Dislocation In Credit Spreads Poses Risk For Market: Booth

of a percent. Heading into we see a consensus forming that the fundamental economy, we'll be fine, We'll be strong, We'll we'll continue to chug along, and we'll allow you to clip coupons. Perhaps not deliver the same kinds of returns we saw in twenty nineteen, but really the question is what could go wrong? And Daniel D. Martino Booth is joining us now here in our interactive broker studio.

She's chief executive officer and chief strategist for Quill Intelligence, LLC, form advisor to the Dallas Federal Reserve, as well as a Bloomberg opinion contributor. UH So, Danielle, what are you seeing when it comes to the fundamental economy and signs that the consensus is right that we're just going to chug along through Well, I think if you, if you

study the headlines, everything looks really really good on the surface. Um. But having worked at the FED for as long as I did, we pay very close attention we I know Powell pays close that he won't say it in public, but he pays close attention to revisions to data. And what we've seen so far through July with the preliminary data is that we've had fifteen consecutive months of downward revisions again through July. But every time we get three months of data out, we tend to see another three

months of rolling downward revisions. And the Bureau of Labor Statistics will will tell you that they have a very hard time adjusting at economic inflection points. And that's why at QUILL we've decided to try and look in the weeds at other types of indicators to tell us, hey, if non farm perils is the most lagging of all

economic indicators, what can we look at this real time? All? Right? So, when we think about the economy, I think most people are just falling back on the fact that the consumers strong. They look at the employment numbers. How do you think about the employment numbers? At QUILL, So we try every week to track two things in the jobless claims data, because it's very timely comes out on a weekly basis. Um, we follow the number of states in the country, uh

that have rising jobless claims. So we're looking at the breadth um how far across the nation or not um jobless claims are rising and uh so far we're seeing about fifty, so over fifty of the states have rising initial jobless claims. And then we also study very closely continuing claims, knowing that just because you apply for unemployment

insurance does not mean that you receive it. If you look at not seasonally adjusted continuing jobless claims, you're actually looking at hard weekly data on the number of Americans currently collecting unemployment insurance. We we know Thanksgiving was a very noisy um contributor to the data, so we've adjusted it on a fifty three week year over year basis, and what we found was ten consecutive weeks of rising continuing this claims in this country. That's a red flag

to me. All right, so what does that mean? Translate that, Well, what we're seeing is an increasing trend of what the CFO Duke survey said yesterday that fifty percent of CFOs are in a cost cutting mode. A cost cutting mode is a polite way of saying we're trimming head count. It's not, again, something we're seeing in the non farm payalle unemployment data, but it's definitely something that is being

picked up in the weekly data. And actually to that point, we did get jobless claims today that rose to two hundred thousand versus the estimate of two thousand. So, Paul, we are seeing that exactly. Well, yes, but I have a really hard time with these two weeks. I mean you kind of have to kind of have to marry the two of them because thanks getting again is so noisy that you can't really trust this big number either.

All Right. So, given that we may be seeing, maybe from some of your data, a little bit slowing on the consumer side with the employment, what do you do on the on your kind of when you think about the credit markets where you're allocating so um, you know it. Obviously, I live on Twitter and the the mantra on Twitter is it's only energy. Uh So I got so tired of hearing that I kind of dug in the weeds.

And if you look at the Triple C universe, which has refused to come in and this has been you know, they're like, it's just an aberration, it's just energy. So they're the Triple C universe is trading. So that's over half of the Triple C universe is trading. It less than nine cents on the dollar. So of that universe is energy? What's the other so other stuff like not energy. We've seen a lot of retails. We've seen retail, We've

seen some some some tensions in communications. Um, we've seen some chemical downgrades so cyclical, but also retail as well. What does this mean that we're going to see something broader in or does this just mean frankly that there is discretion and markets and people have been disciplined during

this rally. Well, so you would want for an vests to be discerning and looking at companies that might, oh, I don't know, go from Triple C to as for applebys, for boy c'es, for cats, for default, So you would want for them to be discerning and and for dog but at the same time, you can't just look at the data and say it's just an energy thing, because it's so much broader than that. That being said, I'm going to talk out of the other side of my mouth.

The entire Triple C universe, a undred and seventy one billion dollars worth of debt, is only fifteen percent energy. So we're definitely seeing a you know, twice the percentage in terms of deeply distressed paper being in the energy sector. And from everything that we know from the eleven billion dollars Chevron right down yesterday, there's still a lot of bad things going on in the shale complex. And you know old melent of my buddy over Bank America, Meryl,

you know, he's been in high yield forever. He anticipates that by the end of given the seven percent trailing twelve month default rate and energy, that we will be back up at when he's sixteen double digit default rates or broadly defined, Are you seeing heightened credit quality issues in the marketplace? If not, do you think we might

see them? I think that I think that after the turn of the year, after after portfolio managers have finished all their window addressing that we are either going to see double bees uh, double bee spreads rise in other in other words, credit stress spreading, or we're gonna see triple cs spreads come down. It's got to be one of the other, because we've never had a dislocation of

this persistence and and and and length in time. What about loans, We've seen, for example, one prediction I believe out of ubs that leverage loans will return a negative return next year, Felt declined, lunch two per cent. Do you agree? Uh? But yes. One of my favorite credit rating high yield analysts will remain unnamed, basically said, look, Danielle, if you really want to go to the quick and dirty on this, if you can access the high yeld

bond market, go to the leverage loan market. They'll they'll loan your money. So everything I'm saying about triple c's you need to downgrade further if you're talking about the leverage loan market. And we've and Molly Smith has done a fabulous job reporting on this, we've definitely seen more than just a few instances of leverage loans blowing up.

And when they blow up, because there's no covenants assigned to them, they gap down very quickly, So I think that's going to affect recovery rates um in the next credit downturn. Daniel D. Martino Booth, thank you so much for joining us. We really appreciate it. Daniel's CEO and director of intelligence for Quill Intelligence UH and also a

former advisor of the Dallas Federal Reserve. Any Bloomberg opinion columns, you can read all of her work, and that of all the Bloomberg opinion on Bloomberg dot com, slash Opinion

or on the terminal O P I n GO. I will say it raises an interesting question because it sort of raises a challenge to the consensus heading into and this was sort of my takeaway is that we have this belief in stability, despite the political risk, despite the fact that we have a number of headwinds to growth, and if that gets upended, that upends the vast consensus across Wall Street. And there are some warning signs that there is not necessarily the strength to sort of keep

chugging through some of the uncertainty that could come up. Yeah, absolutely right, And Daniel kind of calling out the labor market, you should be again the print that we just had this week on the labor market front was very strong, and the market took that very in a bullish light, and certainly the Fed did saying that the economy is

generally in very good shape. This is Bloomberg. I think this is going to be my favorite game to play, heading into your end, which is, let's name the consensus and then decide whether or not we think it is likely or not. Very red Holds joining us here to play the game with us. Do do do do? Do Do? Do do? We should have like a soundtrack for alright.

Very red Holts, Bloomberg opinion columnist and host of Masters and Business on Bloomberg Radio, also founder of Redhol's Wealth Management, joining us here in our interactive Broker Studios first consensus, the economic fundamentals will stay strong and it will be a coupon clipping year. So we have the industrial sector in a recession already, and admittedly that's a much smaller part of the economy than it used to be. Um

I hate the phrase uncertainty. I think it's a completely misused, but you do have company executives saying we don't know how the trade and tariff war is gonna be resolved. We don't know where our supply chain is going to be hit next, and that causes a slowdown in all sorts of capital investment, from from trucks and rails to new plants and ships. And it's a self inflicted wound.

And as long as this just continues to as long as Lucy keeps pulling the football away and Charlie Brown keeps being a soccker for it, two feet forward, two feet backwards, we've made no forward progress with that. So, you know, an okay year, maybe two to and a quarter g g d P. Maybe towards the end of the year, things start to soften. Hard to tell much more than a quarter or two out. So this is in other words, yes, he agrees with the consensus. Is

that is that the consensus? I honestly don't know. Yeah, all right, another call here. The short term fed repo market could in fact be a big problem for the markets. You know, that's the silliest thing I hear everybody is is, you know, the old line is to a man who's only tool is a hammer, everything looks like a nail. To the people who missed the financial crisis in oh seven or eight or nine, and now they have a little PTSD and they're just fearful of the next crisis.

They're scared of their own shadow. Everything they see is the next book, you man, that's going to cause the next market to get slashed and half and so everything becomes We had a liquidity price crisis during the during the O eight or nine period, so now everything else is going to lead to a liquidity crisis. I first of all, I don't imagine the FED would tolerate more than a little bit of a problem. And you saw their last response when things got gummed up. This is

a problem with the plumbing, not a systemic problem. Admittedly was a plumbing problem that spun out of the out of control. But this just doesn't look or smell like, you know, an O eight o nine disaster. We should have like a noise for rejected. It's rejected, all right. The television show that does that already, I don't know if it's ratings. Well. I want to get to the

next issue, which is developing markets versus developed markets. Developing markets have that people expect them to perform better pretty much across as a classes next year versus developed ones. Well, E M is having a fantastic two day run. This is the best two day run we've seen in emerging markets in a long time. The gap on valuations between the US and the rest of the world, the US and and UM, e M or we won't even talk about frontier markets is as large as it's ever been.

And if you believe in mean reversion, you would say lighten up on the US by emerging market. However, you could have said the same thing every year for the past five years, and you would have been wrong. And full disclosure, I've been wrong about this for a couple of years. My only caveat is I've said I will look like an idiot for two or three years and then look like a genius. So now we're in year two of looking like an idiot recommending e M. Who

knows how much longer I could go. We're starting to see signs that the rest of the world is catching up to the U. S okay, so that's with consensus. I think so well. I was early wrong early, and and as all traders know, early equals wrong. UM. But I'm you know, I'm doubling down. My cognitive dissonance doesn't see anything separate from what I've been seeing. The US is fully valued I won't even say richly value. The

rest of the world is pretty cheap. If you want to buy value, you look out side of the US. If you want by momentum straight to the sp FED is gonna do nothing in so I don't buy. So here's the consensus. The consensus is quantitative tightening and rising interest rates throttled back the economy and that's what caused the Q drop. And I think that's utter nonsense. It is a classic after the fact explanation that nobody said, Oh, by the way, we're too tight and we're gonna see

a big drop. The president, Um, well he's he's been saying that since the day he gets worn in um after saying Janet Yellen should be ashamed of our low rates previously. So I don't believe that we're too tight. We are still very close to emergency footing. Um. I'm not a big fan of higher rates, but I do like the idea of the FED normalizing rates, normalizing their balance sheets. I've been saying this for I don't know

seven years. Now it's time for the FED to stop their extraordinary acommodation, which effectively has the result of driving asset prices higher and not a whole lot more. No, one is not buying a house, not buying a car, not buying building a plan because rates fed fund rates would go up to three or three and a half percent. Borry Dholts, thanks so much for joining us and playing our game with us. Bloomberg Opinion columns and host of Masters in Business that's on Bloomberg Radio. He's also a

founder of Ridholts Wealth Management. Joining us here in our Bloomberg Interactive Broker's studio. Consensus throw down, consensus, throw it down like a bit. We'll take that to Anthony from Sparta, see what he thinks. So we'll see. A couple of days ago, the House passed the U s m c A bill Mexico Canada, the US that trade build the new NAFTA if you will. The question is now, when will the Senate approve it? As well? To get some details,

we welcome Shannon O'Neil. She's a Senior Fellow for Latin American Studies at the Council on Foreign Relations and also a Bloomberg Opinion calumnist. Shannon, thanks so much for joining us. I guess there's some conflicting signals from Senator to Mitch McConnell about whether this UMS m c A bill can get ratified in the Senate this year or is it

gonna be pushed into next year. What are your thoughts, Well, he has said that he wants to wait until after impeachment proceedings go far, which would be in the new year. And also he hasn't been personally a big fan of the changes to the to NAFTA, the new NAPTA called the U S m c A UM but whether it

will probably push them too next year. But I would highly doubtful that the Republicans would turn down this bill, especially since the Democrats and the Trump administration have finally gotten to a guess, Shannon, let's talk about the winners and the losers from this steal. Can you give us a sense of what we've learned so far as people

pass through the details. Well, I think there are political winners on both side Trump administration had he Trump during his campaign said he was going to renegotiate NAFTA, and lo and behold, he has renegotiated NAFTA. On the same time,

the Democrats have wins there. They said that they would fix the bill that they weren't on board with what had originally negotiated, and they got, particularly in Mexico but also Canada to move on something so they can go back and say they have a win on labor issues and environmental issues and the like. UM. As we look at the U S economy, you know, I think American companies in general, there's there's some wins there. Definitely Internet companies,

Amazon dot Com there are wins. They're both because you'll see more e commerce going to the other countries. You have the U taxes of what they called diminimus, the amount of money you are allowed to send duty free has increased in both Canada and Mexico. And also the internet and tech companies fought back some changes that were suggested by Democrats to uh to UM increase sort of their obligations in terms of responsibility about what goes back

and forth US the borders. So internet side are winners the losers. Actually, the biggest loser was the pharmaceutical industry. UM. Things that they had wanted in U S. M c A that had been in the first round got stripped out in the second round. So I think they came out the biggest losers this time around. And what looks like we'll pass through the US House and Senate Shannon.

Some critics are suggesting that this is you know, much ado about nothing, that the new NAPTA is not a whole lot different from the existing NAFTA, and all we've done has taken a year here to kind of you know, banning about and get political and but nothing really changed. Is that parity think? So there are some updates in this in this version of it. And you NAFTA was passed back in the world was a really different place

back then. So this version has different regulations for e commerce and and digital flows of information that wasn't even on the horizon really back in, so that is new. We see updates in intellectual property right, some other types of things that most of which were frankly included in the t PP, the Transpacific Partnership, which was a big Obama administration initiative with the countries in Asia as well as Latin America. UM so some of that stuff is

new to NAFTA. Uh. Some of the things that just came in this latest version sort of round three in terms of labor oversight and enforcement and some environmental issues. Those are a step up from the first NAFTA, so I think there are changes there, but overall, what all of this negotiation has done is kept the agreement between the three countries, the United States, Canada, and Mexico to

continue trading and working with each other. When we heard the press conference announcing this deal and that all parties were going to be signing onto it, UH, there was discussion about some heated phone calls with screaming on both ends of negotiators, particularly with US and Mexico. I'm wondering, after these negotiations are basically done and dusted, what's the

relationship going to be like between the US and Mexic go. Well, when I've talked with people who have negotiated trade agreements with all sorts of countries, it's there's always a few moments where heated debate happen. So so I think the screaming was not totally out of the UH the ordinary when people get to this. But as we look, especially at US Mexico relations, the trade issues have now been taken off the table, and I think those in Mexico

are breathing a huge sigh of relief. Companies that operate on both sides of the border at least now they know what the rules are going to be going forward. But we have other issues on the agenda with Mexico and the United States, and the two biggest ones are migration, not just Mexicans coming north, but particularly Central Americans that have been coming through Mexico and coming to the United States seeking asylum from violence and other problems in their countries.

And the other issue is security. Mexico has seen a huge increase in homicides and other violence, and we've seen a couple of high profile cases involving U S citizens where they have been murdered, and so there are tensions there between the countries. That will be the next big issues on the agenda for the two of them. Shannon, So, both the White House and Congress, particularly Democratics, Democrats and Congress taking credit for this deal, saying it's a good

deal for America. How did the Canadians and Mexicans view Did they view it as a good deal for them? You know, a deal is a good deal for them. So I think both countries were playing a bit defense to make sure that NAFTA stayed together, the three countries stayed together in a trading block. There are some things in this that are good for both of those countries, and and a lot of these updates to the old NAFTA will be good for all three countries and their economies.

The Canadians actually in the latest round came out ahead some of the things that they had not wanted to do that they've given as a concession, particularly some of the pharmaceutical issues that got stripped out. The Canadians one on that because they had not wanted it in the first place. But overall, I think this is a small update is brings some new stuff into the overall mix. Uh. It has some wins and loses in particular sectors that we've talked about, But overall, what it does is keep

masked in from Mexico and Canada. That is what they wanted in the first place. Shannon, just real quick here, I'm wondering what your outlook is just in general on Mexico. I know Mexican assets have had kind of a rocky year. Uh so far, what are you looking for? Well, Mexico has seen a huge decrease in investment, be foreign direct

investment but also domestic investment. Some of that was masked uncertainty whether or not this deal is going to get passed, but a lot of it comes from the domestic policies of the Locus overdoor government. So as I look forward, I look to see what he is going to be doing. What is he going to be doing in terms of the energy sector and the contracts that might be with private companies, whether domestic or international. How is he going

to treat other sectors. Is there going to be investment in infrastructure that would help the manufacturing sector, And like, those are the things that in the end, I think are going to determine whether Mexico grows faster than it has been or if it continues to fall into recession. Shannon O'Neill, thank you so much for being with us. Shannon O'Neill a Senior Fellow for Latin American Studies at the Council on Foreign Relations. She's also a Bloomberg Opinion calumnist,

joining us via phone. Really interesting to see the shake out as people are trying to determine the winners and the losers. Interesting the pharmaceutical industry is being pinpointed as a big loser here. Like the way Shannon characterizes this deal is it's essentially an update of the existing NAFTA deal to take into account some of the changes that

have occurred in the economy and society since the early nineties. Yeah, and we're hearing that from a number of people, just to give you a sense of what's going on in markets. You're actually seeing those gains get paired quite a bit, with the DAZ dec now just up three tenths of a percent, down from more than a percent earlier in the trading session. I'm Lisa Bramoy. It's alongside my coast

and colleague Paul Sweeney, and this is Bloomberg. A big question mark facing the market has been the housing market, which had been showing signs of softness, seemed to stabilize and even show signs of strength on the lower mortgage rates. But there's a question now with affordability, with the prospects going forward of uncertainty. Doug Duncan joining us right now. He has senior vice president in chief economist at Fannie May based in Washington, d C. He trekked up to

our interactive Brooker Studios today. Doug, thank you so much for being here. I want to start with a survey that you recently did of mortgage lenders. What is that telling you right now about how people feel going into sorry in a quarterly basis. It covers the whole spectrum of lenders. What it's saying is that after three quarters of increased after three quarters of increased profit expectations, those

expectations have leveled off, but at a high level. And the reason for that leveling is that there's been a burst of refinancing, which is slow wing, but there is continue to be a pick up on the purchase side. Uh So, on balance, they have stable and a strong expectations for profits. Okay, so just a bit ago, the Wall Street Journal was reporting on some trade negotiations and how uh the US is offering to cut existing teriff

rates by up to fifty uh. They also are potentially going to cancel the new tariffs that are said to take effect on December fifteenth, and we saw longer term treasury yields go up quite a bit. What's the tipping point for the housing market for rates to go up that would impede the progress? Well, the pay The question is how fast and how far? So they could go up two hundred basis points or two percentage points over a three year period and have relatively slow and little impact.

But if they did that in a year like in two thousand and eighteen where they rose a full percentage point first half an and teams slow down in housing rates of come back down, which is why you said at the outset things have picked up or stabilized. So household budgets don't adjust. You don't get a pay raise every month. If interest rates go up monthly, you don't get the same adjustment in household incomes. So there's a

lag on which households react. On the purchase side, in particular, refinances more immediate because it's just a change of coupon from the difference between your existing coupon and the market, and you can act on that quickly. You're not moving your family, so that One of the aspects of the housing market that I don't fully understand is this concept or this issue of the shortage of affordable housing UH

for for first time virus. Is that something because home builders aren't buying entry level homes or what's really driving this, Because it seems like if there's demand from Gen X and the millennials, there should be supplyed to meet it. Well, the builders are moving in that direction over the last couple of years, the average square footage of a new home being constructed has been bawling. But it's not the

core of builder market. The core of the builder market is the move up buyer excuse me, not the entry level bar So they're moving in that direction because there is very strong demand and in every market if you look at the low end of the market, the price appreciation there is very strong. This is the millennial is doing what they said they're gonna do when they add uh an stable job and income, they're gonna buy a house, and since two thousand fifteen, they're driving it. But their

entry level borrowers. And typically the entry level barrower buys an existing home with the boomers aging in place like they said they were gonna and the gen xer is tearing the roof off, putting on a second floor because they already own the land. Those two things are keeping supply out from the entry level barrower. Where is there a risk of over supply at this point? I mean one feature of this housing cycle. People come on they say there hasn't been overbuilding. Well, if you go to

certain cities, you see cranes all over the place. I'm wondering where have we reached that tipping point in in the United States. I actually think the risk is more in the cost of living in that space and whether companies move because the cost to their workers of attaining housing is higher than their ability to pay wage rates and stay profitable. So I think the risk is not over building. It's a shift in demand because of a change in where jobs are going. And you're seeing that now.

You're seeing some, uh, some companies in high cost markets move jobs, say to Salt Lake City or to Reno or to Phoenix, where housing is much more affordable, because they're at the wage rates that they can pay and

remain profitable. They simply can't find housing for people. That's why you see people like Google and Facebook and folks like that saying we're going to build affordable housing is because it's so expensive they at some point they can't afford to pay higher wages to to house people there.

That's something we're looking at from a mobility perspective because the question is if if you start moving jobs out of the market, will prices start to come down because demand for housing will fall right and people start to sell. That's more of the risk than overbuilding. Uh. There's not really a place where there's too much inventory at the

high end. That's that's a different story because high income households have pretty much prepositioned themselves where they want to be and taking advantage of low rates and locked in very low rates and are unlikely to move, so that part of the market is softer than you see at the entry level. Dog Duncan, thank you so much. We

appreciate your comments as always on the housing market. Dug Duncan, Senior Vice President, chief Economist for Fannie May joinings here in our Bloomberg Interactive Broker Studio and Lisa Continued strength across the in the financial markets s and P up over one percent on again the tweet from President Trump about trade, and then of course that report coming out of down Jones in the Wall Street Journal about tears rolling back not just some of the existing tearrits or

some of the newer tariffs holding off on those, but maybe rolling back some of the existing terrorists in the market. Taking that as a bullish sign, is that December fifteen deadline for additional tariffs ways on the market. Yeah, Negotiators are reportedly offering to cut Chinese tariffs up to fift on three hundred and sixty billion dollars in imports that said the U s would reimpose the original tariff level

of China failed to carry out pledges. These are some of the offers that are being reported uh that are a part of the discussions that the US and Chinese trade negotiators are having. I'm Lisa bram Woe's alongside Paul Sweeney. This is Bloomberg Markets. Thanks for listening to the Bloomberg pen L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa abram Woids.

I'm on Twitter at Lisa A. Bramwoits one before the podcast. You can always catch us worldwide on Bloomberg Radio.