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Speaker 1: Welcome to the Bloomberg Penl podcast. I'm Paul Swinge. You,

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Speaker 1: along with my co host Lisa Brahma wits each day

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Speaker 1: we bring you the most noteworthy and useful interviews for

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Speaker 1: you and your money, whether at the grocery store or

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Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple

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Speaker 1: podcast or wherever you listen to podcasts, as well as

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Speaker 1: at Bloomberg dot com. Well, after raising interest rates several

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Speaker 1: notches in ten, the FETE appears to be on the sidelines,

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Speaker 1: at least for the near term. So let's get a

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Speaker 1: sense of what that means for the US housing market.

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Speaker 1: Let's bring on Logan Mohatshami. Logan is a senior loan

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Speaker 1: officer AMC Lending group based in Irvine, California. So Logan,

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Speaker 1: thank you so much for joining us. So we do

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Speaker 1: have the feed on the sidelines here. In the early

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Speaker 1: part of twenty nine, team of the Bias continues to

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Speaker 1: seem to be with an upward bias. How are the

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Speaker 1: US housing market? How is the housing market really dealing

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Speaker 1: with this rate environment? Well, in this second cycle, whenever

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Speaker 1: mortgage rates get to about four and a half percent

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Speaker 1: or higher, we see a slow down in the housing market,

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Speaker 1: mostly in the hot coastal areas. But again for this year,

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Speaker 1: the trend looks like existing home sales are going to

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Speaker 1: be lower again and new home sales is really struggling

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Speaker 1: right now. And I don't think the lower interest rates

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Speaker 1: on the thirty year fix that we've gotten from last

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Speaker 1: November to now is still good enough to drive sales

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Speaker 1: for growth. So logan, where are we in terms of

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Speaker 1: the average mortgage rate right now? Right now you're looking

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Speaker 1: still around four and a half percent, four point six

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Speaker 1: to five diff You know, it's nothing. The mortgage rate

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Speaker 1: impacts the marginal home buyer, the total principal interest, tax, inflation,

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Speaker 1: all those higher home prices, higher mortgage rights. And that's

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Speaker 1: one thing that I think we forgot about housing. Last year.

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Speaker 1: Nominal home prices were at all time highs last year,

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Speaker 1: mortgage rates were higher in demand. We lost just roughly

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Speaker 1: only a hundred and seventy thousand existing home sales from

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Speaker 1: the previous year. So how is it actually held up

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Speaker 1: considering all those variables actors? Okay, so just looking forward,

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Speaker 1: if you are expecting a slowdown, if you don't think

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Speaker 1: that there's enough strength to sort of sustain the momentum

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Speaker 1: in the markets where in the US to expect the

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Speaker 1: most pronounced bouts of a slowdown and and potentially decline

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Speaker 1: in home values New York, Seattle, California. And you can

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Speaker 1: see that some of the homes that were bought let's

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Speaker 1: say last March, April and May that might have been

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Speaker 1: a part of a bidding process. It looks like to

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Speaker 1: me that those homes on a year over year basis

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Speaker 1: could be down. Uh, the Midwest, the South, everywhere else

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Speaker 1: should be okay. But if we look at the purchase

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Speaker 1: application data right now, last year, we were positive almost

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Speaker 1: every single week except for six we only had two

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Speaker 1: real negative prints. Right now, we've already had two negative

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Speaker 1: prints for the year. It's not even Valentine's Day yet,

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Speaker 1: So that data line has already shown you today that

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Speaker 1: there's a little bit of softness. Now. It isn't going

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Speaker 1: to be a big decline in existing home sales. That

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Speaker 1: I haven't forecasted growth in existing home sales since I'm

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Speaker 1: expecting another year of slightly down sales, a little bit

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Speaker 1: increase in inventory, but nothing too big on both fronts.

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Speaker 1: What could cause the US housing market they decline significantly

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Speaker 1: more than you're anticipating, and maybe the market markets anticipating

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Speaker 1: is it's simply the interest rate environment. If mortgage rates

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Speaker 1: ever got about five point eight seven, I think that

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Speaker 1: could create a noticeable decline in sales and a noticeable

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Speaker 1: increase in inventory. This is for existing home sales. New

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Speaker 1: home sales is always expensive there they have more issues

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Speaker 1: than the existing homesale market. But because demographics are about

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Speaker 1: to get bigger and better for the housing market, I

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Speaker 1: don't see a major decline in sales anytime soon. But

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Speaker 1: if mortgage rates did get up to five and that

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Speaker 1: basically takes us to the low levels of their previous cycle,

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Speaker 1: with real home prices where they are right now, you

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Speaker 1: can see a noticeable decline. But for now it's just

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Speaker 1: going to be a slight decline for nineteen nothing too

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Speaker 1: draft that similar to what we saw in so look

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Speaker 1: and talk. You mentioned the demographics here and this goes

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Speaker 1: This might go to a longer term call on the

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Speaker 1: housing markets. Gives a sense of how the demographics are

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Speaker 1: playing into it. Are millennials buying houses that type of thing.

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Speaker 1: Millennials are the biggest home buyers in the world right now.

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Speaker 1: I think that we don't ever focused on that. I

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Speaker 1: think housing demand problem or in some cases some people

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Speaker 1: think the manage should be stronger. Is the move up

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Speaker 1: buyer is not there? People are staying in their homes longer.

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Speaker 1: We might have gone from a five to seven time

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Speaker 1: the year time horizon for people staying their homes to

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Speaker 1: a twelve or twenty two year That will impact sales.

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Speaker 1: But the biggest demographic patch we have in America right

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Speaker 1: now are ages thirty one the median first time home

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Speaker 1: buyers two. So I look at them as replacement buyers.

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Speaker 1: I know a lot of people are, you know, banking

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Speaker 1: on this demographic boom for housing. I kind of have

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Speaker 1: a different take on it. You have replacement buyers to

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Speaker 1: come in. If you get a little bit more action

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Speaker 1: than move up buyers, then you could get a little

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Speaker 1: bit more existing home sales. But you know, five point

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Speaker 1: five million existing home sales might be the for this cycle,

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Speaker 1: and that's not a bad thing. I think some people

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Speaker 1: just have um too much aggressive high forecasts for existing

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Speaker 1: home sales and they think this is bad or something's off.

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Speaker 1: It's just this is this is how the housing market

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Speaker 1: is going to be for maybe another ten years. Okay,

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Speaker 1: so I guess I'm trying to figure out logan. If

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Speaker 1: you're expecting the coastal cities to see uh decline in

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Speaker 1: home values, how deep will it be? Given your forecast

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Speaker 1: for mortgage rates will be mortgage rates should go even

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Speaker 1: lower than what they are right now. I think I

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Speaker 1: was one of the few people for nineteen that's forecast

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Speaker 1: at lower mortgage rates. So even if mortgage rates fall,

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Speaker 1: it doesn't change my forecast any And this is similar

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Speaker 1: to what happened in as well. Mortgage rates were training

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Speaker 1: lower the entire year and sales were down, but still

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Speaker 1: sales are are holding up as well. But for California,

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Speaker 1: New York, in Seattle, UM, even though inventory monthly supply

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Speaker 1: isn't high, pricing will be an issue. So to me,

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Speaker 1: we have to see how do sellers react if they

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Speaker 1: don't get the price they want. You know, a few

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Speaker 1: years ago they just wouldn't sell their homes because they

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Speaker 1: needed a certain price level. To make sense, because we

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Speaker 1: just started the increase of home prices. Now that's four

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Speaker 1: years ago. We've got about near twenty trillion dollars of

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Speaker 1: equity out there. We have a fifteen trillion dollars of

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Speaker 1: net equity for these home home owners, they might be

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Speaker 1: willing to take a little bit lower prices just to

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Speaker 1: move the move their homes, so that to me can

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Speaker 1: create year over year declines in some areas of California, Seattle,

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Speaker 1: even Las Vegas, even in New York because now they

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Speaker 1: feel a little bit better, they have a little bit

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Speaker 1: more equity, so they have to cut their prices. They

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Speaker 1: will where four years ago that wasn't the case. So logan,

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Speaker 1: how about on the new home supply are the Toll

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Speaker 1: Brothers of the world. Are they still buying homes or

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Speaker 1: are they pulled back? New home sales is much different.

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Speaker 1: Sales have not gone anywhere for a while now. But um,

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Speaker 1: that big spike we saw a new homes there last

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Speaker 1: month or for the month of November kind of discount

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Speaker 1: that that marketplace is struggling and until we see the

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Speaker 1: stod new home sales trends come back again. Uh, don't

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Speaker 1: look for housing starts to really grow aggressively. And you

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Speaker 1: know told Brothers, in these these companies, they sell to

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Speaker 1: a very small market base, so you will find wealthy

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Speaker 1: buyers for those products just in the rate of growth

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Speaker 1: of them is just not going to be the same,

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Speaker 1: and this might be the case for a very long

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Speaker 1: time if interest rates don't go lower. Every single housing

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Speaker 1: cyclists have two percent lower interest rates to help boost

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Speaker 1: them at For that to happen, we need about a

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Speaker 1: one in a quarter and two and a quarter thirty

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Speaker 1: year six. That means a ten year yield have to

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Speaker 1: go negative. I don't think that's going to happen. Longer term.

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Speaker 1: The builders have to build cheaper homes or smaller homes

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Speaker 1: to grow that base. Especially as told brothers, Yeah, Logan

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Speaker 1: Mota Shami, thank you so much for being with us.

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Speaker 1: Love the perspective. Logan Motor Shami, a senior loan officer

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Speaker 1: for AMC Lending Group, talking about what he's expecting on

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Speaker 1: the coastal cities in particular with a slow down of

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Speaker 1: potential declines in home values. Interesting. Paul I thought also

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Speaker 1: that he sees mortgage rates going lower from here, not

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Speaker 1: higher from here, but that may not be enough to

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Speaker 1: really juice the market in a way that the coastal

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Speaker 1: cities need kind of compelling to especially at a time

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Speaker 1: when people are still calling for higher rates. It hasn't

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Speaker 1: been a particularly exciting year in uh. Frankly, broadly in

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Speaker 1: markets at a day to day level, But if you

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Speaker 1: look at returns, holy cow, credit has crushed it. How

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Speaker 1: your bonds have returned nearly five percent so far. You're

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Speaker 1: to date being led by the riskiest of risky bonds.

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Speaker 1: Joining us here to figure out how much longer this

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Speaker 1: rally can continue. Peter Sheer, head of macro Strategy to

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Speaker 1: Academy herdis based in Connecticut, but joining us here today

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Speaker 1: in our Bloomberg Interactive broker's studios. So, Peter, are we

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Speaker 1: sort of at the precipice of another sell off? Or

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Speaker 1: could we see those ten percent returns eleven percent returns

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Speaker 1: at some Wall Street analysts are calling for this year?

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Speaker 1: You know, I think we could. I'm saying that bonds

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Speaker 1: have wound up. We were talking about following angels. They

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Speaker 1: didn't go to hell, they wound up in purgatory. So

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Speaker 1: I think we're stuck. Now some of the big total

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Speaker 1: returns gone, and now you're gonna have to live off

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Speaker 1: of coupon return and kind of roll and carry. So

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Speaker 1: it's gonna be a little bit boring. What does that

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Speaker 1: mean in terms of total return over So you know,

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Speaker 1: in high yield you could add another five to seven

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Speaker 1: percent that way, Okay, so you could get to ten

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Speaker 1: to twelve percent returns and on you know, triple B bonds,

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Speaker 1: you're gonna be lower, but I think it'll still be

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Speaker 1: a very nice positive return. We're not done yet, so

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Speaker 1: I think you're supposed to keep in credit right now. So, Peter,

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Speaker 1: given the rally that we've had in the credit markets

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Speaker 1: this year, where are you're in terms of the risk profile.

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Speaker 1: Are you still out there looking for risk or are

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Speaker 1: you using the rally to kind of improve the credit

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Speaker 1: quality of your portfolio. So we went kind of from

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Speaker 1: raging bull and kind of didn't matter to we're being

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Speaker 1: a little bit more elective. What I find interesting right

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Speaker 1: now in the market is I actually like the triple

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Speaker 1: B sector, so the lowest end of investment grade, because

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Speaker 1: I still think that's the part that was least you know, loved,

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Speaker 1: so there's still more room to buy it. I don't

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Speaker 1: actually like single B, so the stuff above triple B,

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Speaker 1: because I don't think they got the messages that take

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Speaker 1: credit is bad. So the single as are the companies

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Speaker 1: that are going to do the M and A activity,

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Speaker 1: that are gonna still do stock buybacks. And then weirdly.

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Speaker 1: I also don't like the double B sector, which is

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Speaker 1: the high end of high yield, partly because all this

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Speaker 1: money's flown in so it's gone into the quote unquote

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Speaker 1: safe part of high yield, which is double bees. So

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Speaker 1: I think you want to be a little bit cautious

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Speaker 1: on high yield, kind of skew yourself a little bit

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Speaker 1: more to triple B and fund managers to do that

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Speaker 1: and even start looking at leverage loans again. All right,

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Speaker 1: so a mild bull, not a raging bull, but a

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Speaker 1: tempered bowl. Peter Cheer with the expectation that HIO bonds

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Speaker 1: could still return tended towelve first sent so far this year,

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Speaker 1: the question is how long can it last? You know?

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Speaker 1: And people talk about or the ninth inning. This has

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Speaker 1: been a credit cycle that we're probably in the twenty

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Speaker 1: third inning, um. But I have to wonder, do you

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Speaker 1: even see more investors getting into credit via credit default swaps,

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Speaker 1: via e T s, via instruments that they can get

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Speaker 1: out of very quickly. I think there's definitely more trading mentality.

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Speaker 1: People want to look for what's the right hedge, how

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Speaker 1: do we get out if we need to? And I

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Speaker 1: think this isn't going to be driven as much by

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Speaker 1: demand but by lack of supply. I think we're going

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Speaker 1: to see less than a trillion dollars of I G credit,

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Speaker 1: which sounds like a lot, but that would be the

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Speaker 1: least since two thousand and eleven. You have about seven

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Speaker 1: billion of I debt that matures this year. You're seeing

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Speaker 1: tender offers in very large size by companies like Verizon

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Speaker 1: and Budweiser. So I think this is going to be

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Speaker 1: a limited supply and people are companies are reacting. They're saying, WHOA,

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Speaker 1: this was bad. The companies with a lot of debt

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Speaker 1: got punished. Their stock price was really far down, whether

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Speaker 1: your Budweiser, g E, Newal, rubber made. So you're starting

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Speaker 1: to see companies change that narrative. So I think you're

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Speaker 1: gonna see less and less debt available to buy, and

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Speaker 1: that's where you'll get the squeeze, not because there's so

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Speaker 1: much more new demand. So, Peter, you mentioned you're assuming

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Speaker 1: some risk still in the high yield sector. What are

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Speaker 1: some of the sectors that you think are still attractive

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Speaker 1: to you right here even after the rally. So we

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Speaker 1: like anything kind of to do with liquid, natural gas.

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Speaker 1: We do believe that everything we're hearing out of d

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Speaker 1: C is a trade deal is still likely to come,

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Speaker 1: and it's gonna be very heavy on Chinese buying. Liquid

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Speaker 1: natural gas is one of the products that will agree to.

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Speaker 1: There's a lot of build up that's still necessary. So

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Speaker 1: we see that area is something that is underappreciated. Some

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Speaker 1: of the price, you know, some of the potential for

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Speaker 1: deals priced in. I think people are gonna be surprised

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Speaker 1: just how power for the deal is. So we like

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Speaker 1: that sector. Autos at the other end, is one we're

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Speaker 1: still watching very closely. What we're trying to figure out

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Speaker 1: is how effective they've been by the tariffs and trade

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Speaker 1: war and how much is just saturation in terms of

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Speaker 1: automobiles and what higher rates are doing to the consumers

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Speaker 1: domestically and more of a saturation overseas. So autos are

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Speaker 1: kind of there that we're taking a closer look at

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Speaker 1: what would have to happen to make you, uh, not

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Speaker 1: fulish anymore in credit. So I think one no sign

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Speaker 1: of a trade deal. I think if we're not going

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Speaker 1: to get a trade deal, we're gonna have serious economic problems.

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Speaker 1: The slowdown we're already seeing in China and Europe is

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Speaker 1: going to get worse there and spread to hear So

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Speaker 1: that would be one thing. The other is if companies

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Speaker 1: quickly kind of forget about how bad it was in

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Speaker 1: November di sever and start releveraging themselves. Right. Big part

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Speaker 1: of this is you know, you're kind of looking management

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Speaker 1: in the eyes and saying are you going to behave?

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Speaker 1: And to the extent that you believe management's gonna behave,

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Speaker 1: you want a long credit. If they start going back

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Speaker 1: to the bad ways, you want to pull back. But

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Speaker 1: to that point, Goldman Sacks put out a report overnight

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Speaker 1: where they basically said, we're no longer recommending that you

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Speaker 1: invest in the shares of companies that are responsible and

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Speaker 1: that are deleveraging. Go ahead and go towards those that

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Speaker 1: have much worse balance sheets because the FED is going

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Speaker 1: to have your back. I think there may be premature

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Speaker 1: on that. I want the ones that have worst balance

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Speaker 1: sheets that are still deleveraging. I don't want to touch

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Speaker 1: again some of those high qualities single A companies that

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Speaker 1: might decide to leverage themselves or do something that as punitive.

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Speaker 1: But I think they're a bit early on that. I

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Speaker 1: still want companies that are doing the right thing, because

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Speaker 1: I think the markets are going to be fickle and

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Speaker 1: if you do the wrong thing, you'll see big sell

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Speaker 1: offs and stocks. Again, are there any sectors that you

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Speaker 1: see a preponderance of companies doing the wrong thing that

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Speaker 1: we should stay away from. No, I think that was

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Speaker 1: probably true September on October. Right now, most companies seem

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Speaker 1: to be doing the right thing, which is encouraging. Alright.

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Speaker 1: So going forward, you like credit, when do you see

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Speaker 1: this turning? I mean, how how long do people have

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Speaker 1: before you start to see the risks building up again?

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Speaker 1: I think at least six months, maybe a year, maybe longer.

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Speaker 1: Do you think that there will be another credit crisis?

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Speaker 1: And if so, what would cause it. I don't think

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Speaker 1: there's gonna be another credit crisis because I don't see

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Speaker 1: the leverage in the system or the trading system. In

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Speaker 1: the financial crisis, there was everything was kind of interconnected,

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Speaker 1: you know, one thing not the other. There were products

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Speaker 1: like c P d O s which were constant proportion

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Speaker 1: default obligations. There were l s s s which were

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Speaker 1: leverage super senior. So everything was linked and as soon

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Speaker 1: as one part of the capital structure started getting in trouble.

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Speaker 1: Everything had to get sold. There was a lot of

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Speaker 1: mark to market risk. I do think we can get

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Speaker 1: bouts like we saw in December where the e t

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Speaker 1: f s and for particular drive prices lower, but they

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Speaker 1: can rebound quickly. There's just not liquidity. But I don't

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Speaker 1: see people being forced out of the market alright, So

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Speaker 1: going forward, you don't see another credit crisis. So if

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Speaker 1: people are going into credit right now, you don't. You

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Speaker 1: say that people do have a trading mentality, but it

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Speaker 1: sounds like perhaps they shouldn't. Perhaps it should be more

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Speaker 1: buy and hold. Yeah. I think you're supposed to pick

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Speaker 1: the credits you like, stick with it, and that's how

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Speaker 1: you're gonna make your money. And if there is a bubble,

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Speaker 1: I think the bubble is much more in terms of

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Speaker 1: volatility selling. We see that in the equity markets. But

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Speaker 1: you know, all these e t f s really generate

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Speaker 1: a lot of options to activity around it. H y G,

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Speaker 1: which is one high yield et F that's about three

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Speaker 1: times the dollar price of j n K which is

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Speaker 1: another one, has a lot more volume because the option

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Speaker 1: activity is very big. B k l N, which was

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Speaker 1: a leverage loan, had a big trouble. There was a

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Speaker 1: huge put strike done one. As you near that twenty

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Speaker 1: two price on b kln, the decline accelerated, it went

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Speaker 1: through and bounced back. So I think the options markets

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Speaker 1: are again becoming the tail wagging the dog. That's where

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Speaker 1: I see the problem. So I think selling volatility is

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Speaker 1: very careless, and that's what you gotta be careful. Peter Cheer,

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Speaker 1: thank you so much for being with us. Always wonderful

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Speaker 1: having you. Peter Cheers, head of macro Strategy for Academy

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Speaker 1: Securities based in Connectic but Connecticut, but joining us here

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Speaker 1: today in our eleven three oh studios. Well, we all

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Speaker 1: know that the Chinese economy is slowing, but what about

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Speaker 1: the health of the Chinese credit markets. We had two

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Speaker 1: big borrowers just miss payment deadlines this month. So to

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Speaker 1: help us dig into what is going on in China

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Speaker 1: in the credit markets, let's bring in the birthday boy himself,

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Speaker 1: Damien Sassaur. Damian is the chief Emerging markets credit strategist

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Speaker 1: for Bloomberg Intelligence. He joins us in our Bloomberg eleven

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Speaker 1: three oh studios in New York's. So Damien on behalf

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Speaker 1: of Lisa. I happy birthday. Thank you, Thank you give

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Speaker 1: us a sense of is this the beginning of a

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Speaker 1: credit you know, real problem for the Chinese economy, do

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Speaker 1: you believe? Well, I think it's an extension of what

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Speaker 1: we've seen in and I mean last year was a

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Speaker 1: record year in terms of the faults. We saw roughly

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Speaker 1: eighteen billion U S dollars worth of the faults in

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Speaker 1: China um and including um Win Time Energy, I mean

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Speaker 1: when time Energy was the second biggest default. Or that's

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Speaker 1: one of the two today that people are talking about

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Speaker 1: right them in China. Mentioning trying to mention is a

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Speaker 1: big name. They've issued a lot of bonds and a

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Speaker 1: lot of dollar credit at also, So it's it's actually interesting.

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Speaker 1: And what what I take out of this is very simple.

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Speaker 1: You know, with Chado banking being removed from China and

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Speaker 1: it becoming more difficult to access finding for Chinese corporates,

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Speaker 1: what you're seeing is sort of a bifurcation. You know,

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Speaker 1: there are certain companies right that the government will allow

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Speaker 1: to default, such as those like win Time which are

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Speaker 1: involved in coal and non clean energy, and and others

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Speaker 1: that are just systemic to the to the economy and

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Speaker 1: they're just gonna do everything they can to support that

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Speaker 1: that that company, and so you're seeing that bifurcation play

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Speaker 1: out today. One thing that I'm wondering is how much

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Speaker 1: to international investors have to care? And this is it's

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Speaker 1: sort of I mean a little bit. Uh. I don't know,

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Speaker 1: selfish or self centered in terms of the developed market,

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Speaker 1: but I'm just wondering how much of this dollar debt

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Speaker 1: versus local debt. Well, I mean, let's the first question,

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Speaker 1: how much should we care? We should care a lot,

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Speaker 1: because as goes China, so goes a lot of the

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Speaker 1: things in the world that we care most about. Right,

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Speaker 1: But to your point, how much do we care about

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Speaker 1: these two specific issuers? Probably not so much. Even though

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Speaker 1: China mention is a pretty big issue of dollar debt,

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Speaker 1: a lot of the holders people believe, and it's difficult

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Speaker 1: to prove because the data is just not as transparent,

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Speaker 1: are actually Chinese corporates who have had their their money

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Speaker 1: offshore in dollars buying back that debt. So you don't

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Speaker 1: necessarily know if it's US retail or even US institutional

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Speaker 1: funds who own that debt, because it's just it's not

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Speaker 1: as transparent as you what other life like. So the

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Speaker 1: verdict is at as to who's getting hit with the

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Speaker 1: move today. But that's kind of where we are. So, Davian,

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Speaker 1: how much of the credit issues that we're seeing bubble

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Speaker 1: up you mentioned team we started to see it and

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Speaker 1: now we've got these two big issues. How much are

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Speaker 1: a really issue or specific or are they really representative

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Speaker 1: of Boyd? The economy is slowing here and we're going

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Speaker 1: to see more of this. Yeah, No, I mean the

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Speaker 1: economy is definitely slowing down. Um. I think really what

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Speaker 1: it is more function of is not so much growth

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Speaker 1: patterns or inflation or some of the you know, kind

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Speaker 1: of fundamental metrics that we look at to to to

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Speaker 1: to assess the health of the Chinese comedy. It's more

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Speaker 1: a function of, you know, just dislocations in the market

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Speaker 1: with shadow financing being pulled out from under the rug.

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Speaker 1: I mean, I don't think the markets really understood the

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Speaker 1: extent to which shadow funding in China, just how that

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Speaker 1: greased the pipes and loosen the economy and allowed borrowers

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Speaker 1: to extend leverage and do all that. I mean, it

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Speaker 1: was a massive it was a massive way to grease

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Speaker 1: the pipes domestically and now that it's gone just overnight.

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Speaker 1: I think the markets having a little bit of a

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Speaker 1: difficult time reacting to that one thing that I'm struck by.

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Speaker 1: Over the weekend, there were signs that perhaps trade negotiations

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Speaker 1: are breaking down in addition to negotiations over the government shutdown, etcetera, etcetera.

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Speaker 1: The response has been sharply negative in the U. N Right,

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Speaker 1: we've seen the un weekend considerably versus the dollar. Now

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Speaker 1: we're gonna have to start talking about where the thresholds

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Speaker 1: are where people start to get concerned. Is this a

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Speaker 1: good thing for jijimping or a bad thing that their

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Speaker 1: currency is weakening? Uh, well, it depends really where we

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Speaker 1: are in the negotiations. But look, I mean, we've had

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Speaker 1: this conversation many times least I mean, in my opinion,

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Speaker 1: us trying to trade negotiations. I don't think we're gonna

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Speaker 1: have any They're gonna be ongoing for years and years

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Speaker 1: and years. Specifically whether whether where it relates to I

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Speaker 1: P And I'm sure Mr Sweeney over here can talk

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Speaker 1: ad nauseam about what that really means for us. But

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Speaker 1: you know, from where I sit, it's all about rate differentials,

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Speaker 1: the correlation between dollar u on and the difference between

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Speaker 1: US and Chinese interest rates. The correlation has been very

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Speaker 1: tight over the better part of the last three years.

432
00:20:45,119 --> 00:20:48,119
Speaker 1: So as go those rates differentials, so go dollar u on.

433
00:20:48,520 --> 00:20:50,320
Speaker 1: And what we saw at the beginning of this year

434
00:20:50,400 --> 00:20:52,320
Speaker 1: was a rebound along with all risk assets, and we

435
00:20:52,359 --> 00:20:54,840
Speaker 1: saw dollar yuan rally through the month of January, had

436
00:20:54,840 --> 00:20:57,720
Speaker 1: a huge month. But now after after the new year,

437
00:20:57,800 --> 00:20:59,280
Speaker 1: and you know, people are back in the office, I

438
00:20:59,320 --> 00:21:03,240
Speaker 1: think people are take another look and just fundamentally, yeah,

439
00:21:04,080 --> 00:21:07,280
Speaker 1: just take a step back. What does this practically mean

440
00:21:07,440 --> 00:21:10,000
Speaker 1: for companies looking to finance themselves, either in China or

441
00:21:10,280 --> 00:21:12,800
Speaker 1: the government itself. What does this mean for its economy? Well,

442
00:21:12,840 --> 00:21:14,280
Speaker 1: I think if you look at the fact that you

443
00:21:14,400 --> 00:21:17,040
Speaker 1: might need to pay more to borrow money in China

444
00:21:17,119 --> 00:21:19,159
Speaker 1: on a nominal basis relative to the US for the

445
00:21:19,240 --> 00:21:22,600
Speaker 1: first time since two thousand and nine, it's a pretty

446
00:21:22,640 --> 00:21:24,680
Speaker 1: big deal, right, I mean, I'm talking about the fact

447
00:21:24,720 --> 00:21:28,240
Speaker 1: that you will actually need to pay more to borrow

448
00:21:28,600 --> 00:21:31,200
Speaker 1: in dollars than you were then you would in China.

449
00:21:31,240 --> 00:21:33,800
Speaker 1: You on, and this remember China growing at seven six

450
00:21:33,880 --> 00:21:35,840
Speaker 1: percent plus. In the US we're only growing at two

451
00:21:35,840 --> 00:21:37,520
Speaker 1: and a half three percent right, Yet you're gonna have

452
00:21:37,640 --> 00:21:39,959
Speaker 1: to pay more in terms of yields here than there.

453
00:21:40,000 --> 00:21:42,159
Speaker 1: It just doesn't make much sense. It doesn't reconcile. But

454
00:21:42,280 --> 00:21:44,600
Speaker 1: that has much more to do with the fact that, um,

455
00:21:44,840 --> 00:21:46,800
Speaker 1: you know, rate differentials are moving in the everg direction

456
00:21:46,840 --> 00:21:49,040
Speaker 1: and they're quite frankly, I think they're gonna invert this year.

457
00:21:49,600 --> 00:21:52,240
Speaker 1: So you know, how does the world credit market you

458
00:21:52,359 --> 00:21:54,760
Speaker 1: China right now? I mean, is this something that is

459
00:21:54,800 --> 00:21:57,280
Speaker 1: still you want to put money there? You know, I

460
00:21:57,320 --> 00:21:59,439
Speaker 1: think it's really again, it's going to be idiosyncratic. There

461
00:21:59,440 --> 00:22:01,520
Speaker 1: are a certain more gets. There are certain issues where

462
00:22:01,680 --> 00:22:03,920
Speaker 1: you know, their their balance sheets are healthy and fundamentally

463
00:22:03,960 --> 00:22:06,439
Speaker 1: there's reasons to be um to be bullish about them.

464
00:22:06,960 --> 00:22:09,160
Speaker 1: But you know, yeah, no, I mean I think sentiments

465
00:22:09,200 --> 00:22:10,880
Speaker 1: is deteriorating. I mean, we got a lot of data

466
00:22:10,920 --> 00:22:12,879
Speaker 1: this week, Paul. We see inflation data coming out, we

467
00:22:12,920 --> 00:22:15,040
Speaker 1: see trade data coming out this week. Overnight we saw

468
00:22:15,119 --> 00:22:18,359
Speaker 1: reserves which barely budged go figure um. And so the

469
00:22:18,440 --> 00:22:20,000
Speaker 1: numbers you mentioned least, you know, what are the big

470
00:22:20,080 --> 00:22:22,919
Speaker 1: numbers that you know she and the Chinese are looking at.

471
00:22:23,280 --> 00:22:26,640
Speaker 1: It's that three trillion in in AFEX reserves that really

472
00:22:26,720 --> 00:22:29,560
Speaker 1: doesn't move so much. It's that psychological seven handle on

473
00:22:29,680 --> 00:22:32,639
Speaker 1: dolla U on. I mean those can't both exist in

474
00:22:32,680 --> 00:22:35,359
Speaker 1: a happy place without, you know, with what's going on

475
00:22:35,440 --> 00:22:38,440
Speaker 1: between US and China trade talks. Damian Sassaur, we love

476
00:22:38,480 --> 00:22:41,800
Speaker 1: having you on, especially on your very special birthday. Davian

477
00:22:41,800 --> 00:22:46,240
Speaker 1: Sassaur is chief Emerging market credit strategist for Bloomberg Intelligence.

478
00:22:46,640 --> 00:23:04,399
Speaker 1: Check out his research. It is fabulous. Well, Amazon dot

479
00:23:04,440 --> 00:23:06,320
Speaker 1: Com has certainly been in the news for a variety

480
00:23:06,320 --> 00:23:09,760
Speaker 1: of reasons, one of which was the long anticipated HQ two.

481
00:23:09,840 --> 00:23:13,000
Speaker 1: Where were they put their second headquarters and they chose Queens,

482
00:23:13,119 --> 00:23:15,560
Speaker 1: the Borough of Queens in New York City. Lots of

483
00:23:15,640 --> 00:23:18,720
Speaker 1: economics going back and forth there to attract Amazon. But

484
00:23:18,840 --> 00:23:21,080
Speaker 1: we've got other news and just kind of goes to

485
00:23:21,200 --> 00:23:24,080
Speaker 1: that Amazon story, and it goes to the corporate headquarters

486
00:23:24,160 --> 00:23:27,080
Speaker 1: and where companies are allocating their corporate headquarters and what

487
00:23:27,359 --> 00:23:30,800
Speaker 1: kind of incentives local municipalities are making to lure those

488
00:23:30,840 --> 00:23:34,800
Speaker 1: corporate headquarters to their markets. Um to walk us through

489
00:23:34,880 --> 00:23:36,680
Speaker 1: kind of the Fox coun story and any kind of

490
00:23:36,760 --> 00:23:39,760
Speaker 1: light it might shed on the Amazon story is Austin Carr.

491
00:23:40,040 --> 00:23:43,320
Speaker 1: Austin is a technology reporter for Bloomberg News. He joins

492
00:23:43,400 --> 00:23:47,320
Speaker 1: us on our Bloomberg Interactive Broker studio. So, Austin, I

493
00:23:47,400 --> 00:23:50,280
Speaker 1: know you did a long story on fox Con and

494
00:23:51,080 --> 00:23:55,639
Speaker 1: their move to bring headquarters to Wisconsin. What did you find. Uh?

495
00:23:55,880 --> 00:23:58,639
Speaker 1: We just found that there was a great disparity between

496
00:23:58,680 --> 00:24:01,040
Speaker 1: how this deal was talked about leading up to when

497
00:24:01,080 --> 00:24:03,280
Speaker 1: it was signed with fox Con in the state of Wisconsin,

498
00:24:03,680 --> 00:24:05,840
Speaker 1: versus how the deal has actually gone thus far. We

499
00:24:05,960 --> 00:24:08,600
Speaker 1: spent months reporting this for Business Week's new cover story,

500
00:24:08,640 --> 00:24:11,520
Speaker 1: which is on news stands now and online right now um,

501
00:24:11,960 --> 00:24:14,880
Speaker 1: in which it sort of details how it has fell

502
00:24:15,000 --> 00:24:17,800
Speaker 1: short thus far in terms of job creation and even

503
00:24:17,880 --> 00:24:20,080
Speaker 1: some of the conditions inside the factory that they've set

504
00:24:20,160 --> 00:24:22,200
Speaker 1: up there for the early operations in the state where

505
00:24:22,480 --> 00:24:25,760
Speaker 1: that the pay has been low, where people feel expendable,

506
00:24:25,840 --> 00:24:28,840
Speaker 1: where they've been making an aggressive push towards more automation,

507
00:24:29,160 --> 00:24:31,440
Speaker 1: which likely means a lot of their roles will be obsolete.

508
00:24:31,680 --> 00:24:33,800
Speaker 1: And so just overall, the sort of r o I

509
00:24:33,960 --> 00:24:36,399
Speaker 1: for this project creating more factory jobs hasn't lived up

510
00:24:36,400 --> 00:24:38,960
Speaker 1: to those expectations, which raises a lot of doubts about

511
00:24:39,040 --> 00:24:41,840
Speaker 1: these types of mega subsidy deals. Which have become increasingly common.

512
00:24:42,160 --> 00:24:45,600
Speaker 1: What kind of oversight was there an enforcement action with

513
00:24:45,840 --> 00:24:48,600
Speaker 1: Fox Con as it became clear that they were unable

514
00:24:48,680 --> 00:24:51,159
Speaker 1: or unwilling to fulfill some of the promises that that

515
00:24:51,280 --> 00:24:53,920
Speaker 1: they had made. So the way that this deal is

516
00:24:53,960 --> 00:24:58,040
Speaker 1: structured is UH. It's it's all taggered, staggered to hiring

517
00:24:58,119 --> 00:25:01,159
Speaker 1: and capital investment expenditures and now of words UH in

518
00:25:01,240 --> 00:25:04,119
Speaker 1: exchange for about four point five billion dollars in subsidies,

519
00:25:04,160 --> 00:25:06,600
Speaker 1: depending on how you calculated, the company has to invest

520
00:25:06,640 --> 00:25:09,800
Speaker 1: about ten billion dollars and create as many as thirteen

521
00:25:09,800 --> 00:25:13,000
Speaker 1: thousand jobs in the state based on the threshold of targets.

522
00:25:13,440 --> 00:25:16,159
Speaker 1: But the first year UH they had to create as

523
00:25:16,240 --> 00:25:18,919
Speaker 1: many as one thousand forty jobs. They actually only created

524
00:25:19,119 --> 00:25:21,639
Speaker 1: one seventy eight, So they missed that by if you,

525
00:25:21,920 --> 00:25:24,040
Speaker 1: depending on again how you're looking at it, about two

526
00:25:24,440 --> 00:25:27,359
Speaker 1: for the maximum threshold. So there are agencies in place

527
00:25:27,520 --> 00:25:30,600
Speaker 1: to sort of monitor this deal. Their argument is that, look,

528
00:25:30,640 --> 00:25:32,760
Speaker 1: they didn't create the jobs, they didn't get the tax credits.

529
00:25:32,920 --> 00:25:34,760
Speaker 1: But as we detail not just in this piece as

530
00:25:34,760 --> 00:25:36,440
Speaker 1: well as a newsletter that just came out for a

531
00:25:36,520 --> 00:25:41,040
Speaker 1: fully charged Bloomberg newsletter on the tech team Um, you know,

532
00:25:41,119 --> 00:25:43,719
Speaker 1: there are other ways the taxpayers have already been vooting

533
00:25:43,800 --> 00:25:46,760
Speaker 1: this bill, whether that's through putting the deal together, monitoring

534
00:25:46,840 --> 00:25:49,840
Speaker 1: its progress, um, as well as overall just sort of

535
00:25:49,920 --> 00:25:53,199
Speaker 1: some of the upfront investments that local municipalities have been

536
00:25:53,359 --> 00:25:56,240
Speaker 1: been making in the range of hundreds of millions of dollars. So, Austin,

537
00:25:56,280 --> 00:25:58,360
Speaker 1: you mentioned four and a half billion dollars in subsidies

538
00:25:58,400 --> 00:26:01,359
Speaker 1: from the state of Wisconsin. That's obviously big money, particular

539
00:26:01,440 --> 00:26:05,159
Speaker 1: for the taxpayers of Wisconsin. What recourse does the state have,

540
00:26:05,400 --> 00:26:09,879
Speaker 1: or the taxpayers have if these corporate entities don't fulfill

541
00:26:09,920 --> 00:26:13,720
Speaker 1: their end of the bargain. Yeah. Their argument is basically that, um,

542
00:26:14,240 --> 00:26:17,439
Speaker 1: you know, again, if they don't meet these job creation targets,

543
00:26:17,520 --> 00:26:20,320
Speaker 1: if they don't hit their capital expenditure targets, that they

544
00:26:20,359 --> 00:26:23,719
Speaker 1: won't get the tax credits. But I think just as

545
00:26:23,800 --> 00:26:26,000
Speaker 1: risky could be if they do actually hit these targets.

546
00:26:26,280 --> 00:26:29,800
Speaker 1: A Wisconsin Legislative Fiscal Bureau analysis actually found that the

547
00:26:29,880 --> 00:26:33,239
Speaker 1: return on investment UH for this billions of dollars by

548
00:26:33,240 --> 00:26:36,640
Speaker 1: the state won't actually come until two, meaning the state

549
00:26:36,680 --> 00:26:39,000
Speaker 1: will be on the red end this deal until two.

550
00:26:39,040 --> 00:26:41,800
Speaker 1: That's decades before they're going to see a potential return.

551
00:26:42,080 --> 00:26:44,000
Speaker 1: It's also going to be difficult for budgeting in the

552
00:26:44,080 --> 00:26:46,960
Speaker 1: years ahead. Again if the company, if this deal goes perfectly,

553
00:26:47,280 --> 00:26:50,000
Speaker 1: the state could be writing paychecks to the company essentially

554
00:26:50,040 --> 00:26:52,520
Speaker 1: as high as three and twelve million dollars per year

555
00:26:53,119 --> 00:26:54,960
Speaker 1: for these job creation targets. That's that's a lot of

556
00:26:55,000 --> 00:26:57,280
Speaker 1: money that that just sort of that is built on

557
00:26:57,359 --> 00:26:58,800
Speaker 1: this premise that a lot of these jobs are going

558
00:26:58,840 --> 00:27:02,720
Speaker 1: to create this ripple fact, this multiplier economic ripple throughout

559
00:27:02,760 --> 00:27:06,200
Speaker 1: the stage. So one could argue, Okay, this was a fail.

560
00:27:06,359 --> 00:27:09,000
Speaker 1: This fox Con deal ended up being more expensive for

561
00:27:09,119 --> 00:27:12,399
Speaker 1: taxpayers whatever way you slice it, UH than it was worth.

562
00:27:13,040 --> 00:27:16,240
Speaker 1: But it might be just an idiosyncratic case. Are there

563
00:27:16,320 --> 00:27:20,400
Speaker 1: other cases of similar incentives that have had similar outcomes.

564
00:27:21,080 --> 00:27:24,720
Speaker 1: So the comparative example that that I would cite UH

565
00:27:24,920 --> 00:27:27,880
Speaker 1: to not just Amazon HQ two, but as well as

566
00:27:28,240 --> 00:27:32,280
Speaker 1: UH fox Cons move into Wisconsin. UH New York State

567
00:27:32,680 --> 00:27:35,280
Speaker 1: in the city of Buffalo, Extra actually struck a seven

568
00:27:35,720 --> 00:27:38,399
Speaker 1: fifty million dollar deal with Tesla to open up a

569
00:27:38,480 --> 00:27:42,000
Speaker 1: solar factory UH in just ten minutes south of Buffalo.

570
00:27:42,359 --> 00:27:44,080
Speaker 1: And that deal has been going on for years and

571
00:27:44,200 --> 00:27:47,400
Speaker 1: years and had very similar connotations. You know, this big

572
00:27:47,480 --> 00:27:51,280
Speaker 1: talk of job creation. Uh, you know, big you know,

573
00:27:51,680 --> 00:27:54,520
Speaker 1: press events for the groundbreaking ceremony. But then, as with

574
00:27:54,640 --> 00:27:57,399
Speaker 1: most of these deals, there's often changes. The company is

575
00:27:57,480 --> 00:27:59,959
Speaker 1: under different pressures, Tesla especially as under just given their

576
00:28:00,040 --> 00:28:02,840
Speaker 1: or automotive pressures. Uh, they've put some of their solar

577
00:28:02,880 --> 00:28:05,120
Speaker 1: ambitions on the back burner. And of course who has

578
00:28:05,200 --> 00:28:06,920
Speaker 1: to sort of pick up the slack for us, it's

579
00:28:06,960 --> 00:28:09,880
Speaker 1: the taxpayers as the job creations sort of slow down

580
00:28:10,200 --> 00:28:12,200
Speaker 1: as it takes years for the company actually to set

581
00:28:12,320 --> 00:28:15,359
Speaker 1: up its factory. Um. We spent months reporting that story

582
00:28:15,400 --> 00:28:17,800
Speaker 1: as well, and we actually got to visit that factory

583
00:28:17,840 --> 00:28:20,840
Speaker 1: in Buffalo and vast majorities of it were still empty.

584
00:28:21,240 --> 00:28:24,399
Speaker 1: We compared it to sort of an empty Walmart supercenter. Um.

585
00:28:24,520 --> 00:28:26,719
Speaker 1: So that just raises, you know, again, doubts about these

586
00:28:26,760 --> 00:28:28,959
Speaker 1: types of mega deals and whether they actually these companies

587
00:28:29,000 --> 00:28:31,879
Speaker 1: live up to their promises. Austin Carr, we love having you.

588
00:28:32,000 --> 00:28:34,120
Speaker 1: Thank you so much for being with us always fun.

589
00:28:34,200 --> 00:28:37,200
Speaker 1: Thank you Austin car technology reporter for Bloomberg News and

590
00:28:37,240 --> 00:28:40,640
Speaker 1: Bloomberg Business Week, joining us here in our interactive Brokers studios.

591
00:28:41,480 --> 00:28:43,680
Speaker 1: Thanks for listening to the Bloomberg P and L podcast.

592
00:28:43,880 --> 00:28:46,480
Speaker 1: You can subscribe and listen to interviews at Apple Podcasts

593
00:28:46,560 --> 00:28:49,600
Speaker 1: or whatever podcast platform you prefer. Paul Sweeney I'm on

594
00:28:49,680 --> 00:28:52,320
Speaker 1: Twitter at pt Sweeney and Lisa bram Boyd's I'm on

595
00:28:52,360 --> 00:28:55,240
Speaker 1: Twitter at Lisa bram Woyd's One before the podcast. You

596
00:28:55,240 --> 00:29:01,320
Speaker 1: can always catch us worldwide on Bloomberg Radio speaking