WEBVTT - Pervasive Pessimism Is a Reason to Be Bullish: Hyzy 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penel Podcast. I'm Paul swing you. 0:00:05.360 --> 0:00:07.680 Along with my co host Lisa Brahma Waits. Each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 0:00:12.520 you and your money. Whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.959 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:24.520 at Bloomberg dot com. Everyone hates this rally. I think 0:00:24.520 --> 0:00:26.360 it's fair to say this is probably one of the 0:00:26.360 --> 0:00:29.520 most hated rallies ever, although there are a growing number 0:00:29.560 --> 0:00:32.440 of people who say that the US equities can continue 0:00:32.520 --> 0:00:34.879 to melt up. Here with us to talk about his 0:00:35.080 --> 0:00:38.080 mid year outlook and what investors are looking to do 0:00:38.200 --> 0:00:40.800 heading into the second half is Chris Heisie. He's chief 0:00:40.840 --> 0:00:44.440 investment officer at Bank of America Global Wealth and Investment Management, 0:00:44.760 --> 0:00:46.959 And I want to start with this sort of hatred 0:00:47.120 --> 0:00:49.319 of this rally. There is a feeling that there's no 0:00:49.440 --> 0:00:53.240 way that after more than ten years of an incredible 0:00:53.360 --> 0:00:56.639 run and a slow growing economy, that this market can 0:00:56.680 --> 0:01:00.440 just keep chugging along for another year. Do you think 0:01:00.480 --> 0:01:02.800 that that is the most likely outcome that we will 0:01:02.840 --> 0:01:06.120 just continue to chug along for another year. Yeah, that's 0:01:06.120 --> 0:01:08.960 the most likely outcome in our view for a variety 0:01:08.959 --> 0:01:10.760 of reasons, but I think the biggest one is the 0:01:10.800 --> 0:01:13.360 fact that you hit it right off at the top there, 0:01:13.400 --> 0:01:16.840 which is the barish sentiment if you if you talk 0:01:16.920 --> 0:01:20.720 to people, uh, they feel like you know. Some of 0:01:20.760 --> 0:01:23.440 this rally, at least the latest portion of this rally 0:01:23.560 --> 0:01:27.399 is justified because of a stalemate on the trade front, 0:01:27.920 --> 0:01:31.120 no further tariffs that were about to hit UH, an 0:01:31.160 --> 0:01:35.760 easier FED, etcetera. But in action, the private investor is 0:01:35.800 --> 0:01:38.240 simply not in the market as much as they normally 0:01:38.280 --> 0:01:41.000 would be. That's point number one. Point number two is 0:01:41.000 --> 0:01:43.440 is when you get a FED that goes from literally 0:01:43.520 --> 0:01:48.080 hiking in December to an about face a big pivot 0:01:48.480 --> 0:01:52.240 two months later, starting in January that on that panel 0:01:52.720 --> 0:01:56.320 that share Powell did, and then now with the market 0:01:56.400 --> 0:02:00.280 suggesting at least three cuts between now and the end 0:02:00.320 --> 0:02:04.160 of the first quarter, that allows multiples to go up 0:02:04.440 --> 0:02:08.280 climb the wall of worry, and if the risks remain muted, 0:02:08.800 --> 0:02:11.520 that's where you get a pretty powerful surge between now 0:02:11.520 --> 0:02:13.080 and the end of the year. Even though we are 0:02:13.320 --> 0:02:17.080 pretty aggressively off of the lows um late last year. So, Chris, 0:02:17.080 --> 0:02:20.520 we're coming into the earnings period for the June quarter. 0:02:21.320 --> 0:02:25.480 How important is the near term earnings outlook for this market? 0:02:26.560 --> 0:02:28.280 You know it's uh. I think it's the tail of 0:02:28.320 --> 0:02:30.600 the tape. At this point. You've got a dual track 0:02:30.639 --> 0:02:34.240 economy UH, led by the U S consumer in the US, 0:02:34.760 --> 0:02:37.360 and you've got manufacturing and trade that is uh, the 0:02:37.480 --> 0:02:40.600 leverage of global economies. And you're gonna get a mixed 0:02:40.600 --> 0:02:42.959 bag in our view coming out of the industrial space 0:02:43.240 --> 0:02:48.280 versus the financials, versus tech versus retail or consumer discretionary. 0:02:48.480 --> 0:02:51.000 And when you roll it all up, the earnings numbers 0:02:51.000 --> 0:02:53.040 that are coming out now should be a small beat. 0:02:53.480 --> 0:02:56.480 Because of the low bar, a small beat is likely 0:02:56.520 --> 0:02:59.000 to support the market. Uh. And then it's gonna come 0:02:59.040 --> 0:03:01.600 down to guidance. It's all going to be guidance. Guidance 0:03:01.600 --> 0:03:05.160 guidance on a go forward basis. UH. So we can 0:03:05.200 --> 0:03:07.639 actually determine whether or not we're just bottoming out or 0:03:07.639 --> 0:03:09.040 are we actually going to get some growth in the 0:03:09.080 --> 0:03:10.960 second half. So, Chris, if you do think that we're 0:03:10.960 --> 0:03:13.080 going to chug along here on the US equity side 0:03:13.080 --> 0:03:15.560 for another twelve months, or so I'm wondering what that 0:03:15.600 --> 0:03:18.840 means for bonds because there has been something of a 0:03:18.880 --> 0:03:21.640 divergence with bond yields going lower and lower, typically a 0:03:21.680 --> 0:03:25.240 bearish sign, while equity markets continue to climb higher. And 0:03:25.280 --> 0:03:27.680 do you think that this is an incompatible reality that 0:03:27.720 --> 0:03:30.560 has to at one point, at some point mean that 0:03:30.600 --> 0:03:33.640 bonds are going to experience losses or stocks will? You know? 0:03:33.680 --> 0:03:35.840 It's a great point, because I think what we have 0:03:35.920 --> 0:03:38.560 to figure out is how long this can actually last 0:03:38.560 --> 0:03:41.560 where bond yields do at least remain close to record 0:03:41.600 --> 0:03:44.080 low levels or creep even lower from here with equities 0:03:44.120 --> 0:03:46.040 going up. Part of that is the fact that the 0:03:46.120 --> 0:03:49.640 multiple is going up as discount rates go down. But 0:03:49.760 --> 0:03:52.440 most importantly it's a flow argument. At this point, I 0:03:52.480 --> 0:03:56.320 think we've had the greatest divergence and flows uh probably 0:03:56.360 --> 0:03:58.960 ever if you think about close to four billion difference 0:03:58.960 --> 0:04:02.520 two into fixed income flows UH and two under billion 0:04:02.560 --> 0:04:04.520 out of equities, even though we're at all time highs 0:04:04.520 --> 0:04:08.560 on the equity side. So from our perspective, the big 0:04:08.600 --> 0:04:10.960 reason for the creep lower and yields has a lot 0:04:11.040 --> 0:04:13.440 to do with demographics around the world and the need 0:04:13.560 --> 0:04:16.000 for any kind of a yield. Given the fact that 0:04:16.760 --> 0:04:19.240 of the world's bond markets have a negative carrier negative 0:04:19.279 --> 0:04:22.280 yield to them, which is close to twelve twelve to 0:04:22.360 --> 0:04:26.640 thirteen trillion, people called, you know, Tina, there is no alternative. 0:04:26.680 --> 0:04:28.560 I don't really like to use that phrase because there's 0:04:28.600 --> 0:04:31.000 plenty of alternatives. But at the end of the day, 0:04:31.000 --> 0:04:34.920 if you can get a dividend yield um potential total 0:04:34.960 --> 0:04:38.880 return that's three times the tenure yield, UH, that's an 0:04:38.880 --> 0:04:43.080 attractive equity market backdrop on an absolute and relative basis. So, Chris, 0:04:43.120 --> 0:04:46.240 want to get your sense of valuation in the equity markets. 0:04:46.279 --> 0:04:48.560 We've had this big run up, and equity markets this year, 0:04:48.880 --> 0:04:52.159 earnings estimates for the most part have not risen. What 0:04:52.320 --> 0:04:54.080 is your sense of where we are in terms of 0:04:54.160 --> 0:04:57.479 valuation right here? It seems like we're borrowing a little 0:04:57.480 --> 0:05:00.200 bit from from next year or borrowing a little bit 0:05:00.200 --> 0:05:02.839 from the future in terms of returns, And that tends 0:05:02.880 --> 0:05:06.000 to happen if the FED makes an about face switch, 0:05:06.080 --> 0:05:10.640 and it's because there's the potential to create a soft landing. 0:05:10.680 --> 0:05:13.719 So the FED is seems to be doing. They seem 0:05:13.800 --> 0:05:16.400 to be trying to right size the curve. The yield curve. 0:05:16.480 --> 0:05:19.080 If that's the case, which is what we believe, and 0:05:19.160 --> 0:05:22.360 it's not a situation where the fed UM is raising 0:05:22.440 --> 0:05:25.440 rates last year to stop inflation, because that's simply not 0:05:25.520 --> 0:05:27.800 in the cards. But if they have to right size 0:05:27.800 --> 0:05:30.640 the curve and that is likely to go on, then 0:05:30.680 --> 0:05:34.080 you get earnings following later. You get multiple expansion first, 0:05:35.000 --> 0:05:38.600 liquidity first, multiple expansion second, and then earnings follow And 0:05:38.640 --> 0:05:42.039 that seems to be what UM investors that are coming 0:05:42.040 --> 0:05:44.240 back into the market are telling us. Where we think 0:05:44.279 --> 0:05:47.800 earnings are gonna come. Now, that's where comes into play. 0:05:47.839 --> 0:05:50.760 Where if earnings don't show four or five six percent 0:05:50.800 --> 0:05:53.880 earnings growth, that's where the market's got in ahead of itself. So, Chris, 0:05:53.960 --> 0:05:56.480 if you do think that perhaps we're building in some 0:05:56.560 --> 0:05:59.680 gains now, are borrowing from next year, what kind of 0:05:59.680 --> 0:06:02.479 return can people expect to other equity investments over the 0:06:02.480 --> 0:06:05.479 next twelve months. I think if you you put it well, 0:06:05.880 --> 0:06:08.040 if you look away from the calendar. I know everyone's 0:06:08.080 --> 0:06:10.320 patterned on the calendar. They ask you about year in 0:06:10.400 --> 0:06:12.320 price targets, etcetera. But if we just look at a 0:06:12.440 --> 0:06:15.880 rolling twelve month basis, we think earnings growth of around 0:06:15.880 --> 0:06:19.279 five percent between now and that twelve month rolling basis, 0:06:19.640 --> 0:06:23.160 plus the fact that yields should remain low, if not lower, 0:06:23.200 --> 0:06:26.800 from here, that should push the multiple up another point. 0:06:26.960 --> 0:06:29.600 And if we get five percent earnings growth, that gets 0:06:29.600 --> 0:06:33.320 you still double digits low double digit return potential in 0:06:33.320 --> 0:06:36.240 the next twelve months. So, Chris, one of the things 0:06:36.320 --> 0:06:39.320 we've heard from some investors is this expanding their search 0:06:39.480 --> 0:06:42.880 for yield and returns. What an alternative investments do you 0:06:42.920 --> 0:06:44.600 think people should be looking at at this point in 0:06:44.600 --> 0:06:48.719 the cycle. You know, I think, um, we have a 0:06:48.880 --> 0:06:51.480 risk out there in the next two years of getting 0:06:51.480 --> 0:06:56.880 too complacent on inflation. Meaning there's been an attempt to 0:06:57.000 --> 0:06:59.760 get to the two percent level a couple of times 0:06:59.760 --> 0:07:02.880 in the last eleven years, and we haven't really reached that, 0:07:03.200 --> 0:07:06.200 and said realizes that, and now they're willing to let 0:07:06.240 --> 0:07:08.520 things run hotter. So the big thing we have to 0:07:08.560 --> 0:07:11.840 worry about is do we get too complacent on inflation. 0:07:12.000 --> 0:07:14.600 That's number one, and then number two, when you just 0:07:14.800 --> 0:07:17.600 step back a little bit in terms of earnings guidance 0:07:17.800 --> 0:07:21.320 and earnings estimates, we have now pushed them too low. 0:07:21.680 --> 0:07:23.840 The analyst community is about to do the same thing, 0:07:23.840 --> 0:07:27.120 for they haven't pulled them back yet. Um. But as 0:07:27.120 --> 0:07:29.880 they pull them back and then we we borrow some 0:07:30.040 --> 0:07:32.240 future gains. At the end of the day, it's going 0:07:32.280 --> 0:07:35.720 to come down to what type of correction and what's 0:07:35.760 --> 0:07:38.760 the driver of it. UM. Typical years have two to 0:07:38.840 --> 0:07:44.560 three five percent pullbacks. One correction. We had that this year. UM. 0:07:44.640 --> 0:07:47.120 The question is is do we have another five percent 0:07:47.160 --> 0:07:50.040 pullback in the cards that's likely to be earnings driven, 0:07:50.320 --> 0:07:53.800 not necessarily FED driven, and that's a buy on weakness 0:07:53.880 --> 0:07:57.440 pullback from our perspective. Chrisze, thank you so much for 0:07:57.520 --> 0:07:59.920 joining us. Chris is the chief investment Officer for Bank 0:08:00.000 --> 0:08:03.160 of America Global Wealth and Investment Management, based in New 0:08:03.240 --> 0:08:22.320 York City. Well, we are ten plus years into this 0:08:22.360 --> 0:08:25.920 economic cycle. The FED appears to remain quite dubbish, and 0:08:25.960 --> 0:08:28.880 many investors are questioning how much risk they should be 0:08:28.960 --> 0:08:32.000 taken given the extraordinary performance of the first six months 0:08:32.040 --> 0:08:33.640 of this year. To get a better look at the 0:08:33.679 --> 0:08:36.280 state of the global fixed income markets, returned to Ted 0:08:36.440 --> 0:08:39.480 revel Tad as chief investment officer for fixed Income at 0:08:39.480 --> 0:08:42.720 TCW with a hundred seventy billion dollars under management, based 0:08:42.720 --> 0:08:45.360 in Los Angeles. H Tad thanks so much. For joining US. 0:08:45.400 --> 0:08:47.360 I wonder if we could just start off by getting 0:08:47.360 --> 0:08:51.000 a sense of your thoughts about allocation between you know, 0:08:51.080 --> 0:08:54.240 investment grade, high yield, emerging markets. Where are you on 0:08:54.280 --> 0:08:57.680 the risk curve here, Well, we're pretty defensive on the 0:08:57.760 --> 0:09:01.480 risk curve. I think that the investors are supposed to 0:09:02.080 --> 0:09:06.840 think about their asset allocation in terms of a protracted 0:09:06.960 --> 0:09:10.280 asset price cycle that we have experienced obviously, but that 0:09:10.360 --> 0:09:14.640 the time for taking enthusiastic risk with your fixed income 0:09:14.679 --> 0:09:18.000 portfolio is typically in the first few years of the cycle. 0:09:18.080 --> 0:09:20.840 That's when you want those big allocations to things like 0:09:20.960 --> 0:09:24.800 high yields, emerging markets, leverage loans, the most leverage parts 0:09:24.800 --> 0:09:27.280 of the capital structure. As you get into the later 0:09:27.360 --> 0:09:29.839 stages of the cycle, which I think there is abundant 0:09:29.920 --> 0:09:32.720 evidence that we are. In those late stages, you're supposed 0:09:32.720 --> 0:09:36.679 to be actually very cautious about making allocations to leveraged 0:09:36.720 --> 0:09:40.720 asset classes and against leverage business models. So that counsels 0:09:40.760 --> 0:09:45.880 a portfolio that has a significant character um with respect 0:09:45.920 --> 0:09:49.840 to using sovereign debt, using investment grade debt top of 0:09:49.880 --> 0:09:53.240 the capital structure, type of exposure, and asset backs meaning 0:09:53.240 --> 0:09:57.040 triple A triple a exposure and commercial mortgages and avoidance 0:09:57.360 --> 0:10:01.199 generally speaking of let's say, uh, much of the high 0:10:01.280 --> 0:10:04.959 yield market, and particularly the single be and below portions 0:10:05.000 --> 0:10:08.840 of that So ted, One thing that I find striking 0:10:09.160 --> 0:10:12.480 is that the vast majority of investment managers who we 0:10:12.559 --> 0:10:15.320 speak to echo the sentiment that you just had. And 0:10:15.360 --> 0:10:17.680 I'm wondering whether that in and of itself is a 0:10:17.720 --> 0:10:20.640 reason to be more bullish, uh than cautious, just because 0:10:20.640 --> 0:10:23.800 if so many people are baking in such caution, what 0:10:23.960 --> 0:10:26.160 exactly is going to cause this market to turn? And 0:10:26.480 --> 0:10:31.840 and the positioning isn't really there for something violent, right right? Yeah, Well, 0:10:31.880 --> 0:10:35.160 those are great questions. First of all, I'm I do 0:10:35.600 --> 0:10:39.480 sympathize with the observation that many people are talking the 0:10:39.559 --> 0:10:43.719 late cycle game in terms of caution in their asset allocations. 0:10:43.960 --> 0:10:47.280 I'm not sure how many our walk in the walk, though, Um, 0:10:47.360 --> 0:10:50.480 the pricing that exists in much of the the fixed 0:10:50.480 --> 0:10:53.000 income market doesn't suggest that that is actually the case. 0:10:53.480 --> 0:10:55.960 But as it relates to what might be a catalyst 0:10:56.080 --> 0:10:59.760 for turning the cycle and flushing out the risk, you 0:10:59.800 --> 0:11:02.360 don't have to look very far. Indeed, look back at 0:11:02.400 --> 0:11:05.360 the fourth quarter of last year, there wasn't really much 0:11:05.400 --> 0:11:07.800 of a catalyst. It's simply that there was a there 0:11:07.840 --> 0:11:10.600 was an abrupt shift in risk preferences, and you saw 0:11:10.840 --> 0:11:14.680 an abrupt widening of the high yield market to roughly 0:11:14.760 --> 0:11:17.600 five and a half or five and fifty basis points 0:11:17.640 --> 0:11:20.400 over treasuries from a level that I think had started 0:11:20.400 --> 0:11:23.200 the fourth quarter at about three hundred and today we're 0:11:23.280 --> 0:11:25.960 sitting at about three hundred and seventy. But I think 0:11:26.000 --> 0:11:29.560 that if you're looking for confirmation of the light cycle 0:11:29.600 --> 0:11:32.640 type of environment, you have your inverted yield curve. You 0:11:32.720 --> 0:11:36.640 have what may turn out to be a profits recession 0:11:36.679 --> 0:11:40.800 as divine, as defined by two consecutive quarters of of 0:11:41.480 --> 0:11:45.120 negative growth with respect to earnings, that potentially being this quarter. 0:11:45.720 --> 0:11:48.240 There's a slowdown in China going on, We've seen the 0:11:48.360 --> 0:11:51.280 statistics with respect to trade. There's a lot of leverage 0:11:51.280 --> 0:11:54.319 already built into the investment grade market. We have actually 0:11:54.360 --> 0:11:57.040 seen under performance in the triple ceas. And then you 0:11:57.080 --> 0:12:01.720 have this whole conundrum of negative yields, that of the 0:12:01.800 --> 0:12:05.679 global investment grade debt out there is yielding less than zero. 0:12:06.000 --> 0:12:10.040 Not exactly a compelling argument for taking risk in your portfolio. 0:12:10.800 --> 0:12:13.160 So tad. It kind of brings me into my next question, 0:12:13.240 --> 0:12:15.200 kind of what are you seeing as you look across 0:12:15.520 --> 0:12:18.680 UH your portfolio in terms of credit quality. Given where 0:12:18.720 --> 0:12:21.080 we are in the psychole, are you seeing anything any 0:12:21.120 --> 0:12:25.680 red flags popping up in terms of red flags in 0:12:25.679 --> 0:12:30.280 the market. Absolutely, arguably even as recent as this morning 0:12:30.360 --> 0:12:33.640 the news with the i p O that that failed 0:12:33.640 --> 0:12:35.400 with him and that I don't know if I should 0:12:35.400 --> 0:12:37.520 call it a failed i p O with in BEV, 0:12:37.600 --> 0:12:40.600 but certainly one that was shelved and pulled. UH. That 0:12:40.760 --> 0:12:44.199 is a relatively levered business model. That is one of 0:12:44.240 --> 0:12:46.760 those investment grade companies out there that I think is 0:12:46.840 --> 0:12:49.840 running at least four turns maybe closer to five turns 0:12:49.880 --> 0:12:52.760 of leverage, which is out of alignment with what you 0:12:52.800 --> 0:12:56.040 typically think of as an investment grade UH leverage level. 0:12:56.360 --> 0:12:58.040 The fact that the i p O was pulled and 0:12:58.080 --> 0:13:01.400 therefore the proceeds are not available for de leveraging tells 0:13:01.400 --> 0:13:04.000 you something about this specific credit but it also I 0:13:04.000 --> 0:13:05.640 think tells you a lot about the mood and the 0:13:05.679 --> 0:13:09.360 mind of the marketplace that the the need or the 0:13:09.520 --> 0:13:13.040 urgency to delever or to get your metrics back down 0:13:13.320 --> 0:13:15.920 to more in line for where they ought to be 0:13:16.000 --> 0:13:18.920 in a light cycle environment, isn't there. The reason this 0:13:19.040 --> 0:13:21.520 is important, at least in our judgment, is that when 0:13:21.520 --> 0:13:24.680 you look at past cycles, you'll actually see that something 0:13:24.760 --> 0:13:28.000 like between at the low end and at the high 0:13:28.080 --> 0:13:32.560 end of the triple bes. Okay, not the entirety of 0:13:32.559 --> 0:13:35.200 the investment grade corporate market, but about a quarter to 0:13:35.280 --> 0:13:38.199 a half of the triple B universe suffers downgrades to 0:13:38.280 --> 0:13:42.520 below investment grades gets junked uh into a into a 0:13:42.600 --> 0:13:46.240 de leveraging type of environment. Given how much triple bees 0:13:46.280 --> 0:13:49.120 have expanded in terms of their market value and the 0:13:49.160 --> 0:13:53.400 size of that market, it could have really devastating consequences 0:13:53.440 --> 0:13:56.600 for the pricing of below investment grade debt and leverage loans. 0:13:57.080 --> 0:14:00.640 So that's I think one avenue that you're supposed to 0:14:00.679 --> 0:14:03.920 be very thoughtful about the fallen angel risk that may 0:14:04.080 --> 0:14:07.520 exist in in the what would otherwise be thought of 0:14:07.559 --> 0:14:12.640 as a relatively conservative investment grade portfolio. Ted Earlier in 0:14:12.679 --> 0:14:14.959 the conversation, you were saying that a lot of people 0:14:15.040 --> 0:14:17.960 talk the talk, but they don't walk the walk, and 0:14:18.000 --> 0:14:21.000 they're not perhaps de risking as much as it may seem. 0:14:21.120 --> 0:14:24.600 Where in particular are you seeing this I think you're 0:14:24.600 --> 0:14:27.800 seeing it in the corporate markets primarily and in the 0:14:27.880 --> 0:14:30.600 leverage loan markets, and the leverage loan market, since we 0:14:30.640 --> 0:14:33.280 haven't spoken about it, is probably a really good place 0:14:33.320 --> 0:14:37.440 to focus on that. So, the leverage loan market has 0:14:37.480 --> 0:14:40.520 grown enormously over the course of this cycle and is 0:14:41.120 --> 0:14:44.440 would appear to be one of the primary vehicles of 0:14:44.440 --> 0:14:49.120 of choice as it relates to financing relatively leverage and 0:14:49.360 --> 0:14:53.120 smaller type type type businesses. What appears to be the 0:14:53.160 --> 0:14:56.560 case is that the covenant light structures and the very 0:14:56.640 --> 0:14:59.920 generous terms that exist in these loan agreements vias of 0:15:00.240 --> 0:15:03.040 that of the of the borrower, generous to the borrower. 0:15:03.120 --> 0:15:08.880 That is um our suggestive that the traditional originators of 0:15:08.920 --> 0:15:11.400 these loans are not putting them on their books. It's 0:15:11.440 --> 0:15:15.000 a it's a going back to the Mark Twain is 0:15:15.040 --> 0:15:18.440 um about cycles rhyming. In the last cycle, those that 0:15:18.520 --> 0:15:22.520 were very knowledgeable and very up close and personal with 0:15:22.560 --> 0:15:25.840 respect to the underwriting of sub prime mortgages weren't putting 0:15:25.840 --> 0:15:28.920 it on their own balance sheets. They were securitizing them 0:15:28.920 --> 0:15:32.000 and sending them into C d O type structures or 0:15:32.080 --> 0:15:36.040 somewhere else. In this particular cycle, you're seeing an inordinate 0:15:36.080 --> 0:15:39.840 amount of those leverage loans going into the CLO structure, 0:15:40.160 --> 0:15:44.160 but something like six of all of these leverage loans 0:15:44.440 --> 0:15:46.480 are not ending up on the balance sheets of the 0:15:46.480 --> 0:15:49.760 people who are presumptively underwriting them. That in and of 0:15:49.800 --> 0:15:54.520 itself should serve should serve to raise a question about 0:15:55.080 --> 0:15:57.400 why is that the case? And of course the answer 0:15:57.480 --> 0:16:01.560 is because there is cheap and a capital available in 0:16:01.600 --> 0:16:06.760 the CLO market. How knowledgeable uh, that some of those 0:16:06.800 --> 0:16:09.600 investors might be. I mean, obviously there are many investors 0:16:09.720 --> 0:16:12.040 in that space that are knowledgeable, but it's not all 0:16:12.080 --> 0:16:14.720 of them. Tad Revel, thank you so much. We could 0:16:14.720 --> 0:16:16.560 speak with you all day. We love that you came on. 0:16:16.560 --> 0:16:20.000 Tad Revel, chief investment officer for fixed income at TCW, 0:16:20.040 --> 0:16:38.640 coming to us from Los Angeles. Well, we got some 0:16:38.680 --> 0:16:41.440 economic data out of China overnight, and I guess the 0:16:41.520 --> 0:16:44.920 takeaway is that Chinese economy slow to the weakest paced 0:16:45.080 --> 0:16:49.320 since quarterly data began, but there was some signs of 0:16:49.520 --> 0:16:52.640 stabilization as well. To get the latest, we welcome Tom 0:16:52.720 --> 0:16:55.840 or like Tom's cheap economist for Bloombrick Economics. He joins 0:16:55.880 --> 0:16:58.320 us on the phone from Washington, d C. Tom, thanks 0:16:58.320 --> 0:17:00.640 so much for joining us. Kind of what your key 0:17:00.720 --> 0:17:03.680 takeaways from the most recent round of economic data out 0:17:03.680 --> 0:17:07.680 of China. I think you put it pretty well, Paul. Yes, 0:17:07.800 --> 0:17:12.200 this is the weakest number since back in six point 0:17:12.280 --> 0:17:17.280 two percent growth. Um. Yes, there are some signs of 0:17:17.520 --> 0:17:20.840 a little bit of additional resilience coming through in the 0:17:20.840 --> 0:17:24.119 more high frequency June data. We've got a bounce in 0:17:24.240 --> 0:17:28.600 retail sales, we've got a bounce in industrial output. But 0:17:28.960 --> 0:17:31.440 and this is the crucial caveat, I want to throw 0:17:31.480 --> 0:17:34.760 in a bunch of the factors which were behind that 0:17:35.080 --> 0:17:39.880 more optimistic June data aren't going to be very long lasting. 0:17:40.400 --> 0:17:43.440 Retail sales, for example, a big factor there was one 0:17:43.480 --> 0:17:48.080 off discounts to get rid of inventory of old cars 0:17:48.080 --> 0:17:51.000 sitting on dealer's lots. That drove a huge surge in 0:17:51.119 --> 0:17:54.760 car sales. That's not something which is going to be repeated. Um. 0:17:54.920 --> 0:17:57.320 So we think the June numbers might be a bit 0:17:57.359 --> 0:17:59.679 of a false dawn and there could be more weakening 0:17:59.720 --> 0:18:01.800 to come for China. Tom, how much can we trust 0:18:01.840 --> 0:18:05.480 these numbers as being accurate? So? Um, that's the perennial 0:18:05.560 --> 0:18:09.320 question with China's data Lisa UM And what we do 0:18:09.440 --> 0:18:12.280 is we run a bunch of different checks. We look 0:18:12.280 --> 0:18:16.520 at the GDP numbers against what we call the Leaka 0:18:16.680 --> 0:18:21.520 Chang Index that's based on rail freight, electricity UM and 0:18:22.080 --> 0:18:26.720 loan numbers UM. We look at it based on different 0:18:27.440 --> 0:18:30.760 private and academic gauges of how fast the Chinese economy 0:18:30.840 --> 0:18:33.440 is going. At different points in the past, there's been 0:18:33.600 --> 0:18:37.640 really wide deviation, especially back in two thousand and fifteen, 0:18:37.920 --> 0:18:41.080 the government was saying six point five seven percent growth. 0:18:41.359 --> 0:18:44.399 Are private gauges were saying now, Actually it's closer to 0:18:44.520 --> 0:18:49.719 three or four percent. Right now, our private gauges and 0:18:49.760 --> 0:18:53.359 the official numbers are actually matching up. So, Tom, you 0:18:53.680 --> 0:18:57.679 lived and worked in China in Beijing for many many years. 0:18:58.000 --> 0:19:01.080 Love to get your sense based upon your experience of 0:19:01.280 --> 0:19:03.119 where do you think China is right now as they 0:19:03.119 --> 0:19:05.919 think about trade negotiations with the US. We've got this 0:19:06.080 --> 0:19:08.680 latest batch of economic data. It's a sense of where 0:19:08.760 --> 0:19:10.800 you think they are and what they really want to achieve. 0:19:11.560 --> 0:19:14.440 So I was in Beijing for the week ahead of 0:19:14.480 --> 0:19:18.119 that G twenty negotiation between President she and President Trump 0:19:18.359 --> 0:19:21.960 and the week after UM and we spoke to to 0:19:22.080 --> 0:19:24.400 a bunch of people there, and I can tell you 0:19:24.440 --> 0:19:28.560 the mood after that G twenty agreement was I would 0:19:28.600 --> 0:19:33.119 say a combination of relief and caution. Relief that she 0:19:33.359 --> 0:19:37.120 and Trump had at least managed a handshake deal things 0:19:37.160 --> 0:19:41.840 didn't get any worse. Caution, because well, we've seen this show. 0:19:41.880 --> 0:19:45.280 Before the top leaders meet, they agree to get along, 0:19:45.520 --> 0:19:48.280 but once you get into the detailed negotiations of who's 0:19:48.280 --> 0:19:52.000 going to give up what, talks start breaking down. Um. 0:19:52.160 --> 0:19:54.280 So I think that's the view in Beijing right now. 0:19:54.680 --> 0:19:59.640 Relief things aren't getting worse immediately, Caution, concern that we're 0:19:59.640 --> 0:20:01.840 not far from the next blow up. Do we have 0:20:01.880 --> 0:20:05.160 a sense of how much of the slowdown is due 0:20:05.200 --> 0:20:08.480 to the trade, the tariffs and the trade wars, and 0:20:08.520 --> 0:20:10.000 how much has to do with just the fact that 0:20:10.080 --> 0:20:13.040 China has been slowing down as it shifts from an 0:20:13.080 --> 0:20:17.280 industrial economy to more of a service oriented economy. Yeah. 0:20:17.320 --> 0:20:19.879 So you've got three things going on at the same Timely, so, 0:20:20.040 --> 0:20:23.680 you've got the trade war, which is hitting exports directly 0:20:23.760 --> 0:20:28.400 but maybe more important having a big negative impact on sentiments. Um. 0:20:28.520 --> 0:20:32.520 Then you've got the government's deliveraging agenda, that awareness that 0:20:32.560 --> 0:20:36.280 they've taken on too much debt um and that needs 0:20:36.359 --> 0:20:38.520 to be managed down if they're going to steer clear 0:20:38.560 --> 0:20:41.600 of financial stability risks. And then you've just got the 0:20:41.680 --> 0:20:45.960 kind of natural inertia, the natural drag that comes when 0:20:46.280 --> 0:20:49.960 you've got a shrinking working age population UM and an 0:20:49.960 --> 0:20:52.200 economy which is trying to shift to a new set 0:20:52.200 --> 0:20:55.280 of growth drivers. All of these things are happening at 0:20:55.320 --> 0:20:58.000 the same time, UM, and I think that's what's weighing 0:20:58.040 --> 0:21:01.919 on growth. And until we see some more stimulus coming in, 0:21:02.280 --> 0:21:04.720 our concern is that we could see some more weakness 0:21:05.320 --> 0:21:07.720 in the months ahead. So Tom, just real quickly, maybe 0:21:07.760 --> 0:21:10.640 next thirty seconds. It's just how committed do you think 0:21:10.680 --> 0:21:13.600 the Chinese government is to this de leveraging issue. As 0:21:13.600 --> 0:21:15.800 you mentioned, eight taken on tremendous amount of debt over 0:21:15.800 --> 0:21:18.720 the last decade or so. So I think the thing 0:21:18.760 --> 0:21:21.119 which China has on their side when it comes to 0:21:21.200 --> 0:21:25.240 deleveraging is time. Yes, they've taken on a lot of debt, 0:21:25.480 --> 0:21:28.719 but it's all domestic and that means they can manage 0:21:28.720 --> 0:21:32.040 it down over a period of years, maybe even a decade. 0:21:32.320 --> 0:21:34.160 They're not going to be forced into doing it over 0:21:34.200 --> 0:21:36.560 a period a few months. UM. And so what we've 0:21:36.560 --> 0:21:38.920 seen in two thousand and eighteen and two thousand and 0:21:39.000 --> 0:21:43.320 nineteen is well, you know what, the trade war supporting growth, 0:21:43.480 --> 0:21:47.119 that's the bigger priority now. Deleveraging, Yes, we need to 0:21:47.160 --> 0:21:49.000 do it. We're not going to do it right now. 0:21:49.760 --> 0:21:51.480 Tom more Like, thank you so much, as always for 0:21:51.520 --> 0:21:55.280 your insights. Tom or Like as chief economist for Bloomberg Economics, 0:21:55.320 --> 0:22:13.920 talking about those GDP data out of China overnight, oh, 0:22:14.000 --> 0:22:16.639 a staggering forty two million people face hunger in the 0:22:16.720 --> 0:22:20.639 United States, while at the same time, roughly the food 0:22:20.720 --> 0:22:24.119 produced in America goes to waste. Our next guest is 0:22:24.119 --> 0:22:27.680 trying to address a small part of this problem. Matt 0:22:27.800 --> 0:22:31.720 jos mac jils We, act founder and executive director of 0:22:31.840 --> 0:22:35.679 Rethink Food NYC that is based in Brooklyn, joins us 0:22:35.680 --> 0:22:38.080 here in our Bloomberg Interactive Broker Studio. Matt, thanks so 0:22:38.160 --> 0:22:40.680