Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley.
Speaker 1: We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
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Speaker 1: really place decide that. Joining us now on the phone
Speaker 1: from Paris at the O e c D headquarters is
Speaker 1: Lawrence Boon, O E c D Chief Economists. Lawrence, great
Speaker 1: to have you with us. You're just out with your
Speaker 1: year ahead, trimming the outlook, but seeing a much bigger
Speaker 1: problem potentially brewing for the decade ahead. Just walk us
Speaker 1: through what you're saying. So that's true. We've actually projecting
Speaker 1: both to remain stuck at two point nine for the
Speaker 1: next two years. And that's mostly due to all the
Speaker 1: uncertainty related to the trade tensions, but so to China
Speaker 1: economic slowdown and and much beyond that geo political and
Speaker 1: political economy uncertainty. Lollis, how do you make a year
Speaker 1: ahead calls the base case around trade? How difficult as
Speaker 1: things this year? Well, you know, the difficulty with the
Speaker 1: trade tensions is that they're very focused on a few tariffs,
Speaker 1: which has which have a direct effect on the price
Speaker 1: of important goods, so consumers the higher forward the the buy.
Speaker 1: But the biggest effect is the uncertainty that's creating because
Speaker 1: if you're affirmed today, you don't really know when you
Speaker 1: where you're going to launch your next investment, because these
Speaker 1: trange tensions jump from countries to countries to start and
Speaker 1: and then they're at heart there is a performed in
Speaker 1: satisfaction with the way that that a lot of support
Speaker 1: to government subsidies, protection of inticule proterity technology transferred. All
Speaker 1: these mingled within this discussion and they are very deep
Speaker 1: rooted problems that will take a long time to address.
Speaker 1: Right although you are seeing a guarded optimism of heading
Speaker 1: into a lot of economists and investors seeing a resurgence
Speaker 1: in the global economy, and you square that with the
Speaker 1: deteriorating outlook from the O E c D. So I
Speaker 1: think there are two things to distinguish. If you get
Speaker 1: an agreement on what's called the Phase one between the
Speaker 1: US and China, then yes, market will have some temporary
Speaker 1: relief and chap But as I was saying, the issue
Speaker 1: surrounding trade um much beyond what we are seeing here
Speaker 1: um and they have to do with the way that
Speaker 1: digital digitalization has changed trade and commercial exchanges. They have
Speaker 1: to see with all the subsidies and the form of
Speaker 1: government supports that out there which are undermining the level
Speaker 1: playing field. And these issues we will take years to resolve,
Speaker 1: especially if we're just focusing on by little tariffs. It's
Speaker 1: like if you were focusing on the top of the
Speaker 1: iceberg when the iceberg below the sea level is growing.
Speaker 1: Laurent's your predecessor of those O E c D. Catherine
Speaker 1: man Now at City Group, as an o E c
Speaker 1: D was quite strident about the roll up that we're
Speaker 1: seeing in world business because of slow economic growth. She
Speaker 1: would speak of scale and the idea of monopsidy, the
Speaker 1: idea of monopoly coming in to play. We're seeing that
Speaker 1: in America this morning with a merger in discount brokerage
Speaker 1: reported of Schwab and TD Ameritrade. Do you in Paris
Speaker 1: still believe that we will see a roll up of
Speaker 1: global business because of slow economic growth. So they are
Speaker 1: things threatening globalization and that's the trade tension that we
Speaker 1: have discussed, and it's also the possible tax fugmentation that
Speaker 1: the O E c D is trying to address um
Speaker 1: and that relates really well to how our business is
Speaker 1: going to thrive in tomorrow's word, and for that we
Speaker 1: need more certainty, more prectability, and the better level playing field.
Speaker 1: And that means you know, ending this thought that tensions
Speaker 1: and tariff. It also means concluding, as we expect, the
Speaker 1: international negotiation on the taxation of multinational enterprises. As you know,
Speaker 1: we've been working on this for a while now and
Speaker 1: we really think that we can conclude an agreement in
Speaker 1: twenty that would change this specimism of globalization. I mean,
Speaker 1: what what this comes down to? A Lawrencebourne. I'm gonna
Speaker 1: uh site here magdam desire. The London School of Economics,
Speaker 1: which is all of economics, is about profitability. Given the
Speaker 1: O E. C D view, how you extend your timeline
Speaker 1: out to two thousand one, will there be a dearth
Speaker 1: of prop prop prop I'll get it out three to one.
Speaker 1: Will there be a earth of profitability? As we have
Speaker 1: slower economic growth? But that's what that's one of the
Speaker 1: things we're really concerned about. If you stay with various
Speaker 1: sluggish growth for a long time, then there will not
Speaker 1: be enough revenues to to you know, there will be
Speaker 1: not enough growth to raise revenues, and that applies to
Speaker 1: people as maternity applies to businesses. And also also if
Speaker 1: you want profits to be lifted, you need investment, which
Speaker 1: is why we're particularly invested in insisting on the need
Speaker 1: for governments to level up public investment because that's one
Speaker 1: of the main impediment to the implementation of private sector
Speaker 1: investment plans. Lauren's point, thank you so much. We greatly
Speaker 1: approiciate of economics the O E. C. D. Here right now,
Speaker 1: Joe Quidlin, who's with us with decades of experience at
Speaker 1: Maryland Bank of America private bank, and out of course
Speaker 1: with investment perspective. But Joe, you and I are gonna
Speaker 1: wax philosophical here. Remember the first day discount brokerage showed up.
Speaker 1: You and I were like what, remember that, we can't
Speaker 1: do it ourselves, but it was super cheap and we
Speaker 1: all know they're never gonna last. John, there is discount
Speaker 1: brokerage a big deal in London. Brokerage people have to
Speaker 1: try farn exchange very well. We don't do that. But
Speaker 1: it was Charles who remember that first open a whole
Speaker 1: new frontier for retail investor. People laughed for about six
Speaker 1: months until oh, so here we are with a mating
Speaker 1: here and it goes to your work on a broader
Speaker 1: investment strategy to slower economic growth, challenge profitability one one
Speaker 1: in doubt. You have to mate, that's all, It's all
Speaker 1: it's about. You have to look for that growth organically
Speaker 1: is very tough given a democraphic slower growth, lack of productivity. So,
Speaker 1: I mean, what's surprises me? Time? Like ten years after
Speaker 1: the crisis, so to speak, we are starting to see
Speaker 1: some of the financial companies thinking about, you know, marrying
Speaker 1: or like at least observing each other. And well, I'm
Speaker 1: on this is TD a merritrade folks. Of course, Joe
Speaker 1: Ricketts firm to be taken up by Schwab. It is presumed,
Speaker 1: it has not announced yet, CNBC reporting this and Fox
Speaker 1: Biz putting a twenty six billion dollar number on it.
Speaker 1: But it comes down to to bring it over to
Speaker 1: John's uh world of yield, lower nominal GDP, some form
Speaker 1: of disinflation and growth that just doesn't get it done
Speaker 1: right right, It doesn't get it done and goes back
Speaker 1: to what we talked about earlier time, like wanting and
Speaker 1: needing the scale. So if you don't have scale, you
Speaker 1: can't drive productivity or have the margin expansion. So this
Speaker 1: is about scale and reaching for that type of not
Speaker 1: organic growth, but kind of emerge growth. I want to
Speaker 1: challenge the idea that this is simply a case of
Speaker 1: slowing growth and really raise a question of an existential
Speaker 1: crisis facing the asset management and brokerage businesses. People want
Speaker 1: stuff for free, and how long it can mating and
Speaker 1: scale sustain businesses that ultimately are going to zero fee models. Well,
Speaker 1: I would push back a little bit of people want
Speaker 1: for free because we've got a massive transfer of wealth
Speaker 1: coming in this country, like nine trillion dollars, and in
Speaker 1: the private wealth face they still want that service. They
Speaker 1: still need tax strategy. So I think your average retail
Speaker 1: investor does want it free and it's expecting it free.
Speaker 1: But there's also part of the industry where I still
Speaker 1: want to have access to UH specialty asset management. I
Speaker 1: still want access to credit, I want the full line
Speaker 1: of concier services. So I do think there is a
Speaker 1: segment that wants it free. But when you look at
Speaker 1: ten trillion dollars and inheritance being passed generationally, that's not
Speaker 1: going to be done on a retail wire. Do you
Speaker 1: see people went in to pipe for that? Oh, the
Speaker 1: sevin is that you just described, they they're willing to
Speaker 1: pay for. But because of the competition, yes, the margins
Speaker 1: are coming down absolutely, which means we anyone like Bank
Speaker 1: of America or anyone in the industry has to be
Speaker 1: more productive, has to have the right products in place
Speaker 1: and drive that growth and up. In this really strange
Speaker 1: world where companies like schout Swab and tv amrit trade
Speaker 1: end up making money like little banks a little bit
Speaker 1: of candy for the deposits, they have taken a little
Speaker 1: bit more candy on doing other things with the money.
Speaker 1: What do you think of that as a business model,
Speaker 1: that all of these companies just get bigger and start
Speaker 1: behaving like little banks, like a little bit. I mean,
Speaker 1: I mean I work for a big bank, so I
Speaker 1: mean I'll preface it with that. We'll see if it
Speaker 1: works or now. But yes, it's it's part. It's part
Speaker 1: of birth right, it's it's part it's part of that.
Speaker 1: Like I got my model isn't producing what I expected
Speaker 1: in terms of revenue or profits. What do I do next?
Speaker 1: And rarely does that. Is that sustainable and or is
Speaker 1: it being being set up for more mergers? Got to
Speaker 1: talk about your brought a market strategy as well. I
Speaker 1: said at the top of the program. Investors at the
Speaker 1: moment seemed to be lost between courcious optimism total confusion
Speaker 1: of everything around China. How do you have any kind
Speaker 1: of optimism gun into next year without any real climency
Speaker 1: on some of these big issues. Well, I mean, look
Speaker 1: at earnings, their corder earnings weren't that bad. They're better
Speaker 1: and expected. You know, the economy is chugging along at
Speaker 1: two percent. It's not great, but we're you know, an
Speaker 1: eleven twelfth year of the expansion. The Chinese economy is
Speaker 1: growing at five percent plus. Europe is looking slightly better.
Speaker 1: Let's put it this way, Europe is looking less bad.
Speaker 1: So globally we're bottoming out. The manufacturing numbers are getting better,
Speaker 1: but it's too early to jump with both feets. So
Speaker 1: you know, whether it's healthcare, technology, robotics, automa. Sure, there's
Speaker 1: places to put money to work. And are you sustaining
Speaker 1: US dominant investment? Do you still believe US large camp
Speaker 1: will lead after Eno? I think will become more balanced
Speaker 1: next year between more developed Europe, Japan and then the
Speaker 1: emerging markets. But you know the emerging markets, we've been
Speaker 1: waiting and waiting for exactly what's the is it China
Speaker 1: trade clears? I think it's China trade cuder, But you know,
Speaker 1: the emerging markets. I would just not throw the term
Speaker 1: out of the vocabulary. Of course, specific it's say at sectors,
Speaker 1: at countries technology versus consumption. That's issue. That's the key.
Speaker 1: This has been a wonderful Joe Quilin thanks us with
Speaker 1: a ton of breaking news, A potential time between challenge
Speaker 1: Schwab and Tedium matters right, and as far as then
Speaker 1: I tell them no comment from either company. I agree
Speaker 1: in this school that you state that this is a
Speaker 1: bit odd the way the flow is coming out. I
Speaker 1: know Fox Biz put a twenty six billion dollar statistic
Speaker 1: on the deal about five times sales. A tie up
Speaker 1: would create a firm with roughly five trillion dollars and
Speaker 1: combined asset and serious Jim Cramer's shop. Really interestingly, I
Speaker 1: I didn't know this. Schwab's Commission trades, it's only eight
Speaker 1: percent of their business. We're td imrig trade. That's what
Speaker 1: you'd expect this on the program and leads away in
Speaker 1: it's the it's the banks, the little banks within these brokerages.
Speaker 1: That's how they're making the money. It's the hope to
Speaker 1: bring in customers that they can actually pink and other
Speaker 1: layers of revenue streams. But it is a question how
Speaker 1: much are people willing to pay for that one of
Speaker 1: these sort of demand free services there too? How do
Speaker 1: you make money from it? That's a big question. Joining
Speaker 1: us in the studio, I'm really pleased to say, looking
Speaker 1: forward to this intoview lay too. Charlie joins us now
Speaker 1: jo h c M Senior fund Manager. Good morning to Larie,
Speaker 1: good morning. We won't be talking about tdumrrige trade and
Speaker 1: charge SWAB. I can see embracing for potential question on that.
Speaker 1: Don't worry, you know what we will talk about Bill
Speaker 1: Dudley's peace out on Bloomberg Opinion in the last twenty
Speaker 1: four hours Bloomberg Opinion columnist, formally the New York Fed President,
Speaker 1: and of course he worked at government with you many
Speaker 1: many years ago. Larly, his comments on triple beats, That's
Speaker 1: where I want to start. Whenever this conversation comes up
Speaker 1: anyone outside of the fixed income world says this is
Speaker 1: a problem. Everyone inside of the fixed income world that
Speaker 1: I get to speak to, Lisa and Tom have conversations
Speaker 1: with us, well, say, this isn't a problem. Walk me
Speaker 1: through the issues that play here. Sure. So. Well, first
Speaker 1: of all, I'm really excited because I'm in the same
Speaker 1: height as Tom, because usually I feel like a shrimp.
Speaker 1: That is this is this is exciting so much at
Speaker 1: lunch yesterday A little bit wow. Um. So the facts
Speaker 1: are correct. The Triple Bees as a whole is about
Speaker 1: half of the US Investment Great Index. And I think
Speaker 1: when you look at the largest and actually came armed
Speaker 1: with data, if you look at the top thirteen issuers
Speaker 1: within that, the debt numbers are staggering, right, So the
Speaker 1: top issues would be something like A T and T
Speaker 1: hundred and ninety billion of that and you go down
Speaker 1: the numbers. But if you look at these top thirteen,
Speaker 1: what's unique about them is with the exception of the
Speaker 1: auto an energy where perhaps you have a little bit
Speaker 1: more well if you have more exposure to external shocks
Speaker 1: that may not be in your control. Everybody else has
Speaker 1: a very steady revenue stream. So the de leveraging path
Speaker 1: is there. So I don't want to ignore the fact
Speaker 1: that there are a large component. I just don't think
Speaker 1: it people should be as alarmed as that they should be. Okay, So,
Speaker 1: then is the risk of some sort of fallout from
Speaker 1: the corporate debt build up that Bill Dudley was flagging?
Speaker 1: Is that overstated or is that risk still there? Oh?
Speaker 1: I think the corporate over uh debt build out, I
Speaker 1: think the risk is in a different way. So to me,
Speaker 1: you may know these numbers, but I think it's a
Speaker 1: staggered number. The U, S I G and high yield
Speaker 1: number is about eight and a half trillion dollars. Now
Speaker 1: it's too excess the financial crisis. And if you look
Speaker 1: at the debt in these credit assets that's in daily
Speaker 1: liquid mutual funds, it's a little it's about a little
Speaker 1: over a trillion, Okay. If you look at the US
Speaker 1: broker balance sheet, it's of daily inventory of how much
Speaker 1: they're willing to trade and sort of keep on the books.
Speaker 1: Twelve billion. So to me, the mismatches not necessarily these
Speaker 1: things are gonna get downgraded from triple B to double
Speaker 1: B in the high yield is going to be a
Speaker 1: total utter disaster to me. The issue is how do
Speaker 1: you when the selling point comes, how does the plumbing works?
Speaker 1: Because I don't think that's been tested and I don't
Speaker 1: think people understand that. So what do you think will happen?
Speaker 1: How do you think things will function? Well, A, you're
Speaker 1: gonna it's gonna be a price discovery. So it's good
Speaker 1: in that. I don't know. I mean, I think you
Speaker 1: may test where your marks are not accurate. It has
Speaker 1: nothing to do in some cases with the company's health.
Speaker 1: It's it's like selling your house, right your house is
Speaker 1: worth what somebody is willing to pay for it. You
Speaker 1: may think it's a million bucks. It depends where the
Speaker 1: bit comes in. So I spoke to Pimcom about these
Speaker 1: kind of issues earlier this year and they said, just
Speaker 1: in terms of their investment strategy, that why they want
Speaker 1: to play this and outside this quite simply, and you
Speaker 1: can add some new wants to it. We want to
Speaker 1: be liquidity providers, not liquidity demanders. Wait for these kind
Speaker 1: of gappy moves in credit and then deploy capital like
Speaker 1: can you be that patient? Can you went around for
Speaker 1: those kind of things? You certainly can, But look, I
Speaker 1: mean this is another it's a pit peep of mind
Speaker 1: and nothing against PIMCO. It's people always says there's cash
Speaker 1: on the sidelines. There's no such thing as cash on
Speaker 1: the sidelines, right, Nobody has bags of cash sitting in.
Speaker 1: It's sitting in something else, right, And usually Tom Keane
Speaker 1: actually has bags of cash and sitting on That's why
Speaker 1: you're my height today. You're sitting on under yours. The
Speaker 1: leverage cash continue. Oh boy, this conversation is getting dangerous. Um.
Speaker 1: It's when when big fallofs happened, big wall events happen.
Speaker 1: The markets are connected, right, everything kind of moves, so
Speaker 1: you have to sell something to fund something else. And
Speaker 1: that's where you know, it becomes a lot difficult. So yes,
Speaker 1: in concept, can you buy hundred million two million? Sure?
Speaker 1: Can you be able to deploy billions and immediately be
Speaker 1: able to take advantage at that time? I don't know.
Speaker 1: The solution always is the extenduration and extend maturity. Is
Speaker 1: that the trap of next year when in doubt go
Speaker 1: from x to X plus one X plus two. Is
Speaker 1: that what's going to happen? I don't know. Duration. I
Speaker 1: think it's a very tough call. Um. We we played
Speaker 1: around with it a little bit and we played around
Speaker 1: the context of Look, I think we're a little unsure
Speaker 1: whether the recovery is happening or not, so perhaps we're
Speaker 1: better off just literally buying ten year treasuries and just
Speaker 1: not taking the credit risk as opposed to on i g. Credit.
Speaker 1: There's also something that you're talking about before, which is
Speaker 1: liquidity risk. You hear a lot of investors saying that
Speaker 1: they are going into less liquid credit for the extra
Speaker 1: premium embedded in what you're saying in terms of the
Speaker 1: structural issue plumbing issue in credit markets is I believe
Speaker 1: compared to what you said last time or here you
Speaker 1: are not taking liquidity risk and you'd rather go into
Speaker 1: stocks than risk here debt at this point based on liquidity,
Speaker 1: can you give us a sense of where you are
Speaker 1: on that now the same playbook, we run a daily
Speaker 1: liquid mutual fund. Like I mean, I like the thing
Speaker 1: that I will never get a redemption, but that's just
Speaker 1: that's just not the real world. So credit funds investing
Speaker 1: in stocks, well, we run a commingled for the product,
Speaker 1: so it's not a pure credit, so it's credit and equity,
Speaker 1: but we will always run it liquid. And look, there
Speaker 1: have been numerous evidences of these liquidity issuing popping not
Speaker 1: and funds unwinding over the last several years. We just
Speaker 1: treat them as their episodic and we just blame the manager.
Speaker 1: The underlying symptom is the same thing. You reach for
Speaker 1: yield and you went a liquid and frankly, I have
Speaker 1: a hard time when I buy a mutual fund to
Speaker 1: figure out what they own. You really think people sit
Speaker 1: there and go through the line items. Lonnie, thank you
Speaker 1: as always, thank you for joining us. Don't triple for
Speaker 1: the leverage. I felt I'd cut the into off. Cloni
Speaker 1: can get away to television and run out of the studio.
Speaker 1: I didn't know that. Okay, Kathy Jones is with Charles Schwab,
Speaker 1: and the way the game has played, folks, is if
Speaker 1: you're on staff, and particularly if you're on research staff,
Speaker 1: you can't talk about the business. She's looking at her
Speaker 1: phone through something. You ask her about the business. We're
Speaker 1: not gonna ask her about the business soon. Of course,
Speaker 1: it reports this morning of a mating between Schwab and
Speaker 1: the Merrior trade. We will move on to fixed income,
Speaker 1: and the host of the Real Yield will do I
Speaker 1: forward that conversation. Let's talk about it, Kathy, you have
Speaker 1: been a lot more conservative about your views and risk
Speaker 1: assets and fixed income. How yield is getting back out
Speaker 1: to in and around four hundred basis points just looking
Speaker 1: at that spread, Kathy, your thoughts on the skipas of
Speaker 1: fixed income at the moment, Yeah, John, we haven't really
Speaker 1: changed our view that as you know, that spread has
Speaker 1: been widening, narrowing, widening, narrowing all year, back and forth,
Speaker 1: back and forth. And our concern is, you know, still
Speaker 1: hasn't changed that we had deteriorating credit quality. UM much
Speaker 1: more leverage in the corporate bond space than I think
Speaker 1: is justified by the rate of growth. So corporate profits
Speaker 1: are growing much more slowly UM than corporate leverage, and
Speaker 1: all that sets us up for UM we think is
Speaker 1: some sort of a correction in the market. So we're
Speaker 1: underweight high yield and continue to think that that's just
Speaker 1: too risky an area to have a lot of exposure
Speaker 1: right now. Kathy, this has been scenario that people have
Speaker 1: been hating on for a long time. Junk bonds not
Speaker 1: a loved asset class, even as they've rallied. Now, however,
Speaker 1: Goldman Sacces Asset Management, among others are starting to kind
Speaker 1: of tiptoe into even the triple ce rated debt, the
Speaker 1: lowest or of junk bonds. And I'm wondering, what are
Speaker 1: they getting wrong in your view? You know, I'm not
Speaker 1: really sure why, um, you would be crazy about triple ceas,
Speaker 1: except that they've underperformed the rest of the high old market.
Speaker 1: So maybe they you know, maybe there's a view that
Speaker 1: they can take advantage of a convergence between triple seas
Speaker 1: and the rest of the high old market in a
Speaker 1: benign fed scenario, which is what we have. But it
Speaker 1: strikes me as the old, the old idea of picking
Speaker 1: up Nichols in front of the steam roller. You know,
Speaker 1: it's not probably a game that most people want to play.
Speaker 1: What's the trigger here to spur the sell off here? Well,
Speaker 1: I think you could have a couple of things. One
Speaker 1: could be, um, that the leverage gets to be too
Speaker 1: much for some of the players and and we start
Speaker 1: to see some weakening there, uh, and the spreads blowout
Speaker 1: that way. UM, so more economically driven than anything else.
Speaker 1: And on my to be just sector based. You know,
Speaker 1: we've already seen underperformance by energy. If you had another
Speaker 1: sector that suffered, um, that could be the case. Um
Speaker 1: or it could be the surprising, surprising strength in the
Speaker 1: economy which leans people towards viewing that reads might actually
Speaker 1: go up for safe assets. Now we don't think that's
Speaker 1: a real likely scenario, but um that could also cause
Speaker 1: high yield spreads to move. Kathy Jones A charm of
Speaker 1: what you do in Lizaran's understoods every day as you
Speaker 1: understand flows of retail like no one, what is what
Speaker 1: are people actually doing with their money in fixed income?
Speaker 1: I'm fascinated by this they you know, you say, well
Speaker 1: I want you to buy a two year coupon. You're like, really,
Speaker 1: are they all out of twenty plus years trying to
Speaker 1: make total return? Well, you know, of course we have
Speaker 1: a wide variety. You know, a lot of jesters have
Speaker 1: been saying very short duration because frankly, the yields aren't
Speaker 1: that attractive to to take on duration risk. Some have
Speaker 1: been moving into risk ear assets, but I would say
Speaker 1: it's mostly a pretty much a short duration, high quality
Speaker 1: story for many investors. I look at full faith and
Speaker 1: credit versus full faith UH and credit versus the credit market,
Speaker 1: and I guess you can pick up yield there. How
Speaker 1: much do I actually pick up if I go into
Speaker 1: the credit market versus government bonds in paper. So if
Speaker 1: you're an investment rage, you're going to pick up a
Speaker 1: hundred basis points or sell on change. Yeah, in a
Speaker 1: higher quality um investment grade corporate bond. And you know
Speaker 1: the thing is, we have a lot of investors and
Speaker 1: municipal bonds and actually, after tax from many investors, bonds
Speaker 1: make more sense than Okay, great, but what's the movement
Speaker 1: in muni bonds has been extraordinary this year? I mean,
Speaker 1: can you state that muni bonds price up, yield down,
Speaker 1: or price to perfection? I wouldn't say price to perfection,
Speaker 1: but you know, clearly valuations, particularly at the short end
Speaker 1: of the curve, has have moved this year. As you
Speaker 1: go out the curve, valuations have actually improved because we've
Speaker 1: gotten a little bit more fly. Let's bring some life
Speaker 1: to the investment grade part of the market. Kathy, we've
Speaker 1: had this big discussion over the last couple of days
Speaker 1: about triple b's. It's come up so many times over
Speaker 1: the last couple of years for anyone outside of fixed
Speaker 1: income tuning in and interested in the concept. If you
Speaker 1: look at the market, every security that comes to market
Speaker 1: will have a credit rating. The line of the sound
Speaker 1: between investment grade and junk is triple B. And within
Speaker 1: the triple B complex and big well known companies like Ford, A,
Speaker 1: T and T, the likes of A B and A
Speaker 1: B and BED and the worrior is Cathy that in
Speaker 1: an economic downturn, these guys won't have done the hard work,
Speaker 1: the banush sheets won't look good and they will drop
Speaker 1: down to junk status. Cathy just weigh in to that
Speaker 1: broader debate at the moment, Well, it's certainly a risk.
Speaker 1: We know that a lot of those companies have stated
Speaker 1: that they're focused on maintaining a triple B reading and
Speaker 1: not getting U downgraded into two junk status. But um,
Speaker 1: you know, good intentions are just bad good intentions. So
Speaker 1: if we were to hit it down tour and you
Speaker 1: would see some of these big companies down rated. The
Speaker 1: market for high yield is much smaller, the pool of
Speaker 1: buyers is much smaller than in the investment grade area.
Speaker 1: And the worry is if you get one of these
Speaker 1: big companies that gets down grade, if you have a
Speaker 1: lot of securities hitting the high yield market, and inevitably
Speaker 1: there's a big price gap that the whole market would
Speaker 1: probably feel. I mean, this is to put this into English,
Speaker 1: and we could do this with Lisa Bramo. It's farm Girl.
Speaker 1: If Fargo North Dakota, I mean the twenty year piece
Speaker 1: out of Fargo North Dakota is a four percent coupon
Speaker 1: price to one ten yield. The worst is three point
Speaker 1: three percent, and I'm joining a two percent coupon right now.
Speaker 1: Fargo is reliable. Actually that's probably less risky than other areas.
Speaker 1: But I'm just saying when I'm no. But but that's
Speaker 1: an example of where it's a four investment code. I'm
Speaker 1: getting you. I'm not saying coupon. I stand listen. Before
Speaker 1: we let you go, and before we start talking about
Speaker 1: the farm journal, I do want to get your sense
Speaker 1: on liquidity risk because this is something that Lolly was
Speaker 1: just talking about that she's really concerned about a breach
Speaker 1: in the plumbing. Do you buy that? Is that still
Speaker 1: a concern even though most people seem to have forgotten. Well,
Speaker 1: it's obviously still on the radar, but I think the
Speaker 1: FED has has made huge moves to address it right now,
Speaker 1: so I wouldn't be as concerned as we were a
Speaker 1: six months or a year ago. You know, it's funny
Speaker 1: because it all sort of came to ahead in September
Speaker 1: when we had the spike in the in the repo rate.
Speaker 1: But this is something people have been talking about since
Speaker 1: the FED started online. It's balance sheet, so um. I
Speaker 1: think they've taken huge steps to to address it, and
Speaker 1: I'm much less concerned than I was a while back.
Speaker 1: Cathy johnest to catch how many cholnse wap chief Fixed
Speaker 1: Income strategistic We finished strong today so my morning. It
Speaker 1: has been spectacular to touch upon the Bloomberg New Economy
Speaker 1: Forum in Beijing, and of course the highlight of this,
Speaker 1: without question was Neil Ferguson's conversation with Henry Kissinger. We
Speaker 1: are now almost fifty years on from what those of
Speaker 1: us of a certain vintage remember, is absolutely shocking. I
Speaker 1: can't begin to calculate the shock of that nineteen seventy
Speaker 1: one morning. In the nineteen seventy two is President Nixon
Speaker 1: went there. I've actually Paul had the honor of being
Speaker 1: at the Pace Hotel in Shanghai, in the room that
Speaker 1: Henry Kissinger was in literally the night before he flew
Speaker 1: to Beijing to get this thing started. And we have
Speaker 1: the right guest now he is Ambassador Bacus. He's a
Speaker 1: gentleman from Montana. Of course you know him from his
Speaker 1: public service to the nation as a senator, uh and
Speaker 1: as our eleventh ambassador to China. We're just thrilled Max Bocus,
Speaker 1: you could be with us at today, Max Shuart Stanford
Speaker 1: and then on back to Montana's a politician. Do you
Speaker 1: have a recollection of that absolute shock when America woke
Speaker 1: up and in Nixon so changed that moment with China.
Speaker 1: I do, I very much do, and remember the photographs
Speaker 1: of occurred there when Nixon went over. It's interesting to
Speaker 1: me too. This is not really directly on point, but
Speaker 1: Mike manstill forming bastard um. I came across the speech
Speaker 1: he wrote in nineteen sixty six, um explaining why the
Speaker 1: United States should spend more time with China and understand China.
Speaker 1: It was the best most effective statement I've ever read
Speaker 1: by anybody on any subject. And I talked to him,
Speaker 1: to Kristenier about that just last week and he said, yes,
Speaker 1: Mike had a big influence on our going over to China,
Speaker 1: on President Nixon going to China. So yeah, I was.
Speaker 1: I was I do remember it, and this was so important, folks,
Speaker 1: because Senator Bacchus and Senator Mansfield and others in the
Speaker 1: House and in the dialogue, we're so isolated from a
Speaker 1: discussion that came out of all of World War Two
Speaker 1: in the fractious fifties and sixties. Here is Henry Kissinger
Speaker 1: today with Bloomberg and Beijing Max Bacchus, looking at the
Speaker 1: foothills of a cold war? How close are we to?
Speaker 1: It's a beautiful phrase, How close are we to the
Speaker 1: foothills of a cold war? After what you've observed the
Speaker 1: US Chinese relationships in the last year or two. Well,
Speaker 1: we're slipping in that direction unfortunately, UM and I think
Speaker 1: it's it's a fridge. First of all, it's somewhat natural,
Speaker 1: rising power, established power. People have talked about this so
Speaker 1: called considities trap, but we're kind of accelerating at The
Speaker 1: United States were helping. UM managed the relationship as well
Speaker 1: as we should. And in the same vain president she
Speaker 1: is the nationalistic He also is, I think contributing to
Speaker 1: the problem. We have two very strong willed people each
Speaker 1: side of the PA city and either one wants to
Speaker 1: really do a deal in the way one should do
Speaker 1: a deal. So, Senator, there seems to be bipartisan support
Speaker 1: that there needs to be a real frank dialogue between
Speaker 1: the China and the US about trade. Um. So that
Speaker 1: seems to have some support. Where do you think this
Speaker 1: may be going wrong here? I think, Frankly, Um, I
Speaker 1: don't mean to sound particle a partisan political partisan. I
Speaker 1: think part of the problem is as President Trump's approach
Speaker 1: to this is a bit flawed. He is trying to
Speaker 1: shape shake China up by slapping these tariffs on and that, frankly,
Speaker 1: is not working. I created that said now is much
Speaker 1: higer now was back when he took office. Second, it's
Speaker 1: not going to get the heart of the problem. Heart
Speaker 1: of the problem, clearly is is the structural problems in
Speaker 1: China for technology transfer subsidies and the like. But John,
Speaker 1: they solve it. It needed Frankly, somebody has sit down,
Speaker 1: a president understands this, a president who really wants to
Speaker 1: solve it, and and does so privately, not probably without
Speaker 1: all that is in Twitter, and starts to build up
Speaker 1: trust and confidence with the Chinese. That hasn't happened, Senator
Speaker 1: bogg Is, because of news flow. We're gonna have to
Speaker 1: keep it shorter today and it's most regrettable, but I
Speaker 1: must touch upon Hong Kong. Senator McConnell has provided leadership
Speaker 1: and with Senator Rubio of Florida in making a statement
Speaker 1: about Hong Kong by our legislative branch, he succeeded in
Speaker 1: that with the Senate of the House waiting for the
Speaker 1: President's signature and signature on a legislative effort to tell
Speaker 1: and send a message to Beijing for that matter, to
Speaker 1: carry lamb in Hong Kong. Is this appropriate foreign diplomacy
Speaker 1: by our legislative branch? Frankly, I have trouble whether, Um,
Speaker 1: it's not going to help the protesters. Frankly, just more
Speaker 1: it will probably hurt the protesters, because if the United
Speaker 1: States is not to give a special status of Hong Kong,
Speaker 1: or if it thanks to certain people and on congret
Speaker 1: China over human rights, that's going to step back the protesters.
Speaker 1: Second is going to also put another nail in the
Speaker 1: buy bowler in in the coffin. That's driving the US
Speaker 1: and China apart from each other because very much upset China.
Speaker 1: And third is not going to help help us get
Speaker 1: a trade deal. Frank. If I were in the Senate,
Speaker 1: I vote against it. This will hurt the protesters not
Speaker 1: helping Senator backs. Thank you so much. He's the eleventh
Speaker 1: Ambassador of China for the United States and we're thrilled
Speaker 1: thinking you join us today. Thanks for listening to the
Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at
Speaker 1: Tom Key before the podcast. You can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio