China's Structural Decline Will Drive Down Steel Price

at Bloomberg dot com. Let's talk about the effect of the ongoing trade war between the US and China on medals that are used in for industrial purposes, in particular Steele. Joining us now from Bangkok is Gordon Johnson, managing director at Vertical Group, who is in Bangkok to present at a conference, but it is taking time out to join us today. Thank you so much Gordon for being with us.

I want us talk about steel because it is used in so much construction, and that is some areas that would take a hit potentially, especially in China given the slowdown there and in light of the trade war. So what do you see there? We're seeing about a five percent to client so far you're to date in steel. How much further do have? Yes, so we think there's

significant downside for still prices. And if you look at just the data points, if you look at the major economies and specifically p m I, sixty seven of the major economy p m I s are in contraction right now, and specifically with China. And the reason why China is so important. They consume fifty of the world still, so as goes China, as goes global still prices. And if you look at the tax and p m I, the China official p m I or the Hong Kong p m I, all of them are in contraction right now.

And that's despite stimulus efforts, significant stimulus efforts from China recently. It's not working anymore. And the reason is because the debt service is so high, so they have to stimulate even more just to run. You know, they basically keep running on the same treadmill. So the last thing we'd say is um. You know, China is clearly devaluing their currency, so that means they're going to export their devaluation or

depreciation to the rest of the world. And keep in mind remember in two thousand fifteen, in the first quarter of sixteen, China's currency devalued. We had the Great balk commodity scare where you had still prices really collapsed down to the three hundred and sixty four dollar per short ton level, and we think we're headed back to those levels. Not there yet, So Gordon Barish on the demand side of the equation, talk to us about the supply side

of steel globally. Yeah, so that's a great question. So with Trump's tariffs, we saw a unprecedented spike and still prices in the US. Still price in the U S were five hundred dollars. Trump implemented the tariffs, they went up to nine, you know, just under nine hundred dollars per short ton um. And on that increase in prices, a lot of US still mills decided they were going to announce capacity additions. So you have all these capacity

editions that have been announced. But now if you look at the US market, whether it's agriculture which is in a state of UM disarray, UM, the energy sector which is also suffering, and clearly autos which is a key to driver of demand for still which is suffering. The problem is U S still can't implement a trade case

against js W and Ohio. So this still is being added and there's nothing the U S still mills can do other than capacity, and you're seeing that from some of the blast furnace guys, but you're not seeing it from the E A F guys. So again we see

big problems ahead. Look, it's it's really driven by China because China drives us still prices, um, but you also have this dynamic in the U S where you have capacity that's being added that you know, these guys can't issue trade cases against each other, so it's kind of backfired in a way, if you will. So what does this mean for the investment case? I mean in terms of how do you position around this? Right? So we we think that um, you know, there's gonna be further downside,

uh for a lot of stocks. Think about this right that we were presenting. We were doing two presentations at this conference. If you look at from the early eighties until two thousand four, iron ore prices average between twenty five dollars and thirty five dollars per metric tun. Iron or prices are sitting at eighty two dollars right now. The point is what happened in two thousand four is the Chinese economy had a debt to GDP ratio of

a it's now above. A lot of that debt went to build empty office buildings to the sky, which are very still intensive. The point is once we mean revert back to where China was pre two thousand four, given they consume such a large percent of the world still, we think iron old prices probably dropped back down to those levels. Iron ore and coking coal are used to

make still. So when you have iron ore and coking coal prices, coken coal prices down in April, UM revert back down to the levels they were pre China stimulus, we think you're also gonna have still prices revert back down the levels that I think people don't see as possible today. So we think the way to position UM is to be short in general still in iron ore stocks. So it's interesting, Gordon, as I look at the on the Bloomberg terminal, the A n R function for your coverage,

I see one by two holes and ten cells. So I think I understand the bear case that you're suggesting here. Been pretty consistent. Why the bion United States steal? What's different about those guys? Well, we had to we we have a bio in United States still because um, you know about a month ago. UM. You know, we thought that the cut and capacity from US STILL as well as UM A K S UM was going to drive

some upside sentiment in the space. And it did. UM. But you know, since we've made that call, you had that kind of short term positivity UM, and now you're seeing the negative negativity feed back in so UM still by rated Uh. But UM, you know the negativity is starting to outweigh UM. You know, those those those capacity cuts. So how much is your sort of base case disrupted if there is some sort of trade agreement between the

U S and China. Yeah, so, I mean there will clearly be a knee jerk effect UM if there's a trade agreement between the U S and China. UM. But we think this is structural. Uh. The real issue here is not a trade war between the U S and China.

We think the real issue here is special typically China. UM. If you think about this, right, if you look at trillion twelve months UM UH liquidity to GDP in China UM in two thousand, fourteen and fifteen, that ratio declined sixty three basis points, and that basically was the precursor to the Big Balk commodity scare we had in the

second half of fifteen. In the first quarter of sixteen, that ratio is down a three basis point, meaning liquidity in China is just not there as it used to be, and we think that is the major driver of global bulk commodity prices UM. And if you look at the credit it's being extended to China, it's just not enough. You need about two trillion per month in credit. You know, in July you had just one trillion of credit extended. China is just not issuing enough credit to drive the

um uh. You know the build out of these you know, construction essentially, whether it's bad investment or good investment, we think it's bad. Uh. They're just not issuing the credit needed to drive that build out. So we think China is the real driver again a US trade war um uh, you know, m agreement. We think we'll call the knee jerk reaction, but we think this structural decline involved commodity prices um is the name of the game. Gordon Johnson,

thank you so much. Gordon Johnson's managing director at Vertigo Group talking to us about to steal business. Calling in from Bangkokery's attending a graphite electrode conference. That sounds interesting. I guess if you're into that whole metals thing, the yield curve is inverted. We continue to have uncertainty persisting around the continued continued trade tension. So the question for a lot of investors is do the confluence of these events kind of suggest at a recession might be in

the offering for the US economy. To answer that question, we welcome our good friend Jim Paulson, Chief Investment Strategies from the Lootole Group. Lootole Group has about one point two billion dollars under management, based in Minneapolis. Jim, thanks so much for joining us. So let's start off right away with your thoughts about what seems to be some growing talk about ever recession over the next twelve months. Yeah.

I have to say, Paul, I don't remember if we if we are headed eminently for recession, it's gonna be one of the most widely anticipated and best forecasting ones we've ever had. Um, it's just so covered out there, not only the media, that Wall Street commentary as well as just all over this. UM. I think that, um, you know, the two events, I think we make far too much of the trade um issue. I think it's a mild negative for the United States recovery, not a

not a recovery killer UM. And the yield curve UH concerns me much more. I think that the signal that's it's been so good historically is is frightening to me

as an old, old investment guy. But I think there's reasons to suspect the signal, maybe a little more this time, given that we've screwed up monetary policy so badly in this cycle with quantitative easing and negative yields UM and if I go away from that, what I think doesn't get enough attention, Paul, is the amount of stimulus that's being devoted to this recovery now, and not only here

but globally. We've just had a tremendous amount. We worry about whether the FED is going to cut rates at quarter point on the funds rate, but the the tenuere treasury yield has fallen from three and a quarter last October to one this morning. That's a drop more than one half and most of the yield curve in the

last nine months or ten months or so. Follow that up with the annual growth of the real money supply going from below one percent last year to about three and a half percent now, and followed up with fiscal juice deficit. Federal defic percent of GDP is one percent greater today than it was a little over a year ago. So we're getting three gun goose er here of stimulus that you normally only see in the pit of a recession,

and it doesn't get much uh much weight in people's outlooks. Normally, with this much stimulus, with about a nine month leg or twillmut leg, you'd see a course of economists suggesting the economy is probably, you know, poised to pick up, but you're hard to hear anyone talk about that. I think it comes down, does fear freeze up the financial markets or the stimulus ultimately win. And I'm worried about a confidence freeze, but I think, uh, the odds favor

that stimulus is gonna win. And I'm already seeing some events of pick up in the economy that might be starting to respond to legged impact of all this easy. I still am I still at least I paul I, I believe that, uh, you know, we've we've done a lot of things here since UH last year that I think sort of rebuilds or helps the helps the stock market,

making it look a little more attractive. The current P modile now on the trailing people and the s below average in the last third year since nineteen the competitive tenure yield is less than half of what it was last October, so we've got a lower much lower motible and much lower competitive yield. Financial liquidity growth that is the excess of M two money growth over a nominal GDP just went positive for the first time in the

second quarter since two thousand seventeen. UM, the advance in the SMP this year is more broad base, more sectors are participating as opposed to the concentrated nature of the advanced last year. UM. Overall, we've got, as I said, full on policy support. We've got, we've eliminated the overheat pressures that we were struggling with last year. And I would argue that fear is very pronounced and prevalent. That is a wall of worry this year as opposed to

what it was last year. So in many regards, UM, I think the fundamentals have been improving in the last year, while the market has been roughly flat, earnings have slowly gone up and yields have come down. So um, Jim, given where we are in the cycle, and you mentioned kind of markets kind of flat on a trailing twelve months basis, Um. You know, people that are still constructive on the equity markets sometimes will suggest you need to get a defensive however, and is that kind of where

you are? Are you willing to go out a little bit more on the risk and you know, maybe uh not necessarily go back into or staying utilities or reads or some of those defensive sectors. Well, I wouldn't. I think it's a good point. Well, I I would not be maximum risk on. I'd be somewhere between neutral and halfway to max risk on right now in terms of my bullish tilled overall. But I I I would not. I don't really favor that you only own defensive stocks

right now. I think defensive stocks are overpriced, overpopularized, and probably have a fair amount of risk, at least on a relative basis, if we decide we're not headed for an imminent recession. Jim Paulson, chief investment strategist at the Luthld Group, talking to us about why he remains bullish on stocks well, as has become the norm. It seems like over the course of the summer, lots of news

out of Europe. Again, Let's start with what's going on in the UK the Bars Johnson and the parliament gambit that he is playing right now in order to try to make the October thirty one deadline for Brexit. Let's welcome Alberto Gallo, partner and portfolio manager for the Algebras Macro Credit Fund UH, also a Bloomberg Opinion opinion columnists, joins us from our based in London at Thanks so

much for joining us. First, let's to start with what's going on with the Brexit situation here and Bars Johnson and moving to suspend parliament temporarily. What do you what do you make of what's going on there? The situation is very confused even on the ground. There is three to four scenarios here. One of them is, as you know, Parliament is suspended. There can be a no confidence vote.

Depending on this result, you may have new elections or you may have a continuation of the current government, which then we'll have to decide whether to negotiate or go into a hard Brexit. Scenario. The general view we have is that this is more a symptom, a symptom of the problem than than the cause of the problem. And the issue with the UK is the growth model the country had for the last twenty thirty years, which was importing capital, goods and people on exporting services. This growth

model no longer works with the United Europe. So the UK needs to re engineer itself. There's too much inequality, lack of productivity, and unfortunately the various political parties are are proposing very quick uh fixes which are not going to work. So in any case, we see a start inflationary environment. You see inflation going up and growth slowly declining in the UK, and some companies are getting hurt.

So Alberto, I want to talk about I mean, it's clear that the uncertainty in Europe persists, as it does in the US, as it does in China. This is sort of the theme of and perhaps beyond. But I'm trying to figure out how an investor positions here, and I'm wondering how you can justify lending money to Italy for less than a percent uh, just simply on the hope that they can actually get a government together please explain. I think the I think the Italian new coalition is

a done deal. It will be announced in our view later today, and it will be a better coalition that what we had before, more moderate with the Democrats and the Five Star Movement UM uniting forces, but potentially less populist economic measures than before. As you know, the Northern League UM led by Salvini, wanted to uh not only stopped migrants, but also had a very strong stance against the European Union, potentially with the threat of exiting the Euro.

This is no longer the case, UM, so we have you know, it's true we have less than one percent kneeled on Italian tenure. GOVI is, but we have zero Spain, zero, Portugal minus seventy beats on German boons and hedged back into Euros. You know, the US treasuries also our minus sixty beats. So you're investing in Italy? Are you investing in Italian? But we've been buying in August when the Sylvini had lines that you know, broke the coalition and b DPS widened. So we've been buying and we think

there's still value compared to everything else. We don't think the spread over bonds is um it's justifiable compared to zero yield everywhere else. Obviously, we live in a queue infinity world, in a yield desert that there's no more yield in anything that's safe. We see a bit more valuing in corporate bonds and in bank bonds than there is in sovereign bonds. At the moment, sovereign bonds are getting to two crazy levels where it's almost better to to buy gold or put your cushion in the mattress

rather than getting a negative yield. So Alberto is used said, we only buy positive yield bonds here, right, So albertis used. Fact, your front has about twelve point three billion pounds under management. You obviously think about the macro side of investing. What is just kind of your overall view about Western eube. I mean, it just seems like there are headwinds everywhere you look. Are you This year has been and we

continues to be able to kick the can. World of a world that becomes closer to Japan, where growth and productivity are still positive but more sluggish, where companies and banks kick the can thanks to Dobvish monetary policy. But we don't have an acceleration in growth. So we've been buying tresory bonds with positive yield across the US, across Australia, across Europe, across countries where central banks have to throw

the towel and become more dovish. We've been buying the bonds of corporates and banks which are surviving with relatively stronger capital structures. And we've been, um, we've been short on small caps, on cyclical equities, on things that basically need a pick up a momentum to do well. And this continues in our view to be to be a good set up. Um. We think there's more value in corporate bonds rather than sovereign bonds now. Um, but you know we obviously it does depend on what growth will do.

When growth is becoming increasingly fragile, right become increasing fragile over the past months. Alberto Gallo, thank you so much for being with us. Alberto Gallo as partner and portfolio manager for the Algebras Macro Credit Fund Algebras Investments over in London, overseeing twelve point three billion pounds from wide talking about what is going on over in Western Europe. Italian BONDI yields falling to all time lows today. But you have a very interesting I PO that I'll hopefully

coming to the market later this year. Peloton, the I would call exercise leisure company coming public just followed its I p O prospectus. Help us dig down a little bit deeper, we welcome Drew Singer drews and IPO reporter for Bloomberg News. Uh, Drew. One of the things I noticed when I first opened the s one is this company. I'm not sure they really know what they are? Who they are? Are they a tech company? Are a leisure company? What do you do? What did you see? I think

that's the big question. I mean, maybe even the ten billion dollar question if that's what this I p O ends up valuing the company. Yet, as we hear it might I mean, you have investors who are going to be spending their labor day vacations trying to figure out the answer to that exact question. And everybody's going to

kind of have their own take. I mean, some people are going to look at this like AI, a fit Bit or a go pro and their i TS went went really badly, if you remember, other people might see it more like a Canada goose or a YETI and their i ts went went great. So the bulls and the bears both have a lot of ammo here. I love the soul searching sort of kind of the language that we use around some of these tech I p

o s. What is this company? It's sort of like we work, you know, I mean, Drew, I guess can we put this in a perspective in terms of I p o s in general? How much are this sort of tech darlings? Yes, this is an exercise tech sort of version of it. How different is that from the rest of the industries that try to do I p o s in terms of the sort of soul searching

aspect of what they are. It's a good question because some of these companies are so large, and they've raised already so much money in both equity and debt that in order for them to be uh successful, in order for them to return money to all of these investors, they need to become massive, just absolutely gigantic, like something out of Black Mirror gigantic. That's what we Work seems to be talking about, where a million people per city are going to be going to these we Work offices.

And and and changing their their vision for the world. Uh, you need the company to be absolutely gigantic, and in order to do that, you don't really know what the company is going to look like at that stage and its maturity just because of how relatively immature the companies are at the point of their I p O. Right, which is a reason why we hear things like it's a lifestyle, it's community, it's the concept of life. We are everything to you and you will pay us for it. Exactly. So, Drew,

what does this company? Let's go ask the easy questions. First, does this company make money? No, they don't make money, and they're they're very similar to some other large ip as we've seen, like Uber and like we work in that regard. They they are not yet profitable. So this is another really big bet on a company that hasn't yet reached a point where they've figured out how to turn a profit. Well, technology companies coming public that are

unprofitable is not necessarily, you know, a new thing. The markets, you know, generally been pretty comfortable that. But the issue is can they do they have a path of profitability that they can really sell to investors. And the reason I asked that is because a lot of tech companies have been able to do that, including the Amazons of the world and the Google's of the world and so on. UM, but some notable companies recently like Lift and Uber have

not been able to sell that path of profitability. What's kind of early thinking here with UM this peloton? You're reight in that that's such an important question because I think people, you know, when when they're looking for the next big thing in the I p O market, they are thinking about Amazon or or Google. But the truth is, most these companies don't figure it out, and they don't

find a way to become profitable. This filing has been out for less than twenty four hours now, so it's still a little too early to say whether or not it's crystal clear or more murky in terms of their path to profitability. But you can rest assured that the coming days and weeks are gonna be very very busy for I p O investors and some other analysts as they try to figure out that question. What are they

hoping to do with the money that they raise? Potentially? Yeah, so let's see here, I mean this they're looking to raise We don't know exactly how much they're gonna raise. At first of all, the figure, remember in the initial filing, is just a placeholder. Um. But they're pretty vague in the filing about what exactly they're going to use the money for. I mean, this is a quote from the filing. We will have broad discretion over the use in that

proceeds and this offerings. I mean they talk about, you know, maybe uh, short term holding, things like that, but they say the main purpose of the I p O they're just trying to create financial flexibility. So maybe they're gonna turn around and and just support some of that profitable growth that they've been having, or maybe they can go make murders and acquisitions. Uh. They just call it general corporate purposes, which is that good old fashioned vague language

you see in somebody's I p F filings. Paul, I love it. Just general financial flexibility for the owners and the founders who can then go off and go to a beach and drink a peanut clada. I mean to me, I think that this is a fascinating story. It is. I think it is too so it's interesting. We'll have to see how it goes. Drew Singer, thanks so much for joining us. Drew's ip, a reporter for Bloomberg News,

giving us some thoughts on uh this peloton. I p oh, it's one of those companies that, again, I think it's a I think Drew made a great point. Is it a fit bit kind of company where it's just kind of a one product and if some of something else comes along you kind of lose interest? Or is it more you know of a more day to day lifestyle type of company, like a Jetti, like a you know, Canada, a Goose, And I think that's really gonna be an issue. Thanks for listening to the Bloomberg P and L podcast.

You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform prefer. I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm Lisa Abram Wohits. I'm on Twitter at Lisa Abram woods One. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio