Welcome to the Bloomberg p m L Podcast. I'm pim Fox. Along with my co host Lisa Bramowitz. Each day we bring you the most important, noteworthy, and useful interviews for you and your money, whether you're at the grocery store or the trading floor. Find the Bloomberg p m L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. In the past few weeks, you've seen a little bit of
caution in equities, not so much in credit. In fact, investors are earning close to the lowest extra premium to own junk bonds in the US relative to treasuries since two thousand and seven. Here to talk with us about that and when this could potentially shift? Is Shriny Dulipla Deep Dulipola correct that, okay, Chief investment officer and founder of killden in Castle Asset Management in it New York. Tremely thank you so much for being here. What do you make of this? Why is there such a risk
on environment right now? First of all, thanks for having me over, Lisa, It's great to be here. Um, you know, I think this trend kind of started really um, you know, post the financial crisis, when basically the global central banks. Um, you know, effectively moved rates from what we're basically neutral rates of around five percent all the way to like negative interest rates and that level of liquidity in the market. Um, just effectively caused this huge influence of fixed income assets
and as a corollary into the highal market. And that has effectively been playing out to this day. UM. You know obviously, UM, you know, the fed a tailwind doesn't exist anymore. UM. And you know these types of the type of changes occur, you know, they meander, tell there is a final cathartic event that causes a shift to current to happen. So at this time, UM, you know it is you know, it's it's to me, it's very
very surprising that spreads are holding where they are. Um. Um, my guests, if I had to say something positive about the credit markets, what I would say is the fundamentals underlying the market are actually pretty good. What about the negative? I think the biggest negative is really valuations. UM. You know you are so to kind of put numbers onto kind of what you said at the beginning, uh hwyal markets are trading at a spread of about three sixty
basis points over treasuries. That is, as you very well mentioned, like close to the all time types, which was basically back in two thousand and seven. The difference in two thousand and seven and now is rather marked, the biggest being you know, the corporations are no longer as loved as they were back then. Uh. You know, you actually have a pretty robust economy. Global economy is growing at I think the last time I checked time a forecast, they've been kind of they keep ticking it up. It's
about three point nine pc now. Uh. You know, investors are no longer all that leveraged either. So back in the day, you had banks that were very leveraged. You had hetge funds that were carrying thirty times to one leverage. Um. So those are the positives. And as a result, I would expect, uh, you know, all in coupon yields for corporates have also kind of gone down a lot, so in terms of interest coverage, that the the the corporates
look reasonably healthy. Um and you know, because of the underlying economy, I would say that the default rates will be reasonably lower. So that's the positive, and that would that would probably explain why spreads trade where they do. Okay, I'm assuming there's a negative here now. I think the biggest negative, as I said, is valuations. Um, you know, at three d sixty basis points over treasuries, you're just
not getting paid enough. You own the one second, if I were hearing you right now, I would say this is a bullish person who sees very limited down side because it seems like a positive backdrop. But a prop with valuations would that be accurate? No, I would say, I'm actually the absolute opposite. This is the most cautious I have been about credit. Um, you know, for the simple reason. So, like, let's just step back, Like, you know, what is a bond. A bond has two components to it.
Bond has an interest rate component and a spread component. The spread component is effectively the risk component. And what we just discussed, the fundamentals that are good kind of explained why the spread component is trading at all time types. And I think at this point it's kind of capped. This is the all time tights and sure enough, you know, the fundamentals look good. But the bigger issue with credit
is the interest rate component. Over the last thirty five years, we've seen nothing but this uninterrupted rally and treasuries, which has been the biggest tailwind to owning high yield. We As as a portfolio manager, I never really had to think about rates as a risk. This is really the first time in a very very long time that rate component is the one that is going to basically be
the biggest risk for our market. So if I want to expand a little more into it, you know, uh, that that very simply speaking, why do I feel negative about credit? High credit deals roughly around six and a quarter percent three month libor yields to and a quarter percent to two point You now actually have a tremendous competition from cash substitute instruments for uh, you know, rather than owning high yield. So I think the biggest risk
to high yield I feel is liquidity risk. Um. You know, I think over the last five to six years, there's been a big proliferation of passive money you know, long only uh. You know, people talk a lot about ets. They have small percentage of the market, but overall about half the market has a daily liquidity to it um. And as a result, I feel like the next crisis is not going to be an OA type of crisis. You know, we're not going to have a spike in default.
The big worry is what is that interest rate where people actually start to say, you know what, I'm just not getting paid enough to be in high yield and I want to move out. If investor here's what you're saying, and buys your thesis and agrees also with Jamie Diamond in his annual literature Shareholders, in which he said that interest rates may go higher and faster than people expect. What do you do right now? I think, um, you know a couple of things. So one of the things
you can do is effectively go into low duration instruments. Unfortunately, one of the beautiful things about you know, this low interest rate environment we've had in high yield, these companies have been able to turn out their debt, so there's not a lot of low duration instruments left. But I think this is as good as it gets for the for the medium term. For term loans, you know what
what used to be some thing. So if you are talking about an environment where um, um, you know where default rates are going to be low, um, you know a lot of the term loans, higher quality term loans that really did not afford you a good amount of yield, actually pay you some some yield to own that those those look fine. But more importantly, I think I don't mean to be completely negative on corporate credit and high
yield um. What has happened as a result of a lot of proliferation of indexed money into this into the market is you now have a market which is bifurcated between haves and have not the very liquid credit I think I would avoid. But one has to also accept that there is a small subset of the market which focuses on mid cap corporate credit which is generally under underappreciated and under owned, where you can find a lot
of value. And you know, I think on the long side, that's kind of what we prefer are And this one last thing a plug about what I do. What I will say is this is as good an environment as I have seen for long short credit managers. So you can be risk neutral uh and really make what I would consider to be well about market recurrens without taking too much risk. I want to thank you very much for coming in and sharing your experience and your knowledge.
Shrine Duli Pala, founder of the credit hedge fund KILL Donnan Castle Asset Management much appreciated a hundred million people. Can they be wrong? Well, they're spending a hundred dollars a year in order to be Amazon Prime subscribers. Shira O v Day, Bloomberg, gad Fly Technology Commus may in dB one of them. Shira, what do you make of this revelation that a hundred million in Prime subscribers are filling the coffers of Amazon with ten billion dollars a
year for the privilege of shopping. So it wasn't really surprised by the number, but I was surprised that Amazon disclosed the number. So let me break that down. So, Amazon, for more than a year now has been disclosing the revenue it generates from Amazon Prime and its other subscription products like Audible, um, subscription models and things like that.
And thanks to that number, which Amazon was essentially forced to reveal because the SEC has been pressuring them to disclose the number of Prime members and Amazon has refused to do so until recently until it gave the revenue disclosure. So An also have been able to kind of back out the approximate number of Amazon Prime members and it's been pretty close to a hundred million if you look
at the numbers. The question for me again is why didn Amazon pick now, of all times to disclose finally, after years of silence, how many prime members it really has? And I'm curious to know the answer and don't have one. Another number that Amazon disclosed that you wrote about is one that is less talked about, and that is the median salary of people who work for Amazon. It is less than thirty dollars. What is this due to the
narrative that Amazon is creating high quality jobs around the country. Look, I think it's a great question, and there's been questions for a long time that a lot of the jobs that Amazon has created, and to be fair, this company has hired hundreds of thousands of people in the last few years, but there's been a big question about whether a lot of those jobs are quality lasting jobs. Right in Amazon, Um, those package sorting centers or package warehouses
that are dotted across the country. Uh, there have been you know, reports about bad job conditions and and and low pay for long hours and other ill treatment of workers. So yeah, the revelation that the median compensation of an Amazon employee is less than twenty nine thousand dollars. Uh, that's an interesting piece of that debate about whether Amazon Amazon creates jobs that are good jobs. Sure, just the
back of the envelope estimate. If you have a hundred million subscribers to Amazon Prime paying a hundred dollars a year, that's ten billion. If you have a hundred and twenty five million people for Netflix of paying a hundred and twenty a year, that's about a fifteen billion. Spotify seven, I believe it's seventy million subscribers paying what maybe a hundred a year for Uh, let's call it a hundred year for Spotify, that's another seven big that's thirty two
billion dollars for people to just get entertainment. Uh. Is that enough to sustain the valuations of these businesses? Well, I mean, look of those companies that you men s and uh, you know, Amazon does not generate the biggest chunk of its revenue from subscriptions, right That Prime is sort of this genius idea that costco also uses, right, where you pay a company for the privilege of spending more money at the company throughout the year. Um, Amazon
Web services though, and things like advertising potentially for Amazon. Yeah, fair enough. Um, you know, Netflix and Spotify are both highly valued companies that exist only on subscriptions. And look, the business model of cable and telecom companies is also to sell subscriptions, and those are again some of the largest UM and and companies in the world and also highly profitable. So yeah, you can sell subscriptions to things, whether it's entertainment or telecom services, and that is a
very viable business for a lot of companies. So, just to put this new perspective, Amazon shares today up one and a half percent, following gains in the past three sessions. Not so happy over in Apple Lands, And I do want to touch in this because this is catching a lot of people's attention. Shares down more than two per cent, and some people are attributing this to mounting concerns about
waning smartphone demand. We talked about this not frequently. Um, why are people suddenly worried about this now because this has been known forever. Yes, it's a it's a fair question. I mean the there has been this kind of the same exercise happened before Apple's last earnings report, which was I think there was some over optimism about the sales potentials of the iPhone ten and other new Apple devices.
And then you saw in the weeks before Apple reported December quarter earnings that analysts started to pair back their expectations and that turned out to be smart um. And again we're seeing a very similar exercise this year. Look, I think everyone in the investment world, if not inside of the Cupertino headquarters of Apple, is coming to realize that this is a new reality for Apple, which is it's getting harder and harder for them to sell more
iPhones every year. If you look at the analyst estimates of iPhone sales this year, they're expected to interrupt a few percentage points. And remember this is a year when a year ago everybody expected there to be this big boon from the iPhone tan and other new devices that come on the market. That's not going to happen. So there's been this kind of re imagination of what Apple really is. So it's not a company that is going
to rely on growth in unit sales of iPhones. Instead, it's going to need to charge more for those devices, is going to need to sell ancillary products like the home pod and the air POD's headphones, and that's the way that Apple is going to keep growing. Now that the easy growth of I can just sell more iPhones every year, that that story is over. So people are waking up to that and they're getting a little bit nervous or perhaps just setting some risk ahead of earning. Sarah,
thank you so much for being with us. We love having you on Shara Ovida Bloomberg Gadfly columnists covering all things tech, talking about what's going on with Amazon dot Com. It was surprising how low the median salary was, less than twenty nine dollars apiece, fifty nine times less than what Jeff Bezos took home. Definitely interesting. The price of gold. An ounce of gold right now will cost you about and four dollars, But what will it cost you, let's say,
in the next twelve months. Here to help us understand the ins and outs and the ups and downs of gold is Frank Holmes. He is the chief executive and the chief investment officer for US Global Investors. They are based in San Antonio, Texas, but he joins us here in our eleven three oh studios. Frank, always a pleasure. Thanks for coming in. I want to just mention also that you men helped to manage the Golden Precious Metals
Fund U s r X give us your outlook for gold. Well, I think that gold has a high probability of hitting fire this year. Uh. And the double combo with that, with that fear trade is just a weaker dollar even the rates have been rising, and that's helping actually fuel global economic growth and as leading to this commodity boom because you're getting this this great export of our high end products and using of commodities. And the other part
of this is the love trade. And you find that when which is six all demand for gold, and it's highly correlated to the g d P per capita of China and India and their GDP capita continues to rise. And this is the year of the Dog, and there's gonna be a lossle of gold puppies purchased. Coward, Okay, so people are going to be purchasing gold puppies. Is that the main driver here of the price of gold?
Because gold has been a very confusing asset class and a lot of people have been expecting it to gain as people I inflation. Now people are ratcheting back inflation expectations. What's the main driver here, Well, the inflation is no doubt and important issue because the concern is that if you use factors to to look at the cost of inflation, inflation is running at eight percent. If you use nineteen eighty prices, inflation is pushing close to ten percent. So
there's an argument that inflation is actually understate it. And we're just talking about this is the cost for cell phones and mobile technology, all this stuff. It's really creeping up much faster than two point seven percent or three point one percent. So I think in the airlines industry, one reason why I created jets because I saw my options to fly had fallen by but my ticket prices went up, and that's inflationary. So I think that inflation is going to I believe the New York Fed has
a different inflationary number. It's higher than the CPI number, and I think as people reassess this, the factors behind ended inflation is probably running closer to over five. So we actually have real negative interest rates under that scenario, and that bodes well for a gold Frank, I want to cast your mind back out on the movie you call in nineteen I guess it was the mid nine ninety six. There was something called e gold and it's
been written about as the precursor to cryptocurrencies. It was basically a digital currency that was back by gold. Governments around the world did not like this. Uh. In fact, I believe there was even an application that was written for the pomp pilot in order to track e gold. Do you believe that the popularity of cryptocurrencies is having a dampening effect, perhaps even temporarily on the on the price of gold. No, I don't. I think what's really
important in my journey of going into that space. I'm a chairman of high blockchain, first company mining these coins in Sweden and Iceland. Uh. And I think that that you saw five billion dollars last year go into these new I c o s and that's speculative money. And the regulatory world has basically said you cannot speculate in the securities market. Uh. You want to speculate, go to casinos,
buy lottery tickets, to go to racetrack. So the millennials, they want to speculate, and that's what that's money is. It's really gone into speculation. Uh. And now there's a crackdown taking place because some of the stuff was not full true plane autonomy. Disclosure. But I really think that's five billion dollars that never went into new expiration for gold or new technology that normally would you see going into the capital markets. I'm just wondering what would have
to happen for you to dramatically change your outlook on gold. Well, first of all, stand back at fifty thou feet, get an airplane. Gold is you know gold has always been advocated ten percent, waiting rebalance each year. And why is that? Since your two thousand gold is two times the appreciation of the SMP five two times and last year it was up, that's not bad. So I give you a short term or long term. Gold is done what it's supposed to do in an overall portfolio against currency volatility.
So from that end, until I see something else take place, I don't think gold is a fourth most liquid UH asset class trade in the world. I think that gold has its place in a portfolio. But don't buy gold to get rich. Yeah, you go and buy it for love, for jewelry, or you buy for your portfolio because it does mitigate volatility and it's a de risks overall portfolio. What about investing in gold company in companies that have royalty streams from gold. My favorite is a superior business model.
I mean, just think of it. Franko Nevada has the royalties on Barrick and Newmont's assets in Nevada, and their revenue per employee is a half a million dollars for for simplicity, and Franque Nevada is twenty one million. I mean, Goldman Sacks is one million to alors. So the efficiency ratio is so high. They have very some do they have a hit to book value. They pay more dividends FRANKL. Nevada than all any other gold mining company in the world.
So it just goes to superior business model. All right, We're gonna leave it there, Thanks very much, Frank Holmes. He is the chief executive and the chief investment officer for US Global Investors, managing the Gold and Precious Metals Fund U s e r X. We have heard a lot about possible sanctions on Russia. Will President Trump issue more?
Looks like perhaps not. To make some sense of all of this back and forth, I want to bring in Richard Kahn, managing partner at Eurasia Advisors, which is based in New York, and Richard has vast technicles, working with Russian businesses and Russian and US alliances, So he is a perfect person awagh in on this. Uh does this matter? First? I should ask should we even be talking about sort of the will will the US or won't the US
add sanctions to Russia? Well? Thanks, Lisa. I think certainly it should be on our minds because it goes to the issues of how we view the Trump administration and their relationship with Russia. Um. But I you know, in my view, that's if you will, a side show to the main events which relate to investigation looking for evidence of interference and links and coordination with Russia, which is
what Mueller is looking at. Now. This is potentially, at least in some people's mind, evidence of proclivity to favor Russia and perhaps evidence that Russia remains in a position to affect Trump. Just to be clear, the fact that President Trump seemingly walked back what Nicki Haley had said earlier about possible additional sanctions is that what you're talking about. I am referring to that. It certainly plays into that narrative.
Of course, there may be other explanations for it, but this is part of a pattern of Trump from the very early stages of his campaign of making nice with Putin and being unwilling to take on Russia as he has taken on many other countries, particularly some of our allies. Richard, I wonder if you could just give us the perspective of what it's like to be in Russia at the
current moment. I mean, if you go online, you can see a variety of photographs around the Internet showing a lot of food that has been banned because of Russian retaliation to Western sanctions. The food being banned is then destroyed in landfills, and indeed, even the Russian cabinet is said to consider a special agency in order to counter
foreign sanctions. What are the sanctions doing to the daily lives of Russians and what do they hear about the back and forth between because it's not just the United States and sanctions, it's many other countries. Well, First, I note the sort of the little joke that was making a rounds a while back that Puttin and Medvede felt really upset about, you know, being left out in connection with Russian sanctions, so they decided to put sanctions on
Russia as well. Uh and uh, and that was accomplished. Of course, I'm referring to what you just mentioned, which is the restriction of imports into Russia, which is obviously
very harmful to to the Russian people themselves. Look, you know, Russia is a very different structure in nation than than ours, is very different history, Their relationship with their government is totally different, and they you know, as a country, they tend to think more in terms of supporting the state and that that's sort of what the country is about, rather than the more of a US model where we these historically have viewed our public representatives as representing US
in the country being about the citizens. So they are generally speaking very supportive of their government and the no matter what is done in the West, the governments in an ideal position due to its control of media, etcetera. To present that as an attack on Russia, it's been a constant theme in Russian history. So, you know, Russia is now in a mode where, at least as I see it, they're really often playing uh, tactics of a
rogue state. And I don't think that's something they wanted to do back even even five six years or so ago. But I think they're pretty firmly ingrained in that now, and I do believe they're looking to at some point trade, if you will, to leverage their gaining by playing that role to perhaps over time get back into a more normal relationship in the West. But from their perspective, both the citizens and the government, they feel that we call the tune here, that would be their way of looking
at it, that we've pushed them into this corner. Uh. They see either you know, retaliation through interference and in the election, trying to get people more amenable to better relations with them as appropriate. Um, they're not going to admit they did it, but certainly they know it well. I do have to wonder. I mean, so the Moller investigation and President Trump's relationship with Russia is one thing.
Arguably some events that have been much more important to world peace is what's going on in Syria and Russia's involvement there. Recently Russia saying that perhaps it will supply Syria with state of the art air defense, which has rung some alarms, Uh, particularly in Israel. How concerning is all of this and Russia's involvement in the Syrian conflict. Look,
it's a huge problem. I just returned from a meeting of the Crisis Group in UH in Berlin, where you know, the subject of the Russia's involvement both in Syria and in other parts of the world and the role they're playing is is a big part of a conversation, as well as the inability of the Trump admen Llustration to interact in a manner that we in the US can
trust and be certain what their interests are. It dramatically complicates the game and it's truly a frightening dynamic to have, you know, our forces in such proximity with Russia with different saber rattling. You know, Trump is engaged with that. Uh. We have had instances, as you know, in the history of the Cold War, where there were real risks of conflict, including nuclear conflict, which were averted by individuals making key decisions.
There three or four instances of that. We don't want to be in postures where we're enhancing the risk of conflict. We should instead be you know, trying to minimize those situations. And uh, you know, I don't have a sense that Trump currently has a particular strategy in Syria. Uh. I
think it's generally a pr sort of play on his part. Uh, So is it something I worry about, Yes, constantly having that type of dynamic with all of our forces there we already had, by the way, as you know, a situation where we ended up killing two hundred Russians, you know, when they attacked you know, one of our you know, one of our bases. That was played down by both
the US and Russia. But I think most of us would agree this is not a healthy situation, and we want to have some adults in the room trying to deal with that and take it out of domestic US politics. I just also want to note that you are the author of a new book. It is uh really about a topic that many people are interested in. It is called The Earthbound Parent, How and Why to raise your
Little Angels without religion. So congratulations on the production of your of your new book about the science and uh using that as part of an educational foundation. Thanks Pim. It is tied into these very concepts of of the role, if you will, of principle over loyalty m and how that ties into religious upbringing. And so it does tie in,
if you will, with these political discussions. But at his heart, it's a book that's you know, suggesting to parents in a gentle way that they consider the benefits of raising children, certainly without the supernatural, to be critical thinkers rather too than embracing delusional concepts that can sort of set their children in the wrong direction. I want to thank you very much for joining us. Sir Richard Cohn is Managing partner for Eurasia Advisers, joining us to talk about the Russia.
And once again, congratulations on the publication of your new book. It is entitled The Earth Pound Parent, How and Why to Raise Your Little Angels Without Religion. 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.