Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene. Along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jaily. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com,
Speaker 1: and of course, on the Bloomberg terminal. William Dudley is
Speaker 1: a former Photo Reserve Bank President of New York and
Speaker 1: buried last week in the Newsflow was his exceptionally important
Speaker 1: essay for Bloomberg opinion on the banks and leverage. It
Speaker 1: harkens back to the summer of two thousand four is
Speaker 1: codified by Simon Johnson in his book Thirteen Bankers, when
Speaker 1: the SEC allowed the broker dealers to become more leveraged
Speaker 1: bill This is not like two thousand four, where you
Speaker 1: say these are banks that need to be free from
Speaker 1: regulatory restriction. Now it's completely different. Their balance sheets becoming
Speaker 1: more tight because the feed is buying treasury securities and
Speaker 1: agency mortgage backed securities, and that's boosting the amount of
Speaker 1: reserves in the banking system. The banks can't make any
Speaker 1: choice about whether they're they're going to hold the reserves
Speaker 1: or not collectively, so that as that amount of reserves
Speaker 1: and the systems goes up, the leverage ratios for these
Speaker 1: banks becomes more binding. How how was Jamie Diamond or
Speaker 1: other bankers, how are they restricted now? Well, the leverage
Speaker 1: creation show hasn't bound very tightly for many banks, but
Speaker 1: it will become more binding as we go forward, as
Speaker 1: we go from now to the summer, because reserves in
Speaker 1: the system are gonna go out pretty dramatically. What what
Speaker 1: will happen at you know, the big banks is they'll
Speaker 1: basically try to push deposits elsewhere. They basically won't want
Speaker 1: to take corporate deposits. They'll want the corporations to take
Speaker 1: their money elsewhere. That induces, you know, unnecessary frictions in
Speaker 1: the system for no net benefits. So it seems to
Speaker 1: me like it's pretty obvious that why don't you just
Speaker 1: make an adjustment for the leverage ratio to take into
Speaker 1: account the fact that the fit is driving the amount
Speaker 1: of reserves in the system, not the banks. How uncomfortable
Speaker 1: is it Bill to be arguing to reduce certain regulatory
Speaker 1: pressures on banks at the same time that we're dealing
Speaker 1: with the archagus fallout that JP Morgan says will probably
Speaker 1: cost banks ten billion dollars. Well, remember here, reserves at
Speaker 1: the Federal Reserve are not risky assets, so we're not
Speaker 1: talking about an exemption of that increases bank risk. And
Speaker 1: if we're really concerned about the idea of you know,
Speaker 1: exempting reserves and that giving the banks more room, we
Speaker 1: can offer we can just raise the leverage ratio requirement
Speaker 1: from say five percent to five and a half percent.
Speaker 1: On what's left that point is that reserves are not
Speaker 1: risky and banks can't control how many reserves they hold.
Speaker 1: That's determined by the fit. Although moving beyond just this
Speaker 1: particular point of regulation talking about the leverage ratio, you've
Speaker 1: talked before about concern about leverage building up in the
Speaker 1: shadow banking industry, about a lack of regulation in that
Speaker 1: particular area of financial markets. Do you still see this
Speaker 1: as a concern and do you see it as a
Speaker 1: pressing one or simply something to deal with perhaps later on.
Speaker 1: I think it's pretty pressing. I mean when you think
Speaker 1: about what happened last March a year ago. Uh, we've
Speaker 1: been basically the federal government had to rescue the money
Speaker 1: market mutual fund industry. Again, we had problems for mortgage
Speaker 1: reach space. We had problems in the corporate bond space,
Speaker 1: and we have just function in the US treasury market.
Speaker 1: So and then more recently we had the arctical issues.
Speaker 1: So it seems to be like the non bank financial
Speaker 1: sector is still right for a lot of issues that
Speaker 1: need to be dealt with sooner rather than later. Bill Dudley,
Speaker 1: I need to switch to the present FED discussion. We've
Speaker 1: been making jokes all this morning about transitory as well.
Speaker 1: You and I have talked before about the British pretense
Speaker 1: of short term, medium term, long term. Now we've got
Speaker 1: a transitory thing. As we move along the X axis
Speaker 1: in the timeline. Does any of this make theoretical sense?
Speaker 1: Or we just is kidding ourselves massaging the unknown. Well,
Speaker 1: the FED is being patient for some a couple of
Speaker 1: very obvious reasons. Number one, they're not really sure where
Speaker 1: full employment is. Number two, they're not sure how fast
Speaker 1: inflation will rise once they get to full employment, and
Speaker 1: so they're willing. And number three, they're worried about inflation
Speaker 1: expectations becoming unanchored to the downside because the FED hasn't
Speaker 1: been able to achieve is two percent inflation objective for
Speaker 1: a long time so that change in policy is well motivated.
Speaker 1: The risk is that the FED will be late before
Speaker 1: the FED basically try to tighten monetary policy to arrive
Speaker 1: at a two percent inflation rate, full employment in the
Speaker 1: neutral monetary policy all at the same time. Now, they're
Speaker 1: not even going to start to tighten monetary policy until
Speaker 1: they're at full employment, inflations at two percent, and they
Speaker 1: expect inflation to move higher. So the FED is gonna
Speaker 1: be much slower to tighten this regime than in prior regimes,
Speaker 1: and that does create some risks for the economy. But
Speaker 1: we say it's a risk that will be like, isn't
Speaker 1: it a commitment that they're going to be Like, well,
Speaker 1: the question is how late? Yes, I think they are
Speaker 1: that they are making commitment that they're gonna be, Like,
Speaker 1: the question is really how late? And then how high
Speaker 1: will they have to raise short term rates to basically
Speaker 1: keep inflation from continuing to accelerate? Now, the risk is
Speaker 1: I think that the risk is that recession will be
Speaker 1: uh more more likely at that point because the Fed's
Speaker 1: gonna have to move not to a neutral madreate policy,
Speaker 1: but to a tight madre policy. If they're following this
Speaker 1: new UH framework so bill, this is a huge issue.
Speaker 1: And I think the most important question we can ask
Speaker 1: right now FED officials, and we asked it if last
Speaker 1: check cloud on Friday, is how will they know if
Speaker 1: they're wrong on this transit tree issue? If you run
Speaker 1: the FMC back on the FMC bill, how would you
Speaker 1: not if you were wrong? Well, at the end of
Speaker 1: the day, I mean, I think they're gonna look at
Speaker 1: the bubble that we're going to see inflation this year
Speaker 1: is mostly due to base effects and some frictional costs.
Speaker 1: You sort of reopened the economy. They're gonna be really
Speaker 1: focusing more on the labor market. How many people are
Speaker 1: still unemployed compared to where we were in March of
Speaker 1: two thousand uh and twenty. Right now we have a
Speaker 1: shortfall of employment of about eight and a half nine
Speaker 1: million people, and Fed's gonna be tracking that very carefully.
Speaker 1: As does people get employed, then the Federals start to
Speaker 1: not focus on the transitory factors driving inflation. But really
Speaker 1: the one that they are most concerned about is what
Speaker 1: what point do you get to such a tight labor
Speaker 1: market that it generates wage pressures that drive up crisis,
Speaker 1: and FED officials have said that they have the tools
Speaker 1: to combat inflation that's higher than expected. Do they have
Speaker 1: the tools to deal with financial disruption after with this
Speaker 1: incredible surge in risk taking that has been on the
Speaker 1: heels of FED policy, What happens if that stopped in
Speaker 1: its tracks as a result of FED tightening policy. I
Speaker 1: think you're raising an important question that when the FED
Speaker 1: goes from very very friendly to unfriendly, financial markets are
Speaker 1: going to have an adjustment to make, and the adjustment
Speaker 1: could be quite severe after such a long period of
Speaker 1: low interest rates. Uh. I don't think the FED cares
Speaker 1: about the stock market level per se, but they do
Speaker 1: care if the stock market were to collapse, and that
Speaker 1: would potentially hurt the US economy. So the FED does
Speaker 1: care about financial conditions in terms of how they feed
Speaker 1: into the performance of the economy. But the FAN is
Speaker 1: not going to run to the rescue just because the
Speaker 1: stock market goes downtown. No. But it raises a question
Speaker 1: about whether if the if the FED is going to
Speaker 1: tighten in the near term because they see that things
Speaker 1: are getting a little bit ahead of their skis, or
Speaker 1: if they try to take actions to combat inflation, could
Speaker 1: the torpedo markets that are already at heavy levels. I mean,
Speaker 1: do you feel like your colleagues are actively considering that
Speaker 1: or is that sort of not as significant as just
Speaker 1: getting the market and the economy back up to speed.
Speaker 1: I think PA repeatedly has made it very clear that
Speaker 1: the FED is not going to be preemptive and they're
Speaker 1: not that concerned about financialstlis. What they're concerned about is
Speaker 1: getting that eight to nine million people back to work
Speaker 1: as soon as possible. That's the focus of policy right now.
Speaker 1: What that does do, though, creates a risk for markets
Speaker 1: when the FED has to shift gears and start worry
Speaker 1: about inflation. That's probably that's probably several years off. In
Speaker 1: our great debate here, do we still underestimate the wage
Speaker 1: inflation doesn't move because of the new technological impulses that
Speaker 1: we see in our economy, Well that could be a factor.
Speaker 1: I mean, we're running an experiment basically, and we're gonna
Speaker 1: see how it goes. And this experiment is, you know,
Speaker 1: has more uncertainty than usually because we've never had a
Speaker 1: recovery from a pandemic like this before, going back for
Speaker 1: more than a hundred years. So anybody who tells you
Speaker 1: that they know how the economist can perform over the
Speaker 1: next year or two. I think is not being truly
Speaker 1: honest with you, because we've never had an economic recovery
Speaker 1: like this one fuelled by massive mater and fiscal policy stimulus.
Speaker 1: So I think it's gonna be very hard to know
Speaker 1: for sure how fast this is all going to unfold
Speaker 1: before you go, Bill. An important question Mohammad al Arian
Speaker 1: asked on Blowing Bag Opinion this morning. Did the FETCH
Speaker 1: shift policy lines at the wrong time? Do you think
Speaker 1: they make this framework shift a little bit prematurely? I
Speaker 1: asked that because I wonder if they have known was
Speaker 1: about to happen on the fiscal side, whether they would
Speaker 1: have made this change. I think they would have made
Speaker 1: the change in any case, because they were really worried
Speaker 1: about inflation expectations becoming an anchored in the downside, and
Speaker 1: because they had such a poor record of forecasting what
Speaker 1: level of employment is full employment. So I think they
Speaker 1: would have made the shift no matter what. But I
Speaker 1: think Muhammad al Arian's pieces is a good one because
Speaker 1: I think he points out the fact that there are
Speaker 1: some risks to this new strategy. The FED could be
Speaker 1: late and if they fed is late, they'll have to
Speaker 1: slam on the brakes and now have consequences not just
Speaker 1: for the economy but also for fun financial market. Looking
Speaker 1: forward to catching up with you both on that issue
Speaker 1: a little bit later this week as well. Bill, Looking
Speaker 1: forward to that Bill Dudley, the former Federal Reserve Bank
Speaker 1: of New York President, on some of the issues right now.
Speaker 1: This is a conversation that we wanted to have for
Speaker 1: days with the passing of Robert Mundell. You've heard me
Speaker 1: say that Ken rog Offen others that the line the
Speaker 1: lineage of our international economics goes back to Chicago of
Speaker 1: long ago. And Jacob Frankel. We are thrilled that Dr
Speaker 1: Frankel could join us this morning. He is a course
Speaker 1: with a group of thirty. Chairman of the Board of Trustees, Jacob.
Speaker 1: We had a wonderful friday with Ken Rogar, Richard Clarida,
Speaker 1: and Angus Daton talking about the twentieth century international economics.
Speaker 1: When you were writing at Chicago, what did you learn
Speaker 1: from Mandela Colombia. Well, to begin with, when I came
Speaker 1: to Chicago in nine, Mandel was a superstar. We were
Speaker 1: students together. Rudy don't Bush, Michael Mussa, myself and some
Speaker 1: other people who well, all in a way hypnotized by
Speaker 1: the way in which he changed completely the way in
Speaker 1: which the economic profession looked at the economy. I would
Speaker 1: say that up to that point the world was viewed
Speaker 1: in the textbooks as a closed economy. Each country was
Speaker 1: a unit. Yes, it had some inter inter relationships with
Speaker 1: other countries through trade, but by and large it was
Speaker 1: a close unit ran by the policy makers of that unit.
Speaker 1: Caman deal and said, the only closed economy for real world,
Speaker 1: but each country within the world. And therefore, you know,
Speaker 1: in order to understand how the economy works, we need
Speaker 1: to develop a new approach, which is called open economy
Speaker 1: macro economics. It means that you cannot run monetary policy
Speaker 1: under the assumption that you are a close unit, because
Speaker 1: after all, exchange rates because of time, and I know
Speaker 1: Listen wants to get in here. I want to drive
Speaker 1: this forward to the modern age because you were your
Speaker 1: work with JP Morgan, with Mr Diamond and the team there,
Speaker 1: and your work with Group of thirty. You have been
Speaker 1: the architect of so much of our discussion of an
Speaker 1: open economy. Is Mr Diamond mentioned in his letter the
Speaker 1: other day, does America resist? Does America have a chance
Speaker 1: to lose our open economy advantage? It depends if it
Speaker 1: keeps the open economy perspective or if it closes itself.
Speaker 1: The only way a country can succeed, small or lounge
Speaker 1: in the intergrated world is by being open to benefit
Speaker 1: from the better things that other countries do and to
Speaker 1: and to benefit other countries by the things that we do.
Speaker 1: The principles of comparative advantage that we're coined still ages
Speaker 1: ago by David Ricardo Adam Smith, I'll still valid today,
Speaker 1: but even more so because capital markets are very inter real.
Speaker 1: Capital markets are moving by expectations, Expectations are being fed
Speaker 1: by announcements, and announcements are affecting the economy through the credibility.
Speaker 1: All of it together means that we cannot afford playing
Speaker 1: the game of isolationism, and anyone who will try to
Speaker 1: do it will be penalized by the markets. And I
Speaker 1: believe that by now there is greater understanding that when
Speaker 1: countries are trying to close themselves under the excuse of
Speaker 1: trying to protect its own citizens, so to speak, as
Speaker 1: a matter of fact, they helped their citizens because they
Speaker 1: don't allow the citizens to enjoy the benefits from the
Speaker 1: world knowledge and technology. Jacob. This used to be a
Speaker 1: common thought, a common belief, and increasingly it's become less so,
Speaker 1: and there's been more isolationism. I'm wondering how much pushback
Speaker 1: you're getting in from the members that you talk with
Speaker 1: among the group of thirty to this idea that perhaps
Speaker 1: globalization doesn't help everyone in the same kind of ways,
Speaker 1: and at certain things need to be done in a
Speaker 1: more domestic capacity, especially as we see these supply chain disruptions. Absolutely,
Speaker 1: but the main lesson is not to throw the baby
Speaker 1: with the water tub. Namely, if globalization is not perfect,
Speaker 1: don't make globalization a passee. On the contrary, ask yourself
Speaker 1: what's not working. What it was not working was that
Speaker 1: the benefits were not widely shelled. And this is basically
Speaker 1: the agenda for governments to make sure that the benefits
Speaker 1: are widely shelled. That's that's that's the essence of fiscal policy,
Speaker 1: of transfer of text policy. But it is not the
Speaker 1: case against opening the window. If you open the window,
Speaker 1: yes you may get some storms, so make yourself more robust.
Speaker 1: But if you close the window, you really miss the
Speaker 1: smell of roses from the garden. Are the benefits from
Speaker 1: globalization the same now as they were twenty thirty years ago,
Speaker 1: given how much pay has evened out, given how much
Speaker 1: wealth has gotten spread out around the world. We don't
Speaker 1: have the same China today as we did thirty years ago,
Speaker 1: driving prices down. Thirty years ago, we did not know
Speaker 1: that China will come, and here it came, and you
Speaker 1: could have said thirty years ago the globalization has already
Speaker 1: exhausted its benefits by the same talking today, when you
Speaker 1: look today at the we are, we have and we
Speaker 1: have experienced now the pandemics. We have experienced now the
Speaker 1: fact that pandemics did not recognize boulders, that knowledge is
Speaker 1: an international public good, that the vaccinations are to be shared,
Speaker 1: that the mechanisms need to be in place. So by
Speaker 1: and large, the manifestation of globalization will come from different
Speaker 1: places in the coming year or years, will be in
Speaker 1: the ferry, in the climate area, who needs to have
Speaker 1: the cooperation of God, all issues that do not recognize
Speaker 1: Jacob Franco. It is such an honor to have you
Speaker 1: on right now. Is Adam Posen of the Peterson Institute
Speaker 1: announced the death of John Williamson. I'll be honest, Jacob,
Speaker 1: I can't think of someone I'd better talk to at
Speaker 1: this moment than you. John Williamson was a micro economist
Speaker 1: who spend all of economics, including macroeconomics, and his founding
Speaker 1: in nineteen eighty nine of the phrase the Washington Consensus. Jacob,
Speaker 1: every bit of your work identifies what Williamson wrought. Do
Speaker 1: we have a Washington consensus today? In honor of John Williamson?
Speaker 1: Welcome begin with I really wanted to share other opposing
Speaker 1: sadness and sorrow and with the death of our trend,
Speaker 1: John Williamson, the Washington consensus was a concept that was
Speaker 1: developed about the notion that there was a consensus of
Speaker 1: what does it take to be a successful economy. And
Speaker 1: I believe that today we do not have the Washington consensus.
Speaker 1: And the reason is that, especially since the Great Financial
Speaker 1: Crisis of two thousand and seven eight nine, subsequently with
Speaker 1: the subsequent crisis, seems to be that policymakers in many
Speaker 1: places of the world have I would say, lost their compass.
Speaker 1: And if you lose your compass, you cannot have a
Speaker 1: consensus about a strategy. And I think that The challenge
Speaker 1: today is again to recognize what are the basic principles
Speaker 1: that our robust and what are the things that can
Speaker 1: be put pushed aside? And I think that consensus we
Speaker 1: I see. I still think that the issue of globalization,
Speaker 1: of openness, of making sure the globalization succeeds, of making
Speaker 1: sure that the benefits are shared, of making sure that
Speaker 1: the machinery is in place to bring about this sharing
Speaker 1: of the benefits. This has to be a strong fiscal system,
Speaker 1: a strong text system, and a very independent, when focused
Speaker 1: monetaried policy looking at the long term and not just
Speaker 1: about the show's working. About Mandeli, he was a false
Speaker 1: sited economies that could see behind the conor and del poll.
Speaker 1: He was so successful. And Mandel and Williams and Jacob Franco,
Speaker 1: we are so honored to have you with us, the
Speaker 1: former governor of the Bank of Israel. This is an
Speaker 1: exceptionally important interview. In the last for eight hours of surveillance,
Speaker 1: we've had terrific interviews on economics and now a must listen,
Speaker 1: must watch on China ching, which is a JP Morgan.
Speaker 1: She's vice chairman of Asia Pacific Banking for the firm
Speaker 1: and that barely describes her commitment to a dialogue between
Speaker 1: the Western world and China. We're thrilled that Jing Ulwar
Speaker 1: could join us. This want to Jing, I want to
Speaker 1: talk about Hong Kong. I want to talk about it
Speaker 1: forever changed, How Hong Kong? How much is Hong Kong change?
Speaker 1: And what does it look like for the JP Morgan
Speaker 1: Company in the coming years. Well, Hong Kong. I've been
Speaker 1: here for many years, and the Hong Kong financial markets
Speaker 1: are extremely buoyant, as you could see from you know,
Speaker 1: many activity in the I P O market, many of
Speaker 1: the innovative companies from China coming to the Hong Kong
Speaker 1: market to list. In terms of the recovery from the pandemic,
Speaker 1: Hong Kong actually has done pretty well if you think
Speaker 1: about it right. Hong Kong is a city of seven
Speaker 1: million people all together. I think they have been about
Speaker 1: eleven thousand cases of COVID since the pandemic began, And
Speaker 1: these days, I think a pandemic is definitely coming under control.
Speaker 1: Economic activity is actually returning to normal slowly but steadily.
Speaker 1: During with your influence, your experience, the breadth of your
Speaker 1: knowledge of the Pacific rim, do you look at Hong
Speaker 1: Kong that it will be changed for Western banking or
Speaker 1: will it be business as usual? Well, so far it's
Speaker 1: been business as usual. We're as busy as ever helping
Speaker 1: our clients among the corporates and also investors. And they
Speaker 1: remember China has a huge amount of likuti as well.
Speaker 1: Through the connect program between Shanghai and Hong Kong, shen
Speaker 1: Jen and Hong Kong. There's a lot of mainland money
Speaker 1: actually coming to Hong Kong to invest in world class companies.
Speaker 1: Can we talk about what's happening on the mainland right now?
Speaker 1: The equity market is really struggled over the last month
Speaker 1: or so. What's going on? Well, you know, the equity
Speaker 1: markets in China have performed differently from the US. The
Speaker 1: U S indusseries are near all time highs. The China
Speaker 1: market had done very well up until February of this year.
Speaker 1: I think this has to do with the liquidity situation
Speaker 1: in China. As you know, normally the Chinese equity market
Speaker 1: performance is very much um in synct with the credit cycle.
Speaker 1: Now that the mainland authorities are actually typing liquidity because
Speaker 1: economic recovery is firmly on track, they want to control
Speaker 1: the laborage ratio. They want to control the risk of overheating.
Speaker 1: So therefore, as they really raining raining in the credit
Speaker 1: uh growth, you're seeing some softening of the mainland markets.
Speaker 1: They had done very very well throughout two thousand and
Speaker 1: twenty and also into January February this year. I think
Speaker 1: this is taking a breather, not just reigning in credit.
Speaker 1: They're running in some of the big tech players. And
Speaker 1: I understand you can't do single names, so I do
Speaker 1: it for you, Ali Baba and Financial very much in
Speaker 1: the news at the moment ing and I think for
Speaker 1: people outside of the main land, outside of Hong Kong
Speaker 1: even I think they're struggling with what's happening with regulation
Speaker 1: on the ground around some big tech players. These were
Speaker 1: big themes that investors worldwide wanted to get some traction,
Speaker 1: some exposure to. What are you telling them now, Well,
Speaker 1: you know, despite the recent market volatility, we think the
Speaker 1: digital economy in China is still alive and well, especially
Speaker 1: since the pandemic. The digital way of life is definitely
Speaker 1: not turning back. If you look at e commerce, you
Speaker 1: look at the sharing economy, you look at payments, everything
Speaker 1: is growing in a very robust passion. So we believe
Speaker 1: the medium to a long term outlook for the large
Speaker 1: tech companies remains very robust. Although you've got to wonder
Speaker 1: which area people are going to invest in big tech.
Speaker 1: Do you find that some of your international investors are
Speaker 1: more hesitant to invest in Chinese big tech because of
Speaker 1: the regulatory oversight that does seem to be tightening. Actually,
Speaker 1: many international investors are looking at China as an asset class.
Speaker 1: They find themselves actually under exposed to China. If you
Speaker 1: think about the next ten years, the Chinese economy is
Speaker 1: going to surpass the US economy to become the largest
Speaker 1: in the world. However, if you look at the waiting
Speaker 1: of global funds in China, it remains very low. So
Speaker 1: we're actually looking at in the national institutions finding different
Speaker 1: ways to gain more exposure to China, both equities and
Speaker 1: fixed income securities. And on the fix income side, you know,
Speaker 1: I know, you guys talk about the tenure treasure yield
Speaker 1: all the time every day on your show. China is
Speaker 1: three point two percent on the tenure right now, so
Speaker 1: that's relatively a track tip for international funds really seeking
Speaker 1: to get some additional yields could you dovetail the advent
Speaker 1: of a digital u N into this conversation, the idea
Speaker 1: that that could potentially lure more money into the nation
Speaker 1: due to it being on the cusp of more modern technology.
Speaker 1: Do you view a digital UN as bringing more capital
Speaker 1: into the nation? Well, I think China has been very
Speaker 1: judicious in terms of bringing capital on shore because they
Speaker 1: don't want too much capital flooding into the country causing
Speaker 1: you know, bubble concerns, and there's ample liquidity already in China,
Speaker 1: so I think when it comes to capital inflows and outflows,
Speaker 1: the authorities are very careful in terms of controlling what
Speaker 1: types of money comes into the country and what types
Speaker 1: of money can flow outside of the country. So we're
Speaker 1: seeing obviously in a recent couple of years, the gradual
Speaker 1: internationalization of the Chinese currency. We're seeing the Chinese currency
Speaker 1: being use of lot more in international trade. But there's
Speaker 1: a long way to go. You know, in the next
Speaker 1: ten years, as I said, channel become the largest economy
Speaker 1: in the world, but the Chinese un is still not
Speaker 1: fully convertible on a couple account, So it's going to
Speaker 1: be a steady journey or gradual opening up. And I
Speaker 1: do believe in the coming several years, capital influence and
Speaker 1: outflows will gradually become loosened. Jing. I want to speak
Speaker 1: about not so much the politics at the moment or
Speaker 1: frankly the politics of the future, but the reality that
Speaker 1: business can often lead politics. JP Morgan has been in
Speaker 1: Hong Kong for nineties years or so. JP Morgan provided
Speaker 1: leadership and being in Taipei in seventy explain of business
Speaker 1: and financials will interlink with our politics in this delicate
Speaker 1: debate between the mainland and Taiwan. Well, you know, I
Speaker 1: will leave the politics to politicians. So we UM as
Speaker 1: a firm are very committed to the Asia Pacific region,
Speaker 1: of course, including China and the rest of the economies
Speaker 1: and UH as you said, you know, we've been in
Speaker 1: the region in some countries for over a hundred years
Speaker 1: and this year we're actually celebrating our one hundred anniversary
Speaker 1: in China. So we're here to serve our clients, both
Speaker 1: in the national clients who want to do more business
Speaker 1: in the region, and also UM local clients who actually
Speaker 1: want to go global. So we are here really acting
Speaker 1: as a bridge between East and West, and we're here
Speaker 1: to facilitate capital transactions both in and out of the
Speaker 1: region doing some really really sensitive topics. We appreciate your
Speaker 1: time this morning to comment on some of them. Jingle
Speaker 1: Rick there, JP Morgan Chase Managing Director and Asia Pacific
Speaker 1: Vice Chairman. Tony Rodriguez is with newving with years and
Speaker 1: years of work, and what's wonderful about in his work
Speaker 1: it's really been focused on the corporate side and investment
Speaker 1: grade his tenure of credit Suite of years ago. Tony Rodriguez,
Speaker 1: you are ever optimistic here about the credit quality that's
Speaker 1: out there? Do we underestimate the goodness of the balance
Speaker 1: sheet of Corporate America? Well, good morning, Tom, good to
Speaker 1: be with with all of you guys. Um. I do
Speaker 1: think that there is some underestimation the quality balance sheet.
Speaker 1: I mean, we are looking at UVINE this year at
Speaker 1: or higher earnings and cash flow growth. And when you
Speaker 1: look at what companies did basically throughout was they really
Speaker 1: fortified their balance sheet. They borrowed a lot, but they
Speaker 1: kept a lot of cash on the balance sheet. So
Speaker 1: we're expecting to see this year, both in the high
Speaker 1: grade space and the high yield space, is a significant
Speaker 1: pay out of that debt where you might get one
Speaker 1: full turn of leverage decline this year in the high
Speaker 1: yield market, So balance sheets are gonna be very healthy
Speaker 1: in our view. And from then, from that perspective, you
Speaker 1: can look at the pricing in the high yield market
Speaker 1: and what we certainly think it's pretty full. We think
Speaker 1: that it's justified by the reality of the improvement in
Speaker 1: the fundamentals. So I'm going to suggest that something new
Speaker 1: year to see the gross paid down that we see
Speaker 1: and we saw it from Jim Suva on Apple where
Speaker 1: he says they're going to really come in with a
Speaker 1: vengeance on buybex and div it an increase to see
Speaker 1: leverage come in. But then in a high yield space,
Speaker 1: look at the story right now, you're not in airlines
Speaker 1: out this morning kicking off the five point five billion
Speaker 1: dollar high yield bond sale. We've had a ton of
Speaker 1: supply and the numbers this year is set to get
Speaker 1: bigger tony and the numbers of one thing. What that
Speaker 1: money is used for is another And you've touched on
Speaker 1: this how much of that is just refinancing, But we're
Speaker 1: seeing the numbers that well indicate something like is refinancing.
Speaker 1: So companies have been able to extend out the debt,
Speaker 1: which is clearly very critical in case you run into
Speaker 1: some sort of liquidity hiccup and an ability to finance.
Speaker 1: But in addition to that, by paying down some of
Speaker 1: the cash that they've built up given all the uncertainty
Speaker 1: they were facing in now, that really starts to bring
Speaker 1: down the leverage. And that's a big reason why we
Speaker 1: see default forecasts, not only our own, but rating agencies,
Speaker 1: other street firms bringing them down to numbers in many
Speaker 1: cases are as low as two percent of faults on
Speaker 1: a trailing twelve month basis. By the end of this year,
Speaker 1: those are almost record lows, Tony. This makes sense when
Speaker 1: you look back six months, but there seems to be
Speaker 1: a cognitive dissonance a little bit when you take a
Speaker 1: look at the one point six trillion dollars of high
Speaker 1: old dead outstanding in the United States and you look
Speaker 1: at that it's near a record high that if you
Speaker 1: look back beyond the immediate pandemic times, these companies still
Speaker 1: look highly leveraged. Is there some sort of reckoning that
Speaker 1: is waiting for these companies past this arrow when they
Speaker 1: actually have to start paying this down in real time,
Speaker 1: not just paying down some of the borrowing that they
Speaker 1: did during the pandemic times to stay alive. Yeah. Well,
Speaker 1: when we look at kind of lawn term averages of
Speaker 1: debt to cash flow and you look at the high
Speaker 1: market and say maybe it's four to we're and a
Speaker 1: half times debt to but down market we see numbers
Speaker 1: coming back down into that range, meaning the long term
Speaker 1: historical average range. So what that tells us is that
Speaker 1: the overall high market is really not we don't believe
Speaker 1: as significant risk of dislocation just from the level of debt.
Speaker 1: The dislocation would come really more from a surprise and inflation,
Speaker 1: a much weaker growth outlook, potentially negative outcomes on whether
Speaker 1: it's the vaccine or resurgence of COVID more of a
Speaker 1: fundamental driver of weaker growth. But from a financial stability perspective,
Speaker 1: the high market is pretty well positioned in terms of
Speaker 1: level of debt and where cash flow is and where
Speaker 1: companies have been able to restructure their balance sheet to
Speaker 1: extend out their maturities, kind of pushing back any near
Speaker 1: term maturity wall that is often a big risk in
Speaker 1: the market. From a liquidity perspective, tell you just a
Speaker 1: find question for me before we let you go, marches
Speaker 1: could be an issue this year, and marches will being
Speaker 1: focused in the next couple of weeks when we get
Speaker 1: the onnings as well. On the cost side of things,
Speaker 1: how closely are you looking at that and right now? So, honey, well,
Speaker 1: very closely, and we clearly expect there to be some
Speaker 1: cost pressures, particularly here in the middle of the year
Speaker 1: as we head into towards the end of the year.
Speaker 1: All of the supply bottle next thing. You guys have
Speaker 1: highlighted some of the initial reopening price pressures. Whether it's
Speaker 1: from not only a goods perspective, but I also obviously
Speaker 1: from employment bringing people back in quickly enough to match
Speaker 1: what we think would be a big surge and services demand.
Speaker 1: So we'll be looking to see whether that is truly
Speaker 1: just a transitory short term bulge in those pressures impacting
Speaker 1: margins negatively, and what the outlook will be for twenty two.
Speaker 1: Right now, our view is that the margin pressures will
Speaker 1: be transitory and in twenty two you get back to
Speaker 1: an equilibrium level of really still pretty supportive margins. From
Speaker 1: a depth perspective. London getting drunk on this program quickly,
Speaker 1: This drinking games taking off isn't it. Tony Drake has
Speaker 1: moving head fix thing comes Johnny. This is the Bloomberg
Speaker 1: Surveillance Podcast. Thanks for listening. Join us live weekdays from
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Speaker 1: Tom Keene, and this is Bloomberg