Latest / Bloomberg Intelligence / Pimco Sees Short-Term Opportunities, Long-Term Pain In Corporate Credit

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Pimco Sees Short-Term Opportunities, Long-Term Pain In Corporate Credit · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim
• 0:08
  Speaker 1: Fox along with my co host Lisa A. Brahmowitz. Each
• 0:11
  Speaker 1: day we bring you the most important, noteworthy, and useful
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  Speaker 1: interviews for you and your money, whether you're at the
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  Speaker 1: grocery store or the trading floor. Find the Bloomberg p
• 0:20
  Speaker 1: m L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com.
• 0:27
  Speaker 1: Yesterday I spoke with Dan Ivanson, chief investment officer of Pimco,
• 0:31
  Speaker 1: overseeing one point seven trillion dollars in assets. He also
• 0:34
  Speaker 1: happens to be the manager of the world's biggest actively
• 0:36
  Speaker 1: managed bond fund, and we discussed everything from leveraged loans,
• 0:40
  Speaker 1: to Brexit to emerging markets. I started off by asking him,
• 0:43
  Speaker 1: are we on the brink of a more serious downturn
• 0:46
  Speaker 1: than many people are preparing for starting in take a listen.
• 0:50
  Speaker 1: The short answer is, you know, we don't know for sure. Uh.
• 0:53
  Speaker 1: I think the last few months have given us a
• 0:56
  Speaker 1: sense of the types of risks that are out there.
• 0:59
  Speaker 1: You know that both UH, the economy and markets going
• 1:01
  Speaker 1: to face in two thousand nineteen. I think, at a
• 1:04
  Speaker 1: minimum like we've seen this year, expect ongoing volatility and
• 1:10
  Speaker 1: I think that's true across really all segments of the
• 1:13
  Speaker 1: financial markets um Looking at two thousand nineteen, we're still
• 1:19
  Speaker 1: quite constructive on growth at least in the base case,
• 1:22
  Speaker 1: much more concerned about policy politics on a global basis.
• 1:27
  Speaker 1: And although we've seen some repricing in risk assets over
• 1:30
  Speaker 1: the course of the last few months, we still think
• 1:34
  Speaker 1: valuations are at a point where, you know, if we
• 1:37
  Speaker 1: see more negative outcomes, you know, across a series of
• 1:40
  Speaker 1: pockets of uncertainty, you know, you could see continued pressure
• 1:43
  Speaker 1: on risk assets from here. So which risk assets in
• 1:46
  Speaker 1: particular look specially vulnerable. Well again, and we've talked about
• 1:52
  Speaker 1: this now for for quite some time, you know, the
• 1:55
  Speaker 1: credit markets, you know, particularly the non financial segments of
• 1:59
  Speaker 1: the corporate credit mark gets or where we see the
• 2:02
  Speaker 1: most long term risks. Now, I think it's important to
• 2:04
  Speaker 1: note that we've seen some repricing there. If you look
• 2:08
  Speaker 1: at more traditional valuation metrics, at least in terms of
• 2:11
  Speaker 1: where spreads are from a historical perspective, you know, things
• 2:14
  Speaker 1: look closer to fair. But hold on a second, that's important.
• 2:18
  Speaker 1: You said things look closer to fair, meaning that there
• 2:21
  Speaker 1: are some buying opportunities within credit right now. Well, yeah,
• 2:24
  Speaker 1: to be clear again, UM, you know, you know, first
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  Speaker 1: of all, the types of measures that that would suggest that,
• 2:29
  Speaker 1: you know, the corporate credit markets are more fair, I
• 2:32
  Speaker 1: don't necessarily take into account some of the risks that
• 2:35
  Speaker 1: have been building in that space. So to answer your
• 2:37
  Speaker 1: specific question, first, we are beginning to see a few
• 2:41
  Speaker 1: select opportunities across credit markets, but we remain concerned about
• 2:48
  Speaker 1: credit in general, and I'm referring to to again non
• 2:50
  Speaker 1: financial corporate credit. Mostly we think this is a sector
• 2:55
  Speaker 1: that is most prone to overshooting fundamentals. Uh, there's been
• 2:58
  Speaker 1: a tremendous amount of issuance of the last decade. We've
• 3:01
  Speaker 1: seen a steady deterioration in underwriting standards. And it's been
• 3:06
  Speaker 1: a long time, you know, really, you know, not since
• 3:08
  Speaker 1: early sixteen has there have been real fear you know,
• 3:11
  Speaker 1: in the corporate credit market. And it's been much longer
• 3:14
  Speaker 1: than that since we've gone through a default cycle. In fact, uh,
• 3:17
  Speaker 1: you know, many participants in these markets, uh today you
• 3:20
  Speaker 1: have never gone through a default cycle. So we're cautious.
• 3:23
  Speaker 1: I think, you know, as an active asset manager, the
• 3:25
  Speaker 1: more generic forms of credit risk, even though in a
• 3:28
  Speaker 1: more narrow sense, are beginning to look more reasonable from
• 3:32
  Speaker 1: evaluation perspective, This is an area where you know, we
• 3:36
  Speaker 1: believe if you can be more creative, use you know,
• 3:38
  Speaker 1: all the global tools at a investor's disposal, you can
• 3:42
  Speaker 1: end up with a much more resilient portfolio, still underweight
• 3:46
  Speaker 1: that risk. It's a tough needle to thread here. And
• 3:48
  Speaker 1: I can tell because you're not the only one. But
• 3:50
  Speaker 1: I've spoken to people and they're starting to see select opportunities,
• 3:54
  Speaker 1: but overall, on average, credit spreads could widen. So can
• 3:58
  Speaker 1: you talk about, first of all, where opportunities are starting
• 4:01
  Speaker 1: to emerge, and how to be creative in an environment
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  Speaker 1: where it does become more specific and less macro driven. Sure,
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  Speaker 1: and I think you know, first you know a lot
• 4:12
  Speaker 1: of what we're talking about here, you know, relating to
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  Speaker 1: the credit markets, UM is really the type of philosophy
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  Speaker 1: you need as an active asset manager to outperform. More broadly,
• 4:23
  Speaker 1: I think at this stage in the cycle, and cycles
• 4:26
  Speaker 1: can extend a lot longer than h than participants UM
• 4:29
  Speaker 1: expect them to. You know, you want to be nimble,
• 4:32
  Speaker 1: you want to be flexible, you want to be liquid,
• 4:35
  Speaker 1: and if you can do that, and of course that
• 4:37
  Speaker 1: involves a lot of patients, which sometimes from a behavioral
• 4:40
  Speaker 1: perspective is the toughest thing to adhere to. But with
• 4:44
  Speaker 1: that flexibility, you know, we believe, you know, we can
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  Speaker 1: be liquidity providers in areas where there has been some overshooting.
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  Speaker 1: So you know, looking at the world today, um, for
• 4:53
  Speaker 1: the first time in a while, we're beginning to see,
• 4:57
  Speaker 1: you know, pockets of concern, in pockets of volatility show
• 5:01
  Speaker 1: up one sectors within the financial space, banks more specifically,
• 5:07
  Speaker 1: So for example, uh, there's a tremendous uncertainty relating to Brexit.
• 5:12
  Speaker 1: There's certainly you know, very negative paths that these negotiations
• 5:16
  Speaker 1: can take. But even under very extreme negative scenarios for Brexit,
• 5:21
  Speaker 1: you know, and looking at the banking system there, you know,
• 5:24
  Speaker 1: we don't believe that even under worse case type scenarios
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  Speaker 1: the viability of some of these larger financial institutions is
• 5:32
  Speaker 1: at risk. You have very high capital ratios relative to
• 5:37
  Speaker 1: past history, and now, although you have to appreciate the
• 5:41
  Speaker 1: increased uncertainty and the ongoing volatility in that space, you're
• 5:46
  Speaker 1: picking up yields and spreads um that we think are
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  Speaker 1: more than enough to compensate for the risk that's one example.
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  Speaker 1: Of course, as you go through other areas of the world,
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  Speaker 1: across Europe, even in the United States, with the there's
• 6:00
  Speaker 1: a similar dynamic where you know, in the midst of
• 6:02
  Speaker 1: a market that's you know, at best fairly valued, there
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  Speaker 1: is this sector of the market that's born the brunt
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  Speaker 1: of some of the recent volatility and where we think,
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  Speaker 1: you know, as a patient investor you can go on
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  Speaker 1: the offense a little bit and find good risk adjusted returns.
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  Speaker 1: What do you think US credit versus emerging markets tot Yeah,
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  Speaker 1: that's that's that's another great question, UM. On the margin,
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  Speaker 1: you know, looking into next year, we still think there's
• 6:28
  Speaker 1: some attractive opportunities in the emerging markets. But I think
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  Speaker 1: also you know, we're are acknowledging that emerging markets very
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  Speaker 1: quietly have formed extremely well over the course of the
• 6:40
  Speaker 1: past few months. UM. As you know, back in uh
• 6:44
  Speaker 1: the summer period um, there was considerable fear towards the
• 6:48
  Speaker 1: emerging markets. Almost all the financial press was focused on
• 6:52
  Speaker 1: concerns you know, really across the board, Brazil and Mexico
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  Speaker 1: and in some of the I guess relatively safer areas Turkey, Argentina,
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  Speaker 1: a tremendous amount of concern. Of course. You know, now
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  Speaker 1: over the last few months, we've seen weakness in global
• 7:07
  Speaker 1: equity markets, weakness in the corporate credit markets. These areas
• 7:11
  Speaker 1: where there appeared to be the most fear just a
• 7:14
  Speaker 1: few months ago, have actually performed extremely well, both on
• 7:18
  Speaker 1: a relative basis and in many cases on an absolute
• 7:21
  Speaker 1: basis as well. So when we look at emerging markets
• 7:23
  Speaker 1: today versus several months ago, fears dissipated. Along with fear
• 7:29
  Speaker 1: being reduced, spreads of tightened prices have gone up, so
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  Speaker 1: their advantage versus other types of credit investments has narrowed.
• 7:37
  Speaker 1: With all that said, we continue to be you know,
• 7:40
  Speaker 1: active in the emerging markets. I think the key in
• 7:42
  Speaker 1: this space is to size risk appropriately given increased volatility
• 7:47
  Speaker 1: and at times, you know, more idiosyncratic uncertainty. UM So
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  Speaker 1: we like the sector. We just don't love some of
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  Speaker 1: these investments um on a relative basis like we did
• 7:57
  Speaker 1: just a few months ago. Dan, when you're talking, I'm
• 8:00
  Speaker 1: just thinking how being nimble really does sort of stand out,
• 8:03
  Speaker 1: because you're talking about how a few months ago it
• 8:06
  Speaker 1: seemed like a goodbye. Now it probably seems a little
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  Speaker 1: bit less. So. Credit markets starting to see a little
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  Speaker 1: bit more value. How do you remain nimble given the
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  Speaker 1: size of some of your funds um and given the
• 8:16
  Speaker 1: fact that there could be a change in sentiment that
• 8:20
  Speaker 1: is very hard to execute quickly. Sure, you know, I
• 8:24
  Speaker 1: think one key is is diversity and approach, and you know,
• 8:28
  Speaker 1: the the you know, we're we're fortunate at PIMCO, And
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  Speaker 1: I know we started the conversation with with you kindly,
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  Speaker 1: you know, referring you know, to me a you know,
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  Speaker 1: you know, as as a member of royalty. In fact,
• 8:41
  Speaker 1: I'm you're not very comfortable with me saying that, are you. Well,
• 8:44
  Speaker 1: it's not it's it's not about comfort. I just think
• 8:47
  Speaker 1: that you know, myself and and and other senior folks
• 8:50
  Speaker 1: around our firm, you know, have the benefit of a
• 8:53
  Speaker 1: tremendous team, a global team, and a team that's involved
• 8:56
  Speaker 1: in many segments of the market. So I think the
• 8:59
  Speaker 1: value position is to come up with creative ways to
• 9:02
  Speaker 1: generate value while maintaining sufficient liquidity or flexibility and not
• 9:07
  Speaker 1: relying on you know, more of a lazy overweight to
• 9:11
  Speaker 1: corporate beta. And one way we do that is to
• 9:14
  Speaker 1: try to understand what types of risk we're taking and
• 9:17
  Speaker 1: if we're expressing a view on credit spreads more broadly
• 9:21
  Speaker 1: in a portfolio, we try to do that in the
• 9:23
  Speaker 1: most liquid way possible. UM So, rather than getting into
• 9:27
  Speaker 1: a situation where you're buying each cash corporate bond that
• 9:30
  Speaker 1: comes to market, and we try to pull risk in
• 9:33
  Speaker 1: such a way where we maintain that flexibility to change
• 9:37
  Speaker 1: our views as market conditions change or credit to fault swaps. Yeah,
• 9:41
  Speaker 1: typically indices UM you know, we've looked at the et
• 9:44
  Speaker 1: F market, but mostly some of these diversified indicries that
• 9:47
  Speaker 1: trade out there in the marketplace can typically offer liquidity,
• 9:51
  Speaker 1: you know, up to twenty times greater than a portfolio
• 9:54
  Speaker 1: of cash bonds. So that would be an example where
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  Speaker 1: if we're simply looking to fine tune the beta UM
• 10:00
  Speaker 1: or our overall exposure to to credit more broadly. You know,
• 10:03
  Speaker 1: those are the type of tools that we try to utilize.
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  Speaker 1: In addition to that, UM we look to find areas
• 10:11
  Speaker 1: of the market that are attractive that offer materially better liquidity. UM.
• 10:16
  Speaker 1: One area of the market that we're focused on currently
• 10:18
  Speaker 1: our agency mortgage backed securities. These are areas of the
• 10:22
  Speaker 1: market that have widened this year. One of the primarily
• 10:26
  Speaker 1: primary reasons why they've widened is that the Federal Reserve
• 10:28
  Speaker 1: is selling them again. Uh, we don't mind that. Um,
• 10:32
  Speaker 1: that's a technical in the marketplace that over time will
• 10:35
  Speaker 1: likely resolve itself. Of course, as the Fed continues to
• 10:39
  Speaker 1: reduce balance sheet, they can certainly go wider from here.
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  Speaker 1: But that's an example of a reasonable surrogate for forms
• 10:46
  Speaker 1: of less liquid risk that we like to utilize and
• 10:49
  Speaker 1: where we again have the good fortune of having a
• 10:52
  Speaker 1: big and an effective team in that area coming through
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  Speaker 1: the different alternatives within that very high quality segment of
• 10:59
  Speaker 1: of the market. And then finally, UM, the willingness to
• 11:02
  Speaker 1: hold uh cash, sometimes moderate amounts, sometimes a lot of cash.
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  Speaker 1: And that gets back to what I mentioned earlier. It
• 11:10
  Speaker 1: requires patients. It also requires the ability to accept under
• 11:15
  Speaker 1: performance during periods where credit spreads are tightening and when
• 11:19
  Speaker 1: stocks are going up. We were in that environment now
• 11:22
  Speaker 1: for you know, a good portion of two thousand seventeen,
• 11:26
  Speaker 1: even you know, briefly earlier in this year. And I
• 11:28
  Speaker 1: think you have to be willing to give up a
• 11:29
  Speaker 1: little bit of near term return to optimize portfolios for
• 11:33
  Speaker 1: clients over the long run. So right now, how much
• 11:35
  Speaker 1: cash you holding relative to recent history yeah, it depends
• 11:40
  Speaker 1: on the mandate. UM. But I you know, looking looking
• 11:43
  Speaker 1: across the board, you know, certainly relative to UM you
• 11:48
  Speaker 1: know several years ago, you know, we are you know,
• 11:51
  Speaker 1: at several multiples more cash than we would hold historically,
• 11:55
  Speaker 1: and even that doesn't tell the full um or doesn't
• 11:58
  Speaker 1: you know, fully paint the picture. In addition to having
• 12:01
  Speaker 1: cash on hand, we really really focus on liquidity tearing.
• 12:05
  Speaker 1: So we want to make sure that uh, you know,
• 12:07
  Speaker 1: above and beyond just old fashioned cash, we also have
• 12:10
  Speaker 1: sufficient liquidity and other areas of the portfolio to be
• 12:13
  Speaker 1: able to deal with more negative negative environments. So one
• 12:17
  Speaker 1: area that's been particularly beaten up, at least verbally, by
• 12:20
  Speaker 1: regulators and analysts, has been leveraged loans. People have called
• 12:24
  Speaker 1: this the epicenter of the credit bubble and the first
• 12:27
  Speaker 1: first place to go. We have seen prices declined to
• 12:29
  Speaker 1: the lowest since October two thousand sixteen on these leveraged loans.
• 12:33
  Speaker 1: Do you agree? Do you feel like this is a
• 12:34
  Speaker 1: really a troubled spot. So, I, you know, we're concerned
• 12:41
  Speaker 1: with longer term fundamentals within the leverage loan space. UM.
• 12:46
  Speaker 1: You know, I've always said that if if, if I
• 12:47
  Speaker 1: was allowed one piece of research or one piece only.
• 12:50
  Speaker 1: A pretty good piece of research would be to look
• 12:52
  Speaker 1: at issuance versus history. And I think when you look
• 12:56
  Speaker 1: at leverage loans, you look at other segments of the
• 12:58
  Speaker 1: corporate credit universe, UH, issuance is very very high UM
• 13:02
  Speaker 1: and that has been not surprisingly accompanied by reduced credit fundamentals,
• 13:08
  Speaker 1: less um covenants to protect investors, and this risk has
• 13:13
  Speaker 1: been distributed very broadly. And I bring that point up
• 13:15
  Speaker 1: because if we were to get into a more difficult
• 13:18
  Speaker 1: market environment, it will be increasingly difficult for investors to
• 13:23
  Speaker 1: defend their positions and look to exert influence in any
• 13:28
  Speaker 1: required workouts. You combine that with significant issuance within the
• 13:33
  Speaker 1: clo market, and you know, looking at total outstandings of
• 13:36
  Speaker 1: the cello market UM and I don't mean to sunt
• 13:39
  Speaker 1: over the alarmists, but you know, total issuance today is
• 13:43
  Speaker 1: pretty dark, close to max outstandings of A B, S,
• 13:46
  Speaker 1: C d os prior to the financial crisis UH. And
• 13:49
  Speaker 1: in no way do I suggest that these structures are
• 13:51
  Speaker 1: nearly as weak as those were, but it is setting
• 13:54
  Speaker 1: us up for under performance and probably overshooting to the downside.
• 13:59
  Speaker 1: One investor sentiment towards economic growth changes. So this is
• 14:04
  Speaker 1: an area where where the most cautious our activities in
• 14:08
  Speaker 1: this space have almost entirely been confined to the most
• 14:12
  Speaker 1: senior tranche in the in the clos that have been
• 14:15
  Speaker 1: issued UM, and we have very small holdings in that space.
• 14:20
  Speaker 1: One other final point I'll make on on loans is
• 14:22
  Speaker 1: that UM, you know, typically later in the cycle, when
• 14:26
  Speaker 1: the FED is taking interest rates higher and when people
• 14:29
  Speaker 1: are concerned about interest rate risk, you hear the thesis
• 14:32
  Speaker 1: that loans are a good way to protect against rising rates. UM.
• 14:36
  Speaker 1: I guess it's true in the sense that the coupons float,
• 14:39
  Speaker 1: but if you want to head your insulated portfolio from
• 14:42
  Speaker 1: interest rate exposure, there are other ways to do that.
• 14:44
  Speaker 1: So it's true that loans float and they don't have
• 14:47
  Speaker 1: a lot of direct interest rate exposure. But it's also
• 14:50
  Speaker 1: important to note that these are below investment grade assets
• 14:53
  Speaker 1: that have had a deterioration and fundamentals. So you hedge
• 14:58
  Speaker 1: against one risk, and of course you expose yourself to
• 15:01
  Speaker 1: pretty significant risk of a more negative environment for credit.
• 15:05
  Speaker 1: And I think you know from a from a retail
• 15:07
  Speaker 1: investor perspective, you know at times that's dangerous to the
• 15:10
  Speaker 1: extent that they don't fully appreciate that very critical and
• 15:14
  Speaker 1: important second form of risk embedded in UH in these
• 15:17
  Speaker 1: types of investments, Dan, I don't want to take up
• 15:19
  Speaker 1: too much of your time, but just to finish up here,
• 15:21
  Speaker 1: I would love to get your sense. This year, investment
• 15:24
  Speaker 1: grade US corporate bonds were some of the worst performers
• 15:27
  Speaker 1: out there, and cash was the best performer. This time
• 15:32
  Speaker 1: next year, what do you think would be the best
• 15:34
  Speaker 1: performing as a class within fixed income and the worst performing? Yeah,
• 15:38
  Speaker 1: it's you know twelve forecasts are are are difficult. I
• 15:42
  Speaker 1: think there's a you know, there's certainly the chance that
• 15:44
  Speaker 1: that cash ends up with a with a real good year. Again. UH,
• 15:48
  Speaker 1: We're we were made a little cautious on high quality bonds,
• 15:52
  Speaker 1: but if we end up in an environment where a
• 15:55
  Speaker 1: lot of these risks that markets are facing, policy politics, UH,
• 15:59
  Speaker 1: central bank over shooting. We don't think high quality bonds
• 16:03
  Speaker 1: necessarily have a bad potential for returns during during two
• 16:07
  Speaker 1: thousand nine. So UM, if you pin me down to
• 16:10
  Speaker 1: UH one specific area of the market. UM, At PIMCO,
• 16:14
  Speaker 1: our favorite sector continues to be the housing related sectors.
• 16:18
  Speaker 1: So I would say, you know, how's it related. Bonds
• 16:20
  Speaker 1: all else equal and adjusted for risk, will likely continue
• 16:24
  Speaker 1: to be a top performer, even with the slowdown in
• 16:26
  Speaker 1: housing that we've seen. Absolutely, and and I think I
• 16:30
  Speaker 1: think there's there's an important distinction that that needs to
• 16:32
  Speaker 1: be made there Um. We are not advocating big overweights
• 16:35
  Speaker 1: to investments that require, uh, the pace of home price
• 16:40
  Speaker 1: growth to continue, um at very at the levels we've
• 16:44
  Speaker 1: seen the last few years. Also within the housing sector,
• 16:48
  Speaker 1: as you know, um, that's where we've begun to see
• 16:51
  Speaker 1: significant wage pressure. So home builder business models can remain
• 16:55
  Speaker 1: under pressure, while bonds backed by homes or borrowers will
• 17:01
  Speaker 1: likely continue to perform extremely well. And the simple reason
• 17:05
  Speaker 1: for that is that regulators, as you know, have made
• 17:07
  Speaker 1: it real hard um to issue new loans to investors.
• 17:13
  Speaker 1: And we've had several years of very strong home price performance.
• 17:16
  Speaker 1: So in these types of investments, you have borrowers that
• 17:19
  Speaker 1: have a lot of equity in their property, um, that
• 17:22
  Speaker 1: for the most part have are employed, and where the
• 17:27
  Speaker 1: downside risks are much lower than some investors still fear.
• 17:30
  Speaker 1: So we think not only is this an attractive investment
• 17:33
  Speaker 1: from a yield perspective, we think you'll really see significant
• 17:37
  Speaker 1: resiliency versus other alternatives if we happen to get into
• 17:40
  Speaker 1: a more difficult economic environment next year. Not quite our
• 17:43
  Speaker 1: base case yet, but it's certainly increasing in terms of
• 17:46
  Speaker 1: probability and what's the worst performing as a class within
• 17:49
  Speaker 1: fixed income again, where we're we're real cautious on corporate
• 17:52
  Speaker 1: credit despite recent repricing. That's where we think at least
• 17:56
  Speaker 1: the prospects for more negative returns. Cist. That was Dan Ivison,
• 18:01
  Speaker 1: chief investment officer of PIMCO overseeing one point seven trillion
• 18:05
  Speaker 1: dollars in assets, also the manager of the world's biggest
• 18:09
  Speaker 1: actively managed bond fund, speaking with me yesterday and pim
• 18:13
  Speaker 1: you know, this is actually important, the concept of being
• 18:15
  Speaker 1: a very large actively managed fund, you know, the concept
• 18:19
  Speaker 1: of nimbleness, the concept of holding more cash, of holding derivatives,
• 18:23
  Speaker 1: of holding things that you could get in and out
• 18:25
  Speaker 1: of really quickly, of bonds that were you know, traded
• 18:28
  Speaker 1: more frequently. Such a prevalent theme, and I find that
• 18:31
  Speaker 1: fascinating at a time when everybody seems to agree the
• 18:34
  Speaker 1: volatility is picking up and it's not as clear cut
• 18:38
  Speaker 1: as there's a great opportunity and credit broadly or a
• 18:41
  Speaker 1: terrible opportunity and credit broadly, but you know specific opportunities
• 18:45
  Speaker 1: and perhaps uh opportunities that arrive at that arise that
• 18:49
  Speaker 1: can disappear within a month. Well, my reaction is that
• 18:53
  Speaker 1: when the head of the world's largest actively managed bond
• 18:57
  Speaker 1: fund says cash is a great alternative to anything out there,
• 19:03
  Speaker 1: and that they're concerned about potential liquidity risks and that
• 19:08
  Speaker 1: risk has been broadly distributed, it doesn't sound so great. No,
• 19:14
  Speaker 1: it doesn't. At the same time, it's not that the
• 19:17
  Speaker 1: world is about to end and sort of this is
• 19:19
  Speaker 1: the this is the hard line. It never does. But
• 19:22
  Speaker 1: it sounds bleak, bleak, but not two thousand and eight, right.
• 19:26
  Speaker 1: I mean, basically people are saying it's not necessarily the
• 19:28
  Speaker 1: big kahuna, but you're going to get something that's going
• 19:31
  Speaker 1: to be a much more uncomfortable backdrop. And the idea
• 19:34
  Speaker 1: being that the way you can generate bigger returns is
• 19:37
  Speaker 1: to if there is a liquidity event, be able to
• 19:40
  Speaker 1: have the money to go put it to work. In
• 19:41
  Speaker 1: other words, if there is a lot of withdrawals from
• 19:44
  Speaker 1: an e t F and the underlyings can't sell, they
• 19:46
  Speaker 1: have to sell it a discount. You know, how do
• 19:48
  Speaker 1: you make sure you can be a buyer at that point?
• 19:51
  Speaker 1: But what I do wonder is, given the number of
• 19:53
  Speaker 1: investments invest managers who we've spoken with who are emphasizing this,
• 19:57
  Speaker 1: you have to wonder is that, you know, will that
• 20:01
  Speaker 1: buffer some of the declines? It's possible, But I was
• 20:05
  Speaker 1: just looking at h y G, which is the I
• 20:08
  Speaker 1: shares I box high yield e t F. It is
• 20:11
  Speaker 1: down nearly two and a half percent since the beginning
• 20:15
  Speaker 1: of October. Yeah, it's been it's been a really rough ride.
• 20:19
  Speaker 1: And we've seen spreads or the extra yield that investors
• 20:21
  Speaker 1: earn on top of benchmark rates for HIO bonds and
• 20:24
  Speaker 1: investment grade bonds widened their most since since two thousand sixteen.
• 20:28
  Speaker 1: So definitely risk off. But when you put it in
• 20:31
  Speaker 1: a sort of longer term scheme of things, it isn't
• 20:34
  Speaker 1: it isn't really going and retracing too much of what
• 20:37
  Speaker 1: dan Ivison was talking about, which was this incredible run
• 20:40
  Speaker 1: up and credit and an unbelievable amount of record issuance. Yes,
• 20:43
  Speaker 1: and just wait until those maturities start hitting, And what
• 20:48
  Speaker 1: are they going to do for new credit? Are they
• 20:51
  Speaker 1: going to roll over those old credits and go back
• 20:53
  Speaker 1: to the same lenders and say please give me better terms. Yeah.
• 20:58
  Speaker 1: And then the other question is is will this be
• 20:59
  Speaker 1: a off landing with sort of the air being led
• 21:02
  Speaker 1: out of spreads slowly over time, or will this sort
• 21:05
  Speaker 1: of be subject to an event that will create some
• 21:08
  Speaker 1: kind of trauma. And that's sort of a big question
• 21:10
  Speaker 1: emerging out there as well. Well, we'll be covering it
• 21:12
  Speaker 1: whether it is a big event or a slow leak.
• 21:16
  Speaker 1: Talking about what happens in the world's credit markets. Apple
• 21:25
  Speaker 1: came out and said that it would invest one billion
• 21:28
  Speaker 1: dollars to expand its operations in Austin. It's also looking
• 21:31
  Speaker 1: at opening up establishments and Culver City, Seattle, and San Diego. Uh,
• 21:37
  Speaker 1: adding to sites in Boulder. It's like all the cities
• 21:40
  Speaker 1: that have benefited the most from some of the tech
• 21:43
  Speaker 1: tentacles that have trickled out of San Francisco joining us
• 21:47
  Speaker 1: now to talk about this. David Garretty, chief market strategist
• 21:49
  Speaker 1: for laid Law and Company. Uh, David, do you think
• 21:53
  Speaker 1: this is a case of President Trump getting what he
• 21:56
  Speaker 1: wants in terms of big tech opening more are headquarters
• 22:01
  Speaker 1: around the country. The only way that Trump would really
• 22:04
  Speaker 1: benefit from a political standpoint, is if Apple were to
• 22:06
  Speaker 1: come out and say that they were going to be
• 22:08
  Speaker 1: opening up campuses in rural locations around America, such as Davenport, Iowa, Peoria, Illinois,
• 22:15
  Speaker 1: or others. Um Out of the six cities that Apple cited,
• 22:19
  Speaker 1: really only Pittsburgh might be considered as falling into possibly
• 22:23
  Speaker 1: an area that you know, the Trump political base might benefit.
• 22:26
  Speaker 1: But arguably in Pittsburgh, the reason why Apples establishing it
• 22:29
  Speaker 1: is really because of Carnegie Mellon University and strength of
• 22:32
  Speaker 1: their computer science programs. And obviously Apple wants to go
• 22:36
  Speaker 1: where the talent is. But what's the difference Why what
• 22:39
  Speaker 1: I mean, a billion dollars is still a billion dollars.
• 22:41
  Speaker 1: It's great for the city of Austin, right, It's a
• 22:44
  Speaker 1: billion dollars over three years UM. And the question is
• 22:48
  Speaker 1: how many of those employees are actually gonna be coming
• 22:50
  Speaker 1: into the US under H one B visas is another
• 22:53
  Speaker 1: thing to sort of consider here. I mean, obviously there's
• 22:56
  Speaker 1: a there's a granularity behind this headline may make it
• 23:00
  Speaker 1: sound as if the tech sector is cow towing to
• 23:03
  Speaker 1: Trump's presidential protectionist edicts, but at the end of the day,
• 23:08
  Speaker 1: you know, Apple is going to have to try to
• 23:09
  Speaker 1: find a way to maneuver around these walls that Trump
• 23:13
  Speaker 1: is building against a multilateral global economy. Well, I guess
• 23:17
  Speaker 1: let's put it this way. There has been some talk
• 23:19
  Speaker 1: about rejiggering supply chains in response to some of the tariffs.
• 23:23
  Speaker 1: Apple in particular might or said that it might do
• 23:26
  Speaker 1: that should the tariffs be implemented. Do you think this
• 23:30
  Speaker 1: is a whole lot of lip service? Do you think
• 23:32
  Speaker 1: that they are starting to rejigger their supply chains. Well,
• 23:36
  Speaker 1: understand that these supply chains were established over decades, and
• 23:40
  Speaker 1: clearly one can't necessarily turn on a dime or in
• 23:44
  Speaker 1: a turn of Trumpian temperament and recon reconstitute one's global business.
• 23:49
  Speaker 1: But certainly businesses having to deal with the uncertainty that
• 23:53
  Speaker 1: protection is m or the leaning towards protectionism has represented,
• 23:57
  Speaker 1: obviously have to be running themselves in a little bit
• 24:01
  Speaker 1: more fluid manner. So if you have to make some
• 24:03
  Speaker 1: announcements about beefing things up in places where you're gonna
• 24:06
  Speaker 1: be recruiting people anyway, wonderful. Um. But otherwise, um, you know,
• 24:11
  Speaker 1: just the idea of moving imposing protection is in America
• 24:14
  Speaker 1: first basically leads towards smaller markets undermines economies of scale. Ultimately,
• 24:21
  Speaker 1: the wages of protectionism will be inflation, whether they're because
• 24:25
  Speaker 1: of tariffs being imposed on US consumers or because of
• 24:29
  Speaker 1: structural costs that are being imposed on businesses as they
• 24:32
  Speaker 1: face these smaller markets. David, just to sort of step
• 24:36
  Speaker 1: back a second, you get a chance to listen to
• 24:38
  Speaker 1: some dar of Google testify before Congress. Right, Yes, okay,
• 24:47
  Speaker 1: I'm sure there are, but I can't name them. You
• 24:50
  Speaker 1: think there are any Americans who are the head of
• 24:54
  Speaker 1: behemoth Indian companies? Uh? At President? No? So okay. And
• 25:02
  Speaker 1: the reason I ask it like that is because the
• 25:04
  Speaker 1: fact that he is. They are testifying before Congress representing what,
• 25:09
  Speaker 1: in all intensive purposes, is the largest search engine company
• 25:12
  Speaker 1: in the world and advertising. Doesn't that kind of speak
• 25:17
  Speaker 1: to the openness of markets here in the United States? Well,
• 25:21
  Speaker 1: it speaks to what has been, you know, the meritocracy
• 25:24
  Speaker 1: of achievement, of America's ability, because of its relative openness
• 25:28
  Speaker 1: to attract human talent from a global market, and certainly
• 25:32
  Speaker 1: immigration or the imposition of immigration controls have started to
• 25:37
  Speaker 1: militate against that. We've seen early signs that foreign students
• 25:41
  Speaker 1: are no longer considering American universities for their postgraduate programs.
• 25:45
  Speaker 1: You know, one has to understand if one goes through
• 25:48
  Speaker 1: and looks at you know, the unicorns, the billion dollar
• 25:51
  Speaker 1: valuation private companies, whether in the tech sector or elsewhere,
• 25:54
  Speaker 1: how many of those have been founded by non US
• 25:57
  Speaker 1: nationals who came here to get the postgraduate degrees and
• 26:01
  Speaker 1: decided to stay. And now we've also started to see
• 26:03
  Speaker 1: evidence that people have decided that, rather than basically pursue
• 26:07
  Speaker 1: opportunity in the US, take their capabilities returned back to
• 26:11
  Speaker 1: their countries India, China, elsewhere, and decided to pursue their
• 26:15
  Speaker 1: dreams in those locales. This is what we get as
• 26:19
  Speaker 1: a result of protectionism. This is what we get from
• 26:22
  Speaker 1: the standpoint of nationalism. All right, I'm just looking right now.
• 26:26
  Speaker 1: It sort of fits in. The NASDAC has actually turned
• 26:28
  Speaker 1: negative for the day, uh and is down about a
• 26:31
  Speaker 1: half a percentage point after being up earlier. We saw
• 26:34
  Speaker 1: some optimism kind of getting baked in with possible trade
• 26:37
  Speaker 1: agreements or tensions whatever. But uh, the NAZAC is still
• 26:41
  Speaker 1: up for the year three point four percent, including reinvested dividends.
• 26:44
  Speaker 1: And I'm just wondering I mean, do you think that
• 26:46
  Speaker 1: next year is going to be a very rough year
• 26:49
  Speaker 1: for big tech based on the regulatory pressures as well
• 26:52
  Speaker 1: as the trade tensions. Well, I certainly think that from
• 26:55
  Speaker 1: the standpoint of the volatility that the trade negotiations have
• 26:58
  Speaker 1: built in here, I mean, certainly we're seeing a market
• 27:01
  Speaker 1: that's far more volatile, and I don't think that this
• 27:03
  Speaker 1: is necessarily going to be resolved UM early in two
• 27:06
  Speaker 1: thousand nineteen, despite the fact that coming out of the
• 27:09
  Speaker 1: G twenty meeting in Buenos Areas, there was a thought
• 27:11
  Speaker 1: that there would be some sort of framework agreement in
• 27:13
  Speaker 1: place by March first. UM. I would also say at
• 27:16
  Speaker 1: the same time that yes, the concerns, whether it's from
• 27:19
  Speaker 1: the standpoint of data privacy or whether it's from the
• 27:22
  Speaker 1: standpoint of election interference, I think that the Democratic House
• 27:26
  Speaker 1: of Representatives clearly is going to be stepping up further
• 27:29
  Speaker 1: discussions with the technology sector as to how it is
• 27:33
  Speaker 1: that's dead and being data is being managed. And we've
• 27:36
  Speaker 1: seen some data health bills that have been introduced in
• 27:39
  Speaker 1: the Senate UM primarily from Democratic senators. And we all
• 27:43
  Speaker 1: know that a Democrat Republican Senate led by Mitch McConnell.
• 27:47
  Speaker 1: You know things like that, probably see a snowball's chance
• 27:49
  Speaker 1: of hell of actually getting to the floor. But you know,
• 27:51
  Speaker 1: Mitch McConnell represents a dead hand political expression carrying it
• 27:55
  Speaker 1: is it is dead hand is another word to use
• 27:57
  Speaker 1: for it. But sometimes Mitch looks like that. But in
• 28:01
  Speaker 1: any event, neither here nor there. The outlook for two
• 28:03
  Speaker 1: thousand nineteen, I would argue, is probably a four to
• 28:06
  Speaker 1: six percent upside in the SMP five hundred with increased
• 28:09
  Speaker 1: volatility in terms of one percent moves. For investors, it
• 28:12
  Speaker 1: probably means if you have long positions, right options against
• 28:15
  Speaker 1: them to get the premium income that comes from greater volatility.
• 28:18
  Speaker 1: But for people looking to put money to work in
• 28:20
  Speaker 1: the market, certainly this hasn't made things any easier. David Garritty,
• 28:25
  Speaker 1: just to give you twenty seconds, you agree with this
• 28:27
  Speaker 1: statement that China is now the greatest threat to americans privacy? No,
• 28:33
  Speaker 1: I think arguably that there are other countries that are
• 28:35
  Speaker 1: the greatest prep threat to America's privacy. The Marriott hacking
• 28:39
  Speaker 1: with five hundred million accounts involved, notwithstanding, I mean certainly
• 28:44
  Speaker 1: China is not alone in terms of hacking. We could
• 28:46
  Speaker 1: look at a wide range of other state actors, not
• 28:49
  Speaker 1: just China. Thank you very much, much appreciated. David Garretty
• 28:53
  Speaker 1: always a pleasure, Chief market strategist for laid Law and Company,
• 28:58
  Speaker 1: and he joins us here in our Bloomberg director Broker's studios.
• 29:01
  Speaker 1: And just taking a look at the SMP five hundred
• 29:04
  Speaker 1: right now, basically unchanged at the fifty off the highs
• 29:08
  Speaker 1: of the day that were set earlier in the morning.
• 29:11
  Speaker 1: Taking a look at oil right now up about six
• 29:14
  Speaker 1: tents of a percent, fifty one dollars a barrel. Gold
• 29:17
  Speaker 1: right now down about a quarter of a percent, lower
• 29:20
  Speaker 1: by three dollars and forty cents one dollars for an
• 29:23
  Speaker 1: ounce of gold. You're listening to Bloomberg Markets. I'm pim
• 29:26
  Speaker 1: Fox along with Lisa Abramowitz. The topic now is Amazon
• 29:33
  Speaker 1: and it's a workforce. Amazon workers can earn between seventeen
• 29:39
  Speaker 1: and a half to twenty three dollars an hour, and
• 29:41
  Speaker 1: they also receive what the company describes as world class benefits. Well,
• 29:46
  Speaker 1: some workers, at least in New York may not feel
• 29:49
  Speaker 1: that way because they have announced plans to unionize. Here
• 29:53
  Speaker 1: to tell us more is josh Idolson. He is our
• 29:56
  Speaker 1: labor reporter for Bloomberg and he joins us from pal
• 30:00
  Speaker 1: Walto and you can follow Josh as we all do
• 30:02
  Speaker 1: on Twitter at Josh Idolson. That's E I D E
• 30:06
  Speaker 1: L S O N. So, Josh tell us why workers
• 30:10
  Speaker 1: at Amazon would want to unionize. Employees I talked to
• 30:14
  Speaker 1: at the Staten Island facility talked about pay that they
• 30:19
  Speaker 1: view as inadequate, especially in New York City. Safety concerns
• 30:24
  Speaker 1: they say don't get adequately addressed. Twelve hour shifts without
• 30:28
  Speaker 1: enough breaks, without the ability to get to a break room,
• 30:32
  Speaker 1: and with enough time left to make it worth it,
• 30:35
  Speaker 1: Hourly quotas for how much stuff they have to process,
• 30:38
  Speaker 1: quotas that they say keep moving and are like a
• 30:42
  Speaker 1: finish line that keeps getting changed every day. And additional
• 30:45
  Speaker 1: time that they lose after those twelve hour shifts, and
• 30:49
  Speaker 1: mandatory overtime because they're stuck in line, unpaid, waiting to
• 30:54
  Speaker 1: go through security check so they can leave. So, Josh,
• 30:57
  Speaker 1: can you give us a sense of what type of
• 30:59
  Speaker 1: wages these workers get? And it's sort of surprising to
• 31:02
  Speaker 1: me because when I heard that Amazon was creating a
• 31:05
  Speaker 1: new headquarters and putting part of it in New York
• 31:08
  Speaker 1: that these would be higher paid positions. So these are
• 31:13
  Speaker 1: staten Island fulfillment center workers. These are not HQ two workers,
• 31:18
  Speaker 1: and these standard island workers. One of them I talked to,
• 31:22
  Speaker 1: for example, said that he makes eighteen dollars and sixty
• 31:26
  Speaker 1: cents an hour. Amazon points out that when people are
• 31:29
  Speaker 1: working over time and they're getting time and a half
• 31:32
  Speaker 1: at that facility, they're making to thirty four fifty for
• 31:37
  Speaker 1: those time and a half over time hours. Well, Josh,
• 31:42
  Speaker 1: you know, looking at the Bureau of Labor Statistics report
• 31:46
  Speaker 1: that tracks weekly wages for New York City workers, the
• 31:51
  Speaker 1: average weekly pays over three thousand dollars. Let's say you
• 31:55
  Speaker 1: get twenty three dollars an hour working at Amazon. That
• 31:59
  Speaker 1: doesn't even add up to a thousand dollars a week
• 32:02
  Speaker 1: for forty hour a week. And again that and upgrade
• 32:09
  Speaker 1: is four time and a half. So that's not what
• 32:12
  Speaker 1: people are making the other forty hours a week by
• 32:16
  Speaker 1: the data that Amazon is giving. And these are jobs
• 32:19
  Speaker 1: where people say there's the cost of living that they're
• 32:24
  Speaker 1: unable to keep up with at this rate. And even so,
• 32:28
  Speaker 1: one of the workers I talked to said he commutes
• 32:30
  Speaker 1: four hours a day so you add the four hours
• 32:33
  Speaker 1: a day back and forth to the job to a
• 32:36
  Speaker 1: twelve hour shift, and people say there's an exhaustion that
• 32:42
  Speaker 1: builds on the exhaustion of the job itself. All Right, So, Josh,
• 32:46
  Speaker 1: I have to think the timing of this is not accidental.
• 32:48
  Speaker 1: There's a lot of focus and political pressure on Amazon
• 32:51
  Speaker 1: to increase wages, to offer better conditions for workers, especially
• 32:55
  Speaker 1: given their parade for the headquarters search, the sort of
• 33:00
  Speaker 1: Bachelor at type of scene that we had there. You know,
• 33:04
  Speaker 1: I'm wondering, is that our potential unionizer is taking advantage
• 33:09
  Speaker 1: of that, basically saying the time is ripe, let's pounce.
• 33:12
  Speaker 1: Now Amazon is in the news for this. There is
• 33:15
  Speaker 1: absolutely an aspect of that to the strategy here. In fact,
• 33:20
  Speaker 1: the union that these workers are working with, the retail
• 33:22
  Speaker 1: wholesale Wholet Sale and Department Store Union, it's president told
• 33:26
  Speaker 1: me directly that he thinks there's never been greater leverage
• 33:30
  Speaker 1: to support this kind of effort by workers. He says,
• 33:33
  Speaker 1: if there's up to three billion dollars in taxpayer subsidies
• 33:37
  Speaker 1: effectively that Amazon is getting, that's leverage to make Amazon
• 33:42
  Speaker 1: not bust a union. There. Now the situation is complicated
• 33:46
  Speaker 1: by the fact that federal law restricts states and cities
• 33:50
  Speaker 1: from regulating union organizing and union busting activities, and so
• 33:56
  Speaker 1: the city does not have totally free reign, and neither
• 34:00
  Speaker 1: us the state. However, there is some leeway for governments
• 34:05
  Speaker 1: under court precedent when their own money is involved, when
• 34:09
  Speaker 1: they have a so called proprietary interest, and certainly in
• 34:14
  Speaker 1: the political debate that's going on that, among other things,
• 34:18
  Speaker 1: involves advocates and lawmakers saying that a state entity should
• 34:24
  Speaker 1: reject this subsidy deal with Amazon. What Amazon's labor reputation
• 34:30
  Speaker 1: and behavior is, It's something that certainly people will take
• 34:34
  Speaker 1: into account in drawing their conclusions, and so the union
• 34:37
  Speaker 1: and the workers think that there is leverage here. There
• 34:40
  Speaker 1: wouldn't be otherwise to try to stop Amazon from making
• 34:44
  Speaker 1: some of the moves that people allege otherwise might be
• 34:48
  Speaker 1: going on. Josh Idelson, thank you so much for being
• 34:51
  Speaker 1: with us. Josh Idelson as labor reporter for Bloomberg News,
• 34:54
  Speaker 1: coming to us from Palo Alto, and I do have
• 34:57
  Speaker 1: to think, Pam. The other side of this is Amazon
• 35:00
  Speaker 1: doesn't necessarily have the biggest margins in the world, and
• 35:03
  Speaker 1: they're all into compressing their margins that they can gain share,
• 35:06
  Speaker 1: and you have to wonder will this force their profitability
• 35:09
  Speaker 1: to decline or force prices to increase If this does
• 35:12
  Speaker 1: gain steam, and how that will affect the entire retail backdrop.
• 35:16
  Speaker 1: A really interesting issue. Yes, and this is coming out
• 35:19
  Speaker 1: of particularly difficult and fraud time for Amazon because of
• 35:22
  Speaker 1: the two new headquarters that they said they're going to build.
• 35:27
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 35:29
  Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
• 35:33
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 35:37
  Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
• 35:41
  Speaker 1: It's one before the podcast. You can always catch us
• 35:44
  Speaker 1: worldwide on Bloomberg Radio