Latest / Bloomberg Intelligence / China Investors' Worst Fears Coming Home In BCOM Block: Balloon

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China Investors' Worst Fears Coming Home In BCOM Block: Balloon · 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 Abramowitz. Each day we
• 0:11
  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
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. President
• 0:34
  Speaker 1: Donald Trump with an executive order blocking Broadcom's bid for Quawcom.
• 0:39
  Speaker 1: Here to tell us more about it is Tony Balloon.
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  Speaker 1: He is the head of the China corporate consulting practice
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  Speaker 1: at Austin and Bird. And also we have Bloomberg's Department
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  Speaker 1: of Justice of reporter David McLaughlin. David, maybe you can
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  Speaker 1: just set the tone for us. This is not necessarily
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  Speaker 1: that unusual. We've had instances in the past and financial right.
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  Speaker 1: This is the Chinese financial services company that is owned
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  Speaker 1: by Ali Baba's co founder Jack ma. They abandoned a
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  Speaker 1: one point two billion dollar bid for Money Graham. Previously,
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  Speaker 1: the Trump administration had blocked the acquisition of a Lattice,
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  Speaker 1: a semiconductor by a private equity group that was controlled
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  Speaker 1: by Chinese interests. Tell us about how this particular action
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  Speaker 1: today with Broadcom fits into that. You're right. So there
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  Speaker 1: have been a lot of um uh, a lot of
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  Speaker 1: Chinese deals that have fallen apart since Trump came into office. UM.
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  Speaker 1: And really there's been a long, long running concern about
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  Speaker 1: China buying American technology even before he came in. UM.
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  Speaker 1: So you mentioned some of the deals that have fallen apart.
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  Speaker 1: UM in the Broadcom deal, although Broadcom is not a
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  Speaker 1: Chinese company, it's it's based in Singapore. UM. What we
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  Speaker 1: know from letters that the Treasury Department UM, which was
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  Speaker 1: leading this review wrote is that they had they had
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  Speaker 1: a fear that China UM would be able to sort
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  Speaker 1: of move into the space that that Qualcom has right now.
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  Speaker 1: UM if Broadcom acquired Qualcom, and the fear and the
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  Speaker 1: government's view was that China and particularly Huawei technologies would
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  Speaker 1: sort of come to dominate UH wireless to the next
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  Speaker 1: generation of wireless technology, which is known as as five
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  Speaker 1: as five G. So even though even though it was
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  Speaker 1: not a Chinese REQUIRER, China was sort of looming in
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  Speaker 1: the background this whole time. So Tony, come on in here,
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  Speaker 1: because some people have been saying, Uh, this doesn't make
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  Speaker 1: a whole lot of sense with respect to the fact
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  Speaker 1: that uh Qualcom Broadcom is not necessarily a Chinese company,
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  Speaker 1: as David is saying, though there is a Chinese influence
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  Speaker 1: in Singapore, potentially there is. So do you think that
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  Speaker 1: this makes enough sense from a regulatory standpoint that it
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  Speaker 1: won't have a dampening effect on other potential deals. Well,
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  Speaker 1: I do think that there may potentially be a dampening effect.
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  Speaker 1: It is somewhat extraordinary that that if you look at
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  Speaker 1: the deals that that the president or Sciphius is either
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  Speaker 1: blocks or or sought to unwind. Historically, um, they have
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  Speaker 1: actually almost always had a nexus with with with China
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  Speaker 1: or another perceived foreign power, whereas here uh you really
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  Speaker 1: have a much more tangential connection between between China and
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  Speaker 1: the actual investor. So I think I think it is
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  Speaker 1: a stretch, but I think it fits within what the
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  Speaker 1: Trump administration's overall posture has been towards towards China since
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  Speaker 1: since they've come into power. David, this is not just
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  Speaker 1: limited to technology companies have mentioned money Grand but also
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  Speaker 1: energy companies with China. Petrick Chemical explain this may not
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  Speaker 1: just be focused on what you consider to be national
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  Speaker 1: security and technology could be national security and other industries. Alright,
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  Speaker 1: So siphius basically what they're primarily focused on generally are
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  Speaker 1: sort of critical infrastructure. UM. So that could be UM,
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  Speaker 1: you know, telecommunications, that could be UM, nuclear power plants,
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  Speaker 1: you know which which would never get off the ground. Uh,
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  Speaker 1: but UM any sort of UM like electrical electrical grids
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  Speaker 1: that would be another thing. UM. It's just that I
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  Speaker 1: think technology has been in the news because there's just
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  Speaker 1: been so many deals, and we've seen China has made
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  Speaker 1: a very concerted effort to build up its UM semiconductor
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  Speaker 1: no how so that it's no longer sort of uh
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  Speaker 1: so it's no longer dependent on on outside suppliers, and
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  Speaker 1: they've effectively I think hit a wall here in the
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  Speaker 1: United States. UM, there's just a lot of concern both
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  Speaker 1: in the administration and on Capitol Hill, rightly or wrongly
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  Speaker 1: about UM, about the risk that China poses. Tony, I
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  Speaker 1: want to get back to what you were saying about
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  Speaker 1: the dampening effect on potential deals. This used to be
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  Speaker 1: considered the deal's administration. I mean President Trump is known
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  Speaker 1: as Art of the Deal. He's known for business and
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  Speaker 1: and and sort of trying to stimulate that. I'm just wondering.
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  Speaker 1: I mean, have you had conversations in the past few
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  Speaker 1: hours with clients that previously we're considering deals that are
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  Speaker 1: now saying, you know what, we need to build in
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  Speaker 1: a much bigger buffer, or perhaps this isn't a good
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  Speaker 1: time and we misunderstood how aggressive this administration is going
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  Speaker 1: to be with respect to blocking M and A. Yeah.
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  Speaker 1: I think certainly we have had discussions with clients in
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  Speaker 1: the in the last several hours, but even even in
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  Speaker 1: over the last several months. I think I think today
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  Speaker 1: is really just uh, their their worst fears coming coming home,
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  Speaker 1: Which is that that there that if it's a if
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  Speaker 1: it's a Chinese investor, there are going to be significant
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  Speaker 1: limitations on the sectors where investments can be made. And
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  Speaker 1: I think there's just a general sense of trepidation coming
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  Speaker 1: out of China on that area. Although Tony, you know,
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  Speaker 1: you have to wonder is it just China or is
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  Speaker 1: it more broadly too, Because we saw the A T
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  Speaker 1: and T and Time Warner deal UH that the Department
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  Speaker 1: of Justice sued to try to stop, there have been
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  Speaker 1: other potential ripples of interference. I mean, is it just
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  Speaker 1: isolated to China related deals or is this something broader?
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  Speaker 1: You know? I think certainly with respect to Syphius, it's
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  Speaker 1: it's isolated to China. And I think notwithstanding the broader,
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  Speaker 1: you know, imposition of steel tariffs across a number of
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  Speaker 1: trading partners, that that was really a warning shot at
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  Speaker 1: China as well. So I do think there's a conscious
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  Speaker 1: effort by the administration to try and reset what it
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  Speaker 1: perceives as an unfair economic playing field and try to
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  Speaker 1: get us, the US away from what it perceives what
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  Speaker 1: the Trump administration perceives as at a competitive disadvantage relative
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  Speaker 1: to China, Tony. Is it also just worth noting that
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  Speaker 1: this is not necessarily limited to the Trump administration. I
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  Speaker 1: mean President Obama played a role in blocking China's acquisition
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  Speaker 1: of the German semiconductor firm uh Extron correct correct, as
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  Speaker 1: well as a Chinese controlled company called Roles and its
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  Speaker 1: development of wind farms adjacent to US restricted airspace near
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  Speaker 1: near near a military installation. Um but you know, i'd say,
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  Speaker 1: in terms of presidential activity, I mean, there's only been
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  Speaker 1: five presidential orders since nineteen ordering a divestiture or blocking
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  Speaker 1: a foreign acquisition, and and it's interesting that, you know,
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  Speaker 1: President Obama had two in his years and President Trump
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  Speaker 1: has now had you know too, in his first fourteen
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  Speaker 1: months of office. Yeah, definitely fascinating. Thank you to both
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  Speaker 1: of you. Tony Balloon, partner and head of the China
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  Speaker 1: corporate consulting practice at Alston and Bird based in Atlanta,
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  Speaker 1: and our own David mclaughland, Department of Justice reporter for
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  Speaker 1: Bloomberg News, coming to us from our studio in Washington,
• 8:22
  Speaker 1: d C. The housing market, mortgages, mortgage servicing of Fannie Mae.
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  Speaker 1: Freddie Mack. Here to help us understand this industry and
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  Speaker 1: some of the changes it is undergoing is Willie Walker.
• 8:46
  Speaker 1: He is the founder and the owner of Walker and
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  Speaker 1: dun Lapo. He's one of the owners. He's got a
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  Speaker 1: lot of shareholders. They're based in Bethesda, Maryland, but he
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  Speaker 1: joins us here in our eleven three oh studios. Well,
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  Speaker 1: he thank you so much for being here. Just how
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  Speaker 1: people a little bit about Walk and that they may
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  Speaker 1: not know about it if they're not in the DC area.
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  Speaker 1: Good morning. Pim UH Public traded under the ticker of
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  Speaker 1: w D on the New York Stock Exchange. Billions six
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  Speaker 1: market cap. UH we are primarily focused in the multi
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  Speaker 1: family lending space. We did UM twenty eight billion dollars
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  Speaker 1: of total transaction volume in two thousand and seventeen, and
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  Speaker 1: of that billion was loans on commercial real estate. And
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  Speaker 1: of that twenty five billion of loans on commercial real estate,
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  Speaker 1: twenty billion was on apartment buildings. So we are very
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  Speaker 1: large in the apartment lending space. As you said in
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  Speaker 1: the in the lead in UH, we are a very
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  Speaker 1: big partner to Fannie Mae, Freddie, MAC and HUD because
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  Speaker 1: they are the three sources, the dominant sources of capital
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  Speaker 1: to the apartment industry. Before we take into some of
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  Speaker 1: the changes in in Fannie and Freddy and HUD that
• 9:56
  Speaker 1: have been happening, I want to talk about just where
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  Speaker 1: we are in the credit cycle and the housing cycle.
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  Speaker 1: Just should point out that your shares were up more
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  Speaker 1: than fifty last year, up more than ten percent this year.
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  Speaker 1: It's been an amazingly good time for real estate, and
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  Speaker 1: particularly your company has done particularly well. I'm just wondering
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  Speaker 1: how long can this last? Now that we're seeing mortgage
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  Speaker 1: rates rise to the the highest levels since two thousand
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  Speaker 1: and eleven, and you're seeing interest rates rise just generally So, Lisa,
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  Speaker 1: it's a great question. One of the things that W
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  Speaker 1: and D has been able to do is is is
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  Speaker 1: grows significantly faster than the market. So the overall commercial
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  Speaker 1: lending market was up three percent last year, and we
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  Speaker 1: grew in our overall lending, and the multi family market
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  Speaker 1: was up five percent last year and we grew forty
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  Speaker 1: three percent year on year. So W and D has
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  Speaker 1: been able to grow much quicker than the market. With
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  Speaker 1: that said, to your question about what are the fundamentals
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  Speaker 1: from an underwriting standpoint, um, we did sixteen billion dollars
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  Speaker 1: of lending last year with Fannie and Freddie Mack and
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  Speaker 1: of that sixteen billion dollars of loans, the average loan
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  Speaker 1: to value was sixty eight percent and the average debt
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  Speaker 1: service cover so how much cash flow there is to
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  Speaker 1: cover the cost of the debt was one point four
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  Speaker 1: three times. Those are extremely healthy underwriting standards at this
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  Speaker 1: time in a cycle. So you typically would think at
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  Speaker 1: the end of a cycle, people stretch, they need more
• 11:16
  Speaker 1: debt and they have less cash flow to cover the debt.
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  Speaker 1: We are not seeing that in our lending whatsoever. All right, now,
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  Speaker 1: let's turn our attention to mortgage credit risk and first
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  Speaker 1: of all define it for us, but then tell us
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  Speaker 1: about how the g s c s Fannie and Freddie
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  Speaker 1: participate in this currently, so PIM two sides of that.
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  Speaker 1: One would be the multi family sector, where we are
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  Speaker 1: very large and a big partner of THEIRS. The other
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  Speaker 1: is the single family side of the house. On the
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  Speaker 1: multi family side, as I just gave you the credit
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  Speaker 1: statistics that was with Fannie and Freddie at and one
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  Speaker 1: point for three times debt service cover on sixteen billion
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  Speaker 1: dollars of lending. So Fannie and Freddy on the multi
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  Speaker 1: family side have not changed their credit box whatsoever and
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  Speaker 1: have held standards very tight. Because there's such a dominant
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  Speaker 1: force in the market on the single family side, we
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  Speaker 1: don't do any single family lending with Fannie and Freddie. Um,
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  Speaker 1: I would say only this is a general comment. Fanny
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  Speaker 1: and Freddie got into trouble in the early two thousands
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  Speaker 1: by going after alt A loans in the single family side.
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  Speaker 1: That was due to the pressure from the single family
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  Speaker 1: r MBS market, the residential mortgage back securities market. That
• 12:24
  Speaker 1: market hasn't come back, and as a result of that,
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  Speaker 1: Fanny and Freddie are not being pushed on the single
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  Speaker 1: family side from an underwriting standpoint, and therefore able to
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  Speaker 1: hold their credit standards much better now than they were previously.
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  Speaker 1: I want to push back on that a little bit
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  Speaker 1: because we had a Bloomberg View columnist on our show
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  Speaker 1: in the past few weeks who was saying, uh that
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  Speaker 1: there have been an increasing number of non bank lenders
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  Speaker 1: who have been originating the single family loans that are
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  Speaker 1: being ensured by Fanny and Freddy and f H And
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  Speaker 1: it raises a question if they don't have to have
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  Speaker 1: skin in the game, if they are basic lead packaging
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  Speaker 1: and originating to sell, and if Fanny, Freddy and f
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  Speaker 1: h A are not necessarily checking on the risks there,
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  Speaker 1: could we be setting ourselves up for a big problem,
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  Speaker 1: perhaps one to be borne by the taxpayer. So exactly
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  Speaker 1: where you went with that, Lisa. Because the originator of
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  Speaker 1: the mortgage holds no risk, it makes no difference whether
• 13:20
  Speaker 1: they're an extremely well capitalized bank or Quicken, who is
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  Speaker 1: not a bank but is the largest single family home
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  Speaker 1: originator in the country. Because there is no counterparty risk,
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  Speaker 1: we as taxpayers on the single family side, take a
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  Speaker 1: percent of the risk on the multi family business. With
• 13:34
  Speaker 1: Fannie and Freddie. Companies like Walker and Dunlop take the
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  Speaker 1: first lost position. So there's a big difference between the
• 13:39
  Speaker 1: securitization markets on the single family side and on the
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  Speaker 1: multi family side and so on. Commercial private companies take
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  Speaker 1: the first lost position in the single family side. The
• 13:50
  Speaker 1: government has not gone and required that the originators of
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  Speaker 1: the mortgages hold that risk. And of all the things
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  Speaker 1: they need to reform as it relates to the g
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  Speaker 1: c s, they don't need to throw away Fanny and Freddy.
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  Speaker 1: They us need to put private capital in front of
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  Speaker 1: government capital in the single family business and they will
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  Speaker 1: get the same type of business they have on the
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  Speaker 1: multi family side, which works really well and has really
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  Speaker 1: really good credit performance. All right, tell us about the
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  Speaker 1: pilot program that that Freddie, uh and Fani are rolling
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  Speaker 1: out on s FR so on single family rental, which
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  Speaker 1: is a market we really like because I think that
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  Speaker 1: at the end of the day, people want to still
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  Speaker 1: live and attach single family home, but the economic reality
• 14:29
  Speaker 1: is that fewer and few of them can afford to
• 14:31
  Speaker 1: do it. So I think that single family rental is
• 14:34
  Speaker 1: a great market. The f h f A, which is
• 14:36
  Speaker 1: the regulator Fannie and Freddy, has given both of them
• 14:39
  Speaker 1: one point to billion dollars of if you will, lending
• 14:42
  Speaker 1: capacity this year to go do a pilot in single
• 14:45
  Speaker 1: family rental securitization. And so Fanny and Freddie are entering
• 14:48
  Speaker 1: the market and we and other lenders will go out
• 14:51
  Speaker 1: and work with people who are most One of the
• 14:53
  Speaker 1: key issues here, PIM, is that they have required Fannie
• 14:56
  Speaker 1: and Freddie to focus on affordable single family Willie Walker
• 15:00
  Speaker 1: unfortunately have to leave it there. We look forward to
• 15:02
  Speaker 1: speaking with you again. Willie Walker, founder and owner of
• 15:05
  Speaker 1: Walker and Dunlop, which is based in Bethesda, Maryland and
• 15:09
  Speaker 1: focuses on commercial real estate multi family homes. What is
• 15:27
  Speaker 1: a bearish bull market? Well, here to help us understand
• 15:31
  Speaker 1: this is James Paulson. Jim Paulson is the chief investment
• 15:33
  Speaker 1: strategist for the Loothold Group. He helps to manage nearly
• 15:37
  Speaker 1: one and a half billion dollars based in Minneapolis. Jim
• 15:41
  Speaker 1: always a pleasure. So what is a bearish bull market?
• 15:46
  Speaker 1: Good morning, pim. Um. Well, you know, I think the
• 15:49
  Speaker 1: thing that's gonna stick with me about this bull forever
• 15:52
  Speaker 1: is is how it's primary characteristic was climbing a perpetual
• 15:58
  Speaker 1: wall of worry, and this was reflecting a lot of
• 16:03
  Speaker 1: the bull market to the first six years of this bowl,
• 16:08
  Speaker 1: it was led by some of the most defensive sectors
• 16:11
  Speaker 1: or defensive stocks, that the stuff that you'd buy if
• 16:14
  Speaker 1: you expected the market to fall apart um. The dividend aristocrats,
• 16:20
  Speaker 1: you know, the high quality, defensive dividend payers, were among
• 16:25
  Speaker 1: the leadership of the market for the first six or
• 16:27
  Speaker 1: seven years. If you look at low val the SNP
• 16:31
  Speaker 1: five Low Volatility Index, again something you'd buy if you
• 16:35
  Speaker 1: feared there was downside risk. Between the start of two
• 16:39
  Speaker 1: thousand and ten and November of two thousand seventeen, almost
• 16:44
  Speaker 1: eight years that that completely matched the advance in the
• 16:47
  Speaker 1: overall SMP five in an index. So in many ways,
• 16:51
  Speaker 1: a big chunk of this bowl until just recently was
• 16:55
  Speaker 1: led by bears, and it has now started to shift ups.
• 17:00
  Speaker 1: The sentiment towards a more bullish tint is starting to
• 17:05
  Speaker 1: shift right now. What's not starting to shift just yet
• 17:08
  Speaker 1: is moving out of the Goldilocks economic backdrop. At least
• 17:11
  Speaker 1: that was according to the US inflation numbers that we
• 17:13
  Speaker 1: got today, with the consumer price index, which excludes food
• 17:19
  Speaker 1: and energy, rising at zero point two percent from January
• 17:21
  Speaker 1: inline with expectations, but not the blockbuster that some people
• 17:25
  Speaker 1: were hoping for. Is there anything to make you change
• 17:30
  Speaker 1: your allocations or actually, uh, you know, sell things by
• 17:34
  Speaker 1: things based on the economic data that we've been receiving recently. Yeah,
• 17:39
  Speaker 1: you know, I think the Goldilocks has changed. I mean,
• 17:42
  Speaker 1: if you think about a year, the last twelve eighteen months, UM,
• 17:46
  Speaker 1: we've definitely had a pick up an inflation, not just
• 17:49
  Speaker 1: wage inflation, which even the three month moving average at
• 17:52
  Speaker 1: to seven is the highest year on your rate and
• 17:55
  Speaker 1: wage inflation right now of the recovery. Um, but we've
• 17:59
  Speaker 1: all also had to pick up. You know, CPI has
• 18:01
  Speaker 1: gone from zero to two point two percent since two
• 18:05
  Speaker 1: thousand fifteen pp I and went from minus four to
• 18:08
  Speaker 1: almost plus four. Uh. You've had a rise in the
• 18:12
  Speaker 1: SMP Goldman Sacks Commodity Price Index in the last two years.
• 18:15
  Speaker 1: Inflation expectations and better than tips are have just gone
• 18:19
  Speaker 1: to three year highs Uh. So there's quite a bit
• 18:22
  Speaker 1: of information just beyond any one number that you know,
• 18:26
  Speaker 1: we've got a change of foot there, and certainly we've
• 18:29
  Speaker 1: had yields now going up, not only the fedlifting rates
• 18:32
  Speaker 1: but ten year bond yields closing in on three uh
• 18:35
  Speaker 1: and we that that's starting as we saw earlier in January,
• 18:38
  Speaker 1: to challenge the stock market. We also have declining financial liquidity,
• 18:43
  Speaker 1: you know, a FED that's now contracting their balance sheet.
• 18:45
  Speaker 1: A lot of the things of goldilocks have changed. So
• 18:48
  Speaker 1: I do think it's different what I What I think
• 18:51
  Speaker 1: is we're gonna have a flattish year for the stock market,
• 18:54
  Speaker 1: um and I think we might have some more selloffs
• 18:57
  Speaker 1: along the way also with rallies. And I certainly would
• 19:01
  Speaker 1: would maybe move more defensive as we moved back up
• 19:04
  Speaker 1: towards those January highs and look at some of the
• 19:07
  Speaker 1: traditional out of favorite defensive sectors like utilities and consumer staples,
• 19:11
  Speaker 1: and I would get more aggressive back towards capital goods
• 19:15
  Speaker 1: sectors if we go back to challenge those lows that
• 19:17
  Speaker 1: we we hit in February. Yeah. But Jim, if you
• 19:20
  Speaker 1: as you said earlier, if people have already invested in
• 19:22
  Speaker 1: these defensive stocks, that that is what has led the
• 19:25
  Speaker 1: market higher, why would you be doing adding to those holdings? Well,
• 19:31
  Speaker 1: Because in the last twelve d eighteen months, Phim, defensive
• 19:35
  Speaker 1: areas of the stock market have just totally underperformed dramatically
• 19:40
  Speaker 1: relative to the cyclical areas. If you look at the
• 19:44
  Speaker 1: S and P cyclical sectors to defensive sectors that went
• 19:48
  Speaker 1: to an record high for this recovery. It has exploded
• 19:52
  Speaker 1: just in the last six to nine months. And so
• 19:55
  Speaker 1: defensive stocks if you should call up the listeners to
• 19:59
  Speaker 1: call up look at a chart of utility stocks, or
• 20:02
  Speaker 1: consumer stables, even healthcare some of the more traditional telecoms,
• 20:07
  Speaker 1: you know, the more traditional defensive plays, they have really
• 20:11
  Speaker 1: underperformed radically just in the last year. And I do
• 20:14
  Speaker 1: think it's a it's been so dramatic over a very
• 20:17
  Speaker 1: short period of time that they now represent probably a
• 20:19
  Speaker 1: good short term by Jim. What about on the fixed
• 20:23
  Speaker 1: income side, Today is a big day not only for
• 20:26
  Speaker 1: US Treasury auctions, but also Campbell Soup is selling bonds
• 20:29
  Speaker 1: as well as Caterpillar, and over in Europe issuance has
• 20:32
  Speaker 1: also been picking up. I mean it's amazing even Valiant
• 20:35
  Speaker 1: could sell bonds yesterday which have been left for dead
• 20:38
  Speaker 1: not so long ago. Are you buying into these deals?
• 20:40
  Speaker 1: I mean, do you see value here? Or is this
• 20:42
  Speaker 1: basically companies getting in before the going gets much much harder?
• 20:48
  Speaker 1: I I is hard to find value in the bond market.
• 20:52
  Speaker 1: For me, I I think that the tenure treasury, I'm
• 20:55
  Speaker 1: still suspecting that we've only got half the leg here
• 20:59
  Speaker 1: the this year in where we're probably going to go
• 21:02
  Speaker 1: up towards three and a half percent year yet before
• 21:05
  Speaker 1: the year's out. And so I do think there's more
• 21:08
  Speaker 1: carnage to be had in fixed income instruments. You're I
• 21:11
  Speaker 1: can see why investors are more inclined towards credit spread,
• 21:15
  Speaker 1: you know, because they continue to tighten. And I think
• 21:17
  Speaker 1: those spreads will continue tighten, meaning that corporate bonds probably
• 21:21
  Speaker 1: outperformed treasuries, but both probably do poorly. As far as
• 21:24
  Speaker 1: the issuance it is, it is uh pretty striking. Um
• 21:29
  Speaker 1: you're seeing greater issuance uh and and really pretty good
• 21:33
  Speaker 1: growth in corporate debt now over the last five six
• 21:35
  Speaker 1: years or even in this recovery. And I think it
• 21:38
  Speaker 1: reflects Lisa, the latter point you made. I think it
• 21:41
  Speaker 1: reflects uh CEOs and treasures going, hey, look we may
• 21:45
  Speaker 1: have turned the corner on the secular bond bowl. And
• 21:48
  Speaker 1: if if yields are starting to trend higher again, this
• 21:51
  Speaker 1: is a heck of a great time to lock in
• 21:53
  Speaker 1: some long term financing, and I think that's what we're seeing.
• 21:56
  Speaker 1: You talked about inflation. What kind of stocks do well
• 21:59
  Speaker 1: if we see acceleration and inflation, Well, I think I
• 22:04
  Speaker 1: like the capital good stocks pim over the balance of
• 22:07
  Speaker 1: this recovery. Now, I would go away from those at
• 22:11
  Speaker 1: times like the current moment towards more defensive disposure, just
• 22:14
  Speaker 1: concerned of the overall market. But if the mark keeps
• 22:17
  Speaker 1: going up over the next few years, I think it
• 22:18
  Speaker 1: will be led by the capital good stocks, and a
• 22:21
  Speaker 1: number of those are do really well in inflation. In fact,
• 22:23
  Speaker 1: all of them tend to outperform. I put technology in there,
• 22:27
  Speaker 1: but I'd also put materials, industrials, and energy, and all
• 22:31
  Speaker 1: of the latter three in particular are very tight to
• 22:34
  Speaker 1: commodity prices and low stage industrial producer price inflation um
• 22:40
  Speaker 1: and I think I I think that they will outperform
• 22:43
  Speaker 1: the market if inflation fears continue to intensify. But in
• 22:48
  Speaker 1: a down market, they might also go down. So one
• 22:52
  Speaker 1: thing that we have been suggesting that investors look at
• 22:55
  Speaker 1: is putting a little bit of direct commodities into your
• 22:59
  Speaker 1: equity portfolio. You can do this through a diversified E
• 23:03
  Speaker 1: T F like the DBC for example. And you know,
• 23:07
  Speaker 1: if inflation fears intensify, steal aluminium copper prices will rise,
• 23:14
  Speaker 1: and steal aluminium copper stocks may outperform the equity market
• 23:18
  Speaker 1: if they may still go down. And so I think
• 23:20
  Speaker 1: that adds an additional level of diversity or equity portfolio
• 23:24
  Speaker 1: against inflation risk. Jim Paulson, thank you so much for
• 23:26
  Speaker 1: joining us. Always a pleasure. Jim Paulson, chief investment strategist
• 23:30
  Speaker 1: at the Loophole Group, which oversees about one and a
• 23:33
  Speaker 1: half billion dollars from Minneapolis, Minnesota and the Bullish Bear,
• 23:38
  Speaker 1: the Parish bull. Where we are today in the cycle, Well,
• 23:53
  Speaker 1: we want to consult over Jersey, chief US interest rate
• 23:56
  Speaker 1: Strategies for Bloomberg Intelligence about going of his thoughts about
• 24:01
  Speaker 1: the ongoing auctions for US treasuries. Alright, give us an
• 24:04
  Speaker 1: update on what's happening. And uh, I note that we're
• 24:08
  Speaker 1: a little bit of really sort of inaction. We had
• 24:10
  Speaker 1: a little bit of buying at the long end this
• 24:12
  Speaker 1: morning and that has faded right now. We're at three
• 24:15
  Speaker 1: point one for the thirty year and two point eight
• 24:18
  Speaker 1: six percent for the tenure. Yeah, I think some of
• 24:21
  Speaker 1: the recent actions. So you had to pop right after
• 24:25
  Speaker 1: cp I and the news about about the Secretary of
• 24:27
  Speaker 1: State resigning. Um, you know that that brought in a
• 24:30
  Speaker 1: little bit of slight to quality clear pop in price,
• 24:34
  Speaker 1: decline in yields correct, right, So you so you had uh, um,
• 24:38
  Speaker 1: you know, prices rallied, you had thirty year yields that
• 24:41
  Speaker 1: went down to about three point one percent. Uh. They
• 24:44
  Speaker 1: backed off now and are un changed in the day.
• 24:46
  Speaker 1: But I think part of that is is getting ready
• 24:48
  Speaker 1: for the auctions because at one o'clock the Treasury Department
• 24:51
  Speaker 1: is going to be issuing some thirty year bombs, which
• 24:54
  Speaker 1: is the longest maturity debt that that the US issues,
• 24:57
  Speaker 1: and you know there is some worry about that. It's
• 24:59
  Speaker 1: going to be a billion dollars more issued today than
• 25:02
  Speaker 1: there was issued in January. And um, you know that
• 25:05
  Speaker 1: there is the worry that that will investors like these
• 25:09
  Speaker 1: yields given how much supply there's going to come. But
• 25:11
  Speaker 1: so far, when you look at the ten year auction yesterday,
• 25:13
  Speaker 1: when you look at what's happened with table auctions, actually
• 25:16
  Speaker 1: things have gone just about average. Um, it's it's been
• 25:20
  Speaker 1: There hasn't been much change in either demand or in
• 25:23
  Speaker 1: um uh in who's buying most of this most of
• 25:26
  Speaker 1: these securities? You know, I'm wondering what's the best way
• 25:29
  Speaker 1: to frame this week's auctions, is it? Uh? There was
• 25:32
  Speaker 1: demand and they went off pretty well considering a lot
• 25:36
  Speaker 1: of the jitters around the deepening deficit in the US
• 25:39
  Speaker 1: UH or is it these were only average auctions even
• 25:44
  Speaker 1: though yields for the highest levels since two thousand and
• 25:47
  Speaker 1: eleven and two thousand and eight and two thousand and
• 25:49
  Speaker 1: pick your pick your size of stokes. Yeah, well, I think, Lisa,
• 25:54
  Speaker 1: you know, a big thing is remember that these are
• 25:56
  Speaker 1: the yields of these are being issued at is the
• 25:58
  Speaker 1: highest since you known, depending on what which issues you're
• 26:02
  Speaker 1: talking about. But that's just a function of where the
• 26:04
  Speaker 1: market is. So it's not it's not surprising that they're
• 26:07
  Speaker 1: being issued where they are. What's important is that where
• 26:09
  Speaker 1: they're being issued compared to what's expected at the time
• 26:13
  Speaker 1: that the auction closes. So these auctions have specific closing time.
• 26:16
  Speaker 1: So let's say today we're going to close the auction
• 26:18
  Speaker 1: at one o'clock. All the bids have to be in.
• 26:21
  Speaker 1: If the mart markets expecting yields to be three point
• 26:24
  Speaker 1: one four and you get three point two percent, that's bad.
• 26:28
  Speaker 1: That means that you had a weak demand. You couldn't
• 26:30
  Speaker 1: fill the auctions where the market thought it was going
• 26:33
  Speaker 1: to clear. That shows that there's a week auction, but
• 26:36
  Speaker 1: you haven't had that. You've had plus or minus a
• 26:38
  Speaker 1: basis point, which is, you know, kind of that's just noise.
• 26:41
  Speaker 1: That's not that, that's not pointing to anything either nefarious
• 26:44
  Speaker 1: or particularly good. So, but but I think as these
• 26:47
  Speaker 1: auctions continue to go on, we'll get a better understanding
• 26:50
  Speaker 1: of you know, what are the demand dynamics here, because
• 26:53
  Speaker 1: um as we start issuing more and more bonds, particularly
• 26:56
  Speaker 1: in two and three year notes, which is where the
• 26:58
  Speaker 1: treasuries increase, you seeing supply the most. That is potentially
• 27:03
  Speaker 1: where you can see some chinks in the armor for
• 27:05
  Speaker 1: demand for for treasuries. IRA. If you take a look
• 27:08
  Speaker 1: at the White House is nineteen budget proposal, it would
• 27:12
  Speaker 1: raise the deficit to nearly a trillion, right, that's double
• 27:16
  Speaker 1: the projections from last year, and it would total over
• 27:19
  Speaker 1: seven trillion dollars over the next decade. That pushes the
• 27:22
  Speaker 1: national debt, so I believe almost thirty trillion dollars. Doesn't
• 27:28
  Speaker 1: this mean that the Treasury is going to have to
• 27:30
  Speaker 1: issue a lot of debt, something like one and a
• 27:32
  Speaker 1: quarter trillion a year over the next five years. Who's
• 27:36
  Speaker 1: going to buy all that? Yeah, that's a that's an
• 27:39
  Speaker 1: excellent question, and um, you know, ultimately there winds up
• 27:42
  Speaker 1: probably being a bit of a crowding out. And this
• 27:45
  Speaker 1: is where you know, deficits don't always help the economy.
• 27:48
  Speaker 1: I mean, the the ideas is that when corporate bond issuers,
• 27:52
  Speaker 1: for example, are having a problem issuing bonds, that's when
• 27:55
  Speaker 1: the Treasury Department should step in, issue some debt, try
• 27:58
  Speaker 1: and stimulate the econom me via fiscal stimulus. But at
• 28:03
  Speaker 1: some point, um, there's gonna be so many bonds outstanding
• 28:07
  Speaker 1: that that yields in general are likely to go up. Now,
• 28:10
  Speaker 1: you know. We say that and then a lot of
• 28:12
  Speaker 1: people that point to Japan and say, well, look, Japan
• 28:14
  Speaker 1: has debt to GDP that's you know what, far higher
• 28:17
  Speaker 1: than the US, and they still have interest rates near zero.
• 28:20
  Speaker 1: But one of the ways that they've gotten there is
• 28:22
  Speaker 1: from their central bank buying um a significant amount of debt,
• 28:27
  Speaker 1: both both both government debt as well as um as
• 28:31
  Speaker 1: private sector debt as well. So so the question is
• 28:33
  Speaker 1: can we with the Fed not buying all this debt
• 28:36
  Speaker 1: and not monetizing the federal government, can can yield stay here?
• 28:40
  Speaker 1: The answer is probably not if if it were to
• 28:42
  Speaker 1: be that high. Um. But then again there's you know,
• 28:46
  Speaker 1: still a lot of demand at the moment. So UM.
• 28:48
  Speaker 1: You know it's saying what's gonna happen in one because
• 28:51
  Speaker 1: of all these issues is a little bit more difficult. UM. No.
• 28:54
  Speaker 1: Near term, it seems that things are okay. Do you
• 28:56
  Speaker 1: care at all about the turmoil and President Trump's cabinet? Um?
• 29:01
  Speaker 1: Not so much. UM. I think particularly in the international space. UM,
• 29:06
  Speaker 1: I think you know, the top of the house is
• 29:08
  Speaker 1: obviously running things. So you know, what's the response from
• 29:12
  Speaker 1: the likes of of our trading partners and and you know,
• 29:15
  Speaker 1: large holders of debt like Japan and China? Do they
• 29:18
  Speaker 1: change what they're going to do in in in retaliation
• 29:21
  Speaker 1: for things like tariffs? Um? Now, I I think changing
• 29:25
  Speaker 1: that the cabinet isn't going to be changing those uh,
• 29:28
  Speaker 1: those kind of big questions that we still have to
• 29:30
  Speaker 1: ask ourselves just quickly, you know, looking at all these
• 29:33
  Speaker 1: auctions that are that are coming up, right, Uh, does
• 29:36
  Speaker 1: this mean that they're gonna just what could this overnight
• 29:39
  Speaker 1: change in terms of how much the government has to
• 29:41
  Speaker 1: pay to get people attracted. Um No, I don't think so,
• 29:45
  Speaker 1: not yet anyway. Okay, thank you so much. I Red Jersey.
• 29:48
  Speaker 1: Always a pleasure speaking with you, and we'll check back
• 29:51
  Speaker 1: in with you regarding these auctions as we go forward
• 29:54
  Speaker 1: with respect to US interest rates interest rates. He is
• 29:58
  Speaker 1: our chief US interest rate strate just for Bloomberg Intelligence.
• 30:06
  Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
• 30:09
  Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
• 30:13
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 30:17
  Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
• 30:21
  Speaker 1: It's one before the podcast. You can always catch us
• 30:23
  Speaker 1: worldwide on Bloomberg Radio.