Latest / Bloomberg Intelligence / Cash And De-Risking Look Good As We Enter Late Cycle: Kennedy

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Cash And De-Risking Look Good As We Enter Late Cycle: Kennedy · Bloomberg Intelligence

0:05
Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
0:08
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
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Speaker 1: bring you the most important, noteworthy, and useful interviews for
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Speaker 1: you and your money, whether you're at the grocery store
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Speaker 1: or the trading floor. Find the Bloomberg p m L
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Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. It's
0:32
Speaker 1: been an incredibly quiet August for the bond market in
0:37
Speaker 1: the US. Certainly US tenure treasuries were fields that have
0:41
Speaker 1: remained in the narrowest range in more than a year.
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Speaker 1: But the year ahead, the next six months, the next
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Speaker 1: four months could be a little bit more interesting. Joining
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Speaker 1: us now is Tom Kennedy had a fixed income strategy
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Speaker 1: at JP Morgan at private bank, overseeing about five six
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Speaker 1: billion dollars of assets, I believe based in New York. Tom,
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Speaker 1: thank you so much for being with us so looking
1:01
Speaker 1: out you. You said something in the report that I
1:04
Speaker 1: thought was interesting, which is we were entering a later
1:07
Speaker 1: stage of the credit cycle and you need to dust
1:10
Speaker 1: off your playbooks for this time. What does a playbook
1:13
Speaker 1: for late cycle investing in the debt markets? Look like?
1:16
Speaker 1: At having me so really it's talking talking late cycle
1:21
Speaker 1: is something we haven't had to even discuss for the
1:23
Speaker 1: last ten years. It's something new, it's something it's something different. Uh,
1:26
Speaker 1: and even candidly, when I look around the floor, there's
1:28
Speaker 1: lots of young people on the floor that don't even
1:30
Speaker 1: know what late cycle looks like. Um. But late cycle
1:33
Speaker 1: is a couple of three, three or four pillars. I
1:36
Speaker 1: think we need to talk about its duration. We've been
1:39
Speaker 1: underweight duration across the wealth management platform for for many years.
1:44
Speaker 1: So it's full disclosure, it's a measure. It's sort of
1:46
Speaker 1: how closely tied. Uh. You know your investments are to
1:50
Speaker 1: hire yields or yields going up, absolutely so, so we
1:54
Speaker 1: there's a if you're underweight duration, you're fearing that interest
1:56
Speaker 1: rates will go higher. So we're you've talked about the
2:00
Speaker 1: interest rate on tenure treasury is being quite low. I'm
2:02
Speaker 1: not so sure it's gonna go much higher. And hopefully
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Speaker 1: we can talk about that in the time I'm here.
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Speaker 1: But you want to start to slowly dial your way
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Speaker 1: into duration. Another one we were talking about in the
2:11
Speaker 1: break is about credit. You for years, you have been
2:14
Speaker 1: incentivized to reach for yields, so Let's say that's a
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Speaker 1: traditional investment grade investor that's gonna say yields and an
2:21
Speaker 1: investment grade are not high enough. I'm gonna reach to
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Speaker 1: high yield, but maybe not so comfortable with those risks.
2:26
Speaker 1: As interest rates by the FED start to rise, those
2:29
Speaker 1: credits should be challenged and we should see a readjustment there. Um.
2:33
Speaker 1: Those are two two key pillars that we're focused on.
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Speaker 1: And then, finally, for the first time in a long time,
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Speaker 1: cash actually has a position in a portfolio. Um. Again,
2:41
Speaker 1: a challenging discussion to have because you haven't had it
2:44
Speaker 1: for so long, but cash is actually yielding you T
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Speaker 1: bills are over two percent. That's that's an interesting risk
2:49
Speaker 1: reward proposition to discussing portfolios. How do you discuss that?
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Speaker 1: When people don't want to talk about relative return and
2:55
Speaker 1: they say, you know what, we can't really live on
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Speaker 1: two percent tax? Do you send them to the municipal market.
3:03
Speaker 1: I think the municipal market is is actually looking quite
3:05
Speaker 1: attractive at this point. What's actually interesting about the municipal
3:09
Speaker 1: market is in the front end we actually see relative
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Speaker 1: value as not especially in your favor, but further out
3:14
Speaker 1: in the in the municipal curve. There's actually a steepness
3:17
Speaker 1: in that curve. The in in the media outlets, Bloomberg
3:21
Speaker 1: is constantly talking about the shape of the treasury Oeld
3:23
Speaker 1: curve being very flat, but the Muniol curve is actually
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Speaker 1: quite steep. So if you move further out to say,
3:28
Speaker 1: ten year MUNI bonds, you can actually pick up a
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Speaker 1: hundred basis points and spread relative to short data munies.
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Speaker 1: I want to go back to the idea that we're
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Speaker 1: in a late stage. Does that mean that you expect
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Speaker 1: a recession or downturn in the imminent future in the
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Speaker 1: next three months, six months? What does that mean to you?
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Speaker 1: So late cycle? I think it's importantly to say late
3:48
Speaker 1: cycle is not end cycle. Late cycle means we are
3:51
Speaker 1: closer to the end than the beginning. But I actually
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Speaker 1: believe this economy has a good bit of runway to
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Speaker 1: go in it um the key indicator to look at,
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Speaker 1: I mean, if you only had one, would be to
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Speaker 1: got the spread between treasure yields two years versus ten years.
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Speaker 1: It's flattening, but historically an inverted Yel curve is the
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Speaker 1: key measure that I'm looking So you still buy this
4:08
Speaker 1: whole thing as an indicator so some people try to
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Speaker 1: say this time is different. You're not one of those people. Um,
4:14
Speaker 1: the this time is different theory suggest I think when
4:19
Speaker 1: I've tried to unearth when people say this time is different,
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Speaker 1: to me, they're suggesting that monetary policy is keeping rates
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Speaker 1: in the long end much lower than they they fundamentally
4:28
Speaker 1: should be. I really don't find that argument compelling, really
4:32
Speaker 1: for two reasons. When you look back of what's happened
4:34
Speaker 1: over the last ten years, fundamentals in this in the
4:37
Speaker 1: United States have changed dramatically. Demographics, it's an aging demographic
4:42
Speaker 1: by the Census Bureau is telling us roughly of the
4:45
Speaker 1: U S population will be sixty five and older. That's
4:47
Speaker 1: relative to seven percent pre crisis. So aging, there are
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Speaker 1: less people working. Employment to population ratio is coming down.
4:55
Speaker 1: And then importantly, and it's not discussed nearly enough, is
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Speaker 1: central bank credibility. We the FED is telling us what
5:01
Speaker 1: they're gonna do, and we believe them, We trust them.
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Speaker 1: So your term premium that the risk you should be
5:06
Speaker 1: the compensation you demand for risk is much lower. So
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Speaker 1: all in all, that back end I don't think has
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Speaker 1: to reprice very much. When I when I modelowed interest
5:14
Speaker 1: rates to actually think they're a little bit rich to
5:16
Speaker 1: fair value right now, but not substantially, and just trying
5:20
Speaker 1: to understand from an investor point of view that has
5:24
Speaker 1: followed what the Federal Reserves said to do, which is
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Speaker 1: basically go further out on the risk curve and reach
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Speaker 1: for yield. As you described earlier, have they bought products
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Speaker 1: that they really don't understand from people who are no
5:39
Speaker 1: longer in the business of selling those products. That sounds
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Speaker 1: an awful lot like what we went through in two
5:45
Speaker 1: thousand and eight. So now you're talking about the next
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Speaker 1: piece of this argument, which is the FED has displaced
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Speaker 1: natural investors, and that's in the treasury market, in the
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Speaker 1: NBS market. I think that has happened quite substantially. But
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Speaker 1: the balance sheets size of the FED, the new operating
6:02
Speaker 1: framework that they've implemented post crisis, demands that their balance
6:05
Speaker 1: sheet be much bigger. So when I look at the
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Speaker 1: underlying trends in the balance sheet, I don't see the
6:11
Speaker 1: balance sheet for the FED contracting very much more. I'm
6:13
Speaker 1: talking about when I start to model out where the
6:15
Speaker 1: Fed's balance sheet is gonna go, it's about four point
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Speaker 1: two trillion today. I think it's going to intersect it's
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Speaker 1: natural level around year and twenty nineteen at about three
6:23
Speaker 1: and a half trillion. It's a little bit higher than
6:26
Speaker 1: what markets are talking about, but it suggests that this
6:30
Speaker 1: monetary policy displacement that's happened for so long isn't likely
6:34
Speaker 1: to reverse very much. It's important to sort of put
6:36
Speaker 1: into context here your background, because you worked at the
6:39
Speaker 1: New York FED and you helped draft the program UH
6:42
Speaker 1: that will unwind the balance sheet? Am I correct that
6:45
Speaker 1: the Fed is following the FEDS playbook has been out
6:48
Speaker 1: for quite some time. When I was there, we we
6:50
Speaker 1: put that thing together, all right. So UM, it's wonderful
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Speaker 1: then to get your insights on later this year because
6:55
Speaker 1: there is some concern among fixed income analysts that there
6:59
Speaker 1: will be a choppy sort of stoppage of refinancing some
7:03
Speaker 1: of the Fed's UH treasury holdings. In other words, as
7:06
Speaker 1: say forty billion dollars of longer term treasuries come do
7:11
Speaker 1: or three year tenure, whatever it is, they will let
7:14
Speaker 1: it roll off instead of repurchasing those treasuries, and it
7:17
Speaker 1: could cause some kind of hiccup in the bond market.
7:19
Speaker 1: Do you buy these arguments? I really don't you can
7:23
Speaker 1: think about a flow versus a stock concept. And really,
7:28
Speaker 1: what I'm trying to say is, as an investor, I
7:30
Speaker 1: should be responding to known quantity information. The FED has
7:34
Speaker 1: put out its its planned we all know it. We
7:37
Speaker 1: can all look at what treasury reinvestments look like, and
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Speaker 1: we should be able to tell right now, this per
7:42
Speaker 1: this piece of the treasury roll off will be reinvested in,
7:45
Speaker 1: this piece won't. So in a sense, when we have
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Speaker 1: known information, we should be able to price that into markets.
7:51
Speaker 1: And I think that's effectively been done. The FED has
7:54
Speaker 1: slowly every quarter been stepping up the amount of treasuries
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Speaker 1: and mbs that it allows to roll off its balance.
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Speaker 1: It hasn't had a substantial impact in my opinion. Um,
8:03
Speaker 1: now that's you can see. I'm a big believer in
8:06
Speaker 1: this stock argument. Being on the investing side of the business,
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Speaker 1: I can I understand the flow dynamic, but I just
8:13
Speaker 1: think it's a marginal contributor to two rates relative to
8:17
Speaker 1: the stock impact. Thank you so much for being with us.
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Speaker 1: Really really illuminating. Tom Kennedy had a fixed income strategy
8:23
Speaker 1: at JP Morgan, a private bank overseeing more than five
8:26
Speaker 1: hundred billion dollars based in New York really him important inside,
8:31
Speaker 1: especially considering Tom's experience at the New York Federal Reserve.
8:35
Speaker 1: At a time when a lot of people say we're
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Speaker 1: not paying enough attention to the roll off of the
8:39
Speaker 1: balance sheat Evidently we have less than a trillion more
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Speaker 1: to go for that balance sheet to roll off. The
8:58
Speaker 1: value of goal it has dropped consistently over the last
9:03
Speaker 1: couple of months. It currently trades below twelve drear an
9:07
Speaker 1: ounce atars on the Comax. Here to help us understand
9:12
Speaker 1: what is going on with the precious metal is Ben Hunt.
9:15
Speaker 1: He is the co founder and chief investment officer for
9:19
Speaker 1: Second Foundation Partners. He is also the creator and the
9:22
Speaker 1: author for Epsilon Theory. They're based in Reading, Connecticut. Ben Hunt,
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Speaker 1: thank you very much for being here. You've got a
9:30
Speaker 1: lot of people who are interested in what you've got
9:32
Speaker 1: to say about the value of precious metal, specifically gold.
9:36
Speaker 1: Do you believe that it is linked to what the
9:39
Speaker 1: Federal Reserve is doing with interest rates? Hey, great to
9:42
Speaker 1: be on Tim, Thanks thanks for having me in. And
9:45
Speaker 1: the short answer is yes, it is absolutely linked to
9:49
Speaker 1: what the FAT is doing. And and frankly, that's the
9:51
Speaker 1: only thing I think that really drives the price of
9:55
Speaker 1: gold as it's being traded. So this is nothing new.
9:59
Speaker 1: I mean, we haven't had gold responding to i'll call
10:03
Speaker 1: it a geopolitical crisis for a long time, a decade
10:07
Speaker 1: or more. It looks if you're a businessman in Istanbul
10:12
Speaker 1: or Kara today, you know, you're you're you're delighted to
10:15
Speaker 1: have gold. It's very it's worth a lot to you
10:18
Speaker 1: because you can't access your your dollar denominated bank account.
10:22
Speaker 1: But for all the rest of US, I suspect, you know,
10:25
Speaker 1: ninety nine people listening to this radio broadcast. The meaning
10:30
Speaker 1: of gold, the the the factor that gold trades on
10:35
Speaker 1: is well, what what's the FED doing? What are central
10:38
Speaker 1: banks doing? It's an insurance policy against central bank error.
10:43
Speaker 1: That's the way I think you should really think about
10:45
Speaker 1: gold in its price. Okay, So before we get to
10:49
Speaker 1: the central bank era part, which I want to tease
10:51
Speaker 1: out and understand exactly why gold would be a hedge
10:55
Speaker 1: against that, I want to just talk about the idea
10:58
Speaker 1: that gold used to be a store value. It used
11:01
Speaker 1: to be a haven investment. Are you saying it is
11:04
Speaker 1: no longer a haven investment in anyway? Uh? In any way?
11:09
Speaker 1: Is a is a is a tough you know, tough
11:11
Speaker 1: kind of additional clause to put on there, but basically, yes, look,
11:15
Speaker 1: you know JP Morgan, the original JP Morgan, you know Jupiter,
11:19
Speaker 1: Jupiter Morgan. He had a great quote and his quote
11:23
Speaker 1: was gold is money, everything else is credit. And look
11:28
Speaker 1: that was right, that was right back when you know
11:32
Speaker 1: JP Morgan, the man was you know what was walking
11:35
Speaker 1: the earth. But it's but it's not true anymore. It's
11:39
Speaker 1: not it's not what gold means to investors anymore, and
11:44
Speaker 1: that it really it's not just gold. When people talk
11:48
Speaker 1: about whether it's bitcoin or they talk about gold is
11:50
Speaker 1: being a store of value, I think they're really missing
11:55
Speaker 1: what that phrase means. Okay, well, uh, and perhaps it's
11:59
Speaker 1: not entirely a coincidence that we're seeing a dramatic so
12:02
Speaker 1: often cryptocurrencies in tandem with gold, although that's probably another story.
12:06
Speaker 1: But I do want to get to your point of
12:08
Speaker 1: why this could be a hedge, my gold could be
12:10
Speaker 1: a hedge against such a bank. Eric, Can you just
12:13
Speaker 1: sort of explain that? Sure? Sure, what I'm trying to
12:17
Speaker 1: describe as is what well, they back up A second
12:21
Speaker 1: one I'm always interested in is not what what you know,
12:24
Speaker 1: we the words we have for things. But what actually
12:27
Speaker 1: is and what you actually see in the price of gold,
12:31
Speaker 1: what you actually see in the price of of any
12:35
Speaker 1: precious commodity, is that it goes up or down depending
12:40
Speaker 1: on confidence in central bankers, right because because that's that
12:46
Speaker 1: that's really what gold is there to be. That's that's
12:49
Speaker 1: the insurance policy that I'm talking about if things get
12:53
Speaker 1: really awful, right, if central makers make some gruesome policy
12:57
Speaker 1: mistake that results in infation or deflation. It can work
13:01
Speaker 1: either way, right, But it's it's that sort of mistake
13:05
Speaker 1: that gold has meaning for today. It It doesn't have
13:10
Speaker 1: meaning as an alternative currency, it does any Look, if
13:14
Speaker 1: we get to the point where we need gold to
13:17
Speaker 1: buy something at the store, yeah, you're better off owning
13:22
Speaker 1: ammunition and seeds rather than gold. My point is that
13:26
Speaker 1: as a security, as an investment, what gold goes up
13:31
Speaker 1: and down on is the degree of confidence we have
13:35
Speaker 1: the central bankers are large and in charge, and right
13:38
Speaker 1: now there's a lot of confidence in that, and so
13:41
Speaker 1: that's why the price of gold is down ben just quickly.
13:44
Speaker 1: Because Doug Cass of Seabreeze Partners, he enjoys listening to you,
13:48
Speaker 1: and he wants to know your thoughts about the VIX
13:51
Speaker 1: because it rose to fifteen from ten yesterday on less
13:55
Speaker 1: than a one percent drop in the SMPI index. Your
13:59
Speaker 1: thoughts give you about twenty seconds. Sure, well, we'll look
14:02
Speaker 1: like the VIX is another one of these um constructed entities.
14:09
Speaker 1: I mean it's it's it's essentially the short to medium
14:11
Speaker 1: term volatility in the SMP five hundred. But what it
14:14
Speaker 1: also is is a trading instrument, so in exactly the
14:19
Speaker 1: same way that gold now means something I think very
14:22
Speaker 1: different from what it meant for JP Morgan back in
14:26
Speaker 1: the early nineteen hundreds. So do I think the VIX
14:29
Speaker 1: as a trading instrument means something very different than we
14:32
Speaker 1: when it started. And so you can see these outsized
14:35
Speaker 1: movements for things other than just the mechanistic impact of
14:40
Speaker 1: a change in the SMP five. Ben Hunt, thank you
14:43
Speaker 1: so much. As always, it feels like two little time.
14:45
Speaker 1: We'll have to have you back. Pen Hunt, co founder
14:47
Speaker 1: and chief investment officer of Second Foundation Partners and publisher
14:50
Speaker 1: of Epsilon Theory. Earlier today, Home Depot came out with
15:08
Speaker 1: their earnings beating expectations. In response, shares up less than
15:15
Speaker 1: one percentage point. Not much here to talk about what
15:19
Speaker 1: the Staples, the retail Staples world brings or should bring
15:25
Speaker 1: in the next few months. Is Scott Mushkin, Managing director
15:28
Speaker 1: and senior Staples retail analyst for Wolf Research in New York. Scott,
15:32
Speaker 1: thank you so much for being with us so we
15:34
Speaker 1: did get those positive results from Home Depot. I want
15:37
Speaker 1: to look ahead. We're gonna get Walmart after the bell.
15:40
Speaker 1: What's the biggest concern of analysts on the street, the
15:43
Speaker 1: wild card, given how positive the backdrop of the American
15:47
Speaker 1: economy is right now. Thanks for having me by the way,
15:51
Speaker 1: And I think if you're looking at Home Depot and
15:52
Speaker 1: you just said it, stocks barely off even though they
15:54
Speaker 1: absolutely just crushed expectations. Um, I think you know, when
15:58
Speaker 1: people look at housing, uh, there's concern. Uh, there's concern
16:02
Speaker 1: that we're going to We've been a you know, a
16:04
Speaker 1: bullish housing market for a long time. Interest rates are
16:07
Speaker 1: coming up. Certain housing markets have been so so hot,
16:13
Speaker 1: unfortunately not in Connecticut where I live, but in places
16:16
Speaker 1: like Seattle, Portland's, Denver, or even Boston. Uh, these markets
16:21
Speaker 1: have been so hot and they're cooling off very quickly.
16:24
Speaker 1: And I think you know, we all have memories of
16:26
Speaker 1: the last financial crisis and what happened to housing. So
16:29
Speaker 1: I think people are growing a little concerned with with
16:32
Speaker 1: the housing market. That's what kind of holding back the
16:34
Speaker 1: Home Depot stock right now. But you know, Home Deepot
16:37
Speaker 1: is one of the best companies out there, and so
16:39
Speaker 1: you know, we take the opportunity to buy it to
16:40
Speaker 1: you know, buy it today with such great numbers. Hey,
16:43
Speaker 1: as Scott Mushkin, what about the increases in the cost
16:47
Speaker 1: of fuel transportation as well as input costs for things
16:51
Speaker 1: such as imported lumber. Yeah, I mean so, I mean
16:54
Speaker 1: that's definitely an issue. Right we were seeing some inflation
16:57
Speaker 1: creep in. Um. Some of that it's unforced because we're
17:01
Speaker 1: putting some tarrass on and we're getting some retaliatory terrorists.
17:04
Speaker 1: But right now, you know, the home Depot and the
17:06
Speaker 1: home improvement sectors managing through that. Okay. Uh. We saw
17:10
Speaker 1: appliances actually do okay at Home Depot, even though we've
17:13
Speaker 1: seen prices come up quite a bit. So it's something
17:16
Speaker 1: you know, we're watching, it's something the company is watching.
17:18
Speaker 1: But at this stage, it really isn't enough to uh,
17:22
Speaker 1: to kind of derail the very strong sales that the
17:24
Speaker 1: company seeing and the strong earnings, because of course that's
17:27
Speaker 1: causing some cost pressures. But Home Depot is a master
17:30
Speaker 1: of being efficient in increasing their productivity and we definitely
17:36
Speaker 1: saw that this quarter. Okay, So you were saying that
17:38
Speaker 1: you are viewing this as an opportunity to buy Home Depot.
17:42
Speaker 1: I'm looking at shares right now of the company two
17:44
Speaker 1: hundred dollars and seventy two cents. Where do you see
17:47
Speaker 1: them going by the end of the year. Now we
17:50
Speaker 1: have a two fifteen price target. Uh. Is kind of
17:53
Speaker 1: where we you know, where our heads are still. And um,
17:57
Speaker 1: you know, it's one of the few companies as this
17:58
Speaker 1: market is really rat I look at a lot of
18:00
Speaker 1: my companies. I know you guys want to talk about
18:02
Speaker 1: Walmart and and some of the other names. Um, but
18:05
Speaker 1: the house some of these housing stocks lately have been
18:08
Speaker 1: left behind Home Deep belows and so it's one of
18:11
Speaker 1: the few places where my DCF is actually this kind
18:14
Speaker 1: of cash flow analysis is actually nicely above that one. Um.
18:19
Speaker 1: And so you know we do like Home DEEPO. Still okay,
18:21
Speaker 1: but but I want to go to that point. I mean,
18:23
Speaker 1: you're saying that homebuilders and housing stores or housing related
18:27
Speaker 1: stores have done poorly recently, and I'm just wondering, I mean, why,
18:31
Speaker 1: what makes you confident that people are wrong about the
18:34
Speaker 1: cooling housing market waying on these companies. So, you know,
18:39
Speaker 1: always you don't always don't want to be overconfident in
18:42
Speaker 1: your analysis. But one of the things I think it's
18:44
Speaker 1: under uh, I guess underplayed a little bit. It's just
18:48
Speaker 1: the strong supply and demand aspects of what's going on
18:52
Speaker 1: and in housing, particularly for home DEEPO and lows, where
18:56
Speaker 1: the aging of the housing stock, the fact that we
18:58
Speaker 1: haven't built in a bid to enough houses, the fact
19:01
Speaker 1: if you look at housing spending or spending into the
19:04
Speaker 1: home improvement area, it actually peaks between sixty and seventy four,
19:09
Speaker 1: So it's baby boomers are still playing a big role
19:12
Speaker 1: and spending on their house. Uh. The other thing that's
19:16
Speaker 1: interesting is the millennials. The millennials are you know, we've
19:18
Speaker 1: seen homeownership rates rise a little bit. The crest of
19:23
Speaker 1: the millennials is now, so they're really starting to get
19:27
Speaker 1: into that area of they're going to buy their first home. Uh.
19:31
Speaker 1: We've seen household formations pick up. So there are definitely
19:35
Speaker 1: besides the macrocyclical aspects. There are definitely things going on
19:40
Speaker 1: and housing, particularly for home DEEPO and lows that are
19:43
Speaker 1: more more bullish than I think is being recognized. Scott
19:47
Speaker 1: Mushkin give you about twenty seconds here just to comment
19:50
Speaker 1: on the comps that Home Depot is going to have
19:53
Speaker 1: to deal with in the second half of the year
19:55
Speaker 1: because of that six hundred million in hurricane related sales
19:59
Speaker 1: that have to compare against. Yeah, I mean it's about
20:02
Speaker 1: a one headwind, so it's definitely there, you know, you know,
20:07
Speaker 1: thankfully knocking on wood there. Thankfully we haven't had any
20:10
Speaker 1: hurricanes yet, so that's a good thing. Um. But it's
20:13
Speaker 1: you know, it's a little bit of a head wind,
20:14
Speaker 1: but certainly it's not such a big headwind that there.
20:18
Speaker 1: You know, their sales will be you know, we were
20:20
Speaker 1: still expecting five five is typed cops into the back
20:22
Speaker 1: after the year. All right, Thanks very much for being
20:25
Speaker 1: with us, Scott Mushkin. Of course, he's an expert when
20:28
Speaker 1: it comes to all things really related to the world
20:31
Speaker 1: of retail, in this case Walmart, Target and the Home
20:35
Speaker 1: Depot in China. Spending on fixed assets such as factory
20:52
Speaker 1: machinery and public works projects it is at its lowest
20:56
Speaker 1: point in nearly twenty years. To tell us more about
21:01
Speaker 1: the Chinese economy and the potential for continued trade conflagration
21:06
Speaker 1: with the United States States is Christopher Balding. He is
21:10
Speaker 1: a Bloomberg opinion columnist. He is also the author of
21:14
Speaker 1: Sovereign Wealth Funds, The New Intersection of Money and Power.
21:18
Speaker 1: He is the former Associate Professor of Business and Economics
21:21
Speaker 1: at the HSBC School Business School, and he joins us now. Christopher,
21:27
Speaker 1: thank you very much for being with us. Can you
21:28
Speaker 1: just describe the state of the Chinese economy for those
21:31
Speaker 1: that made me think it's monolithic? I think what we're
21:35
Speaker 1: seeing right now is is some real weakening. What we
21:38
Speaker 1: saw in late two thousand and seventeen and really through
21:42
Speaker 1: let's say up through about May this year, was a
21:45
Speaker 1: real credit tightening, and so this is this has been
21:49
Speaker 1: passing through into real activity. And in China, we're typically
21:54
Speaker 1: looking at about a six to nine month lag from
21:55
Speaker 1: the time credit starts tightening until the time it hits activity,
21:59
Speaker 1: and so we're really starting to see the effects of
22:02
Speaker 1: all that credit tightening that began in say November December
22:05
Speaker 1: trickled down right now UM. I do think what you're
22:08
Speaker 1: seeing though, is some conflicting signals. And what I mean
22:12
Speaker 1: by that is, UM a lot of fixed asset investment
22:16
Speaker 1: is is it a decade decade lows? But there are
22:20
Speaker 1: other signs that are actually incredibly robust. Uh. Land sales
22:24
Speaker 1: and construction starts are up that in the mid teams
22:29
Speaker 1: for the most part. UH. So it really depends on
22:32
Speaker 1: what you're looking at. And if you look at the
22:34
Speaker 1: credit cycle and where we are with the economy, it's
22:37
Speaker 1: not unrealistic to believe that all of those new construction
22:40
Speaker 1: starts and land sales are going to filter through into
22:43
Speaker 1: let's say, not a boom, but let's say a pick
22:46
Speaker 1: up in the second half of this year, in the
22:49
Speaker 1: latter second half of this year or the early first
22:51
Speaker 1: half of next year. Christopher, there's a story in the
22:54
Speaker 1: latest edition of The Economist. The headline is China losing
22:58
Speaker 1: the trade war against Aren't that? What do you make that?
23:01
Speaker 1: Do you think that it is? Um? It's it's it's
23:04
Speaker 1: tough to say who's who's losing it because in in
23:07
Speaker 1: the grand scheme of things, for let's say a fifteen
23:10
Speaker 1: nearly fifteen trillion dollar economy, UM fifty fifty billion dollars
23:15
Speaker 1: in tariffs is effectively zero. UM. But what there is
23:20
Speaker 1: prompting in a lot of China is a is a
23:23
Speaker 1: lot of concern about One of the things you've seen
23:27
Speaker 1: in political circles is UM, did China try to get
23:31
Speaker 1: too big too fast to stand up to the United States? UM.
23:34
Speaker 1: I also think it's very fair to say that there
23:37
Speaker 1: is that that this discussion over the trade war that
23:40
Speaker 1: you're seeing in China UM is is kind of a
23:43
Speaker 1: proxy for two specific discussions that people don't want to
23:48
Speaker 1: have in public, and that is, first of all, UH,
23:51
Speaker 1: the political crackdown led by Chairman she UM really reversing
23:56
Speaker 1: a lot of the liberal reforms over the past say
23:58
Speaker 1: twenty years UH. And then furthermore, whether or not China
24:03
Speaker 1: should open its market. There's been very little discussion in
24:06
Speaker 1: China about that. So this handringing about is China losing
24:10
Speaker 1: the trade war? UM? There is some very valid questions
24:14
Speaker 1: about that, but I think it's there there's other factors
24:17
Speaker 1: going on. UM. And the other thing is is that
24:21
Speaker 1: this is this is likely to have a bigger impact
24:25
Speaker 1: on China UM. Even though we always think of China
24:28
Speaker 1: as this trading nation that is running these large current
24:31
Speaker 1: accounts surpluses. Actually so far UM the current account in
24:35
Speaker 1: China this year is is effectively zero UM, and so
24:39
Speaker 1: any impact on trade is going to have a very
24:42
Speaker 1: significant pass through effect to other aspects of the economy,
24:46
Speaker 1: much more than it will in the United States. Christopher,
24:49
Speaker 1: I'm glad that you broke you brought in this sort
24:51
Speaker 1: of crackdown on liberal orders of things in China because
24:56
Speaker 1: it kind of leads me to ask you about why
24:59
Speaker 1: you decided to leave. I know that you opted to
25:03
Speaker 1: leave HSBC Business School, and you uh left China after
25:07
Speaker 1: I think after almost a decade, right, what made you
25:10
Speaker 1: decide to do that? So I I was informed last
25:15
Speaker 1: year that that my contract would not be renewed, and
25:19
Speaker 1: I actually debated where, you know, if I wanted to
25:22
Speaker 1: stay in China, and actually interviewed with some Western universities
25:25
Speaker 1: in China. UM, and I opted to leave because UM
25:29
Speaker 1: I started there were stories. You could sense the crackdown.
25:33
Speaker 1: But at the same time as I was talking to
25:35
Speaker 1: people not even mentioning my situation, you started hearing more
25:38
Speaker 1: and more stories about even innocent issues being grounds for
25:43
Speaker 1: dismissal UM or worse, UM and quite honestly, you know
25:48
Speaker 1: it did it. It felt that just remaining in China
25:51
Speaker 1: was simply going to up that risk uh continually where
25:54
Speaker 1: I felt it was just better for me to leave China. Christopher,
25:57
Speaker 1: based on your experience, do you see Chinese individuals who
26:02
Speaker 1: have the wherewithal to move money out of China continuing
26:06
Speaker 1: to do so? Um? I think there is absolutely, uh
26:11
Speaker 1: every interest in doing so. UM people with means um
26:15
Speaker 1: that that you meet in China, Everyone that I ever
26:18
Speaker 1: met absolutely has some type of let's say, fallback position.
26:23
Speaker 1: They have hedged their their bets in some way. UM.
26:26
Speaker 1: At the same time, right now, I think China has
26:29
Speaker 1: cracked down very very hard on capital in in capital
26:34
Speaker 1: controls and made it much much more difficult to get
26:37
Speaker 1: money out. That doesn't mean that it's not still happening, um,
26:40
Speaker 1: but the the levels that we're seeing are much much
26:43
Speaker 1: smaller because it is so much harder to get money
26:46
Speaker 1: out um in different ways. UM. But there is absolutely
26:50
Speaker 1: a continued interest among people with that have money to
26:54
Speaker 1: get money out of China. Christopher. I want to go
26:56
Speaker 1: back to something that you were saying, which is, you know,
26:58
Speaker 1: is there a risk that China just expanded too quickly
27:02
Speaker 1: and perhaps without the necessary infrastructure to really compete with
27:07
Speaker 1: the US. Right now, what do you think, just to
27:10
Speaker 1: sort of tie this all together, what do you think
27:11
Speaker 1: it's a likely outcome for the Chinese economy going forward? Here?
27:15
Speaker 1: Are we going to have a higher risk of a
27:17
Speaker 1: hard landing? UM? I've I've always been a believer that
27:22
Speaker 1: a hard life, let's say, a crisis of of what
27:25
Speaker 1: we would think of as a crisis, maybe something akin
27:27
Speaker 1: to what we're seeing in Turkey right now, is decidedly
27:30
Speaker 1: unlikely UM. And the primary reason is is that UM.
27:34
Speaker 1: Beijing is acutely aware of what happens if there is
27:38
Speaker 1: a financial crisis. UM. If there is a financial crisis
27:41
Speaker 1: in China, UM, it is that once a century event.
27:44
Speaker 1: And so they will not allow a crisis UM except
27:48
Speaker 1: as an absolute laughed outcome. That doesn't mean that there
27:51
Speaker 1: won't be pain, UM, and that they won't be willing
27:53
Speaker 1: to impose pain. And so this leads us to, you know,
27:56
Speaker 1: for instance, the trade war. I think there there needs
27:59
Speaker 1: to be a very clear understanding that with regards to China,
28:02
Speaker 1: they will be very, very willing to accept a lot
28:05
Speaker 1: of pain going forward in a trade war or bailing
28:09
Speaker 1: out firms as long as it avoids a type of
28:12
Speaker 1: financial crisis. Christopher Balding, thank you so much for joining us.
28:16
Speaker 1: Welcome back to the States, if only temporarily. Christopher Balding
28:19
Speaker 1: was an Associate professor of Business Economists at HSBC Business
28:23
Speaker 1: School in China and is continues to be a Bloomberg
28:26
Speaker 1: opinion columnist. I recommend you read his columns. They are very,
28:29
Speaker 1: very good. Thanks for listening to the Bloomberg P and
28:35
Speaker 1: L podcast. You can subscribe and listen to interviews at
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Speaker 1: Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm
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Speaker 1: pim Fox. I'm on Twitter at pim Fox. I'm on
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Speaker 1: Twitter at Lisa Abramo. It's one before the podcast. You
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Speaker 1: can always catch us worldwide on Bloomberg Radio.