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China's Surging Interest Bill Underscores Debt Strain (Podcast) · 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. Bramowitz. 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
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• 0:33
  Speaker 1: As we talk about China easing their monetary and fiscal policies,
• 0:38
  Speaker 1: there is a big question which is how much more
• 0:41
  Speaker 1: ammunition do they really have? Joining us now? I am
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  Speaker 1: so pleased to say, as Victor she associate professor at
• 0:47
  Speaker 1: UC San Diego, a former principle for the Carlisle Group
• 0:51
  Speaker 1: and a former professor at Northwestern Victor, thank you so
• 0:54
  Speaker 1: much for being with us. I want to talk about
• 0:57
  Speaker 1: the composition of China's debt and how much ability they
• 1:00
  Speaker 1: have to lever up further. So let's first talk about
• 1:04
  Speaker 1: where do you see the biggest debt problem in China? Um,
• 1:08
  Speaker 1: thanks for having me on. So I think the biggest problem,
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  Speaker 1: you know, obviously people have talked about the domestic debt,
• 1:13
  Speaker 1: which is you know, around three GDT. That's not good,
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  Speaker 1: but domestically, They've got a lot of UH policy tools
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  Speaker 1: to deal with that. I think the biggest trouble spot
• 1:24
  Speaker 1: that a lot of investors may not realize is China's
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  Speaker 1: external debt. Among em countries, China is the largest that
• 1:31
  Speaker 1: are by far according to b i S data, and
• 1:36
  Speaker 1: if you include Hong Kong, which of course is a
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  Speaker 1: part of China UM, China's external debt now stands around
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  Speaker 1: two point five trillion dollars. So that's an enormous amount,
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  Speaker 1: even given as three trillion dollars in point exchange reserved.
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  Speaker 1: And doesn't about one point two trillion of that have
• 1:53
  Speaker 1: to be rolled over this year? Yeah? Well, actually, you know, uh,
• 2:00
  Speaker 1: hundreds of billions have to be rolled over every month
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  Speaker 1: because a lot of it is is short term loans
• 2:06
  Speaker 1: that Chinese banks have borrowed to finance the foreign exchange
• 2:10
  Speaker 1: needs of Chinese companies and even China's overseas investments such
• 2:15
  Speaker 1: as part of the One Belt, One Road initiative. So
• 2:18
  Speaker 1: here's here's where I'm wondering. Where the concern comes in
• 2:22
  Speaker 1: is the fear basically that China is restricted in how
• 2:26
  Speaker 1: much it can weaken its currency because if it does
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  Speaker 1: so overly then it will have a harder time rolling
• 2:32
  Speaker 1: over these obligations and repaying them. There there are many
• 2:37
  Speaker 1: different potential risks there. There's the evaluation risks because you know,
• 2:41
  Speaker 1: even though a lot of these loans is denominated in dollars,
• 2:45
  Speaker 1: of course the underlying assets that ultimately back a lot
• 2:49
  Speaker 1: of these loans are women be denominated um. The other
• 2:53
  Speaker 1: concern is that you know, of course the threat of
• 2:56
  Speaker 1: the trade war if it were to shrink China's trade
• 2:59
  Speaker 1: surplus and then meaningful way um because currently obviously the
• 3:03
  Speaker 1: trade surplus has been what China has been using the
• 3:06
  Speaker 1: services dead and if um the trade surplus would the
• 3:10
  Speaker 1: shrink in a meaningful way, then that that would be
• 3:12
  Speaker 1: a problem for China general e M. Panic. You know,
• 3:16
  Speaker 1: what China has done in the past couple of years
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  Speaker 1: is to constantly increase his external debt in order to
• 3:23
  Speaker 1: roll over the existing debt and and to pay for
• 3:27
  Speaker 1: some of the interests even with new loans. And so
• 3:30
  Speaker 1: you know that pipeline were to freeze, that also would
• 3:34
  Speaker 1: cause a problem for China. I want to pick up
• 3:36
  Speaker 1: on the interest point because this was something that was
• 3:38
  Speaker 1: brought to my attention and I actually reached out to
• 3:40
  Speaker 1: about this, Uh, just how much money China is spending
• 3:44
  Speaker 1: on interest payments? Can you talk a little bit about that.
• 3:47
  Speaker 1: I don't think a lot of people are aware that
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  Speaker 1: at this point, given its debtload, a substantial proportion of
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  Speaker 1: of of its of the money that it borrows may
• 3:57
  Speaker 1: have to go towards just even repaying interest. Yes, so
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  Speaker 1: domestically China has a has a really big debt problem. Um.
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  Speaker 1: You know, when you have debt that is GDP, and
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  Speaker 1: when you're interest rate is not zero like the case
• 4:11
  Speaker 1: of Japan and some of the European countries, um, you
• 4:15
  Speaker 1: end up spending a lot of the new credit just
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  Speaker 1: to service uh the interest payment, which by my calculation
• 4:22
  Speaker 1: is something like nineteen trillion women b or you know,
• 4:26
  Speaker 1: roughly three trillion dollars per year. So every month the
• 4:30
  Speaker 1: monetary authorities have to come up with dollars just to
• 4:35
  Speaker 1: service the interests in the economy and it and if
• 4:38
  Speaker 1: it wants the economy to grow from investment on top
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  Speaker 1: of that, it would have to provide even more money.
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  Speaker 1: So that's why I think investors in China are very savvy. Now.
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  Speaker 1: When the PBOC cuts reserve requirement ratio by one, the
• 4:53
  Speaker 1: market actually didn't really react to it, because you know,
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  Speaker 1: it's just part of the course. That's the minimum amount
• 4:59
  Speaker 1: that the monetary authorities need just to roll over its
• 5:04
  Speaker 1: enormous debt pile. Uh, it would have to do a
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  Speaker 1: lot more. It would have to deregulate the shadow banking industry,
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  Speaker 1: which it just successfully regulated, would basically have to undo
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  Speaker 1: all of that in order to get the economy going. Yet,
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  Speaker 1: will the additional money that's necessary to finance either the
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  Speaker 1: rollover or indeed new borrowing on the part of China,
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  Speaker 1: will that compete for investor dollars who have to also
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  Speaker 1: fund US treasury borrowings. Um? So I think, you know,
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  Speaker 1: the the domestic and external part are relatively separate, um
• 5:42
  Speaker 1: and of course increasing them. And I think there's this
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  Speaker 1: implicit competition in the sense that Chinese investors increasingly do
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  Speaker 1: not want to hold their money in women b because, um,
• 5:54
  Speaker 1: they know that the monetary authorities would just have to
• 5:57
  Speaker 1: keep on printing money to to prevent a crisis, knowing
• 6:01
  Speaker 1: that they would rather hold foreign currencies, and so that
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  Speaker 1: creates almost this sort of private demand for the U. S. Treasuries.
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  Speaker 1: As a result, of course, the Chinese government has done
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  Speaker 1: a lot to prevent domestic money from flowing overseas to
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  Speaker 1: overseas assets. They've been relatively successful. Um. And so right
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  Speaker 1: now that you know that, we were not seeing a
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  Speaker 1: massive capital flight, but the temptation is there. Uh and
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  Speaker 1: the moment that the regulators um looseness grips, so to speak. UM,
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  Speaker 1: I think a lot of money would want to flow
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  Speaker 1: out of China. Victor. I want to talk a little
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  Speaker 1: bit about something that you mentioned that just servicing non
• 6:43
  Speaker 1: financial debt in China totaled about three trillion dollars. You
• 6:47
  Speaker 1: said that basically, Uh, that was roughly twenty two of
• 6:52
  Speaker 1: the gross domestic product of China. So this is a
• 6:57
  Speaker 1: significant headwing to economic growth at this point. Is that correct? Yes, Um,
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  Speaker 1: it is a significant headwind. UM. And and we've seen that,
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  Speaker 1: we've seen you know, so China actually did not de
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  Speaker 1: leverage uh. It's it's a financial system in the past year,
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  Speaker 1: despite the rhetorics, UM, it just slowed down the rate
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  Speaker 1: of growth of credit UM from you sort of mid
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  Speaker 1: teens to around ten percent. Uh. And that already in
• 7:27
  Speaker 1: itself caused a drastic slowdown of growth. UM. You know,
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  Speaker 1: actual deleveraging would immediately cause a financial crisis. So going forward,
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  Speaker 1: if it wanted growth to resume at at a at
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  Speaker 1: a real rate of you know, six percent, seven percent,
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  Speaker 1: which are the policy objectives still, then it would have
• 7:48
  Speaker 1: to pump a lot more money into the economy, and that,
• 7:52
  Speaker 1: of course will challenge people's confidence in the Roman b
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  Speaker 1: I want to thank you very much for spending time
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  Speaker 1: with us. A Vic She is the associate professor at
• 8:02
  Speaker 1: the University California, San Diego, joining us from La Joya
• 8:06
  Speaker 1: speaking about the need for China to service it's dollar
• 8:11
  Speaker 1: denominated debt and the amount of debt that it will
• 8:13
  Speaker 1: have to roll over this year. Big banks are pushing
• 8:31
  Speaker 1: back against the big equity exchanges. Basically, they want to
• 8:36
  Speaker 1: have their cake and eat it too. They want cheaper exchanges,
• 8:40
  Speaker 1: they want them faster, so they're going to create their own.
• 8:42
  Speaker 1: Joining us now to talk about that, Chris and Ag
• 8:45
  Speaker 1: executive editor focusing on equities for Bloomberg. So, Chris, what
• 8:49
  Speaker 1: exactly is this that a group of banks, Dine founders
• 8:53
  Speaker 1: including Morgan, Stanley, Ubs, Citadel, Virtue and others, were they
• 8:56
  Speaker 1: hoping to create here? Um, I think if you've got
• 8:59
  Speaker 1: to look at the US stock market structures. That's kind
• 9:02
  Speaker 1: of constantly evolving sort of Darwinian competitive arena, and there's
• 9:08
  Speaker 1: been there's been four or five waves of that over
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  Speaker 1: the last twenty years. This is the latest sort of
• 9:14
  Speaker 1: you know, monopoly busting effort among in that in that cycle.
• 9:19
  Speaker 1: It's not exactly you know, a bunch of rag tag
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  Speaker 1: up starts. You're dealing with the biggest financial institutions in
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  Speaker 1: the country banding together, um to get some kind of
• 9:30
  Speaker 1: in road foothold in the not not really do opoly.
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  Speaker 1: There's about there's about three companies to control most of
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  Speaker 1: the the stock exchanges at the moment, and now there's
• 9:40
  Speaker 1: going to be there's gonna be four, and this is
• 9:42
  Speaker 1: going to be sort of mutually held thing by again
• 9:45
  Speaker 1: all of the biggest all of the biggest players in
• 9:48
  Speaker 1: the in the stock trading ecosystem, including interestingly the big
• 9:52
  Speaker 1: market makers which are really the power players in that
• 9:55
  Speaker 1: in that system, Virtue and UH Citadel, which are responsible
• 9:59
  Speaker 1: for or some ungodly number of trades in the in
• 10:02
  Speaker 1: the U S stock market. Chris, what did these banks
• 10:06
  Speaker 1: and brokerage firms object to when it comes to price? Um,
• 10:10
  Speaker 1: it's not I have to say not altogether queer frankly,
• 10:13
  Speaker 1: I mean they in some ways, A lot of these
• 10:16
  Speaker 1: a lot of these players are sort of they're sort
• 10:19
  Speaker 1: of the pantheon of villains and a lot of market
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  Speaker 1: structure arguments, certainly Citadel and Virtue or not companies that
• 10:24
  Speaker 1: have enormous amounts of peers cried for them, um uh,
• 10:28
  Speaker 1: sort of straightforwardly one of the big cost centers. One
• 10:31
  Speaker 1: of the only things that anyone can make any money
• 10:33
  Speaker 1: doing in the stock market right now is selling data
• 10:36
  Speaker 1: on trades. This incredibly you know, this not enormous data
• 10:41
  Speaker 1: that is generated by the actual customers is then sold
• 10:46
  Speaker 1: back to those very customers. But at the same time,
• 10:49
  Speaker 1: don't these exchanges pay rebates to the brokers that send
• 10:53
  Speaker 1: them order flo that's right, and Virtue and Citadel or
• 10:56
  Speaker 1: presumably big collectors of those. So it's not entirely clear
• 11:00
  Speaker 1: what huge advantage they're hoping hoping to leverage out of
• 11:02
  Speaker 1: the existing should create for themselves by doing this. This
• 11:06
  Speaker 1: is not a hugely profitable business anymore. It's very low margin,
• 11:11
  Speaker 1: very extremely high volume. That's sort of been the direction
• 11:14
  Speaker 1: of market structure revolution over the last twenty years that
• 11:17
  Speaker 1: spreads on trades have gone ever ever slimmer, and the
• 11:20
  Speaker 1: amount of trades that happen by virtue of basically high
• 11:23
  Speaker 1: frequency traders computerized traders has gone way up. So what
• 11:27
  Speaker 1: they lack in profits they make up for in volume. So, Chris,
• 11:30
  Speaker 1: I wonder if there's a broader takeaway here about market structures,
• 11:34
  Speaker 1: since people are accusing the changes in market structure that
• 11:38
  Speaker 1: have moved trading towards a more electronic, faster, uh, you know,
• 11:43
  Speaker 1: less lucrative for the exchanges and others kind of model,
• 11:47
  Speaker 1: and that this is the reason why things are bouncing
• 11:49
  Speaker 1: around because there aren't humans in between. You buying that? Um,
• 11:53
  Speaker 1: I'm not sure that that. I totally buy that. I
• 11:55
  Speaker 1: feel like volatility we shall always have. I do think
• 11:57
  Speaker 1: that may be relevant to this, to the what's going
• 12:00
  Speaker 1: on here today, Like a lot of stuff that goes
• 12:02
  Speaker 1: on in market structure, if you look at it closely,
• 12:04
  Speaker 1: is a kind of big pr game, um and and
• 12:09
  Speaker 1: a serious one because uh, the regulatory sites for every
• 12:12
  Speaker 1: once in a while trained on high frequency trating. It's
• 12:15
  Speaker 1: I doubt this was the reason. But you had Stephen
• 12:17
  Speaker 1: nuch in three weeks ago talking about how high frequency
• 12:20
  Speaker 1: traders were responsible for all of the Volatili. They make
• 12:22
  Speaker 1: fairly easy targets. And one thing you get every now
• 12:25
  Speaker 1: and then is someone coming in saying sort of I'm
• 12:28
  Speaker 1: going to baptize the world and fire. I'm gonna simplify
• 12:31
  Speaker 1: everything and put out home homey sounding press release like
• 12:34
  Speaker 1: the one that went out this morning, saying look, we're
• 12:36
  Speaker 1: gonna come in and simplify everything. That's going to be cheaper,
• 12:39
  Speaker 1: you know, simple order types. You had a couple of
• 12:41
  Speaker 1: years ago with the Michael Lewis exchange of I E X,
• 12:43
  Speaker 1: the one profiled, and uh, flash boys, that this happens.
• 12:47
  Speaker 1: And this is a consideration where setting yourself up is
• 12:50
  Speaker 1: kind of a hero of market structure, however questionable what
• 12:53
  Speaker 1: ultimately is can be a worthwhile thing when regulators start
• 12:56
  Speaker 1: to get their dander up about stuff that may be
• 12:58
  Speaker 1: part of what's going on here. I mean, I don't know,
• 13:01
  Speaker 1: you know, I certainly it wouldn't be stated as one
• 13:03
  Speaker 1: of the goals of the thing, but it might be
• 13:05
  Speaker 1: nice to have, oh, we're coming in trying to save
• 13:07
  Speaker 1: everyone to point to in a couple months when Minuchin
• 13:12
  Speaker 1: starts setting up hearings and things like that. I don't
• 13:15
  Speaker 1: I don't know which occurs to me, it's not out
• 13:17
  Speaker 1: of the question that that's part of the motive here,
• 13:19
  Speaker 1: doesn't the security is an exchange commission really regulate how
• 13:23
  Speaker 1: much the exchanges can charge for their data? There's yeah,
• 13:27
  Speaker 1: and the exchange has recently lost uh uh some kind
• 13:31
  Speaker 1: of regulatory hearing where their their fees were sent back
• 13:35
  Speaker 1: to them for more explanation. Basically with the you know,
• 13:38
  Speaker 1: the expectation that they're probably gonna end up being cut.
• 13:41
  Speaker 1: At the same time, keeping exchanges, keeping the companies that
• 13:44
  Speaker 1: uh that are the sites of all trading in this
• 13:48
  Speaker 1: country is not totally bankrupt motive in and of itself.
• 13:52
  Speaker 1: It helps to have relatively profitable venues where you can
• 13:57
  Speaker 1: go and get your trade done in half a second.
• 13:59
  Speaker 1: It's not a completely bankrupt motive for the work for
• 14:02
  Speaker 1: you know, for capitalism, basically to have these things existing
• 14:06
  Speaker 1: so you know what of things to balance. Thanks very
• 14:09
  Speaker 1: much for being with us. Chris nig is Executive editor
• 14:12
  Speaker 1: for editor for Equities for Bloomberg, speaking about brokers forming
• 14:16
  Speaker 1: a new stock market to take on the New York
• 14:19
  Speaker 1: Stock Exchange, the NASTAC and the cbo E on Friday,
• 14:40
  Speaker 1: p G and E. This is the utility that supplies
• 14:44
  Speaker 1: electricity and power to most of northern California, said that
• 14:48
  Speaker 1: it is quote working diligently to assess the company's potential
• 14:51
  Speaker 1: liabilities as a result of the wildfires and the options
• 14:55
  Speaker 1: for addressing those liabilities, while those liabilities may lead to
• 15:01
  Speaker 1: bankruptcy filing and bankruptcy protection. Here to tell us more,
• 15:05
  Speaker 1: Kick Conoledge he is our senior Industrials and utilities analysts
• 15:08
  Speaker 1: for Bloomberg Intelligence Kit. Is this part of the negotiation
• 15:13
  Speaker 1: that goes on between the utility and lawmakers or is
• 15:17
  Speaker 1: there a serious issue here that PGNI could seek bankruptcy
• 15:22
  Speaker 1: protection because it needs it right? Well, I think him
• 15:25
  Speaker 1: there that it's both. Really, I think you can with utilities,
• 15:30
  Speaker 1: you can't separate, uh, the the financial condition from the
• 15:34
  Speaker 1: political condition that they are always dependent on what the
• 15:41
  Speaker 1: regulators and the legislators do. And of course that has
• 15:45
  Speaker 1: come to a critical situation in California, especially for Penny
• 15:49
  Speaker 1: and Northern California, because of all the wildfire. So you
• 15:51
  Speaker 1: have twenty five billion estimated or thirty billion. I saw
• 15:55
  Speaker 1: today somebody saying in liabilities for wildfire's potentially over the
• 16:00
  Speaker 1: next X number of years to be paid out. Somebody's
• 16:04
  Speaker 1: got to pay that, that would I mean, the whole
• 16:06
  Speaker 1: market cap of PG and E is only eleven billion
• 16:10
  Speaker 1: or ten billion now, so, uh, something's got to give.
• 16:13
  Speaker 1: So a bankruptcy filing as reported would would not I
• 16:19
  Speaker 1: think shock anybody, but whether it's needed at this point
• 16:24
  Speaker 1: is in question. So if its market cap is a
• 16:28
  Speaker 1: ten or a little bit above a billion dollars, just
• 16:31
  Speaker 1: give you a sense. It's total debt is more than
• 16:33
  Speaker 1: twice that at about twenty two billion dollars, and its
• 16:36
  Speaker 1: bonds have been plunging. I just have to wonder what
• 16:39
  Speaker 1: are the recoveries going to be like if they do
• 16:42
  Speaker 1: decide to declare bankruptcy or file for bankruptcy. Because this
• 16:46
  Speaker 1: is a company that is an investment grade credit rating,
• 16:49
  Speaker 1: right it is. Uh, it doesn't happen that much that
• 16:54
  Speaker 1: utility goes bankrupt, So we don't really know what would
• 16:57
  Speaker 1: happen in that situation. But uh, but interestingly, the one
• 17:02
  Speaker 1: that did go bankrupt, and oh one I believe it
• 17:04
  Speaker 1: was was p G and E. And I think the
• 17:10
  Speaker 1: you can go back and look at that, and the
• 17:12
  Speaker 1: recoveries were good for bondholders. I believe it was all
• 17:17
  Speaker 1: fully recovered. And you know, it's a while ago, so
• 17:20
  Speaker 1: I don't hold me to every detail, but I think
• 17:21
  Speaker 1: it was all fully recovered, and eventually the stock got
• 17:25
  Speaker 1: back to a point where it was higher than it
• 17:28
  Speaker 1: was before they went into bankruptcy. So but that took
• 17:31
  Speaker 1: four or five years. So it's a an extremely complex,
• 17:36
  Speaker 1: UH working out type of situation where of course everybody
• 17:41
  Speaker 1: wants to get paid, and the bond holders and the
• 17:43
  Speaker 1: stockholders and the UH trial lawyers and and the regulators
• 17:49
  Speaker 1: and so on. So it's it at least it will
• 17:52
  Speaker 1: take a long time to figure out who's owed what. UH.
• 17:57
  Speaker 1: But the bottom line is California. I think that the
• 18:01
  Speaker 1: cooler heads know that it only makes sense to have
• 18:04
  Speaker 1: an investment grade utility to run the polls and wires
• 18:09
  Speaker 1: and electrons in northern California. The shares of pgen E
• 18:13
  Speaker 1: are down a little bit more than today. What would
• 18:18
  Speaker 1: a bankruptcy filing do that would be positive for pg
• 18:24
  Speaker 1: n E. UH. What what it would do is it
• 18:27
  Speaker 1: would UH put the question of how you adjust the
• 18:34
  Speaker 1: debt to the amount of equity UH into a bankruptcy
• 18:38
  Speaker 1: court so that you would be relieved of the concern
• 18:42
  Speaker 1: that a sudden influx of demand for payment would immediately
• 18:46
  Speaker 1: tip over the company and lead to a liquidity crisis.
• 18:49
  Speaker 1: So you know, as with any bankruptcy, that's the kind
• 18:52
  Speaker 1: of situation. But overall the utility bankruptcy, the idea is
• 18:57
  Speaker 1: you take the piecemeal workout where as to the regulators,
• 19:00
  Speaker 1: back to the legislative, back to the regulators, and it
• 19:03
  Speaker 1: could just go on and on and nobody knows what's
• 19:05
  Speaker 1: going on. At least it gets organized in a bankruptcy
• 19:08
  Speaker 1: court and people start to say, Okay, what do you need?
• 19:11
  Speaker 1: What do you need? And the judge ultimately brings everything together.
• 19:15
  Speaker 1: And I think in this case, the state of California
• 19:18
  Speaker 1: would say what we need is a functioning utility. So
• 19:21
  Speaker 1: kid a lot of people are saying that this is
• 19:23
  Speaker 1: basically political warfare, and this is p g N saying, Okay,
• 19:27
  Speaker 1: you're not going to bail us out, fine world, file
• 19:29
  Speaker 1: for bankruptcy and put our credit rating in jeopardy and
• 19:33
  Speaker 1: throw the entire utility system, uh put it at risks.
• 19:37
  Speaker 1: So is this a dangerous precedent for other utilities. I
• 19:41
  Speaker 1: don't think any utility would uh lightly go into the
• 19:46
  Speaker 1: kind of situation that pg N is in so I'd
• 19:49
  Speaker 1: say I'm not aware of any other utility out there
• 19:52
  Speaker 1: now that has this kind of imbalance between as you
• 19:55
  Speaker 1: were discussing the debt and equity. Uh so, let's just
• 19:59
  Speaker 1: say it. You know, it's a very unpleasant situation, and
• 20:02
  Speaker 1: nobody wants to go through it if they don't have to.
• 20:04
  Speaker 1: But pg N is now in a situation where the
• 20:07
  Speaker 1: debt and the increased possibility of even much more debt
• 20:11
  Speaker 1: to pay the liabilities, uh is much more than they
• 20:15
  Speaker 1: can handle on their own at this point, and so
• 20:18
  Speaker 1: they have to look for more extreme out outcomes than
• 20:23
  Speaker 1: than you might hope for. Kick College, thank you so
• 20:25
  Speaker 1: much for being with us. Just to also note the
• 20:28
  Speaker 1: p g NI bonds that are maturing currently treating a
• 20:32
  Speaker 1: six and a half percent yield compared to a six
• 20:35
  Speaker 1: point one percent average yield on the junk rated bonds
• 20:39
  Speaker 1: with the top ratings of junk bonds. UM same about
• 20:43
  Speaker 1: average maturity, if not the p g ANY bonds are
• 20:46
  Speaker 1: actually maturing sooner, so they're being treated as junk in
• 20:50
  Speaker 1: the bond markets, even though credit rating companies are not
• 20:54
  Speaker 1: saying that that is what they are. Kick connle Edge,
• 20:56
  Speaker 1: thank you for joining us, Senior utilities industry in the
• 20:58
  Speaker 1: list for Bloomberg Intel legends he's bullish on markets for indeed,
• 21:18
  Speaker 1: he believes that stocks are currently undervalued. Here to tell
• 21:22
  Speaker 1: us more, David Cats. He's the chief investment officer for
• 21:24
  Speaker 1: Matrix Asset Advisors. He's got nearly eight hundred million dollars
• 21:29
  Speaker 1: of assets under management. David Cats a pleasure to have
• 21:33
  Speaker 1: you with us. Give us your thesis for for stocks. Well, basically,
• 21:39
  Speaker 1: you've just gone through the worst quarter in about a decade,
• 21:42
  Speaker 1: You've gone through the worst December in over uh ninety years.
• 21:46
  Speaker 1: We think stocks are now at a level that's pretty attractive.
• 21:49
  Speaker 1: The ultimate driver of stock prices is usually price earnings ratios.
• 21:53
  Speaker 1: The markets at about fourteen and a half times two
• 21:55
  Speaker 1: thousand and nineteen numbers, so that's a pretty good level
• 21:59
  Speaker 1: Historically you've done quite well from that, and we think
• 22:01
  Speaker 1: there's just much, much too much pessimism built into stock
• 22:04
  Speaker 1: prices right now, and there's a lot of room for
• 22:07
  Speaker 1: them to go high. There are a lot of great
• 22:08
  Speaker 1: businesses that are selling a ten eleven times earnings. Historically,
• 22:12
  Speaker 1: you're going to make pretty good money when you can
• 22:13
  Speaker 1: do that. Yeah, David is sort of highlight the pessimism
• 22:16
  Speaker 1: that you're talking about. Black Rocks annual survey of institutional
• 22:19
  Speaker 1: clients overseeing seven trillion dollars in assets globally came out
• 22:23
  Speaker 1: uh and more than half of them plan to cut
• 22:26
  Speaker 1: stock exposure this year, up dramatically from the proportion that
• 22:31
  Speaker 1: said the same thing last year. So where are you
• 22:34
  Speaker 1: adding opportunities and when did you start buying just one thing?
• 22:39
  Speaker 1: I'm at black Rock. What's interesting is probably if they
• 22:41
  Speaker 1: had done that Poul about six months ago, people were
• 22:44
  Speaker 1: universally bullish. So you've just had this really sharp sell
• 22:47
  Speaker 1: off and all of a sudden, sentiments turned pretty negative.
• 22:49
  Speaker 1: We think that's chasing what's happened rather than the future. Now.
• 22:53
  Speaker 1: What what we like here is we think there are
• 22:54
  Speaker 1: a wealth of industries and sectors that are pretty attractive.
• 22:58
  Speaker 1: We like the financials a great deal. Um Technology has
• 23:01
  Speaker 1: just been beaten up pretty badly, so we think there
• 23:03
  Speaker 1: are opportunities there. Communications services another area. Energy we think
• 23:08
  Speaker 1: it is poised to do a lot better. The stocks
• 23:10
  Speaker 1: have really been washed out, and select healthcare, so really
• 23:14
  Speaker 1: lots of different places to make money. The key driver
• 23:18
  Speaker 1: there is depressed valuation, good long term outlook. David I'm
• 23:22
  Speaker 1: assuming that everyone has access to more or less the
• 23:25
  Speaker 1: same information that you have access to so much it
• 23:28
  Speaker 1: must be your reading of the information that causes you
• 23:32
  Speaker 1: to be bullish and a bit of a contrarian. Maybe
• 23:35
  Speaker 1: you could just give us an example, whether it is
• 23:38
  Speaker 1: Comcast or whether it is Facebook or another stock, to
• 23:41
  Speaker 1: sort of highlight your strategy and why your perspective is different. Well,
• 23:46
  Speaker 1: our perspective is different because we try not to get
• 23:49
  Speaker 1: caught up in the day to day manias. So right
• 23:52
  Speaker 1: now the market is very, very focused on the negatives
• 23:55
  Speaker 1: associated with the trade war with interest rates. About six
• 23:59
  Speaker 1: weeks ago they were rising. Earnings are going to be
• 24:02
  Speaker 1: at a slower pace this year, so you hear that
• 24:04
  Speaker 1: from many strategists that how can the stock market go
• 24:06
  Speaker 1: up with slower earning space. We actually looked at the
• 24:10
  Speaker 1: period from nineteen thirty seven to two thousand and eighteen,
• 24:14
  Speaker 1: uh the level of earnings growth and its impact on
• 24:18
  Speaker 1: stock prices. How did the smp FI when earning s
• 24:21
  Speaker 1: growth was higher when it was lower, and we found
• 24:23
  Speaker 1: there was almost a zero correlation. So that really means
• 24:26
  Speaker 1: that that's not going to be the driver in aggregate
• 24:29
  Speaker 1: for stock prices this year. A lot of people are
• 24:31
  Speaker 1: getting caught up in that. We agree that earnings growth
• 24:34
  Speaker 1: is gonna be a lot slower than it was in
• 24:35
  Speaker 1: two thousand and eighteen, but you really can do pretty
• 24:38
  Speaker 1: nicely in a five or ten percent growth mode. In
• 24:41
  Speaker 1: terms of your question on individual stocks, Comcast has been
• 24:44
  Speaker 1: a great business that's growing at north of fifteen percent
• 24:47
  Speaker 1: a year for the last ten years. We really like management,
• 24:50
  Speaker 1: we like the acquisition that they made internationally, and you're
• 24:53
  Speaker 1: you're getting this wonderful business at about thirteen point nine
• 24:56
  Speaker 1: times earnings. UH Normally it'll sell UH at fifth seen
• 25:00
  Speaker 1: sixteen seventeen times earning, So you're getting a really good
• 25:02
  Speaker 1: business at a very attractive price. Another stock that you
• 25:05
  Speaker 1: find attractive is Facebook, which is kind of interesting because
• 25:09
  Speaker 1: there is a lot of pessimism around this one. Uh
• 25:13
  Speaker 1: the biggest bear on the street. Pivotal Research Group came
• 25:15
  Speaker 1: out today saying that Facebook is likely to see another
• 25:17
  Speaker 1: rough year and lowered their price target to a hundred
• 25:20
  Speaker 1: thirteen dollars from a hundred and twenty five dollars previously.
• 25:24
  Speaker 1: Currently shares it through a hundred and thirty eight dollars.
• 25:26
  Speaker 1: I'm just wondering where do you see Facebook shares going
• 25:29
  Speaker 1: and what gives you conviction that these bears are wrong? Well,
• 25:33
  Speaker 1: we're not that happy with Facebook management, and we really
• 25:36
  Speaker 1: do think that they run a business without a lot
• 25:38
  Speaker 1: of ethics. So we think regulation is going to be
• 25:41
  Speaker 1: a much better thing for them. We think they can
• 25:43
  Speaker 1: do a lot better in providing accurate information UH and
• 25:46
  Speaker 1: not chasing the dollar as their sole motivation. Having said that, UM,
• 25:52
  Speaker 1: they have a tremendous franchise, whether it's Facebook or Instagram
• 25:56
  Speaker 1: or What's app. UH, they make an enormous amount of
• 25:59
  Speaker 1: money advertise dollars are going more and more to social media,
• 26:02
  Speaker 1: and it really is one of the best ways to
• 26:05
  Speaker 1: target your ad and get the consumer to buy. So,
• 26:08
  Speaker 1: even though they've got a lot of business problems and
• 26:10
  Speaker 1: they're gonna have to spend a lot more money uh
• 26:13
  Speaker 1: in terms of uh managing themselves better, they're still going
• 26:17
  Speaker 1: to make a boatload of money. So for all of
• 26:18
  Speaker 1: the negatives, right now, Facebook is telling it about sixteen
• 26:22
  Speaker 1: point four times UH two thousand and nineteen earnings, they've
• 26:25
  Speaker 1: got about fifteen dollars cash per share, So if you
• 26:28
  Speaker 1: adjust for cash per share, it's at about fifteen times
• 26:31
  Speaker 1: adjusted earnings, and historically, when you can buy a very
• 26:34
  Speaker 1: good growth business at that type of price, you're gonna
• 26:38
  Speaker 1: do very very well. Tell us about your call for
• 26:40
  Speaker 1: the industrial sector, is that geared towards global economic growth.
• 26:46
  Speaker 1: So we we think that the global economy is going
• 26:49
  Speaker 1: to be okay. It definitely is going to be a
• 26:51
  Speaker 1: lot less robust than it was in two thousand eighteen. Uh,
• 26:55
  Speaker 1: Europe is struggling a little bit, China has slowed down.
• 26:58
  Speaker 1: But having said that, a lot of these companies have
• 27:01
  Speaker 1: sold off and are selling at twelve times earnings, and
• 27:04
  Speaker 1: we think that, uh, it's an absolute imperative that the
• 27:08
  Speaker 1: United States and China come up with some sort of
• 27:10
  Speaker 1: a trade deal. It's in both of their interests. We
• 27:12
  Speaker 1: think President Trump, while he might not like to do
• 27:17
  Speaker 1: a deal, is going to have to in order to
• 27:19
  Speaker 1: stabilize the US market. And if that's the case, we
• 27:22
  Speaker 1: think industrials are very well positioned to start to grow again.
• 27:26
  Speaker 1: And you're getting these companies at really good prices, whether
• 27:28
  Speaker 1: it's a United Technologies or an Eaton Corps or a
• 27:31
  Speaker 1: T Connectivity, really good businesses that will do better in
• 27:35
  Speaker 1: a reasonable global economy. So just real quick, are there
• 27:39
  Speaker 1: any stocks that you're staying away from. So the one
• 27:42
  Speaker 1: group that actually did pretty well last year, even though
• 27:45
  Speaker 1: the business was not that good were utilities. Uh, they
• 27:48
  Speaker 1: were a flight to quality. As a result, they're selling
• 27:51
  Speaker 1: at the high end of the evaluation range that we
• 27:53
  Speaker 1: normally would like for such a slow growth group. So
• 27:55
  Speaker 1: this is a group that we would be taking money
• 27:58
  Speaker 1: away from and putting into all of these There areas
• 28:00
  Speaker 1: that we just mentioned. So you're not buying pg N
• 28:04
  Speaker 1: surely not. I mean, when you're when you're looking at that,
• 28:07
  Speaker 1: that's just you're making a bet that they're not going
• 28:09
  Speaker 1: to go bankrupt. And generally when you buy utilities, you're
• 28:12
  Speaker 1: buying it for safety, So that would not fall into
• 28:15
  Speaker 1: that category if you're trying to buy a utility for safety. Uh.
• 28:18
  Speaker 1: Companies like Duke are very good companies, but we think
• 28:20
  Speaker 1: they're pretty fully priced. David Cats, thank you so much
• 28:23
  Speaker 1: for being with us. David Kat's chief investment Officer Matrix
• 28:26
  Speaker 1: Asset Manage Advisors. Matrix Matrix Asset Advisor is based in
• 28:31
  Speaker 1: New York. Thanks for listening to the Bloomberg P and
• 28:37
  Speaker 1: L podcast. You can subscribe and listen to interviews at
• 28:40
  Speaker 1: Apple Podcasts. SoundCloud or whatever podcast platform you prefer. I'm
• 28:44
  Speaker 1: pim Fox. I'm on Twitter at pim Fox. I'm on
• 28:48
  Speaker 1: Twitter at Lisa Abramo. It's One before the podcast. You
• 28:51
  Speaker 1: can always catch us worldwide on Bloomberg Radio