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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: Bloomberg Terminal and the Bloomberg Business App. Bruce Casman joins
Speaker 2: us now for more. Bruce, We're going to talk about
Speaker 2: management policy, the Fed, the boj Can we just start
Speaker 2: on this with America's debt pile? I know you and
Speaker 2: the team at JP Morgan have talked about the boiling
Speaker 2: of the frog, Bruce. When does it start to get
Speaker 2: a little bit too hot?
Speaker 3: Well, I think it will get too hot if we're
Speaker 3: right that the FED just doesn't have very much room
Speaker 3: to ease, and over time that begins to affect balance sheet.
Speaker 3: It keeps credit tight, it weighs on pricing power. It's
Speaker 3: a slow moving story, and I think we have to
Speaker 3: recognize that so far the effects of high interest rates
Speaker 3: just haven't done nearly as much damage as we would
Speaker 3: have thought to the private sector. So this story is
Speaker 3: playing out against another narrative, which is to say the
Speaker 3: private sector is healthy, we're getting supply side improvement, and
Speaker 3: maybe we can live with high interest rates and actually
Speaker 3: generate a soft landing. We've kind of moved from being
Speaker 3: very much in the boiler frog stands to being agnostic
Speaker 3: about where this story is going to lead us.
Speaker 2: Can you talk to me, Bruce then, about the supply
Speaker 2: side narrative that the chairman seemed to endorse in the
Speaker 2: news conference last week. What's the question? Do you have
Speaker 2: the sort of linger before fully embracing it.
Speaker 3: Well, I think we should embrace it. There's an immigration
Speaker 3: story which is playing out right now and is boosting
Speaker 3: labor force growth. It's limiting the pressure on labor markets
Speaker 3: and inflation from rising jobs. I think we've also generated
Speaker 3: some pretty strong productivity growth, and that seemed to me
Speaker 3: to be linked with what we've been doing on spending
Speaker 3: an R and D and intellectual property. The question is,
Speaker 3: though we still have a tight label market, we have
Speaker 3: elevated inflation, which I think is sticky. I think, as
Speaker 3: you mentioned a minute ago, the goods price story globally
Speaker 3: is shifting gear. I'm just not convinced that's going to
Speaker 3: be enough to get inflation all the way down to
Speaker 3: what will make the FED comfortable over the next year
Speaker 3: or so.
Speaker 1: Bruce, we've been talking a lot about the bridge collapse
Speaker 1: in Baltimore and understanding that it's just one particular port
Speaker 1: and that potentially other ports can take in.
Speaker 4: Some of that traffic.
Speaker 1: But does this highlight to you that supply shocks have
Speaker 1: not gone away and that there are these vulnerabilities that
Speaker 1: will kind of put some sort of floor under this
Speaker 1: goods disinflation that we've seen for the past couple of years.
Speaker 3: Yeah, I think what you're seeing in some senses is
Speaker 3: a little bit of that, with the idea that there's
Speaker 3: some new pressures and shipping costs and this port closure
Speaker 3: might be part of that. But also you're just losing
Speaker 3: the benefits of having unwound this locations. You know, you've
Speaker 3: had over the last six seven months, US goods pricing
Speaker 3: X food and energy falling at two two and a
Speaker 3: half percent base. I think most of the indicators, both
Speaker 3: domestically and globally are saying that's going back at a
Speaker 3: minimum to zero here, you know, So when Chair Pal
Speaker 3: talks about shelter inflation coming down, I think there's an
Speaker 3: offset here, quite substantial, maybe even complete, of what's happening
Speaker 3: in the goods price story. And then that leaves the focus,
Speaker 3: of course on inflation very much on how you think
Speaker 3: about labor markets and other service price inflation, which I
Speaker 3: think we're going to see is pretty firm when we
Speaker 3: get the PCE report on prices on Friday.
Speaker 1: So taking a step back, this raises the question, and
Speaker 1: we were talking about it with Muhammad al Arian about
Speaker 1: whether this is sort of a tipping point for this
Speaker 1: Federal Reserve intacitly accepting a two point something or a
Speaker 1: two to three percent inflation rate for the foreseeable future.
Speaker 1: Do you think that we have shifted that This past
Speaker 1: press conference from the Federal Reserve was really the key
Speaker 1: moment in that transition.
Speaker 3: I think what the Fed is telling us it wants
Speaker 3: to are at the easing process in the middle of
Speaker 3: the year, and it's willing to do so even if
Speaker 3: in the first half of this year it's getting uncomfortably
Speaker 3: high inflation performance. What I don't think this means is
Speaker 3: that the FED is willing to accept on a sustained
Speaker 3: basis inflation close to or higher than three percent. And
Speaker 3: what we think is going to happen here is that
Speaker 3: you are going to see a pivot sometime around the
Speaker 3: middle of the year where the FED maybe delivers one
Speaker 3: or two easing, but it really then starts to shift
Speaker 3: its guidance. The market today has over one hundred and
Speaker 3: fifty basis points a FED easing price through the end
Speaker 3: of twenty five. Unless the economy gets into trouble. I
Speaker 3: don't think we're going to see that delivered.
Speaker 4: You say they.
Speaker 5: Want to cut, which echoes a lot of individuals that
Speaker 5: come on the program, But they also continuously how data
Speaker 5: dependent they are. What would they need to see in
Speaker 5: the data to actually say, you know what, we're waiting,
Speaker 5: we're not going to cut this year.
Speaker 3: I think that's an interesting point because as they're talking
Speaker 3: data dependent, you could see Chairpal in his press conference
Speaker 3: really talk as if the bar is pretty high event
Speaker 3: in easing. So I'm not sure I have the numbers.
Speaker 3: I'd want to be confident about where that is. But
Speaker 3: I think what they've told us at least to start
Speaker 3: the easing process around mid year that they're fairly comfortable
Speaker 3: they've made enough progress. Yeah, there are data prints here
Speaker 3: that could take them off of that, and I would
Speaker 3: argue the committee, as you look at the projections, are
Speaker 3: probably more evenly divided on this issue. But I think
Speaker 3: the bar is pretty high here. I'm not even sure
Speaker 3: that if we get a couple of point threes on
Speaker 3: core inflation, which i'd say a high numbers, that that's
Speaker 3: going to be enough to prevent a June easing. I
Speaker 3: think it'll stop them from doing much, but I'm not
Speaker 3: sure it'll stop them from easing in June.
Speaker 2: Brace this one inconsistency that jumps out to me, perhaps
Speaker 2: we should finish it. How can the FEDS simultaneously say
Speaker 2: we're restrictive and then at the same time embrace the
Speaker 2: supply side narrative of the labor market, but also points
Speaker 2: the labor market as evidence of being restrictive. How does
Speaker 2: that ant up.
Speaker 3: Well, I think there's a level issue of how tight
Speaker 3: the labor market is, and then there's an issue how
Speaker 3: much supply side performance is helping it. But I think
Speaker 3: you are raising an important point, which is that the
Speaker 3: supply side is improving and helping the FED, but it
Speaker 3: is also a signal that the neutral rate is higher.
Speaker 3: And I think when you look at financial market performance here,
Speaker 3: it is embedding this idea that some combination of supply
Speaker 3: side performance, a friendly FED, and some other things going
Speaker 3: on here is allowing us to do a lot better
Speaker 3: with higher interest rates than we might have expected. So
Speaker 3: I do think you're one hundred percent right here. Policy
Speaker 3: is not as restrictive as the FED seems to be suggesting.
Speaker 3: I think growth will do better if we're right. Then
Speaker 3: inflation is sticky. I think they are going to have
Speaker 3: to change their tunes somewhat here, but it still looks
Speaker 3: to us like they're getting ready to at least start
Speaker 3: an easing process around mid year.
Speaker 2: It's hard to disagree at the moment. Bruce. Thank you, Sir,
Speaker 2: Bruce Kunsman of JP Morgan Economic Tanks on Friday morning
Speaker 2: AM under line of a black Rock, expecting cuts to
Speaker 2: start in the second half and writing this while a
Speaker 2: high for longer cost of capital environment poses fundamental pressure
Speaker 2: for some floating rate borrowers with limited financial flexibility. Competition
Speaker 2: between syndicated and private markets, coupled with ample private debt.
Speaker 2: Dry powder has encouraged tighter pricing, especially for large borrowers
Speaker 2: who have access to both markets. A Mandarin places say
Speaker 2: joined us now for more a man, good morning to
Speaker 2: you morning. Thank you for the MP parabobble with us
Speaker 2: yesterday and they were talking about a soft landing in credit.
Speaker 2: Is that your kind of world you're view on things
Speaker 2: at a moment?
Speaker 6: And good morning, thank you for having me I did
Speaker 6: see that interview with Megan yesterday.
Speaker 4: I think I would agree with that.
Speaker 6: I think the bar for significant disruption is really high
Speaker 6: in the corporate credit market. We do, though, expect dispersion,
Speaker 6: and we are actually seeing that to a pretty significant
Speaker 6: extent more recently in the US, European and Asian credit markets.
Speaker 6: Two things I would note on the point of kind
Speaker 6: of competition between public and private, I think the way
Speaker 6: we're viewing it as maybe several years ago, if you
Speaker 6: were a corporate and left finn you would have made
Speaker 6: the decision between issuing a bond and issuing a leverage loan.
Speaker 6: Now there's a third option, and so you've actually seen
Speaker 6: private credit become a viable option for the opportunity set
Speaker 6: for a lot of corporates, not every corporate. Not every
Speaker 6: corporate needs the size to become index eligible in that market,
Speaker 6: but it is a viable third option.
Speaker 4: The other point is, I think on just the terms.
Speaker 6: Of having more access outside of the banking channel and
Speaker 6: the public markets, we believe has been a good thing
Speaker 6: for corporates. And you actually see that in what I
Speaker 6: would argue as a pretty muted default rate given the
Speaker 6: interest hikes that we've had since March of twenty twenty two.
Speaker 4: And I think that that shows that it's working.
Speaker 1: And Bob Michael of Jpmorgo was talking about that the
Speaker 1: ballast kind of to some of the credit sphere. I do, though,
Speaker 1: want to just sit on this idea of frost, and
Speaker 1: that's something that Megan was talking about, that there is
Speaker 1: this frost developing and tighter credit speds because of.
Speaker 4: The increased competition.
Speaker 1: Sounds a lot like the equity market exuberance, but it
Speaker 1: makes sense so it can go on.
Speaker 4: For a long period of time.
Speaker 1: Is that kind of what you see.
Speaker 6: We see it, and I would say it's not exclusively
Speaker 6: limited to the lift fin market where there's overlap with
Speaker 6: private credit. You also see super tight credit spreads and
Speaker 6: investment grade. To me actually it reflects a few things.
Speaker 6: One is fundamentals are pretty good. Economic backdrop is pretty strong,
Speaker 6: but if you look at spreads, they look really tight optically,
Speaker 6: if you look at all in yields. However, if you
Speaker 6: going back to the post financial crisis period, we're talking
Speaker 6: really cheap levels on a percentile basis.
Speaker 4: If you were to look at.
Speaker 6: Just daily spreads, daily yields back to twenty ten, yield
Speaker 6: screen really cheap and spread screen really rich. So I
Speaker 6: think that's part of it is that the marginal buyer
Speaker 6: in credit is actually yield based, so when they're coming
Speaker 6: to deploy capital, they're not looking at it on a
Speaker 6: spread versus index. They're looking at where can I lock
Speaker 6: in all in yields? And I think it's fueling some
Speaker 6: of that optically tight spread measures and credit as opposed
Speaker 6: to it's not indiscriminate because again we.
Speaker 4: Are actually seeing triple c's lag.
Speaker 6: We're seeing actually a pretty significant share of credits that
Speaker 6: are trading above thousand basis points in spread. You are
Speaker 6: seeing dispersion in the single name capital structure over leverage
Speaker 6: capital structures that are.
Speaker 4: Doing liability management.
Speaker 6: So I would say if it were kind of a
Speaker 6: rising tide lifts, all boats and everything was rallying. I
Speaker 6: would say we are entering into kind of maybe possible
Speaker 6: over exuberants, but we're not seeing that. We are actually
Speaker 6: seeing some discrimination under the surface.
Speaker 2: That's what I really wanted to get into. If I
Speaker 2: just go over a part of that quote again and
Speaker 2: just read it out loud for the audience, competition between
Speaker 2: syndicated and private markets, coupled with ample private debt dry
Speaker 2: powder has encouraged types of pricing, especially for larger borrowers.
Speaker 2: Is it just the larger borrowers who's getting left for
Speaker 2: debt here?
Speaker 6: I think it's it's largely in the high end of
Speaker 6: the size spectrum, where companies have the ability to run
Speaker 6: dual track processes so they can actually see Okay, again,
Speaker 6: going back to that point of I've now got this
Speaker 6: other third viable option, where am I getting best execution?
Speaker 6: I think the pricing is most competitive at that end.
Speaker 6: But again it's it's not I do think it's it's
Speaker 6: there's not a sense thatolks are being left behind in
Speaker 6: the sense that that competition is pricing them out. I
Speaker 6: think what it is doing is it's just changing that
Speaker 6: mix shift in link twenty twenty three, we saw a
Speaker 6: lot of public debt being refinanced with private debt. That
Speaker 6: shifted in the first quarter. Now that the syndicated markets
Speaker 6: are open and we're seeing a lot of private debt
Speaker 6: actually getting refinance in the public markets, but those companies
Speaker 6: need to be ready to be public market.
Speaker 1: Just falling up on Megan's point, how concerned are you
Speaker 1: about weakening covenants weakening deal terms? Is this something that
Speaker 1: you see sowing the seeds for something that might not
Speaker 1: come home to rust this year, Maybe not in twenty five,
Speaker 1: but maybe twenty six.
Speaker 6: Well, most of the syndicated market is covlight, as you know,
Speaker 6: on the leverage loan side, and as the high old
Speaker 6: bond market has become more institutionalized, covenants have become less
Speaker 6: of a binding constraint in that market too. It's really
Speaker 6: the private market that has a.
Speaker 4: Lot of the covenant protections.
Speaker 6: I think the big risks that I'm concerned about for
Speaker 6: risk asset valuations is a sustained reacceleration and inflation that
Speaker 6: the Fed cannot deliver at some point in twenty twenty
Speaker 6: four on rate not that that rate cut in the
Speaker 6: form of rate relief is so game changing for those credits.
Speaker 6: But I do think that it's really important for sentiment,
Speaker 6: and I think that's where you might start to see
Speaker 6: things really unravel from a risk asset side, is that
Speaker 6: we don't get any rate cuts in twenty twenty four.
Speaker 6: We're in this extended high for longer into twenty twenty five,
Speaker 6: and I think the key there is if that's happening
Speaker 6: because inflation is sticky, that is problematic. If rate cuts
Speaker 6: are very shallow and twenty twenty four because of high growth,
Speaker 6: I would view that it's less of a problem. But
Speaker 6: if that gets postponed, I think that's an issue.
Speaker 2: Just quickly maturity will red hair and go no big
Speaker 2: issue of something to ignore.
Speaker 6: I was very concerned about it in the fall of
Speaker 6: twenty twenty three. I think the fact that the capital
Speaker 6: markets have remained open to lower rated issuers to allow
Speaker 6: them to get that refinancing done, it's relieved a lot
Speaker 6: of pressure pressure in European hig yield.
Speaker 4: It's a steeper maturity wall than the US. So I'm
Speaker 4: watching there.
Speaker 2: Interesting thanks for that. With some making a pivot to
Speaker 2: hybrid vehicles in China, chares with BYD falling in Hong
Speaker 2: Kong trading after the ev makers earnings missed estimates amid
Speaker 2: aggressive price cuts, competitive Volkswagen saying it expects to fall
Speaker 2: behind in China. Quote along with our value over volume
Speaker 2: growth strategy, we are deliberately prepared to give up market
Speaker 2: share in order to find a sound compromise between margins
Speaker 2: and volume. For more. Pablo de c, Volkswagen Group of
Speaker 2: America President and CEO, joined us Now, Pablo, good to
Speaker 2: see you, Good morning. Thank you for coming into the studio.
Speaker 2: I know it's an important couple of days for you
Speaker 2: and the team here in New York City. I just
Speaker 2: want to reflect on the events of yesterday in Baltimore,
Speaker 2: important hub for auto makers. Can you walk us through
Speaker 2: the potential disruptions for you, the team, and the company.
Speaker 7: Yeah. First of all, regarding yesterday, our hard goes to
Speaker 7: the families. Yeah, it's quite unfortunately, and everybody's putting. But
Speaker 7: looking at this from a business point of view, we
Speaker 7: are on the side of the sea level, so you know,
Speaker 7: when the ships come into Baltimore are not going to
Speaker 7: be affected by this event. Obviously we're going to have
Speaker 7: some disruption because of the trucks, but it's not going
Speaker 7: to be a disruptive as other automakers.
Speaker 2: Supply certainly has been the problem in this industry. Unfortunately,
Speaker 2: it's been demand. Can you walk us through way youre
Speaker 2: seeing things wasteeing, things strengthened, and whether you're able to
Speaker 2: lean into what's handling with hybrids in the demand for
Speaker 2: it in America?
Speaker 7: Absolutely, so let me start talking about the industry February today.
Speaker 7: The demand is very strong as an industry. The North
Speaker 7: American market, which is Canada, US and Mexico grew eight
Speaker 7: percent feverruyear to date versus last year and we grew
Speaker 7: twenty one percent, so we're tripling the growth of the market.
Speaker 7: But still eight percent is quite strong, and what we're
Speaker 7: seeing the data from March is still strong. Having said that,
Speaker 7: the EVE has flattened, the curb remains around seven and
Speaker 7: a half eight percent of the total industry. But we
Speaker 7: as BW, we still have twelve percent of ourselves are
Speaker 7: in the eighty four in the electric vehicle space, so
Speaker 7: we're still having higher growth than the average market.
Speaker 1: Do you expect to ramp it up though more slowly
Speaker 1: and maybe put a greater emphasis on hybrids. Are you
Speaker 1: starting to sort of sow the seeds for that right now,
Speaker 1: because you have a couple of years or potentially months
Speaker 1: to really get that up and running.
Speaker 7: Yeah. So our factory is highly localized in the US,
Speaker 7: and we have both combustion engines and electric vehicles in
Speaker 7: Chattanooga in Tennessee, and we're the only foind automaker that
Speaker 7: qualifies for the seven thousand, five hundred dollars credit for
Speaker 7: the consumer, which means that we're localized within the vision.
Speaker 7: So that gives us our flexibility going forward. I think
Speaker 7: the pace of growth will be slower, but we still
Speaker 7: grow in the av space.
Speaker 1: Other power trends.
Speaker 7: Will be a good alternative for the consumers, so the
Speaker 7: consumers will be able to choose electric vehicles, planking hybrids,
Speaker 7: hybrids and combustion engines.
Speaker 1: How important was that subsidy to you to not only
Speaker 1: build a factory but also just in terms of your
Speaker 1: decision of the product mix to sell well.
Speaker 7: First, I think the ir Ed Inflation Reacting Act is
Speaker 7: a great piece of legislation for the US because it
Speaker 7: is transforming the industrial base of the US. So you
Speaker 7: see all these new factories and battery factories being built
Speaker 7: in the US over the next three or four years.
Speaker 7: So the benefit is not only for us, but also
Speaker 7: for the consumer by the fact that we're localizing and
Speaker 7: we're bringing all the jobs of Bozzagen and also the suppliers.
Speaker 7: You know, we create an ecosystem that provides more jobs
Speaker 7: here and then the consumer gets a seven thousand, five
Speaker 7: hundred dollar credit.
Speaker 5: If Trump were to come back in power, though, he
Speaker 5: can rewrite those Treasury laws which makes a subsidy, which
Speaker 5: could make the subsidy basically impossible to get. How are
Speaker 5: you thinking about that kind of impact when all this
Speaker 5: money has been put towards the evening market.
Speaker 7: Yeah, so we have a long term vision on these topics.
Speaker 7: I mean, we know that, and we believe where we
Speaker 7: amain committed to the EV strategy in the long term,
Speaker 7: and the pace will depend on the consumer. Now, is
Speaker 7: it possible that the rules will change. It's possible, but
Speaker 7: he would need a vast majority in the Congress and
Speaker 7: the Senate to change his laws. And also when you
Speaker 7: look at the map where all the factories have been built,
Speaker 7: they're not built only in states that are democratic or Republican,
Speaker 7: and they're being built all over the US. I think,
Speaker 7: you know, in the interest of jobs and growth, in technology.
Speaker 7: I think it would be wise to maintain this long
Speaker 7: term vision.
Speaker 2: Do you think it would be wise to wait until
Speaker 2: after the election before you make decisions about your manufacturing
Speaker 2: footprint in this country?
Speaker 7: I don't think so, and I give you an example
Speaker 7: at this are not only words. We decided to localize
Speaker 7: the ID four way before the Inflection Reaction Act, which
Speaker 7: goes back to your question. Right, So we believe so
Speaker 7: much in the transition to elective vehicles and in localizing
Speaker 7: our footprint in the US that we made decisions before
Speaker 7: and after that we're going to continue to localize.
Speaker 2: One push over the last year or so by this President,
Speaker 2: by this White House is to push and support union workers.
Speaker 2: You mentioned Chattanooga. There at that plant, there's going to
Speaker 2: be a vote on whether the workers joined UAW that
Speaker 2: specific union. Can you walk us through what that could
Speaker 2: do to your cosspace?
Speaker 7: Now, First of all, we respect the freedom of our
Speaker 7: workers to choose how they're represented. Having said that, we're
Speaker 7: constantly talking to our workers on how to improve, you know,
Speaker 7: the working conditions, the salaries, and the benefits. It would
Speaker 7: be up to them how they want to be represented
Speaker 7: in the future. So we will respect now and.
Speaker 2: The cost space, you just assume that it would increase
Speaker 2: of the bank of.
Speaker 7: That, I'm not so sure. I mean, we have a
Speaker 7: very competitive cost space, competitive in terms of the employees.
Speaker 7: We have wages around twenty three dollars an hour which
Speaker 7: are compatible to Michigan with the lower cost of living.
Speaker 2: So we will see Pablo. Thank you sir. Hopefully we
Speaker 2: can catch up against soon. I appreciate your time, thanks
Speaker 2: for the invitation. See you next time, Pablo, the s
Speaker 2: VW North America CEO. This is the Bloomberg Sevenans podcast,
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