Latest / Bloomberg Intelligence / Oil Could Revisit Lows of $42 on Supply Glut, Kilduff Says

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Oil Could Revisit Lows of $42 on Supply Glut, Kilduff Says · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim
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• 0:32
  Speaker 1: I want to just sort of focus in on energy
• 0:34
  Speaker 1: just because we are seeing this pretty market decline in
• 0:37
  Speaker 1: oil prices, and I want to bring in John Kilduff,
• 0:39
  Speaker 1: who's a founding partner of Again Capital. I mean, there
• 0:42
  Speaker 1: was once upon a time when oil prices would dictate
• 0:44
  Speaker 1: the direction of stocks and bonds in a massive way. John,
• 0:48
  Speaker 1: do you think that this move lower is sort of
• 0:51
  Speaker 1: the end of this particular blip downward or do you
• 0:55
  Speaker 1: think that there is much more downside ahead. I think
• 0:59
  Speaker 1: there's certainly some more downside to come. I think we're
• 1:02
  Speaker 1: going to revisit belows from November at around forty two
• 1:06
  Speaker 1: barrel um, and that's it's a result of just the
• 1:12
  Speaker 1: pent up buying that came into this market on the
• 1:14
  Speaker 1: back of the OPEQ and non OPEC production accord um
• 1:18
  Speaker 1: being coming up short and and and being given back
• 1:23
  Speaker 1: because the deal is proving ineffective. We're still heavily oversupplied
• 1:28
  Speaker 1: UM with no real relief in sight. And that's what
• 1:31
  Speaker 1: you're seeing here. John. I'm wondering, if you know, all
• 1:34
  Speaker 1: those books and reports about peak oil, I'm never going
• 1:36
  Speaker 1: to get that time back having read them. Should I
• 1:38
  Speaker 1: just throw them out now? Absolutely? And actually I would
• 1:42
  Speaker 1: be the guy that Bloomberg would have me on to
• 1:44
  Speaker 1: come and refute, uh that that theory at the time,
• 1:48
  Speaker 1: So I kind of missed those gigs myself. But absolutely.
• 1:53
  Speaker 1: And you know, at the time when I was pushing
• 1:55
  Speaker 1: back against the argument of peak oil, it was because
• 1:58
  Speaker 1: of technology that I've figured would come into the oil
• 2:02
  Speaker 1: patch just as it was coming in, you know, to
• 2:05
  Speaker 1: every other aspect of our lives. You know, cell phones
• 2:07
  Speaker 1: that were you know, bigger than your head you're coming
• 2:10
  Speaker 1: into to fit into your shirt pocket. You know, why
• 2:12
  Speaker 1: couldn't some of that technology be transferred and brought to UM,
• 2:16
  Speaker 1: not just tracking per se, which was really a reinvented
• 2:18
  Speaker 1: old technology, but seismics, well, you know, being able to
• 2:22
  Speaker 1: look into the ground, things like that. So that's that's
• 2:24
  Speaker 1: why we're here. So John, you're saying that you think
• 2:26
  Speaker 1: that oil is headed to forty two dollars barrel Dave.
• 2:31
  Speaker 1: If oil gets there within the next, say, couple of weeks,
• 2:35
  Speaker 1: what do you expect the reaction to be on the stocks.
• 2:37
  Speaker 1: I mean, we already are seeing a down downturn in
• 2:39
  Speaker 1: the hya bond market. It's starting to track a little
• 2:42
  Speaker 1: bit more with with oil. But what about what about stocks? Well,
• 2:46
  Speaker 1: arguably more of the same. I mean you just look
• 2:48
  Speaker 1: at what's going on with the S and P five
• 2:50
  Speaker 1: Energy Index as a point of reference. Uh, that peak
• 2:54
  Speaker 1: back in the middle of December, and since then it's
• 2:57
  Speaker 1: fallen four cent. So you know, we've seen sort of
• 3:01
  Speaker 1: the air come out of the balloon to some extent already.
• 3:05
  Speaker 1: And if you get you know, more the same, well,
• 3:07
  Speaker 1: there's more reason for that particular move to keep going.
• 3:11
  Speaker 1: And I just point out on a day like today,
• 3:13
  Speaker 1: it's like pick your company that's out with results and
• 3:16
  Speaker 1: people aren't liking what they're seeing. Uh. Two examples Pioneer
• 3:20
  Speaker 1: Natural Resources, which has fallen three percent. They're lowering production
• 3:25
  Speaker 1: forecasts among other things. And Chesapeake Energy. You know, even
• 3:28
  Speaker 1: though they had their first profit in a couple of years,
• 3:31
  Speaker 1: that stocks down close to seven and a half percent,
• 3:35
  Speaker 1: So you know, put it all together, and it's not
• 3:37
  Speaker 1: like you're gonna get much on the ernie's front at
• 3:39
  Speaker 1: this point. That's going to head off more of what
• 3:43
  Speaker 1: we've been seeing lately. Hey John, just a quick note
• 3:46
  Speaker 1: to wondering about the coverage ratio, you know, the ability
• 3:48
  Speaker 1: of these oil companies to continue to pay dividends. I
• 3:51
  Speaker 1: was looking at a Royal Dutch Shell over seven percent
• 3:53
  Speaker 1: exce on Mobile now three and three quarters of a percent.
• 3:56
  Speaker 1: Are those the kind of things that people can invest
• 3:59
  Speaker 1: in an expect the dividend or are they're just going
• 4:01
  Speaker 1: to enjoy a wild ride and they're gonna enjoy a
• 4:04
  Speaker 1: bit of a wild ride. I will say there's a
• 4:06
  Speaker 1: there's two silver linings here for an investors. Just probably
• 4:09
  Speaker 1: within the SMP five hundred, the energy sector is down
• 4:12
  Speaker 1: a lot. It's it's maybe only eighteen percent I think
• 4:15
  Speaker 1: these days, right, Dave and UM as well. The oil
• 4:18
  Speaker 1: companies have really gone through a wrenching reorganization and are
• 4:23
  Speaker 1: a lot more profitable at lower oil prices. So to
• 4:27
  Speaker 1: the extent we do dip down to the levels that
• 4:29
  Speaker 1: that I see, there will be some short term hits
• 4:31
  Speaker 1: and the index has already taken a big hit. But
• 4:33
  Speaker 1: to the extent there's any kind of an upturner industry
• 4:36
  Speaker 1: reaction production wise, UM, the stocks will become goodbyes because
• 4:39
  Speaker 1: you will see some good earnings as we are seeing
• 4:42
  Speaker 1: relative to where prices are. I just point out looking
• 4:45
  Speaker 1: among the eleven million industry groups in the SMP five hundred,
• 4:48
  Speaker 1: energy is just about six percent, so it's really kind
• 4:51
  Speaker 1: of lost its sway over the stock market. Nonetheless, it's
• 4:54
  Speaker 1: definitely an area that's been hurting the SMP five hundred,
• 4:58
  Speaker 1: one of only two that's down this year, phone companies
• 5:01
  Speaker 1: being the other. And you're really talking about five stocks there. Yeah,
• 5:04
  Speaker 1: I'm sure it's really overtaken energy, John. I wanted to
• 5:07
  Speaker 1: get your take and if forty two dollars a barrel
• 5:10
  Speaker 1: would be the new normal for oil prices for a
• 5:12
  Speaker 1: longer period of time, or is that going to be
• 5:15
  Speaker 1: the inflection point at which prices can then rise again.
• 5:19
  Speaker 1: We're gonna have to see what the industry reaction is. Uh.
• 5:22
  Speaker 1: When we got down to these these levels or lower
• 5:25
  Speaker 1: than that. UM, we saw the rigs D recount here
• 5:28
  Speaker 1: in the US in particular really plummet since then, since
• 5:32
  Speaker 1: we hear a low point about a year or so ago,
• 5:34
  Speaker 1: it's doubled. So you know they've come racing back. And
• 5:37
  Speaker 1: they've also hedged a lot of their productions. So even
• 5:39
  Speaker 1: if prices fall, they're getting paid fifty dollars a barrel
• 5:42
  Speaker 1: no matter where they go. So we're gonna have to see, uh,
• 5:46
  Speaker 1: where we're at that point. Um, it could be an
• 5:48
  Speaker 1: interesting showdown with the OPEC and Saudi Arabia where they
• 5:52
  Speaker 1: decide to flood the market and really break the back
• 5:55
  Speaker 1: of prices again and um and potentially see a price war.
• 6:00
  Speaker 1: Got we got to leave it there, John Kildeff, thanks
• 6:02
  Speaker 1: very much, founding partner again the Capital our thanks also
• 6:05
  Speaker 1: to Dave Wilson, Bloomberg Stocks Commus go ahead send him
• 6:07
  Speaker 1: an email at d Wilson at Bloomberg dot net. Right now, however,
• 6:22
  Speaker 1: I want to discuss the ramifications from Puerto Rico's move
• 6:26
  Speaker 1: to file for bankruptcy like protection, and I want to
• 6:28
  Speaker 1: bring in David Hammer, head of the municipal bond portfolio
• 6:31
  Speaker 1: management at Pacific Investment Management Company in New York. David,
• 6:36
  Speaker 1: thank you so much for joining us. Uh. First, I
• 6:38
  Speaker 1: just want to get your take on what the implications
• 6:41
  Speaker 1: are for the holders of Puerto Rico seventy four billion
• 6:45
  Speaker 1: dollars of debt as a result of this Title three filing. Hi,
• 6:48
  Speaker 1: thanks for having me. You know, I think the most
• 6:51
  Speaker 1: important UH turn of events here is that the period
• 6:54
  Speaker 1: for consensual restructuring between the Oversight Board and the Government
• 6:59
  Speaker 1: of Puerto Rico and creditors appears to be coming to
• 7:01
  Speaker 1: a close. And what looks more likely is that the
• 7:04
  Speaker 1: Oversight Board will begin to use UH Title three of
• 7:08
  Speaker 1: the recently established Premise of Bankruptcy Code, which allows the
• 7:12
  Speaker 1: Oversight Board to effectively dictate recovery to creditors. UM. So
• 7:16
  Speaker 1: it opens up a door for UH. It's a potentially
• 7:19
  Speaker 1: lower lower prices on bonds, steeper haircuts than what's implied
• 7:23
  Speaker 1: in the market. And also importantly, you know this is
• 7:26
  Speaker 1: gonna take a while, so well, well, David, do you say, Yeah,
• 7:30
  Speaker 1: there's gonna be probably steepier, steeper implied prices, steeper declines
• 7:34
  Speaker 1: and prices that we're seeing currently in the market. One
• 7:37
  Speaker 1: thing that we don't hear a lot about is a
• 7:38
  Speaker 1: lot of the holders of these bonds are individual mom
• 7:42
  Speaker 1: and pop investors, UH, particularly in Puerto Rico. And how
• 7:46
  Speaker 1: much will that sort of political angle change the dynamic
• 7:51
  Speaker 1: of how much debt will get written down because people
• 7:53
  Speaker 1: think of like vulture hedge funds and that you know,
• 7:55
  Speaker 1: who cares if they get they get some of the
• 7:57
  Speaker 1: principle written down. But what about these retail invests? You
• 8:00
  Speaker 1: know what I'd say, for starters, we don't think that
• 8:03
  Speaker 1: that true. Mom and pop retail investors still own a
• 8:05
  Speaker 1: lot of this debt. Puerto Rico is downgraded to sub investment,
• 8:09
  Speaker 1: creating two thousand thirteen. UH default has been widely anticipated
• 8:13
  Speaker 1: and expected really for a number of years now. Bomb
• 8:17
  Speaker 1: prizes have been trading at really steep discounts for a
• 8:19
  Speaker 1: long period of time, so you know a lot of
• 8:22
  Speaker 1: risk transfers already occurred. And the primary holders of these
• 8:25
  Speaker 1: bonds now are a few mutual funds in primarily hedge funds. David,
• 8:29
  Speaker 1: Is there any possibility that this will just be the
• 8:32
  Speaker 1: opening act in other municipal filings such as Illinois? Will
• 8:37
  Speaker 1: they use the same route? Yeah? I don't think so
• 8:40
  Speaker 1: for a couple of reasons. You know that the three
• 8:42
  Speaker 1: point eight trillion dollar municipal market is where states and
• 8:45
  Speaker 1: cities and schools and toll roads and airports go for
• 8:49
  Speaker 1: their their financing needs. Puerto Rico is really a distinct case.
• 8:53
  Speaker 1: It's a territory and only territories are eligible to use
• 8:57
  Speaker 1: this law premises, so it applied just the territories. And
• 9:02
  Speaker 1: when you talk about other areas in the United States,
• 9:05
  Speaker 1: you know, they've experienced decent growth UH post crisis, post
• 9:08
  Speaker 1: financial crisis, UH, decent population trends. Puerto Rico's economy has
• 9:13
  Speaker 1: been in a recession for about a decade UH, and
• 9:15
  Speaker 1: they're experiencing out migration, so they're losing people every year.
• 9:19
  Speaker 1: What about the Virgin Islands, Yes, it's the Virgin Islands
• 9:23
  Speaker 1: is one that in theory UH could use PROMISSA in
• 9:27
  Speaker 1: the future. You know, I think it's a very different
• 9:29
  Speaker 1: situation and that they are having fiscal stress, but they're
• 9:32
  Speaker 1: really early in the process. They haven't done much to
• 9:35
  Speaker 1: cut their budget. They haven't done anything on pension reform.
• 9:38
  Speaker 1: Puerto Rico is very different. You know, they've already reformed
• 9:40
  Speaker 1: one of the biggest pensions. UH. Their average pension is
• 9:43
  Speaker 1: only about fourteen thousand dollars. So while there was a
• 9:47
  Speaker 1: lot of room to cut at one point in Puerto Rico,
• 9:50
  Speaker 1: there isn't anymore, so a bit different from Virgin Islands
• 9:53
  Speaker 1: as well. So what are you looking at? What do
• 9:54
  Speaker 1: you think is the best opportunity in the three point
• 9:57
  Speaker 1: eight trillion dollar US munsoot ball market. So we really
• 10:00
  Speaker 1: like a lot of debt at the moment, I'd say,
• 10:03
  Speaker 1: particularly in the low triple B too high double B range.
• 10:07
  Speaker 1: Municipal default rates continued to be really low. Despite these
• 10:10
  Speaker 1: headlines on Detroit and Jefferson County and now Puerto Rico,
• 10:14
  Speaker 1: municipal bonds continue to experience low default rates versus corporates.
• 10:18
  Speaker 1: One thing we look at quite a bit is the
• 10:20
  Speaker 1: default rate for triple B munies is currently less over
• 10:24
  Speaker 1: the last ten years as calculated by mood He's actually
• 10:26
  Speaker 1: less than double A corporate bonds, So we see a
• 10:29
  Speaker 1: lot of opportunity. The market has been I think a
• 10:32
  Speaker 1: bit wary this year due to the backdrop of tax reform.
• 10:35
  Speaker 1: So where we typically see pretty strong inflows into the
• 10:38
  Speaker 1: asset class early in the year, that hasn't been the
• 10:41
  Speaker 1: case this year. We've only seen about two billion dollars
• 10:43
  Speaker 1: coming to the municipal market compared to about a hundred
• 10:46
  Speaker 1: billion in the investment grade corporate market. David, we're just
• 10:49
  Speaker 1: to let you know we're waiting for President Donald Trump.
• 10:52
  Speaker 1: He is expected to make remarks as part of the
• 10:54
  Speaker 1: National Day of Prayer event from the Rose Garden at
• 10:56
  Speaker 1: the White House. Will be bringing those to you when
• 10:59
  Speaker 1: he appears. If someone were to call you, David on
• 11:01
  Speaker 1: the phone and say, all right, so, what's We're going
• 11:03
  Speaker 1: to give you the power to figure out what Puerto
• 11:06
  Speaker 1: Rico should do? Do Do you have any recommendations what should
• 11:09
  Speaker 1: happen next? If you were given that task? Yeah, so yeah,
• 11:12
  Speaker 1: I think importantly the oversight board that Congress established has
• 11:16
  Speaker 1: already been given that task. So that is exactly what
• 11:18
  Speaker 1: they're doing. And the you know, the first step in
• 11:20
  Speaker 1: the process was to approve a fiscal plan that sets
• 11:24
  Speaker 1: Puerto Rico on a sustainable path going forward. Uh, you know,
• 11:27
  Speaker 1: requires burden sharing in terms of further pension cuts and
• 11:30
  Speaker 1: they assume about a tem percent reduction and pensions uh
• 11:34
  Speaker 1: increasing uh the budget through reducing expenses and increasing revenues,
• 11:39
  Speaker 1: so enforcing tax collections. But all that, but I mean,
• 11:43
  Speaker 1: that's I mean I started to break into it, but
• 11:45
  Speaker 1: you know, all that makes complete sense, But that's doesn't
• 11:49
  Speaker 1: seem to be ruling the day at the moment, and
• 11:51
  Speaker 1: I'm wondering whether there are things that can be enacted.
• 11:55
  Speaker 1: I mean, you know, one of the things that always
• 11:57
  Speaker 1: talked about in Puerto Rico was the triple tax free
• 11:59
  Speaker 1: status was granted by the federal government, the tax breaks
• 12:02
  Speaker 1: to the pharmaceutical industry. Is there anything that can be
• 12:04
  Speaker 1: tangibly done in the next six months that will help
• 12:08
  Speaker 1: revive the Puerto Rican economy? So I think the Oversight
• 12:11
  Speaker 1: Board is doing it. You know where I disagree with you.
• 12:13
  Speaker 1: I think they are taking actions. They are taking steps, uh.
• 12:17
  Speaker 1: And it's it's deeper haircuts for bond holders. Uh. And
• 12:19
  Speaker 1: then we'd like to see some some pro growth reform.
• 12:22
  Speaker 1: So I think one example, there is a Cofina sales
• 12:25
  Speaker 1: tax bond uh and right now creditors are disputing is
• 12:28
  Speaker 1: that lean valid or not? Do I have a claim
• 12:31
  Speaker 1: on those sales tax revenues? You know, we think could
• 12:33
  Speaker 1: be beneficial the economy is actually reducing the sales tax
• 12:36
  Speaker 1: in Puerto Rico. It's a regressive tax. You could bring
• 12:40
  Speaker 1: more money into the economy. You know, it's not the
• 12:42
  Speaker 1: greatest thing for bondholders, but we think that could help
• 12:44
  Speaker 1: get the Puerto rico economy going. We want to take
• 12:55
  Speaker 1: a moment to let you know about something new from Bloomberg.
• 12:58
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• 13:27
  Speaker 1: dot com slash lens. So we have been talking quite
• 13:36
  Speaker 1: a bit about the increasing weakness that we've seen in
• 13:40
  Speaker 1: consumer credit, and one story that was in the Wall
• 13:43
  Speaker 1: Street Journal last night that did catch my attention was that,
• 13:47
  Speaker 1: you know, some big banks have started to pull back
• 13:49
  Speaker 1: pretty pretty sharply from auto loans as a result of
• 13:52
  Speaker 1: the weakening credit quality, and this is sort of adding
• 13:54
  Speaker 1: to the weakness that we're seeing in sales. To make
• 13:56
  Speaker 1: sense of this and try to paint this in the
• 13:59
  Speaker 1: broader scheme of credit markets, I want to bring in
• 14:01
  Speaker 1: Matthew miss he's global credit strategist at UBS Securities in
• 14:06
  Speaker 1: New York. Matt, thank you so much for joining us.
• 14:08
  Speaker 1: I want to start with what your take on the
• 14:11
  Speaker 1: latest data at the latest results from Synchrony Capital one
• 14:16
  Speaker 1: the automakers with the deterioration in their sales numbers. I mean,
• 14:20
  Speaker 1: do you think that this points to some kind of
• 14:22
  Speaker 1: broader problem that is being underrated in markets today? Yeah,
• 14:28
  Speaker 1: I think there's UM. I think there's there's two two stories.
• 14:32
  Speaker 1: The more optimistic one is that aggregate consumer credit fundamentals
• 14:36
  Speaker 1: look relatively strong. The backdrop from macroeconomic perspective is fairly
• 14:41
  Speaker 1: resilient and stable, albeit at a lower base than I
• 14:43
  Speaker 1: think many would like. UM. I think what we've argued
• 14:46
  Speaker 1: to be clear is the rise in delinquencies. We think
• 14:49
  Speaker 1: is uh certainly an undercovered story, and it's driven by
• 14:52
  Speaker 1: three things. I think. The first is you've certainly seen lenders,
• 14:55
  Speaker 1: particularly non banks, go further down the credit spectrum to
• 14:59
  Speaker 1: base we meet loan growth hurdles. UM. So you've seen,
• 15:02
  Speaker 1: in particular, across a lot of different segments, not just
• 15:05
  Speaker 1: consumer or retail, but also commercial credit, you've seen non
• 15:08
  Speaker 1: banks be much more aggressive in terms of going down
• 15:11
  Speaker 1: the curve and lending to non primary subprime borrowers. But
• 15:14
  Speaker 1: I think the second thing, and we use a proprietary
• 15:16
  Speaker 1: survey from UBS Evidence Lab to uncover this, this dynamic
• 15:20
  Speaker 1: I think in in detail um is we think that
• 15:23
  Speaker 1: the underlying consumer population is pressured by essentially a lack
• 15:27
  Speaker 1: of real wage growth. So when you look at nominal
• 15:30
  Speaker 1: wage growth, it's been certainly positive, but in low to
• 15:33
  Speaker 1: mid single digits and fairly disappointing. But what we find
• 15:36
  Speaker 1: is that expenditures are rising if you think about education costs,
• 15:40
  Speaker 1: if you think about healthcare costs, and on balance, there
• 15:43
  Speaker 1: doesn't seem to be a lot of velocity or growth
• 15:45
  Speaker 1: and real incomes. And so you can you can rationalize
• 15:49
  Speaker 1: a world where default rates are rising, uh in the
• 15:51
  Speaker 1: sense that a lending conditions have gotten too loose. But
• 15:55
  Speaker 1: be ultimately, we think that credit quality is driven in
• 15:58
  Speaker 1: many cases by the ability and the willingness to pay.
• 16:02
  Speaker 1: And if the ability to pay is constrained by cash flow,
• 16:05
  Speaker 1: which we would say income is a good proxy for that,
• 16:08
  Speaker 1: it makes sense to us six or seven years into
• 16:10
  Speaker 1: the cycle again, when you started to lend down the
• 16:12
  Speaker 1: curve that some of that income inequality and essentially a
• 16:16
  Speaker 1: lack of real wage growth is really starting to come
• 16:18
  Speaker 1: through UH and uh and and and and show some
• 16:21
  Speaker 1: you know, some cracks on the consumer side. So, Matt,
• 16:23
  Speaker 1: if you can extrapolate out on the more barish view
• 16:26
  Speaker 1: on what these numbers mean and sort of give us
• 16:29
  Speaker 1: a sense of what the result would be if this
• 16:33
  Speaker 1: credit weakness in the consumer does continue to increase the
• 16:37
  Speaker 1: pace that we've seen recently, what what would be the
• 16:40
  Speaker 1: implications for say a credit investor, even an equity investor. Yes,
• 16:45
  Speaker 1: so I think this cycle, we would argue that central
• 16:47
  Speaker 1: bank policy has been very accommodative UM, and so some
• 16:50
  Speaker 1: of the traditional measures we look at UM, such as
• 16:53
  Speaker 1: financial condition indicators or lending standards, seem to look fairly benign. Again,
• 16:58
  Speaker 1: I think a lot of that is the liquidity that's
• 17:00
  Speaker 1: been provided by central banks. So one of the things
• 17:03
  Speaker 1: that we believe this cycle, UM is that delinquency and
• 17:06
  Speaker 1: default rates may need to be severe UH and elevated
• 17:10
  Speaker 1: enough to basically to scare out or to push back
• 17:13
  Speaker 1: on all of the liquidity UH and the investment money
• 17:17
  Speaker 1: that's basically reaching for yield. So I think the story
• 17:19
  Speaker 1: this time may actually end up being default rates and
• 17:22
  Speaker 1: delinquencies need to get high enough that essentially it shocks
• 17:25
  Speaker 1: or scares UH the investor community, and it basically causes
• 17:28
  Speaker 1: a pullback in liquidity UM. So I think that you
• 17:31
  Speaker 1: look for two things from our side, Either one very
• 17:34
  Speaker 1: severe increase in delinquency or default rates in a specific
• 17:38
  Speaker 1: market UM such as autos, or two, I think, more importantly,
• 17:42
  Speaker 1: a more broad based increase in delinquency rates UM that
• 17:45
  Speaker 1: again would affect lenders such as non banks and banks
• 17:49
  Speaker 1: on a more widespread scale. Matthew, I want to pick
• 17:51
  Speaker 1: ups on something having to do with these non bank
• 17:53
  Speaker 1: lenders that you say are being pressured to meet their
• 17:56
  Speaker 1: loan growth goals. If non bank lenders create the credit
• 18:03
  Speaker 1: and then sell on the loans to other people, they'll
• 18:07
  Speaker 1: be long gone before any of this paper starts to stink.
• 18:12
  Speaker 1: Is that accurate? Probably depends on the type of the
• 18:17
  Speaker 1: loan that you are referencing. So I mean they're not
• 18:20
  Speaker 1: going to hold it on their books, is my point.
• 18:22
  Speaker 1: No other ways. We just spoke to Mark Stefanski of
• 18:25
  Speaker 1: the of the Federal third Federal Savings and Loan they're
• 18:30
  Speaker 1: based in Cleveland. He said, no, no, when they make
• 18:31
  Speaker 1: the loan let's say for a house, they keep the
• 18:33
  Speaker 1: loan on their books, but most of these non bank lenders,
• 18:35
  Speaker 1: are they really keeping the loans? I think it really depends.
• 18:39
  Speaker 1: I mean again, I think you know, to be clear,
• 18:41
  Speaker 1: it depends whether you're talking about a mortgage versus a
• 18:44
  Speaker 1: student versus a credit card, or an auto loan. UM,
• 18:48
  Speaker 1: let's stick. But let's stick with auto and credit the
• 18:50
  Speaker 1: revolving credit, because those are the two areas that that
• 18:52
  Speaker 1: seemed to be at least in the crosshairs right now.
• 18:56
  Speaker 1: Autos and credit cards. Yes, I believe anywhere from a
• 19:00
  Speaker 1: quarter to let's say a little over a half of
• 19:03
  Speaker 1: loans are securitized. UM. You know, I think the the
• 19:08
  Speaker 1: the caveat there is not everything is securitized or not.
• 19:11
  Speaker 1: Everything is basically moved off balance sheet. UM. I think
• 19:14
  Speaker 1: you know, if you take mortgages, for example, UM, you
• 19:18
  Speaker 1: have residual rights in many cases on the servicing side,
• 19:21
  Speaker 1: and you also have UM, I think risks around certainly
• 19:25
  Speaker 1: if you're lending uh aggressively. We've seen with companies. UM.
• 19:30
  Speaker 1: You know, earlier in the month, we've seen with companies
• 19:31
  Speaker 1: on the mortgage side. Uh. You know that there's still
• 19:34
  Speaker 1: reputational or other risks if they're not essentially underwriting to
• 19:37
  Speaker 1: proper appropriate standards. So I think it's it's a fair
• 19:41
  Speaker 1: argument to say, well, isn't this just intermediated without any
• 19:44
  Speaker 1: skin in the game. Um. But I would point out
• 19:47
  Speaker 1: that a lot of the non banks, I think you
• 19:49
  Speaker 1: need to keep in mind, are funded either by wholesale
• 19:52
  Speaker 1: funding or by the banks themselves. Um. And we've seen
• 19:55
  Speaker 1: this issue with some of the Canadian mortgage companies in
• 19:58
  Speaker 1: the last week, which is like home capital, Yeah, yeah,
• 20:01
  Speaker 1: if the market confidence right, it pulls back that that
• 20:04
  Speaker 1: funding ultimately is either wholesale in many cases wholesale based,
• 20:08
  Speaker 1: or it's it's supported in many cases by banks. Now,
• 20:11
  Speaker 1: not speaking specifically to a given issue in Canada, but
• 20:14
  Speaker 1: when we look at the non bank lenders across the
• 20:16
  Speaker 1: US from any of the consumer loans, you know, the
• 20:20
  Speaker 1: backstop essentially is the banks. Well, so let's put aside
• 20:24
  Speaker 1: the armageddon or sort of systemic crisis type of scenario.
• 20:28
  Speaker 1: Under the current scenario scenario where we see delinquencies and
• 20:31
  Speaker 1: charge offs increasing, do you think that the unsecured bonds
• 20:35
  Speaker 1: of say Capital One or debt of Synchrony, or you know,
• 20:40
  Speaker 1: some of these lenders do you think that that the
• 20:43
  Speaker 1: risk is adequately priced in right now? I think what
• 20:47
  Speaker 1: you've seen over the last few weeks is it's not
• 20:49
  Speaker 1: um and I think structurally the view that we would
• 20:51
  Speaker 1: have is again two things. One is that a lot
• 20:54
  Speaker 1: of the loan growth has occurred in the non banks sector,
• 20:58
  Speaker 1: and too, to be clear, that those loans tend to
• 21:01
  Speaker 1: be much higher risk. And I think lenders have been
• 21:05
  Speaker 1: lulled into a sense of complacency. I you know, I
• 21:08
  Speaker 1: think they're telling you in the last few weeks these
• 21:10
  Speaker 1: loans and the loan losses that were expected, we're much
• 21:13
  Speaker 1: lower than what's being realized. And in an environment I
• 21:15
  Speaker 1: would say where we're not in a recession or from
• 21:18
  Speaker 1: our side, not close to a recession. You know, the
• 21:20
  Speaker 1: concern that we have is if it's still a fairly
• 21:24
  Speaker 1: stable or or or benign backdrop. And you know, I
• 21:27
  Speaker 1: would use that term gently, but I do think that's
• 21:29
  Speaker 1: the case. And structurally, as we look out two to
• 21:32
  Speaker 1: three years, if the environment were to deteriorate, I think
• 21:35
  Speaker 1: the pressure is going to intensify. We gotta leave it there.
• 21:38
  Speaker 1: Matthew miss Global Credit Strategies for UBS securities. This is
• 21:42
  Speaker 1: Bloomberg for honor to bring in Ning Tang, chief executive
• 21:57
  Speaker 1: officer and founder of Credit Ease, a Chinese lender that
• 22:02
  Speaker 1: is funneling money into the United States from China and
• 22:06
  Speaker 1: seeing really what the Chinese consumer was looking to buy
• 22:10
  Speaker 1: in the US and the big wealthy investor is as well.
• 22:13
  Speaker 1: Thank you so much for joining us. So can you
• 22:15
  Speaker 1: just give us UH an overview of credit ees which
• 22:17
  Speaker 1: overseas almost fifteen billion dollars and pioneered a peer to
• 22:22
  Speaker 1: peer lending model. Yes, and UH we are a leading
• 22:26
  Speaker 1: wealth management company in China. We're also in a lending
• 22:30
  Speaker 1: business and we've been around for eleven years now. One
• 22:35
  Speaker 1: of the key things we are doing is to help
• 22:39
  Speaker 1: high end, wealthy Chinese investors deployed their wealth globally and
• 22:46
  Speaker 1: the US is a great destination. And just this week
• 22:50
  Speaker 1: one I'm here, so our fund of funds team H
• 22:55
  Speaker 1: is here evaluating investment opportunities into funds like a KR
• 23:00
  Speaker 1: black Stone. And also we have a fintech investment fund
• 23:05
  Speaker 1: team here evaluating investment opportunities into financial technology companies. Well,
• 23:11
  Speaker 1: so this this is really interesting. Are people going into
• 23:15
  Speaker 1: properties or are they steering away from US property investments?
• 23:20
  Speaker 1: Actually the demand is huge for alternative assets such as
• 23:25
  Speaker 1: real estate and the venture capital, private equity, and also
• 23:30
  Speaker 1: credit solutions as well as hedge funds. So we are
• 23:34
  Speaker 1: the leader in helping people do that. What if you
• 23:37
  Speaker 1: could just give us a little detail on your partnership
• 23:41
  Speaker 1: agreement with Tishman Spire that's taking place in Beijing. That
• 23:45
  Speaker 1: may highlight some of the areas that you find investors
• 23:49
  Speaker 1: are attracted to. Yeah. So we've been working with Tischman
• 23:53
  Speaker 1: for many years, investing in their global funds, European funds
• 23:58
  Speaker 1: as well as China on a project and the incoming
• 24:02
  Speaker 1: three years together we're going to do a ten billion
• 24:06
  Speaker 1: an R and B projects and uh, some in China,
• 24:10
  Speaker 1: some outside of China, like the springs in Shanghai. Is
• 24:14
  Speaker 1: that one of the in Shanghai and also in Beijing. Well,
• 24:19
  Speaker 1: so you know, there's been a lot of discussion and
• 24:21
  Speaker 1: a lot of fear frankly over in the US about
• 24:23
  Speaker 1: China and the credit market in China and that people
• 24:27
  Speaker 1: uh and that is it getting overheated? Are people still
• 24:30
  Speaker 1: able to withdraw their money and bring it invest globally?
• 24:34
  Speaker 1: What do you what do you say to some of this?
• 24:35
  Speaker 1: Do you think the view of China's credit markets and
• 24:39
  Speaker 1: sort of the support from the government is overblown. Actually,
• 24:42
  Speaker 1: we see tremendous opportunity as Chinese consumers, micro entrepreneurs and
• 24:48
  Speaker 1: the small business owners as do a hungry for credit help.
• 24:53
  Speaker 1: Chinese people are very entrepreneurial and the new economy is
• 24:56
  Speaker 1: very vibrant looking for capital. But so do you find
• 25:00
  Speaker 1: that your wealthy clients have more difficulty funneling their money
• 25:04
  Speaker 1: out of China and into a place like the US
• 25:07
  Speaker 1: given the capital controls that the government's put in place.
• 25:09
  Speaker 1: We are a leading wealth management company in China, and
• 25:13
  Speaker 1: many of our clients have assets and currencies outside of
• 25:18
  Speaker 1: China already. They are successful entrepreneurs globally. So this is
• 25:24
  Speaker 1: not that you sue we have. You're also bringing this
• 25:27
  Speaker 1: model to trade finance. I believe I wonder if you
• 25:29
  Speaker 1: could expand a little bit about that because Trade Shift
• 25:32
  Speaker 1: is one of your businesses that you're partnering with. Yes,
• 25:36
  Speaker 1: trade Shift is a very interesting company, one of the
• 25:40
  Speaker 1: over ten investments that we've done through our Fintech investment
• 25:44
  Speaker 1: fund in the US, and so we are a equity
• 25:49
  Speaker 1: investor in Trade Shift. Also, we operationally and a strategically
• 25:54
  Speaker 1: work with it as a value adding partner. Is there
• 25:57
  Speaker 1: any place in the in the world that the Chinese
• 26:00
  Speaker 1: clients that you work with used to be interested in
• 26:04
  Speaker 1: but no longer are not really because Chinese investors are
• 26:09
  Speaker 1: going global big time, right, But as far as reducing
• 26:12
  Speaker 1: their allocation to a certain country in favor of another,
• 26:16
  Speaker 1: I mean, is there a place that Is there any
• 26:17
  Speaker 1: shift in the way that the investors that you deal
• 26:21
  Speaker 1: with are looking to deploy their money? Well, I think
• 26:24
  Speaker 1: the trend is that they now work one and more
• 26:28
  Speaker 1: with professional organizations as opposed to doing things on their
• 26:33
  Speaker 1: own or through their friends. So they used to be
• 26:36
  Speaker 1: not so professional. So I think the trend is moving
• 26:39
  Speaker 1: from not so professional way to professional way. You mean
• 26:42
  Speaker 1: to go towards, for example, of venture capital form or
• 26:45
  Speaker 1: a KKR, Carlyle or what of these. First of all
• 26:49
  Speaker 1: is through a wealth management organizations experts like us. Yes,
• 26:55
  Speaker 1: your company is listed on the New York Stock Exchange,
• 26:58
  Speaker 1: but that's our subsidiary. Come bunny, it is a small
• 27:01
  Speaker 1: business of ours doing marketplace lending. This is why are
• 27:06
  Speaker 1: the this is a year and die? Yes? Is that correct? Yes? Okay,
• 27:10
  Speaker 1: I just want to understand this because there's a platform
• 27:13
  Speaker 1: that has been launched right, which is supposed to give
• 27:17
  Speaker 1: the companies an ability to get data from you as
• 27:21
  Speaker 1: well as anti fraud technology customer acquisition capabilities. Does that
• 27:26
  Speaker 1: mean that you're going to be moving more deeply into
• 27:29
  Speaker 1: advising the people that borrow money? Um, it's actually a
• 27:33
  Speaker 1: platform working for both borrowers and lenders doing uh P
• 27:40
  Speaker 1: online and it was listed the end of two thousand fifteen.
• 27:44
  Speaker 1: But as a fintech leader, it has accumulated a lot
• 27:48
  Speaker 1: of data that can work for other players in China
• 27:53
  Speaker 1: for anti fraud so on. So it's kind of a
• 27:56
  Speaker 1: value adding service we offer to the whole industry. Well,
• 27:59
  Speaker 1: and it seems like from my research on peer to
• 28:02
  Speaker 1: peer lending in China there is a much bigger ground
• 28:06
  Speaker 1: swell of support for this particular form of financing than
• 28:10
  Speaker 1: in the US, where some of the peer to peer
• 28:12
  Speaker 1: lenders are are less peer to peer and more kind
• 28:14
  Speaker 1: of financed by bigger institutions uh and then they can
• 28:17
  Speaker 1: make micro loans. I mean, what do you think the
• 28:19
  Speaker 1: future of of the so called peer to peer in
• 28:22
  Speaker 1: the US really is? Yeah, Actually, a marketplace lending has
• 28:27
  Speaker 1: been around for over ten years. We invented that model
• 28:30
  Speaker 1: in China and the leading companies like uh Lending Club
• 28:34
  Speaker 1: and so long have done uh yeah well in the US.
• 28:38
  Speaker 1: And recently we invested invested in a company called upgrade
• 28:42
  Speaker 1: Um that's uh founded by a lending club founder and
• 28:46
  Speaker 1: x CEO renored, so we are great to be his investors.
• 28:52
  Speaker 1: So you weren't scared off by the whole KRIF fluffle
• 28:54
  Speaker 1: with the Lending Club a couple of years ago. I
• 28:57
  Speaker 1: believe the model is robust and the industry will be
• 29:01
  Speaker 1: for the long haul. The robot advisor topic is certainly
• 29:08
  Speaker 1: something that US investors have been grappling with. Do you
• 29:11
  Speaker 1: have robo advisors in China and are they going to expand? Yes?
• 29:15
  Speaker 1: And uh so our wealth management business while covering high
• 29:20
  Speaker 1: network ultra high net worth individuals the Mary Lynch and
• 29:24
  Speaker 1: the ubs way, we also serve a middle class uh
• 29:28
  Speaker 1: mass affluent investors, but we do that through utilizing technology
• 29:33
  Speaker 1: through robo advisor. So we have a leading robot advisory
• 29:36
  Speaker 1: service in China, so people can get their own customized
• 29:42
  Speaker 1: the solution through mobile phone. So based on your wealthy clients,
• 29:47
  Speaker 1: you were saying that your view is that the economy
• 29:50
  Speaker 1: is going well in China, are they at all concerned
• 29:53
  Speaker 1: about some of the issues that people are talking about
• 29:56
  Speaker 1: with respect of the slowing Chinese economy and whether or
• 29:59
  Speaker 1: not the uh, whether or not it can head for
• 30:01
  Speaker 1: a software Yeah, that's very interesting phenomena. We see that,
• 30:06
  Speaker 1: you know, many of our investors are successful entrepreneurs from
• 30:11
  Speaker 1: the old economy, so they are in manufacturing, in trading,
• 30:14
  Speaker 1: so on. But they realized that the new economy is coming,
• 30:17
  Speaker 1: so they like to embrace the new economy. How to
• 30:20
  Speaker 1: do that through fund of funds investment. So when you
• 30:22
  Speaker 1: say the new economy, you're talking services right, uh. And
• 30:25
  Speaker 1: also like a cloud computing for example, like Internet Plus,
• 30:30
  Speaker 1: like uh, you know, a mobile internet so on, all
• 30:34
  Speaker 1: like enabling the old economy to do better. The regulations
• 30:39
  Speaker 1: that exist in China over peer to peer lending, they've
• 30:42
  Speaker 1: claimed a couple of victims like for example home facts.
• 30:46
  Speaker 1: Uh no more, is there a regulatory regime that ensures
• 30:51
  Speaker 1: the stability and the safety of the system for investors. Yeah,
• 30:55
  Speaker 1: And actually talking about the fintech innovation, two sectors have
• 30:59
  Speaker 1: become relatively more mature, namely marketplace lending and payment. They
• 31:05
  Speaker 1: are like a trillion dollar in size. And also there
• 31:08
  Speaker 1: are regulatory regimes for them, but other sectors are still
• 31:12
  Speaker 1: up and coming, like a robo advisor, like crowdfunding so on.
• 31:16
  Speaker 1: All right, I want to thank you very much for
• 31:17
  Speaker 1: coming in and sharing all this with us. Tank is
• 31:20
  Speaker 1: the chief executive and the founder of Credit Yes, thank
• 31:24
  Speaker 1: you very much for being with us. Thanks for listening
• 31:28
  Speaker 1: to the Bloomberg P and L podcast. You can subscribe
• 31:31
  Speaker 1: and listen to interviews at Apple Podcasts, SoundCloud, or whatever
• 31:34
  Speaker 1: podcast platform you prefer. I'm pim Fox. I'm on Twitter
• 31:38
  Speaker 1: at pim Fox. I'm on Twitter at Lisa Abramo. It's
• 31:42
  Speaker 1: one before the podcast. You can always catch us worldwide
• 31:45
  Speaker 1: on Bloomberg Radio