Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg p m L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. So
Speaker 1: while I was away at treasury, yields climbed. They had
Speaker 1: their biggest five days sell off since the November since
Speaker 1: right after the US election. And to bring in someone
Speaker 1: who can can tell us, you know, whether this is
Speaker 1: the beginning of a more protracted bond market route or
Speaker 1: whether this is just a hiccup in an otherwise low
Speaker 1: yield environment. We have Jim Bianco, who I am so
Speaker 1: pleased to speak with. Jim Bianco is president of Bianco Research,
Speaker 1: which is based in Chicago. Jim, what is going on here?
Speaker 1: You know? Is this just uh, you know, rates kind
Speaker 1: of normalizing in a a little bit more of a
Speaker 1: choppy fashion that they have been, or is this the
Speaker 1: beginning of something bigger? It could be the beginning of
Speaker 1: something bigger, but I don't think. So let's talk about
Speaker 1: what happened June, which was not that long ago, uh,
Speaker 1: just two weeks ago the tenure yield was it two eleven?
Speaker 1: And the next day there was a bunch of central
Speaker 1: bankers that spoke uh Mark Kearney of the Bank of
Speaker 1: England and Mario Dragging of the European Central Bank, and
Speaker 1: they hinted that even they might be looking at a
Speaker 1: period of when they're central bank stimulus of bond buying
Speaker 1: might end. Remember now that all bonds in the world,
Speaker 1: and developed market government bonds in the world, one third
Speaker 1: of them are now owned by central banks. So if
Speaker 1: all the Fed has already stopped buying, if the ECB
Speaker 1: is gonna stop buying, in the Bank of England is
Speaker 1: going to stop buying. The bond market responded accordingly by
Speaker 1: seeing a rise in yields a lot. Now we've seen
Speaker 1: the tenure, you'll go up, but your europeanials have gone
Speaker 1: up a lot more. That ten year German Bund is
Speaker 1: at an eighteen month high on that news, So I
Speaker 1: think that's been the catalyst for it. The problem is
Speaker 1: that they're assuming, they being central banks, are assuming that
Speaker 1: inflation is going to kick back up. If it does,
Speaker 1: then all their hawk ish talk about raising rates is
Speaker 1: probably justified if it doesn't and these uh and inflation
Speaker 1: stays low, and for the last several years, that has
Speaker 1: always been the thing. Inflation confounds by being too much
Speaker 1: lower than everybody thinks. If it stays there, then they
Speaker 1: might be overtightening and they could be seriously impacting the
Speaker 1: economy in a negative way. Which way do you fall
Speaker 1: on this? I think that they're going too far. I
Speaker 1: think that inflation is not going to pick up to
Speaker 1: the degree that central banks say it's going to pick up.
Speaker 1: We did a study a couple of weeks ago where
Speaker 1: we looked at uh FED speech and usually when inflation
Speaker 1: surprises them, they start using the words models and for
Speaker 1: tasks a lot, meaning that O'll pay no attention to
Speaker 1: us being wrong. Now the future, according to our model
Speaker 1: and forecast says will be right. They've used the words
Speaker 1: model and forecast more than they have at any point
Speaker 1: in the last eight years. So they're really betting that
Speaker 1: they're going to see a rise of inflation, and I
Speaker 1: just don't see it right now. And if they intend
Speaker 1: on reducing the balance, she at least the Federal Reserve
Speaker 1: raising rates more, and we were to get this kind
Speaker 1: of pull back from the e c BE in the
Speaker 1: Bank of England, it could be very problematic for the
Speaker 1: economies because you could wind up tightening to the point
Speaker 1: where it actually hurts the economy, something we haven't seen
Speaker 1: yet so far. I'm wondering, Jim, what's your take on
Speaker 1: whether this bond market sell off happened on thin volume
Speaker 1: and it was simply a result from a summer market
Speaker 1: where a lot of people were out of the office
Speaker 1: versus uh, people were positioned for this and we're waiting
Speaker 1: for this, and and and and have been. So the
Speaker 1: market has gotten so one sided that it can readjust
Speaker 1: quickly and more violently. Let me make it just an
Speaker 1: an don't for you about the thin volume. Um JP
Speaker 1: Morgan has reported now that among their high institutional clients
Speaker 1: that they have mobile apps for them to trade and
Speaker 1: they have now done at trades in excessive a billion
Speaker 1: dollars with somebody on their phone. So all those traders
Speaker 1: that are summering in the Hampton's over the Fourth of
Speaker 1: July weekend, they're not in the office, They've got a phone,
Speaker 1: They've got their two buttons away from doing a trade.
Speaker 1: And that's exactly what they have been doing, and so
Speaker 1: I don't buy the argument that there's there's this thing
Speaker 1: called thin summer volume. As far as where the where
Speaker 1: the markets go, as far as the positioning goes in
Speaker 1: the marketplace, I think it's rather neutral. We look at
Speaker 1: things like the Commitment of Traders report, which is a
Speaker 1: breakdown of open interest, and we see that the ten
Speaker 1: year UH, the speculators in the ten year contract are
Speaker 1: very very long, and that's supposed to be bearished. But
Speaker 1: then we've got the opposite in the ear dollar, and
Speaker 1: when you add them all up, they're kind of in
Speaker 1: a middling kind of range. So I don't see UH
Speaker 1: positioning as being they were extreme right now, which suggest
Speaker 1: that this this rise and rates might have a little
Speaker 1: bit more to run, but not much more, because if
Speaker 1: the if it's going to continue to raise rates without inflation,
Speaker 1: I think the market is going to start worrying that
Speaker 1: they're gonna hurt the economy, and that could be very
Speaker 1: supportive for interest rates. At what point do you think,
Speaker 1: for let's say, on the tenure, what yields do you
Speaker 1: think are going to be attractive enough to bring people
Speaker 1: in buying in bulk. I think to forty would do it.
Speaker 1: We're only a couple of asis points away from that
Speaker 1: right now. I think that if you see a two
Speaker 1: point four facts fill in the blank after that, I
Speaker 1: think that people will start getting interested in the bond market. Jim,
Speaker 1: you know when I when I always speak with you
Speaker 1: or here hear your voice or read things that you're right,
Speaker 1: I always think, Okay, Jim is in Chicago, so he's
Speaker 1: kind of the steady eddie and all this. You know,
Speaker 1: he kind of sees it from a perspective that many
Speaker 1: people on the coast and so on may not be
Speaker 1: able to see. And then I of course thought, but
Speaker 1: Chicago was in Illinois, and you know, you've got a problem,
Speaker 1: and I'm wondering if you could talk about just the
Speaker 1: pensions and these problems with the budgets in particularly in Illinois,
Speaker 1: and what you think the effects of that are going
Speaker 1: to be in the economy Illinois on the road to ruin?
Speaker 1: How about that? Um? And unfortunately I'll say that we're
Speaker 1: just further along on that road than everybody else. They
Speaker 1: all seem to be on it. Um. Real brief, here's
Speaker 1: Illinois problem. They passed the new constitution in nineteen seventy
Speaker 1: Section five of the new Constitution said you cannot change
Speaker 1: a pension plan or any retirement plan that is done
Speaker 1: by the state, city, or any municipal workers. They've tried
Speaker 1: to amend or I'm sorry, they've tried to change the plans,
Speaker 1: the courts have struck it down because the constitutions says
Speaker 1: you can't change them. So we've got this giant pension
Speaker 1: problem that cannot be changed short of a constitutional amendment.
Speaker 1: I won't go to the the mechanics to that, but
Speaker 1: let's just say that a constitutional amendment in Illinois all
Speaker 1: but impossible. So that's the first problem that Illinois has.
Speaker 1: The second problem that Illinois has been at that point
Speaker 1: is that they have been raising taxes to try and
Speaker 1: meet this pension problem. They've been driving people out of
Speaker 1: the state. The state of Illinois has the largest exodus
Speaker 1: of people in the country. The city of Chicago has
Speaker 1: the largest exodus of any major city of people in
Speaker 1: the country. We've just raised the taxes again. The Illinois
Speaker 1: Policy Institute says that, congratulations, Illinois, you've got the highest
Speaker 1: tax rate in the country. Now, all in tax rate
Speaker 1: in the country. That's gonna drive more people out of
Speaker 1: the state that's going to lower the number of people
Speaker 1: that pay taxes. That's why I mean by Illinois on
Speaker 1: the road to ruin. Now, what fixes this? Well, when
Speaker 1: the Illinois voters decide what they want to be. Do
Speaker 1: they do they want to be a quasi socialist state
Speaker 1: and continue to just raise taxes and raise taxes and
Speaker 1: they don't care if they drive everybody out, or do
Speaker 1: they want to correct this by electing politicians that will
Speaker 1: pass the constitutional amendment to start start fixing this problem.
Speaker 1: The Illinois voters haven't decided yet, and that's why we
Speaker 1: will remain on the road of ruin until they do
Speaker 1: decide what they want to do. Thank No, but Jim Bianco,
Speaker 1: I mean, you know, as they say, tell us how
Speaker 1: you really feel. No, but Jim Bianco, You're you're highlighting
Speaker 1: so many very pertinent issues, and we want to thank
Speaker 1: you for doing so. Jim Bianco is the president and
Speaker 1: the founder of Bianco Research, and yes, he is based
Speaker 1: in Chicago. There's a holiday coming up, Lisa of Romwitz.
Speaker 1: It's only happening online though it's ending in the Amazon world,
Speaker 1: and it's called Amazon Prime Day. And this apparently is
Speaker 1: a moment in Internet experience that people have waited for
Speaker 1: all year. But we've got someone who has to do
Speaker 1: this for a living, just Hendra Warrel. He is our
Speaker 1: Global Internet and Consumer Electronics Analyst for Bloomberg Intelligence and
Speaker 1: he joins us from our nine sixty studio in San Francisco.
Speaker 1: Je Tendra, thank you very much for making time for us.
Speaker 1: And have you got the countdown clock or something to
Speaker 1: this retail experience? Tell tell people who are not familiar
Speaker 1: with it or whose eyes are rolling into the rhead
Speaker 1: what this is all about. So basically this is a
Speaker 1: third year that Amazon is doing this. Essentially, what they
Speaker 1: want to do is for all their Prime members, make
Speaker 1: you know, products available, deep discounts so that you know,
Speaker 1: more people are aware of this prime membership service and
Speaker 1: they attract more Prime members you know long term. Now,
Speaker 1: what we have seen last year two years basically every
Speaker 1: time they have a Prime Day one day, they always
Speaker 1: have like a you know, sales exceeding sort of expectations
Speaker 1: on the Prime Day, which reflects on the prey guidance
Speaker 1: being higher than expectations, but also a surgeon prime memberships.
Speaker 1: So what you can expect here is deals, more Prime
Speaker 1: members and um, you know, them selling more Equit devices
Speaker 1: to you this year to Tendra. How big are the
Speaker 1: discounts and who takes the cut in profits? Does Amazon
Speaker 1: pass on the cut and profits to the suppliers, the
Speaker 1: stores that supply uh the goods? Or is it just
Speaker 1: them taking the hit and taking the loss. See, the
Speaker 1: goal here is not just chasing sales and profitability on
Speaker 1: this day. The goal here is to broadcast the brand globally, right,
Speaker 1: so attracting more prime members. So it's it's less to
Speaker 1: do with profits and more to do it just the acquisition.
Speaker 1: I know, I understand that, I understand that, but I'm
Speaker 1: wondering if they discount things heavily, right, how does that?
Speaker 1: You know, are they basically taking a loss with the
Speaker 1: amount that they're discounting it, or are they just they're
Speaker 1: discounting it a little bit and they're still on certain
Speaker 1: categories on certain categories. That would be true. But if
Speaker 1: you actually look at you know, the stuff that they
Speaker 1: sell the most or or hope to sell the most,
Speaker 1: is Amazon's own products, which obviously you know they're taking
Speaker 1: a loss on it as it is, so you know,
Speaker 1: it's safe to assume that they would be taking a
Speaker 1: loss on that. But the goal here is more penetration
Speaker 1: of you know, these devices like Amazon Echo and henceforth,
Speaker 1: the more tuned customers are to the whole Amazon ecosystem.
Speaker 1: So if I said to the Alexa or the Echo
Speaker 1: machine in the living room, tell me the dollar amount
Speaker 1: of sales that Amazon does on these days, what would
Speaker 1: the response be? They don't disclose this number. What do
Speaker 1: you think it is? What kind of sales numbers are
Speaker 1: we talking about? So right now we will be probably
Speaker 1: approaching a billion dollars in gm re because you know,
Speaker 1: they have thirty hours this year versus twenty four, be
Speaker 1: they have more Prime members. How did they get how
Speaker 1: did they squeeze those hours? Who did they call to
Speaker 1: get those extra hours? Well, they also expanded the number
Speaker 1: of countries over here, and they want to make sure
Speaker 1: that you know, all these deals attract as many Prime
Speaker 1: and Echo customers as possible. So, but what's interesting is
Speaker 1: with the Echo devices, like you have exclusive deals on
Speaker 1: them as well, and deep discounts on the Echo product
Speaker 1: as well. So Amazon clearly wants, you know, more and
Speaker 1: more people to buy these Echo devices and rely more
Speaker 1: on it so that you know, they stay away from
Speaker 1: shopping elsewhere. Why don't all retailers do this, have their
Speaker 1: own holiday, not Black Friday, but have their own holiday
Speaker 1: that they managed to create manufacturing. I mean, Hallmark basically
Speaker 1: did that for like Mother's Day and Valentine's Day, right,
Speaker 1: So I mean, why why don't we see more of this?
Speaker 1: It's interesting because you know what we have seen all
Speaker 1: the last three years, it's been reactionary uh stances from
Speaker 1: other players. So Walmart had something similar last year in
Speaker 1: response to Prime, but like this year, they are not
Speaker 1: doing it. But why aren't they doing it? Um? Well,
Speaker 1: maybe maybe one of the reasons it is probably their
Speaker 1: discounts are more flexible throughout the year versus Amazon. It's
Speaker 1: it's a little bit more rigid on that stance. And
Speaker 1: also they don't have members you know for Prime members
Speaker 1: as for Prime Member, Prime Member, Prime Days, Prime Members only,
Speaker 1: so they don't have this sort of membership loyalty program
Speaker 1: going on across the board. And I think that's something
Speaker 1: that they couldn't do. They're buying an annual annuity stream
Speaker 1: and whatever they were, right, I mean, and they just
Speaker 1: had to figure out a way to finance what they have.
Speaker 1: The stock is up one in a quarter percent. Right now,
Speaker 1: Amazon shares trading just under a thousand dollars a share
Speaker 1: nine dollars a share for for Amazon. So who who
Speaker 1: takes the hit from all this? Walmart? Oh well, Walmart
Speaker 1: interestingly didn't do it this year, like you know, have
Speaker 1: a reactionary sort of response, but not Walmart as much.
Speaker 1: But like you could see the other source, uh, you
Speaker 1: know sort of do take a hit from traffic being
Speaker 1: the worded away from them. But it's not about a
Speaker 1: hit one day. It's about it hit on like what
Speaker 1: it means for the next year, you know. So, like
Speaker 1: I said, they have twenty two million more Prime members
Speaker 1: now coming into Prime Day versus it was last year,
Speaker 1: So more people are attuned to this ecosystem, more likely
Speaker 1: they want to stick to it. It's like a cable company, right,
Speaker 1: They've got more people paying a year. Absolutely believe it's
Speaker 1: absolutely But but what's interesting is that, I mean, it
Speaker 1: doesn't really cover your free shipping and all the goods
Speaker 1: you get out of it. So what Amazon wants to
Speaker 1: do is essentially rely more on third party sellers through
Speaker 1: their Fulfillment by Amazon program uh, to sell it to
Speaker 1: Prime members. So that's how they try to recuperate. Uh
Speaker 1: you know all the costs that or some of the
Speaker 1: costs at least for now to um to give you
Speaker 1: the free shipping and all these services to tender world.
Speaker 1: Thank you so much for joining us and gonna let
Speaker 1: you go and get started to get up your wish
Speaker 1: list for Amazon Prime to turn as our global Internet
Speaker 1: and consumer Electronics analyst for Bloomberg Intelligence joining us from
Speaker 1: San Francisco. Well, there is a market that isn't covered
Speaker 1: very much, but is vast and is of great importance
Speaker 1: to really the heart of the U S economy, and
Speaker 1: that is middle market lending. I want to bring in
Speaker 1: Andy Stoyerman. He is head of middle market lending and
Speaker 1: head of late stage lending for Gallop Capital, its dollars
Speaker 1: under management based in Chicago. Andy, I want to talk
Speaker 1: about just the state of the market right now, because
Speaker 1: in the first half of broadly syndicated loans saw an
Speaker 1: unprecedented amount of issuance, and a lot of this was repricing.
Speaker 1: People try Our company is trying to get lower rates
Speaker 1: on their loans. Right now, we're starting to see some
Speaker 1: softness in the broader, bigger loan market. What about the
Speaker 1: middle market, The middle market always is immune to what's
Speaker 1: going on the syndicated market. We do say if they
Speaker 1: have a flu, we get a cold. But middle markets
Speaker 1: more relationship blending, and our clients really don't have a choice.
Speaker 1: They don't really have a syndicated option, they don't have
Speaker 1: a non syndicated option. So middle market has some spread
Speaker 1: compression when the large market has spread compression, which is
Speaker 1: happening now. But we're more immune and we tend to
Speaker 1: be more relationship lending, so clients tend to pick us
Speaker 1: and work with us even when markettions change. What kind
Speaker 1: of how much higher are the rates on these loans?
Speaker 1: Say on average then on broadly syndicated loans, they could
Speaker 1: be anywhere from about a hundred to a hundred and
Speaker 1: twenty five basis points. And if you're one of the
Speaker 1: leader arrangers, you get to keep most of the upfront fees.
Speaker 1: Were in a syndicated market, the investment bank keeps the
Speaker 1: outfront fees and the retail market takes a very low
Speaker 1: o I D. So we actually get a premium in
Speaker 1: our spread because we're the underwriter and holder. I want
Speaker 1: you to just use if you can, the here's the image.
Speaker 1: The image is you have a pet and you have
Speaker 1: to go and you need to let's say, have it
Speaker 1: cared for, and you get the bill and you just
Speaker 1: are in shock, but you pay it. Can you tell
Speaker 1: us about that and a loan that you put together
Speaker 1: and how that kind of exemplifies not only your role,
Speaker 1: but specifically the kinds of businesses and the people involved
Speaker 1: in the businesses, the owners, the operators. Sure Golf Capital
Speaker 1: works with middle market companies in the United States. Middle
Speaker 1: market companies really are the growth engine. That's where both
Speaker 1: changes happen because larger companies are kind of too bureaucratic.
Speaker 1: We do like the pet space. We found over time
Speaker 1: that people actually like their pets, sometimes more than their children,
Speaker 1: and we'll feed their pets better food than they feed
Speaker 1: their children. So it's actually a pretty recession resistant elements.
Speaker 1: So we we've worked well. In the vetman, I'm sorry,
Speaker 1: it's proven to be true. We we could see it.
Speaker 1: I just want you to get the vet care so
Speaker 1: people bring. Veterinary care is has been recession resistant. We
Speaker 1: have data going back fifteen years when we've done our
Speaker 1: first Veterinarians have two issues, right, they have issues of
Speaker 1: scale because they need to kind of grow their business
Speaker 1: and they have generational change issues, which is how do
Speaker 1: I monetize what I've created? So the private equity market
Speaker 1: has been great at creating these super companies where they
Speaker 1: consolidate all the operations get more efficient, so sometimes pricing
Speaker 1: goes down better care referral sources. But also the owners
Speaker 1: of these businesses actually get to cash out and change
Speaker 1: their generational wealth. So our company we did was called
Speaker 1: pet Fet. Pet FETs one of the larger consolidators. And
Speaker 1: this is an example how we did a middle market
Speaker 1: deal and didn't go syndicated. Seven hundred million dollar facility
Speaker 1: in prior years would have been done the larger syndicated
Speaker 1: loan market. And just to be just this was this
Speaker 1: headquartered in in um Uh, Connecticut. Headquartered in Connecticut. But
Speaker 1: but their operations are national and they're building clusters nationally
Speaker 1: and their owned by a pension plan, by a pen
Speaker 1: and plan and other lenders like like ourselves. Well, I
Speaker 1: want to pick up on the idea that a pension
Speaker 1: plan owns this company Ontario Teachers Pension Plan. This I
Speaker 1: thought was interesting and this is a new development where
Speaker 1: you're seeing an increasing number of pensions invest directly in
Speaker 1: smaller companies in order to capture those higher yields that
Speaker 1: you were saying, we're uh north of one percentage point
Speaker 1: higher than more broadly syndicated loans. Um, how much are
Speaker 1: you seeing this as a trend and is it good
Speaker 1: or is it bad? So we've seen pension plans in
Speaker 1: two places. One we've seen them as buyers of businesses
Speaker 1: where they've decided not to invest in private equity funds
Speaker 1: and pay the carrying the promote to private equity funds
Speaker 1: and they build their own teams. And then we've seen
Speaker 1: as direct direct lenders where they have huge obligations and
Speaker 1: they see the direct loans that we're making and giving
Speaker 1: to our investors and I'd like to participate, and someone
Speaker 1: have the scale to get their teams together. So there
Speaker 1: are it's a delicate balance into when you say scale
Speaker 1: to get their teams together. Does that mean that they
Speaker 1: are hiring people who are specialists in direct lending to
Speaker 1: go out on behalf of them and source opportunities or
Speaker 1: does this mean that uh, they're getting sort of investment
Speaker 1: thecs together in order to invest. No, they're doing both.
Speaker 1: They actually have full teams, their marketing to the private
Speaker 1: equity universe as if they were Gollop Capital. So they're
Speaker 1: out there using their balance sheet, using their pension plan
Speaker 1: and going out and sourcing loans on their own. Does
Speaker 1: this make it difficult for you? You know there, it
Speaker 1: does make it more difficult, But there is a scale,
Speaker 1: there is tenures. So Gallop capitalsman in business for twenty years.
Speaker 1: It takes a long time to queue. In this business.
Speaker 1: One of the things that people don't talk about. You
Speaker 1: have to provide companies that revolvers the lines of credit.
Speaker 1: Having that operation is very time consuming, expensive and it's
Speaker 1: a big organization. They tend to do more the junior capital.
Speaker 1: Pension plans second lean high yield bonds and tend to
Speaker 1: buy into our loans, probably more than than to arrange
Speaker 1: and lead themselves because that difficult, real, real quick. Which
Speaker 1: pension plans have the biggest teams devoted to direct lending
Speaker 1: um Ontario Teachers was there's a group called PSP. There
Speaker 1: are there are pension plans all of the United States.
Speaker 1: They're all doing it. They're family offices that are doing
Speaker 1: it too, high net worth individuals and family offices. So
Speaker 1: the Canadian market has been one of the largest. If
Speaker 1: you look at all the Canadian pension plans, they've been
Speaker 1: the most aggressive, you know, really in our market. That
Speaker 1: is amazing. They really so they're investing in the United
Speaker 1: States to fund their future liabilities for their retirees. Yes,
Speaker 1: not our own pension plans. Some invest through us. Well
Speaker 1: what a trend. All right, well done, Thanks very much
Speaker 1: for being here illuminating an interesting topic. Andy's Storyaman He
Speaker 1: is the head of middle market lending and the head
Speaker 1: of late stage lending. He does it all at Gallup
Speaker 1: Capital twenty billion under management based in Chicago. This is Bloomberg. Well,
Speaker 1: in the past week alone, the biggest emerging markets e
Speaker 1: t F debt e t F I should say, which
Speaker 1: trades unto the ticker e m B, has lost about
Speaker 1: one almost one billion dollars of assets through withdrawals. And
Speaker 1: this comes after many, many weeks of consecutive and record inflows.
Speaker 1: Here to help us understand whether this is the beginning
Speaker 1: of some kind of bigger route with an emerging markets
Speaker 1: debt is Damien Sassaur. He's are fixed income strategist focus
Speaker 1: on emerging markets for Bloomberg Intelligence, and he joins us
Speaker 1: here in our Bloomberg eleven three oh Studios, Damien, thank
Speaker 1: you so much for joining us. So we have seen
Speaker 1: this weakness, which is a little bit surprising, simply because
Speaker 1: there were so many big investors who were saying that
Speaker 1: right now emerging markets debt is in better shape simply
Speaker 1: because these economies are doing better and even a bit
Speaker 1: of of of a benchmark rate increase in the US
Speaker 1: won't really shake it. What's behind the latest weakness and
Speaker 1: kind of continue, Well, I think the latest weakness, as
Speaker 1: we were discussing, it's it's been macro factors, right, I
Speaker 1: think six of spread movement for the better part of
Speaker 1: the past two years. An emerging market debt is related
Speaker 1: to oil US yields and China China consumption, So you
Speaker 1: know that explains the bulk of it. I mean, we
Speaker 1: just hiked on June fourteen, and since that point, the
Speaker 1: meaning that the Federal Reserve raised indust rates again on
Speaker 1: in June, and since then we have seen this weakness
Speaker 1: precisely we are we are the Bloomberg Barkley's Emerging market
Speaker 1: hard currency aggregate benchmark indexes down one point oh five
Speaker 1: percent since the date of the uh the FED rate hikes.
Speaker 1: So so yeah, look, I mean it's still at five
Speaker 1: points percent year to date. I mean it rose nine
Speaker 1: percent last year. So maybe you know, call it what
Speaker 1: you will, you know, um now that um, you know,
Speaker 1: maybe profit taking. Maybe you know you're just seeing people,
Speaker 1: you know, the markets are maybe a little bit over extended, etcetera.
Speaker 1: But but look fundamentally, and this is what we look at.
Speaker 1: I think there's something bigger going on beneath the surface. Right,
Speaker 1: We've got em credit quality degradation, and we have tighter
Speaker 1: spread perturn of leverage, meaning the spread premiere that creditors
Speaker 1: require per unit of growth leverage has compressed by thirteen
Speaker 1: point four percent year to date. So you're just like
Speaker 1: that just to trans so in other words, that a
Speaker 1: left turn or right. So investors are basically getting much
Speaker 1: less compensation correct for extra debt that emerging markets companies
Speaker 1: are building up relative to their income. In other words,
Speaker 1: they're becoming more levered and people are accepting less uh
Speaker 1: less an income. And that's exactly right. You you said
Speaker 1: it perfectly so so um, and it's not uniform, right,
Speaker 1: I mean, the level of leverage that is going up
Speaker 1: an emerging market, it's not going up across the board.
Speaker 1: It's going up across most sectors, although you know, our
Speaker 1: analysis finds that mining and utility issues leverages actually uh
Speaker 1: the client um and it's not going to up across
Speaker 1: all regions. In fact, um well, in the Asia Pacific
Speaker 1: region it's gone up quite considerably, but in Central and
Speaker 1: Eastern Europe leverage is actually declining. So you know, it's
Speaker 1: it's it's about these pockets, you know, these idiosyncratic regions
Speaker 1: and countries and sectors and and and and that kind
Speaker 1: of lends you to where you know the opportunities are
Speaker 1: and quite frankly, where the risks are. Let me just
Speaker 1: try to put this into a picture for myself, Damien,
Speaker 1: because if you were brave enough after the November presidential
Speaker 1: election to go in and buy e m B, which
Speaker 1: is as we're describing the e t F, that is
Speaker 1: the proxy for how people feel about emerging market debt.
Speaker 1: If you were lucky enough to do that, you would
Speaker 1: be getting in and around one oh six, and I'm
Speaker 1: just going to tell you something about June. This is
Speaker 1: the beginning of June, emerging debt e t F saw
Speaker 1: the largest weekly inflows in more than four years, adding
Speaker 1: one point four billions. So that was the beginning of
Speaker 1: last month. So may be when you're a smart investor
Speaker 1: and you read that and you say, oh, largest weekly
Speaker 1: inflow in more than four years. I'm getting out. I
Speaker 1: got in at one oh six, and now I can
Speaker 1: get out of at one sixteen. Great, thank you. I'll
Speaker 1: buy it back when it goes to one oh three
Speaker 1: or one thirteen. And Pam, let me just expand on that.
Speaker 1: Thirteen billion has found its way into emerging market debt
Speaker 1: e t F in seventeen, and that's equal to thirty
Speaker 1: percent of EM debt e t F assets under management.
Speaker 1: I mean, that's an extraordinary number of few that either
Speaker 1: speaks to the marketing, the sales, or the actual underlying
Speaker 1: because how do you even know what's in this? Do
Speaker 1: most people know what's well? Yeah, well, now, over se
Speaker 1: of the thirty four billion in the five largest emerging
Speaker 1: market that e t F s are U S dollar bonds,
Speaker 1: right their hard currency emerging market. Um, yeah, but I
Speaker 1: got right here. Russia is the largest holding in e
Speaker 1: m B right, you gotta you gotta Russia, Uruguay, poland Peru.
Speaker 1: It's interesting how so much of this has also connected
Speaker 1: to politics. Because I was looking at this list that
Speaker 1: you have in the story, which gives a really detailed
Speaker 1: reckoning for each individual country. Why don't to just share
Speaker 1: some highlights with of that. Well, I mean Mexico, Turkey
Speaker 1: and so on. Well, you know, Mexico is an interesting one.
Speaker 1: I mean, let's start with Russia, right, I mean the
Speaker 1: thing with Russia is, I think you know, people are
Speaker 1: looking at Russia and they look at emerging markets, and
Speaker 1: what do you look at? You look at growth, you
Speaker 1: look at effectively, what is the forward earnings potential of
Speaker 1: the country itself, and sometimes you ignore the basic fundamentals.
Speaker 1: Leverage in Russia is low relative to just about any
Speaker 1: country on the planet, predominantly because it's been sanctioned by
Speaker 1: the U S and the EU, and so it hasn't
Speaker 1: been able to tap the international capital markets for some time.
Speaker 1: I mean, they have, but just not not the way
Speaker 1: you would you would have you would have thought, and
Speaker 1: you know, so, yeah, I mean they actually have low leverage,
Speaker 1: but on a forward basis, just extrapolating that out, their
Speaker 1: growth potential is not nearly what it is or what
Speaker 1: it once was, given the sanctions and given what's going
Speaker 1: on with geo political risk in Russia. Right, So you know,
Speaker 1: and and let's compare that to Mexico. Our analysis looking
Speaker 1: at spread Perturn finds that Mexico um corporates and quasi
Speaker 1: sovereign issuers are actually being valued well below what their
Speaker 1: credit rating. Their trip will be. Credit rating now says
Speaker 1: they're actually being valued as a double B. So yeah,
Speaker 1: that's great information. Go along, Mexico, watch out if you're
Speaker 1: in Russia. Thanks very much, Damian Sasaur, fixed income strategist,
Speaker 1: Bloomberg Intelligence. Thanks for listening to the Bloomberg P and
Speaker 1: L podcast. You can subscribe and listen to interviews at
Speaker 1: Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm
Speaker 1: pim Fox. I'm on Twitter at pim Fox. I'm on
Speaker 1: Twitter at Lisa Abramo. It's one before the podcast. You
Speaker 1: can always catch us worldwide on Bloomberg Radio