BOJ Allows Japan To Keep QE In Place For Another Three Years

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Bank of Japan Governor Haruhiko Kuroda said that he's going to let a key interest rate increase by a tenth of a percentage point, but otherwise he's sticking to the bank's ultra easy monetary policy that seems to defy a global trend toward tightening. Here to tell us about this is Jeff Usher. He has had of research for Japan Insider. They're based in Jeffersonville, New York. Jeff Usher, thanks very

much for being with us. Tell us about this move or non move by the Bank of Japan. What does it mean? Well, I think what it really means is we're going to have what they call quantitative and qualitative easing forever um. The key point that was in today's meeting was that the Bank of Japan is going to be unable to meet its two percent inflation target at least until the end of March of and probably even

further so. Because we've had such easy money for so long, it's putting pressure on Japanese banks and it's also affecting the Japanese government bond market. And so what they did today is essentially apply a few tweaks to allow them to keep q QUO E in place for at least another three years. Jeff, I'd love to talk about the Japanese economy because by a lot of measures, it's doing really well. I mean, the job market is the best in this nineteen four There do appear to be some

very small shoots of inflation. So what's the Bank of Japan waiting for here? Well, um, I think they're just waiting for, um, you know, the overall inflation to to get up towards two percent. I mean, my personal view is that two percent is actually unrealistic target. Uh that you know, if you look at a chart of inflation going back thirty years, the only time they've hit that is when you've had a consumption tax increase, and that's not really the kind of inflation that you want. So uh,

you know, the job market is great. We're getting a lot of older workers, post retirement workers, a lot more women entering the workforce, but wages are not rising as quickly as you'd expect because most of the new people coming into the workforce actually get paid less than the full time workers. Jeff, you were the first non Japanese individual to work on the floor of the Tokyo Stock

Exchange back in correct, Yes, when you had a floor. Okay, can you explain to people how the Japanese economy is different then let's say the economy in the United States and its relationship to let's say you are Japanese government debt. Okay, people are very worried about Japanese government debt, and I think that, um, you know, one of the issues here is that, unlike the US, most Japanese government debt is owned owned, excuse me, by Japanese and so you don't

really have to worry about capital flight. Uh. The in fact, there's a real shortage of long term debt right now because again the Japanese economy has been very wealthy for

a very long time. And UH, insurance companies, UH, the g p i F, which is the government pension fund, all of these big investors really don't have a lot of places to put yen to work in the domestic market, so um, you know, I think as far as the economy goes, it's a very diversified economy, much different say the Chinese market or other emerging markets, and in many ways people might be surprised to hear that it's similar to the US, and that Japan's dependence on exports is

about the same as the United States. It's only about seventeen or eighteen vent of GDP where it's ay a country like Germany relies on about on exports for about forty of their GDP. The reason why people have been watching Japan so closely recently, I mean not not to mention that it's one of the major economies of the world, but also because it was clear that the Bank of Japan's moves are having a pretty significant impact on global bond yields. I mean, even the sort of suspicion that

they might make some sort of policy tweak. Last night, UH sent longer term yields in the US U in Germany higher. That has obviously reversed as they show that they were not willing to make those tweaks. Um, the idea that you're saying q E forever to me indicates that will be a consistent and ongoing pressure on yields globally. Uh do you see it that way? Yeah? Absolutely, There's

there's no doubt about. Um. Japanese investors are being forced to put more of their money overseas, and in a sense, it makes it a very easy trade because, uh, if you know that the b o J is going to be keeping interest rates pretty much where they are for at least the next three years, but let's say yields in the US or Germany are rising, Um, you know, you're just gonna get wider spreads between Japan and uh, you know, the US and Europe, and that's going to

attract more Japanese outflows to these markets. And Uh again, as those spreads widen, it becomes much more profitable for Japanese investors hedge their currency as well, So that makes it even easier for them to to put more money let's say into ten your treasury, Jeff, does this based on your analysis, do you see the Japanese end weakening against the U. S. Dollar? Um? Just marginally. I actually think the dollar again is pretty much stuck in a

trading range. Um, I think that you know, we're kind of trading between one oh seven at the low end and one thirteen at the upper end. And uh, honestly, if you look at how the Japanese economy operates, if the end gets a whole lot weaker than say one fifteen, it's actually bad for the domestic economy because don't forget, Japan imports all of its food, all of its energy,

and so um. You know, once once you start raising those import prices, you leave less money available for discretionary purchases like say, refrigerators, and that keeps the economies, uh consumption weak. Jeff Fusher, thank you so much for being with us. Jeff Usher, head of research at Japan Insider, talking about that b o J decision that we got overnight, definitely causing a reversal of some of the yield curve widening.

Now you're getting flattening once again. Apple reports its results after the close of trading today, and here to help us understand what to expect is our own John Butler. He's our senior telecom services and equipment analysts for Bloomberg Intelligence. Please follow John on Twitter as we all do at John Underscore Butler twenty five all right, John Underscore Butler revenue annual revenue for Apple in the neighborhood of two

hundred and fifty billion dollars. What are you going to be looking for when Apple reports results after the close? I am looking at services, which includes the App Store, and I'm looking at the other products category which includes air pods and HomePod and Apple Watch, and together those two divisions are really driving future growth at Apple. Right if you look at the current quarter, we're in a

very good iPhone cycle. Right now, people expect iPhone revenue to be up fifteen percent year on year, same with the total growth at Apple. We should get top lene growth in that same range. But as you look down the road, this is a company and transition from a hardware centric model to a much more balanced model of hardware and software sales services. So that's the important thing right now is to show is for Apple to show

people that it is successfully diverse fating away from the iPhone. Yes, because all iPhone sales are close to all iPhone sales now are coming from existing users who are upgrading to

new phones, better phones. So it's driving decent sales. But what you really want is to leverage that platform to sell services and to sell your other products that work well now with the iPhone all right now, you know, in the interest of trying to find an expert to sort of really put the questions to you, because we know that, you know, we are a little older in the demographic for the iPhone and the Apple products. We have a guest here in the studio, Zeke Abramowitz, who

is nine years old. And you know, it's always good to go right to the to the customer when when the yeah, well yeah, mother pays the bills, parents pay the bills. But Zeke, I know you have a question for John Butler because you are an Apple efficient now to go ahead and ask John a question why are so many people buying? But you know it, it's what I was just talking about a moment ago, which is the software and the services matter most now. And so

people love playing games on their phones. So if you take a look around the train at night, everyone has a game up on their phone and that's paying for those games. And do an Apple do Apple customers pay for games versus Android users. I'm not a gamer, so I'm gonna say apps in general. I mean, because I think there's that note that Apple users they're more willing to actually spend money. Yes, so, so people are spending up and a third of App store sales are games,

believe it or not. And the App store is growing over thirty percent a year, or it seems so, because if you look at services as a whole, it's growing well over thirty. So. Um. Back to the question Sun, why do people are people buying games on the iPhone? The answer is yes, and it really is driving growth at Apple. I guess you know, it's sort of interesting.

I was reading a story and frankly, this was something that Zeke and I were talking about this morning, that there were some reports that Fortnite that the popularity has actually helped Apple. And the question is, when you have a free game like that, how does it translate to money for Apple? How does Apple profit from these games?

That's a great question. I'm not quite sure, except to say you make in game purchases of sort of added items for your character in the game, So Fortnite is actually generating a lot of revenue as people buy these sort of ancillary shields and swords and all this stuff. And I have to believe. Given Apple's model of charging roughly for all app store sales app sales, they're probably making a portion of that, so that may help them.

What's the breakdown right now? What are you looking for in terms of services versus iPhone sales with respect to the sheriff revenue for Apple? So I I'll go back to that thought of I look at services and other products together because the other products are all the new products including air pods and home pod and so forth, and together with services, they're over of revenue where they were last quarter, they were close to total sales, that's versus the iPhone at over sixty of sales. But over

time you'll see that mixed shift. And that's very important because those services and other products are more profitable than the iPhone and so it will boost not only the top line and help to boid growth on the top line, but it's going to fuel bottom line growth. So that is a key factor. And I noticed the street is focused on it more and more every quarter. You can just hear it in the Q and a Zeke has another question, John, are money people buying the Apple Watch. Yes,

the Apple Watch is doing quite well. I don't have the numbers in front of me. But I think it's fair to say that has been a real hit product for them, and it's here to stay for a while. It's hurt a lot of the watch companies, hasn't it. I'm not sure on that. It's in a different category. It probably has hurt Fitbit and some of the sport and fitness watches. Um do you think, yes, Okay, that

a given. But just to connect that with the facial I D recognition that is coming with all of the new Apple iPhones, combine that with the watch, can we see personalized medical information coming to a digital assistant near us? I actually would love to see that. And health and fitness is a big silo that Apple is is very focused stun they haven't made as much headway as as

you would think. I mean, I look at the world of healthcare and how you could really leverage that iPhone and watch combination to take advantage of that and grow your business there. So stay tuned. I think there's more to come on that front. Well. It should be interesting to see whether Apple can give people a sense of confidence that big tech in the US is here to stay, because certainly people worry about that, So this is going to be the moment of truth upon us at four

thirty pm Eastern time today. I think the stuff that ailed Facebook and Google is not in Apple's wheelhouse, so they may be safe there. But we'll see, we will see. John Butler, thank you so much as always for being with us. John Butler, Senior Telecom Service as an equipment analyst for Bloomberg Intelligence. The leverage loan market is the sister asset class to the US junk bond market, but it has grown so quickly that it is now eclipsed the bond market, and a lot of people are wondering

has it gone too far too fast? Here to talk about that. Jim Schafer Co. Had a public fixed income and deputy chief investment officer at a gun USA asset management in managing over a hundred billion dollars. He comes to us from Chicago. Jim, A lot of focus is on the collateralized loan obligation part of this world. Just before we get into talking about about this issue, what is a collateralized loan obligation? Well, it's a structured vehicle.

At first off, thanks for having me. It's a structured vehicle where the collateral is loans, and you have a capital structure that's tronched and the investors in vast where they wanted on the triple A is the double A all the way down to the equity component of the capital structure. It's just the tronched vehicle where the loans are the collateral and there's a series of investors and you as a manager by loans and they as the investors, get to return profile depending where they are in the

capital structure. And as far as the actual loans are concerned, how did they differ significantly from bonds, shorter life, shorter maturities. Yeah, I mean they're number when they're not securities first off, so their their governance provisions are a little bit different. But generally speaking, they don't have call protection and they're generally floating rate obligations so they reacht on libor and then they can be refinanced at any time. And those

are the two fundamental key aspect that the markets focuses on. Okay, so sort of fast forwarding to today, we've seen record issue ince in recent years in the leveraged loans space, with the market uh surpassing a trillion dollars and a lot of it's been driven by these clos that basically packaged loans into bonds. Is this market getting frauthy right now? Well,

let's let's step back for a minute. I mean, the demand makes ends because you've got a floating rate obligation and you've got a potential for a rising rate environment, and you have a strong fundamentals and so the strong fundamental picture makes the fault environment remain low, and that gets Barrow comfortable that they're gonna invest in lower quality credits like high heel bonds or leverage loans. And you've got a floating rate component that can protect you against

writing rates. So the demand makes sense. Is the market getting sloppy? Well, what you see as you move later on any business cycle and you see a supply demand and bounce. So we see a lot of demand for this sloating right asset class and that because of that, Barrows can take advantage of that, they can take advantage of because they can get better pricing, better covenants and really push the envelope if you will, on that those

two elements. And so does it get sloppy, Well, it gets more aggressive and you lose covenant protections you loose, you get a lot of really you know, really aggressive pricing, so you're the riff to the downsid becomes slightly higher. And if you do see a market turn, and we don't look at we're comfortable with fundamentals. We don't think the market's gonna We don't see defaults taking up in

the near term. But when it does, the types of trans fashions get that get done later in a cycle in more of an aggressive form are the ones that caused some concerns. So you could see you could be sowing the seeds of a more more of the next wave of default in the market. Ten tends to get a little bit sloppy as it gets later in the cycle. So, Jim, there was an article on the Bloomberg yesterday talking about how there does seem to be an increasing amount of caution.

I guess you would say on the part of some banks certainly releasing reports that note some of the issues with the leverage loan market, are you also seeing it in terms of their supplying you with credit lines for leverage loan investments or warehousing housing loans? What are you seeing on that front? Yeah, so what we saw, you know, we saw tremendous UH demand for collateralized loans and a willingness from providers in the capital structure to be very

active participants. There's been you know, the CLO demand is an extremely strong for what I mentioned slower and apsid strong fundamentals. Uh and and so you'd expect that as we went to do our next CELLO, we saw in the warehouse facilities where you ramp up you buy loans to ramp up for the next issuance of a CLO, we saw a little bit of a pause from a

few of the providers. And I don't know if that's a function of the aggressiveness of the structures or just there's been such a strong amount of issuance in the first part of the early for the last year, they're just standing back and take a little bit of pause to say, okay, let's let's take a look at this market. But generally speaking, a little bit of pause is what we saw. So you're seeing a little bit more caution on behalf of banks that that would have to pay

more money to hold onto assets that become riskier. In other words, UH, there does seem to be a little bit more risk aversion or hard. I don't know if that's the right I don't know if that's the right way to look at it. Actually, I'd say what we saw is in those who provide warehouses, so warehouse facilities, when you're ramping up the CLO, there's a period of time you need to aggregate a number of loans that you get the scale you need them to issue the

CELLO in the warehouse facilities. And there's still demand, there's still interest in warehouse it just was not as much as we had seen the last twelve months previously. So those providers a warehouse this is a light or ramp up and put loans that you can then issue to PELO, there were just as not as many people interested in doing that piece of that piece of the of the puzzle, if you will. So these warehouse providers they don't have

the inventory that they previously had. Is that accurate? Well, I wouldn't use the inventory of loans. We're in the market as the manager buying the loans and putting them in the warehouse facility. They're the ones backstopping, if you will, taking the first lost piece or back stopping or providing the capital to support the warehouse they're the ones that

took a little bit of a pause. So that's not that there's not you know, actually the supplying the loan market picked up a little bit recently and again that so that supplied the man in balance we saw for the twelve months previously where you had a lot of demand from the clo marketplace and really the mutual fund marketplace and okay, supply decent supplying the low mark grade that's applied to man and bounce the gay borrowers a lot of you know, the abilty to really you know,

drive lower pricing and better covenant protections or more beneficial covenant protections to them. That changed a little bit because now if the warehouse providers pause a little bit, it kind of goes the other way, whether there's slightly less of ability to do more cellos and thus that strong technical support we've seen in loans slows a little bit, and you've had a lot of you know, a lot of loans come in at prices that are priced very aggressively.

If demand falls is a little bit, you can see those prey those loans back up a little bit. For this the last thing I saved that is from our perspective that would be kind of welcome. We wouldn't mind seeing loans back up, but we're still pretty comfortable fundamentally with the loan market and the underlying borrowers. But pricing has gotten you get to aggressively. You see that supply demand and balance. So Jim, I'd love to broaden out here. I'd sort of put loans in the perspective of the

fixed income spectrum. What are you seeing that you really like right now? And where do you see the least attractive investments within fixed income? That's interesting question. I mean, I think the fixed income marketplace because where it kind of depends in your outlook for rates. Um. You know, we actually have become a little more comforted high yel

bonds right now. We've seen a kind of a you know, we are our told of return expectation for high heel bonds in the first of this year was you know, three quarter five percent. We saw kind of a flat first half of the year, a lot of it driven to the big the big move in rates, the big jump in the ten uere had. It got people a little bit concerned about how the velocity of the rate move. But as that's leveled out a little bit. We now see that the high yiel aft because the faults remain low,

fundamentals remain strong. We think that could be an interesting asset class the back half of the year. We don't mind the leverage loan asset class as well. It's it's been on a very consistent return had on this year. We thought it was going to be a fortified percent toldal return year with and it really we saw that the first half of the year was up you know, two and a half odd percent, and we kind of

expect that to continue. So we although we really like loans to start a little more balanced there, but like high yield, we like some of the structured asset classes. You know, we were a the egan is a is across the six income spectrum. We've got a deep focused on research across boat not only UM, not only credit, but AFRA structured asset classes. So we like the structured asset classes a lot. Think there's some value there. We've

got to leave it there. Jim Schaeffer, thank you very much for being with us CO Head of Public Fixed Income, Deputy Chief Investment Officer for Agon USA Asset Management, helping to manage over three hundred billion dollars worldwide. President Trump's administration is considering going around Congress and granting a one hundred billion dollar tax cut, mainly to the wealthiest individuals in the United States. This according to a New York Times report. We want to find out more, so we're

going to turn to Andrew Mayeta. He's global trade and economy reporter for Bloomberg News, as well as Andrew Silverman, government analyst for Bloomberg Intelligence. Andrew Mayeta, thank you so much for joining us from d C. What is this that we're talking about here? Yeah, So the Time spoke to Secretary Manution at the G twenty and he indicated that the Treasury Department is looking at potentially allowing people to account for inflation in calculating capital gains taxes. I mean,

what does that mean in plain English? What it means in plain English is if I bought a hundred dollars worth of stock, say five years ago, if I can account for inflation, uh, it might actually be worth a hundred and fifty in present terms. And that means that the taxit that I take is going to be lower. So that's what that's what they're considering. Andrew Silverman, just follow up with this affect both short term and long term capital gains. Lately, just on long term couple of

short term coupital gains are tanks of the ordinary income taks. Right, So, Andrew Silverman, can you give us a sense of whether this has been tried before and what the pros cons are for this? Well, so this has been suggested before. President H. W. Bush thought about doing this in nine There was a memorandum that was written by a few lawyers in Washington and Sean Pittman are now Pillsbury, went through UM and they suggested that Uh it was it

was perfectly legal. UM and the president UM consider this, UH, talk to Treasury about it. They actually decided against it. But when Bob Dole ran for president nine six, he said that he wanted to do this by FIAT and those lawyers who are the memorandum in in UM UH in nineteen UH eighty nine, then reissued it in in twelve UM saying that they still supported the idea and thought it was perfectly legal. Andrew Mayda just to run down

the capital gains tax structure right now. It has to do with where you fall in terms of your income, right, Uh, if you make let's say, I think over a hundred and what what four hundred and twenty five thousand dollars year as a single taxpayer, you're going to pay long term, long term capital gains. Is that accurate? Well, I'm not a tax expert, so I'm going to pass on that, but I will say, I mean, there's no question that this is going to primarily benefit the wealthy. And you know,

you have to remember the context of this. This is coming months before mid term elections. If you look at a tax plan that is going to potentially have more appeal to voters. Chairman Kevin Brady, the Republican chairman of the Tax the House Ways and Means Committee, came out with a plan that, to me, I think sounds a little bit more palatable to the electorate. He said. He proposed, for example, just making permanent the tax cuts that the

Republican Party passed earlier this year. So that seems to me like a little bit more of a vote winner than than this hype of tax which is which will primarily benefit the wealthy. Yeah, that's exactly what I was gonna say. I don't really understand how this appeal is to sort of the populous movement that President Trump kind of is known for. Aiming at Andrew Silverman, I guess I'm struggling to understand what's the economic benefit that that

they argue is achieved by this tax cut. Well, I think that you can spend it a number of different ways. But you know, you can say it's a it's um to the wealthy, and certainly a lot of all the people are investors and would benefit from this, but it's also a benefit to for win ks and pension funds, and that helps all of us. So it's not necessarily something that just helps the wealthy, and it really helps everybody that's an investor. It hurts the government collect Andrewmata,

can you jump on in here. I mean, what's the economic sort of throw down on this. Is there some kind of consensus on whether this is helpful or hurtful for the economy, this kind of policy, Well, it's a it's a good question. I mean, you know, in the New York Times article, I read that somebody who's justifying this any idea that you know, people will be buying and selling more assets. But generally speaking, when economists look at the biggest bang for the buck, they're looking at

measures that actually increase income or increase consumption. Uh. So, you know, all of those things being equal, you're probably going to get more of a bank for the buck by doing something that benefits, you know, the lower class of the middle class, people who have less disposable income. So, UM, I don't know, I guess the jury the jury would still be out on exactly what which type of approach

would would generate more of an economic boost. Andrew Silverman just quickly, Uh, you said four oh one ks and iras would be uh favorably treated. Why is that because when you withdraw the money from them, it will be at a lower tax rate. Well, they're investors, they're large investors, but they don't have any tax consequences, right, I mean, it's all tax deferred, but their investors do when they

take the money out. You mean, that's right, exactly, Okay, all right, So when you withdraw let's say from the four oh one K or you end up with drawing from the RA, you take the minimum distribution whatever it is, then you would end up being less because the actual investment would be index to inflation as a result of

this potential change. That's exactly right, so so um uh like like Andrew was saying, if you invest a hundred dollars thirty years ago and it goes up to a hundred and ten dollars, um uh and uh you know if you have gains, you know, a hundred and ten dollars um you have no um, no capital gains tax of you indexit to inflation. Well done, all right, thanks very much for explaining this, gentleman. Andrew Silverman our government

analysts for Bloomberg Intelligence. And Andrew Mayeta are global Trade and Economy reporter for Bloomberg News, joining us from our Washington bureau. 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 abramowits one before the podcast. You can always catch us worldwide on Bloomberg Radio.