Latest / Bloomberg Intelligence / US Trade Threats To China Are More Bark Than Bite: McDonough Samara Lenga

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US Trade Threats To China Are More Bark Than Bite: McDonough Samara Lenga · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Brabowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:18
  Speaker 1: or the trading floor. Find the Bloomberg P M L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Fears
• 0:34
  Speaker 1: of a trade war between the US and China have
• 0:38
  Speaker 1: subsided a bit. Here with US is Mike McDonough, chief
• 0:41
  Speaker 1: economist for financial Products at Bloomberg. Mike, I want to
• 0:46
  Speaker 1: start with the news that the Trump administration is urging
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  Speaker 1: China to lower tariffs on cars and open its markets
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  Speaker 1: to you as financial services. This this comes as part
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  Speaker 1: of talks to resolve uh, the rise in trade tensions.
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  Speaker 1: What do you make of this? I mean, how much
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  Speaker 1: credence can we put in some of these measures coming
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  Speaker 1: to pass? Uh? You know, I think that there there
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  Speaker 1: is a willingness from China to um implement some of
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  Speaker 1: these changes. But I think the timeline that may be
• 1:16
  Speaker 1: President Trump has in mind and the timeline that China
• 1:19
  Speaker 1: may have in line maybe where you have a difference.
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  Speaker 1: But that doesn't mean there can't be some sort of
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  Speaker 1: compromise in some of these areas. You know, it's an
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  Speaker 1: interesting Trade in China is an interesting topic because it's
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  Speaker 1: one area where a lot of leaders around the world
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  Speaker 1: may actually agree with President Trump. Uh. And when you
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  Speaker 1: you look at this situation, the problem is it looks
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  Speaker 1: like President Trump really wants some sort of short term
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  Speaker 1: gain that he could show. Look, I did this victory victory,
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  Speaker 1: a very short term victory, which this is kind of
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  Speaker 1: the damaging aspect of it. Right, nobody's going to win
• 1:52
  Speaker 1: from a trade war. The especially the US will get
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  Speaker 1: hit especially hard if there were a trade war. But
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  Speaker 1: you know, we're missing this opportunity to have a sort
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  Speaker 1: of multilateral approach where we joined together with a lot
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  Speaker 1: of the other countries that China's trading with and and
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  Speaker 1: go through the w t O or more traditional mether
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  Speaker 1: um uh channels. Uh. And it's that that's someone unfortunate.
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  Speaker 1: But I do think there could be some short term
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  Speaker 1: compromise on certain things. So, Mike, I'm looking at equity
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  Speaker 1: markets today, Dow Jones off its earlier highs, but still
• 2:25
  Speaker 1: up about one and a half percent, and you could
• 2:28
  Speaker 1: see a green across the screen throughout the US indices. UM.
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  Speaker 1: People could attribute various reasons for this, but one of
• 2:36
  Speaker 1: them could be that these that the potential for a
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  Speaker 1: trade war has gone down, right, that that there has
• 2:42
  Speaker 1: been a softening in the discussion around China and the US.
• 2:45
  Speaker 1: Our markets being too complacent in taking the words from
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  Speaker 1: Treasury Secretary Minution and the Chinese officials for saying that
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  Speaker 1: they're making some progress here. You know, I don't think so.
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  Speaker 1: I think when you look at really since President Trump
• 3:00
  Speaker 1: was elected, there's a lot of reasons that markets have
• 3:02
  Speaker 1: been going up. But the two big macro ones. One
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  Speaker 1: is the expectation that the Feds going to be very
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  Speaker 1: gradual and normalization, and the second important input was that
• 3:10
  Speaker 1: there wasn't going to be any major disruption to international trade.
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  Speaker 1: I think many times now we've seen Rehderick get really
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  Speaker 1: hot on a bunch of topics out of out of Washington,
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  Speaker 1: this now being trade, and then the action though had
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  Speaker 1: the follow through has been a fraction of what the
• 3:26
  Speaker 1: original rhetoric indicated it might be. So I think we
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  Speaker 1: could be seeing another case of that. So I think
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  Speaker 1: the market taking this, uh, this new input into consideration,
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  Speaker 1: and it might say that it overreacted. The market may
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  Speaker 1: have overreacted a bit last week, uh, and is now
• 3:41
  Speaker 1: kind of normalizing to the reality of the situation. Well,
• 3:43
  Speaker 1: so that what do you have to see before you
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  Speaker 1: would bet on the idea of a trade war heating
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  Speaker 1: up materially more than what we've seen in the past,
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  Speaker 1: But you would you would need to see action, not
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  Speaker 1: just words, right, You would need to see actual tariffs
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  Speaker 1: being implemented on a wide swim off of goods, not
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  Speaker 1: you know, not very targeted, relatively small uh, tariffs that
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  Speaker 1: don't have that much of an impact on the US
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  Speaker 1: or Chinese economy, like steel are aluminum tariffs don't have
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  Speaker 1: a major and they're not They're bad, and I don't
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  Speaker 1: think they're a good thing to have occur, but they're
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  Speaker 1: not going to have a major impact alone on either
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  Speaker 1: of the U s or the or the Chinese economy.
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  Speaker 1: So um, you know, just sort of shifting a little
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  Speaker 1: bit from China to Canada and Europe. The steel and
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  Speaker 1: aluminum tariffs that we talked about so extensively weeks ago, Uh,
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  Speaker 1: can we now write them off? Is largely non existent.
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  Speaker 1: Since everybody's gotten an exception. Well, this is another this
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  Speaker 1: is another example of what I was talking about, where
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  Speaker 1: the rhetoric is really high, really hot. Uh, and then
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  Speaker 1: when you actually see the implementation, it's a fraction of
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  Speaker 1: what was originally indicated would happened. So I mean, I
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  Speaker 1: wouldn't write anything off yet we don't know what's going
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  Speaker 1: to happen. You know, you're one tweet away from the
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  Speaker 1: markets being very concerned. Again, well, but this is my point.
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  Speaker 1: Are we or our markets going to learn to ignore
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  Speaker 1: those tweets as all bark and no bite. Uh hasn't
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  Speaker 1: happened so much yet. I think eventually the market could
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  Speaker 1: get desensitized to tweets. I guess it matters what the
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  Speaker 1: tweet says. Uh, it matters is it a new target,
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  Speaker 1: is it a new idea? Um? Is their indications of
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  Speaker 1: a follow through? Does you know if if there is
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  Speaker 1: a tweet that targets another country, does that country then
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  Speaker 1: respond with their own not tweet necessarily, but their own
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  Speaker 1: communication that indicates that this could but could then escalate.
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  Speaker 1: So I think there's a lot of factors you need
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  Speaker 1: to look at. Maybe a tweet in and of itself
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  Speaker 1: about steeler aluminum tariffs or um some of these Chinese
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  Speaker 1: tariffs might not have the same impact it had last week,
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  Speaker 1: but um, you know, you still got to be on
• 5:40
  Speaker 1: the lookout for it and see what happens in the
• 5:42
  Speaker 1: aftermath of that tweet. Mike mcdonna, thank you so much
• 5:45
  Speaker 1: for being with us. Mike mcdonot, Chief economist for financial
• 5:48
  Speaker 1: Products at Bloomberg. We've talked a lot about ETNA recently
• 6:06
  Speaker 1: in light of a CBS bid to buy Etna. But
• 6:09
  Speaker 1: there's another side of Etna, the Etna Foundation, that has
• 6:13
  Speaker 1: been studying what makes a community healthy, what impact the
• 6:18
  Speaker 1: opioid epidemic has had on the nation, and going forward,
• 6:22
  Speaker 1: what can make the nation in a better position health wise.
• 6:25
  Speaker 1: Dr Garth Graham joins me now. He's president of the
• 6:28
  Speaker 1: ETNA Foundation, which is based in Hartford, Connecticut. Uh. The
• 6:32
  Speaker 1: Etna Foundation just released its inaugural Healthiest Communities rankings. So
• 6:37
  Speaker 1: who's healthy, who's healthiest in this in this kind of
• 6:39
  Speaker 1: well so, you know, based on this ranking, we saw
• 6:41
  Speaker 1: a lot of communities in Virginia and Colorado that trended
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  Speaker 1: to the top of the list. What's important to understand
• 6:47
  Speaker 1: here with what we're publishing is that health you know,
• 6:50
  Speaker 1: we only spend a couple of hours a year in
• 6:52
  Speaker 1: the doctor's office. At the most, health is defined by
• 6:55
  Speaker 1: everything else, all the stuff that's happening in the community.
• 6:58
  Speaker 1: You know, where you can get fresh fruits and VEGTA, bikeability, walkability,
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  Speaker 1: safe housing, making sure that um, you know, you can
• 7:04
  Speaker 1: do all the things environment ere we breathe. So what
• 7:07
  Speaker 1: we try to really define with this ranking is a
• 7:10
  Speaker 1: common concept UM that your zip code defines your health
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  Speaker 1: more than your genetic code UM. And really by looking
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  Speaker 1: at all of those factors within a zip code, that
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  Speaker 1: really influences how long people live. So I'm just wondering,
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  Speaker 1: when a community is determined to be healthy, does that
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  Speaker 1: mean that they can enjoy lower insurance premiums in uh
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  Speaker 1: in tandem with nicer lives. And conversely, if you live
• 7:38
  Speaker 1: in an unhealthy community, are premiums higher. Well, you know,
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  Speaker 1: I'm not sure there's a wanton one connection with the premium.
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  Speaker 1: I think there's if you're living in a community and
• 7:47
  Speaker 1: that community lacks healthcare access and you are healthier unhealthier
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  Speaker 1: because of that community, you're going to spend a lot
• 7:53
  Speaker 1: more in healthcare. And so remember there's a difference between
• 7:56
  Speaker 1: health and healthcare. Health is when we are living a
• 7:59
  Speaker 1: healthy I be able to do all the things we
• 8:01
  Speaker 1: want to do. Health Care is when you're sick and
• 8:03
  Speaker 1: you got to go to the doctor's office and get treated.
• 8:05
  Speaker 1: But we want to emphasize is how do you make
• 8:07
  Speaker 1: people healthier in general? And how do you make sure
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  Speaker 1: that they can enjoy their lives, enjoy their aspiration, and
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  Speaker 1: enjoy their goals. And you know that's intrinsically linked to
• 8:15
  Speaker 1: the strength of the community around them. So perhaps when
• 8:19
  Speaker 1: you have to rely on the healthcare system, it's when
• 8:21
  Speaker 1: you are sick. Although a number of people are believing
• 8:26
  Speaker 1: or sort of having faith in the idea that they
• 8:27
  Speaker 1: will never get sick. Because there was a story on
• 8:29
  Speaker 1: the Bloomberg today looking at how a number of Americans
• 8:33
  Speaker 1: are dumping insurance because the premiums are going up. How
• 8:37
  Speaker 1: much have you noticed this trend and can you can
• 8:39
  Speaker 1: connect that to the healthy healthiness of community? So I
• 8:42
  Speaker 1: think in general, UM, we tend to overestimate how healthy
• 8:46
  Speaker 1: we are. UM And I think truth be told again,
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  Speaker 1: we have to understand what are the kinds of things
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  Speaker 1: that goes into making us healthy. I mean, if we
• 8:54
  Speaker 1: think about the day that we spend, we spend the
• 8:56
  Speaker 1: day interacting with family, with friends, and going out into
• 8:59
  Speaker 1: the environment, and those components of how we build that
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  Speaker 1: social and community infrastructure really defines what makes us healthy.
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  Speaker 1: And again understanding just how much time you know, I'm
• 9:09
  Speaker 1: a I'm a physician by training, by practice, and you know,
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  Speaker 1: all the vast majority of health occurs outside of the
• 9:16
  Speaker 1: doctor's office, and a lot of that health is local. So,
• 9:19
  Speaker 1: like politics, all health is local. And so understanding what
• 9:22
  Speaker 1: are the components of local health UM that are making
• 9:26
  Speaker 1: communities healthier? Dr Graham, what's the responsibility of the healthcare
• 9:31
  Speaker 1: community with respect to the opioid epidemics and so a
• 9:34
  Speaker 1: lot of people think that it started with prescriptions of
• 9:38
  Speaker 1: oxycodone and other types of hard pain killing medications. Yeah,
• 9:44
  Speaker 1: so the health the opera emidemic is multi factorial. We
• 9:48
  Speaker 1: see challenges across the economic spectrum. There's no doubt though
• 9:51
  Speaker 1: that communities that are hardested are those communities where folks
• 9:55
  Speaker 1: of labs, jobs and infrastructure and issues around mental health
• 9:58
  Speaker 1: and addictions start to take more of um compounded tone.
• 10:03
  Speaker 1: And so you know, understanding just how we treat that
• 10:06
  Speaker 1: entire community and also understanding that the line to recover
• 10:09
  Speaker 1: for addiction is giving people hope, an opportunity, and so
• 10:12
  Speaker 1: understanding that when we build that community infrastructure that makes
• 10:15
  Speaker 1: that community stronger, we then have people if they survive
• 10:18
  Speaker 1: on the locks an operiod overdose and they get a
• 10:21
  Speaker 1: locks own or an operiod reversing treatment, they go back
• 10:23
  Speaker 1: into a healthier community and healthy infrastructure. So again, all
• 10:27
  Speaker 1: health is still defined as those components of local activity
• 10:31
  Speaker 1: that make both a family and a community is stronger.
• 10:33
  Speaker 1: As a practicing doctor, what have you learned about people
• 10:39
  Speaker 1: who use opioids, perhaps even patients of your own, that
• 10:44
  Speaker 1: perhaps might challenge some of the conceptions that people have
• 10:47
  Speaker 1: about Yeah, you know, one of the things that I
• 10:50
  Speaker 1: learned is it really does cross all lines, all geographic lines,
• 10:55
  Speaker 1: alsocio economic lines, um, all different kinds of different mean
• 11:00
  Speaker 1: is that you would not have expected to be impacted.
• 11:02
  Speaker 1: One of the most troubling things that many of us
• 11:04
  Speaker 1: have seen in both clinical and public health, and you
• 11:07
  Speaker 1: see reflected in the CDC data, is that the impact
• 11:10
  Speaker 1: that is happening on the youngest and most vibrant folks
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  Speaker 1: within our community. And understanding that what we're doing is
• 11:16
  Speaker 1: what's happening here, is that it's not just you know, um,
• 11:20
  Speaker 1: folks who are in their twenties and thirties, but even
• 11:23
  Speaker 1: filtering down into younger folks within teenage years. And so
• 11:26
  Speaker 1: the recent CDC data points to the fact that the
• 11:29
  Speaker 1: decrease in life expectance in national that we're nationally that
• 11:32
  Speaker 1: we're seeing has a lot to do with the impact
• 11:34
  Speaker 1: that opiates are having on our youngest and most vibrant
• 11:37
  Speaker 1: And that's why you know, through efforts that we're doing
• 11:40
  Speaker 1: in the end a foundation tackling opiated epidemic, investing in
• 11:43
  Speaker 1: local communities, but also others across the board, we really
• 11:46
  Speaker 1: have to understand about the future of our country. Is
• 11:49
  Speaker 1: there any crossover between the ETNA Foundation and the healthcare provider? Yeah?
• 11:53
  Speaker 1: So you know, ETNA Foundation is a philanthropic arm of Enna.
• 11:57
  Speaker 1: So we invest again the local community and we invest
• 12:01
  Speaker 1: in We have a Healthy Cities and Counties Initiative where
• 12:03
  Speaker 1: we work. We work with fifty cities and counties across
• 12:06
  Speaker 1: the board to deal with local issues impact in those communities.
• 12:09
  Speaker 1: So we we are the arm that helps expand the
• 12:12
  Speaker 1: reach of our organization into local communities. Do you share
• 12:16
  Speaker 1: the data that you collect with the healthcare community? No,
• 12:19
  Speaker 1: So most of our funding are with partners and grantees
• 12:22
  Speaker 1: um So they may be state based organizations or even
• 12:26
  Speaker 1: local nonprofits and their data is their data. We just
• 12:29
  Speaker 1: help support them do work in the community. I mean,
• 12:31
  Speaker 1: does sort of look to your work to determine how
• 12:34
  Speaker 1: to sort of set pricing and determine how to sort
• 12:38
  Speaker 1: of view American health. No, we're a separate entity and
• 12:41
  Speaker 1: not a part of the business arm in terms of
• 12:45
  Speaker 1: um UH, that intersection between pricing and economics. That being said,
• 12:50
  Speaker 1: as part of the foundation as broad an enterprise, I
• 12:53
  Speaker 1: think we're all committed to this issue of building local,
• 12:56
  Speaker 1: healthy communities and trying to invest in communities, go as
• 12:59
  Speaker 1: local as we can, and find those partners who can
• 13:01
  Speaker 1: impact change. Dr Graham, just real quick, where are we
• 13:05
  Speaker 1: in the opioid epidemic? So, you know, for the past
• 13:08
  Speaker 1: couple of years as a country, as a nation, we've
• 13:12
  Speaker 1: seen our life expectancy decline, primarily driven by the impact
• 13:16
  Speaker 1: of the opioid epidemic on the younger population. I think
• 13:20
  Speaker 1: many folks have said that, you know, over the next
• 13:23
  Speaker 1: couple of years, is this continues to have that impact,
• 13:27
  Speaker 1: it will no longer be a bullet, it will be
• 13:29
  Speaker 1: a trend. So I think right now we're seeing we're
• 13:32
  Speaker 1: in the midst of the epidemic. I think we are
• 13:34
  Speaker 1: as a country, as a community, UM, I think fighting
• 13:37
  Speaker 1: for the lives of our youngest and most vulnerable. And
• 13:40
  Speaker 1: so I think the next couple of years, depending on
• 13:42
  Speaker 1: how we can come together, whether it be government or
• 13:44
  Speaker 1: public government, privac sector, I think we'll define where we go.
• 13:48
  Speaker 1: Dr Garth Graham, President of the ETNA Foundation, which is
• 13:52
  Speaker 1: based in Hartford, Connecticut, thank you so much for being
• 13:54
  Speaker 1: with us. The high old bond market is often thought
• 14:12
  Speaker 1: of as the canary in the coal mine for distress
• 14:15
  Speaker 1: in financial markets. Right now, it is not signaling any distress.
• 14:20
  Speaker 1: Joining me right now. Ken Monahan, co director of high
• 14:23
  Speaker 1: Yield at a MOONDI pioneer overseeing more than fifty billion dollars. Uh.
• 14:28
  Speaker 1: You know, can I want to focus a little bit
• 14:31
  Speaker 1: not on high yields, but on investment grade because there's
• 14:35
  Speaker 1: a question, as we see all of these mergers and
• 14:38
  Speaker 1: acquisitions going on in investment grade UH, Corporate America, how
• 14:42
  Speaker 1: many of these deals will end up in the high
• 14:45
  Speaker 1: old bond market. Well, it at least it's something we're
• 14:48
  Speaker 1: concerned about, are thinking about going forward. If we look
• 14:50
  Speaker 1: at the uh M and A activity in the bond
• 14:54
  Speaker 1: market right now, there's about two d and fifty billion
• 14:57
  Speaker 1: dollars of transactions to be financed this year, and that's
• 15:00
  Speaker 1: off of a number last year that was about a
• 15:02
  Speaker 1: hundred and seventy five billion. So you think about headline names,
• 15:05
  Speaker 1: We've got the Courier acquisition of Dr Pepper, We've got
• 15:09
  Speaker 1: the Signat acquisition of express Scripts, We've got the General
• 15:12
  Speaker 1: Mills acquisition of Blue Buffalo. There's a lot of transactions
• 15:15
  Speaker 1: going on a lot of these companies if you look
• 15:18
  Speaker 1: at them post the acquisition or sporting leverage ratios which
• 15:22
  Speaker 1: look much more like a high yield company than an
• 15:24
  Speaker 1: investment grade company. And I think the rating agencies thus
• 15:27
  Speaker 1: far have been giving uh these companies a little bit
• 15:31
  Speaker 1: of leeway to get their houses in order through synergies
• 15:33
  Speaker 1: and assets sales post acquisitions before they make any final
• 15:37
  Speaker 1: pronouncements on ultimate rating action. Well, yeah, you can see that. Fitch,
• 15:40
  Speaker 1: for example, has Etna on a rating watch negative after
• 15:45
  Speaker 1: CVS agreed to acquire the company. I'm just wondering, as
• 15:49
  Speaker 1: a high yield debt investor, how do you play in
• 15:53
  Speaker 1: debt that gets downgraded from investment grade to high yield
• 15:57
  Speaker 1: after an acquisition, do you buy? Do you sell? I mean,
• 16:01
  Speaker 1: what's what's your move? Well, you know, we certainly look
• 16:04
  Speaker 1: at it, you know, and there's a lot of investors
• 16:07
  Speaker 1: in the high yeld space that would say, okay, well
• 16:08
  Speaker 1: it's now entered my index or my benchmark, I need
• 16:11
  Speaker 1: to be invested in it, and we don't happen to
• 16:13
  Speaker 1: look at it that way. We'll be much more selective
• 16:15
  Speaker 1: there that there things that we will buy that happened
• 16:19
  Speaker 1: to be now or what we call fallen angels formally
• 16:22
  Speaker 1: investment grade companies that fall into the hig yield space,
• 16:24
  Speaker 1: and there's a lot we ignore. We just don't think
• 16:27
  Speaker 1: that they were inappropriately valued. I guess another question is
• 16:30
  Speaker 1: you have at one point three trillion dollar US high
• 16:33
  Speaker 1: old bond market. Let's say some of the record volume
• 16:37
  Speaker 1: of triple B companies corporate debt, some of it gets
• 16:41
  Speaker 1: downgraded all of a sudden. You could see this universe
• 16:43
  Speaker 1: of high yeld debt expand dramatically with a limited number
• 16:47
  Speaker 1: of investors. Could you see spreads? Could you see yields
• 16:50
  Speaker 1: blowout in response in the high led bond market? Well,
• 16:53
  Speaker 1: we certainly did. When General Motors and Ford enter the
• 16:56
  Speaker 1: High Yield Index a number of years ago. Is a
• 16:58
  Speaker 1: matter of fact, a number of the designers of benchmarks
• 17:03
  Speaker 1: reacted as a result. They went from having benchmarks that
• 17:07
  Speaker 1: were we called unconstrained constraints, so they limited the amount
• 17:11
  Speaker 1: of that anyone issuer could represented the index to two
• 17:14
  Speaker 1: percent because Ford and General Motors, because they were such
• 17:19
  Speaker 1: large issuers, actually overwhelmed the hih yield marketplace. Now, I
• 17:22
  Speaker 1: don't think any of the transactions we mentioned, like Dr Pepper,
• 17:26
  Speaker 1: not that we're suggesting that's going to get into high
• 17:28
  Speaker 1: yield necessarily, that any of these transactions themselves would overwhelm
• 17:33
  Speaker 1: the marketplace or the indices to the degree that it
• 17:35
  Speaker 1: did with Foreign General Motors. But it certainly would be
• 17:38
  Speaker 1: if if if a number of these companies were ultimately downgraded,
• 17:41
  Speaker 1: it would be a significant shift in the market. Let's
• 17:43
  Speaker 1: talk about the supply demand dynamic. In another way, There's
• 17:47
  Speaker 1: been a lot of talk about foreign investors, who are
• 17:50
  Speaker 1: one of the major buyers of US credit stepping away.
• 17:54
  Speaker 1: I'm wondering, from your vantage point, how significantly is this
• 17:58
  Speaker 1: the case. Yeah, well, um, you know a Mundi Pioneers,
• 18:01
  Speaker 1: a global firm UH, and we have global clients, and
• 18:05
  Speaker 1: we certainly had seen a lot of inflows UH from
• 18:08
  Speaker 1: UH non US investors into the corporate credit market, both
• 18:12
  Speaker 1: investment grade and high yield UM. So whether we're looking
• 18:15
  Speaker 1: at Asian investors and European investors, we seem to have
• 18:18
  Speaker 1: seen that slow somewhat this year. UM. Whether that changes
• 18:22
  Speaker 1: or not, it's unclear, but clearly the hedging costs, the
• 18:25
  Speaker 1: cost of hedging back to one's native currency, have increased
• 18:30
  Speaker 1: over the course of two thousand and seventeen and into
• 18:32
  Speaker 1: two thousand and eighteen, and we think that's at least
• 18:34
  Speaker 1: one factor UH that's impacting investors overseas investors willingness to
• 18:40
  Speaker 1: buy corporate credit in the United States. So the risks
• 18:43
  Speaker 1: are clearly rising, whether it's the risk of downgrades from
• 18:47
  Speaker 1: mergens and acquisitions, whether it's the foreign bid declining for
• 18:52
  Speaker 1: US corporate credit. And yet a lot of high yield
• 18:56
  Speaker 1: debt has gotten sold, including from Tesla and Uber companies
• 19:00
  Speaker 1: that are burning through cash. What do you make of that? Well, historically,
• 19:05
  Speaker 1: if you look at the high yield marketplace, it has
• 19:07
  Speaker 1: financed technology companies, but most technology companies that have had
• 19:12
  Speaker 1: has financed have been companies that have been much further
• 19:15
  Speaker 1: along in their business cycle UM, where there was let's
• 19:19
  Speaker 1: say a software company, where there was a certainty or
• 19:22
  Speaker 1: a consistency with cash flows. The problem with uh Tesla's
• 19:27
  Speaker 1: or the Ubers of the world. These are companies that
• 19:30
  Speaker 1: are still very much of the building portion of their
• 19:32
  Speaker 1: business cycle, and therefore they've got large negative cash flows. UM.
• 19:36
  Speaker 1: That makes them much more difficult to finance in the
• 19:38
  Speaker 1: credit markets, and that's why historically those businesses have been
• 19:42
  Speaker 1: financed with equity and sometimes that they've gone to the
• 19:44
  Speaker 1: debt markets, they've used convertible bonds rather than high yield bonds.
• 19:48
  Speaker 1: So have you been buying their loans? Um? We generally
• 19:52
  Speaker 1: don't like to comment on specific companies, but we've been
• 19:55
  Speaker 1: much more cautious about the technology sector. Why don't we
• 19:57
  Speaker 1: be very very diplomatic. Is there any any sector that
• 20:01
  Speaker 1: you're particularly bullish on. Well, we've been more bullish on
• 20:03
  Speaker 1: the housing market. UM continue to be that we think
• 20:06
  Speaker 1: that there is still some value there. We've been bullish
• 20:09
  Speaker 1: on the steel industry and we've been bullish on it
• 20:11
  Speaker 1: prior to what's gone on with regards to some of
• 20:15
  Speaker 1: the trade barriers that were put up recently by the
• 20:18
  Speaker 1: White House. Uh, and we think that those are two
• 20:21
  Speaker 1: sectors that will continue to benefit given the current state
• 20:24
  Speaker 1: of the economy. As you pointed out early in our conversation, UM,
• 20:28
  Speaker 1: the high yield market, which has often thought of as
• 20:30
  Speaker 1: the canary in the coal mine, hasn't been singing this time. UM.
• 20:32
  Speaker 1: We don't think that the that the fundamentals are actually
• 20:35
  Speaker 1: pretty strong still. So what'll you have to see to
• 20:39
  Speaker 1: change that too? You know? Uh. Business cycles, as we know,
• 20:46
  Speaker 1: generally don't end because they get they die of old age.
• 20:49
  Speaker 1: They die because companies start doing more foolish things. So
• 20:53
  Speaker 1: you worry about the M and A side, which we
• 20:55
  Speaker 1: just talked about, UM, and then you worry about how
• 20:58
  Speaker 1: aggressive that the central Bank will be. And the FEDS
• 21:01
  Speaker 1: obviously is beginning to not necessarily take away the punch bowl,
• 21:06
  Speaker 1: but maybe they put a drain on the bottom of
• 21:07
  Speaker 1: it and they're beginning to take some of the liquid out. Um.
• 21:10
  Speaker 1: If the e c B moves as well, maybe that
• 21:12
  Speaker 1: becomes more more troublesome, but we don't think that happens
• 21:15
  Speaker 1: this year. FED is dimming the lights in the bar
• 21:17
  Speaker 1: Ken Monahan, thank you so much for being with us
• 21:19
  Speaker 1: co director of High Yield at a Moundi Pioneer, which
• 21:23
  Speaker 1: oversees more than fifty billion dollars of assets from Durham,
• 21:27
  Speaker 1: North Carolina. Definitely an interesting time, especially with the proportion
• 21:32
  Speaker 1: of triple B rated debt in the investment grade market
• 21:36
  Speaker 1: being the highest it's ever been, raising the issue of
• 21:40
  Speaker 1: what happens if some of this gets downgraded. As part
• 21:59
  Speaker 1: of the spending bill that was passed last week in Congress,
• 22:04
  Speaker 1: a particular type of fund, business development funds, were allowed
• 22:08
  Speaker 1: to incur more leverage to boost returns. Here joining us
• 22:13
  Speaker 1: now to talk about that and other things affecting the
• 22:15
  Speaker 1: middle market space. David Dulham, President of Gladstone Investment Corporation
• 22:19
  Speaker 1: based in McLean, Virginia. David, thank you so much for
• 22:23
  Speaker 1: being here. First, can you lay out what the change
• 22:26
  Speaker 1: was that was made? And it was sort of slipped
• 22:29
  Speaker 1: in to the bill that was passed last week. Surely
• 22:32
  Speaker 1: said thank you for having me on UM. Basically, BBC's
• 22:37
  Speaker 1: business development companies have been limited, if you will, to
• 22:41
  Speaker 1: a leverage ratio of one layer of debt to one
• 22:45
  Speaker 1: layer of equity. It's been that way since BBCs were created.
• 22:49
  Speaker 1: So what this bill basically allows is that we can
• 22:52
  Speaker 1: now go from one to one leverage, if you will,
• 22:55
  Speaker 1: to a two to one leverage. So for each dollar
• 22:59
  Speaker 1: of equity that any fund has, theoretically they can increase
• 23:04
  Speaker 1: it by another one to two to one. There are
• 23:06
  Speaker 1: those some requirements, and as as most things, the details
• 23:11
  Speaker 1: are important, and in this case, each BDC will have
• 23:15
  Speaker 1: to get shareholder approval by at least fifty percent of
• 23:19
  Speaker 1: shareholders to be able to increase from the one to
• 23:22
  Speaker 1: one to two to one, and it may be affected
• 23:25
  Speaker 1: somewhat by other restrictions in their capital structures, such as
• 23:29
  Speaker 1: any lines of credit or preferred shaw instiences that they have,
• 23:32
  Speaker 1: where there are some restrictions in there which will have
• 23:35
  Speaker 1: to be worked through, if you will. But having said that,
• 23:38
  Speaker 1: it definitely will be a positive. I believe in that
• 23:42
  Speaker 1: two to one leverage is not huge leverage, certainly relative
• 23:45
  Speaker 1: to other financial institutions, and it will give an opportunity
• 23:48
  Speaker 1: for a higher return on equity for those funds that
• 23:51
  Speaker 1: are able to employ it. So, just taking a step back,
• 23:53
  Speaker 1: business development companies typically invest in smaller and mid sized
• 23:57
  Speaker 1: US companies through debt and equity UH and they get
• 24:01
  Speaker 1: some tax benefits as a result. Uh, and they are
• 24:05
  Speaker 1: typically the I P of they have initial public offerings
• 24:08
  Speaker 1: and there raise a certain amount of capital that they
• 24:09
  Speaker 1: can then invest in these smaller companies. Right correct. Okay,
• 24:13
  Speaker 1: So I'm wondering, since you run a b DC, a
• 24:16
  Speaker 1: business development company Gladstone Investment Corporation, are you planning to
• 24:20
  Speaker 1: increase the leverage in response to this new rule that
• 24:23
  Speaker 1: was allowed. Yes, we certainly are looking into it to
• 24:27
  Speaker 1: determine how we go about getting that done, including, as
• 24:30
  Speaker 1: I mentioned, our shareholder reproval. Absolutely, I think it's a
• 24:34
  Speaker 1: very positive thing. The industry has been working on this
• 24:37
  Speaker 1: for a while and it's good to see it happen.
• 24:39
  Speaker 1: How much do you think that you could increase returns
• 24:41
  Speaker 1: as a result of this, Well, you know, it's it's
• 24:45
  Speaker 1: hard to tell. Obviously, depends how much leverage anyone fund
• 24:48
  Speaker 1: would would access, but you know most of us have
• 24:52
  Speaker 1: returns on equity if you will, are we, depending on
• 24:55
  Speaker 1: how you count it, that are in the say anywhere
• 24:58
  Speaker 1: In our case, we're over because we are differentiated business
• 25:04
  Speaker 1: development company gain meaning glass own investment because we actually
• 25:07
  Speaker 1: when we buy a business, we are we're using both
• 25:10
  Speaker 1: our own debt and our equity, so we are differentiated
• 25:13
  Speaker 1: from most BDCs that are lenders. So my anticipation is
• 25:18
  Speaker 1: with the ability to access at least another say half
• 25:23
  Speaker 1: of our of another layer of debt, we'll be able
• 25:27
  Speaker 1: to have a lower cost of capital, and therefore I
• 25:30
  Speaker 1: would expect our returns could be increased. I don't know
• 25:33
  Speaker 1: ten perhaps just because of incremental leverage. David, It's interesting
• 25:38
  Speaker 1: the timing of this because there's a lot of money
• 25:42
  Speaker 1: chasing yield right now, and there's a lot of money
• 25:44
  Speaker 1: looking in the small and MidCap space with an increasing
• 25:49
  Speaker 1: number of private credit funds raised by number of private
• 25:52
  Speaker 1: equity firms and even hedge funds. And I'm wondering, are
• 25:55
  Speaker 1: you concerned that valuations are getting too heady h and
• 25:59
  Speaker 1: that the and is so great that the investment opportunities
• 26:03
  Speaker 1: really just aren't there, right, It's a great question. UM,
• 26:07
  Speaker 1: I would say this we have. It's not new necessarily,
• 26:11
  Speaker 1: I would say the last number of years we've certainly
• 26:13
  Speaker 1: been in this environment where I would call it challenging,
• 26:17
  Speaker 1: UH in terms of finding and investing in these new
• 26:20
  Speaker 1: biout opportunities. UM. As far as the traditional b dcs
• 26:26
  Speaker 1: and lending b dcs, I think clearly this This is
• 26:29
  Speaker 1: going to help because it will have a tendency to
• 26:31
  Speaker 1: lower the cost of capital for those b dcs. For
• 26:34
  Speaker 1: farns like my own Glass own investment, where we are
• 26:37
  Speaker 1: a biot oriented BDC. Our challenge is really competing with,
• 26:42
  Speaker 1: as you said, the other private equity firms that have
• 26:45
  Speaker 1: a fair amount of capital. This is going to help
• 26:48
  Speaker 1: us because our cost of capital will also be a
• 26:52
  Speaker 1: bit lower. So where perhaps we might have been challenged,
• 26:55
  Speaker 1: let's say in a buyout where you know, seven or
• 26:58
  Speaker 1: eight times even d A was a problem, we might
• 27:01
  Speaker 1: be able to raise all our valuations a little bit
• 27:04
  Speaker 1: and therefore actually be a bit more competitive. But overall,
• 27:07
  Speaker 1: let's say it's challenging in finding good new opportunities, and
• 27:10
  Speaker 1: indeed it is a bit frothy, but it's been that
• 27:12
  Speaker 1: way for the last couple of years, and I'm not
• 27:15
  Speaker 1: sure I see it changing dramatically going forward in the
• 27:18
  Speaker 1: next few years, as long as the economy continues as
• 27:20
  Speaker 1: it is. So it doesn't concern you to add a
• 27:22
  Speaker 1: little more leverage at this point because we still have
• 27:24
  Speaker 1: some some time left. Yeah, not really, And as I say,
• 27:28
  Speaker 1: it will help us in terms of I think being
• 27:30
  Speaker 1: even more competitive and certainly a potential for greater return
• 27:34
  Speaker 1: on equity, which of course benefits our public shareholders. David Dulham,
• 27:38
  Speaker 1: thank you so much for joining me. David Dulham, President
• 27:41
  Speaker 1: of Gladstone Investment Corporation. It trades in the NASDACK as
• 27:45
  Speaker 1: gain G a I N. It is based in McLean, Virginia,
• 27:50
  Speaker 1: and this particular shift in the leverage allowance for business
• 27:54
  Speaker 1: development companies was tucked into the one point three trillion
• 27:58
  Speaker 1: dollar spending bill that was passed by US Congress last week.
• 28:03
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 28:06
  Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
• 28:10
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 28:13
  Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
• 28:18
  Speaker 1: It's one before the podcast. You can always catch us
• 28:20
  Speaker 1: worldwide on Bloomberg Radio.