WEBVTT - Surveillance: Big Risks In Manufacturing Sector, Sweeney Says 0:00:00.080 --> 0:00:12.960 Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. 0:00:13.480 --> 0:00:17.560 Daily we bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:29.840 Bloomberg dot Com, and of course on the Bloomberg. Right 0:00:29.840 --> 0:00:32.519 now with us is James Sweeney of Credit Sweets in 0:00:32.520 --> 0:00:34.960 our New York studios and John Fair. And I know 0:00:35.040 --> 0:00:37.760 that we've read very carefully James Sweeney over the years, 0:00:38.280 --> 0:00:44.320 always counseling against inflation fears. You updated you published yesterday 0:00:44.680 --> 0:00:47.280 on this arch fear that's out there. Tell us what 0:00:47.320 --> 0:00:50.080 you wrote, well, I mean, the FED has gotten some 0:00:50.120 --> 0:00:53.600 criticism recently for claiming that the declines and inflation that 0:00:53.640 --> 0:00:57.639 we've seen lately are due to temporary factors that will 0:00:57.680 --> 0:01:00.240 go away. And we looked at it closely in we 0:01:00.320 --> 0:01:03.440 found that it's due to temporary factors that will go away. 0:01:03.680 --> 0:01:07.000 Does the FED look at temporary factors which is a 0:01:07.040 --> 0:01:10.160 two point to four percent ten year yield and a 0:01:10.200 --> 0:01:13.360 two year yield that's gonna drop under two at some point, 0:01:13.760 --> 0:01:16.759 or do they look at the the Sweeney inflation rate 0:01:16.840 --> 0:01:19.560 or the Powell inflation rate, which are they a slave 0:01:19.600 --> 0:01:22.480 to right now. I think they're definitely a slave to 0:01:22.800 --> 0:01:26.679 the bond market and the incoming growth data and the 0:01:26.720 --> 0:01:30.600 fears about what's going to happen next more than what's 0:01:30.600 --> 0:01:33.320 happening on inflation. I mean, this is lagging, this is statistical, 0:01:33.440 --> 0:01:36.039 this is not particularly interesting. We're not We're not kind 0:01:36.080 --> 0:01:38.360 of plunging towards deflation or anything like that. There are 0:01:38.400 --> 0:01:42.119 many inflation measures and they are broadly sideways and dull. 0:01:42.360 --> 0:01:44.480 But there is a growth issue. But there's there's a 0:01:44.480 --> 0:01:46.920 growth issue. And you know, folks, let's get this straight. 0:01:46.959 --> 0:01:49.720 There's two There's two mandates in the United States one 0:01:49.760 --> 0:01:52.880 in some other countries, including the EU. Jeffrey Frankel of 0:01:52.920 --> 0:01:55.320 Harvard did a great thing for n b R a 0:01:55.440 --> 0:01:58.640 number of years ago, folding in the growth dynamic. Does 0:01:58.720 --> 0:02:03.040 Chairman Powell have a Jeffrey Frankel like growth dynamic in 0:02:03.120 --> 0:02:06.000 his mix? Well, I think the growth dynamic is that 0:02:06.280 --> 0:02:11.079 we have weakening and pretty weak US manufacturing growth right now. 0:02:11.320 --> 0:02:13.359 We have a shock right in the heart of that 0:02:13.520 --> 0:02:16.120 with the trade dispute. So you know, I think the 0:02:16.160 --> 0:02:19.120 I S M figure for for June coming up in 0:02:19.120 --> 0:02:21.680 a couple of weeks will be a very important data 0:02:21.760 --> 0:02:25.560 point because it's possible that that will plunge from an 0:02:25.560 --> 0:02:28.360 already low level. And we've been getting weak p M 0:02:28.560 --> 0:02:31.480 s UH. That's the sort of thing that drives markets, 0:02:31.560 --> 0:02:34.960 drives yields lower and and and de FED even intend 0:02:35.080 --> 0:02:38.560 to react to that even in the absence of broader 0:02:38.760 --> 0:02:41.000 weakness in the economy. And right now when you look 0:02:41.040 --> 0:02:44.280 at labor market indicators, there are not signs of broader 0:02:44.280 --> 0:02:47.519 weakness in the economy. We we have not seen jobless 0:02:47.520 --> 0:02:50.760 claims rise, we have not really seen payrolls growth slow. 0:02:50.880 --> 0:02:54.720 We certainly haven't seen unemployment rise. So so where we 0:02:54.760 --> 0:02:56.360 are right now if if you think of really the 0:02:56.400 --> 0:03:00.080 three variables is being the labor market, short term manu 0:03:00.080 --> 0:03:04.640 facturing and investment momentum UH, and inflation. You know, inflation 0:03:05.080 --> 0:03:11.280 basically ignore temporary factors manufacturing very bad, big risks given 0:03:11.320 --> 0:03:15.280 the trade war and the labor market fine, but bears watching, 0:03:15.360 --> 0:03:17.400 and that that I think is why the FED is 0:03:17.400 --> 0:03:20.239 in wait and see mode right now. Um, but there's 0:03:20.280 --> 0:03:22.880 some things there that can go in different directions rather quickly. 0:03:22.919 --> 0:03:24.560 You can have a deal on the trade war, or 0:03:24.560 --> 0:03:26.680 you can have disappoint on the labor side. See John 0:03:26.720 --> 0:03:29.240 how he's doing that. He's hedgended as an economist. We're 0:03:29.240 --> 0:03:32.200 going in different directions. That's what economists do, Tom James. 0:03:32.280 --> 0:03:34.280 Let's talk about the experience of Europe in the last 0:03:34.320 --> 0:03:37.520 twelve months. They've managed to get by okay, and largely 0:03:37.520 --> 0:03:41.800 because the weakness in manufacturing hasn't spread to services. The 0:03:41.840 --> 0:03:44.160 experience of Europe is that something we can expect in 0:03:44.200 --> 0:03:47.040 the United States. Well, this is really typically the case. 0:03:47.800 --> 0:03:51.120 We have manufacturing slumps all the time around the world, 0:03:51.520 --> 0:03:55.240 where labor markets are not affected very much. I mean, 0:03:55.400 --> 0:03:58.560 you'll recall two thousand, fifteen sixteen, we had a large 0:03:58.560 --> 0:04:02.000 manufacturing slump globally, also two thousand twelve and thirteen, and 0:04:02.120 --> 0:04:04.920 neither of those cases did you see the US labor 0:04:04.960 --> 0:04:09.080 market materially weakened. So uh yeah, I mean Europe has 0:04:09.120 --> 0:04:11.480 been hit by the trade concerns, but it's also had 0:04:11.520 --> 0:04:14.000 some troubles last year in the chemical sector. It had 0:04:14.040 --> 0:04:16.360 some troubles in the auto sector which persists to this 0:04:16.480 --> 0:04:20.080 day and are being partly driven by by fears of 0:04:20.240 --> 0:04:23.520 potential tariffs. But you know, the labor market in Europe 0:04:23.600 --> 0:04:26.080 also bears watching it. As you said, you just got 0:04:26.200 --> 0:04:29.640 a little bit of a blip on German unemployment. But 0:04:30.200 --> 0:04:33.960 when you start to see labor data broadly start to slow, 0:04:34.520 --> 0:04:37.560 then you you you have a different threshold of of 0:04:37.560 --> 0:04:39.560 of worry. I mean, I look at where the market 0:04:39.640 --> 0:04:42.440 is priced for FED cuts and and I don't see 0:04:42.480 --> 0:04:45.400 the market pricing for a high probability of one or 0:04:45.400 --> 0:04:47.640 two cuts. I see it pricing for a lower but 0:04:47.880 --> 0:04:51.480 rising probability of a lot more cuts than that in 0:04:51.520 --> 0:04:55.120 the case that labor market weakness really falls off. Do 0:04:55.160 --> 0:04:57.559 you think what it's priceful right now is misplaced? James, 0:04:57.560 --> 0:04:59.640 what do you think of market pricing at the moment? No, 0:05:00.040 --> 0:05:03.279 I think the market is is priced for for the 0:05:03.400 --> 0:05:06.080 risks of moving towards a U S for session and 0:05:06.120 --> 0:05:10.240 getting many many cuts from the FED. UM and and 0:05:10.279 --> 0:05:12.840 so I think what we're what we've done recently is 0:05:12.880 --> 0:05:16.159 we've moved away from this idea of insurance cuts. And 0:05:16.200 --> 0:05:19.039 really the conversation in the market is are you going 0:05:19.080 --> 0:05:21.359 to see the labor data start to break down in 0:05:21.400 --> 0:05:23.880 the US so that the FED needs to cut a 0:05:23.960 --> 0:05:27.400 hundred basis points two hundred basis points big moves? So 0:05:27.520 --> 0:05:30.640 you know, my conversations with investors have really been about 0:05:31.080 --> 0:05:34.400 you know that outlier scenario rather rather than you know, 0:05:34.480 --> 0:05:37.280 an insurance cut or two a little bit of a 0:05:37.360 --> 0:05:39.479 little bit of a tweak. Well, let's take the GDP 0:05:39.640 --> 0:05:42.640 second look that we're gonna have and basically a bypart 0:05:42.720 --> 0:05:46.719 economy we all agree many elements of any given domestic 0:05:46.800 --> 0:05:49.599 nation economy now is actually pretty good. And then there's 0:05:49.640 --> 0:05:52.000 old trade component as well. Do you look at as 0:05:52.040 --> 0:05:55.320 a is a by part analysis or do you aggregate 0:05:55.400 --> 0:05:57.919 into a moldy us g d P. Now we we 0:05:58.040 --> 0:06:01.000 really do look at it as as pretty separate because 0:06:01.080 --> 0:06:04.440 we see constantly, you know, we have many many charts 0:06:04.440 --> 0:06:08.400 and models where you see the sensitivity of both FED 0:06:08.480 --> 0:06:13.719 decisions and market behavior. Two wobbles in momentum in manufacturing 0:06:13.760 --> 0:06:17.640 growth where the labor data are just not affected. So 0:06:17.800 --> 0:06:20.440 it's it's during the two thousand eights and the two 0:06:20.440 --> 0:06:23.200 thousand ones. These are the rare times where the labor 0:06:23.279 --> 0:06:25.480 data broadly does get affected. So that is the big 0:06:25.600 --> 0:06:28.599 question right now we are not assuming a material slow 0:06:28.640 --> 0:06:31.600 down in the labor data. So so that means if 0:06:31.640 --> 0:06:35.440 you think the labor market is going to be fine, yeah, 0:06:35.600 --> 0:06:38.360 when either they're completely stable or they only hike once 0:06:38.440 --> 0:06:39.960 or twice in a little bit of a panic. This 0:06:40.000 --> 0:06:41.880 has been great. James Sweeney, thank you so much for 0:06:41.920 --> 0:06:44.520 the attention to her, particularly after you publish on our 0:06:44.600 --> 0:07:03.400 fears of deflation. Mr Sweeney with credit sweets joining us. 0:07:03.440 --> 0:07:06.160 Someplace to say is Jerome Schneider. Good morning to Jerome, 0:07:06.400 --> 0:07:10.000 Good morning overseeing short term rates here at PIMCO. What 0:07:10.040 --> 0:07:11.800 a morning for it? What is going on in this 0:07:11.840 --> 0:07:14.040 bond market? What do you tell clients this morning? Short 0:07:14.160 --> 0:07:16.800 term rates, long term rates? Basically, the market believes that 0:07:17.320 --> 0:07:20.640 defense wins championships at this point in time, and ultimately, 0:07:20.720 --> 0:07:22.880 when you see what the movement and rates has done 0:07:22.880 --> 0:07:25.920 over the past few days, the markets clearly romancing the 0:07:25.960 --> 0:07:29.280 fact that perhaps recessionary environment is on the horizon, and 0:07:29.760 --> 0:07:32.400 we clearly need to be thinking about that. From the 0:07:32.480 --> 0:07:34.600 rate move for much of this year, For much of 0:07:35.560 --> 0:07:37.520 we've been pricing in the idea, at least many people 0:07:37.560 --> 0:07:41.000 have the idea of a soft landing in the United States. 0:07:41.240 --> 0:07:44.200 Are we moving past that idea to something maybe a 0:07:44.240 --> 0:07:46.200 little bit more sinister now? Well, it's definitely not at 0:07:46.200 --> 0:07:48.520 the forefront, and most investors mind at this point in time. 0:07:48.520 --> 0:07:50.080 In fact, you know, when you look at the frictions 0:07:50.080 --> 0:07:52.760 that are going on and emanating in the marketplace. Uh, 0:07:52.800 --> 0:07:56.720 there's some disjointed, desjointed views, and I think originally that 0:07:57.200 --> 0:07:59.440 was thought as a low probability event or a lower 0:07:59.480 --> 0:08:02.560 probability event has moved towards the forefront. Clearly, trade and 0:08:02.560 --> 0:08:05.040 trade frictions have placed on that. And when people think 0:08:05.080 --> 0:08:09.960 about that, they quickly exacerbate and extrapolate what is going 0:08:10.000 --> 0:08:12.120 to happen in the environment, not just for the next 0:08:12.200 --> 0:08:14.360 few days or weeks, but the next few years. And 0:08:14.360 --> 0:08:17.720 we're seeing the rallying rates happened for two reasons. One 0:08:17.800 --> 0:08:21.400 risk off scenario too when you think about the the 0:08:21.400 --> 0:08:25.080 the continued evolution of where of where growth is going 0:08:25.160 --> 0:08:27.600 in the United States. Again, a lower lower for longer, 0:08:27.600 --> 0:08:30.040 which we've positive here for a long time here at PIMCO. 0:08:30.240 --> 0:08:32.520 The reality is is that a lower growth rate probably 0:08:32.559 --> 0:08:35.760 means that there's more susceptibility to re seasionary trends. And 0:08:36.120 --> 0:08:39.600 when you have that, ultimately the race to a nearer 0:08:39.640 --> 0:08:42.400 or closer to zero yield is going to be is 0:08:42.440 --> 0:08:44.160 going to be in the cards to ye rights right 0:08:44.200 --> 0:08:46.640 now two percent. It was only three years ago that 0:08:46.679 --> 0:08:48.679 the two year Treasury not how to yield a fifty 0:08:48.679 --> 0:08:50.840 basis points. We went up, we can come down just 0:08:50.880 --> 0:08:52.480 as quickly, can't. Wait. Well, I mean that was the 0:08:52.480 --> 0:08:54.679 idea behind the FED. Ultimately, what they want to do 0:08:55.040 --> 0:08:58.360 is create a bandwidth, create some type of distance to 0:08:58.559 --> 0:09:01.600 that zero bound, and timately with that zero bound, you know, 0:09:01.720 --> 0:09:04.360 we really don't The FED wanted to simply use their 0:09:04.520 --> 0:09:07.200 ordinary tools or traditionary tool kit at that point in 0:09:07.240 --> 0:09:10.440 time to effectively cut rates. Should we have a recession 0:09:10.520 --> 0:09:13.840 environment and don't expect anything, you know, much beyond that, 0:09:13.960 --> 0:09:15.839 we're not going to be hitting negative rates in the 0:09:15.920 --> 0:09:19.160 United States. But simply put, they're gonna be focusing on 0:09:19.160 --> 0:09:21.600 on the sequencing a risk. And and mind you that 0:09:21.720 --> 0:09:24.360 the market is well ahead of itself. There's a pretty 0:09:24.480 --> 0:09:27.880 high barrier to cut rates, much a higher barrier than 0:09:27.920 --> 0:09:30.000 than the market might appreciate at this point in time. 0:09:30.440 --> 0:09:33.320 And so with that in mind, uh, you know, three 0:09:33.360 --> 0:09:36.720 plus rate hikes priced into where we are right now, Uh, 0:09:36.880 --> 0:09:38.920 does you know, does seem a little full at this 0:09:38.960 --> 0:09:42.120 point in time. That being said, if if processionary environment 0:09:42.160 --> 0:09:44.440 does come to fruition, you know, you can quickly see 0:09:44.800 --> 0:09:47.600 tenure rates move well past that two percent threshold all 0:09:47.600 --> 0:09:49.959 the way down to your rates. As you highlighted before, 0:09:50.160 --> 0:09:53.760 could you know could quickly obviously recalibrate much lower considering 0:09:53.760 --> 0:09:56.079 a rate cut that might happen. She's just joining us 0:09:56.080 --> 0:10:00.120 worldwide John Farrell at Newport Beach, California with pim Co. 0:10:00.559 --> 0:10:04.600 He begins a terrific day of conversations on Bloomberg, surveillance 0:10:04.640 --> 0:10:07.760 and all the other feral properties, beginning now with Jerome 0:10:07.800 --> 0:10:11.560 Schneider on short rates. Jerome, how do you measure the 0:10:11.679 --> 0:10:15.120 left tail? Speak to our global Wall Street audience. You 0:10:15.240 --> 0:10:19.480 walk into Pimco early early morning, You've got three logins 0:10:19.520 --> 0:10:23.760 on your Bloomberg. How do you measure left tail instability 0:10:23.880 --> 0:10:27.280 right now? Well, for me, the left tail instability it 0:10:27.320 --> 0:10:29.640 comes from what I view as the great barometer of 0:10:29.679 --> 0:10:32.440 financial markets, which is the funding markets, the repo markets, 0:10:32.440 --> 0:10:35.320 and as we've discussed on many times, that has given 0:10:35.360 --> 0:10:38.640 us great indicators of the health of the overall liquidity 0:10:38.800 --> 0:10:41.880 and and overall aquidity of the marketplace and leverage within 0:10:41.920 --> 0:10:44.440 the marketplace. You know, late, you know, the third quarter 0:10:44.480 --> 0:10:46.720 of last year, we saw that begin to deteriorate as 0:10:46.720 --> 0:10:49.480 we hit into your end. Actually, right now, there's very 0:10:49.480 --> 0:10:52.720 little inclination that there's instability in those markets right now, 0:10:52.840 --> 0:10:56.559 So it seems seems fairly stable at this point in time. 0:10:57.120 --> 0:10:59.600 What I would say is that we clearly are focused 0:10:59.640 --> 0:11:03.360 on the acro economic changing macro economic conditions tom which 0:11:03.440 --> 0:11:06.400 ultimately says rates are moving lower in the US on 0:11:06.440 --> 0:11:09.679 a relative basis, U s yields look relatively high compared 0:11:09.720 --> 0:11:11.599 to the rest of the world, clearly from the Eurozone, 0:11:11.880 --> 0:11:15.400 even even other jurisdictions, you know, like Canada, etcetera. So 0:11:15.480 --> 0:11:19.719 from that perspective, there's probably valid reason why rates should 0:11:19.760 --> 0:11:22.200 coalesce at a lower degree than they were just even 0:11:22.200 --> 0:11:24.480 a few days ago. You think that spread needs to 0:11:24.520 --> 0:11:27.240 come in, well, I can understand why it should come 0:11:27.280 --> 0:11:29.320 in at this point in time. Does it need to Well, 0:11:29.360 --> 0:11:31.480 it all depends upon what your trajectory of growth is 0:11:31.520 --> 0:11:34.600 and how higher probability do you think that recessionary environment 0:11:35.000 --> 0:11:36.959 UH is going to happen. Well, let's talk about your 0:11:36.960 --> 0:11:40.040 trajectory for growth and how it might differ with everyone else. 0:11:40.160 --> 0:11:41.840 Right now, you say this market might be a little 0:11:41.840 --> 0:11:44.360 bit ahead of itself with the right cuts. Is pricing 0:11:44.440 --> 0:11:46.800 in to what degree to run? Well, so from that 0:11:46.840 --> 0:11:48.240 point of view, you know, we've we've had a view 0:11:48.280 --> 0:11:50.679 that there's been moderating growth in the economy, in the 0:11:50.760 --> 0:11:52.440 U S economy for some time. You have I S 0:11:52.559 --> 0:11:54.400 M S that have continued to be above fifty, but 0:11:54.520 --> 0:11:57.000 are deteriorated off the other peaks over the past few 0:11:57.200 --> 0:12:00.280 past few months. At the same time, UM that others 0:12:00.280 --> 0:12:03.280 response in the FED as as quickly elicited UH an 0:12:03.280 --> 0:12:05.800 appetite for risk, for risk taking that we've seen at 0:12:05.800 --> 0:12:07.960 the beginning of the part of the year. UM. When 0:12:07.960 --> 0:12:10.520 you look at that, you know, there's clearly implications that 0:12:10.559 --> 0:12:13.440 were much more positive just a few weeks ago. Now 0:12:13.480 --> 0:12:16.160 we have trade frictions. Those might resolve tomorrow, they might 0:12:16.200 --> 0:12:18.080 be resolve over the course of the next year or two, 0:12:18.360 --> 0:12:20.079 and then the longer they take, there's obviously going to 0:12:20.160 --> 0:12:22.600 be more to demand more drained on that growth expectation. 0:12:22.720 --> 0:12:24.480 So from our point of view, you know, this is 0:12:24.480 --> 0:12:26.560 just simply a point in time where you should be 0:12:26.600 --> 0:12:28.679 playing a little bit more defense from a point in 0:12:28.720 --> 0:12:31.160 the cycle where very late in the cycle, as we've highlighted, 0:12:31.320 --> 0:12:33.960 we want to basically be picking our spots in terms 0:12:34.000 --> 0:12:37.120 of credit, picking our spots in terms of credit portfolio 0:12:37.160 --> 0:12:41.400 differentiations of having a diversified portfolio and ultimately, uh, you know, 0:12:41.440 --> 0:12:44.000 focusing on that aspect of defense, focusing on the front 0:12:44.040 --> 0:12:45.839 end of the YO curve, which we still find is 0:12:45.960 --> 0:12:49.160 pretty safe at this point in time, self liquidating assets 0:12:49.240 --> 0:12:52.040 and you can pretty much still hunt around and find 0:12:52.040 --> 0:12:54.840 assets that are closer to about three percent compared to 0:12:54.920 --> 0:12:57.480 the interest on access reserves, which is the Fed's benchmark 0:12:57.720 --> 0:13:13.200 of about two point three percent. Snod as Beth McLean 0:13:13.280 --> 0:13:15.920 joining us now. Tom. Thank you very much, pim Coage 0:13:15.920 --> 0:13:19.160 portfolio manager on leverage lines. Beth. Great to have you 0:13:19.160 --> 0:13:21.439 with us on the program. It is one of those 0:13:21.640 --> 0:13:24.920 much talked about areas of fixed income, but perhaps one 0:13:24.920 --> 0:13:28.679 of the least understood, the federal reserve piling in over 0:13:28.679 --> 0:13:30.880 the last couple of years. Saying that it's an area 0:13:30.920 --> 0:13:33.360 of worry, perhaps an area that could cause some kind 0:13:33.360 --> 0:13:37.319 of systemic risk. Let's start there, Beth, your thoughts on that, sure, 0:13:37.400 --> 0:13:39.720 Thank you and thanks for having me this morning. Um. 0:13:39.760 --> 0:13:41.880 You know, I do think it's interesting leverage zones have 0:13:42.000 --> 0:13:44.840 become a real topic of conversation from the Fed to 0:13:44.920 --> 0:13:48.320 the Hill and definitely in the media. But um, we 0:13:48.360 --> 0:13:50.360 think in a way it's become a case of the 0:13:50.400 --> 0:13:52.880 people aren't seeing the forest for the trees, right. There's 0:13:52.880 --> 0:13:56.520 an increased risk across all of credit. The investment grade 0:13:56.520 --> 0:13:59.960 market is now fift triple b s. There's weaker terms 0:14:00.000 --> 0:14:02.800 and conditions in the loan market, yes, but also in 0:14:02.840 --> 0:14:06.199 the high yield market, which is an unsecured market versus 0:14:06.240 --> 0:14:09.240 loans which are which are secured um and and then 0:14:09.280 --> 0:14:11.640 overall the growth of the private credit market, which is 0:14:11.679 --> 0:14:14.680 completely unregulated. So I think there's plenty of risk to 0:14:14.679 --> 0:14:17.680 go around. And importantly, you have to to boil it 0:14:17.720 --> 0:14:21.320 down to you know, picking the individual credits, doing the 0:14:21.400 --> 0:14:24.720 bottom up credit research so that you're picking the healthiest trees, 0:14:24.760 --> 0:14:27.120 if you will, in in in the forest. The rny 0:14:27.160 --> 0:14:28.960 of it all is that maybe the risks we're building 0:14:28.960 --> 0:14:32.000 when the Federal Reserve was cutting hiking interest rates rather 0:14:32.000 --> 0:14:35.040 because there was this massive wall of demand for floating 0:14:35.160 --> 0:14:39.360 right product. Just how much have the covenants have some 0:14:39.400 --> 0:14:41.680 of the securities that invested would typically have Just how 0:14:41.760 --> 0:14:44.120 much have they been beaten up over the last couple 0:14:44.160 --> 0:14:45.840 of years. Yeah, I think that's been an area of 0:14:45.920 --> 0:14:49.480 focusing rightly. So, I think that the demand for income 0:14:49.800 --> 0:14:53.240 across you know, high yield and leverage loans has driven 0:14:53.280 --> 0:14:56.040 to weaker terms. So generally we see most of the 0:14:56.080 --> 0:14:59.960 market now over it was quote unquote covenant light, which 0:15:00.080 --> 0:15:03.240 means there's no maintenance covenants. But importantly there are still 0:15:03.240 --> 0:15:06.800 incurrence tests, so companies can only incur debt if their 0:15:06.880 --> 0:15:09.880 leverages is peaked at a certain level. So there are 0:15:09.960 --> 0:15:13.120 some protection still in the documents. And then the other 0:15:13.240 --> 0:15:16.040 area of weakness, if you will, has been you know, 0:15:16.040 --> 0:15:19.800 maybe looser baskets. UM. There there's more room for adding 0:15:19.840 --> 0:15:23.960 incremental indebtedness, there's more room to make restricted payments or dividends. 0:15:24.000 --> 0:15:26.000 So those are the things that again it gets down 0:15:26.040 --> 0:15:29.240 really to us to how do you underwrite these loans 0:15:29.280 --> 0:15:31.480 and are you in your models? You know, we have 0:15:31.520 --> 0:15:34.120 our our global credit research team that that you hear 0:15:34.160 --> 0:15:37.800 Markquisel and others talk about. UM. That team is very 0:15:37.800 --> 0:15:40.280 focused on doing that bottom up analysis and taking a 0:15:40.280 --> 0:15:42.760 look at the structure and saying, what if we fund 0:15:42.800 --> 0:15:45.200 that incremental debt and it pays a dividend. So it's 0:15:45.240 --> 0:15:48.440 not really doing anything to help the company, if you will, 0:15:48.480 --> 0:15:51.400 but to help equity investors. UM. You know, how does 0:15:51.440 --> 0:15:53.920 that look, what does that impact our you know, our 0:15:54.000 --> 0:15:56.400 view on their ability to deleverage over time, how the 0:15:56.440 --> 0:15:59.920 company can fare through a downturn. So we're always under 0:16:00.000 --> 0:16:02.840 writing to what is that downside? What if they pull 0:16:02.920 --> 0:16:04.760 all of these triggers that they have in their credit 0:16:04.760 --> 0:16:07.080 agreements and how do how do how will they be 0:16:07.120 --> 0:16:10.760 able to sustain cash flows and pay down debt during 0:16:11.000 --> 0:16:13.680 during a weaker economic And let's talk about the prospect 0:16:13.720 --> 0:16:16.000 of a much weaker economy. We have a global bond 0:16:16.040 --> 0:16:19.240 market pricing in right cuts in the treasury market, for instance, 0:16:19.840 --> 0:16:23.040 the prospective recoveries the default cycle. What it could look 0:16:23.080 --> 0:16:26.400 like now for this error fixed income versus what it 0:16:26.400 --> 0:16:28.600 looked like ten years ago. Has it changed in your mind? 0:16:28.960 --> 0:16:31.280 I think it has changed. Um you know, you can't 0:16:31.320 --> 0:16:35.600 have this this fundamental shift in weaker terms, etcetera, and 0:16:35.640 --> 0:16:38.320 not have some expectation on how it's going to impact 0:16:38.560 --> 0:16:41.440 the behavior through the next economic cycle. Um. So I 0:16:41.520 --> 0:16:44.760 think a couple of things. One, we do think that recoveries. 0:16:44.880 --> 0:16:48.000 In the last couple of cycles, you've had cumulative default 0:16:48.080 --> 0:16:53.360 rates oft with recoveries and loans of about sevent If 0:16:53.400 --> 0:16:56.840 we go through the next cycle, and let's say you 0:16:56.840 --> 0:16:59.960 have the same cumulative default rate but recoveries of same 0:17:00.000 --> 0:17:02.280 were like sixty to sixty five percent, which is what 0:17:02.440 --> 0:17:07.119 the UM, what the rating agencies are are generally forecasting. Obviously, 0:17:07.200 --> 0:17:10.800 that's increased losses to UM you know two investors. But 0:17:10.880 --> 0:17:12.800 I think if you put it in in in the 0:17:12.920 --> 0:17:16.360 broader framework, the loan market is about a trillion dollars. 0:17:16.600 --> 0:17:19.320 Let's say we have that thirty percent cumulator default, right, 0:17:20.000 --> 0:17:23.360 and a more draconian scenario of fifty percent recoveries. That's 0:17:23.400 --> 0:17:26.320 a hundred and fifty billion of losses. So that's not 0:17:26.320 --> 0:17:29.600 not unmeaningful. But think about what the fang stocks lose 0:17:29.680 --> 0:17:32.919 sometimes in an afternoon, right, If you put it in perspective, 0:17:33.280 --> 0:17:37.040 that's not that big. And and then secondly, those losses 0:17:37.200 --> 0:17:41.119 are going to be born primarily by CLLO equity investors. 0:17:41.400 --> 0:17:45.080 CLOS owned two thirds of the loan market and Cello 0:17:45.200 --> 0:17:48.359 Equity is the first loss. So even in that scenario 0:17:48.400 --> 0:17:52.280 where you have fifteen percent cumulative losses, most of that 0:17:52.359 --> 0:17:55.840 actually hits just the CLLO equity and maybe the double bs. 0:17:56.040 --> 0:17:58.480 Beth really smart stuff and gas get your insight this 0:17:58.520 --> 0:18:00.600 morning on an area of fixed thing. Come Tom, But 0:18:00.640 --> 0:18:03.240 I think he's talked about a lot but not understood 0:18:03.440 --> 0:18:05.960 very well. Beth McLean that of pim cut really good 0:18:05.960 --> 0:18:08.919 perspective in a series of conversations with John Farrow at 0:18:08.920 --> 0:18:25.200 Newport Beach with PIMCO. Today, we now get a clinic 0:18:25.280 --> 0:18:29.000 on China from Hugo Rogers, chief investment strategist at Dell Tech. 0:18:29.080 --> 0:18:31.960 He's smarter than I am. In February he's in the Bahamas. 0:18:32.000 --> 0:18:34.639 Even now in May he's in the Bahamas. So, Hugo, 0:18:34.720 --> 0:18:38.119 you're smarter than I am. But your note on China 0:18:39.040 --> 0:18:45.440 is jaw dropping. You clearly take the gloomy side. Why well, Um, 0:18:45.480 --> 0:18:49.080 there's a very thank you for your introduction. My ability 0:18:49.119 --> 0:18:52.800 to focus the weather is is well famous. Maybe I'm 0:18:52.880 --> 0:18:56.760 very tough to do in the Bahamas, but continue exactly. Um. 0:18:56.840 --> 0:18:59.480 So the gloomy view and China really is that there 0:18:59.480 --> 0:19:04.760 are long term structural issues in China. China is has 0:19:04.800 --> 0:19:08.040 been running a series of stimulus since the Great Financial Crisis. 0:19:08.119 --> 0:19:11.159 They've all been debt fueled fixed asset investment, and the 0:19:11.200 --> 0:19:15.040 marginal returns on those kinds of investments have been falling. 0:19:15.160 --> 0:19:17.520 You know, the the credit impulse has led to a 0:19:17.560 --> 0:19:22.199 lower and lower GDP response each time. So there is 0:19:22.200 --> 0:19:26.480 a problem with the old way of stimulating growth. That 0:19:26.680 --> 0:19:31.480 mechanism is broken, Um. And there's actually it's worse than that. 0:19:31.520 --> 0:19:34.359 There's a direct conflict. The way you're funding that growth 0:19:34.400 --> 0:19:37.359 away that China is funding that growth is your effectively 0:19:37.440 --> 0:19:42.000 expropriating savings from your consumers. And it's the consumer you 0:19:42.040 --> 0:19:44.160 need to pick up the economy. You know, it's less 0:19:44.160 --> 0:19:46.240 than half the economy and it's just not growing. What 0:19:46.280 --> 0:19:49.400 do you make of the bank failure and inner mongolia 0:19:49.520 --> 0:19:51.480 four or five, six days ago? Is that a one 0:19:51.520 --> 0:19:56.760 off video syncretic moment or not. It's it's potentially a harbinger. 0:19:56.800 --> 0:19:58.760 But you know, let's not let's not read too much 0:19:58.760 --> 0:20:01.960 into a small banker. But the you know, I've seen 0:20:02.080 --> 0:20:05.399 the Chinese banks I met when the i PR however 0:20:05.400 --> 0:20:08.600 long ago, and they all are state controlled, so they 0:20:08.680 --> 0:20:11.720 have to lend where they're told and as provide the 0:20:11.760 --> 0:20:16.359 balance right now of the political economics of Beijing with 0:20:16.480 --> 0:20:19.679 the trade war and with the classic answer, which is China, 0:20:19.760 --> 0:20:24.480 what outpatients us? Do they have the underlying economic slash 0:20:24.560 --> 0:20:30.200 financial to out patients? President Trump, Um, Yeah, I hate 0:20:30.240 --> 0:20:32.800 to be consensus, but the answer is they do have 0:20:33.440 --> 0:20:37.080 They have less domestic political pressure. They control the narrative, 0:20:37.280 --> 0:20:40.439 they control the press. They can they can play a 0:20:40.480 --> 0:20:43.680 long game. But I think it's clear that that is 0:20:43.720 --> 0:20:46.359 what they are betting on. They are turning around and 0:20:46.400 --> 0:20:48.920 saying that we can play the long game. Trump isn't 0:20:48.920 --> 0:20:52.639 the presidential election cycle right now. Um, so if we 0:20:52.680 --> 0:20:58.240 wait out, we get a softer Um administration, we can 0:20:58.280 --> 0:21:00.720 maybe we can maybe win. Come on, they're not a 0:21:00.760 --> 0:21:03.640 currency manipulator. There was an uproar one year ago, two 0:21:03.720 --> 0:21:06.840 years ago, five years ago. They were a currency manipulator. 0:21:07.000 --> 0:21:10.159 I guess they still aren't. Fine. We've got rarers now, 0:21:10.280 --> 0:21:13.960 know not the band folks from a million years ago? Rarers, Cobalt, 0:21:14.080 --> 0:21:18.560 selenium and the rest of it. Go on. We got 0:21:18.560 --> 0:21:21.959 all that. Are those distractions or should we actually study 0:21:22.040 --> 0:21:26.800 those as we try to study China? Um? They are. 0:21:26.880 --> 0:21:29.359 I think there's there's small weapons. You know that the 0:21:29.440 --> 0:21:32.560 problem is that actually right now China is in such 0:21:32.800 --> 0:21:35.640 a weak position because it's trying to stimulate its economy. 0:21:36.080 --> 0:21:38.760