaker 1: where am I going to go ahead and get real
Speaker 1: high yield UM? And I don't see a default cycle
Speaker 1: coming on anytime soon, even though we're in a rising
Speaker 1: interest rate environment and so on. Weight I actually think
Speaker 1: that the worst point and and this is the broader
Speaker 1: point here about general portfolio management, not for specific high
Speaker 1: yield managers who have a mandate to invest in a
Speaker 1: high yield I'm talking about the overall investor, whether that
Speaker 1: be institutional or individual. UM. There is very bad risk
Speaker 1: reward ratio right now in high yield. And what I
Speaker 1: what I mean by that is, yes, there isn't an
Speaker 1: apparent risk outstanding, but at the same time, we do
Speaker 1: have some lurking potential risks like geo political, whether they
Speaker 1: be in this country specifically or whether they be generally
Speaker 1: around the world with regimes that are unpredictable. UM. We're
Speaker 1: also dealing with the market that has has changed substantially
Speaker 1: over the past five to ten years. There's a lot
Speaker 1: of ETF money in high yield that there wasn't once was.
Speaker 1: We do not know how that works in a bear market,
Speaker 1: in an extreme sell off. Uh, the liquidity um depth
Speaker 1: is much shallower than it once was. We all know
Speaker 1: that people have talked about it at nauseum throughout the
Speaker 1: broker dealer world. Um. And so at the end of
Speaker 1: the day, the downside risk is extreme and unpredictable, and
Speaker 1: the upside at this point is to your point, we're
Speaker 1: reaching nosebleed levels. Happy Wednesday, David Towell, Thank you so
Speaker 1: much for joining us. It's definitely a harrowing market to cover,
Speaker 1: since we see gains every day and yet where is
Speaker 1: that value? David Towell is president and co founder of
Speaker 1: Magdalen Capital, which is based in New York. And I'm
Speaker 1: looking right now at relative yields and hier bonds three
Speaker 1: and have percentage points above treasury Young Sid Vermo, market
Speaker 1: supporter for Bloomberg in London, joins us now and he
Speaker 1: wrote a story about how there are some remarkable similarities
Speaker 1: now to the lead up to the financial crisis, especially
Speaker 1: as it relates to these big rating agencies. Said, thank
Speaker 1: you so much for joining us. Can you just give
Speaker 1: us a sense of what those similarities are? Yes, Um,
Speaker 1: I mean I think It's obviously a very well documented
Speaker 1: fact that the post crisis financial landscape for a lot
Speaker 1: of players such as banks, or insurance firms or brokers,
Speaker 1: couldn't be any more different. But the big three credit
Speaker 1: rating agencies maintain their market share, their business models remain intact,
Speaker 1: and their profits are remaining extremely strong. UM. At the
Speaker 1: same time, the regulatory regime that governs credit rating agencies
Speaker 1: on all accounts remains remarkably soft relative to the fact
Speaker 1: that they were blamed as the villains UM for creating
Speaker 1: a crisis in the first place. UM. The issue of
Speaker 1: pays model, which was really lamented UM and one of
Speaker 1: the reasons cited by US regulators for contributing to the
Speaker 1: crisis in the first place through creating conflicts of interest,
Speaker 1: remains intact and and many many people concerned that they crept.
Speaker 1: The big three agencies UM have been loosening their standards
Speaker 1: just trying to win business, and that crisis era behavior
Speaker 1: has been noted by UM the sec and we've also
Speaker 1: seen UM some problems in the asset that security industry,
Speaker 1: in which UM a couple of the agencies have been
Speaker 1: faulted UM, but it's not clear how much has changed
Speaker 1: was really the numb of my piece. Well, you're being
Speaker 1: diplomatic about it, said, so we we appreciate that. I
Speaker 1: won't be because you know this thing about paying for
Speaker 1: a rating. I'm wondering if you could explain that to
Speaker 1: people how that works. And uh, you know, when businesses,
Speaker 1: not only when you're thinking of investing in a business,
Speaker 1: but I mean thinking of buying a business, particularly if
Speaker 1: it's a large business and it has lots of relations
Speaker 1: financial relationships, they're gonna go out and they're gonna get
Speaker 1: a rating, and they're gonna get a rating either from
Speaker 1: you know, maybe even an insurance company, and then they
Speaker 1: use that rating because that's part of the sale process.
Speaker 1: Speak about how people pay for ratings. You've encapsulated the
Speaker 1: issue very well. UM. Basically, since the nineteen seventies, a
Speaker 1: model in which the bora UM buys a credit rating
Speaker 1: and then the credit agency itself does an assessment that's
Speaker 1: supposed to be independent about its credit wordiness UM uh
Speaker 1: kicks in and UM A lot of that has obviously
Speaker 1: come under a lot of criticism. UM. What's interesting is
Speaker 1: there have been new credit rating agencies that have emerged
Speaker 1: on the scene which have tried to go on an
Speaker 1: investor pays model in which subscribers to the credit rating
Speaker 1: UM pay for the rating and the issuer itself doesn't
Speaker 1: pay for the rating to try and reduce perceived conflicts
Speaker 1: of interest. Interestingly, that hasn't really got off the ground UM.
Speaker 1: A lot of investors UM. There is a free rider
Speaker 1: issue there, A lot of the rating agency information, rating
Speaker 1: information and rating itself can be consumed by third party
Speaker 1: who don't provide UM, you know, don't contribute financially to
Speaker 1: the cost of that rate thing UM. And so we've
Speaker 1: seen that model not take off. Same time, the credit
Speaker 1: rating agencies argue themselves that UM. What we've seen is
Speaker 1: the fact that that's a very difficult model because actually
Speaker 1: by reducing information in the marketplace, you increase trading courts UM.
Speaker 1: And there's a reason why that model UM exists, and
Speaker 1: there's a reason why it persists. You know. I have
Speaker 1: to say, just anecdotally, just to push back a little bit,
Speaker 1: I have heard from investors that in fact, UH, when
Speaker 1: they want a deal rated that is maybe smaller and
Speaker 1: a structured deals a securitization, they'll go to DBRs or
Speaker 1: CRULL simply because SMP and Moody's and Fitch will not
Speaker 1: rate it because they do not want to be accused
Speaker 1: of exactly what you are saying in your article. What's
Speaker 1: your response to that. Yeah, I mean, certainly their market
Speaker 1: share has been reduced and you can see that in
Speaker 1: some of their numbers for the asset backed securitization market,
Speaker 1: and SMP has been fingered by the SEC for and
Speaker 1: was banned from a portion of that credit market for
Speaker 1: a UM. But a lot of the a lot of
Speaker 1: the issues of that market probably pertained to the fact
Speaker 1: that a lot of the rated issuance is pretty minuscule
Speaker 1: UM and we've not really seen it achieved to its
Speaker 1: pre crisis peak. So yes, UM, a lot of the
Speaker 1: rating agencies and the Big three might be concerned about
Speaker 1: their reputational risks in that market, but it's not really
Speaker 1: from a kind of business perspective that problematic for them,
Speaker 1: because there's been this boom in corporate bond issuance and
Speaker 1: boom and emerging market bonding. So literally they made it
Speaker 1: up in volume completely right. They set revenues from the
Speaker 1: declining revenues and securitization. Yeah, yeah, well done, good good
Speaker 1: to have you on. Thank you very much. Sid Verma
Speaker 1: is our markets reporter for a Bloomberg. He joins us
Speaker 1: from London. Well, Apple reported earnings yesterday after the bell,
Speaker 1: and they were great. The markets cheering stocks are up
Speaker 1: the highest to the highest levels they have ever been,
Speaker 1: dragging along a lot of other UH shares with them,
Speaker 1: and Shara Overday is here to cast some shade on
Speaker 1: it all. Shara Ovida is our technology calumnist for Bloomberg,
Speaker 1: gad Fly and Shira I am just struck by the
Speaker 1: fact that our entire stock market is leveraged to an iPhone.
Speaker 1: Can you give us a sense of what your main
Speaker 1: takeaways were from this earnings report? Well, it was better
Speaker 1: than feared, I think, is the big top line headline right,
Speaker 1: And you're right that. I mean a large portion of
Speaker 1: Apple's share press right now is leveraged to a phone
Speaker 1: that no one has seen yet, which is the next
Speaker 1: versions of the iPhone. Expe did to debut in September
Speaker 1: or so, and the stock has been running up for
Speaker 1: more than a year basically on expectations that this new
Speaker 1: phone is going to unleash what the the Wall Street
Speaker 1: smarties have called a supercycle of iPhone sales. Sure, just
Speaker 1: to move us to the numbers for just a moment,
Speaker 1: because I find this staggering. This is a company that,
Speaker 1: at least, as for the last twelve months, two hundred
Speaker 1: and twenty three billion dollars in sales. So because my
Speaker 1: brain is small, I get rid of the billions and
Speaker 1: I just say, all right, imagine you had a business
Speaker 1: where you did two hundred and twenty three dollars in
Speaker 1: sales and you were able to put forty six of
Speaker 1: it in your pocket. Forty six billion dollars in profit
Speaker 1: out of that to twenty three. That is a staggering thing,
Speaker 1: no matter whether it's you know, you're selling phones or
Speaker 1: or you know, I don't know, pocket protectors. But it
Speaker 1: is amazing that the scale of this business continues to grow.
Speaker 1: Do you think they can continue this this momentum? I mean,
Speaker 1: can they get the fifty in profits? Well? Certainly seems
Speaker 1: in rage and you're right that. I mean, the scale
Speaker 1: of Apple is nuts. I mean, this is its own category. Yes,
Speaker 1: it's own category. It's the most profitable company in the
Speaker 1: country by you know, a long shot um. But the
Speaker 1: big question is what is the natural growth rate in
Speaker 1: the future for Apple? And I don't know the answer
Speaker 1: to that question, right, what what Apple had been before
Speaker 1: last year or so was a company that was huge,
Speaker 1: incredibly profitable and growing very quickly. And the growth part
Speaker 1: of that three legged stool kind of has fallen apart.
Speaker 1: And so what we don't know is, Okay, what is
Speaker 1: the natural growth rate of a company at Apple scale
Speaker 1: beyond the next year or so? And I don't think
Speaker 1: anybody has a realistic answer to that question. Well, and Sira,
Speaker 1: in your latest god Like column, you talked about how
Speaker 1: sales in China have been following for six consecutive quarters
Speaker 1: and continued in this lot latest pay earning this period.
Speaker 1: Uh in other places also internationally, Apple has not gained
Speaker 1: the same kind of traction and it's certainly accelerating momentum
Speaker 1: as it has in the US. And I'm just wondering
Speaker 1: how much is priced into the shares already, right, because
Speaker 1: we're talking about a relative game. We're not talking about
Speaker 1: Apple going out of business or becoming, you know, not
Speaker 1: a behemoth and an amazing performer. We're talking about, you know,
Speaker 1: is is the stock price pricing in astronomical growth that
Speaker 1: seems improbable at this point? What's your answer to that question?
Speaker 1: Probably is the answer to that question. I mean, the
Speaker 1: stock has run up. UM. Apple has always been a
Speaker 1: little bit of a tricky company to value because it's
Speaker 1: a hardware company and typically those are valued lower than
Speaker 1: other kinds of high margin software companies. UM. But even
Speaker 1: relative to Apple's own history, it's stock valuation is higher
Speaker 1: than it has ever been, or certainly has ever been
Speaker 1: in the recent history of Apple. And there is a
Speaker 1: lot of expectation of growth and profitability baked into the
Speaker 1: share price at this point. And obviously, you know the
Speaker 1: slucks now at a record today, so that's even pushing
Speaker 1: up the valuation even more. India and the next maybe
Speaker 1: frontier for Apple, because I know that Tim Cook, the
Speaker 1: chief executive, he's already said he's focused on India, and
Speaker 1: indeed production of the iPhone SE is going to begin
Speaker 1: this quarter. That could be the next growth story. Yeah,
Speaker 1: India is a very interesting market, not only for Apple,
Speaker 1: but for lots of other tech companies, both domestic tech
Speaker 1: companies and India and foreign companies like Apple and Amazon,
Speaker 1: which is also investing heavily in India. UM. Tim Cook
Speaker 1: has said for a while now that he sees India
Speaker 1: on kind of a similar potent entual trajectory as China
Speaker 1: for them, which has been an enormous growth driver, although
Speaker 1: India is lagging far behind. Really, in the last year,
Speaker 1: you've seen this huge surge of people with UM smartphone
Speaker 1: connections with There's been some moves by one of the
Speaker 1: domestic cell phone companies in India to basically make almost
Speaker 1: free fast Internet connection from people's phones, and that's going
Speaker 1: to be a big help to anybody that's selling smartphones
Speaker 1: in India. But there's a lot of hurdles. I mean
Speaker 1: there there's a lot of favoritism towards UM domestic companies
Speaker 1: in India. Apple phones are very expensive relative to what
Speaker 1: people typically buy in India, so it's not an immediate
Speaker 1: growth story. Thanks very much for being here. Sure O.
Speaker 1: The day is Bloomberg Gadfly columnists covering technology for Bloomberg News.
Speaker 1: Let's turn our attention now to China. The Premier of
Speaker 1: China said yesterday that all states US states, including Michigan,
Speaker 1: are welcome to strength and exchanges with provinces and municipalities
Speaker 1: in China in order to deepen cooperation in fields such
Speaker 1: as trade, investment, manufacturing, and innovations. Who was he speaking
Speaker 1: to the Governor of Michigan, Rick Snyder, who happens to
Speaker 1: be in China. Here to tell us about the U. S.
Speaker 1: China trade relation is Tom Orlick. Here's our chief Asia
Speaker 1: economist for Bloomberg Intelligence. Uh, Tom, maybe just come in
Speaker 1: on what is the current state of US China trade
Speaker 1: relations and what do you believe the President and the
Speaker 1: administration are going to propose. Um, I think the current
Speaker 1: picture is actually extremely positive for China, PIM. If you remember,
Speaker 1: Donald Trump came into office promising to get extremely tough
Speaker 1: on China relations. He was talking about at tariff on
Speaker 1: Chinese imports, talking about naming China a currency manipulator. So far,
Speaker 1: we've had some aggressive tweets, we've had some um suggestive
Speaker 1: reports from the U. S. T R and others, but
Speaker 1: in terms of substance, we've basically had nothing. And that
Speaker 1: means that China's exports to the US are doing really
Speaker 1: well up around so far this year. Well, Tom, there
Speaker 1: was a report today out of the New York Times
Speaker 1: saying the White House is preparing to open a broad
Speaker 1: investigation into China's trade practices. This is in part to
Speaker 1: possibly counter the country's effort to become a global leader
Speaker 1: in microchips, electric cars, and other crucial technologies of the future.
Speaker 1: Does that concern you in any way? China is a
Speaker 1: country which has an industrial strategy, so they're consciously and
Speaker 1: deliberately attempting to catch up with the technology frontier. They
Speaker 1: see what the US, Europe, Japan has in terms of
Speaker 1: high technology and they want to get there, and they
Speaker 1: use policy together. UM. Now, so far, other countries have
Speaker 1: not really formulated a response to that. UM. It's been
Speaker 1: left to corporates to decide do we want to put
Speaker 1: on new high tech R and D facility in China
Speaker 1: and risk that technology transfer or not. What this seems
Speaker 1: to suggest is perhaps the Trump administration is going to
Speaker 1: put a bit of US government strategy around a response.
Speaker 1: Oh that's fascinating I I when I see this, I
Speaker 1: start thinking to myself, Wow, China US relationship trade and
Speaker 1: then paired with North Korea and the fact that US
Speaker 1: is trying to uh strengthen its hand to force China
Speaker 1: into action with North Korea. But what you're saying makes
Speaker 1: it sound like this is completely unrelated. I think the
Speaker 1: US administration are going to be taking a view on
Speaker 1: China relations in the round. If you remember, going back
Speaker 1: to the she Trump meeting at Mara Lago, Trump said, Okay,
Speaker 1: we can't go in too hard on trade. We can't
Speaker 1: go in too hard on the exchange rate because we
Speaker 1: need support on North Korea. UM. At the same time,
Speaker 1: clearly it's possible to snap these things apart and take
Speaker 1: separate views on security, trade, intellectual property. Tom fox Can
Speaker 1: didn't the the president was touting this move by fox
Speaker 1: Can to place a new factory in the United States, right,
Speaker 1: maybe spend anywhere from ten to thirty billion dollars here.
Speaker 1: If you're going to praise them for doing that, how
Speaker 1: can you in the same what what's the reaction from
Speaker 1: the Chinese leaders if you if you praise that and
Speaker 1: then launch this trade investigation, what do you think Chinese
Speaker 1: leaders and business leaders are thinking. So my first reaction
Speaker 1: to that fox Can news was ten billion dollars. That
Speaker 1: must be the most expensive factory ever built. UM. My
Speaker 1: second reaction was, do US politicians know what it's like
Speaker 1: working in a Chinese factory? Is this the kind of
Speaker 1: job which they really want to offer to their voters.
Speaker 1: Take a look at some of the news flow on
Speaker 1: what happens at some of Chinese electronics assembly plants. I
Speaker 1: understand in certain places, right, they put nets so that
Speaker 1: people who jump aren't don't necessarily die. They have nets,
Speaker 1: and those nets and not being used to play soccer,
Speaker 1: that's right, Pim, Well, I just want to get a sense,
Speaker 1: so if you do, zoom back. And I am wondering
Speaker 1: as we hear more about North Korea, and there was
Speaker 1: a report on Bloomberg today talking about how perhaps North
Speaker 1: Korean nuclear technologies have gotten too far for sanctions to work.
Speaker 1: I'm just wondering what's the state of the relationship between
Speaker 1: China and the US with respect to moving forward and
Speaker 1: some kind of diplomatic solution to that quagmire. I think
Speaker 1: for Beijing, there's going to be a certain amount of
Speaker 1: confusion in the new aggressive approach which the Trump administration
Speaker 1: is taking. Um Mara Largo. Trump passed she to help
Speaker 1: out with North Korea. UM and China has now actually
Speaker 1: gone further than it's ever gone in the past in
Speaker 1: terms of putting the choke on North Korea's exports. China
Speaker 1: has basically embargoed North Korea's sales of coal, which cuts
Speaker 1: off a huge source of f X income from Pyongyang. Now,
Speaker 1: you would expect that that would be welcomed by the
Speaker 1: Trump administration as a kind of constructive show of good
Speaker 1: faith by the Chinese administration. In fact, the reverse has happened.
Speaker 1: Trump has been on Twitter saying China has done nothing,
Speaker 1: China needs to do more. He's very disappointed. You've been
Speaker 1: studying China, but I think you've been in China for
Speaker 1: how long a decade? All rights a decade. Are there
Speaker 1: some things that you can describe, even anecdotally, to give
Speaker 1: people a quick version of what they would see if
Speaker 1: they went to China they've never been. I think the
Speaker 1: striking thing which people miss a by China pim um
Speaker 1: is firstly, well, I think the thing which people miss
Speaker 1: about China when they read the coverage in some of
Speaker 1: the Western press is just the optimism you have on
Speaker 1: the grain there. I think if you read you know,
Speaker 1: Western commentary, you think the end is nigh, the credit
Speaker 1: bubble um, the stress in the financial system. That's just
Speaker 1: not the feeling on the Chinese street. Tom more Like,
Speaker 1: thank you so much for joining us, Tom or Like
Speaker 1: as Chief Asia economist for Bloomberg Intelligence. Thanks for listening
Speaker 1: to the Bloomberg p M l podcast. You can subscribe
Speaker 1: and listen to interviews at Apple Podcasts, SoundCloud, or whatever
Speaker 1: podcast platform you prefer. I'm Pim Fox. I'm on Twitter
Speaker 1: at pim Fox. I'm on Twitter at Lisa Abramo. It's
Speaker 1: one before the podcast. You can always catch us worldwide
Speaker 1: on Bloomberg Radio