Argentina Is Biggest Risk Facing Emerging Market Credit

G twenty summit have arrived. They are gathering on stage in Boetos, Artis, And you know, it's interesting because we're so focused on Jping meeting with Donald Trump, but there's a lot of other things going on, including the fact that the US Canada Mexico did just sign their new trade deal and meanwhile Mexico is about to get its new president joining US now. Damien Sassaur, who heads up things Fixed income Emerging Markets research for Bloomberg Intelligence, Damian,

thank you so much for being with us. I want to start with this agreement that was just signed and talk about its effect on Mexico, in particular Mexico. What are the hottest vets in emerging markets? Credit Land, which has failed again and again and has been struggling. So can you just give us a sense are they losing out here? Is it? Are they Is it putting Mexico to an even worse position even with everything else going

on politically? Well, it's interesting because um, you know, Mexico is just taking it on the chin right and the pass at some of the weakest levels we've seen in some time. And and and we happen like Mexico at these levels. But you know, there are some real issues, I mean, more domestic than related to trade at this point. I think that's really kind of you know, resonating in the eyes and the minds of creditors here in the US.

And and they have more to do with you know, issues such as um fees being charged by banks on on households and on depositors, on pemm X, on the airport which was recently voted down. I mean, these are all issues that have quite frankly, a much bigger impact on asset valuations than than the trade agreement at this point, Damian, Does the security situation in Mexico also have an effect

on how investors interpret the potential for investment returns? Absolutely, absolutely, Tim, I think sentiment is largely been driven by um, you know, much of the really the headlines coming out of the White House here in the US, right, and so you know, well,

well you can't really kind of hang your hat on it. Yes, there's no question that sentiment has been impacted by that and UM and security is an issue, right because I think Amos on the record is saying he does not support a wall and he's not going to fund it. I can imagine. One other aspect of the G twenty meeting, which I find really interesting is that it is being

held in Buenos Aires in Argentina. Argentina, of course, has had a very difficult period of time, uh, you know, after having gone back to capital markets after a long absence, showing that it still is in financial straits. Interestingly, though, the Argentinean currency has actually been doing phenomenally over the past month. What's going on? Well, I think that's more that's more technical on the heels of the I m

F deal. But let me be very clear about this, Lisa, Argentina and specifically the elections in the second half of next year are the number one UH exogenous risk facing emerging market creditors in Okay. I mean, if we have a return to I'm not suggesting, you know, Kushner is going to be reelected, but not Paris or something along those lines, um, which is very probable. I mean, I think the the market, they're going to perceive that as

really a very negative thing. And and to the austerity measures that that that racing Marcorea has passed, and and and and supports and and and that would be really really bad for for Argentina and for its creditors, of which there is no shortage, given the fact that Argentina, despite the sell off, is still one of the biggest overweights in emerging market portfolios today. Well, I want to

pick up on something you said. You said that is the the biggest argenous risk facing emerging markets creditors, even more than China. Um. Yes, And I'll tell you why. Because China is an investment grade uh issuer. You know, so, so spreads are not so wide, and the risk of Chinese of credit spreads in China really blowing out given the size of that economy is nowhere near that of you know, high yield speculative single B rated Argentina and and and Argentina's impact on EM portfolios is I mean

it's amazing. I mean, despite the fact that China, I mean is fiftent of of e M dollar debt, Argentina is not far behind it. Argentina has issued a lot of US dollar debt in the past three years, and so yes, we believe that that has more potential than China to move the needle. Now, that's that's a direct impact. In terms of an indirect impact, clearly, weakness in China and slower growth in China has a knock on effect to the broader emerging markets. Right. So so from that perspective,

I hear you. But but in terms of a direct impact, all lives are gonna be on that election. As we at into Damian, I was under the impression that a stronger US dollar would actually be better for emerging markets because it would make their commodities more competitive and their products and services more competitive. Is that off the table? Well, you know, you know you're hitting on a nerve. I mean,

we wrote that exactly to that point. This week. We did a deep dive just yesterday on corporate credit fundamentals

in emerging markets, and it's amazing what we found. We found that those um, those companies who basically have um basically large US dollar denominated inputs have really seen their credit fundamentals week and here in twenty team, which makes sense, right, because they have to spend more money on whatever it is, the the whatever input inputs they need to manufacture, whatever it is they're manufacturing, or or whatever the case may be.

As we get into if we see the dollar begin to weaken, we should see those those companies, the fundamentals underlying those companies term more supportive. On the flip side, commodity producers who's whose output is denominated in dollars have done extraordinarily well and from a fundamental perspective look as good as they have in sometime. And that's including all the large quasi sovereign oil producers and and and some of the larger industrial metal producers. Thanks very much for

being with us. Damien sassaur is our chief Emerging markets credits strategist for Bloomberg Intelligence. This comes on a day when the G twenty meeting opens in Argentina. It's coming after the family photo shoot with all the leaders lining up at the G twenty meeting. You're listening to Bloomberg Markets. I'm pim Fox along with Lisa Abramowitz. Can we talk a lot about how the fang stocks are the Facebook, Amazon, Netflix,

Google have such dominance over the entire stock market. Increasingly, these big companies are having a dominance over everything and joining us now as someone who really talks about the consequences of that. Jonathan Tepper, I'm very pleased to say, is joining us now, founder of Variant Perception in London. He also he's in San Francisco today. He's also a Bloomberg opinion columnist and author of a new book, The Myth of Capitalism, Monopolies and the Death of Competition. Jonathan,

thank you so much for joining us. You highlight in a recent column, which is an excerpt of your book, UH, that the US is startup culture is fading and that this is a big problem. Why So, what's interesting is over the last twenty years we've seen a rise in industrial concentration across the board, and that means that there are fewer and fewer players UH in particular industries. And it's not just the things, it's actually economy wide um. And so if you look at the twenty twenty years ago,

we had twice as many public stocks. So there's been a collapse in listings in the stock market. Um, we've also seen essentially a collapse in startups, you know, even including non public companies. So every year companies die or exit markets. And when you have a collapse in startups, obviously, you know, if this were happening with the population in the US would be deeply alarmed and would be uh dire for the future. But that's what's happening effectively in business.

And so what's happening is that there are a few much bigger companies that now dominate a lot of industries. The book The Myth of Capitalism touches on the fangs, but this is actually happening in many other industries as well, and so it's a broad based trend in in the U. S economy. What is your theory for why this is happening? So that the main reason is that in UH it goes back to two when Reagan changed the merger guidelines the Department of Justice in the FTC and basically mergers

were given green light. And you know, when every single stock market boom that we've had has created a merger wave. So we're now sitting here chatting in and we're essentially four merger waves in and if you think about it, like the Sweet sixteen or the World Cup, you know, you start with sixteen players, get down to eight and to four and the two and so what happened is we've just had, you know, um, competitor after competitor being eliminated.

And so you know, something like the US beer market, now two companies control the beer Americans drink, and that's totally contrary to the antitrust laws like the UM Sherman Act, Clayton Act, and so essentially it's this wave of mergers and eliminating competition. Jonathan, there's an argument that the larger that a company is, the more efficient they can be, and they can actually offer lower prices to the consumer, which is a net win. Why is it a problem

for there to be so much more concentration at the top. Sure, so that's the argument that's offered UM And certainly when mergers are about to go through, they hire K Street law firms and then economists for hire generally trials, Rivers, Associate and comes lex con But the evidence is overwhelming that reducing the number of players actually it leads to price increases. So uh, you know, it's it's like New

Year's resolutions. Companies, you know, say that they're gonna get these synergies and they're gonna pass on to consumers, and as soon as the food shows up, they uh, you know, decided to break the New year resolution. And the book goes into sort of dozens of studies where that's the case.

And so unfortunately, I think that the FDC and dj OR do nothing institutions and essentially broadly captured by um, the revolving door, and so there's there's no real challenge to mergers, and you just end up with higher prices. The more concentrated the industry in the US generally the more the higher the price. So alright, so Johnny, that's the case. What's the recipe for changing this? Certainly so

that the simply analyzing the problem would be terribly helpful. Um. The last chapter in the book and has some of these proposals, but basically the sort of short answer is one prevent further concentration, meaning that we shouldn't allow mergers that reduce competition materially. Um and uh, there's research pointing out that when you get blow six players, prices tend to go up. And so I would say that you know, if an industry is blow six players, let them compete,

don't let them merge. UM. I would also say that we have to break up the previous mergers that have reduced competition. UM. The world didn't end when standard oil was broken up for a T and T, and the world won't end when we break up the current to

the monopolies. UH. And then the other aspect I think it's very important is that regulation tends to act as a very strong barrier to entry, and unfortunately, what we have in the United States right now is uh, not too much or too little regulation, but regulations essentially that serves the interests of companies that want to keep out competitors. So we definitely need better, more principal space regulation that

has competition and new entrants as its key objective. I have to wonder what kind of responses you've gotten so far to this, because it seems like there are a number of people talking about this now and and probably more than say, ten years ago. Is that a correct statement? Absolutely, and I think that this has really started basically UM

at least entering the public consciousness probably about two years ago. UM. I think that it unsurprisingly it was sort of at the end essentially of the of of a fourth merger wave was a peak, and in mergers for for the US, twenty seventeen and eighteen broadly globally have been peaks. Um. But but clearly people are now realizing that there's just

a lot less competition. The reaction has been overwhelmingwhelmingly positive. Um. You know, the people who have endorsed the book and uh so praised the message of the book been Nobel Prize winners like Ranks deton my expense, uh and then the economists like Kenneth Rugoff and historians let you know first and so I think this is a very big subject um and uh when I talk to people, you know at book events or you know, just sitting at

the airport randomly chatting with people, Um, everyone recognizes their own industry as having less competition, you know, sitting next to someone who works in hospitals of US hospital markets are highly concentrated, so it resonates in people's lives. I have to one because we also had Tim wu On the Columbia Professor recently, who is talking about a similar type of idea. What kind of hope do you have that the current political establishment could potentially enact some measure

that would be appropriate here in your opinion. So I think that the tide is changing. And I did some book events in in d C. And got to meet quite a lot of people on the hill, and very

definitely senators want to do something about this. You know, you have Warren Warner Grey book or club schar and others, and even the Republicans who often have been perhaps more friendly to big business than not, are realizing that actually, if you care about competition and you care about free markets, and you know you're pro capitalism, what you should want is to have reduce industrial concentration to have more competition.

So I think this is becoming essentially a bipartisan issue, um, and I certainly do hope that we'll get some change. Thanks very much for being with us. Jonathan Temper is the founder of Variant Perception. He is also a Bloomberg opinion columnist, and his latest book is entitled The Myth of Capitalism, Monopolies and the Death of Competition. Just yesterday, the California Public Utilities Commission met in order to try to figure out what is next for the top utility

in the state of California. That is pg NY, and here to tell us more is Mark Chettiac of Bloomberg News. You can follow Mark on Twitter at Mark Chettiac. That H E. D I A K. Mark. Just give us a little background as to why P and G is in the focus of regulators related to the recent wildfires. Hi, Yes, thanks for having me on. I appreciate it. Um So

Penny is California's largest utility. UH It's been operating in California for more than a hundred years, but it has um within the last ten to fifteen years quite a checkered past in the state. Um it's responsible. It was responsible for a natural gas pipeline explosion in a San Francisco suburb that killed eight people and level the neighborhood. It's power lines are have been identified as starting many of last year's deadly Wine Country fires in northern California.

Last year, and just recently, investigators are looking at its power lines for starting the camp Fire, which is now considered the most destructive and deadliest fire in California's history. So UM, as you mentioned yesterday, California's top energy regulator um is opening open these questioning basically whether or not the company actually has the safety culture and structure in place to UM to deliver safe and reliable electricity in

the state. Yeah, I mean, I guess that this raises a lot of questions, right, I mean, is this just sort of a cost of doing business for any utility or is this some kind of rampant negligence that's endemic at the utility. And then there's a question too, what are you gonna do put them out of business? Who's going to take over? So how are people sort of addressing both of those questions? Yeah, that's a great point.

And uh Michael Picker, who is the president of the California Public Utilities Commission, kind of he basically spoke to that specifically. What he said yesterday is um. He noted, this is, you know, utility that people depend on for reliable electricity, so you can't just put them out of business. He he talked about, you know, fixing or changing PGNIE

is a kind to trying to fix an aircraft in flight. UM. He said, you know, we don't want to crash the plane, so we have to be very careful and very deliberative about how we do this. What is the potential liability for PGEN or has that not even been figured out? Well, Um, first of all, let me make it clear that they haven't determined the cause of this year's camp fire. So p power lines are are being looked at, but no

final determination has been made. If the company has found liable, analysts think UM it could be around fifteen billion dollars that surpasses PGNs market cap. Right now, PI is also looking at about fifteen billion dollars or more of liability from last year's fire. So that's about thirty billion dollars and liabilities that far exceeds the company's market capitalization. So what's happening now is UM State officials are looking at ways in which UM they can potentially help the utility

pay off these massive liabilities. They don't really want the company to go bankrupt. UM that's kind of a worst case scenario, But they also don't want the public very much doesn't want the utility to get off scot free either. Well, yeah, I mean there are chances of quote no bailout. As you as you wrote in your latest story. I have to wonder at this point, can they break the company up, can they try to can the state try to give some kind of advantage to competing utilities to try to

gain share. I mean, what are sort of some of the ways that they could, uh that they could solve this. Yeah, that's a great question, um, and I think every you know, state officials are really taking a hard look at this. Some of the options being considered. One the top energy regulator, Michael Picker, said there could be changes at the company's board. There's some board members who have been with the company for quite some quite a long time, so you could

see something like that. You could the company has an electric distribution service and also a natural gas distribution service. You could see them breaking up those two pieces of the company. You could even see them breaking up GENI into smaller sort of regional division. So there are a number of potential options. Nothing has been suggested, there are there have been no firm suggestions at this point. Mark Tettiak,

thank you so much for being with us. Mark Tettiac as an energy reporter for Bloomberg News coming to us from San Francisco. Really interesting to think about too Big to Fail in the context of utilities, especially when you do have him a pattern frankly here with p Gennie, although of course it does have to be established what their role was in the campfires. But but really, uh, potentially this could be a real big problem for California.

Well it could be. Yes. Pg US market cap right now is just a little bit more than thirteen and a half billion dollars and it has dropped by more than forty percent this year. Yeah, it's been a really rough year for them, and frankly, uh for all Californians who are thinking, what are we gonna do with them? And we don't want to bail him out. Joining us here in our Bloomberg Interactor Ochre Studio is Joe Maisak,

editor for the Bloomberg Grief for municipal markets. Joe Maisak, let's begin with General Motors and the announcement this week that they will be exiting a variety of locations. They are shuttering a total of five plants, one of them going to be in Canada. What effect is this going to have on municipal finances? Well, you know, whenever you and something, most of these plants are in the they're in the Upper Midwest, Ohio and Michigan. Uh, of course

one in Canada. You know, there is a an outsize effect in some of these small communities, uh where you know these particularly Amanda Albright did a story this week about Lordstown, Ohio. Small town has a factory in it that GM wants to shut and that is going to have an outsize impact because the village there's thirty people and uh, you know, it's just as this has a knockout effect. You know when you say, here, we're closing down and we're getting rid of you know, several hundred people,

several thousand people. There are stores that are gonna have there's gonna be an impact there, and the housing markets is going to be impacted. Schools, So yeah, this is it's it's tough when when you have a company coming and say we're going to close down, and of course, you know, maybe some of it is uh, you know, a bargaining chip. We said we're shutting down six firms or were started shutting down six factories, and you really

have to shut down maybe one. Well, just according to this story, if you look at the total employment in just as this example Lordstown, you're talking about five percent of the total county employment. How do you take up something like that. It's very difficult, especially because in these Upper Midwest communities, you don't have a lot of uh, it's it's not the same as in the South, where you have a lot of factories that are uh, you know, going to be moving in or want to move in.

So when you have one of these long time UM employers decide that, well, let's say see you, it's very difficult to make that up. And this has been really the story of a lot of the rust Belt, the so called rust belt, right. I mean, this is sort of we're watching it in real time sort of as it plays out near the end of this whole thing, or maybe we're in the middle. I don't know, but it's really interesting to think about how that affects municipalities.

On a brighter note though, for municipalities right now, uh, there was a bond rally that was inclusive of municipal bonds after j. Powell of the Fed spoke, people seem to want to come back to the debt because it seems like the Fed's not gonna hike rates as quickly. How sustainable is the rally that we saw the sort of knee jerk money into the record flow into Black roxy t f MEUNI, Bonny TF and sort of the

the initial jolt there. Well, it's funny the thing we talked about earlier this summer about so many bonds being you know, going to mature and so many bonds being called away money looking for a new home. We're setting up for that again in December January. These are the months where people get money back. And after we invested and the supply, I would say, we're probably going to get a little boomlet in December, but it's not gonna it's it's not going to overwhelm the money that's looking

for a new home. So that is very constructive. Uh. You know, that is one of those factors in the muni market. See it in December, January, and then see it in June and July. What's the likelihood they're going to have to inc pase rates in order to entice buyers. Not very much, not much, you know, we have wow. You know when you take a look at the tenure uh bond, the yield to drop back down. I mean

I thought for a while we might hit three on it. Nah, not gonna uh And and you know, as I say, there's boomlet and I the only place you can go for three percent is Pennsylvania. For the tenure, the boomlet is not going to result, and everybody, you know, all of a sudden coming in and saying, well, we have to pay more money to attract investors. Well, one place that might have to pay more money is Puerto Rico because there is some talk that they might be returning

to the municipal bond market at some point. How realistic is that at this point? Oh? I saw that that deal on the calendar, and that's actually the exchange bonds for the Government Development Bank, the UH deal that has restructuring deal that has been set up. So it's not quite a new issue where they're coming in and saying, oh, we're to send all sell all new bonds. Step right up? How likely is that right now? I guess at some point next year we'll probably see Puerto Rico way in

and say, well here's a new bond issue. But gosh, who knows how much they'd have to pay a yield there? Joe, Is there any estimate, just quickly on how much of an effect the fact that banks are not going to be buying and have actually been shedding municipal bonds from their portfolios. Well, as you can see, not much. Uh, you know, that the yields have been coming down. You know, we had we had a little bit of an impact and that was purely fed and rates moved higher and

just the kind of swooning again, you know. The An interesting thing I just want to toss in the unrated bond market is up about this year in Muni. Interesting search for search for Yale to imagined. It yields a little bit more and it's a little bit less liquid. Joe Maisak, editor of the Bloomberg Brief, focused on the miss of a bond market for Bloomberg News. Thank you so much for being with us. Coming up, we're gonna be talking about luxury and how the concept of luxury

is changing ahead of this holiday season. I'm Lisa Abramoh. It's along with Pim Fox and this is Bloomberg. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.