Latest / Bloomberg Intelligence / 80% of Bain’s Distressed Purchases Have Been Outside the U.S. (Correct)

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80% of Bain’s Distressed Purchases Have Been Outside the U.S. (Correct) · Bloomberg Intelligence

0:02
Speaker 1: Welcome to the Bloomberg Penel podcast. I'm Paul swing you,
0:05
Speaker 1: along with my co host Lisa Brahma wits. Each day
0:07
Speaker 1: we bring you the most noteworthy and useful interviews for
0:10
Speaker 1: you and your money, whether at the grocery store or
0:12
Speaker 1: the trading floor. Find a Bloomberg penl podcast on Apple
0:15
Speaker 1: podcast or wherever you listen to podcasts, as well as
0:17
Speaker 1: at Bloomberg dot com. So it seems like there are
0:25
Speaker 1: new funds being raised every day to invest in private credit.
0:30
Speaker 1: Angelo Gordon is expanding further into distressed debt with a
0:33
Speaker 1: new fund UH that has a billion dollars That is
0:36
Speaker 1: the latest today. Bain Capital among the most active with
0:40
Speaker 1: respect to raising money UH successfully and deploying it. Joining us.
0:44
Speaker 1: We are so lucky to have Jonathan Levine, co managing
0:47
Speaker 1: partner of Bain Capital, normally based in Boston, but gracing
0:51
Speaker 1: us with his presence here in our Bloombgood Active Brokers Studios. Jonathan,
0:55
Speaker 1: your firm overseas so much of this debt billion dollar
1:00
Speaker 1: there's an assets under management. Are you concerned about the
1:04
Speaker 1: amount of money being raised given the fact that there
1:08
Speaker 1: really aren't that many assets to buy? Well, I think
1:13
Speaker 1: you have to think about, uh, the world more globally.
1:18
Speaker 1: You know, ten years ago, if somebody were to ask
1:21
Speaker 1: us about the market, or were to ask us about credit,
1:24
Speaker 1: they would really be asking about the US buyout business
1:27
Speaker 1: and the US credit business. And really, UM, we actually
1:32
Speaker 1: manage a hundred and eight billion dollars, of which forty
1:34
Speaker 1: one billion is in credit. But that credit is UM
1:39
Speaker 1: senior and junior, it's over, it's it's in UM Europe, US, Asia, Australia,
1:45
Speaker 1: and the credit asset class has become quite nuanced in
1:49
Speaker 1: terms of the types of risk you can take, the
1:52
Speaker 1: types of liquidity you can take in the geographies you
1:55
Speaker 1: participate in, and those are not as correlated as they
1:59
Speaker 1: were ten years ago, when the story was whatever happened
2:02
Speaker 1: in US high yield was the entire story. So, Jonathan,
2:06
Speaker 1: were ten plus years into this economic cycle, you're the chief,
2:11
Speaker 1: I guess you know, chief credit investment officer. You need
2:15
Speaker 1: to really think about the quality of the credit where investment.
2:19
Speaker 1: When you think about the credit quality and deals that
2:21
Speaker 1: you're seeing, Now, how's it looking? So I think that
2:25
Speaker 1: the degree of difficulty has gone up. There's clearly larger
2:29
Speaker 1: use of proformas. But I've you know, made it clear
2:32
Speaker 1: that not all proformas are are good or bad and
2:36
Speaker 1: pro performers. What are you talking about because forecast by
2:38
Speaker 1: the company forecast adjustments in earnings almost always for the positive. Okay, UM,
2:44
Speaker 1: So I have yet to see one where somebody said
2:46
Speaker 1: our numbers are going to be worse in the future
2:48
Speaker 1: than they are today. And they really take three types.
2:51
Speaker 1: They take tangible um upside to earning that you can
2:55
Speaker 1: achieve and quantify. There's things that are dependent on growth,
3:00
Speaker 1: and then there's things what that I would call are
3:02
Speaker 1: highly ambitious market top type of behavior. So consolidating two
3:06
Speaker 1: factories clearly quantifiable UM. A software company that's growing quickly,
3:11
Speaker 1: you can't take last year's earnings and just grow, you know,
3:15
Speaker 1: run it out because there is some obvious growth things
3:18
Speaker 1: like proform of future revenue synergies. I don't even know
3:22
Speaker 1: what that is, but I have seen that in a
3:23
Speaker 1: perform and you don't You don't take that um because
3:28
Speaker 1: there is some margin of safety in there. And if
3:30
Speaker 1: you take every possible good thing that can happen to
3:32
Speaker 1: the company, and then the sponsor pays for that in
3:35
Speaker 1: their purchase price, and then you borrow against that UM,
3:39
Speaker 1: your margin of safety if the economy slows down has
3:41
Speaker 1: gone away. So one thing that people have said is
3:44
Speaker 1: that private equity sponsors, of which BANE counts itself among them.
3:50
Speaker 1: I know that that's not necessarily your day to day focus.
3:52
Speaker 1: As much as perhaps the credit investments UH that their
3:56
Speaker 1: sponsorship has led to a deterioration the a quality of
4:01
Speaker 1: some of the credit in particularly at the bonds and
4:03
Speaker 1: loans that companies are are issuing. Do you find that
4:07
Speaker 1: from the credit investor standpoint, I think that it is
4:11
Speaker 1: very much industry specific, company specific and sponsor specific. UM
4:17
Speaker 1: sponsors like us have a hundred people who go in
4:20
Speaker 1: and work with companies and really only invest in companies
4:24
Speaker 1: where we can add value and help change the answer
4:28
Speaker 1: versus other types of investors who may be participating in
4:32
Speaker 1: the upside beta of the market. And UM. At this
4:36
Speaker 1: stage in in any cycle, UM, the marginal deal is
4:41
Speaker 1: probably not the best deal. UM. That does not mean
4:44
Speaker 1: that all the deals being done are troublesome, all the
4:47
Speaker 1: deals being done are are are bad. You just need
4:50
Speaker 1: to make sure that you're investing in areas that can
4:53
Speaker 1: weather a cycle. Because I'm not saying whether there will
4:56
Speaker 1: or will not but it's certainly more likely than it
4:58
Speaker 1: would have been ten years ago. UM. Two, you want
5:00
Speaker 1: to make sure that you're in industries and business models
5:04
Speaker 1: that are sustainable. UM. And three, you want to make
5:07
Speaker 1: sure that you have a capital structure that can weather
5:11
Speaker 1: a storm. So which which industries are sustainable in the
5:14
Speaker 1: next cycle and which aren't. Well, it's interesting, UM, it
5:18
Speaker 1: used to be that technology was something everybody was scared of,
5:21
Speaker 1: and technology everybody viewed as vaporware or internet concepts like
5:26
Speaker 1: from a one when the bubble happened. And really, when
5:29
Speaker 1: you think about technology, there's lots of different types of technology.
5:32
Speaker 1: As a lender, software businesses that are subscription business is
5:36
Speaker 1: really good. Razor and razor blade types of technology business
5:40
Speaker 1: is really good. Um. What you have to watch out
5:43
Speaker 1: for is where people are taking equity risk with debt,
5:47
Speaker 1: business models that have to reinvent themselves, where there's massive
5:50
Speaker 1: amounts of capital expenditures that are required and you have
5:54
Speaker 1: to refresh the product on a very short life cycle.
5:59
Speaker 1: I'd know that. I just I don't know, go ahead
6:02
Speaker 1: fall no, So, Jonathan, I mean, you know what are
6:05
Speaker 1: the issues? You know, Geopolitical risk I know was always
6:07
Speaker 1: a part of the credit checklist you have to deal with.
6:09
Speaker 1: But it just seems like maybe in the last couple
6:12
Speaker 1: of years of geopolitical risk, whether it's trade tensions with
6:14
Speaker 1: China or European risks with Brexit, how are you how
6:18
Speaker 1: are the folks at bane kind of factory that into
6:20
Speaker 1: your credit analysis? UM So, I think there's two things.
6:24
Speaker 1: One is, the requirement for imagination almost exceeds the requirement
6:29
Speaker 1: for UM analysis because the sort of standard bell curve
6:35
Speaker 1: of what economic policy, trade policy, UM international treaties look
6:40
Speaker 1: like has gone out the window, and therefore outcomes I mean,
6:44
Speaker 1: if I'm sure you remember, you know, early on people
6:47
Speaker 1: were like, there is no way brexit will pass UM,
6:50
Speaker 1: and that was the operating assumption. And then once bregg
6:53
Speaker 1: bregsit passed, the markets created for half hour and then
6:58
Speaker 1: bounce back because they're like, well it'll it won't get implemented,
7:01
Speaker 1: and it hasn't been implemented. So what we try to
7:04
Speaker 1: do is think of a um an array of outcomes
7:08
Speaker 1: and test our hypothesis against that. And obviously you can't
7:12
Speaker 1: protect against every downside, but certainly being more broadly being
7:17
Speaker 1: UM more broadly UM analytical about tariffs, trade wars, UM
7:24
Speaker 1: immigration things like that are just a new requirement. So
7:28
Speaker 1: just in in about thirty seconds, which areas in the
7:31
Speaker 1: world do you see as the potentially most fruitful when
7:34
Speaker 1: it comes to distress opportunities? So uh, over the last
7:38
Speaker 1: several years, eight percent of our investing has actually taken
7:42
Speaker 1: place globally outside the United States. UM. The the ways
7:47
Speaker 1: that UH, different economies work through the crisis has resulted
7:52
Speaker 1: in very different opportunities. And we've spent a lot of
7:55
Speaker 1: time working on non performing loan portfolios coming out of
7:58
Speaker 1: European banks which are ill um in need of capital
8:02
Speaker 1: UM and the Asian capital markets which UM as I
8:06
Speaker 1: said earlier about technology, it's not a thing, it's a
8:09
Speaker 1: lot of things provide a lot of diversity, whether it's
8:12
Speaker 1: distressed debt in in India, npls in China, or private
8:17
Speaker 1: landing in Australia. Right right, Jonathan Levine, and thank you
8:19
Speaker 1: so much that we have to leave it there, but
8:21
Speaker 1: we're gonna definitely get you back in the studio next
8:23
Speaker 1: time you're in New York. But we understand happens often.
8:26
Speaker 1: Jonathan Levine, co Managing Partner and credit Chief Investment Officer
8:29
Speaker 1: at Bain Capital talking to us about the private equity world,
8:32
Speaker 1: in the credit side of private equity investment. Well, when
8:50
Speaker 1: trade tensions between the US and China really began to
8:53
Speaker 1: escalate several weeks ago, one of the U S names
8:56
Speaker 1: that came right into focus was Apple. Apples certainly exposed
8:59
Speaker 1: to China, getting almost revenue from China. Plus they also
9:04
Speaker 1: manufacture a lot of their phones and iPads and things
9:07
Speaker 1: in China, so clearly some risks there. Let's get the
9:10
Speaker 1: latest from John Butler Johnson, senior Telecom Services and Equipment
9:13
Speaker 1: annals from Bloomberg Intelligence. He joins us on the phone
9:16
Speaker 1: from Princeton, New Jersey. John, there's actually growing discussion that
9:21
Speaker 1: maybe Apple can source a lot of its products that
9:25
Speaker 1: were in China outside of China. How feasible is that
9:27
Speaker 1: do you think? Yeah, thanks, Paul, I think it's very feasible.
9:31
Speaker 1: The question is how much time does uh Apple's main
9:36
Speaker 1: UM manufacturer, called fox Con, how much time does fox
9:40
Speaker 1: Con really need to make that move? Um? In fact,
9:44
Speaker 1: I suspect the move is already underway. You know, Apple
9:49
Speaker 1: is long overdue to kind of spread its bets, so
9:51
Speaker 1: to speak. And and there are regions like Vietnam, for example,
9:56
Speaker 1: which are lower costs to produce a good like the
10:00
Speaker 1: iPhone than China. How long would it take for Apple
10:04
Speaker 1: to move its supply chain, Well, it's hard to say, Lisa.
10:08
Speaker 1: I would say to really move a hundred percent of
10:11
Speaker 1: the iPhone production out of China would probably take at
10:14
Speaker 1: least a couple of years, would be my guest. So
10:17
Speaker 1: wouldn't immunize them from some sort of very near term
10:21
Speaker 1: move by China? Not immediately, but again I suspect there's
10:26
Speaker 1: been some movement behind the scenes that we're not seeing.
10:30
Speaker 1: You know, the comment was made by a senior Fox
10:33
Speaker 1: con officials, so they probably he probably got the green
10:36
Speaker 1: light to say something suggesting to me the move is
10:40
Speaker 1: already underway. Lisa, just, you know, just to kind of
10:44
Speaker 1: go and show how the supply chain for Apple, how
10:46
Speaker 1: intense it is, and how expansive it is. On the
10:49
Speaker 1: Bloomberg terminal, you can just type in the symbol for Apple,
10:52
Speaker 1: then put in the function SPLC for supply chain, and
10:55
Speaker 1: it is just it's amazing how many suppliers supply Apple
10:59
Speaker 1: than how many customs. Apple has truly a global company.
11:02
Speaker 1: So John, I think that one of the risks, you know,
11:05
Speaker 1: when you think about it. You know that. I guess
11:07
Speaker 1: a real concern would be, at least the most immediably
11:10
Speaker 1: would be sales into China. Is there any sense that
11:14
Speaker 1: Chinese consumers, maybe just for nationalistic perspectives, might be pulling
11:18
Speaker 1: away from Western goods and Apple? Yeah, I mean that
11:21
Speaker 1: is spot on, Paul. I mean that's really what I
11:24
Speaker 1: worry about most right now. When I look at Apple
11:27
Speaker 1: and their risk um China. They don't break out sales
11:32
Speaker 1: by country, but I believe China is Apple's largest country
11:36
Speaker 1: by sales by iPhone sales. Um, my guess because it's
11:42
Speaker 1: probably um that's a that's a good point. It could
11:46
Speaker 1: be second to the US. It's hard to say. Again,
11:48
Speaker 1: they don't they break out sales by region, not country,
11:52
Speaker 1: So by region Greater China is just shy of of sales.
11:58
Speaker 1: It's around nine on of sales in the latest calendar year.
12:02
Speaker 1: So there's a lot at risk there, and there is
12:06
Speaker 1: I imagine there is rising um nationalist sentiment among Chinese consumers,
12:12
Speaker 1: and that can really dent sales of not just the
12:15
Speaker 1: iPhone but other Apple products. So I want to ask you, John,
12:21
Speaker 1: we were talking earlier about how the tech sector text
12:24
Speaker 1: shares in the United States have rallied the most in
12:28
Speaker 1: the past six days since two thousand and eleven. And
12:32
Speaker 1: I'm trying to understand how much of this is driven
12:36
Speaker 1: by fundamental improvements in the backdrop geopolitical otherwise, and how
12:42
Speaker 1: much this is just a knee jerk response too. Well,
12:45
Speaker 1: I guess people have stopped freaking out now, you know.
12:49
Speaker 1: My thought on that is a couple of things. Number One,
12:52
Speaker 1: Wall Street tends to look beyond the abyss a little bit, right, So, uh,
12:57
Speaker 1: this latest announcement by Fox con tells us that Apple
13:01
Speaker 1: can make moves to limit its exposure, and other tech
13:05
Speaker 1: companies can as well. That's number one, And I think
13:09
Speaker 1: number two, there's probably some hope that at the G twenty,
13:13
Speaker 1: the U. S And China can come to maybe even
13:16
Speaker 1: a short term agreement to take some of the pressure off, because,
13:20
Speaker 1: as you know, the US is as reliant on China
13:23
Speaker 1: as China is reliant on US. It's a two way
13:26
Speaker 1: street and it's in no one's best interest to let
13:29
Speaker 1: this escalate beyond where we are. John, just real quick,
13:33
Speaker 1: what's the next thing that Apple investors should be looking
13:36
Speaker 1: for in terms of new product launches or anything like that?
13:39
Speaker 1: Also a great question. So this they tend to do
13:43
Speaker 1: the fall refresh event they introduce all the new iPhones
13:46
Speaker 1: in September. I think this refresh will be okay but
13:51
Speaker 1: not great. But I'm really looking to for that new
13:55
Speaker 1: five G I phone, So I think next year is
13:58
Speaker 1: going to be a really big year for Apple. Would
14:01
Speaker 1: be my guest on the iPhone front, John Butler, thank
14:04
Speaker 1: you so much for being with us as always. John Butler,
14:06
Speaker 1: Senior Telecom Service as an equipment analyst for Bloomberg Intelligence.
14:27
Speaker 1: One area of the US equities that have underperformed are
14:31
Speaker 1: the A d R, the depository receipts of Chinese companies.
14:35
Speaker 1: I'm looking at Ali Baba a d R s which
14:37
Speaker 1: are down nearly twenty percent. Our next guest says, that's
14:41
Speaker 1: a buying opportunity. Let's bring him in, Danton Goie. He
14:43
Speaker 1: has a portfolio manager of at Davis Funds, which overseas
14:47
Speaker 1: about two billion dollars, and he joins us here in
14:50
Speaker 1: our Bloomberg Interactive broker's studios. So you actually are starting
14:54
Speaker 1: to see opportunities emerge in these Chinese stocks, even though
14:58
Speaker 1: people are very concerned earned about the corollary effects of
15:02
Speaker 1: trade wars in addition to a slowing Chinese economy. Why, yes,
15:06
Speaker 1: good morning, Thanks for having me. Yes, I think they
15:08
Speaker 1: are very interesting, specifically because of the worries now how
15:11
Speaker 1: depressed valuations and the stock prices are down, even though
15:15
Speaker 1: the businesses continue to be very strong, and it makes
15:17
Speaker 1: sense these businesses are focused on the Chinese consumer. They're
15:21
Speaker 1: not export driven, very little international sales, almost d percent
15:24
Speaker 1: domestic sales, and the Chinese consumer remains a very strong tailwind,
15:29
Speaker 1: a very strong story. Uh. And the business confuses to
15:32
Speaker 1: be very strong even in the recent quarters when there's
15:34
Speaker 1: been worries about the U S trade friction. Revenues have
15:37
Speaker 1: been up two cours ago last quarter revenues at Ali Baba,
15:41
Speaker 1: for example, we're up fifty, so business is great. The
15:47
Speaker 1: balance sheets continue to be very strong, long term demand
15:50
Speaker 1: forecast remain good. UH. And right now the valuations are down,
15:54
Speaker 1: so to us as value investors at Davis, we think
15:56
Speaker 1: it's a great buying opportunity. So give us a sense
15:59
Speaker 1: of how you think Chinese consumers are thinking about the
16:03
Speaker 1: trade issues as it go into consumer sentiment consumer confidence.
16:07
Speaker 1: Are you seeing any of those types of data points
16:09
Speaker 1: coming that might cause your consumer centric story to a
16:12
Speaker 1: little bit of a pause. Yeah, I think from the
16:14
Speaker 1: consumer point of view, it's not a huge worry. It's
16:17
Speaker 1: probably a bigger worry for Chinese investors UH and maybe
16:21
Speaker 1: taking a pause and investment. But at the margin of
16:24
Speaker 1: course it is negative UH and so it's not a positive.
16:27
Speaker 1: We do think though, that in the sort of short terms,
16:30
Speaker 1: sort of the next two to four quarters, there will
16:33
Speaker 1: be a resolution UH to the trade war. Mean, of course,
16:36
Speaker 1: no one knows the future perfectly, but in this case,
16:39
Speaker 1: there's strong reasons why both parties, the US and China
16:43
Speaker 1: want a trade of resolution. We are seeing a little
16:46
Speaker 1: bit of a slowdown in both economies UH being impacted,
16:50
Speaker 1: and this is something that they can both UH resolve
16:53
Speaker 1: on their own by coming to an agreement. So we
16:55
Speaker 1: do think that eventually there will be an agreement and
16:57
Speaker 1: this will be behind them. In the meantime, the companies,
17:00
Speaker 1: despite this are doing well. So some of the other
17:03
Speaker 1: companies other than Ali Baba, New Oriental Education and Technology
17:07
Speaker 1: trades onto the A d r H ticker e d
17:10
Speaker 1: U and then j D dot Com UH. Those shares,
17:13
Speaker 1: by the way, the A d R s have lost
17:15
Speaker 1: nearly thirty percent year to date, UH, so d U
17:19
Speaker 1: the new Oriental Education is sort of the outperformer here,
17:22
Speaker 1: only losing about twelve I'm just wondering. One question people
17:26
Speaker 1: have is the transparency of Chinese companies and concerns about
17:30
Speaker 1: really being able to dig into the finances given this
17:33
Speaker 1: sort of different accounting standards. How do you deal with that? Yes,
17:37
Speaker 1: that's a good question. You know. One of the ways
17:39
Speaker 1: we deal with that, and that's with any company that
17:41
Speaker 1: we look at, UH. But in China specifically, we only
17:44
Speaker 1: invest in US listed A d R S or Hong
17:47
Speaker 1: Kong listed stocks and no local A share companies. The
17:50
Speaker 1: reason being that here in the US, of course, we
17:53
Speaker 1: have US GAP and in Hong Kong they use International
17:56
Speaker 1: GAP UH. And so the listing standards, the acquire accounting standards, UH,
18:02
Speaker 1: the transparency requirements, the corporate governance requirements are much higher
18:05
Speaker 1: because they're listed here in the US or in Hong Kong.
18:09
Speaker 1: And so that's one way that you can. The other way,
18:11
Speaker 1: of course, is doing very in depth due diligence, which
18:13
Speaker 1: is what we're known for. And so we'll go and
18:15
Speaker 1: been following these companies for well over a decade now,
18:18
Speaker 1: so we know all the key individuals. We've talked to
18:20
Speaker 1: all their competitors and suppliers, their customers, UH and get
18:24
Speaker 1: a good sense of who they are as well. But
18:26
Speaker 1: you know, of course there's always UH risks there and
18:29
Speaker 1: so we're always trying to match the numbers compared to
18:33
Speaker 1: what we are hearing out there in the broad economy
18:35
Speaker 1: or other companies, and so that's one good way, UH
18:38
Speaker 1: to kind of minimize risk. So, Danton, you mentioned the
18:42
Speaker 1: as one of the supports for investing in China down
18:44
Speaker 1: addition to evaluation the these strong Chinese economy. We know
18:47
Speaker 1: it's slowing, but still I guess the the government is
18:51
Speaker 1: still talking about six six and a half percent growth.
18:52
Speaker 1: What is your sense of the economy in China right
18:54
Speaker 1: now in the next year or so. Yeah, it um it.
18:57
Speaker 1: It definitely is slowing and it's been on a sort
18:59
Speaker 1: of a down and trying. You know, used to be
19:00
Speaker 1: double digits, of course, then highest single digits. Now we're
19:03
Speaker 1: approaching sort of more mid single digits. And even if
19:06
Speaker 1: you know, some people always want to put a haircut
19:08
Speaker 1: on it, and I think that's reasonable in terms of
19:11
Speaker 1: how much you believe the numbers. It's still is still
19:13
Speaker 1: good you know, everything you look at, and even if
19:15
Speaker 1: you look at uh, non government reported numbers, if you
19:18
Speaker 1: look at sort of trainloadings or electrical production or uh
19:24
Speaker 1: you know, miles driven or things like that, Uh, those
19:26
Speaker 1: are all still very strong. And so all the sort
19:30
Speaker 1: of the non GDP numbers sort of correlate with still
19:33
Speaker 1: a growing UH economy in our senses that the government
19:36
Speaker 1: still has quite a bit of firepower in terms of
19:38
Speaker 1: helping the economy along its way. Meaning they have the
19:41
Speaker 1: ability cut rates, which are you know, tourner basis points
19:44
Speaker 1: higher than ours. They also have the ability to cut
19:47
Speaker 1: the reserve requirement at banks, which is the the amount
19:49
Speaker 1: of banks amount of money the banks that the cap
19:51
Speaker 1: keep uh, and so it increases their lending ability. So
19:54
Speaker 1: they have quite a bit of firepower to help the economy.
19:57
Speaker 1: They've been doing that. It has had an impact, and
20:00
Speaker 1: so they do have that impact that ability over the
20:02
Speaker 1: next new year or two to continue doing that. Very
20:04
Speaker 1: good Danton Goie, Thank you so much. Danton's portfolio manager
20:08
Speaker 1: for Davis Funds, joining us here in a Bloomberg Interactive
20:10
Speaker 1: Broker Studio week. Well, the markets are discounting at least
20:29
Speaker 1: two rate cuts this year and maybe more in But
20:32
Speaker 1: just recently we've had a couple of Wall Street economists say,
20:35
Speaker 1: not so fast to kind of square that circle. There.
20:38
Speaker 1: We welcome our next guest, Ira Jersey, chief US interest
20:41
Speaker 1: rate strategist for Bloomberg Intelligence, joining us from Princeton, New Jersey. Ira,
20:45
Speaker 1: thanks so much for joining us again. A couple of
20:47
Speaker 1: economists came out and said, gee, maybe the traders are
20:50
Speaker 1: a little bit ahead of themselves. What are your thoughts? Yeah,
20:52
Speaker 1: I'm I'm very uh in that camp. Actually, I think
20:56
Speaker 1: that the market has gotten a bit of ahead of itself.
20:58
Speaker 1: I think that the UM, no, the Fed it while
21:02
Speaker 1: it doesn't want to disappoint the markets, it also has
21:05
Speaker 1: to focus very strongly on the incoming data, both here
21:08
Speaker 1: in the US and abroad. And while we've seen, you know,
21:11
Speaker 1: a few disappointing data prints, it's not obvious that the
21:14
Speaker 1: economy is falling out of bed and is likely to
21:17
Speaker 1: do so going forward. So I think the market pricing
21:20
Speaker 1: right now for for a July cut is you know,
21:25
Speaker 1: is setting itself up for disappointment. I think, so, what
21:27
Speaker 1: in the data will the federals are point to to
21:30
Speaker 1: justify not cutting rates right now? And defying market expectations. Sure,
21:35
Speaker 1: so you know, I'm not saying that this is true, right,
21:38
Speaker 1: there's certainly a scope for some of the data to
21:41
Speaker 1: weaken over the next six or seven weeks before the
21:44
Speaker 1: before the July FED meeting. But if you look at
21:46
Speaker 1: at where we are on trends and things like retail
21:49
Speaker 1: sales running above four percent year on year, that's reasonably solid,
21:53
Speaker 1: although not at the five percent it was last year,
21:55
Speaker 1: but it's still at a solid reading. Um. You look
21:58
Speaker 1: at a lot of the the inflation data we got
22:01
Speaker 1: this morning, for example, you still have a p p
22:04
Speaker 1: I X food and energy up two point three percent,
22:07
Speaker 1: and if you get you know, cp I tomorrow, that's
22:09
Speaker 1: you know, close to two. Um. You know, those aren't
22:13
Speaker 1: the type of designer type of numbers that will give
22:16
Speaker 1: the Fed too much pause. I think the key and
22:19
Speaker 1: all of this, and and again they're going to be,
22:21
Speaker 1: you know, as data dependent as they can possibly be.
22:24
Speaker 1: I think in this intermeding period from the June to
22:26
Speaker 1: July meeting winds up being the June payrolls report, Right,
22:29
Speaker 1: you got a rebound into the hundreds of thousands, So
22:31
Speaker 1: you get a hundred and fifty thousand pay rolls and
22:34
Speaker 1: suddenly everyone's like, okay, maybe you know, May was a
22:37
Speaker 1: blip and and we're really on this more hundred and
22:40
Speaker 1: fifty thousand trend, which is fine. That's what you need
22:43
Speaker 1: in order to continue to have the unemployment rate stable,
22:46
Speaker 1: if not falling a little bit. Further, So, Eira, when
22:49
Speaker 1: the Fed does finally begin to ease, how do you
22:52
Speaker 1: think it will look? Yeah, so, so I think when
22:56
Speaker 1: they ease, you know, the I think the rates mark
23:00
Speaker 1: it in particular, is set up to uh to potentially
23:03
Speaker 1: steepen a little bit. And typically what happens when the
23:06
Speaker 1: Fed does start to cut interest rates um, the yield
23:09
Speaker 1: curve steepens and you wind up with some optimism that
23:12
Speaker 1: you're going to have inflation going up at some point
23:14
Speaker 1: in the future because of the easier monetary policy. But
23:17
Speaker 1: I think at this this time we might not get
23:20
Speaker 1: the type of typical curve steepening that we've gotten in
23:23
Speaker 1: the past. So in the past you've had curves that
23:27
Speaker 1: that's steepened a hundred two hundred two fifty basis points um.
23:31
Speaker 1: I think that we get significantly less than that this time,
23:34
Speaker 1: probably probably about half of that. And the reason being
23:37
Speaker 1: that we're starting from a much different uh point in
23:41
Speaker 1: terms of how much the Fed could actually cut. They
23:44
Speaker 1: haven't made the typical policy mistake of continuing two hike
23:48
Speaker 1: interest rates when the curve inverts. In fact, they stopped
23:51
Speaker 1: basically as soon as the curve inverted. So um, so
23:54
Speaker 1: they're not making some of the mistakes that that they've
23:56
Speaker 1: typically made the past. So therefore there's not as much
23:59
Speaker 1: to go the other the other direction. And you also
24:02
Speaker 1: mentioned in your recent research piece that people are starting
24:04
Speaker 1: to price in another round of quantitative easing. Did I
24:07
Speaker 1: read that correctly? Yeah? So, so the the one of
24:11
Speaker 1: the things that j. Powell mentioned last week was that
24:14
Speaker 1: we will at some point get to the zero lower
24:16
Speaker 1: bound again, which just makes sense. I mean, if we
24:18
Speaker 1: do have any type of kind of meaningful and prolonged
24:20
Speaker 1: economic downturn, the Federal Reserve cuts interest rates, you know,
24:24
Speaker 1: eight times, and the next thing you know, we're at
24:25
Speaker 1: the zero lower bound again. So what is then the
24:28
Speaker 1: next action. It seems that that um, quantitative easing would
24:31
Speaker 1: wind up being one of the first things that that
24:34
Speaker 1: the market would expect the Fed to do after cutting
24:38
Speaker 1: interest rates. So therefore, you know, again it's one of
24:40
Speaker 1: these things where if they're gonna be buying a whole
24:41
Speaker 1: lot of tenure notes and thirty year bonds, is going
24:44
Speaker 1: to be harder for the curve to significantly steep in
24:47
Speaker 1: an environment where the FED might be buying a whole
24:50
Speaker 1: lot of of treasury securities. So I hate to ask
24:53
Speaker 1: you this question, but I'm going to ask it anyway. Ira.
24:56
Speaker 1: The President this morning once again was tweeting about the
24:59
Speaker 1: FED and trust rate policies. Just give us a sense,
25:02
Speaker 1: once again, kind of how you think the FED, if
25:05
Speaker 1: at all, pays attention to such tweeting. I have a
25:09
Speaker 1: funny feeling that they put their hands on their forehead
25:11
Speaker 1: and lean forward on their desks and say, oh, my goodness,
25:14
Speaker 1: not again. Um. But at the end of the day,
25:17
Speaker 1: you know, the FED wants to be as independent as
25:19
Speaker 1: it can be. We know from there's a lot of
25:22
Speaker 1: academic studies, both from conservative and liberal think tanks and
25:26
Speaker 1: and and academians that suggests that an independent central bank
25:30
Speaker 1: has better long term economic outcomes than central banks that
25:33
Speaker 1: are influenced by policymakers. Because the thing is elected policymakers, um,
25:38
Speaker 1: you know, like a president or like members of the
25:40
Speaker 1: House of Representatives. They care about the next election. They
25:43
Speaker 1: don't care so much about you know, where are we
25:45
Speaker 1: going to be in five or ten years? So um so,
25:48
Speaker 1: rather than worrying about the short term gains that you
25:51
Speaker 1: might get from you know, interest rate cuts, the FED
25:53
Speaker 1: is going to look through that and say, Okay, what
25:55
Speaker 1: what policies can do we need to do in order
25:58
Speaker 1: to sustain the current recovery and then at the same
26:01
Speaker 1: time don't overheat. So we have to you know, maybe
26:04
Speaker 1: step on the brakes even faster in the future, which
26:06
Speaker 1: which would be a concern potentially in some situations. Now,
26:09
Speaker 1: you know, the current situation might be a little bit different,
26:12
Speaker 1: but certainly a year ago when they were hiking interest rates,
26:14
Speaker 1: it seemed that that that was a risk that was
26:15
Speaker 1: on the table at the time I read. Jersey, thank
26:18
Speaker 1: you so much for being with us as always. IROD Jersey,
26:20
Speaker 1: chief US interest rate strategist for Bloomberg Intelligence. Thanks for
26:24
Speaker 1: listening to the Bloomberg pen L podcast. You can subscribe
26:26
Speaker 1: and listen to interviews at Apple Podcasts or whatever podcast
26:29
Speaker 1: platform you prefer. I'm Paul Sweeney, I'm on Twitter at
26:32
Speaker 1: pt Sweeney. I'm Lisa bram Woyds I'm on Twitter at
26:35
Speaker 1: Lisa bramwoits one before the podcast. You can always catch
26:38
Speaker 1: us worldwide on Bloomberg Radio