Speaker 1: Welcome to the Bloomberg Penl podcast. I'm Paul Swinge. You,
Speaker 1: along with my co host Lisa Brahma wits each day
Speaker 1: we bring you the most noteworthy and useful interviews for
Speaker 1: you and your money, whether at the grocery store or
Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
Speaker 1: podcast or wherever you listen to podcasts, as well as
Speaker 1: at Bloomberg dot com. Well, after raising interest rates several
Speaker 1: notches in ten, the FETE appears to be on the sidelines,
Speaker 1: at least for the near term. So let's get a
Speaker 1: sense of what that means for the US housing market.
Speaker 1: Let's bring on Logan Mohatshami. Logan is a senior loan
Speaker 1: officer AMC Lending group based in Irvine, California. So Logan,
Speaker 1: thank you so much for joining us. So we do
Speaker 1: have the feed on the sidelines here. In the early
Speaker 1: part of twenty nine, team of the Bias continues to
Speaker 1: seem to be with an upward bias. How are the
Speaker 1: US housing market? How is the housing market really dealing
Speaker 1: with this rate environment? Well, in this second cycle, whenever
Speaker 1: mortgage rates get to about four and a half percent
Speaker 1: or higher, we see a slow down in the housing market,
Speaker 1: mostly in the hot coastal areas. But again for this year,
Speaker 1: the trend looks like existing home sales are going to
Speaker 1: be lower again and new home sales is really struggling
Speaker 1: right now. And I don't think the lower interest rates
Speaker 1: on the thirty year fix that we've gotten from last
Speaker 1: November to now is still good enough to drive sales
Speaker 1: for growth. So logan, where are we in terms of
Speaker 1: the average mortgage rate right now? Right now you're looking
Speaker 1: still around four and a half percent, four point six
Speaker 1: to five diff You know, it's nothing. The mortgage rate
Speaker 1: impacts the marginal home buyer, the total principal interest, tax, inflation,
Speaker 1: all those higher home prices, higher mortgage rights. And that's
Speaker 1: one thing that I think we forgot about housing. Last year.
Speaker 1: Nominal home prices were at all time highs last year,
Speaker 1: mortgage rates were higher in demand. We lost just roughly
Speaker 1: only a hundred and seventy thousand existing home sales from
Speaker 1: the previous year. So how is it actually held up
Speaker 1: considering all those variables actors? Okay, so just looking forward,
Speaker 1: if you are expecting a slowdown, if you don't think
Speaker 1: that there's enough strength to sort of sustain the momentum
Speaker 1: in the markets where in the US to expect the
Speaker 1: most pronounced bouts of a slowdown and and potentially decline
Speaker 1: in home values New York, Seattle, California. And you can
Speaker 1: see that some of the homes that were bought let's
Speaker 1: say last March, April and May that might have been
Speaker 1: a part of a bidding process. It looks like to
Speaker 1: me that those homes on a year over year basis
Speaker 1: could be down. Uh, the Midwest, the South, everywhere else
Speaker 1: should be okay. But if we look at the purchase
Speaker 1: application data right now, last year, we were positive almost
Speaker 1: every single week except for six we only had two
Speaker 1: real negative prints. Right now, we've already had two negative
Speaker 1: prints for the year. It's not even Valentine's Day yet,
Speaker 1: So that data line has already shown you today that
Speaker 1: there's a little bit of softness. Now. It isn't going
Speaker 1: to be a big decline in existing home sales. That
Speaker 1: I haven't forecasted growth in existing home sales since I'm
Speaker 1: expecting another year of slightly down sales, a little bit
Speaker 1: increase in inventory, but nothing too big on both fronts.
Speaker 1: What could cause the US housing market they decline significantly
Speaker 1: more than you're anticipating, and maybe the market markets anticipating
Speaker 1: is it's simply the interest rate environment. If mortgage rates
Speaker 1: ever got about five point eight seven, I think that
Speaker 1: could create a noticeable decline in sales and a noticeable
Speaker 1: increase in inventory. This is for existing home sales. New
Speaker 1: home sales is always expensive there they have more issues
Speaker 1: than the existing homesale market. But because demographics are about
Speaker 1: to get bigger and better for the housing market, I
Speaker 1: don't see a major decline in sales anytime soon. But
Speaker 1: if mortgage rates did get up to five and that
Speaker 1: basically takes us to the low levels of their previous cycle,
Speaker 1: with real home prices where they are right now, you
Speaker 1: can see a noticeable decline. But for now it's just
Speaker 1: going to be a slight decline for nineteen nothing too
Speaker 1: draft that similar to what we saw in so look
Speaker 1: and talk. You mentioned the demographics here and this goes
Speaker 1: This might go to a longer term call on the
Speaker 1: housing markets. Gives a sense of how the demographics are
Speaker 1: playing into it. Are millennials buying houses that type of thing.
Speaker 1: Millennials are the biggest home buyers in the world right now.
Speaker 1: I think that we don't ever focused on that. I
Speaker 1: think housing demand problem or in some cases some people
Speaker 1: think the manage should be stronger. Is the move up
Speaker 1: buyer is not there? People are staying in their homes longer.
Speaker 1: We might have gone from a five to seven time
Speaker 1: the year time horizon for people staying their homes to
Speaker 1: a twelve or twenty two year That will impact sales.
Speaker 1: But the biggest demographic patch we have in America right
Speaker 1: now are ages thirty one the median first time home
Speaker 1: buyers two. So I look at them as replacement buyers.
Speaker 1: I know a lot of people are, you know, banking
Speaker 1: on this demographic boom for housing. I kind of have
Speaker 1: a different take on it. You have replacement buyers to
Speaker 1: come in. If you get a little bit more action
Speaker 1: than move up buyers, then you could get a little
Speaker 1: bit more existing home sales. But you know, five point
Speaker 1: five million existing home sales might be the for this cycle,
Speaker 1: and that's not a bad thing. I think some people
Speaker 1: just have um too much aggressive high forecasts for existing
Speaker 1: home sales and they think this is bad or something's off.
Speaker 1: It's just this is this is how the housing market
Speaker 1: is going to be for maybe another ten years. Okay,
Speaker 1: so I guess I'm trying to figure out logan. If
Speaker 1: you're expecting the coastal cities to see uh decline in
Speaker 1: home values, how deep will it be? Given your forecast
Speaker 1: for mortgage rates will be mortgage rates should go even
Speaker 1: lower than what they are right now. I think I
Speaker 1: was one of the few people for nineteen that's forecast
Speaker 1: at lower mortgage rates. So even if mortgage rates fall,
Speaker 1: it doesn't change my forecast any And this is similar
Speaker 1: to what happened in as well. Mortgage rates were training
Speaker 1: lower the entire year and sales were down, but still
Speaker 1: sales are are holding up as well. But for California,
Speaker 1: New York, in Seattle, UM, even though inventory monthly supply
Speaker 1: isn't high, pricing will be an issue. So to me,
Speaker 1: we have to see how do sellers react if they
Speaker 1: don't get the price they want. You know, a few
Speaker 1: years ago they just wouldn't sell their homes because they
Speaker 1: needed a certain price level. To make sense, because we
Speaker 1: just started the increase of home prices. Now that's four
Speaker 1: years ago. We've got about near twenty trillion dollars of
Speaker 1: equity out there. We have a fifteen trillion dollars of
Speaker 1: net equity for these home home owners, they might be
Speaker 1: willing to take a little bit lower prices just to
Speaker 1: move the move their homes, so that to me can
Speaker 1: create year over year declines in some areas of California, Seattle,
Speaker 1: even Las Vegas, even in New York because now they
Speaker 1: feel a little bit better, they have a little bit
Speaker 1: more equity, so they have to cut their prices. They
Speaker 1: will where four years ago that wasn't the case. So logan,
Speaker 1: how about on the new home supply are the Toll
Speaker 1: Brothers of the world. Are they still buying homes or
Speaker 1: are they pulled back? New home sales is much different.
Speaker 1: Sales have not gone anywhere for a while now. But um,
Speaker 1: that big spike we saw a new homes there last
Speaker 1: month or for the month of November kind of discount
Speaker 1: that that marketplace is struggling and until we see the
Speaker 1: stod new home sales trends come back again. Uh, don't
Speaker 1: look for housing starts to really grow aggressively. And you
Speaker 1: know told Brothers, in these these companies, they sell to
Speaker 1: a very small market base, so you will find wealthy
Speaker 1: buyers for those products just in the rate of growth
Speaker 1: of them is just not going to be the same,
Speaker 1: and this might be the case for a very long
Speaker 1: time if interest rates don't go lower. Every single housing
Speaker 1: cyclists have two percent lower interest rates to help boost
Speaker 1: them at For that to happen, we need about a
Speaker 1: one in a quarter and two and a quarter thirty
Speaker 1: year six. That means a ten year yield have to
Speaker 1: go negative. I don't think that's going to happen. Longer term.
Speaker 1: The builders have to build cheaper homes or smaller homes
Speaker 1: to grow that base. Especially as told brothers, Yeah, Logan
Speaker 1: Mota Shami, thank you so much for being with us.
Speaker 1: Love the perspective. Logan Motor Shami, a senior loan officer
Speaker 1: for AMC Lending Group, talking about what he's expecting on
Speaker 1: the coastal cities in particular with a slow down of
Speaker 1: potential declines in home values. Interesting. Paul I thought also
Speaker 1: that he sees mortgage rates going lower from here, not
Speaker 1: higher from here, but that may not be enough to
Speaker 1: really juice the market in a way that the coastal
Speaker 1: cities need kind of compelling to especially at a time
Speaker 1: when people are still calling for higher rates. It hasn't
Speaker 1: been a particularly exciting year in uh. Frankly, broadly in
Speaker 1: markets at a day to day level, But if you
Speaker 1: look at returns, holy cow, credit has crushed it. How
Speaker 1: your bonds have returned nearly five percent so far. You're
Speaker 1: to date being led by the riskiest of risky bonds.
Speaker 1: Joining us here to figure out how much longer this
Speaker 1: rally can continue. Peter Sheer, head of macro Strategy to
Speaker 1: Academy herdis based in Connecticut, but joining us here today
Speaker 1: in our Bloomberg Interactive broker's studios. So, Peter, are we
Speaker 1: sort of at the precipice of another sell off? Or
Speaker 1: could we see those ten percent returns eleven percent returns
Speaker 1: at some Wall Street analysts are calling for this year?
Speaker 1: You know, I think we could. I'm saying that bonds
Speaker 1: have wound up. We were talking about following angels. They
Speaker 1: didn't go to hell, they wound up in purgatory. So
Speaker 1: I think we're stuck. Now some of the big total
Speaker 1: returns gone, and now you're gonna have to live off
Speaker 1: of coupon return and kind of roll and carry. So
Speaker 1: it's gonna be a little bit boring. What does that
Speaker 1: mean in terms of total return over So you know,
Speaker 1: in high yield you could add another five to seven
Speaker 1: percent that way, Okay, so you could get to ten
Speaker 1: to twelve percent returns and on you know, triple B bonds,
Speaker 1: you're gonna be lower, but I think it'll still be
Speaker 1: a very nice positive return. We're not done yet, so
Speaker 1: I think you're supposed to keep in credit right now. So, Peter,
Speaker 1: given the rally that we've had in the credit markets
Speaker 1: this year, where are you're in terms of the risk profile.
Speaker 1: Are you still out there looking for risk or are
Speaker 1: you using the rally to kind of improve the credit
Speaker 1: quality of your portfolio. So we went kind of from
Speaker 1: raging bull and kind of didn't matter to we're being
Speaker 1: a little bit more elective. What I find interesting right
Speaker 1: now in the market is I actually like the triple
Speaker 1: B sector, so the lowest end of investment grade, because
Speaker 1: I still think that's the part that was least you know, loved,
Speaker 1: so there's still more room to buy it. I don't
Speaker 1: actually like single B, so the stuff above triple B,
Speaker 1: because I don't think they got the messages that take
Speaker 1: credit is bad. So the single as are the companies
Speaker 1: that are going to do the M and A activity,
Speaker 1: that are gonna still do stock buybacks. And then weirdly.
Speaker 1: I also don't like the double B sector, which is
Speaker 1: the high end of high yield, partly because all this
Speaker 1: money's flown in so it's gone into the quote unquote
Speaker 1: safe part of high yield, which is double bees. So
Speaker 1: I think you want to be a little bit cautious
Speaker 1: on high yield, kind of skew yourself a little bit
Speaker 1: more to triple B and fund managers to do that
Speaker 1: and even start looking at leverage loans again. All right,
Speaker 1: so a mild bull, not a raging bull, but a
Speaker 1: tempered bowl. Peter Cheer with the expectation that HIO bonds
Speaker 1: could still return tended towelve first sent so far this year,
Speaker 1: the question is how long can it last? You know?
Speaker 1: And people talk about or the ninth inning. This has
Speaker 1: been a credit cycle that we're probably in the twenty
Speaker 1: third inning, um. But I have to wonder, do you
Speaker 1: even see more investors getting into credit via credit default swaps,
Speaker 1: via e T s, via instruments that they can get
Speaker 1: out of very quickly. I think there's definitely more trading mentality.
Speaker 1: People want to look for what's the right hedge, how
Speaker 1: do we get out if we need to? And I
Speaker 1: think this isn't going to be driven as much by
Speaker 1: demand but by lack of supply. I think we're going
Speaker 1: to see less than a trillion dollars of I G credit,
Speaker 1: which sounds like a lot, but that would be the
Speaker 1: least since two thousand and eleven. You have about seven
Speaker 1: billion of I debt that matures this year. You're seeing
Speaker 1: tender offers in very large size by companies like Verizon
Speaker 1: and Budweiser. So I think this is going to be
Speaker 1: a limited supply and people are companies are reacting. They're saying, WHOA,
Speaker 1: this was bad. The companies with a lot of debt
Speaker 1: got punished. Their stock price was really far down, whether
Speaker 1: your Budweiser, g E, Newal, rubber made. So you're starting
Speaker 1: to see companies change that narrative. So I think you're
Speaker 1: gonna see less and less debt available to buy, and
Speaker 1: that's where you'll get the squeeze, not because there's so
Speaker 1: much more new demand. So, Peter, you mentioned you're assuming
Speaker 1: some risk still in the high yield sector. What are
Speaker 1: some of the sectors that you think are still attractive
Speaker 1: to you right here even after the rally. So we
Speaker 1: like anything kind of to do with liquid, natural gas.
Speaker 1: We do believe that everything we're hearing out of d
Speaker 1: C is a trade deal is still likely to come,
Speaker 1: and it's gonna be very heavy on Chinese buying. Liquid
Speaker 1: natural gas is one of the products that will agree to.
Speaker 1: There's a lot of build up that's still necessary. So
Speaker 1: we see that area is something that is underappreciated. Some
Speaker 1: of the price, you know, some of the potential for
Speaker 1: deals priced in. I think people are gonna be surprised
Speaker 1: just how power for the deal is. So we like
Speaker 1: that sector. Autos at the other end, is one we're
Speaker 1: still watching very closely. What we're trying to figure out
Speaker 1: is how effective they've been by the tariffs and trade
Speaker 1: war and how much is just saturation in terms of
Speaker 1: automobiles and what higher rates are doing to the consumers
Speaker 1: domestically and more of a saturation overseas. So autos are
Speaker 1: kind of there that we're taking a closer look at
Speaker 1: what would have to happen to make you, uh, not
Speaker 1: fulish anymore in credit. So I think one no sign
Speaker 1: of a trade deal. I think if we're not going
Speaker 1: to get a trade deal, we're gonna have serious economic problems.
Speaker 1: The slowdown we're already seeing in China and Europe is
Speaker 1: going to get worse there and spread to hear So
Speaker 1: that would be one thing. The other is if companies
Speaker 1: quickly kind of forget about how bad it was in
Speaker 1: November di sever and start releveraging themselves. Right. Big part
Speaker 1: of this is you know, you're kind of looking management
Speaker 1: in the eyes and saying are you going to behave?
Speaker 1: And to the extent that you believe management's gonna behave,
Speaker 1: you want a long credit. If they start going back
Speaker 1: to the bad ways, you want to pull back. But
Speaker 1: to that point, Goldman Sacks put out a report overnight
Speaker 1: where they basically said, we're no longer recommending that you
Speaker 1: invest in the shares of companies that are responsible and
Speaker 1: that are deleveraging. Go ahead and go towards those that
Speaker 1: have much worse balance sheets because the FED is going
Speaker 1: to have your back. I think there may be premature
Speaker 1: on that. I want the ones that have worst balance
Speaker 1: sheets that are still deleveraging. I don't want to touch
Speaker 1: again some of those high qualities single A companies that
Speaker 1: might decide to leverage themselves or do something that as punitive.
Speaker 1: But I think they're a bit early on that. I
Speaker 1: still want companies that are doing the right thing, because
Speaker 1: I think the markets are going to be fickle and
Speaker 1: if you do the wrong thing, you'll see big sell
Speaker 1: offs and stocks. Again, are there any sectors that you
Speaker 1: see a preponderance of companies doing the wrong thing that
Speaker 1: we should stay away from. No, I think that was
Speaker 1: probably true September on October. Right now, most companies seem
Speaker 1: to be doing the right thing, which is encouraging. Alright.
Speaker 1: So going forward, you like credit, when do you see
Speaker 1: this turning? I mean, how how long do people have
Speaker 1: before you start to see the risks building up again?
Speaker 1: I think at least six months, maybe a year, maybe longer.
Speaker 1: Do you think that there will be another credit crisis?
Speaker 1: And if so, what would cause it. I don't think
Speaker 1: there's gonna be another credit crisis because I don't see
Speaker 1: the leverage in the system or the trading system. In
Speaker 1: the financial crisis, there was everything was kind of interconnected,
Speaker 1: you know, one thing not the other. There were products
Speaker 1: like c P d O s which were constant proportion
Speaker 1: default obligations. There were l s s s which were
Speaker 1: leverage super senior. So everything was linked and as soon
Speaker 1: as one part of the capital structure started getting in trouble.
Speaker 1: Everything had to get sold. There was a lot of
Speaker 1: mark to market risk. I do think we can get
Speaker 1: bouts like we saw in December where the e t
Speaker 1: f s and for particular drive prices lower, but they
Speaker 1: can rebound quickly. There's just not liquidity. But I don't
Speaker 1: see people being forced out of the market alright, So
Speaker 1: going forward, you don't see another credit crisis. So if
Speaker 1: people are going into credit right now, you don't. You
Speaker 1: say that people do have a trading mentality, but it
Speaker 1: sounds like perhaps they shouldn't. Perhaps it should be more
Speaker 1: buy and hold. Yeah. I think you're supposed to pick
Speaker 1: the credits you like, stick with it, and that's how
Speaker 1: you're gonna make your money. And if there is a bubble,
Speaker 1: I think the bubble is much more in terms of
Speaker 1: volatility selling. We see that in the equity markets. But
Speaker 1: you know, all these e t f s really generate
Speaker 1: a lot of options to activity around it. H y G,
Speaker 1: which is one high yield et F that's about three
Speaker 1: times the dollar price of j n K which is
Speaker 1: another one, has a lot more volume because the option
Speaker 1: activity is very big. B k l N, which was
Speaker 1: a leverage loan, had a big trouble. There was a
Speaker 1: huge put strike done one. As you near that twenty
Speaker 1: two price on b kln, the decline accelerated, it went
Speaker 1: through and bounced back. So I think the options markets
Speaker 1: are again becoming the tail wagging the dog. That's where
Speaker 1: I see the problem. So I think selling volatility is
Speaker 1: very careless, and that's what you gotta be careful. Peter Cheer,
Speaker 1: thank you so much for being with us. Always wonderful
Speaker 1: having you. Peter Cheers, head of macro Strategy for Academy
Speaker 1: Securities based in Connectic but Connecticut, but joining us here
Speaker 1: today in our eleven three oh studios. Well, we all
Speaker 1: know that the Chinese economy is slowing, but what about
Speaker 1: the health of the Chinese credit markets. We had two
Speaker 1: big borrowers just miss payment deadlines this month. So to
Speaker 1: help us dig into what is going on in China
Speaker 1: in the credit markets, let's bring in the birthday boy himself,
Speaker 1: Damien Sassaur. Damian is the chief Emerging markets credit strategist
Speaker 1: for Bloomberg Intelligence. He joins us in our Bloomberg eleven
Speaker 1: three oh studios in New York's. So Damien on behalf
Speaker 1: of Lisa. I happy birthday. Thank you, Thank you give
Speaker 1: us a sense of is this the beginning of a
Speaker 1: credit you know, real problem for the Chinese economy, do
Speaker 1: you believe? Well, I think it's an extension of what
Speaker 1: we've seen in and I mean last year was a
Speaker 1: record year in terms of the faults. We saw roughly
Speaker 1: eighteen billion U S dollars worth of the faults in
Speaker 1: China um and including um Win Time Energy, I mean
Speaker 1: when time Energy was the second biggest default. Or that's
Speaker 1: one of the two today that people are talking about
Speaker 1: right them in China. Mentioning trying to mention is a
Speaker 1: big name. They've issued a lot of bonds and a
Speaker 1: lot of dollar credit at also, So it's it's actually interesting.
Speaker 1: And what what I take out of this is very simple.
Speaker 1: You know, with Chado banking being removed from China and
Speaker 1: it becoming more difficult to access finding for Chinese corporates,
Speaker 1: what you're seeing is sort of a bifurcation. You know,
Speaker 1: there are certain companies right that the government will allow
Speaker 1: to default, such as those like win Time which are
Speaker 1: involved in coal and non clean energy, and and others
Speaker 1: that are just systemic to the to the economy and
Speaker 1: they're just gonna do everything they can to support that
Speaker 1: that that company, and so you're seeing that bifurcation play
Speaker 1: out today. One thing that I'm wondering is how much
Speaker 1: to international investors have to care? And this is it's
Speaker 1: sort of I mean a little bit. Uh. I don't know,
Speaker 1: selfish or self centered in terms of the developed market,
Speaker 1: but I'm just wondering how much of this dollar debt
Speaker 1: versus local debt. Well, I mean, let's the first question,
Speaker 1: how much should we care? We should care a lot,
Speaker 1: because as goes China, so goes a lot of the
Speaker 1: things in the world that we care most about. Right,
Speaker 1: But to your point, how much do we care about
Speaker 1: these two specific issuers? Probably not so much. Even though
Speaker 1: China mention is a pretty big issue of dollar debt,
Speaker 1: a lot of the holders people believe, and it's difficult
Speaker 1: to prove because the data is just not as transparent,
Speaker 1: are actually Chinese corporates who have had their their money
Speaker 1: offshore in dollars buying back that debt. So you don't
Speaker 1: necessarily know if it's US retail or even US institutional
Speaker 1: funds who own that debt, because it's just it's not
Speaker 1: as transparent as you what other life like. So the
Speaker 1: verdict is at as to who's getting hit with the
Speaker 1: move today. But that's kind of where we are. So, Davian,
Speaker 1: how much of the credit issues that we're seeing bubble
Speaker 1: up you mentioned team we started to see it and
Speaker 1: now we've got these two big issues. How much are
Speaker 1: a really issue or specific or are they really representative
Speaker 1: of Boyd? The economy is slowing here and we're going
Speaker 1: to see more of this. Yeah, No, I mean the
Speaker 1: economy is definitely slowing down. Um. I think really what
Speaker 1: it is more function of is not so much growth
Speaker 1: patterns or inflation or some of the you know, kind
Speaker 1: of fundamental metrics that we look at to to to
Speaker 1: to assess the health of the Chinese comedy. It's more
Speaker 1: a function of, you know, just dislocations in the market
Speaker 1: with shadow financing being pulled out from under the rug.
Speaker 1: I mean, I don't think the markets really understood the
Speaker 1: extent to which shadow funding in China, just how that
Speaker 1: greased the pipes and loosen the economy and allowed borrowers
Speaker 1: to extend leverage and do all that. I mean, it
Speaker 1: was a massive it was a massive way to grease
Speaker 1: the pipes domestically and now that it's gone just overnight.
Speaker 1: I think the markets having a little bit of a
Speaker 1: difficult time reacting to that one thing that I'm struck by.
Speaker 1: Over the weekend, there were signs that perhaps trade negotiations
Speaker 1: are breaking down in addition to negotiations over the government shutdown, etcetera, etcetera.
Speaker 1: The response has been sharply negative in the U. N Right,
Speaker 1: we've seen the un weekend considerably versus the dollar. Now
Speaker 1: we're gonna have to start talking about where the thresholds
Speaker 1: are where people start to get concerned. Is this a
Speaker 1: good thing for jijimping or a bad thing that their
Speaker 1: currency is weakening? Uh, well, it depends really where we
Speaker 1: are in the negotiations. But look, I mean, we've had
Speaker 1: this conversation many times least I mean, in my opinion,
Speaker 1: us trying to trade negotiations. I don't think we're gonna
Speaker 1: have any They're gonna be ongoing for years and years
Speaker 1: and years. Specifically whether whether where it relates to I
Speaker 1: P And I'm sure Mr Sweeney over here can talk
Speaker 1: ad nauseam about what that really means for us. But
Speaker 1: you know, from where I sit, it's all about rate differentials,
Speaker 1: the correlation between dollar u on and the difference between
Speaker 1: US and Chinese interest rates. The correlation has been very
Speaker 1: tight over the better part of the last three years.
Speaker 1: So as go those rates differentials, so go dollar u on.
Speaker 1: And what we saw at the beginning of this year
Speaker 1: was a rebound along with all risk assets, and we
Speaker 1: saw dollar yuan rally through the month of January, had
Speaker 1: a huge month. But now after after the new year,
Speaker 1: and you know, people are back in the office, I
Speaker 1: think people are take another look and just fundamentally, yeah,
Speaker 1: just take a step back. What does this practically mean
Speaker 1: for companies looking to finance themselves, either in China or
Speaker 1: the government itself. What does this mean for its economy? Well,
Speaker 1: I think if you look at the fact that you
Speaker 1: might need to pay more to borrow money in China
Speaker 1: on a nominal basis relative to the US for the
Speaker 1: first time since two thousand and nine, it's a pretty
Speaker 1: big deal, right, I mean, I'm talking about the fact
Speaker 1: that you will actually need to pay more to borrow
Speaker 1: in dollars than you were then you would in China.
Speaker 1: You on, and this remember China growing at seven six
Speaker 1: percent plus. In the US we're only growing at two
Speaker 1: and a half three percent right, Yet you're gonna have
Speaker 1: to pay more in terms of yields here than there.
Speaker 1: It just doesn't make much sense. It doesn't reconcile. But
Speaker 1: that has much more to do with the fact that, um,
Speaker 1: you know, rate differentials are moving in the everg direction
Speaker 1: and they're quite frankly, I think they're gonna invert this year.
Speaker 1: So you know, how does the world credit market you
Speaker 1: China right now? I mean, is this something that is
Speaker 1: still you want to put money there? You know, I
Speaker 1: think it's really again, it's going to be idiosyncratic. There
Speaker 1: are a certain more gets. There are certain issues where
Speaker 1: you know, their their balance sheets are healthy and fundamentally
Speaker 1: there's reasons to be um to be bullish about them.
Speaker 1: But you know, yeah, no, I mean I think sentiments
Speaker 1: is deteriorating. I mean, we got a lot of data
Speaker 1: this week, Paul. We see inflation data coming out, we
Speaker 1: see trade data coming out this week. Overnight we saw
Speaker 1: reserves which barely budged go figure um. And so the
Speaker 1: numbers you mentioned least, you know, what are the big
Speaker 1: numbers that you know she and the Chinese are looking at.
Speaker 1: It's that three trillion in in AFEX reserves that really
Speaker 1: doesn't move so much. It's that psychological seven handle on
Speaker 1: dolla U on. I mean those can't both exist in
Speaker 1: a happy place without, you know, with what's going on
Speaker 1: between US and China trade talks. Damian Sassaur, we love
Speaker 1: having you on, especially on your very special birthday. Davian
Speaker 1: Sassaur is chief Emerging market credit strategist for Bloomberg Intelligence.
Speaker 1: Check out his research. It is fabulous. Well, Amazon dot
Speaker 1: Com has certainly been in the news for a variety
Speaker 1: of reasons, one of which was the long anticipated HQ two.
Speaker 1: Where were they put their second headquarters and they chose Queens,
Speaker 1: the Borough of Queens in New York City. Lots of
Speaker 1: economics going back and forth there to attract Amazon. But
Speaker 1: we've got other news and just kind of goes to
Speaker 1: that Amazon story, and it goes to the corporate headquarters
Speaker 1: and where companies are allocating their corporate headquarters and what
Speaker 1: kind of incentives local municipalities are making to lure those
Speaker 1: corporate headquarters to their markets. Um to walk us through
Speaker 1: kind of the Fox coun story and any kind of
Speaker 1: light it might shed on the Amazon story is Austin Carr.
Speaker 1: Austin is a technology reporter for Bloomberg News. He joins
Speaker 1: us on our Bloomberg Interactive Broker studio. So, Austin, I
Speaker 1: know you did a long story on fox Con and
Speaker 1: their move to bring headquarters to Wisconsin. What did you find. Uh?
Speaker 1: We just found that there was a great disparity between
Speaker 1: how this deal was talked about leading up to when
Speaker 1: it was signed with fox Con in the state of Wisconsin,
Speaker 1: versus how the deal has actually gone thus far. We
Speaker 1: spent months reporting this for Business Week's new cover story,
Speaker 1: which is on news stands now and online right now um,
Speaker 1: in which it sort of details how it has fell
Speaker 1: short thus far in terms of job creation and even
Speaker 1: some of the conditions inside the factory that they've set
Speaker 1: up there for the early operations in the state where
Speaker 1: that the pay has been low, where people feel expendable,
Speaker 1: where they've been making an aggressive push towards more automation,
Speaker 1: which likely means a lot of their roles will be obsolete.
Speaker 1: And so just overall, the sort of r o I
Speaker 1: for this project creating more factory jobs hasn't lived up
Speaker 1: to those expectations, which raises a lot of doubts about
Speaker 1: these types of mega subsidy deals. Which have become increasingly common.
Speaker 1: What kind of oversight was there an enforcement action with
Speaker 1: Fox Con as it became clear that they were unable
Speaker 1: or unwilling to fulfill some of the promises that that
Speaker 1: they had made. So the way that this deal is
Speaker 1: structured is UH. It's it's all taggered, staggered to hiring
Speaker 1: and capital investment expenditures and now of words UH in
Speaker 1: exchange for about four point five billion dollars in subsidies,
Speaker 1: depending on how you calculated, the company has to invest
Speaker 1: about ten billion dollars and create as many as thirteen
Speaker 1: thousand jobs in the state based on the threshold of targets.
Speaker 1: But the first year UH they had to create as
Speaker 1: many as one thousand forty jobs. They actually only created
Speaker 1: one seventy eight, So they missed that by if you,
Speaker 1: depending on again how you're looking at it, about two
Speaker 1: for the maximum threshold. So there are agencies in place
Speaker 1: to sort of monitor this deal. Their argument is that, look,
Speaker 1: they didn't create the jobs, they didn't get the tax credits.
Speaker 1: But as we detail not just in this piece as
Speaker 1: well as a newsletter that just came out for a
Speaker 1: fully charged Bloomberg newsletter on the tech team Um, you know,
Speaker 1: there are other ways the taxpayers have already been vooting
Speaker 1: this bill, whether that's through putting the deal together, monitoring
Speaker 1: its progress, um, as well as overall just sort of
Speaker 1: some of the upfront investments that local municipalities have been
Speaker 1: been making in the range of hundreds of millions of dollars. So, Austin,
Speaker 1: you mentioned four and a half billion dollars in subsidies
Speaker 1: from the state of Wisconsin. That's obviously big money, particular
Speaker 1: for the taxpayers of Wisconsin. What recourse does the state have,
Speaker 1: or the taxpayers have if these corporate entities don't fulfill
Speaker 1: their end of the bargain. Yeah. Their argument is basically that, um,
Speaker 1: you know, again, if they don't meet these job creation targets,
Speaker 1: if they don't hit their capital expenditure targets, that they
Speaker 1: won't get the tax credits. But I think just as
Speaker 1: risky could be if they do actually hit these targets.
Speaker 1: A Wisconsin Legislative Fiscal Bureau analysis actually found that the
Speaker 1: return on investment UH for this billions of dollars by
Speaker 1: the state won't actually come until two, meaning the state
Speaker 1: will be on the red end this deal until two.
Speaker 1: That's decades before they're going to see a potential return.
Speaker 1: It's also going to be difficult for budgeting in the
Speaker 1: years ahead. Again if the company, if this deal goes perfectly,
Speaker 1: the state could be writing paychecks to the company essentially
Speaker 1: as high as three and twelve million dollars per year
Speaker 1: for these job creation targets. That's that's a lot of
Speaker 1: money that that just sort of that is built on
Speaker 1: this premise that a lot of these jobs are going
Speaker 1: to create this ripple fact, this multiplier economic ripple throughout
Speaker 1: the stage. So one could argue, Okay, this was a fail.
Speaker 1: This fox Con deal ended up being more expensive for
Speaker 1: taxpayers whatever way you slice it, UH than it was worth.
Speaker 1: But it might be just an idiosyncratic case. Are there
Speaker 1: other cases of similar incentives that have had similar outcomes.
Speaker 1: So the comparative example that that I would cite UH
Speaker 1: to not just Amazon HQ two, but as well as
Speaker 1: UH fox Cons move into Wisconsin. UH New York State
Speaker 1: in the city of Buffalo, Extra actually struck a seven
Speaker 1: fifty million dollar deal with Tesla to open up a
Speaker 1: solar factory UH in just ten minutes south of Buffalo.
Speaker 1: And that deal has been going on for years and
Speaker 1: years and had very similar connotations. You know, this big
Speaker 1: talk of job creation. Uh, you know, big you know,
Speaker 1: press events for the groundbreaking ceremony. But then, as with
Speaker 1: most of these deals, there's often changes. The company is
Speaker 1: under different pressures, Tesla especially as under just given their
Speaker 1: or automotive pressures. Uh, they've put some of their solar
Speaker 1: ambitions on the back burner. And of course who has
Speaker 1: to sort of pick up the slack for us, it's
Speaker 1: the taxpayers as the job creations sort of slow down
Speaker 1: as it takes years for the company actually to set
Speaker 1: up its factory. Um. We spent months reporting that story
Speaker 1: as well, and we actually got to visit that factory
Speaker 1: in Buffalo and vast majorities of it were still empty.
Speaker 1: We compared it to sort of an empty Walmart supercenter. Um.
Speaker 1: So that just raises, you know, again, doubts about these
Speaker 1: types of mega deals and whether they actually these companies
Speaker 1: live up to their promises. Austin Carr, we love having you.
Speaker 1: Thank you so much for being with us always fun.
Speaker 1: Thank you Austin car technology reporter for Bloomberg News and
Speaker 1: Bloomberg Business Week, joining us here in our interactive Brokers studios.
Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
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