WEBVTT - Sell Credit On A Dovish Rally: PGIM's Mike Collins 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penel podcast. I'm Paul Swinge. You. 0:00:05.360 --> 0:00:07.640 Along with my co host Lisa Brahma Wicks. 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 --> 0:00:23.280 at Bloomberg dot com. Well, it is Fed Wednesday on 0:00:23.400 --> 0:00:26.080 Wall Street. All eyes are on the Federal Reserve today? 0:00:26.200 --> 0:00:28.600 How many rate cuts will the Fed be carrying out 0:00:28.640 --> 0:00:30.880 this year? And how the markets react? We get some 0:00:30.920 --> 0:00:33.839 answers to those questions. We welcome our next guest, Michael Collins. 0:00:33.920 --> 0:00:37.080 Mike as a senior investment officer and senior portfolio manager 0:00:37.159 --> 0:00:40.120 for ke G. I AM fixed income based in Newark, 0:00:40.120 --> 0:00:43.000 New Jersey. Mike, thanks so much for joining us. What 0:00:43.040 --> 0:00:47.320 do you expect to hear from Chairman Pal today? Yeah, 0:00:47.360 --> 0:00:50.040 good morning Paul and Alex. Yeah, this is like our 0:00:50.080 --> 0:00:52.080 our super Bowl, right, This is about as exciting as 0:00:52.080 --> 0:00:55.279 it gets for for pond geefs, Like we haven't had 0:00:55.360 --> 0:00:59.200 this much uncertainty for a FED meeting in a long time. 0:00:59.280 --> 0:01:01.320 I mean the way we could. There are four different 0:01:01.320 --> 0:01:05.240 things the FED could do. One is really not come 0:01:05.240 --> 0:01:07.600 across as being a dovish, right kind of moving the 0:01:07.680 --> 0:01:10.640 dots down a little bit. Remember their last out plot 0:01:10.640 --> 0:01:13.680 in March showed a median expectation for a hike uh 0:01:13.720 --> 0:01:15.760 this year. So let's say they just lower that, so 0:01:15.800 --> 0:01:18.720 the medium expectation is for for no change this year. 0:01:19.520 --> 0:01:21.560 That would be viewed, I think as being rather rather 0:01:21.600 --> 0:01:24.240 hawkish by the market and probably resulting to sell off. 0:01:24.560 --> 0:01:27.000 The second probability is that they actually lower the dots, 0:01:27.360 --> 0:01:30.559 still don't cut, but show that they're probably gonna cut 0:01:30.600 --> 0:01:33.760 once or maybe even twice this year. I think that 0:01:33.760 --> 0:01:36.560 would probably be okay. Maybe the markets would do okay 0:01:36.560 --> 0:01:39.240 in that environment. The third is that they actually cut 0:01:40.160 --> 0:01:43.400 beats and signal that they might cut another time this year. 0:01:43.600 --> 0:01:45.959 And of course fourth is that they do the fifty 0:01:46.319 --> 0:01:48.280 right and and there are people out there who think 0:01:48.320 --> 0:01:50.720 that that's possible. I would put the probabilities that those 0:01:50.760 --> 0:01:56.480 four different scenarios at like thirty ten, right, So, um, 0:01:56.600 --> 0:01:59.480 it's really evenly distributed. So that's leading to all this 0:01:59.720 --> 0:02:02.400 on certainty and handwringing today. Yeah, I like to look 0:02:02.440 --> 0:02:04.080 at the e I a data I don't know you 0:02:04.240 --> 0:02:06.920 nerds look at but that's kind of my jam. Okay, 0:02:06.920 --> 0:02:11.680 but no, it's seriously so okay the dollar question, how 0:02:11.720 --> 0:02:15.280 are you positioned over the next three hours? Yeah, so 0:02:15.280 --> 0:02:19.239 so interestingly, right, if you look at FED funds futures, 0:02:19.240 --> 0:02:24.120 what's priced in through July, there's just about one cut 0:02:24.200 --> 0:02:26.919 priced in, and we think it's actually a pretty good 0:02:27.000 --> 0:02:30.720 chance that they do cut once or maybe even twice, 0:02:31.360 --> 0:02:33.760 meaning you know, if they don't do a fifty today, 0:02:33.800 --> 0:02:36.320 maybe they do it in July. Um. So actually, that's 0:02:36.320 --> 0:02:38.400 something that looks like a pretty attractive way to play 0:02:38.440 --> 0:02:41.120 this right now, betting that they do cut at least 0:02:41.160 --> 0:02:43.160 once by the end of July. And you can actually 0:02:43.160 --> 0:02:46.120 make money in that trade right now on the credit side, 0:02:46.120 --> 0:02:49.160 which is really important here, right because there's been such 0:02:49.200 --> 0:02:52.120 a big rally in credit spread in anticipation of a 0:02:52.200 --> 0:02:55.639 dosh FED in aish E c B. We're actually looking 0:02:55.720 --> 0:02:59.600 at today's news if they sound dobsh and markets rally, 0:02:59.720 --> 0:03:03.600 meaning spreads tighten and equities go up. I think you're 0:03:03.600 --> 0:03:06.239 supposed to take some profits on that trade, right, because 0:03:06.600 --> 0:03:09.840 ultimately it's going to be really tough for the FED, 0:03:09.919 --> 0:03:12.799 for the e c B for for Trump uh to 0:03:12.800 --> 0:03:17.720 to continue to provide positive surprises to the market. So, Mike, 0:03:17.760 --> 0:03:20.120 are you you one of those folks that are thinking 0:03:20.200 --> 0:03:23.800 about our discounting into your models a recession maybe sometime 0:03:23.840 --> 0:03:27.560 in mid you know, it feels like that probability has 0:03:27.600 --> 0:03:29.240 gone up a lot. I know, if you look at 0:03:29.280 --> 0:03:31.680 all the you know, normal indicators, and if you look 0:03:31.680 --> 0:03:35.360 at the typical speculative excesses that build up later in 0:03:35.360 --> 0:03:38.360 the cycle that typically lead to a recession, we actually 0:03:38.360 --> 0:03:40.080 haven't had a lot of them, right, I mean, the 0:03:40.120 --> 0:03:44.080 banking system is in the best financial condition of our lives, 0:03:44.560 --> 0:03:46.560 um so, so that's kind of something to hang your 0:03:46.560 --> 0:03:48.640 hat on. So we actually think the probability of recession 0:03:48.680 --> 0:03:52.360 is pretty moderate. That being said, we're really bad. Everybody's 0:03:52.400 --> 0:03:55.320 really bad. The FED is really bad at predicting recessions, right. 0:03:55.600 --> 0:03:59.279 They tend to become self fulfilling and kind of snowball 0:03:59.680 --> 0:04:02.920 into recession. So, you know, looking at the business confidence 0:04:03.000 --> 0:04:06.840 falling pretty hard, Looking at China, China data really falling 0:04:06.840 --> 0:04:09.440 off a cliff, and Europe arguably is kind of teetering 0:04:09.680 --> 0:04:12.720 on a recession. Now. It is not unlikely that in 0:04:12.760 --> 0:04:17.480 twelve or eighteen months, we have a pretty significant global slowdown, 0:04:17.480 --> 0:04:19.120 and maybe we're just starting to see that now. So 0:04:19.160 --> 0:04:23.160 you have to position your portfolios for that scenario. So 0:04:23.800 --> 0:04:28.280 is that scenario worth twelve trillion dollars in negative yielding 0:04:28.279 --> 0:04:32.480 debt around the world. Yeah, it is. I think it's 0:04:32.480 --> 0:04:34.520 gonna that twelve is going to keep getting bigger. Right, 0:04:34.560 --> 0:04:36.200 does that mean the recession we see is going to 0:04:36.279 --> 0:04:39.719 be terrible or does it? What does that mean? Well, um, 0:04:40.160 --> 0:04:43.240 I think there's the base cases that it's actually not 0:04:43.320 --> 0:04:45.600 a terrible recess and that it's just kind of more 0:04:45.640 --> 0:04:50.360 of the same, that global growth just continues to slow, right, 0:04:50.480 --> 0:04:53.800 driven by these big secular forces, driven by you know, 0:04:53.880 --> 0:04:58.279 confidence waning, maybe generally more trade friction, even if Trump 0:04:58.360 --> 0:05:01.799 and g you know, talk nice and next week in Japan, 0:05:02.560 --> 0:05:04.920 But notwithstanding it, I think we're in a world of 0:05:05.400 --> 0:05:09.919 more trade friction, more geopolitical friction, rather than less. You 0:05:09.920 --> 0:05:11.760 look what's happening in Turkey this morning. You look at 0:05:11.760 --> 0:05:13.840 what's happening, and I ran, So that's the state of 0:05:13.880 --> 0:05:17.120 the world probably indefinitely. Uh So, it's just I think 0:05:17.120 --> 0:05:21.800 it's just a slow slog towards slower growth. Um. Not 0:05:21.839 --> 0:05:25.080 necessarily a deep kind of V shaped recession. And in 0:05:25.160 --> 0:05:27.960 that world, you know, central banks continue to be really 0:05:28.000 --> 0:05:31.279 easy and rates just continue to stay low, and US 0:05:31.360 --> 0:05:33.800 rates obviously have the most scope to fall of all 0:05:33.839 --> 0:05:36.840 the big developed government bond markets. So Mike, I mean, 0:05:36.839 --> 0:05:38.960 you guys are predential are just massive. I mean, almost 0:05:39.040 --> 0:05:41.840 eight hundred billion in fixed income under management. How are 0:05:41.880 --> 0:05:45.680 you allocating you know that between you know, maybe some 0:05:45.720 --> 0:05:50.679 of the safer investment grade UH securities versus perhaps pushing 0:05:50.680 --> 0:05:52.080 the risk out a little bit and high yield in 0:05:52.160 --> 0:05:55.080 some other riskier aspects in the credit markets. Yeah, I 0:05:55.120 --> 0:05:57.720 mean we're we're generally positioned in a in a barbell 0:05:57.839 --> 0:06:01.400 type of UM credits ructure, and that is you know, 0:06:01.400 --> 0:06:02.919 I always say, you want to you want to do 0:06:02.960 --> 0:06:05.040 well in the base case, and the base case isn't 0:06:05.200 --> 0:06:07.279 isn't that horrible? But you don't want to, you know, 0:06:07.440 --> 0:06:09.919 really have a big draw down in in these tail risks, 0:06:09.920 --> 0:06:12.719 which would be the recession. So the barbell we have 0:06:12.839 --> 0:06:16.040 on is you know, there are opportunities in high yield 0:06:16.200 --> 0:06:19.800 or select opportunities in emerging markets. UM. You know, even 0:06:19.800 --> 0:06:24.080 in investment grade corporate European banks and US banks still 0:06:24.120 --> 0:06:26.320 look pretty cheap to us. So so you can add 0:06:26.360 --> 0:06:28.640 your yield and your coupon and your and your beta 0:06:29.040 --> 0:06:32.040 and your best ideas in those areas. Uh. And then 0:06:32.240 --> 0:06:34.240 the other half or so of a lot of our 0:06:34.240 --> 0:06:38.000 portfolios are in very high quality responds, and a lot 0:06:38.000 --> 0:06:40.800 of that are in actually in asset back securities or 0:06:41.000 --> 0:06:44.680 different structured products like you know, triple A rated commercial 0:06:44.720 --> 0:06:48.560 mortgage backed securities or collateralized loan obligations or asset backs, 0:06:48.839 --> 0:06:51.360 things that have such a low probability of losing principle 0:06:51.600 --> 0:06:54.720 and they still have a pretty decent yield or or spread. 0:06:54.880 --> 0:06:57.000 So to me that that's kind of the ballast in 0:06:57.040 --> 0:06:59.279 the portfolio if you do have a credit to this location. 0:06:59.800 --> 0:07:02.480 Like Collins, thanks so much for joining us. Mica Senior 0:07:02.520 --> 0:07:05.880 investment Officer and senior portfolio manager at p G. I 0:07:05.960 --> 0:07:10.000 AM fixed income based in Newark, New Jersey. And it's interesting, uh, 0:07:10.280 --> 0:07:12.040 you know still, you know, I think still a lot 0:07:12.120 --> 0:07:15.200 of institutional investors, a lot of professional investors are still 0:07:15.200 --> 0:07:17.920 willing to put some risk on into their portfolio despite 0:07:17.920 --> 0:07:19.040 the fact where we are in the you know, the 0:07:19.040 --> 0:07:22.880 economic cycle, and where we are with potential economic slowdown, 0:07:22.920 --> 0:07:26.120 and and it's just this lower rate environment. Yeah. What's 0:07:26.120 --> 0:07:28.880 also really puzzling to me, and I feel like this 0:07:28.960 --> 0:07:31.240 is gonna be the conversation after the FED too, is 0:07:31.280 --> 0:07:34.160 the interest rate differentials in particular, let's just call it 0:07:34.280 --> 0:07:36.640 US and Europe for example, like Germany, And then how 0:07:36.640 --> 0:07:40.200 it's not actually being reflected in the apex market, and 0:07:40.200 --> 0:07:43.120 how you're seeing just like weird trading happenings like what's 0:07:43.200 --> 0:07:46.480 leading what I think is also a little bit confusing. 0:07:46.520 --> 0:07:48.880 And do the carry trades then in that environment still work? 0:07:48.920 --> 0:07:52.080 I don't know, yeah exactly. And we saw Mario drag 0:07:52.200 --> 0:07:54.400 I guess earlier this week, you know, talking about they 0:07:54.400 --> 0:07:56.560 will they have lots of tools and their toolbox to 0:07:57.040 --> 0:07:59.040 try to jump start the European economy. But you look 0:07:59.040 --> 0:08:01.880 at the you know, negative yielding rates in in Germany. 0:08:01.920 --> 0:08:03.240 You mentioned that, you know, the twelve and a half 0:08:03.240 --> 0:08:06.040 billion dollars of negative yielding debt. It's just extraordinary and 0:08:06.040 --> 0:08:08.720 at some point, uh, you know, it has to reverse, 0:08:08.880 --> 0:08:11.720 one would think, one would think, But we didn't hear 0:08:11.760 --> 0:08:15.880 that Fromario Draga earlier. Normal man, slow rates forever, not 0:08:16.080 --> 0:08:18.600 for longer, but forever forever, I guess. And so we'll 0:08:18.600 --> 0:08:22.120 see what the FED does later today again, uh that 0:08:22.200 --> 0:08:25.360 coming up around to thirty with Chairman Powe with some 0:08:25.400 --> 0:08:28.320 of his commentary that will be covering that of course 0:08:28.320 --> 0:08:45.920 at Bloomberg Radio. Facebook yesterday jumped into the cryptocurrency game 0:08:45.960 --> 0:08:48.560 in a pretty big way. They announced the launch of 0:08:48.559 --> 0:08:50.960 what they're calling Libra, which will launch as soon as 0:08:51.200 --> 0:08:53.560 next year and be what's known as a wait for it, 0:08:53.920 --> 0:08:57.280 stable coin, which is a digital currency that's supported by 0:08:57.520 --> 0:09:01.120 established government backed currencies and purities. To get the latest, 0:09:01.520 --> 0:09:05.720 we welcome our good friend Leonard Laurent, calumnists covering Brussels 0:09:05.800 --> 0:09:09.360 for Bloomberg Opinion. He is based in London today, Leonard, 0:09:09.480 --> 0:09:12.800 thanks so much for joining us. What's the what's new 0:09:12.920 --> 0:09:16.400 about lie bro? There's other cryptocurrencies in the marketplace. What 0:09:16.520 --> 0:09:19.760 is Facebook bring to the table? In your opinion? So, 0:09:19.840 --> 0:09:24.040 I think that this is the first time that a 0:09:24.040 --> 0:09:27.960 company of Facebook sides that's almost three billion users they have, 0:09:28.600 --> 0:09:33.000 has essentially come out with the cryptocurrency or endorse the 0:09:33.040 --> 0:09:35.560 space in the way that it has. So that's that's new. 0:09:35.920 --> 0:09:38.080 The second thing that's new is that they clearly do 0:09:38.120 --> 0:09:41.400 not want to be associated with bitcoin and the kind 0:09:41.400 --> 0:09:45.080 of crotocurrencies that have no intrinsic value, nothing to stop 0:09:45.120 --> 0:09:47.840 them being worth nine thousand dollars or a hundred dollars 0:09:47.920 --> 0:09:51.000 or fifteen thousand dollars, depending on which which day of 0:09:51.040 --> 0:09:53.199 the year it is. These this currency is gonna be 0:09:53.240 --> 0:09:56.360 backed by hard assets, so in theory it should never 0:09:56.360 --> 0:10:01.360 be worth more than the reserve currencies backing it. And finally, 0:10:01.760 --> 0:10:04.080 I just think we should realize that this is the 0:10:04.200 --> 0:10:07.240 culmination of many years of experimentation from Facebook and trying 0:10:07.240 --> 0:10:10.319 to expand in payments. It has had several stabs at 0:10:10.320 --> 0:10:13.000 getting a payments business going. This to me is part 0:10:13.080 --> 0:10:17.040 of that. It's not just about crypto, so it's definitely new. 0:10:17.440 --> 0:10:21.120 Whether it's succestful, whether it's really some bold new vision 0:10:21.200 --> 0:10:23.880 or a kind of incremental step in terms of Facebook's 0:10:23.880 --> 0:10:26.199 business that I think is the is the remaining question 0:10:26.480 --> 0:10:29.319 to me. You said the two magic words in theory, 0:10:29.880 --> 0:10:33.000 So on a technical basis, I'm kind of wondering how 0:10:33.120 --> 0:10:35.559 they wind up having Libra stay consistent if it's made 0:10:35.600 --> 0:10:37.400 up of a bunch of currencies that wind up moving 0:10:37.440 --> 0:10:41.440 a lot. Well, I think they basically want to be 0:10:41.559 --> 0:10:45.520 their own central bank in a way. We have examples 0:10:45.559 --> 0:10:48.720 of currencies that are managed in this way that are 0:10:48.800 --> 0:10:52.120 pegged to currencies. Now we all know the dollar currency peg. 0:10:52.160 --> 0:10:53.720 This is not going to be a dollar currency peg. 0:10:53.760 --> 0:10:56.280 This is going to be a mix of currencies. There's 0:10:56.320 --> 0:10:57.920 a lot we don't know about what goes in there. 0:10:58.000 --> 0:10:59.560 There's a lot we don't know about how it's gonna 0:10:59.520 --> 0:11:02.360 be managed. At the point being is that their their 0:11:02.400 --> 0:11:05.000 claim would always be that they have a one to 0:11:05.120 --> 0:11:11.200 one assets backing every piece of liber So again in theory, 0:11:11.240 --> 0:11:13.760 because markets can do funny things if you believe what 0:11:13.800 --> 0:11:16.960 they say, it should never fluctuate wildly in the way 0:11:17.000 --> 0:11:20.480 that nonpaid currencies do so le you know they when 0:11:20.480 --> 0:11:22.320 it made this annound me yesterday, I guess they announced 0:11:22.440 --> 0:11:24.920 they have twenties seven or so partners some of the 0:11:24.920 --> 0:11:30.240 big credit card companies Visa, master Card, even PayPal. What 0:11:30.320 --> 0:11:32.480 did you make of the list of companies that are 0:11:32.520 --> 0:11:34.680 partnering with him? Was it the names you wanted to see? 0:11:34.800 --> 0:11:36.480 Was it as many names as you wanted to see? 0:11:36.480 --> 0:11:38.240 Do they have more work to do? How do you 0:11:38.320 --> 0:11:41.920 view that? Yeah? It was? I mean, look that there 0:11:42.040 --> 0:11:45.920 is It depends on what what the ambitions are. Um, 0:11:46.600 --> 0:11:49.560 it's pretty obvious that none of Facebook's big competitors were 0:11:49.559 --> 0:11:52.840 on the list. There was no Amazon, there was no Apple, 0:11:53.440 --> 0:11:55.280 There were no banks on the list. Again, you might 0:11:55.440 --> 0:11:59.400 question whether Facebook again that's that's the right competition of Facebook. 0:11:59.440 --> 0:12:03.000 So there were no banks. There were a few services 0:12:03.040 --> 0:12:05.880 companies like Spotify, like Uber, so you can you can 0:12:05.920 --> 0:12:09.480 sort of try and piece together how in future this 0:12:09.559 --> 0:12:11.640 crepital currency might be used, because this is the big 0:12:11.720 --> 0:12:16.000 question with any kind of form of electronic money, what 0:12:16.200 --> 0:12:17.720 is the use case? If you're just going to fill 0:12:17.840 --> 0:12:20.959 an electronic wallet with with some money, do you have 0:12:21.000 --> 0:12:22.760 stuff that you can do with it? I mean, we 0:12:22.800 --> 0:12:25.080 have PayPal already, so I think that they have a 0:12:25.120 --> 0:12:29.520 sort of predictable but pretty small list of partners. It 0:12:29.679 --> 0:12:32.079 is Facebook, after all. I'm not sure that many companies 0:12:32.160 --> 0:12:35.520 wants to kind of be in its orbits today. But 0:12:35.640 --> 0:12:39.080 I'm guessing or assuming their theory is that if it 0:12:39.120 --> 0:12:41.719 gains traction, more people will come. If you build it, 0:12:41.760 --> 0:12:45.680 they will come. I have no certainty that's true, though, Paul. 0:12:45.720 --> 0:12:47.240 Do you also know who comes if you built something 0:12:47.240 --> 0:12:53.679 new and cool? When it comes to currencies, regulators they're like, hey, 0:12:53.840 --> 0:12:55.880 I mean what I what I found really interesting is 0:12:55.920 --> 0:12:58.400 that yesterday it felt like Congressman kind of came out 0:12:58.440 --> 0:13:03.319 in full force, being like unprecedented power, unprecedented experience, and 0:13:03.360 --> 0:13:06.040 then today you hear from shell Sandberg it can being like, yeah, yeah, 0:13:06.080 --> 0:13:08.640 we're talking to regulator. Is it the process? Do you 0:13:08.679 --> 0:13:15.079 kind of buy that? I buy that Facebook is totally 0:13:15.200 --> 0:13:18.440 conscious of the scrutiny that it's under. And you know, 0:13:18.520 --> 0:13:22.800 companies do funny things when they are under huge regulatory scrutiny, 0:13:23.040 --> 0:13:28.120 when they're under potential antitrust investigation. This seems totally reckless 0:13:28.440 --> 0:13:30.160 at first glance, but on the other hand, you could 0:13:30.160 --> 0:13:32.360 easily see why a company that makes something like nineties 0:13:32.400 --> 0:13:36.480 six of its money from advertising and is looking exceptionally 0:13:36.960 --> 0:13:39.520 powerful and concentrated, you can see why they might go, well, 0:13:39.600 --> 0:13:43.360 let's diversify, let's find other revenue streams. And as for 0:13:43.400 --> 0:13:46.160 the As for the regulation part, I haven't seen anyone 0:13:46.960 --> 0:13:50.760 say outrights that they would, you know, ban Libra or 0:13:50.960 --> 0:13:53.800 stop it or properly clamped down on it, because it 0:13:53.880 --> 0:13:56.400 is actually quite easy. If you wanted to stop Libra, 0:13:56.480 --> 0:13:58.960 you could just ban crypto currencies. You can you can 0:13:59.040 --> 0:14:00.360 do things. So I think that they are going to 0:14:00.440 --> 0:14:03.320 do everything in their power too, quite rightly, ask a 0:14:03.360 --> 0:14:05.760 more transparency. Let us get in there, let us access 0:14:05.800 --> 0:14:08.680 the data, let us localize the data. Remember, this is 0:14:08.920 --> 0:14:11.240 going to be across many, many countries, and it's going 0:14:11.280 --> 0:14:13.880 to be an ongoing kind of fight and ongoing friction 0:14:13.880 --> 0:14:17.320 over the next year. Leonard Laurent Calmas, covering Brussels for 0:14:17.400 --> 0:14:19.800 Bloomberg Opinion, joining us on the phone from London. Thank 0:14:19.840 --> 0:14:40.520 you so much, leone. Well, over the past several weeks, 0:14:40.520 --> 0:14:44.120 we've had an inverted yield per from on several occasions, 0:14:44.160 --> 0:14:47.359 and that typically for many investors, suggests that a recession 0:14:47.800 --> 0:14:51.440 maybe coming. Our next guest says, maybe not so fast. 0:14:52.280 --> 0:14:56.240 Our next guest, James Skank, president and CEO of Pentagon 0:14:56.680 --> 0:14:59.440 Federal based on Alexander, Virginia, joins us. James, thanks so 0:14:59.520 --> 0:15:02.800 much for joining us again. You wrote this article op 0:15:03.000 --> 0:15:05.960 ed opinion for the USA Today where you suggest that 0:15:06.200 --> 0:15:09.680 maybe investors shouldn't be too concerned about a recession following 0:15:09.960 --> 0:15:14.040 an inverted your curve. Oh, I think you got exactly right. Um, again, 0:15:14.040 --> 0:15:16.120 we're just one data point, but we serve about one 0:15:16.160 --> 0:15:19.240 point eight million Americans, and so on any given day 0:15:19.280 --> 0:15:22.480 we're getting a really good um consumer data. That's demand 0:15:22.480 --> 0:15:26.600 for autos, mortgages, credit cards, and refinance student loans. And 0:15:26.640 --> 0:15:31.000 basically what we're seeing consumers spending is remaining extremely small strong. 0:15:31.080 --> 0:15:33.200 We had a really strong May, came out of a 0:15:33.240 --> 0:15:37.640 strong April. Wage rates are rising and that's having more 0:15:37.680 --> 0:15:41.520 disposable income into the consumers pockets. Lots of people are working, 0:15:41.680 --> 0:15:45.280 Unemployment claims are very low, and there's low inflation. So 0:15:45.400 --> 0:15:48.200 you know, I think the most recent revision of the 0:15:48.400 --> 0:15:51.400 Bureau of Economic Analysis, in the first quarter, the economy 0:15:51.400 --> 0:15:53.360 grew three point one per cent. So we're not buying 0:15:53.360 --> 0:15:56.800 into naysayers. We're seeing incredibly strong demand for our products 0:15:56.800 --> 0:16:00.400 and services. So the obviously the issue with the curve 0:16:00.520 --> 0:16:02.960 is at some point banks don't want to lend any 0:16:02.960 --> 0:16:04.760 money because they're not going to make any money off 0:16:04.760 --> 0:16:06.600 of it. That's the whole point, right, You're gonna borrow 0:16:06.640 --> 0:16:09.440 short and then lend Longum. Have you noticed any of 0:16:09.440 --> 0:16:13.520 that in your business anecdotally, And that's the one difference 0:16:13.520 --> 0:16:15.520 Alex with the with the credit union, so we can 0:16:15.560 --> 0:16:18.120 really play the long game. Unfortunately, for a lot of 0:16:18.120 --> 0:16:20.960 the banks, if the FED does drop rates are flat 0:16:21.000 --> 0:16:25.080 yield curve, they're they're really constrained by the quarterly earning reports. 0:16:25.120 --> 0:16:27.720 They got to grow their earnings and continue to grow 0:16:27.880 --> 0:16:30.880 quarter to quarter without missing a beat, otherwise they get 0:16:30.920 --> 0:16:33.440 slaughtered into public markets. As a credit union is about 0:16:33.440 --> 0:16:36.120 five thousand, four hundred credit unis in America can really 0:16:36.160 --> 0:16:38.120 play the long game because we're not We're owned by 0:16:38.120 --> 0:16:41.080 our members, unlike being owned by a shareholder, So we 0:16:41.120 --> 0:16:43.680 can continue to lend through the cycle, and we can 0:16:43.680 --> 0:16:47.080 continue to give competitive rates. Uh. What I wrote at 0:16:47.080 --> 0:16:48.480 my article, what you see a lot of times what 0:16:48.520 --> 0:16:50.720 banks are gonna do is they're going to really tighten 0:16:50.800 --> 0:16:53.360 credit because they have to be concerned because they lend 0:16:53.360 --> 0:16:55.680 a lot deeper throughout the year that we do go 0:16:55.720 --> 0:16:58.720 into a recession, their delinquency is going to go up significantly, 0:16:58.720 --> 0:17:01.360 which really impacts their earning. So they start tightening. Then 0:17:01.400 --> 0:17:04.639 they have to put their expenses across a much shorter 0:17:04.760 --> 0:17:07.239 number of new consumers, and so they start driving up 0:17:07.320 --> 0:17:09.320 rates and higher feed You don't have that in the 0:17:09.320 --> 0:17:11.080 credit union business, and we're very proud of that that 0:17:11.119 --> 0:17:12.760 we can really do what's right for the consumer for 0:17:12.760 --> 0:17:16.679 the long haul. So, James, what I didn't really know about, uh, 0:17:16.720 --> 0:17:18.879 Pentagon Federal is how big you guys are You the 0:17:18.960 --> 0:17:22.080 second largest credit union in the US with over assets, 0:17:22.119 --> 0:17:24.640 So you obviously, as you mentioned earlier, have your finger 0:17:24.680 --> 0:17:26.640 on the pulse of kind of the consumer. Let's talk 0:17:26.640 --> 0:17:29.280 about credit quality right now. We're, you know, ten plus 0:17:29.359 --> 0:17:33.240 years into this economic cycle. UH, there's some concerns among 0:17:33.640 --> 0:17:36.080 some creditors that credit quality may become an issue. What 0:17:36.119 --> 0:17:39.840 do you seeing. We're seeing still strong. We're not seeing 0:17:39.840 --> 0:17:42.119 a huge uptick in credit quality right now, and we 0:17:42.160 --> 0:17:44.600 think it was a combination of the tax cuts last 0:17:44.680 --> 0:17:48.080 year put additional income in the Americans pockets and also 0:17:48.119 --> 0:17:51.280 with the rising UH rates. As far as salaries, after 0:17:51.440 --> 0:17:54.520 a ten year expansionary cycle, it really has only been 0:17:54.520 --> 0:17:57.480 in the last twelve to eighteen months that we're starting 0:17:57.520 --> 0:17:59.399 to see sort of real wage growth, with you know, 0:17:59.480 --> 0:18:02.200 unemployed up blow four percent, you're starting to see more 0:18:02.280 --> 0:18:05.320 income being paid to the consumer. And across the banks too, 0:18:05.320 --> 0:18:07.520 with their tax cuts, they've been able to pay for 0:18:07.640 --> 0:18:10.480 talent and UH take really good care of the customers. 0:18:10.480 --> 0:18:12.840 So we're not seeing the credit concerns right now at 0:18:12.840 --> 0:18:14.919 this time. You always have to be concerned with it. 0:18:15.160 --> 0:18:16.879 But if you continue to sort of you play for 0:18:16.920 --> 0:18:19.840 the long haul, make good credit decisions, UH, and don't 0:18:19.840 --> 0:18:22.080 stretch too deep. You can you can weather any cycle. 0:18:22.400 --> 0:18:27.000 So typically, where do you see the cracks first? Where 0:18:27.000 --> 0:18:28.600 do you see the cracks first? You'll see it in 0:18:28.800 --> 0:18:31.720 UM some someone of the auto lending when you start 0:18:31.760 --> 0:18:34.920 seeing eighty four months and even longer financing periods as 0:18:35.119 --> 0:18:39.000 auto raids continue to rise. You'll see it in credit 0:18:39.040 --> 0:18:43.600 card receivables, the delinquency on credit card portfolios. So those 0:18:43.600 --> 0:18:45.760 were you were the first to. You know, usually mortgages 0:18:45.920 --> 0:18:48.840 UM the consumer holds onto the mortgage the longest. But 0:18:48.920 --> 0:18:51.119 so we always look at a credit card delinquency and 0:18:51.160 --> 0:18:53.359 auto delinquency to start looking for any sort of cracks 0:18:53.359 --> 0:18:56.320 and credit quality. James Kank, thank you so much. James 0:18:56.400 --> 0:19:00.119 as president and CEO of Pentagon Federal Credit Union Alexander 0:19:00.200 --> 0:19:18.880 of Virginia dollars under management well more than a year ago, 0:19:19.040 --> 0:19:21.639 actually seems longer than that. T Mobile and Sprint announced 0:19:21.800 --> 0:19:24.520 their merger. The deal would combine the number three and 0:19:24.600 --> 0:19:28.080 number four wireless carriers in the United States, and no 0:19:28.160 --> 0:19:30.919 surprise of regulators have been studying this deal very closely 0:19:30.960 --> 0:19:33.720 to get the latest on where we stand with this saga, 0:19:34.000 --> 0:19:36.280 we turned to our good friend Tara la Chapelle. She 0:19:36.359 --> 0:19:39.720 covers deals, telecom and media for Bloomberg Opinion. She joins 0:19:39.800 --> 0:19:42.280 us in our Bloomberg and Actor broker studio. Tara, thanks 0:19:42.320 --> 0:19:44.480 so much for joining us. Boy. This seems to be 0:19:44.560 --> 0:19:47.640 the never ending deal, the deal that just can't get closed. 0:19:47.760 --> 0:19:50.600 What's the latest on this deal now? So, the latest 0:19:50.640 --> 0:19:53.040 in this saga is that it looks like T Mobile 0:19:53.040 --> 0:19:56.440 and Sprint may actually be inching closer to winning approval 0:19:56.520 --> 0:19:59.719 from the US Justice Department for this deal. They already 0:19:59.760 --> 0:20:02.480 see to have gotten a nod from the Federal Communications Commission, 0:20:02.880 --> 0:20:07.119 So the Justice Department wants them to help sort of 0:20:07.200 --> 0:20:10.600 lay the groundwork for the formation of a viable fourth 0:20:10.640 --> 0:20:13.120 competitor that would sort of replace or fill the whole 0:20:13.160 --> 0:20:15.119 that Sprint is going to leave behind when they buy Sprint, 0:20:15.480 --> 0:20:17.520 which seems like it was sort of negate the whole 0:20:17.560 --> 0:20:20.520 reason for doing this merger. But it sounds like, according 0:20:20.560 --> 0:20:24.240 to my Bloomberg News colleagues, they're hearing from sources that 0:20:24.720 --> 0:20:28.359 Dish Network, they satellite TV provider run by Charlie organ 0:20:28.960 --> 0:20:31.480 is in talks to buy about six billion dollars worth 0:20:31.520 --> 0:20:34.600 of assets from these companies, including Spectrum and the boost 0:20:34.600 --> 0:20:37.480 Mobile prepaid brand, in order to help smooth this along 0:20:37.560 --> 0:20:39.959 and appease the Justice Department, And I guess they're hoping 0:20:40.359 --> 0:20:43.200 that this will be enough to get the deal through. Um, 0:20:43.200 --> 0:20:45.760 the spectrum is the jam, like, that's what everyone wants. 0:20:45.760 --> 0:20:48.280 It's the good stuff, right, So is it a good 0:20:48.320 --> 0:20:50.040 thing that T Mobile wants to sell it or not? 0:20:50.160 --> 0:20:53.160 And isn't it good if Dish buys it? So one 0:20:53.160 --> 0:20:55.440 of the reasons for T Mobile doing this deal is 0:20:55.480 --> 0:20:58.040 that Sprint has a lot of midband spectrum that would 0:20:58.040 --> 0:21:00.280 be really helpful for T Mobile and building out of 0:21:00.320 --> 0:21:03.640 five G next generation wireless network, which is something all 0:21:03.680 --> 0:21:06.320 these carriers are focused on now. Um, so that will 0:21:06.400 --> 0:21:08.840 really help them. And where I think it's puzzling is 0:21:09.160 --> 0:21:11.240 T Mobile is the one that needs the spectrum Dish 0:21:11.280 --> 0:21:14.760