EM Countries With Weaker Fundamentals See Repricing: BBH's Thin

Emerging Markets FX at Brown Brothers Harriman. Win Thin, Thanks very much for being with us. I want you to give us your thoughts about what's happening with Turkey after we see the Turkish lea or a slide more than three percent against the US dollar trading right now at four point eight six. Yes. Um, we've been seeing a broad based emerging market sell off really since the quarter began actually back in late March. UM. But what we've seen, uh,

the selling presidents have intensified for certain countries. Argentina was was sort of the first to come under the gun, and now Turkey is is being sold. Now Here's the difference to me is a critical difference. Both both starffer from very weak fundamentals um politically consider etcetera. But Argentina made some bold moves over the last time of weeks to try and and stop throughout they hike grace, announce some fiscal tightening and they said they would go to

the IRONMAF for standby agreement. You know, all very orthodox and that's what Mr mcweys President mcwew is known for. But Turkey's is really on the other end of spectrum. Mr Urdwan, President Urdwan has has very rocky relations with it with the West. Uh. He's always talking about the you know, Western efforts to stabilize this country. He wants a lower interest rate on hike them. So there's really to me a stark difference UM in the post response.

And because the Central Mark has done nothing yet um, the markets that have really green light to sell the leer at this point. So uh, when thank you so much for being with us, because I'm struggling to understand the situation in Turkey because frankly, the economy has been growing at a pretty quick clip that seems to be a lot of strength. There is this just simply a political crisis with President urduan being opposite in the face of an election trying to in gender support somehow with

mass inflation. Well, you know, it's a little bit of everything. UM. The one I think you are correct that the economy is doing well. In fact, the many investors I think is doing too well. It's overheating. The inflation is up close to eleven percent UM, the current account definite is blowing out UM, and the center markets is basically stating on its hands as its current is weaken again within

the context of broad based e M weakness. You know, in a rising US interest rate environment, UM emerging market typically comes under stress, and it's avoided for much of this past year, but it's really come back with a vengeance. Countries that have high degree at donal financing need to either the current account or short term external debt. Those are countries like Turkey that are very, very vulnerable in

this environment. Argentina is also there. So to me, the interesting thing is that if you look at a year to date UM performance I always do this on your w c RS page for emerging markets, you'll see a wide wide DIVERSIONCE you've got four or five currencies that are actually up on the air, Columbian pace, Soach, Chinese jun Masian ring gatt taiba um. And yet you've got some that are down well, I guess the argent past

dictually down your date Brazilian realium of ten percent. So you see some real divergences and thinks the way it should work, that is, the countries with the stronger fundamentals are going to outperform. That they may come under some selling pressure, but they will do realtive, do relatively better than countries with weaker fundamentals. And that's what we've really have seen unfolding this higher dollar, higher US rate environment.

I wonder at what point this dispersion will break down, because we've seen a lot of money go into emerging markets over the past five years, into indexed funds that

don't delineate between one country and another. And now you have a growing chorus of academics and uh AN investment managers saying that they are concerned about an emerging markets crisis, the latest being Paul Krugman today tweeting it's become at least possible to envision the classic style reinforcing crisis emerging market currency falls causing corporate debt to blow up, causing stress on the economy, causing further fall in the currency.

Do you agree, I'm not quite embarished, And there's one big reason for that. Unlike I would say, even um, most emerging Martin currencies are not floating or manage floats um. In the past, we saw Maxican Tekila crisis with the Asian crisis, or we had a right of pigs come under stress and then eventually break, and those are much more destabilizing, much more stressful on economy because you're going from a fixed exchange rate to you know, a fully

floating I would say probably thinking exchange rates. To me, the floating exchange rates are are are have been doing a job's they worked in a shock absorber. External shocks are reflecting weaker currency and they allow over time, these these countries and emerging countries to adjust their behavior. They're barring their hedging, et cetera over a more extended amount of time. So you know, to me, the weaker currencies are doing their job. This is what it's supposed to happen.

Of course, we'll see some bankruptcies. I'm sure we'll see some de fause in the corporate set. Uh, sphere. But that's just that's just part of the game. I think that's one of the problems that UM people were miss pricing EM during this whole secure rate environment and now were repricing e M and the ones that we had the worst fundamentals, where we're sort of the most miss priced and we have got we're sort of early in

this game. Who gets repriced next? Indonesia, Brazil, Well, uh, Brazil, I would say Brazil in Mexico are are sort of in the sites because we've got heightened political risk for both elections coming up, as well as uh, somewhat weak fundamentals. So you know, again, you know, we're not talking about a huge um you know, devaluation, sort of default evaluations. So now we are seeing, you know, under this floating stange red regime, we're seeing these currencies with poor fundamentals

come under pressure. So I would probably throw in South Africa, perhaps Russia as well. India. Indonesia are sort of the worst in Asia, but not as really not as bad as what we're talking about in our c Argentina and Turkey. But you know, again, the microscope was on all these countries. UM, you know, I would just uh tell our clients and invested in general to be discerning, to look at the fundamentals and realize that, you know, you can't tell everything

on masks. Some some should do better than others, some should do worse than others. And that's that's really part of the fundamental story that's lost sometimes when there's a lot of liquidity being thrown around. Dr Winton, thank you so much for being with us. A really important day for you to be here giving us some insight. Dr Winton, Global Head of Emerging Markets f X for Brown Brothers

Harriman in New York. I'm sure this is a very interesting time for Dr Wintin as well as all those dealing in emerging markets, considering the volatility that we've seen throughout the spectrum of currencies from Turkey to Argentina. This is Bloomberg Markets divisions, potential divisions among Federal Reserve officials over the yield curve and inflation that will be under the spotlight today when the U. S. Central Bank publishes minutes of its last policy meeting. Here to tell us

more about this situation is Matt Miskin. He is a market strategist for John Hancock Investments. He's based in Boston, but he joins us here in our eleven three oh studios. Matt, A pleasure to have you with us one if you could offer your thoughts. Are are you having internal divisions about the yield curve and inflation? And you would I think you'd be accurate in describing that. A lot of invest just feel divided as well. Yeah, actually we have

very little division. That we believe that of the biggest risks in the market today is if they get that third rate hike in from here, making it a fourth rate hike. If you do the math on that and where the Fed funds rate will stand and the two year yield will stand on that, we could be looking at a three point three percent to year yield by year end the tenure treasury standing at just over three

percent today. That would represent an inverted yield curve to us, that risk could be minimized if the Fed does go slowly and pauses on one of those rate hikes throughout the course of the year. We're gonna hear about that when the minutes are released at two and try to get inside for that June meeting that is that is coming up very soon. So you think that it's really important with these meeting minutes. Say from that perspective, well,

the symmetry around the inflation projection is critical. If they can let that inflation tick above that two percent target and be okay with that, then that kind of sets the pathway for taking one rate hike off that table. So it is a start of that. Now is there going to be market moving I mean, we're talking the main meeting, but what investors and analysts are gonna be doing is trying to extrapolate do they go in June and does the summary of economic projections in the June

meeting set that up? Okay, I want to make sure I really understand this. In other words, you're saying, if the Federals are of hikes four times this year, we will be looking at an inverted yield curve in short order by your end. If you do the math of the eight basis points between the Fed funds rate in the two year, you put that on two and a half, which is what the Fed funds rate will be by your end. If they do four rate x for the year, that gets you three thirty. So does that mean that

we head into recession next year? Typically going back over the last seven recessions, it has been a forewarning of a forthcoming recession. Usually there's a window. You know, in the mid two thousands it was twenty three months before the recession happened. Market peaked before that, but in the

midnight the nineties it was about six months. So it's not a precise measurement, but we would look at it as an opportunity to look to de risk assets and think about risk management more so in the end of this year and into next year. So panic now and avoid the rush. No, because our base cases the FED takes went off went off the table, and that the FED is trying to communicate to the market that inflation

going about their target is okay. This is a relatively new phenomenon in terms of the symmetry language that's been put into their communication. UM. So, you know, risk management is always a part of our process. It's it's critical. Um But as we look into the end of the year, you know, we we see if the FED does continue to raise rates uh to that fourth time, Yeah, then that would be time to kind of think about it even more so. What does that do to the dollar?

I mean, the dollar strength is something that if you had said the had a reserve officials, you know, at the beginning of the year, that we'd be at one seventeen against the euro, it might not have have foreseen that. Yeah, you're absolutely right. And and to us that does mean dollar strengthening. That means US equities look better than international that's divergence of global growth instead of the synchronized global growth.

I mean the p m I to date data today just Europe, right, yeah, out of Europe and then the US market pm I just came out down one t of a you know, one tick basically, well, the European data came in softer. You're starting to see desynchronization of of global growth here. So overnight or yesterday afternoon, Mark Quisel of PIMCO said that they're recommending that clients increase their allocation to cash to ten to fift from five to ten percent. They said that they should probably cycle

out of credit, in particular longer dated corporate debt. Do you agree. You know, the short en of the curve is offering a pretty nice yield, So we get that because cash is yielding. You know, if you look at kind of the shorten the treasury curve to two and a half percent. Not bad. The problem is you're not going to get diversification from equities if you cut all your duration away. Durations what you want when we get into a recession, and you know that kind of strategy.

If you're balancing that too to offset your equities in a downturn. You know, if you'd do collapse in the in the longer end of the curve, that's actually where you want to be. So I get it. You know in the next six months that you're gonna be, you know, mitigating the duration risk. As the short end goes up, you're gonna get some money there from from holding that. But when it goes to a recession time, you want duration.

So it'll be interesting to see if he ends up putting that back on six months from tonight, if we're kind of seeing this recession or environment that might be happening in nineteen seconds. Is there something specific you want to be looking for in the release of today's f o MC meeting minutes symmetry, Do they really harp on it or not? All right, thank you so much for being with us. Really interesting ideas. Matt msk in, market strategist for John Hancock Investments based in boss In, but

here in our eleven three studios today. Really interesting. I wonder if the focus will be back on the yield curve after the release of those meeting minutes, because, as Matt was saying, they're expecting the yeld curve to invert by year end. Should the federal reserve go four times? Not necessarily a consensus view. I should just point out there are other people who think that there's a significant more amount more room we have to go. But fascinating,

Thank you so much. Right now we actually are looking at some strengthening of the lot of Yeah, look at that three percent. Now at the US ten year treasury yield. As mortgage rates rise to the highest in at least seven years of news, when will it start to crimp people's demand for mortgages. Data today suggests that it already is. To talk about this more, I want to bring in Logan Mota Shami. He is senior loan officer for AMC Lending. Logan,

thank you so much for being with us. I'm talking about the data that showed that US purchases of new homes fell in April more than people had expected. Do you think this is an indication that higher mortgage rates is crimping into the home sales market at this point. No,

for multiple reasons. Number one purchase application data is that cycle highs currently right now, and we've had year over year growth in every single week this year, even with higher home prices, even with higher mortgage rates UH and working from a higher base. This is not like what we saw in when rates were higher in a non seasonal timing. You saw that impacting demand. So as of now,

absolutely not mortgage demanded. That cycle high. New home sales for me personally is trending much better than I even thought I was only looking for two to growth this year. We're looking at double digit sales growth this year for new home sales. The revisions were down, but they're not down big. So so far, we haven't seen mortgage rates impact demand at all. One bit. It's impacted the refinance market, but not the purchase market. We'll get two refinances in

just a second. I'm curious, are you seeing people put more cash down? No, Typically when home prices rise, UH, the ability to UH put more down and gets limited. But again the markets are different. You know, UH c A home buyers typically tend to be the highest income highest net worth asset people. So you know, if you get some buyers who put down, but then you get the most of the other markets, you probably get a

three to five percent down home buyer. So even new tax regulations affecting the deduction of mortgage interest, that is a beg pardon um. Property taxes not affecting home home sales. Absolutely not, and it shouldn't. That's that's a very marginal small number of perspective home buyers that would actually look at that and change their mind. I don't think that will will have any impact because the mortgage interest deduction

is still up to seven fifty thousands. You know, the majority of homes are under that level, So I don't see that being any impact whatsoever. You know, Logan, we're talking in generalities and averages. Though the US is a monolith, and obviously it's a fragmented market when it comes to real estate. And I'm wondering, you know, can we break out which part of the US property sales market is actually driving the whole bus here? Because we know that there has been robust growth in the prices and the

sales of the higher end houses. But you know, certainly there has been a dearth of affordable housing for people who are lower income, just the first time buyers, etcetera. Where are we on that, on that sort of dynamic that seems to have gotten a little bit out of whack. There is no such thing as affordable housing in America. We do not create the incentives or the backdrop to

create affordable housing. And this is a post phenomenon where we've just been building bigger and bigger homes, and whenever the economy gets weak, we lower interest rates, which spur demand and the notion that there's anything affordable out there. For a long time now, it's just not feasible in my eyes, because we based affordability indexes on people who

supposedly have down with low interest rates. So I don't even I don't even subscribe to that these I think if you want affordability, you move towards the middle of America, where home prices are much smaller than you know, the coastal areas. Again, that goes into the U. S economy. We've you know, more than the population are in five six different areas in the US, and that tends to be where the high overheating home prices are. But again those people make money as well, and this is why

you see home sales still slow and steady. There's no record breaking demand. This is one of the reasons why you don't see housing starts get to fifty year moving average. But we don't build affordable housing. We gave that up decades ago when we've subsidized the housing market with low down payments, low FCO score loans. Interest rates were lower, they were rate of growths and falling for interest rates

for decades. So to me, it's impossible to get affordable housing back based on what the builders need to do, because the builders have to make money and they have to build bigger and bigger homes to get that profit margin, especially now with lumber prices of the labor costs stuff as well. Well. Logan, you just described some of the headwinds that many of the home builders are facing. And

we got the report from Toll Brothers this week. Obviously they produced luxury housing, but do you see any divergence between the health of your business and the somewhat lackluster fortunes of the home builders. Here's the thing with the builders. The builders were terribly expensive going into the year, and since new home sales if you actually look at adjusting to population used in a six month moving average, we're basically a little tat about what we would see in

a recession. So they are dealing with low numbers and they have to make as much money as possible out there. So this is why they've been building bigger and bigger homes. I think it becomes an issue for them, Uh if interest rates go to six or six and a half percent, because these are mortgage buyers. It's not like existing homes that still has a record breaking cash buyer index out there. So, but the demographics for housing has been sought from two

thousand and eight to two thousand. We're about to get into a demographic boom for homeownership. So because the numbers are still low for new home sales, they're going to run into a better demograp aftric passion on like two thousand and seven where we had a credit bubble. So I think the builders sales have legs to go higher. It just becomes a profit margin story. Lumber prices, labor cost,

land cost. These things matter more now at this stage of the cycle because sales are starting to mature toward more of a fifty year average, and when people talk about a demographic boom. They talk about all the millennials, people who are going to be moving out of apartments and buying homes. Is there any evidence that this shift that we've seen accelerate toward renting rather than owning will

reverse this is this is a really interesting topic. Millennials are the biggest home buyers in America today and have been for some time. They're the biggest home buyers in the world. But they buy homes aged thirty two and on. So that big demographic pitch right now that we have in America or ages twenty three to twenty nine. So this is why I've always stated for five years on

Bloomber you have to wait till years four. Now, last it was the first year that we had more homeowners and renters, and that makes sense that these people are actually starting to live longer in their rents. Once they get up to the thirty two age they start to buy home. So we're still a few years away from having a better demographic patch. But but once they get to that age group, they if they if they do have that kind of the educated, skilled wage factor in

their households, they tend to buy homes. So it's just it's just a makeshift of the demographics in the cycle. It's very unique. We're very old and we're very young. But once they get to that proper age group, they buy homes and that that data has been evident now for for years. Thank you very much for being with us. Logan Mata Shami he is a senior loan officer for a MC lending group. They are based in Irvine, California. You can follow Logan on Twitter at Logan Mata Shami.

That's m O H T A s H A M. I. You're listening to Bloomberg. I'm pim file box along with Lisa Abramowitz. Coming up, we're going to be taking a look at what happens when Dodd Frank legislation is changed. The US currently imports most of the uranium that is used for fuel in nuclear power plants in order to generate electricity. About four of the uranium used in the United States comes from Russia. But what would happen if the Russian legislature decides to ban the export of uranium

to the United States. Well, here to help us understand the situation is Lee Courier. He is the president chief executive and founder of next Gen Energy. They are based in Vancouver, British Columbia, and they are the owners of a vast track of land in the Athabaska region of Canada where they mind for uranium. Lee, thank you very much for being with us, my pleasure. So did I set out the kind of situation that that is that

the country faces accurately? Yes, she did. You quite rightly pointed out that the US relies very heavily currently on uh uranian source from Kazakhstan. We'd respect to our project. We're currently in development, heading towards production. Um not currently in production. So Lee, just to sort of give a sense of why why uranium is a hot topic. It's used in nuclear weapons. Correct, Correct, and as a result, perhaps comes under more scrutiny and has dealt with, greeted

with more skepticism than other than other commodities. Correct, well, grect it is it is a sy energy obviously, anything that that's produced in Canada or Australia, and countries that produced uranium who they sell it to must be parties to the non proliferation treaty and they only sell to those countries. So, yes, it is used in nuclear weapons,

but is only mined um for electrical generation purposes. So then this sort of goes into what Pim was talking about, where the complicated sort of foreign relationship between the US and Russia is sort of an interesting an interesting side story to the uranium market. When Russia or Kazak sne Is is actually supplying most of the US is uranium,

Yes they are. They're supplying it for the US in power generation in the utilities, and the US produces domestically very little uranium and hence they're currently reliant on imports of uranium from Canada, Australia, Kazakhstan and predominantly to service their their current requirements. So can you tell us what would a ban on the export of uranium from Russia, which accounts for fourteen percent of US imports, what would

that do to the price of uranium? Look at that would exacerbate an already supply side situation where there's a lot of minds around the world closing due to the higher cost of production and being at the end of their use from mind life. It would exacerbate the that that situation and I think undoubtedly have a very positive impact on the price of uranium. Are you expecting to see higher prices in more demand for for the uranium that you your company minds? Well, yes, I do. We

have an asset that's located in Saskatchewan, Canada. It's ranked of the number one minded jurisdiction in the world. And in this day and age, with geopolitical issues becoming even more prevalent than than what they have been in the past, uranium source from countries that have a very stable sovereign jurisdiction,

such as Canada and Australia. I think we'll start to see a premium or or greater attention from the US utilities with respect to sourcing their uranium supply from Canada predominantly. You know, it's it's interesting when I think of aluminium, for example, I have, you know, this feeling of industry and this feeling of building things else aluminum foil from my children's lunch. When I think of uranium, it kind

of makes me feel uneasy. I think about something that sort of has a short half life, that's used in weapons, that you know is dangerous um and flammable. Could you give me just a sense, can you give me a picture of what a uranium mind looks like and you know sort of whether whether the impression that that I have is sort of false and that it's just like

any other kind of mind material. It is when from a mining perspective, look at the mind that we are developing or or in the other ones in Canada or anywhere in the world, really are very very benign. They're no more complicated than a gold mine or a copper mine or aluminum mine. Um. Look, uranium is a fantastic source of energy. It's why nuclear energy is such. Is the lowest cost of given output of electricity is the lowest on the planet, and it emits no carbon emissions.

The fact that it's such a fantastic source of energy is why it has been used in the past in nuclear weapons. But um, from the mining perspective, it's it's very benign. It's not until it gets into the nuclear fusion process in the in the utility that it generates, it's it's terrific power. But look, there's no deny it. It has had that history in the past. But as I said earlier, mind uranium is very benign. It's no

more complicated than many gold mines around the world. And as a source of electricity, it's the lowest cost of power, and that's over time. It's been province in the sixties, that is the case, and now with carbon emissions being such a well, I think it's actually one of the planet's largest issues to resolve and properly address. Attention to that is the only form of clean power that provides base load power. So wind, solar, older renewables fantastic initiatives

and must be pursued. But with respect to our requirements and the world's population through at least till at least, nuclear power is the only answer, and I stress the only answer, and I think a lot of countries are starting to realize that China will become the world's largest consumer of electricity of nuclear power sometimes in the decade

and overtaking the US as the largest consumer. And he also seeing a lot of other countries around the world extent and the licenses of nuclear power stations because it's just unbeatable in terms of a good, clean, low cost source of energy. Lee Curier, thank you so much for being with us. He's president, chief executive and founder of next Gen Energy based in Vancouver, British Columbia. Coming up politics, policy, power and law, Bloomberg's own June Grosso it was joining

us now. The show is being broadcast from the Bloomberg Law Leadership Forum. Real quick, June, what are you focusing on today? Well, Rod Rosenstein is making a speech right now. We're gonna be talking to the top lawyers at companies like ge about regulatory compliance. Stick with it. Sounds fascinating. I will be listening, so should you. Bloomberg Politics, Policy, Power and Law. That is next, and Lisa Abramo it's along with my co host Pim Fox, and this is

Bloomberg Radio. 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 wits one Before the podcast, you can always catch us worldwide on Bloomberg Radio