WEBVTT - China's Surging Interest Bill Underscores Debt Strain (Podcast) 0:00:05.800 --> 0:00:08.360 Welcome to the Bloomberg p m L Podcast. I'm Pim 0:00:08.400 --> 0:00:11.200 Fox along with my co host Lisa A. Bramowitz. Each 0:00:11.240 --> 0:00:14.440 day we bring you the most important, noteworthy, and useful 0:00:14.480 --> 0:00:17.079 interviews for you and your money, whether you're at the 0:00:17.120 --> 0:00:20.360 grocery store or the trading floor. Find the Bloomberg p 0:00:20.520 --> 0:00:33.560 m L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. 0:00:33.560 --> 0:00:38.560 As we talk about China easing their monetary and fiscal policies, 0:00:38.880 --> 0:00:41.000 there is a big question which is how much more 0:00:41.080 --> 0:00:44.599 ammunition do they really have? Joining us now? I am 0:00:44.640 --> 0:00:47.280 so pleased to say, as Victor she associate professor at 0:00:47.400 --> 0:00:51.480 UC San Diego, a former principle for the Carlisle Group 0:00:51.479 --> 0:00:54.760 and a former professor at Northwestern Victor, thank you so 0:00:54.880 --> 0:00:57.320 much for being with us. I want to talk about 0:00:57.400 --> 0:01:00.880 the composition of China's debt and how much ability they 0:01:00.920 --> 0:01:03.920 have to lever up further. So let's first talk about 0:01:04.160 --> 0:01:08.240 where do you see the biggest debt problem in China? Um, 0:01:08.280 --> 0:01:10.959 thanks for having me on. So I think the biggest problem, 0:01:11.040 --> 0:01:13.280 you know, obviously people have talked about the domestic debt, 0:01:13.280 --> 0:01:17.320 which is you know, around three GDT. That's not good, 0:01:17.400 --> 0:01:21.240 but domestically, They've got a lot of UH policy tools 0:01:21.240 --> 0:01:24.039 to deal with that. I think the biggest trouble spot 0:01:24.120 --> 0:01:26.720 that a lot of investors may not realize is China's 0:01:26.760 --> 0:01:31.720 external debt. Among em countries, China is the largest that 0:01:31.880 --> 0:01:36.039 are by far according to b i S data, and 0:01:36.080 --> 0:01:38.360 if you include Hong Kong, which of course is a 0:01:38.360 --> 0:01:41.960 part of China UM, China's external debt now stands around 0:01:41.959 --> 0:01:45.720 two point five trillion dollars. So that's an enormous amount, 0:01:45.880 --> 0:01:49.240 even given as three trillion dollars in point exchange reserved. 0:01:49.880 --> 0:01:53.200 And doesn't about one point two trillion of that have 0:01:53.400 --> 0:01:59.800 to be rolled over this year? Yeah? Well, actually, you know, uh, 0:02:00.080 --> 0:02:02.720 hundreds of billions have to be rolled over every month 0:02:02.800 --> 0:02:06.120 because a lot of it is is short term loans 0:02:06.200 --> 0:02:10.720 that Chinese banks have borrowed to finance the foreign exchange 0:02:10.760 --> 0:02:15.480 needs of Chinese companies and even China's overseas investments such 0:02:15.480 --> 0:02:18.560 as part of the One Belt, One Road initiative. So 0:02:18.919 --> 0:02:22.160 here's here's where I'm wondering. Where the concern comes in 0:02:22.639 --> 0:02:26.480 is the fear basically that China is restricted in how 0:02:26.560 --> 0:02:29.079 much it can weaken its currency because if it does 0:02:29.120 --> 0:02:32.919 so overly then it will have a harder time rolling 0:02:32.960 --> 0:02:37.160 over these obligations and repaying them. There there are many 0:02:37.160 --> 0:02:41.840 different potential risks there. There's the evaluation risks because you know, 0:02:41.880 --> 0:02:45.000 even though a lot of these loans is denominated in dollars, 0:02:45.160 --> 0:02:49.760 of course the underlying assets that ultimately back a lot 0:02:49.760 --> 0:02:53.679 of these loans are women be denominated um. The other 0:02:53.720 --> 0:02:56.280 concern is that you know, of course the threat of 0:02:56.360 --> 0:02:59.200 the trade war if it were to shrink China's trade 0:02:59.200 --> 0:03:03.480 surplus and then meaningful way um because currently obviously the 0:03:03.520 --> 0:03:06.600 trade surplus has been what China has been using the 0:03:06.760 --> 0:03:10.679 services dead and if um the trade surplus would the 0:03:10.720 --> 0:03:12.680 shrink in a meaningful way, then that that would be 0:03:12.680 --> 0:03:16.560 a problem for China general e M. Panic. You know, 0:03:16.600 --> 0:03:18.880 what China has done in the past couple of years 0:03:18.960 --> 0:03:23.760 is to constantly increase his external debt in order to 0:03:23.880 --> 0:03:27.240 roll over the existing debt and and to pay for 0:03:27.440 --> 0:03:30.360 some of the interests even with new loans. And so 0:03:30.639 --> 0:03:34.080 you know that pipeline were to freeze, that also would 0:03:34.120 --> 0:03:36.040 cause a problem for China. I want to pick up 0:03:36.040 --> 0:03:38.280 on the interest point because this was something that was 0:03:38.320 --> 0:03:40.280 brought to my attention and I actually reached out to 0:03:40.400 --> 0:03:44.640 about this, Uh, just how much money China is spending 0:03:44.800 --> 0:03:47.520 on interest payments? Can you talk a little bit about that. 0:03:47.760 --> 0:03:49.920 I don't think a lot of people are aware that 0:03:50.000 --> 0:03:54.680 at this point, given its debtload, a substantial proportion of 0:03:54.680 --> 0:03:57.360 of of its of the money that it borrows may 0:03:57.360 --> 0:04:01.280 have to go towards just even repaying interest. Yes, so 0:04:01.360 --> 0:04:05.360 domestically China has a has a really big debt problem. Um. 0:04:05.400 --> 0:04:09.080 You know, when you have debt that is GDP, and 0:04:09.080 --> 0:04:11.880 when you're interest rate is not zero like the case 0:04:11.920 --> 0:04:15.280 of Japan and some of the European countries, um, you 0:04:15.360 --> 0:04:17.560 end up spending a lot of the new credit just 0:04:17.720 --> 0:04:22.000 to service uh the interest payment, which by my calculation 0:04:22.600 --> 0:04:26.400 is something like nineteen trillion women b or you know, 0:04:26.520 --> 0:04:30.279 roughly three trillion dollars per year. So every month the 0:04:30.320 --> 0:04:35.640 monetary authorities have to come up with dollars just to 0:04:35.960 --> 0:04:38.760 service the interests in the economy and it and if 0:04:38.760 --> 0:04:42.400 it wants the economy to grow from investment on top 0:04:42.440 --> 0:04:45.359 of that, it would have to provide even more money. 0:04:45.440 --> 0:04:48.880 So that's why I think investors in China are very savvy. Now. 0:04:49.640 --> 0:04:53.560 When the PBOC cuts reserve requirement ratio by one, the 0:04:53.640 --> 0:04:56.880 market actually didn't really react to it, because you know, 0:04:56.920 --> 0:04:59.560 it's just part of the course. That's the minimum amount 0:04:59.760 --> 0:05:03.240 that the monetary authorities need just to roll over its 0:05:04.160 --> 0:05:07.040 enormous debt pile. Uh, it would have to do a 0:05:07.080 --> 0:05:10.919 lot more. It would have to deregulate the shadow banking industry, 0:05:11.040 --> 0:05:14.599 which it just successfully regulated, would basically have to undo 0:05:14.680 --> 0:05:17.080 all of that in order to get the economy going. Yet, 0:05:17.920 --> 0:05:22.000 will the additional money that's necessary to finance either the 0:05:22.120 --> 0:05:25.880 rollover or indeed new borrowing on the part of China, 0:05:26.000 --> 0:05:29.640 will that compete for investor dollars who have to also 0:05:29.800 --> 0:05:36.400 fund US treasury borrowings. Um? So I think, you know, 0:05:36.560 --> 0:05:42.200 the the domestic and external part are relatively separate, um 0:05:42.240 --> 0:05:44.680 and of course increasing them. And I think there's this 0:05:44.800 --> 0:05:49.560 implicit competition in the sense that Chinese investors increasingly do 0:05:49.680 --> 0:05:54.480 not want to hold their money in women b because, um, 0:05:54.520 --> 0:05:57.200 they know that the monetary authorities would just have to 0:05:57.279 --> 0:06:01.080 keep on printing money to to prevent a crisis, knowing 0:06:01.160 --> 0:06:04.600 that they would rather hold foreign currencies, and so that 0:06:05.040 --> 0:06:09.600 creates almost this sort of private demand for the U. S. Treasuries. 0:06:10.120 --> 0:06:13.080 As a result, of course, the Chinese government has done 0:06:13.080 --> 0:06:17.560 a lot to prevent domestic money from flowing overseas to 0:06:18.240 --> 0:06:23.080 overseas assets. They've been relatively successful. Um. And so right 0:06:23.120 --> 0:06:25.359 now that you know that, we were not seeing a 0:06:25.440 --> 0:06:29.240 massive capital flight, but the temptation is there. Uh and 0:06:29.400 --> 0:06:34.080 the moment that the regulators um looseness grips, so to speak. UM, 0:06:34.160 --> 0:06:36.359 I think a lot of money would want to flow 0:06:36.440 --> 0:06:39.000 out of China. Victor. I want to talk a little 0:06:39.040 --> 0:06:43.680 bit about something that you mentioned that just servicing non 0:06:43.720 --> 0:06:47.599 financial debt in China totaled about three trillion dollars. You 0:06:47.600 --> 0:06:52.800 said that basically, Uh, that was roughly twenty two of 0:06:52.839 --> 0:06:57.599 the gross domestic product of China. So this is a 0:06:57.680 --> 0:07:04.559 significant headwing to economic growth at this point. Is that correct? Yes, Um, 0:07:04.600 --> 0:07:07.640 it is a significant headwind. UM. And and we've seen that, 0:07:07.720 --> 0:07:10.640 we've seen you know, so China actually did not de 0:07:10.920 --> 0:07:15.440 leverage uh. It's it's a financial system in the past year, 0:07:16.120 --> 0:07:19.000 despite the rhetorics, UM, it just slowed down the rate 0:07:19.040 --> 0:07:22.160 of growth of credit UM from you sort of mid 0:07:22.800 --> 0:07:27.560 teens to around ten percent. Uh. And that already in 0:07:27.640 --> 0:07:33.400 itself caused a drastic slowdown of growth. UM. You know, 0:07:33.480 --> 0:07:38.240 actual deleveraging would immediately cause a financial crisis. So going forward, 0:07:38.880 --> 0:07:42.120 if it wanted growth to resume at at a at 0:07:42.120 --> 0:07:44.800 a real rate of you know, six percent, seven percent, 0:07:45.200 --> 0:07:48.440 which are the policy objectives still, then it would have 0:07:48.640 --> 0:07:52.120 to pump a lot more money into the economy, and that, 0:07:52.240 --> 0:07:56.400 of course will challenge people's confidence in the Roman b 0:07:57.360 --> 0:07:59.240 I want to thank you very much for spending time 0:07:59.280 --> 0:08:02.560 with us. A Vic She is the associate professor at 0:08:02.600 --> 0:08:06.120 the University California, San Diego, joining us from La Joya 0:08:06.640 --> 0:08:10.920 speaking about the need for China to service it's dollar 0:08:11.080 --> 0:08:13.760 denominated debt and the amount of debt that it will 0:08:13.800 --> 0:08:31.320 have to roll over this year. Big banks are pushing 0:08:31.560 --> 0:08:36.680 back against the big equity exchanges. Basically, they want to 0:08:36.760 --> 0:08:39.960 have their cake and eat it too. They want cheaper exchanges, 0:08:40.000 --> 0:08:42.800 they want them faster, so they're going to create their own. 0:08:42.920 --> 0:08:44.800 Joining us now to talk about that, Chris and Ag 0:08:45.160 --> 0:08:49.080 executive editor focusing on equities for Bloomberg. So, Chris, what 0:08:49.280 --> 0:08:53.200 exactly is this that a group of banks, Dine founders 0:08:53.200 --> 0:08:56.920 including Morgan, Stanley, Ubs, Citadel, Virtue and others, were they 0:08:56.960 --> 0:08:59.920 hoping to create here? Um, I think if you've got 0:08:59.920 --> 0:09:02.839 to look at the US stock market structures. That's kind 0:09:02.840 --> 0:09:08.679 of constantly evolving sort of Darwinian competitive arena, and there's 0:09:08.720 --> 0:09:11.080 been there's been four or five waves of that over 0:09:11.080 --> 0:09:13.920 the last twenty years. This is the latest sort of 0:09:14.200 --> 0:09:19.360 you know, monopoly busting effort among in that in that cycle. 0:09:19.480 --> 0:09:23.000 It's not exactly you know, a bunch of rag tag 0:09:23.120 --> 0:09:25.839 up starts. You're dealing with the biggest financial institutions in 0:09:25.880 --> 0:09:30.160 the country banding together, um to get some kind of 0:09:30.240 --> 0:09:34.840 in road foothold in the not not really do opoly. 0:09:34.960 --> 0:09:37.720 There's about there's about three companies to control most of 0:09:37.720 --> 0:09:40.600 the the stock exchanges at the moment, and now there's 0:09:40.600 --> 0:09:42.080 going to be there's gonna be four, and this is 0:09:42.080 --> 0:09:45.240 going to be sort of mutually held thing by again 0:09:45.360 --> 0:09:47.960 all of the biggest all of the biggest players in 0:09:48.000 --> 0:09:52.679 the in the stock trading ecosystem, including interestingly the big 0:09:52.679 --> 0:09:55.560 market makers which are really the power players in that 0:09:55.720 --> 0:09:59.839 in that system, Virtue and UH Citadel, which are responsible 0:09:59.880 --> 0:10:02.760 for or some ungodly number of trades in the in 0:10:02.760 --> 0:10:06.319 the U S stock market. Chris, what did these banks 0:10:06.320 --> 0:10:10.400 and brokerage firms object to when it comes to price? Um, 0:10:10.520 --> 0:10:13.559 it's not I have to say not altogether queer frankly, 0:10:13.600 --> 0:10:16.160 I mean they in some ways, A lot of these 0:10:16.480 --> 0:10:19.280 a lot of these players are sort of they're sort 0:10:19.280 --> 0:10:21.880 of the pantheon of villains and a lot of market 0:10:21.880 --> 0:10:24.480 structure arguments, certainly Citadel and Virtue or not companies that 0:10:24.520 --> 0:10:28.319 have enormous amounts of peers cried for them, um uh, 0:10:28.400 --> 0:10:31.400 sort of straightforwardly one of the big cost centers. One 0:10:31.440 --> 0:10:33.280 of the only things that anyone can make any money 0:10:33.280 --> 0:10:36.160 doing in the stock market right now is selling data 0:10:36.320 --> 0:10:41.520 on trades. This incredibly you know, this not enormous data 0:10:41.600 --> 0:10:45.960 that is generated by the actual customers is then sold 0:10:46.280 --> 0:10:49.679 back to those very customers. But at the same time, 0:10:49.760 --> 0:10:53.480 don't these exchanges pay rebates to the brokers that send 0:10:53.480 --> 0:10:56.360 them order flo that's right, and Virtue and Citadel or 0:10:56.400 --> 0:10:59.840 presumably big collectors of those. So it's not entirely clear 0:11:00.040 --> 0:11:02.880 what huge advantage they're hoping hoping to leverage out of 0:11:02.880 --> 0:11:06.679 the existing should create for themselves by doing this. This 0:11:06.760 --> 0:11:10.520 is not a hugely profitable business anymore. It's very low margin, 0:11:11.040 --> 0:11:14.360 very extremely high volume. That's sort of been the direction 0:11:14.440 --> 0:11:17.320 of market structure revolution over the last twenty years that 0:11:17.440 --> 0:11:20.800 spreads on trades have gone ever ever slimmer, and the 0:11:20.840 --> 0:11:23.680 amount of trades that happen by virtue of basically high 0:11:23.679 --> 0:11:27.440 frequency traders computerized traders has gone way up. So what 0:11:27.520 --> 0:11:30.880 they lack in profits they make up for in volume. So, Chris, 0:11:30.880 --> 0:11:34.680 I wonder if there's a broader takeaway here about market structures, 0:11:34.679 --> 0:11:38.680 since people are accusing the changes in market structure that 0:11:38.679 --> 0:11:43.400 have moved trading towards a more electronic, faster, uh, you know, 0:11:43.640 --> 0:11:46.840 less lucrative for the exchanges and others kind of model, 0:11:47.200 --> 0:11:49.160 and that this is the reason why things are bouncing 0:11:49.200 --> 0:11:53.600 around because there aren't humans in between. You buying that? Um, 0:11:53.640 --> 0:11:55.520 I'm not sure that that. I totally buy that. I 0:11:55.520 --> 0:11:57.880 feel like volatility we shall always have. I do think 0:11:57.920 --> 0:12:00.240 that may be relevant to this, to the what's going 0:12:00.280 --> 0:12:02.199 on here today, Like a lot of stuff that goes 0:12:02.200 --> 0:12:04.200 on in market structure, if you look at it closely, 0:12:04.880 --> 0:12:09.079 is a kind of big pr game, um and and 0:12:09.120 --> 0:12:12.640 a serious one because uh, the regulatory sites for every 0:12:12.640 --> 0:12:15.120 once in a while trained on high frequency trating. It's 0:12:15.640 --> 0:12:17.320 I doubt this was the reason. But you had Stephen 0:12:17.400 --> 0:12:20.559 nuch in three weeks ago talking about how high frequency 0:12:20.559 --> 0:12:22.679 traders were responsible for all of the Volatili. They make 0:12:22.720 --> 0:12:25.720 fairly easy targets. And one thing you get every now 0:12:25.800 --> 0:12:28.720 and then is someone coming in saying sort of I'm 0:12:28.720 --> 0:12:31.280 going to baptize the world and fire. I'm gonna simplify 0:12:31.400 --> 0:12:34.560 everything and put out home homey sounding press release like 0:12:34.559 --> 0:12:36.360 the one that went out this morning, saying look, we're 0:12:36.360 --> 0:12:38.880 gonna come in and simplify everything. That's going to be cheaper, 0:12:39.000 --> 0:12:41.240 you know, simple order types. You had a couple of 0:12:41.320 --> 0:12:43.520 years ago with the Michael Lewis exchange of I E X, 0:12:43.559 --> 0:12:47.200 the one profiled, and uh, flash boys, that this happens. 0:12:47.240 --> 0:12:49.959 And this is a consideration where setting yourself up is 0:12:50.040 --> 0:12:53.280 kind of a hero of market structure, however questionable what 0:12:53.400 --> 0:12:56.400 ultimately is can be a worthwhile thing when regulators start 0:12:56.480 --> 0:12:58.679 to get their dander up about stuff that may be 0:12:58.800 --> 0:13:00.880 part of what's going on here. I mean, I don't know, 0:13:01.320 --> 0:13:03.640 you know, I certainly it wouldn't be stated as one 0:13:03.679 --> 0:13:05.280 of the goals of the thing, but it might be 0:13:05.360 --> 0:13:07.880 nice to have, oh, we're coming in trying to save 0:13:07.920 --> 0:13:11.680 everyone to point to in a couple months when Minuchin 0:13:12.600 --> 0:13:15.720 starts setting up hearings and things like that. I don't 0:13:15.760 --> 0:13:17.520 I don't know which occurs to me, it's not out 0:13:17.559 --> 0:13:19.360 of the question that that's part of the motive here, 0:13:19.760 --> 0:13:23.400 doesn't the security is an exchange commission really regulate how 0:13:23.520 --> 0:13:27.400 much the exchanges can charge for their data? There's yeah, 0:13:27.440 --> 0:13:31.719 and the exchange has recently lost uh uh some kind 0:13:31.760 --> 0:13:35.400 of regulatory hearing where their their fees were sent back 0:13:35.440 --> 0:13:38.480 to them for more explanation. Basically with the you know, 0:13:38.520 --> 0:13:41.079 the expectation that they're probably gonna end up being cut. 0:13:41.720 --> 0:13:44.680 At the same time, keeping exchanges, keeping the companies that 0:13:44.960 --> 0:13:48.520 uh that are the sites of all trading in this 0:13:48.600 --> 0:13:51.640 country is not totally bankrupt motive in and of itself. 0:13:52.040 --> 0:13:57.120 It helps to have relatively profitable venues where you can 0:13:57.160 --> 0:13:59.199 go and get your trade done in half a second. 0:13:59.520 --> 0:14:02.400 It's not a completely bankrupt motive for the work for 0:14:02.679 --> 0:14:05.960 you know, for capitalism, basically to have these things existing 0:14:06.120 --> 0:14:09.160 so you know what of things to balance. Thanks very 0:14:09.200 --> 0:14:12.160 much for being with us. Chris nig is Executive editor 0:14:12.200 --> 0:14:16.720 for editor for Equities for Bloomberg, speaking about brokers forming 0:14:16.760 --> 0:14:19.520 a new stock market to take on the New York 0:14:19.560 --> 0:14:40.080 Stock Exchange, the NASTAC and the cbo E on Friday, 0:14:40.440 --> 0:14:44.480 p G and E. This is the utility that supplies 0:14:44.520 --> 0:14:48.000 electricity and power to most of northern California, said that 0:14:48.040 --> 0:14:51.640 it is quote working diligently to assess the company's potential 0:14:51.760 --> 0:14:55.680 liabilities as a result of the wildfires and the options 0:14:55.680 --> 0:15:00.840 for addressing those liabilities, while those liabilities may lead to 0:15:01.080 --> 0:15:05.280 bankruptcy filing and bankruptcy protection. Here to tell us more, 0:15:05.400 --> 0:15:08.720 Kick Conoledge he is our senior Industrials and utilities analysts 0:15:08.720 --> 0:15:13.280 for Bloomberg Intelligence Kit. Is this part of the negotiation 0:15:13.400 --> 0:15:17.560 that goes on between the utility and lawmakers or is 0:15:17.560 --> 0:15:22.520 there a serious issue here that PGNI could seek bankruptcy 0:15:22.520 --> 0:15:25.640 protection because it needs it right? Well, I think him 0:15:25.680 --> 0:15:29.600 there that it's both. Really, I think you can with utilities, 0:15:30.040 --> 0:15:34.600 you can't separate, uh, the the financial condition from the 0:15:34.640 --> 0:15:40.960 political condition that they are always dependent on what the 0:15:41.000 --> 0:15:44.840 regulators and the legislators do. And of course that has 0:15:45.240 --> 0:15:49.160 come to a critical situation in California, especially for Penny 0:15:49.200 --> 0:15:51.520 and Northern California, because of all the wildfire. So you 0:15:51.560 --> 0:15:55.520 have twenty five billion estimated or thirty billion. I saw 0:15:55.560 --> 0:16:00.800 today somebody saying in liabilities for wildfire's potentially over the 0:16:00.840 --> 0:16:04.320 next X number of years to be paid out. Somebody's 0:16:04.360 --> 0:16:06.720 got to pay that, that would I mean, the whole 0:16:06.760 --> 0:16:10.120 market cap of PG and E is only eleven billion 0:16:10.240 --> 0:16:13.560 or ten billion now, so, uh, something's got to give. 0:16:13.720 --> 0:16:19.200 So a bankruptcy filing as reported would would not I 0:16:19.240 --> 0:16:23.720 think shock anybody, but whether it's needed at this point 0:16:24.040 --> 0:16:27.920 is in question. So if its market cap is a 0:16:28.040 --> 0:16:31.280 ten or a little bit above a billion dollars, just 0:16:31.360 --> 0:16:33.800 give you a sense. It's total debt is more than 0:16:33.880 --> 0:16:36.360 twice that at about twenty two billion dollars, and its 0:16:36.360 --> 0:16:39.760 bonds have been plunging. I just have to wonder what 0:16:39.840 --> 0:16:42.440 are the recoveries going to be like if they do 0:16:42.560 --> 0:16:46.000 decide to declare bankruptcy or file for bankruptcy. Because this 0:16:46.080 --> 0:16:49.280 is a company that is an investment grade credit rating, 0:16:49.800 --> 0:16:54.080 right it is. Uh, it doesn't happen that much that 0:16:54.400 --> 0:16:57.400 utility goes bankrupt, So we don't really know what would 0:16:57.400 --> 0:17:02.120 happen in that situation. But uh, but interestingly, the one 0:17:02.160 --> 0:17:04.679 that did go bankrupt, and oh one I believe it 0:17:04.760 --> 0:17:08.960 was was p G and E. And I think the 0:17:10.320 --> 0:17:12.480 you can go back and look at that, and the 0:17:12.560 --> 0:17:17.120 recoveries were good for bondholders. I believe it was all 0:17:17.160 --> 0:17:20.080 fully recovered. And you know, it's a while ago, so 0:17:20.119 --> 0:17:21.960 I don't hold me to every detail, but I think 0:17:21.960 --> 0:17:25.280 it was all fully recovered, and eventually the stock got 0:17:25.320 --> 0:17:28.280 back to a point where it was higher than it 0:17:28.320 --> 0:17:31.400 was before they went into bankruptcy. So but that took 0:17:31.440 --> 0:17:35.680 four or five years. So it's a an extremely complex, 0:17:36.440 --> 0:17:41.160 UH working out type of situation where of course everybody 0:17:41.160 --> 0:17:43.760 wants to get paid, and the bond holders and the 0:17:43.800 --> 0:17:49.400 stockholders and the UH trial lawyers and and the regulators 0:17:49.480 --> 0:17:52.800 and so on. So it's it at least it will 0:17:52.800 --> 0:17:57.000 take a long time to figure out who's owed what. UH. 0:17:57.040 --> 0:18:01.120 But the bottom line is California. I think that the 0:18:01.160 --> 0:18:04.480 cooler heads know that it only makes sense to have 0:18:04.560 --> 0:18:09.000 an investment grade utility to run the polls and wires 0:18:09.040 --> 0:18:13.680 and electrons in northern California. The shares of pgen E 0:18:13.760 --> 0:18:18.480 are down a little bit more than today. What would 0:18:18.480 --> 0:18:23.960 a bankruptcy filing do that would be positive for pg 0:18:24.119 --> 0:18:27.880 n E. UH. What what it would do is it 0:18:27.920 --> 0:18:34.639 would UH put the question of how you adjust the 0:18:34.720 --> 0:18:38.280 debt to the amount of equity UH into a bankruptcy 0:18:38.320 --> 0:18:41.880 court so that you would be relieved of the concern 0:18:42.000 --> 0:18:46.000 that a sudden influx of demand for payment would immediately 0:18:46.080 --> 0:18:49.760 tip over the company and lead to a liquidity crisis. 0:18:49.800 --> 0:18:52.960 So you know, as with any bankruptcy, that's the kind 0:18:52.960 --> 0:18:56.800 of situation. But overall the utility bankruptcy, the idea is 0:18:57.240 --> 0:19:00.879 you take the piecemeal workout where as to the regulators, 0:19:00.880 --> 0:19:03.119 back to the legislative, back to the regulators, and it 0:19:03.160 --> 0:19:05.400 could just go on and on and nobody knows what's 0:19:05.400 --> 0:19:08.639 going on. At least it gets organized in a bankruptcy 0:19:08.680 --> 0:19:11.320 court and people start to say, Okay, what do you need? 0:19:11.400 --> 0:19:15.080 What do you need? And the judge ultimately brings everything together. 0:19:15.600 --> 0:19:18.639 And I think in this case, the state of California 0:19:18.640 --> 0:19:21.119 would say what we need is a functioning utility. So 0:19:21.359 --> 0:19:23.040 kid a lot of people are saying that this is 0:19:23.080 --> 0:19:27.159 basically political warfare, and this is p g N saying, Okay, 0:19:27.280 --> 0:19:29.800 you're not going to bail us out, fine world, file 0:19:29.840 --> 0:19:33.000 for bankruptcy and put our credit rating in jeopardy and 0:19:33.320 --> 0:19:37.119 throw the entire utility system, uh put it at risks. 0:19:37.280 --> 0:19:41.679 So is this a dangerous precedent for other utilities. I 0:19:41.720 --> 0:19:46.480 don't think any utility would uh lightly go into the 0:19:46.560 --> 0:19:49.200 kind of situation that pg N is in so I'd 0:19:49.280 --> 0:19:51.960 say I'm not aware of any other utility out there 0:19:52.000 --> 0:19:55.639 now that has this kind of imbalance between as you 0:19:55.680 --> 0:19:59.520 were discussing the debt and equity. Uh so, let's just 0:19:59.560 --> 0:20:02.159 say it. You know, it's a very unpleasant situation, and 0:20:02.200 --> 0:20:04.359 nobody wants to go through it if they don't have to. 0:20:04.920 --> 0:20:07.679 But pg N is now in a situation where the 0:20:07.760 --> 0:20:11.600 debt and the increased possibility of even much more debt 0:20:11.680 --> 0:20:15.959 to pay the liabilities, uh is much more than they 0:20:15.960 --> 0:20:18.320 can handle on their own at this point, and so 0:20:18.400 --> 0:20:23.200 they have to look for more extreme out outcomes than 0:20:23.359 --> 0:20:25.480 than you might hope for. Kick College, thank you so 0:20:25.560 --> 0:20:28.120 much for being with us. Just to also note the 0:20:28.119 --> 0:20:32.119 p g NI bonds that are maturing currently treating a 0:20:32.160 --> 0:20:35.440 six and a half percent yield compared to a six 0:20:35.520 --> 0:20:39.840 point one percent average yield on the junk rated bonds 0:20:39.920 --> 0:20:43.840 with the top ratings of junk bonds. UM same about 0:20:43.920 --> 0:20:46.280 average maturity, if not the p g ANY bonds are 0:20:46.280 --> 0:20:50.040 actually maturing sooner, so they're being treated as junk in 0:20:50.080 --> 0:20:53.760 the bond markets, even though credit rating companies are not 0:20:54.000 --> 0:20:56.040 saying that that is what they are. Kick connle Edge, 0:20:56.040 --> 0:20:58.119 thank you for joining us, Senior utilities industry in the 0:20:58.240 --> 0:21:18.720 list for Bloomberg Intel legends he's bullish on markets for indeed, 0:21:18.720 --> 0:21:22.000 he believes that stocks are currently undervalued. Here to tell 0:21:22.080 --> 0:21:24.800 us more, David Cats. He's the chief investment officer for 0:21:24.960 --> 0:21:29.880 Matrix Asset Advisors. He's got nearly eight hundred million dollars 0:21:29.880 --> 0:21:33.119 of assets under management. David Cats a pleasure to have 0:21:33.240 --> 0:21:39.400 you with us. Give us your thesis for for stocks. Well, basically, 0:21:39.440 --> 0:21:42.200 you've just gone through the worst quarter in about a decade, 0:21:42.240 --> 0:21:46.560 You've gone through the worst December in over uh ninety years. 0:21:46.680 --> 0:21:49.560 We think stocks are now at a level that's pretty attractive. 0:21:49.640 --> 0:21:53.080 The ultimate driver of stock prices is usually price earnings ratios. 0:21:53.400 --> 0:21:55.720 The markets at about fourteen and a half times two 0:21:55.720 --> 0:21:59.040 thousand and nineteen numbers, so that's a pretty good level 0:21:59.200 --> 0:22:01.760 Historically you've done quite well from that, and we think 0:22:01.760 --> 0:22:04.720 there's just much, much too much pessimism built into stock 0:22:04.800 --> 0:22:07.040 prices right now, and there's a lot of room for 0:22:07.080 --> 0:22:08.600 them to go high. There are a lot of great 0:22:08.640 --> 0:22:12.200 businesses that are selling a ten eleven times earnings. Historically, 0:22:12.200 --> 0:22:13.720 you're going to make pretty good money when you can 0:22:13.800 --> 0:22:16.600 do that. Yeah, David is sort of highlight the pessimism 0:22:16.640 --> 0:22:19.879 that you're talking about. Black Rocks annual survey of institutional 0:22:19.880 --> 0:22:23.000 clients overseeing seven trillion dollars in assets globally came out 0:22:23.400 --> 0:22:26.879 uh and more than half of them plan to cut 0:22:26.960 --> 0:22:31.399 stock exposure this year, up dramatically from the proportion that 0:22:31.440 --> 0:22:34.000 said the same thing last year. So where are you 0:22:34.080 --> 0:22:38.959 adding opportunities and when did you start buying just one thing? 0:22:39.000 --> 0:22:41.320 I'm at black Rock. What's interesting is probably if they 0:22:41.320 --> 0:22:43.920 had done that Poul about six months ago, people were 0:22:44.000 --> 0:22:47.120 universally bullish. So you've just had this really sharp sell 0:22:47.160 --> 0:22:49.359 off and all of a sudden, sentiments turned pretty negative. 0:22:49.400 --> 0:22:53.000 We think that's chasing what's happened rather than the future. Now. 0:22:53.040 --> 0:22:54.840 What what we like here is we think there are 0:22:54.880 --> 0:22:58.160 a wealth of industries and sectors that are pretty attractive. 0:22:58.160 --> 0:23:01.679 We like the financials a great deal. Um Technology has 0:23:01.720 --> 0:23:03.600 just been beaten up pretty badly, so we think there 0:23:03.640 --> 0:23:08.920 are opportunities there. Communications services another area. Energy we think 0:23:08.920 --> 0:23:10.720 it is poised to do a lot better. The stocks 0:23:10.760 --> 0:23:14.440 have really been washed out, and select healthcare, so really 0:23:14.520 --> 0:23:18.240 lots of different places to make money. The key driver 0:23:18.359 --> 0:23:22.840 there is depressed valuation, good long term outlook. David I'm 0:23:22.880 --> 0:23:25.720 assuming that everyone has access to more or less the 0:23:25.800 --> 0:23:28.879 same information that you have access to so much it 0:23:28.960 --> 0:23:32.600 must be your reading of the information that causes you 0:23:32.760 --> 0:23:35.480 to be bullish and a bit of a contrarian. Maybe 0:23:35.520 --> 0:23:37.840 you could just give us an example, whether it is 0:23:38.040 --> 0:23:41.520 Comcast or whether it is Facebook or another stock, to 0:23:41.600 --> 0:23:46.480 sort of highlight your strategy and why your perspective is different. Well, 0:23:46.600 --> 0:23:49.280 our perspective is different because we try not to get 0:23:49.280 --> 0:23:52.280 caught up in the day to day manias. So right 0:23:52.280 --> 0:23:55.040 now the market is very, very focused on the negatives 0:23:55.080 --> 0:23:59.560 associated with the trade war with interest rates. About six 0:23:59.560 --> 0:24:02.280 weeks ago they were rising. Earnings are going to be 0:24:02.320 --> 0:24:04.320 at a slower pace this year, so you hear that 0:24:04.400 --> 0:24:06.840 from many strategists that how can the stock market go 0:24:06.960 --> 0:24:10.359 up with slower earning space. We actually looked at the 0:24:10.400 --> 0:24:13.720 period from nineteen thirty seven to two thousand and eighteen, 0:24:14.200 --> 0:24:17.760 uh the level of earnings growth and its impact on 0:24:18.119 --> 0:24:21.320 stock prices. How did the smp FI when earning s 0:24:21.320 --> 0:24:23.800 growth was higher when it was lower, and we found 0:24:23.800 --> 0:24:26.800 there was almost a zero correlation. So that really means 0:24:26.840 --> 0:24:29.520 that that's not going to be the driver in aggregate 0:24:29.560 --> 0:24:31.479