China's Savings Surplus Must Find a Home, Bannister Says

chief equity strategist that as step Nicholas. You know, Barry, when I mentioned earlier to Tom Keene that you were coming on the program, he kind of lit up a little bit. A little bit, he lit up a little bit. Yeah, I think that kind of he that was that was something that rang a bell with him. So I'm wondering, how long have you been doing this. I've been a strategist for about seven years, and then prior to that, for about three years, I was a analyst in the

equity side, sell side as well as by side. So you've seen the cycles come and go yeah, quite a few. Yeah, And I use the word cycle specifically be and I think you know why. And I'm wondering if you would just describe where we are in the cycles that you pay attention to. Yeah, one of the things that we've differed on from from the earliest days is that the Fed really began hiking in May, when what's called the Atlanta Fed Shadow Fed funds rate bottomed at minus three uh.

It's a complex calculation based on options pricing models, but what it really describes is the effect of q E rate suppression, forward guidance twist, and other things the Fed did. So we've been in a tightening cycle for several years, and I do think that at about a two interest rate on Fed funds, we will reach a point where it's just too much, but that's not going to happen in the next six to nine. So I think the market looks pretty good to the spring of eighteen. Well

until the spring of eighteen. What do you do. Just stay where you are right now. We've been a big positive bull on the reflation trade, more so last year on energy. I was three months early on that, and then un financials again I was three months early. We've had a few soft months since the election, approximately mid December, as the Fiscal House is trying to get an order

and it is very difficult. This is not an administration that thought it would win, so there was no government in waiting, and so things are in a bit of disarray. But I think things will get better. And with the clarity on that, the FEDS clarity that they've been giving some growth abroad, I think things look good for another move up in the reflation trade and that would include energy. Would that include financials? It is primarily financials, obviously banks.

It's also the capital spending side of technology, a little different than the social media side. It's also that includes software, semis and things like that, continuing or resuming the run that they've had. It also includes industrial and some basic materials. Although we have to be careful not to assume that the Chinese are going to employ a fixed investment model forever. Uh, they have to reduce that as a share of GDP.

But generally, yes, it's a more pro cyclical, more pro global growth bet and I think it looks pretty good into the spring of eighteen. So for the SMP right now, if you've participated and you're looking at it on an annual basis, although I mean every it really makes no sense, but uh, you're five percent, what would you do Yeah. One of the things about low interest rates is it can be two things. One, you can have a low

rate because you're fearful of deflation. So what you have is a very low real rate and a very low inflation rate, and that's not necessarily good. It does help your multiples, your PE multiples, because you're discounting the cash flows at a low interest rate. But when you switch you over psychologically from fear of deflation to a little more confidence in reflation, it's almost like a light goes on and you get the positive benefit of a super normal,

very low interest rate. Uh and as a result, you get a very very high PE ratio. So we do think that the dollar traily twelve month SMP earnings can be discounted at a twenty multiple, which is a inverse of a five mid grade corporate B double A yield, and that puts you are So that's our target this year. Well, all right, we're gonna we could write We're going to write that down and then we'll be able to see how that, you know, turns out for the for the

rest of the year. But Barry, you know, as I look over your notes and also receive emails from people who have followed your career in and listen to you over the time. Uh. They go back to let's say the post nine eleven UH world, and you wrote about

that what all the way back from two thousand and two. Mm. Yeah, in two thousand one and two thousand I've been writing about a a rotation into hard assets, which would be commodities and to an extent real estate and gold and things like that, UM and away from financial assets in terms of relative strength, and the commodity cycle two thousand

two roughly to two thousand fifteen. Oil as you know, rolled over in the OPEC price war and the FED somewhat premature attempt to exit and raise rates when the rest of the world was going to negative rates, so that tended to crash the price of oil, as we saw in So the commodity cycle was two thousand two to two thousand and fifteen, we played that. UM. The cycle now though, is most of a post debt deflation and a global rebalancing and de leveraging. It gets into

very complicated global, cross border macroeconomics. And so I'm spending most of my time now Pam, trying to be more knowledgeable of macroeconomics and uh that occupies probably my time. So so from that perspective, maybe you can share some of your more recent uh understandings. Yeah, yeah, Well, I mean, one of the things that's going on is the Chinese savings surplus, which still exists, has to find a home. It has to go someplace. If it stays domestic, it

inflates bubbles, drives credit growth. If it's exported, it bids up housing prices in Brooklyn, and uh and Vancouver and elsewhere and Toronto, you name it, uh and uh. So what we're seeing now is a push in this administration, which is I wouldn't classify it as mercantilist, but I would say that they're unwilling to have eat The surplus is the trade surpluses of every other country in the world. So we're seeing a change in the global monetary order.

This is a very big deal. It's on the scale of what happened in nineteen forties with the Breton Woods Agreement, and the US is no longer willing to be the dumping ground for the exports of all the other surplus countries, from Germany to Mexico to China. And as a result, there's a political change of foot and I think that will gel over the next several years and we'll see more of a balancing of savings investment in each country domestically, uh, and that will reduce this role of trade. And we

have to figure out what all this means. That's a very powerful statement. Well, the US had, I guess, decided to uh, you know, to allow first it happened in Europe after World War two, Martial Plan and so on, that the US would be a source of of of demand for their outputs so that they could modernize and develop into capitalist democracies. Um. But then they did that in Asia with some of the tigers, as you recall, and I recall because we've been around a while, in

the ninety nineties the tiger economies. UM. Before that, it was the Japanese and and of course the Koreans and Taiwanese. But what's happening now is China, which is simply too big, has tried to follow that model and it's been very disruptive. China is no longer a currency manipulator. China was a manipulator two thousand and two thousand seven when they built up their reserve position. So we gotta we gotta leave it there, but I look forward to having you in

the future anytime. Barry Banister, chief equity strategists stifle financial based in Baltimore, Maryland, Medicare and doctors. There are many surveys that have produced results indicating that doctors are foregoing entry into Medicare they no longer feel that it would make financial sense. Joining us now is Dr Chris Chen. He is the chief executive of Chen med and they are a physician led primary care facility and he joined

just now on the phone. Thanks very much for being with us a Dr Chen, Maybe you could just explain the role that Medicare and the reimbursement practice of Medicare works a little bit and so that we can understand how the doctor fits in and some of the ways in which you are challenging conventional notions. Hi, pim yep Um. So you know, our practice primarily relies on Medicare advantage UM, which is a subsegment of the overall Medicare UM population.

And what that means is is that there's a premium that goes from Medicare over to a health plan um. The way that we're able to work with these health plans is that the health plan will then give us a fixed amount of dollars to manage a patient, and that really allows us to create really flexible and unique and innovative models of care that can substantially improve the outcomes of patients. What kind of pushback has there been inside the doctor community if any well, you know, any

kind of change, um, can be difficult. Today in the Medicare there's the Medicare fee for service world. Um. You know, doctors are paid for you know, for volume, They're paid for transactions. The more patients to see, the better you do. In our model, which is primarily based in Medicare advantaged, Um, we've created what is a value based care full risk arrangement with health plans? What is that? What is it?

Because I just I want to understand where this came from, right, because this is all has to do, I believe, with the rules from the Medicare Access and the and the chip re Or Authorization Act, because that really was kind of something that changed the way doctors got paid, right right.

So um, you know there there's something called the care advantage um, which is the private which is the private system, as you said, would in which you the Medicare recipient can have the premiums go to this private company Medicare advantage.

That's correct, and so there are many Medicare advantage health plans out there, and essentially the premium dollar goes over to these health plans, and these health plans have to figure out how to improve the outcomes of patients and ultimately reduce costs so that way they have some margin left over, right, And so what a lot of these health plans have done is they've gone out to physicians UM and physician organizations like ours to create novel innovative

models that can ultimately improve that the outcomes of these patients and subsequently reduce the cost so that way there can be an opportunity to create margin on that patient population. What is different about the way you would structure your business having all of this information, Uh, if you had a kind of clean slate. So you know, that's exactly what Chen meant. Did you know we noticed that UM about five of any given population within Medicare advantage accounts

for about fifty and seventy of costs. And so what we notice is this population tends to be load of moderate incomes, seniors with multiple chronic conditions. And so what chen Mets sought to do was deliver you know, you know these load of modernit incomes seniors, concierge level care um. This is the kind of care that usually is only available to you know, CEOs and executives at large companies. And and we are able to provide this level of

concierge care at no additional costs of the patient. So, if you're a chen Met patient, what we're able to deliver them is instead of the average doctor taking care of twenty three patients, our doctors only take care of for it in fifty. Instead of a doctor only spending about thirteen to sixteen minutes a year with a FaceTime with a patient, our doctors have been about a hundred

and sixty eight minutes. Well, the way we do give us you reveal and pull back the curtain a little bit absolutely, So, you know, by increasing access to care, by providing this really high touch, concert level care that includes transportation, medications on site, specialists on site, and this high touch level of care, what we're able to do

is significantly reduced the hospitalization rate. Today we published that we can reduce hospitalizations by thirty eight percent and so what happens is when you can reduce hospitalizations, you substantially reduce costs. What would be an example, So give us a patient example being you know and you know, paint the picture for us wonderful. So I have a patient of mine. Um, his name is, let's call him Mr F. Mr F came to me. He had been going to the hospital about five times a year because he has

end stage heart failure. Okay, it's heart doesn't pump well anymore. Um, it's it's weak and he keeps showing up in the emergency room. Now, what I know is this is a patient that you know in general and a normal traditional fee for service Medicare environment will be seen for thirteen to sixteen minutes a year of FaceTime. What I have done is I see him and I will see him every single week if necessary. And so initially when I met him, he was actually in hospice. He was ready

to call it quits. And when I and you know, after seeing him every single week, after providing him door to doctor transportation, after giving his medications on site, after having multiple conferences and coordinating his care with his other specialists, I took him from being admitted five times a year, of which each admission costs twenty tho dollars. Now he has not been admitted in over four years, and he's out of hospice, and so how do you but then but there and not but but and you are who

pays you, how could you forward to do this? Right? So this is perfect. So if a patient comes to us, right, if they because we are actually taking the premium dollar, the a Medicare advantage health plan will offload the a percentage of the premium. So fix the amount of money to us, right, And so therefore the patient ends up in the hospital like like Mr F five times, okay, and it's twenty knowledge every time they go to the hospital.

I pay for that. But the beautiful thing is if I'm able to significantly reduce his catastrophic hospitalization rates, then well I'm going to bet for benefit from that. And so what we found is this is a scenario in which if I can figure out a way to substantially reduce the most costly admissions for our patients, patients win

because they're not getting sick. But also we win because now we actually don't have to you know what what that patient would have cost it would have been you know, five times at an admission hundred thousand dollars a year instead of that, you know, perhaps that patient actually hasn't accrued any major catastrophic costs, so we actually are able

to make money. And what unique about chen Med is that we're not not only can we do this in what we started, which was in South Florida, but we've been able to replicate this exact model across multiple practices

in nine U S geographies. So you know, what we've discovered is this model of care is actually scalable and we then surrounded well, we'll have to check in with you and find out the future of chen Med is the chief executive Dr. Chris chen We want to take a moment to let you know about something new from Bloomberg.

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to try it out. Learn more at Bloomberg dot com slash lens. Let's take a look at Canada. Canada because they are are neighbor to the north, but also because President Donald Trump in a speech was promising to find a solution to a trade dispute with Canada that well has left many dairy farmers in Wisconsin and New York without a market for their product. So, um, let's find out more from Joe Light. He is our financial regulation reporter,

and this is not necessarily a out regulation. I wanted to just bring in the Canada issue because, uh, when we talk about home building, Uh, it's interesting how the world gets connected very quickly, and I'm wondering, Joe, if you can just kind of describe what what is all

going on here and maybe just bring in current events. Yeah. Sure, So the um, as you mentioned, Trump talked to the dairy community yesterday, and I've been doing some reporting on Canada's imports of softwood lumber to the United States and it's kind of a great example of how even for you know, kind of the most basic of commodities, like would you have all sorts of different lobbying groups and

interest groups on both sides of the border. Um with thousands of jobs at stake, uh, you know, fighting each other for a share of the US market. So in the case of lumber, you know, this is a dispute

that's been going on for more than three decades. Canada imports about five billion dollars of lumber into the U s that's in that's in US dollars, and as a trade dispute that maybe not many people in the United States have heard of, but it means hundreds of thousands of jobs in certain communities, communities in Oregon, communities in British Columbia. Yeah. So so the so basically Canada subsidizes is lumber industry. Most of the timberland and Canada is

owned by provincial governments. They charge a fee to timber producers to cut the trees down and as a result, um US companies say that Canadian producers are able to sell their lumber in the United States at depress prices, which which they say costs American American jobs, cost lumber companies profits. And so as soon as next week, the US government might be imposing huge tariffs on Canadian lumber imports, and the threat of that has driven lumber prices up

by by more than twenty since since the election. And part of that's because you know, Trump has talked very tough on trade with Canada and UH, and you know, American producers and Canadian producers, the lumber market is expecting those tariffs to you know, and a new deal to come in UH pretty tough. So tell us about the price a lumber right now and what are the implications for businesses for the lumber companies. So the price of lumber, it's it's gone up two since UH. That's as of

the close yesterday, since the UH, since the election. And for UH for a typical US home, the home builders say that's added about three thousand dollars to the UH to to the cost of a home. So so you kind of have two sides here in the US. You have the people who buy the lumber and the people who sell the lumber. The people who buy the lumber they want to keep these lumber imports cheap, so so they they don't want to see the the US UH

impose these UH impose these tariffs. The people who sell sell the lumber, you know, big timber companies like wire Houser, which actually has some UH they've they've got some for in Canada as well as the US, but most mostly in the US. UH. Local lumber companies and in places like how wide is the gap between Canadian lumber and the US lumber. So, so the tariffs that they're that they're hoping to so the lumber market, it's a it's

a Canadian lumber in US lumber is competing with each other. Right, So the you know, because it's traded right, I mean, yeah, traded right, it's up three three points six today, right, And but I've been looking, I'm going back all the way to May of of last year, and you're right, it's up. The prices up more than right, and and and so the Canadian Canadian US lumber is always competing,

so they're selling for about the same price. The difference here is that the cost of lumber, of producing lumber

in Canada, U S companies say, is much lower. So the tariffs that UM we're the US is inspected expected to impose as soon as next week or starting next week, could run a run between thirty and according to some analysts, and the impact of that would be to make US companies much more competitive, at least in their eyes, and to make Canadian companies much less competitive, which could result in you know, mills closing in Canada, perhaps mills opening in the US, and the US market share of the

lumber market rising. So that would benefit companies obviously that have these operations in the United States. That's right, Yeah, it say so so that this is all This is all about the US market share versus the versus the Canadian market share. For for the lumber producers, for the home builders. You know, they're so frustrated by the UH quickly rising costs of lumber that you know, they're already looking for sources of supply elsewhere. They send a trade

delegation to Chile in September. They've been talking to governments and producers in Sweden and Brazil, you know, basically anybody who grows trees because they want to keep What about alternatives to lumber for home builders, and you know that's uh. I I think we're they're going to be framing homes with with soft lumber for UH for quite a while. I don't think they're gonna try to reinvent the reinvent the home building process. And I mean obviously, but not

you know, in other places, in other places around the world. Um, they use other you know, materials to to do build large scale housing. Yeah. And and you know one of the points that the timber producers make is that that lumber you know, they say, is it's not it's not

the bulk of a cost of a home. You know, the bulk of a cost of a home comes in, uh, you know, labor costs and other materials, land costs, and and so they they're um, uh, the lumber lobby United States says, they're you know, at least somewhat you know, mystified that the home builders are fighting so hard against against these tariffs. But you know, all already homebuilders are competing against um, against existing homes with the new homes, and so it's it's difficult for them to pass the

costs nder buyer. So this this rise in LUMBERCASI, it's directly into their profits. Thanks very much for joining us. Joe Light. Hey Joe, what's your Twitter handle? It's at Joe Light. That's all you need to know. Our financial regulation reporter joining us from Washington. Home builders could be losers in an early test of Donald Trump's trade policy. High yield. Well, if you're looking for high yield, what

does that mean these days? High yield was up to nearly three percent as of the end of February, and then it's stumbled. Well, let's find out more from Ken Monahan. He is the head of Global High year Yield at a mundy Smith Breeden. They helped him manage ten point nine billion dollars and they're based in Durham, North Carolina. Ken,

Thanks very much for being with us. Why don't you first just explain a little bit about your role there, what you are actively doing, and then tell us your perspective on what's happening with with yields right now for these specific types of bonds. Yeah, I Keim, and thanks for asking me to join you today. Um. I'm focused on the global high yield markets. So that includes not only the US high yield marketplace, which we're all familiar with, but also the European high yield market as well as

emerging market corporate debt. So you're looking at a marketplace which is approximately two point trillion dollars, of which about that is US high yield, about is Europe and about the remainder is is e M corporate. So that's that's what my focus is. And I've been doing this for a long time with more gray hair than I care to count. Okay, all right, well well maybe all right, so so share some of your wisdom with us right now. Well, as you mentioned, I said, we had we had a

pretty strong rally coming into February. Market was up quite strong, and then kind of petered out in March. And I think that there were a couple of head winds we were experiencing. Certainly one of them was in the retail side of things. Obviously, there's been a lot of headline news both for investment grade companies as well as how you'd companies like Jake Crewe for example, and sears Um regarding head winds in the retail space, and that I think,

what's your prognosis? Well, you know, I think that that both are facing ultimate restructuring. Um. I think it's pretty much in the news already on J. C. Penny and dialogue is taking place with creditors as it as we speak with sears it's uh, it's been a longer term issue. They've been uh deteriorating in quality for a long period of time and uh and uh the equity uh controlling equity shareholders you know, has been selling the crown jewels

along the way, uh to keep the engine going. And uh, you know, I think ultimately that will doesn't solve the problem that Sears of of a deteriorating business. Well just give you Sears, of course we know is rutten and owned by Eddie Lampert hedge fund manager. And well I'll just say investor at this point because I mean I'm looking at the Sears holdings and it's a one and a half billion dollar market capital right now. Yeah, well

you know him. It's that it's like that old story or the old adage, when a good business, a bad business, and a great management team to come together, it's usually the bad business that keeps his reputation intact. So I think that's what you're seeing here right now. Interesting. Okay, So, um, where do you want to go? Because you know you said there's the two point two trillion and then you know you can slice and dice it really either by industry or by currency. What's the best way to approach

what is happening now? Because I mean we are late in a cycle. We are late in a cycle. But you know, I think you know you we're not necessarily expecting the cycle to blow up the way the way it did in a way or oh nine. I think

you know, we know you talked to sociologists. They also they always talked about the concept of recency and primacy, the concepts being you know, you were most impacted or by our most recent experience, which in this case obviously was the O eight or O nine recession as well as the first one we've had exposure to. I think the O eight or O nine one was a highly unu to a one because it impacted the banking system

in a major way. And obviously we've had the banks recapitalized in the US in particular, there's some that are still need to work in Europe, but the U S banks have raised a lot of capital. So whatever headwinds were expecting talking about late in the credit cycle, I don't think we're necessarily expecting it to be is broader recession when it ultimately occurs, as we experienced in eight

or oh nine. You know, if you look back at previous recessions, he would typically find that they impacted you know, one or two industries in particular. So if you look back at the O two three oh two oh three recession, um, that one was much more focused on telecom. So there's certainly some sectors right now that uh that you know, would cause concerns going forward, and maybe the ones that will be most impacted, you know, if we have a

recession in a year or two. Retail is perhaps at the top of the list, but there's others like technology, uh that some are concerned about as well. You know, you can argue that oil and gas and metals and mining already had a session of their own, you know, secular problems, uh with the kind of period from late to fourteen through the early part of last year. Hm. I'm just digesting all that because you know that, I mean, that's a that's an interesting scenario if it if it

plays out that way. Yeah, you know, I think, look, do you think how many how many interest rate increases do you think are on the table right now? Well, it looks like it looks like too for this year, I think, is what our guess is. But I recognize that an increase in interest rates can impact uh corporate credit.

But I think the things that we get concerned about typically Um, coming into a recession or laid in the credit cycle, we're not seeing as much of this time so typically you know, so is there anything worth buying right now? Well? I think that there is. I think you know, we're gonna let's recognize that the benefit of the high yield marketplaces for US high yield is that you're picking up effectively one point seven basis points a day of of current income. All right, so I'll give

you a thirty seconds, go ahead. Well, I you know, I think that the the answer from our perspective is is, you know, we still think that there's opportunities in the steel sector for example. UM, we're ultimately looking for opportunities in retail. We recognize that there's going to be the proverbial throwing the baby out with the bath water, and

there are retailers that they're going to survive. Uh. You know, we look at L Brands, for example, is a perfect example of a very high quality credit and a double B space that could be investment grade if it wished to be. Uh. They've done a better job at taking care of their shareholders, and they have their bondholders, and those bonds are under pressure. At some point they'll be

interesting to buy. Maybe not yet. Yeah, well I'm checking them on the Bloomberg and uh well, if we'll have to see, well, we're gonna put them there and then you know what, we'll have you back and we'll be able to sort of track the progress of those uh L brands bonds. Thanks very much for joining us. Ken Monahan is the head of Global high Yield at a Mundy Smith Breeden, helping to manage ten point nine billion dollars. They're based in Durham, North Carolina. Thanks for listening to

the Bloomberg pien L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.