WEBVTT - Banks Reveal Concerning Credit Deterioration: Peabody 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg PENL Podcast. I'm Paul Sweene. You, 0:00:05.360 --> 0:00:07.680 along with my co host Lisa Brahma Waits, each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 0:00:12.520 you and your money, whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.960 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:25.120 at Bloomberg dot com. This morning, JP Morgan and Wells 0:00:25.120 --> 0:00:28.120 Fargo kicked off earnings for the biggest banks, and in 0:00:28.160 --> 0:00:32.640 some ways the divergence between these two behemoths really highlights 0:00:32.680 --> 0:00:36.720 the bifurcation of the banking industry. Right now, joining us 0:00:36.720 --> 0:00:39.360 to talk about that and just the results in general. 0:00:39.440 --> 0:00:43.760 Charles Peabody, president of Portala's Partners ll l C, Thank 0:00:43.760 --> 0:00:45.600 you so much for being with us. Charles, We always 0:00:45.600 --> 0:00:48.640 love having you on. So let's start with JP Morgan 0:00:48.800 --> 0:00:51.879 shares up more than four percent after reporting better than 0:00:51.920 --> 0:00:56.840 expected earnings benefiting from consumer banking and the gap between 0:00:56.880 --> 0:00:59.640 how much they pay depositors and how much they're earning 0:01:00.080 --> 0:01:04.080 from loans. What was your biggest takeaway from the report? Well, 0:01:04.560 --> 0:01:07.760 you're right, it was a very solid quarter and You're right, 0:01:07.800 --> 0:01:10.720 there is a real bifurcation between what JP Morgan and 0:01:11.000 --> 0:01:14.200 Wells reported. In the case of JP Morgan, this is 0:01:14.200 --> 0:01:16.600 a company that has been investing in its businesses and 0:01:16.680 --> 0:01:21.679 growing revenues. In the case of Wells Fargo revenues are shrinking. UM. 0:01:21.880 --> 0:01:26.880 The biggest takeaway I think UM going forward is that 0:01:26.920 --> 0:01:29.120 this is probably the peak year over year quarter and 0:01:29.200 --> 0:01:32.920 net interest income UM number one, and that's your highest 0:01:32.959 --> 0:01:36.480 pe source of revenue. And the second biggest takeaway is 0:01:36.520 --> 0:01:41.560 you're beginning to see credit deterioration. Okay, so let's let's 0:01:41.600 --> 0:01:44.280 unpack both of those issues. That this is the peak 0:01:44.480 --> 0:01:50.440 year for net interest income, so quarter this peak quarter. 0:01:50.800 --> 0:01:54.280 I'm trying to figure out whether that is simply due 0:01:54.440 --> 0:01:57.440 to the Federal reserve being on hold, or if it 0:01:57.480 --> 0:02:01.120 has to do with the rate of loan growth slowing 0:02:01.400 --> 0:02:05.120 or or what you're seeing there. Yeah, it is a combination. 0:02:05.240 --> 0:02:09.040 For example, JP Morgan was growing their core loans at 0:02:09.040 --> 0:02:11.160 a seven to eight percent rate in the first half 0:02:11.200 --> 0:02:15.600 of eighteen. By the fourth quarter of eighteen, their core 0:02:15.680 --> 0:02:18.720 loan growth was around a six percent annual rate. Here 0:02:18.720 --> 0:02:21.640 in the first quarter it slowed to five. Now JP 0:02:21.760 --> 0:02:24.400 Morgan's doing that on purpose, and it is very wise 0:02:24.440 --> 0:02:26.480 and prudent of them because of where we are in 0:02:26.520 --> 0:02:30.000 the in the economic cycle. UM so you're getting less 0:02:30.520 --> 0:02:35.080 loan growth driving an I I. The flat yield curve 0:02:35.320 --> 0:02:39.919 is also going to put pressure on net interest margins UM. 0:02:40.080 --> 0:02:43.360 And so for example, in this morning, um Wells Fargoes 0:02:43.639 --> 0:02:46.560 stock started up in the morning, but as the conference 0:02:46.560 --> 0:02:50.320 call went on and they lowered their NII growth forecast 0:02:50.680 --> 0:02:53.200 to a you know, a fall of two to five, 0:02:54.120 --> 0:02:57.840 then the stock tanked. So one other aspect of net 0:02:57.919 --> 0:03:00.320 interest income that I want to unpack before move on 0:03:00.360 --> 0:03:03.919 to credit deterioration is this idea that banks have been 0:03:03.960 --> 0:03:06.560 able to The biggest banks have gotten away with not 0:03:07.680 --> 0:03:11.959 passing along the extra yield extra rate UH that they 0:03:12.000 --> 0:03:14.720 get from the Fed funds rate as well as just 0:03:14.800 --> 0:03:18.720 in general on loans to the depositors, and they paid 0:03:18.720 --> 0:03:22.640 their depositors almost nothing, even as online firms credit unions 0:03:22.639 --> 0:03:26.959 have offered higher yields for that money. I'm just wondering 0:03:27.000 --> 0:03:28.720 at what point you're going to actually see some kind 0:03:28.720 --> 0:03:32.440 of migration of deposits away from the biggest banks to 0:03:32.600 --> 0:03:35.120 some of the smaller ones that actually are paying them 0:03:35.840 --> 0:03:39.480 for their money. I think that's a very good point, Lisa, 0:03:39.720 --> 0:03:43.080 because the more bullish analysts are saying that the deposit 0:03:43.120 --> 0:03:45.960 beta will slow as the year progresses because the FED 0:03:46.080 --> 0:03:50.480 is on pause. If you look at JP Morgan's projection 0:03:50.560 --> 0:03:53.640 for deposit growth for the industry this year, they're expecting 0:03:53.720 --> 0:03:56.760 to slow it about two So there's going to be 0:03:56.920 --> 0:04:01.320 an increased um bidding for the quidity in the form 0:04:01.360 --> 0:04:05.040 of deposits. The non bank system and the small regional 0:04:05.080 --> 0:04:07.840 banks are the ones that really need the liquidity, and 0:04:07.880 --> 0:04:10.400 so I think you're gonna see much more aggressive bidding 0:04:10.480 --> 0:04:13.600 for those deposits from those two entities, and I think 0:04:13.640 --> 0:04:16.280 eventually the big banks like JP Morgan are going to 0:04:16.360 --> 0:04:18.920 have to pay up, which I don't expect. The depositated 0:04:18.960 --> 0:04:21.840 is slow as much as others do. Interesting. Okay, so 0:04:21.880 --> 0:04:25.840 let's move on to the credit terieration. Where in either 0:04:25.880 --> 0:04:28.760 Wells Fargo or JP Morgan's earnings, did you see this 0:04:28.800 --> 0:04:31.039 in the most in the most pronounced way, and how 0:04:31.040 --> 0:04:34.280 significant is it? Well, you saw it on a number 0:04:34.320 --> 0:04:36.880 of fronts, and I think it's very significant. You know, 0:04:37.120 --> 0:04:40.080 we've been waiting for signs of credit deterioration for two 0:04:40.200 --> 0:04:43.080 years now, and I think we've grown immune to those 0:04:43.120 --> 0:04:46.000 early signs. But I'll tell you where I saw it, 0:04:46.040 --> 0:04:49.200 all right, Net charge offs and long lost provisions for 0:04:49.320 --> 0:04:52.599 both Morgan Wells, Fargo and p n C, which report 0:04:52.680 --> 0:04:56.560 this morning, came in higher than expected non accruel loans, 0:04:56.600 --> 0:05:00.120 particularly on the corporate side. UM rose in the is 0:05:00.160 --> 0:05:03.440 the second quarter in a row that it's rose. UM 0:05:03.600 --> 0:05:07.640 p n C raised their future for guidance for UM 0:05:07.640 --> 0:05:12.080 provisioning levels by about twenty five million. That doesn't sound 0:05:12.080 --> 0:05:15.279 like much, but it is significant, and all three banks 0:05:15.279 --> 0:05:18.799 added to their reserves for future losses. In the past, 0:05:18.839 --> 0:05:21.880 they were releasing reserves. So you saw it on so 0:05:21.960 --> 0:05:24.280 many fronts. And then prior to this quarter, you were 0:05:24.320 --> 0:05:28.760 beginning to see the inflow of new problem masst's starting 0:05:28.800 --> 0:05:32.520 to outstrip the return to performing status and that was 0:05:32.560 --> 0:05:35.520 a sign that there was organic credit detriation starting to 0:05:35.560 --> 0:05:39.680 take place. Where are we seeing the detrioration most pronouncedly? 0:05:39.680 --> 0:05:42.080 In other words, is it corporate? Is a consumer? Is 0:05:42.080 --> 0:05:46.960 a specific consumer loans? It's definitely corporate. And you know, 0:05:47.880 --> 0:05:50.760 it's hard to say that there's a theme in terms 0:05:50.800 --> 0:05:53.799 of industry, but you're seeing it in manufacturing, you're seeing 0:05:53.800 --> 0:05:56.039 it in retail, and you're seeing in commercial real estate. 0:05:56.440 --> 0:05:58.840 That's so interesting at a time when credit is still 0:05:58.880 --> 0:06:04.040 so free and certainly equity markets reflect a certain enthusiasm. 0:06:04.080 --> 0:06:08.800 Does this give you Yeah, I'm perplexed by the lack 0:06:08.839 --> 0:06:11.680 of reaction to what I see, as you know, the 0:06:12.240 --> 0:06:16.880 seeds of credit cycle developing. Um you know. To me, 0:06:17.160 --> 0:06:21.640 today's action is somewhat curious and it doesn't have the 0:06:21.720 --> 0:06:27.080 steel of true institutional you know, Corbine. It has the 0:06:27.120 --> 0:06:32.400 feel of someone goosey in the market in terms of 0:06:32.480 --> 0:06:35.640 banks docs. Charles Peabody, thank you so much for taking 0:06:35.640 --> 0:06:38.560 the time with us. We always love your insights. Charles Peabody, 0:06:38.800 --> 0:06:57.760 president of Portala's Partners, joining us in our Bloomberg intera 0:06:57.760 --> 0:07:00.480 active broker studios. I'm so pleased to say Tara Chappelle, 0:07:01.000 --> 0:07:04.520 who covers all things media and deals and telecom for 0:07:04.560 --> 0:07:08.720 Bloomberg Opinion Tera, I find this deal fascinating. They unleashed 0:07:08.880 --> 0:07:13.680 Disney Plus, which is the answer to Netflix. But can 0:07:13.720 --> 0:07:18.200 we start with just how limited is this offering? At first? Right? 0:07:18.240 --> 0:07:20.560 I mean this offering it's six a month, and a 0:07:20.560 --> 0:07:22.280 lot has been made of the price, but it's because 0:07:22.280 --> 0:07:23.800 there's not gonna be a whole lot on it to 0:07:23.880 --> 0:07:26.640 begin with. If you're a really big Star Wars fan, 0:07:26.800 --> 0:07:28.680 perhaps there's a draw there because they are going to 0:07:28.720 --> 0:07:31.160 be able to have all the old Star Wars films, 0:07:31.400 --> 0:07:33.320 which wasn't a sure thing. We didn't know that. There 0:07:33.360 --> 0:07:35.880 was a big surprise last night because Disney It actually 0:07:35.920 --> 0:07:37.880 sold the rights to those movies to turn her a 0:07:37.880 --> 0:07:39.640 while back, so they probably had to pay a big 0:07:39.640 --> 0:07:42.200 time to get those rights back for the Disney Plus app. 0:07:42.520 --> 0:07:44.240 So if you like Star Wars, okay, you've got that, 0:07:44.440 --> 0:07:46.080 a Star Wars series is going to be on it, 0:07:46.360 --> 0:07:49.400 the Mandalorian, and then a lot of old Disney movies. 0:07:49.520 --> 0:07:51.440 So if you have young kids, perhaps it's good for 0:07:51.480 --> 0:07:53.680 that because we know kids don't mind watching the same 0:07:53.720 --> 0:07:55.880 movies over and over again. It's a great way to 0:07:55.880 --> 0:07:59.200 to keep them busy. But other than that, you know, 0:07:59.520 --> 0:08:02.320 it's spilled a sort of the family app complement to 0:08:02.760 --> 0:08:05.360 ESPN Plus and Hulu, which are this, you know, sports 0:08:05.360 --> 0:08:07.960 and more of the adult content. I guess you could say, 0:08:08.000 --> 0:08:12.120 but to me, it really is for super fans of Disney, 0:08:12.200 --> 0:08:14.680 and at six, you know you're really not getting a 0:08:14.720 --> 0:08:17.840 whole lot for that price at first? What's the vision 0:08:17.880 --> 0:08:20.760 for Disney Plus. I think Disney Plus is sort of 0:08:20.800 --> 0:08:23.600 the the product at the center of the future of Disney, 0:08:23.640 --> 0:08:26.200 which is kind of amazing. And I made the point 0:08:26.240 --> 0:08:28.000 in my column today that, you know, that's why the 0:08:28.120 --> 0:08:30.960 name kind of concerns me, because Disney Plus implies it's 0:08:30.960 --> 0:08:32.800 sort of like an add on, a supplement to the 0:08:32.840 --> 0:08:36.360 real Disney, when really they're staking their future on this app, 0:08:36.640 --> 0:08:39.040 and it's not going to be profitable into until two 0:08:39.040 --> 0:08:41.440 thousand twenty four, which is going to be a few 0:08:41.520 --> 0:08:44.480 years after CEO Bob igor who's leading this mission, is 0:08:44.520 --> 0:08:47.880 long gone. He's retiring in one So there's still a 0:08:47.960 --> 0:08:50.840 lot of questions about what this is going to look like, 0:08:50.880 --> 0:08:53.200 how it's going to disturb the rest of the empire 0:08:53.720 --> 0:08:56.480 as an increasing amount of content goes to the app 0:08:56.520 --> 0:08:58.679 and not to Disney's other properties. How is this going 0:08:58.720 --> 0:09:00.760 to be the future though? I mean, is if I 0:09:01.080 --> 0:09:03.640 assume that eventually it will have more content. You're talking 0:09:03.679 --> 0:09:07.480 about the limited offerings in the initial rollout, What is 0:09:07.520 --> 0:09:10.559 the content eventually and how does this end up being 0:09:10.920 --> 0:09:14.480 the monster revenue driver that Disney really needs? So I 0:09:14.520 --> 0:09:16.760 think what they're envisioning is, as we've sort of seen 0:09:16.840 --> 0:09:20.800 this balkanization of the TV industry, that Disney is increasingly 0:09:20.880 --> 0:09:23.800 going to keep anything that comes that's made by Disney 0:09:24.000 --> 0:09:26.320 on Disney Plus. That's where you're gonna have to subscribe 0:09:26.320 --> 0:09:28.640 to to get it, or to ESPN Plus and Hulu, 0:09:28.679 --> 0:09:30.400 and maybe there'll be some sort of bundle of those 0:09:30.400 --> 0:09:33.280 three apps. But basically, if you if you're a Star 0:09:33.320 --> 0:09:35.920 Wars fan, if you like Marvel movies, if you want 0:09:36.480 --> 0:09:39.520 Pixar movies, if you want national geographic content, you're going 0:09:39.559 --> 0:09:42.120 to have to subscribe to Disney Plus. So they're really 0:09:42.160 --> 0:09:46.559 sort of uh, monopolizing that content for their own app, 0:09:46.640 --> 0:09:48.840 and it's not going to be available in other places. 0:09:48.840 --> 0:09:51.080 I mean, you can still you know, big big films 0:09:51.080 --> 0:09:52.960 will still go to the movie theaters and and maybe 0:09:52.960 --> 0:09:55.040 people will still pay to go see those, you know, 0:09:55.160 --> 0:09:58.840 Marvel big productions. Maybe that still draws people out to 0:09:58.880 --> 0:10:00.679 pay and go to the movie years. But at the 0:10:00.760 --> 0:10:02.200 end of the day, I think what they're saying is 0:10:02.280 --> 0:10:04.600 the app is going to be the new home of Disney, 0:10:04.640 --> 0:10:07.280 and you need to subscribe if you want anything Disney. 0:10:07.320 --> 0:10:10.720 So people are focusing on Netflix today and Netflix shares 0:10:10.800 --> 0:10:14.040 are are slightly lower, but to me, the real losers 0:10:14.080 --> 0:10:17.520 here are potentially the big cable networks absolutely. I mean, 0:10:17.640 --> 0:10:21.040 Disney right now is very dependent on the traditional bundles still, 0:10:21.120 --> 0:10:23.480 and you know, they're not fully moving away from that 0:10:23.520 --> 0:10:26.520 by any means with this Disney Plus app. Yet they 0:10:26.559 --> 0:10:29.800 I was hearing from Kegan part of SMP Global Market 0:10:29.840 --> 0:10:34.240 Intelligence that Disney gets about fifteen dollars a month per 0:10:34.280 --> 0:10:37.080 subscriber from its top twelve TV networks, which is a 0:10:37.080 --> 0:10:38.880 ton of money, and they're gonna have this app for SI. 0:10:39.920 --> 0:10:43.319 They generated about three billion dollars in box office ticket 0:10:43.360 --> 0:10:46.679 sales last year from its films and Avengers endgame opening 0:10:46.760 --> 0:10:49.199 later this month could be the biggest opening ever. So 0:10:49.480 --> 0:10:53.680 they are still very dependent on these former revenue streams. 0:10:53.760 --> 0:10:57.319 But I think Disney Plus will accelerate this cord cutting 0:10:57.360 --> 0:11:00.360 trend because if you are such a Disney and why 0:11:00.360 --> 0:11:02.679 would you subscribe to cable at you know, a hundred 0:11:02.720 --> 0:11:05.560 dollars some hundreds of dollars a month or you could 0:11:05.559 --> 0:11:07.320 just get Disney for six nine. And I think that's 0:11:07.360 --> 0:11:09.480 what they're really hoping for, Although can you really get 0:11:09.480 --> 0:11:11.560 it for six nine? My question is when they actually 0:11:11.559 --> 0:11:15.679 start to incorporate more offerings onto Disney Plus, can they 0:11:15.760 --> 0:11:18.600 possibly stay at this price that undercuts Netflix. I mean 0:11:18.600 --> 0:11:21.120 that's the reason why people kind of were so odd 0:11:21.160 --> 0:11:23.720 by it, because it just you know, blows Netflix out 0:11:23.760 --> 0:11:27.120 of the water in terms of in terms of discounts, right, 0:11:27.200 --> 0:11:29.160 I mean, they've left themselves a lot of wiggle room 0:11:29.240 --> 0:11:31.360 to raise the price. At six ninety nine, it's much 0:11:31.400 --> 0:11:34.880 cheaper than Netflix. But again, Netflix has more i would say, 0:11:34.880 --> 0:11:38.319 diversity of content for adults at least um. But yeah, 0:11:38.360 --> 0:11:40.200 they've left themselves a lot of room, and I would 0:11:40.240 --> 0:11:42.319 imagine the company hasn't said anything about this, but I 0:11:42.320 --> 0:11:46.000 would imagine that over time, as bigger hits make it 0:11:46.040 --> 0:11:48.480 to that app and there are increasing number of originals, 0:11:48.800 --> 0:11:51.400 they will have both the wherewithal and the need to 0:11:51.480 --> 0:11:55.760 raise the price. Okay, So going forward for Netflix, what 0:11:56.040 --> 0:11:58.439 is sort of the key test about whether this will 0:11:58.440 --> 0:12:02.280 actually draw people away from it? Yeah? Because I think 0:12:02.360 --> 0:12:04.679 right now that the draw with Netflix is that it's 0:12:04.720 --> 0:12:07.080 good enough for the price. Right. You know, maybe it 0:12:07.120 --> 0:12:10.679 doesn't have always the best quality movies, and you know, 0:12:10.880 --> 0:12:12.679 it doesn't have some of the TV shows you like 0:12:12.800 --> 0:12:14.880 to watch on cable, But at the end of the day, 0:12:14.880 --> 0:12:16.760 at you know, thirteen dollars a month, it's kind of 0:12:16.800 --> 0:12:19.400 a great deal. The question is, over time does it 0:12:19.520 --> 0:12:22.640 lose that appeal as Disney Plus comes on board, and 0:12:22.640 --> 0:12:25.360 then a T and T launches some app around HBO 0:12:25.559 --> 0:12:27.920 and the other assets it bought from Time Warner, and 0:12:27.920 --> 0:12:30.560 then there's all these other free, ad supported apps coming 0:12:30.679 --> 0:12:33.440 coming out now this year, And that question is, you know, 0:12:33.640 --> 0:12:35.800 do people still need to pay for Netflix? I think 0:12:35.880 --> 0:12:37.560 for a lot of people, it's going to be sort 0:12:37.600 --> 0:12:39.679 of the base case. It's kind of like what you 0:12:39.720 --> 0:12:41.880 need and then what else can you afford to pay for? 0:12:42.400 --> 0:12:45.120 But for others, you know, for parents, maybe Disney Plus 0:12:45.120 --> 0:12:47.400 solves a lot of their problems and they don't need Netflix, 0:12:47.480 --> 0:12:49.679 And that'll be interesting to see over time does Netflix 0:12:49.720 --> 0:12:53.120 lose sort of that that premium. I honestly want to 0:12:53.200 --> 0:12:55.720 use that quote for the rest of my life. Maybe 0:12:55.720 --> 0:12:58.480 for parents, Disney Plus solves all of their problems. There 0:12:58.480 --> 0:13:00.480 are a lot of Chapelle, Thank you for being here 0:13:01.120 --> 0:13:05.000 with Sarah La Chapel is a Bloomberg opinion columnist focused 0:13:05.000 --> 0:13:09.720 on deals, telecom and media. Disney Plus definitely giving a 0:13:09.880 --> 0:13:30.240 lift Disney shares. When you look at the global outlook today, 0:13:30.280 --> 0:13:33.199 there are a lot of concerns on the horizon Broxit, 0:13:33.400 --> 0:13:36.480 you have the European unions slowing down, you have rising 0:13:36.640 --> 0:13:41.200 strains of populism threatening uh the trade backdrop, But really, 0:13:41.240 --> 0:13:44.600 how bad is it? Joining us now to discuss Mike Buchanan, 0:13:44.640 --> 0:13:49.000 Deputy Chief Investment Officer for Western Asset Management Co. Which 0:13:49.040 --> 0:13:52.920 is an independent affiliate of le Mason and overseas about 0:13:53.000 --> 0:13:57.160 four hundred and thirty billion dollars. He joins us from Pasadena, California. 0:13:57.320 --> 0:14:00.520 Mike love having you on. I want to start there. 0:14:00.559 --> 0:14:03.800 Do you think that there is just too much pessimism 0:14:03.840 --> 0:14:07.960 baked into risk assets right now? Even as they continue 0:14:07.960 --> 0:14:09.840 to rally? Do you think that there's still is too 0:14:09.880 --> 0:14:13.160 much pessimism baked in? Yeah? I would say that there's 0:14:13.160 --> 0:14:17.760 certainly a lot to worry about, and those worries get 0:14:18.440 --> 0:14:21.000 a lot of attention and a lot of focuses. We 0:14:21.040 --> 0:14:23.640 think they should um But as you said, the markets 0:14:23.680 --> 0:14:26.800 continue to UH to march in a positive direction, and 0:14:27.080 --> 0:14:29.600 actually I think that's that's validated. I think when you 0:14:29.600 --> 0:14:33.560 look at fundamentals, when you look at valuations right now, 0:14:33.600 --> 0:14:36.800 when you look at relative value UM. We still think 0:14:36.800 --> 0:14:41.160 there's a pretty compelling case for riskt risk assets within 0:14:41.360 --> 0:14:45.200 fixed income. Obviously, we had a very very strong first quarters, 0:14:45.280 --> 0:14:48.760 so you know, the magnitude or the trajectory of the 0:14:48.880 --> 0:14:53.080 rally is unlike unlikely to sustain. But I think, you know, 0:14:53.160 --> 0:14:55.200 from where we are now through the end of the year, 0:14:55.240 --> 0:14:58.280 I still think you can get reasonable returns UM and 0:14:58.320 --> 0:15:01.360 a lot of the risk sectors within extinct. Okay, are 0:15:01.400 --> 0:15:04.960 you talking about US hild bonds, Uh, that would certainly 0:15:05.040 --> 0:15:08.280 be one US high yield UM. You know, we have 0:15:08.480 --> 0:15:12.160 been uh favorable on US high yield we uh we 0:15:12.240 --> 0:15:15.040 thought that that sell off that we witnessed in the 0:15:15.080 --> 0:15:17.760 fourth quarter, where you saw spreads go from you know, 0:15:17.800 --> 0:15:20.520 a little over three hundred basis points over treasuries at 0:15:20.520 --> 0:15:22.600 the beginning of the quarter all the way out to 0:15:22.640 --> 0:15:25.600 almost five D and fifty, we really felt like that 0:15:25.760 --> 0:15:31.320 created a very uh compelling buying opportunity, and in a 0:15:31.360 --> 0:15:34.600 lot of our portfolio strategies, we added to HI yield 0:15:34.680 --> 0:15:38.280 late last year, early in January UM. And again, you know, 0:15:38.280 --> 0:15:42.720 we've been surprised at how quickly the market has recovered UM. 0:15:42.760 --> 0:15:44.800 But even where we are right now, Lisa, I would 0:15:44.840 --> 0:15:46.880 still say, you know, again, you're you're at a yield 0:15:47.000 --> 0:15:50.600 north of six percent UH. You know, defaults very very 0:15:50.600 --> 0:15:54.680 low UM fundamentals, like I said earlier, very strong. So 0:15:54.720 --> 0:15:57.520 I'm looking right now at us HILED that returns of 0:15:57.600 --> 0:16:00.400 eight point two percent so far here to date. It 0:16:00.440 --> 0:16:02.600 does raise a question, especially as yields go to the 0:16:02.640 --> 0:16:06.160 lowest UH since October of last year, or tracing all 0:16:06.160 --> 0:16:08.760 of the losses, are all of the rise and yields 0:16:08.760 --> 0:16:10.480 and the and the in the decline in prices that 0:16:10.520 --> 0:16:16.520 we saw over November December, how much more upside is there? Though? Yeah, 0:16:16.560 --> 0:16:18.840 I think with with high yield, you know, it's it's 0:16:19.320 --> 0:16:23.840 not necessarily about more spread tightening. So you know, one 0:16:23.840 --> 0:16:26.800 of the great things about high yield is that it 0:16:26.880 --> 0:16:29.600 is a really nice carry trade. If you just have 0:16:29.760 --> 0:16:32.440 it on, you're clipping a you know, a nice coupon, 0:16:32.560 --> 0:16:36.480 You're you're clipping a north of six percent yield. So 0:16:36.520 --> 0:16:40.200 I don't think you necessarily need to get UH spread 0:16:40.240 --> 0:16:43.880 compression or spread tightening and capital gains. I think just 0:16:43.960 --> 0:16:48.120 simply holding it and earning that carrier, earning that yield 0:16:48.640 --> 0:16:52.440 UH still translates into a pretty good return profile in 0:16:52.520 --> 0:16:54.960 a in a world where you know you looked at UM, 0:16:55.000 --> 0:16:57.760 you know there's over ten billion of negative, negative yielding 0:16:57.840 --> 0:17:02.720 assets out there. What about emerging markets, Uh, We've liked 0:17:02.760 --> 0:17:06.439 emerging markets, continue to like emerging markets, uh, in in 0:17:06.520 --> 0:17:12.800 many different forms. Local currency probably our most passionate overweight 0:17:12.840 --> 0:17:15.960 within the spread sectors. There, we just think, you know, 0:17:16.000 --> 0:17:19.960 you've got very high nominal yields, you've got inflation trends 0:17:20.040 --> 0:17:23.520 that are trending lower, just as they are in developed markets. 0:17:23.840 --> 0:17:26.320 And then when you look at real yields, the differential 0:17:27.119 --> 0:17:30.840 between developed markets and developing markets that's abnormally high. So 0:17:30.880 --> 0:17:35.800 we think that's a very attractive sector within emerging markets. 0:17:35.840 --> 0:17:40.200 But we also have some favorites in the hard dollar 0:17:40.359 --> 0:17:43.920 e M space as well, the dollar denominated So I 0:17:44.240 --> 0:17:47.520 see that you just spearheaded the firm's new global outlook, 0:17:47.520 --> 0:17:50.520 which is very beautiful. So congratulations. It has like not 0:17:50.880 --> 0:17:54.119 lots of pretty graphics. Um. The most contrarian call that 0:17:54.200 --> 0:17:57.400 I thought in here was that people are too pessimistic 0:17:57.480 --> 0:18:00.080 on Europe, and this has actually gone from control are 0:18:00.160 --> 0:18:02.640 into a little bit more accepted that that already there's 0:18:02.720 --> 0:18:06.360 so much negativity based in baked into asset prices in 0:18:06.400 --> 0:18:10.200 Europe that there could be potentially opportunities there. Where are 0:18:10.240 --> 0:18:15.159 you seeing opportunities in Europe given that backdrop, Yeah, I 0:18:15.160 --> 0:18:17.159 think you know that's that's rightly so you said it 0:18:17.280 --> 0:18:19.600 the right way that um, you know that it's just 0:18:19.680 --> 0:18:22.919 really about the bar being set so low in Europe 0:18:22.920 --> 0:18:27.280 and the outlook is so gloomy that the likelihood that um, 0:18:27.400 --> 0:18:31.240 you could see some positive surprises we think is very real. 0:18:31.400 --> 0:18:36.000 We think you could get a a catalyst once if 0:18:36.040 --> 0:18:39.120 we get a trade agreement worked out with China, that 0:18:39.119 --> 0:18:42.520 that could have some follow through for Europe and Germany 0:18:42.520 --> 0:18:45.560 in particular. UM. But we would really say this, we 0:18:45.600 --> 0:18:50.560 would say the opportunities, um that you get by identifying 0:18:51.240 --> 0:18:54.680 a stronger Europe aren't necessarily in Europe. It really it's 0:18:54.720 --> 0:18:58.479 really about how that translates to global growth, and Europe 0:18:58.520 --> 0:19:01.000 is a is a key component of global growth. So 0:19:01.359 --> 0:19:03.879 our story really is that, you know, if you put 0:19:03.920 --> 0:19:07.320 the main ingredients of global growth together, whether it's China 0:19:07.680 --> 0:19:12.000 US Europe, that Europe is that one piston or that 0:19:12.080 --> 0:19:14.439 one cylinder that you know, everyone has a lot of 0:19:14.480 --> 0:19:16.240 doubts on and we just think that it could be 0:19:17.080 --> 0:19:21.479 a little better than very gloomy expectations. So given all 0:19:21.520 --> 0:19:24.040 of that, and it seems like you're pretty optimistic and 0:19:24.080 --> 0:19:28.040 constructive just generally on all things risk, I'm trying to 0:19:28.119 --> 0:19:33.720 understand whether that necessarily translated translates into higher developed market 0:19:34.280 --> 0:19:38.359 government bond yields, because right now we're not seeing inflation 0:19:38.800 --> 0:19:42.200 tick up. You do see that negative yielding debt backdrop, 0:19:42.280 --> 0:19:47.920 and that's kind of what's driving the risk asset rally. Right. Yeah, 0:19:48.040 --> 0:19:50.119 that's a fair that's a fair question, and I do 0:19:50.200 --> 0:19:54.800 think that, um, when you look longer term the prospects 0:19:54.880 --> 0:19:59.080 for for for rates within Europe, certainly, you know, you 0:19:59.119 --> 0:20:01.439 have to think they're going higher. It's it seems like 0:20:01.480 --> 0:20:05.320 they're at unsustainable levels where they are right now. UM, 0:20:05.359 --> 0:20:07.480 But we do think there's quite a bit of time 0:20:07.520 --> 0:20:10.840 between now and when that ultimately takes place. The FED 0:20:10.880 --> 0:20:14.320 has been very clear about, um, you know, they're they're 0:20:14.480 --> 0:20:17.359 dug in right now and very very unlikely we think 0:20:17.400 --> 0:20:22.000 to see a hike anytime within two thousand nineteen UM. 0:20:22.040 --> 0:20:24.159 And we do think that Europe. I mean, you know, 0:20:24.200 --> 0:20:27.680 you're talking very very slow growth, so you know, in 0:20:27.960 --> 0:20:31.159 inflation that's well below target. So you really have to 0:20:31.160 --> 0:20:34.879 get those factors moving in the right direction, but before 0:20:34.920 --> 0:20:37.760 you'd have to be overly concerned about, you know, an 0:20:37.800 --> 0:20:40.879 upward trajectory in the overall rate environment. So not a 0:20:41.720 --> 0:20:44.159 thing we don't think. So we think, you know, you're 0:20:44.200 --> 0:20:47.159 probably looking out you know, past two two thousand, twenty 0:20:47.240 --> 0:20:51.359 or even later for rates become a real material risk 0:20:51.600 --> 0:20:55.040 to the upside. Mike Bikannan, wonderful getting your point of view. 0:20:55.040 --> 0:20:58.040 Thank you so much. Mike b. Cannan's Deputy Chief Investment 0:20:58.040 --> 0:21:01.560 Officer for Western Asset Management UH, an independent affiliate of 0:21:01.600 --> 0:21:04.880 Like Mason, overseeing about four hundred and thirty billion dollars 0:21:05.160 --> 0:21:27.120 from Pasadena, California. How does one value Uber? This becomes 0:21:27.160 --> 0:21:30.119 important as it prepares it's initial public offering that is 0:21:30.160 --> 0:21:33.480 expected to raise about ten billion dollars. Joining us to 0:21:33.560 --> 0:21:37.640 discuss Shia Ovid, a technology columnist for Bloomberg Opinion, joining 0:21:37.720 --> 0:21:41.560 us here in our interactive brokers studios. So, Serre, we 0:21:41.600 --> 0:21:44.600 got the S one filing, so we got some financial 0:21:44.640 --> 0:21:48.359 information for the first time about Uber. What did it 0:21:48.400 --> 0:21:51.440 show us? Well, it showed us that Uber is a 0:21:51.480 --> 0:21:55.119 complex business, which we knew. But the S one was 0:21:56.080 --> 0:21:59.920 three hundred and fifty some odd pages, including financial statements, 0:22:00.000 --> 0:22:04.080 which is, you know, pretty meaty. And so I learned 0:22:04.080 --> 0:22:08.760 a couple of things. One, did you read the whole thing? Okay, 0:22:08.800 --> 0:22:11.000 skimmed a lot of it, but you know, I read 0:22:11.000 --> 0:22:14.560 the important bits. So a couple of things were evident. Look, 0:22:14.640 --> 0:22:19.560 this is basically two businesses. Two main businesses, the on 0:22:19.640 --> 0:22:22.880 demand rides, which is eight percent of revenue, and then 0:22:23.040 --> 0:22:26.400 Uber Eats, which is their food younger food delivery business, 0:22:26.400 --> 0:22:30.280 which is fifteen percent or so of revenue. And the 0:22:30.359 --> 0:22:34.320 on demand ride business is large, but also not growing 0:22:34.440 --> 0:22:38.280 very fast, at least by kind of current tech startup standards. 0:22:38.320 --> 0:22:42.840 That the the it's in the sort of twenty plus 0:22:42.920 --> 0:22:46.439 percent range right now, which is again maybe not the 0:22:46.480 --> 0:22:49.000 growth rate that investors have come to expect from young 0:22:49.040 --> 0:22:51.960 companies going public. We also have to remember that look, 0:22:52.280 --> 0:22:56.040 Uber is basically not a startup by any conventional definition 0:22:56.040 --> 0:22:58.720