EM Investors Are Very Worried About China: Van Eck’s Fine

van Eck Global. He just returned from I MF meetings in Bali. He got back Sunday night. He's been going to these meetings for twenty years. This one, this one was different for you. How so um this Well, first, what's different is they're crowded, um, and there are a lot of people and it speaks to the amount of investment that's going into the e M and e M

bonds and and that's a good thing. Um. But uh, I think the biggest thing is, uh, this is one of the most if not the most you know, uh worried meetings in the sense of, you know, I go to the meetings and then I spend time with the old timers afterwards and see you know you are you leaving here as more of a seller or more of a buyer because you have to have a bottom line on everything obviously, and uh um and and and and a seller, but uh much more concerned about China. That's

really the thing China set up is. Though you could have said a lot of the things that are being said now a year ago, two years ago, five years ago, um um and uh and I think that's fair. The issue is when is it relevant? Wise it matter? And that's why I care. Is it now for reasons I can get into. But now it's elevated as a concern. Well, that's where I wanted to go. Is this matter of China's economy accelerating it slowdown? Or does this have to

do with trade tensions with the US? Um? I think I think you can't disentangle the issues, um um, even though uh you know it's trade is a big jobs generator in uh in China and the current account uh surplus is declining and uh that's a that's an important uh as I said, poor generator jobs, which it's important generative confidence. Why do I say that the set up for China, I don't. I think China is a country that has for twenty years been disciplined by equity investors.

What do equity investors want? Growth growth, growth, growth, growth growth. Bond investors are very different. They're happy with recessions, they welcome recessions. They worry about over leverage. Right, so they've gotten the growth. But with the growth, they've gotten the growth. With with with the growth came immense leverage. So the set up, the initial conditions are bad. They're not bad in the traditional sense of oh my gosh, they owe a lot

of dollars and they don't have them. It's a very different setup, and that's why people have been calm, and that's also essentially why I think the market has been right to sort of say, you know, it's not really it's a problem, but not really a problem for today and not something here. The issue there is domestic claims.

The most acute phase of EM crisis, in my experience, is when locals lose confidence and all the money M zero, the money in your pocket, M want a short term claim like a demand deposit or M two, something like include savings accounts UM. When that when people start closing that and saying I want the dollars. I want the reserves. And that ratio in China is basically the worst in

the world. Um, the amount of domestic claims on dollars and you know what you're getting for a tenure bond in China and the local currency three and a half percent in a tenure Do I need to say anything else? Right? That's the issue. And oh if the argumacy, Oh they can hike interest rates, high interest rates, what is that going to do to growth? Right? And and if the growth gets hit, this is an economy that depends on

significant investment, almost half of GDPs and investment. So those, I think are the issues that are coming to the fore. But they're coming. The trigger is, as you're suggesting, is trade. Um. But this broadening of this tense of the relationship with China, or the tense points on to beyond trade, I think is is settling it in people's minds. And there and and uh, it's a new big risk. When you talk

about a new big risk. There is a headline in the South China Morning Post several weeks ago six trillion dollar debt bubble which Chinese local authorities have built up. Go ahead, you know everything unwind that without a lot of pain. Yeah. Look, I I and and today's announcement is more sort of new products, right, more and more and more leverage. And I was struck by how more leverage and stimulation is seems to be. My sense is

that it's viewed as a legitimate policy option. More stimulation, stimulating and then having your currency weakend is not stimulating, right, that that's that's spinning your wheels, right, and trying to get out of something. Um. Every time we've looked at the Chinese financial system um um. And when we seem that we feel like we get a handle on it, um, some new balance sheet with leverage comes up, and so

that's a real problem. The one thing that we've consistently said, though, and that is probably still the case, is the Chinese authorities are extremely impressive when you bring up these problems. If you brought up that problem, they are not denying it. That's the other thing that characterizes free crisis. They know these they have tools to do. They come up with tools to deal with it. Um. It's just that what they need to do might be bigger than what they've fought.

So you know, you've got to give them the benefit of the doubt. But these issues are are are come up and they're real, and so far the government's had the credibility to say, look, don't worry about it, We're doing something. So I want to go back to those I m F meetings that you had with the old time ers, as you said, how much are they considering

that a possible disruption in China? How much of an impact would that have on the rest of the emerging markets complex in which countries would get hit the hardest? And are they staying away from as a result of this uncertainty. Short answer, profound impact and all right, um now, yeah, but but I don't think that means run for the hills, right, Argentina has already been through a lot. Right, you can find short dated bonds with high yields where right or

wrong in the world. If they mature and they pay their care, you're going to be fine. So kudos to you, because when you came in here you basically called the bottom of the Argentinian bonds sell offs to carry on. Thanks thanks, notice So, but there are there are a lot of countries that are being stressed out by tougher financial conditions and the trade trade conflict UM and UH UM.

And so one one straightforward answer is there's you know, there's there's some cheap things to do in UH in in emerging markets, UM and and and those are those of them. But China has been opening for forty years. UM. For the last forty maybe the thirty plus years, you've had declining inflation and inflation expectations and rising trade. UM, they've been related, right. I mean, it's, you know, the the economic logic of globalization, optimizing global outcomes and reducing

inflation and is correct. UM doesn't mean it's right, but it's it's certainly correct UM and UM. I think that's at risk this thirty year trend. Thanks very much for being with us, and we look forward to having you in the future. Eric Fine lots to talk about portfolio manager emerging markets fixed income strategy for van eck Loobal.

For much of this week, the news in Washington, d C was dominated by Saudi Arabia and US relations and what would happen now that there was a disappearance that resulted in the most likely death of a journalist who worked for the Washington Post. But is that the big takeaway from this week? Marty Schanker joins US now chief content officer for Bloomberg News. Definitely, Uh, the news out of Washington, d C. Is moving so quickly that you

blink you miss it. How much lasting power will the Saudi Arabia US story have going forward or will people just sort of forget about this doesn't have legs. It definitely does have legs, and uh, you know, it continues even today. There's somewhat of a lull. It's a it's the Sabbath in the region, in the Mid East, so there isn't a lot of news. But in the the issue as it relates to Donald Trump's response is still very top of mind. Um in the politics of Washington.

Whether or not at actually resonates into the mid term elections is another question. Why because I think that mid term Why Why is it resonating so strongly politically? Because it in some ways, and I think the news channels reflect this. It speaks to Donald Trump's unconventional way of conducting foreign policy and the transactional nature of his presidency. You know, immediately people have gone to the whole issue of what kind of business relationship does Donald Trump have?

Why isn't there a sense of complete outrage. Why aren't we taking very concrete steps to sever our close relationship with Saudi Arabia? And in Donald Trump's defense, it is a much It is a very complicated issue. And many people have commented on the fact that, uh, because o Ji's death, will try magic hundreds of thousands of people being killed in Yemen, and no one says a word

about that. Indeed, And just to kind of add a little bit more to the story, there was a report that Secretary of State Mike Pompeo initially did hear the audio that the Turkish government claims they have, when in fact, a State Department spokeswoman came out yesterday and said noe had neither heard the audio nor the transcript. So my question then is what do you think Secretary of State Mike Pompeo was doing in Saudi Arabia and is there

a potential for conversations about succession planning in Saudi Arabia. Well, I can't speculate about what mom Mike Pompeo was thinking, but clearly all the participants in this controversy are trying to figure a way out um that includes Donald Trump, that includes this the Saudi government UM in a way that provides some accountability for what happened in the in

the Saudi embassy and Anchora, while still having repercussions. And Donald Trump did hint at that that there would be severe consequences if it was determined that there was a murder uh in some way connected to the Saudi government. But it is true that the Saudi the Saudis are critically important to the strategic interests of the United States, and you have to balance that against you know, this obviously outrageous action, UM, and they're all trying to figure

a way out. So let's talk about the political fallout. There definitely has been vocal criticism from fellow Republicans in the Senate and elsewhere. There are reports that Nicki Haley may have resigned from the u N Post as a result of this. Is there any truth to that? Well, we're you know, that is the big question. No one, as far as I can tell, have definitively said why Nikki Halley decided to resign and why she decided to

resign now, UM. None other than Steve Bannon, who's not should not be underestimated in terms political acumen, said that this was a horrible thing to do, terrible timing, you know, like less than a month before mid terms. She was at the Al Smith dinner last night and actually joked a little bit about it. Um, but it could have been a factor. But then there are you know, multiple things that could also. There was also a report that it was Kavanaugh, which she denied. Anyway, she has her

reasons and maybe ultimately we'll find them out. So let's shift gears a little bit because we are heading into the midterm elections and I'm just wondering how important it is to sort of watch what comes out of President Trump's Twitter feed to figure out his agenda over the next couple of months or next couple of weeks ahead of the midterm elections. Right, and we've already got a lot of discussion about UH, immigration and the and the margin.

What should we pay attention to him? Well, I think if you looked at his uh, if you listen to his rally speech last night, he sort of outlined what his strategy is for the mid terms, it's you know that the economy is great, We're going for safe boarders.

I think he used the slogan that the Democrats are mobs and the Republicans are about jobs, and that's pretty effective argument whether it and there are there is polling that shows that, you know, there is a narrowing of this race, that the blue tide is actually could be questioned um, and that the poll numbers are moving in the GOP's direction. So that kind of messaging may quite maybe quite effective. As we run down to the final days of the Smith term campaign, just a little bit

more on Saudi Arabia, Marty is it uh? Is it

a situation where business interests are colliding with strategic interests? Actually, I would say that they're similar their blind uh and we and others have written stories while the headline people like Jamie Diamond about out of the investor conference next week, a lot of the underlings are going to be in the region and attending that conference because there are such financial there is such financial importance to the Saudi Arabia UM wealth that no one can afford to kind of ostracized.

So there are deep historical financial connections that will underpin that relationship, just as there are deep political uh strategic relationships on the government side that will continue that relationship. Thanks very much for being with us, Always a pleasure Marty Schenker. He is our chief content officer here at

the Bloomberg News. Much appreciated talking about Saudi Arabia and US relations in light of the disappearance and alleged murder of the Jamal Kashogi, a contributing journalist to The Washington Post. It's time to talk about Brazil and Brazil's largest airline group. Well in English, it's called Goal Intelligent Airlines. It carries more than thirty three million passengers each year on more than seven daily flights more than sixty destinations. The chief

financial officer is Richard Larkin. He joins us here in our Bloomberg Interactive Broker's studios. Richard Lark, thank you very much for being here. Thank you a good morning. Start by just describing for people that may not be familiar with your airline how it came to be and how it has come to really be the premier airline in Brazil. Yeah, we started in two thousand one, which is about one

year after we had uh deregulation in Brazil UH. And we started with a traditional low cost carrier based on a single fleet type, which for US was the Boing seven thirty seven high operating efficiency, high utilization, and we started with four aircraft in two thousand one, and a combination of the cost advantage of the company plus the fair dynamic allowed us to over a ten year period, UH become the largest airline in Brazil. That was also

helped by two acquisitions that we did. And over the last couple of years we've we've been investing heavily in our product, UH technology and the onboard customer experience, which has allowed us today to become the number one business airline in Brazil. All right, so let's fast forward to now. We have a situation where the Brazilian economy has been

mired in a deep recession, the worse in its history. UH. Things are starting to look up a little bit, at least when you look at bond and stock markets, possibly because of the candidate Bosonaro that looks like the front runner who has a much more conservative view towards cutting the deficit and rearranging some of the pension the pensions.

I'm just wondering, from your perspective, how much will this give a boost to your company should this go through and there is some measure of reform that gets enacted on the governmental level. Yeah, Obviously we can't predict the outcome of the elections, but assuming UH we see that, UH, you know, we see well adjust to the outcome. UH,

you know, we see UM. A lot of components in bolson Oars platform are very clear in terms of the impact that they're going to have on our sectors, such as, in addition to the reforms you mentioned, you know, pension tax reform, we're also UH in his platform seeing some things will be positive for the airline sectors, such as

increasing airport privalizations. We have a dire need for improvement and infrastructure and airports and airspace in Brazil, and a general liberalization of a lot of the other regulations that affect our sectors, such as bilateral agreements UH on international travel for on capital rules UM and UH. We also think that UM the policies are gonna have a positive impact on demand, particularly in the corporate space and within that particularly the agro UH, the agro sector in Brazil,

which is a big portion of our air travel base. Also, just to get specific on goal for a moment, ratings upgrade, when it comes to your credit tender offers, redemptions, improved cash liquidity. This is all giving you greater financial flexibility, any idea what you're gonna do with the money. Well, in the short term, we're continuing deleveraging over the next two years. UH. We expected delever by another two billion eyes,

which is uh, you know, call it five six million dollars. UH, and that that's the main focus of this this additional cash flower generating. In the short term is continued deleveraging. UH. We were upgraded back to a single B, but our our target is to get back to double B minus entity within the next two years. I'm curious about the mix of your travelers. How much is domestic versus international and how has that shifted. Yeah, today we're about eighty

five percent domestic international. We have been globalizing our business constantly over the over the years, pretty much since our founding. Today we have over ninety code shares and interlines. You know, we sell tickets in over a hundred forty countries around the world. And in fact, one of the reasons that we're up in New York today is we're UH talking about our our direct service that we're adding to Miami

and Orlando. In two weeks we launch uh service, and that's gonna allow us to expand our non Brazilian o in these non Brazilian revenues from the current fifteen to around over the next three or five years. So how does the backdrop of increased trade tensions and tariffs, etcetera affect your business if at all, especially as you try to globalize. Well, we we have a platform that has been developed over a period of time based on a

lot of global partnerships. Uh. You know, Uh, we have a very strong relationship with Delta Airlines, with Air France KLM, and UH what really drives these flows is the demand. Uh. On the Brazilian side of the equation. For example, we take our what we're adding service to to South Florida. Part of it is leisure, but there's a very large uh small business uh component in South Florida. A lot of Brazilians have small businesses there, and we don't see

that very much affected by anything on the trade side. Obviously, it is affected by on the currency side, which affects purchasing power, which affects our business. Uh, but we're expecting improvements on that. Well, that's where I was gonna go. Was the idea that if you have a devaluing currency, that makes it just that much more challenging to buy

the twenty Boeing seven three seven Max aircraft. Tell us about why you decided on the seven three seven Max and how that's going to change the operating efficiency of the company. Yeah, the main reason is the fuel economy. The seven thirty seven Max eight, which is the model war operating we are have already have three operating in the fleet. UH is already achieving for us a fifteen percent fuel economy and about a third of our costs are our jet fuel. That hasn't a significant impact on

our margins. So that's been the main driver UH to have that absolute cost reduction. Secondarily, you know, Brazil is a very dynamic competitive market and our competitors are also investing in in proved aircraft on the airbow side of the equation. We're the only Boeing operator in Brazil. But the second reason is the larger, slightly larger configuration of the Max. UH will be configured with a hundred and eighties six seats as opposed to our current hundred seventy seven.

That gives us a greater revenue productivity. But the final reason, which is important, which is facilitating these flights that were launching in two weeks to mamor Orlando. Is the additional range of about uh kilometers on the max that allows us to do direct flights to Miami Orlando. Richard Lark, thank you so much for being with us. Thank you, Richard Larcas, chief financial officer of Goal Airlines based in South Howlo, Brazil, but joining us here in our eleven

three oh studios. Among all stocks, Procter and Gamble really stands out posting a game today that is the biggest since October two thousand and eight, more than eight percent climb. Well, they beat earnings, they posted great expectations. Joining us now to talk about this, Sarah how Zach Bloomberg Opinion, consumer calumnists, Sarah, come on in here. Is this just that we like to buy really expensive creams and we just keep on buying them and Procter and Gamble cashed in on that.

So that's certainly a part of it. Beauty was a particularly strong division with seven percent organic sales growth in the quarter, and they definitely have been having success with their premium lines within Beauty, so s K two, which has very high price tags, has been leading the growth in that division for some time now. But that said, that's not the whole picture. They really had strength in their uh they grew sales and their grooming division, their

healthcare division, their fabric divisions. So um a broad based series of categories fueling this gain this quarter. Sara, this has to do also with organic sales growth, correct, it does. So organic sales growth, what they mean with that number is sort of excluding M and A activity and currency fluctuations, and so that's a closely watched metric for the particular

company given its global reach. But if you're talking about organics, UM, that is definitely an area that they're focused on in naturals um, understanding that the consumer is kind of moving in this direction and considering that more of a priority. So, for example, in the diaper's division, they now have this Pampers natural lines that's supposed to be made in a more sustainable way, and that helps drive growth in the quarter.

I love this sort of organic growth versus organics. And then I have to wonder, what is organic face cream? I mean, how is that organic? I don't I just boggles of mind. I do want to ask you, though, Sarah. They also said that they were gaining market share at a number of different divisions. Who's the loser here? Who are they grabbing market share from? Yeah, it's it's not. I think it varies widely across the globe. So for example, I think one interesting place to look is in their

loves diaper division. That's a place where they had been getting smacked by the private label diapers makers because they had so underpriced. So you can assume that's from the likes of Walmart, from Target, from Amazon who have strong private label offerings. There. They slash prices in the Love's division this quarter to try to get some of that market share back, and so presumably that's sort of where

that push and pole is taking place. Have they been able to raise prices or is that still a challenge. That's a really good question. So they have announced they're going to be raising prices on some key brands like Bounty, Sharman, and Pops because of commodity costs, right, pulp costs, paper costs are increasing, and so they're going to be taking

those price increases starting October thirties one. We don't know yet how consumers are going to respond to that, and I think that's a really important thing when you look at how sustainable as this growth that they deliver this quarter. Uh,

that's a real X factor. Executives were cautioning on the conference call today that trying to take these price increases could result in some volatility because they don't know how much Kimberly Clark or Colgate pal Mama is going to move in the same direction, and they could end up losing shoppers when they take that that action. I am the strange person that actually pays attention to the price of my toilet paper or my paper towels. Do you phim No to you, Sarah, I I pay attention to that.

I mean the differential can be dollars, like entire dollars in one package. I don't. I'm definitely a person who's just on autopilot. You know, I'm revealing too much about myself. I want to get your sense on how much Procter and Gamble is just doing things right itself, and how much it's indicative of the strong consumer the people have

really been rejecting so far this year. I mean, Procter Gamble shares are still down nearly two percent year to date, so you know, is the consumer a lot stronger than people think, and does this give wind to other consumer product companies. I do think this is an indicator of the fact that the consumer environment is strong, and we see this in so many different ways. We've got this in strong quarters from major retailers into two and I

think this is an additional reflection of that. That said, I do think that the consumer has been strong for a while now, right, so the fact that PNG is seeing this inflection point speak to some of the things they're doing right. I think, particularly in the grooming category, that is a business where they were just assaulted by

these newcomers like Dollar Shave Club and Harry's UM. They were offering these sort of disruptive subscription models and they finally returned to growth there this quarter, and so that suggests that, you know, they on the one hand, did some smart things in terms of adjusting their price structure to be more competitive with those guys UM, and also just got their mix of products in the right places

in front of the right shoppers. I got to imagine though, that whatever happens in China is also important to Proctor and Gamble. They cited double digit growth in some of their skin care lines in China, yes, and and China isn't very so China is very important to their future. Right now, it's actually only nine percent of their total annual sales, but certainly that that will change over time as the middle class grows there. But China is definitely

a real success story for PNG. It was only two years ago that they were posting declining sales in that market overall, and they've just been doing a lot of consumer product one oh one type work there. I think the l A brand is a great example of that. So in China, they really wanted to make that brand stronger, so they change the packaging of their ol A face product. Um. That's a place where in the Chinese market you might have an actual like over the counter service with a

customer representative there. So they sort of change the training and the approach to that kind of service. It's really worked, not as pim. She doesn't say change the cream, it's changed the packaging. Change the way people talk about where most of the marketing, it really is the one that grabs most of the money. We're so gullible. It's true when something is more expensive and packaged in a prettier package can be as gross margins they could be over.

Thanks very much, Sarah hall Zack, an expert in all things retail our Bloomberg Opinion consumer columnist, telling us about Procter and Gamble. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews that app, 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