Credit Spread Cushion Is Pretty Much Gone: UBS's Falconio

senior fixed income strategist at UBS Global Wealth Management. Nearly a trillion dollars in assets under management firm whide, including family office assets. So Leslie really has a great view of where people are putting their money, where flows are going, and what families are doing versus what institutions are doing. So Leslie talked to us first about those flows. Have we seen much of anything change hands recently? Is there a sort of an area that certain certain um demographics

or what have you are moving towards. Yeah, I mean right now. Obviously we still have this in our in our opinion, a little bit too much cash on hands

that we think investors have. But I think to your points, you know, as we know, especially in the fixed income aside, it's the search field and in order to really gain you know, decent yield and decent return going forward, you have to sort of looking at at the alternatives market, and that's where right now a lot of people are sort of allocating because of this stimulus that we've seen, because of all this central bank support, and because of

the liquidity that people who have a little bit longer time horizons are really sort of picking their spots that areas that have been hit due to this crisis. So although people in our opinios still have a little bit too much cash, they are starting to allocate to somebody's alternative investments. When you say alternative investments, give us a little more detail on where, yeah, absolutely, Like i' let's

just say things like commercial real estate. Okay, we know that the commercial real estate areas actually has had obviously you know a lot of points of concern, particularly those pockets of vulnerability, whether it's office space, you know, hotels, you know all those all those sort of areas that have really been a problem, problematic area that have not

recovered yet. But the market is forecasting such high levels of delinquencies that right now there are alternatives that allow investors to really get involved for if they have a longer term of time arising and they're willing to forego a bit of liquidity. There are these pockets of opportunity because the market is pressing in such negativity. That's really interesting because you know, we hear so much about some of these businesses going going away, you know, hotels in particular,

So is there a big premium to these investments? There are? I mean, and actually, and you're absolutely right. I mean, that's why you really need to pick your spots, and you really need to do your due diligence. But as as as opportunistic sort of as the opportunity set, particularly within fixed income and co and has participated, it's really

gotten white. When you look at things like CMBs theory, those there are pockets of opportunities there if you do your due diligence, that are actually for the longer term, we believe, particularly because we do believe it'shistical stateless the summing, because we do believe there's there's the Fed and the government is a great backstop. We'll be able to recover, not not everywhere, but so you really need to pick

your spots. But given you're an environment where you've had such great returns and equity and even a lot of recovery and fixed income. The opportunities are very small. So if you pick your spots, then over the longer term, you know, you have really good returns. So the market it's looking like it's anticipating a Biden victory right now. Is it too complacent? Leslie? You know, honestly, I think it is a bit too complaced. And and and I'll tell you why if you look at things like the

credit market. Let's just look at the credit market for example, triple see how yield spreads are at pre COVID levels. Okay, the credit markets spreads are right now are incredibly incredibly tight, and you're really not getting compensated a tremendous amount for a fact elevent whether it's upboard down. So I do think the market is a bit complacent. It is just spooming this Biden suite. And you know, over longer term, I think with the market really needs to focus on

is the fact that the curvice sea thing. You know, deals are a bit higher. But more importantly, that cushion that you once had is pretty much gone. Can you

elaborate a little bit um Yeah? Absolutely, yeah. So for example, so if you like I seari the trip sea side, like right, if you have things like you know is now the pre COVID spreads and a lot of the issuance that we're seeing are at triple seas and as we know, you know a lot of these companies have sort of been riding the hotel of the fed liquidity.

You know, when we look at things like say, for example, just a basic invest in grade corporate, which has been a great faccept for the feed the set has bought invest in grade corporate. It has a lot of powder drive to do more. But you asn't as a corporate if you're going to corporate right now, you have only maybe twenty basis points rise in interest rates where you

wipe out a whole year of income. You don't have a lot of spread Crishian there to really you know, compensate you if in fact you get more default in both investment grade and high you okay, So let's see can I skill us all about you know outside of the US. You know, there's a lot of talk about Asia these days, and I suppose emerging markets more generally the China we sort of treat a little bit separately. What are you doing there? Particularly given the the strengthening

in the yuan recently. Yeah, we we do feel for those investors that are looking for their guild, and then when we talk about high yield, for example, that we feel it's a little bit more tight in the US. You can go over to Asia high yields and actually took up a nice, a nice yield at like six. We do think the Asian the Asian market is actually on a road to recovery. A little bit more inflation that they have obviously the backstep of the central bank, and we do think that that p m I is,

although volatile overall, we expect about recovery there. So our preference for those that are really that are yield speakers that believe that the US is just simply a bit too tight. Asia high yield is another alternative that you can invest it. All right, Leslie, thank you so interesting

to speak with you. One final question, if you don't mind, families that have great wealth, are they trying to do something with that before there is a change in administration assuming that there is, Yeah, I mean list really look, taxicles harvesting is always, always, always a big thing to do, and I'm sure that there there there are families that

are trying to allocate in terms of potential changes. But you know, and frankly, our view is that even if we do have a democratic suite, it's that's gonna be the first thing on the agenda to go changing taxes. It's just not the economy is the first and the agenda jobs with the first on the agenda, you know, and make sure and having you know, corporations remain and sustainability of corporations on the agenda. So although yes, they are, it's just not going to be on day one, that day.

This change is gonna ocurse, gonna occur over over time. Yeah, that's for sure. Okay, Leslie, thank you, we'll be talking to you again. Well before then, Leslie Falconio is senior strategist at ubs A Global Wealth Management. All right now it is time to turn to the world of commercial banking, and for that we bring in a specialist. We have Done mcque head of commercial banking as Citizens Bank. Don What does your job involved primarily these days and pandemic times, Well,

it's really taking care of our clients. Fannie um. You know, right at the beginning of the pandemic, we we actually said our primary job is to help our clients get through this really unprecedented events, and that you know, started with the p PP loans, that started with the provision of a lot of liquidity lines, some restructuring of credit agreements. And we're really encouraged by what we're saying. We're seeing

some real bright spots in the portfolio. There's obviously some real trouble in certain industries, but but so far, so good. You must have had an internal conversation about what the criteria might be, what the lines in the sand might be, what industries you're willing to be more lenient on than others.

How did that conversation go. Well, you know what what we really did was we immediately undertook what we call it cash burn analysis on our client base, and we really throughout history and went to what current cash flow was versus current cash resources and try to project forwards three, six, twelve months to see how long the company you know,

had before it ran into a real liquidity problem. And then we we actually took a ride of different actions against those different scenarios and and really tried to bolster the companies to get to the other end of the pandemic. We we don't. We don't have any redline industries in terms of things that the places that we won't help. We certainly have some there in a little bit more

difficulty than others. So anything that's in the hospitality sector or the restaurants sector, or the leisure sectors obviously experiencing a fair amount of distress right now. But but the broad portfolio looks like it's stabilizing. How do you avoid some of your clients being aided by other, you know, maybe shadow banking type entities. Is there a way that you can hold onto them, or are you actually quite happy for some of these private equity companies or what

have you dig on sometimes that might be underperforming. We haven't. We haven't seen a lot of that, you know. What we what we have seen is some distressed investments, for example, So some clients just needs minority equity and and we'll try to facilitate that. But we haven't seen the non banks trying to come in and take our clients away at the split second. And you know, I think our general approaches if we do a good job of our clients and take care of them and are close to them.

And we went on a real communication effort with all of our CEOs as we went through this to make sure we understood what was happening with their companies. So we've seen some refinancing. We we've refanced some people out of other facilities, but it's nothing very different from usual way. Well, that's good to hear from your perspective. I suppose how are you handling the we're in the we're mortgage and

interest rates in general. Well, you know, we we've done a great job in lowering our costs of deposits um and so we've held up on our energy margin pretty well. Can I just intervene and say that that's bank for not paying anything on deposits. Well, we pail, we pay a little bit, but but our our our neg interest

margin while under pressure is held up, held up. Okay, we've benefited from a very strong fee line, so as you might have seen when we when we reported last week or pp ANDR line was quite strong, and in fact it was a record level. So we feel good about our overall PANO. Well, that's good to hear. And now there's been a lot of talk about whether there

might be some consolidation. How is citizens faring in terms of being able to ward off any outside interest or indeed maybe looking around if if you're in that good of a position and trying to beef up what you have, well, we don't. You know, we don't feel like we have to do a transaction to be successful. And you know, we're not really in discussions either way with anyone, and we wouldn't talk about it anyway. So what we have done is we've we've focused on acquiring smaller companies to

basically beef up our offerings on our solution set. So I bought three M and A boutiques in the last two years. We bought a big mortgage company. We brought a wealth management company. So our our strategy is really um fill in acquisitions that that that broughten out our products White. Yeah, so Bolletons. Then, so what are these t companies on? What do they specialize in mergers? And actually no, I mean what kinds of mergers rooms? So, so one is a general industrial UM and we bought

them two years ago. They really do Midwestern industrial companies. We bought one down in Atlanta, which is really business services and and other kinds of services. And we bought one in California, which is restaurants and franchise franchise finance, so fascinating and why did you land on those particular ones. We just saw that one day were leaders in their market. Um and we want to buy M and A boutiques which are which are really strong and very narrow sectors.

We're not going to compete with Golden Sacks or JP Morgan in M and can't compete in narrow sectors. And frankly, we've been incredibly successful through the pandemic. I think we're closing an M and A deal a week right now, so it's it's gone quite well. That's really phenomenal. I want to hear more about these M and A deals. So one a week is a distress semina or no? You know. I think the perspective I give you is they're an awful lot of companies that are doing quite

well and some are actually thriving through the pandemic. And as long as as long as the company's EBA diesn't being impacted, we're seeing that people want to complete transactions that we're in the pipeline. So they're not huge. I mean, they're anywhere from fifty million to three million in terms of valuation. So it's not the billion ten billion dollar deals,

but you're seeing some of those happen also. So you know, we see some that have gone on hold because you've had cash flows disrupted and we just have to figure out what a profile looks like on the back end. But a lot of them have moved forward. We've been frankly surprised at how many moved forward. Yeah, I mean,

it's the wheels of capitalism, isn't it. They just keep turning, and it's really really fascinating to watch and also a very good sign because you do want to, you know, the wheels of industry to be well oiled and turning, even at times like this. You just hope that that can be the case. Well, thank you very much, Don, very interesting conversation and good look for the next couple of months. We'll be talking to you again before long. Don McCree is head of commercial Banking citizens by Ink,

and you heard him. So much going on in the capital markets these days. It's it's not all just stagnancy and dooming loom and waiting for stimulus. The fields of capitalism do continue to turn. So let's bring in George ferguson our senior aerospace, defense and airlines analysts with Bloomberg Intelligence. George. What I found interesting about the conversation was that Scary Kelly seems to be so optimistic that it looks like he's still almost expecting some kind of targeted stimientos somewhere

he does. I found that interesting as well. It seems to me I'm in the camp that we probably don't see a stimulus package for the airline um until next year, if we get one at all. I really don't see anything happening in a lame duck session. I sense it potentially the Republicans don't, you know, don't really see a need to be stimulating in parts of the economy like the airlines, and so I think I think the best

case would be a Democratic win for the airlines. Democratic win in November, and then they could actually gets into stimulust into into early next year. We'll see. That's funny because I would have thought that if the Democrats win, that it would not be politically expedient for them to be seen to be quote unquote bailing out particular industries, and that in fact, the Republicans would be more likely to do targeted some stimulus how do you get to

Democrats bailing out airlines? I just think I think the unionized labor force is one that they have, you know, they have a strong support from and they and they in turn on a continue support and I use some of the Pat Toomey, Republican from Pennsylvania is on the record is saying the airline shouldn't be providing any more stimulus like kind of us. I guess those two, uh, you know, benchmarks as well as I think Republicans are more concerned about deficit spending, and I think there's a

little bit less concerned about that. And that's certainly will come back to the four if indeed there is a transfer of power. And you know it because right now it's it's not popular to talk about the deficit, but it will be soon if the Republicans aren't in power still. So, George, is Gary Kelly a little bit misguided? Or can he get enough liquidity? Can he wait until next year until something comes? Yeah? So you know what, Gary Kelly, he

has plenty of liqudity. I mean he's Southwest is in one of the best positions of any U S airline to weather this storm. They have a lot of cash they would. I think somewhere around fifteen billion cash they reported this morning. Uh, and they have less debt than that. You know, when we even we look at all the US airlines, we see them all able to survive into into summer. I think they've all sort of targeted that area. Late next year's being a time when they think demand

is gonna hopefully start to recover. So I think it's for Gary, it's more a question of whether or not, you know, as he as he mentioned, whether or not he's going to push his employees through, you know, taking pay cuts and things like that and furloughing more employees, and his role can Sorry, I think about you know,

an unsettled environment at Southwest. It years to make those moves to drive down, drive down costs and get to a zero cash man, Georgie, I love to have your thoughts on Bowing on the seven thirty seven Max getting back up in the air. We were waiting for it for so long and so long, and suddenly it's it's all happening. Yes, I mean I think that you know, Bowing Bowing, He's had some challenges, but the airplane is an absolutely viable airplane, and I think Bowing really gets

focused on getting the airplane back in the air. It's been a while, but we think it's going to be approved by the f a A, you know, by end of year this year or early next year. So I think Gary is going to be having that discussion more intensely now about when he really wants all those airplanes that Bowing is built for him. Because it's it's again we see it's sort of late this year early next year back in service. Can you give us an update

on orders? So there was a big order book and then it was slowly you know, lines in that book we're getting crossed out, as are some airlines a you know, got hit by the pandemic. But we weren't maybe willing fully to wait for Boeing. Where are we out now for Boing? Yeah? I mean the last time we looked at the set seven max, I'm going to give you

a rough Converns around five thousand. The challenge with the order book is exactly like you heard this morning, right, Gary Kelly wouldn't go on record as to what he was going to do in that order book, and he said he would continue to talk to Bowing. Now, look, we know over time, Gary will need airplanes, and he's a solely he's solely a Bowing shop. And when the world looks better, Gary will go to Bowing. I need airplanes and airplanes sooner because I got great demand, and

he'll want Bowing to give him those airplanes. And so Bowing is going to come to him at this time and say, look, we have a problem, right, We've got a lot of airplanes stacked up, we need to deliver, we need to cash what we need you to support us through this downturn. So that negotiation and and Gary Kelly is one of the most important customers for Bowing. That conversation is going on throughout that Bowing order book,

you know, with this and sort of intensities. So it's really hard to plumb what portion of those of those orders could go away or not. We think a lot of them will just be deferred. And what will happen is Boweling and Airbus. Airbus will be in the same boat with their customers, will have to lower build rates as they manage manage a slower airline recovery, and the customers say, look, I just can't take those airplanes this year. So we don't see a lot of unwinding the books,

but we see a lot of deferrals in the books. George, we went into this thing with you know, close on twenty airlines were now at what's seventeen? I think, can you give us an update on on where we are and who didn't survive? I'm sorry say it again. We went into the pandemic with a couple of more airlines than than are in existence now. Basically, you know around

the world, can you give us an update? Well, I mean right right now, you know, right now, I don't think we've seen anybody really liquidated and taken out of the game yet, so you know, there may be or to I I'm missing, but we know we have hot spots of problems. You know, down in South America we had lat Time in Avianca declared bankruptcy and restructure their companies, which if if demand doesn't improve long term, more airlines will need to go through that bankruptcy and lay off

their debt and get rid of their airplanes. So we saw them. We know Norwegian out in Europe is having challenges and cut operations percent, but is still limping along. We have a number of airlines around the world that are kind of limping through. We know air Asia out in Malaysia's having big problems with they're big buyer of air A three and A three thirties their Asia X longer haul um a portion of that airline, so we

see it cropping up. But remember we're now coming into winter season, and so winter season is the really difficult travel season, and I think now is where we're going to start to see even more failures as airlines don't see this demand come in cash flow this weekend to go into the weaker season. But again, the airlines have a great propensity to sort of um limp along, go to a bankruptcy, restructuring, and continue. I think what we'll really watch though, is the amount of capacity that comes

out of the marketplace. Right these airplanes have to leave these airlines because they don't have to they don't have the demand to fly them. And the question will start to become what do we do with all these airplanes and the market up there a bunch of them down. But we're watching for capacity to come out of these global airlines. Gosh, those car parks and Phoenix, or those airplane parks and Phoenix are going to get pretty full

if they're not already. George, thank you so much. George Ferguson, Senior Aerospace, Defense and Airlines analyst for Bloomberg Intelligence, joining us there. All right, it is time for our weekly visit with Barry Whittle's Bloomberg opinion columnists. We're always thrilled to have them on, and Barry, I want you to take on things because you're so learned and you also read just voraciously about the market, and you're also in the market as well, so you've got people's money and

your money, you know, at risk. We've heard a lot of different opinions about what's going on here in the last week. And I'm talking about people like Bill Miller, for example, talking in his note about it and that getting disseminated. We had Eric Shatsker talking to bos Weinstein today. A lot of big names are trying to figure out the environment. What have you taken away from them? Who are the best thinkers on this? Wow, that's such a

challenging question. There we go, you know, I think that and my vantage point is having sat with many of these people for masters and business interviews for the podcast. Each of these people have a a somewhat unique um perspective, but a much more um precise specialty. So when I'm talking to Howard Marks, I'm talking to him about two things. I'm talking to him about the thinking pro says, how do you make decisions? How do you analyze things? As

well as this specifics of distress debt um. This weekend's guest is Ray Dalio from from Bridgewater Associates. He's a big macro thinker. So when I'm talking to Ray, I want to ask him about different asset classes, what do you do now that rates are so low? What do you do with gold? What do you do you know,

those sort of questions. But at the same time, I want to understand how he looks at the world, and I know he's he's not just an investor, but a historian and someone who's thought process is really what is the history tell us about this particular area. Um So, So we were talking for for this week's show about the pandemic and the lockdown and how unique this is, and his answer is, yeah, it's unique in your lifetime, but you look back a few hundred years and you

could see examples of things that have happened before. We've had um Central Bank create a lot of um take rates down to zero. We've had governments have all sorts of debt be monetized. We've seen the wealth gap expand in prior cycles, and we've seen um arising power challenge the established um powers that be. All these things that we're experiencing today, they've all happened before, sometimes separately, sometimes together, and and so it's that whole what drives their thought

process before they get to their specific expertise. That really is quite fast, and I mean very honestly, you know, wouldn't you argue that not only has it happened before, but it happens roughly once every ten years. So, I mean, we had the Great Financial Crisis ten years ago. In terms of pandemics, we we had one twenty years ago.

And I mean, these things happen. We're very likely to have a rolling series of these for the rest of our lifetimes, particularly out of time when global thought systems are fragmenting and disintegrating, and you know, the world that worked for a while has not been working for a long time. So that's why you want these guys's opinions on things. You want to see how they're thinking about it.

So so that's Ray Dalio. Those who specialize in treasury investing, though, may have a different opinion on this, because it certainly is the greatest expansion, even greater than the Great Financial Crisis of you know, monetary policy tools and um just the monetary base that we've ever seen across the world. Right, Dalio says, you have to go back to ninety three to find a central bank like the US taking rates

now to zero. But when you look at the balance sheet of the by the joke about that was, I guess modern monetary theory ain't so modern because the version of it that that we're sort of experiencing goes back to UM. But but to your point about how cyclical all these things are, and how you know, unprecedented is a bad word because unprecedented things happen all the time. I think I say the same thing every time I hear someone say it's a hundred year flood. It's yeah,

we but we get them every ten years. Maybe we should stop calling these things that come along ten or more times a century. Maybe we should stop calling them hundred year floods. Yeah, I mean, honestly, the people that do do you do you take them seriously? So I almost think of it as a verbal tick, the phrase you know, you ever speak to someone who every other sentences?

You know, we have these unthinking, unconscious verbal ticks. Uh. Market hates uncertainty is probably the one that's most dominance these days, and I think we should really stop and carefully consider what we say and and try to avoid cliches. Market hates uncertainty is a perfect example mark it's thrived on uncertainty. Anytime there's certainty, there isn't someone to take the other side of your trade. There there has to

be by definition, uncertainty about the future. It's inherently unknown, and therefore markets are a mechanism to make sense I have of uncertainty. Given what's been going on in the markets lately, UM, I love the narrative that we've been hearing lately that the possibility of a lack of resolution of the presidential contest on November three is it has

been all the uncertainty. Let me let me point out that in two thousand um Bush v. Gore wasn't resolved until I think it was December twelfth or December thirteenth. And if you really want to be a story and you could go back to the election of eighteen hundred, which was an electoral college tie. It was a dead heat.

When that happens, it gets thrown to the House, and each state gets a vote in the House of representative of each state's um congressional delegation gets one vote plus plus the various um um territories and and non states and and so that's in the event of an electoral college tie, the House is the final determiner. So all these things that look like they're so unique in one off,

we've experienced some form of them in the past. Yeah, I mean, it's that old joke on Wall Street, right that the interns or the newies haven't seen this before and they have no idea what they're in for. But you know, it really does help to live through a couple of them, I think, and you see how markets react and how they work, and and and you have

minor ones, you know, in the meantime. So for example, when remember when when when the credit rating was was downgraded for the US, that was a little bit of a minor shock to the system as well. So it's all practiced it yet it did nothing to the contractory market other than the news broke. There was a little wobble for a couple of minutes, and then the bullmarket and treasuries continued for they're ongoing. Arguably it still hasn't ended. Barry,

Thank you. Always fun to have a chat Barry Riddles. Do tune into his Master's in Business podcast. He also makes frequent appearances here on Bloomberg Radio and of course, on Bloomberg Television in the mornings. 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.