Bill Rhodes: China Will Squeeze Shadow Banking to Avoid Crisis

United States, countries wanting to leave the European Union. Oil in the Middle East, Russia and Syria and the United States and Saudi Arabia. Let me give you the other list. Let's go all the way to Asia. Now, other things we can worry about. UH, problems on the Korean Peninsula, North and South Korea and China, as well as Japan and the Asian Trade Block. I can't make sense of it. You know why that is? Okay, that's right because we've

got Bill Rhodes. He is the president and the chief executive of William R. Rhodes Global Advisors, and a Bill you know, just in giving you that list, that's like a free for all. Um, Where where do you start? Let's start with China and and the Korea, because you know that that area of the world very well. It's

great to be with you guys here again. And I think as far as China goes, the most recent news of courses that their first quarter came at a six point nine percent people that expect GDP g d p uh, people that expected somewhere between six point seven and six point eight. The problem is it's driven by tremendous increases in debt. Their debt burden as we speak is somewhere between two d and fifty and two percent of g

d p UH. The difference with those numbers is basically, if you count the inner bank exposures of the banks, it's too weighty, if you know, and it's to fifty. But that's like double it was a few years ago.

And it continues to grow because the government is pushing as much uh, you know, liquidity into the market and allowing credit to grow significantly with the state owned banking system because they want to make sure the economy is red hot when they have the nineteenth Party Congress is full because this only happens every five years, and they want to make sure that President Shi Jin ping gets all his favorites on the Standing Committee of the Politburo,

and Uh, this is all it counts at this point, is to get that done, uh, which will ensure that he's got at least another five years, and who knows, he may decide the first one since Don Joe Pain to extend it beyond that. Uh. And so that's all it counts. But the problem here is shadow banking continues to be basically regulated. It's growing very rapidly. That's helping

fund this tremendous credit boom. Uh. They haven't done much to close the zombie companies and steal coal, shipbuilding and other areas, which they need to do because eventually this is going to catch up to them, probably next year. So the real question is what happens after the Party Congress is fall. Will they start squeezing the economy? Yeah, you know, Bill, I want to pick up on what you're saying that probably next year they're going to have

to start grappling with this. You are a an international banker at City Group for five decades and you dealt with a lot of workouts, don't Well, it's it's it's important to have that kind of background because you helped negotiate workouts in a host of different countries, from Argentina, Brazils at Maco, Mexico. Uh, you know, South Korea, you name it. What are you looking for? You just got

back from China. What are you looking for to understand exactly where we are with respect to when China's credit bubble will come crossing town? Well, I think they're gonna have to start squeezing starting the end of this year. And they have a first rate central bank, to People's Bank of China, uh, and some of the best economists in Asia there. The head of it, UH, Joe shah Shuan, has been kept over three years, which is a very

smart move of Shi Jinping. He should have retired three years ago because he is trying to keep this thing moving. UH and UH. Also when we talk about China, the People's Bank of China, we have to talk about the n m B because, as you know, our president, the Chinese currency exactly. Our president had had talked again and again about manipulation by the Chinese of their currency and the first thing he was going to do was take

action to declare them manipulator. And the truth is that the Chinese, through the People's Bank of China has spent a trillion dollars over the last year to maintain the stability of the ren MB, so they're not pushing it down, they're actually keeping it stable or pushing it up. Well, I just I want to just press you on the credit issue before we go on, because it's this is the big question that a lot of people have, which is if China's credit system blows up, that will disrupt

the entire financial system of the world. Are we close to that point? Well, my own feeling is that the Chinese will be pragmatic enough that when they get through this nineteen Party Congress, they'll start basically uh squeezing the banking system, start controlling the shadow banking system, UH, working more to uh to to basically control the bubble in real estate municipalities UH, and start moving more rapidly and

closing down some of these zombie companies. So I think you're going to see a major surge starting at the end of this year through next year in this area because the Chinese no they have a problem them UH and UH. I think they will work at it. The question is do they start early enough and what will be the impact if their growth rate goes from near seven percent where it is today and drops down to five. Uh,

you know the effect in the world. As a world second largest economy, the largest importer of commodities in the world, so they have the largest banking system in the in the world. Now they passed Europe. So you've got to take a look at all of these and watch very carefully. Once you have that party Congress what they do with the economy. Can you do Brexit and the new the snap election that's just been called, can you do that

in fifteen seconds. I'm not surprised that Prime Minister May has done it because she needs the strongest hand she can get in this negotiation, because this negotiation is going to be tough, and uh, you know she was counting on some good feelings from Chancellor Merkel and others. But

remember Chancellor Merkel has to go into an election. God only knows what's going to happen in France because everyone thought two weeks ago or three weeks ago there was going to be a runoff in the second round between Makron and the le Pen, But now you have the Left surging and it's really not clear what's gonna happen in the first round, so I think that all bets are off. With regards to the French election, I think with Merkele she will win, but it may be a

tougher election than people think. Exactly. Well, I will keep will keep getting in touch with you because you have a lot of fantastic insights. Bill Rhodes is the author of Banker to the World, and he has been for decades as a former banker at City Group. Bill Rhodes is the president, chief executive officer of William R. Rhodes Global Advisors. My grandfather used to say to me, just because your paranoid doesn't mean they're not out to get you.

And somebody who might ascribe to that theory of the world is Michael sal Loov. He's head of products, particularly with mobile security focus for Checkpoints Software Technologies. He's former CEO and co founder of Lacoon Mobile Security, which was acquired by Checkpoints Software. The company is based in San Carlos, California, as well as Tel Aviv. Michael sat, thank you so

much for joining us. I want to start with talking about what companies that you work with are doing to make sure that their mobile devices and all of those used by the employees are secure and our company is doing enough. Good morning, Lisa Um. So indeed, you know, we've seen quite am impressive adoption of mobile devices in

the in the corporate environment. I think all of us are using those the smartphones, Android ius um as our primary sort of computing platform for for doing mobile and most of the companies today basically they actually invested heavily in the manage those devices, but very few of them have adopted solutions to to secure the device itself from from hackers. Well, tell us a little bit about some of the things that could happen if you don't spend

time and money securing your network. Right, So, you know, cybercriminals and they recognize the trend and they see the mobile devices probably the weakest link in all of the i T infrastructure, mainly because I T professionals or security professionals, they don't have good visibility into what's going on on those devices. And you can add to that the fact that most of those devices are actually they have dual use, right, they are used by the the owners both for corporate

communication but also for personal use. So you know, once cyber criminals hack into that device, they can actually do almost everything, starting from like is dropping on all of your about communication passwords that you would type, you know, get access to your calendar, contact lists, and probably some of the scarier things is the fact that they can use the Microsoft the microphone and the and the camera to drop on you even you know, when when the

follows in your pocket, when the screen is closed. Wait wait, wait, back up, back up. Okay. So we've heard a lot about these sort of worst case scenarios, you know, the dolls that are spying on your children and telling them what to do with microphones and stuff like that. She never believes me that. Well, no, no, I believe. I believe.

I'm trying to figure out how common is this. I mean, is this just you know, a one in a you know billion chance that somebody's going to do this, or are there growing teams of people actively trying to hack in activate the microphone and steal everything that you have in your bank. So I think that the microphone scenario is actually very targeted scenario. But the truth to be told.

First of all, in a survey that we've conducted a few few weeks ago, together with dimensional data, they they have dimensional research I'm sorry, they've actually the company is actually recognized about of the company is recognized that they already had a breach from a mobile device, and twenty five said that they actually have no clue, right that they don't have visibility from our own research, basically from customers that are using our our mobile threat prevention product,

and we have more than eight hundred customers those days that are using the product. Every every company that they have more than five hundred employees, they had a mobile breach. So that's definitely quite common. Is that? Is that? Okay, we're just sinking in with that any company that has more than five people, it's not okay, Well that the truth is out right, Okay, so we got so this is now you're trying to combat this. So you're trying to offer up some solutions, right for for companies to

prevent this from becoming a total mess. Yeah that's not true it yeah, yeah, okay, So give us some idea, like how much would something like that cost? I mean, is is that is that expensive? Is that on a perform basis? How does that work? So it's actually it's not that expensive, you know, for you know, from if we're talking about list price. It's basically it's basically four

dollars per month per per device. Now, you know tech, you know, an average company with with let's say, like you know, five thousand or three thousand employees, it's not that expensive. And also of course you know those things, those type of software, they have discounts, you know, based on volumes. Yeah, Michael, how do you have a sense of where a lot of these hackers come from? Um, you know, it's it's usually sort of like you know,

the the usual suspects. So a lot of those groups are emerging from China, you know, for example, last that's the same last November, we've uncovered a group which preached about one point three million devices. They were Chinese. Some of those groups are actually emerging from from Russia, so we've seen traces that the same guys that hacked DNC they also have capabilities in the in the mobile in

the smartphone space. No, it's it's pretty much equivalent to what we're seeing, you know, everywhere else in in the cyberspace. Thank you very much for joining us. Michael shall Love is the head of Products Mobile Security for a checkpoint software and I guess that you know offers a little bit of a window into what you should at least be aware could happen to your phone. Just because your paranoid doesn't mean they're not advocate. Just that's all I'm

gonna say. Okay, Well, the rental car companies Hurts Global Holdings and Avis Budget Group, they have bonds which trade, and boy, they are not trading like hotcakes. They are sort of like lemons, at least according to Molly Smith, our Bloomberg corporate finance reporter who joins US now and you can follow Molly on Twitter at Molly Smith News.

Molly Smith tell us the tale of Hurts Global and Avis Budget and I just want to note that you are in the enviable position of actually being charged more if you were ever to rent a car from either of these organizations because they have that twenty five year old and below penalty. That's true. I am charged with that penalty being I think or something like that security deposit charge for us under the age of UM. But

that's true. Yeah, the bonds are really getting hit lately. Um. You could see it starting from a bit earlier this month, and it's really coming in line with the decline in used car prices, which is really the assets essentially that back these bonds and loans that are issued by these companies. So when those prices are coming down on the cars, you know, so are these um securitizations from the companies, And you're seeing that now reflected in the bond prices.

Previously was an equity issue, you know, you saw a bit more of the stock sell off earlier, but the creditors now starting to get weary as well well. And just to be clear, this isn't just the investors in the securitized bonds, but also in the straight corporate debt that Hurts and Avis have issued. Which is interesting because

these companies have levered up on several fronts. Right they've sold off the residuals, there are the income that they get from rentals to go to the securitized bond holders, as well as sold corporate debt to raise money for their operations. Have these companies addressed the ongoing and growing concern that the resale market for autos is falling out of bed and it's going to profoundly challenge their whole

business model. Well, I think that's exactly the challenge that they're facing now and possibly having to re evaluate their residual value assumptions and what they had previously made. Both Hurts and Avis were forecasting no more than a two to three percent decline and used car prices. You're now already seeing um GMS forecasting those prices to fall seven

percent this year. Ally Financial UM, which is an auto financing lender UM their prices already fell seven percent in the first quarter, So um the decline is definitely steeper and faster than these companies had anticipated. Not just looking four point eight billion dollars worth of debt. Let's just take Hurts Global for h for a moment, But this INCURDS includes I beg your pardon, um, revolving revolvers that are available, term loans that out that our outstanding, as

well as a bond principle. So well, although you should note that it's up right, I mean it was that that if you look at just for example of Hurts, they're short and long term debt has increased from eleven point three billion dollars in two thousand and eleven to thirteen point five billion dollars, so they've been actually increasing their debts, so it actually matters quite a bit anyway,

carry on, okay, Okay. I anyway, I was looking at four point eight billion right on the Bloomberg and is that considered a lot for for these kinds of companies. I mean, these are assets and you may you may, you may find that people are going to buy them,

and it may be good paper. You don't know, right well, I mean, I think really what's more concerning to the creditors right now and the analysts that look at it's not so much the absolute amount of debt, but when you're looking at it on a net leverage ratio basis. So Hurts is really trying to keep that within a two and a half to three and a half times range, and they're as of year end it was at five points six times. They're um net debt to adjusted earnings.

So really, like then they've acknowledged that, you know, their CFO on conference cause they know that they are really at elevated leverage levels and something that they are working to reduce. But so far that clearly has not happened. Well. And investment and as you said in stockholders, investors in the company, owners of the investor have already kind of voted with their money and the stock is down so far this year, right and Avis also down more than

this year as well. You have to wonder why Hurts and Avis still buy new cars, hold them for a year during their highest appreciation period of time, and then try to resell them. Is there any talk about changing that model. Well, the idea right now, as they're starting to buy more new cars versus used in the fleet, is really to take advantage of the heavy discounting going

on at the new car level. And while I mean they are trying to drive their acquisition costs down in other ways by some of them are switching more to what's called the risk versus a program vehicle, a risk vehicle in which case the companies like Hurts an Avis own the vehicle outright, they're making the assumptions about the residual um price when you know, when it comes time to sell the car. Versus a program car, the companies get on a buyback agreement from the manufacturers, so they

don't have to assume any of that price risk. So the program cars in that sense do cost a bit more. Hence why the rental car companies are somewhat shifting, shifting a little bit more towards the risk vehicles to drive down the acquisition costs a little bit more. Is that is that going to affect you know, how the business actually run, the kind of car you get when you, you know, you show up at a at a rental car company. Well, at least for Hurts right now, the

fleet is like a bit lopsided. And we talked about this little bit in the story that you know, they were trying to you know, reduce the size and age of their fleet previously by buying smaller, cheaper cars, but they didn't turn out to be so popular. Americans tent prefer bigger cars, especially when they're renting, when they're on the road, you know, they have more things to carry. So I think right now that's really what they're in the middle of doing, of correcting their fleet, and that's

something that analysts are looking for coming up. Thank you so much. This is a really important story to sort of highlights some of the growing distress that we've been hearing about and seeing in the auto sector. Molly Smith, we really appreciate you joining us. Molly Smith is a corporate finance reporter for Bloomberg. Talking about Avis and Hurts and their bonds tumbling to new lows as we see resale values of vehicles decline. Medical bills have been straining

employers for a long time. But the question really is how much does Obamacare change that? How much does the failure of the GOP's proposal UH to repeal and replace Obamacare affect all of this. I want to bring in Joe Jackson, who's chairman and executive officer of wage Works, which is based in San Mateo, California. And if everyone has ever deducted or put aside money for medical expenses, they've dealt with wage Works and filling out those forms, I know that I have, Joe, Thank you so much

for joining us right now. How much are you keeping track of what happens on the national healthcare level? How much does that affect your revenues and your business? Well, thank you for having me, Lisa. I think we spend quite a bit of time kind of tracking and um UH keeping close to the the puts and takes that were put into the recent healthcare bill. UM. We continue to have folks in Washington UM monitor the meetings that

are taking place UM. But I think overall, what we tell folks at wage Works is that the whether or not the bill were to pass UM are products that we provide. Working families across the countries are thriving today and will continue to thrive no matter whether there's a new healthcare bill, which I believe that there will be at some point in time, or um if if there's not.

The key thing is that out of pocket healthcare expenses continue to go up each year, and working families across the country the only defense mechanism that they have UM to offset those increases and out of pocket expenses is to use health savings account put pre tax dollars into a flexible spending account UM that allows them to pay for those expenses using pre tax dollars, which is really

a benefit for working families Joe Jackson. Then how come the government seems to make it so difficult and so complicated for everybody to share the same kinds of benefits that you are describing. Because you've got the flexible spending accounts the f s as, then you have the health savings accounts, the h s A S oh and yes, Health Reimbursement Arrangements the h r a S and then

you've got transit programs. Why can't they just simplify this and expand these programs you you say they work, Why just not expand something that is already doing pretty well well? I think there is expansion across the board. I think in health savings accounts a lot of what was proposed in the recent healthcare bill would go a long way to expand the amount of dollars that can be contributed to a health savings account. Uh. There were some other

what if they pulled off the caps for example? I mean they keep talking about tearing up the script and you know, making the government. What would you like if you could write your own bill, Let's say, what would it contain? Well? I think from from our industry standpoint, I think you make a good point. I think working Americans should be allowed to contribute whatever the amount that suits.

Their family would be required to cover their out of pocket expenses, so eliminating the caps um making the product more efficient, products more efficient to be utilized is uh. You also have sections of the US and in different populations. Some are spenders where a flexible spending account where the dollars are available to be spent in total on January one,

at the beginning of each plan year. They find that a lot more attractive to cover their requirements UM savings accounts are becoming more and more popular from a health saving standpoint. If you think about um UH individuals that are are retiring, that the amount of money that is going to for example of sixty five year old couple today that retire UH, their healthcare costs are going to average through their lifetime about three hundred and seventy seven

thousand dollars. That's expected to be about five hundred and seventy thousand dollars in the near future. So from our perspective, we believe and and I say this many times too folks that we speak with, that I think in three to five years people are going to have a four oh one K account for retirement. They're going to have a healthcare account, whether it's a savings or a spending

account for retirement. And I think the recent health care bill has a lot of UH pluses that are going to impact both flexible savings accounts and health savings accounts. And I think that you know more of that as you described as whether it's UH expanding the cap, expanding the use of an eligibility for these accounts. I think all of that is going to play well for our

industry and our business going forward. So talking about your business, Joe wage Works manages some of these flexible spending accounts health savings accounts for companies. How do you make money? Is it the companies pay you to manage this this arrangement or are there other sources of revenue for you? Well, no, primarily it's the employers. We have a little over a hundred thousand employers that we work with today. Primarily they would pay us a per participant, per month fee for

the plan. Year are big time of re enrollment season, which is in open enrollment. We spend a lot of time and effort educating, providing awareness programs to people so they're aware that of the value these products provide them. I mean, if you're an employee today and you don't take advantage of a health savings account or a flexible spending account in essence, you're really leaving money on the table. Are more people using these um more and more every year?

H s A s are fastest growing product. Our hs A business grew last year a little over fifty uh Flexible spending accounts continue to grow especially uh IN was really a catalyst when the government basically eliminated the antiquated user or lose it policy for flexible spending accounts, and now you're able to carry over up to five d dollars in your account each year. So that's really spurred the growth of flexible spending accounts. But with c h right there, I mean right there, right, I mean, why

it's five? I mean, come on, let's I mean, I understand, you know that the country and the geography of the world, and and you know we're coast to coast and worldwide. We know that there are these vast differences. But I mean, come on, and and I'm not saying that it's your role, so you know, please, don't, you know, take it that way. But it's like, come on, five hundred bucks. I mean, you know, if you're gonna end up with some kind of serious medical issue, what is it a thousand a

day in a hospital? And none of this really goes to I mean, why not would you support a single payer system for example? Um? No, I don't think that that's really the uh you know again, I wouldn't speak towards whether a single payer or the process we have in place worked. I would tell you I'm shoulder to shoulder with you in your comments with regard to the

five dollars. If you have a chronic condition today, the average out of pocket expenses that you're going to incur each year is about four thousand dollars, So you know, the five dollar carryover doesn't seem like a lot. But we worked for about eighteen months with Treasury in the I R. S UH to help get that provision path. I I guess I was just trying to get from you the understanding of what is the other side, whoever the other side is, what are they thinking when you

have these conversations with them? Well, I think it always involves a tax code which is obviously very complicated and very time consuming, and trying to make changes done. I would tell you we continue. In fact, I have my chief compliance officer in Washington today who's having uh, you know, daily meeting. Oh wow, I wouldn't. I gotta say, I do not envy him at all, but I'm so glad

you were able to spend time with us. Joe Jackson is the chairman and the chief executive of wage Works, giving us some detailed information and some updates on some aspects of the bill to replace Obamacare might actually help consumers. Maybe expand some of those health savings accounts. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm out there

on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio