Ed Goldberg and Alex Wayne Discuss Bannon Losing NSC Role

Stephen Bannon from this committee at Goldberg is an adjunct faculty member at n y U Center for Global Affairs. He is also an adject professor at Brooke College and joins us here in our Bloomberg eleven three oh studio and uh ed we were going to talk initially about President Trump's meeting with President Jan Ping of China today and it's interesting at Steve Bannon was among the people who are supposed to be there, right, Yes, he was.

He was one of the people with Secretary of Tragedy Uh Munchen and and Um Kohn and Um and Jared Um who are all going to be at the meeting. So who knows what's going to happen. Now, So what are you expecting to come out of this meeting with president from China? Well, it's it's look, the goal basically would be stability. I mean, this is what China would like. Um. The problem is, of course, the President Trump campaigned using China as a whipping boy, and with in with Presidents

Trump truly weak political standing at the moment. Does he need to bluster? Uh? Surely the Chinese UM know enough about President trump senist personality. And we also have to assume that the Chinese intelligence knows exactly much much more than the Senate intelligence can about what went on with Russians in the election. To the Chinese have a little bit of the UM upper hand here, but they they really need to keep things calm. So one has to

assume they're gonna offer some UM cameras to Trump. So I could use to say that something was accomplished, but it's a difficult meeting. Well, I want to bring in right now, Wayne Alex Wayne he is our politics editor for Bloomberg, about this breaking story of President Donald Trump and the reorganization of the National Security Council. Alex, maybe

you could just tell us the details. Sure, Um, this comes as a bit of a surprise the the administration filed a document with the Federal Register this morning outlining some organizational changes to the National Security Council, which advises

UH Donald Trump on foreign policy matters. Um. Broadly, the changes place his National Security Advisor hr McMaster UH in firm control of everything that the that the National Security Council does, and also everything that the Homeland Security Council does. That's like, that's a domestic group that that focuses on on internal security and border security and that kind of thing, um.

But also of of of high interest to people in Washington. UH. Steve Bannon, the chief strategist, is no longer a member of what's called the Principles Committee of the National Security Council. And from a policy perspective, how does this change in the composition of President Trump's Security Council affect or potentially affect policy going forward. Well, it seems to give hr McMaster a much stronger voice in the administration. UH. He is regarded as a pretty sober minded guy, um, and

probably a positive influence on the on the on the president. UM. The thought to say that the Bannon is is not I'm not making a judgment here, but there is the Bannon is definitely a more controversial figure in Washington. So I am sure that that this change will be applauded by the president's critics. Ed. What about you, Yeah, I

think it. It sounds like it. It's things a foreign policy direction, much more to an even hand, much more rational, um, much less American first instead of America and the world. But this is all re means to be seen as far as policy goes, alex Wayne, is there any noted change in policy because Steve Bannon would be leaving the Security Council? You know, it was never really evident what

Steve Bannon's influence was. Um. He was put in charge of the council when when Michael around started not put in charge of the council, he was put in the Principles plinny when Michael Flynn was in charge of the council. Uh. Michael Flynn was a much more controversial figure than hr

McMaster um, more of a let's say, erratic figure. Um. So it's possible that Bannon was on the Council the Principle's clanning at that time just so that the President would have a close awry on what Michael Phon was doing. The President may have more confidence in hr mc master quite honestly, Well, you know, talking about policy, and I just want to get your quick thoughts on how North Korea and the launch of yet another missile affects the

conversation today that President gy and President Treup have. Oh it just it just makes it even more complicated. Look, China basically has been been both the protector and um the pusher to make North Korean more sane for the last um, you know, fifteen twenty years. They really from the Chinese perspective, they realize they have a problem. They really don't know how to handle it. I think, on the other hand, that they don't want to upset the

Apple car too much. They don't want, you know, the problem of having no Yeah, well, I guess the upsetting the Apple car too much just sort of goes back ed to your to your comment earlier about trying to

maintain stability and that that's the goal at Goldberg. Thank you so much for joining us at Goldberg's adjug faculty and hy U Suenter for Global Affairs, also the author of the Joint Ventured Nation, Why America needs a new Foreign policy, and of course or thanks to Alex Wayne, Politics editor for Bloomberg, Well, there is a revolution underway

in bond markets. The e t F industry has taken over with a storm, and to find out just how much it has transformed the way of doing business, we want to bring in Bloomberg's Rachel Evans, a corporate financial reporter who wrote a tremendous piece on it uh in Bloomberg's Markets magazine, as well as Eric Beltunas, senior et F analyst for Bloomberg Intelligence, who is the guru when it comes to things e t F s At Rachel, I want to start with you just to get some

perspective on how much bond ETFs have been transforming the debt markets in the US. So this has been going on over the last kind of five to ten years really, and it's really a product of changes we saw after the financial crisis. We saw bond bond traders who typically would have been kind of making the market really back away. The infantries went down and as a result, investors have had to find new ways to actually buy and sell bonds. Now.

The e t F at the same time was kind of climbing as a financial instrument that people could get into and out of very very quickly, and that's now something that people look to and when they're trying to get into or out of bonds as kind of a vehicle by which they might do that. Well, Eric Baltunas, maybe you could come in on this. My question has to do with the fact that if you're a bond trader, does that make you different than a bond investor? Are

the days of buy and hold over? I think you know, if you look at the turnover in these different bond etf you look at the Vanguard uh B n D that's saying barely turns over. People are going in there and they like the fact that it's under ten basis points. You get a diverse group of bonds. I think there's eight thousand bonds in that fund um and look, that would be one that people buy and hold. Then you have something like h y G, which I refer to as a hotel. People are checking in and checking out

of that saying all the time. The turnover is much higher, and I think that's a sort of parallel with the whole E T F universe. It's serving many different investors. But I think this bond movement. The number I like to throw out is if you look at h y G, it's only represents one to two percent of the assets in the high yield market, but it accounts for about of the trading, so they become really a big part

of the trading, but still relatively small asset wise. Well, and there wouldn't be a revolution without a good degree of worry that comes along with it, And there are some people who are worried that, uh, the sort of framework of an e t F, which is bundling a group of securities and having that portfolio and then selling shares that trade on a daily basis, could be problematic,

particularly in the dead industry. At Rachel, do you want to explain what some of those concerns are sure, I mean, this really kind of relates to the liquidity mismatch, as people put it, between having something that is exchange traded and can be traded at any point in the day and some of the underlying instruments that maybe there's a market for them once a week or once a day perhaps.

Um So, I mean we've seen through the financial crisis that when you know, we we were in the depths of two thousand and eight that sometimes the net asset value of these funds, that the value of the underlying holdings I've verged significantly from the price. Now the question really is is kind of what actually represents the kind of fair value of the fund? Is? Is the net

value a better representation or is it the price? And often we've seen the price of the underlying securities catch up with the t F. Eric, I want to I want to get you away in on this because I know you and I have talked extensively a out this issue. Is it fair to say that e t s, particularly fixed income ETFs, particularly high bond e t s, which we referred to with h y G, is it Is it fair to say they have not been tested by a major crisis? So yes, and no, Uh look h

y G was around in two thousand and eight. People forget that, but it was tiny. Come on, let's be honest. Yeah it was. It was smaller back then, right. So, and what Rachel was referring to as the discount, I referred to that as the arbitrage band. It's essentially the price. The price has to go down below the n A V before somebody thinks it's worth it to buy the bond and sell the E T S and so the arbitrage band over the last ten years has shrunken incredibly.

So you have two things I think is consider when you think of this I called the Jurassic part concern um.

When you look when when you are looking at the fact that if you were trying to sell high yield debt on a bad day, you'd probably have is tough time, if not tougher than selling shares of the E T F. So I think, you know, look, the E T S is a convenient way to do it, but it's not without risk, and I think there is probably some bit of cost that you will have to pay if you wanted to get out on those bad days, in the

form of just the middlemen. They're in there making markets, but there's so many more people with their eyes on the trading, especially the big ones like h y G, that you do see more liquidity in the secondary market for them. Rachel, I wonder if you could just tell us about a gentleman named Layton Chance, because he figures in your article and I thought it explained an interesting process by which bond investors are investigating exchange traded funds. Right.

So Layson was really kind of one of the first um to to to really use this process and with ETFs. Basically what he did is he utilized one of the interesting feat and he was at the Lockheed Martin investment management company, right, and also he did Tennessee's retirements right and now he's now he's in Texas with the Employees Retirement System of Texas. UM Yes, So basically, I mean he utilized kind of this this function of ETFs whereby you can buy the shares in the e t F

either with cash or what's called in kind. Now, in kind creation basically means that you deliver a portfolio of bonds to the e t F provider and in return they give you some e t F shares for those bonds. Now, of course, you can either keep those e t F shares in your book and that that's a very liquid thing that you can buy more of or sell, or you can sell them and use that kind of cash

you free up to to change your portfolio. So he used this as a kind of a novel way to to change his portfolio from investment grade debt to high yield and treasuries. For more information, just check out the Bloomberg Market story by Rachel Evans, Bloomberg's corporate finance reporter. R thanks also Eric baltunas Senior E T F Analyst for Bloomberg Intelligence. Well Wall streets bet against empty malls

in the United States is getting too crowded. This, according to a report from Group, instead recommend wagering against individual retailers as the next big short. Well here to tell us about malls and commercial real estate is Paul Adernato. He is the senior reats analyst and Managing director of BEMO Capital Markets, and he joins us here in the studio. Paul, always a pleasure, Thanks for being with us. Let's talk about the death of the mall? Is it the overrated?

I mean, have we always been talking about the death of retail and the death of the mall? Him, It's been It's been an ongoing story for for years and years. You know, first it was going to be bird flu, then it was terrorism. Uh, then it was of course that e commerce years ago. And so the mall has always evolved to to to bring consumers different experiences. Uh that would be more like restaurants, movie theaters, etcetera. So, uh, the malls have always been just a place for people

to meet and a place of commerce. And so if we just think more general early about those places, uh, they'll probably survive in some form or another. They've been very very good at evolving in the past. Well, Paul, do you think there are specific reads real estate investment trusts that have been oversold as a result of the growing pessimism about the retail sector in general? Alright, A

very good points. So if we were to separate the U S. Mall industry into the most productive malls, those would be companies like UH, Simon Property Group SPG, mase Rich and a C and g g P Inc. That's a symbol, g g P. Those would be considered the top tier operators in the US. And UM and this group I think, uh, you know, has been oversold to

some extent. The reason I say that is that if we look at the implied cap rate and so really that's just looking at the um the value of the underlying real estate, it's trading much much cheaper than the private market value of of real estate, uh, substantially cheaper. So you know, are the malls are the malls stocks cheap? Very much? So? UM what will be the catalyst to get them going. Um, that's a little more of a

tricky question. I'm not quite sure that we will ever have, you know, evidence until this whole you know, UH department store anchor and and you know, small shop retail uh evolution has has really played out. What about the payoffs from these real estate investment trusts? So many people look to those as a source of income. Are those payouts covered by the current operations of these companies? Yes, so all of the three companies that I just mentioned have

very strong balance sheets. Uh. The dividends, I would say, are not at risk uh at all. You know, we talk about malls and we talk about the carnage that we've seen in among retailers, and often we conflate the too because we think so goes the fate of retailers goes the fate of malls. Is this true? Um, there's a very, very big disconnect between the fortunes of retailers and the fortunes of the mall owners, for instance, the anchors. Many people don't realize that the anchors pay little or

no rent to the mall owner. Historically, they were given the space for free or for a very very low rent in order to generate traffic for the mall. Now they haven't really done that for a long time, and now it's it's finally playing out that the anchors are are disappearing or shrinking. But that's just, you know, kind of one example of how the retailers don't necessarily directly

impact the fortunes of the mall owners. Right although, in evaluating the value of a mall, you have to look at the traffic, the foot traffic of the stores that currently are there. And based on those analyzes, do you believe that there is still more pain to be had in the retailers specifically? So, so, there's definitely more pain to be had. I mean that we're we're probably still only in the in the third or fourth inning of the whole e commerce impact on on the retail space.

So so I do think that there's a lot more transformation that has to occur in terms of the mall traffic. It's interesting, but the mall owners claim that they don't really track it. Now they have now they're starting to. But you know, this is this is what we're we're we're hearing, and so they say, look at things like gift cards but they you know, they should be able to count cars in the parking lot, etcetera. But um but anyway, I guess the point is is that the

way that people shop in malls is changing. Right, so you're probably going to do some research online before you go to a store, Whereas you know, twenty years ago, you might have started at one end of the mall and just you know, made your way all the way down to the other end. Uh And that's the way people used to shop. Uh so so so habits are changing, behaviors are changing, uh so so traffic. While it's it's critically important to know that, um, you know, we have

to consider the bigger picture as well. Consider Acadia Realty Trust. This is an interesting company. A k R is the symbol. They've got properties in Brooklyn, Chicago, Washington, San Francisco, Boston's Newberry Street, for example, as well as Milwaukee, uh and and Chicago. Tell us about Akadia? Why is it different? Sure? So, Acadia does not own any mall real estate. In terms of the regional malls. They have a few community shopping centers that are grocery anchored, but none of the of

the malls that are currently under under scrutiny. UM so years ago, Acadia, you know saw what was coming, as did as did many folks, but they actually acted on it and built a company around it. And that is the thought that UM dense urban areas, this live, work, play environment is going to be the place that UH people want to want to be UH and where commerce will will occur and also where brand awareness can be established.

And so if you talk to retailers today, UH, those that are either UH doing very well online or those that want a better online presence, they will tell you that they you know, first you need to have brand awareness. And so brand awareness generally occurs at flagship locations. These are the very large stores that really really convey the experience of the brand when when you go in these take these UH stores are located generally, UH in the

metro areas that you that you just mentioned. Paul at NATO, Thank you so much for being with us. Truly, this is the story of the moment. Is definitely, at least in the debt world and in the real estate world, is what is going to happen among retailers and with commercial real estate, real estate investment trusts and all of the other related instruments. Paul are Donato, senior reads analyst Managing director at BMO Capital Markets, and he was with

us in our Bloomberg eleven three oh studio. The minutes to the March fourteenth and fifteen f o MC meeting will be released today at two pm Wall Street time. We will of course be bringing that to you, but we know that Federal Reserve officials have been well less than transparent in telling us all about what adjustments to the balance sheet of the Federal Reserve they might Mike,

let's bring in John Augustine. He is the chief investment Officer of Huntington National Bank, helping to manage approximately seventeen and a half billion dollars. Based in Columbus, Ohio, John can be followed on Twitter at John Underscore Augustine, John, thanks very much for being here. As I mentioned, we'll get those meeting minutes at two pm Wall Street time. Do you expect to hear anything or learn anything about adjustments to the Federal Reserves balance sheet? We don't think so.

We know that debates obviously picking up to that for an a half trillion dollar balance sheet, and when they may quit renewing purchases from matured securities there, but we don't suspect it. It would be rather surprised, we think the markets if that showed up in meetings or excuse me, in meeting minutes this afternoon, but we'll see you never know. Well, yeah, John, you know this is my big question right now because Dan Trullo today uh FED chair in Uh just who

is about to resign? So in fairness, he's not necessarily going to be relevant to this discussion, but he said on a CNBC interview today that he thinks it makes sense to start talking about possibly unwinding the balance sheet. This follows a lot of FED talks saying the same thing. Markets have not responded. Are they just saying we don't

believe you. We're gonna call your bluff potentially? You know that the surprise to us today and market so far is the fact that bond yields have gone nowhere today and as a matter of fact, that they're slightly lower now on the tenure as we sit and speak this morning. So the bond market is not buying it um, that's for sure, and they're not buying the economic recovery either. There's two big sets of buyers in the bond market individual investors through mutual funds, and then the TICK data

shows foreign investors. Now that's data that's January, the last report Treasury Treasury international flows. So yes, sorry, but anyways, there's there's still big buyers prevalent in the bond market, and it's it's a it's a surprise to us at our shop at Huntington this year to see yield this

low and now having negative real rates. Is it possible that we're getting a demographic shift in the investor base that as people age, the baby boomers age, that they will be getting out of stocks and moving into treasuries

because they want the security and the consistency of return. Potentially, but we think, at least at our shop, as we look out for our customers again, you know, I'd rather almost own Johnson and Johnson stock right now and get three percent divit and yield than a bond right now and get one percent. So yields we would say we still strive for three percent in our income focused portfolios.

Um still below that on a tenure treasury yield, So that may be correct, We're just not approaching it that way, at least at Huntington's So let's say we do get some hints about balance sheet discussions at the Fed today at two o'clock when we get the f O m C meeting minutes. Uh, do you think that there will

be a severe, potentially severe market reaction potentially now? And by the way, we may be following Europe a little bit this morning to that bond markets quiet, and we tend to follow the European bond market until the afternoon, so it'll be more interesting here this afternoon. Now, if we do get indication that they may try to at least stop growth or lower the balance sheet, yes, we would suspect you're going to eventually get a reaction in

the bond market. Again, that's the surprise does this year's We haven't to most any news. Just to give some perspective on the Fed's balance sheet, it's about four and a half trillion dollars that has been expanding since the financial crisis when the FED started to engage in buying bonds and increasingly mortgages as well. Back in two thousand and nine, it was nearly one point eight trillion dollars, so it has Wow, it is really is more than doubled,

nearly troubled, but think of this for this afternoon. Though. One interesting thing this afternoon, what's on our mind is where they're gonna do in the second half of the year and are they going to change their dialogue around the second half of the year. In other words, are

they thinking more than three rate increases this year? Because we do think the Fed is going to have an impact on not only the yield curve treasury yield curve, but potentially stock valuations in the second half of the year if their discussion and meeting minutes gets more are hawkish. That is what we're watching this afternoon. All right, let's talk about stock valuations for just a moment. If you had a portfolio manager that consistently made ten percent a year,

what would you say, hire him first? Okay, So the reason I ask you this is because you know, if you happen to buy a n ASDAC fund right just tracked the NASDAC, you're up ten percent, So why not just get out? Now? Why do we never hear when you should sell and take some profits. So we're we're a long only shop in general, and our clients are hiring us to basically keep them fully invested unless we see a recession coming. We don't see a recession coming.

Alternatives to equities are difficult right now because you could argue most all markets are expensive. So what we're doing is making sure diversification plays into equity markets. We're rotating as those valuations EBB and flow. Uh. This is an environment we as discretionary money managers, don't particularly like, but it's kind of the one that's handed to us. I got an egg it of real yields coming out of bonds, and I got cash that's still well below the inflation rate.

So equities are where we have to focus and do it diligently. For clients, we have to be more diligent. You're right, How concerned are you about a sort of perfect storm where longer yields rise substantially and stocks sell off, which is something that people have been worried about. How do you diversify that well? Then that at least would provide us potentially an avenue to rotate from stocks into bonds.

How high would yields have to go on the thirty year of the ten year for you to make that rotation. Right now, we're somewhere between two point eight and three point percent. That's what our fixed income team is looking at. On the tenure, that's why our fixed income team is looking at. We've been talking about that already most of this year, when rates got to to six earlier this

year but then but then rolled over. So we're we're kind of setting a number there in our mind, and we're kind of setting it around the potential for real GDP. We're kind of using that is our barometer to see when we want to make it, when we eventually want

to make that switch. You mentioned rotation, and I wonder if you could tell us what you're rotating out of and what are you rotating into well in sectors for instance, what we're talking to our equity team about is find excuse me, technology has been where the action is so far this year. It's the only sector up double digits. Energy, by contrast, is the one down, one of the two

downs so far this year. So there's one potential rotation not to sell out wholesale, but just trim some gains and add now that oil seems to want to hang around fifty dollars a barrel, so PIM that's one. The second one we've been talking talking about consistently and we've been early on is small and mid caps. If we're going to get some fiscal programs here in the US, some policy change, we think that's going to be a beneficiary, and that's on pause right now. But that's another area

we're looking at. How long are you gonna wait before seeing fiscal stimulus before saying, all right, maybe this trade isn't isn't gonna workout? Probably two So if we don't see some kind of fiscals Emula's plan by the end of June. You know, in March we really started seeing restlessness coming markets around that issue from day to day. So you're probably here in the second quarter somewhere. John Augustin, thank you so much for joining us. That was really,

really fascinating. John Augustine is chief investment officer at Huntington National Bank, overseeing about seventeen and a half billion dollars based in Columbus, Ohio, and I thought it was super fascinating this idea of that bogey, that benchmark at which you get at a stock at stocks and into bonds to capture that higher yield. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer.

I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch US World War ID on Bloomberg Radio mm hm