Central Banks Going Too Far With Tightening, Bianco Says

right after the US election. And to bring in someone who can can tell us, you know, whether this is the beginning of a more protracted bond market route or whether this is just a hiccup in an otherwise low yield environment. We have Jim Bianco, who I am so pleased to speak with. Jim Bianco is president of Bianco Research, which is based in Chicago. Jim, what is going on here?

You know? Is this just uh, you know, rates kind of normalizing in a a little bit more of a choppy fashion that they have been, or is this the beginning of something bigger? It could be the beginning of something bigger, but I don't think. So let's talk about what happened June, which was not that long ago, uh, just two weeks ago the tenure yield was it two eleven?

And the next day there was a bunch of central bankers that spoke uh Mark Kearney of the Bank of England and Mario Dragging of the European Central Bank, and they hinted that even they might be looking at a period of when they're central bank stimulus of bond buying might end. Remember now that all bonds in the world, and developed market government bonds in the world, one third

of them are now owned by central banks. So if all the Fed has already stopped buying, if the ECB is gonna stop buying, in the Bank of England is going to stop buying. The bond market responded accordingly by seeing a rise in yields a lot. Now we've seen the tenure, you'll go up, but your europeanials have gone up a lot more. That ten year German Bund is at an eighteen month high on that news, So I

think that's been the catalyst for it. The problem is that they're assuming, they being central banks, are assuming that inflation is going to kick back up. If it does, then all their hawk ish talk about raising rates is probably justified if it doesn't and these uh and inflation stays low, and for the last several years, that has always been the thing. Inflation confounds by being too much

lower than everybody thinks. If it stays there, then they might be overtightening and they could be seriously impacting the economy in a negative way. Which way do you fall on this? I think that they're going too far. I think that inflation is not going to pick up to the degree that central banks say it's going to pick up.

We did a study a couple of weeks ago where we looked at uh FED speech and usually when inflation surprises them, they start using the words models and for tasks a lot, meaning that O'll pay no attention to us being wrong. Now the future, according to our model and forecast says will be right. They've used the words model and forecast more than they have at any point in the last eight years. So they're really betting that they're going to see a rise of inflation, and I

just don't see it right now. And if they intend on reducing the balance, she at least the Federal Reserve raising rates more, and we were to get this kind of pull back from the e c BE in the Bank of England, it could be very problematic for the economies because you could wind up tightening to the point where it actually hurts the economy, something we haven't seen

yet so far. I'm wondering, Jim, what's your take on whether this bond market sell off happened on thin volume and it was simply a result from a summer market where a lot of people were out of the office versus uh, people were positioned for this and we're waiting for this, and and and and have been. So the market has gotten so one sided that it can readjust quickly and more violently. Let me make it just an

an don't for you about the thin volume. Um JP Morgan has reported now that among their high institutional clients that they have mobile apps for them to trade and they have now done at trades in excessive a billion dollars with somebody on their phone. So all those traders that are summering in the Hampton's over the Fourth of July weekend, they're not in the office, They've got a phone, They've got their two buttons away from doing a trade.

And that's exactly what they have been doing, and so I don't buy the argument that there's there's this thing called thin summer volume. As far as where the where the markets go, as far as the positioning goes in the marketplace, I think it's rather neutral. We look at things like the Commitment of Traders report, which is a breakdown of open interest, and we see that the ten year UH, the speculators in the ten year contract are

very very long, and that's supposed to be bearished. But then we've got the opposite in the ear dollar, and when you add them all up, they're kind of in

a middling kind of range. So I don't see UH positioning as being they were extreme right now, which suggest that this this rise and rates might have a little bit more to run, but not much more, because if the if it's going to continue to raise rates without inflation, I think the market is going to start worrying that they're gonna hurt the economy, and that could be very

supportive for interest rates. At what point do you think, for let's say, on the tenure, what yields do you think are going to be attractive enough to bring people in buying in bulk. I think to forty would do it. We're only a couple of asis points away from that right now. I think that if you see a two point four facts fill in the blank after that, I

think that people will start getting interested in the bond market. Jim, you know when I when I always speak with you or here hear your voice or read things that you're right, I always think, Okay, Jim is in Chicago, so he's kind of the steady eddie and all this. You know, he kind of sees it from a perspective that many people on the coast and so on may not be

able to see. And then I of course thought, but Chicago was in Illinois, and you know, you've got a problem, and I'm wondering if you could talk about just the pensions and these problems with the budgets in particularly in Illinois, and what you think the effects of that are going to be in the economy Illinois on the road to ruin? How about that? Um? And unfortunately I'll say that we're just further along on that road than everybody else. They all seem to be on it. Um. Real brief, here's

Illinois problem. They passed the new constitution in nineteen seventy Section five of the new Constitution said you cannot change a pension plan or any retirement plan that is done by the state, city, or any municipal workers. They've tried to amend or I'm sorry, they've tried to change the plans, the courts have struck it down because the constitutions says you can't change them. So we've got this giant pension problem that cannot be changed short of a constitutional amendment.

I won't go to the the mechanics to that, but let's just say that a constitutional amendment in Illinois all but impossible. So that's the first problem that Illinois has. The second problem that Illinois has been at that point is that they have been raising taxes to try and meet this pension problem. They've been driving people out of the state. The state of Illinois has the largest exodus of people in the country. The city of Chicago has the largest exodus of any major city of people in

the country. We've just raised the taxes again. The Illinois Policy Institute says that, congratulations, Illinois, you've got the highest tax rate in the country. Now, all in tax rate in the country. That's gonna drive more people out of the state that's going to lower the number of people that pay taxes. That's why I mean by Illinois on the road to ruin. Now, what fixes this? Well, when

the Illinois voters decide what they want to be. Do they do they want to be a quasi socialist state and continue to just raise taxes and raise taxes and they don't care if they drive everybody out, or do they want to correct this by electing politicians that will pass the constitutional amendment to start start fixing this problem. The Illinois voters haven't decided yet, and that's why we will remain on the road of ruin until they do

decide what they want to do. Thank No, but Jim Bianco, I mean, you know, as they say, tell us how you really feel. No, but Jim Bianco, You're you're highlighting so many very pertinent issues, and we want to thank you for doing so. Jim Bianco is the president and the founder of Bianco Research, and yes, he is based in Chicago. There's a holiday coming up, Lisa of Romwitz. It's only happening online though it's ending in the Amazon world,

and it's called Amazon Prime Day. And this apparently is a moment in Internet experience that people have waited for all year. But we've got someone who has to do this for a living, just Hendra Warrel. He is our Global Internet and Consumer Electronics Analyst for Bloomberg Intelligence and he joins us from our nine sixty studio in San Francisco. Je Tendra, thank you very much for making time for us. And have you got the countdown clock or something to

this retail experience? Tell tell people who are not familiar with it or whose eyes are rolling into the rhead what this is all about. So basically this is a third year that Amazon is doing this. Essentially, what they want to do is for all their Prime members, make you know, products available, deep discounts so that you know, more people are aware of this prime membership service and

they attract more Prime members you know long term. Now, what we have seen last year two years basically every time they have a Prime Day one day, they always have like a you know, sales exceeding sort of expectations on the Prime Day, which reflects on the prey guidance being higher than expectations, but also a surgeon prime memberships. So what you can expect here is deals, more Prime members and um, you know, them selling more Equit devices to you this year to Tendra. How big are the

discounts and who takes the cut in profits? Does Amazon pass on the cut and profits to the suppliers, the stores that supply uh the goods? Or is it just them taking the hit and taking the loss. See, the goal here is not just chasing sales and profitability on this day. The goal here is to broadcast the brand globally, right, so attracting more prime members. So it's it's less to do with profits and more to do it just the acquisition.

I know, I understand that, I understand that, but I'm wondering if they discount things heavily, right, how does that? You know, are they basically taking a loss with the amount that they're discounting it, or are they just they're discounting it a little bit and they're still on certain

categories on certain categories. That would be true. But if you actually look at you know, the stuff that they sell the most or or hope to sell the most, is Amazon's own products, which obviously you know they're taking a loss on it as it is, so you know, it's safe to assume that they would be taking a loss on that. But the goal here is more penetration of you know, these devices like Amazon Echo and henceforth, the more tuned customers are to the whole Amazon ecosystem.

So if I said to the Alexa or the Echo machine in the living room, tell me the dollar amount of sales that Amazon does on these days, what would the response be? They don't disclose this number. What do you think it is? What kind of sales numbers are we talking about? So right now we will be probably approaching a billion dollars in gm re because you know, they have thirty hours this year versus twenty four, be they have more Prime members. How did they get how

did they squeeze those hours? Who did they call to get those extra hours? Well, they also expanded the number of countries over here, and they want to make sure that you know, all these deals attract as many Prime and Echo customers as possible. So, but what's interesting is with the Echo devices, like you have exclusive deals on them as well, and deep discounts on the Echo product

as well. So Amazon clearly wants, you know, more and more people to buy these Echo devices and rely more on it so that you know, they stay away from shopping elsewhere. Why don't all retailers do this, have their own holiday, not Black Friday, but have their own holiday that they managed to create manufacturing. I mean, Hallmark basically did that for like Mother's Day and Valentine's Day, right, So I mean, why why don't we see more of this?

It's interesting because you know what we have seen all the last three years, it's been reactionary uh stances from other players. So Walmart had something similar last year in response to Prime, but like this year, they are not doing it. But why aren't they doing it? Um? Well, maybe maybe one of the reasons it is probably their discounts are more flexible throughout the year versus Amazon. It's

it's a little bit more rigid on that stance. And also they don't have members you know for Prime members as for Prime Member, Prime Member, Prime Days, Prime Members only, so they don't have this sort of membership loyalty program going on across the board. And I think that's something that they couldn't do. They're buying an annual annuity stream and whatever they were, right, I mean, and they just had to figure out a way to finance what they have.

The stock is up one in a quarter percent. Right now, Amazon shares trading just under a thousand dollars a share nine dollars a share for for Amazon. So who who takes the hit from all this? Walmart? Oh well, Walmart interestingly didn't do it this year, like you know, have a reactionary sort of response, but not Walmart as much. But like you could see the other source, uh, you know sort of do take a hit from traffic being the worded away from them. But it's not about a

hit one day. It's about it hit on like what it means for the next year, you know. So, like I said, they have twenty two million more Prime members now coming into Prime Day versus it was last year, So more people are attuned to this ecosystem, more likely they want to stick to it. It's like a cable company, right, They've got more people paying a year. Absolutely believe it's absolutely But but what's interesting is that, I mean, it doesn't really cover your free shipping and all the goods

you get out of it. So what Amazon wants to do is essentially rely more on third party sellers through their Fulfillment by Amazon program uh, to sell it to Prime members. So that's how they try to recuperate. Uh you know all the costs that or some of the costs at least for now to um to give you the free shipping and all these services to tender world.

Thank you so much for joining us and gonna let you go and get started to get up your wish list for Amazon Prime to turn as our global Internet and consumer Electronics analyst for Bloomberg Intelligence joining us from San Francisco. Well, there is a market that isn't covered very much, but is vast and is of great importance to really the heart of the U S economy, and that is middle market lending. I want to bring in

Andy Stoyerman. He is head of middle market lending and head of late stage lending for Gallop Capital, its dollars under management based in Chicago. Andy, I want to talk about just the state of the market right now, because in the first half of broadly syndicated loans saw an unprecedented amount of issuance, and a lot of this was repricing. People try Our company is trying to get lower rates on their loans. Right now, we're starting to see some

softness in the broader, bigger loan market. What about the middle market, The middle market always is immune to what's going on the syndicated market. We do say if they have a flu, we get a cold. But middle markets more relationship blending, and our clients really don't have a choice. They don't really have a syndicated option, they don't have a non syndicated option. So middle market has some spread compression when the large market has spread compression, which is

happening now. But we're more immune and we tend to be more relationship lending, so clients tend to pick us and work with us even when markettions change. What kind of how much higher are the rates on these loans? Say on average then on broadly syndicated loans, they could be anywhere from about a hundred to a hundred and twenty five basis points. And if you're one of the leader arrangers, you get to keep most of the upfront fees.

Were in a syndicated market, the investment bank keeps the outfront fees and the retail market takes a very low o I D. So we actually get a premium in our spread because we're the underwriter and holder. I want you to just use if you can, the here's the image. The image is you have a pet and you have to go and you need to let's say, have it cared for, and you get the bill and you just

are in shock, but you pay it. Can you tell us about that and a loan that you put together and how that kind of exemplifies not only your role, but specifically the kinds of businesses and the people involved in the businesses, the owners, the operators. Sure Golf Capital works with middle market companies in the United States. Middle market companies really are the growth engine. That's where both changes happen because larger companies are kind of too bureaucratic.

We do like the pet space. We found over time that people actually like their pets, sometimes more than their children, and we'll feed their pets better food than they feed their children. So it's actually a pretty recession resistant elements. So we we've worked well. In the vetman, I'm sorry, it's proven to be true. We we could see it. I just want you to get the vet care so

people bring. Veterinary care is has been recession resistant. We have data going back fifteen years when we've done our first Veterinarians have two issues, right, they have issues of scale because they need to kind of grow their business and they have generational change issues, which is how do I monetize what I've created? So the private equity market has been great at creating these super companies where they consolidate all the operations get more efficient, so sometimes pricing

goes down better care referral sources. But also the owners of these businesses actually get to cash out and change their generational wealth. So our company we did was called pet Fet. Pet FETs one of the larger consolidators. And this is an example how we did a middle market deal and didn't go syndicated. Seven hundred million dollar facility in prior years would have been done the larger syndicated loan market. And just to be just this was this

headquartered in in um Uh, Connecticut. Headquartered in Connecticut. But but their operations are national and they're building clusters nationally and their owned by a pension plan, by a pen and plan and other lenders like like ourselves. Well, I want to pick up on the idea that a pension

plan owns this company Ontario Teachers Pension Plan. This I thought was interesting and this is a new development where you're seeing an increasing number of pensions invest directly in smaller companies in order to capture those higher yields that you were saying, we're uh north of one percentage point higher than more broadly syndicated loans. Um, how much are you seeing this as a trend and is it good or is it bad? So we've seen pension plans in

two places. One we've seen them as buyers of businesses where they've decided not to invest in private equity funds and pay the carrying the promote to private equity funds and they build their own teams. And then we've seen as direct direct lenders where they have huge obligations and they see the direct loans that we're making and giving to our investors and I'd like to participate, and someone

have the scale to get their teams together. So there are it's a delicate balance into when you say scale to get their teams together. Does that mean that they are hiring people who are specialists in direct lending to go out on behalf of them and source opportunities or does this mean that uh, they're getting sort of investment thecs together in order to invest. No, they're doing both. They actually have full teams, their marketing to the private

equity universe as if they were Gollop Capital. So they're out there using their balance sheet, using their pension plan and going out and sourcing loans on their own. Does this make it difficult for you? You know there, it does make it more difficult, But there is a scale, there is tenures. So Gallop capitalsman in business for twenty years. It takes a long time to queue. In this business.

One of the things that people don't talk about. You have to provide companies that revolvers the lines of credit. Having that operation is very time consuming, expensive and it's a big organization. They tend to do more the junior capital. Pension plans second lean high yield bonds and tend to buy into our loans, probably more than than to arrange and lead themselves because that difficult, real, real quick. Which pension plans have the biggest teams devoted to direct lending

um Ontario Teachers was there's a group called PSP. There are there are pension plans all of the United States. They're all doing it. They're family offices that are doing it too, high net worth individuals and family offices. So the Canadian market has been one of the largest. If you look at all the Canadian pension plans, they've been the most aggressive, you know, really in our market. That is amazing. They really so they're investing in the United

States to fund their future liabilities for their retirees. Yes, not our own pension plans. Some invest through us. Well what a trend. All right, well done, Thanks very much for being here illuminating an interesting topic. Andy's Storyaman He is the head of middle market lending and the head of late stage lending. He does it all at Gallup

Capital twenty billion under management based in Chicago. This is Bloomberg. Well, in the past week alone, the biggest emerging markets e t F debt e t F I should say, which trades unto the ticker e m B, has lost about one almost one billion dollars of assets through withdrawals. And this comes after many, many weeks of consecutive and record inflows. Here to help us understand whether this is the beginning of some kind of bigger route with an emerging markets

debt is Damien Sassaur. He's are fixed income strategist focus on emerging markets for Bloomberg Intelligence, and he joins us here in our Bloomberg eleven three oh Studios, Damien, thank

you so much for joining us. So we have seen this weakness, which is a little bit surprising, simply because there were so many big investors who were saying that right now emerging markets debt is in better shape simply because these economies are doing better and even a bit of of of a benchmark rate increase in the US

won't really shake it. What's behind the latest weakness and kind of continue, Well, I think the latest weakness, as we were discussing, it's it's been macro factors, right, I think six of spread movement for the better part of the past two years. An emerging market debt is related to oil US yields and China China consumption, So you

know that explains the bulk of it. I mean, we just hiked on June fourteen, and since that point, the meaning that the Federal Reserve raised indust rates again on in June, and since then we have seen this weakness precisely we are we are the Bloomberg Barkley's Emerging market hard currency aggregate benchmark indexes down one point oh five percent since the date of the uh the FED rate hikes. So so yeah, look, I mean it's still at five points percent year to date. I mean it rose nine

percent last year. So maybe you know, call it what you will, you know, um now that um, you know, maybe profit taking. Maybe you know you're just seeing people, you know, the markets are maybe a little bit over extended, etcetera. But but look fundamentally, and this is what we look at.

I think there's something bigger going on beneath the surface. Right, We've got em credit quality degradation, and we have tighter spread perturn of leverage, meaning the spread premiere that creditors require per unit of growth leverage has compressed by thirteen point four percent year to date. So you're just like that just to trans so in other words, that a left turn or right. So investors are basically getting much less compensation correct for extra debt that emerging markets companies

are building up relative to their income. In other words, they're becoming more levered and people are accepting less uh less an income. And that's exactly right. You you said it perfectly so so um, and it's not uniform, right, I mean, the level of leverage that is going up an emerging market, it's not going up across the board.

It's going up across most sectors, although you know, our analysis finds that mining and utility issues leverages actually uh the client um and it's not going to up across all regions. In fact, um well, in the Asia Pacific region it's gone up quite considerably, but in Central and

Eastern Europe leverage is actually declining. So you know, it's it's it's about these pockets, you know, these idiosyncratic regions and countries and sectors and and and and that kind of lends you to where you know the opportunities are

and quite frankly, where the risks are. Let me just try to put this into a picture for myself, Damien, because if you were brave enough after the November presidential election to go in and buy e m B, which is as we're describing the e t F, that is the proxy for how people feel about emerging market debt. If you were lucky enough to do that, you would be getting in and around one oh six, and I'm

just going to tell you something about June. This is the beginning of June, emerging debt e t F saw the largest weekly inflows in more than four years, adding one point four billions. So that was the beginning of last month. So may be when you're a smart investor and you read that and you say, oh, largest weekly inflow in more than four years. I'm getting out. I got in at one oh six, and now I can get out of at one sixteen. Great, thank you. I'll buy it back when it goes to one oh three

or one thirteen. And Pam, let me just expand on that. Thirteen billion has found its way into emerging market debt e t F in seventeen, and that's equal to thirty percent of EM debt e t F assets under management. I mean, that's an extraordinary number of few that either speaks to the marketing, the sales, or the actual underlying because how do you even know what's in this? Do

most people know what's well? Yeah, well, now, over se of the thirty four billion in the five largest emerging market that e t F s are U S dollar bonds, right their hard currency emerging market. Um, yeah, but I got right here. Russia is the largest holding in e m B right, you gotta you gotta Russia, Uruguay, poland Peru. It's interesting how so much of this has also connected to politics. Because I was looking at this list that you have in the story, which gives a really detailed

reckoning for each individual country. Why don't to just share some highlights with of that. Well, I mean Mexico, Turkey and so on. Well, you know, Mexico is an interesting one. I mean, let's start with Russia, right, I mean the thing with Russia is, I think you know, people are looking at Russia and they look at emerging markets, and

what do you look at? You look at growth, you look at effectively, what is the forward earnings potential of the country itself, and sometimes you ignore the basic fundamentals. Leverage in Russia is low relative to just about any country on the planet, predominantly because it's been sanctioned by the U S and the EU, and so it hasn't been able to tap the international capital markets for some time.

I mean, they have, but just not not the way you would you would have you would have thought, and you know, so, yeah, I mean they actually have low leverage, but on a forward basis, just extrapolating that out, their growth potential is not nearly what it is or what it once was, given the sanctions and given what's going on with geo political risk in Russia. Right, So you know,

and and let's compare that to Mexico. Our analysis looking at spread Perturn finds that Mexico um corporates and quasi sovereign issuers are actually being valued well below what their credit rating. Their trip will be. Credit rating now says they're actually being valued as a double B. So yeah, that's great information. Go along, Mexico, watch out if you're in Russia. Thanks very much, Damian Sasaur, fixed income strategist, Bloomberg Intelligence. 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