WEBVTT - Oil Could Revisit Lows of $42 on Supply Glut, Kilduff Says 0:00:05.800 --> 0:00:08.360 Welcome to the Bloomberg p m L Podcast. I'm Pim 0:00:08.400 --> 0:00:11.440 Fox along with my co host Lisa Bramowitz. Each day 0:00:11.480 --> 0:00:15.000 we bring you the most important, noteworthy, and useful interviews 0:00:15.040 --> 0:00:17.520 for you and your money, whether you're at the grocery 0:00:17.560 --> 0:00:20.560 store or the trading floor. Find the Bloomberg p m 0:00:20.680 --> 0:00:31.960 L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. 0:00:32.000 --> 0:00:34.159 I want to just sort of focus in on energy 0:00:34.240 --> 0:00:37.239 just because we are seeing this pretty market decline in 0:00:37.320 --> 0:00:39.280 oil prices, and I want to bring in John Kilduff, 0:00:39.280 --> 0:00:42.080 who's a founding partner of Again Capital. I mean, there 0:00:42.159 --> 0:00:44.840 was once upon a time when oil prices would dictate 0:00:44.880 --> 0:00:48.640 the direction of stocks and bonds in a massive way. John, 0:00:48.680 --> 0:00:51.720 do you think that this move lower is sort of 0:00:51.960 --> 0:00:55.160 the end of this particular blip downward or do you 0:00:55.200 --> 0:00:59.440 think that there is much more downside ahead. I think 0:00:59.440 --> 0:01:02.000 there's certainly some more downside to come. I think we're 0:01:02.040 --> 0:01:06.319 going to revisit belows from November at around forty two 0:01:06.800 --> 0:01:10.800 barrel um, and that's it's a result of just the 0:01:12.480 --> 0:01:14.640 pent up buying that came into this market on the 0:01:14.680 --> 0:01:18.800 back of the OPEQ and non OPEC production accord um 0:01:18.840 --> 0:01:23.039 being coming up short and and and being given back 0:01:23.240 --> 0:01:28.160 because the deal is proving ineffective. We're still heavily oversupplied 0:01:28.800 --> 0:01:30.959 UM with no real relief in sight. And that's what 0:01:31.000 --> 0:01:34.119 you're seeing here. John. I'm wondering, if you know, all 0:01:34.160 --> 0:01:36.679 those books and reports about peak oil, I'm never going 0:01:36.760 --> 0:01:38.680 to get that time back having read them. Should I 0:01:38.720 --> 0:01:42.199 just throw them out now? Absolutely? And actually I would 0:01:42.200 --> 0:01:44.040 be the guy that Bloomberg would have me on to 0:01:44.160 --> 0:01:47.880 come and refute, uh that that theory at the time, 0:01:48.360 --> 0:01:53.160 So I kind of missed those gigs myself. But absolutely. 0:01:53.320 --> 0:01:55.080 And you know, at the time when I was pushing 0:01:55.120 --> 0:01:58.440 back against the argument of peak oil, it was because 0:01:58.560 --> 0:02:02.880 of technology that I've figured would come into the oil 0:02:02.880 --> 0:02:05.240 patch just as it was coming in, you know, to 0:02:05.400 --> 0:02:07.680 every other aspect of our lives. You know, cell phones 0:02:07.720 --> 0:02:10.040 that were you know, bigger than your head you're coming 0:02:10.080 --> 0:02:12.480 into to fit into your shirt pocket. You know, why 0:02:12.520 --> 0:02:15.960 couldn't some of that technology be transferred and brought to UM, 0:02:16.000 --> 0:02:18.760 not just tracking per se, which was really a reinvented 0:02:18.800 --> 0:02:22.560 old technology, but seismics, well, you know, being able to 0:02:22.560 --> 0:02:24.280 look into the ground, things like that. So that's that's 0:02:24.280 --> 0:02:26.760 why we're here. So John, you're saying that you think 0:02:26.800 --> 0:02:30.560 that oil is headed to forty two dollars barrel Dave. 0:02:31.000 --> 0:02:34.600 If oil gets there within the next, say, couple of weeks, 0:02:35.360 --> 0:02:37.360 what do you expect the reaction to be on the stocks. 0:02:37.360 --> 0:02:39.720 I mean, we already are seeing a down downturn in 0:02:39.760 --> 0:02:42.000 the hya bond market. It's starting to track a little 0:02:42.000 --> 0:02:46.120 bit more with with oil. But what about what about stocks? Well, 0:02:46.240 --> 0:02:48.560 arguably more of the same. I mean you just look 0:02:48.600 --> 0:02:50.280 at what's going on with the S and P five 0:02:50.840 --> 0:02:54.040 Energy Index as a point of reference. Uh, that peak 0:02:54.160 --> 0:02:57.560 back in the middle of December, and since then it's 0:02:57.600 --> 0:03:01.640 fallen four cent. So you know, we've seen sort of 0:03:01.680 --> 0:03:04.720 the air come out of the balloon to some extent already. 0:03:05.080 --> 0:03:07.280 And if you get you know, more the same, well, 0:03:07.320 --> 0:03:10.760 there's more reason for that particular move to keep going. 0:03:11.240 --> 0:03:13.440 And I just point out on a day like today, 0:03:13.480 --> 0:03:16.080 it's like pick your company that's out with results and 0:03:16.120 --> 0:03:20.120 people aren't liking what they're seeing. Uh. Two examples Pioneer 0:03:20.200 --> 0:03:24.920 Natural Resources, which has fallen three percent. They're lowering production 0:03:25.040 --> 0:03:28.600 forecasts among other things. And Chesapeake Energy. You know, even 0:03:28.639 --> 0:03:31.120 though they had their first profit in a couple of years, 0:03:31.560 --> 0:03:34.960 that stocks down close to seven and a half percent, 0:03:35.080 --> 0:03:37.480 So you know, put it all together, and it's not 0:03:37.480 --> 0:03:39.320 like you're gonna get much on the ernie's front at 0:03:39.320 --> 0:03:43.040 this point. That's going to head off more of what 0:03:43.080 --> 0:03:46.200 we've been seeing lately. Hey John, just a quick note 0:03:46.240 --> 0:03:48.720 to wondering about the coverage ratio, you know, the ability 0:03:48.760 --> 0:03:51.040 of these oil companies to continue to pay dividends. I 0:03:51.080 --> 0:03:53.520 was looking at a Royal Dutch Shell over seven percent 0:03:53.840 --> 0:03:56.360 exce on Mobile now three and three quarters of a percent. 0:03:56.960 --> 0:03:59.360 Are those the kind of things that people can invest 0:03:59.520 --> 0:04:01.480 in an expect the dividend or are they're just going 0:04:01.520 --> 0:04:04.760 to enjoy a wild ride and they're gonna enjoy a 0:04:04.800 --> 0:04:06.720 bit of a wild ride. I will say there's a 0:04:06.720 --> 0:04:09.280 there's two silver linings here for an investors. Just probably 0:04:09.400 --> 0:04:12.480 within the SMP five hundred, the energy sector is down 0:04:12.600 --> 0:04:14.920 a lot. It's it's maybe only eighteen percent I think 0:04:15.000 --> 0:04:18.559 these days, right, Dave and UM as well. The oil 0:04:18.600 --> 0:04:23.440 companies have really gone through a wrenching reorganization and are 0:04:23.560 --> 0:04:27.200 a lot more profitable at lower oil prices. So to 0:04:27.240 --> 0:04:29.400 the extent we do dip down to the levels that 0:04:29.400 --> 0:04:31.680 that I see, there will be some short term hits 0:04:31.680 --> 0:04:33.760 and the index has already taken a big hit. But 0:04:33.960 --> 0:04:36.120 to the extent there's any kind of an upturner industry 0:04:36.160 --> 0:04:39.800 reaction production wise, UM, the stocks will become goodbyes because 0:04:39.839 --> 0:04:41.640 you will see some good earnings as we are seeing 0:04:42.240 --> 0:04:45.400 relative to where prices are. I just point out looking 0:04:45.440 --> 0:04:48.000 among the eleven million industry groups in the SMP five hundred, 0:04:48.120 --> 0:04:50.960 energy is just about six percent, so it's really kind 0:04:51.000 --> 0:04:54.760 of lost its sway over the stock market. Nonetheless, it's 0:04:54.800 --> 0:04:58.279 definitely an area that's been hurting the SMP five hundred, 0:04:58.400 --> 0:05:01.000 one of only two that's down this year, phone companies 0:05:01.000 --> 0:05:03.520 being the other. And you're really talking about five stocks there. Yeah, 0:05:04.440 --> 0:05:07.400 I'm sure it's really overtaken energy, John. I wanted to 0:05:07.400 --> 0:05:10.000 get your take and if forty two dollars a barrel 0:05:10.080 --> 0:05:12.640 would be the new normal for oil prices for a 0:05:12.720 --> 0:05:14.960 longer period of time, or is that going to be 0:05:15.000 --> 0:05:17.920 the inflection point at which prices can then rise again. 0:05:19.839 --> 0:05:22.880 We're gonna have to see what the industry reaction is. Uh. 0:05:22.960 --> 0:05:25.520 When we got down to these these levels or lower 0:05:25.560 --> 0:05:28.880 than that. UM, we saw the rigs D recount here 0:05:28.880 --> 0:05:32.520 in the US in particular really plummet since then, since 0:05:32.520 --> 0:05:34.480 we hear a low point about a year or so ago, 0:05:34.640 --> 0:05:37.440 it's doubled. So you know they've come racing back. And 0:05:37.440 --> 0:05:39.920 they've also hedged a lot of their productions. So even 0:05:39.920 --> 0:05:42.599 if prices fall, they're getting paid fifty dollars a barrel 0:05:42.680 --> 0:05:46.040 no matter where they go. So we're gonna have to see, uh, 0:05:46.160 --> 0:05:48.680 where we're at that point. Um, it could be an 0:05:48.720 --> 0:05:52.480 interesting showdown with the OPEC and Saudi Arabia where they 0:05:52.520 --> 0:05:54.960 decide to flood the market and really break the back 0:05:55.000 --> 0:05:59.599 of prices again and um and potentially see a price war. 0:06:00.040 --> 0:06:02.120 Got we got to leave it there, John Kildeff, thanks 0:06:02.240 --> 0:06:05.000 very much, founding partner again the Capital our thanks also 0:06:05.040 --> 0:06:07.360 to Dave Wilson, Bloomberg Stocks Commus go ahead send him 0:06:07.360 --> 0:06:22.719 an email at d Wilson at Bloomberg dot net. Right now, however, 0:06:22.760 --> 0:06:26.080 I want to discuss the ramifications from Puerto Rico's move 0:06:26.160 --> 0:06:28.680 to file for bankruptcy like protection, and I want to 0:06:28.680 --> 0:06:31.880 bring in David Hammer, head of the municipal bond portfolio 0:06:31.920 --> 0:06:35.960 management at Pacific Investment Management Company in New York. David, 0:06:36.000 --> 0:06:38.719 thank you so much for joining us. Uh. First, I 0:06:38.760 --> 0:06:41.480 just want to get your take on what the implications 0:06:41.560 --> 0:06:45.040 are for the holders of Puerto Rico seventy four billion 0:06:45.080 --> 0:06:48.880 dollars of debt as a result of this Title three filing. Hi, 0:06:48.960 --> 0:06:51.200 thanks for having me. You know, I think the most 0:06:51.240 --> 0:06:54.680 important UH turn of events here is that the period 0:06:54.800 --> 0:06:59.000 for consensual restructuring between the Oversight Board and the Government 0:06:59.000 --> 0:07:01.080 of Puerto Rico and creditors appears to be coming to 0:07:01.120 --> 0:07:04.080 a close. And what looks more likely is that the 0:07:04.120 --> 0:07:08.000 Oversight Board will begin to use UH Title three of 0:07:08.080 --> 0:07:12.040 the recently established Premise of Bankruptcy Code, which allows the 0:07:12.080 --> 0:07:16.440 Oversight Board to effectively dictate recovery to creditors. UM. So 0:07:16.520 --> 0:07:19.520 it opens up a door for UH. It's a potentially 0:07:19.560 --> 0:07:23.720 lower lower prices on bonds, steeper haircuts than what's implied 0:07:23.800 --> 0:07:26.920 in the market. And also importantly, you know this is 0:07:26.920 --> 0:07:30.120 gonna take a while, so well, well, David, do you say, Yeah, 0:07:30.160 --> 0:07:34.440 there's gonna be probably steepier, steeper implied prices, steeper declines 0:07:34.480 --> 0:07:37.080 and prices that we're seeing currently in the market. One 0:07:37.120 --> 0:07:38.800 thing that we don't hear a lot about is a 0:07:38.800 --> 0:07:42.280 lot of the holders of these bonds are individual mom 0:07:42.280 --> 0:07:46.640 and pop investors, UH, particularly in Puerto Rico. And how 0:07:46.720 --> 0:07:51.400 much will that sort of political angle change the dynamic 0:07:51.480 --> 0:07:53.480 of how much debt will get written down because people 0:07:53.480 --> 0:07:55.600 think of like vulture hedge funds and that you know, 0:07:55.600 --> 0:07:57.480 who cares if they get they get some of the 0:07:57.720 --> 0:08:00.920 principle written down. But what about these retail invests? You 0:08:00.960 --> 0:08:03.400 know what I'd say, for starters, we don't think that 0:08:03.400 --> 0:08:05.840 that true. Mom and pop retail investors still own a 0:08:05.880 --> 0:08:09.080 lot of this debt. Puerto Rico is downgraded to sub investment, 0:08:09.120 --> 0:08:13.840 creating two thousand thirteen. UH default has been widely anticipated 0:08:13.880 --> 0:08:17.240 and expected really for a number of years now. Bomb 0:08:17.280 --> 0:08:19.760 prizes have been trading at really steep discounts for a 0:08:19.800 --> 0:08:21.920 long period of time, so you know a lot of 0:08:22.000 --> 0:08:25.320 risk transfers already occurred. And the primary holders of these 0:08:25.360 --> 0:08:29.400 bonds now are a few mutual funds in primarily hedge funds. David, 0:08:29.480 --> 0:08:32.480 Is there any possibility that this will just be the 0:08:32.559 --> 0:08:37.280 opening act in other municipal filings such as Illinois? Will 0:08:37.320 --> 0:08:40.200 they use the same route? Yeah? I don't think so 0:08:40.360 --> 0:08:42.320 for a couple of reasons. You know that the three 0:08:42.320 --> 0:08:45.480 point eight trillion dollar municipal market is where states and 0:08:45.559 --> 0:08:49.120 cities and schools and toll roads and airports go for 0:08:49.200 --> 0:08:52.480 their their financing needs. Puerto Rico is really a distinct case. 0:08:53.280 --> 0:08:57.200 It's a territory and only territories are eligible to use 0:08:57.280 --> 0:09:01.920 this law premises, so it applied just the territories. And 0:09:02.360 --> 0:09:05.400 when you talk about other areas in the United States, 0:09:05.440 --> 0:09:08.680 you know, they've experienced decent growth UH post crisis, post 0:09:08.679 --> 0:09:13.240 financial crisis, UH, decent population trends. Puerto Rico's economy has 0:09:13.280 --> 0:09:15.840 been in a recession for about a decade UH, and 0:09:15.880 --> 0:09:19.440 they're experiencing out migration, so they're losing people every year. 0:09:19.600 --> 0:09:23.600 What about the Virgin Islands, Yes, it's the Virgin Islands 0:09:23.679 --> 0:09:27.160 is one that in theory UH could use PROMISSA in 0:09:27.160 --> 0:09:29.360 the future. You know, I think it's a very different 0:09:29.360 --> 0:09:32.520 situation and that they are having fiscal stress, but they're 0:09:32.520 --> 0:09:35.240 really early in the process. They haven't done much to 0:09:35.280 --> 0:09:38.360 cut their budget. They haven't done anything on pension reform. 0:09:38.640 --> 0:09:40.760 Puerto Rico is very different. You know, they've already reformed 0:09:40.760 --> 0:09:43.880 one of the biggest pensions. UH. Their average pension is 0:09:43.880 --> 0:09:47.440 only about fourteen thousand dollars. So while there was a 0:09:47.440 --> 0:09:49.880 lot of room to cut at one point in Puerto Rico, 0:09:50.200 --> 0:09:53.080 there isn't anymore, so a bit different from Virgin Islands 0:09:53.120 --> 0:09:54.560 as well. So what are you looking at? What do 0:09:54.600 --> 0:09:57.160 you think is the best opportunity in the three point 0:09:57.200 --> 0:10:00.800 eight trillion dollar US munsoot ball market. So we really 0:10:00.840 --> 0:10:03.080 like a lot of debt at the moment, I'd say, 0:10:03.080 --> 0:10:06.280 particularly in the low triple B too high double B range. 0:10:07.000 --> 0:10:10.040 Municipal default rates continued to be really low. Despite these 0:10:10.040 --> 0:10:13.319 headlines on Detroit and Jefferson County and now Puerto Rico, 0:10:14.120 --> 0:10:17.880 municipal bonds continue to experience low default rates versus corporates. 0:10:18.200 --> 0:10:20.000 One thing we look at quite a bit is the 0:10:20.480 --> 0:10:24.040 default rate for triple B munies is currently less over 0:10:24.080 --> 0:10:26.400 the last ten years as calculated by mood He's actually 0:10:26.520 --> 0:10:29.440 less than double A corporate bonds, So we see a 0:10:29.440 --> 0:10:32.520 lot of opportunity. The market has been I think a 0:10:32.559 --> 0:10:35.440 bit wary this year due to the backdrop of tax reform. 0:10:35.720 --> 0:10:38.360 So where we typically see pretty strong inflows into the 0:10:38.400 --> 0:10:41.120 asset class early in the year, that hasn't been the 0:10:41.120 --> 0:10:43.240 case this year. We've only seen about two billion dollars 0:10:43.240 --> 0:10:46.160 coming to the municipal market compared to about a hundred 0:10:46.160 --> 0:10:49.360 billion in the investment grade corporate market. David, we're just 0:10:49.440 --> 0:10:52.040 to let you know we're waiting for President Donald Trump. 0:10:52.040 --> 0:10:53.960 He is expected to make remarks as part of the 0:10:54.000 --> 0:10:56.360 National Day of Prayer event from the Rose Garden at 0:10:56.360 --> 0:10:58.720 the White House. Will be bringing those to you when 0:10:59.040 --> 0:11:01.760 he appears. If someone were to call you, David on 0:11:01.760 --> 0:11:03.560 the phone and say, all right, so, what's We're going 0:11:03.600 --> 0:11:06.319 to give you the power to figure out what Puerto 0:11:06.440 --> 0:11:09.280 Rico should do? Do Do you have any recommendations what should 0:11:09.320 --> 0:11:12.840 happen next? If you were given that task? Yeah, so yeah, 0:11:12.920 --> 0:11:16.120 I think importantly the oversight board that Congress established has 0:11:16.160 --> 0:11:18.360 already been given that task. So that is exactly what 0:11:18.400 --> 0:11:20.559 they're doing. And the you know, the first step in 0:11:20.600 --> 0:11:24.240 the process was to approve a fiscal plan that sets 0:11:24.280 --> 0:11:27.680 Puerto Rico on a sustainable path going forward. Uh, you know, 0:11:27.720 --> 0:11:30.920 requires burden sharing in terms of further pension cuts and 0:11:30.920 --> 0:11:34.280 they assume about a tem percent reduction and pensions uh 0:11:34.400 --> 0:11:39.760 increasing uh the budget through reducing expenses and increasing revenues, 0:11:39.800 --> 0:11:43.480 so enforcing tax collections. But all that, but I mean, 0:11:43.520 --> 0:11:45.199 that's I mean I started to break into it, but 0:11:45.240 --> 0:11:49.480 you know, all that makes complete sense, But that's doesn't 0:11:49.520 --> 0:11:51.800 seem to be ruling the day at the moment, and 0:11:51.800 --> 0:11:55.320 I'm wondering whether there are things that can be enacted. 0:11:55.320 --> 0:11:56.640 I mean, you know, one of the things that always 0:11:57.040 --> 0:11:59.560 talked about in Puerto Rico was the triple tax free 0:11:59.559 --> 0:12:02.240 status was granted by the federal government, the tax breaks 0:12:02.280 --> 0:12:04.720 to the pharmaceutical industry. Is there anything that can be 0:12:04.840 --> 0:12:08.440 tangibly done in the next six months that will help 0:12:08.480 --> 0:12:11.760 revive the Puerto Rican economy? So I think the Oversight 0:12:11.800 --> 0:12:13.679 Board is doing it. You know where I disagree with you. 0:12:13.920 --> 0:12:17.320 I think they are taking actions. They are taking steps, uh. 0:12:17.320 --> 0:12:19.960 And it's it's deeper haircuts for bond holders. Uh. And 0:12:19.960 --> 0:12:22.440 then we'd like to see some some pro growth reform. 0:12:22.559 --> 0:12:25.480 So I think one example, there is a Cofina sales 0:12:25.480 --> 0:12:28.800 tax bond uh and right now creditors are disputing is 0:12:28.840 --> 0:12:31.360 that lean valid or not? Do I have a claim 0:12:31.400 --> 0:12:33.680 on those sales tax revenues? You know, we think could 0:12:33.679 --> 0:12:36.480 be beneficial the economy is actually reducing the sales tax 0:12:36.840 --> 0:12:40.280 in Puerto Rico. It's a regressive tax. You could bring 0:12:40.320 --> 0:12:42.480 more money into the economy. You know, it's not the 0:12:42.480 --> 0:12:44.760 greatest thing for bondholders, but we think that could help 0:12:44.800 --> 0:12:55.640 get the Puerto rico economy going. We want to take 0:12:55.679 --> 0:12:58.479 a moment to let you know about something new from Bloomberg. 0:12:58.720 --> 0:13:01.800 Starting right now, you can use our io s app 0:13:01.960 --> 0:13:05.439 or our new Google Chrome extension to scan any news 0:13:05.480 --> 0:13:09.560 story on any website, instantly revealing relevant news and market 0:13:09.640 --> 0:13:13.200 data from Bloomberg and other sources related to companies and 0:13:13.320 --> 0:13:16.480 people you're reading about. So no matter where you're reading 0:13:16.520 --> 0:13:18.760 the news, you can bring the power of Bloomberg's news 0:13:18.760 --> 0:13:22.000 and data with you. It's pretty amazing. Download our Io 0:13:22.280 --> 0:13:24.640 s app or search for the Bloomberg extension on the 0:13:24.679 --> 0:13:27.600 Chrome Store to try it out. Learn more at Bloomberg 0:13:27.679 --> 0:13:36.200 dot com slash lens. So we have been talking quite 0:13:36.200 --> 0:13:40.040 a bit about the increasing weakness that we've seen in 0:13:40.320 --> 0:13:43.319 consumer credit, and one story that was in the Wall 0:13:43.320 --> 0:13:46.920 Street Journal last night that did catch my attention was that, 0:13:47.080 --> 0:13:49.319 you know, some big banks have started to pull back 0:13:49.800 --> 0:13:52.640 pretty pretty sharply from auto loans as a result of 0:13:52.679 --> 0:13:54.800 the weakening credit quality, and this is sort of adding 0:13:54.800 --> 0:13:56.840 to the weakness that we're seeing in sales. To make 0:13:56.880 --> 0:13:59.080 sense of this and try to paint this in the 0:13:59.120 --> 0:14:01.839 broader scheme of credit markets, I want to bring in 0:14:01.920 --> 0:14:05.840 Matthew miss he's global credit strategist at UBS Securities in 0:14:06.080 --> 0:14:08.080 New York. Matt, thank you so much for joining us. 0:14:08.679 --> 0:14:11.600 I want to start with what your take on the 0:14:11.679 --> 0:14:15.640 latest data at the latest results from Synchrony Capital one 0:14:16.080 --> 0:14:19.920 the automakers with the deterioration in their sales numbers. I mean, 0:14:20.160 --> 0:14:22.200 do you think that this points to some kind of 0:14:22.320 --> 0:14:28.400 broader problem that is being underrated in markets today? Yeah, 0:14:28.560 --> 0:14:32.200 I think there's UM. I think there's there's two two stories. 0:14:32.280 --> 0:14:36.520 The more optimistic one is that aggregate consumer credit fundamentals 0:14:36.520 --> 0:14:41.000 look relatively strong. The backdrop from macroeconomic perspective is fairly 0:14:41.040 --> 0:14:43.800 resilient and stable, albeit at a lower base than I 0:14:43.800 --> 0:14:46.120 think many would like. UM. I think what we've argued 0:14:46.160 --> 0:14:49.200 to be clear is the rise in delinquencies. We think 0:14:49.320 --> 0:14:52.080 is uh certainly an undercovered story, and it's driven by 0:14:52.160 --> 0:14:55.680 three things. I think. The first is you've certainly seen lenders, 0:14:55.720 --> 0:14:59.600 particularly non banks, go further down the credit spectrum to 0:14:59.720 --> 0:15:02.360 base we meet loan growth hurdles. UM. So you've seen, 0:15:02.360 --> 0:15:04.920 in particular, across a lot of different segments, not just 0:15:05.000 --> 0:15:08.360 consumer or retail, but also commercial credit, you've seen non 0:15:08.400 --> 0:15:11.080 banks be much more aggressive in terms of going down 0:15:11.080 --> 0:15:14.120 the curve and lending to non primary subprime borrowers. But 0:15:14.200 --> 0:15:16.800 I think the second thing, and we use a proprietary 0:15:16.840 --> 0:15:20.360 survey from UBS Evidence Lab to uncover this, this dynamic 0:15:20.440 --> 0:15:22.960 I think in in detail um is we think that 0:15:23.000 --> 0:15:27.720 the underlying consumer population is pressured by essentially a lack 0:15:27.760 --> 0:15:30.160 of real wage growth. So when you look at nominal 0:15:30.200 --> 0:15:33.480 wage growth, it's been certainly positive, but in low to 0:15:33.600 --> 0:15:36.880 mid single digits and fairly disappointing. But what we find 0:15:36.960 --> 0:15:40.560 is that expenditures are rising if you think about education costs, 0:15:40.560 --> 0:15:43.160 if you think about healthcare costs, and on balance, there 0:15:43.200 --> 0:15:45.840 doesn't seem to be a lot of velocity or growth 0:15:45.880 --> 0:15:49.160 and real incomes. And so you can you can rationalize 0:15:49.160 --> 0:15:51.680 a world where default rates are rising, uh in the 0:15:51.760 --> 0:15:55.520 sense that a lending conditions have gotten too loose. But 0:15:55.680 --> 0:15:58.600 be ultimately, we think that credit quality is driven in 0:15:58.640 --> 0:16:01.760 many cases by the ability and the willingness to pay. 0:16:02.000 --> 0:16:04.440 And if the ability to pay is constrained by cash flow, 0:16:05.200 --> 0:16:08.360 which we would say income is a good proxy for that, 0:16:08.480 --> 0:16:10.320 it makes sense to us six or seven years into 0:16:10.320 --> 0:16:12.160 the cycle again, when you started to lend down the 0:16:12.160 --> 0:16:16.000 curve that some of that income inequality and essentially a 0:16:16.080 --> 0:16:18.000 lack of real wage growth is really starting to come 0:16:18.000 --> 0:16:20.720 through UH and uh and and and and show some 0:16:21.040 --> 0:16:23.520 you know, some cracks on the consumer side. So, Matt, 0:16:23.560 --> 0:16:26.640 if you can extrapolate out on the more barish view 0:16:26.800 --> 0:16:29.960 on what these numbers mean and sort of give us 0:16:29.960 --> 0:16:32.880 a sense of what the result would be if this 0:16:33.320 --> 0:16:37.120 credit weakness in the consumer does continue to increase the 0:16:37.120 --> 0:16:40.240 pace that we've seen recently, what what would be the 0:16:40.240 --> 0:16:45.560 implications for say a credit investor, even an equity investor. Yes, 0:16:45.600 --> 0:16:47.840 so I think this cycle, we would argue that central 0:16:47.840 --> 0:16:50.840 bank policy has been very accommodative UM, and so some 0:16:50.880 --> 0:16:53.480 of the traditional measures we look at UM, such as 0:16:53.520 --> 0:16:58.720 financial condition indicators or lending standards, seem to look fairly benign. Again, 0:16:58.760 --> 0:17:00.920 I think a lot of that is the liquidity that's 0:17:00.920 --> 0:17:03.800 been provided by central banks. So one of the things 0:17:03.800 --> 0:17:06.879 that we believe this cycle, UM is that delinquency and 0:17:06.880 --> 0:17:10.280 default rates may need to be severe UH and elevated 0:17:10.359 --> 0:17:13.280 enough to basically to scare out or to push back 0:17:13.920 --> 0:17:17.119 on all of the liquidity UH and the investment money 0:17:17.560 --> 0:17:19.919 that's basically reaching for yield. So I think the story 0:17:19.960 --> 0:17:22.480 this time may actually end up being default rates and 0:17:22.480 --> 0:17:25.360 delinquencies need to get high enough that essentially it shocks 0:17:25.480 --> 0:17:28.679 or scares UH the investor community, and it basically causes 0:17:28.760 --> 0:17:31.719 a pullback in liquidity UM. So I think that you 0:17:31.720 --> 0:17:34.720 look for two things from our side, Either one very 0:17:34.800 --> 0:17:38.159 severe increase in delinquency or default rates in a specific 0:17:38.200 --> 0:17:42.200 market UM such as autos, or two, I think, more importantly, 0:17:42.200 --> 0:17:45.439 a more broad based increase in delinquency rates UM that 0:17:45.480 --> 0:17:48.640 again would affect lenders such as non banks and banks 0:17:49.160 --> 0:17:51.640 on a more widespread scale. Matthew, I want to pick 0:17:51.680 --> 0:17:53.800 ups on something having to do with these non bank 0:17:53.920 --> 0:17:56.840 lenders that you say are being pressured to meet their 0:17:56.880 --> 0:18:03.600 loan growth goals. If non bank lenders create the credit 0:18:03.840 --> 0:18:07.880 and then sell on the loans to other people, they'll 0:18:07.920 --> 0:18:11.600 be long gone before any of this paper starts to stink. 0:18:12.920 --> 0:18:17.159 Is that accurate? Probably depends on the type of the 0:18:17.200 --> 0:18:20.480 loan that you are referencing. So I mean they're not 0:18:20.520 --> 0:18:22.080 going to hold it on their books, is my point. 0:18:22.160 --> 0:18:26.240 No other ways. We just spoke to Mark Stefanski of 0:18:25.520 --> 0:18:30.000 the of the Federal third Federal Savings and Loan they're 0:18:30.000 --> 0:18:31.600 based in Cleveland. He said, no, no, when they make 0:18:31.640 --> 0:18:33.520 the loan let's say for a house, they keep the 0:18:33.520 --> 0:18:35.919 loan on their books, but most of these non bank lenders, 0:18:35.920 --> 0:18:39.600 are they really keeping the loans? I think it really depends. 0:18:39.680 --> 0:18:41.720 I mean again, I think you know, to be clear, 0:18:41.720 --> 0:18:44.399 it depends whether you're talking about a mortgage versus a 0:18:44.520 --> 0:18:48.000 student versus a credit card, or an auto loan. UM, 0:18:48.240 --> 0:18:50.119 let's stick. But let's stick with auto and credit the 0:18:50.240 --> 0:18:52.399 revolving credit, because those are the two areas that that 0:18:52.440 --> 0:18:55.520 seemed to be at least in the crosshairs right now. 0:18:56.359 --> 0:19:00.280 Autos and credit cards. Yes, I believe anywhere from a 0:19:00.400 --> 0:19:03.480 quarter to let's say a little over a half of 0:19:03.560 --> 0:19:08.240 loans are securitized. UM. You know, I think the the 0:19:08.440 --> 0:19:11.119 the caveat there is not everything is securitized or not. 0:19:11.200 --> 0:19:14.800 Everything is basically moved off balance sheet. UM. I think 0:19:14.880 --> 0:19:18.080 you know, if you take mortgages, for example, UM, you 0:19:18.119 --> 0:19:21.000 have residual rights in many cases on the servicing side, 0:19:21.680 --> 0:19:25.159 and you also have UM, I think risks around certainly 0:19:25.200 --> 0:19:29.960 if you're lending uh aggressively. We've seen with companies. UM. 0:19:30.000 --> 0:19:31.879 You know, earlier in the month, we've seen with companies 0:19:31.880 --> 0:19:34.160 on the mortgage side. Uh. You know that there's still 0:19:34.160 --> 0:19:37.480 reputational or other risks if they're not essentially underwriting to 0:19:37.680 --> 0:19:41.040 proper appropriate standards. So I think it's it's a fair 0:19:41.160 --> 0:19:44.800 argument to say, well, isn't this just intermediated without any 0:19:44.840 --> 0:19:47.320 skin in the game. Um. But I would point out 0:19:47.359 --> 0:19:49.000 that a lot of the non banks, I think you 0:19:49.000 --> 0:19:52.119 need to keep in mind, are funded either by wholesale 0:19:52.160 --> 0:19:55.480 funding or by the banks themselves. Um. And we've seen 0:19:55.520 --> 0:19:57.960 this issue with some of the Canadian mortgage companies in 0:19:58.000 --> 0:20:01.160 the last week, which is like home capital, Yeah, yeah, 0:20:01.200 --> 0:20:04.359 if the market confidence right, it pulls back that that 0:20:04.480 --> 0:20:07.879 funding ultimately is either wholesale in many cases wholesale based, 0:20:08.520 --> 0:20:11.280 or it's it's supported in many cases by banks. Now, 0:20:11.400 --> 0:20:14.000 not speaking specifically to a given issue in Canada, but 0:20:14.240 --> 0:20:16.520 when we look at the non bank lenders across the 0:20:16.640 --> 0:20:19.680 US from any of the consumer loans, you know, the 0:20:20.000 --> 0:20:24.240 backstop essentially is the banks. Well, so let's put aside 0:20:24.280 --> 0:20:27.639 the armageddon or sort of systemic crisis type of scenario. 0:20:28.160 --> 0:20:31.520 Under the current scenario scenario where we see delinquencies and 0:20:31.600 --> 0:20:35.800 charge offs increasing, do you think that the unsecured bonds 0:20:35.880 --> 0:20:40.080 of say Capital One or debt of Synchrony, or you know, 0:20:40.240 --> 0:20:42.760 some of these lenders do you think that that the 0:20:43.440 --> 0:20:47.159 risk is adequately priced in right now? I think what 0:20:47.200 --> 0:20:48.919 you've seen over the last few weeks is it's not 0:20:49.359 --> 0:20:51.520 um and I think structurally the view that we would 0:20:51.560 --> 0:20:54.199 have is again two things. One is that a lot 0:20:54.280 --> 0:20:57.359 of the loan growth has occurred in the non banks sector, 0:20:58.040 --> 0:21:01.840 and too, to be clear, that those loans tend to 0:21:01.840 --> 0:21:05.080 be much higher risk. And I think lenders have been 0:21:05.119 --> 0:21:08.119 lulled into a sense of complacency. I you know, I 0:21:08.119 --> 0:21:09.960 think they're telling you in the last few weeks these 0:21:10.000 --> 0:21:13.160 loans and the loan losses that were expected, we're much 0:21:13.200 --> 0:21:15.520 lower than what's being realized. And in an environment I 0:21:15.520 --> 0:21:18.360 would say where we're not in a recession or from 0:21:18.359 --> 0:21:20.840 our side, not close to a recession. You know, the 0:21:20.920 --> 0:21:23.440 concern that we have is if it's still a fairly 0:21:24.080 --> 0:21:27.480 stable or or or benign backdrop. And you know, I 0:21:27.520 --> 0:21:29.880 would use that term gently, but I do think that's 0:21:29.880 --> 0:21:32.600 the case. And structurally, as we look out two to 0:21:32.720 --> 0:21:35.920