Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.
Speaker 1: Along with my co host Lisa Abramowitz. 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 and L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. The
Speaker 1: topic is China and how to absorb what some describe
Speaker 1: as industrial quantities of the most indigestible stuff had a
Speaker 1: grapple with China's economy and its political system. Here to
Speaker 1: tell us about it is none other than George Magnusi,
Speaker 1: an associate of the China Center at Oxford University, former
Speaker 1: chief economist for UBS, and the author of a new
Speaker 1: book entitled Red Flags Y G's China Is in Jeopardy.
Speaker 1: George magnus thank you very much for being with us.
Speaker 1: Tell us what you want people to take away from
Speaker 1: your book. Well, I think the main thing is that
Speaker 1: China is facing a number of economic issues which are
Speaker 1: not necessarily unique to China. Um, they're very special in
Speaker 1: the kind of China's case. But the main thing really
Speaker 1: is that since Seijing pin came to power in two
Speaker 1: thousand and twelve. There's been a very substantial shift in
Speaker 1: the way in which China is governed, in what we
Speaker 1: might call its governance system. And this is not the
Speaker 1: China that we thought we knew, that erupted onto the
Speaker 1: world scene, so to speak, during the last kind of
Speaker 1: twenty or thirty years. It's obviously still in certain years,
Speaker 1: are much more powerful China than it used to be,
Speaker 1: and it's a much richer China than it used to be.
Speaker 1: But the governance system has changed a dramatically. And what
Speaker 1: I've tried to do in the book is to set
Speaker 1: out what difference this makes to the chances of yet
Speaker 1: another transformation which China has to make if it wants
Speaker 1: to aspire to all the things that it says it
Speaker 1: wants to be. So, George, can you connect that sort
Speaker 1: of shifting governing structure in China to what we're hearing
Speaker 1: with respect of the tensions between the US and China?
Speaker 1: In other words, is the US misplacing some of its
Speaker 1: concerns about the dominance of China, And is China going
Speaker 1: to become less of a threat than than China than
Speaker 1: US officials seemed to think UM. Now I kind of
Speaker 1: picture the other way, to be honest. I mean, I
Speaker 1: think that, you know, one of the remarkable transformations that
Speaker 1: China has has done over the last thirty or forty
Speaker 1: years is, you know, once upon a time, it used
Speaker 1: to be a very um, you know, a magnetic customer
Speaker 1: for global companies and particularly for Western companies, and gradually
Speaker 1: it's sort of evolved into a very feisty competitor, not
Speaker 1: just in low value goods, but increasingly in in medium
Speaker 1: skill and medium technological level goods and serve one services,
Speaker 1: but certainly goods UM. And now it's become also, of course,
Speaker 1: a very feisty and very considerable competitor and and adversary
Speaker 1: to the United States and some degree to to the
Speaker 1: Western world as well. And I don't really see that
Speaker 1: this is going to change any time in the future.
Speaker 1: And if anything, I think that the trade war, which
Speaker 1: of course consumes us all and it's kind of almost
Speaker 1: front page news kind of every day, UM, is something
Speaker 1: that we should expect to continue and perhaps to become
Speaker 1: even starker and spill over to other areas in the future,
Speaker 1: because it does signify a kind of an adversarial relationship
Speaker 1: which at the moment, neither of the two presidents of
Speaker 1: the two countries, a President Trump and President sieging Ping,
Speaker 1: you know, seemed to be, you know, one of them
Speaker 1: is following an America first policy, the others following a
Speaker 1: chi in the first policy, and that sort of dialogue
Speaker 1: that America and China used to have has has clearly
Speaker 1: kind of broken down, at least for the time being.
Speaker 1: Can China pursue policies for speedy growth and simultaneously reduce
Speaker 1: the risk of financial instability? M Now that is the
Speaker 1: sixty four trillion you are in question, um, And the
Speaker 1: answer that very simply is that I think is no. UM,
Speaker 1: so as I think a lot of people who are
Speaker 1: watching China kind of realize and understand. Since the end
Speaker 1: of two thousand sixteen, China has embarked on a quite
Speaker 1: quite a seriously minded course of deleveraging the financial system
Speaker 1: to try to unhook the economy's dependency on debt and
Speaker 1: on credit creation, and to some degree they have been successful,
Speaker 1: but only to a limited degree. Now that the economy
Speaker 1: is also slowing down and falter a little bit in
Speaker 1: the wake of this de leveraging policy, but also supplemented
Speaker 1: increasingly by the consequences of the tariffs and the trade conflict. Um.
Speaker 1: We can see quite a number of bits of anecdotal
Speaker 1: evidence where the government and the People's Bank of China
Speaker 1: a kind of rowing back a little bit from the
Speaker 1: intensity of this kind of deleveraging squeeze. So I think
Speaker 1: there is an unresolved conflict in China between the almost
Speaker 1: the kind of the mantra that we have. You know,
Speaker 1: they have to have elevated or high rates of economic growth,
Speaker 1: and in the conviction that certainly many Chinese leaders have,
Speaker 1: which is that they need to reduce their dependency on debt.
Speaker 1: But I don't think they've resolved yet. You know how
Speaker 1: those two incompatible objectives actually can co exist Because they can't.
Speaker 1: You have to choose one or the other. Although Georgia,
Speaker 1: some people would say the fact that China is easing
Speaker 1: again actually prolongs this cycle and gives China more time
Speaker 1: to sort of right size itself and fix that some
Speaker 1: of the structural problems that it faces and avoids a
Speaker 1: hard landing. Do you agree with that? Um? Not not really.
Speaker 1: I mean I think that the there is an argument
Speaker 1: that you know, if you if the Chinese authorities can
Speaker 1: basically just hold the line on credit creation and deleveraging
Speaker 1: for long enough that you know that faster growth will resume.
Speaker 1: But I think that this conflates to kind of things
Speaker 1: which actually are entirely dependent on one another. The reason
Speaker 1: that China can have and has had during the last
Speaker 1: ten years relatively elevated rates of growth, maybe not quite
Speaker 1: as elevated as official numbers suggest, but certainly quite high
Speaker 1: rates of growth is because of the because of the
Speaker 1: credit creation that's underpending. It Once you take away that
Speaker 1: credit creation mechanists, and growth will almost certainly drop off
Speaker 1: quite significantly. So this is the this is the acid
Speaker 1: test of Chinese policy making and of seizing pings kind
Speaker 1: of governance, shall we say, in terms of macroeconomics over
Speaker 1: the next kind of two or three years, is will
Speaker 1: they be willing to kind of bite the bottom lips,
Speaker 1: so to speak, and allow the economy to slow down
Speaker 1: materially whilst this deleveraging takes place, or or will they
Speaker 1: kind of give up and and go for growth. They
Speaker 1: still have a system of setting annual growth targets, and
Speaker 1: if that were ever to be abandoned, which has been
Speaker 1: mooted but it hasn't happened yet. If that were ever
Speaker 1: to be abandoned, I think we would see certainly a
Speaker 1: big shift in the way in which, you know, policy
Speaker 1: was being conducted in China and the tolerance that would
Speaker 1: be implicit for weaker economic expansion. But so far that's
Speaker 1: not been the case. George Magnus, thank you so much
Speaker 1: for being with us. Wonderful to get your insights on
Speaker 1: this very important topic. China, of course front and center
Speaker 1: for the entire global economy, not only the US. We
Speaker 1: respect to the tensions. George Magnus economist and associate at
Speaker 1: the China Center at Oxford University, also a research associate
Speaker 1: at the School of Oriental and African Studies, and formerly
Speaker 1: he was chief economist at u b S. Ongoing questions
Speaker 1: are continuing about China's hacking of hardware that is used
Speaker 1: by a lot of different US agencies, governmental companies, as
Speaker 1: well as defense units. Matt Choti joins US now vice
Speaker 1: president chief information security Officer at Redlock from Philadelphia. Matt,
Speaker 1: thank you so much for for coming back with us.
Speaker 1: There was a story yesterday that our Bloomberg Business Week
Speaker 1: reporters broke talking about additional signs that China had implanted
Speaker 1: some sort of micro chip to be able to hack
Speaker 1: into computers for a major US to telecommunications company. And
Speaker 1: this was using information given by somebody who is using
Speaker 1: their name on the record. What did you make of this? So,
Speaker 1: you know, this is really really interesting for a couple
Speaker 1: of reasons, right, First is that this is the first
Speaker 1: time that we've got some indication possibly around which industry
Speaker 1: this is affecting. And the second thing, like you mentioned,
Speaker 1: now we have a known hardware security expert who seems
Speaker 1: to be backing up these claims really for the first time.
Speaker 1: And the thing that's different right this hack is different
Speaker 1: from what we heard about last week, and that this
Speaker 1: is not an embedded chip in the motherboard but rather
Speaker 1: directly onto the servers network port. And I think the
Speaker 1: other thing that's important, and hold on one second before
Speaker 1: you continue, what does that mean? What's the difference here?
Speaker 1: So the difference is that it's just from from a
Speaker 1: skills perspective, it is it's much more difficult to do
Speaker 1: what we were talking about last week. We were talking
Speaker 1: about that really small embedded chip. In this case we're
Speaker 1: talking about it has been reported that the server's actual port.
Speaker 1: So where it's called an Internet jack where you plug
Speaker 1: a computer into the network that the actual port was
Speaker 1: replaced with a device that now can do those remote communications.
Speaker 1: How would a company or an individual check to see
Speaker 1: whether they are affected? So you know, this is again
Speaker 1: we don't know the scope of this right now. That's
Speaker 1: that's part of the challenge, right. So there is newer
Speaker 1: technology that exists, surely not that a consumer would have, right,
Speaker 1: but there's technology that exists today that utilizes X rays
Speaker 1: and machine learning to compare chip designs. Right, so you
Speaker 1: show it this is what a good chip looks like,
Speaker 1: and then it will compare it. And so this type
Speaker 1: of technology can help provide assurances, but today it's use
Speaker 1: is very limited. So Matt, I want to go back
Speaker 1: to this idea that you're talking about, where the prior
Speaker 1: story that we were talking at about how to deal
Speaker 1: with them planting a chip on the motherboard. This is
Speaker 1: an easier way of accessing information going through the ethernet port.
Speaker 1: I'm sure I'm butchering this, but I'm just wondering from
Speaker 1: your perspective, is it also easier to detect from sort
Speaker 1: of a security standpoint or does it just sort of
Speaker 1: raise the fear that this type of hacking and in
Speaker 1: these types of implants are all the more prevalent than
Speaker 1: anyone could ever imagined. Surely, in this case, this is
Speaker 1: something that was visibly different. I think I remember reading
Speaker 1: that it was you know that one is normally plastics,
Speaker 1: this sport, and this one was metallic. So surely this
Speaker 1: would be easier to spot just visually. But I think,
Speaker 1: you know, the thing that's really important remember is that
Speaker 1: this is not a super micro issue, right, this is
Speaker 1: an industry wide concern that's actually gone back for a
Speaker 1: number of years. Um. I found a report from that
Speaker 1: the Department of Defense issued. It was called the Cyber
Speaker 1: Supply Chain, and in there they identified concerns similar to
Speaker 1: what's been reported, and they actually made a couple of recommendations, right.
Speaker 1: The first was training, the SEC was developing new technical
Speaker 1: methods to identify malicious hardware. And the last one was
Speaker 1: new regulations that would require all defense suppliers to report
Speaker 1: hardware issues. So this, again, this is not really new.
Speaker 1: It's just the first time that the general public has
Speaker 1: been made aware of it. Matt, do you think that
Speaker 1: this will become a factor in the approval or disapproval process,
Speaker 1: the review process for US companies combining with Chinese companies
Speaker 1: or Chinese foreign investment in the United States. I think
Speaker 1: it's certainly going to add a whole new level of
Speaker 1: rigor in review. Right. So today companies they spend billions
Speaker 1: to secure software, but almost nothing for hardware. So definitely
Speaker 1: it will definitely become a point of contention. But again,
Speaker 1: it's not just a super micro issue. This is an
Speaker 1: industry wide concern. All right, So Matt, let's let's say
Speaker 1: that this is an industry wide concern and its evidence
Speaker 1: that China is trying to infiltrate big companies as well
Speaker 1: as possibly governmental units. I'm just wondering from your perspective, Uh,
Speaker 1: how how how do you sort of counter it on
Speaker 1: a broad level? And have you heard any I mean,
Speaker 1: you talked about regulations, but have you heard any movement
Speaker 1: in that direction. I have not personally seen that. I
Speaker 1: haven't read anything about it. But I guarantee you this
Speaker 1: is going to spurn it. That's why I think, you know,
Speaker 1: regardless if what's being reported accurate, this news will have
Speaker 1: a positive effect, and that it's going to spurn companies
Speaker 1: and governments worldwide to begin investigating the security of their hardware.
Speaker 1: All right, so let's let's actually go with that, because
Speaker 1: a lot of people I tweeted out the story and
Speaker 1: a lot of people were saying, hmmm, well, all of
Speaker 1: the governmental agencies and all of the companies are denying
Speaker 1: that this is the case, when at least the initial
Speaker 1: story they're saying that there was no microchip that was
Speaker 1: implanted in their hardware. Uh So, you know, with all
Speaker 1: of those denials, could it be that somebody is trying
Speaker 1: to get out this story or a lot of people
Speaker 1: are in order to prompt change, but that perhaps aren't
Speaker 1: getting the facts totally right. That's absolutely true. I mean,
Speaker 1: that could absolutely be the case. The other thing to
Speaker 1: keep in mind, right, if this really is a top
Speaker 1: secret government investigation, no doubt, each one of these companies
Speaker 1: would have received a national security letter, and if they
Speaker 1: receive that national security letter, it may have very well
Speaker 1: to have one that has a non disclosure provision, in
Speaker 1: which case they are legally prevented from even talking about it,
Speaker 1: and it would be in their best interest to stringently
Speaker 1: deny it. We don't know if that is the case,
Speaker 1: but it's certainly probable given the wide ranging nature of
Speaker 1: this reported issue. If you're an individual that has responsibility
Speaker 1: for the security of a network, or you had a
Speaker 1: team that has such responsibility, what kind of money are
Speaker 1: we talking about that's necessary in order to do the
Speaker 1: right kind of review? You know, it's it's really going
Speaker 1: to take in terms of investment. It's hard to say
Speaker 1: what it would be for a specific company. Certainly would
Speaker 1: depend upon, you know, just the scale at which that
Speaker 1: company operating. You know, for example, my company, right we
Speaker 1: operate all our compute capacity in for example, the Amazon
Speaker 1: Web Services cloud. We've outsourced in a sense that hardware
Speaker 1: security to Amazon and they do a phenomenal job at that.
Speaker 1: But for companies that are still operating traditional data centers,
Speaker 1: it could be a really large and very expensive effort.
Speaker 1: As I mentioned, we know that companies are spending billions
Speaker 1: of dollars on software security, but almost nothing for hardware.
Speaker 1: That's going to need to change quickly. So, just in general,
Speaker 1: from your perspective, how concerned should people be about this
Speaker 1: in a broad level? I mean, I think that the
Speaker 1: at the consumer level, I wouldn't be that concern right now,
Speaker 1: simply because we really don't have specifics of around how
Speaker 1: this may affect a consumer. Now, if I am a
Speaker 1: business owner, if I am protecting very expensive, very sensitive
Speaker 1: intellectual property, if I am a government right we're talking defense.
Speaker 1: I'm very concerned over this, and this is something again
Speaker 1: that's going to require a lot of investment. Again, I
Speaker 1: mentioned that report. This is something that's been around for
Speaker 1: a while. It's not new. It's just the first time
Speaker 1: that this has been brought to such public attention, so
Speaker 1: you know. And the only thing I've mentioned too is
Speaker 1: there's been a lot of academic research on this just
Speaker 1: in the last two years, so the information on how
Speaker 1: to address this is out there. It just seems like
Speaker 1: this may actually be the stimulus to finally get something done.
Speaker 1: Matt ki Audi, thanks very much for being with US
Speaker 1: Vice president chief Information Security officer for Redlock. Tesla has
Speaker 1: been the focus for many who wished to short sell it,
Speaker 1: basically betting on its demise or at least it's swoon,
Speaker 1: and certainly it shares a fall in thirty four percent
Speaker 1: since August seven, so it has been a pretty big swoon.
Speaker 1: But is there more to come here? Molly Smith joining
Speaker 1: US now corporate finance reporter for Bloomberg News Molly, you
Speaker 1: wrote a story that I thought was really important because
Speaker 1: people can talk about the short interest on Tesla, people
Speaker 1: can talk about the business model of Tesla, but really
Speaker 1: what you need to focus on is the debt. Please
Speaker 1: explain why, right, I mean, the debt right now is
Speaker 1: really Tesla's uh, it should be at least their first
Speaker 1: and foremost priority. Right now, everyone's really been looking at
Speaker 1: this million dollar maturity that's coming to in March on
Speaker 1: a convertible bond, and Tesla Elon Musk in particular, has
Speaker 1: said that he plans to repay, not refinance this bond,
Speaker 1: which is pretty strong language, especially given that the company
Speaker 1: had two point two billion dollars of cash as of June,
Speaker 1: so it would, in most analysts and investors opinion, be
Speaker 1: very prudent to do another capital raise or try to
Speaker 1: refinances bond instead of pay it outright. How much debt
Speaker 1: does Tesla have right now at eleven and a half
Speaker 1: billion dollars worth and the likelihood that they would be
Speaker 1: able to raise capital any s demn No, I don't
Speaker 1: think there's any indication right now the capital markets are
Speaker 1: closed to Tesla. The equity valuation is still incredibly strong.
Speaker 1: I mean, thet bllion dollars is still an incredible sum
Speaker 1: regardless of what the debt is trading at. But even
Speaker 1: if you do look at the bonds right now, they're
Speaker 1: trading in line with other triple C rated peers, which
Speaker 1: is what these bonds are rated. They're not showing any
Speaker 1: imminent panic or distress levels. So yes, it would be
Speaker 1: expensive to go that root of an unsecured bond, but
Speaker 1: doing another convertible bond or equity or possibly secured debt,
Speaker 1: those are definitely options that have been raised. So has
Speaker 1: anyone looked at just how much interest they can take on,
Speaker 1: how much how much they can actually afford to pay
Speaker 1: out in interest payments to lure in new investors, given
Speaker 1: the fact that they're burning through cash and they need
Speaker 1: to increase their profitability, their productivity. I mean, they've got
Speaker 1: a lot of needs and wants here and kind of
Speaker 1: does the math work. I haven't seen any numbers that
Speaker 1: actually put out Tesla's interest payment capacity, but that would
Speaker 1: be a really interesting stat to nail down. But that's
Speaker 1: exactly right that there is. There are just so many
Speaker 1: needs that the company has right now, between servicing the debt,
Speaker 1: between funding the operations and are we going to finally
Speaker 1: see positive free cash flow and a profit for the
Speaker 1: first time in this company's fifteen year history. Well, and
Speaker 1: just to put into perspective what we have seen in
Speaker 1: terms of price action on the Tesla bonds maturing in
Speaker 1: they're currently trading at less than eighty four cents in
Speaker 1: the dollar. August of last year, they were trading at
Speaker 1: more than a hundred cents in the dollars. So this
Speaker 1: has been a huge swoon. People are pricing in a
Speaker 1: much bigger risk today, uh than they were a little
Speaker 1: bit more than a year ago, even though in general
Speaker 1: triple c's have actually rallied right right, and at Tesla
Speaker 1: bonds right they were issued at part. They have never
Speaker 1: traded at parts since they were issued. These were fell
Speaker 1: right out of the gates and have been you know,
Speaker 1: I guess, uh whenever there's you know, some kind of
Speaker 1: event that drives the bonds down on maybe a Musk
Speaker 1: tweet or an SEC lawsuit for example, that you've seen
Speaker 1: them go down as low as I think somewhere in
Speaker 1: the two eight three range maybe, but they tend to
Speaker 1: come back into this eight seven level, and that seems
Speaker 1: to be the sweet spot right now, but exactly in
Speaker 1: line with the triple ceas, which, like you said, yeah,
Speaker 1: are the best performing part of the high yield market
Speaker 1: right now. Who owns most of the debt it's not
Speaker 1: institutional hands. I can tell you that every traditional asset
Speaker 1: manager who I've talked to has said they will not
Speaker 1: look at these. They want companies with proven free cash
Speaker 1: flow that they can show ability to service their debt.
Speaker 1: It's mostly short money that's in it. Uh make an
Speaker 1: individual money managers like about Post Group, White Box Advisor
Speaker 1: without naming names. Yeah, alright, so just looking forward, let's
Speaker 1: talk about just how much do they have coming do?
Speaker 1: And you know, has Testla started to have conversations with
Speaker 1: investors about what their potential, uh post abilities are for
Speaker 1: raising additional cash From those that I have talked to,
Speaker 1: it doesn't sound that way, but the company is still
Speaker 1: really maintaining this stance that they're going to be able
Speaker 1: to pay out this bond in March, and there's also
Speaker 1: a maturity do in November on convertible bonds issued by
Speaker 1: Solar City, which these bonds are what we would call
Speaker 1: out of the money, Like there's uh the conversion price
Speaker 1: would be so high for Tesla to be able to
Speaker 1: convert the bonds into stock, that it looks like they
Speaker 1: will have to pay the two million dollars of principle
Speaker 1: outright to holders, just as a quick reality check. Does
Speaker 1: anyone who you speak to believe that Tesla really doesn't
Speaker 1: need to raise additional cash? No? Alright, I mean, but
Speaker 1: then that's telling. I mean basically that that Elon Musk
Speaker 1: is saying we don't need to do it, and not
Speaker 1: one person who has been studying corporate finance for their
Speaker 1: lifetimes believes that that's the case. They will all tell
Speaker 1: Some will tell you definitely. I've definitely heard people say, yes,
Speaker 1: they have the money to pay the maturities to do
Speaker 1: what they say they can do. Is that a wise move?
Speaker 1: Is that what they should be doing? No, everyone will
Speaker 1: tell you no. Well done. Thanks very much for being here.
Speaker 1: Molly Smith our expert for all things related to the
Speaker 1: debt markets and of course talking about Tesla and it's debt,
Speaker 1: and you can follow Molly Smith on Twitter at Molly
Speaker 1: Smith News. Our next guest is Jim Paulson. He is
Speaker 1: the chief investment strategist for the Luthhole Group, helping to
Speaker 1: manage nearly one and a half billion dollars based in Minneapolis. Jim,
Speaker 1: I want you to define a couple of terms for us.
Speaker 1: Let's begin with toggle switch. What's a toggle switch? When
Speaker 1: it comes to Wall Street? Well, damn us to do?
Speaker 1: Um UM. I think people are looking. You know, the
Speaker 1: question everywhere today is what yield level bites stocks? And UM.
Speaker 1: I think people when they look back historically, they go, well,
Speaker 1: let's look back historically. You know, yields had to get
Speaker 1: the five per cent or whatever on the tenure before
Speaker 1: that happens. And I think it's not about a yield level.
Speaker 1: It's about an attitude that develops. And that attitude I
Speaker 1: think is captured by the correlation between stocks and bonds.
Speaker 1: And when the correlation UH is positive between the stock
Speaker 1: market and yields, which it has been most of the
Speaker 1: time in the last twenty years, what that says is
Speaker 1: that good good news comes out and it pushes yields up.
Speaker 1: But because the attitude on Wall Street is mostly concerned
Speaker 1: about weak growth, that's good news for stocks as well.
Speaker 1: It just means we're farther away from recession or depression. Um.
Speaker 1: But occasionally this this correlation is turned negative, that is
Speaker 1: to say that higher yields caused stock market to fall.
Speaker 1: And I think that's because good news becomes bad news
Speaker 1: for stocks. And and it's a shift in the Wall
Speaker 1: Street attitude from worried about we growth to worried about
Speaker 1: overheat uh and inflation conditions. And we just actually, if
Speaker 1: you update this correlation, the fifty two week trailing correlation
Speaker 1: between stock movements and yield movements, that just went negative
Speaker 1: or the toggle switch just went off as it's toggled
Speaker 1: from positive to negative correlation. And in the past when
Speaker 1: this has gone negative, it has not been a good
Speaker 1: sign for the stock market. Alright, So basically taking taking
Speaker 1: a big step back to try to get this sort
Speaker 1: of ten thousand foot picture here. Uh. The Fed another
Speaker 1: central banks suppressed rates across the board, brought down overnight rates,
Speaker 1: purchased bonds to lower longer term rates. They're stepping away
Speaker 1: from that rates rising. We don't have to reach for
Speaker 1: yield anymore, so people are not needing to go into equities. UH.
Speaker 1: And and to risk your corporate that we're seeing some
Speaker 1: pretty big outflows overnight, actually some of the biggest I've
Speaker 1: ever seen. And I'm just trying to understand from from
Speaker 1: your perspective, how bad could this get right and what
Speaker 1: sort of the threshold of yields at which things really
Speaker 1: start to heat up in terms of losses for stocks. Well,
Speaker 1: you know, it's I think it's been building for a
Speaker 1: while UM already, Lisa, in the sense that yields that
Speaker 1: came up earlier this year at the yield rise pause
Speaker 1: for a while, but eventually you kind of saw defensive stocks.
Speaker 1: A lot of those stocks. Utility stocks have been have
Speaker 1: been matching the market, for example since January of this year,
Speaker 1: and uh staple stocks have been matching since April. You know,
Speaker 1: you're seeing a similar type of matching with the SMP
Speaker 1: dividend aristocrats and with low valve the SMP Lovaland my
Speaker 1: point is is that even the stopped going up for
Speaker 1: a while, defensive stocks started to help perform the leadership
Speaker 1: of the market for the last few years, technology started
Speaker 1: to underperform, and so a lot of this has already
Speaker 1: been building. You look at the narrowing of the market,
Speaker 1: the equally weighted SMP has been falling relative to the
Speaker 1: market cap. For example, small cap stocks have started to
Speaker 1: underperform UM. So I I think it wouldn't take a
Speaker 1: lot more for this too turn into more of not
Speaker 1: just to sell off, but a panic to some degree.
Speaker 1: I don't really see the conditions for a recession or
Speaker 1: bear market, but I certainly do see rising conditions for
Speaker 1: a really healthy correction that scares a lot of players.
Speaker 1: Jim Paulson, Just to your point about the utilities, the
Speaker 1: Dow Utility Index has gained thirteen and a half percent
Speaker 1: since mid June. Is this because investor sentiment has changed
Speaker 1: or is there something underlying the actual corporate fundamentals that
Speaker 1: has changed well? Or might be both? Yeah, it might be.
Speaker 1: I think it is maybe a little both, but I
Speaker 1: do think it. Uh, It's very interesting that in the
Speaker 1: year where the economy by all accounts has been better
Speaker 1: than it's ever been in this recovery, and that people
Speaker 1: feel very excited about conditions on main Street and super
Speaker 1: excited about profits, that in the last you know, six
Speaker 1: months or more, and and particularly this last move to
Speaker 1: a new high we just did in the last couple
Speaker 1: of months was led by defensive stocks. Now what is
Speaker 1: that saying? What when defensive stocks start to outperform in
Speaker 1: a good economy, when financial is no longer outperformed? Uh,
Speaker 1: in a in a good economy. When raw industrial commodity
Speaker 1: prices have a ten fall since June, what's the message
Speaker 1: of that. I think it's a message that weaker growth
Speaker 1: is coming on mas read in the stock markets already
Speaker 1: starting to pick it up. Jim Paulson, thank you so
Speaker 1: much for being with us. Jim Paulson, Chief Investment Strategies
Speaker 1: at the Luthhold Group. Thanks for listening to the Bloomberg
Speaker 1: P and L podcast. You can subscribe and listen to
Speaker 1: interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
Speaker 1: I'm Pim Fox. I'm on Twitter at Pim Fox. I'm
Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
Speaker 1: You can always catch us worldwide on Bloomberg Radio.