Latest / Bloomberg Intelligence / China's Savings Surplus Must Find a Home, Bannister Says

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China's Savings Surplus Must Find a Home, Bannister Says · Bloomberg Intelligence

• 0:04
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Abramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:14
  Speaker 1: you and your money, whether at the grocery store or
• 0:16
  Speaker 1: the trading floor. Find the Bloomberg P L Podcast on iTunes,
• 0:20
  Speaker 1: SoundCloud and at Bloomberg dot com. For all of us here,
• 0:29
  Speaker 1: I just want to figure out how to introduce Barry Banister,
• 0:32
  Speaker 1: chief equity strategist that as step Nicholas. You know, Barry,
• 0:36
  Speaker 1: when I mentioned earlier to Tom Keene that you were
• 0:41
  Speaker 1: coming on the program, he kind of lit up a
• 0:44
  Speaker 1: little bit. A little bit, he lit up a little bit. Yeah,
• 0:47
  Speaker 1: I think that kind of he that was that was
• 0:49
  Speaker 1: something that rang a bell with him. So I'm wondering,
• 0:52
  Speaker 1: how long have you been doing this. I've been a
• 0:56
  Speaker 1: strategist for about seven years, and then prior to that,
• 0:58
  Speaker 1: for about three years, I was a analyst in the
• 1:02
  Speaker 1: equity side, sell side as well as by side. So
• 1:05
  Speaker 1: you've seen the cycles come and go yeah, quite a few. Yeah,
• 1:09
  Speaker 1: And I use the word cycle specifically be and I
• 1:13
  Speaker 1: think you know why. And I'm wondering if you would
• 1:15
  Speaker 1: just describe where we are in the cycles that you
• 1:19
  Speaker 1: pay attention to. Yeah, one of the things that we've
• 1:23
  Speaker 1: differed on from from the earliest days is that the
• 1:26
  Speaker 1: Fed really began hiking in May, when what's called the
• 1:30
  Speaker 1: Atlanta Fed Shadow Fed funds rate bottomed at minus three uh.
• 1:36
  Speaker 1: It's a complex calculation based on options pricing models, but
• 1:39
  Speaker 1: what it really describes is the effect of q E
• 1:42
  Speaker 1: rate suppression, forward guidance twist, and other things the Fed did.
• 1:46
  Speaker 1: So we've been in a tightening cycle for several years,
• 1:50
  Speaker 1: and I do think that at about a two interest
• 1:53
  Speaker 1: rate on Fed funds, we will reach a point where
• 1:55
  Speaker 1: it's just too much, but that's not going to happen
• 1:58
  Speaker 1: in the next six to nine. So I think the
• 2:00
  Speaker 1: market looks pretty good to the spring of eighteen. Well
• 2:05
  Speaker 1: until the spring of eighteen. What do you do. Just
• 2:07
  Speaker 1: stay where you are right now. We've been a big
• 2:10
  Speaker 1: positive bull on the reflation trade, more so last year
• 2:14
  Speaker 1: on energy. I was three months early on that, and
• 2:17
  Speaker 1: then un financials again I was three months early. We've
• 2:20
  Speaker 1: had a few soft months since the election, approximately mid December,
• 2:25
  Speaker 1: as the Fiscal House is trying to get an order
• 2:27
  Speaker 1: and it is very difficult. This is not an administration
• 2:30
  Speaker 1: that thought it would win, so there was no government
• 2:33
  Speaker 1: in waiting, and so things are in a bit of disarray.
• 2:35
  Speaker 1: But I think things will get better. And with the
• 2:38
  Speaker 1: clarity on that, the FEDS clarity that they've been giving
• 2:42
  Speaker 1: some growth abroad, I think things look good for another
• 2:46
  Speaker 1: move up in the reflation trade and that would include energy.
• 2:50
  Speaker 1: Would that include financials? It is primarily financials, obviously banks.
• 2:56
  Speaker 1: It's also the capital spending side of technology, a little
• 3:01
  Speaker 1: different than the social media side. It's also that includes software,
• 3:05
  Speaker 1: semis and things like that, continuing or resuming the run
• 3:09
  Speaker 1: that they've had. It also includes industrial and some basic materials.
• 3:13
  Speaker 1: Although we have to be careful not to assume that
• 3:15
  Speaker 1: the Chinese are going to employ a fixed investment model forever. Uh,
• 3:19
  Speaker 1: they have to reduce that as a share of GDP.
• 3:22
  Speaker 1: But generally, yes, it's a more pro cyclical, more pro
• 3:25
  Speaker 1: global growth bet and I think it looks pretty good
• 3:28
  Speaker 1: into the spring of eighteen. So for the SMP right now,
• 3:34
  Speaker 1: if you've participated and you're looking at it on an
• 3:37
  Speaker 1: annual basis, although I mean every it really makes no sense,
• 3:41
  Speaker 1: but uh, you're five percent, what would you do Yeah.
• 3:46
  Speaker 1: One of the things about low interest rates is it
• 3:49
  Speaker 1: can be two things. One, you can have a low
• 3:51
  Speaker 1: rate because you're fearful of deflation. So what you have
• 3:55
  Speaker 1: is a very low real rate and a very low
• 3:57
  Speaker 1: inflation rate, and that's not necessarily good. It does help
• 4:01
  Speaker 1: your multiples, your PE multiples, because you're discounting the cash
• 4:04
  Speaker 1: flows at a low interest rate. But when you switch
• 4:07
  Speaker 1: you over psychologically from fear of deflation to a little
• 4:11
  Speaker 1: more confidence in reflation, it's almost like a light goes
• 4:14
  Speaker 1: on and you get the positive benefit of a super normal,
• 4:18
  Speaker 1: very low interest rate. Uh and as a result, you
• 4:23
  Speaker 1: get a very very high PE ratio. So we do
• 4:25
  Speaker 1: think that the dollar traily twelve month SMP earnings can
• 4:30
  Speaker 1: be discounted at a twenty multiple, which is a inverse
• 4:34
  Speaker 1: of a five mid grade corporate B double A yield,
• 4:38
  Speaker 1: and that puts you are So that's our target this year. Well,
• 4:42
  Speaker 1: all right, we're gonna we could write We're going to
• 4:44
  Speaker 1: write that down and then we'll be able to see
• 4:46
  Speaker 1: how that, you know, turns out for the for the
• 4:48
  Speaker 1: rest of the year. But Barry, you know, as I
• 4:52
  Speaker 1: look over your notes and also receive emails from people
• 4:56
  Speaker 1: who have followed your career in and listen to you
• 4:58
  Speaker 1: over the time. Uh. They go back to let's say
• 5:02
  Speaker 1: the post nine eleven UH world, and you wrote about
• 5:07
  Speaker 1: that what all the way back from two thousand and two. Mm. Yeah,
• 5:11
  Speaker 1: in two thousand one and two thousand I've been writing
• 5:14
  Speaker 1: about a a rotation into hard assets, which would be
• 5:18
  Speaker 1: commodities and to an extent real estate and gold and
• 5:21
  Speaker 1: things like that, UM and away from financial assets in
• 5:26
  Speaker 1: terms of relative strength, and the commodity cycle two thousand
• 5:29
  Speaker 1: two roughly to two thousand fifteen. Oil as you know,
• 5:32
  Speaker 1: rolled over in the OPEC price war and the FED
• 5:34
  Speaker 1: somewhat premature attempt to exit and raise rates when the
• 5:37
  Speaker 1: rest of the world was going to negative rates, so
• 5:40
  Speaker 1: that tended to crash the price of oil, as we
• 5:42
  Speaker 1: saw in So the commodity cycle was two thousand two
• 5:45
  Speaker 1: to two thousand and fifteen, we played that. UM. The
• 5:49
  Speaker 1: cycle now though, is most of a post debt deflation
• 5:53
  Speaker 1: and a global rebalancing and de leveraging. It gets into
• 5:56
  Speaker 1: very complicated global, cross border macroeconomics. And so I'm spending
• 6:01
  Speaker 1: most of my time now Pam, trying to be more
• 6:03
  Speaker 1: knowledgeable of macroeconomics and uh that occupies probably my time.
• 6:08
  Speaker 1: So so from that perspective, maybe you can share some
• 6:12
  Speaker 1: of your more recent uh understandings. Yeah, yeah, Well, I mean,
• 6:17
  Speaker 1: one of the things that's going on is the Chinese
• 6:20
  Speaker 1: savings surplus, which still exists, has to find a home.
• 6:24
  Speaker 1: It has to go someplace. If it stays domestic, it
• 6:27
  Speaker 1: inflates bubbles, drives credit growth. If it's exported, it bids
• 6:31
  Speaker 1: up housing prices in Brooklyn, and uh and Vancouver and
• 6:35
  Speaker 1: elsewhere and Toronto, you name it, uh and uh. So
• 6:39
  Speaker 1: what we're seeing now is a push in this administration,
• 6:42
  Speaker 1: which is I wouldn't classify it as mercantilist, but I
• 6:45
  Speaker 1: would say that they're unwilling to have eat The surplus
• 6:48
  Speaker 1: is the trade surpluses of every other country in the world.
• 6:51
  Speaker 1: So we're seeing a change in the global monetary order.
• 6:53
  Speaker 1: This is a very big deal. It's on the scale
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  Speaker 1: of what happened in nineteen forties with the Breton Woods Agreement,
• 7:00
  Speaker 1: and the US is no longer willing to be the
• 7:02
  Speaker 1: dumping ground for the exports of all the other surplus countries,
• 7:06
  Speaker 1: from Germany to Mexico to China. And as a result,
• 7:09
  Speaker 1: there's a political change of foot and I think that
• 7:11
  Speaker 1: will gel over the next several years and we'll see
• 7:14
  Speaker 1: more of a balancing of savings investment in each country domestically, uh,
• 7:19
  Speaker 1: and that will reduce this role of trade. And we
• 7:22
  Speaker 1: have to figure out what all this means. That's a
• 7:24
  Speaker 1: very powerful statement. Well, the US had, I guess, decided
• 7:30
  Speaker 1: to uh, you know, to allow first it happened in
• 7:34
  Speaker 1: Europe after World War two, Martial Plan and so on,
• 7:37
  Speaker 1: that the US would be a source of of of
• 7:40
  Speaker 1: demand for their outputs so that they could modernize and
• 7:43
  Speaker 1: develop into capitalist democracies. Um. But then they did that
• 7:47
  Speaker 1: in Asia with some of the tigers, as you recall,
• 7:49
  Speaker 1: and I recall because we've been around a while, in
• 7:51
  Speaker 1: the ninety nineties the tiger economies. UM. Before that, it
• 7:55
  Speaker 1: was the Japanese and and of course the Koreans and Taiwanese.
• 7:59
  Speaker 1: But what's happening now is China, which is simply too big,
• 8:02
  Speaker 1: has tried to follow that model and it's been very disruptive.
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  Speaker 1: China is no longer a currency manipulator. China was a
• 8:09
  Speaker 1: manipulator two thousand and two thousand seven when they built
• 8:11
  Speaker 1: up their reserve position. So we gotta we gotta leave
• 8:15
  Speaker 1: it there, but I look forward to having you in
• 8:17
  Speaker 1: the future anytime. Barry Banister, chief equity strategists stifle financial
• 8:23
  Speaker 1: based in Baltimore, Maryland, Medicare and doctors. There are many
• 8:40
  Speaker 1: surveys that have produced results indicating that doctors are foregoing
• 8:45
  Speaker 1: entry into Medicare they no longer feel that it would
• 8:49
  Speaker 1: make financial sense. Joining us now is Dr Chris Chen.
• 8:52
  Speaker 1: He is the chief executive of Chen med and they
• 8:55
  Speaker 1: are a physician led primary care facility and he joined
• 9:00
  Speaker 1: just now on the phone. Thanks very much for being
• 9:02
  Speaker 1: with us a Dr Chen, Maybe you could just explain
• 9:06
  Speaker 1: the role that Medicare and the reimbursement practice of Medicare
• 9:13
  Speaker 1: works a little bit and so that we can understand
• 9:16
  Speaker 1: how the doctor fits in and some of the ways
• 9:19
  Speaker 1: in which you are challenging conventional notions. Hi, pim yep Um.
• 9:26
  Speaker 1: So you know, our practice primarily relies on Medicare advantage UM,
• 9:31
  Speaker 1: which is a subsegment of the overall Medicare UM population.
• 9:37
  Speaker 1: And what that means is is that there's a premium
• 9:41
  Speaker 1: that goes from Medicare over to a health plan um.
• 9:44
  Speaker 1: The way that we're able to work with these health
• 9:46
  Speaker 1: plans is that the health plan will then give us
• 9:49
  Speaker 1: a fixed amount of dollars to manage a patient, and
• 9:53
  Speaker 1: that really allows us to create really flexible and unique
• 9:57
  Speaker 1: and innovative models of care that can substantially improve the
• 10:01
  Speaker 1: outcomes of patients. What kind of pushback has there been
• 10:06
  Speaker 1: inside the doctor community if any well, you know, any
• 10:12
  Speaker 1: kind of change, um, can be difficult. Today in the
• 10:17
  Speaker 1: Medicare there's the Medicare fee for service world. Um. You know,
• 10:21
  Speaker 1: doctors are paid for you know, for volume, They're paid
• 10:23
  Speaker 1: for transactions. The more patients to see, the better you do.
• 10:29
  Speaker 1: In our model, which is primarily based in Medicare advantaged, Um,
• 10:32
  Speaker 1: we've created what is a value based care full risk
• 10:36
  Speaker 1: arrangement with health plans? What is that? What is it?
• 10:39
  Speaker 1: Because I just I want to understand where this came from, right,
• 10:41
  Speaker 1: because this is all has to do, I believe, with
• 10:44
  Speaker 1: the rules from the Medicare Access and the and the
• 10:47
  Speaker 1: chip re Or Authorization Act, because that really was kind
• 10:51
  Speaker 1: of something that changed the way doctors got paid, right right.
• 10:57
  Speaker 1: So um, you know there there's something called the care
• 11:00
  Speaker 1: advantage um, which is the private which is the private system,
• 11:03
  Speaker 1: as you said, would in which you the Medicare recipient
• 11:06
  Speaker 1: can have the premiums go to this private company Medicare advantage.
• 11:11
  Speaker 1: That's correct, and so there are many Medicare advantage health
• 11:14
  Speaker 1: plans out there, and essentially the premium dollar goes over
• 11:19
  Speaker 1: to these health plans, and these health plans have to
• 11:21
  Speaker 1: figure out how to improve the outcomes of patients and
• 11:25
  Speaker 1: ultimately reduce costs so that way they have some margin
• 11:28
  Speaker 1: left over, right, And so what a lot of these
• 11:31
  Speaker 1: health plans have done is they've gone out to physicians
• 11:34
  Speaker 1: UM and physician organizations like ours to create novel innovative
• 11:38
  Speaker 1: models that can ultimately improve that the outcomes of these
• 11:44
  Speaker 1: patients and subsequently reduce the cost so that way there
• 11:47
  Speaker 1: can be an opportunity to create margin on that patient population.
• 11:52
  Speaker 1: What is different about the way you would structure your
• 11:56
  Speaker 1: business having all of this information, Uh, if you had
• 12:00
  Speaker 1: a kind of clean slate. So you know, that's exactly
• 12:04
  Speaker 1: what Chen meant. Did you know we noticed that UM
• 12:07
  Speaker 1: about five of any given population within Medicare advantage accounts
• 12:12
  Speaker 1: for about fifty and seventy of costs. And so what
• 12:15
  Speaker 1: we notice is this population tends to be load of
• 12:18
  Speaker 1: moderate incomes, seniors with multiple chronic conditions. And so what
• 12:22
  Speaker 1: chen Mets sought to do was deliver you know, you
• 12:25
  Speaker 1: know these load of modernit incomes seniors, concierge level care um.
• 12:31
  Speaker 1: This is the kind of care that usually is only
• 12:33
  Speaker 1: available to you know, CEOs and executives at large companies.
• 12:36
  Speaker 1: And and we are able to provide this level of
• 12:39
  Speaker 1: concierge care at no additional costs of the patient. So,
• 12:42
  Speaker 1: if you're a chen Met patient, what we're able to
• 12:45
  Speaker 1: deliver them is instead of the average doctor taking care
• 12:49
  Speaker 1: of twenty three patients, our doctors only take care of
• 12:53
  Speaker 1: for it in fifty. Instead of a doctor only spending
• 12:56
  Speaker 1: about thirteen to sixteen minutes a year with a FaceTime
• 13:01
  Speaker 1: with a patient, our doctors have been about a hundred
• 13:03
  Speaker 1: and sixty eight minutes. Well, the way we do give
• 13:09
  Speaker 1: us you reveal and pull back the curtain a little
• 13:11
  Speaker 1: bit absolutely, So, you know, by increasing access to care,
• 13:15
  Speaker 1: by providing this really high touch, concert level care that
• 13:19
  Speaker 1: includes transportation, medications on site, specialists on site, and this
• 13:23
  Speaker 1: high touch level of care, what we're able to do
• 13:26
  Speaker 1: is significantly reduced the hospitalization rate. Today we published that
• 13:31
  Speaker 1: we can reduce hospitalizations by thirty eight percent and so
• 13:34
  Speaker 1: what happens is when you can reduce hospitalizations, you substantially
• 13:38
  Speaker 1: reduce costs. What would be an example, So give us
• 13:42
  Speaker 1: a patient example being you know and you know, paint
• 13:45
  Speaker 1: the picture for us wonderful. So I have a patient
• 13:47
  Speaker 1: of mine. Um, his name is, let's call him Mr F.
• 13:53
  Speaker 1: Mr F came to me. He had been going to
• 13:55
  Speaker 1: the hospital about five times a year because he has
• 13:58
  Speaker 1: end stage heart failure. Okay, it's heart doesn't pump well anymore. Um,
• 14:03
  Speaker 1: it's it's weak and he keeps showing up in the
• 14:05
  Speaker 1: emergency room. Now, what I know is this is a
• 14:09
  Speaker 1: patient that you know in general and a normal traditional
• 14:12
  Speaker 1: fee for service Medicare environment will be seen for thirteen
• 14:15
  Speaker 1: to sixteen minutes a year of FaceTime. What I have
• 14:18
  Speaker 1: done is I see him and I will see him
• 14:21
  Speaker 1: every single week if necessary. And so initially when I
• 14:25
  Speaker 1: met him, he was actually in hospice. He was ready
• 14:28
  Speaker 1: to call it quits. And when I and you know,
• 14:31
  Speaker 1: after seeing him every single week, after providing him door
• 14:34
  Speaker 1: to doctor transportation, after giving his medications on site, after
• 14:40
  Speaker 1: having multiple conferences and coordinating his care with his other specialists,
• 14:45
  Speaker 1: I took him from being admitted five times a year,
• 14:48
  Speaker 1: of which each admission costs twenty tho dollars. Now he
• 14:53
  Speaker 1: has not been admitted in over four years, and he's
• 14:56
  Speaker 1: out of hospice, and so how do you but then
• 14:59
  Speaker 1: but there and not but but and you are who
• 15:05
  Speaker 1: pays you, how could you forward to do this? Right?
• 15:09
  Speaker 1: So this is perfect. So if a patient comes to us, right,
• 15:12
  Speaker 1: if they because we are actually taking the premium dollar,
• 15:16
  Speaker 1: the a Medicare advantage health plan will offload the a
• 15:21
  Speaker 1: percentage of the premium. So fix the amount of money
• 15:23
  Speaker 1: to us, right, And so therefore the patient ends up
• 15:26
  Speaker 1: in the hospital like like Mr F five times, okay,
• 15:30
  Speaker 1: and it's twenty knowledge every time they go to the hospital.
• 15:33
  Speaker 1: I pay for that. But the beautiful thing is if
• 15:36
  Speaker 1: I'm able to significantly reduce his catastrophic hospitalization rates, then
• 15:42
  Speaker 1: well I'm going to bet for benefit from that. And
• 15:44
  Speaker 1: so what we found is this is a scenario in
• 15:47
  Speaker 1: which if I can figure out a way to substantially
• 15:50
  Speaker 1: reduce the most costly admissions for our patients, patients win
• 15:55
  Speaker 1: because they're not getting sick. But also we win because
• 15:58
  Speaker 1: now we actually don't have to you know what what
• 16:01
  Speaker 1: that patient would have cost it would have been you know,
• 16:03
  Speaker 1: five times at an admission hundred thousand dollars a year
• 16:06
  Speaker 1: instead of that, you know, perhaps that patient actually hasn't
• 16:09
  Speaker 1: accrued any major catastrophic costs, so we actually are able
• 16:13
  Speaker 1: to make money. And what unique about chen Med is
• 16:16
  Speaker 1: that we're not not only can we do this in
• 16:18
  Speaker 1: what we started, which was in South Florida, but we've
• 16:21
  Speaker 1: been able to replicate this exact model across multiple practices
• 16:27
  Speaker 1: in nine U S geographies. So you know, what we've
• 16:30
  Speaker 1: discovered is this model of care is actually scalable and
• 16:34
  Speaker 1: we then surrounded well, we'll have to check in with
• 16:36
  Speaker 1: you and find out the future of chen Med is
• 16:40
  Speaker 1: the chief executive Dr. Chris chen We want to take
• 16:50
  Speaker 1: a moment to let you know about something new from Bloomberg.
• 16:53
  Speaker 1: Starting right now, you can use our iOS app or
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• 17:23
  Speaker 1: slash lens. Let's take a look at Canada. Canada because
• 17:34
  Speaker 1: they are are neighbor to the north, but also because
• 17:36
  Speaker 1: President Donald Trump in a speech was promising to find
• 17:40
  Speaker 1: a solution to a trade dispute with Canada that well
• 17:44
  Speaker 1: has left many dairy farmers in Wisconsin and New York
• 17:47
  Speaker 1: without a market for their product. So, um, let's find
• 17:52
  Speaker 1: out more from Joe Light. He is our financial regulation reporter,
• 17:57
  Speaker 1: and this is not necessarily a out regulation. I wanted
• 18:01
  Speaker 1: to just bring in the Canada issue because, uh, when
• 18:04
  Speaker 1: we talk about home building, Uh, it's interesting how the
• 18:08
  Speaker 1: world gets connected very quickly, and I'm wondering, Joe, if
• 18:11
  Speaker 1: you can just kind of describe what what is all
• 18:13
  Speaker 1: going on here and maybe just bring in current events. Yeah. Sure,
• 18:17
  Speaker 1: So the um, as you mentioned, Trump talked to the
• 18:21
  Speaker 1: dairy community yesterday, and I've been doing some reporting on
• 18:26
  Speaker 1: Canada's imports of softwood lumber to the United States and
• 18:29
  Speaker 1: it's kind of a great example of how even for
• 18:32
  Speaker 1: you know, kind of the most basic of commodities, like
• 18:35
  Speaker 1: would you have all sorts of different lobbying groups and
• 18:38
  Speaker 1: interest groups on both sides of the border. Um with
• 18:41
  Speaker 1: thousands of jobs at stake, uh, you know, fighting each
• 18:44
  Speaker 1: other for a share of the US market. So in
• 18:46
  Speaker 1: the case of lumber, you know, this is a dispute
• 18:48
  Speaker 1: that's been going on for more than three decades. Canada
• 18:52
  Speaker 1: imports about five billion dollars of lumber into the U
• 18:55
  Speaker 1: s that's in that's in US dollars, and as a
• 18:58
  Speaker 1: trade dispute that maybe not many people in the United
• 19:01
  Speaker 1: States have heard of, but it means hundreds of thousands
• 19:03
  Speaker 1: of jobs in certain communities, communities in Oregon, communities in
• 19:07
  Speaker 1: British Columbia. Yeah. So so the so basically Canada subsidizes
• 19:14
  Speaker 1: is lumber industry. Most of the timberland and Canada is
• 19:18
  Speaker 1: owned by provincial governments. They charge a fee to timber
• 19:21
  Speaker 1: producers to cut the trees down and as a result,
• 19:25
  Speaker 1: um US companies say that Canadian producers are able to
• 19:28
  Speaker 1: sell their lumber in the United States at depress prices,
• 19:32
  Speaker 1: which which they say costs American American jobs, cost lumber
• 19:36
  Speaker 1: companies profits. And so as soon as next week, the
• 19:39
  Speaker 1: US government might be imposing huge tariffs on Canadian lumber imports,
• 19:45
  Speaker 1: and the threat of that has driven lumber prices up
• 19:47
  Speaker 1: by by more than twenty since since the election. And
• 19:51
  Speaker 1: part of that's because you know, Trump has talked very
• 19:54
  Speaker 1: tough on trade with Canada and UH, and you know,
• 19:58
  Speaker 1: American producers and Canadian producers, the lumber market is expecting
• 20:01
  Speaker 1: those tariffs to you know, and a new deal to
• 20:03
  Speaker 1: come in UH pretty tough. So tell us about the
• 20:07
  Speaker 1: price a lumber right now and what are the implications
• 20:12
  Speaker 1: for businesses for the lumber companies. So the price of lumber,
• 20:17
  Speaker 1: it's it's gone up two since UH. That's as of
• 20:21
  Speaker 1: the close yesterday, since the UH, since the election. And
• 20:26
  Speaker 1: for UH for a typical US home, the home builders
• 20:30
  Speaker 1: say that's added about three thousand dollars to the UH
• 20:34
  Speaker 1: to to the cost of a home. So so you
• 20:36
  Speaker 1: kind of have two sides here in the US. You
• 20:38
  Speaker 1: have the people who buy the lumber and the people
• 20:39
  Speaker 1: who sell the lumber. The people who buy the lumber
• 20:41
  Speaker 1: they want to keep these lumber imports cheap, so so
• 20:45
  Speaker 1: they they don't want to see the the US UH
• 20:48
  Speaker 1: impose these UH impose these tariffs. The people who sell
• 20:52
  Speaker 1: sell the lumber, you know, big timber companies like wire Houser,
• 20:56
  Speaker 1: which actually has some UH they've they've got some for
• 21:00
  Speaker 1: in Canada as well as the US, but most mostly
• 21:01
  Speaker 1: in the US. UH. Local lumber companies and in places
• 21:05
  Speaker 1: like how wide is the gap between Canadian lumber and
• 21:10
  Speaker 1: the US lumber. So, so the tariffs that they're that
• 21:15
  Speaker 1: they're hoping to so the lumber market, it's a it's
• 21:17
  Speaker 1: a Canadian lumber in US lumber is competing with each other. Right,
• 21:21
  Speaker 1: So the you know, because it's traded right, I mean, yeah,
• 21:24
  Speaker 1: traded right, it's up three three points six today, right,
• 21:28
  Speaker 1: And but I've been looking, I'm going back all the
• 21:30
  Speaker 1: way to May of of last year, and you're right,
• 21:33
  Speaker 1: it's up. The prices up more than right, and and
• 21:36
  Speaker 1: and so the Canadian Canadian US lumber is always competing,
• 21:40
  Speaker 1: so they're selling for about the same price. The difference
• 21:43
  Speaker 1: here is that the cost of lumber, of producing lumber
• 21:46
  Speaker 1: in Canada, U S companies say, is much lower. So
• 21:48
  Speaker 1: the tariffs that UM we're the US is inspected expected
• 21:53
  Speaker 1: to impose as soon as next week or starting next week,
• 21:56
  Speaker 1: could run a run between thirty and according to some analysts,
• 22:01
  Speaker 1: and the impact of that would be to make US
• 22:03
  Speaker 1: companies much more competitive, at least in their eyes, and
• 22:06
  Speaker 1: to make Canadian companies much less competitive, which could result
• 22:09
  Speaker 1: in you know, mills closing in Canada, perhaps mills opening
• 22:13
  Speaker 1: in the US, and the US market share of the
• 22:15
  Speaker 1: lumber market rising. So that would benefit companies obviously that
• 22:20
  Speaker 1: have these operations in the United States. That's right, Yeah,
• 22:23
  Speaker 1: it say so so that this is all This is
• 22:25
  Speaker 1: all about the US market share versus the versus the
• 22:28
  Speaker 1: Canadian market share. For for the lumber producers, for the
• 22:31
  Speaker 1: home builders. You know, they're so frustrated by the UH
• 22:35
  Speaker 1: quickly rising costs of lumber that you know, they're already
• 22:37
  Speaker 1: looking for sources of supply elsewhere. They send a trade
• 22:40
  Speaker 1: delegation to Chile in September. They've been talking to governments
• 22:44
  Speaker 1: and producers in Sweden and Brazil, you know, basically anybody
• 22:48
  Speaker 1: who grows trees because they want to keep What about
• 22:51
  Speaker 1: alternatives to lumber for home builders, and you know that's uh.
• 22:56
  Speaker 1: I I think we're they're going to be framing homes
• 22:58
  Speaker 1: with with soft lumber for UH for quite a while.
• 23:02
  Speaker 1: I don't think they're gonna try to reinvent the reinvent
• 23:05
  Speaker 1: the home building process. And I mean obviously, but not
• 23:07
  Speaker 1: you know, in other places, in other places around the world. Um,
• 23:13
  Speaker 1: they use other you know, materials to to do build
• 23:17
  Speaker 1: large scale housing. Yeah. And and you know one of
• 23:20
  Speaker 1: the points that the timber producers make is that that
• 23:25
  Speaker 1: lumber you know, they say, is it's not it's not
• 23:28
  Speaker 1: the bulk of a cost of a home. You know,
• 23:30
  Speaker 1: the bulk of a cost of a home comes in, uh,
• 23:33
  Speaker 1: you know, labor costs and other materials, land costs, and
• 23:36
  Speaker 1: and so they they're um, uh, the lumber lobby United
• 23:41
  Speaker 1: States says, they're you know, at least somewhat you know,
• 23:43
  Speaker 1: mystified that the home builders are fighting so hard against
• 23:47
  Speaker 1: against these tariffs. But you know, all already homebuilders are
• 23:51
  Speaker 1: competing against um, against existing homes with the new homes,
• 23:55
  Speaker 1: and so it's it's difficult for them to pass the
• 23:57
  Speaker 1: costs nder buyer. So this this rise in LUMBERCASI, it's
• 24:01
  Speaker 1: directly into their profits. Thanks very much for joining us.
• 24:04
  Speaker 1: Joe Light. Hey Joe, what's your Twitter handle? It's at
• 24:07
  Speaker 1: Joe Light. That's all you need to know. Our financial
• 24:10
  Speaker 1: regulation reporter joining us from Washington. Home builders could be
• 24:14
  Speaker 1: losers in an early test of Donald Trump's trade policy.
• 24:30
  Speaker 1: High yield. Well, if you're looking for high yield, what
• 24:33
  Speaker 1: does that mean these days? High yield was up to
• 24:35
  Speaker 1: nearly three percent as of the end of February, and
• 24:39
  Speaker 1: then it's stumbled. Well, let's find out more from Ken Monahan.
• 24:42
  Speaker 1: He is the head of Global High year Yield at
• 24:45
  Speaker 1: a mundy Smith Breeden. They helped him manage ten point
• 24:48
  Speaker 1: nine billion dollars and they're based in Durham, North Carolina. Ken,
• 24:52
  Speaker 1: Thanks very much for being with us. Why don't you
• 24:54
  Speaker 1: first just explain a little bit about your role there,
• 24:57
  Speaker 1: what you are actively doing, and then tell us your
• 25:00
  Speaker 1: perspective on what's happening with with yields right now for
• 25:04
  Speaker 1: these specific types of bonds. Yeah, I Keim, and thanks
• 25:06
  Speaker 1: for asking me to join you today. Um. I'm focused
• 25:09
  Speaker 1: on the global high yield markets. So that includes not
• 25:11
  Speaker 1: only the US high yield marketplace, which we're all familiar with,
• 25:15
  Speaker 1: but also the European high yield market as well as
• 25:17
  Speaker 1: emerging market corporate debt. So you're looking at a marketplace
• 25:20
  Speaker 1: which is approximately two point trillion dollars, of which about
• 25:26
  Speaker 1: that is US high yield, about is Europe and about
• 25:29
  Speaker 1: the remainder is is e M corporate. So that's that's
• 25:32
  Speaker 1: what my focus is. And I've been doing this for
• 25:34
  Speaker 1: a long time with more gray hair than I care
• 25:36
  Speaker 1: to count. Okay, all right, well well maybe all right,
• 25:39
  Speaker 1: so so share some of your wisdom with us right now. Well,
• 25:43
  Speaker 1: as you mentioned, I said, we had we had a
• 25:44
  Speaker 1: pretty strong rally coming into February. Market was up quite strong,
• 25:48
  Speaker 1: and then kind of petered out in March. And I
• 25:50
  Speaker 1: think that there were a couple of head winds we
• 25:52
  Speaker 1: were experiencing. Certainly one of them was in the retail
• 25:55
  Speaker 1: side of things. Obviously, there's been a lot of headline
• 25:57
  Speaker 1: news both for investment grade companies as well as how
• 26:00
  Speaker 1: you'd companies like Jake Crewe for example, and sears Um
• 26:05
  Speaker 1: regarding head winds in the retail space, and that I think,
• 26:08
  Speaker 1: what's your prognosis? Well, you know, I think that that
• 26:12
  Speaker 1: both are facing ultimate restructuring. Um. I think it's pretty
• 26:15
  Speaker 1: much in the news already on J. C. Penny and
• 26:16
  Speaker 1: dialogue is taking place with creditors as it as we
• 26:19
  Speaker 1: speak with sears it's uh, it's been a longer term issue.
• 26:23
  Speaker 1: They've been uh deteriorating in quality for a long period
• 26:26
  Speaker 1: of time and uh and uh the equity uh controlling
• 26:31
  Speaker 1: equity shareholders you know, has been selling the crown jewels
• 26:34
  Speaker 1: along the way, uh to keep the engine going. And uh,
• 26:37
  Speaker 1: you know, I think ultimately that will doesn't solve the
• 26:40
  Speaker 1: problem that Sears of of a deteriorating business. Well just
• 26:44
  Speaker 1: give you Sears, of course we know is rutten and
• 26:48
  Speaker 1: owned by Eddie Lampert hedge fund manager. And well I'll
• 26:53
  Speaker 1: just say investor at this point because I mean I'm
• 26:55
  Speaker 1: looking at the Sears holdings and it's a one and
• 26:58
  Speaker 1: a half billion dollar market capital right now. Yeah, well
• 27:01
  Speaker 1: you know him. It's that it's like that old story
• 27:02
  Speaker 1: or the old adage, when a good business, a bad business,
• 27:06
  Speaker 1: and a great management team to come together, it's usually
• 27:09
  Speaker 1: the bad business that keeps his reputation intact. So I
• 27:13
  Speaker 1: think that's what you're seeing here right now. Interesting. Okay, So, um,
• 27:17
  Speaker 1: where do you want to go? Because you know you
• 27:19
  Speaker 1: said there's the two point two trillion and then you
• 27:21
  Speaker 1: know you can slice and dice it really either by
• 27:24
  Speaker 1: industry or by currency. What's the best way to approach
• 27:28
  Speaker 1: what is happening now? Because I mean we are late
• 27:30
  Speaker 1: in a cycle. We are late in a cycle. But
• 27:32
  Speaker 1: you know, I think you know you we're not necessarily
• 27:35
  Speaker 1: expecting the cycle to blow up the way the way
• 27:39
  Speaker 1: it did in a way or oh nine. I think
• 27:40
  Speaker 1: you know, we know you talked to sociologists. They also
• 27:43
  Speaker 1: they always talked about the concept of recency and primacy,
• 27:46
  Speaker 1: the concepts being you know, you were most impacted or
• 27:50
  Speaker 1: by our most recent experience, which in this case obviously
• 27:53
  Speaker 1: was the O eight or O nine recession as well
• 27:55
  Speaker 1: as the first one we've had exposure to. I think
• 27:57
  Speaker 1: the O eight or O nine one was a highly
• 27:59
  Speaker 1: unu to a one because it impacted the banking system
• 28:02
  Speaker 1: in a major way. And obviously we've had the banks
• 28:04
  Speaker 1: recapitalized in the US in particular, there's some that are
• 28:07
  Speaker 1: still need to work in Europe, but the U S
• 28:10
  Speaker 1: banks have raised a lot of capital. So whatever headwinds
• 28:13
  Speaker 1: were expecting talking about late in the credit cycle, I
• 28:16
  Speaker 1: don't think we're necessarily expecting it to be is broader
• 28:20
  Speaker 1: recession when it ultimately occurs, as we experienced in eight
• 28:25
  Speaker 1: or oh nine. You know, if you look back at
• 28:27
  Speaker 1: previous recessions, he would typically find that they impacted you know,
• 28:30
  Speaker 1: one or two industries in particular. So if you look
• 28:32
  Speaker 1: back at the O two three oh two oh three recession, um,
• 28:37
  Speaker 1: that one was much more focused on telecom. So there's
• 28:40
  Speaker 1: certainly some sectors right now that uh that you know,
• 28:43
  Speaker 1: would cause concerns going forward, and maybe the ones that
• 28:46
  Speaker 1: will be most impacted, you know, if we have a
• 28:48
  Speaker 1: recession in a year or two. Retail is perhaps at
• 28:51
  Speaker 1: the top of the list, but there's others like technology,
• 28:54
  Speaker 1: uh that some are concerned about as well. You know,
• 28:56
  Speaker 1: you can argue that oil and gas and metals and
• 28:58
  Speaker 1: mining already had a session of their own, you know,
• 29:01
  Speaker 1: secular problems, uh with the kind of period from late
• 29:05
  Speaker 1: to fourteen through the early part of last year. Hm.
• 29:08
  Speaker 1: I'm just digesting all that because you know that, I mean,
• 29:11
  Speaker 1: that's a that's an interesting scenario if it if it
• 29:13
  Speaker 1: plays out that way. Yeah, you know, I think, look,
• 29:17
  Speaker 1: do you think how many how many interest rate increases
• 29:20
  Speaker 1: do you think are on the table right now? Well,
• 29:23
  Speaker 1: it looks like it looks like too for this year,
• 29:25
  Speaker 1: I think, is what our guess is. But I recognize
• 29:29
  Speaker 1: that an increase in interest rates can impact uh corporate credit.
• 29:34
  Speaker 1: But I think the things that we get concerned about
• 29:36
  Speaker 1: typically Um, coming into a recession or laid in the
• 29:39
  Speaker 1: credit cycle, we're not seeing as much of this time
• 29:42
  Speaker 1: so typically you know, so is there anything worth buying
• 29:45
  Speaker 1: right now? Well? I think that there is. I think
• 29:47
  Speaker 1: you know, we're gonna let's recognize that the benefit of
• 29:49
  Speaker 1: the high yield marketplaces for US high yield is that
• 29:51
  Speaker 1: you're picking up effectively one point seven basis points a
• 29:54
  Speaker 1: day of of current income. All right, so I'll give
• 29:57
  Speaker 1: you a thirty seconds, go ahead. Well, I you know,
• 29:59
  Speaker 1: I think that the the answer from our perspective is is,
• 30:02
  Speaker 1: you know, we still think that there's opportunities in the
• 30:04
  Speaker 1: steel sector for example. UM, we're ultimately looking for opportunities
• 30:08
  Speaker 1: in retail. We recognize that there's going to be the
• 30:10
  Speaker 1: proverbial throwing the baby out with the bath water, and
• 30:13
  Speaker 1: there are retailers that they're going to survive. Uh. You know,
• 30:15
  Speaker 1: we look at L Brands, for example, is a perfect
• 30:17
  Speaker 1: example of a very high quality credit and a double
• 30:20
  Speaker 1: B space that could be investment grade if it wished
• 30:22
  Speaker 1: to be. Uh. They've done a better job at taking
• 30:24
  Speaker 1: care of their shareholders, and they have their bondholders, and
• 30:27
  Speaker 1: those bonds are under pressure. At some point they'll be
• 30:29
  Speaker 1: interesting to buy. Maybe not yet. Yeah, well I'm checking
• 30:32
  Speaker 1: them on the Bloomberg and uh well, if we'll have
• 30:34
  Speaker 1: to see, well, we're gonna put them there and then
• 30:36
  Speaker 1: you know what, we'll have you back and we'll be
• 30:39
  Speaker 1: able to sort of track the progress of those uh
• 30:43
  Speaker 1: L brands bonds. Thanks very much for joining us. Ken
• 30:46
  Speaker 1: Monahan is the head of Global high Yield at a
• 30:49
  Speaker 1: Mundy Smith Breeden, helping to manage ten point nine billion dollars.
• 30:53
  Speaker 1: They're based in Durham, North Carolina. Thanks for listening to
• 31:01
  Speaker 1: the Bloomberg pien L podcast. You can subscribe and listen
• 31:05
  Speaker 1: to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer.
• 31:10
  Speaker 1: I'm Pim Fox. I'm out there on Twitter at pim Fox.
• 31:14
  Speaker 1: I'm out there on Twitter at Lisa Abramo. It's one
• 31:17
  Speaker 1: before the podcast. You can always catch us worldwide on
• 31:20
  Speaker 1: Bloomberg Radio.