EM Optimism Has Been Overblown: Brown Brothers' Thin

one um. This actually request comes at odds with years of global pressure on China from the Group of Twenty Economies in particular to move towards a more free floating currency. To get a sense of what's going on, let's bring in Dr wind Thin. Dr Thinn is the global head of currency strategy of Brown Brothers Harmon in New York. He joins us on the phone. So, Dr Thinn, what is behind the US move to, you know, in theory,

push the Chinese to stabilize the one. It's caught me off, car because as you know, the US has some pressuring China bout his exchange. It positive for years and years and years. It's it's getting written up all the time in the semi annual Treasury fact supports. Now it's not been in designated currency manipulator, but you know it's it meets some of the criteria. So then to turn around and a most in the same breath asked them to basically manipulate the currencies. To me, it just doesn't make

any sense. Um, you know, they hit the headline yesterday. I don't think it's something that really China can really commit to. I mean they are you know, opening up um uh their economy and markets, the more market forces, and to be quite honest, I don't think they want to really lose that the career freedom. I mean that is if you go into some sort of pig or quasi pig uh, you know, you you lose some degrees

of freedom in terms of running monetary policy. And and it's and given how many balls that the Chinese policy makes a juggling right now in terms of structure reforms, uh, secular slowdown, etcetera, I don't think that's something they want to give up. So you know, it's one of those things that there's traveling that's being out there. Um you know I I I personally if they agreed to it. It's not. I don't think it's something that they can

held to. Yeah, I gotta I gotta admit I was struck by the same idea that basically the US has been yelling at China all of these years for manipulation not only of currency but also of of its companies. And so then turn around and say, please manipulate them because otherwise your currency is going to weaken too much? Is head scratching at best? I'm wondering, do you buy that the U n would weaken considerably versus a dollar

if it were allowed to float freely? Well, I think part of that question has to be, uh, frame within sort of the view of what what do I? What do you? What do I think of em? Because we when I say that, is that the correlation between the you want exchange rate and for instance, the e M s c I e M affects index is up around seventy, which is a hugely a huge jump from what used

to be and what that reflects to me. You know, of course it's still a black box, but to me, you know, the PBOC fixes still fixes the you want to exchange rea and allows to fuctuat in a certain ban, but it tells me that this black box fixing mechanism is has for better for worse introduced. Uh, you know, a more market forces into the exchange rate. That is, it's moving along with the rest of EM. So I happen to be a little bit more negative on EM

than many I think out out there. I think there's s some issues out quite a few issues out there. That's that's that's weighing on EM. SO I'm looking at through a lens of uh sort of, I see EM weakness in this year, in two thousand nineteen. So my view would be that the you want to probably weakend

as well along with the rest of EM. So Dr Thinn So, given that you know the U. S And Chinese negotiators are back at it trying to hammer out a trade deal, what is your sense of the what will come out of those negotiations and how does that impact your view of the dollar? Sure, you know, you probably know, yeah, and you guys have been caring at a lot of the you know, the news and quite timely fashion that we're playing sort of headline ping pong right now. But for the most part, we're seeing some

constructive comes from both sides. This is quite fence from back in December, when, if you recall, the US put it their span on the Chinese didn't even bother putting out any response. So they can they show the lines communication and better. Their meetings are much more frequent. Remember that we just ended a round in Beijing last week. They're here in DC this week. So it's definitely picking

up all that you have to. Because we have the March first deadline, I think most participants in the market believe there will be some sort of delay. Despite all this positive talk about some progress, it seems that the structure, the speaking points of structural reform issue in China, and I don't have something that can resolve in two weeks.

So you know, we've heard comments that we could get a sixty day extension, and that's probably sort of the base case, and I think the market would actually I think that it's positive that we're just even though it's pretty much like you know, taking the can down the road, you know, from the long term, as you I do think they'll come up with some sort of face saving compromise that both sides can say the claim victory. Now, I don't think it's gonna be some huge shift in

what in in UM trading relations. I saw it would be more long lines what we saw with NAFTA to oh just just sort of you know, sort of some tweaking here and there. But you know, it's not gonna be the greatest trade deals. And Slice Bread, which is with spun slice Bread was was a fantastic trade deal. Dr Thin, I do want to get your sense going back to what you said about emerging markets and the correlation between the U N and it broad our emerging markets.

In the past two days, the UN is weekend versus the dollar by the UH actually has strengthened versus the dollar UH the most since December and about two months. And I'm just wondering, I mean, do you think that that is idiosyncratic specific to the rumors that we have heard that the US is looking for this is part of the trade negotiations, a fixed UN and a sort of artificial propping it up. Or do you believe that this is sort of more optimism generally around emerging markets,

whether or not it will last. Yeah, I know, I think it's the latter. If you look at the more MSCI I refer to the MSc I e m f X index. Uh, that's been up the last couple of days. Um, it's a multi uh week high, so you know, and

in general it's also very high coal. You know, good news on sort of the US trade um front is tends to be reflected in an in a stronger EM currencies, also a stronger Ausie dollar, and that you know, there's a feedback loop between sort of wider e M and and and Yuan, I think, but you know, it's all sort of you know and in some ways made the two sides of the same coin. Um. You know again, um yea. As you know, Marcus Simmon, the pendulum swings

back and forth extremes. I tend to think sort of maybe on the extremely positive side right now, I don't think I don't think a significant deal is is likely by the March first deadline. It's possible, but I don't think it's my base case. Um, and so we may see that Pengelum swing back a little bit, so dr thin,

let's go ahead. No, good, I'm sorry, good, No. I think the one thing you have to sort of famous whole debate about EM is that the fact that the global growth outlook is you know, has worse than significantly in the last several weeks. You know, the drade out of Germany, UK, Japan and you know some except the U S and with retail sales shock or uh you know. To me, that's the really the most important thing I think going forward for EM is is what's the global

grout growth outlook. And you know at this point there's a big, big question mark UM and we need more clarity on that so real quickly dr thin the other side of the world, halfway around the world. UM Brexit continues to be a very messy situation. Yet the Sterling kind of hangs in there around one thirty. What's your short term view on on sterling? Sure, you know again it's been just like just headlines up and down, the headline volatility, UM. I think to me, I think I

can't take there would be welcome as well. There's been talk about extending the Article fifty deadline past the end of March. There was headlines in the last year so that they could somehow h a man the Irish pack stop. I still think that's that's something UK wants, but the the EU has made it clear that's a nonstarter, that

that's non negotiable. So again, I think the pendulum sentiment has probably gone a little bit too far and son of getting a deal, um, it may swing back a little bit more towards the realism that you know, we're probably the can down the road. Uh, it just seems that, you know, the difference seemed too great to Dr Winton. Unfortunately we have to leave it there. Thank you so much for being with us, Dr Wintin, Global head of

Currency Strategy for Brown Brothers Harriman in New York. Well, despite the winter storm that has descended upon our nation's capital, we still expect to get the minutes from the Federal Reserve meeting January meeting at two pm Eastern today, So it help us break down what we might see in those minutes. As Danielle di Martino booth. Danielle is the CEO and Director of Intelligence at Quill Intelligence ll c UH. She was also a former advisor at the Dallas Federal Reserve,

and she is a Bloomberg Opinion economist. Danielle, thanks so much for joining us here two o'clock. Despite the storm, we should get the minute. What are you expecting to see? What are you looking for? Well, I'm expecting to see an elaboration on the chatter that we know has been going on behind closed doors about that balance sheet um.

In j Pal's press press conference, he said that over the next several meetings they would determine what the thresholds would be with the benchmarks are such that they were to either potentially taper, but that's looking less likely after Mesters comments that said that that quantitative tightening would stop

on a dime. They wouldn't taper the quantitative tightening, But I think the minutes today are going to reveal more details about what that process is going to be, what economic thresholds will be hit such that they would also, in addition to stopping the rate hikes, also stopped shrinking the balance sheet. So we've talked with a lot of investors and analysts who are still expecting one two more

rate hikes later this year. Do you think that the Federal Reserve is going to hike rates again in this credit cycle? No, I think that that train has left the station at this point. I don't. I don't think that. In in a recent speech when he was up on stage with Bernakey and Yell and famously, I don't think that he would have opened the door to quantitative easing, which he reiterated in a subsequent appearance, if he had

not already taken rate hikes completely off the table. Do you think that today's meeting minutes are going to show this? I certainly do. I do, and and so that is going to be positive for markets, right Well, I think that markets have already priced in the positivity in today's minutes, So I think that anything shy of the devishness that's anticipated will be very unwelcome news. So that the market

has gotten fairly fairly ahead of itself. So, Danielle, we've had the markets experience a tremendous amount of volatility in December then kind of coming back reversing itself in January. So far this year to date, a lot of it was due to the Fed in the in the changing positioning and policy and commentary and messaging. Do you think the Fed minutes today will shine a light on what happened? Well, I think that they will elaborate on the reasons that the Fed went on pause. It will go into some

of the global economic um challenges that we've seen. Obviously, We've seen Germany and Italy week and even more. Uh, since then China is a train wreck. UM. So I think that it will detail some of the reasons globally and even here at home with housing UM being weak in terms of justifying their position. I think that there

will be a lot of details. So out today, Golvins, Peter Oppenheimer and a Bloomberg television interview said that the expectations of recession have been overblown, and you can see this by the positive performance of both credit and equities. You disagree with that, why, well, I don't think that you can actually take back the lagged defects of the

rate height of the rate tightening that has occurred. Uh. The LaGG defects on the economy take nine to twenty four months to settle in, so I don't think that those can necessarily be reversed. On a more fundamental level. UH. We follow at quil Intelligence very closely the breath of jobless claims, and as of last week we saw fifty three percent of states have rising year over year jobless claims.

Challenge your grain Christmas layoff data. We've seen six straight months of year over year increases, and we know that the best year of M and A on record mergers and acquisitions on record, which was last year. We know that that realizing synergy, so to speak, means that when two companies get married, that there's going to be layoffs that follow. And indeed that is the fastest growing category of reasons behind layoffs. So we we we think that

this fifty three of states is going to increase. It's just two percent just over a year ago, So we think that that's going to increase, and that that alone states that if you've got rising joblessness, you've got a rising probability of a recession. So, Daniel, you're the author of a book who's title I just love. I think it's great, just titled fed Up and Insiders take on why the Federal Reserve is bad for America? Why is the Federal Reserve bad for America? In your opinion, Well,

I'm I'm an old uh. I guess I'm an old markets veteran who took securities pricing way back when mark It's actually determined prices. And you know, back in in the aftermath of of Black Monday, Alan Greenspan started leaking information to fix and come trading desks ahead of FED moves to inject liquidity into the markets. This is a

matter of public record. And as the years went by, every time there was a bigger hiccup, whether it was long term capital management blowing up or San Diego and in the municipal bankruptcy, whatever it was, every time there was the need for the FED to step in, they had to step in in a bigger way. And I think intervening in market functionality is inherently not non American. Given the fact that real rates right now are not much above zero, do you think that the FED is

out of ammunition to counter the next downturn? I think it's going to be very difficult. I'm not sure how quickly we will recapture the zero bound, but I think Powell's understanding that we will go back to zero is what has opened the door to his discussing quantitative easing real quick. Here. Where do you think the next credit

crisis is going to be? You know, it's hard to say, but I would have to say that with all the negative yielding corporate debt in Europe and the fact that the ECB was able to to to intervene in that market and to purchase bonds in that market, suggests to me that that is the most overvalued credit market in the world. Negative yielding debt still eight trillion dollars or more out there of such debt, which defies logic to pay a borrower to borrow money from you. Danielle D.

Martino Booth, thank you so much for being here. Danielle D. Martino Booth is chief executive of Quill Intelligence l l C. Also a former advisor at the Dallas Federal Reserve and a Bloomberg opinion columnist, author of Fed Up and Insiders take on why the Food Reserve is bad for America. Earnings recession is upon us. That is what we keep hearing from a lot of analysts across Wall Street. But the question is doesn't really matter when it comes to how much stocks can rally and is it so bad

other than they are words sounding just terrible. Joining us here in the Bloomberg Interactive Broker Studios is nickole As, co founder of Data Trek Research l l SEE. Also a Bloomberg opinion columnist, Nick, thank you so much for being here. Also a fellow University of Chicago grad. I had through that throw that in, So let's talk about this. Are we looking at an earnings recession? Here in nine and does it matter. The short answer on point one

is we absolutely are. First quarter earning should be down about two two point two percent. Second quarter expectations are running one percent, but they were two percent a month ago, so we'll certainly see analysts cut those numbers too negative quarters. That's an earnings recession. And now we kind of know why the market fell apart in the fourth quarter of last year. It was discounting this As far as what

it means for the future, not very much. I mean, analysts, markets, investors, they're all looking for a settlement to the trade deal to reignitet liibal economic growth and get the second half earnings back on track. And that's why we're rallying this year. So Nick, I was a former sell side analyst, So I'm trying to ask you, how do you use sell side research these days and what do you think they're getting right and wrong as they think about earnings for

next year? For example? Yeah, I was also a sell said, let's spen spent a decade the old First Boston covering the autos in the nineteen nineties. I was there as well, And so you know, analysts, industry analysts do one thing very well. They analyze the industry and they try to factor all those things into their earnings models. But they are generally late to cut numbers, as we all know. So we should have been seeing number cuts all the way through the middle half of the middle and back

half of last year. We're only getting them now. And that kind of tells you that the market was ahead of the analysts. And they usually are priced typically leads fundamentals, and this is no exception, So don't use them, So use them for what they're sorry, I mean, let's take this to the logical stuff. Here are they useful? They are useful from two perspectives. First, they have a deep industry knowledge, and if you want to be a fundamental investor,

you need that information. And somebody, particularly the analysts that have ten twenty years of experience covering a sector, they're very useful to understand the sector and the managements and everything else. If you want to understand where the market's going, though, you've got to be thinking about where the analysts will be taking their numbers versus what they're doing with them

right now. Well that sounds like an ad for Bloomberg Intelligence. Um. But Nick, So when you think about the market, how how important are some of these geopolitical macro issues, whether it's you know, the trade deal with China, you know, a Brexit deal. You know, that sounds a lot more macro obviously than some of the micro levels you were

talking about. For the moment, macro really trumps everything else, I think in the US equity market because the near term fundamentals, both in the US and around the world are kind of sluggish. We're seeing a possible recession in

parts of Europe, China, slowing. US retail sales and other data have been kind of sloppy, and so the markets are really hinging on whether or not we get a good, descriptive, detailed trade deal between the US and China that then gives both corporates and investors confidence to invest in the back half of the year. Okay, So Christian christnam Money of Oppenheimer Funds was on Blueberg Television earlier this morning, and he was saying he could see this credit cycle,

this rally and markets continuing for five more years. Is that feasible to you? Anything is possible. Let's not get into relatives. Were philosophical. We're ten years into a recovery. In practical terms, if you sort of give a pass to two thousand and eleven, right, but they don't die of old aged YadA, YadA. I mean, is if you is it, is it a likely outcome to you? Likely? No, possible? Yes, I would give odds odds, you know with some of New York term issues like we're getting this year with

this bump in the road with earnings. Um. But you know, cycles tend to form for a reason and tend to repeat for a reason. People get too enthusiastics at the top, they take on too much credit, and then you have an economic downturn and the leverage kills him. But we have heard very little enthusiasm. I mean, let's be very honest. People have been bearished upon parish doubling down on parishness

for the past ten years. Yes, but I mean it's in in a you know, historically low indest rate environment. You know, how crazy was that in hindsight? But how about the volatility nick that we've been dealing with just over the last couple of three months. How does that factor into your analysis? I mean we've been whipsawed December versus year to day nineteen. How does that factor in we have in whip saw, but I would put it

into a larger historical context. So, for example, a third quarter of the last year SMP had no one percent days, meaning it didn't move more than one percent in any given day. Same with Q four of seventeen. You have to go back to the early nineteen sixties to see entire quarters where there was no volatility of that nature one percent days. So in the grand scheme of things, we're reverting back to a norm, to a mean. On average, the SMP will have a one percent day every week

of the year. That's the average. Back to Nick real quick here you were saying that you think that things are going to be driven much more by the macro, but we have seen sectors go through downturns, housing, energy. What's the next sector to face a downturn? I'll tell you the section we're looking at actually today for our

note for and Tonita's healthcare. Healthcare has not been a leadership group this year, and it's supposed to be a defensive group, and it's up only seven on the large cap side versus eleven for the SMP, and it's lacking, and it's lacking pretty seriously. And you know, you've seen the three top names Fies, United Health, Johnson, and Johnson.

None of them are performing this year. So healthcare is the one area that kind of befuddles us right now because it should be working better than It is a good growth group, it has good fundamentals, and yet so far you're to date nothing done. Healthcare befuddlement. I can I can relate to that? Nicolas co founder of Data Trek Research l l C. He joins us in our Bloomberg eleven three Ghost studios. Nick, thanks so much for

joining us. Deutsche Bank was one of the only major banks that would continue to lend to the Trump organization after a series of bankruptcies which created a sort of cannunt drum for the German lender when a President Trump won the US election. Joining us here to talk a little bit about the deliberations inside of Deutsche Bank at the time and the implications today. Shakia and Sarapore. He has a reporter for Bloomberg News, joining us here in

our Bloomberg Interactive Broker's studios. So Shakin, can you lay out just what was happening in and how Deutsche Bank

was discussing it? Sure? So in the aftermath election, Deutsche Bank discover that it had, you know, what would appear to be a problem on its hands, where it had lent a considerable amount of money to the incoming president and his company, and those loans were going to be start coming to during a hypothetical second term, and they had to confront the risk of, well, what happens if he defaults, the company defaults, and we have to go after his assets? What? What is that? What kind of

situations that create for us? So internally at Deutsche Bank, at the highest level, bank executives discussed, you know, this possible hypothetical risk, and as part of their deliberations they discussed extending the repayment term for his loans so they wouldn't mature until after a hypothetical second term. Now, the bank ultimately decided against this. They didn't change the terms of his loans and instead they decided they won't do

any more business with him. So the current status of the business between Deutsche Bank, President Trump and his companies, as I understand it, it's not the corporate investment bank making the loans, it's the private wealth management that that's right, that's right. So the investment bank had been doing business with the President or with Mr Trump and his company UM. You know, a more than decade ago, they had len actually considerable amount of money to Mr Trump UM to

construct this tower in Chicago. Now the issue is he defaulted on the loan. UH. They were dueling lawsuits. Trump's lawsuit against Deutsche accused them of basically having UM having started the global financial crisis back in two thousand eight, or being part of the banks that that brought that brought that into existence. And so the investment bank decided, We're not going to do any more business with this

guy UM. But the private bank and the wealth management decided they want to keep his business, and they started as sending him credit. So Eric Trump, which is who is one of the sons of President Trump, said, this story is complete nonsense. We are one of the most under leveraged real estate companies in the country. Speaking of course of the Trump administration, How does this factor into

the Trump organization today? As well as UH Deutsche banks sort of perilous relationship with the President that already is in existence with respect to these loans that are outstanding, I mean for the Trump organization. You know, Eric is right in that they don't have a ton of leverage that we can see. Um the loans that they take out against their properties when weighed against the value of the properties, and a lot of cases it's pretty small.

You know. They'll have a building valued that like let's say x and the loan will be for like a tenth of x UM, which is, you know, not typical when it comes to commercial real estate developers. UM. And they own a lot of their properties free and clear. Now the issue is they have a tremendous, tremendous amount of debt oh to Deutscha as well as Ladder Capital

and Deutscha. That relationship with Deutsche is one thing that Democrats in Congress really want to spend the next two years going over with a fine tooth comb because they've spent the last two years in the minority. They haven't been able to dig into this relationship. And they think there's something there and that's what they're gonna do. What

what do they think is there there is this? You know, no one will say this explicitly, but if you read between the lines, they these are the two separate thrand threads that they're chasing. On one hand, they think of Deutsche Bank as a bank that has gotten to problems when it comes to money laundering controls. It's so that's that's one thing. The second thing is Deutsche Bank has done a lot of business in Russia. The third thing is Deutsche Bank has done a lot of business with

President Trump. Now are those three things connected in some way? That's kind of the overarching question that they want to answer. Okay. So that's why we're going to be getting a lot of news about Deutsche Bank and President Trump from here on out right, because the houses scrutinizing this and probably driveling it out to get a sense of some kind of illicit relationship. But as far as what we know now,

there is no evidence to that effect. There's no evidence whatsoever. Okay, And and and to not public at least not public evidence. And Eric Trump's point, it is not an over leveraged company at this point that's facing bankruptcy or anything like that. No. I mean, when you look at Trump Organization loans that have been securitized into cnbs, they're making their payments on time. There's no delinquency of any kind, and the amounts that they borrowed are it's very low relative to the value

of those buildings. Well, Deutsche Bank is not doing new business with the Trump organization. Who is That is a great question. We don't that that's the answer. That's the next story, okay, because the real estate business is a business that obviously needs big chunks of capital. But I'm guessing there's also revolving credits that they need to maintain properties and do upgrades and things like that, and that typically,

you know, means external financing somewhere. That's right. And a lot of these loans, I mean, some of their loans are interest only with bloom payments and maturity and their path. The company's past practice has been to rEFInd those loans

when it's nearing maturity. So for a lot of these loans from Ladder and from Deutsche, they come to and a hypothetical second term question is what happens Do they pay off those balances or they seek financing from other lenders and what kind of risks does that entail, both for the lenders, for the company, for the White House. Excellent, Shaheen, Thanks very much. Shaheen Sirapor, Bloomberg reporter for Bloomberg News. Thanks for listening to the Bloomberg p and l podcast.

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