Latest / Bloomberg Intelligence / Little Upside Left in U.S. Junk Bonds: Diamond Hill

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Little Upside Left in U.S. Junk Bonds: Diamond Hill · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penel podcast. I'm Paul swing you.
• 0:05
  Speaker 1: Along with my co host Lisa Brahmas. Each day we
• 0:07
  Speaker 1: bring you the most noteworthy and useful interviews for you
• 0:10
  Speaker 1: and your money. Whether at the grocery store or the
• 0:12
  Speaker 1: trading floor. Find a Bloomberg penl podcast on Apple podcast
• 0:16
  Speaker 1: or wherever you listen to podcasts, as well as at
• 0:18
  Speaker 1: Bloomberg dot com. A lot of people have been trying
• 0:23
  Speaker 1: to hate on the hil bond market for years. They've
• 0:26
  Speaker 1: been saying this area is inflated, it is going to
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  Speaker 1: be a boys for a big fall. The result this
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  Speaker 1: year so far has been a ten percent gain, the
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  Speaker 1: best return for the first six months of a year
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  Speaker 1: since two thousand and nine when we were climbing out
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  Speaker 1: of a financial crisis. Joining us to talk about this sector,
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  Speaker 1: Bill's Ox. He is chief investment Officer of fixed income
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  Speaker 1: at Diamond Hill Capital Management. Thank you so much for
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  Speaker 1: being with us today. I want to start with just
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  Speaker 1: a broad question. How much more upside is there left
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  Speaker 1: in the US hild bond market right now? Yea, there's
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  Speaker 1: very little upside left. It's more about treading water right
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  Speaker 1: here and earning your coupon for the back half of
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  Speaker 1: the year. So all right, but we are again we're
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  Speaker 1: at least it suggested we've had a great run here
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  Speaker 1: in the high were ten plus years into this economic cycle.
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  Speaker 1: Are there any sectors that you're overweight or underweight given
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  Speaker 1: where we are in the cycle here. Yeah. I mean
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  Speaker 1: one interesting sector that's still under a cloud, but a
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  Speaker 1: different cloud than the equity markets are focused on, would
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  Speaker 1: be pharma. In the high old space, the valuations are
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  Speaker 1: very much washed out. Yesterday's deal with Allergan could be
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  Speaker 1: a sign that that people are starting to take notice
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  Speaker 1: of those valuations. And is that simply because of the
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  Speaker 1: regulatory overhang of the sector? I think that's that's now.
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  Speaker 1: The business has have been weak, but they're starting to
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  Speaker 1: bottom out. But the primary issue on valuation today is
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  Speaker 1: the political overhang for sure, although there are other challenges
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  Speaker 1: to im think of Tava, for example, the biggest generic
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  Speaker 1: maker UH and their bonds have been beaten up. There
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  Speaker 1: an incredibly leveraged company and they haven't really seen the
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  Speaker 1: same kind of pricing power that they had in the past,
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  Speaker 1: and they faced a lot of headwinds. I mean, is
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  Speaker 1: that an area where you'd be willing to go or
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  Speaker 1: are you looking more toward US focused areas that have
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  Speaker 1: been hit by speculation about policy. No. I think that
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  Speaker 1: is one that that it makes sense to dip your
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  Speaker 1: toe in table. Yes, okay, really interesting to see that
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  Speaker 1: there is some opportunity there Are there any places that
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  Speaker 1: you're selling right now? Well, I the of the U
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  Speaker 1: S high old market right now has a maturity greater
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  Speaker 1: than five years in a yield to worse below five percent.
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  Speaker 1: That part of the market gives people comfort and that
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  Speaker 1: the it's defensive, but the price is just too high.
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  Speaker 1: I think that's an area that you actually have to
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  Speaker 1: be selling right now. You know, one of the areas
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  Speaker 1: that's just been a huge issue or has been kind
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  Speaker 1: of the greater communication space, you know a T and T, Comcast,
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  Speaker 1: things like that, and there's so much technology change going on.
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  Speaker 1: There's some uh M and a activity in this space.
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  Speaker 1: How do you guys feel about the communications sector? Big issuers? Yeah,
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  Speaker 1: I mean in the high yield market, you're really talking
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  Speaker 1: about Sprint and T Mobile and whether that deal gets
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  Speaker 1: approved or not, Sprint will be under severe pressure of
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  Speaker 1: that deal does not get approved, Probably a very high
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  Speaker 1: probability that they file for bankruptcy and the investment grade space,
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  Speaker 1: there's a lot of pressure on A T and T
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  Speaker 1: and Verizon. I mean that those businesses are are very
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  Speaker 1: mature right now, and they're they're tough, capital intensive businesses.
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  Speaker 1: So the picture that you're painting right now, which is
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  Speaker 1: security selection, treading water, coupon collecting for a firm that
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  Speaker 1: overseas twenty three billion dollars. And I'm looking right now
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  Speaker 1: at the inflows into the high yield sector. They have
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  Speaker 1: been escalating, Uh significantly. Does that concern you given the
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  Speaker 1: fact that there just aren't that many opportunities out there
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  Speaker 1: to put that money to work in a way that
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  Speaker 1: you think might be prudent. Well, if we were too
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  Speaker 1: big and I had to put those inflows to work
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  Speaker 1: and in a relatively less liquid high old market, I
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  Speaker 1: would be concerned. But we're very disciplined in terms of
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  Speaker 1: our capacity, so that inflows have been steady but not
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  Speaker 1: at all difficult for us to put the war. We're
• 4:14
  Speaker 1: hearing more and more from economists, investors, strategists about rising
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  Speaker 1: odds of a recession mid next year's that's something you're
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  Speaker 1: thinking about as you think about your portfolio. Well, I
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  Speaker 1: think the treasury market is is the best signal of
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  Speaker 1: that right now, And we're discounting three rate cuts between
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  Speaker 1: now and the end of the year, And to me,
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  Speaker 1: that's kind of on the precipice of that, that's probably
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  Speaker 1: still consistent with insurance against too low inflation, but anything
• 4:44
  Speaker 1: more than that. And now the treasury market is discounting
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  Speaker 1: a much higher probability of recession. So we're we're close.
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  Speaker 1: I'm close to being concerned about that, but not quite yet.
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  Speaker 1: Are you more concerned about the longer term for the
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  Speaker 1: high old bond market or the private depth markets right now? Yeah?
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  Speaker 1: I think that the private debt markets probably have grown
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  Speaker 1: much more rapidly that the high yield market. Although flows
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  Speaker 1: have been strong this year, it's actually down in size
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  Speaker 1: over the last three years or so, with the loan
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  Speaker 1: market and then the private debt market increasing in size.
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  Speaker 1: So I think that investor expectations in the private loan
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  Speaker 1: market are probably more out of whack with reality than
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  Speaker 1: what you would see in the high yield market. And
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  Speaker 1: how significant is the risk that you see in say
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  Speaker 1: a recession, I mean, are we looking at just normal
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  Speaker 1: declines that are you know, not necessarily super painful but
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  Speaker 1: you know our declines. Are we talking about something that's
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  Speaker 1: more substantial than that? Yeah, I mean LDD Leverage finance
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  Speaker 1: is extremely resilient. We saw that in the financial crisis.
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  Speaker 1: Spreads blue out in uh, you know, a year and then,
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  Speaker 1: but mostly in the three months after Lehman Brothers filed
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  Speaker 1: to over two thousand basis points, but high yield was
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  Speaker 1: back above its high water mark in the fall of
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  Speaker 1: two thousand nine. So it's a very resilient asset class.
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  Speaker 1: Each sector in leverage finance can pick up the other.
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  Speaker 1: So I don't think it's going to bring the economy
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  Speaker 1: down or anything like that. Bill Zocks, thanks so much
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  Speaker 1: for being with us. Bill as a chief investment officer
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  Speaker 1: of fixed income for Diamond Hill Capital Management, about three
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  Speaker 1: billion dollars under management, is based in Columbus, Ohio the
• 6:19
  Speaker 1: Ohio State University. I don't know why you guys say
• 6:22
  Speaker 1: at the Ohio State, but it sounds good. We'll go
• 6:24
  Speaker 1: with it. Traders are preparing for the onset of G
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  Speaker 1: twenty talks, and as one guest on Billover Television said
• 6:44
  Speaker 1: this morning, it really is b G two meeting because
• 6:47
  Speaker 1: really we're looking at j and Ping and President Trump
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  Speaker 1: of China and the US getting together and coming to
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  Speaker 1: some sort of ceasefire. Maybe perhaps to set the stage
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  Speaker 1: from very pleased to say, we have Leland Miller with US,
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  Speaker 1: chief executive for Sir China beij Book International in New York.
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  Speaker 1: He's joining us in our Bloomberg Interactive Broker Studios Leland
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  Speaker 1: Uh just to set the stage for these discussions between
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  Speaker 1: Presidents JJ and Ping and Trump. What is the economic
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  Speaker 1: backdrop in particular of China right now? Sure, so, people
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  Speaker 1: who have been very gloomy over the last several months,
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  Speaker 1: one because trade talks haven't gone well, but also you've
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  Speaker 1: had pieces of official data that have come in that
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  Speaker 1: haven't made people very happy. And then there's rumors of
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  Speaker 1: trouble within the financial system, so a lot of pessimism
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  Speaker 1: out there. Are new Q two data, which was released
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  Speaker 1: this morning is actually more optimistic on that. So from
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  Speaker 1: a top line perspective, Q two improved over Q one,
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  Speaker 1: which I don't think many people expected. And then on
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  Speaker 1: the sectual perspective, manufacturing and retail were the two co leaders.
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  Speaker 1: So a lot of people probably assume manufacturing is under fire.
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  Speaker 1: That's true because of the trade war, but there was
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  Speaker 1: evidence of very strong policy support, so manufacturers borrowed more
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  Speaker 1: and they borrowed the cheapest rates. This is the government
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  Speaker 1: stepping in. And Rita also did relatively well, so we Uh,
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  Speaker 1: there's some some worries on inventory, but the the key
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  Speaker 1: metrics for those two sectors in particular or upbeat. Hiring
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  Speaker 1: was upbeat, which means the trade war hasn't hit China
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  Speaker 1: word hurts yet. Uh. And overall, I think that there
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  Speaker 1: was improvement the economy. How about the shadow banking situation
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  Speaker 1: that had been on the downside as China begun to
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  Speaker 1: de lever over the less several years. What's the status there. Well,
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  Speaker 1: when people heard the term deleveraging over the last several years, uh,
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  Speaker 1: they assumed that China was actually actively deleveraging. I mean
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  Speaker 1: the government was saying it was doing that. China was
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  Speaker 1: never deleveraging. It was doing some aspects of financial uh, deleveraging,
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  Speaker 1: and in particular, they were cracking down on shadow finance.
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  Speaker 1: That's something that's crystal cleared our data. So for the
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  Speaker 1: past two to three years, we've seen shadow finance cracked
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  Speaker 1: down on a much lower share of overall borrowing over
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  Speaker 1: time and UH more to that borrowing going from off
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  Speaker 1: balance sheet to on balance sheet. The borrowing wasn't there,
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  Speaker 1: wasn't less borrowing, but it was going from the shadows
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  Speaker 1: to the on balance on balance sheet where it could
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  Speaker 1: be was turning more transparent and more regulated. Well, that
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  Speaker 1: just reversed completely. This quarter we saw an explosion I
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  Speaker 1: think explosions right word for this of shadow banking and
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  Speaker 1: Q two it was the highest one quarter jump we've
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  Speaker 1: seen in shadow banking usage in the history of China
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  Speaker 1: based book survey. So what clearly is happening here. Q
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  Speaker 1: one was a big credit quarter for China that made
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  Speaker 1: a decision that they were going to create a cushion
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  Speaker 1: for the economy in a worst case scenario for the
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  Speaker 1: trade war, prepare for the downside. And Q two was
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  Speaker 1: an expansion of that, almost as much borrowing overall, almost
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  Speaker 1: as aggressive, uh diminishment of of of rejection rates, et cetera,
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  Speaker 1: but an expansion of shadow banking. So it's really amazing
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  Speaker 1: what the Chinese have done since the fourth quarter in
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  Speaker 1: the credit side. Leland, I want to just highlight this
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  Speaker 1: point once again because this seems to be a really
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  Speaker 1: big deal. You did just put out this early look
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  Speaker 1: brief of the Q two Chinese economy. The fact that
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  Speaker 1: shadow banking activity increased at the fastest pace quarter over
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  Speaker 1: quarter since China Beijing book began in two thousand and
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  Speaker 1: ten seems significant. What is the potential risk here? I mean,
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  Speaker 1: how close are we to the consequences of this? Because
• 10:21
  Speaker 1: it is a pretty closed economy, so some people say
• 10:23
  Speaker 1: it's contained in terms of riskiness. Well, there's a reason
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  Speaker 1: that the Beijing leadership cracked down on shadow banking several
• 10:31
  Speaker 1: years ago because they said, this is an enormous vulnerability.
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  Speaker 1: It operates outside of most rules. It operates in a
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  Speaker 1: very out pake manner. Uh. There's important parts of shadow
• 10:41
  Speaker 1: finance for the economy, but there's also Ponzi schemes, and
• 10:43
  Speaker 1: there's no real way to to control this unless we
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  Speaker 1: shine a light on it. Now. They have been doing
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  Speaker 1: more and more and more to crack down on shadow
• 10:52
  Speaker 1: finance for years, and what they're essentially doing right now
• 10:54
  Speaker 1: is just throwing that all out. You know, the Trump
• 10:57
  Speaker 1: trade war is such a priority to make sure you
• 10:59
  Speaker 1: don't look weak in the face of that, and in
• 11:02
  Speaker 1: order to guard your downside if this goes wrong. Uh,
• 11:07
  Speaker 1: they have essentially said we're gonna we're gonna forget about
• 11:09
  Speaker 1: the long term consequences which could hit in the short
• 11:12
  Speaker 1: term and medium term or long term. It's an unclear
• 11:14
  Speaker 1: how long the a you know, taking fuse they have
• 11:17
  Speaker 1: on this, but they decided that's not the priority. The
• 11:19
  Speaker 1: priority is to make sure that we're getting credit to
• 11:21
  Speaker 1: everybody that we have stronger growth numbers. And as a result,
• 11:24
  Speaker 1: they've tossed out some of the good work they've done
• 11:25
  Speaker 1: over the past few years. All right, let's turn our
• 11:27
  Speaker 1: attention to the G twenty. About an hour President Trump
• 11:30
  Speaker 1: aboard Air Force one for Osaka. What is in your
• 11:33
  Speaker 1: mind a realistic expectation for the G two. Right, Markets
• 11:38
  Speaker 1: have been much too barish on Osaka for weeks and
• 11:42
  Speaker 1: weeks because after President Trump implemented terrorists back in May,
• 11:46
  Speaker 1: there was this belief, due to the coverage UH that
• 11:51
  Speaker 1: the two sides were hardening and that China was preparing
• 11:54
  Speaker 1: for the long war and singing patriotic songs, and you know,
• 11:58
  Speaker 1: the US was was led tariff man who wanted to
• 12:01
  Speaker 1: lead the crusade against China, and you know, the two
• 12:04
  Speaker 1: you know, two sides had nowhere to go except farther apart.
• 12:07
  Speaker 1: This was never true. Nothing has fundamentally changed since the
• 12:10
  Speaker 1: terroriffs are raised, with the exception of some cracked some
• 12:14
  Speaker 1: technology company crackdowns that are going to be used as
• 12:17
  Speaker 1: trade fodder trade chips. In terms with President She so
• 12:21
  Speaker 1: we are not at a deal yet, but the atmosphere
• 12:25
  Speaker 1: for Osaka is one of the White House clearly wanting
• 12:29
  Speaker 1: a reset of talks. They're willing to punt the last
• 12:32
  Speaker 1: tranche of tariffs and its entirety to make that happen.
• 12:34
  Speaker 1: They're willing to give assurances on Huawei that will be
• 12:36
  Speaker 1: part of a final deal. All the music that she
• 12:39
  Speaker 1: wants to hear, uh and in return that the Chinese
• 12:42
  Speaker 1: have to say, we will return to the base text
• 12:45
  Speaker 1: and we will work from that base text that was
• 12:47
  Speaker 1: about nine note A Secretary of Nation said, So, assuming
• 12:52
  Speaker 1: that the Chinese go along with this, the President wants
• 12:54
  Speaker 1: to ride this out, and we're gonna see uh, quite
• 12:57
  Speaker 1: a quite a positive solution from a deal standpoint at Osaka. Really,
• 13:01
  Speaker 1: so you think it's not just gonna be uh, the
• 13:03
  Speaker 1: the uh, the fact that the trade tensions are going
• 13:07
  Speaker 1: to escalate, but there actually will be a resolution. I
• 13:09
  Speaker 1: don't think there's gonna be a resolution that there's not
• 13:11
  Speaker 1: gonna be a final deal. They're not ready to do
• 13:13
  Speaker 1: a final deal, but if they don't get along, you're
• 13:16
  Speaker 1: gonna see UH tariffs on all five billion starting July one.
• 13:21
  Speaker 1: And that was a real possibility. As a matter of that,
• 13:23
  Speaker 1: markets were rather scared a few weeks ago that this
• 13:27
  Speaker 1: was a becoming more and more of a possibility. Look,
• 13:29
  Speaker 1: that is not on the table right now. They have
• 13:31
  Speaker 1: not been war gaming that possibility. Internally, they want to reset.
• 13:35
  Speaker 1: So I think that the fact that this continues on
• 13:37
  Speaker 1: may not be seen as as bullish because in some ways,
• 13:41
  Speaker 1: you know, we're just getting tired of this entire tarade.
• 13:43
  Speaker 1: At the same time, this looked like it was going
• 13:46
  Speaker 1: in the wrong direction and it was accelerating in the
• 13:48
  Speaker 1: wrong direction. That wasn't true. But now markets are correcting
• 13:51
  Speaker 1: themselves and they will realize that this has got that
• 13:54
  Speaker 1: there is a clear glide path to a deal if
• 13:57
  Speaker 1: the two sides decide they want to get there. We'll
• 13:59
  Speaker 1: see out that this week, hopefully some movement there. Leland Miller,
• 14:02
  Speaker 1: CEO of the China Beige Book International, joining us in
• 14:05
  Speaker 1: our Bloomberg eleven three oh studios today starts the two
• 14:24
  Speaker 1: day extravaganza of democratic debates, including a twenty candidates to
• 14:28
  Speaker 1: become uh the lead in the contest against President Trump.
• 14:32
  Speaker 1: Joining us now, Tim O'Brien, I'm so glad to say,
• 14:35
  Speaker 1: executive editor for Bloomberg Opinion, joining us here in our
• 14:38
  Speaker 1: interactive broker's studios, always with fresh perspective and all things
• 14:42
  Speaker 1: politics and certainly President Trump. I'm just wondering, are we
• 14:45
  Speaker 1: looking at a circular firing squad tonight. That's a great question, Lisa.
• 14:49
  Speaker 1: I you know, we'll see what happens when all these
• 14:51
  Speaker 1: folks get on stage. It's a lot of people, but
• 14:53
  Speaker 1: I don't think the spirit of this is uh, they
• 14:57
  Speaker 1: want to try to assassinate each other. Uh. They clearly
• 15:00
  Speaker 1: need to get Biden out of their ways. To some extent,
• 15:04
  Speaker 1: Joe Biden hasn't had to put much effort into making
• 15:08
  Speaker 1: public statements around things he's He's stepped in it a
• 15:11
  Speaker 1: few times when he has, but he's clearly the front runner.
• 15:14
  Speaker 1: So I think the extent to which the people on
• 15:17
  Speaker 1: stage tonight, which Biden won't be there tonight, he'll be
• 15:19
  Speaker 1: there tomorrow, they needed to find themselves an opposition to
• 15:22
  Speaker 1: Joe Biden and then I think the second step is
• 15:25
  Speaker 1: an opposition to President Trump, and I think they don't
• 15:28
  Speaker 1: really see a need to define themselves in opposition to
• 15:31
  Speaker 1: one another. So do you think that beginning tonight and
• 15:34
  Speaker 1: through the all the the debates coming up, do you
• 15:37
  Speaker 1: think the strategy will be for these candidates to focus
• 15:41
  Speaker 1: on President Trump, attack President Trump, per se, or maybe
• 15:44
  Speaker 1: step back and maybe try to differentiate themselves to find
• 15:47
  Speaker 1: their own policies. And you know, Paul, I think I
• 15:50
  Speaker 1: think you know. I'm not a political consultant, but I
• 15:53
  Speaker 1: think you know, in the media, we do know when
• 15:55
  Speaker 1: things gain traction and when people start paying attention to things.
• 15:58
  Speaker 1: And I think each of these candidates gonna have to say,
• 16:00
  Speaker 1: because we're gonna have a limited amount of time, what
• 16:03
  Speaker 1: can I say that We'll get picked up after the
• 16:05
  Speaker 1: debates are over and give me the kind of follow
• 16:08
  Speaker 1: up where I can get asked on to other shows
• 16:11
  Speaker 1: and I can begin to define myself in front of voters,
• 16:13
  Speaker 1: because it's gonna be very hard with this many people
• 16:16
  Speaker 1: for any of them to really stand out. And one
• 16:18
  Speaker 1: question I have is how much to the left is
• 16:21
  Speaker 1: the Democratic Party swinging? And do we have a sense
• 16:23
  Speaker 1: of just where what's gaining tractions so far and what
• 16:27
  Speaker 1: that means about the direction of the party. Well, you
• 16:29
  Speaker 1: know that I think the Democrats have as similar dynamic
• 16:33
  Speaker 1: as the as the GOP does, where you've got you
• 16:35
  Speaker 1: know that the left wing of the Democratic Party is
• 16:37
  Speaker 1: pushing for bolder policy proposals in the same way that
• 16:40
  Speaker 1: the populist wing of of the GOP is. I think. UM,
• 16:45
  Speaker 1: I think the Democrats have to figure out what they
• 16:49
  Speaker 1: can put in front of a national block of voters
• 16:51
  Speaker 1: and make palatable. And I think traditionally in national elections
• 16:55
  Speaker 1: that's been the middle of the road kind of program. Uh. However,
• 16:59
  Speaker 1: there's very you know, we're in an era where there's
• 17:01
  Speaker 1: a lot of wealth inequality. UM. I think the Trump
• 17:04
  Speaker 1: presidency has brought intolerance and racial insensitivities to the frow
• 17:09
  Speaker 1: and to the four and I think that that's going
• 17:12
  Speaker 1: to Uh, those are issues that Democrats have to address. So, Tim,
• 17:16
  Speaker 1: I've got a million things to talk about here, but
• 17:18
  Speaker 1: let's shift gears to the Mueller hearings. Uh. It now
• 17:21
  Speaker 1: looks like Mr Mueller is gonna appear before uh Senate,
• 17:25
  Speaker 1: um a car before Congress next month. How important do
• 17:28
  Speaker 1: you think his appearance in his testimony is I think
• 17:31
  Speaker 1: the theatrics of it really matter, Paul. I think most
• 17:34
  Speaker 1: Americans haven't read the Mulla Report. It's a long, dense
• 17:37
  Speaker 1: thing that that we in the media have consumed. Apparently
• 17:40
  Speaker 1: the President hasn't read it um and I think the
• 17:44
  Speaker 1: congressional hearings offer this easily digestible visual way for average
• 17:49
  Speaker 1: Americans across the country to connect with what Muller believes
• 17:53
  Speaker 1: that report was about. And I think the second reason
• 17:57
  Speaker 1: that's important is I think Bill barr Uh really was
• 18:02
  Speaker 1: politically adept and and shrewd about trying to define it
• 18:07
  Speaker 1: before the report even came out, and he had a
• 18:09
  Speaker 1: lot of free air time as Attorney General to define
• 18:12
  Speaker 1: the report in a way that I think wasn't accurate.
• 18:14
  Speaker 1: I think it was designed to protect the president. I
• 18:17
  Speaker 1: don't think bar was hiding the fact that that's what
• 18:19
  Speaker 1: he was up to, but that doesn't mean it was
• 18:22
  Speaker 1: an accurate reflection of what the report said. And so
• 18:24
  Speaker 1: this is a moment for that to happen. I guess
• 18:26
  Speaker 1: that one question I have is there have been a
• 18:29
  Speaker 1: number of surveys that show that the bulk of Americans
• 18:32
  Speaker 1: are sick of the Mala report and aren't necessarily trained
• 18:35
  Speaker 1: on it, and that basically they think that probably President
• 18:38
  Speaker 1: Trump did some things that were wrong, but they kind
• 18:39
  Speaker 1: of just want to move on. And I'm wondering what
• 18:42
  Speaker 1: the political risk is for Harping on this point, even
• 18:45
  Speaker 1: if there is some credence to the view that there
• 18:48
  Speaker 1: that there are aspects of this report that have not
• 18:50
  Speaker 1: been highlighted well, because I think that there's more than
• 18:53
  Speaker 1: politics at work here where a nation of laws, and
• 18:55
  Speaker 1: I think one of the dangerous things that emerged here
• 18:57
  Speaker 1: is that I think the president and his attorney general
• 19:00
  Speaker 1: have defined him and the presidency is above the law.
• 19:03
  Speaker 1: And we live in a country which we believe no
• 19:05
  Speaker 1: one is above the law. And I think that people
• 19:07
  Speaker 1: on both sides of the political aisle should find common
• 19:11
  Speaker 1: ground around that principle, even if it comes at a
• 19:13
  Speaker 1: political cost. We've had other moments in our history where
• 19:16
  Speaker 1: politicians have taken unpopular stands or taken stands on issues
• 19:20
  Speaker 1: of photos don't care about, in order further the good
• 19:23
  Speaker 1: uh the good, the good will and the well being
• 19:26
  Speaker 1: of the nation. So do you think the Democrats will
• 19:29
  Speaker 1: use the Maldar testimony as perhaps a step towards impeachment.
• 19:33
  Speaker 1: I have no idea. You know clearly Nancy Pelosi does
• 19:36
  Speaker 1: not think impeachment is smart politically. I think there's law
• 19:39
  Speaker 1: and order types and and other principle people in the
• 19:43
  Speaker 1: in the party who think that it should happen regardless.
• 19:46
  Speaker 1: I'm wondering, considering the fact that you actually have read
• 19:49
  Speaker 1: through this report, what are the areas that you think
• 19:51
  Speaker 1: are going to get sort of highlighted as breaking the law,
• 19:55
  Speaker 1: moments that could be exactly speaking to what you what
• 19:58
  Speaker 1: you just said, Yeah, I've now read it twice, I'm
• 20:01
  Speaker 1: sorry to say. And um, I think the second half
• 20:04
  Speaker 1: of the report on obstruction of justice is glaring. I
• 20:07
  Speaker 1: think you can't read that report and not believe that
• 20:10
  Speaker 1: there were very definable instances in which the president tried
• 20:14
  Speaker 1: to disrupt the Mueller investigation and uh Jim Comey's investigation,
• 20:20
  Speaker 1: that he tried to pull other people in his orbit
• 20:22
  Speaker 1: to do this. It was very bald faced. I don't
• 20:24
  Speaker 1: think there's any doubt around it. I think the only
• 20:26
  Speaker 1: reason Bob Mueller decided not to indict the president is
• 20:29
  Speaker 1: because he believed that the Justice Department had a rule
• 20:32
  Speaker 1: preventing him from doing so I think the language and
• 20:35
  Speaker 1: the report clearly laid out that he believed it was
• 20:39
  Speaker 1: up to the Congress to decide what to do next,
• 20:41
  Speaker 1: but that he wasn't willing to exonerate the president from
• 20:44
  Speaker 1: having committed no crimes. What would be a successful outcome
• 20:48
  Speaker 1: for the Democrats with with this testimony? What are they
• 20:50
  Speaker 1: really looking for? Uh? You know, I think they're I
• 20:54
  Speaker 1: think they're I don't know. I don't know there's a
• 20:56
  Speaker 1: unified golder. I think there's some that would like to
• 20:58
  Speaker 1: see it, as you asked earlier, Paul out is, you know,
• 21:00
  Speaker 1: to make it a first step on the way towards impeachment.
• 21:03
  Speaker 1: I think there's others that would be satisfied for it
• 21:06
  Speaker 1: simply to raise doubts among the electorate about the president
• 21:10
  Speaker 1: and his ethics and the way he operates. How much
• 21:14
  Speaker 1: support is there from the Republicans to defend him regardless
• 21:17
  Speaker 1: of of what comes out. I think there's like one
• 21:20
  Speaker 1: thousand percent support from the Republicans to get in the
• 21:24
  Speaker 1: way of this. Yeah, I think that they I think
• 21:27
  Speaker 1: he's already got you know, last night, Mark Meadows went
• 21:29
  Speaker 1: on Fox and said that if Bob Mueller thinks he's
• 21:32
  Speaker 1: going to come in here and uh not get cross
• 21:35
  Speaker 1: examined by us. You know, he's got another thing coming
• 21:38
  Speaker 1: as if you know Bob Mueller, as a veteran prosecutor,
• 21:40
  Speaker 1: would really worry about a junior congressman's ability to cross
• 21:43
  Speaker 1: examine him in a public forum. I don't think Bob
• 21:46
  Speaker 1: Mueller will break a sweat during that hearing. Uh, but
• 21:49
  Speaker 1: clearly Mark Meadows, Jim Jordan, there's other people who have
• 21:52
  Speaker 1: argued beyond the report, I think to defend the president.
• 21:56
  Speaker 1: Tim O'Brien, thank you so much. He has a way
• 21:59
  Speaker 1: of phrasing than Tim O'Brien is. Is really a word
• 22:02
  Speaker 1: smith Beyond words Smith, he's fabulous. Thank you for joining
• 22:05
  Speaker 1: us to my Brian executive at her Bloomberg Opinion, Joining
• 22:08
  Speaker 1: us on our Bloomberg Interactive Broker studio. If you look
• 22:24
  Speaker 1: at home builder stocks, they have taken quite a fall,
• 22:27
  Speaker 1: with the biggest to day decline in the subsector of
• 22:31
  Speaker 1: the SMP five hundred since December. The question is how
• 22:34
  Speaker 1: far have we gotten already in the slowdown in the
• 22:37
  Speaker 1: housing market? Joining us now Logan Motor sham Me. He's
• 22:40
  Speaker 1: senior loan officer at AMC Lending Group. Joining US from California, Logan,
• 22:44
  Speaker 1: thank you so much for joining us. I want to
• 22:47
  Speaker 1: start there. How concerning is the slowing housing data that
• 22:51
  Speaker 1: we're getting. How concerning is it to you? Well? Last year,
• 22:55
  Speaker 1: towards the end of the new homesale market was flashing
• 22:59
  Speaker 1: your recession, you know, uh, the builder's confidence index was collapsing,
• 23:04
  Speaker 1: monthly supply spikes up to levels in and new home
• 23:08
  Speaker 1: sales were trending negative. So I was, you know, calling
• 23:11
  Speaker 1: for Hey, this is not a good data line. But
• 23:14
  Speaker 1: back then I said, new home sales are still too low.
• 23:16
  Speaker 1: Don't call a peak yet. We should be able to
• 23:18
  Speaker 1: get back, uh, get monthly supplied back down to below
• 23:22
  Speaker 1: six and a half months. Now. We've done that this year,
• 23:24
  Speaker 1: and new home sales are still being my estimates for
• 23:27
  Speaker 1: the year. But we simply have too much supply of
• 23:30
  Speaker 1: new homes for the builders to really start accelerating construction,
• 23:34
  Speaker 1: especially on single family homes now. And I think that's
• 23:37
  Speaker 1: the problem. And I think the market is starting to
• 23:39
  Speaker 1: get a get a whiff of this. That if if
• 23:41
  Speaker 1: we are seven days away from really having the longest
• 23:44
  Speaker 1: economic expansion ever with mortgage rates under five per cent
• 23:47
  Speaker 1: since two thousand eleven, and we have a really hard
• 23:50
  Speaker 1: time pushing housing starts to above one point four million
• 23:53
  Speaker 1: on permits. There's a problem for the builders, not just now,
• 23:57
  Speaker 1: but going out for maybe two or three more decades.
• 23:59
  Speaker 1: Can they really provide a product that would facilitate enough
• 24:03
  Speaker 1: demand to keep monthly supply low enough for them to
• 24:06
  Speaker 1: make money and to for for housing starts to keep
• 24:09
  Speaker 1: on growing at an acceptable rate. And I've always argued this,
• 24:13
  Speaker 1: they cannot compete with the bigger existing homesale marketplates. So look,
• 24:17
  Speaker 1: I want to get a sense of kind of the
• 24:19
  Speaker 1: new home sales market for versus existing how's that shaping
• 24:22
  Speaker 1: up right now? Even though existing home sales are down
• 24:26
  Speaker 1: this year, which was my poecast sales are down a
• 24:28
  Speaker 1: little bit, inventory up a little bit, it's still out
• 24:30
  Speaker 1: performing as it has this entire cycle. New home sales
• 24:34
  Speaker 1: basically had the worst demand curve ever in US history.
• 24:38
  Speaker 1: So existing home sales is doing better. In my mind,
• 24:41
  Speaker 1: new home sales has done one positive things. It brought
• 24:43
  Speaker 1: monthly supply back down to below six and a half months.
• 24:46
  Speaker 1: UH sales trends are still running a positive But if
• 24:50
  Speaker 1: we get above six and a half months again, a
• 24:53
  Speaker 1: monthly supply. That is a red flag. And this is
• 24:55
  Speaker 1: one of the reasons, and we talked about this last
• 24:57
  Speaker 1: year on the show. Why housing starts in twenty nine
• 25:00
  Speaker 1: is a question mark. We're still running negative year or
• 25:02
  Speaker 1: year and housing starts, but comps on all housing datas
• 25:06
  Speaker 1: are going to get a lot easier in the second
• 25:07
  Speaker 1: half of the year, so things should look a little
• 25:10
  Speaker 1: bit better on the year of year averages. But simply
• 25:13
  Speaker 1: there's not enough demand in the new home sales market
• 25:16
  Speaker 1: to warrant more construction, and the builders are more cautious
• 25:20
  Speaker 1: now than ever any time in the cycle. I'm trying
• 25:23
  Speaker 1: to understand how this bleeds through to housing values going forward,
• 25:27
  Speaker 1: because we have seen a decline in certain coastal cities
• 25:30
  Speaker 1: due to the salt deductions and other issues that might
• 25:34
  Speaker 1: have arisen, and just in general inflation and valuations there.
• 25:37
  Speaker 1: But what about throughout the nation, given the fact that
• 25:40
  Speaker 1: market rates are so low and heading lower adjusting to inflation,
• 25:46
  Speaker 1: home prices should be flattened. Some markets they are negative.
• 25:50
  Speaker 1: There's there are homeowners that bought their homes last year
• 25:53
  Speaker 1: and let's say early in spring that are down year
• 25:55
  Speaker 1: over year. This to me is a very healthy saw
• 26:00
  Speaker 1: of the housing market, the existing home sales market actually
• 26:03
  Speaker 1: performing this function. You know, a little bit demand weakness,
• 26:06
  Speaker 1: a little bit supply increase in certain areas where the
• 26:09
  Speaker 1: supply is actually more the rate of growth that's flowing down.
• 26:12
  Speaker 1: In some cases, people are are down in your rear.
• 26:14
  Speaker 1: I think that's perfectly fine. I think so many people
• 26:17
  Speaker 1: are in this housing bubble two point oh mentality that
• 26:20
  Speaker 1: they think that there's going to be just another crash
• 26:23
  Speaker 1: in prices. That's not how it works. You would need
• 26:26
  Speaker 1: to really see a significant demand decrease from where sales
• 26:29
  Speaker 1: are right now, even worse than the housing bubble and
• 26:33
  Speaker 1: crash to get prices to really accelerate down on a
• 26:36
  Speaker 1: national basis. So I think we're okay there. I think
• 26:38
  Speaker 1: that's what's happening with in the home price market is
• 26:41
  Speaker 1: positive in my mind. Uh that meeting sales prices for
• 26:45
  Speaker 1: the new homesale market following is a lot of that
• 26:48
  Speaker 1: has to do more with the makeshift of smaller homes
• 26:51
  Speaker 1: being part of the sales mix we have. We've seen
• 26:53
  Speaker 1: some discounting by the builders, but nothing dramatic yet. I
• 26:57
  Speaker 1: think that's where you, if you, if you really want housing,
• 26:59
  Speaker 1: start to really kick up to provide more homes out there.
• 27:03
  Speaker 1: You need. You simply just need a lot more new
• 27:05
  Speaker 1: home sales now than any other time in this cycle.
• 27:08
  Speaker 1: Look and are there any regions of the country that
• 27:10
  Speaker 1: are surprising you with maybe with a little bit on
• 27:13
  Speaker 1: the downside in terms of weakness. No, because the coastal
• 27:17
  Speaker 1: areas in the high price here is whenever mortgage rates
• 27:19
  Speaker 1: get higher, uh, they see a demand hit. And I'm
• 27:24
  Speaker 1: not a big fan of the salt deduction is really
• 27:27
  Speaker 1: impacting the coastal areas that we just mortgage rates got
• 27:30
  Speaker 1: up higher. This similar thing happened in actually uh and
• 27:35
  Speaker 1: here in California, sales are a little bit higher than
• 27:37
  Speaker 1: what they were in when when we saw the last
• 27:40
  Speaker 1: dip and there was no solved problem back then. Uh
• 27:42
  Speaker 1: So right now, because mortgage rates are coming back down,
• 27:45
  Speaker 1: it stopped the supply bleeding. You know, we're we're starting
• 27:48
  Speaker 1: to see a little bit more demand pick up, take
• 27:50
  Speaker 1: off a little bit of a supply. But again, these
• 27:52
  Speaker 1: coastal areas, whenever mortgage rates go up to about four
• 27:56
  Speaker 1: and a half to five percent, they see an impact
• 27:58
  Speaker 1: on demand. And that should be the case for sometime now. Look, Multasha,
• 28:04
  Speaker 1: thank you so much for joining us logan as a
• 28:06
  Speaker 1: senior loan officer for the A m C Lending Group
• 28:09
  Speaker 1: based in Irvine, California. Thanks for listening to the Bloomberg
• 28:13
  Speaker 1: P and L podcast. You can subscribe and listen to
• 28:15
  Speaker 1: interviews at Apple Podcasts or whatever podcast platform you prefer.
• 28:19
  Speaker 1: I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm
• 28:21
  Speaker 1: Lisa abram Woit's I'm on Twitter at Lisa abram Woits
• 28:24
  Speaker 1: one before the podcast. You can always catch us worldwide.
• 28:27
  Speaker 1: I'm Bloomberg Radio.