Borthwick Looks for Weaker Dollar, Sees Strong China Currency

Chapter Lane and Company. Doug Borthwick always a pleasure dollar Euro one oh seven. The Federal Reserve raises rates, but the dollar weekends tell us. I think that the Federal Reserve raising rates priced in pretty much over the last three or four weeks, and so there's an expectation that was already there. What people are really looking at is the statements on the comments that came out from the Fed,

and I think there are nota in that. People realize that the Fed raised rates even though growth is still not where it should be, and so there's an expectation that rather than having more rate rises going forward, there may be less. I think on top of that, though you've got this overall layering that comes from the Trump administration, where they're out there talking about how they want a

weaker dollar. And I think that what you're seeing this week is you've seen the Secretary of State go out to Asia talk to them, and since she's been out there, you've seen Dolly and start to come off considerably. You've seen in Europe, you've seen the German Deputy financements are talking about how to higher euro isn't that bad and they'd like to see higher rates in Europe. And so there's a little bit of a change here in terms of both interest rates but also where people think currency

should be. Certainly, with the Fed raised rates by twenty five basis points, but now Europe is talking about maybe ending their chewi and raising their rates as well, so that cancels some of the effects. But also if the Fed, if the US administration was to look for a weaker dollar, they'll be looking forward against the currencies that they have obviously the largest deficits against. You've seen Dollar Mexico come done considerably, You've seen Dolla Enne come off, and you're

also seeing the Euro start to rally. On Our belief is that you're going to see at the G twenty meeting this weekend, there's going to be considerable discussion about currencies pressed forward by the new Treasury Secretary, and that's going to cause some movement in that they're going to be no longer approving countries going out there and weakening their currency for the for the pure sense of to get more trade. If that happens, you'll see Dolly inn

come off. You expected the eurogo bid, You just actually Dolla Mexico go lower. And I think that what they're doing is they're setting the table for a Plaza cord two point oh perhaps at Mara Lago next week, sorry, next month, when the Chinese premier is coming over. Doug, I want to pass through some of the things you were saying, because you made a lot of fascinating points. Number one, perhaps the feed is taking a backseat to

the policies of President Trump. The fact that Rex Tillerson has been going around and meeting with UH foreign officials. We are looking at the end strength and against the dollar. The pound is strengthening a lot against the dollar, and I'm wondering if the pound is not probably the target here but UH in Asia, how exactly would conversations with Rex Tillerson and some of the leaders of those countries

directly and immediately trickle out into currency movements. Well, I think it's a quick pro quo in that, you know, when the Trump administration came in, they struck a very hard line, they said, you know, why should we be out there policing your waters And since then they've managed to clock it back somewhat. But I think that by having that fear out there allows these negotiating room, which

is suddenly the President Trump obviously likes. By negotiating room, you say to them, look, we don't want you to stop interviewing in your currency markets. In return, will end up being your policeman and continued to pay for our bases out there and to look after you and protect you from North Korea, for example. And so I think that there is there's a direct correlation there between you know, USUS essentially using the big stick in one hand, but

then speaking softly in the other. The softly speaking is right now in the currency market, spend the big swift and is thus sending out carriers out to that region. Douglas, I wonder if you could just talk a little bit about Italy and the sort of contradiction between how Italian seemed to view using the Euro and perhaps the French or other members of the European Union, and maybe just

put it in the context of the Dutch elections. Well, I think that everyone uses for for someone like Italy that's more in the fringe in terms of normally if they didn't have the Euro, that have much much higher interest rates than they do right now. I think France is closer to the center and closer to where Germany is, and the administration would be high, but maybe not quite

as low as they are right now. But certainly all countries in Europe benefit from being part of the Euro because they get that Germany part which lies them to have much much lower rates. But now that can be constrictive at times as well, which the UK certainly, though not part of the Euro, is noting as part of the EU, and that it means you give up a lot of sovereignty. And I think that the Italians probably

rather a little bit more sovereignty these days. If they want to get the industry going, they probably rather much weaker currency, so they could sort of rev up their um, their their their economies. But you also have you know, lots of different sex coming out. There are are are facts, are a new positions, are are in each of the markets that are moving towards more of a nationalist state. They look at what Trump's done in the United States and they think maybe this is our turn, you know.

They look at the UK leaving the EU and they think maybe this is our turn. They point to immigration, they say, maybe this is our turn. But then you get the election, you know, last night, and obviously and it came out and maybe they know that the right wing side didn't get in quite as many votes as they expected to, and so it seem as a little bit of a fizzle, which obviously helps the euro to rally by its dirty pips since that dnaiment came out. So and then there's a lot of there's a lot

of different things, you know. Scotland also as part of this whole discussion, Scotland then turns round and says we'd like to leave the UK, but at the same time we'd like to be part of the EU. Well, it's not going to be allowed by a lot of countries in in Europe because they don't want different areas within their countries to splinter r and say we want to

do the same thing real quick thirty seconds. Doug, out of all of this uncertainty, what's the one currency that you think is going to move the most in the next six months. I think that everyone believes the Chinese currency is going to weaken. I think it's going to strengthen considerably. I think it's going to strengthen consivably because I think you're gonna see the Euro move higher, dollar

yen move a lot lower. I think that on the back of that, because the Chinese currency is based on a basket, yourency the Chinese currency strengthened, especially given that there's a lot of positioning out there right now that has short China as opposed to along China. Fascinating. Thank you so much for joining us, Doug Barthwick with a contrarian call for a strengthening Chinese currency. He's managing director and head of f X at Chapter Lane and Company.

UH and we're looking at a dollar that is weakening against most other currencies from Asia to Europe. After the Federal Reserve spoken as the u AS goes out and tries to sort of change the conversation with respect to currency manipulation. The ticker for the Bank of America, Mary lynch U s issuers of high yield retail bonds is really apropos. It's hurt h u r T and it works very well because these bonds have been in a world of hurt so far this year. They are the

worst performing bonds in the high old bond market. And I want to bring in someone who knows a lot more about this, Jenna g. N Nelly. She is a high yield analyst and also focuses on retail and gaming at City Group, and she joins us here in our Bloombrig eleven three oh student studio. Jenna, We're so glad you could be here, And I want to start with the idea, uh that we've seen all of these losses, we've seen mounting bankruptcies and the expectation of more Where

are we in this cycle? How much more pain are we going to see in retailers? Hi, Lisa, thanks so much for having me in today. Um having to be here, you know, I I think that's you know, a great question, and I would say that although there are a lot of investors out there that are thinking this might be the opportunity and the time to jump in. And I do still think that there is more pain to be had.

I mean, we remain underweight the sector. UM. And I think that when you look at a lot of the issues that investors are concerned about right now, especially for some of these larger LBO candidates, about potential for you know, moving assets, looking at loose covenants. UM. You know, more macro issues like border adjustment, taxes, arising cost environment UM, and really some of the bigger secular issues that we're

facing like increasing online print penetration, changing consumer preferences. UM. There's a whole host of things center investors, you know, need to be worried about. It's coming out them from every angle. So I think we're still going to continue to see these play out in two thousands seventeen. And some of the LBO companies that you're talking about, even Marcus Jake, Crude Toys, r Us Claire's, Jimberry, many more. Uh, how many of these do you expect to go bankrupt?

Oh that's a good question. I mean, look, the reality has a lot of them don't actually have liquid the issues as it stands right now. UM. You know, when you think about Nieman, UM, you know, even if Claire's has some time left, Jimbury, you know, could be a two thousand and seventeen event, but they do still have liquidity and you know a lot of the maturity runways for at least the next one to two years. Um,

So I think we'll see restructuring. I mean a lot of them, you still have you look at the sponsors. They haven't taken a lot of money out of these l b o s, right, so they're gonna do everything that they can kind of kick the can down the road and do some sort of an exchange with the bond holders to really do everything they possibly can to avoid bankruptcy and preserve their equity cushion. So I don't think we're actually going to see a ton for some

of these bigger names in two thousand and seventeen. Maybe down the road, um, but we have some time. But so if that's the case, they're basically going to squeeze everything out of everywhere but the equity holders, which means the bond holders will be potentially really bad for all of the debt owners in these companies. That's the fear.

That is the fear, and that has been you know, I'd say, the one of the big topics so far here to date is you know, covenants, covenants, covenants, um everyone I think you know, it started with Player's last summer, I mean, and and then J Crew um with with um, you know, the moving of IP assets where everyone's exploring it now as a possibility for all these companies, UM, you know Nemon Marcus looking at their covenants and saying

what assets could they move? They just you know, announced the other day that they are doing something of this nature, moving assets into an unrestricted subsidiary for the purpose of of dealing with bond holders. So, UM, we're seeing loans, especially in retail, you know, under some pressure. Uh. And and there's a concern that look there in these documents there are um, I don't want to say, not loopholes, but certainly flexibility to um you know, to to move

assets out to the detriment of the creditors. So we're seeing that in levels. And it's one of the biggest concerns on investor's mind right now. It's the supply available for the kind of investor that you are dealing with, because you know, supply begets demand in many cases in terms of yes, I mean I think look generally, um, you know, the supply of of bonds out there. I mean, we've definitely seen more sellers than buyers in retail, especially

in most real money accounts. And you think about it, more traditional investors versus hedge funds. Traditional guys have been um largely underweight for most of two thousand and sixteen, and then even into two thousand and seventeen, we've had a lot of hedge funds and more distress players I'd say hovering but not quite stepping in pulling the trigger. No one, no one pulling the trigger, but some are

increasingly pulling the trigger on the opposite bet. I mean, you're talking Genna about how it's very common discussion about how much pain has been in the retailers. And there was a story on the Bloomberg just a few days ago about how the big short now is in commercial mortgage backed securities that are tied to retail properties. Also, we're seeing short interest on retail reads rise to the highest level in more than two years. Is now the time? Is this the big short? Is now the time to

short sell this stuff? Well, you know, I think it's the first time that we've ever had actually heard any commentary from the retailers where they're staying there starting to see rent relief. Right, We've been everyone's been asking about this trade probably for the last two or three years. How could the rots be doing so well and the retailers be doing so poorly. It doesn't make any sense. And for the first time we're hearing the retailers say, look,

we are starting to get some relief. We're starting to see more favorable clauses when we are extending their leases. But that being said, um, you know, the average lease life, you know, you're still looking at five to ten years for a lot of these guys, and so it's going to be measured in terms of the timing of the closures. It's going to be more concentrated in the lower end malls.

When you think about the dispersion of A, B and C malls, the C malls are really there are a third of the malls in this country, right, and so it's gonna definitely be more concentrated towards those. When you think about the closures that we're going to be seeing a Macy's in J. C. Penny. That's where these you know, the anchor stores are going to be concentrated again, it's going to take time to play out. Um, And you know, I don't want to say it's a crowded trade, but

I don't. But um, it's certainly been a popular one and one that you know, I think a lot of investors have tried to express a view. And you don't have to say it's so popular. It's not crowded, it's just popular. But gently just to be clear, so SEA malls are the ones that are sort of lower tier and lower end and A or this, yeah, more luxury,

and B is in the middle exactly. I think the perception is that traffic has been um just week across the board, but when you look at the dispersion, UM, A malls have really held up pretty well, I would say, I mean, occupancy rates are still very strong. Um, you know, the traffic to those malls is still reasonable, maybe flat

to download single digit. It's definitely been more concentrated in the lower end where you're seeing um, you know, occupancies decline and um the traffic you know, um, you know, you know week or we've we've heard from a few different retailers that when you think about the dispersion of comps, um it could be anywhere from two to three percentage

points for an A versus B versus C mall. So if you're a mall, you're down to you you're down for in your be mall, and you're you know you're down six and your semall just I mean, it's not a perfect rule of thumb, but we've heard to that you know that degree for different retailers, which is why you're seeing such negative comps for a lot of these guys. Thank you very much for coming in and spending time with us. We look forward to having you again in

the future. Jenner Gnelli is the high Yield Analysts for retail and gaming from City Group. Thank you very much well. The Bank of England today held its benchmark interest rates steady, but signaled that an increase may not be far off. Indeed, one official dissenting in favor of higher borrowing costs, and others saying that it might not be long before they do the same. Here to tell us more about the decision and also a look at European politics and economy

is Jamie Murray. He is chief European, Middle East and Africa economist for Bloomberg Intelligence, and he joins us from our London studio, Jamie, thanks very much for being with us. Tell us about the Bank of England rate decision, well, I think the markets have probably correctly interpreted it as more hawkish than previous statements, and it took most people

by surprise. One thing I would say is that this may not last that long because the member that elected to lift rates is only going to be on the Monitary Policy Committee until June before she is replaced. And we expressed in Forbes that's right, yes, so we expect the one. We don't know who's going to replace it. It could be could be anyone um. And the other thing to bear in mind is that the Bank of England is making this contingent on what happens to the

data now. So far the data is surprised. On the upside, growth has been stronger, inflation has been roughly where most people expected it to be given what's happened to Sterling. Now, if that continues, then yes we could be in for earlier rate hike. But our view is that the economy, or at least the data will begin to sour little bits GDP growth will slow as that exchange rate effect

starts to squeeze real incomes and lift inflation. Well, Jamie, when you talk about the border market and how it responded him in two year yields in the UK more than doubled in response to the Bank of England's decision UM to not do anything but sort of the hawk ish tone, and Paul Dobson, Bloomberg team leader here noted on the Market's live blog that the smoking gun from the BOE minutes that made the market sit up and pay attention was with inflation rising sharply and only mixed

evidence and slowing activity domestically. Some members noted that would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction and policy support might be warranted. In other words, uh, they would be more willing to go ahead and hike rates faster with just a little bit more news that would that would that would edify this sense of of inflation rising. Yes, so I completely agree with Paul's assessment there.

The thing is that we I'm not expecting the data to show that source of improvement. The wages data came in remarkably weak just this week. UM. The and despite the fact that unemployment is falling to very low levels, so there's no evidence whatsoever that domestically generated inflation is rising. And that's what the Bank of England needs to be

looking at. Well, if that's what they need to be looking at, I wonder if you could provide a little bit of context for Brexit, the ongoing negotiations and then dive into Dutch politics. For us, well, we're up to with Brexit is that that's the Article fifty is likely

to be triggered towards the end of this month. It's been delayed slightly by some adjustments to the bill going through the House of Lords, and this means that Britain will be on an official exit path from the EU and will have two years from the end of this March to reach an agreement with the rest of the EU.

If it doesn't, then all likelihood Britain will default sort of World Trade Organization rules, which should mark a very sharp increase in tariffs and a lot of goods being bought and sold between US and the UK and the EU. So that's we're up to with Brexits. My feeling is that I think it's most people's feeling is that the negotiations are going to be incredibly challenging. There's not a loss of There's not a lot of things going for Britain in this respect. Goodwill could we say not a

lot of good will between Europe. That's exactly the word escapes me a couple of moments ago. So yeah, there is not much good will. Um So, my my feeling is that the rest of the U has no incentive to show goodwill to Britain because the more it does that, the lower the hurdle of other countries to leave. Is it encouraging to the outcome of the Dutch elections, the fact that the liberal candidate one and the sort of

populist anti Islam candidate was pushed aside? Does this sort of give people a stronger feeling of less political risk right now in European markets? I think in markets it probably is having that effects. I'm not sure whether that's the right interpretation of it. Though the Dutch election was quite unique in that had had the extremest party one the the they had no chance of governing. Really that is not the case so much in other places in

the Eurozone. Now, what I would say is that each of these countries is remarkably different, and it's very easy to lump them all together. So it's easy to imagine. The typical distinction is core versus Prephery. So you have the Netherlands, France and Germany and one group and then you have the Italy, the Spains, the Greases and the other. Now, actually there's significant differences even within those categories. So in let's take in the Netherlands. In the Netherlands, only five

of under thirty five's voted for the extremest party. In France, however, one third looked like they're going to vote for Le Pen. Now this is this is a real difference in the in not in demographic makeup, in among those groups who is voting that it's completely upside down for between France

and the Netherlands. Does it get you frustrated when you hear people like us in the United States talk about Europe and it's like, oh, the populous way of going through Europe and all of these elections and sort of lumping them together. Um, is it? Is it just or you know, in Europe our market players really making the distinctions that you're talking about, or even in Europe, is this sort of there are a lumping together kind of

that might lead to unwarranted conclusions. Well, I think it's no no worse than how we'd we describe the US over here. Um. So I think the there is a tendency to lump these economies together and treat their politics is the same. And one distinction, which I think is probably the most important thing for a U S audience to recognize, is that the Euro is remarkably popular across most of the Eurozone, including France, where it isn't popular. However,

is Italy and that really singles out. And that's so if you really want a place to look, you think, if you're worried about risk of the Eurozone, Italy is that place fascinating. Thank you so much for joining us. Jamie Murray chief E m E a economist for Bloomberg Intelligence. Day after a federate hike, and you can't find much concern in risk your assets. You've got stocks gaining, you've got junk bonds gaining. Uh. And there was a story on the terminal that Kredent sweets and UBS analysts are

telling their wealthy clients it's not too late to buy equities. Well, we're gonna talk with somebody to find out whether he agrees. Hugh Johnson, chairman and chief investment officer at Hugh Johnson Advisors, which overseas about one point two billion dollars, and he speaks with us now from Albany, New York. Que. Do you agree. Are you telling your clients to don't worry, go ahead buy stocks? It's not too late from one point of view, Lisa, Yes, I think that's a good idea.

You have to have some stocks in your portfolio. The simple reason for that is that when they asked the question, which I think is the key question now is are we at or even near the end of the current stock market economic interest rate cycle. The answer to that, based on the performance of the markets and the performance of important economic variables, is clearly no. So you need to have a meaningful allocation to equities. That's the first part of the equation. The second part of the equation

is what about valuation or current valuation? And if you were to ask me, and everybody answers the question differently, if you were to ask me, are we undervalued, fairly valued or overvalued? I'd say we're a little bit ahead of ourselves, you know, we've had a big run since the election, and so common sense alone says that it might have be a little bit pricier overvalued. And I would say that the upside potential between right now and the end of two thousand and eighteen is about one

percent at the best. And so the most important thing is yes, meaningful allocation to stocks. But if you're going to add to your portfolio of the equities in your portfolio, wait for a good entry point. This is not a good entry point. You need a lower level to be buying stocks. That's in my view. Hugh Johnson, Perhaps you know an investor that would like to take some profits, what would you recommend they sell? Uh, that's a really great question because I get that question almost every day.

There are folks that obviously feel very uncomfortable with the kind of move we've seen up in stock prices. Me, do you I don't mean that they have to be uncomfortable. They can even be gratified and say maybe they just want to sell half a position. But I'm wondering, what would you sell if you just want to Yeah, I'll be honest. With the three sectors which have had the big move uh since the election and of course, they're right at the top of the list, are the financials.

The second second too, that I would mention is first of all technology, which has had a big move to the upside. And then I would take a very hard look at the healthcare stocks because there's a lot of fundamental problems. There also some industrials that have had a

big move to the upside. The real issue is is if you've had a big move up and some of the stocks in your portfolio, particularly the financials, you might want to take and it's a great question, you might want to take some of that position, shall we say off the table or sell it? Well, I just want to give you the credit where credit is due, because I remember back in August of last year, you were pounding the table on financial stocks when no one else

was really going out on a limb like that. Yeah, that was probably as good a guess as any. I didn't expect, obviously that Trump would win the election. I didn't,

I I thought at the time. But I really thought after the election of Trump that, of course, with deregulation, with dot Frank maybe being under under the gun, obviously, with the better outlook for the economy based on the so called Trump bump or the Trump stimulus plan that we might be talking about higher interest rates, were talking about higher interest rates would accrue to the benefit of, obviously, the the profits of the commercial banking part of the

financial sector. So you know, um, yeah, it looked good in August. Uh, and it looked particularly good when Trump got elected. But the move up in the fourth quarter of in one sector alone, that's that's quite a bit. And and there again common sense says you might want to take some off the table. Okay, So, Hugh, let's say somebody does sell some of their financial holdings. Uh, they sell around the edges to get prepared for perhaps a better entry point. What should they do with the

proceeds from those sales. Should they keep it in cash? Should they go into bonds? Well, you know, Lisa, I as I say, I think I'm worried be concerned about valuation. So when I'm concerned about valuation, would would be one of the reasons why I would sell some financials, maybe technology industrials, maybe some healthcare stock. I might go into cash for the time being, and again look for a

better entry point. If someone were to press me and ask me, what's a good entry point, I would say, look, it's got to be five percent below current levels, because unless we go down five from current levels and even a little bit more, um, you know, in my judgment, the upside potential between the current level and the end

of two thousand eighteen would certainly not be that attractive. So, just from a big picture portfolio management point of view, you've got a sharp decline in stock prices before I would use that cash. Cash is not a bad thing to have right now. I'm not barished by a long shot, but I'm just saying from a timing point of view, valuation point of view, I have my concerns how much in your ideal portfolio, how much would be in cash right now compared with say at the end of last year. Yeah, what,

we we've worked pretty much. We've been pretty bullish. And so if a and said to us, look, I have got a target for equities and fixed income of fifty and equities, I'll let you, folks go to sixty of the portfolio and equities when you think conditions are times are good, and be down at thirty five percent when you think times are bad right now, and quite frankly, the end of last year we've been at six and

that's where we're going to stay. But um as far as adding to positions, and we're not going to change that adding to positions, we'd wait for that decline in stock prices before we would add to positions. If somebody said to me, if somebody said to me, look, I'm really concerned about the current stock market, I would ask them the question, Look, you've got a fifty percent target

with a little bit of leeway both sides. Maybe what you want to do is to reduce that target from fifty down to or to what we would call a sleep at night level. Uh, that would be the decision of the of the client. But right now we have over fifty percent allocation to equities, and that's based on the fact that we think equities are the place to be for the time being. Thanks very much for joining us.

Hugh Johnson, as always, he is the chairman and the chief investment Officer of Hugh Johnson Advisers, joining us from Albany, New York, where he helps to manage over one point two billion dollars of customer assets. 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.

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