Latest / Bloomberg Intelligence / Dislocation In Credit Spreads Poses Risk For Market: Booth

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Dislocation In Credit Spreads Poses Risk For Market: Booth · Bloomberg Intelligence

• 0:02
  Speaker 1: Welcome to the Bloomberg Penel Podcast. I'm Paul Swinge. You,
• 0:05
  Speaker 1: along with my co host Lisa Brahma wits each day
• 0:07
  Speaker 1: we bring you the most noteworthy and useful interviews for
• 0:10
  Speaker 1: you and your money. Whether at the grocery store or
• 0:12
  Speaker 1: the trading floor, find a Bloomberg penl podcast on Apple
• 0:15
  Speaker 1: podcast or wherever you listen to podcasts, as well as
• 0:17
  Speaker 1: at Bloomberg dot com. Just to give you a sense,
• 0:20
  Speaker 1: we are seeing a bit of those gains being paired,
• 0:22
  Speaker 1: with all the three main indexes up about seven tenths
• 0:25
  Speaker 1: of a percent. Heading into we see a consensus forming
• 0:30
  Speaker 1: that the fundamental economy, we'll be fine, We'll be strong,
• 0:33
  Speaker 1: We'll we'll continue to chug along, and we'll allow you
• 0:35
  Speaker 1: to clip coupons. Perhaps not deliver the same kinds of
• 0:38
  Speaker 1: returns we saw in twenty nineteen, but really the question
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  Speaker 1: is what could go wrong? And Daniel D. Martino Booth
• 0:45
  Speaker 1: is joining us now here in our interactive broker studio.
• 0:47
  Speaker 1: She's chief executive officer and chief strategist for Quill Intelligence, LLC,
• 0:51
  Speaker 1: form advisor to the Dallas Federal Reserve, as well as
• 0:54
  Speaker 1: a Bloomberg opinion contributor. UH So, Danielle, what are you
• 0:57
  Speaker 1: seeing when it comes to the fundamental economy and signs
• 1:01
  Speaker 1: that the consensus is right that we're just going to
• 1:03
  Speaker 1: chug along through Well, I think if you, if you
• 1:06
  Speaker 1: study the headlines, everything looks really really good on the surface. Um.
• 1:11
  Speaker 1: But having worked at the FED for as long as
• 1:13
  Speaker 1: I did, we pay very close attention we I know
• 1:17
  Speaker 1: Powell pays close that he won't say it in public,
• 1:19
  Speaker 1: but he pays close attention to revisions to data. And
• 1:23
  Speaker 1: what we've seen so far through July with the preliminary
• 1:26
  Speaker 1: data is that we've had fifteen consecutive months of downward
• 1:28
  Speaker 1: revisions again through July. But every time we get three
• 1:31
  Speaker 1: months of data out, we tend to see another three
• 1:34
  Speaker 1: months of rolling downward revisions. And the Bureau of Labor
• 1:36
  Speaker 1: Statistics will will tell you that they have a very
• 1:39
  Speaker 1: hard time adjusting at economic inflection points. And that's why
• 1:42
  Speaker 1: at QUILL we've decided to try and look in the
• 1:45
  Speaker 1: weeds at other types of indicators to tell us, hey,
• 1:49
  Speaker 1: if non farm perils is the most lagging of all
• 1:51
  Speaker 1: economic indicators, what can we look at this real time? All? Right? So,
• 1:55
  Speaker 1: when we think about the economy, I think most people
• 1:57
  Speaker 1: are just falling back on the fact that the consumers strong.
• 2:00
  Speaker 1: They look at the employment numbers. How do you think
• 2:03
  Speaker 1: about the employment numbers? At QUILL, So we try every
• 2:07
  Speaker 1: week to track two things in the jobless claims data,
• 2:11
  Speaker 1: because it's very timely comes out on a weekly basis. Um,
• 2:14
  Speaker 1: we follow the number of states in the country, uh
• 2:17
  Speaker 1: that have rising jobless claims. So we're looking at the
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  Speaker 1: breadth um how far across the nation or not um
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  Speaker 1: jobless claims are rising and uh so far we're seeing
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  Speaker 1: about fifty, so over fifty of the states have rising
• 2:30
  Speaker 1: initial jobless claims. And then we also study very closely
• 2:33
  Speaker 1: continuing claims, knowing that just because you apply for unemployment
• 2:37
  Speaker 1: insurance does not mean that you receive it. If you
• 2:39
  Speaker 1: look at not seasonally adjusted continuing jobless claims, you're actually
• 2:43
  Speaker 1: looking at hard weekly data on the number of Americans
• 2:46
  Speaker 1: currently collecting unemployment insurance. We we know Thanksgiving was a
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  Speaker 1: very noisy um contributor to the data, so we've adjusted
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  Speaker 1: it on a fifty three week year over year basis,
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  Speaker 1: and what we found was ten consecutive weeks of rising
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  Speaker 1: continuing this claims in this country. That's a red flag
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  Speaker 1: to me. All right, so what does that mean? Translate that, Well,
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  Speaker 1: what we're seeing is an increasing trend of what the
• 3:09
  Speaker 1: CFO Duke survey said yesterday that fifty percent of CFOs
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  Speaker 1: are in a cost cutting mode. A cost cutting mode
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  Speaker 1: is a polite way of saying we're trimming head count.
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  Speaker 1: It's not, again, something we're seeing in the non farm
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  Speaker 1: payalle unemployment data, but it's definitely something that is being
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  Speaker 1: picked up in the weekly data. And actually to that point,
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  Speaker 1: we did get jobless claims today that rose to two
• 3:31
  Speaker 1: hundred thousand versus the estimate of two thousand. So, Paul,
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  Speaker 1: we are seeing that exactly. Well, yes, but I have
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  Speaker 1: a really hard time with these two weeks. I mean
• 3:40
  Speaker 1: you kind of have to kind of have to marry
• 3:41
  Speaker 1: the two of them because thanks getting again is so
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  Speaker 1: noisy that you can't really trust this big number either.
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  Speaker 1: All Right. So, given that we may be seeing, maybe
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  Speaker 1: from some of your data, a little bit slowing on
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  Speaker 1: the consumer side with the employment, what do you do
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  Speaker 1: on the on your kind of when you think about
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  Speaker 1: the credit markets where you're allocating so um, you know it. Obviously,
• 4:02
  Speaker 1: I live on Twitter and the the mantra on Twitter
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  Speaker 1: is it's only energy. Uh So I got so tired
• 4:09
  Speaker 1: of hearing that I kind of dug in the weeds.
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  Speaker 1: And if you look at the Triple C universe, which
• 4:13
  Speaker 1: has refused to come in and this has been you know,
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  Speaker 1: they're like, it's just an aberration, it's just energy. So
• 4:19
  Speaker 1: they're the Triple C universe is trading. So that's over
• 4:24
  Speaker 1: half of the Triple C universe is trading. It less
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  Speaker 1: than nine cents on the dollar. So of that universe
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  Speaker 1: is energy? What's the other so other stuff like not energy.
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  Speaker 1: We've seen a lot of retails. We've seen retail, We've
• 4:38
  Speaker 1: seen some some some tensions in communications. Um, we've seen
• 4:42
  Speaker 1: some chemical downgrades so cyclical, but also retail as well.
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  Speaker 1: What does this mean that we're going to see something
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  Speaker 1: broader in or does this just mean frankly that there
• 4:53
  Speaker 1: is discretion and markets and people have been disciplined during
• 4:57
  Speaker 1: this rally. Well, so you would want for an vests
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  Speaker 1: to be discerning and looking at companies that might, oh,
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  Speaker 1: I don't know, go from Triple C to as for applebys,
• 5:06
  Speaker 1: for boy c'es, for cats, for default, So you would
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  Speaker 1: want for them to be discerning and and for dog
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  Speaker 1: but at the same time, you can't just look at
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  Speaker 1: the data and say it's just an energy thing, because
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  Speaker 1: it's so much broader than that. That being said, I'm
• 5:20
  Speaker 1: going to talk out of the other side of my mouth.
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  Speaker 1: The entire Triple C universe, a undred and seventy one
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  Speaker 1: billion dollars worth of debt, is only fifteen percent energy.
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  Speaker 1: So we're definitely seeing a you know, twice the percentage
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  Speaker 1: in terms of deeply distressed paper being in the energy sector.
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  Speaker 1: And from everything that we know from the eleven billion
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  Speaker 1: dollars Chevron right down yesterday, there's still a lot of
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  Speaker 1: bad things going on in the shale complex. And you
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  Speaker 1: know old melent of my buddy over Bank America, Meryl,
• 5:49
  Speaker 1: you know, he's been in high yield forever. He anticipates
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  Speaker 1: that by the end of given the seven percent trailing
• 5:56
  Speaker 1: twelve month default rate and energy, that we will be
• 5:58
  Speaker 1: back up at when he's sixteen double digit default rates
• 6:02
  Speaker 1: or broadly defined, Are you seeing heightened credit quality issues
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  Speaker 1: in the marketplace? If not, do you think we might
• 6:08
  Speaker 1: see them? I think that I think that after the
• 6:12
  Speaker 1: turn of the year, after after portfolio managers have finished
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  Speaker 1: all their window addressing that we are either going to
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  Speaker 1: see double bees uh, double bee spreads rise in other
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  Speaker 1: in other words, credit stress spreading, or we're gonna see
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  Speaker 1: triple cs spreads come down. It's got to be one
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  Speaker 1: of the other, because we've never had a dislocation of
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  Speaker 1: this persistence and and and and length in time. What
• 6:31
  Speaker 1: about loans, We've seen, for example, one prediction I believe
• 6:35
  Speaker 1: out of ubs that leverage loans will return a negative
• 6:39
  Speaker 1: return next year, Felt declined, lunch two per cent. Do
• 6:42
  Speaker 1: you agree? Uh? But yes. One of my favorite credit
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  Speaker 1: rating high yield analysts will remain unnamed, basically said, look, Danielle,
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  Speaker 1: if you really want to go to the quick and
• 6:51
  Speaker 1: dirty on this, if you can access the high yeld
• 6:52
  Speaker 1: bond market, go to the leverage loan market. They'll they'll
• 6:54
  Speaker 1: loan your money. So everything I'm saying about triple c's
• 6:57
  Speaker 1: you need to downgrade further if you're talking about the
• 7:00
  Speaker 1: leverage loan market. And we've and Molly Smith has done
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  Speaker 1: a fabulous job reporting on this, we've definitely seen more
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  Speaker 1: than just a few instances of leverage loans blowing up.
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  Speaker 1: And when they blow up, because there's no covenants assigned
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  Speaker 1: to them, they gap down very quickly, So I think
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  Speaker 1: that's going to affect recovery rates um in the next
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  Speaker 1: credit downturn. Daniel D. Martino Booth, thank you so much
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  Speaker 1: for joining us. We really appreciate it. Daniel's CEO and
• 7:22
  Speaker 1: director of intelligence for Quill Intelligence UH and also a
• 7:25
  Speaker 1: former advisor of the Dallas Federal Reserve. Any Bloomberg opinion columns,
• 7:29
  Speaker 1: you can read all of her work, and that of
• 7:30
  Speaker 1: all the Bloomberg opinion on Bloomberg dot com, slash Opinion
• 7:34
  Speaker 1: or on the terminal O P I n GO. I
• 7:36
  Speaker 1: will say it raises an interesting question because it sort
• 7:39
  Speaker 1: of raises a challenge to the consensus heading into and
• 7:42
  Speaker 1: this was sort of my takeaway is that we have
• 7:45
  Speaker 1: this belief in stability, despite the political risk, despite the
• 7:50
  Speaker 1: fact that we have a number of headwinds to growth,
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  Speaker 1: and if that gets upended, that upends the vast consensus
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  Speaker 1: across Wall Street. And there are some warning signs that
• 8:00
  Speaker 1: there is not necessarily the strength to sort of keep
• 8:03
  Speaker 1: chugging through some of the uncertainty that could come up. Yeah,
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  Speaker 1: absolutely right, And Daniel kind of calling out the labor market,
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  Speaker 1: you should be again the print that we just had
• 8:11
  Speaker 1: this week on the labor market front was very strong,
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  Speaker 1: and the market took that very in a bullish light,
• 8:17
  Speaker 1: and certainly the Fed did saying that the economy is
• 8:20
  Speaker 1: generally in very good shape. This is Bloomberg. I think
• 8:37
  Speaker 1: this is going to be my favorite game to play,
• 8:40
  Speaker 1: heading into your end, which is, let's name the consensus
• 8:44
  Speaker 1: and then decide whether or not we think it is
• 8:47
  Speaker 1: likely or not. Very red Holds joining us here to
• 8:50
  Speaker 1: play the game with us. Do do do do? Do Do?
• 8:52
  Speaker 1: Do do? We should have like a soundtrack for alright.
• 8:55
  Speaker 1: Very red Holts, Bloomberg opinion columnist and host of Masters
• 8:58
  Speaker 1: and Business on Bloomberg Radio, also founder of Redhol's Wealth Management,
• 9:01
  Speaker 1: joining us here in our interactive Broker Studios first consensus,
• 9:05
  Speaker 1: the economic fundamentals will stay strong and it will be
• 9:08
  Speaker 1: a coupon clipping year. So we have the industrial sector
• 9:13
  Speaker 1: in a recession already, and admittedly that's a much smaller
• 9:16
  Speaker 1: part of the economy than it used to be. Um
• 9:20
  Speaker 1: I hate the phrase uncertainty. I think it's a completely misused,
• 9:24
  Speaker 1: but you do have company executives saying we don't know
• 9:28
  Speaker 1: how the trade and tariff war is gonna be resolved.
• 9:30
  Speaker 1: We don't know where our supply chain is going to
• 9:33
  Speaker 1: be hit next, and that causes a slowdown in all
• 9:38
  Speaker 1: sorts of capital investment, from from trucks and rails to
• 9:41
  Speaker 1: new plants and ships. And it's a self inflicted wound.
• 9:45
  Speaker 1: And as long as this just continues to as long
• 9:47
  Speaker 1: as Lucy keeps pulling the football away and Charlie Brown
• 9:51
  Speaker 1: keeps being a soccker for it, two feet forward, two
• 9:53
  Speaker 1: feet backwards, we've made no forward progress with that. So,
• 9:56
  Speaker 1: you know, an okay year, maybe two to and a
• 9:59
  Speaker 1: quarter g g d P. Maybe towards the end of
• 10:02
  Speaker 1: the year, things start to soften. Hard to tell much
• 10:04
  Speaker 1: more than a quarter or two out. So this is
• 10:06
  Speaker 1: in other words, yes, he agrees with the consensus. Is
• 10:09
  Speaker 1: that is that the consensus? I honestly don't know. Yeah,
• 10:12
  Speaker 1: all right, another call here. The short term fed repo
• 10:16
  Speaker 1: market could in fact be a big problem for the markets.
• 10:19
  Speaker 1: You know, that's the silliest thing I hear everybody is is,
• 10:22
  Speaker 1: you know, the old line is to a man who's
• 10:24
  Speaker 1: only tool is a hammer, everything looks like a nail.
• 10:27
  Speaker 1: To the people who missed the financial crisis in oh
• 10:30
  Speaker 1: seven or eight or nine, and now they have a
• 10:32
  Speaker 1: little PTSD and they're just fearful of the next crisis.
• 10:36
  Speaker 1: They're scared of their own shadow. Everything they see is
• 10:41
  Speaker 1: the next book, you man, that's going to cause the
• 10:42
  Speaker 1: next market to get slashed and half and so everything
• 10:46
  Speaker 1: becomes We had a liquidity price crisis during the during
• 10:51
  Speaker 1: the O eight or nine period, so now everything else
• 10:53
  Speaker 1: is going to lead to a liquidity crisis. I first
• 10:56
  Speaker 1: of all, I don't imagine the FED would tolerate more
• 10:59
  Speaker 1: than a little bit of a problem. And you saw
• 11:01
  Speaker 1: their last response when things got gummed up. This is
• 11:04
  Speaker 1: a problem with the plumbing, not a systemic problem. Admittedly
• 11:10
  Speaker 1: was a plumbing problem that spun out of the out
• 11:13
  Speaker 1: of control. But this just doesn't look or smell like,
• 11:16
  Speaker 1: you know, an O eight o nine disaster. We should
• 11:19
  Speaker 1: have like a noise for rejected. It's rejected, all right.
• 11:23
  Speaker 1: The television show that does that already, I don't know
• 11:25
  Speaker 1: if it's ratings. Well. I want to get to the
• 11:28
  Speaker 1: next issue, which is developing markets versus developed markets. Developing
• 11:32
  Speaker 1: markets have that people expect them to perform better pretty
• 11:36
  Speaker 1: much across as a classes next year versus developed ones. Well,
• 11:40
  Speaker 1: E M is having a fantastic two day run. This
• 11:44
  Speaker 1: is the best two day run we've seen in emerging
• 11:46
  Speaker 1: markets in a long time. The gap on valuations between
• 11:51
  Speaker 1: the US and the rest of the world, the US
• 11:53
  Speaker 1: and and UM, e M or we won't even talk
• 11:57
  Speaker 1: about frontier markets is as large as it's ever been.
• 12:02
  Speaker 1: And if you believe in mean reversion, you would say
• 12:06
  Speaker 1: lighten up on the US by emerging market. However, you
• 12:09
  Speaker 1: could have said the same thing every year for the
• 12:11
  Speaker 1: past five years, and you would have been wrong. And
• 12:15
  Speaker 1: full disclosure, I've been wrong about this for a couple
• 12:18
  Speaker 1: of years. My only caveat is I've said I will
• 12:21
  Speaker 1: look like an idiot for two or three years and
• 12:24
  Speaker 1: then look like a genius. So now we're in year
• 12:26
  Speaker 1: two of looking like an idiot recommending e M. Who
• 12:30
  Speaker 1: knows how much longer I could go. We're starting to
• 12:33
  Speaker 1: see signs that the rest of the world is catching
• 12:36
  Speaker 1: up to the U. S okay, so that's with consensus.
• 12:39
  Speaker 1: I think so well. I was early wrong early, and
• 12:43
  Speaker 1: and as all traders know, early equals wrong. UM. But
• 12:46
  Speaker 1: I'm you know, I'm doubling down. My cognitive dissonance doesn't
• 12:49
  Speaker 1: see anything separate from what I've been seeing. The US
• 12:52
  Speaker 1: is fully valued I won't even say richly value. The
• 12:55
  Speaker 1: rest of the world is pretty cheap. If you want
• 12:57
  Speaker 1: to buy value, you look out side of the US.
• 12:59
  Speaker 1: If you want by momentum straight to the sp FED
• 13:03
  Speaker 1: is gonna do nothing in so I don't buy. So
• 13:08
  Speaker 1: here's the consensus. The consensus is quantitative tightening and rising
• 13:14
  Speaker 1: interest rates throttled back the economy and that's what caused
• 13:17
  Speaker 1: the Q drop. And I think that's utter nonsense. It
• 13:22
  Speaker 1: is a classic after the fact explanation that nobody said, Oh,
• 13:27
  Speaker 1: by the way, we're too tight and we're gonna see
• 13:29
  Speaker 1: a big drop. The president, Um, well he's he's been
• 13:32
  Speaker 1: saying that since the day he gets worn in um
• 13:35
  Speaker 1: after saying Janet Yellen should be ashamed of our low
• 13:38
  Speaker 1: rates previously. So I don't believe that we're too tight.
• 13:42
  Speaker 1: We are still very close to emergency footing. Um. I'm
• 13:46
  Speaker 1: not a big fan of higher rates, but I do
• 13:49
  Speaker 1: like the idea of the FED normalizing rates, normalizing their
• 13:52
  Speaker 1: balance sheets. I've been saying this for I don't know
• 13:56
  Speaker 1: seven years. Now it's time for the FED to stop
• 13:58
  Speaker 1: their extraordinary acommodation, which effectively has the result of driving
• 14:05
  Speaker 1: asset prices higher and not a whole lot more. No,
• 14:08
  Speaker 1: one is not buying a house, not buying a car,
• 14:10
  Speaker 1: not buying building a plan because rates fed fund rates
• 14:13
  Speaker 1: would go up to three or three and a half percent.
• 14:16
  Speaker 1: Borry Dholts, thanks so much for joining us and playing
• 14:18
  Speaker 1: our game with us. Bloomberg Opinion columns and host of
• 14:20
  Speaker 1: Masters in Business that's on Bloomberg Radio. He's also a
• 14:23
  Speaker 1: founder of Ridholts Wealth Management. Joining us here in our
• 14:26
  Speaker 1: Bloomberg Interactive Broker's studio. Consensus throw down, consensus, throw it
• 14:30
  Speaker 1: down like a bit. We'll take that to Anthony from Sparta,
• 14:33
  Speaker 1: see what he thinks. So we'll see. A couple of
• 14:51
  Speaker 1: days ago, the House passed the U s m c
• 14:54
  Speaker 1: A bill Mexico Canada, the US that trade build the
• 14:58
  Speaker 1: new NAFTA if you will. The question is now, when
• 15:00
  Speaker 1: will the Senate approve it? As well? To get some details,
• 15:04
  Speaker 1: we welcome Shannon O'Neil. She's a Senior Fellow for Latin
• 15:07
  Speaker 1: American Studies at the Council on Foreign Relations and also
• 15:10
  Speaker 1: a Bloomberg Opinion calumnist. Shannon, thanks so much for joining us.
• 15:13
  Speaker 1: I guess there's some conflicting signals from Senator to Mitch
• 15:15
  Speaker 1: McConnell about whether this UMS m c A bill can
• 15:19
  Speaker 1: get ratified in the Senate this year or is it
• 15:22
  Speaker 1: gonna be pushed into next year. What are your thoughts, Well,
• 15:25
  Speaker 1: he has said that he wants to wait until after
• 15:28
  Speaker 1: impeachment proceedings go far, which would be in the new year.
• 15:31
  Speaker 1: And also he hasn't been personally a big fan of
• 15:34
  Speaker 1: the changes to the to NAFTA, the new NAPTA called
• 15:37
  Speaker 1: the U S m c A UM but whether it
• 15:39
  Speaker 1: will probably push them too next year. But I would
• 15:42
  Speaker 1: highly doubtful that the Republicans would turn down this bill,
• 15:45
  Speaker 1: especially since the Democrats and the Trump administration have finally
• 15:48
  Speaker 1: gotten to a guess, Shannon, let's talk about the winners
• 15:51
  Speaker 1: and the losers from this steal. Can you give us
• 15:54
  Speaker 1: a sense of what we've learned so far as people
• 15:56
  Speaker 1: pass through the details. Well, I think there are political
• 16:00
  Speaker 1: winners on both side Trump administration had he Trump during
• 16:04
  Speaker 1: his campaign said he was going to renegotiate NAFTA, and
• 16:07
  Speaker 1: lo and behold, he has renegotiated NAFTA. On the same time,
• 16:10
  Speaker 1: the Democrats have wins there. They said that they would
• 16:13
  Speaker 1: fix the bill that they weren't on board with what
• 16:15
  Speaker 1: had originally negotiated, and they got, particularly in Mexico but
• 16:19
  Speaker 1: also Canada to move on something so they can go
• 16:22
  Speaker 1: back and say they have a win on labor issues
• 16:24
  Speaker 1: and environmental issues and the like. UM. As we look
• 16:27
  Speaker 1: at the U S economy, you know, I think American
• 16:29
  Speaker 1: companies in general, there's there's some wins there. Definitely Internet companies,
• 16:34
  Speaker 1: Amazon dot Com there are wins. They're both because you'll
• 16:37
  Speaker 1: see more e commerce going to the other countries. You
• 16:40
  Speaker 1: have the U taxes of what they called diminimus, the
• 16:43
  Speaker 1: amount of money you are allowed to send duty free
• 16:45
  Speaker 1: has increased in both Canada and Mexico. And also the
• 16:48
  Speaker 1: internet and tech companies fought back some changes that were
• 16:52
  Speaker 1: suggested by Democrats to uh to UM increase sort of
• 16:56
  Speaker 1: their obligations in terms of responsibility about what goes back
• 16:59
  Speaker 1: and forth US the borders. So internet side are winners
• 17:03
  Speaker 1: the losers. Actually, the biggest loser was the pharmaceutical industry. UM.
• 17:07
  Speaker 1: Things that they had wanted in U S. M c
• 17:10
  Speaker 1: A that had been in the first round got stripped
• 17:11
  Speaker 1: out in the second round. So I think they came
• 17:13
  Speaker 1: out the biggest losers this time around. And what looks
• 17:15
  Speaker 1: like we'll pass through the US House and Senate Shannon.
• 17:19
  Speaker 1: Some critics are suggesting that this is you know, much
• 17:21
  Speaker 1: ado about nothing, that the new NAPTA is not a
• 17:24
  Speaker 1: whole lot different from the existing NAFTA, and all we've
• 17:28
  Speaker 1: done has taken a year here to kind of you know,
• 17:30
  Speaker 1: banning about and get political and but nothing really changed.
• 17:34
  Speaker 1: Is that parity think? So there are some updates in
• 17:39
  Speaker 1: this in this version of it. And you NAFTA was
• 17:42
  Speaker 1: passed back in the world was a really different place
• 17:45
  Speaker 1: back then. So this version has different regulations for e
• 17:49
  Speaker 1: commerce and and digital flows of information that wasn't even
• 17:52
  Speaker 1: on the horizon really back in, so that is new.
• 17:55
  Speaker 1: We see updates in intellectual property right, some other types
• 17:59
  Speaker 1: of things that most of which were frankly included in
• 18:02
  Speaker 1: the t PP, the Transpacific Partnership, which was a big
• 18:05
  Speaker 1: Obama administration initiative with the countries in Asia as well
• 18:08
  Speaker 1: as Latin America. UM so some of that stuff is
• 18:11
  Speaker 1: new to NAFTA. Uh. Some of the things that just
• 18:14
  Speaker 1: came in this latest version sort of round three in
• 18:17
  Speaker 1: terms of labor oversight and enforcement and some environmental issues.
• 18:22
  Speaker 1: Those are a step up from the first NAFTA, so
• 18:25
  Speaker 1: I think there are changes there, but overall, what all
• 18:28
  Speaker 1: of this negotiation has done is kept the agreement between
• 18:31
  Speaker 1: the three countries, the United States, Canada, and Mexico to
• 18:34
  Speaker 1: continue trading and working with each other. When we heard
• 18:37
  Speaker 1: the press conference announcing this deal and that all parties
• 18:41
  Speaker 1: were going to be signing onto it, UH, there was
• 18:44
  Speaker 1: discussion about some heated phone calls with screaming on both
• 18:48
  Speaker 1: ends of negotiators, particularly with US and Mexico. I'm wondering,
• 18:52
  Speaker 1: after these negotiations are basically done and dusted, what's the
• 18:57
  Speaker 1: relationship going to be like between the US and Mexic go. Well,
• 19:02
  Speaker 1: when I've talked with people who have negotiated trade agreements
• 19:04
  Speaker 1: with all sorts of countries, it's there's always a few
• 19:07
  Speaker 1: moments where heated debate happen. So so I think the
• 19:10
  Speaker 1: screaming was not totally out of the UH the ordinary
• 19:13
  Speaker 1: when people get to this. But as we look, especially
• 19:16
  Speaker 1: at US Mexico relations, the trade issues have now been
• 19:20
  Speaker 1: taken off the table, and I think those in Mexico
• 19:22
  Speaker 1: are breathing a huge sigh of relief. Companies that operate
• 19:25
  Speaker 1: on both sides of the border at least now they
• 19:26
  Speaker 1: know what the rules are going to be going forward.
• 19:29
  Speaker 1: But we have other issues on the agenda with Mexico
• 19:32
  Speaker 1: and the United States, and the two biggest ones are migration,
• 19:35
  Speaker 1: not just Mexicans coming north, but particularly Central Americans that
• 19:38
  Speaker 1: have been coming through Mexico and coming to the United
• 19:41
  Speaker 1: States seeking asylum from violence and other problems in their countries.
• 19:45
  Speaker 1: And the other issue is security. Mexico has seen a
• 19:48
  Speaker 1: huge increase in homicides and other violence, and we've seen
• 19:52
  Speaker 1: a couple of high profile cases involving U S citizens
• 19:55
  Speaker 1: where they have been murdered, and so there are tensions
• 19:57
  Speaker 1: there between the countries. That will be the next big
• 20:01
  Speaker 1: issues on the agenda for the two of them. Shannon, So,
• 20:03
  Speaker 1: both the White House and Congress, particularly Democratics, Democrats and
• 20:07
  Speaker 1: Congress taking credit for this deal, saying it's a good
• 20:11
  Speaker 1: deal for America. How did the Canadians and Mexicans view
• 20:14
  Speaker 1: Did they view it as a good deal for them?
• 20:19
  Speaker 1: You know, a deal is a good deal for them.
• 20:21
  Speaker 1: So I think both countries were playing a bit defense
• 20:24
  Speaker 1: to make sure that NAFTA stayed together, the three countries
• 20:27
  Speaker 1: stayed together in a trading block. There are some things
• 20:30
  Speaker 1: in this that are good for both of those countries,
• 20:32
  Speaker 1: and and a lot of these updates to the old
• 20:34
  Speaker 1: NAFTA will be good for all three countries and their economies.
• 20:38
  Speaker 1: The Canadians actually in the latest round came out ahead
• 20:40
  Speaker 1: some of the things that they had not wanted to
• 20:43
  Speaker 1: do that they've given as a concession, particularly some of
• 20:45
  Speaker 1: the pharmaceutical issues that got stripped out. The Canadians one
• 20:49
  Speaker 1: on that because they had not wanted it in the
• 20:50
  Speaker 1: first place. But overall, I think this is a small
• 20:54
  Speaker 1: update is brings some new stuff into the overall mix. Uh.
• 20:57
  Speaker 1: It has some wins and loses in particular sectors that
• 21:00
  Speaker 1: we've talked about, But overall, what it does is keep
• 21:03
  Speaker 1: masked in from Mexico and Canada. That is what they
• 21:05
  Speaker 1: wanted in the first place. Shannon, just real quick here,
• 21:08
  Speaker 1: I'm wondering what your outlook is just in general on Mexico.
• 21:10
  Speaker 1: I know Mexican assets have had kind of a rocky year.
• 21:13
  Speaker 1: Uh so far, what are you looking for? Well, Mexico
• 21:18
  Speaker 1: has seen a huge decrease in investment, be foreign direct
• 21:21
  Speaker 1: investment but also domestic investment. Some of that was masked
• 21:25
  Speaker 1: uncertainty whether or not this deal is going to get passed,
• 21:27
  Speaker 1: but a lot of it comes from the domestic policies
• 21:30
  Speaker 1: of the Locus overdoor government. So as I look forward,
• 21:32
  Speaker 1: I look to see what he is going to be doing.
• 21:35
  Speaker 1: What is he going to be doing in terms of
• 21:36
  Speaker 1: the energy sector and the contracts that might be with
• 21:38
  Speaker 1: private companies, whether domestic or international. How is he going
• 21:42
  Speaker 1: to treat other sectors. Is there going to be investment
• 21:45
  Speaker 1: in infrastructure that would help the manufacturing sector, And like,
• 21:48
  Speaker 1: those are the things that in the end, I think
• 21:50
  Speaker 1: are going to determine whether Mexico grows faster than it
• 21:53
  Speaker 1: has been or if it continues to fall into recession.
• 21:56
  Speaker 1: Shannon O'Neill, thank you so much for being with us.
• 21:58
  Speaker 1: Shannon O'Neill a Senior Fellow for Latin American Studies at
• 22:01
  Speaker 1: the Council on Foreign Relations. She's also a Bloomberg Opinion calumnist,
• 22:06
  Speaker 1: joining us via phone. Really interesting to see the shake
• 22:09
  Speaker 1: out as people are trying to determine the winners and
• 22:12
  Speaker 1: the losers. Interesting the pharmaceutical industry is being pinpointed as
• 22:16
  Speaker 1: a big loser here. Like the way Shannon characterizes this
• 22:18
  Speaker 1: deal is it's essentially an update of the existing NAFTA
• 22:21
  Speaker 1: deal to take into account some of the changes that
• 22:24
  Speaker 1: have occurred in the economy and society since the early nineties. Yeah,
• 22:27
  Speaker 1: and we're hearing that from a number of people, just
• 22:29
  Speaker 1: to give you a sense of what's going on in markets.
• 22:31
  Speaker 1: You're actually seeing those gains get paired quite a bit,
• 22:34
  Speaker 1: with the DAZ dec now just up three tenths of
• 22:36
  Speaker 1: a percent, down from more than a percent earlier in
• 22:39
  Speaker 1: the trading session. I'm Lisa Bramoy. It's alongside my coast
• 22:43
  Speaker 1: and colleague Paul Sweeney, and this is Bloomberg. A big
• 23:00
  Speaker 1: question mark facing the market has been the housing market,
• 23:04
  Speaker 1: which had been showing signs of softness, seemed to stabilize
• 23:07
  Speaker 1: and even show signs of strength on the lower mortgage rates.
• 23:11
  Speaker 1: But there's a question now with affordability, with the prospects
• 23:16
  Speaker 1: going forward of uncertainty. Doug Duncan joining us right now.
• 23:19
  Speaker 1: He has senior vice president in chief economist at Fannie
• 23:21
  Speaker 1: May based in Washington, d C. He trekked up to
• 23:24
  Speaker 1: our interactive Brooker Studios today. Doug, thank you so much
• 23:27
  Speaker 1: for being here. I want to start with a survey
• 23:30
  Speaker 1: that you recently did of mortgage lenders. What is that
• 23:34
  Speaker 1: telling you right now about how people feel going into
• 23:38
  Speaker 1: sorry in a quarterly basis. It covers the whole spectrum
• 23:41
  Speaker 1: of lenders. What it's saying is that after three quarters
• 23:46
  Speaker 1: of increased after three quarters of increased profit expectations, those
• 23:51
  Speaker 1: expectations have leveled off, but at a high level. And
• 23:55
  Speaker 1: the reason for that leveling is that there's been a
• 23:58
  Speaker 1: burst of refinancing, which is slow wing, but there is
• 24:01
  Speaker 1: continue to be a pick up on the purchase side.
• 24:04
  Speaker 1: Uh So, on balance, they have stable and a strong
• 24:07
  Speaker 1: expectations for profits. Okay, so just a bit ago, the
• 24:11
  Speaker 1: Wall Street Journal was reporting on some trade negotiations and
• 24:16
  Speaker 1: how uh the US is offering to cut existing teriff
• 24:19
  Speaker 1: rates by up to fifty uh. They also are potentially
• 24:23
  Speaker 1: going to cancel the new tariffs that are said to
• 24:25
  Speaker 1: take effect on December fifteenth, and we saw longer term
• 24:29
  Speaker 1: treasury yields go up quite a bit. What's the tipping
• 24:32
  Speaker 1: point for the housing market for rates to go up
• 24:36
  Speaker 1: that would impede the progress? Well, the pay The question
• 24:41
  Speaker 1: is how fast and how far? So they could go
• 24:45
  Speaker 1: up two hundred basis points or two percentage points over
• 24:48
  Speaker 1: a three year period and have relatively slow and little impact.
• 24:53
  Speaker 1: But if they did that in a year like in
• 24:56
  Speaker 1: two thousand and eighteen where they rose a full percentage
• 24:58
  Speaker 1: point first half an and teams slow down in housing
• 25:02
  Speaker 1: rates of come back down, which is why you said
• 25:04
  Speaker 1: at the outset things have picked up or stabilized. So
• 25:07
  Speaker 1: household budgets don't adjust. You don't get a pay raise
• 25:10
  Speaker 1: every month. If interest rates go up monthly, you don't
• 25:15
  Speaker 1: get the same adjustment in household incomes. So there's a
• 25:18
  Speaker 1: lag on which households react. On the purchase side, in particular,
• 25:23
  Speaker 1: refinances more immediate because it's just a change of coupon
• 25:27
  Speaker 1: from the difference between your existing coupon and the market,
• 25:30
  Speaker 1: and you can act on that quickly. You're not moving
• 25:31
  Speaker 1: your family, so that One of the aspects of the
• 25:33
  Speaker 1: housing market that I don't fully understand is this concept
• 25:37
  Speaker 1: or this issue of the shortage of affordable housing UH
• 25:40
  Speaker 1: for for first time virus. Is that something because home
• 25:43
  Speaker 1: builders aren't buying entry level homes or what's really driving this,
• 25:48
  Speaker 1: Because it seems like if there's demand from Gen X
• 25:50
  Speaker 1: and the millennials, there should be supplyed to meet it. Well,
• 25:52
  Speaker 1: the builders are moving in that direction over the last
• 25:55
  Speaker 1: couple of years, the average square footage of a new
• 25:58
  Speaker 1: home being constructed has been bawling. But it's not the
• 26:02
  Speaker 1: core of builder market. The core of the builder market
• 26:05
  Speaker 1: is the move up buyer excuse me, not the entry
• 26:08
  Speaker 1: level bar So they're moving in that direction because there
• 26:12
  Speaker 1: is very strong demand and in every market if you
• 26:15
  Speaker 1: look at the low end of the market, the price
• 26:17
  Speaker 1: appreciation there is very strong. This is the millennial is
• 26:20
  Speaker 1: doing what they said they're gonna do when they add
• 26:23
  Speaker 1: uh an stable job and income, they're gonna buy a house,
• 26:26
  Speaker 1: and since two thousand fifteen, they're driving it. But their
• 26:29
  Speaker 1: entry level borrowers. And typically the entry level barrower buys
• 26:33
  Speaker 1: an existing home with the boomers aging in place like
• 26:37
  Speaker 1: they said they were gonna and the gen xer is
• 26:39
  Speaker 1: tearing the roof off, putting on a second floor because
• 26:42
  Speaker 1: they already own the land. Those two things are keeping
• 26:45
  Speaker 1: supply out from the entry level barrower. Where is there
• 26:49
  Speaker 1: a risk of over supply at this point? I mean
• 26:52
  Speaker 1: one feature of this housing cycle. People come on they
• 26:55
  Speaker 1: say there hasn't been overbuilding. Well, if you go to
• 26:57
  Speaker 1: certain cities, you see cranes all over the place. I'm
• 27:00
  Speaker 1: wondering where have we reached that tipping point in in
• 27:03
  Speaker 1: the United States. I actually think the risk is more
• 27:07
  Speaker 1: in the cost of living in that space and whether
• 27:10
  Speaker 1: companies move because the cost to their workers of attaining
• 27:15
  Speaker 1: housing is higher than their ability to pay wage rates
• 27:19
  Speaker 1: and stay profitable. So I think the risk is not
• 27:22
  Speaker 1: over building. It's a shift in demand because of a
• 27:25
  Speaker 1: change in where jobs are going. And you're seeing that now.
• 27:29
  Speaker 1: You're seeing some, uh, some companies in high cost markets
• 27:33
  Speaker 1: move jobs, say to Salt Lake City or to Reno
• 27:37
  Speaker 1: or to Phoenix, where housing is much more affordable, because
• 27:40
  Speaker 1: they're at the wage rates that they can pay and
• 27:42
  Speaker 1: remain profitable. They simply can't find housing for people. That's
• 27:46
  Speaker 1: why you see people like Google and Facebook and folks
• 27:49
  Speaker 1: like that saying we're going to build affordable housing is
• 27:53
  Speaker 1: because it's so expensive they at some point they can't
• 27:56
  Speaker 1: afford to pay higher wages to to house people there.
• 27:59
  Speaker 1: That's something we're looking at from a mobility perspective because
• 28:03
  Speaker 1: the question is if if you start moving jobs out
• 28:05
  Speaker 1: of the market, will prices start to come down because
• 28:08
  Speaker 1: demand for housing will fall right and people start to sell.
• 28:11
  Speaker 1: That's more of the risk than overbuilding. Uh. There's not
• 28:14
  Speaker 1: really a place where there's too much inventory at the
• 28:17
  Speaker 1: high end. That's that's a different story because high income
• 28:22
  Speaker 1: households have pretty much prepositioned themselves where they want to
• 28:26
  Speaker 1: be and taking advantage of low rates and locked in
• 28:28
  Speaker 1: very low rates and are unlikely to move, so that
• 28:32
  Speaker 1: part of the market is softer than you see at
• 28:35
  Speaker 1: the entry level. Dog Duncan, thank you so much. We
• 28:37
  Speaker 1: appreciate your comments as always on the housing market. Dug Duncan,
• 28:40
  Speaker 1: Senior Vice President, chief Economist for Fannie May joinings here
• 28:43
  Speaker 1: in our Bloomberg Interactive Broker Studio and Lisa Continued strength
• 28:46
  Speaker 1: across the in the financial markets s and P up
• 28:49
  Speaker 1: over one percent on again the tweet from President Trump
• 28:52
  Speaker 1: about trade, and then of course that report coming out
• 28:54
  Speaker 1: of down Jones in the Wall Street Journal about tears
• 28:57
  Speaker 1: rolling back not just some of the existing tearrits or
• 28:59
  Speaker 1: some of the newer tariffs holding off on those, but
• 29:01
  Speaker 1: maybe rolling back some of the existing terrorists in the market.
• 29:03
  Speaker 1: Taking that as a bullish sign, is that December fifteen
• 29:07
  Speaker 1: deadline for additional tariffs ways on the market. Yeah, Negotiators
• 29:12
  Speaker 1: are reportedly offering to cut Chinese tariffs up to fift
• 29:15
  Speaker 1: on three hundred and sixty billion dollars in imports that
• 29:19
  Speaker 1: said the U s would reimpose the original tariff level
• 29:22
  Speaker 1: of China failed to carry out pledges. These are some
• 29:24
  Speaker 1: of the offers that are being reported uh that are
• 29:27
  Speaker 1: a part of the discussions that the US and Chinese
• 29:29
  Speaker 1: trade negotiators are having. I'm Lisa bram Woe's alongside Paul Sweeney.
• 29:32
  Speaker 1: This is Bloomberg Markets. Thanks for listening to the Bloomberg
• 29:36
  Speaker 1: pen L podcast. You can subscribe and listen to interviews
• 29:38
  Speaker 1: at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney,
• 29:42
  Speaker 1: I'm on Twitter at pt Sweeney. I'm Lisa abram Woids.
• 29:45
  Speaker 1: I'm on Twitter at Lisa A. Bramwoits one before the podcast.
• 29:48
  Speaker 1: You can always catch us worldwide on Bloomberg Radio.