WEBVTT - China's Structural Decline Will Drive Down Steel Price 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penl podcast on Paul Swing 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 --> 0:00:21.880 at Bloomberg dot com. Let's talk about the effect of 0:00:21.920 --> 0:00:24.960 the ongoing trade war between the US and China on 0:00:25.280 --> 0:00:28.760 medals that are used in for industrial purposes, in particular Steele. 0:00:28.880 --> 0:00:31.840 Joining us now from Bangkok is Gordon Johnson, managing director 0:00:31.880 --> 0:00:35.360 at Vertical Group, who is in Bangkok to present at 0:00:35.400 --> 0:00:37.360 a conference, but it is taking time out to join 0:00:37.440 --> 0:00:40.519 us today. Thank you so much Gordon for being with us. 0:00:40.560 --> 0:00:43.920 I want us talk about steel because it is used 0:00:44.000 --> 0:00:46.760 in so much construction, and that is some areas that 0:00:46.800 --> 0:00:50.440 would take a hit potentially, especially in China given the 0:00:50.479 --> 0:00:54.160 slowdown there and in light of the trade war. So 0:00:54.240 --> 0:00:56.600 what do you see there? We're seeing about a five 0:00:56.600 --> 0:00:59.120 percent to client so far you're to date in steel. 0:00:59.200 --> 0:01:02.800 How much further do have? Yes, so we think there's 0:01:02.880 --> 0:01:07.080 significant downside for still prices. And if you look at 0:01:07.120 --> 0:01:08.919 just the data points, if you look at the major 0:01:09.560 --> 0:01:13.160 economies and specifically p m I, sixty seven of the 0:01:13.200 --> 0:01:16.040 major economy p m I s are in contraction right now, 0:01:16.240 --> 0:01:18.640 and specifically with China. And the reason why China is 0:01:18.640 --> 0:01:21.440 so important. They consume fifty of the world still, so 0:01:21.480 --> 0:01:24.880 as goes China, as goes global still prices. And if 0:01:24.880 --> 0:01:26.520 you look at the tax and p m I, the 0:01:26.600 --> 0:01:29.160 China official p m I or the Hong Kong p 0:01:29.360 --> 0:01:31.240 m I, all of them are in contraction right now. 0:01:31.280 --> 0:01:36.160 And that's despite stimulus efforts, significant stimulus efforts from China recently. 0:01:36.160 --> 0:01:38.480 It's not working anymore. And the reason is because the 0:01:38.560 --> 0:01:40.560 debt service is so high, so they have to stimulate 0:01:40.600 --> 0:01:43.640 even more just to run. You know, they basically keep 0:01:43.680 --> 0:01:46.600 running on the same treadmill. So the last thing we'd 0:01:46.640 --> 0:01:49.960 say is um. You know, China is clearly devaluing their currency, 0:01:50.040 --> 0:01:53.440 so that means they're going to export their devaluation or 0:01:53.480 --> 0:01:55.800 depreciation to the rest of the world. And keep in 0:01:55.800 --> 0:01:59.040 mind remember in two thousand fifteen, in the first quarter 0:01:59.080 --> 0:02:03.400 of sixteen, China's currency devalued. We had the Great balk 0:02:03.440 --> 0:02:06.720 commodity scare where you had still prices really collapsed down 0:02:06.800 --> 0:02:09.160 to the three hundred and sixty four dollar per short 0:02:09.200 --> 0:02:11.480 ton level, and we think we're headed back to those levels. 0:02:11.720 --> 0:02:16.080 Not there yet, So Gordon Barish on the demand side 0:02:16.080 --> 0:02:18.040 of the equation, talk to us about the supply side 0:02:18.040 --> 0:02:21.680 of steel globally. Yeah, so that's a great question. So 0:02:22.000 --> 0:02:25.600 with Trump's tariffs, we saw a unprecedented spike and still 0:02:25.639 --> 0:02:27.360 prices in the US. Still price in the U S 0:02:27.400 --> 0:02:30.680 were five hundred dollars. Trump implemented the tariffs, they went 0:02:30.720 --> 0:02:32.880 up to nine, you know, just under nine hundred dollars 0:02:32.919 --> 0:02:36.840 per short ton um. And on that increase in prices, 0:02:36.919 --> 0:02:38.920 a lot of US still mills decided they were going 0:02:38.960 --> 0:02:43.320 to announce capacity additions. So you have all these capacity 0:02:43.440 --> 0:02:45.600 editions that have been announced. But now if you look 0:02:45.639 --> 0:02:48.200 at the US market, whether it's agriculture which is in 0:02:48.240 --> 0:02:51.519 a state of UM disarray, UM, the energy sector which 0:02:51.560 --> 0:02:54.320 is also suffering, and clearly autos which is a key 0:02:54.320 --> 0:02:57.000 to driver of demand for still which is suffering. The 0:02:57.040 --> 0:02:59.480 problem is U S still can't implement a trade case 0:02:59.639 --> 0:03:03.040 against js W and Ohio. So this still is being 0:03:03.080 --> 0:03:05.200 added and there's nothing the U S still mills can 0:03:05.200 --> 0:03:08.040 do other than capacity, and you're seeing that from some 0:03:08.080 --> 0:03:10.240 of the blast furnace guys, but you're not seeing it 0:03:10.280 --> 0:03:12.440 from the E A F guys. So again we see 0:03:12.480 --> 0:03:16.160 big problems ahead. Look, it's it's really driven by China 0:03:16.200 --> 0:03:19.480 because China drives us still prices, um, but you also 0:03:19.560 --> 0:03:21.200 have this dynamic in the U S where you have 0:03:21.240 --> 0:03:23.760 capacity that's being added that you know, these guys can't 0:03:23.760 --> 0:03:26.280 issue trade cases against each other, so it's kind of 0:03:26.280 --> 0:03:29.240 backfired in a way, if you will. So what does 0:03:29.360 --> 0:03:32.120 this mean for the investment case? I mean in terms 0:03:32.200 --> 0:03:36.480 of how do you position around this? Right? So we 0:03:36.480 --> 0:03:39.760 we think that um, you know, there's gonna be further downside, 0:03:40.160 --> 0:03:42.680 uh for a lot of stocks. Think about this right 0:03:42.680 --> 0:03:45.240 that we were presenting. We were doing two presentations at 0:03:45.240 --> 0:03:48.720 this conference. If you look at from the early eighties 0:03:48.800 --> 0:03:52.160 until two thousand four, iron ore prices average between twenty 0:03:52.200 --> 0:03:55.320 five dollars and thirty five dollars per metric tun. Iron 0:03:55.440 --> 0:03:57.480 or prices are sitting at eighty two dollars right now. 0:03:57.960 --> 0:04:00.160 The point is what happened in two thousand four is 0:04:00.200 --> 0:04:02.840 the Chinese economy had a debt to GDP ratio of 0:04:02.840 --> 0:04:06.600 a it's now above. A lot of that debt went 0:04:06.680 --> 0:04:09.560 to build empty office buildings to the sky, which are 0:04:09.640 --> 0:04:12.560 very still intensive. The point is once we mean revert 0:04:12.640 --> 0:04:15.800 back to where China was pre two thousand four, given 0:04:15.840 --> 0:04:18.080 they consume such a large percent of the world still, 0:04:18.320 --> 0:04:20.640 we think iron old prices probably dropped back down to 0:04:20.680 --> 0:04:23.080 those levels. Iron ore and coking coal are used to 0:04:23.120 --> 0:04:25.520 make still. So when you have iron ore and coking 0:04:25.560 --> 0:04:29.719 coal prices, coken coal prices down in April, UM revert 0:04:29.800 --> 0:04:32.760 back down to the levels they were pre China stimulus, 0:04:32.920 --> 0:04:35.279 we think you're also gonna have still prices revert back 0:04:35.320 --> 0:04:37.160 down the levels that I think people don't see as 0:04:37.200 --> 0:04:40.360 possible today. So we think the way to position UM 0:04:40.480 --> 0:04:43.760 is to be short in general still in iron ore stocks. 0:04:43.760 --> 0:04:45.680 So it's interesting, Gordon, as I look at the on 0:04:45.720 --> 0:04:48.560 the Bloomberg terminal, the A n R function for your coverage, 0:04:48.560 --> 0:04:51.479 I see one by two holes and ten cells. So 0:04:51.520 --> 0:04:55.240 I think I understand the bear case that you're suggesting here. 0:04:55.680 --> 0:04:58.560 Been pretty consistent. Why the bion United States steal? What's 0:04:58.600 --> 0:05:02.080 different about those guys? Well, we had to we we 0:05:02.120 --> 0:05:04.599 have a bio in United States still because um, you 0:05:04.640 --> 0:05:08.719 know about a month ago. UM. You know, we thought 0:05:08.839 --> 0:05:12.520 that the cut and capacity from US STILL as well 0:05:12.560 --> 0:05:15.440 as UM A K S UM was going to drive 0:05:15.520 --> 0:05:18.800 some upside sentiment in the space. And it did. UM. 0:05:18.839 --> 0:05:20.840 But you know, since we've made that call, you had 0:05:20.880 --> 0:05:24.360 that kind of short term positivity UM, and now you're 0:05:24.400 --> 0:05:27.920 seeing the negative negativity feed back in so UM still 0:05:27.960 --> 0:05:32.280 by rated Uh. But UM, you know the negativity is 0:05:32.279 --> 0:05:35.760 starting to outweigh UM. You know, those those those capacity cuts. 0:05:36.480 --> 0:05:40.120 So how much is your sort of base case disrupted 0:05:40.279 --> 0:05:42.359 if there is some sort of trade agreement between the 0:05:42.400 --> 0:05:46.120 U S and China. Yeah, so, I mean there will 0:05:46.200 --> 0:05:48.919 clearly be a knee jerk effect UM if there's a 0:05:48.960 --> 0:05:51.919 trade agreement between the U S and China. UM. But 0:05:52.040 --> 0:05:55.000 we think this is structural. Uh. The real issue here 0:05:55.120 --> 0:05:57.760 is not a trade war between the U S and China. 0:05:58.000 --> 0:06:01.560 We think the real issue here is special typically China. UM. 0:06:01.600 --> 0:06:03.360 If you think about this, right, if you look at 0:06:03.360 --> 0:06:07.560 trillion twelve months UM UH liquidity to GDP in China 0:06:07.680 --> 0:06:11.799 UM in two thousand, fourteen and fifteen, that ratio declined 0:06:12.040 --> 0:06:15.919 sixty three basis points, and that basically was the precursor 0:06:16.000 --> 0:06:18.760 to the Big Balk commodity scare we had in the 0:06:18.800 --> 0:06:22.000 second half of fifteen. In the first quarter of sixteen, 0:06:23.440 --> 0:06:27.080 that ratio is down a three basis point, meaning liquidity 0:06:27.080 --> 0:06:30.040 in China is just not there as it used to be, 0:06:30.360 --> 0:06:33.640 and we think that is the major driver of global 0:06:33.760 --> 0:06:36.480 bulk commodity prices UM. And if you look at the 0:06:36.520 --> 0:06:39.000 credit it's being extended to China, it's just not enough. 0:06:39.040 --> 0:06:41.839 You need about two trillion per month in credit. You know, 0:06:41.839 --> 0:06:44.840 in July you had just one trillion of credit extended. 0:06:45.080 --> 0:06:48.520 China is just not issuing enough credit to drive the 0:06:48.640 --> 0:06:50.640 um uh. You know the build out of these you know, 0:06:50.760 --> 0:06:53.800 construction essentially, whether it's bad investment or good investment, we 0:06:53.839 --> 0:06:56.200 think it's bad. Uh. They're just not issuing the credit 0:06:56.279 --> 0:06:58.839 needed to drive that build out. So we think China 0:06:58.880 --> 0:07:02.120 is the real driver again a US trade war um uh, 0:07:02.279 --> 0:07:04.720 you know, m agreement. We think we'll call the knee 0:07:04.760 --> 0:07:08.440 jerk reaction, but we think this structural decline involved commodity 0:07:08.480 --> 0:07:11.480 prices um is the name of the game. Gordon Johnson, 0:07:11.560 --> 0:07:14.480 thank you so much. Gordon Johnson's managing director at Vertigo 0:07:14.560 --> 0:07:16.960 Group talking to us about to steal business. Calling in 0:07:17.000 --> 0:07:20.640 from Bangkokery's attending a graphite electrode conference. That sounds interesting. 0:07:20.880 --> 0:07:36.200 I guess if you're into that whole metals thing, the 0:07:36.320 --> 0:07:40.720 yield curve is inverted. We continue to have uncertainty persisting 0:07:40.760 --> 0:07:44.000 around the continued continued trade tension. So the question for 0:07:44.040 --> 0:07:46.560 a lot of investors is do the confluence of these 0:07:46.560 --> 0:07:48.840 events kind of suggest at a recession might be in 0:07:48.840 --> 0:07:51.360 the offering for the US economy. To answer that question, 0:07:51.400 --> 0:07:54.120 we welcome our good friend Jim Paulson, Chief Investment Strategies 0:07:54.120 --> 0:07:56.600 from the Lootole Group. Lootole Group has about one point 0:07:56.600 --> 0:07:59.760 two billion dollars under management, based in Minneapolis. Jim, thanks 0:07:59.760 --> 0:08:01.360 so much for joining us. So let's start off right 0:08:01.400 --> 0:08:05.360 away with your thoughts about what seems to be some 0:08:05.560 --> 0:08:09.520 growing talk about ever recession over the next twelve months. Yeah. 0:08:09.720 --> 0:08:12.080 I have to say, Paul, I don't remember if we 0:08:12.240 --> 0:08:15.680 if we are headed eminently for recession, it's gonna be 0:08:15.760 --> 0:08:19.120 one of the most widely anticipated and best forecasting ones 0:08:19.200 --> 0:08:23.880 we've ever had. Um, it's just so covered out there, 0:08:23.920 --> 0:08:26.400 not only the media, that Wall Street commentary as well 0:08:26.480 --> 0:08:31.520 as just all over this. UM. I think that, um, 0:08:31.720 --> 0:08:33.400 you know, the two events, I think we make far 0:08:33.480 --> 0:08:36.959 too much of the trade um issue. I think it's 0:08:37.000 --> 0:08:40.880 a mild negative for the United States recovery, not a 0:08:41.240 --> 0:08:46.439 not a recovery killer UM. And the yield curve UH 0:08:46.600 --> 0:08:50.640 concerns me much more. I think that the signal that's 0:08:50.720 --> 0:08:53.360 it's been so good historically is is frightening to me 0:08:53.400 --> 0:08:56.880 as an old, old investment guy. But I think there's 0:08:56.920 --> 0:09:01.199 reasons to suspect the signal, maybe a little more this time, 0:09:01.240 --> 0:09:05.360 given that we've screwed up monetary policy so badly in 0:09:05.440 --> 0:09:09.720 this cycle with quantitative easing and negative yields UM and 0:09:10.360 --> 0:09:13.439 if I go away from that, what I think doesn't 0:09:13.440 --> 0:09:17.800 get enough attention, Paul, is the amount of stimulus that's 0:09:17.840 --> 0:09:21.040 being devoted to this recovery now, and not only here 0:09:21.120 --> 0:09:25.560 but globally. We've just had a tremendous amount. We worry 0:09:25.559 --> 0:09:27.120 about whether the FED is going to cut rates at 0:09:27.160 --> 0:09:30.400 quarter point on the funds rate, but the the tenuere 0:09:30.440 --> 0:09:33.000 treasury yield has fallen from three and a quarter last 0:09:33.040 --> 0:09:37.280 October to one this morning. That's a drop more than 0:09:37.360 --> 0:09:39.400 one half and most of the yield curve in the 0:09:39.520 --> 0:09:42.480 last nine months or ten months or so. Follow that 0:09:42.559 --> 0:09:45.280 up with the annual growth of the real money supply 0:09:45.400 --> 0:09:48.520 going from below one percent last year to about three 0:09:48.559 --> 0:09:51.760 and a half percent now, and followed up with fiscal 0:09:51.840 --> 0:09:55.840 juice deficit. Federal defic percent of GDP is one percent 0:09:55.960 --> 0:09:58.560 greater today than it was a little over a year ago. 0:09:59.360 --> 0:10:03.280 So we're getting three gun goose er here of stimulus 0:10:03.280 --> 0:10:05.840 that you normally only see in the pit of a recession, 0:10:06.559 --> 0:10:12.240 and it doesn't get much uh much weight in people's outlooks. Normally, 0:10:12.240 --> 0:10:15.560 with this much stimulus, with about a nine month leg 0:10:15.640 --> 0:10:18.760 or twillmut leg, you'd see a course of economists suggesting 0:10:18.800 --> 0:10:21.480 the economy is probably, you know, poised to pick up, 0:10:21.520 --> 0:10:24.240 but you're hard to hear anyone talk about that. I 0:10:24.320 --> 0:10:27.960 think it comes down, does fear freeze up the financial 0:10:28.000 --> 0:10:33.640 markets or the stimulus ultimately win. And I'm worried about 0:10:33.640 --> 0:10:38.600 a confidence freeze, but I think, uh, the odds favor 0:10:38.679 --> 0:10:41.240 that stimulus is gonna win. And I'm already seeing some 0:10:41.280 --> 0:10:44.160 events of pick up in the economy that might be 0:10:44.200 --> 0:10:46.680 starting to respond to legged impact of all this easy. 0:10:49.040 --> 0:10:51.720 I still am I still at least I paul I, 0:10:51.720 --> 0:10:55.840 I believe that, uh, you know, we've we've done a 0:10:55.880 --> 0:11:00.640 lot of things here since UH last year that I 0:11:00.679 --> 0:11:04.800 think sort of rebuilds or helps the helps the stock market, 0:11:04.920 --> 0:11:07.920 making it look a little more attractive. The current P 0:11:08.120 --> 0:11:11.280 modile now on the trailing people and the s below 0:11:11.320 --> 0:11:16.360 average in the last third year since nineteen the competitive 0:11:16.400 --> 0:11:19.000 tenure yield is less than half of what it was 0:11:19.080 --> 0:11:22.360 last October, so we've got a lower much lower motible 0:11:22.440 --> 0:11:26.560 and much lower competitive yield. Financial liquidity growth that is 0:11:26.600 --> 0:11:28.880 the excess of M two money growth over a nominal 0:11:28.960 --> 0:11:32.800 GDP just went positive for the first time in the 0:11:32.880 --> 0:11:38.120 second quarter since two thousand seventeen. UM, the advance in 0:11:38.120 --> 0:11:40.880 the SMP this year is more broad base, more sectors 0:11:40.880 --> 0:11:44.000 are participating as opposed to the concentrated nature of the 0:11:44.000 --> 0:11:47.840 advanced last year. UM. Overall, we've got, as I said, 0:11:47.920 --> 0:11:51.960 full on policy support. We've got, we've eliminated the overheat 0:11:51.960 --> 0:11:54.320 pressures that we were struggling with last year. And I 0:11:54.320 --> 0:11:58.320 would argue that fear is very pronounced and prevalent. That 0:11:58.480 --> 0:12:01.320 is a wall of worry this year as opposed to 0:12:01.320 --> 0:12:04.960 what it was last year. So in many regards, UM, 0:12:05.000 --> 0:12:08.520 I think the fundamentals have been improving in the last year, 0:12:08.520 --> 0:12:11.600 while the market has been roughly flat, earnings have slowly 0:12:11.600 --> 0:12:14.840 gone up and yields have come down. So um, Jim, 0:12:14.840 --> 0:12:16.760 given where we are in the cycle, and you mentioned 0:12:16.840 --> 0:12:18.600 kind of markets kind of flat on a trailing twelve 0:12:18.640 --> 0:12:21.720 months basis, Um. You know, people that are still constructive 0:12:21.720 --> 0:12:23.880 on the equity markets sometimes will suggest you need to 0:12:23.880 --> 0:12:26.760 get a defensive however, and is that kind of where 0:12:26.760 --> 0:12:28.320 you are? Are you willing to go out a little 0:12:28.320 --> 0:12:30.439 bit more on the risk and you know, maybe uh 0:12:30.520 --> 0:12:33.760 not necessarily go back into or staying utilities or reads 0:12:33.840 --> 0:12:36.400 or some of those defensive sectors. Well, I wouldn't. I 0:12:36.400 --> 0:12:38.560 think it's a good point. Well, I I would not 0:12:38.640 --> 0:12:42.680 be maximum risk on. I'd be somewhere between neutral and 0:12:42.800 --> 0:12:45.680 halfway to max risk on right now in terms of 0:12:45.720 --> 0:12:49.679 my bullish tilled overall. But I I I would not. 0:12:49.800 --> 0:12:53.640 I don't really favor that you only own defensive stocks 0:12:53.720 --> 0:12:59.719 right now. I think defensive stocks are overpriced, overpopularized, and 0:13:00.040 --> 0:13:03.040 probably have a fair amount of risk, at least on 0:13:03.040 --> 0:13:05.960 a relative basis, if we decide we're not headed for 0:13:06.000 --> 0:13:09.360 an imminent recession. Jim Paulson, chief investment strategist at the 0:13:09.480 --> 0:13:14.400 Luthld Group, talking to us about why he remains bullish 0:13:14.480 --> 0:13:34.840 on stocks well, as has become the norm. It seems 0:13:34.880 --> 0:13:37.439 like over the course of the summer, lots of news 0:13:37.480 --> 0:13:40.080 out of Europe. Again, Let's start with what's going on 0:13:40.120 --> 0:13:43.800 in the UK the Bars Johnson and the parliament gambit 0:13:44.120 --> 0:13:47.360 that he is playing right now in order to try 0:13:47.400 --> 0:13:50.680 to make the October thirty one deadline for Brexit. Let's 0:13:50.679 --> 0:13:54.199 welcome Alberto Gallo, partner and portfolio manager for the Algebras 0:13:54.280 --> 0:13:58.680 Macro Credit Fund UH, also a Bloomberg Opinion opinion columnists, 0:13:58.720 --> 0:14:01.280 joins us from our based in London at Thanks so 0:14:01.320 --> 0:14:03.400 much for joining us. First, let's to start with what's 0:14:03.440 --> 0:14:07.680 going on with the Brexit situation here and Bars Johnson 0:14:07.720 --> 0:14:10.839 and moving to suspend parliament temporarily. What do you what 0:14:10.880 --> 0:14:12.839 do you make of what's going on there? The situation 0:14:12.960 --> 0:14:17.080 is very confused even on the ground. There is three 0:14:17.080 --> 0:14:20.080 to four scenarios here. One of them is, as you know, 0:14:20.160 --> 0:14:22.920 Parliament is suspended. There can be a no confidence vote. 0:14:23.800 --> 0:14:26.280 Depending on this result, you may have new elections or 0:14:26.320 --> 0:14:30.200 you may have a continuation of the current government, which 0:14:30.240 --> 0:14:33.080 then we'll have to decide whether to negotiate or go 0:14:33.200 --> 0:14:37.080 into a hard Brexit. Scenario. The general view we have 0:14:37.360 --> 0:14:40.680 is that this is more a symptom, a symptom of 0:14:40.720 --> 0:14:43.600 the problem than than the cause of the problem. And 0:14:43.680 --> 0:14:46.720 the issue with the UK is the growth model the 0:14:46.800 --> 0:14:49.080 country had for the last twenty thirty years, which was 0:14:49.640 --> 0:14:54.760 importing capital, goods and people on exporting services. This growth 0:14:54.800 --> 0:14:58.360 model no longer works with the United Europe. So the 0:14:58.480 --> 0:15:01.479 UK needs to re engineer itself. There's too much inequality, 0:15:02.240 --> 0:15:06.560 lack of productivity, and unfortunately the various political parties are 0:15:06.600 --> 0:15:11.680 are proposing very quick uh fixes which are not going 0:15:11.720 --> 0:15:14.560 to work. So in any case, we see a start 0:15:14.560 --> 0:15:18.520 inflationary environment. You see inflation going up and growth slowly 0:15:18.720 --> 0:15:21.800 declining in the UK, and some companies are getting hurt. 0:15:22.880 --> 0:15:25.200 So Alberto, I want to talk about I mean, it's 0:15:25.320 --> 0:15:28.440 clear that the uncertainty in Europe persists, as it does 0:15:28.480 --> 0:15:30.120 in the US, as it does in China. This is 0:15:30.120 --> 0:15:34.360 sort of the theme of and perhaps beyond. But I'm 0:15:34.360 --> 0:15:37.280 trying to figure out how an investor positions here, and 0:15:37.320 --> 0:15:41.000 I'm wondering how you can justify lending money to Italy 0:15:41.120 --> 0:15:45.600 for less than a percent uh, just simply on the 0:15:45.640 --> 0:15:51.560 hope that they can actually get a government together please explain. 0:15:51.880 --> 0:15:55.560 I think the I think the Italian new coalition is 0:15:55.600 --> 0:15:58.400 a done deal. It will be announced in our view 0:15:58.480 --> 0:16:01.880 later today, and it will be a better coalition that 0:16:02.000 --> 0:16:07.080 what we had before, more moderate with the Democrats and 0:16:07.200 --> 0:16:13.600 the Five Star Movement UM uniting forces, but potentially less 0:16:13.600 --> 0:16:17.160 populist economic measures than before. As you know, the Northern 0:16:17.240 --> 0:16:22.120 League UM led by Salvini, wanted to uh not only 0:16:22.160 --> 0:16:26.400 stopped migrants, but also had a very strong stance against 0:16:26.400 --> 0:16:30.320 the European Union, potentially with the threat of exiting the Euro. 0:16:30.440 --> 0:16:33.440 This is no longer the case, UM, so we have 0:16:34.280 --> 0:16:36.880 you know, it's true we have less than one percent 0:16:36.960 --> 0:16:41.720 kneeled on Italian tenure. GOVI is, but we have zero Spain, zero, 0:16:41.880 --> 0:16:46.880 Portugal minus seventy beats on German boons and hedged back 0:16:46.920 --> 0:16:50.400 into Euros. You know, the US treasuries also our minus 0:16:50.400 --> 0:16:53.680 sixty beats. So you're investing in Italy? Are you investing 0:16:53.680 --> 0:16:59.080 in Italian? But we've been buying in August when the 0:16:59.120 --> 0:17:04.199 Sylvini had lines that you know, broke the coalition and 0:17:04.280 --> 0:17:07.280 b DPS widened. So we've been buying and we think 0:17:07.280 --> 0:17:10.800 there's still value compared to everything else. We don't think 0:17:11.040 --> 0:17:15.879 the spread over bonds is um it's justifiable compared to 0:17:16.080 --> 0:17:18.520 zero yield everywhere else. Obviously, we live in a queue 0:17:18.560 --> 0:17:21.320 infinity world, in a yield desert that there's no more 0:17:21.359 --> 0:17:25.040 yield in anything that's safe. We see a bit more 0:17:25.119 --> 0:17:27.720 valuing in corporate bonds and in bank bonds than there 0:17:27.800 --> 0:17:29.959 is in sovereign bonds. At the moment, sovereign bonds are 0:17:29.960 --> 0:17:33.200 getting to two crazy levels where it's almost better to 0:17:33.200 --> 0:17:35.760 to buy gold or put your cushion in the mattress 0:17:35.840 --> 0:17:38.920 rather than getting a negative yield. So Alberto is used said, 0:17:38.920 --> 0:17:43.000 we only buy positive yield bonds here, right, So albertis used. Fact, 0:17:43.000 --> 0:17:45.920 your front has about twelve point three billion pounds under management. 0:17:46.000 --> 0:17:50.159 You obviously think about the macro side of investing. What 0:17:50.359 --> 0:17:53.159 is just kind of your overall view about Western eube. 0:17:53.359 --> 0:17:56.080 I mean, it just seems like there are headwinds everywhere 0:17:56.119 --> 0:18:01.960 you look. Are you This year has been and we 0:18:02.119 --> 0:18:04.639 continues to be able to kick the can. World of 0:18:04.680 --> 0:18:08.439 a world that becomes closer to Japan, where growth and 0:18:08.480 --> 0:18:14.480 productivity are still positive but more sluggish, where companies and 0:18:14.560 --> 0:18:18.119 banks kick the can thanks to Dobvish monetary policy. But 0:18:18.240 --> 0:18:21.840 we don't have an acceleration in growth. So we've been 0:18:21.880 --> 0:18:26.040 buying tresory bonds with positive yield across the US, across Australia, 0:18:26.760 --> 0:18:31.280 across Europe, across countries where central banks have to throw 0:18:31.320 --> 0:18:34.040 the towel and become more dovish. We've been buying the 0:18:34.040 --> 0:18:36.960 bonds of corporates and banks which are surviving with relatively 0:18:37.000 --> 0:18:40.879 stronger capital structures. And we've been, um, we've been short 0:18:40.920 --> 0:18:44.280 on small caps, on cyclical equities, on things that basically 0:18:44.320 --> 0:18:47.560 need a pick up a momentum to do well. And 0:18:47.840 --> 0:18:50.639 this continues in our view to be to be a 0:18:50.680 --> 0:18:53.520 good set up. Um. We think there's more value in 0:18:53.840 --> 0:18:59.119 corporate bonds rather than sovereign bonds now. Um, but you 0:18:59.119 --> 0:19:02.119 know we obviously it does depend on what growth will do. 0:19:02.160 --> 0:19:07.280 When growth is becoming increasingly fragile, right become increasing fragile 0:19:07.320 --> 0:19:09.600 over the past months. Alberto Gallo, thank you so much 0:19:09.640 --> 0:19:12.120 for being with us. Alberto Gallo as partner and portfolio 0:19:12.119 --> 0:19:16.280 manager for the Algebras Macro Credit Fund Algebras Investments over 0:19:16.400 --> 0:19:20.240 in London, overseeing twelve point three billion pounds from wide 0:19:20.560 --> 0:19:24.119 talking about what is going on over in Western Europe. 0:19:24.119 --> 0:19:39.439 Italian BONDI yields falling to all time lows today. But 0:19:39.440 --> 0:19:41.919 you have a very interesting I PO that I'll hopefully 0:19:41.920 --> 0:19:45.119 coming to the market later this year. Peloton, the I 0:19:45.160 --> 0:19:49.680 would call exercise leisure company coming public just followed its 0:19:49.720 --> 0:19:52.880 I p O prospectus. Help us dig down a little 0:19:52.880 --> 0:19:55.320 bit deeper, we welcome Drew Singer drews and IPO reporter 0:19:55.359 --> 0:19:57.760 for Bloomberg News. Uh, Drew. One of the things I 0:19:57.840 --> 0:20:01.320 noticed when I first opened the s one is this company. 0:20:01.400 --> 0:20:04.200 I'm not sure they really know what they are? Who 0:20:04.240 --> 0:20:07.400 they are? Are they a tech company? Are a leisure company? 0:20:07.600 --> 0:20:10.480 What do you do? What did you see? I think 0:20:10.520 --> 0:20:12.920 that's the big question. I mean, maybe even the ten 0:20:12.960 --> 0:20:14.919 billion dollar question if that's what this I p O 0:20:15.080 --> 0:20:17.679 ends up valuing the company. Yet, as we hear it 0:20:17.760 --> 0:20:20.119 might I mean, you have investors who are going to 0:20:20.200 --> 0:20:22.880 be spending their labor day vacations trying to figure out 0:20:22.880 --> 0:20:25.240 the answer to that exact question. And everybody's going to 0:20:25.320 --> 0:20:27.360 kind of have their own take. I mean, some people 0:20:27.400 --> 0:20:29.400 are going to look at this like AI, a fit 0:20:29.480 --> 0:20:31.600 Bit or a go pro and their i TS went 0:20:31.680 --> 0:20:33.960 went really badly, if you remember, other people might see 0:20:33.960 --> 0:20:35.919 it more like a Canada goose or a YETI and 0:20:35.960 --> 0:20:38.440 their i ts went went great. So the bulls and 0:20:38.480 --> 0:20:40.760 the bears both have a lot of ammo here. I 0:20:40.840 --> 0:20:43.560 love the soul searching sort of kind of the language 0:20:43.600 --> 0:20:45.480 that we use around some of these tech I p 0:20:45.600 --> 0:20:47.720 o s. What is this company? It's sort of like 0:20:47.800 --> 0:20:49.760 we work, you know, I mean, Drew, I guess can 0:20:49.800 --> 0:20:52.399 we put this in a perspective in terms of I 0:20:52.560 --> 0:20:55.360 p o s in general? How much are this sort 0:20:55.359 --> 0:20:58.960 of tech darlings? Yes, this is an exercise tech sort 0:20:59.000 --> 0:21:02.359 of version of it. How different is that from the 0:21:02.440 --> 0:21:04.680 rest of the industries that try to do I p 0:21:04.760 --> 0:21:07.280 o s in terms of the sort of soul searching 0:21:07.320 --> 0:21:10.919 aspect of what they are. It's a good question because 0:21:11.040 --> 0:21:13.800 some of these companies are so large, and they've raised 0:21:13.960 --> 0:21:16.960 already so much money in both equity and debt that 0:21:17.040 --> 0:21:19.920 in order for them to be uh successful, in order 0:21:19.960 --> 0:21:22.360 for them to return money to all of these investors, 0:21:22.400 --> 0:21:26.080 they need to become massive, just absolutely gigantic, like something 0:21:26.119 --> 0:21:28.960 out of Black Mirror gigantic. That's what we Work seems 0:21:29.000 --> 0:21:31.040 to be talking about, where a million people per city 0:21:31.040 --> 0:21:33.080 are going to be going to these we Work offices. 0:21:33.119 --> 0:21:36.200 And and and changing their their vision for the world. Uh, 0:21:36.440 --> 0:21:39.159 you need the company to be absolutely gigantic, and in 0:21:39.240 --> 0:21:40.960 order to do that, you don't really know what the 0:21:41.000 --> 0:21:42.879 company is going to look like at that stage and 0:21:42.920 --> 0:21:46.439 its maturity just because of how relatively immature the companies 0:21:46.480 --> 0:21:48.359 are at the point of their I p O. Right, 0:21:48.359 --> 0:21:50.120 which is a reason why we hear things like it's 0:21:50.119 --> 0:21:53.399 a lifestyle, it's community, it's the concept of life. We 0:21:53.480 --> 0:21:58.480 are everything to you and you will pay us for it. Exactly. So, Drew, 0:21:58.600 --> 0:22:01.240 what does this company? Let's go ask the easy questions. First, 0:22:01.359 --> 0:22:05.240 does this company make money? No, they don't make money, 0:22:05.400 --> 0:22:07.120 and they're they're very similar to some other large ip 0:22:07.200 --> 0:22:09.719 as we've seen, like Uber and like we work in 0:22:09.720 --> 0:22:12.520 that regard. They they are not yet profitable. So this 0:22:12.600 --> 0:22:15.320 is another really big bet on a company that hasn't 0:22:15.400 --> 0:22:17.520 yet reached a point where they've figured out how to 0:22:17.520 --> 0:22:20.520 turn a profit. Well, technology companies coming public that are 0:22:20.600 --> 0:22:23.840 unprofitable is not necessarily, you know, a new thing. The markets, 0:22:24.000 --> 0:22:26.639