Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane Jay Lee.
Speaker 1: We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
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Speaker 1: bring in March on the show, we've plind a gun
Speaker 1: global for ex change markets strateg just a managing conta
Speaker 1: good morning to your mark, your fools, your thoughts on
Speaker 1: what we've seen over night from Chinese authorities. Just frame
Speaker 1: it thora for our audience place so I would phrase it.
Speaker 1: I had to see a sort of a combination about
Speaker 1: what you and Lisa are saying. I so see, the
Speaker 1: dollar had actually weakened in the last part of last
Speaker 1: week after the tariffs were announced. So it was after
Speaker 1: the after the little rally the dollar had on the
Speaker 1: back of the f MC, we get the dollars sell
Speaker 1: off last Thursday and Friday, and so I was one
Speaker 1: of the people that thought that the pullback of the
Speaker 1: dollar would have protected that seven point o level on
Speaker 1: dollar R and B come early this week. But instead
Speaker 1: I think that the Chinese, I think that they stay
Speaker 1: stepped away. They did two things really at things. First day,
Speaker 1: the fixing for the dollar was six point nine, which
Speaker 1: was a bit stronger for the dollar than many people
Speaker 1: have expected given the recent pattern. And then we saw
Speaker 1: the forward and then finally the c n H went
Speaker 1: above seven point oh and no sign from the PBOC
Speaker 1: protesting that. And then spots c n H D on shore,
Speaker 1: R and B went above seven point oh. And I think,
Speaker 1: to Lisa's point, once we have this, Pandora's box is
Speaker 1: open because we don't know what what's the next Where
Speaker 1: is it going to go? Now people are talking seven
Speaker 1: thirties the next The next fix from the Chinese going
Speaker 1: into tomorrow, I think is critical. So can you anticipate
Speaker 1: what Chinese authorities will do after a day of pretty
Speaker 1: big waiting us for the Chinese currency. It's hard to
Speaker 1: predict what the Chinese. I can't even pretend that I
Speaker 1: can predict what the Chinese's gonna do. But they did
Speaker 1: have a statement that I thought was very important, and
Speaker 1: he said something to the effect I might not get
Speaker 1: it exactly right, but something in the effect that the
Speaker 1: seven point oh is not like an age that once passed,
Speaker 1: you can't return too. So I think that they in
Speaker 1: effected was more of a warning shot that if the
Speaker 1: US wants to go down this route ending the tear
Speaker 1: off truths without even notifying the Chinese having to read
Speaker 1: that in a tweet, if the US insists on going
Speaker 1: down this route, China is prepared to just step away.
Speaker 1: They're prepared to take whatever the US wants to hit with,
Speaker 1: hit it with. If that means tariffs, that's what it means,
Speaker 1: because at some point, once you put make Chinese goods uncompetitive,
Speaker 1: it doesn't really matter where the tariff's at. It's uncompetitive.
Speaker 1: We have to find other substitutes for that. So I'm
Speaker 1: concerned that that this is that the US are going
Speaker 1: to retaliate and the situation is going to escalate. I
Speaker 1: can't see how things can get better before they get
Speaker 1: before they're gonna get worse, I think, and that that
Speaker 1: seems to be was being priced into the market. If
Speaker 1: copper dr copper down to the lowest and US on
Speaker 1: your yields the longest losing streak since two thousand and twelve,
Speaker 1: I'm just wondering whether this UH tolerance of the devaluation
Speaker 1: of the UN will hurt or help China, because at
Speaker 1: this point we don't even know about capital outflows. We
Speaker 1: don't know about their purchasing power, their ability to stimulate
Speaker 1: their economy. What's your take? So I think that you know,
Speaker 1: for a while, many of us thought that the seventh
Speaker 1: the reason that the Chinese were preventing further depreciation, despite
Speaker 1: what's happening to the economy, despite the interest rate differentials.
Speaker 1: They were holding up the R and B because I
Speaker 1: think many of us assumed that they were thinking that
Speaker 1: they wanted to help Chinese companies move up to value
Speaker 1: added chain. Find if trade is going to be less conducive,
Speaker 1: then they have to do more value added to make
Speaker 1: their exports more competitive. And I think that the Chinese
Speaker 1: are reluctant to risk this downward spiral that we saw,
Speaker 1: like in lower R and B lower stocks. And this
Speaker 1: is a very important time period. You know, we're about
Speaker 1: to celebrate a China is about to celebrate the seventieth
Speaker 1: anniversary of the Revolute shan In. Americans take these kind
Speaker 1: of things with a big greeness soft but I think
Speaker 1: there are in other parts of the world, like in China,
Speaker 1: these kind of national holidays, national commemorations are very important,
Speaker 1: and I think that They're gonna want to avoid this
Speaker 1: downward spoil these kind of headlines to undermine what would
Speaker 1: seem to be otherwise relatively good news. But Mark, that's
Speaker 1: something I actually do worry about this morning. On a
Speaker 1: morning like this morning, I'm not worried about the Chinese
Speaker 1: engineering currency weakness. I think that comes with massive risks
Speaker 1: for the Chinese, and I'm not sure they want to
Speaker 1: play with fire. But that's not to say they can't
Speaker 1: make a mistake. There is this immense belief, this immense
Speaker 1: faith in the Chinese policymaker's ability to keep control. And
Speaker 1: it always strikes me as odd because back in fifteen
Speaker 1: sixteen they lost control and it took months and months
Speaker 1: and months to find stability in the Chinese economy and
Speaker 1: Chinese markets. Once again, can this lead to a policy
Speaker 1: mistake if you move away from constraining the currency to
Speaker 1: tolerating weakness, can it precipitate the kind of things that
Speaker 1: the Chinese are trying to avoid. I think that's the problem,
Speaker 1: these unintended consequences. I mean, that's why I point out
Speaker 1: that today, despite the despite all the focus on China,
Speaker 1: it's actually Korea wand it actually sold off more, and
Speaker 1: so the the the unintended consequences UH, the chances for
Speaker 1: a policy mistake, not just in China but in the
Speaker 1: United States, and the way other countries respond to this.
Speaker 1: I think it's very important. We saw this with the UH.
Speaker 1: The European released this morning the composite p m I,
Speaker 1: and we see that you're and the large exporters in
Speaker 1: Europe have also been squeezed by this trade tensions. This
Speaker 1: is like bad news for the world, I think. So
Speaker 1: before we let you go, it's gonna be a busy session,
Speaker 1: perhaps a very very busy Wait. What are you looking
Speaker 1: for as the separation progresses this morning in New York? Well,
Speaker 1: I think for me, the most important thing is going
Speaker 1: to be how the US responds to what China is doing.
Speaker 1: Is I just don't see how Trump can back off, now,
Speaker 1: how the U s can back off, And so, whether
Speaker 1: it's the press conference later today or some comment from
Speaker 1: another official, I think people are gonna be very eager
Speaker 1: to see the sort of we're waiting for the other
Speaker 1: shooter drop and left to the US great to catch
Speaker 1: up with you. What a busy weight we've got ahead
Speaker 1: of us now. Bannockburn Global for X Chief Markets Strategists
Speaker 1: managing partner. I'm really glad to bring in henrietto Trees
Speaker 1: to discuss this because honestly, she has decades of experience
Speaker 1: framing all sorts of policy issues and and to me,
Speaker 1: this is the main question. So, Henrietta, thank you so
Speaker 1: much for coming in here and joining US VETA partners.
Speaker 1: What do you think an escalation looks like? Thanks for
Speaker 1: having me this morning. UM, I think you're definitely looking
Speaker 1: at a political dynamic here more than an economics one.
Speaker 1: Now that the US has exhausted essentially it's entire basket
Speaker 1: of five billion someone worth of tariff, and China has
Speaker 1: essentially done the same, Now they're going to be escalating
Speaker 1: in much more obvious political ways. UM. One of the
Speaker 1: anecdotes we heard from the administer asition early on in
Speaker 1: this trade wars that they laughed when other nations including
Speaker 1: the EU, UM and China and Mexico and Canada they laughed,
Speaker 1: and they when they put on tariffs on our agriculture exports.
Speaker 1: Because the President believes that the farmers are firmly united
Speaker 1: behind him, and UM, we're tracking polling data there very closely.
Speaker 1: But still it's about an eight percent approval rating for
Speaker 1: the Republicans and pretty high through most of the Midwest
Speaker 1: and the farms sort of heartland area in support for
Speaker 1: this trade war. So I think as we escalate, it's
Speaker 1: going to get more into the realm of the politics,
Speaker 1: and we should expect the farmers to continue to get hit. UM. Interestingly,
Speaker 1: speaking with Agriculture Committee staff, they were saying, you know,
Speaker 1: I don't care about the fourth list of tariffs going
Speaker 1: into effect. This is the US is three billion dollar basket,
Speaker 1: because there's nothing else that China can do to us.
Speaker 1: They've already carraffed US tariff d US to Kingdom come
Speaker 1: and so now China is essentially going a step further
Speaker 1: still hammering that state that same old saw which is
Speaker 1: hit the farmers all day every day, and I expect
Speaker 1: that's what they'll continue to do. Moving into main facturing
Speaker 1: that might be in the rest belt will probably be
Speaker 1: a good next step to watching um, you know, GM
Speaker 1: and Ford and seeing how they're being treated over in China.
Speaker 1: UM Seeing how any of the activities that China can
Speaker 1: take to impact those guys would be the next step. So, Henrietta,
Speaker 1: this is this raises a really important point if the
Speaker 1: escalation is more political than economic, our traders pricing in
Speaker 1: too much pessimism right now because there isn't that much more,
Speaker 1: uh that China retaliation can do to the U. S economy. See.
Speaker 1: I think that that's a bit discounted because I don't
Speaker 1: think the market has fully appreciated the severity of the tariff.
Speaker 1: Thus far, we have strong underlying economic data. And while
Speaker 1: earnings calls have started to come around and CEOs and
Speaker 1: CFOs are starting to talk about the trade war more sustinctly, Um,
Speaker 1: you're still seeing holdovers from the massive pull forward and
Speaker 1: inventories that businesses pulled off in the first and second
Speaker 1: quarter of this year, not to mention fourth quarter or
Speaker 1: last year. So I think there's still this lag that
Speaker 1: will continue to escalate, and traders need to price into
Speaker 1: the market going into suptime or and even October. There's
Speaker 1: still these reports that, you know, maybe the White House
Speaker 1: is not serious about putting these tariffs on in September.
Speaker 1: That gives folks false hope. I mean, the market being
Speaker 1: down three twenty points is um, you know, getting there,
Speaker 1: in my opinion, starting to appreciate the severity of the situation.
Speaker 1: But there's er room in my opinion, And Riett said,
Speaker 1: just finally, I'd like you to talk about where the
Speaker 1: focuses on either side in the negotiations right now. The
Speaker 1: Chinese may well be focused on the pictures coming out
Speaker 1: of Hong Kong. The president may well be focused on
Speaker 1: the tragic news over the weekend of two mass shootings
Speaker 1: in twenty four hours. Is the focus elsewhere and away
Speaker 1: from the trade talks as we begin a new training week, Well,
Speaker 1: I think we have to be mindful that U S
Speaker 1: t R is working on every single front. I mean,
Speaker 1: they're firing on all cylinders. We've got three separate cases
Speaker 1: with just the EU, they're trying to negotiate with Japan UM.
Speaker 1: When I speak with UM senior officials and with folks
Speaker 1: in the Senate of public caucus circles, with the administration,
Speaker 1: they believe firmly that it is on the brink of
Speaker 1: economic collapse. And so while the trade wars take a while,
Speaker 1: I think usc R Lifefiser is extraordinarily patient and he
Speaker 1: understands that these tires are the best tool that they
Speaker 1: have and it will not be immediate. And so I
Speaker 1: think that they believe that China issue is important, obviously,
Speaker 1: but there's plenty else perculating as you point out the
Speaker 1: domestic unrest. I think immigration and trade go hand in hand.
Speaker 1: So as we escalate with um the trade war on China,
Speaker 1: expect immigration rhetoric to be exacerbated. And the El Passo shootings,
Speaker 1: UH and the Ohio shootings obviously give us a clear
Speaker 1: example of that. So I think that it serves the
Speaker 1: President's best interest to keep both immigration and the trade
Speaker 1: wars front and center. They worked in Kandom and it's
Speaker 1: a great to cant show with you, Henrietta Trade their
Speaker 1: of Vada partners, joining us on the latest moves from
Speaker 1: China at the epicenter of the price action today the
Speaker 1: Chinese currency, that yuan dollar China through seven wang in
Speaker 1: on all of this, I pleased to say, Joining us
Speaker 1: on the phone, Alan Ruskin, Deutsche Bank Securities Managing Director
Speaker 1: and chief International Strategist. Alan just walked me through quite
Speaker 1: simply how you're framing what happened in the last twenty
Speaker 1: four hours for clients this morning. UM, Yes, sir John,
Speaker 1: It's has been an interesting twenty four hours and not
Speaker 1: a complete surprise. After you know, the last announcement from
Speaker 1: President Trump that tariffs would be raised on the you know,
Speaker 1: remaining three hundred billion imports that the US has from China.
Speaker 1: Um that being said, uh, it's you know, China's actions
Speaker 1: didn't have to occur immediately. They didn't have to actually
Speaker 1: let the currency go immediately. So I think there's this
Speaker 1: perception out there in the marketplace that they've effectively weaponized
Speaker 1: the currency and that you know, what you have is
Speaker 1: a trade war which is now turning into you know,
Speaker 1: a genuine currency war. Obviously, we've just had some cleaner
Speaker 1: comments from the PBOC just trying to dampen that down
Speaker 1: and saying they won't use the currency as a tool.
Speaker 1: But I think the proof of the pudding is in
Speaker 1: the eating, unfortunately, and you know, it looks very much
Speaker 1: to a lot of observers and probably to the U.
Speaker 1: S administration as well, that they have actually used the
Speaker 1: currency as at all. So Alan, let's talk about whether
Speaker 1: you think that is the case. I'm never a big
Speaker 1: fan of the word weaponization. I think it's very loaded.
Speaker 1: Looking at the story this morning, they've certainly moved away
Speaker 1: from constraining the currency weakness. If they're now tolerating currency weakness,
Speaker 1: will that be perceived. Is that initially the objective of
Speaker 1: the Chinese authorities for that to be perceived as some
Speaker 1: kind of weaponization of the currency. Well, it certainly looked
Speaker 1: like that up until you know, the latest comments that
Speaker 1: we've had from the PBO cum insomuch as you know,
Speaker 1: I do feel like they could have held the line
Speaker 1: in terms of you know, the seven level for a
Speaker 1: few weeks perhaps and separated the actions on the currency
Speaker 1: side from uh, you know, the actions that we're seeing
Speaker 1: on the tariffs. Um. That being said, the underlying pressures
Speaker 1: are clearly four dollar China to go substantially higher. So
Speaker 1: I think if they were going to hold the line,
Speaker 1: it was only going to be probably for a few weeks,
Speaker 1: and after that, I think they will start to run
Speaker 1: rundown reserves at a pace that was undesirable from the
Speaker 1: Chinese standpoint. And I think, you know, it was inevitable
Speaker 1: that seven was going to go at least over the
Speaker 1: next few months. So Alan, I guess let's just assume,
Speaker 1: as the market seems to be doing right now, that
Speaker 1: this is an intentional escalation and that we don't have
Speaker 1: a path back from here. That's an easy resolution. What
Speaker 1: does this look like what is the playbook for both
Speaker 1: China going forward as well as the US. Yeah, so
Speaker 1: you know, they're still open questions as to how China
Speaker 1: responds to the US and other matters. I think there's
Speaker 1: you know, question marks about you know, have they genuinely
Speaker 1: stopped agricultural imports from in the national entities? Uh? You know,
Speaker 1: those news reports are not entirely clear as well. So
Speaker 1: we need to see, you know, what other actions China
Speaker 1: comes up with, because I think that will then provoke
Speaker 1: a response from the U S side. On the U
Speaker 1: S side, you know, I think they will almost certainly
Speaker 1: point to the latest adjustment we've seen on dollar China
Speaker 1: as as currency manipulation UM as I said, and I
Speaker 1: think market forces are pushing in that direction regardless how
Speaker 1: the US responds thereafter is not obvious. They could, for example,
Speaker 1: intervene UM so they could buy uh, you know, the
Speaker 1: Chinese currency and sell dollars. But I think if that's
Speaker 1: unilateral action and it's done against the you know, the
Speaker 1: desires of the Chinese, and it's not going to be
Speaker 1: terribly effective. A worst case scenario would be the US
Speaker 1: perhaps even sort of threatening to raise tariffs more the
Speaker 1: more the Chinese allow their currency to weaken, So that
Speaker 1: really gets into pretty ugly scenario. And we've had several
Speaker 1: reports over the weekend suggesting that the advisors around the
Speaker 1: president did not want him to tweet what he tweeted
Speaker 1: at the back end of last week, and he still
Speaker 1: did it. We know from a couple of weeks ago,
Speaker 1: a couple of tuesdays ago, there was a meeting within
Speaker 1: the White House about intervening directly in the currency market.
Speaker 1: Reportedly there was a proposal from pin and Navarro about
Speaker 1: weakening the dollar by say ten percent. The President pushed back,
Speaker 1: do you actually think direct intervention may well be on
Speaker 1: the table still for this White House? Um, Look, it's
Speaker 1: it's impossible to rule out, say some sort of in
Speaker 1: a brief foray into into the foreign exchange market. I
Speaker 1: think what would uh, well, I think authorities would quickly
Speaker 1: find is that this is a difficult market to push around.
Speaker 1: And you know, even for example, if they wanted the
Speaker 1: dollar week or with the dollar in nestree weekend, or
Speaker 1: how many billions of dollars of sales will be needed
Speaker 1: actually you know, achieve end goals. I think there's all
Speaker 1: sort of question marks that I think mostly answered on
Speaker 1: the on the on the side of suggesting that intervention
Speaker 1: is not going to be effective. So I think, you know,
Speaker 1: that's why the President's advises us suggesting, well, you know,
Speaker 1: that's not a good idea. There are other arguments, of course,
Speaker 1: not least you know, if you try to drive your
Speaker 1: currency week, it's disruptive for ACID markets in general, it
Speaker 1: will be disruptive for the US bond market, for the
Speaker 1: US equity marketers, et cetera. So I think, you know,
Speaker 1: there are a lot of good reasons why you don't
Speaker 1: really want to drive your currency weaker. So currently there's
Speaker 1: a lot of fear certainly baked into markets are being
Speaker 1: baked into markets. There's a question of how much that
Speaker 1: accurately reflects what the economic readout will be from this.
Speaker 1: And I'm wondering, do you think that there's a real
Speaker 1: possibility that escalating trade war will cause some sort of
Speaker 1: either recession global downturn that is not being fully presced
Speaker 1: into the market right now. Yeah, I think there's a
Speaker 1: level of disruption that could come from this that is
Speaker 1: not being fully priced into the market. I mean, I
Speaker 1: think even if you look at in a past episodes
Speaker 1: where tariffs were an issue. Where this trade issue reared
Speaker 1: its head, you saw the equity market, the US equity
Speaker 1: market in particular, for quite sharply. The adjustments we've seen
Speaker 1: relative to those past episodes is still quite small. So
Speaker 1: it's certainly possible that you could see a much larger
Speaker 1: movements in in a risky assets in general, and that
Speaker 1: will unwind some of the easy financial conditions that we've seen,
Speaker 1: partly helped by the FED. You know. As to whether
Speaker 1: it sort of pushes the US, for example, into recession,
Speaker 1: I think that's you know, we're not we're not nearly
Speaker 1: at that stage yet, but we're at a stage where
Speaker 1: certainly this is consistent with the ongoing global slowdown and
Speaker 1: the U S slowdown. And then let's try and wrap
Speaker 1: things up with a bit of a guide book playbook
Speaker 1: for the next twenty four hours down where maybe a
Speaker 1: little bit of a mini clinic over how the Chinese
Speaker 1: arency has managed. I've always thought the fix is an
Speaker 1: unfortunate phrase because it implies it is something that perhaps
Speaker 1: it is not. But alan just walk us through for
Speaker 1: our listeners that might not be too familiar with what
Speaker 1: happens with the Chinese currency and foreign exchange markets every
Speaker 1: single day, just how they do manage this currency, what
Speaker 1: the fix actually is, and what you're looking for later tonight. Yeah, John,
Speaker 1: I wouldn't make too much of the fix really because
Speaker 1: I think what you're seeing is that outside of the fix,
Speaker 1: you're seeing much larger adjustments by the free market, some
Speaker 1: of us led by the CNH market. So for listeners,
Speaker 1: that's really you know market that's effectively Chinese currency offshore,
Speaker 1: the UH so Hong Kong based Chinese currency um. But
Speaker 1: and we're seeing a bit of a gap developed between
Speaker 1: c and Y and c n H. But on the whole,
Speaker 1: this is a indication that we're seeing from much larger
Speaker 1: adjustments occurring across the board between c n Y and
Speaker 1: c NH. So you know, what we're seeing is something
Speaker 1: which is being tolerated by authorities independent of where they
Speaker 1: may be fixing the currency at any one moment in time. Alan,
Speaker 1: do you think the risk pressure though, because of optics
Speaker 1: and the way it will be perceived to do something
Speaker 1: difference with the fix later this evening going into tomorrow, possibly,
Speaker 1: I think where the fix could be interesting is in
Speaker 1: UH supporting the statements that we've seen from the pbo
Speaker 1: C now that they won't use the currency as a tool.
Speaker 1: If they try to attempt to example, fix the currency
Speaker 1: below seven again, that would be you know, interesting, It
Speaker 1: would be contradictory perhaps too, you know, everything we've just
Speaker 1: seen over the last twelve hours or so, but it
Speaker 1: would at least be indicative of, you know, some genuine
Speaker 1: desire to limit the fallout of the currency and the
Speaker 1: weakness in the currency, and to catch up with you
Speaker 1: as always, to break down some of these foreign exchange moves.
Speaker 1: And I'm Ruskin, their Dutch Bank Securities managing to director
Speaker 1: and chief International Strategists. Let's bring in Lallie Top Charlie
Speaker 1: Shower j HCM, senior fund manager the Bloomberg Barclays agg
Speaker 1: that index on high yield getting out to four hundred
Speaker 1: basis points. Again, Larly, you have been defensive. You've been
Speaker 1: talking about the risk in this credit market. Are we
Speaker 1: seeing a reflection of that or just a reflection of
Speaker 1: treasury yields dropping drastically lower and high yield not coming
Speaker 1: along for the party. I think it's the ladder. Um.
Speaker 1: I think there's a little bit of a risk off
Speaker 1: in high yield for sure. Um. Look four hundred is
Speaker 1: still tight. It's still hundred something basis points tight here
Speaker 1: to date. UM, And I don't think the spreads are
Speaker 1: going to be cheap until we get to five hundred.
Speaker 1: So we will stay we we'll continue to say defensive.
Speaker 1: So my question is, what's the catalyst to see further
Speaker 1: weakness here, further widening and credit spreads that would offset
Speaker 1: those lower rates. Because obviously the yield is two components,
Speaker 1: write the right component and the credit spread the risks component.
Speaker 1: So what's the what's what's sort of the trigger here?
Speaker 1: I mean it's you know, at some point the credit
Speaker 1: will return to fundamentals. So if you think of the
Speaker 1: high yield, which will have a different dynamics than the
Speaker 1: investment grade, which are the larger corporations. But if you
Speaker 1: think of high yield, look again, this is one earning
Speaker 1: season and we're still going through it. The numbers are
Speaker 1: not that great, um, the leveraging has stopped. There are
Speaker 1: more companies missing numbers, UM And eventually I think, you know,
Speaker 1: in high yield you do start pricing in actual credit
Speaker 1: risks well. But things are not that bad though, And
Speaker 1: this is what a lot of people point to that
Speaker 1: that companies are still doing okay, and that you know,
Speaker 1: perhaps are not deleveraging, but they're certainly not re leveraging,
Speaker 1: and some sort of dramatic in some sort of dramatic
Speaker 1: way in the high yield market perhaps and has been
Speaker 1: create more so, so what do you say to people
Speaker 1: who push back and say, you know what, investors have
Speaker 1: shown restraint. You have not seen runaway rallies in the
Speaker 1: risky is debt. Things are still solid. Well, it's really simple, actually,
Speaker 1: So I think of how you'll spreads in two components.
Speaker 1: One is your credit risk um compensation as a function
Speaker 1: of the default and the recovery rate. The other one
Speaker 1: is the liquidity risk premium. So that liquidity risk premium,
Speaker 1: which is basically your average transaction costs over the cycle,
Speaker 1: is actually somewhere around three d basis points over the
Speaker 1: last twenty five years. When the markets gets really tight,
Speaker 1: people price it as tight as two hundred basis points.
Speaker 1: So can the spreads go another hundred basis points? Sure,
Speaker 1: if you always assume you can transact, then your bid
Speaker 1: ask spread is going to remain very muted. But I
Speaker 1: think eventually vault is gonna pick up and we're gonna
Speaker 1: go back to three D and spread liquidity premium. John,
Speaker 1: I love when we bring this up because it really
Speaker 1: highlights this sort of escalating fear that people have that
Speaker 1: when they go to sell, they won't be able to
Speaker 1: at the prices they have on their books. Well, the
Speaker 1: problem is not many people to fit for long it.
Speaker 1: And I guess that is the issue because so many
Speaker 1: people think they connect it. When they want to exit,
Speaker 1: they'll always get ahead of the herd, right, And that's
Speaker 1: that's never how it works. We have a younger generation
Speaker 1: now that has never gone through a bad period. Talked
Speaker 1: to me about that, because I think it's really important.
Speaker 1: I remember sitting down with ubs Is Andrera Chill. Of
Speaker 1: course Andre since left the bank, but it was running
Speaker 1: the investment bank, and it was back in I think
Speaker 1: it was fourteen fifteen and we were going into the
Speaker 1: first rate hike at the Federal Reserve. And I said
Speaker 1: to him, average, I did the trading floor, would you
Speaker 1: reckon it is? And he turned around to him and
Speaker 1: he said maybe early thirties something in and around that level.
Speaker 1: I said, how many of your guys and girls have
Speaker 1: seen a rate hike before? He said, many of them haven't.
Speaker 1: I said, it's that a problem, he said, yes, it's
Speaker 1: a big problem. The rate hikes cycle came. They got
Speaker 1: used to seeing the ball market continue talked to me
Speaker 1: about that inexperience on training desth slale. But still exists.
Speaker 1: It certainly does. I mean it's a function of I mean, look,
Speaker 1: I think wealth managers and investment banks. It's like an accordion, right,
Speaker 1: So when the markets are really good, you expand you bought,
Speaker 1: you hire a bunch of people, composition girls up. When
Speaker 1: when the markets gets a little bit tough, conversation shrinks,
Speaker 1: and the easiest way to do it you go, you hire,
Speaker 1: you're younger in generation. And then they experienced people they
Speaker 1: either had enough of these markets and they retire. So
Speaker 1: it's just a natural cycle. But you can even see it,
Speaker 1: forget the the experience. You can always see it also
Speaker 1: in the company analysis, you know, I think I can
Speaker 1: see some deals getting priced because people forget about the
Speaker 1: cash flow statement and in high yield, which is critical.
Speaker 1: Just to sort of defend people who aren't old or
Speaker 1: who haven't been through a cycle here, I mean, even
Speaker 1: people who are who have been in the market have
Speaker 1: been penalized for their skepticism. The more skeptical you've been
Speaker 1: over the past ten years, the more you have lost money.
Speaker 1: So how much is this just? Also, at a certain point,
Speaker 1: people get beaten into complacency by all of the central
Speaker 1: banks and by the fact that things have not gotten
Speaker 1: materially worse. I think, I mean, you know, fair enough,
Speaker 1: I think you have to believe, you know, whether things
Speaker 1: return to the mean or not. I'm a believer that
Speaker 1: things eventually returned to the mean. Sometimes it takes longer, sure,
Speaker 1: And we're in the investment management business. We've got to
Speaker 1: pay our investors their income um, so we will position
Speaker 1: accordingly in a way that you know, if things go terrible,
Speaker 1: we can still transact and we can capture the opportunity.
Speaker 1: I mean, that's what our job is. Again. You know,
Speaker 1: that's the advertisement for active management as opposed to be
Speaker 1: in passive. So I called. I spoke to pimcot a
Speaker 1: couple of months ago, and I remember Pim Cartainamy, we
Speaker 1: want to be liquidity providers, not liquidity demanders. So we
Speaker 1: want to sit back from here and then when things
Speaker 1: start to get choppy, step in. Just walk me through
Speaker 1: your strategy, like how you deal with that idea, your
Speaker 1: framework for dealing with the markets as you think they're
Speaker 1: going to evolve in the coming quarters. I have sympathy
Speaker 1: for that idea. I mean, I think it comes down
Speaker 1: to the vehicle you run. If you're running a daily
Speaker 1: liquid vehicle and you're going into less liquid assets, it
Speaker 1: just doesn't work. We've seen multiple examples of that. That
Speaker 1: is the traditional what I call kind of the you know,
Speaker 1: the liquidity illusion. Um. But if you're running private equity
Speaker 1: like structure funds where you don't need immediate needs, sure, Look,
Speaker 1: I think the simplest example I can give you, and
Speaker 1: I know I've stated the stat before. Look at the
Speaker 1: belt that happened to the bank loan market in December.
Speaker 1: You know, bank loans is an odd instrument. They settled
Speaker 1: in seven days. So when you have aggressive redemptions continuously,
Speaker 1: what happens is you see a notable drop in price.
Speaker 1: Because most funds now have credit lines that they can
Speaker 1: tap to meet that they liquidity liquidity redemptions. But eventually
Speaker 1: you have to sell aggressively if you're consistently getting redemptions.
Speaker 1: Bank loan outflows. We're sixteen billion, that's one percent of
Speaker 1: the US bank loan market, and we saw a six
Speaker 1: percent drop in NAV. That's nothing. One percent six percent
Speaker 1: drop in NAV. I love John the idea of you
Speaker 1: calling up pimcod, Hey, Pimco, how's it going. I actually wrong.
Speaker 1: They went to see them. I flew out. I know
Speaker 1: I remember that. Actually it was. It was a really good,
Speaker 1: A really good Have enough money to tell one e
Speaker 1: Pimcock very clear. I think you need a certain amount
Speaker 1: of money to get night, to get that directed direct
Speaker 1: line in. I guess I want to know when you
Speaker 1: talk about the pessimism that you have and the downturn
Speaker 1: that you're expecting and credit, how significant will it be,
Speaker 1: because right now I'm looking at a ten point to
Speaker 1: percent gain year to date in u as high led
Speaker 1: pods I have. I have no idea. I mean, it
Speaker 1: depends what the circumstances are. The circumstances are changing by today.
Speaker 1: I mean, I don't think anybody expected the second round
Speaker 1: of terrofs coming through. That's going to be felt more
Speaker 1: on the consumer um And I know from my discussions
Speaker 1: on the consumer companies in high yield look on average
Speaker 1: they turn their inventory about two times a year, right,
Speaker 1: so a lot of the inventory has been pre ordered
Speaker 1: for this year. You won't even see it in the numbers.
Speaker 1: So that's the other thing, Like there's a time lag
Speaker 1: in this, so it will really hit next year. You know,
Speaker 1: you had ten hit on your gross prop margins and
Speaker 1: you're not really de leveraging, and many of them don't
Speaker 1: you much free cash flow, you know the credit at
Speaker 1: Risk HAST three price. Great to catch up with you
Speaker 1: as always, What a morning to have Lolly top Cholie
Speaker 1: with us j O H C M senior fund manager
Speaker 1: breaking down some of the moves in credit and beyond
Speaker 1: and fixed income and equity this morning. Right now, we
Speaker 1: are looking at a pretty ugly market, which raises a
Speaker 1: question of how much China's allowance of the when to
Speaker 1: go above seven per dollar, how much that disrupts existing
Speaker 1: positioning among hedge funds, how much, how quickly people can
Speaker 1: adapt to this. I'm so pleased to say that we
Speaker 1: have Mark Connors with US joining from Credit SWEE. He
Speaker 1: is global head of Prime Brokerage, Portfolio and Risk Advisory. Mark.
Speaker 1: I love getting your insights because you have real good
Speaker 1: on the ground feelers out as to how hedge funds
Speaker 1: are positioning, how they are thinking, and I'm just wondering
Speaker 1: heading into this weekend when China did make this move
Speaker 1: or allow this move to happen. How are people positioned?
Speaker 1: How are hedge funds kind of looking for things to progress?
Speaker 1: Thank you, Lisa, and morning you're you're right into an
Speaker 1: ugly tape. And hedge funds had felt this earlier because
Speaker 1: they came into the weekend and actually into the month
Speaker 1: defensively positioned and defensive. We mean that their whole footprint,
Speaker 1: their leverage profile was at a bottom decile level on
Speaker 1: a two year look back. So quant funds, the very
Speaker 1: leveraged active trade UH profile they've taken in their leverage
Speaker 1: profile because they weren't seeing the ball. They weren't seeing
Speaker 1: the ball since his earliest two thousand eighteen, when very
Speaker 1: high profile hedge funds were saying what's happening with the
Speaker 1: market with value and momentum June of eighteen, And I
Speaker 1: mentioned that because that was when we first had that
Speaker 1: tariff initiated talks. So we're talking about is how macro
Speaker 1: impacts especially to see and why as it relates to
Speaker 1: low growth impacts market dynamics um and hedge funds took
Speaker 1: down their positioning because of it. So they saw it
Speaker 1: and now the rest of the market seeing it. So Mark,
Speaker 1: when you look across the spectrum of hedge funds, what
Speaker 1: are some of the strategies right now that are attracting
Speaker 1: the most inflows? All right, so our cap services team
Speaker 1: would would say macro um strategies. There's definitely some UM.
Speaker 1: So the hedge fund industry we should say, well are
Speaker 1: you long short or your macro are you event? Those
Speaker 1: were kind of nineties uh, indoctrinated or UM created funds,
Speaker 1: But Paul, they've changed now to say, a large platform
Speaker 1: will say, listen, we have a multi strating we have
Speaker 1: an event. But you know we have we have this
Speaker 1: one great idea. Do you want to fund it? It's
Speaker 1: called a fund of one. So the industries maturing is
Speaker 1: becoming more of a business and it has bespoke offerings.
Speaker 1: They're not just saying come into our big come mingle.
Speaker 1: It's becoming more of a complex asset management UM entity.
Speaker 1: And that's what's happening. So the result of that, you know,
Speaker 1: all that, all those words I just said, is the
Speaker 1: industry is consolidating and the bigger getting bigger. Because the
Speaker 1: market is tough, it's tough to make money, so you
Speaker 1: have to change your business plan, and that's what's happening. Mark.
Speaker 1: I love it. Just all those words that I was saying,
Speaker 1: this is what it means. It's getting tough out there.
Speaker 1: I mean, Mark, honestly, I'm trying to figure out whether
Speaker 1: this is sort of indicative of the fact that markets
Speaker 1: don't have that much more to fall, because there is
Speaker 1: a feeling that the FETE is going to support things,
Speaker 1: and because heading into this people were to sort of
Speaker 1: position defensively. It's not like this is going to disrupt
Speaker 1: some sort of consensus trade. What's your view on that
Speaker 1: the hedge funds will not be the sellers in this market,
Speaker 1: and they have not been for the last several days,
Speaker 1: so you're dead on there. However, like we saw in
Speaker 1: Q four, the sellers in October were not hedge funds.
Speaker 1: They were long only. So if we're punching to new
Speaker 1: levels in the CN why which means that it's it's
Speaker 1: an area that we haven't explored before north of seven Um,
Speaker 1: They're doing it because we think the trajectory. I think
Speaker 1: that the trajectory of global growth is lower, which means
Speaker 1: more revisions to earning his models or expectations. So let's
Speaker 1: take a step back. I'm gonna pointed to one graph, Lee,
Speaker 1: so that you and I always talked about, or I
Speaker 1: always asked you to to look at and and we
Speaker 1: shared the US ten year versus bund. So to me,
Speaker 1: that at like a hit to eighty when Trump was elected.
Speaker 1: It's it's the spread between the minus fifty bund and
Speaker 1: the and the one, and it's compressed. It used to
Speaker 1: be wide, which meant that the US has more inflation,
Speaker 1: more growth, and has come in And the point we're
Speaker 1: one water table. So if the U s thinks that
Speaker 1: they're different and there's exceptionalism, they have to think again,
Speaker 1: we are migrating to the trajectory of Europe and Asia. Okay,
Speaker 1: So Mark, this is a really important point and it
Speaker 1: raises a concern that a lot of people have, which
Speaker 1: is the US is heading negative, just the way that
Speaker 1: are up in Japan are Do you think that is
Speaker 1: plausible that we're going to see negative treasury yields in
Speaker 1: the next few years. A one percent tenure is a
Speaker 1: is a probability, not a possibility. So we'll start there
Speaker 1: is a likelihood, but we'll have that sooner than later.
Speaker 1: That's a big car that is a big call. Yeah. So,
Speaker 1: so it's interesting, Mark, I mean, so what are you seeing.
Speaker 1: You mentioned the consolidation in the hedge fund business. It
Speaker 1: seems like, you know, it's all come down to the
Speaker 1: Citadels and the point seventy two of the world. And
Speaker 1: is that good for the industry? The consolidation we're seeing,
Speaker 1: it's necessary in order to play today's game. You have
Speaker 1: to achieve scale. You have to invest in technology, you
Speaker 1: have to invest in data, and you have to invest
Speaker 1: in a new core of people with skills. And as
Speaker 1: I said, you then have to leverage your existing platform
Speaker 1: for new products, which means business development people. Uh, six
Speaker 1: people or twelve people in a room can't do that alone.
Speaker 1: It doesn't mean that those animals don't exist and won't
Speaker 1: continue to exist, but they won't drive growth in the industry,
Speaker 1: and they do serve a purpose. There are there niches
Speaker 1: that are served by smaller firms, but again that's a niche.
Speaker 1: So Mark, okay, so you said that treasure yield heading
Speaker 1: to one percent, Tending your treasure yelds heading to one
Speaker 1: percent is a probability, not a possibility. You see convergence
Speaker 1: in rates around the world. I'm wondering whether this happens
Speaker 1: independent of another recession or whether a recession is seeming
Speaker 1: increasingly likely. And so that part I I can't speak
Speaker 1: to us sort of out of my domain of expertise. Well,
Speaker 1: is that what people are positioned for. People are positioned
Speaker 1: for a convergence of growth sort of approaching the term,
Speaker 1: you know, terminal velocity. Is it recession? I wouldn't say
Speaker 1: people are not position for recession now, um, but the
Speaker 1: our position for a convergence of growth approaching zero. And
Speaker 1: the FETE is as well. They they are trying to
Speaker 1: redefine our star. They're absolutely changing the way they UM
Speaker 1: execute their mandates. Uh. And that's come from Bullard over
Speaker 1: the past eighteen months pretty clearly. So if they don't
Speaker 1: know where our star is, UM, people are gonna look
Speaker 1: to technical and sentiment data and back to the tenure
Speaker 1: boon spread. It's I think average is less than a
Speaker 1: hundred basis points over the past fifteen years, and if
Speaker 1: we go back to that mean, the tenure will be
Speaker 1: at fifty basis points. So one percent using historical patterns
Speaker 1: is not a very difficult target to hit. Mark Connor
Speaker 1: is always fascinating having hearing your thoughts on the hedge
Speaker 1: fun business. Mark Connor's Credit Swiss Global Head of Prime Brokerage,
Speaker 1: Portfolio and Risk Advisory, and thanks for listening to the
Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at
Speaker 1: Tom Keane before the podcast. You can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio