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China's Recovery Lacks Consumer Demand: China Beige Book · Bloomberg Intelligence

0:01
Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, along
0:04
Speaker 1: with my co host of Bonnie Quinn. Every business day
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Speaker 1: we bring you interviews from CEOs, A, market pros, and
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Speaker 1: Bloomberg experts, along with essential market moving news kind of
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Speaker 1: Bloomberg Markets Podcast on Apple podcast or wherever you listen
0:16
Speaker 1: to podcasts, and on Bloomberg dot com. So there's a
0:20
Speaker 1: lot of trepidation about what would happened with China GDP data,
0:23
Speaker 1: of course, China being one of the test cases for
0:27
Speaker 1: what happens to an economy when it's going through COVID.
0:29
Speaker 1: So we got the third quarter GDP data over the
0:32
Speaker 1: weekend and year over year it was up four point
0:34
Speaker 1: nine percent, which was quite the miss from what economists
0:38
Speaker 1: were looking for, which was how ive and a half percent.
0:40
Speaker 1: It was, however, better than the previous quarter three point
0:42
Speaker 1: two percent. But really with China, you have to take
0:45
Speaker 1: a step back and talk to somebody who knows how
0:47
Speaker 1: all of this is put together, and no one better
0:49
Speaker 1: to do that than Leland Miller, China Beige Book International founder.
0:53
Speaker 1: So Leland four point nine percent doesn't sound like a
0:56
Speaker 1: bad rate of growth for an economy that's been hit
0:59
Speaker 1: extremely ours by this coronavirus. Explained to us why this
1:03
Speaker 1: is a shocker, Well, you know, this is a really
1:07
Speaker 1: important number, but it's a really important number for political
1:10
Speaker 1: reasons more than economic reasons. So you have China saying
1:13
Speaker 1: to the world, look at our response, look at how
1:16
Speaker 1: well we've done. We're back to year on year growth.
1:18
Speaker 1: And look at everybody else they haven't done done as well.
1:21
Speaker 1: You know, we're someone to look up to. Now the
1:23
Speaker 1: difference between four point nine and five point five. I
1:25
Speaker 1: understand that the street is is agitating over over the
1:28
Speaker 1: mis here, but this number is very realistic to start with.
1:31
Speaker 1: You know, if you look down at what our data
1:34
Speaker 1: are showing, you're not You're still not seeing that year
1:36
Speaker 1: and year improvement. You're seeing tremendous month on month, quarter
1:41
Speaker 1: and quarter improvement. Things are certainly getting better, but it's
1:44
Speaker 1: very important for them to have a year and year
1:45
Speaker 1: number uh and and improve improvement and uh and So
1:49
Speaker 1: that's what they're that's what they're currently announcing, right and
1:52
Speaker 1: now we also got retail sales. For example, you're over
1:55
Speaker 1: Europe three point but still you know, down seven in
2:00
Speaker 1: September in terms of year, today's year over years so
2:03
Speaker 1: a lot of mixed data. So give us your impression
2:06
Speaker 1: of how the Chinese economy is doing. So as you say,
2:08
Speaker 1: you know, all the data is pretty managed. But at
2:11
Speaker 1: the same time China does seem to be growing. Is
2:15
Speaker 1: that the case consumers do seem to be spending. China
2:17
Speaker 1: does seem to be getting over the hit from the coronavirus. Sure,
2:21
Speaker 1: things are getting better, you know, it's still a supply
2:23
Speaker 1: side recovery. If you look at what's happening on the
2:26
Speaker 1: output side that has been with driving GDP. You know,
2:29
Speaker 1: there was a better September figure for for for retail sales.
2:33
Speaker 1: But if you look at retail sales UH from the
2:36
Speaker 1: beginning of the year to now and compare it to
2:37
Speaker 1: last year, it's it is like you said, down over seven.
2:40
Speaker 1: So this is not a consumption driven economy. This is
2:43
Speaker 1: not a demand recovery. This is the Chinese government deciding
2:47
Speaker 1: that they need to get their numbers up, and so
2:48
Speaker 1: they're making factories work harder and produce more stuff. There's
2:52
Speaker 1: something to be said for getting the growth number up
2:54
Speaker 1: to some degree, but I think the idea that people
2:56
Speaker 1: are really worried about whether this is four percent or
2:59
Speaker 1: three per center five percent. It's not a terribly healthy recovery.
3:03
Speaker 1: It's just a much more healthy, dynamic and recovery than
3:06
Speaker 1: we're seeing in the rest of the world. So Leland's
3:08
Speaker 1: how much of that sort of unhealthiness that you're talking
3:11
Speaker 1: about is related to coronavirus and how much was coming anyway,
3:14
Speaker 1: because it was always a question mark about how much
3:17
Speaker 1: the trade war had impact to China's economy and just
3:20
Speaker 1: the flow of goods and services between China and the US.
3:24
Speaker 1: Right Well, I think what what the coronavirus did is
3:27
Speaker 1: it put China in a box uh and forced it
3:30
Speaker 1: to use tools like property like heavy infrastructure stimulus to
3:34
Speaker 1: get the growth number back up, which was something that
3:37
Speaker 1: it didn't want to do and it hadn't been doing
3:39
Speaker 1: for the past several years. When you look at our
3:42
Speaker 1: data and you look at official data, you see that
3:45
Speaker 1: since seen when they were very worried about growth metrics
3:49
Speaker 1: in the run up to the Party Congress, things that
3:52
Speaker 1: actually slowed down over time, and yet the government did
3:55
Speaker 1: not go back to this let's juice, let's build bridges
3:58
Speaker 1: to nowhere, Let's let's build all these infrastructure developments. No
4:01
Speaker 1: one wants to be in they had basically pushed away
4:04
Speaker 1: from that because they are legitimately worried about debt. What
4:07
Speaker 1: I think coronavirus did is pushed them into such a
4:09
Speaker 1: corner that they said, look, we're gonna have to do,
4:10
Speaker 1: We're gonna have to do and we're gonna have this
4:12
Speaker 1: growth number up. So it is unhealthy levels of debt
4:15
Speaker 1: that are building us up. It's he's the same dynamic
4:19
Speaker 1: scene and much of the rest of the world, but
4:20
Speaker 1: you know, China has a much bigger problem this historically. So, uh,
4:23
Speaker 1: there is a recovery, that's good, but yes, the way
4:25
Speaker 1: we're getting there is not healthy at all. You have
4:29
Speaker 1: said the China made some major colandestine changes to its
4:32
Speaker 1: economic data reporting over the weekend. What were these clandestine changes?
4:36
Speaker 1: It all sounds very token dagger. Yeah, we've been we've
4:39
Speaker 1: been having a field day on on our Twitter feed, uh,
4:42
Speaker 1: talking about this. But look, you know, if you look
4:44
Speaker 1: at fixed asset investment, which is the proxy that the
4:47
Speaker 1: Chinese used for for for investment, you see that, uh,
4:51
Speaker 1: in twenty there was a number for the first three quarters,
4:56
Speaker 1: and then you see a number for the first three
4:57
Speaker 1: quarters of the number in nine was three trillion yuan
5:02
Speaker 1: higher than in but when the when Beijing put out
5:06
Speaker 1: their data last night, they said that things were up
5:08
Speaker 1: eight percent, So we were parsing through the how was
5:12
Speaker 1: this a typo? Why would they possibly do it? What
5:14
Speaker 1: we found is that essentially the Chinese government has reserved
5:17
Speaker 1: the right to no longer report figures regularly. What they're
5:21
Speaker 1: gonna do is they're going to rejigger the figures as
5:23
Speaker 1: new inputs come in. But they're not gonna announce what
5:26
Speaker 1: those new inputs are. They're not going to announce what
5:29
Speaker 1: the changing metrics are. They're not gonna announce what the
5:32
Speaker 1: components of this sort of index their building is. They're
5:34
Speaker 1: simply going to report a number and that number will
5:39
Speaker 1: be new based on the needed changes every year. So
5:42
Speaker 1: you're gonna have, you know, you have basically three trillion
5:45
Speaker 1: yuan they made go away in their fixed asset investment data.
5:49
Speaker 1: To report a year on your increase, it doesn't make
5:52
Speaker 1: any sense at all, but they've reserved the right to
5:55
Speaker 1: do this. Going forward, Leland, what will you be looking
5:58
Speaker 1: for next out of China? In order to give us
5:59
Speaker 1: an indication of you know, not just the health of
6:02
Speaker 1: the Chinese economy, but what that would mean for the
6:04
Speaker 1: health of the US economy at this point. Well, you know,
6:08
Speaker 1: I think on the Chinese side, you've got to look
6:10
Speaker 1: at the retail and how it's recovering over time, and
6:13
Speaker 1: not just not just for for one or two months.
6:15
Speaker 1: But look, China's recovery is going to be based on
6:18
Speaker 1: what happens in the rest of the world. If the
6:19
Speaker 1: rest of the world does not get coronavirus contained, we
6:23
Speaker 1: dipped down into a second wave. That China's data are
6:26
Speaker 1: going to be hurt. Its recovery is going to be
6:28
Speaker 1: hurt because it's not divorced from the rest of the
6:30
Speaker 1: world no matter what's doing back home. Leland, thank you
6:33
Speaker 1: so much, as always love to get you on because
6:37
Speaker 1: you do all of your research as well, and you
6:39
Speaker 1: know you you gather the data just like many economists do.
6:43
Speaker 1: But on the ground, Leland mill or China Beige Book
6:49
Speaker 1: Duncan donuts. Remember like to make the claim that America
6:52
Speaker 1: runs on Duncan, and I'm sure it was true a
6:54
Speaker 1: lot of the time. Well, here is the man who
6:56
Speaker 1: Duncan run on. Robert Olsenberg is the former CEO of
7:00
Speaker 1: what is now Duncan Brand's used to be dunkn Donuts
7:02
Speaker 1: and author of Around the Corner to Around the World,
7:05
Speaker 1: A Dozen Lessons I learned running Duncan Donuts. Robert looking
7:10
Speaker 1: at Duncan Donuts, now, how does it resemble the company
7:13
Speaker 1: you first took over? Were very different? But I when
7:17
Speaker 1: I joined the company as CEO is twenty five years old,
7:20
Speaker 1: a cocky kid, freshwood and n b A. And we
7:23
Speaker 1: had something on the order of a hundred stores. I
7:25
Speaker 1: think now today we have something on the order nearing
7:28
Speaker 1: twelve thousand in forty one countries. It's been transformational, pretty phenomenal. Well,
7:33
Speaker 1: a good leader is needed in order to scale that
7:36
Speaker 1: kind of business, particularly you know, something that you could
7:41
Speaker 1: call a generic enough business. I mean, I know Duncan
7:43
Speaker 1: Donuts are very very different from other types of donuts
7:45
Speaker 1: out there, but there are a lot of donat chains.
7:48
Speaker 1: So how did you do that? What kind of leadership
7:50
Speaker 1: skills does it take to scale a business like that?
7:55
Speaker 1: A great team, a clear strategy. When we got it right,
8:00
Speaker 1: we were very successful. When I got it wrong, we
8:03
Speaker 1: suffered the consequences. Luckily, in the thirty five years we
8:07
Speaker 1: got more years right than we did get wrong. Uh,
8:10
Speaker 1: and a great product and that commitment I think basically
8:14
Speaker 1: to do and to create a set of services and
8:18
Speaker 1: goods better than the competition, and that was always kept
8:21
Speaker 1: us agile and kept us creative and growing and changing.
8:26
Speaker 1: As the time change, consumers and competition are constantly changing,
8:30
Speaker 1: and companies have to change as well. But those are
8:33
Speaker 1: the ingredients I think that made for superior performance for us. Obviously,
8:37
Speaker 1: it's a different set of challenges every year, every month,
8:40
Speaker 1: every day in business, right, but a pandemic is something
8:43
Speaker 1: that doesn't come along too often. If you were running
8:46
Speaker 1: Duncan now and you saw what was happening all sorts
8:51
Speaker 1: of restaurant owners not being able to save their businesses,
8:54
Speaker 1: you know, big businesses depending on PPP funds in order
8:57
Speaker 1: to to continue, what would you do? I mean, how
9:01
Speaker 1: do you survive something that's just completely all encompassing like that.
9:06
Speaker 1: I never had to face anything quite like an worldwide pandemic,
9:10
Speaker 1: but did have to face certain cataclysmucker existential threats the
9:15
Speaker 1: very survival of the business. I think. Uh. I'd comment
9:19
Speaker 1: that the pandemic as I see it, and its impact
9:21
Speaker 1: on the restaurant industry, really is a tale of two
9:23
Speaker 1: different stories. On the one hand, the first story is
9:26
Speaker 1: kind of devastating. It. Basically, the National Restaurant Association says
9:30
Speaker 1: that they expect something on the order of fift all
9:34
Speaker 1: restaurants open, and six fifty restaurants may be permanently closed
9:39
Speaker 1: when the dust clears. That's painful. There may be a
9:42
Speaker 1: million and a half or more people out of work.
9:46
Speaker 1: That's also disastrous and painful. On the other hand, the
9:49
Speaker 1: second tale is a lot more optimistic. Those firms that
9:52
Speaker 1: invested early, which is one of the elements of facing
9:55
Speaker 1: a crisis of pre preparation, that invested in convenience and
9:58
Speaker 1: delivering on all plat forms. However, consumers wanted to access
10:02
Speaker 1: the product drive through windows, home delivery, online ordering, understanding
10:09
Speaker 1: the application of the social network that exists in social media.
10:14
Speaker 1: Those companies that invested, in my view, will not only
10:18
Speaker 1: survive the pandemic, but will thrive. Companies like Duncan that
10:22
Speaker 1: have invested and those kinds of um new developments, pre
10:27
Speaker 1: preparing continually looking to delight their customers better than the competition,
10:32
Speaker 1: will be the ones on the other side. Unfortunately, it's
10:35
Speaker 1: going to be some pain left by the independence and
10:37
Speaker 1: a lot of people out of work. Hopefully, those chains
10:40
Speaker 1: that survive will be able to absorb those, but it
10:42
Speaker 1: only will be over time. Fore warrant is were armed.
10:47
Speaker 1: These days, there's a lot of quote unquote business heroes
10:51
Speaker 1: in Silicon Valley that you know, people look to some
10:55
Speaker 1: unlikely characters for inspiration. Who inspires you in management these days?
10:59
Speaker 1: Robert Well, he's no longer actively engaged in the management
11:03
Speaker 1: of his business. He now runs a major philanthropic activity.
11:07
Speaker 1: But the person I'm most inspired by Bill and Melinda Gates.
11:11
Speaker 1: I find them to be extraordinary citizens, extraordinary people, and
11:16
Speaker 1: I marvel at their brilliance and at their commitment to mankind.
11:20
Speaker 1: And all those CEOs that are currently in the CEO
11:23
Speaker 1: chair and in the boardroom chair, who do you admire? Well,
11:29
Speaker 1: admire the people that I'm closest to and the ones
11:32
Speaker 1: that I had the privilege of being able to serve
11:34
Speaker 1: with day in and day out. So I was on
11:36
Speaker 1: the board of Sonic, and I find Cliff Hudson, who
11:39
Speaker 1: was a longtime twenty years CEO of Sonic Restaurants, an
11:42
Speaker 1: outstanding leader. I also found Um Goodness. His name escaves
11:48
Speaker 1: me for the moment. How Patrick Doyle from Dominoes was
11:51
Speaker 1: an extraordinary leader and ranked among the best leaders by
11:55
Speaker 1: CEO magazine for years. Both both of them were extraordinary leaders, agile, kind, smart,
12:03
Speaker 1: and just thoughtful people. Robert, I'll have to ask you
12:06
Speaker 1: about what your thoughts are as we approach the election,
12:10
Speaker 1: and you know, very very divided country. Um, you know,
12:14
Speaker 1: many issues plaguing the country, and it just seems to
12:18
Speaker 1: be sometimes just difficult to even talk about it because
12:23
Speaker 1: you know, finding middle ground or finding sort of anybody
12:26
Speaker 1: willing to engage is just a little bit difficult. Well,
12:29
Speaker 1: what's the first priority that the next president, whether it's
12:33
Speaker 1: Donald Trump or a Biden administration, what's what should be
12:36
Speaker 1: the first priority in running this country? Thoughtful planning and
12:42
Speaker 1: setting a moral tone for the country and bring us
12:45
Speaker 1: back together. I think that our country can only take
12:47
Speaker 1: so much chaos at any one point in time. So
12:50
Speaker 1: a good leader has to be very clear and crisp
12:52
Speaker 1: about both the strategy, what the country wants to be,
12:55
Speaker 1: what it wants to have, and the four or five
12:58
Speaker 1: specific leavers that are most important for all in order
13:00
Speaker 1: to be able to bridge scarce resources. So whether it's
13:03
Speaker 1: a company of family or a country, and that's a
13:06
Speaker 1: critical element. And the second element is to thround yourself
13:10
Speaker 1: for the best people, complementary set of skills that will
13:13
Speaker 1: help you accomplish that, and then you have to communicate
13:16
Speaker 1: all the constituencies to mobilize them behind it. That works
13:19
Speaker 1: on a company, and it works on a country, and
13:21
Speaker 1: we need a leader who's got those abilities. And you know,
13:23
Speaker 1: it certainly sounds pretty easy when you say it, Roberts.
13:26
Speaker 1: So I hope that whoever starts to run the country
13:28
Speaker 1: next reads your book. It's just out and it's a
13:31
Speaker 1: fantastic read. It's called Around the Corner to Around the World.
13:34
Speaker 1: A dozen lessons I learned running Duncan Donuts and you
13:38
Speaker 1: can have a donut with every lesson there for for
13:40
Speaker 1: your dozen lessons. Robert Rosen very former CEO of Duncan
13:44
Speaker 1: Brands and of course Duncan Donuts as it was. Then,
13:47
Speaker 1: thank you for joining us. Just a wonderful conversation. Let's
13:51
Speaker 1: bring in our J Gallo. He's senior portfolio manage your
13:54
Speaker 1: head of the Municipal Bond group and delighted to have
13:57
Speaker 1: him are J. I have to ask you how much
14:00
Speaker 1: time have you given to the competing tax bands? Um.
14:04
Speaker 1: You know, obviously we're looking at more of a likelihood
14:08
Speaker 1: that there's going to be a President Biden and the
14:10
Speaker 1: Biden administration at the moment. But it's not fully you know,
14:14
Speaker 1: for sure, but he's definitely ahead by a long shot.
14:16
Speaker 1: And some of the polls and you have to have
14:19
Speaker 1: done a little bit of work on it, what have
14:21
Speaker 1: you decided, Well that the tax plans of the two
14:25
Speaker 1: candidates are are vastly different. Um. You know, I don't
14:30
Speaker 1: I agree with you that though that the polls make
14:33
Speaker 1: it pretty likely that President Biden is coming as opposed
14:37
Speaker 1: to being vice President Biden, And I would just suggest
14:41
Speaker 1: that it's just not based in the cake yet. I
14:43
Speaker 1: think that this election is going to be closer than
14:44
Speaker 1: a lot of the polls suggest. Remember it does come
14:47
Speaker 1: down to state by state, and I think there are
14:50
Speaker 1: a number of toss up states where President Trump UM
14:54
Speaker 1: may have some of his voters being under sampled and
14:56
Speaker 1: not showing up in the traditional polls. I know that's
14:59
Speaker 1: somewhat of a of a partisan view, but I'm just
15:01
Speaker 1: saying objectively, that's what happened in We saw a lot
15:05
Speaker 1: of Trump support that was not accurately assessed by the
15:08
Speaker 1: polls leading up to it, and the shy Trump supporter too. Well.
15:12
Speaker 1: Given that, then on the fact that your head of
15:14
Speaker 1: the ministal bond group, are there states for your sort
15:17
Speaker 1: of you know, making making that better or loading up
15:20
Speaker 1: the boat a little bit, well, I would say this.
15:23
Speaker 1: I would say I think that the greatest impact on
15:25
Speaker 1: muni's from the election outcome would be in the event
15:29
Speaker 1: of a blue blue wave. So Biden wins Capitol hialth, House,
15:34
Speaker 1: Senate are completely in Democratic hands. That would open the
15:37
Speaker 1: door for UH for an increase back to thirty nine
15:41
Speaker 1: point six for the top marginal tax rate, which is
15:43
Speaker 1: where I was before the Trump tax cuts. I would
15:46
Speaker 1: also impose a minimum thirty nine point six on all
15:48
Speaker 1: investment income for people who make more than a million
15:50
Speaker 1: dollars UH. That on average would increase demand for municipal bonds. Also,
15:57
Speaker 1: banks who shed munis in droves after their corporate tax
16:00
Speaker 1: rate went to from thirty five, they would be facing
16:03
Speaker 1: a tax right under the Biden tax plan. Also Polish communis,
16:07
Speaker 1: so I think munis would would fare relatively well compared
16:10
Speaker 1: to other fixed income in a blue wave undeniably UM
16:14
Speaker 1: And you'd also probably get a bigger stimulus plan. So
16:17
Speaker 1: the bigger stimulus plan will help all state and local governments.
16:20
Speaker 1: Which ones would move the most, the cheapest ones? Uh?
16:23
Speaker 1: You know? So so states of like New Jersey in
16:25
Speaker 1: Illinois where spreads are wide, you think their bonds might
16:29
Speaker 1: actually fare pretty well in a relative sense in a
16:32
Speaker 1: Biden victory. So it does seem like there's at least,
16:35
Speaker 1: you know, some kind of chance of a nice little
16:38
Speaker 1: pay day here. How are you hedging for that? Even
16:40
Speaker 1: if you don't believe that that's what's going to happen,
16:42
Speaker 1: or you're you know, you're more you're more than convinced
16:45
Speaker 1: either way, there must be some hedging trades that you've
16:49
Speaker 1: been putting on. You know. I think that markets are
16:52
Speaker 1: pretty bad with binary risks. Um, you know, zero one
16:56
Speaker 1: outcome is just not easy to perfectly price in and
16:59
Speaker 1: being of the election. Uh So in terms of just
17:03
Speaker 1: adding duration or reducing duration, or adding munis or reducing communis,
17:07
Speaker 1: uh you know, you you you need to have a
17:09
Speaker 1: little more confidence than than fifty fifty. So it makes
17:12
Speaker 1: it tough. Since I think the chances of this election
17:15
Speaker 1: being indeterminate come election day and maybe in fact being contested,
17:19
Speaker 1: I think that's greater than the markets are currently pricing.
17:21
Speaker 1: So if you're really going to try to hedge, you know,
17:24
Speaker 1: to your question, I think you would need to go
17:26
Speaker 1: into options markets. Okay, there's not a lot of options
17:30
Speaker 1: on munis, makes it really challenging. I think, uh, one
17:36
Speaker 1: important fact here, if we have a contested election, market
17:40
Speaker 1: risk access don't like it, treasure gilds probably go down. Ultimately,
17:44
Speaker 1: regardless of outcome, that event will fade and we will
17:48
Speaker 1: know who the winner is. Biden would be probably more
17:51
Speaker 1: bullish for munis. Trump would be somewhat less bullish formmunities.
17:55
Speaker 1: But on average, we're no matter what happens, we're going
17:57
Speaker 1: to get a stimulus plan. The question of sizing in
18:00
Speaker 1: time is still open. In fact, we're still talking about
18:03
Speaker 1: it before the election. I just doubt that that's going
18:04
Speaker 1: to happen. And how much states and local governments get
18:08
Speaker 1: as well, of course, absolutely extraordinarily different. Um r J.
18:13
Speaker 1: How are you trading the coronavirus in the various states?
18:15
Speaker 1: Obviously Wisconsin is just in trouble right now. We had
18:19
Speaker 1: Icago's marriage coming out and saying that you know, she
18:22
Speaker 1: wants to avoid lockdowns, but it's getting to that tipping
18:25
Speaker 1: point and she absolutely will if necessary. Are you doing
18:30
Speaker 1: any kind of municipal or you know, trades related to
18:33
Speaker 1: the coronavirus across the States. Well, the coronavirus has had
18:36
Speaker 1: a huge impact on municipal fixed income across states, locals
18:40
Speaker 1: and revenue bond sector. I would say we, as our
18:44
Speaker 1: investment group, our MUNI effort, we have been pretty cautious
18:48
Speaker 1: on g os UM for the one primary reason gios
18:52
Speaker 1: didn't blow out that much relative to the overall triple
18:55
Speaker 1: A MUNI scale during the onset of the COVID crisis. Meanwhile,
18:59
Speaker 1: revenue on like airports bonds backed by hotel taxes areas
19:04
Speaker 1: that were very heavily impacted by the COVID shock due
19:08
Speaker 1: to travel plummeting for example. That's where we've looked for
19:11
Speaker 1: opportunities because that's where the risk premiums blew out and
19:14
Speaker 1: bonds became very cheap. As far as the o's are concerned, UM,
19:18
Speaker 1: we haven't been playing coronavirus regionally all that much. We
19:22
Speaker 1: have been playing the coronavirus recovery in our in our
19:25
Speaker 1: revenue bond sectors. So we've added to airports for example.
19:29
Speaker 1: We've also we have some overweight positions in senior care
19:32
Speaker 1: living centers which have been heavily impacted by this. But
19:35
Speaker 1: there's a lot of good survivors in there, and if
19:37
Speaker 1: we can pick them, we get a nice wind. So
19:39
Speaker 1: I think every MUNI investor worth worth their salt is
19:42
Speaker 1: spending a lot of time on coronavirus, not only geographically,
19:46
Speaker 1: but from a sector standpoint. And on the latter we've
19:48
Speaker 1: been much more active than playing the geographies. So interesting,
19:52
Speaker 1: Or j thank you for that insight into how your
19:54
Speaker 1: portfolio managers are looking at all of this. Or Gallo
19:57
Speaker 1: is senior portfolio manager and head of the Municipal Bomb.
20:00
Speaker 1: The group manages almost twelve billion dollars, but the whole
20:04
Speaker 1: UH company has nearly six billion dollars in assets under management,
20:08
Speaker 1: so a loss to a lot to look through there,
20:10
Speaker 1: But then there's a lot of municipal bonds out there
20:12
Speaker 1: as well. It's time now to talk deals. It has
20:17
Speaker 1: been quite the year in many many different ways. Let's
20:20
Speaker 1: bring in Rob Brown, CEO of Lincoln International. So, Rob,
20:24
Speaker 1: we've had so many deals this year. I mean today
20:26
Speaker 1: obviously there's an early ten billion dollar old stock deal
20:29
Speaker 1: in the shale field, but talk to us generally about
20:33
Speaker 1: the appetite for companies getting together this year. Well, the
20:38
Speaker 1: appetite right now is incredibly strong. Um. We obviously went
20:43
Speaker 1: through a period earlier this year when the economy shut
20:46
Speaker 1: down and you saw a huge fall off in deals,
20:49
Speaker 1: And what we've seen coming out of that is companies
20:54
Speaker 1: that have a good COVID story to tell, meaning they
20:56
Speaker 1: either performed well during the economic slowdown or they've bounced
21:01
Speaker 1: back or their viewed as a sector that is going
21:04
Speaker 1: to maybe even more favorable post COVID. Those companies are
21:09
Speaker 1: out for sale. And what we're seeing is as investors,
21:12
Speaker 1: both strategic and financial, are aggressively putting money into those businesses,
21:18
Speaker 1: and in many cases, we're seeing valuations of those businesses
21:22
Speaker 1: at the same or even better than pre COVID levels.
21:26
Speaker 1: So that's an interesting, you know, part of the discussion
21:29
Speaker 1: for me. Why are prices holding up? I mean, you know,
21:33
Speaker 1: prices for almost everything are you know, are not holding
21:36
Speaker 1: up the way they were pre COVID. And and and
21:39
Speaker 1: yet it seems that for companies there isn't that much
21:42
Speaker 1: of a discount of COVID discount being built into these prices.
21:46
Speaker 1: What am I missing? So? I think it's two things. One,
21:50
Speaker 1: I think it's classic supply and demand. So much capital
21:53
Speaker 1: was raised over the last five years, particularly in the
21:56
Speaker 1: private equity world, but but also corporations. Going into the downturn,
22:01
Speaker 1: you had stockpiles of cash, so you had capital that
22:04
Speaker 1: wanted to be put to work in acquiring companies that
22:07
Speaker 1: for a period of time during this past year, it
22:10
Speaker 1: was unable to be put to work. So you have
22:12
Speaker 1: the demand to put capital to work, and then you
22:15
Speaker 1: have kind of a natural selection. The companies that are
22:18
Speaker 1: coming to market right now are the best companies. As
22:21
Speaker 1: I said, they're the ones that showed growth during the downturn.
22:23
Speaker 1: They're the ones that are in resilience sectors that were
22:26
Speaker 1: proven to be essential. So I think as a result
22:28
Speaker 1: of that, you still have more money that wants to
22:31
Speaker 1: be put to work in buying companies than there are
22:33
Speaker 1: high quality companies to buy, and that supplying demand has
22:36
Speaker 1: kept prices very elevated. What about people trying to negotiate
22:42
Speaker 1: stock for deals. I mean, we definitely saw that that
22:44
Speaker 1: set off back in March. Obviously we've recovered a loss
22:47
Speaker 1: of ground, but at the same time, is it more
22:50
Speaker 1: beneficial for companies to try and do an old stock
22:52
Speaker 1: deal or a major portion of the deal in stock.
22:56
Speaker 1: I think that's very companies specific. I think to the
22:58
Speaker 1: extent companies field stock is still a little undervalued, they
23:02
Speaker 1: tend to not want to use stock. I think to
23:04
Speaker 1: the extent companies feel like, hey, my stock is fairly valued. Uh,
23:08
Speaker 1: they want to use it. So we are seeing it
23:11
Speaker 1: be used, but we're not seeing it being used in
23:14
Speaker 1: a materially different way than it was pre COVID election.
23:19
Speaker 1: So there is a very strong possibility that both the
23:22
Speaker 1: White House and Congress turn blue on November three and
23:25
Speaker 1: that tax policy will change, including the capital gains tax policy.
23:30
Speaker 1: Are you seeing people actually come to market with their
23:32
Speaker 1: business because they don't want to have to face paying
23:35
Speaker 1: what they might have to pay pay in tax if
23:39
Speaker 1: they wait until there is a potential Biden presidency to
23:42
Speaker 1: sell their business. Yes, we are definitely seeing that an Interestingly,
23:47
Speaker 1: as I said, it's become a very hot m and
23:50
Speaker 1: a market. And I think what's happening is the fear
23:54
Speaker 1: of cap gains rates going from you or you know,
23:59
Speaker 1: the TRUP administration would like to lower in the fifteen
24:02
Speaker 1: that fear is actually pouring gasolene on what already is
24:06
Speaker 1: a hot market. So not only are we seeing um
24:09
Speaker 1: in particularly for private sellers. Uh. But not only are
24:13
Speaker 1: we seeing companies come to market, we are in the
24:15
Speaker 1: market with some things where the sellers are saying listen.
24:18
Speaker 1: I know initially I said, hey, if this closes in
24:21
Speaker 1: Q one, that's fine. I'm not in a hurry. What
24:23
Speaker 1: we're hearing is, I'd really like to get this done
24:25
Speaker 1: this year. I don't want to take that risk, even
24:27
Speaker 1: though traditionally when Congress makes tax increases, they make them
24:32
Speaker 1: effective the next year. When they make tax decreases, they
24:35
Speaker 1: have on occasion made those effective at the beginning of
24:38
Speaker 1: the year. But but legally and legislatively they can do
24:42
Speaker 1: whatever they want. And so we are seeing sellers feel
24:45
Speaker 1: like the odds of the blue wave are probably better
24:48
Speaker 1: than they felt they were a couple of months ago,
24:52
Speaker 1: and they just don't want to take the risk of
24:53
Speaker 1: having to pay doubled in taxes if they sell their business. Well,
24:57
Speaker 1: I have to ask about sparks. They blew up this year.
25:00
Speaker 1: I mean, there were a couple of big ones and
25:01
Speaker 1: then suddenly almost everything you know related to deal making
25:05
Speaker 1: seem to be you know, a spack being raised. It's
25:08
Speaker 1: the new private equity or something at what happened to
25:12
Speaker 1: have this explosion of special purpose acquisition vehicles. Well, that's
25:17
Speaker 1: interesting because we are seeing SPACs have more interest in
25:20
Speaker 1: our deals that we're selling than we ever had in
25:22
Speaker 1: the past. And I think part of it is UH. Spacts,
25:25
Speaker 1: where you were historically viewed as the capital of last resort.
25:29
Speaker 1: They were very dilutive to sellers and they may be
25:33
Speaker 1: weren't raised by the most reputable investors. That's changed. I
25:36
Speaker 1: think people are feeling like, hey, SPACs are a way
25:38
Speaker 1: to access public markets without having to go through UM,
25:42
Speaker 1: you know, the typical road show and I p O.
25:44
Speaker 1: So they still can be more dilutive in a sale.
25:46
Speaker 1: But I think part of it is UM. Again, it
25:50
Speaker 1: gets back to the ability to raise capital, and so
25:52
Speaker 1: a lot of SPACs were raised pre COVID UH that
25:55
Speaker 1: needed to put money to work. They're raised by sophisticated
25:58
Speaker 1: investors with good reputations, and you know, I think as
26:01
Speaker 1: the public markets have held up, UM, becoming public is
26:05
Speaker 1: still for the right company. It's a way to go
26:08
Speaker 1: public UH in a in a quicker, in sometimes cheaper way.
26:12
Speaker 1: So we are seeing more SPACs than we've ever seen. UH.
26:16
Speaker 1: They're not the right outcome for everybody, but we are
26:19
Speaker 1: seeing them participate more in the companies we have for sale.
26:22
Speaker 1: All right, Rob, but thank you for that updates. Always
26:25
Speaker 1: fascinating to speak with Rob Brown, CEO of Lincoln International
26:28
Speaker 1: on the deal landscape. Once again. A major deal today
26:31
Speaker 1: in the shale space, Consho being bought by Conago from
26:34
Speaker 1: nine point seven billion. Thanks for listening to Bloomberg Markets podcast.
26:39
Speaker 1: You can subscribe and listen to interviews at Apple Podcasts
26:43
Speaker 1: or whatever podcast platform you prefer. I'm Bonnie Quinn, I'm
26:46
Speaker 1: on Twitter at Bonnie Quinn, and I'm Paul Sweeney. I'm
26:49
Speaker 1: on Twitter at pt Sweeney. Before the podcast, you can
26:52
Speaker 1: always catch us worldwide at Bloomberg Radio