WEBVTT - PineBridge Sees Worsening Value in CCC, BBB Rated Bonds 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg P and L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Abramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg P and L 0:00:20.840 --> 0:00:31.880 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. The 0:00:32.040 --> 0:00:35.360 leveraged finance industry here to tell us more about it 0:00:35.400 --> 0:00:38.000 is Stephen Oh. He is the global head of Credit 0:00:38.040 --> 0:00:40.879 and fixed Income and co head of Leveraged Finance for 0:00:41.080 --> 0:00:46.199 pine Bridge Investments, helping to manage more than ninety billion dollars. 0:00:46.240 --> 0:00:49.479 He is based in Los Angeles. Stephen Oh, thank you 0:00:49.560 --> 0:00:52.400 very much for being with us. Do you see more 0:00:52.479 --> 0:00:59.040 potential for distressed and leverage loans in the marketplace currently? Well, 0:00:59.200 --> 0:01:02.000 we've been in a ironment where there has been very 0:01:02.000 --> 0:01:08.240 strong fundamentals and earnings growth, therefore reasonably low default rates. 0:01:08.280 --> 0:01:13.080 While distress will be increasing in the future, there currently 0:01:13.200 --> 0:01:17.960 isn't enough excesses to create material problems. Where we see 0:01:18.040 --> 0:01:21.560 the distress forming is not broad based but much more 0:01:21.600 --> 0:01:25.160 idiosyncratic in nature. All right, I'd love to take a 0:01:25.160 --> 0:01:27.760 look at where we're coming from in the year and 0:01:27.800 --> 0:01:29.920 where we're heading. I know you just put out your 0:01:29.920 --> 0:01:34.360 mid year outlook for fixed income, and I'm struck by 0:01:34.520 --> 0:01:37.600 the huge outperformers in the first half, at least in 0:01:37.640 --> 0:01:41.959 the US, the worst rated companies did the best. The 0:01:42.080 --> 0:01:46.720 riskiest securities outperformed. I'm just wondering how long do you 0:01:46.760 --> 0:01:50.120 think that can continue. Well, we're we're in an environment 0:01:50.160 --> 0:01:54.440 where a combination of risk seeking, desire to stretch for yield, 0:01:54.520 --> 0:01:58.080 combined with a benign fundamental near term environment. And so 0:01:58.160 --> 0:02:01.880 in that environment, we've had really two components out performing, 0:02:01.960 --> 0:02:04.800 and one you noted, which was the highest risk component 0:02:04.840 --> 0:02:07.840 within the leverage finance space. But the other element of 0:02:07.880 --> 0:02:12.320 that is asset classes that have less interest rate sensitivity, 0:02:12.400 --> 0:02:16.120 because so far, year to day, most of the differentials 0:02:16.120 --> 0:02:19.680 and fixed income performance has really been around interest rate 0:02:19.760 --> 0:02:23.480 risk as opposed to credit spread fears, with the exception 0:02:23.520 --> 0:02:26.519 of the emerging markets Arena. Well, Stephen, and maybe you 0:02:26.560 --> 0:02:28.560 could just offer a little bit more detailed. Is it 0:02:28.680 --> 0:02:32.480 the desire for yield that drives the price up or 0:02:32.560 --> 0:02:36.640 is it actually the increased performance of the asset, the 0:02:36.720 --> 0:02:40.840 underlying asset the company for example, it's a combination of 0:02:40.919 --> 0:02:44.040 both that's taking place right now, and so in that 0:02:44.200 --> 0:02:49.079 environment in the short term, yes, the macro GDP growth 0:02:49.160 --> 0:02:52.280 is very good. We're in a benign environment of very 0:02:52.280 --> 0:02:55.360 low default race within the leverage finance space. Earnings are 0:02:55.400 --> 0:02:59.760 broadly improving, so there is an element of justification for 0:03:00.120 --> 0:03:04.920 or credit improvement, particularly the area that has perhaps the 0:03:05.000 --> 0:03:08.560 highest yield, which fits investor appetype. But the way we 0:03:08.680 --> 0:03:11.240 like to think about it is this is the type 0:03:11.240 --> 0:03:14.800 of environment where portfolio should be getting more defensive because 0:03:15.160 --> 0:03:19.120 when we think about what we're getting paid in terms 0:03:19.120 --> 0:03:23.080 of incremental units of risk. While triple cs and the 0:03:23.120 --> 0:03:27.280 highest risk component maybe outperforming right now, we don't believe 0:03:27.320 --> 0:03:30.720 that you're getting paid adequately for a large component of 0:03:30.760 --> 0:03:35.080 that arena, and we never have present insights into exactly 0:03:35.120 --> 0:03:36.800 when is going to be the top or one is 0:03:36.800 --> 0:03:39.280 going to be the bottom. But as we recognize the 0:03:39.320 --> 0:03:41.960 fact that we're not getting paid adequately for some element 0:03:42.000 --> 0:03:45.920 of risk, the prudent manner and approach is to reduce 0:03:45.960 --> 0:03:48.200 the risk in your portfolio, not to take more risk. 0:03:48.440 --> 0:03:52.000 As we're seeing more people doing Stephen, have you witnessed 0:03:52.080 --> 0:03:57.160 either at Pine Bridge or in your colleagues and competitors 0:03:57.200 --> 0:04:01.800 of business the increase sort of build up of cash 0:04:02.280 --> 0:04:07.360 in order to anticipate that potential opportunity. We're not we 0:04:07.440 --> 0:04:11.119 haven't particularly seen that at this point. I think right 0:04:11.160 --> 0:04:16.760 now cash is being fully invested uh in most asset 0:04:16.800 --> 0:04:20.200 classes because in the market environment where performance is about 0:04:20.720 --> 0:04:24.520 generating current income and current yield, and cash acts as 0:04:24.560 --> 0:04:28.359 a dragon that arena. But having said that, as what 0:04:28.480 --> 0:04:32.680 you get paid in cash has increased in recent months, 0:04:33.400 --> 0:04:37.800 being in cash and having the liquidity flexibility is I 0:04:37.839 --> 0:04:42.200 think a relatively prudent approach for portfolios and looking to 0:04:42.279 --> 0:04:46.200 increase cash or alternatively what we like to call cash 0:04:46.200 --> 0:04:51.520 plus substitute, so high quality generally floating rate assets where 0:04:51.520 --> 0:04:55.160 you're getting paid a premium above cash. But feel comfortable 0:04:55.360 --> 0:04:57.880 us sitting in for now, what's the most dangerous spot 0:04:57.880 --> 0:04:59.960 in the fixed income market right now, heading into your end, 0:05:01.600 --> 0:05:05.520 the most dangerous spot our areas that we believe are 0:05:05.720 --> 0:05:09.640 tied to developed market sovereign Yolk curve and so less 0:05:09.680 --> 0:05:12.160 so on the U S side, because the US and 0:05:12.200 --> 0:05:16.360 the FED has already been engaged in a long process 0:05:16.400 --> 0:05:19.919 of normalization. But as we look at you know, Europe 0:05:20.000 --> 0:05:22.640 as we look at Japan and as we see the 0:05:22.760 --> 0:05:26.279 shifting in their approach UH and as they hit an 0:05:26.320 --> 0:05:30.520 inflection point in their monetary policy, that really is set 0:05:30.600 --> 0:05:34.640 up to cause downward volatility for the next eighteen months. 0:05:35.160 --> 0:05:39.440 So that's interesting, especially because other people are pinpointing, perhaps 0:05:39.480 --> 0:05:42.279 concerned that they have with either leveraged loans which have 0:05:42.360 --> 0:05:46.200 been expanding very quickly and have had much more aggressive structures, 0:05:46.440 --> 0:05:48.800 as well as on the investment grade side, with triple 0:05:48.880 --> 0:05:51.839 B rated bonds with the lowest cheer of investment grade. 0:05:52.080 --> 0:05:55.239 You're saying, again, that's not where the real risk lies. 0:05:55.279 --> 0:05:58.640 It's really in sovereign rates and developed markets. Is that? 0:05:58.760 --> 0:06:01.640 Is that what I'm hearing From a broad based standpoint, 0:06:01.640 --> 0:06:04.800 That's correct, But you actually hit upon something that's very important, 0:06:04.880 --> 0:06:08.800 because risk is not solely about asset classes, but within 0:06:08.880 --> 0:06:12.279 asset classes overall. And just as I noted the fact 0:06:12.279 --> 0:06:14.560 that we believe that we're in an environment right now, 0:06:14.560 --> 0:06:16.960 we're on the leverage loan or the HIO bond side, 0:06:17.240 --> 0:06:20.719 triple C risk is not being adequately compensated on the 0:06:20.760 --> 0:06:23.640 investment great credit side. Triple B s are entering that 0:06:23.800 --> 0:06:26.640 territory as well, and I think The dilemma that most 0:06:26.680 --> 0:06:30.080 portfolio managers face is as they look into the future, 0:06:30.160 --> 0:06:33.120 the next six to twelve months looked fairly benign for 0:06:33.240 --> 0:06:36.680 continuing to take that risk. So it's about timing of 0:06:36.800 --> 0:06:40.520 when does one feel comfortable reducing that exposure, And it's 0:06:40.560 --> 0:06:45.520 always the ongoing issue of short term performance versus long term. 0:06:45.560 --> 0:06:48.799 Well do you believe that this is something that professionals 0:06:48.880 --> 0:06:53.040 are selling down as a result of this condition? Uh, 0:06:53.080 --> 0:06:55.800 we're not seeing a broad base, but we are taking 0:06:55.839 --> 0:06:58.279 the approach and have always taken the approach of a 0:06:58.400 --> 0:07:02.760 contrarian mindset that it when risk appetite is extremely strong, 0:07:03.640 --> 0:07:06.919 the right approaches to become more defensive and similarly the 0:07:07.000 --> 0:07:09.920 time to buy and reach for more risk. And there's 0:07:09.960 --> 0:07:12.800 a lot of fear in the marketplace, uh right now, 0:07:13.280 --> 0:07:15.400 And so you know, I think we're in an environment 0:07:15.400 --> 0:07:18.480 where we're starting to as an analogy, you know, we're 0:07:18.520 --> 0:07:21.240 heading into the baseball playoff push, but now is not 0:07:21.360 --> 0:07:23.600 the time to swing for home runs. It's really more 0:07:23.680 --> 0:07:28.000 about timely singles by taking opportunist to advantage of technical 0:07:28.080 --> 0:07:31.000 driven deviations, and it's really more about shoring up your 0:07:31.040 --> 0:07:35.680 defenses right now when it looks like everything is going smoothly, Stephen, 0:07:35.840 --> 0:07:39.320 just a mountain twenty seconds. You also are favoring emerging markets, 0:07:39.360 --> 0:07:41.920 especially in Asia heading into year end. Is that correct? 0:07:42.920 --> 0:07:46.360 We favor asset class as an area where you're getting 0:07:46.360 --> 0:07:50.120 incremental only paid for complexities, whether in the form of 0:07:50.440 --> 0:07:55.560 structure like clos or bank loans, or in geographic complexity 0:07:55.560 --> 0:07:58.600 and emerging markets overall. And so yes, we like the 0:07:58.600 --> 0:08:02.000 fundamental outlook of We think that a component of the 0:08:02.040 --> 0:08:04.840 sell off that's occurred this year is more technical driven. 0:08:05.200 --> 0:08:07.680 But you have to be very targeted in your purse 0:08:07.760 --> 0:08:10.440 to e M and within Asia Asia, it's really more 0:08:10.480 --> 0:08:13.800 about a corporate story, not a sovereign story the e M. Steven, Oh, 0:08:13.880 --> 0:08:15.720 thank you so much for being with us. That was great. 0:08:15.720 --> 0:08:18.440 Steven though, Global head of Credit and fixed Income at 0:08:18.520 --> 0:08:23.160 pine Bridge Investments. Pine Bridge menages ninety point five billion 0:08:23.360 --> 0:08:38.000 dollars globally. Right now it is that special time of 0:08:38.080 --> 0:08:40.360 day we take a look at small and mid cap stocks. 0:08:40.840 --> 0:08:43.640 They are turning up, but not as much as the 0:08:43.920 --> 0:08:48.120 larger cap piers. Your communists bloggard, I'm left go on 0:08:48.120 --> 0:08:50.599 the bloomberg, not at all. In fact, the rust of 0:08:50.679 --> 0:08:54.000 two thousand is actually lowered by a tenth of at 0:08:54.040 --> 0:08:59.120 the moment it was higher, just like stocks are bouncing around. 0:08:59.240 --> 0:09:01.880 What can I mean? You've got the S and P 0:09:02.040 --> 0:09:04.280 five hundred up a quarter of percents just in the 0:09:04.360 --> 0:09:06.760 last few minutes or so that the Russell has taken 0:09:07.080 --> 0:09:09.760 a leg down here. Of course, you're not talking about 0:09:09.920 --> 0:09:13.560 much movement from yesterday's close in either direction. That said, 0:09:13.600 --> 0:09:15.440 since we're down, let's talk about the stock with the 0:09:15.440 --> 0:09:18.600 biggest decline. De Bold nick Storff. The ticker on that 0:09:18.640 --> 0:09:22.720 one is DBD, the maker of automated telemachines, has tumbled 0:09:22.800 --> 0:09:26.240 thirty three and a half percent. De Bald had an 0:09:26.360 --> 0:09:30.840 unexpected second quarter loss, cut annual forecast, and said it's 0:09:30.920 --> 0:09:35.199 asking banks to ease loan terms. You've got New Linked 0:09:35.240 --> 0:09:38.760 Genetics ticker n l n K down twenty percent. The 0:09:39.080 --> 0:09:42.720 drug developer reported second quarter revenue the trout estimates and 0:09:42.800 --> 0:09:46.080 said it's cutting thirty percent of its staff. Also is 0:09:46.240 --> 0:09:49.240 its chief financial officer will be leaving in a few months. 0:09:49.920 --> 0:09:53.600 Biggest gain in the Russell belongs to what Constainer Store Group, 0:09:53.600 --> 0:09:56.920 whose ticker is TCS. It's up almost the thirty nine 0:09:56.920 --> 0:10:00.600 percent fiscal first quarter results at the reds Ollers showed 0:10:00.640 --> 0:10:04.320 a narrower loss and higher revenue than analysts expected based 0:10:04.320 --> 0:10:08.800 on Bloomberg survey and Pandora Media tick her p one 0:10:08.880 --> 0:10:12.400 letter up eighteen percent. The internet radio company posts a 0:10:12.440 --> 0:10:15.319 smaller loss and higher sales for the second quarter than 0:10:15.360 --> 0:10:19.280 analysts predicted. Thank you very much, David Wilson, Bloomberg stocks 0:10:19.280 --> 0:10:21.520 comust remember to send him an email at d Wilson 0:10:21.559 --> 0:10:24.400 at Bloomberg dot net, sign up for his daily free 0:10:24.440 --> 0:10:27.520 email newsletter, and also you'll get his chart of the 0:10:27.640 --> 0:10:32.000 day featuring Apple and its share buy backs. D Wilson, 0:10:32.040 --> 0:10:36.480 Bloomberg dot net. Return our attention now to CBS and 0:10:36.720 --> 0:10:41.280 it's chief executive, Less Moonvest. The Los Angeles District Attorney's 0:10:41.320 --> 0:10:45.560 Offers said it would not prosecute Mr Moonvest for alleged 0:10:45.760 --> 0:10:49.560 sexual crimes because too much time has elapsed to pursue 0:10:49.600 --> 0:10:53.120 incidents from the nineteen eighties. Here to tell us about 0:10:53.200 --> 0:10:56.760 CBS and potential risks for the company's Brian Weezer. He 0:10:56.880 --> 0:11:00.640 is the senior research analyst for Pivotal Research Group. Brian, 0:11:01.240 --> 0:11:06.120 what's the outlook for CBS with Less Moonvest? Well, the 0:11:06.200 --> 0:11:09.600 question is that is it with or without even though 0:11:10.000 --> 0:11:15.000 it is um clearly indicating he intends to stay. Um. 0:11:15.280 --> 0:11:19.199 I mean it's uh, it's hard to fathom that he 0:11:19.440 --> 0:11:24.040 can continue to do so for very long. UM. You know, 0:11:24.080 --> 0:11:27.360 you have two issues. One is that although really this 0:11:27.440 --> 0:11:31.000 is as much now a board issue as anything, uh, 0:11:31.280 --> 0:11:34.599 it is studying that the board and this day and 0:11:34.640 --> 0:11:40.720 age would not have investigated uh previously, given that reports 0:11:40.720 --> 0:11:44.480 are rumors of this were out there months ago, the board, 0:11:44.559 --> 0:11:47.920 as a sort of press reports of indicated wasn't aware 0:11:48.080 --> 0:11:52.120 of reports for this months ago. On top of the 0:11:52.280 --> 0:11:55.520 CBS news issues that were widely reported in the way 0:11:55.600 --> 0:12:00.120 to the Charlie Rose episode, shall we say, uh, and 0:12:00.240 --> 0:12:04.320 that they didn't act suggests strongly that you have a 0:12:04.360 --> 0:12:08.720 board that was in, for lack of better word, management's pocket. Uh. 0:12:08.920 --> 0:12:11.120 That's a problem. Then when you look at what's going 0:12:11.160 --> 0:12:14.600 on with Viacom and the murder potential, where one of 0:12:14.640 --> 0:12:17.319 the concerns is that you have a board CBS who 0:12:17.400 --> 0:12:20.640 is really acting primarily in the CEO's interests, not in 0:12:20.720 --> 0:12:24.840 shareholders interests. They're going to go to Viacom at some point. 0:12:25.080 --> 0:12:27.800 This is just delaying it. Well, but you bring up 0:12:27.800 --> 0:12:30.080 a lot of good points there I mean also the 0:12:30.120 --> 0:12:31.679 fact that the board is coming out and saying that 0:12:31.720 --> 0:12:35.000 they're hiring outside council to investigate the issue. They're doing 0:12:35.040 --> 0:12:37.160 that now after the news before it came out. Why 0:12:37.160 --> 0:12:39.920 didn't they do that, uh, you know, six months ago 0:12:40.120 --> 0:12:42.800 or however long ago when they first found out. But 0:12:42.920 --> 0:12:46.040 Brian translate all of this and concern about the board 0:12:46.160 --> 0:12:49.080 into what a shareholder ought to be doing, or what 0:12:49.240 --> 0:12:52.120 somebody who's looking at the decline and CBS shares ought 0:12:52.160 --> 0:12:54.719 to be thinking. Is this a buying opportunity or does 0:12:54.760 --> 0:12:57.040 this indicate that there are a lot of problems that 0:12:57.040 --> 0:13:00.680 really maybe haven't even been flushed out yet. You know, 0:13:00.720 --> 0:13:03.560 A joke that uh, CBS is board has managed to 0:13:03.559 --> 0:13:09.200 make Viacom's board look good, which is a very difficult task. Um. Unfortunately, 0:13:09.240 --> 0:13:12.080 that is the outcome here. Whereas prior to all, the 0:13:12.160 --> 0:13:15.200 CBS had a chance to kind of well, they had 0:13:15.200 --> 0:13:18.439 a fighting chance at independence, a fighting chance at persuading 0:13:18.440 --> 0:13:21.800 investors to fight as hard as possible to keep CBS 0:13:21.800 --> 0:13:23.839 independence so that it could be sold on to someone 0:13:23.880 --> 0:13:27.360 else for a higher price than what Viacom might pay. 0:13:27.440 --> 0:13:30.760 And now here we are, Viacom will be We'll have 0:13:30.760 --> 0:13:34.400 the upperhand in any negotiation. Um, you have to assume 0:13:34.480 --> 0:13:38.520 the combination happened and not unfavorable terms to CBS. Of course, 0:13:38.520 --> 0:13:40.560 it's impossible to know what those terms will be, what 0:13:40.679 --> 0:13:43.800 the combinations, what the ratios will be for any sure 0:13:43.800 --> 0:13:46.360 exchanges or anything else like that. But it will happen, 0:13:47.040 --> 0:13:49.040 and so I wouldn't It's hard to call the buying 0:13:49.040 --> 0:13:52.600 opportunity of a hold rating on the stock. Brian. What 0:13:52.880 --> 0:13:57.880 are the jewels in the CBS business? Is it the 0:13:58.160 --> 0:14:03.120 television network and the TV studo? Yeah, I mean, certainly 0:14:03.120 --> 0:14:06.640 they they've been in power, although it does so many 0:14:06.720 --> 0:14:10.240 questions are are are are opened up by movies if 0:14:10.559 --> 0:14:14.400 he is in fact eventually removed um, because you know, 0:14:14.520 --> 0:14:18.199 he singularly was involved in most of their businesses, I 0:14:18.200 --> 0:14:20.240 mean Simon and Schust the part that he was least 0:14:20.280 --> 0:14:23.760 involved with, and of course is probably the least important. Um. 0:14:23.960 --> 0:14:26.840 Show Time has developed in its own right, um and 0:14:26.960 --> 0:14:30.280 is doing well and you know, has relatively a significant 0:14:30.280 --> 0:14:33.400 degree of autonomy. But of course, the flagship broadcast network 0:14:33.680 --> 0:14:38.040 is you know, the kind of where the the flywheel moves, 0:14:38.160 --> 0:14:40.680 Um for the whole business. It's it's certainly they're all 0:14:40.720 --> 0:14:43.520 access business, which is one of the more promising and 0:14:43.600 --> 0:14:48.440 issues for streaming service from you know, a traditional broadcaster UM. 0:14:49.360 --> 0:14:52.880 Obviously that they've been successful in driving retransmission consent, blade 0:14:52.920 --> 0:14:58.720 revenues UM and recapturing economics from their local broadcast affiliates UM, 0:14:58.800 --> 0:15:01.920 but primarily because of the success it had at the 0:15:01.920 --> 0:15:06.040 broadcast network level. So you know, that's all without movies, 0:15:06.120 --> 0:15:08.320 it's it's not clear that it would be as successful. 0:15:08.680 --> 0:15:11.000 Brian Weezer, thank you so much for joining us and 0:15:11.040 --> 0:15:14.080 for your insights. Brian Weezer is senior research analyst for 0:15:14.160 --> 0:15:17.000 Pivotal Research Group. And right now I'm looking at these 0:15:17.040 --> 0:15:20.640 shares of Viacom down about three quarters of a percent 0:15:20.880 --> 0:15:23.720 and CBS shares down about a half a percent. It's 0:15:23.720 --> 0:15:25.880 been a rocky period, though, rocky couple of days for 0:15:25.960 --> 0:15:29.280 both shares, although Viacom has come out the better of 0:15:29.360 --> 0:15:32.960 the two by far, in particular from Friday last week, 0:15:32.960 --> 0:15:35.280 when Viacom shares were up about four and a half 0:15:35.360 --> 0:15:55.920 percent and CBS down more than six percent. What do 0:15:56.040 --> 0:16:00.360 Puerto Rican municipal bonds as well as tobacco settlements and 0:16:00.440 --> 0:16:03.560 bonds tied to a New Jersey Mega mall have in common. 0:16:03.800 --> 0:16:06.400 Here to tell us is Matt Winkler. He is columnist 0:16:06.480 --> 0:16:09.840 and for Bloomberg Opinion. It's also editor in chief emeritus 0:16:09.840 --> 0:16:12.880 of Bloomberg News. And you can follow Matt Winkler on 0:16:12.920 --> 0:16:18.840 Twitter at Matthew Underscore Winkler. Alright, Matt Winkler, what do 0:16:18.920 --> 0:16:24.160 these three assets have in common? Uh? They depend on 0:16:24.440 --> 0:16:29.640 a booming economy and ours is just a year away 0:16:29.720 --> 0:16:33.440 from perhaps surpassing the longest expansion in our time, UM, 0:16:33.560 --> 0:16:37.040 and that was back in the nineties. And uh, there's 0:16:37.080 --> 0:16:41.720 every indication that the economy can at least match that 0:16:41.800 --> 0:16:47.080 record and keep going. And UH, the reason why these 0:16:47.760 --> 0:16:50.520 very risky, high yield investments are doing as well as 0:16:50.600 --> 0:16:55.720 they are is typically investors want the greatest yield wherever 0:16:55.760 --> 0:16:58.800 they can get them, and when times are good, which 0:16:58.840 --> 0:17:02.800 they are right now. Uh, the so called risk on 0:17:03.000 --> 0:17:07.400 trade is very attractive, especially UM in the debt market 0:17:07.400 --> 0:17:10.600 where you have some of these issues with coupons of 0:17:10.680 --> 0:17:15.640 six plus and that is a very very attractive UM 0:17:15.920 --> 0:17:18.760 bond h to say the least, when we've had interest 0:17:18.880 --> 0:17:21.840 rates as low as they've been for ten years now. 0:17:22.280 --> 0:17:25.280 So that's what they have in common. And UH, so 0:17:25.320 --> 0:17:28.719 far so good, so far, so good. You highlight some 0:17:29.000 --> 0:17:33.240 really important statistics here in this column. For one, UH, 0:17:33.359 --> 0:17:35.880 the sales tax bonds in Puerto Rico, which has been 0:17:35.920 --> 0:17:40.320 decimated by Hurricane Maria, has yet to fully rebuild. Those 0:17:40.359 --> 0:17:43.200 have doubled in price. UH. You talk about how junk 0:17:43.200 --> 0:17:46.320 graded municipal debt has gained more than four percent so 0:17:46.359 --> 0:17:48.960 far this year. Well, investors who went to top rated 0:17:49.000 --> 0:17:51.480 corporate debt in the US debt of the likes of 0:17:51.640 --> 0:17:57.600 Apple and Amazon, you would have lost money. UM where 0:17:57.640 --> 0:18:00.040 where just sort of the tipping point comes where we 0:18:00.160 --> 0:18:03.159 will have to face the reality of perhaps a not 0:18:03.320 --> 0:18:07.000 yet built New Jersey mega mall that they are supposedly 0:18:07.400 --> 0:18:10.080 going to be financing and then paid back so LESA. 0:18:10.119 --> 0:18:15.040 The dichotomy is that when you're in a normal economic cycle, 0:18:15.240 --> 0:18:19.239 like presumably the one we're in, when the Fed UH 0:18:19.560 --> 0:18:23.919 is very excited about the expansion, so excited that it 0:18:24.160 --> 0:18:27.880 has announced several times that's going to raise interest rates, 0:18:28.400 --> 0:18:32.360 all the investment grade debt behaves as you would expect 0:18:32.359 --> 0:18:37.280 it to. It retreats because higher interest re means that 0:18:37.400 --> 0:18:41.760 at some point, UH, the economy has to UH slow 0:18:41.800 --> 0:18:47.639 down for the highest yielding investments. However, in the debt market, 0:18:48.080 --> 0:18:51.679 it goes its own way until the music stops, and 0:18:51.760 --> 0:18:54.760 it's very sudden. But it's kind of like, for example, 0:18:54.760 --> 0:18:57.879 two thousand six. Uh, if we look back now, we 0:18:57.920 --> 0:19:01.560 should have been pretty concerned, um, because it was just 0:19:01.640 --> 0:19:04.960 two years from the worst or meanest recession since the 0:19:05.000 --> 0:19:08.920 Great Depression. But in two thousand six, everybody was partying. 0:19:09.600 --> 0:19:13.720 Highest yielding investments were sought after around the world. It 0:19:13.760 --> 0:19:16.480 was a little bit different then because we were making 0:19:16.800 --> 0:19:19.159 those investments as trip away so it was a bit 0:19:19.200 --> 0:19:24.400 of a um, uh, misleading and can and con actually 0:19:24.440 --> 0:19:26.679 to the world. But here we are today. We have 0:19:26.800 --> 0:19:31.000 very legitimate high yield investments. They are rated or not 0:19:31.119 --> 0:19:34.639 rated at all. They're rated low and um, they're not 0:19:34.680 --> 0:19:37.600 going to follow the behavior patterns of the of what 0:19:37.640 --> 0:19:41.920 the Fed does the way conventional investment grade debt does, 0:19:42.520 --> 0:19:45.800 and investors for their part, are gonna say, look, as 0:19:45.840 --> 0:19:49.919 long as things are going well, um, getting the compound 0:19:50.000 --> 0:19:54.480 interest from the high yielding investment is a far better 0:19:55.200 --> 0:19:59.040 return total return, even if it's at a discount on 0:19:59.080 --> 0:20:00.919 the dollar. And so that's why you've had some of 0:20:00.960 --> 0:20:05.639 these bankrupt issues. To say the least appreciate as they have, 0:20:05.800 --> 0:20:09.120 because as long as they're paying something, people want them, 0:20:09.160 --> 0:20:11.840 so then there This really raises an important question, especially 0:20:11.880 --> 0:20:14.560 as you raise the rating agency issue, the rating a 0:20:15.520 --> 0:20:19.119 rating company issue from leading up to the prior crisis. 0:20:19.920 --> 0:20:23.719 Do investors recognize the risks that they're taking the specific 0:20:24.800 --> 0:20:29.879 issues of these different municipalities or are they investing through 0:20:30.040 --> 0:20:33.120 index funds that don't necessarily delineate or do the fundamental 0:20:33.160 --> 0:20:35.879 research that would unearth the problems and figure out what 0:20:35.920 --> 0:20:39.439 the correct compensation ought to be for investors. So, Uh, 0:20:39.560 --> 0:20:45.240 most of the performances actively managed, so it's not an algorithm. UM. 0:20:45.359 --> 0:20:50.800 And since you mentioned the context of ratings, you know, 0:20:51.560 --> 0:20:57.960 ratings themselves have been essentially contrary indicators. UM. When rating 0:20:58.000 --> 0:21:03.080 companies downgrade in sen grade debt, particularly sovereign debt. Uh, 0:21:03.160 --> 0:21:05.520 it's been a buying opportunity and you've seen that over 0:21:05.560 --> 0:21:08.439 and over again. So the reality probably is that the 0:21:08.480 --> 0:21:11.399 investors who are buying these high risk communities or muni 0:21:11.480 --> 0:21:15.520 junk aren't really paying any attention to the credit rating. Uh, 0:21:15.640 --> 0:21:17.720 it doesn't mean anything to them. What they're looking at 0:21:18.040 --> 0:21:22.560 is something more fundamental, which is what are these borrowers 0:21:22.600 --> 0:21:26.680 able to pay right now, Um, what is the return 0:21:26.800 --> 0:21:30.520 I likely will get for the preeseeable future? And is 0:21:30.640 --> 0:21:35.439 that reward much greater than the risk that the world's 0:21:35.440 --> 0:21:38.120 going to come to an end tomorrow? And the way 0:21:38.160 --> 0:21:39.680 they see it is the world's not going to come 0:21:39.680 --> 0:21:41.399 to an end tomorrow or the day after or the 0:21:41.480 --> 0:21:44.480 day after. Therefore, this is very attractive and it's a 0:21:44.560 --> 0:21:49.560 very rational decision. Um. So that's the mindset. And so far, 0:21:49.600 --> 0:21:53.399 as I said, so good until it ends. Well. This 0:21:53.480 --> 0:21:55.399 is in about thirty sex and I was wondering, is 0:21:55.400 --> 0:21:58.399 it possible that things are really not as good as 0:21:58.560 --> 0:22:03.080 many have scribe because state and local pension plans they 0:22:03.160 --> 0:22:05.479 have less than three quarters of the money that they 0:22:05.520 --> 0:22:07.720 need in order to meet their promised payouts. Is it 0:22:07.760 --> 0:22:10.160 possible that things are really not good under the surface. 0:22:10.600 --> 0:22:16.399 It's possible, Um. Bloomberg News uh just published a piece 0:22:16.480 --> 0:22:21.000 that said, uh, you know, the faults by municipal issuers 0:22:21.080 --> 0:22:23.159 is relatively low this year. I think only three I 0:22:23.200 --> 0:22:25.639 think I've mentioned so far this year. So that's another 0:22:25.680 --> 0:22:31.240 indication that in a booming economy, the big and small 0:22:31.320 --> 0:22:35.280 state and local governments have tax revenue that is more 0:22:35.320 --> 0:22:40.359 than adequate to cover their expenses. Matt Winkler, thank you 0:22:40.400 --> 0:22:42.119 so much for being with us. Matt Winkler is a 0:22:42.119 --> 0:22:45.879 columnist for Bloomberg Opinion, also editor in chief Emeritus of 0:22:46.160 --> 0:23:04.600 Bloomberg News. Our next guest has been a long time 0:23:04.640 --> 0:23:08.000 proponent of free trade and the importance that it brings 0:23:08.640 --> 0:23:12.680 two economies and how much it has helped the American economy. 0:23:12.760 --> 0:23:16.320 Dr Adam Posen, President of the Peterson Institute for International 0:23:16.320 --> 0:23:20.080 Economics in Washington, d C. Dr Posen, I'm so glad 0:23:20.080 --> 0:23:22.439 that you could join us today. UM, I want to 0:23:22.480 --> 0:23:25.960 start with a question of who's in your camp now. 0:23:26.000 --> 0:23:30.240 Republicans traditionally were the party of free trade. Where do 0:23:30.320 --> 0:23:33.960 we go when the populism of that party flips that 0:23:34.080 --> 0:23:36.880 narrative on its head. Thank you very much for having 0:23:36.880 --> 0:23:39.800 me on Bloomberg Markets today and to talk about this 0:23:39.840 --> 0:23:44.560 issue in in in terms of flipping. Yeah, there's there's 0:23:44.640 --> 0:23:47.520 various times in American history where the parties have had 0:23:47.560 --> 0:23:51.200 different roles on trade. There were periods where the Republicans 0:23:51.240 --> 0:23:54.200 were anti trade and the Democrats were not, or we 0:23:54.440 --> 0:23:58.520 pro free trade. One can think of Cordell Hull, FRANKL. Delo, 0:23:58.640 --> 0:24:03.840 Roosevelt Secretary of State and Anclendela Roosevelt and um then 0:24:03.880 --> 0:24:07.399 President Truman pushing the idea that trade deals with Europe, 0:24:07.480 --> 0:24:11.800 with Japan, with the major economies were necessary for peace 0:24:11.840 --> 0:24:16.439 and security, UM as well as the economic benefits. So 0:24:16.520 --> 0:24:19.320 when you look today, however, it is hard in the 0:24:19.400 --> 0:24:22.119 Congress to find anybody who's really pushy it. There's a 0:24:22.160 --> 0:24:26.320 handful of some older Republican senators who are standing by 0:24:26.359 --> 0:24:29.040 their principles on free trade, and there's a handful of 0:24:29.080 --> 0:24:33.840 moderate Democrats. UM. But I think that's kind of misrepresents 0:24:33.880 --> 0:24:35.960 the situation. I promised not to go on too long, 0:24:36.000 --> 0:24:39.159 but two points. First, there are a lot of people 0:24:39.600 --> 0:24:41.800 in the Congress who may or may not be have 0:24:42.080 --> 0:24:44.640 free trade out of conviction, but it can be convinced 0:24:44.640 --> 0:24:48.960 on national security or a job safety grounds, and for 0:24:49.040 --> 0:24:51.720 whom being anti trade isn't as much of a priority 0:24:51.760 --> 0:24:54.600 as it is safe for President Trump. And the second 0:24:54.600 --> 0:24:56.320 thing is, if you look at the polling data, and 0:24:56.359 --> 0:24:59.000 we're going to be hosting a release from the Pew 0:24:59.040 --> 0:25:03.679 Research Group on these polling in September, all the recent 0:25:03.680 --> 0:25:07.399 polling data suggests there is a growing pro trade, pro 0:25:07.520 --> 0:25:11.560 globalization feeling among younger people of all parties in the US, 0:25:11.600 --> 0:25:14.040