Latest / Bloomberg Intelligence / Jay Powell Nomination Ruptures Bipartisan Fed Image, Binder Says

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Jay Powell Nomination Ruptures Bipartisan Fed Image, Binder Says · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 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 m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. President
• 0:32
  Speaker 1: Trump has the opportunity to reshape the Federal Reserve. Many
• 0:36
  Speaker 1: people are concerned that he will compromise the feds independence.
• 0:41
  Speaker 1: Our next guests argue that that independence is a myth.
• 0:45
  Speaker 1: To begin with, I want to bring in Sarah bind
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  Speaker 1: a professor of political silence science at George Washington University,
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  Speaker 1: as well as Mark Spindell, founder and chief investment officer
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  Speaker 1: at Potomac River Capital, both based in Washington, d C.
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  Speaker 1: Co authors of the new book The Myth of Independence,
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  Speaker 1: How Congress Governs the Federal Reserve. Sarah, I want to
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  Speaker 1: start with you. Can you just explain why it is
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  Speaker 1: a myth that the FED is independent and how so
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  Speaker 1: many people believe this myth? Well, there is thanks for
• 1:15
  Speaker 1: having us. It is a widely held notion, certainly outside
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  Speaker 1: the FED. UH that Congress created the FED and then
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  Speaker 1: throw away the key it gave it autonomy to set
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  Speaker 1: interest rates and control monetary policy, and then Congress turns
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  Speaker 1: the other way. Right. The argument is that in exchange,
• 1:34
  Speaker 1: Congress conducts oversight and tries to hold the FED accountable
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  Speaker 1: for meeting the goals that Congress gives it. We find, though,
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  Speaker 1: in looking at both the history of the FED and
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  Speaker 1: contemporary the FED, that there's a relationship between Congress the Boss,
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  Speaker 1: and the Federal Reserve UH and that both depend on
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  Speaker 1: each other. Right, we call it interdependence. Congress needs the
• 1:56
  Speaker 1: FED to do a good job control the economy and
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  Speaker 1: to have someone to blame when the economy sours. At
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  Speaker 1: the same time, the FED needs Congress, right Congress, The
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  Speaker 1: FED wants to protect its powers, but it needs support.
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  Speaker 1: It needs political support when it makes tough policy choices.
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  Speaker 1: Otherwise Congress will reopen the Federal Reserve Act and possibly
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  Speaker 1: take those powers away or give it more powers that
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  Speaker 1: the FED might not want to have. Mark, why don't
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  Speaker 1: you come in on this and offer your thoughts. Obviously
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  Speaker 1: you must have something that is sympathetic to what Sarah
• 2:27
  Speaker 1: is saying. But is there any doubt that this was ever,
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  Speaker 1: so I think so, and I think that myth was
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  Speaker 1: really propagated in the markets. Uh. You know, part of
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  Speaker 1: the genesis for this project stretches back a decade um
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  Speaker 1: at the time of the Tarp Tarp legislation torpedoing. I
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  Speaker 1: think Sarah and I began to talk about the possibility
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  Speaker 1: that Congress would reopen the Act, and I think in that, uh,
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  Speaker 1: what we discovered a reasonably recurring feature of the Fed's
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  Speaker 1: relationship with Congress and congresses relationship with the FED that
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  Speaker 1: had enormous implications for the way that Congress and the
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  Speaker 1: FED could shape the outlook for markets, the economy, and
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  Speaker 1: monetary policy. And I think beginning to factor in the
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  Speaker 1: kinds of political risks that we saw at the heat
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  Speaker 1: of the crisis, and I think in the in the
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  Speaker 1: ten years hence has really been a feature of trying
• 3:20
  Speaker 1: to understand, uh, the outlook for for the FED, for
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  Speaker 1: monetary policy, and for markets. Indeed, I'm wondering, Sarah, you know,
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  Speaker 1: is this something that always has been the case where
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  Speaker 1: there has been this incredibly political element or has it
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  Speaker 1: gotten more so as the FED has engaged in all
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  Speaker 1: of these unconventional policies and taken more control over the economy.
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  Speaker 1: And I just want to add, you know, in previous
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  Speaker 1: years Obama, for example, former President Obama appointed Ben Burnanki,
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  Speaker 1: who was originally appointed by George W. Bush. So this
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  Speaker 1: was a bipartisan type of arrangement and it seemed to
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  Speaker 1: be an endorsement of just sort of keeping the status quo.
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  Speaker 1: Now we're seeing something different. Can you weigh in? Have
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  Speaker 1: we seen a shift? Sure? Well, this relationship, the interdependence
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  Speaker 1: has been there back to the beginning, back to the
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  Speaker 1: early nineteen hundreds. But what's changed here is really at
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  Speaker 1: least twofold. First, the FED as a far more powerful
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  Speaker 1: institution over over that century because of the powers Congress
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  Speaker 1: has in repeatedly in the responsibilities Congress has given to
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  Speaker 1: the FED. So the FED is vastly more important, and
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  Speaker 1: the US as a global economic power is vastly more
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  Speaker 1: important than it was a hundred years ago. But partisanship
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  Speaker 1: in Washington is also far more polarized today than it
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  Speaker 1: than it has been the last thirty forty years. You
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  Speaker 1: add that up and what do you get, right, it's
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  Speaker 1: crystallized in the Trump nominee uh last week. Right, as
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  Speaker 1: you said, for several several decades, sitting presidents, when faced
• 4:45
  Speaker 1: with the opportunity to reappoint the incumbent chair to a
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  Speaker 1: second term who was appointed by the other party's president,
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  Speaker 1: has gone ahead and made that essentially bipartisan appointment. That
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  Speaker 1: was ruptured last week with the Trump nominating a pal
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  Speaker 1: who's pretty close I think to the current Chair, Jennet
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  Speaker 1: Yellen in terms of monetary policy, at least in terms
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  Speaker 1: of their votes. But that appointment really ruptured this image
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  Speaker 1: of this bipartisan Fed, this technocratic Fed. And now with
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  Speaker 1: Trump right, he can make up to three, maybe even
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  Speaker 1: four appointments to the board in addition to the two
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  Speaker 1: he's the one he's made and one he's about to make.
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  Speaker 1: Um that that uniformly changes will change the makeup of
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  Speaker 1: the FED in a way that the framers of the
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  Speaker 1: FED back in the early nineteen hundreds never envisioned one
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  Speaker 1: party having that much influence over the makeup of the board.
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  Speaker 1: I'm just wondering to both of you all see this
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  Speaker 1: as something that is just specific to the Federal Reserve
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  Speaker 1: or other government institutions. I think of the U. S.
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  Speaker 1: Supreme Court, for example, Sarah or whatever you choose, who's
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  Speaker 1: going to answer that one. It's it's it's certainly the
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  Speaker 1: case that the FED is not the only political institution
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  Speaker 1: with norms and statutes that protect independence. I think what's
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  Speaker 1: unique here is the FED is a unique body here.
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  Speaker 1: It has far more influence over the economy than any
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  Speaker 1: other the myriad independent agencies with economic powers. Right, Yeah,
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  Speaker 1: And I think it's it's important to understand the political similarities,
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  Speaker 1: but I think the economic differences between the impact that
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  Speaker 1: the Federal Reserve can have on markets, on on the
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  Speaker 1: economy versus versus the Court. Although I think PEM it's
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  Speaker 1: a it's a it's an interesting question and an analog
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  Speaker 1: that we looked at in trying to understand the nature
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  Speaker 1: of of the politics, and I think that goes back
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  Speaker 1: to thinking about monetary politics revealed this myth Mark, I
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  Speaker 1: want to get your perspective as a long time investment manager.
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  Speaker 1: I mean, if we are getting a more more polarized
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  Speaker 1: backdrop to the FED, which is already a political animal
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  Speaker 1: as you sort of described, I'm wondering, Mark, how that
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  Speaker 1: affects investments going forward. Does this give or reliability to
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  Speaker 1: the Fed? Less reliability? I mean, how do you navigate that?
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  Speaker 1: So I think I think the selection process, which for
• 7:08
  Speaker 1: lack of a better word, seemed weird, UM, but did
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  Speaker 1: result in an institutionalist UH. We we assume a confirmation
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  Speaker 1: of of J. Powell Chairman. Powell will follow very much
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  Speaker 1: along the monetary contours that Ben Bernankee and Janet Yellen
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  Speaker 1: have put in place, and I think motivating yelling UH
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  Speaker 1: to to institute the balance sheet unwind the kickoff of
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  Speaker 1: monetary tightening, I think it's very easy baton for for J.
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  Speaker 1: Powell to pick up that said, um, we we recognize
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  Speaker 1: that the last two downturns in the US have really
• 7:44
  Speaker 1: been financially financially led the certain Certainly the global financial
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  Speaker 1: crisis revealed a a sort of range of issues regarding
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  Speaker 1: mac repredential and UH super super supervision and regulatory issues
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  Speaker 1: where the FED is really the uber regulator UH. And
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  Speaker 1: I think as we think about not just J. Powell,
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  Speaker 1: but the whole complexion of the board, I think where
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  Speaker 1: we are really paying a lot of attention and as
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  Speaker 1: an investor, the financial sector obviously is is integral? Is
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  Speaker 1: how that how that shakes out? Thank you very much.
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  Speaker 1: Mark Spindell is UH a co author along with Sarah Binder,
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  Speaker 1: professor of George Washington University, of the new book The
• 8:27
  Speaker 1: Myth of Independence, How Congress Governs the Federal Reserve. You're
• 8:32
  Speaker 1: listening to Bloomberg. Will the Murdoch family break up Fox?
• 8:47
  Speaker 1: It's a question that is on every media mobile's mind today.
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  Speaker 1: And here to help us understand why they might break
• 8:55
  Speaker 1: it up and who might purchase it is Porter Bib.
• 8:57
  Speaker 1: He is the uh well, I guess, the founder of
• 9:00
  Speaker 1: Media Tech Capital Partners, and he joins us now. Port
• 9:04
  Speaker 1: are always a pleasure. I think of you as a
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  Speaker 1: kind of media guru. If someone came to you and said, boy, uh,
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  Speaker 1: there is a uh, you know, movie production facility and
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  Speaker 1: television production house that may be up for sale, and
• 9:19
  Speaker 1: it's called twenty one century Fox, would that be of
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  Speaker 1: interest to you? Why would you be interested in perhaps
• 9:25
  Speaker 1: buying it? If I be keenly interested in buying it,
• 9:29
  Speaker 1: as are a lot of other people in the media business.
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  Speaker 1: Because Fox has a terrific array of assets that are
• 9:37
  Speaker 1: are firing on all cylinders right now, and they have
• 9:40
  Speaker 1: a global franchise. But they also are very, very undervalued
• 9:45
  Speaker 1: as a public company. So let's talk about this. There
• 9:49
  Speaker 1: was reports yesterday that Disney was in talks to acquire
• 9:54
  Speaker 1: some of the assets from twenty one century Fox. We're
• 9:57
  Speaker 1: getting subsequent reporting showing that those box have ended with
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  Speaker 1: no deal. But this has opened up the door for
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  Speaker 1: twenty one century to start selling off pieces of its
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  Speaker 1: vast network. And I'm wondering which assets, in particular do
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  Speaker 1: you think are most vulnerable to being sold off or
• 10:17
  Speaker 1: the ripest candidates for for being uh for being auctions. Well,
• 10:22
  Speaker 1: Disney wanted to buy everything except the Fox News, Fox Business,
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  Speaker 1: and Fox Sports, leaving uh Mr Murdoch and his sons
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  Speaker 1: with a news and sports uh empire of some consequence,
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  Speaker 1: But all of the TV production, the cable networks, the
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  Speaker 1: the the thirty nine percent interest in be skuy b,
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  Speaker 1: all of those assets were of vital interest to Disney.
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  Speaker 1: The problem that that the Disney has is that they're
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  Speaker 1: they're low ball players. Bob Iger has been very scrupulous
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  Speaker 1: about never overpaying for any acquisition that he's acquired, and
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  Speaker 1: Ruper Murhak is on the other side of the table
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  Speaker 1: and has never ever uh been willing to sell anything
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  Speaker 1: that he owns at at a bargain basement prices. So
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  Speaker 1: they're gonna be other people. I think the issue here
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  Speaker 1: is Disney came to Murdoch um not knowing whether or
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  Speaker 1: not he was a seller. A lot of UH speculators
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  Speaker 1: have said that Rupert Murdoch and his son's basically said,
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  Speaker 1: the scale is too big a hurdle for a Fox,
• 11:38
  Speaker 1: So we're gonna start to slim down and keep the
• 11:41
  Speaker 1: assets that we want. He needs to have as long
• 11:45
  Speaker 1: as Mr Murdoch is co executive chairman of the company,
• 11:49
  Speaker 1: the Fox News and Fox Business, those those are his
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  Speaker 1: key assets. He's politically connected, politically involved. He talks to
• 11:56
  Speaker 1: the President almost every day, and he's not about sell
• 12:00
  Speaker 1: those assets. That that's the legacy that he wants to
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  Speaker 1: have um after fifty years of building a media empire.
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  Speaker 1: But the other assets are really valuable, and they're going
• 12:11
  Speaker 1: to be a lot of people beyond Disney who come knocking. Well, Porter,
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  Speaker 1: I was looking at the numbers right and Century Fox
• 12:21
  Speaker 1: stock was a thirty two dollars a share that was
• 12:24
  Speaker 1: less spring Now it's at twenty eight dollars. It's got
• 12:27
  Speaker 1: a fifty one billion dollar market cap. Have you been
• 12:31
  Speaker 1: able to do with some of the parts, I mean,
• 12:33
  Speaker 1: you know, what are the division's worth twenties century Fox Film,
• 12:36
  Speaker 1: You've got the television business and so on. What do
• 12:39
  Speaker 1: you think is a is a going price for this? Well,
• 12:43
  Speaker 1: we's it's not just a going price, it's what people
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  Speaker 1: are willing to pay. UM. One of one of the
• 12:49
  Speaker 1: most interesting buyers standing in the wings right now is
• 12:53
  Speaker 1: A T and T. Their deal with Time Warner and
• 12:57
  Speaker 1: billion dollar deal looks like it may not happen right now.
• 13:01
  Speaker 1: They the rub is that the President and CNN or
• 13:06
  Speaker 1: at daggers drawn and President Trump has asked the Justice
• 13:10
  Speaker 1: Department to do a new review of that transaction of Fox.
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  Speaker 1: The assets that Disney wanted to buy from Fox and
• 13:19
  Speaker 1: that Ruper Murdoch was willing to sell would be exactly
• 13:22
  Speaker 1: what a T and T could use. And and in
• 13:26
  Speaker 1: terms of evaluation, UH, Fox does not break out all
• 13:30
  Speaker 1: of the numbers of the different entities that are under
• 13:33
  Speaker 1: twenty first century Fox. But I think you're looking at
• 13:36
  Speaker 1: it somewhere in the same valuation UH as as the
• 13:41
  Speaker 1: the Time Warner deal would be for a T and T,
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  Speaker 1: somewhere in the in the eight million dollar billion dollar range.
• 13:50
  Speaker 1: Porter I'm wondering what this UH, these discussions mean for
• 13:55
  Speaker 1: Foxes proposed acquisition of Sky Networks. I knew that European
• 14:01
  Speaker 1: British regulators just so reviewing that transaction, and it seems
• 14:05
  Speaker 1: as though Rupert Murdoch was willing to ditch that deal
• 14:10
  Speaker 1: in order to sell most of the assets to Disney.
• 14:13
  Speaker 1: Does that mean that he's rethinking this deal or that
• 14:16
  Speaker 1: it's on shake your ground at this point? I think
• 14:20
  Speaker 1: the latter is what what really caused Rupert to sit
• 14:24
  Speaker 1: down and talk to Disney about selling Fox assets. UH.
• 14:29
  Speaker 1: Just in the last several weeks, the British regulators have
• 14:33
  Speaker 1: decided that they have to take another look at at
• 14:38
  Speaker 1: at Fox's attempt to buy the majority interest that they
• 14:44
  Speaker 1: don't now own in Best Guy B. And it is
• 14:47
  Speaker 1: not a question of whether there would be too much
• 14:50
  Speaker 1: consolidation of power in one media company. Really was an
• 14:53
  Speaker 1: issue of whether or not in the British vernacular, Fox
• 14:58
  Speaker 1: is a fit and proper purse and to control a
• 15:01
  Speaker 1: media asset like the skuy B and the the most
• 15:07
  Speaker 1: recent problems that they've had with the on the sexual
• 15:11
  Speaker 1: molestation the issue UH and and and a lot of
• 15:15
  Speaker 1: that is still ongoing there. There's litigation in the UK
• 15:19
  Speaker 1: as well as in the US that caused the government
• 15:24
  Speaker 1: in London to say, we have to look at this
• 15:26
  Speaker 1: all again and there's a major long term review that
• 15:29
  Speaker 1: probably is going to come out negative against the box.
• 15:33
  Speaker 1: So Rupert said, let's start to bail out. Well, we
• 15:37
  Speaker 1: will be following this. Porter Bib thank you so much
• 15:39
  Speaker 1: as always for joining us. Porter Bib is managing partner
• 15:42
  Speaker 1: of Media Tech Capital Partners in New York, also the
• 15:45
  Speaker 1: first publisher of Rolling Stone magazine This is Blue. When
• 16:04
  Speaker 1: I think of debt negotiations, I don't think of a cartel,
• 16:09
  Speaker 1: a drug cartel. I think of office rooms where people
• 16:12
  Speaker 1: in ties or people who are wearing you know, suits,
• 16:15
  Speaker 1: sit around and talk about how to restructure debt. That
• 16:18
  Speaker 1: is perhaps not going to be the case in Venezuela, because, uh,
• 16:22
  Speaker 1: the President of Venezuela just appointed a drug kingpen to
• 16:25
  Speaker 1: lead the renegotiation of the nation's debt, which is sort
• 16:29
  Speaker 1: of a mystery as to exactly how much there is anyway,
• 16:31
  Speaker 1: but here to understand exactly what this means for the
• 16:35
  Speaker 1: negotiations that affect a lot of big money managers in
• 16:38
  Speaker 1: the United States is Damien Sassaur. He's fixed income strategist
• 16:41
  Speaker 1: for Bloomberg Intelligence with a deep knowledge of emerging markets
• 16:46
  Speaker 1: over time, Damien, What was Nicholas Maduro, the head of Venezuela,
• 16:52
  Speaker 1: thinking with this appointment. Yeah, and Nicholas was thinking about
• 16:55
  Speaker 1: getting reelected next year. So I mean effectively what what
• 16:58
  Speaker 1: he did by by now saying that the negotiations would
• 17:01
  Speaker 1: be run by Alisami, who is the drug the drug
• 17:05
  Speaker 1: kingman you're alluding to. He's no fact, Memories been sanctioned
• 17:08
  Speaker 1: by the government. Technically, US creditors cannot negotiate with him,
• 17:11
  Speaker 1: it's legal. So what he's effectively doing is forcing UM,
• 17:17
  Speaker 1: forcing effectively creditors to basically they're going to go into default.
• 17:22
  Speaker 1: It's a it's a given now because you can't talk
• 17:24
  Speaker 1: to somebody like that, you can't deal with them. And
• 17:26
  Speaker 1: more importantly, he's doing this because the bonds UM that
• 17:30
  Speaker 1: are held by US creditors are you know, they're effectively
• 17:34
  Speaker 1: you know down here at twenty cents on the dollar.
• 17:36
  Speaker 1: They could go as low as ten cents on the dollar.
• 17:38
  Speaker 1: He really doesn't care. He's just basically trying to solidify
• 17:40
  Speaker 1: his power base ahead of next year. So I'm so okay,
• 17:44
  Speaker 1: let's back up. Let's talk about the fact that many,
• 17:47
  Speaker 1: many money managers, the biggest ones in the United States
• 17:50
  Speaker 1: own Venezuela debt. It accounts for nearly two percent of
• 17:54
  Speaker 1: the benchmark broad emerging markets. Well not anymore. It actually
• 17:57
  Speaker 1: only accounts for ninety basis points of the bench markt
• 18:00
  Speaker 1: X and that's but you're right. Yesterday it was one
• 18:01
  Speaker 1: point four percent. On Friday was two percent. So they're plummeting.
• 18:04
  Speaker 1: The market value of these bonds are definitely plummeting. I
• 18:06
  Speaker 1: mean the yield, the average yield for Venezuela debt went
• 18:09
  Speaker 1: from something like thirty on Friday close a business to
• 18:12
  Speaker 1: over I think last night was the last time I checked.
• 18:15
  Speaker 1: So the numbers are just off the charts. So who's
• 18:18
  Speaker 1: solidifying their losses right now? So, you know, in terms
• 18:21
  Speaker 1: of fund UH, I mean, look, we can only capture
• 18:24
  Speaker 1: FUN filings right so they're a little bit dated. You know,
• 18:26
  Speaker 1: we're looking at stuff, you know, in arrears. But for
• 18:28
  Speaker 1: the most part, FUN holdings in Venezuela and Petivisa debt,
• 18:32
  Speaker 1: which is the the oil and gas company that is
• 18:34
  Speaker 1: effectively a quasi sermonant, is effectively an extension of the government.
• 18:37
  Speaker 1: You're talking about um black Rock, Goldman, sachs Ashmore, Tiro
• 18:42
  Speaker 1: price GMO. Those are the big fund families that are
• 18:46
  Speaker 1: holding that debt um and you know, effectively in the
• 18:49
  Speaker 1: case of black Rock, you know, passive investors like the
• 18:52
  Speaker 1: black Rock I share et F. It's really it's not
• 18:55
  Speaker 1: a very big position within the index. But and the
• 18:58
  Speaker 1: index is up I think, I'm sorry, the et F
• 19:00
  Speaker 1: is up something on the order of nine percent year
• 19:01
  Speaker 1: to date, and I think negative attribution for venezuel alone
• 19:04
  Speaker 1: is something on the order of a hundred and forty
• 19:06
  Speaker 1: basis points of that. So yeah, I know it's had
• 19:08
  Speaker 1: an impact, but it's now at what if it's only
• 19:12
  Speaker 1: ninety basis points of the index, that's your floor. You
• 19:15
  Speaker 1: can't really lose any more than that technically, right, So
• 19:18
  Speaker 1: so the impact on broader emerging markets is going to
• 19:21
  Speaker 1: be constrained to that point. Damian Venezuela is already overdue
• 19:26
  Speaker 1: on interest payments for debt that is due in twenty six, right,
• 19:37
  Speaker 1: I mean, they've they've got foreign currency reserves, but it's
• 19:41
  Speaker 1: like what about ten billion dollars and I understand that
• 19:44
  Speaker 1: most of that is in gold. Um, well, you know,
• 19:47
  Speaker 1: we don't actually know what the Central Bank of Venezuela
• 19:50
  Speaker 1: is doing when they're calculating their reserves, to be completely
• 19:53
  Speaker 1: honest with you, But the reality is you're absolutely right.
• 19:55
  Speaker 1: I mean, you know, they've got UM roughly sixty billion
• 19:58
  Speaker 1: plus in loans that they received from the China Development
• 20:01
  Speaker 1: Bank in China x him and we looked at that
• 20:03
  Speaker 1: because that's where I wanted you to go. Those Russia
• 20:07
  Speaker 1: and Russia and roseen aft right. So so first, starting
• 20:10
  Speaker 1: with China, the big government agencies, the big government lenders
• 20:14
  Speaker 1: lend sixty billion over the better part since two thousands
• 20:16
  Speaker 1: whatever called the mid two thousands to Venezuela, and those
• 20:20
  Speaker 1: loans are outstanding. We don't know how much of those
• 20:22
  Speaker 1: loads are outstanding. We don't know what assets were pledged
• 20:24
  Speaker 1: against those loans. We don't really know much about them,
• 20:27
  Speaker 1: and we don't know their seniority. And I think creditors
• 20:29
  Speaker 1: don't know where they stack uh you know where they
• 20:32
  Speaker 1: stack up relative to China. So here's what I don't understand. Okay,
• 20:36
  Speaker 1: So basically Venezuela is all but guaranteeing itself a default.
• 20:39
  Speaker 1: At this point, why has this been something that Muduro
• 20:43
  Speaker 1: has avoided for so long? And when people were saying
• 20:45
  Speaker 1: this could lead to regime change, and now it's not
• 20:47
  Speaker 1: been There's been a lot of speculation on that. You've
• 20:49
  Speaker 1: just hit the nail on the head. I mean, everyone
• 20:51
  Speaker 1: had kind of been playing this game where the next
• 20:54
  Speaker 1: the next principle, you know, the next bond that was
• 20:56
  Speaker 1: set to mature. You know, you want to you know,
• 20:59
  Speaker 1: you're hoping that they gonna make payment on that. If
• 21:01
  Speaker 1: they do, it's a home run. If they don't, we're
• 21:03
  Speaker 1: in this situation we are now. And many people felt
• 21:06
  Speaker 1: that Maduro was paying back the people that helped him
• 21:08
  Speaker 1: secure his power base initially by telling them to get
• 21:11
  Speaker 1: along those bonds effectively, and I'm gonna make you whole.
• 21:15
  Speaker 1: That's the way I'm gonna be able to pay it
• 21:16
  Speaker 1: back because I quite frankly can't pay back any other
• 21:18
  Speaker 1: way because I'm sanctioned by everybody else. And so that's
• 21:20
  Speaker 1: the speculation that's been out there. There's no way to
• 21:22
  Speaker 1: prove it, but certainly that's that's that's been kind of
• 21:25
  Speaker 1: you know what we've been like focused on, um. But yeah, no,
• 21:28
  Speaker 1: I mean China, Russia, I mean you just again, creditors
• 21:31
  Speaker 1: don't really know where they stack up, and that's the mystery.
• 21:33
  Speaker 1: Thanks very much for helping to dispel at least some
• 21:36
  Speaker 1: of that mystery. Damian Sassaur, fixed income strategist for Bloomberg Intelligence, Well,
• 21:52
  Speaker 1: we're going to have a focus on fixed income, which
• 21:54
  Speaker 1: has brought to you by PIMCO for investors who demand
• 21:57
  Speaker 1: more than the markets deliver. All investments contain risk and
• 22:00
  Speaker 1: may lose value. Consult your investment professional before investing. And
• 22:05
  Speaker 1: if you want to invest in the European bond markets,
• 22:09
  Speaker 1: and it's important to listen. It's to what Simon Ballard
• 22:12
  Speaker 1: has to say. He's our global credit strategist for Bloomberg
• 22:15
  Speaker 1: and he comes to us from London. Simon, you know
• 22:17
  Speaker 1: today I'm watching the gap in yields between Italian tenure
• 22:23
  Speaker 1: and German ten year government bonds. It is shrunk to
• 22:27
  Speaker 1: the narrowest this year. Why is Italy so much better
• 22:31
  Speaker 1: in terms of economic outlook? I mean still their banking
• 22:34
  Speaker 1: system has some challenges. Can you explain the dynamic right
• 22:36
  Speaker 1: now that's sort of driving this? Yeah, no, absolutely, so
• 22:40
  Speaker 1: good afternoon. It's a it's a great question. But yes,
• 22:42
  Speaker 1: that is one of the one of the trends that
• 22:43
  Speaker 1: we've seen, not only with Italy but with with peripheral
• 22:46
  Speaker 1: with higher yielding risk generally over the course of the
• 22:48
  Speaker 1: last couple of years has been the compression towards the
• 22:52
  Speaker 1: core risk towards Germany um as as investors have chased
• 22:56
  Speaker 1: yield um in what is still a very low interest
• 22:59
  Speaker 1: rate environment what will remain a low interest rate environment.
• 23:01
  Speaker 1: So yes, you know there has been a compression in
• 23:04
  Speaker 1: Italian spreads over Germany. Has the fundamental picture in Italy
• 23:09
  Speaker 1: improved to that extent, No, it has not. It as
• 23:11
  Speaker 1: a function of the underlying liquidity in the market, and
• 23:14
  Speaker 1: there in lies probably one of the risks for investors
• 23:16
  Speaker 1: going forward that as that spread compression continues and yields
• 23:21
  Speaker 1: continue to to to fall, investors are increasingly sort of
• 23:24
  Speaker 1: not being compensated we say, for the risk they're taking
• 23:27
  Speaker 1: on board, but they are obliged, for want of a
• 23:29
  Speaker 1: better term, to to to buy into high yielding in
• 23:32
  Speaker 1: inverted commas risk the lower quality issuance in order to
• 23:36
  Speaker 1: just get a little bit of incremental yield over Germany.
• 23:38
  Speaker 1: So yes, you've seen a compression with with with Italy.
• 23:41
  Speaker 1: You've seen a compression with with with Spain, and with Portugal,
• 23:45
  Speaker 1: and to a certain extent with Greece, although probably more
• 23:47
  Speaker 1: question marks with Greece going forward. Um so yes, it's
• 23:50
  Speaker 1: it's not a story about improving or dramatically improving fundamental
• 23:54
  Speaker 1: stories within Italy. It's more the chase for yield exacerbated
• 23:58
  Speaker 1: by the e CBS as it purchased program. Well, well, Simon,
• 24:02
  Speaker 1: I wonder if you could just help me out here
• 24:03
  Speaker 1: to understand that. You know, it seems as though we
• 24:06
  Speaker 1: use a lot of this information to describe what happens
• 24:09
  Speaker 1: to a constituency that, as you just use this word,
• 24:13
  Speaker 1: is obligated, is obliged to buy. So if you have
• 24:17
  Speaker 1: captive buyers, what's the difference, what the prices? And if
• 24:20
  Speaker 1: you have a ready audience and you know that there
• 24:24
  Speaker 1: is a backstop, well, if you're the issuer, of course
• 24:27
  Speaker 1: you don't wanna uh, you don't want to pay, You
• 24:30
  Speaker 1: don't want to end up having your debts, uh, you know,
• 24:33
  Speaker 1: paid in higher interest paper. So it seems as if
• 24:37
  Speaker 1: you have this obligated buyer, then all of the information
• 24:41
  Speaker 1: is window dressing because they've got to spend the money
• 24:44
  Speaker 1: on these specific kinds of bonds. Well, to a certain extent,
• 24:48
  Speaker 1: that's correct, and that's been one of the reasons why
• 24:50
  Speaker 1: you've seen, you know, such a dramatic compression trade in
• 24:54
  Speaker 1: in yields and spreads within the fixed income market over
• 24:57
  Speaker 1: the last couple of years because investors have increased single
• 25:00
  Speaker 1: sort of wanted to replicate what the central banks are doing,
• 25:03
  Speaker 1: and the FED has been doing the asset purchased program
• 25:05
  Speaker 1: on your side of the Atlantic at the same time,
• 25:06
  Speaker 1: of course, and they want to be on the same
• 25:08
  Speaker 1: side of the traders central banks. That is one of
• 25:10
  Speaker 1: the reasons why liquidity within the secondary market is poor,
• 25:13
  Speaker 1: because investors do not want to sell their existing holdings
• 25:16
  Speaker 1: in order to try and buy you know, new issues
• 25:19
  Speaker 1: or or new bond deal should I say, because they'll
• 25:22
  Speaker 1: probably get crowded out and won't get completely reinvested. And
• 25:25
  Speaker 1: that just again pushes yields and spreads, you know, further
• 25:28
  Speaker 1: and further into into towards negative territory. Simon, there is
• 25:32
  Speaker 1: a calm in the Financial Times today that cut my
• 25:34
  Speaker 1: attention because you you mentioned the European Central Bank as
• 25:38
  Speaker 1: it purchased program. In the past nine months, the European
• 25:43
  Speaker 1: Central Bank has actually purchased a disproportionate amount of French
• 25:47
  Speaker 1: and Italian bonds, and I just wander from a political standpoint,
• 25:51
  Speaker 1: this comes at the expense of German bonds. This alone
• 25:54
  Speaker 1: could be withth driving the dynamic of the trade of
• 25:57
  Speaker 1: the tightening yield gap with peripheral debt versus German government boons.
• 26:02
  Speaker 1: I'm just wondering politically, how does this fly? Well, politically,
• 26:06
  Speaker 1: you know, the e CBS asset purchase program there is
• 26:09
  Speaker 1: there to stand behind the Eurozone economy and trying to
• 26:11
  Speaker 1: inject recovery into the economic growth dynamics, and to a
• 26:16
  Speaker 1: certain extent that it has done that at at some cost.
• 26:18
  Speaker 1: Whom one might add over the over the last year
• 26:20
  Speaker 1: or so since the since the corporate bond program was
• 26:23
  Speaker 1: was initiated in June two thousand and sixteen, Yes, they've
• 26:26
  Speaker 1: been buying disproportionately. Perhaps um I haven't haven't got access
• 26:30
  Speaker 1: of course to Financial Times is analysis. But from what
• 26:33
  Speaker 1: we see, you know, the the utility sector is the
• 26:36
  Speaker 1: largest sector of holdings within the CBS purchase program. They've
• 26:40
  Speaker 1: got about two hundred and seventy two utilities deals, but
• 26:42
  Speaker 1: those are spread broadly across the Eurozone. But you know,
• 26:45
  Speaker 1: the ECB will be buying the areas of the market
• 26:48
  Speaker 1: where it believes it needs to one add support and
• 26:51
  Speaker 1: more importantly, where it can find liquid assets to purchase,
• 26:54
  Speaker 1: because of course the more it buys, the more investors
• 26:56
  Speaker 1: chase the CB and want to be on the same
• 26:58
  Speaker 1: side as the trade. The few of the ones there
• 27:00
  Speaker 1: are too for everybody to buy, so that they're they're
• 27:03
  Speaker 1: chasing liquidity, but also chasing the volition of what they're
• 27:06
  Speaker 1: what they've set out to do um with the program
• 27:08
  Speaker 1: in the first instance. So yes, disproportionately, probably looking at prooferles.
• 27:11
  Speaker 1: But that's not to say that they're not buying core
• 27:13
  Speaker 1: Eurozone bonds as well. Assignment I confess I don't know
• 27:16
  Speaker 1: whether there's the same term in the UK or in Europe,
• 27:19
  Speaker 1: but we have this term. It's called the open book
• 27:21
  Speaker 1: test right where you're basically you're given the answers to
• 27:24
  Speaker 1: whatever the test is, whatever the test questions are, and
• 27:26
  Speaker 1: you just have to go out and find the answers
• 27:28
  Speaker 1: because it's available to everyone. That's kind of way it
• 27:31
  Speaker 1: sounds in terms of this marketplace. If it's if If
• 27:34
  Speaker 1: that's true, then don't you see a lot more American
• 27:37
  Speaker 1: companies like I don't know, Worldpool, for example, borrowing in
• 27:41
  Speaker 1: the European markets because they can take advantage of your
• 27:44
  Speaker 1: version of the open book test. Absolutely, the open book
• 27:48
  Speaker 1: test of my my, my time living in the States,
• 27:49
  Speaker 1: I'm very familiar with UM. But yes, you know, from
• 27:51
  Speaker 1: a certain to a certain extent, it is an issue
• 27:53
  Speaker 1: that's paradise at these sort of levels, particularly in Europe.
• 27:56
  Speaker 1: We had the UK today issuing bonds at a minus
• 27:59
  Speaker 1: one point five percent yield. The investors buying that obviously
• 28:02
  Speaker 1: have to have a conviction about the need for capital preservation.
• 28:04
  Speaker 1: But from a general issue as perspective, yes, in Europe,
• 28:08
  Speaker 1: but these sort of yields, it is a funding boon
• 28:10
  Speaker 1: at the momentum, and I'm sure we'll continue to see
• 28:13
  Speaker 1: more overseas issues coming to the European market over the
• 28:15
  Speaker 1: coming months. Thank you very much. Simon Ballard are global
• 28:19
  Speaker 1: credit strategist for Bloomberg, joining us from London. Thanks for
• 28:25
  Speaker 1: listening to the Bloomberg p m L podcast. You can
• 28:28
  Speaker 1: subscribe and listen to interviews at Apple Podcasts, SoundCloud or
• 28:32
  Speaker 1: whatever podcast platform you prefer. I'm pim Fox. I'm on
• 28:35
  Speaker 1: Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
• 28:39
  Speaker 1: It's one before the podcast. You can always catch us
• 28:42
  Speaker 1: worldwide on Bloomberg Radio.