China's Recovery Lacks Consumer Demand: China Beige Book

to podcasts, and on Bloomberg dot com. So there's a lot of trepidation about what would happened with China GDP data, of course, China being one of the test cases for what happens to an economy when it's going through COVID. So we got the third quarter GDP data over the weekend and year over year it was up four point nine percent, which was quite the miss from what economists were looking for, which was how ive and a half percent. It was, however, better than the previous quarter three point

two percent. But really with China, you have to take a step back and talk to somebody who knows how all of this is put together, and no one better to do that than Leland Miller, China Beige Book International founder. So Leland four point nine percent doesn't sound like a bad rate of growth for an economy that's been hit extremely ours by this coronavirus. Explained to us why this is a shocker, Well, you know, this is a really important number, but it's a really important number for political

reasons more than economic reasons. So you have China saying to the world, look at our response, look at how well we've done. We're back to year on year growth. And look at everybody else they haven't done done as well. You know, we're someone to look up to. Now the difference between four point nine and five point five. I understand that the street is is agitating over over the mis here, but this number is very realistic to start with.

You know, if you look down at what our data are showing, you're not You're still not seeing that year and year improvement. You're seeing tremendous month on month, quarter and quarter improvement. Things are certainly getting better, but it's very important for them to have a year and year number uh and and improve improvement and uh and So that's what they're that's what they're currently announcing, right and

now we also got retail sales. For example, you're over Europe three point but still you know, down seven in September in terms of year, today's year over years so a lot of mixed data. So give us your impression of how the Chinese economy is doing. So as you say, you know, all the data is pretty managed. But at the same time China does seem to be growing. Is that the case consumers do seem to be spending. China

does seem to be getting over the hit from the coronavirus. Sure, things are getting better, you know, it's still a supply side recovery. If you look at what's happening on the output side that has been with driving GDP. You know, there was a better September figure for for for retail sales. But if you look at retail sales UH from the beginning of the year to now and compare it to last year, it's it is like you said, down over seven. So this is not a consumption driven economy. This is

not a demand recovery. This is the Chinese government deciding that they need to get their numbers up, and so they're making factories work harder and produce more stuff. There's something to be said for getting the growth number up to some degree, but I think the idea that people are really worried about whether this is four percent or three per center five percent. It's not a terribly healthy recovery. It's just a much more healthy, dynamic and recovery than

we're seeing in the rest of the world. So Leland's how much of that sort of unhealthiness that you're talking about is related to coronavirus and how much was coming anyway, because it was always a question mark about how much the trade war had impact to China's economy and just the flow of goods and services between China and the US.

Right Well, I think what what the coronavirus did is it put China in a box uh and forced it to use tools like property like heavy infrastructure stimulus to get the growth number back up, which was something that it didn't want to do and it hadn't been doing

for the past several years. When you look at our data and you look at official data, you see that since seen when they were very worried about growth metrics in the run up to the Party Congress, things that actually slowed down over time, and yet the government did not go back to this let's juice, let's build bridges to nowhere, Let's let's build all these infrastructure developments. No one wants to be in they had basically pushed away

from that because they are legitimately worried about debt. What I think coronavirus did is pushed them into such a corner that they said, look, we're gonna have to do, We're gonna have to do and we're gonna have this growth number up. So it is unhealthy levels of debt that are building us up. It's he's the same dynamic scene and much of the rest of the world, but you know, China has a much bigger problem this historically. So, uh, there is a recovery, that's good, but yes, the way

we're getting there is not healthy at all. You have said the China made some major colandestine changes to its economic data reporting over the weekend. What were these clandestine changes? It all sounds very token dagger. Yeah, we've been we've been having a field day on on our Twitter feed, uh,

talking about this. But look, you know, if you look at fixed asset investment, which is the proxy that the Chinese used for for for investment, you see that, uh, in twenty there was a number for the first three quarters, and then you see a number for the first three quarters of the number in nine was three trillion yuan higher than in but when the when Beijing put out their data last night, they said that things were up eight percent, So we were parsing through the how was

this a typo? Why would they possibly do it? What we found is that essentially the Chinese government has reserved the right to no longer report figures regularly. What they're gonna do is they're going to rejigger the figures as new inputs come in. But they're not gonna announce what those new inputs are. They're not going to announce what the changing metrics are. They're not gonna announce what the

components of this sort of index their building is. They're simply going to report a number and that number will be new based on the needed changes every year. So you're gonna have, you know, you have basically three trillion yuan they made go away in their fixed asset investment data. To report a year on your increase, it doesn't make any sense at all, but they've reserved the right to do this. Going forward, Leland, what will you be looking

for next out of China? In order to give us an indication of you know, not just the health of the Chinese economy, but what that would mean for the health of the US economy at this point. Well, you know, I think on the Chinese side, you've got to look at the retail and how it's recovering over time, and not just not just for for one or two months. But look, China's recovery is going to be based on

what happens in the rest of the world. If the rest of the world does not get coronavirus contained, we dipped down into a second wave. That China's data are going to be hurt. Its recovery is going to be hurt because it's not divorced from the rest of the world no matter what's doing back home. Leland, thank you so much, as always love to get you on because you do all of your research as well, and you know you you gather the data just like many economists do.

But on the ground, Leland mill or China Beige Book Duncan donuts. Remember like to make the claim that America runs on Duncan, and I'm sure it was true a lot of the time. Well, here is the man who Duncan run on. Robert Olsenberg is the former CEO of what is now Duncan Brand's used to be dunkn Donuts and author of Around the Corner to Around the World, A Dozen Lessons I learned running Duncan Donuts. Robert looking at Duncan Donuts, now, how does it resemble the company

you first took over? Were very different? But I when I joined the company as CEO is twenty five years old, a cocky kid, freshwood and n b A. And we had something on the order of a hundred stores. I think now today we have something on the order nearing twelve thousand in forty one countries. It's been transformational, pretty phenomenal. Well, a good leader is needed in order to scale that kind of business, particularly you know, something that you could

call a generic enough business. I mean, I know Duncan Donuts are very very different from other types of donuts out there, but there are a lot of donat chains. So how did you do that? What kind of leadership skills does it take to scale a business like that? A great team, a clear strategy. When we got it right, we were very successful. When I got it wrong, we suffered the consequences. Luckily, in the thirty five years we

got more years right than we did get wrong. Uh, and a great product and that commitment I think basically to do and to create a set of services and goods better than the competition, and that was always kept us agile and kept us creative and growing and changing. As the time change, consumers and competition are constantly changing, and companies have to change as well. But those are

the ingredients I think that made for superior performance for us. Obviously, it's a different set of challenges every year, every month, every day in business, right, but a pandemic is something that doesn't come along too often. If you were running Duncan now and you saw what was happening all sorts of restaurant owners not being able to save their businesses, you know, big businesses depending on PPP funds in order

to to continue, what would you do? I mean, how do you survive something that's just completely all encompassing like that. I never had to face anything quite like an worldwide pandemic, but did have to face certain cataclysmucker existential threats the very survival of the business. I think. Uh. I'd comment that the pandemic as I see it, and its impact on the restaurant industry, really is a tale of two different stories. On the one hand, the first story is

kind of devastating. It. Basically, the National Restaurant Association says that they expect something on the order of fift all restaurants open, and six fifty restaurants may be permanently closed when the dust clears. That's painful. There may be a million and a half or more people out of work. That's also disastrous and painful. On the other hand, the

second tale is a lot more optimistic. Those firms that invested early, which is one of the elements of facing a crisis of pre preparation, that invested in convenience and delivering on all plat forms. However, consumers wanted to access the product drive through windows, home delivery, online ordering, understanding the application of the social network that exists in social media. Those companies that invested, in my view, will not only

survive the pandemic, but will thrive. Companies like Duncan that have invested and those kinds of um new developments, pre preparing continually looking to delight their customers better than the competition, will be the ones on the other side. Unfortunately, it's going to be some pain left by the independence and a lot of people out of work. Hopefully, those chains that survive will be able to absorb those, but it only will be over time. Fore warrant is were armed.

These days, there's a lot of quote unquote business heroes in Silicon Valley that you know, people look to some unlikely characters for inspiration. Who inspires you in management these days? Robert Well, he's no longer actively engaged in the management of his business. He now runs a major philanthropic activity. But the person I'm most inspired by Bill and Melinda Gates.

I find them to be extraordinary citizens, extraordinary people, and I marvel at their brilliance and at their commitment to mankind. And all those CEOs that are currently in the CEO chair and in the boardroom chair, who do you admire? Well, admire the people that I'm closest to and the ones that I had the privilege of being able to serve with day in and day out. So I was on the board of Sonic, and I find Cliff Hudson, who was a longtime twenty years CEO of Sonic Restaurants, an

outstanding leader. I also found Um Goodness. His name escaves me for the moment. How Patrick Doyle from Dominoes was an extraordinary leader and ranked among the best leaders by CEO magazine for years. Both both of them were extraordinary leaders, agile, kind, smart, and just thoughtful people. Robert, I'll have to ask you about what your thoughts are as we approach the election,

and you know, very very divided country. Um, you know, many issues plaguing the country, and it just seems to be sometimes just difficult to even talk about it because you know, finding middle ground or finding sort of anybody willing to engage is just a little bit difficult. Well, what's the first priority that the next president, whether it's Donald Trump or a Biden administration, what's what should be

the first priority in running this country? Thoughtful planning and setting a moral tone for the country and bring us back together. I think that our country can only take so much chaos at any one point in time. So a good leader has to be very clear and crisp about both the strategy, what the country wants to be, what it wants to have, and the four or five specific leavers that are most important for all in order

to be able to bridge scarce resources. So whether it's a company of family or a country, and that's a critical element. And the second element is to thround yourself for the best people, complementary set of skills that will help you accomplish that, and then you have to communicate all the constituencies to mobilize them behind it. That works on a company, and it works on a country, and

we need a leader who's got those abilities. And you know, it certainly sounds pretty easy when you say it, Roberts. So I hope that whoever starts to run the country next reads your book. It's just out and it's a fantastic read. It's called Around the Corner to Around the World. A dozen lessons I learned running Duncan Donuts and you can have a donut with every lesson there for for your dozen lessons. Robert Rosen very former CEO of Duncan Brands and of course Duncan Donuts as it was. Then,

thank you for joining us. Just a wonderful conversation. Let's bring in our J Gallo. He's senior portfolio manage your head of the Municipal Bond group and delighted to have him are J. I have to ask you how much time have you given to the competing tax bands? Um. You know, obviously we're looking at more of a likelihood that there's going to be a President Biden and the Biden administration at the moment. But it's not fully you know, for sure, but he's definitely ahead by a long shot.

And some of the polls and you have to have done a little bit of work on it, what have you decided, Well that the tax plans of the two candidates are are vastly different. Um. You know, I don't I agree with you that though that the polls make it pretty likely that President Biden is coming as opposed to being vice President Biden, And I would just suggest that it's just not based in the cake yet. I think that this election is going to be closer than

a lot of the polls suggest. Remember it does come down to state by state, and I think there are a number of toss up states where President Trump UM may have some of his voters being under sampled and not showing up in the traditional polls. I know that's somewhat of a of a partisan view, but I'm just saying objectively, that's what happened in We saw a lot of Trump support that was not accurately assessed by the polls leading up to it, and the shy Trump supporter too. Well.

Given that, then on the fact that your head of the ministal bond group, are there states for your sort of you know, making making that better or loading up the boat a little bit, well, I would say this. I would say I think that the greatest impact on muni's from the election outcome would be in the event of a blue blue wave. So Biden wins Capitol hialth, House,

Senate are completely in Democratic hands. That would open the door for UH for an increase back to thirty nine point six for the top marginal tax rate, which is where I was before the Trump tax cuts. I would also impose a minimum thirty nine point six on all investment income for people who make more than a million

dollars UH. That on average would increase demand for municipal bonds. Also, banks who shed munis in droves after their corporate tax rate went to from thirty five, they would be facing a tax right under the Biden tax plan. Also Polish communis, so I think munis would would fare relatively well compared to other fixed income in a blue wave undeniably UM And you'd also probably get a bigger stimulus plan. So the bigger stimulus plan will help all state and local governments.

Which ones would move the most, the cheapest ones? Uh? You know? So so states of like New Jersey in Illinois where spreads are wide, you think their bonds might actually fare pretty well in a relative sense in a Biden victory. So it does seem like there's at least, you know, some kind of chance of a nice little

pay day here. How are you hedging for that? Even if you don't believe that that's what's going to happen, or you're you know, you're more you're more than convinced either way, there must be some hedging trades that you've been putting on. You know. I think that markets are pretty bad with binary risks. Um, you know, zero one outcome is just not easy to perfectly price in and

being of the election. Uh So in terms of just adding duration or reducing duration, or adding munis or reducing communis, uh you know, you you you need to have a little more confidence than than fifty fifty. So it makes it tough. Since I think the chances of this election being indeterminate come election day and maybe in fact being contested, I think that's greater than the markets are currently pricing.

So if you're really going to try to hedge, you know, to your question, I think you would need to go into options markets. Okay, there's not a lot of options on munis, makes it really challenging. I think, uh, one important fact here, if we have a contested election, market risk access don't like it, treasure gilds probably go down. Ultimately, regardless of outcome, that event will fade and we will know who the winner is. Biden would be probably more

bullish for munis. Trump would be somewhat less bullish formmunities. But on average, we're no matter what happens, we're going to get a stimulus plan. The question of sizing in time is still open. In fact, we're still talking about it before the election. I just doubt that that's going to happen. And how much states and local governments get as well, of course, absolutely extraordinarily different. Um r J. How are you trading the coronavirus in the various states?

Obviously Wisconsin is just in trouble right now. We had Icago's marriage coming out and saying that you know, she wants to avoid lockdowns, but it's getting to that tipping point and she absolutely will if necessary. Are you doing any kind of municipal or you know, trades related to the coronavirus across the States. Well, the coronavirus has had a huge impact on municipal fixed income across states, locals

and revenue bond sector. I would say we, as our investment group, our MUNI effort, we have been pretty cautious on g os UM for the one primary reason gios didn't blow out that much relative to the overall triple A MUNI scale during the onset of the COVID crisis. Meanwhile, revenue on like airports bonds backed by hotel taxes areas that were very heavily impacted by the COVID shock due

to travel plummeting for example. That's where we've looked for opportunities because that's where the risk premiums blew out and bonds became very cheap. As far as the o's are concerned, UM, we haven't been playing coronavirus regionally all that much. We have been playing the coronavirus recovery in our in our revenue bond sectors. So we've added to airports for example. We've also we have some overweight positions in senior care

living centers which have been heavily impacted by this. But there's a lot of good survivors in there, and if we can pick them, we get a nice wind. So I think every MUNI investor worth worth their salt is spending a lot of time on coronavirus, not only geographically, but from a sector standpoint. And on the latter we've been much more active than playing the geographies. So interesting, Or j thank you for that insight into how your

portfolio managers are looking at all of this. Or Gallo is senior portfolio manager and head of the Municipal Bomb. The group manages almost twelve billion dollars, but the whole UH company has nearly six billion dollars in assets under management, so a loss to a lot to look through there, But then there's a lot of municipal bonds out there as well. It's time now to talk deals. It has been quite the year in many many different ways. Let's

bring in Rob Brown, CEO of Lincoln International. So, Rob, we've had so many deals this year. I mean today obviously there's an early ten billion dollar old stock deal in the shale field, but talk to us generally about the appetite for companies getting together this year. Well, the

appetite right now is incredibly strong. Um. We obviously went through a period earlier this year when the economy shut down and you saw a huge fall off in deals, And what we've seen coming out of that is companies that have a good COVID story to tell, meaning they either performed well during the economic slowdown or they've bounced back or their viewed as a sector that is going to maybe even more favorable post COVID. Those companies are

out for sale. And what we're seeing is as investors, both strategic and financial, are aggressively putting money into those businesses, and in many cases, we're seeing valuations of those businesses at the same or even better than pre COVID levels. So that's an interesting, you know, part of the discussion for me. Why are prices holding up? I mean, you know, prices for almost everything are you know, are not holding

up the way they were pre COVID. And and and yet it seems that for companies there isn't that much of a discount of COVID discount being built into these prices. What am I missing? So? I think it's two things. One, I think it's classic supply and demand. So much capital was raised over the last five years, particularly in the

private equity world, but but also corporations. Going into the downturn, you had stockpiles of cash, so you had capital that wanted to be put to work in acquiring companies that for a period of time during this past year, it was unable to be put to work. So you have the demand to put capital to work, and then you have kind of a natural selection. The companies that are coming to market right now are the best companies. As I said, they're the ones that showed growth during the downturn.

They're the ones that are in resilience sectors that were proven to be essential. So I think as a result of that, you still have more money that wants to be put to work in buying companies than there are high quality companies to buy, and that supplying demand has kept prices very elevated. What about people trying to negotiate stock for deals. I mean, we definitely saw that that

set off back in March. Obviously we've recovered a loss of ground, but at the same time, is it more beneficial for companies to try and do an old stock deal or a major portion of the deal in stock. I think that's very companies specific. I think to the extent companies field stock is still a little undervalued, they tend to not want to use stock. I think to the extent companies feel like, hey, my stock is fairly valued. Uh,

they want to use it. So we are seeing it be used, but we're not seeing it being used in a materially different way than it was pre COVID election. So there is a very strong possibility that both the White House and Congress turn blue on November three and that tax policy will change, including the capital gains tax policy.

Are you seeing people actually come to market with their business because they don't want to have to face paying what they might have to pay pay in tax if they wait until there is a potential Biden presidency to sell their business. Yes, we are definitely seeing that an Interestingly, as I said, it's become a very hot m and

a market. And I think what's happening is the fear of cap gains rates going from you or you know, the TRUP administration would like to lower in the fifteen that fear is actually pouring gasolene on what already is a hot market. So not only are we seeing um in particularly for private sellers. Uh. But not only are we seeing companies come to market, we are in the market with some things where the sellers are saying listen. I know initially I said, hey, if this closes in

Q one, that's fine. I'm not in a hurry. What we're hearing is, I'd really like to get this done this year. I don't want to take that risk, even though traditionally when Congress makes tax increases, they make them effective the next year. When they make tax decreases, they have on occasion made those effective at the beginning of the year. But but legally and legislatively they can do

whatever they want. And so we are seeing sellers feel like the odds of the blue wave are probably better than they felt they were a couple of months ago, and they just don't want to take the risk of having to pay doubled in taxes if they sell their business. Well, I have to ask about sparks. They blew up this year. I mean, there were a couple of big ones and then suddenly almost everything you know related to deal making

seem to be you know, a spack being raised. It's the new private equity or something at what happened to have this explosion of special purpose acquisition vehicles. Well, that's interesting because we are seeing SPACs have more interest in our deals that we're selling than we ever had in the past. And I think part of it is UH. Spacts, where you were historically viewed as the capital of last resort. They were very dilutive to sellers and they may be

weren't raised by the most reputable investors. That's changed. I think people are feeling like, hey, SPACs are a way to access public markets without having to go through UM, you know, the typical road show and I p O. So they still can be more dilutive in a sale. But I think part of it is UM. Again, it gets back to the ability to raise capital, and so a lot of SPACs were raised pre COVID UH that

needed to put money to work. They're raised by sophisticated investors with good reputations, and you know, I think as the public markets have held up, UM, becoming public is still for the right company. It's a way to go public UH in a in a quicker, in sometimes cheaper way. So we are seeing more SPACs than we've ever seen. UH. They're not the right outcome for everybody, but we are seeing them participate more in the companies we have for sale.

All right, Rob, but thank you for that updates. Always fascinating to speak with Rob Brown, CEO of Lincoln International on the deal landscape. Once again. A major deal today in the shale space, Consho being bought by Conago from nine point seven billion. Thanks for listening to Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Bonnie Quinn, I'm on Twitter at Bonnie Quinn, and I'm Paul Sweeney. I'm

on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio