Latest / Bloomberg Intelligence / Expect Crude to Rise to $60-$70 A Barrel Next Year: Jason Schenker

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Expect Crude to Rise to $60-$70 A Barrel Next Year: Jason Schenker · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg pim L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. 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
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p and L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. In Vienna,
• 0:35
  Speaker 1: OPEC agreeing to extend its oil production cuts to the
• 0:38
  Speaker 1: end of the year, trying to rebalance the market. They
• 0:42
  Speaker 1: say the job is yet to be completed. Here to
• 0:44
  Speaker 1: tell us, Morris Jason Schenker. He is the president of
• 0:47
  Speaker 1: Prestige Economics and he is also a Bloomberg prophet and
• 0:51
  Speaker 1: he joins us from Vienna. Jason, what can you tell
• 0:53
  Speaker 1: us about this move by OPEC? It doesn't seem to
• 0:56
  Speaker 1: have done much for the price of oil. It was
• 0:58
  Speaker 1: higher earlier in the rating session, now down three tents
• 1:01
  Speaker 1: of a percent. Thats a barrel for West Texas Intermediate Crew. Well,
• 1:08
  Speaker 1: there's a couple of dynamics going on here, pim. And
• 1:10
  Speaker 1: the first is that we don't have a finished agreement
• 1:13
  Speaker 1: as to whether it's six months or nine month extension,
• 1:17
  Speaker 1: whether the cuts in production will go through October one
• 1:21
  Speaker 1: or January one of two thousand nine, so that's not
• 1:26
  Speaker 1: quite yet fully done. I was actually just up in
• 1:28
  Speaker 1: the ministerial room where they were taking a break between
• 1:32
  Speaker 1: the OPAC part of the meeting and now the OPAQ
• 1:34
  Speaker 1: and non opec um discussions around production. So there's no
• 1:38
  Speaker 1: official word out yet as to how long the extension
• 1:42
  Speaker 1: the cuts is going to be. And I think that
• 1:45
  Speaker 1: might be why we're seeing some choppy price action and
• 1:47
  Speaker 1: crew today because we don't yet have a firm thing
• 1:50
  Speaker 1: on the table. Jason, what could OPEC agree to that
• 1:55
  Speaker 1: would materially move the price of oil? Well, I mean,
• 2:00
  Speaker 1: I think it's a matter of time. You know, the
• 2:03
  Speaker 1: longer the inventories fall and the more price support we're
• 2:07
  Speaker 1: likely to see. Um they are well, you know, I
• 2:10
  Speaker 1: doesn't explicitly target the price of crude, but what they
• 2:12
  Speaker 1: are explicitly targeting is the five year average, and so
• 2:16
  Speaker 1: as the Central Bank of Oil, much like the FED
• 2:19
  Speaker 1: that doesn't necessarily target the US exchange rate for the
• 2:22
  Speaker 1: dollar or level for the stock market. You know, they're
• 2:25
  Speaker 1: not explicitly targeting the price of oil, but they're targeting instead. Uh,
• 2:29
  Speaker 1: this other more macro factor which these inventory levels. So
• 2:33
  Speaker 1: I think what's gonna be really important for the price
• 2:35
  Speaker 1: of CREWD in the next year plus is how the
• 2:37
  Speaker 1: global economy shakes out. And next year looks like it's
• 2:41
  Speaker 1: going to be a good year, and if those inventories
• 2:43
  Speaker 1: continue to fall, growth is strong, we can see crewed
• 2:45
  Speaker 1: between sixty seventy bucks and as average price for the
• 2:49
  Speaker 1: year for w t I. But that is only if
• 2:52
  Speaker 1: these production cuts are continued. Well, you know, I think
• 2:59
  Speaker 1: that we're to see them continued, whether it's six months
• 3:01
  Speaker 1: or nine months. I think we we haven't quite seen
• 3:04
  Speaker 1: the full answer on yet, but I think that you're
• 3:08
  Speaker 1: like to see some level of extension even without them,
• 3:10
  Speaker 1: You're like to see prices supported. But I'd say that
• 3:13
  Speaker 1: there's more short term upside risk and also more upside
• 3:16
  Speaker 1: risk at the back end of next year if we
• 3:18
  Speaker 1: see these inventories move towards a five year average. The
• 3:21
  Speaker 1: reason why I'm asking is because you're talking about six
• 3:24
  Speaker 1: to seventy dollars a barrel. It's getting cheaper for shale
• 3:27
  Speaker 1: producers in the US to pump oil, and they are
• 3:31
  Speaker 1: producing more and more, especially as prices rise. How much
• 3:34
  Speaker 1: does that sort of remove the importance of opex decision
• 3:38
  Speaker 1: here because shale can just sort of compensate. On the
• 3:40
  Speaker 1: other side, well, it's still really important because the thing
• 3:45
  Speaker 1: with shale is, while they're trying to cut their way
• 3:48
  Speaker 1: to profitability and more money has come into the space,
• 3:51
  Speaker 1: you still have investors being a little bit gunshine in
• 3:55
  Speaker 1: terms of they want to make sure they're making really
• 3:58
  Speaker 1: good investments. So a lot of funds have been raised.
• 4:00
  Speaker 1: You've seen a lot of money interested in the space,
• 4:03
  Speaker 1: but you're seeing funds kind of hold back on the
• 4:05
  Speaker 1: allocation of capital because everybody's holding out for a sweetheart deal,
• 4:10
  Speaker 1: and if you need to wait for higher break even prices,
• 4:13
  Speaker 1: then those won't really be sweetheart deals. So you can
• 4:16
  Speaker 1: see more production come online, but you know it's not
• 4:19
  Speaker 1: as you know, the decision to drill the well, you know,
• 4:24
  Speaker 1: isn't necessarily going to be um as mercenary as Okay,
• 4:28
  Speaker 1: the price goes up another dollar and they're gonna pull
• 4:30
  Speaker 1: the trigger on it. But I think if we see
• 4:33
  Speaker 1: a significant rise in prices, that's kind of why I
• 4:35
  Speaker 1: say sixty to seventy kind of as an average range,
• 4:38
  Speaker 1: because you know, if you get close to seventy. Get
• 4:40
  Speaker 1: above seventy, there will be more drilling action, but that's
• 4:44
  Speaker 1: also going to a company. The demand side that usually
• 4:46
  Speaker 1: pulls price is higher because oil, like other commodities, is
• 4:50
  Speaker 1: bought and not sold, which means the demand side honestly
• 4:54
  Speaker 1: is going to be more important for prices in the
• 4:56
  Speaker 1: immediate term. Jason, how much of this is all due
• 4:58
  Speaker 1: to the fluctuation in the value of the US dollar,
• 5:03
  Speaker 1: Not that much, pim I mean a lot of this
• 5:05
  Speaker 1: has to do with the fact that China was in
• 5:07
  Speaker 1: a manufacturing recession. If you look at the monthly Sittion
• 5:11
  Speaker 1: Manufacturing p m I on index that's coming out tonight
• 5:14
  Speaker 1: at eight pm Eastern time, that index was below fifty.
• 5:18
  Speaker 1: It's an indication of manufacturing growth, and small and medium
• 5:22
  Speaker 1: sized manufacturers in China was below fifty, indicating recession between
• 5:27
  Speaker 1: December fourteen and June of two thousands sixteen, and that's
• 5:31
  Speaker 1: the exact time window when oil inventories built. In other words,
• 5:36
  Speaker 1: big surprise, the biggest net importer of the world, China
• 5:40
  Speaker 1: was in a recession while global inventories of oil went up.
• 5:45
  Speaker 1: So that's actually a critical part of the story because
• 5:47
  Speaker 1: China has been expanding since and perhaps even more important
• 5:50
  Speaker 1: than the decision today will be what happens with that
• 5:52
  Speaker 1: number tonight and incoming months real quick? Did they play
• 5:56
  Speaker 1: ominous music? As the Russian advocate walked in, there's no
• 6:03
  Speaker 1: ominous music at OPEC, and I don't generally think there's
• 6:06
  Speaker 1: any music here except for when we've had, you know,
• 6:09
  Speaker 1: parties at sheren Boune and they, you know, they bring
• 6:11
  Speaker 1: out the Viennese Orchestra when when occasionally we had a party.
• 6:15
  Speaker 1: One year they had at the the old doors of
• 6:19
  Speaker 1: the Old Exchange and the Vienna Voice Choir serenaded us.
• 6:22
  Speaker 1: But no ominous music. Usually it's more Viennese flair than that.
• 6:26
  Speaker 1: Jason Shanker, thank you so much for joining us. Jason
• 6:29
  Speaker 1: Shanker president of Prestige Economics as well as a Bloomberg prophet,
• 6:34
  Speaker 1: and he is there in Vienna as OPEC leaders meet
• 6:37
  Speaker 1: to talk about furthering output cuts. North Korea launching a
• 7:04
  Speaker 1: missile that lands in the Sea of Japan. It is
• 7:08
  Speaker 1: described as a ballistic missile launch into continental and this
• 7:13
  Speaker 1: missile launch also brings a response from the US government,
• 7:17
  Speaker 1: President Donald Trump saying that after a phone call with
• 7:20
  Speaker 1: President of China Jijing ping that major news sanctions will
• 7:24
  Speaker 1: be imposed on North Korea, perhaps an embargo on oil
• 7:28
  Speaker 1: shipments to North Korea. Here to help us understand more
• 7:31
  Speaker 1: about this is Leland Miller. He is the chief executive
• 7:34
  Speaker 1: of the China beij Book International and he joins us
• 7:37
  Speaker 1: here in our eleven three oh studios levelan thank you
• 7:40
  Speaker 1: for being with us. Maybe just lay out for our listeners,
• 7:44
  Speaker 1: what exactly do you perceive as being the most current risk. Well,
• 7:50
  Speaker 1: the what we're seeing right now is a build up
• 7:53
  Speaker 1: of capabilities by the North Koreans, and they are not
• 7:56
  Speaker 1: yet at the point where they can shoot a missile
• 8:00
  Speaker 1: to the continental United States with a payload that matters.
• 8:03
  Speaker 1: So the real risk right now is that they over
• 8:06
  Speaker 1: signal themselves in a way that that irritates the Trump administration,
• 8:09
  Speaker 1: and the Trump administration overreacts or in some ways are
• 8:13
  Speaker 1: involved in some sort of proliferation with bad guys, and
• 8:15
  Speaker 1: that gives a reason to strike, whereas there may not
• 8:19
  Speaker 1: otherwise be that reason to strike when you say a
• 8:22
  Speaker 1: payload that matters. In other words, they can't get a
• 8:24
  Speaker 1: nuclear weapons small enough to get on some of these
• 8:26
  Speaker 1: ballistic missiles in order to hit the US just sort
• 8:30
  Speaker 1: of zooming out what are the options at this point
• 8:34
  Speaker 1: for the US, And certainly it seems like China is
• 8:37
  Speaker 1: at the center of them. So what would the US
• 8:39
  Speaker 1: have to give up for China to really get more
• 8:41
  Speaker 1: aggressive with North Korea. So the problem with this is
• 8:44
  Speaker 1: this is going to have to go on stages. It's
• 8:46
  Speaker 1: gonna be escalation pause, escalation pause, And there's almost no
• 8:50
  Speaker 1: way to jump from stage A to stage D without
• 8:54
  Speaker 1: going through the hoops at each stage. And what I
• 8:57
  Speaker 1: mean by that is they're going to the North Koreans
• 8:59
  Speaker 1: are going to have to show increased capabilities with their
• 9:02
  Speaker 1: missiles and with their miniaturization of the of their nuclear weapons. Uh,
• 9:06
  Speaker 1: the Trump administration is going to have to show an
• 9:08
  Speaker 1: increasing willingness to confront them. They're going to have to
• 9:12
  Speaker 1: show they're willing to to put a military solution on
• 9:14
  Speaker 1: the table. They're willing to go after the the areas
• 9:18
  Speaker 1: of the Chinese economy which have been too sensitive to
• 9:21
  Speaker 1: do to do that for in the past, so so
• 9:23
  Speaker 1: oil as you said, and also the banking system. And
• 9:26
  Speaker 1: there's gonna have to be this escalation in terms of
• 9:29
  Speaker 1: what the US is willing to do to stop a
• 9:32
  Speaker 1: North Korean UH nuclear capability, and what the North Koreans
• 9:37
  Speaker 1: are willing to do in order to push back against that,
• 9:38
  Speaker 1: and what the Chinese are involved. And this will keep
• 9:41
  Speaker 1: going until a certain point in which everyone will feel
• 9:44
  Speaker 1: it's more politically palatable to come to the table at
• 9:47
  Speaker 1: that point, but not until things have escalated that stage.
• 9:50
  Speaker 1: And we're not there yet. So let's say we get
• 9:52
  Speaker 1: through those stages. What are the different constituents going to
• 9:56
  Speaker 1: ultimately say they want. Well, if you look at North
• 10:00
  Speaker 1: Rea first and foremost, what do they want. They want
• 10:02
  Speaker 1: a continuation that Kim dynasty. They want peace, They want
• 10:04
  Speaker 1: all the sanctions to be ripped off so that their
• 10:06
  Speaker 1: economy can grow again. Um, they want to be a
• 10:09
  Speaker 1: normal country. And that's problematic considering the North Korean dynasty
• 10:15
  Speaker 1: and and and their history. UH. China wants to avoid
• 10:18
  Speaker 1: all of their worst case scenarios. So they've got a
• 10:21
  Speaker 1: worst case scenario that involves uh, you know, a U.
• 10:24
  Speaker 1: S missile strike on the Korean peninsula, refugee flows over
• 10:28
  Speaker 1: the over the North Korean border, but also some sort
• 10:31
  Speaker 1: of peaceful solution that comes too easy, where US troops
• 10:35
  Speaker 1: in South Korea basically swallows up North Korean and then
• 10:38
  Speaker 1: you've got a massive US ally on their border, supported
• 10:41
  Speaker 1: very strongly by the United States. That's also a worst
• 10:43
  Speaker 1: case scenario for them. So what they want is everyone
• 10:46
  Speaker 1: to feel pain and whatever solution ends up happening at
• 10:49
  Speaker 1: the end to be acceptable to China, but painful enough
• 10:55
  Speaker 1: to everybody else so that so that they can live
• 10:56
  Speaker 1: with it. Based on your analysis of the Chinese econ
• 11:00
  Speaker 1: to me right now, is the economy in such a
• 11:02
  Speaker 1: strong position that it can that the political leadership can
• 11:06
  Speaker 1: actually come through on some of the things that you describe. Well,
• 11:10
  Speaker 1: the dynamics of she consolidating his power have to change
• 11:14
  Speaker 1: some of this. So the economy is rather strong. There's
• 11:16
  Speaker 1: a question right now in terms of the first half
• 11:19
  Speaker 1: and going forward, how much is she going to try
• 11:22
  Speaker 1: to restructure and rebalance the economy in a painful way.
• 11:25
  Speaker 1: Is he going to try some reform that's going to
• 11:27
  Speaker 1: actually cut growth and put him uh and and and
• 11:31
  Speaker 1: cause some problems for him? And the anti corruption anti
• 11:34
  Speaker 1: corruptions that he's put in place that has gotten some
• 11:36
  Speaker 1: pushback and it will continue to Any corruption and I pollution,
• 11:40
  Speaker 1: anti over capacity, everything he's doing right now can can
• 11:43
  Speaker 1: cause pain, but she is in such control that there's
• 11:45
  Speaker 1: not really a question of the political willpower in China
• 11:49
  Speaker 1: being able to push a solution. If she wants it,
• 11:51
  Speaker 1: he'll push it. And I don't I don't think that
• 11:52
  Speaker 1: the problem comes from China. So you said that everyone's
• 11:55
  Speaker 1: going to have to feel some pain from the US perspective.
• 11:59
  Speaker 1: What's the pain there? Well, I'm just looking at President Trump.
• 12:03
  Speaker 1: You know, he's repeated what every other president has said
• 12:05
  Speaker 1: for twenty years, which is, we will never allow the
• 12:08
  Speaker 1: North Koreans to have a nuclear missile. So if you're
• 12:10
  Speaker 1: gonna have an ultimate solution to that, there's no way
• 12:12
  Speaker 1: of ripping this away. There's the North Koreans are not
• 12:14
  Speaker 1: gonna give up their nuclear technology or their nuclear weapons,
• 12:18
  Speaker 1: and so the US solution, unfortunately, may have to involve
• 12:22
  Speaker 1: granting the North Koreans uh publicly acknowledging them to be
• 12:27
  Speaker 1: a nuclear power and to possibly bring them into the NPT.
• 12:30
  Speaker 1: Now do I like this No, I think it's awful,
• 12:32
  Speaker 1: But you know, you look at what's possible. The North
• 12:34
  Speaker 1: Koreans are not giving up their nuclear weapons. They saw
• 12:37
  Speaker 1: what happened in in in Libya. They saw what happened
• 12:39
  Speaker 1: in Iraq. They they're not going to do it. So
• 12:41
  Speaker 1: the question is is that what is the US willing
• 12:44
  Speaker 1: to backtrack on in order to get the threat reduced
• 12:48
  Speaker 1: on you know, missile strikes on the US mainland. You
• 12:53
  Speaker 1: also said that prolifer proliferation is the biggest risk. Just quickly,
• 13:00
  Speaker 1: is there any sense that North Korea is thinking of
• 13:02
  Speaker 1: exporting some moths nuclear capacity to say I ran, Well,
• 13:06
  Speaker 1: they have in the past, so that's that's the danger area. Now.
• 13:09
  Speaker 1: They did in the past, they traded technology, they sold technology. Um,
• 13:12
  Speaker 1: so they're perfectly capable of doing it. And there's no
• 13:15
  Speaker 1: there's no moral component here. North Korea will do whatever
• 13:17
  Speaker 1: it thinks is in its interest. The problem is is
• 13:21
  Speaker 1: that the Kim dynasty has has They have to realize
• 13:28
  Speaker 1: at this point that if they crossed that line, that
• 13:30
  Speaker 1: that could be a potential red line for the Trump
• 13:32
  Speaker 1: white House and and could bring a strike where otherwise
• 13:35
  Speaker 1: they might not get a strike, And so they have
• 13:37
  Speaker 1: to be very careful on that. Leland Miller, thank you
• 13:39
  Speaker 1: so much for joining us and for sharing your insights.
• 13:42
  Speaker 1: Leland Biller is chief executive of China beige Book International.
• 13:46
  Speaker 1: Talking about North Korea and how the different phases of
• 13:51
  Speaker 1: this negotiation are likely to play out. Ali Baba people
• 14:14
  Speaker 1: clamored for its I p O, they are now clamoring
• 14:18
  Speaker 1: for its seven billion dollars of bonds sold in the US.
• 14:22
  Speaker 1: I want to bring in Claire Boston, corporate finance reporter
• 14:25
  Speaker 1: for Bloomberg News. She joins us here in our eleven
• 14:27
  Speaker 1: three oh studios to talk about it. Claire, can you
• 14:29
  Speaker 1: give us a sense of why there was so much
• 14:32
  Speaker 1: demand for this debt sale? Can you also put it
• 14:34
  Speaker 1: into context as far as a size and scope with
• 14:38
  Speaker 1: respect to Chinese issuers. Thanks so much for having me,
• 14:41
  Speaker 1: Lisa UM. When it comes to this deal, there were
• 14:44
  Speaker 1: several things that stuck out UM. One is that Ali
• 14:46
  Speaker 1: Baba is not a frequent issue or this is only
• 14:49
  Speaker 1: their second deal UM and their first since their inaugural
• 14:52
  Speaker 1: deal in UM. Also, it's a bit of a higher
• 14:55
  Speaker 1: rated deal. It's a had a triple or had a
• 14:58
  Speaker 1: single A plus rating UM at s P and the
• 15:00
  Speaker 1: equivalent end moodies and for many investors, UH, many investment
• 15:05
  Speaker 1: grade bonds now are more like the triple B range.
• 15:07
  Speaker 1: So this is a opportunity to get some higher quality
• 15:09
  Speaker 1: paper UM in terms of what this means for the market. Uh,
• 15:13
  Speaker 1: this is the biggest UM Asian corporate deal UM this year,
• 15:17
  Speaker 1: and it's just a little bit smaller than Ali Baba's
• 15:19
  Speaker 1: UM inaugural deal. In why do they need the money?
• 15:24
  Speaker 1: They said that they were going to UM, you know,
• 15:26
  Speaker 1: look at investments or you know, kind of growth in
• 15:29
  Speaker 1: the future. It was sort of a general UM bonds,
• 15:31
  Speaker 1: nothing specific, going to invest in artificial intelligence companies, They're
• 15:37
  Speaker 1: going to expand their relationship with their suppliers in in China,
• 15:43
  Speaker 1: but nothing specific by growth, which is you know, something
• 15:46
  Speaker 1: that bond investors like to hear. It's you know, maybe
• 15:49
  Speaker 1: a little bit more palatable than just you know, paying
• 15:51
  Speaker 1: equity holders with your debt than just investing in your
• 15:54
  Speaker 1: bank account. I wonder they'll claire, Uh, with the respect
• 15:57
  Speaker 1: to the denomination, right, this is dollar denominated debt, I'm wondering,
• 16:01
  Speaker 1: does that indicate that Ali Baba is looking to expand
• 16:04
  Speaker 1: in the US. It's hard to say, but um, you know,
• 16:07
  Speaker 1: in terms of this bond sale, they definitely UM, we're
• 16:09
  Speaker 1: going after US investors in addition to Chinese investors, and
• 16:13
  Speaker 1: they were targeting UM, you know, some of their sort
• 16:17
  Speaker 1: of marketing calls to both areas. So Tencent is reportedly
• 16:23
  Speaker 1: looking to follow this up with their own bond sale.
• 16:26
  Speaker 1: Can you give us any color about that. Yes, they
• 16:28
  Speaker 1: announced um yesterday that they you know, may follow in
• 16:31
  Speaker 1: the marketplace. Uh, we don't have any information about, you know,
• 16:34
  Speaker 1: whether they were inspired by Ali Baba or anything. But
• 16:37
  Speaker 1: Ali Baba had forty six billion dollars of demand, our
• 16:39
  Speaker 1: sources tell us. UM, so that might be an indication that, uh,
• 16:43
  Speaker 1: you know, US investors are hungry for Chinese corporate debt. Well,
• 16:46
  Speaker 1: it's certainly pushing up issuance, correct. I mean, we're at
• 16:49
  Speaker 1: the three billion mark for the first time. Yeah, we are.
• 16:53
  Speaker 1: We have already set the this is the Asia Japan
• 16:58
  Speaker 1: Asia extra bond up goo And what was he talking about?
• 17:02
  Speaker 1: That's investment grade and way more. Um. Yeah. So it's
• 17:06
  Speaker 1: been a strong year for Asian issuance, and it's been
• 17:08
  Speaker 1: a strong year for US investment grade sales overall. Um.
• 17:11
  Speaker 1: A few weeks ago we passed last year's record. Um.
• 17:14
  Speaker 1: So we are now at the all time for US
• 17:17
  Speaker 1: investment grade bond sales. So I'm gonna just channel my
• 17:20
  Speaker 1: inner pessimist and say, well, you know, granted, Ali Baba
• 17:24
  Speaker 1: is ahemist hensent. They're like the biggest companies in China
• 17:28
  Speaker 1: and they're grabbing market share and they're grabbing the envy
• 17:30
  Speaker 1: of a lot of tech companies here in the US.
• 17:33
  Speaker 1: But having a dollar denominated debt does raise a currency issue, right,
• 17:37
  Speaker 1: especially with the UN and any potential fluctuations. There No
• 17:41
  Speaker 1: one cares about that, right, It's it's hard to tell,
• 17:44
  Speaker 1: you know. I mean, I think that they lay out
• 17:46
  Speaker 1: their risk factors UM pretty obviously and their various documentations
• 17:51
  Speaker 1: they actually do in their bond sale have a put
• 17:53
  Speaker 1: provision that basically says that if issues arise with the
• 17:57
  Speaker 1: Chinese government UM that prevent Ali Baba from business, the
• 18:00
  Speaker 1: bonds can be called back at one of one cents
• 18:03
  Speaker 1: in the dollar, So you'd actually make money. Well where
• 18:06
  Speaker 1: are they trading now? Yeah, some of them have traded up. Actually,
• 18:09
  Speaker 1: you know, you saw that sort of traditional new issue
• 18:11
  Speaker 1: pop um. Several are already passed one of one cents
• 18:13
  Speaker 1: on the dollar. But you know, we'll see here you go,
• 18:16
  Speaker 1: you lose money if you bought them. Now, why men
• 18:18
  Speaker 1: at issue? I know, but I'm just saying because this
• 18:21
  Speaker 1: is it's relevant. Yes, Uh, you know, that's kind of
• 18:24
  Speaker 1: a sign of healthy demand in the marketplace. You know,
• 18:26
  Speaker 1: when you see that, you know as soon as they
• 18:29
  Speaker 1: hit the market and they're already up a center too.
• 18:32
  Speaker 1: Well you say healthy demand, it might be just exuberant demand,
• 18:35
  Speaker 1: do you think. I mean, basically, we've got nothing by
• 18:38
  Speaker 1: any fans. I mean, but they're being pushed out of
• 18:41
  Speaker 1: a lot of other government debts. So investment grade is
• 18:44
  Speaker 1: the new government debt. And this is just another example
• 18:46
  Speaker 1: where we were seeing that search for yield. It's kind
• 18:48
  Speaker 1: of been the story of the past several years at
• 18:50
  Speaker 1: this point, and it seems to be one that will continue.
• 18:54
  Speaker 1: Thank you very much. Claire Boston is always much appreciated
• 18:57
  Speaker 1: corporate finance reporter for Bloomberg News, giving some details about
• 19:01
  Speaker 1: that Ali Baba bond sales seven billion dollars of US
• 19:06
  Speaker 1: dollar denominated debt. He joins US now Cliff Marine, deputy
• 19:32
  Speaker 1: Chief investment Officer for Mass Mutual Financial Group, helping to
• 19:35
  Speaker 1: manage more than a hundred and sixty billion dollars in assets.
• 19:39
  Speaker 1: Mass Mutual's total assets are over six hundred and fifty billions.
• 19:43
  Speaker 1: You've got to include their subsidiaries, for example, Barings and
• 19:46
  Speaker 1: Oppenheimer Funds. He's based in a Springfield, bass but he
• 19:49
  Speaker 1: joins us in our eleven three oh studios. Cliff, always
• 19:52
  Speaker 1: a pleasure. Thanks for coming in. You know, Before we
• 19:54
  Speaker 1: get to some specifics about you know, investments and so on,
• 19:57
  Speaker 1: I just want to understand if the X Overhaul plan
• 20:01
  Speaker 1: that is being considered in Washington or actually to be
• 20:04
  Speaker 1: passed and become law, do you have any sense of
• 20:09
  Speaker 1: what this would do to the budget, to the deficit
• 20:12
  Speaker 1: of the United States, particularly, you know, what this would
• 20:16
  Speaker 1: mean for all of the obligations that the government has
• 20:19
  Speaker 1: for things like Social Security, medicare as well as all
• 20:24
  Speaker 1: the other entitlement programs, never even mind the municipal programs. Well,
• 20:29
  Speaker 1: this plan is a very giant puzzle. It's very complicated,
• 20:33
  Speaker 1: a lot of moving parts. It's like a chess game
• 20:34
  Speaker 1: going on because we hear different things every day. But
• 20:37
  Speaker 1: the bottom line is our country has twenty point five
• 20:40
  Speaker 1: trillion dollars of debt today. Last year, for year in
• 20:43
  Speaker 1: September three, two thousand seventeen, our government produced revenues or
• 20:47
  Speaker 1: receipts of three point three trillion and spent almost four trillion,
• 20:50
  Speaker 1: So we had a deficit around six and fifty billion dollars,
• 20:55
  Speaker 1: and that deficit has been coming down. It was a
• 20:56
  Speaker 1: little bit lower the year before, but the years during
• 20:58
  Speaker 1: the financial crisis was over trillion dollars. So we've accumulated
• 21:02
  Speaker 1: a lot of debt. Our debt is more than doubled
• 21:04
  Speaker 1: over the last ten years, so that is an issue.
• 21:07
  Speaker 1: And then we have all the obligations for soul security
• 21:10
  Speaker 1: and then for pensions for federal employees in the medical benefits,
• 21:15
  Speaker 1: and that is not included in the twenty and a
• 21:18
  Speaker 1: half trillion. So if you look at all that debt
• 21:20
  Speaker 1: and all the obligations, which add up to some people
• 21:23
  Speaker 1: say a hundred trillion dollars, it is a bit challenging
• 21:25
  Speaker 1: and nobody's really talking about this or addressing it. So
• 21:28
  Speaker 1: from an investment perspective, Cliff, does that mean that you
• 21:30
  Speaker 1: are avoiding treasuries altogether. No, No, we are still behind treasuries.
• 21:34
  Speaker 1: We have to buy treasuries as a large investor in
• 21:37
  Speaker 1: high quality assets. But it is a challenge to our
• 21:40
  Speaker 1: country that is going to have to be addressed, not
• 21:42
  Speaker 1: today tomorrow, but sometime over the next three, five, ten years.
• 21:46
  Speaker 1: You also did buy some of those Ali Baba bonds
• 21:48
  Speaker 1: that we were just talking about. Is that correct? Yes?
• 21:50
  Speaker 1: Does it concern you that they are earning money in
• 21:53
  Speaker 1: u N and trying to pay back dollars? No, The
• 21:55
  Speaker 1: company is a financial powerhouse, has a sixty billion dollar
• 22:00
  Speaker 1: at cap. It doesn't have that much debt. I'm trying
• 22:03
  Speaker 1: to remember talking to our guys yesterday. Um it has
• 22:06
  Speaker 1: fourteen billion dollars in debt. It has more than that
• 22:08
  Speaker 1: in cash. It is growing, and it's using the bond
• 22:10
  Speaker 1: market with these low rates to effectively finance instead of
• 22:14
  Speaker 1: using equity, using debt, paying three four for long term debt,
• 22:19
  Speaker 1: and it is a very smart way for them to
• 22:22
  Speaker 1: raise capital. From us as an investor, we're diversifying our
• 22:25
  Speaker 1: bond portfolio. We don't really invest a lot in the
• 22:28
  Speaker 1: public bond market today is not a lot of value,
• 22:29
  Speaker 1: but we are selectively buying names that we like, and
• 22:33
  Speaker 1: we like Ali Bob as a company. So you mentioned
• 22:35
  Speaker 1: that you're not participating in the public markets as much
• 22:39
  Speaker 1: as you perhaps have done in the past. Can you
• 22:42
  Speaker 1: give us some examples, some ideas of what in the
• 22:45
  Speaker 1: private market you have found to be attractive. We've been
• 22:49
  Speaker 1: making real estate loans mortgages first, mortgages on very large
• 22:52
  Speaker 1: buildings in very large dollar amounts. Again, the public bond
• 22:55
  Speaker 1: investors can invest in those. We don't have liquidit in those,
• 22:58
  Speaker 1: but they do add a lot of and spread to
• 23:00
  Speaker 1: our portfolio. What kind of yield we've been getting on
• 23:03
  Speaker 1: our private corporate debt about a hundred basis points more
• 23:07
  Speaker 1: for ill liquid assets that we cannot sell. But we
• 23:11
  Speaker 1: have very high quality bars, single A, triple B bars,
• 23:16
  Speaker 1: and we've been overweight in that sector. And we've been
• 23:19
  Speaker 1: also buying CLO liabilities that markets tighten this year, but
• 23:22
  Speaker 1: that's been an overweight we've had. We think that it
• 23:25
  Speaker 1: was a miss price. It's less miss price today, but
• 23:27
  Speaker 1: we're buying these less known, less liquid assets that add
• 23:31
  Speaker 1: more yield to our portfolio and long term basis with clos.
• 23:34
  Speaker 1: Are you buying equity? Are you buying triple A paper?
• 23:36
  Speaker 1: What are you buying? We buy primarily triple A, double A,
• 23:39
  Speaker 1: and then what about other sort of a liquid investments
• 23:42
  Speaker 1: because this has gotten increasingly crowded as a lot of
• 23:45
  Speaker 1: insurance companies and UH and pensions and hedge funds and
• 23:48
  Speaker 1: private equity firms have all been trying to go into
• 23:50
  Speaker 1: private debt and some of these less liquid asset classes. Uh,
• 23:53
  Speaker 1: have you had to go further into the esoteric space?
• 23:57
  Speaker 1: So where we've been buying primarily investment grade because because
• 24:00
  Speaker 1: we are highly rate insurance company, we do buy middle
• 24:02
  Speaker 1: market loans, which we believe have much better value today
• 24:05
  Speaker 1: than high yield public bonds. And in the investment rate space,
• 24:09
  Speaker 1: again we're overweighting that because of the nature of our
• 24:11
  Speaker 1: company and our liabilities and our assets. UM corporate debt
• 24:15
  Speaker 1: to some other unusual things like private equity firms into funds,
• 24:19
  Speaker 1: closed end funds. We are lender in both the debt
• 24:22
  Speaker 1: in the preferred stock. We think those are very well secured,
• 24:24
  Speaker 1: very low risk. With private equity firms, you're lending to
• 24:27
  Speaker 1: the private equity firms or to their companies both. I
• 24:31
  Speaker 1: really can't mention their names, but we haven't lending to
• 24:33
  Speaker 1: funds and two different structures they've done that. UM, we
• 24:36
  Speaker 1: think a very secure and represent really good value for
• 24:40
  Speaker 1: our policy holders. Now, the conditions that have pushed you
• 24:43
  Speaker 1: into these kinds of let's just say alternative investments, I
• 24:48
  Speaker 1: mean that in a more generic way. Uh, do those
• 24:51
  Speaker 1: conditions conditions? Do you believe that they will continue? In
• 24:56
  Speaker 1: other words, are we going to maintain this level of
• 24:59
  Speaker 1: low interest So we're in the fourth quarter of two
• 25:02
  Speaker 1: thousand seventeen. This all started in the fourth quarter of
• 25:05
  Speaker 1: two thousand and eight, so we've had nine full years
• 25:08
  Speaker 1: of these very lower industrates. I call this an unconventional,
• 25:12
  Speaker 1: highly unusual, radical era of monetary policy. And how long
• 25:17
  Speaker 1: will this continue? We don't know. We wouldn't you know,
• 25:19
  Speaker 1: three years, five years ago, we thought would be out
• 25:21
  Speaker 1: of it already. But the economy is certainly getting better.
• 25:24
  Speaker 1: The stock market is booming right now, and you would
• 25:27
  Speaker 1: think that we would start in the United States is
• 25:30
  Speaker 1: being the adult here in his raising rates. So we're
• 25:32
  Speaker 1: raised short term rates base points several times. We're going
• 25:35
  Speaker 1: to do it again here in December. But you look
• 25:37
  Speaker 1: at Europe, you look where rates are in Germany, you
• 25:40
  Speaker 1: look at rates in Japan. The two year rate in
• 25:43
  Speaker 1: Germany's negative sixty nine basis points. In Japan, it's negative seventeen.
• 25:47
  Speaker 1: The ten year rates is almost zero in Japan, it's
• 25:50
  Speaker 1: thirty eight basis points in Germany. So investors around the
• 25:54
  Speaker 1: world look in the United States as being the higher
• 25:56
  Speaker 1: yielding area, and that's where a lot of the demand
• 25:59
  Speaker 1: is coming to push ours and keep our rates as
• 26:00
  Speaker 1: low as they have been. The yield Curtish shifted this year.
• 26:03
  Speaker 1: The two year yield is up a lot, it's from
• 26:05
  Speaker 1: about a hundred and twenty to about one and three
• 26:07
  Speaker 1: quarters per cent here this year, but the ten year
• 26:10
  Speaker 1: yield is actually down start it's almost to So we've
• 26:15
  Speaker 1: had um the FED being proactive, and I think that's
• 26:18
  Speaker 1: the right thing to do. So just real quick, you're
• 26:21
  Speaker 1: talking about some of the alternative investments that you're going into.
• 26:24
  Speaker 1: What kind of yield bogey are you going for? Given
• 26:27
  Speaker 1: those investments and given the mandate of staying within the
• 26:30
  Speaker 1: investment grade. Well, everything is still priced off a treasury yield.
• 26:34
  Speaker 1: So we're trying to get a premium yield over US treasuries.
• 26:37
  Speaker 1: And you can look at public bonds, you can buy
• 26:40
  Speaker 1: all day long, you can buy and sell them, and
• 26:42
  Speaker 1: we're actually getting a premium, as I said, on private
• 26:44
  Speaker 1: corporate debt of almost a hundred basis points. Real estate
• 26:47
  Speaker 1: mortgages are less than that, but they are still I
• 26:50
  Speaker 1: think they're better investments. Structurally, you don't have liquidity, but
• 26:53
  Speaker 1: our intent we're a long term hold. We're not investing
• 26:55
  Speaker 1: for quarters, We're investing for years. And decades, and we've
• 26:58
  Speaker 1: been doing this for a long time and it's it's
• 27:00
  Speaker 1: actually a good long term strategy in my mind. Cliff Urine,
• 27:03
  Speaker 1: we love having you on. Yeah, it's great to see you.
• 27:06
  Speaker 1: Cliff Urine is Deputy Chief Investment Officer of mass Mutual
• 27:09
  Speaker 1: Financial Group, helping to oversee a hundred and sixty billion
• 27:13
  Speaker 1: dollars of assets. It's based in Springfield at Massachusetts. Thanks
• 27:22
  Speaker 1: for listening to the Bloomberg P and L podcast. You
• 27:25
  Speaker 1: can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
• 27:29
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 27:32
  Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
• 27:37
  Speaker 1: It's one before the podcast. You can always catch us
• 27:39
  Speaker 1: worldwide on Bloomberg Radio.