WEBVTT - Surveillance: The Foothills Of A Cold War With Baucus 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Ley. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.640 Bloomberg dot Com, and of course on the Bloomberg I'm 0:00:27.640 --> 0:00:30.200 really place decide that. Joining us now on the phone 0:00:30.440 --> 0:00:32.720 from Paris at the O e c D headquarters is 0:00:32.800 --> 0:00:36.200 Lawrence Boon, O E c D Chief Economists. Lawrence, great 0:00:36.240 --> 0:00:38.040 to have you with us. You're just out with your 0:00:38.240 --> 0:00:40.880 year ahead, trimming the outlook, but seeing a much bigger 0:00:40.920 --> 0:00:44.320 problem potentially brewing for the decade ahead. Just walk us 0:00:44.320 --> 0:00:48.360 through what you're saying. So that's true. We've actually projecting 0:00:48.640 --> 0:00:52.600 both to remain stuck at two point nine for the 0:00:52.680 --> 0:00:56.560 next two years. And that's mostly due to all the 0:00:56.640 --> 0:01:00.840 uncertainty related to the trade tensions, but so to China 0:01:00.920 --> 0:01:04.680 economic slowdown and and much beyond that geo political and 0:01:04.720 --> 0:01:09.200 political economy uncertainty. Lollis, how do you make a year 0:01:09.200 --> 0:01:12.240 ahead calls the base case around trade? How difficult as 0:01:12.280 --> 0:01:16.320 things this year? Well, you know, the difficulty with the 0:01:16.360 --> 0:01:20.039 trade tensions is that they're very focused on a few tariffs, 0:01:20.160 --> 0:01:23.199 which has which have a direct effect on the price 0:01:23.240 --> 0:01:27.400 of important goods, so consumers the higher forward the the buy. 0:01:27.880 --> 0:01:31.839 But the biggest effect is the uncertainty that's creating because 0:01:31.880 --> 0:01:34.800 if you're affirmed today, you don't really know when you 0:01:35.040 --> 0:01:38.959 where you're going to launch your next investment, because these 0:01:39.000 --> 0:01:44.600 trange tensions jump from countries to countries to start and 0:01:44.600 --> 0:01:48.240 and then they're at heart there is a performed in 0:01:48.360 --> 0:01:53.280 satisfaction with the way that that a lot of support 0:01:53.360 --> 0:01:59.360 to government subsidies, protection of inticule proterity technology transferred. All 0:01:59.440 --> 0:02:03.280 these mingled within this discussion and they are very deep 0:02:03.360 --> 0:02:07.080 rooted problems that will take a long time to address. 0:02:07.320 --> 0:02:10.120 Right although you are seeing a guarded optimism of heading 0:02:10.120 --> 0:02:14.279 into a lot of economists and investors seeing a resurgence 0:02:14.360 --> 0:02:16.400 in the global economy, and you square that with the 0:02:16.440 --> 0:02:20.720 deteriorating outlook from the O E c D. So I 0:02:20.760 --> 0:02:23.480 think there are two things to distinguish. If you get 0:02:23.520 --> 0:02:27.120 an agreement on what's called the Phase one between the 0:02:27.200 --> 0:02:30.840 US and China, then yes, market will have some temporary 0:02:30.919 --> 0:02:33.959 relief and chap But as I was saying, the issue 0:02:34.000 --> 0:02:37.320 surrounding trade um much beyond what we are seeing here 0:02:37.760 --> 0:02:40.320 um and they have to do with the way that 0:02:40.440 --> 0:02:45.840 digital digitalization has changed trade and commercial exchanges. They have 0:02:46.000 --> 0:02:48.880 to see with all the subsidies and the form of 0:02:48.960 --> 0:02:52.720 government supports that out there which are undermining the level 0:02:52.760 --> 0:02:56.959 playing field. And these issues we will take years to resolve, 0:02:57.200 --> 0:03:02.079 especially if we're just focusing on by little tariffs. It's 0:03:02.120 --> 0:03:04.160 like if you were focusing on the top of the 0:03:04.160 --> 0:03:07.680 iceberg when the iceberg below the sea level is growing. 0:03:07.919 --> 0:03:10.920 Laurent's your predecessor of those O E c D. Catherine 0:03:10.919 --> 0:03:14.079 man Now at City Group, as an o E c 0:03:14.200 --> 0:03:18.520 D was quite strident about the roll up that we're 0:03:18.520 --> 0:03:23.320 seeing in world business because of slow economic growth. She 0:03:23.360 --> 0:03:26.720 would speak of scale and the idea of monopsidy, the 0:03:26.800 --> 0:03:30.000 idea of monopoly coming in to play. We're seeing that 0:03:30.040 --> 0:03:34.200 in America this morning with a merger in discount brokerage 0:03:34.280 --> 0:03:38.320 reported of Schwab and TD Ameritrade. Do you in Paris 0:03:38.840 --> 0:03:41.720 still believe that we will see a roll up of 0:03:41.800 --> 0:03:47.080 global business because of slow economic growth. So they are 0:03:47.200 --> 0:03:52.080 things threatening globalization and that's the trade tension that we 0:03:52.200 --> 0:03:56.560 have discussed, and it's also the possible tax fugmentation that 0:03:56.680 --> 0:03:59.600 the O E c D is trying to address um 0:03:59.640 --> 0:04:03.920 and that relates really well to how our business is 0:04:04.000 --> 0:04:08.280 going to thrive in tomorrow's word, and for that we 0:04:08.360 --> 0:04:13.080 need more certainty, more prectability, and the better level playing field. 0:04:13.240 --> 0:04:17.200 And that means you know, ending this thought that tensions 0:04:17.200 --> 0:04:21.359 and tariff. It also means concluding, as we expect, the 0:04:21.440 --> 0:04:26.719 international negotiation on the taxation of multinational enterprises. As you know, 0:04:26.800 --> 0:04:29.280 we've been working on this for a while now and 0:04:29.320 --> 0:04:31.920 we really think that we can conclude an agreement in 0:04:32.040 --> 0:04:37.160 twenty that would change this specimism of globalization. I mean, 0:04:37.200 --> 0:04:39.360 what what this comes down to? A Lawrencebourne. I'm gonna 0:04:39.600 --> 0:04:43.799 uh site here magdam desire. The London School of Economics, 0:04:43.920 --> 0:04:48.320 which is all of economics, is about profitability. Given the 0:04:48.400 --> 0:04:51.960 O E. C D view, how you extend your timeline 0:04:51.960 --> 0:04:55.239 out to two thousand one, will there be a dearth 0:04:55.440 --> 0:04:58.800 of prop prop prop I'll get it out three to one. 0:04:59.120 --> 0:05:02.359 Will there be a earth of profitability? As we have 0:05:02.480 --> 0:05:06.760 slower economic growth? But that's what that's one of the 0:05:06.839 --> 0:05:10.360 things we're really concerned about. If you stay with various 0:05:10.360 --> 0:05:14.000 sluggish growth for a long time, then there will not 0:05:14.200 --> 0:05:18.080 be enough revenues to to you know, there will be 0:05:18.160 --> 0:05:21.880 not enough growth to raise revenues, and that applies to 0:05:22.480 --> 0:05:27.520 people as maternity applies to businesses. And also also if 0:05:27.520 --> 0:05:31.679 you want profits to be lifted, you need investment, which 0:05:31.760 --> 0:05:36.640 is why we're particularly invested in insisting on the need 0:05:36.800 --> 0:05:41.800 for governments to level up public investment because that's one 0:05:41.920 --> 0:05:45.640 of the main impediment to the implementation of private sector 0:05:46.040 --> 0:05:49.440 investment plans. Lauren's point, thank you so much. We greatly 0:05:49.480 --> 0:06:10.440 approiciate of economics the O E. C. D. Here right now, 0:06:10.560 --> 0:06:13.840 Joe Quidlin, who's with us with decades of experience at 0:06:13.880 --> 0:06:17.719 Maryland Bank of America private bank, and out of course 0:06:17.800 --> 0:06:21.240 with investment perspective. But Joe, you and I are gonna 0:06:21.240 --> 0:06:25.880 wax philosophical here. Remember the first day discount brokerage showed up. 0:06:26.400 --> 0:06:30.160 You and I were like what, remember that, we can't 0:06:30.200 --> 0:06:32.120 do it ourselves, but it was super cheap and we 0:06:32.160 --> 0:06:35.400 all know they're never gonna last. John, there is discount 0:06:35.440 --> 0:06:39.960 brokerage a big deal in London. Brokerage people have to 0:06:40.000 --> 0:06:43.919 try farn exchange very well. We don't do that. But 0:06:44.040 --> 0:06:49.159 it was Charles who remember that first open a whole 0:06:49.160 --> 0:06:52.160 new frontier for retail investor. People laughed for about six 0:06:52.200 --> 0:06:54.960 months until oh, so here we are with a mating 0:06:55.000 --> 0:06:57.720 here and it goes to your work on a broader 0:06:57.800 --> 0:07:03.680 investment strategy to slower economic growth, challenge profitability one one 0:07:03.680 --> 0:07:05.599 in doubt. You have to mate, that's all, It's all 0:07:05.640 --> 0:07:08.520 it's about. You have to look for that growth organically 0:07:08.640 --> 0:07:12.080 is very tough given a democraphic slower growth, lack of productivity. So, 0:07:12.200 --> 0:07:15.080 I mean, what's surprises me? Time? Like ten years after 0:07:15.120 --> 0:07:17.160 the crisis, so to speak, we are starting to see 0:07:17.200 --> 0:07:20.200 some of the financial companies thinking about, you know, marrying 0:07:20.280 --> 0:07:22.720 or like at least observing each other. And well, I'm 0:07:22.760 --> 0:07:24.800 on this is TD a merritrade folks. Of course, Joe 0:07:24.880 --> 0:07:28.000 Ricketts firm to be taken up by Schwab. It is presumed, 0:07:28.040 --> 0:07:30.760 it has not announced yet, CNBC reporting this and Fox 0:07:30.800 --> 0:07:33.880 Biz putting a twenty six billion dollar number on it. 0:07:33.920 --> 0:07:36.200 But it comes down to to bring it over to 0:07:36.320 --> 0:07:42.640 John's uh world of yield, lower nominal GDP, some form 0:07:42.680 --> 0:07:46.240 of disinflation and growth that just doesn't get it done 0:07:46.400 --> 0:07:48.560 right right, It doesn't get it done and goes back 0:07:48.560 --> 0:07:50.560 to what we talked about earlier time, like wanting and 0:07:50.640 --> 0:07:53.320 needing the scale. So if you don't have scale, you 0:07:53.360 --> 0:07:56.760 can't drive productivity or have the margin expansion. So this 0:07:56.840 --> 0:08:00.200 is about scale and reaching for that type of not 0:08:00.360 --> 0:08:02.400 organic growth, but kind of emerge growth. I want to 0:08:02.480 --> 0:08:04.760 challenge the idea that this is simply a case of 0:08:04.800 --> 0:08:07.960 slowing growth and really raise a question of an existential 0:08:08.000 --> 0:08:11.400 crisis facing the asset management and brokerage businesses. People want 0:08:11.440 --> 0:08:14.120 stuff for free, and how long it can mating and 0:08:14.200 --> 0:08:18.560 scale sustain businesses that ultimately are going to zero fee models. Well, 0:08:18.600 --> 0:08:20.800 I would push back a little bit of people want 0:08:21.280 --> 0:08:24.160 for free because we've got a massive transfer of wealth 0:08:24.240 --> 0:08:27.920 coming in this country, like nine trillion dollars, and in 0:08:27.960 --> 0:08:31.160 the private wealth face they still want that service. They 0:08:31.200 --> 0:08:34.880 still need tax strategy. So I think your average retail 0:08:35.200 --> 0:08:37.800 investor does want it free and it's expecting it free. 0:08:37.800 --> 0:08:40.280 But there's also part of the industry where I still 0:08:40.320 --> 0:08:44.360 want to have access to UH specialty asset management. I 0:08:44.360 --> 0:08:46.400 still want access to credit, I want the full line 0:08:46.440 --> 0:08:48.760 of concier services. So I do think there is a 0:08:48.760 --> 0:08:50.840 segment that wants it free. But when you look at 0:08:51.080 --> 0:08:55.200 ten trillion dollars and inheritance being passed generationally, that's not 0:08:55.240 --> 0:08:57.920 going to be done on a retail wire. Do you 0:08:57.960 --> 0:08:59.599 see people went in to pipe for that? Oh, the 0:08:59.640 --> 0:09:02.760 sevin is that you just described, they they're willing to 0:09:02.760 --> 0:09:06.200 pay for. But because of the competition, yes, the margins 0:09:06.200 --> 0:09:09.240 are coming down absolutely, which means we anyone like Bank 0:09:09.320 --> 0:09:11.600 of America or anyone in the industry has to be 0:09:11.679 --> 0:09:14.640 more productive, has to have the right products in place 0:09:14.880 --> 0:09:16.800 and drive that growth and up. In this really strange 0:09:16.840 --> 0:09:19.280 world where companies like schout Swab and tv amrit trade 0:09:19.400 --> 0:09:22.000 end up making money like little banks a little bit 0:09:22.000 --> 0:09:23.920 of candy for the deposits, they have taken a little 0:09:23.960 --> 0:09:26.320 bit more candy on doing other things with the money. 0:09:26.360 --> 0:09:28.199 What do you think of that as a business model, 0:09:28.200 --> 0:09:30.040 that all of these companies just get bigger and start 0:09:30.040 --> 0:09:32.720 behaving like little banks, like a little bit. I mean, 0:09:32.840 --> 0:09:34.920 I mean I work for a big bank, so I 0:09:34.920 --> 0:09:37.400 mean I'll preface it with that. We'll see if it 0:09:37.440 --> 0:09:39.720 works or now. But yes, it's it's part. It's part 0:09:40.360 --> 0:09:42.720 of birth right, it's it's part it's part of that. 0:09:42.800 --> 0:09:45.120 Like I got my model isn't producing what I expected 0:09:45.120 --> 0:09:47.520 in terms of revenue or profits. What do I do next? 0:09:47.520 --> 0:09:50.960 And rarely does that. Is that sustainable and or is 0:09:50.960 --> 0:09:53.240 it being being set up for more mergers? Got to 0:09:53.240 --> 0:09:55.240 talk about your brought a market strategy as well. I 0:09:55.240 --> 0:09:57.080 said at the top of the program. Investors at the 0:09:57.080 --> 0:10:01.160 moment seemed to be lost between courcious optimism total confusion 0:10:01.200 --> 0:10:03.960 of everything around China. How do you have any kind 0:10:04.000 --> 0:10:06.640 of optimism gun into next year without any real climency 0:10:06.760 --> 0:10:08.520 on some of these big issues. Well, I mean, look 0:10:08.520 --> 0:10:11.280 at earnings, their corder earnings weren't that bad. They're better 0:10:11.280 --> 0:10:14.240 and expected. You know, the economy is chugging along at 0:10:14.240 --> 0:10:16.679 two percent. It's not great, but we're you know, an 0:10:16.760 --> 0:10:19.679 eleven twelfth year of the expansion. The Chinese economy is 0:10:19.679 --> 0:10:23.080 growing at five percent plus. Europe is looking slightly better. 0:10:23.240 --> 0:10:25.280 Let's put it this way, Europe is looking less bad. 0:10:25.600 --> 0:10:29.120 So globally we're bottoming out. The manufacturing numbers are getting better, 0:10:29.120 --> 0:10:31.160 but it's too early to jump with both feets. So 0:10:31.400 --> 0:10:34.800 you know, whether it's healthcare, technology, robotics, automa. Sure, there's 0:10:34.800 --> 0:10:37.319 places to put money to work. And are you sustaining 0:10:37.520 --> 0:10:40.920 US dominant investment? Do you still believe US large camp 0:10:40.960 --> 0:10:46.360 will lead after Eno? I think will become more balanced 0:10:46.480 --> 0:10:49.520 next year between more developed Europe, Japan and then the 0:10:49.559 --> 0:10:52.040 emerging markets. But you know the emerging markets, we've been 0:10:52.040 --> 0:10:55.400 waiting and waiting for exactly what's the is it China 0:10:55.440 --> 0:10:57.760 trade clears? I think it's China trade cuder, But you know, 0:10:57.800 --> 0:11:00.960 the emerging markets. I would just not throw the term 0:11:00.960 --> 0:11:05.119 out of the vocabulary. Of course, specific it's say at sectors, 0:11:05.240 --> 0:11:09.520 at countries technology versus consumption. That's issue. That's the key. 0:11:09.640 --> 0:11:12.400 This has been a wonderful Joe Quilin thanks us with 0:11:12.440 --> 0:11:29.920 a ton of breaking news, A potential time between challenge 0:11:29.960 --> 0:11:31.640 Schwab and Tedium matters right, and as far as then 0:11:31.640 --> 0:11:35.199 I tell them no comment from either company. I agree 0:11:35.200 --> 0:11:37.360 in this school that you state that this is a 0:11:37.400 --> 0:11:39.800 bit odd the way the flow is coming out. I 0:11:39.880 --> 0:11:43.280 know Fox Biz put a twenty six billion dollar statistic 0:11:43.320 --> 0:11:46.320 on the deal about five times sales. A tie up 0:11:46.360 --> 0:11:49.320 would create a firm with roughly five trillion dollars and 0:11:49.440 --> 0:11:55.319 combined asset and serious Jim Cramer's shop. Really interestingly, I 0:11:55.679 --> 0:11:59.040 I didn't know this. Schwab's Commission trades, it's only eight 0:11:59.040 --> 0:12:01.880 percent of their business. We're td imrig trade. That's what 0:12:01.920 --> 0:12:05.000 you'd expect this on the program and leads away in 0:12:05.080 --> 0:12:08.360 it's the it's the banks, the little banks within these brokerages. 0:12:08.400 --> 0:12:10.640 That's how they're making the money. It's the hope to 0:12:10.679 --> 0:12:14.280 bring in customers that they can actually pink and other 0:12:14.640 --> 0:12:17.160 layers of revenue streams. But it is a question how 0:12:17.200 --> 0:12:18.680 much are people willing to pay for that one of 0:12:18.720 --> 0:12:21.000 these sort of demand free services there too? How do 0:12:21.040 --> 0:12:22.959 you make money from it? That's a big question. Joining 0:12:23.000 --> 0:12:24.680 us in the studio, I'm really pleased to say, looking 0:12:24.720 --> 0:12:26.800 forward to this intoview lay too. Charlie joins us now 0:12:26.880 --> 0:12:30.400 jo h c M Senior fund Manager. Good morning to Larie, 0:12:30.520 --> 0:12:32.839 good morning. We won't be talking about tdumrrige trade and 0:12:32.920 --> 0:12:35.760 charge SWAB. I can see embracing for potential question on that. 0:12:35.800 --> 0:12:37.839 Don't worry, you know what we will talk about Bill 0:12:37.920 --> 0:12:40.480 Dudley's peace out on Bloomberg Opinion in the last twenty 0:12:40.559 --> 0:12:44.520 four hours Bloomberg Opinion columnist, formally the New York Fed President, 0:12:44.559 --> 0:12:46.240 and of course he worked at government with you many 0:12:46.280 --> 0:12:49.200 many years ago. Larly, his comments on triple beats, That's 0:12:49.200 --> 0:12:52.280 where I want to start. Whenever this conversation comes up 0:12:52.360 --> 0:12:55.880 anyone outside of the fixed income world says this is 0:12:55.880 --> 0:12:59.040 a problem. Everyone inside of the fixed income world that 0:12:59.080 --> 0:13:01.560 I get to speak to, Lisa and Tom have conversations 0:13:01.600 --> 0:13:04.839 with us, well, say, this isn't a problem. Walk me 0:13:04.880 --> 0:13:08.120 through the issues that play here. Sure. So. Well, first 0:13:08.160 --> 0:13:10.160 of all, I'm really excited because I'm in the same 0:13:10.200 --> 0:13:12.320 height as Tom, because usually I feel like a shrimp. 0:13:13.440 --> 0:13:18.040 That is this is this is exciting so much at 0:13:18.120 --> 0:13:29.040 lunch yesterday A little bit wow. Um. So the facts 0:13:29.040 --> 0:13:32.040 are correct. The Triple Bees as a whole is about 0:13:32.040 --> 0:13:35.280 half of the US Investment Great Index. And I think 0:13:35.280 --> 0:13:37.760 when you look at the largest and actually came armed 0:13:37.760 --> 0:13:40.600 with data, if you look at the top thirteen issuers 0:13:40.679 --> 0:13:44.640 within that, the debt numbers are staggering, right, So the 0:13:44.679 --> 0:13:46.439 top issues would be something like A T and T 0:13:47.040 --> 0:13:51.120 hundred and ninety billion of that and you go down 0:13:51.200 --> 0:13:53.240 the numbers. But if you look at these top thirteen, 0:13:54.160 --> 0:13:56.920 what's unique about them is with the exception of the 0:13:56.960 --> 0:14:01.920 auto an energy where perhaps you have a little bit 0:14:02.000 --> 0:14:05.040 more well if you have more exposure to external shocks 0:14:05.080 --> 0:14:08.040 that may not be in your control. Everybody else has 0:14:08.080 --> 0:14:11.280 a very steady revenue stream. So the de leveraging path 0:14:11.440 --> 0:14:13.920 is there. So I don't want to ignore the fact 0:14:14.000 --> 0:14:16.679 that there are a large component. I just don't think 0:14:16.679 --> 0:14:19.560 it people should be as alarmed as that they should be. Okay, So, 0:14:19.600 --> 0:14:22.640 then is the risk of some sort of fallout from 0:14:22.680 --> 0:14:25.440 the corporate debt build up that Bill Dudley was flagging? 0:14:26.000 --> 0:14:29.160 Is that overstated or is that risk still there? Oh? 0:14:29.200 --> 0:14:32.280 I think the corporate over uh debt build out, I 0:14:32.280 --> 0:14:34.680 think the risk is in a different way. So to me, 0:14:35.400 --> 0:14:36.680 you may know these numbers, but I think it's a 0:14:36.680 --> 0:14:38.720 staggered number. The U, S I G and high yield 0:14:38.800 --> 0:14:42.120 number is about eight and a half trillion dollars. Now 0:14:42.160 --> 0:14:46.840 it's too excess the financial crisis. And if you look 0:14:46.880 --> 0:14:50.320 at the debt in these credit assets that's in daily 0:14:50.400 --> 0:14:54.840 liquid mutual funds, it's a little it's about a little 0:14:54.880 --> 0:14:58.640 over a trillion, Okay. If you look at the US 0:14:58.800 --> 0:15:02.760 broker balance sheet, it's of daily inventory of how much 0:15:02.800 --> 0:15:05.880 they're willing to trade and sort of keep on the books. 0:15:06.160 --> 0:15:10.720 Twelve billion. So to me, the mismatches not necessarily these 0:15:10.720 --> 0:15:13.240 things are gonna get downgraded from triple B to double 0:15:13.280 --> 0:15:14.680 B in the high yield is going to be a 0:15:14.680 --> 0:15:19.160 total utter disaster to me. The issue is how do 0:15:19.200 --> 0:15:23.400 you when the selling point comes, how does the plumbing works? 0:15:23.400 --> 0:15:25.920 Because I don't think that's been tested and I don't 0:15:25.960 --> 0:15:28.360 think people understand that. So what do you think will happen? 0:15:29.160 --> 0:15:31.520 How do you think things will function? Well, A, you're 0:15:31.520 --> 0:15:34.840 gonna it's gonna be a price discovery. So it's good 0:15:35.120 --> 0:15:38.160 in that. I don't know. I mean, I think you 0:15:38.280 --> 0:15:41.400 may test where your marks are not accurate. It has 0:15:41.440 --> 0:15:43.880 nothing to do in some cases with the company's health. 0:15:43.960 --> 0:15:46.080 It's it's like selling your house, right your house is 0:15:46.120 --> 0:15:47.960 worth what somebody is willing to pay for it. You 0:15:47.960 --> 0:15:50.840 may think it's a million bucks. It depends where the 0:15:50.880 --> 0:15:53.080 bit comes in. So I spoke to Pimcom about these 0:15:53.120 --> 0:15:55.120 kind of issues earlier this year and they said, just 0:15:55.160 --> 0:15:57.080 in terms of their investment strategy, that why they want 0:15:57.120 --> 0:15:58.960 to play this and outside this quite simply, and you 0:15:58.960 --> 0:16:00.760 can add some new wants to it. We want to 0:16:00.760 --> 0:16:04.040 be liquidity providers, not liquidity demanders. Wait for these kind 0:16:04.080 --> 0:16:07.440 of gappy moves in credit and then deploy capital like 0:16:07.520 --> 0:16:09.400 can you be that patient? Can you went around for 0:16:09.400 --> 0:16:12.560 those kind of things? You certainly can, But look, I 0:16:12.560 --> 0:16:14.560 mean this is another it's a pit peep of mind 0:16:14.680 --> 0:16:18.440 and nothing against PIMCO. It's people always says there's cash 0:16:18.440 --> 0:16:20.280 on the sidelines. There's no such thing as cash on 0:16:20.320 --> 0:16:22.960 the sidelines, right, Nobody has bags of cash sitting in. 0:16:23.240 --> 0:16:26.440 It's sitting in something else, right, And usually Tom Keane 0:16:26.560 --> 0:16:34.000 actually has bags of cash and sitting on That's why 0:16:34.080 --> 0:16:37.880 you're my height today. You're sitting on under yours. The 0:16:37.960 --> 0:16:44.240 leverage cash continue. Oh boy, this conversation is getting dangerous. Um. 0:16:44.280 --> 0:16:48.240 It's when when big fallofs happened, big wall events happen. 0:16:48.360 --> 0:16:50.880 The markets are connected, right, everything kind of moves, so 0:16:50.920 --> 0:16:54.600 you have to sell something to fund something else. And 0:16:54.680 --> 0:16:58.280 that's where you know, it becomes a lot difficult. So yes, 0:16:58.440 --> 0:17:02.840 in concept, can you buy hundred million two million? Sure? 0:17:03.160 --> 0:17:06.080 Can you be able to deploy billions and immediately be 0:17:06.119 --> 0:17:09.040 able to take advantage at that time? I don't know. 0:17:09.600 --> 0:17:14.639 The solution always is the extenduration and extend maturity. Is 0:17:14.680 --> 0:17:17.800 that the trap of next year when in doubt go 0:17:17.960 --> 0:17:20.480 from x to X plus one X plus two. Is 0:17:20.480 --> 0:17:25.679 that what's going to happen? I don't know. Duration. I 0:17:25.720 --> 0:17:29.119 think it's a very tough call. Um. We we played 0:17:29.119 --> 0:17:31.160 around with it a little bit and we played around 0:17:31.240 --> 0:17:35.080 the context of Look, I think we're a little unsure 0:17:35.119 --> 0:17:37.680 whether the recovery is happening or not, so perhaps we're 0:17:37.720 --> 0:17:41.040 better off just literally buying ten year treasuries and just 0:17:41.119 --> 0:17:43.480 not taking the credit risk as opposed to on i g. Credit. 0:17:43.680 --> 0:17:45.960 There's also something that you're talking about before, which is 0:17:46.000 --> 0:17:48.399 liquidity risk. You hear a lot of investors saying that 0:17:48.480 --> 0:17:51.119 they are going into less liquid credit for the extra 0:17:51.200 --> 0:17:54.000 premium embedded in what you're saying in terms of the 0:17:54.040 --> 0:17:58.240 structural issue plumbing issue in credit markets is I believe 0:17:58.440 --> 0:18:01.320 compared to what you said last time or here you 0:18:01.359 --> 0:18:04.040 are not taking liquidity risk and you'd rather go into 0:18:04.080 --> 0:18:08.080 stocks than risk here debt at this point based on liquidity, 0:18:08.119 --> 0:18:09.840 can you give us a sense of where you are 0:18:09.880 --> 0:18:12.720 on that now the same playbook, we run a daily 0:18:12.760 --> 0:18:16.320 liquid mutual fund. Like I mean, I like the thing 0:18:16.359 --> 0:18:18.239 that I will never get a redemption, but that's just 0:18:18.320 --> 0:18:22.959 that's just not the real world. So credit funds investing 0:18:22.960 --> 0:18:26.119 in stocks, well, we run a commingled for the product, 0:18:26.160 --> 0:18:28.240 so it's not a pure credit, so it's credit and equity, 0:18:28.640 --> 0:18:31.360 but we will always run it liquid. And look, there 0:18:31.359 --> 0:18:34.440 have been numerous evidences of these liquidity issuing popping not 0:18:34.600 --> 0:18:37.600 and funds unwinding over the last several years. We just 0:18:37.720 --> 0:18:40.800 treat them as their episodic and we just blame the manager. 0:18:41.240 --> 0:18:44.040 The underlying symptom is the same thing. You reach for 0:18:44.160 --> 0:18:47.399 yield and you went a liquid and frankly, I have 0:18:47.480 --> 0:18:49.760 a hard time when I buy a mutual fund to 0:18:49.840 --> 0:18:52.200 figure out what they own. You really think people sit 0:18:52.240 --> 0:18:55.640 there and go through the line items. Lonnie, thank you 0:18:56.160 --> 0:19:00.040 as always, thank you for joining us. Don't triple for 0:19:00.119 --> 0:19:04.360 the leverage. I felt I'd cut the into off. Cloni 0:19:04.400 --> 0:19:07.000 can get away to television and run out of the studio. 0:19:07.119 --> 0:19:23.800 I didn't know that. Okay, Kathy Jones is with Charles Schwab, 0:19:23.840 --> 0:19:25.800 and the way the game has played, folks, is if 0:19:25.840 --> 0:19:30.120 you're on staff, and particularly if you're on research staff, 0:19:30.600 --> 0:19:33.520 you can't talk about the business. She's looking at her 0:19:33.520 --> 0:19:36.560 phone through something. You ask her about the business. We're 0:19:36.560 --> 0:19:38.560 not gonna ask her about the business soon. Of course, 0:19:38.560 --> 0:19:41.520 it reports this morning of a mating between Schwab and 0:19:41.520 --> 0:19:43.720 the Merrior trade. We will move on to fixed income, 0:19:44.040 --> 0:19:45.879 and the host of the Real Yield will do I 0:19:46.000 --> 0:19:49.080 forward that conversation. Let's talk about it, Kathy, you have 0:19:49.200 --> 0:19:52.000 been a lot more conservative about your views and risk 0:19:52.040 --> 0:19:54.560 assets and fixed income. How yield is getting back out 0:19:54.560 --> 0:19:57.200 to in and around four hundred basis points just looking 0:19:57.240 --> 0:20:01.000 at that spread, Kathy, your thoughts on the skipas of 0:20:01.080 --> 0:20:05.160 fixed income at the moment, Yeah, John, we haven't really 0:20:05.240 --> 0:20:08.080 changed our view that as you know, that spread has 0:20:08.119 --> 0:20:11.760 been widening, narrowing, widening, narrowing all year, back and forth, 0:20:11.840 --> 0:20:14.840 back and forth. And our concern is, you know, still 0:20:14.920 --> 0:20:19.320 hasn't changed that we had deteriorating credit quality. UM much 0:20:19.359 --> 0:20:23.440 more leverage in the corporate bond space than I think 0:20:23.560 --> 0:20:26.440 is justified by the rate of growth. So corporate profits 0:20:26.440 --> 0:20:30.479 are growing much more slowly UM than corporate leverage, and 0:20:30.520 --> 0:20:33.840 all that sets us up for UM we think is 0:20:33.920 --> 0:20:37.520 some sort of a correction in the market. So we're 0:20:37.640 --> 0:20:40.800 underweight high yield and continue to think that that's just 0:20:41.520 --> 0:20:44.760 too risky an area to have a lot of exposure 0:20:44.840 --> 0:20:47.080 right now. Kathy, this has been scenario that people have 0:20:47.119 --> 0:20:49.320 been hating on for a long time. Junk bonds not 0:20:49.520 --> 0:20:52.760 a loved asset class, even as they've rallied. Now, however, 0:20:52.880 --> 0:20:55.959 Goldman Sacces Asset Management, among others are starting to kind 0:20:56.000 --> 0:20:59.240 of tiptoe into even the triple ce rated debt, the 0:20:59.320 --> 0:21:02.959 lowest or of junk bonds. And I'm wondering, what are 0:21:02.960 --> 0:21:06.800 they getting wrong in your view? You know, I'm not 0:21:06.840 --> 0:21:11.000 really sure why, um, you would be crazy about triple ceas, 0:21:11.000 --> 0:21:14.439 except that they've underperformed the rest of the high old market. 0:21:14.520 --> 0:21:16.879 So maybe they you know, maybe there's a view that 0:21:17.400 --> 0:21:20.679 they can take advantage of a convergence between triple seas 0:21:20.840 --> 0:21:23.560 and the rest of the high old market in a 0:21:23.760 --> 0:21:28.000 benign fed scenario, which is what we have. But it 0:21:28.200 --> 0:21:31.400 strikes me as the old, the old idea of picking 0:21:31.480 --> 0:21:33.520 up Nichols in front of the steam roller. You know, 0:21:34.040 --> 0:21:36.960 it's not probably a game that most people want to play. 0:21:37.119 --> 0:21:41.760 What's the trigger here to spur the sell off here? Well, 0:21:41.800 --> 0:21:44.640 I think you could have a couple of things. One 0:21:44.760 --> 0:21:47.800 could be, um, that the leverage gets to be too 0:21:47.840 --> 0:21:50.040 much for some of the players and and we start 0:21:50.119 --> 0:21:54.120 to see some weakening there, uh, and the spreads blowout 0:21:54.240 --> 0:21:59.640 that way. UM, so more economically driven than anything else. 0:21:59.680 --> 0:22:01.240 And on my to be just sector based. You know, 0:22:01.280 --> 0:22:04.000 we've already seen underperformance by energy. If you had another 0:22:04.080 --> 0:22:07.399 sector that suffered, um, that could be the case. Um 0:22:07.640 --> 0:22:10.960 or it could be the surprising, surprising strength in the 0:22:11.000 --> 0:22:14.800 economy which leans people towards viewing that reads might actually 0:22:14.800 --> 0:22:17.200 go up for safe assets. Now we don't think that's 0:22:17.200 --> 0:22:20.879 a real likely scenario, but um that could also cause 0:22:21.200 --> 0:22:23.960 high yield spreads to move. Kathy Jones A charm of 0:22:24.000 --> 0:22:26.480 what you do in Lizaran's understoods every day as you 0:22:26.560 --> 0:22:30.119 understand flows of retail like no one, what is what 0:22:30.160 --> 0:22:33.360 are people actually doing with their money in fixed income? 0:22:33.640 --> 0:22:36.240 I'm fascinated by this they you know, you say, well 0:22:36.240 --> 0:22:38.879 I want you to buy a two year coupon. You're like, really, 0:22:39.320 --> 0:22:41.720 are they all out of twenty plus years trying to 0:22:41.760 --> 0:22:45.320 make total return? Well, you know, of course we have 0:22:45.359 --> 0:22:48.399 a wide variety. You know, a lot of jesters have 0:22:48.520 --> 0:22:51.720 been saying very short duration because frankly, the yields aren't 0:22:51.760 --> 0:22:55.480 that attractive to to take on duration risk. Some have 0:22:55.560 --> 0:22:57.840 been moving into risk ear assets, but I would say 0:22:57.840 --> 0:23:01.880