1 00:00:00,120 --> 00:00:06,760 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 2 00:00:11,640 --> 00:00:15,440 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 3 00:00:15,440 --> 00:00:18,400 Speaker 2: with Lisa Bromwitz and a Marie Hortern. Join us each 4 00:00:18,480 --> 00:00:21,400 Speaker 2: day for insight from the best in markets, economics, and 5 00:00:21,400 --> 00:00:24,720 Speaker 2: geopolitics from our global headquarters in New York City. We 6 00:00:24,760 --> 00:00:27,440 Speaker 2: are live on Bloomberg Television weekday mornings from six to 7 00:00:27,520 --> 00:00:31,000 Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify 8 00:00:31,200 --> 00:00:33,479 Speaker 2: or anywhere else you listen, and as always on the 9 00:00:33,479 --> 00:00:37,400 Speaker 2: Bloomberg Terminal and the Bloomberg Business App. Bruce Casman joins 10 00:00:37,479 --> 00:00:39,120 Speaker 2: us now for more. Bruce, We're going to talk about 11 00:00:39,159 --> 00:00:41,800 Speaker 2: management policy, the Fed, the boj Can we just start 12 00:00:42,040 --> 00:00:44,199 Speaker 2: on this with America's debt pile? I know you and 13 00:00:44,240 --> 00:00:46,680 Speaker 2: the team at JP Morgan have talked about the boiling 14 00:00:47,159 --> 00:00:49,159 Speaker 2: of the frog, Bruce. When does it start to get 15 00:00:49,159 --> 00:00:50,000 Speaker 2: a little bit too hot? 16 00:00:51,840 --> 00:00:53,720 Speaker 3: Well, I think it will get too hot if we're 17 00:00:53,840 --> 00:00:55,920 Speaker 3: right that the FED just doesn't have very much room 18 00:00:55,920 --> 00:00:59,959 Speaker 3: to ease, and over time that begins to affect balance sheet. 19 00:01:00,200 --> 00:01:03,400 Speaker 3: It keeps credit tight, it weighs on pricing power. It's 20 00:01:03,440 --> 00:01:05,520 Speaker 3: a slow moving story, and I think we have to 21 00:01:05,600 --> 00:01:09,319 Speaker 3: recognize that so far the effects of high interest rates 22 00:01:09,400 --> 00:01:11,720 Speaker 3: just haven't done nearly as much damage as we would 23 00:01:11,720 --> 00:01:14,360 Speaker 3: have thought to the private sector. So this story is 24 00:01:14,400 --> 00:01:17,720 Speaker 3: playing out against another narrative, which is to say the 25 00:01:17,760 --> 00:01:20,640 Speaker 3: private sector is healthy, we're getting supply side improvement, and 26 00:01:20,760 --> 00:01:23,400 Speaker 3: maybe we can live with high interest rates and actually 27 00:01:23,440 --> 00:01:25,600 Speaker 3: generate a soft landing. We've kind of moved from being 28 00:01:25,720 --> 00:01:28,919 Speaker 3: very much in the boiler frog stands to being agnostic 29 00:01:28,959 --> 00:01:31,200 Speaker 3: about where this story is going to lead us. 30 00:01:31,440 --> 00:01:33,000 Speaker 2: Can you talk to me, Bruce then, about the supply 31 00:01:33,080 --> 00:01:35,600 Speaker 2: side narrative that the chairman seemed to endorse in the 32 00:01:35,680 --> 00:01:38,200 Speaker 2: news conference last week. What's the question? Do you have 33 00:01:38,560 --> 00:01:41,000 Speaker 2: the sort of linger before fully embracing it. 34 00:01:42,680 --> 00:01:45,000 Speaker 3: Well, I think we should embrace it. There's an immigration 35 00:01:45,120 --> 00:01:47,480 Speaker 3: story which is playing out right now and is boosting 36 00:01:47,560 --> 00:01:51,760 Speaker 3: labor force growth. It's limiting the pressure on labor markets 37 00:01:51,760 --> 00:01:55,800 Speaker 3: and inflation from rising jobs. I think we've also generated 38 00:01:55,840 --> 00:01:58,680 Speaker 3: some pretty strong productivity growth, and that seemed to me 39 00:01:58,760 --> 00:02:00,920 Speaker 3: to be linked with what we've been doing on spending 40 00:02:00,920 --> 00:02:04,440 Speaker 3: an R and D and intellectual property. The question is, 41 00:02:04,520 --> 00:02:07,520 Speaker 3: though we still have a tight label market, we have 42 00:02:07,720 --> 00:02:10,720 Speaker 3: elevated inflation, which I think is sticky. I think, as 43 00:02:10,720 --> 00:02:13,600 Speaker 3: you mentioned a minute ago, the goods price story globally 44 00:02:13,680 --> 00:02:16,640 Speaker 3: is shifting gear. I'm just not convinced that's going to 45 00:02:16,639 --> 00:02:18,600 Speaker 3: be enough to get inflation all the way down to 46 00:02:18,639 --> 00:02:21,000 Speaker 3: what will make the FED comfortable over the next year 47 00:02:21,080 --> 00:02:21,280 Speaker 3: or so. 48 00:02:21,680 --> 00:02:24,160 Speaker 1: Bruce, we've been talking a lot about the bridge collapse 49 00:02:24,280 --> 00:02:28,520 Speaker 1: in Baltimore and understanding that it's just one particular port 50 00:02:28,560 --> 00:02:30,960 Speaker 1: and that potentially other ports can take in. 51 00:02:31,080 --> 00:02:32,079 Speaker 4: Some of that traffic. 52 00:02:32,240 --> 00:02:34,359 Speaker 1: But does this highlight to you that supply shocks have 53 00:02:34,440 --> 00:02:37,360 Speaker 1: not gone away and that there are these vulnerabilities that 54 00:02:37,440 --> 00:02:40,880 Speaker 1: will kind of put some sort of floor under this 55 00:02:41,040 --> 00:02:44,200 Speaker 1: goods disinflation that we've seen for the past couple of years. 56 00:02:46,120 --> 00:02:48,840 Speaker 3: Yeah, I think what you're seeing in some senses is 57 00:02:48,880 --> 00:02:51,160 Speaker 3: a little bit of that, with the idea that there's 58 00:02:51,160 --> 00:02:54,639 Speaker 3: some new pressures and shipping costs and this port closure 59 00:02:54,720 --> 00:02:57,120 Speaker 3: might be part of that. But also you're just losing 60 00:02:57,160 --> 00:03:01,320 Speaker 3: the benefits of having unwound this locations. You know, you've 61 00:03:01,360 --> 00:03:04,560 Speaker 3: had over the last six seven months, US goods pricing 62 00:03:05,400 --> 00:03:07,200 Speaker 3: X food and energy falling at two two and a 63 00:03:07,280 --> 00:03:10,040 Speaker 3: half percent base. I think most of the indicators, both 64 00:03:10,080 --> 00:03:12,720 Speaker 3: domestically and globally are saying that's going back at a 65 00:03:12,760 --> 00:03:16,040 Speaker 3: minimum to zero here, you know, So when Chair Pal 66 00:03:16,200 --> 00:03:19,320 Speaker 3: talks about shelter inflation coming down, I think there's an 67 00:03:19,360 --> 00:03:23,120 Speaker 3: offset here, quite substantial, maybe even complete, of what's happening 68 00:03:23,160 --> 00:03:25,480 Speaker 3: in the goods price story. And then that leaves the focus, 69 00:03:25,520 --> 00:03:27,800 Speaker 3: of course on inflation very much on how you think 70 00:03:27,800 --> 00:03:30,720 Speaker 3: about labor markets and other service price inflation, which I 71 00:03:30,720 --> 00:03:32,400 Speaker 3: think we're going to see is pretty firm when we 72 00:03:32,440 --> 00:03:35,000 Speaker 3: get the PCE report on prices on Friday. 73 00:03:35,200 --> 00:03:37,600 Speaker 1: So taking a step back, this raises the question, and 74 00:03:37,600 --> 00:03:39,840 Speaker 1: we were talking about it with Muhammad al Arian about 75 00:03:39,840 --> 00:03:42,040 Speaker 1: whether this is sort of a tipping point for this 76 00:03:42,120 --> 00:03:45,400 Speaker 1: Federal Reserve intacitly accepting a two point something or a 77 00:03:45,440 --> 00:03:48,560 Speaker 1: two to three percent inflation rate for the foreseeable future. 78 00:03:49,080 --> 00:03:51,720 Speaker 1: Do you think that we have shifted that This past 79 00:03:51,960 --> 00:03:54,720 Speaker 1: press conference from the Federal Reserve was really the key 80 00:03:54,800 --> 00:03:56,240 Speaker 1: moment in that transition. 81 00:03:57,760 --> 00:03:59,680 Speaker 3: I think what the Fed is telling us it wants 82 00:03:59,720 --> 00:04:01,760 Speaker 3: to are at the easing process in the middle of 83 00:04:01,760 --> 00:04:04,200 Speaker 3: the year, and it's willing to do so even if 84 00:04:04,200 --> 00:04:06,440 Speaker 3: in the first half of this year it's getting uncomfortably 85 00:04:06,520 --> 00:04:10,160 Speaker 3: high inflation performance. What I don't think this means is 86 00:04:10,200 --> 00:04:12,600 Speaker 3: that the FED is willing to accept on a sustained 87 00:04:12,600 --> 00:04:16,120 Speaker 3: basis inflation close to or higher than three percent. And 88 00:04:16,160 --> 00:04:18,400 Speaker 3: what we think is going to happen here is that 89 00:04:18,440 --> 00:04:20,640 Speaker 3: you are going to see a pivot sometime around the 90 00:04:20,680 --> 00:04:23,320 Speaker 3: middle of the year where the FED maybe delivers one 91 00:04:23,520 --> 00:04:26,440 Speaker 3: or two easing, but it really then starts to shift 92 00:04:26,440 --> 00:04:29,040 Speaker 3: its guidance. The market today has over one hundred and 93 00:04:29,080 --> 00:04:32,040 Speaker 3: fifty basis points a FED easing price through the end 94 00:04:32,040 --> 00:04:34,880 Speaker 3: of twenty five. Unless the economy gets into trouble. I 95 00:04:34,920 --> 00:04:36,600 Speaker 3: don't think we're going to see that delivered. 96 00:04:37,160 --> 00:04:37,720 Speaker 4: You say they. 97 00:04:38,040 --> 00:04:40,039 Speaker 5: Want to cut, which echoes a lot of individuals that 98 00:04:40,080 --> 00:04:43,160 Speaker 5: come on the program, But they also continuously how data 99 00:04:43,200 --> 00:04:45,359 Speaker 5: dependent they are. What would they need to see in 100 00:04:45,400 --> 00:04:48,760 Speaker 5: the data to actually say, you know what, we're waiting, 101 00:04:48,839 --> 00:04:50,000 Speaker 5: we're not going to cut this year. 102 00:04:51,360 --> 00:04:53,599 Speaker 3: I think that's an interesting point because as they're talking 103 00:04:53,720 --> 00:04:57,240 Speaker 3: data dependent, you could see Chairpal in his press conference 104 00:04:57,320 --> 00:05:00,280 Speaker 3: really talk as if the bar is pretty high event 105 00:05:00,360 --> 00:05:03,440 Speaker 3: in easing. So I'm not sure I have the numbers. 106 00:05:03,440 --> 00:05:05,640 Speaker 3: I'd want to be confident about where that is. But 107 00:05:05,680 --> 00:05:08,080 Speaker 3: I think what they've told us at least to start 108 00:05:08,120 --> 00:05:12,120 Speaker 3: the easing process around mid year that they're fairly comfortable 109 00:05:12,160 --> 00:05:15,560 Speaker 3: they've made enough progress. Yeah, there are data prints here 110 00:05:15,560 --> 00:05:17,600 Speaker 3: that could take them off of that, and I would 111 00:05:17,680 --> 00:05:20,720 Speaker 3: argue the committee, as you look at the projections, are 112 00:05:20,760 --> 00:05:23,679 Speaker 3: probably more evenly divided on this issue. But I think 113 00:05:24,320 --> 00:05:26,279 Speaker 3: the bar is pretty high here. I'm not even sure 114 00:05:26,320 --> 00:05:28,359 Speaker 3: that if we get a couple of point threes on 115 00:05:28,480 --> 00:05:31,200 Speaker 3: core inflation, which i'd say a high numbers, that that's 116 00:05:31,240 --> 00:05:33,880 Speaker 3: going to be enough to prevent a June easing. I 117 00:05:33,880 --> 00:05:36,280 Speaker 3: think it'll stop them from doing much, but I'm not 118 00:05:36,320 --> 00:05:38,159 Speaker 3: sure it'll stop them from easing in June. 119 00:05:38,480 --> 00:05:40,760 Speaker 2: Brace this one inconsistency that jumps out to me, perhaps 120 00:05:40,800 --> 00:05:43,719 Speaker 2: we should finish it. How can the FEDS simultaneously say 121 00:05:43,720 --> 00:05:46,440 Speaker 2: we're restrictive and then at the same time embrace the 122 00:05:46,480 --> 00:05:49,440 Speaker 2: supply side narrative of the labor market, but also points 123 00:05:49,480 --> 00:05:52,120 Speaker 2: the labor market as evidence of being restrictive. How does 124 00:05:52,160 --> 00:05:52,800 Speaker 2: that ant up. 125 00:05:54,200 --> 00:05:56,920 Speaker 3: Well, I think there's a level issue of how tight 126 00:05:57,000 --> 00:06:00,159 Speaker 3: the labor market is, and then there's an issue how 127 00:06:00,240 --> 00:06:02,600 Speaker 3: much supply side performance is helping it. But I think 128 00:06:02,600 --> 00:06:05,279 Speaker 3: you are raising an important point, which is that the 129 00:06:05,320 --> 00:06:08,400 Speaker 3: supply side is improving and helping the FED, but it 130 00:06:08,520 --> 00:06:11,599 Speaker 3: is also a signal that the neutral rate is higher. 131 00:06:11,600 --> 00:06:14,200 Speaker 3: And I think when you look at financial market performance here, 132 00:06:14,560 --> 00:06:18,480 Speaker 3: it is embedding this idea that some combination of supply 133 00:06:18,600 --> 00:06:22,400 Speaker 3: side performance, a friendly FED, and some other things going 134 00:06:22,440 --> 00:06:24,880 Speaker 3: on here is allowing us to do a lot better 135 00:06:24,880 --> 00:06:27,680 Speaker 3: with higher interest rates than we might have expected. So 136 00:06:27,720 --> 00:06:30,520 Speaker 3: I do think you're one hundred percent right here. Policy 137 00:06:30,640 --> 00:06:33,599 Speaker 3: is not as restrictive as the FED seems to be suggesting. 138 00:06:34,080 --> 00:06:36,160 Speaker 3: I think growth will do better if we're right. Then 139 00:06:36,160 --> 00:06:38,400 Speaker 3: inflation is sticky. I think they are going to have 140 00:06:38,400 --> 00:06:40,760 Speaker 3: to change their tunes somewhat here, but it still looks 141 00:06:40,800 --> 00:06:42,480 Speaker 3: to us like they're getting ready to at least start 142 00:06:42,520 --> 00:06:44,360 Speaker 3: an easing process around mid year. 143 00:06:44,560 --> 00:06:47,039 Speaker 2: It's hard to disagree at the moment. Bruce. Thank you, Sir, 144 00:06:47,080 --> 00:06:54,160 Speaker 2: Bruce Kunsman of JP Morgan Economic Tanks on Friday morning 145 00:07:00,680 --> 00:07:02,800 Speaker 2: AM under line of a black Rock, expecting cuts to 146 00:07:02,800 --> 00:07:05,080 Speaker 2: start in the second half and writing this while a 147 00:07:05,120 --> 00:07:08,520 Speaker 2: high for longer cost of capital environment poses fundamental pressure 148 00:07:08,720 --> 00:07:13,080 Speaker 2: for some floating rate borrowers with limited financial flexibility. Competition 149 00:07:13,160 --> 00:07:16,440 Speaker 2: between syndicated and private markets, coupled with ample private debt. 150 00:07:16,520 --> 00:07:20,720 Speaker 2: Dry powder has encouraged tighter pricing, especially for large borrowers 151 00:07:20,800 --> 00:07:24,120 Speaker 2: who have access to both markets. A Mandarin places say 152 00:07:24,360 --> 00:07:26,040 Speaker 2: joined us now for more a man, good morning to 153 00:07:26,080 --> 00:07:28,240 Speaker 2: you morning. Thank you for the MP parabobble with us 154 00:07:28,320 --> 00:07:31,240 Speaker 2: yesterday and they were talking about a soft landing in credit. 155 00:07:31,320 --> 00:07:32,880 Speaker 2: Is that your kind of world you're view on things 156 00:07:32,920 --> 00:07:33,400 Speaker 2: at a moment? 157 00:07:33,880 --> 00:07:35,440 Speaker 6: And good morning, thank you for having me I did 158 00:07:35,480 --> 00:07:37,000 Speaker 6: see that interview with Megan yesterday. 159 00:07:37,040 --> 00:07:38,960 Speaker 4: I think I would agree with that. 160 00:07:39,320 --> 00:07:43,080 Speaker 6: I think the bar for significant disruption is really high 161 00:07:43,160 --> 00:07:46,560 Speaker 6: in the corporate credit market. We do, though, expect dispersion, 162 00:07:46,920 --> 00:07:49,680 Speaker 6: and we are actually seeing that to a pretty significant 163 00:07:49,720 --> 00:07:54,160 Speaker 6: extent more recently in the US, European and Asian credit markets. 164 00:07:54,680 --> 00:07:57,440 Speaker 6: Two things I would note on the point of kind 165 00:07:57,440 --> 00:07:59,920 Speaker 6: of competition between public and private, I think the way 166 00:08:00,040 --> 00:08:02,720 Speaker 6: we're viewing it as maybe several years ago, if you 167 00:08:02,760 --> 00:08:04,600 Speaker 6: were a corporate and left finn you would have made 168 00:08:04,640 --> 00:08:07,320 Speaker 6: the decision between issuing a bond and issuing a leverage loan. 169 00:08:07,480 --> 00:08:10,600 Speaker 6: Now there's a third option, and so you've actually seen 170 00:08:10,800 --> 00:08:14,160 Speaker 6: private credit become a viable option for the opportunity set 171 00:08:14,160 --> 00:08:16,520 Speaker 6: for a lot of corporates, not every corporate. Not every 172 00:08:16,560 --> 00:08:20,040 Speaker 6: corporate needs the size to become index eligible in that market, 173 00:08:20,120 --> 00:08:21,920 Speaker 6: but it is a viable third option. 174 00:08:22,160 --> 00:08:24,280 Speaker 4: The other point is, I think on just the terms. 175 00:08:24,000 --> 00:08:27,000 Speaker 6: Of having more access outside of the banking channel and 176 00:08:27,040 --> 00:08:29,400 Speaker 6: the public markets, we believe has been a good thing 177 00:08:29,600 --> 00:08:31,480 Speaker 6: for corporates. And you actually see that in what I 178 00:08:31,480 --> 00:08:34,680 Speaker 6: would argue as a pretty muted default rate given the 179 00:08:34,720 --> 00:08:37,719 Speaker 6: interest hikes that we've had since March of twenty twenty two. 180 00:08:37,720 --> 00:08:39,120 Speaker 4: And I think that that shows that it's working. 181 00:08:39,200 --> 00:08:41,360 Speaker 1: And Bob Michael of Jpmorgo was talking about that the 182 00:08:41,440 --> 00:08:45,200 Speaker 1: ballast kind of to some of the credit sphere. I do, though, 183 00:08:45,240 --> 00:08:47,120 Speaker 1: want to just sit on this idea of frost, and 184 00:08:47,120 --> 00:08:49,320 Speaker 1: that's something that Megan was talking about, that there is 185 00:08:49,360 --> 00:08:51,719 Speaker 1: this frost developing and tighter credit speds because of. 186 00:08:51,640 --> 00:08:52,679 Speaker 4: The increased competition. 187 00:08:53,720 --> 00:08:56,160 Speaker 1: Sounds a lot like the equity market exuberance, but it 188 00:08:56,200 --> 00:08:57,679 Speaker 1: makes sense so it can go on. 189 00:08:57,679 --> 00:08:58,720 Speaker 4: For a long period of time. 190 00:08:58,840 --> 00:08:59,920 Speaker 1: Is that kind of what you see. 191 00:09:00,400 --> 00:09:02,440 Speaker 6: We see it, and I would say it's not exclusively 192 00:09:02,480 --> 00:09:04,680 Speaker 6: limited to the lift fin market where there's overlap with 193 00:09:04,720 --> 00:09:07,040 Speaker 6: private credit. You also see super tight credit spreads and 194 00:09:07,120 --> 00:09:10,600 Speaker 6: investment grade. To me actually it reflects a few things. 195 00:09:10,640 --> 00:09:14,120 Speaker 6: One is fundamentals are pretty good. Economic backdrop is pretty strong, 196 00:09:14,679 --> 00:09:17,880 Speaker 6: but if you look at spreads, they look really tight optically, 197 00:09:18,160 --> 00:09:20,160 Speaker 6: if you look at all in yields. However, if you 198 00:09:20,400 --> 00:09:22,800 Speaker 6: going back to the post financial crisis period, we're talking 199 00:09:23,080 --> 00:09:26,080 Speaker 6: really cheap levels on a percentile basis. 200 00:09:26,120 --> 00:09:26,960 Speaker 4: If you were to look at. 201 00:09:26,880 --> 00:09:30,640 Speaker 6: Just daily spreads, daily yields back to twenty ten, yield 202 00:09:30,720 --> 00:09:34,920 Speaker 6: screen really cheap and spread screen really rich. So I 203 00:09:34,920 --> 00:09:37,760 Speaker 6: think that's part of it is that the marginal buyer 204 00:09:37,800 --> 00:09:41,160 Speaker 6: in credit is actually yield based, so when they're coming 205 00:09:41,200 --> 00:09:43,560 Speaker 6: to deploy capital, they're not looking at it on a 206 00:09:43,600 --> 00:09:45,760 Speaker 6: spread versus index. They're looking at where can I lock 207 00:09:45,800 --> 00:09:47,600 Speaker 6: in all in yields? And I think it's fueling some 208 00:09:47,760 --> 00:09:51,280 Speaker 6: of that optically tight spread measures and credit as opposed 209 00:09:51,280 --> 00:09:54,400 Speaker 6: to it's not indiscriminate because again we. 210 00:09:54,400 --> 00:09:56,240 Speaker 4: Are actually seeing triple c's lag. 211 00:09:56,559 --> 00:09:59,360 Speaker 6: We're seeing actually a pretty significant share of credits that 212 00:09:59,360 --> 00:10:02,760 Speaker 6: are trading above thousand basis points in spread. You are 213 00:10:02,800 --> 00:10:05,800 Speaker 6: seeing dispersion in the single name capital structure over leverage 214 00:10:05,800 --> 00:10:07,360 Speaker 6: capital structures that are. 215 00:10:07,200 --> 00:10:08,400 Speaker 4: Doing liability management. 216 00:10:08,559 --> 00:10:10,240 Speaker 6: So I would say if it were kind of a 217 00:10:10,360 --> 00:10:12,920 Speaker 6: rising tide lifts, all boats and everything was rallying. I 218 00:10:12,920 --> 00:10:15,360 Speaker 6: would say we are entering into kind of maybe possible 219 00:10:15,360 --> 00:10:17,600 Speaker 6: over exuberants, but we're not seeing that. We are actually 220 00:10:17,640 --> 00:10:19,880 Speaker 6: seeing some discrimination under the surface. 221 00:10:19,960 --> 00:10:21,280 Speaker 2: That's what I really wanted to get into. If I 222 00:10:21,400 --> 00:10:22,880 Speaker 2: just go over a part of that quote again and 223 00:10:22,920 --> 00:10:25,400 Speaker 2: just read it out loud for the audience, competition between 224 00:10:25,440 --> 00:10:28,400 Speaker 2: syndicated and private markets, coupled with ample private debt dry 225 00:10:28,440 --> 00:10:33,280 Speaker 2: powder has encouraged types of pricing, especially for larger borrowers. 226 00:10:33,559 --> 00:10:35,640 Speaker 2: Is it just the larger borrowers who's getting left for 227 00:10:35,760 --> 00:10:36,160 Speaker 2: debt here? 228 00:10:36,360 --> 00:10:39,560 Speaker 6: I think it's it's largely in the high end of 229 00:10:39,559 --> 00:10:42,320 Speaker 6: the size spectrum, where companies have the ability to run 230 00:10:42,400 --> 00:10:45,240 Speaker 6: dual track processes so they can actually see Okay, again, 231 00:10:45,280 --> 00:10:47,120 Speaker 6: going back to that point of I've now got this 232 00:10:47,200 --> 00:10:50,480 Speaker 6: other third viable option, where am I getting best execution? 233 00:10:50,600 --> 00:10:52,920 Speaker 6: I think the pricing is most competitive at that end. 234 00:10:53,720 --> 00:10:58,640 Speaker 6: But again it's it's not I do think it's it's 235 00:10:58,160 --> 00:11:01,560 Speaker 6: there's not a sense thatolks are being left behind in 236 00:11:01,600 --> 00:11:04,600 Speaker 6: the sense that that competition is pricing them out. I 237 00:11:04,600 --> 00:11:06,840 Speaker 6: think what it is doing is it's just changing that 238 00:11:06,960 --> 00:11:09,840 Speaker 6: mix shift in link twenty twenty three, we saw a 239 00:11:09,880 --> 00:11:13,079 Speaker 6: lot of public debt being refinanced with private debt. That 240 00:11:13,280 --> 00:11:15,680 Speaker 6: shifted in the first quarter. Now that the syndicated markets 241 00:11:15,720 --> 00:11:18,079 Speaker 6: are open and we're seeing a lot of private debt 242 00:11:18,120 --> 00:11:20,640 Speaker 6: actually getting refinance in the public markets, but those companies 243 00:11:20,640 --> 00:11:21,920 Speaker 6: need to be ready to be public market. 244 00:11:22,080 --> 00:11:24,280 Speaker 1: Just falling up on Megan's point, how concerned are you 245 00:11:24,320 --> 00:11:27,400 Speaker 1: about weakening covenants weakening deal terms? Is this something that 246 00:11:27,440 --> 00:11:29,320 Speaker 1: you see sowing the seeds for something that might not 247 00:11:29,360 --> 00:11:31,880 Speaker 1: come home to rust this year, Maybe not in twenty five, 248 00:11:32,000 --> 00:11:33,000 Speaker 1: but maybe twenty six. 249 00:11:33,360 --> 00:11:36,360 Speaker 6: Well, most of the syndicated market is covlight, as you know, 250 00:11:36,440 --> 00:11:38,720 Speaker 6: on the leverage loan side, and as the high old 251 00:11:38,760 --> 00:11:43,040 Speaker 6: bond market has become more institutionalized, covenants have become less 252 00:11:43,040 --> 00:11:45,840 Speaker 6: of a binding constraint in that market too. It's really 253 00:11:45,840 --> 00:11:47,240 Speaker 6: the private market that has a. 254 00:11:47,160 --> 00:11:48,480 Speaker 4: Lot of the covenant protections. 255 00:11:48,720 --> 00:11:50,960 Speaker 6: I think the big risks that I'm concerned about for 256 00:11:51,040 --> 00:11:55,600 Speaker 6: risk asset valuations is a sustained reacceleration and inflation that 257 00:11:56,120 --> 00:11:59,000 Speaker 6: the Fed cannot deliver at some point in twenty twenty 258 00:11:59,080 --> 00:12:03,040 Speaker 6: four on rate not that that rate cut in the 259 00:12:03,080 --> 00:12:06,080 Speaker 6: form of rate relief is so game changing for those credits. 260 00:12:06,240 --> 00:12:08,640 Speaker 6: But I do think that it's really important for sentiment, 261 00:12:08,679 --> 00:12:11,240 Speaker 6: and I think that's where you might start to see 262 00:12:11,240 --> 00:12:14,560 Speaker 6: things really unravel from a risk asset side, is that 263 00:12:14,760 --> 00:12:17,040 Speaker 6: we don't get any rate cuts in twenty twenty four. 264 00:12:17,679 --> 00:12:20,280 Speaker 6: We're in this extended high for longer into twenty twenty five, 265 00:12:20,320 --> 00:12:22,439 Speaker 6: and I think the key there is if that's happening 266 00:12:22,440 --> 00:12:26,480 Speaker 6: because inflation is sticky, that is problematic. If rate cuts 267 00:12:26,520 --> 00:12:29,360 Speaker 6: are very shallow and twenty twenty four because of high growth, 268 00:12:29,600 --> 00:12:31,360 Speaker 6: I would view that it's less of a problem. But 269 00:12:31,600 --> 00:12:33,480 Speaker 6: if that gets postponed, I think that's an issue. 270 00:12:33,520 --> 00:12:36,240 Speaker 2: Just quickly maturity will red hair and go no big 271 00:12:36,280 --> 00:12:37,360 Speaker 2: issue of something to ignore. 272 00:12:37,840 --> 00:12:39,760 Speaker 6: I was very concerned about it in the fall of 273 00:12:39,760 --> 00:12:41,880 Speaker 6: twenty twenty three. I think the fact that the capital 274 00:12:41,920 --> 00:12:44,520 Speaker 6: markets have remained open to lower rated issuers to allow 275 00:12:44,559 --> 00:12:47,200 Speaker 6: them to get that refinancing done, it's relieved a lot 276 00:12:47,240 --> 00:12:49,040 Speaker 6: of pressure pressure in European hig yield. 277 00:12:49,080 --> 00:12:50,920 Speaker 4: It's a steeper maturity wall than the US. So I'm 278 00:12:50,960 --> 00:12:51,679 Speaker 4: watching there. 279 00:12:51,600 --> 00:13:03,599 Speaker 2: Interesting thanks for that. With some making a pivot to 280 00:13:03,679 --> 00:13:06,880 Speaker 2: hybrid vehicles in China, chares with BYD falling in Hong 281 00:13:06,960 --> 00:13:10,200 Speaker 2: Kong trading after the ev makers earnings missed estimates amid 282 00:13:10,240 --> 00:13:13,800 Speaker 2: aggressive price cuts, competitive Volkswagen saying it expects to fall 283 00:13:13,840 --> 00:13:16,640 Speaker 2: behind in China. Quote along with our value over volume 284 00:13:16,679 --> 00:13:19,880 Speaker 2: growth strategy, we are deliberately prepared to give up market 285 00:13:19,920 --> 00:13:23,679 Speaker 2: share in order to find a sound compromise between margins 286 00:13:23,720 --> 00:13:27,200 Speaker 2: and volume. For more. Pablo de c, Volkswagen Group of 287 00:13:27,240 --> 00:13:30,319 Speaker 2: America President and CEO, joined us Now, Pablo, good to 288 00:13:30,320 --> 00:13:32,760 Speaker 2: see you, Good morning. Thank you for coming into the studio. 289 00:13:32,800 --> 00:13:34,240 Speaker 2: I know it's an important couple of days for you 290 00:13:34,280 --> 00:13:35,720 Speaker 2: and the team here in New York City. I just 291 00:13:35,720 --> 00:13:38,119 Speaker 2: want to reflect on the events of yesterday in Baltimore, 292 00:13:38,440 --> 00:13:41,079 Speaker 2: important hub for auto makers. Can you walk us through 293 00:13:41,080 --> 00:13:44,000 Speaker 2: the potential disruptions for you, the team, and the company. 294 00:13:44,400 --> 00:13:46,920 Speaker 7: Yeah. First of all, regarding yesterday, our hard goes to 295 00:13:46,960 --> 00:13:50,760 Speaker 7: the families. Yeah, it's quite unfortunately, and everybody's putting. But 296 00:13:51,320 --> 00:13:54,120 Speaker 7: looking at this from a business point of view, we 297 00:13:54,160 --> 00:13:57,840 Speaker 7: are on the side of the sea level, so you know, 298 00:13:57,880 --> 00:14:00,520 Speaker 7: when the ships come into Baltimore are not going to 299 00:14:00,520 --> 00:14:03,200 Speaker 7: be affected by this event. Obviously we're going to have 300 00:14:03,240 --> 00:14:05,520 Speaker 7: some disruption because of the trucks, but it's not going 301 00:14:05,520 --> 00:14:07,319 Speaker 7: to be a disruptive as other automakers. 302 00:14:07,440 --> 00:14:10,600 Speaker 2: Supply certainly has been the problem in this industry. Unfortunately, 303 00:14:10,640 --> 00:14:12,679 Speaker 2: it's been demand. Can you walk us through way youre 304 00:14:12,679 --> 00:14:16,040 Speaker 2: seeing things wasteeing, things strengthened, and whether you're able to 305 00:14:16,120 --> 00:14:18,400 Speaker 2: lean into what's handling with hybrids in the demand for 306 00:14:18,440 --> 00:14:19,560 Speaker 2: it in America? 307 00:14:19,560 --> 00:14:23,640 Speaker 7: Absolutely, so let me start talking about the industry February today. 308 00:14:23,720 --> 00:14:27,120 Speaker 7: The demand is very strong as an industry. The North 309 00:14:27,160 --> 00:14:30,400 Speaker 7: American market, which is Canada, US and Mexico grew eight 310 00:14:30,440 --> 00:14:34,080 Speaker 7: percent feverruyear to date versus last year and we grew 311 00:14:34,200 --> 00:14:37,880 Speaker 7: twenty one percent, so we're tripling the growth of the market. 312 00:14:38,200 --> 00:14:40,440 Speaker 7: But still eight percent is quite strong, and what we're 313 00:14:40,480 --> 00:14:45,200 Speaker 7: seeing the data from March is still strong. Having said that, 314 00:14:45,280 --> 00:14:49,280 Speaker 7: the EVE has flattened, the curb remains around seven and 315 00:14:49,320 --> 00:14:53,120 Speaker 7: a half eight percent of the total industry. But we 316 00:14:53,160 --> 00:14:56,080 Speaker 7: as BW, we still have twelve percent of ourselves are 317 00:14:56,160 --> 00:14:58,880 Speaker 7: in the eighty four in the electric vehicle space, so 318 00:14:59,160 --> 00:15:02,040 Speaker 7: we're still having higher growth than the average market. 319 00:15:02,280 --> 00:15:05,160 Speaker 1: Do you expect to ramp it up though more slowly 320 00:15:05,280 --> 00:15:08,240 Speaker 1: and maybe put a greater emphasis on hybrids. Are you 321 00:15:08,280 --> 00:15:10,440 Speaker 1: starting to sort of sow the seeds for that right now, 322 00:15:10,480 --> 00:15:13,520 Speaker 1: because you have a couple of years or potentially months 323 00:15:13,520 --> 00:15:15,560 Speaker 1: to really get that up and running. 324 00:15:15,880 --> 00:15:20,320 Speaker 7: Yeah. So our factory is highly localized in the US, 325 00:15:20,600 --> 00:15:23,560 Speaker 7: and we have both combustion engines and electric vehicles in 326 00:15:23,640 --> 00:15:27,600 Speaker 7: Chattanooga in Tennessee, and we're the only foind automaker that 327 00:15:27,680 --> 00:15:30,240 Speaker 7: qualifies for the seven thousand, five hundred dollars credit for 328 00:15:30,320 --> 00:15:33,360 Speaker 7: the consumer, which means that we're localized within the vision. 329 00:15:33,480 --> 00:15:37,880 Speaker 7: So that gives us our flexibility going forward. I think 330 00:15:38,000 --> 00:15:40,640 Speaker 7: the pace of growth will be slower, but we still 331 00:15:40,800 --> 00:15:42,280 Speaker 7: grow in the av space. 332 00:15:43,040 --> 00:15:44,280 Speaker 1: Other power trends. 333 00:15:43,960 --> 00:15:46,160 Speaker 7: Will be a good alternative for the consumers, so the 334 00:15:46,200 --> 00:15:49,560 Speaker 7: consumers will be able to choose electric vehicles, planking hybrids, 335 00:15:49,720 --> 00:15:51,120 Speaker 7: hybrids and combustion engines. 336 00:15:51,200 --> 00:15:53,760 Speaker 1: How important was that subsidy to you to not only 337 00:15:53,800 --> 00:15:56,280 Speaker 1: build a factory but also just in terms of your 338 00:15:56,320 --> 00:15:58,600 Speaker 1: decision of the product mix to sell well. 339 00:15:58,720 --> 00:16:01,600 Speaker 7: First, I think the ir Ed Inflation Reacting Act is 340 00:16:01,600 --> 00:16:05,040 Speaker 7: a great piece of legislation for the US because it 341 00:16:05,160 --> 00:16:08,600 Speaker 7: is transforming the industrial base of the US. So you 342 00:16:08,680 --> 00:16:11,880 Speaker 7: see all these new factories and battery factories being built 343 00:16:11,920 --> 00:16:13,920 Speaker 7: in the US over the next three or four years. 344 00:16:14,440 --> 00:16:16,680 Speaker 7: So the benefit is not only for us, but also 345 00:16:16,680 --> 00:16:20,040 Speaker 7: for the consumer by the fact that we're localizing and 346 00:16:20,080 --> 00:16:24,000 Speaker 7: we're bringing all the jobs of Bozzagen and also the suppliers. 347 00:16:24,680 --> 00:16:27,200 Speaker 7: You know, we create an ecosystem that provides more jobs 348 00:16:27,200 --> 00:16:29,720 Speaker 7: here and then the consumer gets a seven thousand, five 349 00:16:29,760 --> 00:16:30,560 Speaker 7: hundred dollar credit. 350 00:16:30,600 --> 00:16:32,280 Speaker 5: If Trump were to come back in power, though, he 351 00:16:32,320 --> 00:16:35,640 Speaker 5: can rewrite those Treasury laws which makes a subsidy, which 352 00:16:35,640 --> 00:16:38,800 Speaker 5: could make the subsidy basically impossible to get. How are 353 00:16:38,840 --> 00:16:41,280 Speaker 5: you thinking about that kind of impact when all this 354 00:16:41,440 --> 00:16:43,160 Speaker 5: money has been put towards the evening market. 355 00:16:43,440 --> 00:16:46,400 Speaker 7: Yeah, so we have a long term vision on these topics. 356 00:16:46,440 --> 00:16:49,680 Speaker 7: I mean, we know that, and we believe where we 357 00:16:49,720 --> 00:16:52,560 Speaker 7: amain committed to the EV strategy in the long term, 358 00:16:52,920 --> 00:16:55,920 Speaker 7: and the pace will depend on the consumer. Now, is 359 00:16:55,960 --> 00:16:59,200 Speaker 7: it possible that the rules will change. It's possible, but 360 00:16:59,360 --> 00:17:02,920 Speaker 7: he would need a vast majority in the Congress and 361 00:17:02,960 --> 00:17:05,560 Speaker 7: the Senate to change his laws. And also when you 362 00:17:05,600 --> 00:17:08,280 Speaker 7: look at the map where all the factories have been built, 363 00:17:08,480 --> 00:17:11,680 Speaker 7: they're not built only in states that are democratic or Republican, 364 00:17:11,680 --> 00:17:14,040 Speaker 7: and they're being built all over the US. I think, 365 00:17:14,320 --> 00:17:18,520 Speaker 7: you know, in the interest of jobs and growth, in technology. 366 00:17:18,560 --> 00:17:20,640 Speaker 7: I think it would be wise to maintain this long 367 00:17:20,720 --> 00:17:21,240 Speaker 7: term vision. 368 00:17:21,520 --> 00:17:23,400 Speaker 2: Do you think it would be wise to wait until 369 00:17:23,400 --> 00:17:26,280 Speaker 2: after the election before you make decisions about your manufacturing 370 00:17:26,280 --> 00:17:27,800 Speaker 2: footprint in this country? 371 00:17:28,600 --> 00:17:30,200 Speaker 7: I don't think so, and I give you an example 372 00:17:30,280 --> 00:17:33,600 Speaker 7: at this are not only words. We decided to localize 373 00:17:33,800 --> 00:17:38,960 Speaker 7: the ID four way before the Inflection Reaction Act, which 374 00:17:39,000 --> 00:17:41,240 Speaker 7: goes back to your question. Right, So we believe so 375 00:17:41,400 --> 00:17:45,240 Speaker 7: much in the transition to elective vehicles and in localizing 376 00:17:45,240 --> 00:17:48,120 Speaker 7: our footprint in the US that we made decisions before 377 00:17:48,680 --> 00:17:50,880 Speaker 7: and after that we're going to continue to localize. 378 00:17:51,000 --> 00:17:54,040 Speaker 2: One push over the last year or so by this President, 379 00:17:54,359 --> 00:17:57,960 Speaker 2: by this White House is to push and support union workers. 380 00:17:58,280 --> 00:18:00,879 Speaker 2: You mentioned Chattanooga. There at that plant, there's going to 381 00:18:00,880 --> 00:18:03,240 Speaker 2: be a vote on whether the workers joined UAW that 382 00:18:03,359 --> 00:18:05,200 Speaker 2: specific union. Can you walk us through what that could 383 00:18:05,240 --> 00:18:06,280 Speaker 2: do to your cosspace? 384 00:18:06,600 --> 00:18:09,640 Speaker 7: Now, First of all, we respect the freedom of our 385 00:18:09,720 --> 00:18:13,480 Speaker 7: workers to choose how they're represented. Having said that, we're 386 00:18:13,480 --> 00:18:17,040 Speaker 7: constantly talking to our workers on how to improve, you know, 387 00:18:17,200 --> 00:18:20,760 Speaker 7: the working conditions, the salaries, and the benefits. It would 388 00:18:20,760 --> 00:18:23,040 Speaker 7: be up to them how they want to be represented 389 00:18:24,440 --> 00:18:26,400 Speaker 7: in the future. So we will respect now and. 390 00:18:26,320 --> 00:18:28,639 Speaker 2: The cost space, you just assume that it would increase 391 00:18:28,800 --> 00:18:29,400 Speaker 2: of the bank of. 392 00:18:29,359 --> 00:18:31,760 Speaker 7: That, I'm not so sure. I mean, we have a 393 00:18:31,880 --> 00:18:34,960 Speaker 7: very competitive cost space, competitive in terms of the employees. 394 00:18:35,760 --> 00:18:38,960 Speaker 7: We have wages around twenty three dollars an hour which 395 00:18:39,000 --> 00:18:42,960 Speaker 7: are compatible to Michigan with the lower cost of living. 396 00:18:43,600 --> 00:18:47,359 Speaker 2: So we will see Pablo. Thank you sir. Hopefully we 397 00:18:47,400 --> 00:18:49,360 Speaker 2: can catch up against soon. I appreciate your time, thanks 398 00:18:49,400 --> 00:18:51,040 Speaker 2: for the invitation. See you next time, Pablo, the s 399 00:18:51,520 --> 00:18:56,639 Speaker 2: VW North America CEO. This is the Bloomberg Sevenans podcast, 400 00:18:56,760 --> 00:19:00,679 Speaker 2: bringing you the best in markets, economics, and Giepolo. You 401 00:19:00,720 --> 00:19:03,479 Speaker 2: can watch the show live on Bloomberg TV weekday mornings 402 00:19:03,480 --> 00:19:06,439 Speaker 2: from six am to nine am Eastern. Subscribe to the 403 00:19:06,480 --> 00:19:09,960 Speaker 2: podcast on Apple, Spotify or anywhere else you listen, and 404 00:19:10,000 --> 00:19:13,120 Speaker 2: as always, on the Bloomberg Terminal and the Bloomberg Business app.