Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
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Speaker 1: a time when the stock market seems to be making
Speaker 1: new highs every day, eking out a little bit more
Speaker 1: in terms of gains without going crazy, a lot of
Speaker 1: investors are seeing stocks is a good place to be
Speaker 1: over the next three years. Among those Hugh Johnson, Chairman
Speaker 1: and Chief investment Officer at Hugh Johnson Advisers, which overseas
Speaker 1: more than a billion dollars and is based in Albany,
Speaker 1: New York. Hugh, thank you so much for joining us.
Speaker 1: First of all, I just want to get your main
Speaker 1: points that you laid out when you came up with
Speaker 1: forecasts for this year, next year, and the year after.
Speaker 1: The main thing is is earnings. You know, I think
Speaker 1: everybody that talks to me has the same question, and
Speaker 1: that is, how can you make the case for stocks
Speaker 1: having done what they've done, and even going even higher
Speaker 1: given all the problems in Washington, some of the international
Speaker 1: geopolitical concerns, concerns about getting healthcare through concerns about the
Speaker 1: tax tax cut, the Trump tax cut. How can you
Speaker 1: make the case for higher pricedents. Well, the answer to
Speaker 1: that question is this is all about earnings, and in
Speaker 1: a cold hearted way, we're looking at very positive growth
Speaker 1: and earnings both for two thousand and eighteen and two
Speaker 1: thousand and nineteen. And if you crunch the numbers, taking
Speaker 1: any consideration the earnings that I think lie ahead, you
Speaker 1: can make the case for higher stock prices four and
Speaker 1: a half percent between now in the end of two
Speaker 1: thousand and eighteen, and maybe as much as eleven percent
Speaker 1: ten point eight percent between now and the end of
Speaker 1: two thousand nineteen. So higher stock prices, and that might
Speaker 1: even be helped a little bit if we get a
Speaker 1: Trump tax cut, a lot, but some. So it's really
Speaker 1: all about earnings. You. I wonder if we could take
Speaker 1: a look from the investor perspective, because let's say you're
Speaker 1: already long stocks, or you have a portfolio that that
Speaker 1: favorite stocks. If you were to get out, if you
Speaker 1: were to sell, chances are you might have a gain,
Speaker 1: you'd have to pay the tax on it, and then
Speaker 1: you'd be faced with the question, what do you do
Speaker 1: with the cash? Correct, You certainly would be faced to that,
Speaker 1: and it would be not an easy not an easy challenge,
Speaker 1: to be honest with you. I mean, you know that
Speaker 1: interest rates are very low. You know that if you
Speaker 1: take that cash and you invested in the bond market
Speaker 1: at a time when the fellow reserve is uh interesting,
Speaker 1: increasing interest rates not only one more time perhaps in
Speaker 1: two seventeen, but three times in two thousand eighteen, you're
Speaker 1: likely to suffer a loss on that fixte income portfolio.
Speaker 1: So it's it's really a challenge, I mean a big challenge.
Speaker 1: I think the returns from the fixed income markets for
Speaker 1: two thousand eighteen two thousand nineteen are going to be
Speaker 1: close to zero. You'll get some money from the coupon,
Speaker 1: you'll lose money on the principle of the fixed income.
Speaker 1: So it is a challenge for sure. You know, I'm
Speaker 1: struck by the fact that your forecasts for next year
Speaker 1: in the year after don't include any sort of downturn.
Speaker 1: You see wages increasing, albeit not a lot, but steadily, uh,
Speaker 1: and you see just a general kind of continuation of
Speaker 1: what we've been seeing over the past year. I'm wondering
Speaker 1: what could make you change your mind, and why are
Speaker 1: you so confident that we won't see some sort of
Speaker 1: economic downturn where you're you never you never releast, you
Speaker 1: never that confident. I say these things, I forecast these things,
Speaker 1: you know, quite frankly, with my fingers tightly crossed. And
Speaker 1: you know, I assume you know we're at a low
Speaker 1: level of interest rates. Yes, the Federals there's gonna be
Speaker 1: raising interest rates. Yes, interest rates are going to be
Speaker 1: going higher. But I don't think we're at a level
Speaker 1: right now that really threatens the economic expansion. So making
Speaker 1: the forecast that the economy is going to continue to
Speaker 1: span through two eighteen nineteen is a little bit easier.
Speaker 1: The second thing is, I don't expect that we're going
Speaker 1: to have a move towards uh fiscal restraint. If anything,
Speaker 1: we're gonna have a move towards an easier fiscal policy,
Speaker 1: more generous fiscal policy in the form of tax cuts
Speaker 1: and spending increases. So it'd be really from the policy
Speaker 1: point of view, you'd say, gee, it's just it's just
Speaker 1: too early to say this, this thing is going to end. Uh,
Speaker 1: it looks like it's going to go further. But but
Speaker 1: talk to me at the end of well, at the
Speaker 1: middle of two thousand nineteen, when we have interest rate
Speaker 1: higher and we start to get much more nervous about
Speaker 1: federal budget deficits, and I think those are in the
Speaker 1: cars when we start to get that nervous, and then
Speaker 1: we're gonna move a shift in the in the different direction,
Speaker 1: and then you're gonna start to see it show up
Speaker 1: in the markets, and things are going to get a
Speaker 1: lot more a lot more dicey, and prospects for a
Speaker 1: turn down in the stock market and the economy will
Speaker 1: start to get certainly higher, if not real high. Alright,
Speaker 1: so he let's say your forecast is accurate, and things
Speaker 1: will kind of grind a law a little bit higher
Speaker 1: all the time over the next two and a half years.
Speaker 1: I'm wondering what's the best way for investors to allocate
Speaker 1: to markets. Is it by you know, passive funds that
Speaker 1: look to broad state look to capture gains and broad
Speaker 1: swaths of UH specific stock markets. Is it active managers?
Speaker 1: What are you advising clients? What's your approach that is
Speaker 1: a really great question, because you and I both know
Speaker 1: that that the passive investing has worked a lot better
Speaker 1: than active investing up until really this year, and this
Speaker 1: year we're starting to see a little bit of a
Speaker 1: shift and active managers have been doing a lot better.
Speaker 1: Whether you lose exchange traded funds for passive investing or
Speaker 1: you start to look at active managers, I'm not sure
Speaker 1: how what the outcome is going to be. The Only
Speaker 1: thing I can say with a lot of confidences, especially
Speaker 1: given my forecast, is that you need to have a
Speaker 1: meaningful allocation, whether it's passive or active, meaningful allocation to equities,
Speaker 1: in other words, don't go in the bunkers right now.
Speaker 1: For example, if your target of fifty equities and you've
Speaker 1: got a range of say thirty to sixt of toleration range,
Speaker 1: you might be up and around and I wouldn't change
Speaker 1: that whether it's active or passive. But your question, should
Speaker 1: it be active, should it be passive? Great question. We're
Speaker 1: all grappling with that question, and we're starting to see
Speaker 1: active managers outperform indexes or passive management. You have you
Speaker 1: ever had a customer or a client who pulled their
Speaker 1: account because the performance was let's say, two hundred basis
Speaker 1: points less than some benchmark. Does that really happen on
Speaker 1: a regular basis, Well, we've been lucky, we've been fortunate.
Speaker 1: We don't take of the levels of risk that they're
Speaker 1: going to give us that two hundred basis points below benchmark.
Speaker 1: If we did, I wouldn't be at all surprised if
Speaker 1: if investors did pull their poll stakes and and go
Speaker 1: to another another manager, because that's not what we promised them.
Speaker 1: We've promised them that we're going to be a roughly
Speaker 1: fifty basis points below fifty basis points above. We've had
Speaker 1: really good luck or fortune because we picked some really
Speaker 1: good stocks in the last couple of years, so we've
Speaker 1: been well above benchmark. I don't think we're for any
Speaker 1: long extended period of time, we'll be honestly going to
Speaker 1: depart very significantly from benchmark, and that means no downside
Speaker 1: and therefore no loss of customers on Our customers are
Speaker 1: quite frankly like us, are kind of risk averse. They
Speaker 1: really want you to do okay in an up market,
Speaker 1: but what they want more than anything is is really
Speaker 1: to preserve capital in the down market, because that's the
Speaker 1: secret long term performance. You real quick, how are you
Speaker 1: creating that insurance building it into the portfolio. You do
Speaker 1: it in a lot of different ways. There's a meaningful,
Speaker 1: you know, balanced portfolio. The second thing is you reduced
Speaker 1: risk by having high quality names in the portfolio. But
Speaker 1: much more importantly is to have a relative balance among
Speaker 1: things in the portfolio, so you don't make a significant
Speaker 1: bet when it comes to sector allocation. Sector allocation, you
Speaker 1: can certainly be overweight technology, maybe a little bit underweight analogy,
Speaker 1: but you have to have us. You have to have
Speaker 1: allocation to all my view, all eleven sectors in the market.
Speaker 1: You can't can significantly overweight small cap stucks. Have a
Speaker 1: meaningful allocation to large, mid, and small, but not so
Speaker 1: significantly different from the benchmark. In other words, don't take
Speaker 1: a lot of sector or capitalization risk. That's just simply
Speaker 1: a mistake, Thank you very much. Hugh Johnson, Chairman, chief
Speaker 1: investment Officer, Hugh Johnson Advisors. Well, let's say get more
Speaker 1: information about a group of companies that will be reporting
Speaker 1: their results. We're gonna get Eli, Lily and Biogen they'll
Speaker 1: come out with their results tomorrow. Plus we've got am
Speaker 1: Jen and Gilliad Sciences. This week, Bristol Myers, Squib, Murky, LII,
Speaker 1: Lily and for that we've got Sam Fizzelli. He's the
Speaker 1: director of research for Bloomberg Intelligence in London. Knows weything
Speaker 1: about these companies. Sam, thank you very much for spending
Speaker 1: time with us. Where do you want Where do you
Speaker 1: want to begin? What's the most important results or what
Speaker 1: should we be looking for this week? Because we've got
Speaker 1: a variety of companies, right, I'm going to begin with
Speaker 1: just talking about the large farmer companies because that's where
Speaker 1: I spend most of my time looking at things I
Speaker 1: want to do. Glaxo Smith Klein, we can, but you
Speaker 1: have to admit that I think the star of the
Speaker 1: show this week and frankly for the third quarter will
Speaker 1: be Eli Lily. Okay, so that's tomorrow. That's tomorrow. They've
Speaker 1: got some decent sales growth expected about six percent. But
Speaker 1: really what's going on in Lily is not only you're
Speaker 1: getting new drugs and some existing key drugs such as
Speaker 1: Trilicity and Jardians driving the top line and they're both
Speaker 1: for diabetes and we know what a big problem that is,
Speaker 1: but it's really the margin story and Lily that's quite
Speaker 1: attractive and exciting and in that the company is working
Speaker 1: has got a long way to come and meet and
Speaker 1: beginning where near some of the others others peers obviously
Speaker 1: other other peers, therefore giving it an opportunity to give
Speaker 1: us almost three times its sales growth in EPs growth
Speaker 1: expectations for this quarter. So that that's really what's driving
Speaker 1: the excitement on that one. Can you give us a
Speaker 1: sense of what's driving that? Is that that they can
Speaker 1: price their drugs at a higher spot is because they're
Speaker 1: cutting staff. I mean, where are the where are the
Speaker 1: margins coming from? Well, I mean again, Lily has been
Speaker 1: one of those companies that, putting beer aside, has been
Speaker 1: at the low end of operating margins among all of
Speaker 1: its what we call the thirteen large farmer peers if
Speaker 1: you still want to call beer a large beyer a
Speaker 1: large farmer company. So there's a lot of room for
Speaker 1: for the performance there, and a lot of it that
Speaker 1: comes from basically a lot um operational leverage that they're
Speaker 1: getting and also more consolidating its sales and and and
Speaker 1: different aspects of their business, which the new CEO is
Speaker 1: particularly focused on in terms of delivering, although it has
Speaker 1: been a target for the past couple of years at
Speaker 1: least to get that margin the one they look at,
Speaker 1: which is R and D plus scn A expenses as
Speaker 1: a percentage of sales to below and they're doing a
Speaker 1: pretty good job of getting that. So it's not just
Speaker 1: about drug pricing. In fact, if I may, Lily has
Speaker 1: been one of those that's not been uh particularly aggressive
Speaker 1: in its price rises, especially in the insulin area where
Speaker 1: there's been a lot of attention recently diabetes, where if
Speaker 1: you look at the net price of the insulin products
Speaker 1: on the market, they've been flat for past three four
Speaker 1: five years, so no real net increasing prices. It's volume
Speaker 1: that's driving that well. And I just want to get
Speaker 1: your thoughts and if you can look just a one
Speaker 1: more about ELI Lily having to do with patent litigation
Speaker 1: and patent interpretation, how's that can affect the company? Well,
Speaker 1: I mean, you know, they have they're they're affected by
Speaker 1: patent experience that they're like everybody else. They haven't anything
Speaker 1: particularly um different to trying to protect their patents. And
Speaker 1: they've got one that's coming up with a Limita, which
Speaker 1: is a cancer drug a billion I have two billion
Speaker 1: dollars of sales in total and that is going through
Speaker 1: the motions. It was challenged by IPRs and it's one
Speaker 1: some of those who has been challenged in the UK
Speaker 1: and it won those So but eventually the molecule will
Speaker 1: go off patterns and there's nothing you can do about that.
Speaker 1: You're you know, this is a formulation pattern that they've
Speaker 1: been protecting and it seems to have the test of
Speaker 1: time so far, but eventually it will come. Other than that,
Speaker 1: there's nothing really in there that they're not doing any
Speaker 1: special moves or if if you're referring to, for instance,
Speaker 1: doing a deal with whether they with a tribe or
Speaker 1: anything like that, nothing like, nothing like that has happened there.
Speaker 1: I'd love to just get a quick overview of what
Speaker 1: to expect from Mark because it seems like they have
Speaker 1: a less rosy expectation with respect to margins and how
Speaker 1: much their sales could right right right, Yeah, So America
Speaker 1: is in a very cut throat business at the moment,
Speaker 1: in the cop throat business of emmano oncology in cancer
Speaker 1: trying to get and it's working immune system, the patient's
Speaker 1: immune system to attack their own cancer. So they are
Speaker 1: they lead along with Bristol Myers, who had the first
Speaker 1: drug on the market in this mechanism, in this in
Speaker 1: this arena called the year Boy a few years back.
Speaker 1: But basically it's so cutthro So you've got Astroseneca, Rush,
Speaker 1: Bristol Myers and Mark all competing to get the biggest,
Speaker 1: broadest indications and the largest number of combinations worked out
Speaker 1: for treating cancer, which costs money and it needs marketing.
Speaker 1: So what Mark has been very open with is we
Speaker 1: are getting some sales potentially in the system. I mean,
Speaker 1: the sales are expected to be about flat in three
Speaker 1: Q versus last year because they've got generic expiries, but
Speaker 1: don't expect margin evolution there. Because we've a twine, we're
Speaker 1: going to have to invest in the business. W'd be
Speaker 1: pretty open about this, which of course is a bit
Speaker 1: tough when you really only have one drug that's growing,
Speaker 1: We're gonna have to leave it there, unfortunately. Thank you
Speaker 1: so much for joining us, Sam Fazzelli, director of research
Speaker 1: for Bloomberg Intelligence, coming to us from London. Well, Haliburton
Speaker 1: reported earnings this morning, Schlumberge last week, and here to
Speaker 1: tell us what the highlights are. Liam Denning Bloomberg Gatflight
Speaker 1: columnists covering energy. So what stood out from you with
Speaker 1: respect to Haliburton's earnings. It shares are down slightly, although
Speaker 1: not as down as schlumber Jay's. Yes, So the biggest
Speaker 1: thing here is just the different messages coming out of
Speaker 1: these two companies. So um, the key differences between Schlumberjo
Speaker 1: and haliber and his halib And is much more North
Speaker 1: America focused, like six revenue slamba, it's round a third.
Speaker 1: So Haliburton whenever there's a big uptick in US activity,
Speaker 1: particularly in the shale basins, Haliburton is the usual beneficiary.
Speaker 1: And so when Slumberge reported on Friday, North America was
Speaker 1: kind of the only bright spot in their earnings, which
Speaker 1: made it very likely that Haliburton was going to step
Speaker 1: up and beat earnings. And and that's exactly what it
Speaker 1: did on on Monday morning. Well, I just just explained
Speaker 1: why North America is doing so much better than everywhere
Speaker 1: else for them. So a big reason is it's really
Speaker 1: a timing thing, and it's this is actually kind of
Speaker 1: the crux of the difference between the two companies, and
Speaker 1: it kind of reflects a big difference in the global
Speaker 1: or market what we're seeing at the moment is in
Speaker 1: the old days, what would happen is the all price
Speaker 1: would collapse and then everyone would stop investing, and then
Speaker 1: the all price would rise, But then it would take
Speaker 1: several years for everyone to you know, find new wells
Speaker 1: of fine new prospects, drill wells, bring the oil into production,
Speaker 1: and so you have a fairly long cycle. What shale
Speaker 1: has done is it's kind of short cirkuted that what
Speaker 1: happens is the old price has come down, but then
Speaker 1: as soon as the old price gets back above fifty
Speaker 1: bucks or so, and particularly a year out, which is
Speaker 1: when MP companies are hedging their future production, they all
Speaker 1: kind of get back to work, which then caps the rally.
Speaker 1: And so that's a big difference we've seen in schlimber
Speaker 1: Jan Haliburton's outlook. Schlimberja is saying things are slowing down
Speaker 1: in North America. All prices are gonna rise. We're going
Speaker 1: to see a big uptick in international drilling coming through.
Speaker 1: Haliburton less certain about that, all right, Leo, let me
Speaker 1: just go to a couple of sort of points here,
Speaker 1: right because a crude or right now trading on the
Speaker 1: NIMEX seventy six cents for a barrel. That's West Texas.
Speaker 1: Let's go through margins when it comes to Haliburton, good margins, right,
Speaker 1: they have very good margins. They kind of took a
Speaker 1: hit earlier this year. You may remember they issued a
Speaker 1: profit warning the first quarter and that, But wasn't that
Speaker 1: to take some some of their capacity out of the
Speaker 1: market and to then prepare air for what they thought
Speaker 1: was going to and has happened, which is this extensive tracking. Yeah,
Speaker 1: and they were actually talking. What they did was actually
Speaker 1: they put more capacity into the market, so they had
Speaker 1: to take a big post up front to redeploy that stuff.
Speaker 1: And it's it's paid off because there their incremental margins
Speaker 1: since then have been have been up quite sharply. What
Speaker 1: about efficiency gains, because they're pointing to the fact, and
Speaker 1: you've written about this that it's that they are focused
Speaker 1: on the fact that it's going to cost a lot
Speaker 1: less money in the future to get whatever you want
Speaker 1: out of the ground, whether it's the shale oil or
Speaker 1: regular oil. That's right. One of the one of the
Speaker 1: points actually made on the coolest morning was they said,
Speaker 1: look you look at the rig count. It's it's way
Speaker 1: down on what it was. But the fact is people
Speaker 1: are drilling alonger wells. They said, actually foot for foot,
Speaker 1: we're actually drilling as much this year as we did
Speaker 1: when all was at a hundred bucks. So maybe you
Speaker 1: can get rid of the Baker hughes like weakly, you know, up, down, sideways,
Speaker 1: you know which way it moves. Because tech this is
Speaker 1: as much a technology story. Well yeah, makesure week, But
Speaker 1: I mean is this true though that? I mean it
Speaker 1: really there has become a technology story when you're talking
Speaker 1: about energy markets. Absolutely. I mean this has been a
Speaker 1: theme for at least the past year. You know, Halibut
Speaker 1: and struck, this alliance with Microsoft. We're seeing these kind
Speaker 1: of alliances being struggled over the sector. So there was
Speaker 1: sort of an implication there when you're talking about how
Speaker 1: Schlumberge seems confident that prices are going to rise and
Speaker 1: Haliburton seems less sure of that. It's part of that,
Speaker 1: first of all, that Schlumberja needs prices to rise in
Speaker 1: order to hit its projections, and how high does it
Speaker 1: have to see prices rise? And what's Haliburton seeing as
Speaker 1: far as a projected crude value in the future. Well,
Speaker 1: let's Let's let's note first that they're both talking their
Speaker 1: own book, right, so of course, but this is important
Speaker 1: to see how they're talking there. I would say it's
Speaker 1: less it's less a price level, and it's more to
Speaker 1: do with something that Haliburton raised on the call, which
Speaker 1: I think was very interesting. So if you go back
Speaker 1: to that point I made about the short cycle kind
Speaker 1: of nature of shale, with shale drillers, all they need
Speaker 1: to see is the al price to get appreciably above
Speaker 1: fifty bucks a barrel over the next twelve months for
Speaker 1: an international project. And this is the point Haliberta made.
Speaker 1: If you're going to drill a deep water field somewhere
Speaker 1: in Africa, you not only need to see that price
Speaker 1: rise above fifty bucks or whatever level it is that
Speaker 1: you need for the next twelve months, you've got to
Speaker 1: think it's going to hold that for at least three
Speaker 1: to four years, because otherwise, why would you drill a
Speaker 1: well that isn't going to start producing the two to
Speaker 1: three four years. And I think that's the key challenge. Well,
Speaker 1: that's also the challenge for investors, right because of whether
Speaker 1: your long term depends how much money you're going to
Speaker 1: put in the ground to get out what's going to
Speaker 1: pay you back? Right, And that's why we've seen, particularly
Speaker 1: with the international companies. You know, even though this is
Speaker 1: apparently a historic opportunity to invest well, prices of rigs
Speaker 1: and that sort of thing are low. You'll notice all
Speaker 1: their investors are basically saying, pay us dividends because we
Speaker 1: don't want you putting it in the ground. Thanks very
Speaker 1: much for joining us and always appreciate your column. So
Speaker 1: he's our Gadfly columnist when it comes to energy, mining
Speaker 1: and commodities, Liam Denning, and you can follow him on
Speaker 1: Twitter at Liam Denning. It's time to pay up. Well,
Speaker 1: Friday is the time to pay up, and next week
Speaker 1: might be the time to pay up if you happen
Speaker 1: to be the Venezuelan nationally owned the oil company. Here
Speaker 1: to tell us more about the debt situation and Venezuela
Speaker 1: is Jamine Patel, our senior credit analyst for Bloomberg Intelligence,
Speaker 1: and Jamine, thanks very much for being with us. Appreciate it.
Speaker 1: Maybe just set out for people exactly how much does
Speaker 1: PETA vesa, oh will it be able to pay? And
Speaker 1: then maybe just describe the relationship that it has with
Speaker 1: ros Neft and how that might sort of play into
Speaker 1: all of this. Sure, First of all, thank you for
Speaker 1: having me um to to your first question, how much
Speaker 1: how much? Instead of oh, we really have to look
Speaker 1: at both Peta Vesta and and the Venezuela sovereign jet
Speaker 1: because you know, it's sort of hard to to differentiate
Speaker 1: between the two. The two are are really quite integrated.
Speaker 1: And to the extent that at investor doesn't have funds
Speaker 1: to make its bond payments, then um, I think you
Speaker 1: have to you have to turn to the sovereign. So
Speaker 1: the total they're if you're looking at the at the
Speaker 1: total bonds is about sixty seven billion, but you have
Speaker 1: to add to that somewhere around fifty billion of loans
Speaker 1: primarily from from China, Russia and UH, you know through
Speaker 1: potentially through Rosneft as well, so that number could be
Speaker 1: as highs undred and twenty billion. Now, what's coming to
Speaker 1: do this week and next week is UH is an
Speaker 1: amatizing amatization payment on a on a secured bond that's
Speaker 1: about eighty four eight d forty million, and then there
Speaker 1: is about one a little over a billion dollars on
Speaker 1: a on a regular on secure bond coming due in
Speaker 1: November the second. Yeah, but jaymen, let's just take a
Speaker 1: step back for for a moment. So Venezuela is obviously
Speaker 1: deeply troubled from a political point of view, and literally,
Speaker 1: uh people are starving in the country, with an average
Speaker 1: weight loss of I think twenty pounds in the past
Speaker 1: year or two among the population. I mean, there's been
Speaker 1: a huge shortage of food. There have been longlines for
Speaker 1: the most basic supplies, a lot of tension rising, and
Speaker 1: there is a question about whether a default on the
Speaker 1: nation's sovereign debt would force the current leader, Maduro UH
Speaker 1: to exit, right, I mean so, so the question is,
Speaker 1: is Venezuela about default given that they have more than
Speaker 1: two billion dollars coming due in the next two weeks
Speaker 1: with limited resources to cover that. Well, Um, you know
Speaker 1: that that that's the big question at this point, and
Speaker 1: it really has come down to crunch times of these guys. Um,
Speaker 1: it's entirely possible that they will make the payments. Um.
Speaker 1: The history here has been every time a maturity has
Speaker 1: come to you, they have somehow come up with the funds,
Speaker 1: either by securing SITCO or borrowing from from outside sources. Uh.
Speaker 1: To to to make the payments, cutting capex, cutting their
Speaker 1: imports um in order to fill that cash flow gap.
Speaker 1: So um, it appears that they are working on a
Speaker 1: deal with Rosine to enter into either some mapter tales
Speaker 1: or jvs which potentially will come up with enough consideration
Speaker 1: to make these payments. Total payments are somewhere between three
Speaker 1: and three and a half billion, because the two billion
Speaker 1: or so and and some interest payments. Okay, that's a
Speaker 1: two weeks about three and a half bills. Well, actually
Speaker 1: over the next week or so, there's one on Friday,
Speaker 1: and then there's one on November the TEWOD, so October
Speaker 1: twenty seven and November the SEWOD, So they really cannot
Speaker 1: afford it to fall. I mean, I think I think
Speaker 1: a default would be would be almost unthinkable just given
Speaker 1: uh that petty best accounts for something like their effects flows.
Speaker 1: So if petty Vest were to stop functioning as it
Speaker 1: does right now, which would potentially happen in default, I
Speaker 1: think things would go from bad to verse for for
Speaker 1: the people UH as as well as obviously the government.
Speaker 1: So I think even the opposition really doesn't want to
Speaker 1: want to see a default here. Jaman, how did they
Speaker 1: sell the stuff to begin with. I mean, it's not
Speaker 1: as if the situation in Venezuela is that new. No, No,
Speaker 1: it isn't. It's it's it's been going on for a while.
Speaker 1: But you know, when oil prices are at a hundred
Speaker 1: dollars of barrel or higher, Uh, it's much easier to
Speaker 1: manage your your your balances um at forty dollars forty
Speaker 1: five dollars um, particularly when you don't have a rainy
Speaker 1: day fund, when you haven't prepared for it, things urry
Speaker 1: very quickly. Uh. Now, the government just to answer you
Speaker 1: know earlier question if if there is a default, I
Speaker 1: think I think there's a good chance that uh President
Speaker 1: Muduro it would have to uh potentially leave this post,
Speaker 1: potentially even leave the country. UM. So I think I
Speaker 1: think they will do everything they can to to make
Speaker 1: this particular payment. Uh and then don't forget there at
Speaker 1: election coming due a presidential election in uh towards the
Speaker 1: end of next year, November of next year, at which
Speaker 1: point Venezuela has some some fairly heavy majorities coming to
Speaker 1: you that they have to make. So can we just
Speaker 1: get a sense of why Russia and China are continuing
Speaker 1: to lend to Venezuela when Venezuela doesn't seem to be
Speaker 1: getting more credit worthy uh and is igniting ire among
Speaker 1: other big economies like the US. Well, I think I
Speaker 1: think China to me seems to be pretty much maxed
Speaker 1: out at this point. I don't think they're going to
Speaker 1: be putting a lot more um uh in terms of
Speaker 1: investment in the country. H. Russia has has a potentially
Speaker 1: different agenda. Much of it may be political Venezuela's ties
Speaker 1: to Cuba some of the other Caribbean nations UM. But
Speaker 1: it's also a way for them to ensure that they
Speaker 1: have a steady supply of oil UM going forward. Not
Speaker 1: that Russia itself doesn't uh, it is not a heavy
Speaker 1: oil producer, but uh, this this just gives them that
Speaker 1: one additional avenue and and then a lot of it
Speaker 1: is political as well, political influence, political economic ties. The
Speaker 1: two countries have been tied for a long time. There
Speaker 1: have been significant arms sales from from Venezuela to excuse me,
Speaker 1: from Russia to Venezuela, So I think it will sort
Speaker 1: of ties in with that. Just quickly, jamine if if
Speaker 1: you got a call from an investor who recently had
Speaker 1: purchased some of this Venezuelan Petave said that what would
Speaker 1: you be explaining to them that they may they may
Speaker 1: not know. I mean, they might know about the risks
Speaker 1: of of repayment, but what about the potential for unexpected activity,
Speaker 1: whether it's from Russia, China or indeed even the Venezuelan regime. Well,
Speaker 1: I think you really have to differentiate between the long
Speaker 1: term and the short term bond holders, the the the
Speaker 1: immediate bonds that are coming to the ones that I
Speaker 1: talked about on Friday and and next week. UM. You know,
Speaker 1: at this point it really depends upon whether they this
Speaker 1: Russian deal comes through. Um. And and that's not even
Speaker 1: getting into the technical side of of of things, because
Speaker 1: there is no great sperod on these payments. So if
Speaker 1: they don't make them, the bond holes could there they
Speaker 1: could call it default. UM. For the long term bondholders, UM,
Speaker 1: it's it's you've got a country here which has got
Speaker 1: in oil reserves, so it's not a solvency issue. It
Speaker 1: really has a liquidity issue. UM. And if if there
Speaker 1: is a regime change, and that's really what what the
Speaker 1: bond holders will be looking for in the long run, UM,
Speaker 1: then that would open up all sorts of avenues for
Speaker 1: additional aid, because then they could reengage with the IMF,
Speaker 1: big agreen age with the us UH. Some of the
Speaker 1: sanctions we lifted and so on. We're gonna have to
Speaker 1: leave it there. Thank you so much for joining us.
Speaker 1: Jaman Patel, Senior credit strategist for Bloomberg Intelligence, talking about
Speaker 1: Venezuela debt coming do. Thanks for listening to the Bloomberg
Speaker 1: P and L podcast. You can subscribe and listen to
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Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
Speaker 1: You can always catch us worldwide on Bloomberg Radio