EU Growth is OK for Credit, Not So Much For Stocks

at Bloomberg dot com. Earlier today, the European Commission cut its growth forecasts for the euro Area and slashed its projection, in particular for Germany, warning that escalating trade tensions threatened to make the outlook even worse. Not a huge surprise, and yet there definitely was a market response, with guilds going even lower in Germany. Joining us now Alberto Galla, partner in folio manager for the Algebras Macro Credit Fund

as well as a Bloomberg Opinion calumnist. Alberto, what was your take on the European Commission's forecast that was cut yet again and the fact that the market moved on it. The European region is clearly um into a Japan like environment for growth, so we have had repetitive downgrades on growth over the last month with limited fiscal stimulus. Um. Only some countries have been able to do it, but

the core countries remained very conservative. And we are in the run up to European elections at the end of this month, so that could be perhaps a game changer. UM we could see maybe after European elections some reaction to these luggish growth environment which we have had. But you know, so far it's just the ECB has been doing most of the stimulus and marty policy on its own cannot really lift growth. We have seen that across several countries. You actually end up having the opposite results.

You go into liquidity trap if you only have monetary policy keeping interest rates negative for too long. So we need a fiscal boost, but we don't have the willingness. Germany is still on the sided, and the other countries don't have a lot of ammunition we better. You mentioned in Germany, and that's kind of what surprised me the most out of this morning's data, the e c B slashing the growth projection to just zero point five from

one point one. What's really driving that deceleration in Germany. There is a number of theories, So I would say first there's been a global desileration with Chinese orders for UM for important goods including cars, you know, falling very sharply at the end of last year. This hasn't recovered. Then there's a second factor specific to Germany, which is Turkey. You know, the Turkish economies under pressure. UM. Turkey and

Germany are very close import expert partners. You know, the President Erdogan is just called for the rerun of the Istanbul elections and this is creating a lot of volatility in the Turkish lira and in in generally in busines as flows to Turkey UM, which affects affects Germany being part of the supply chain UM. But there's also a lack of domestic demand UH in Europe. UM. There is a rebound from last year for short p M I have gone back to positive. We're not in a recession,

but we also don't have a V shaped rebound. It's it's something between a U shaped and an L shaped rebound. Now, to re accelerate an economy in in an late stage in you know, in the late stage of an expansion, UM, you need some physical stimulus. You don't, it just doesn't happen on its own. Well, you know, if you just had a recession and you tend to grow much faster because you have pent up demand. You have you know, consumers that haven't spent for many years and companies that

haven't invested. Here where the late at late stage of the cycle, and we need some some government top down decision um either from Germany or or broadly from China. But we have seen that the Chinese stimulus is relatively smaller compared to what they did in on nine. So Alberto, as an investor, is this a time to stay away from European assets in particularly in Germany? Or from a credit standpoint, is this a positive because it means the ECB isn't going to be backing away from its stimulus

anytime soon. So exactly, if you take Japan as an example, So what happened over fifteen years, twenty years? Rates remained relatively low. UM equities didn't do much. They you know, they kept going down. You could trade some rallies, but they kept going down. Credit was fine except the worst banks and corporates UH. Credit UH survived because once you are you know, the definition is you are in a UM. You're in a slow growth environment with persistent lower rates,

companies kick the can. You may have don't be firms, don't be banks that survived because of lower rates. So essentially credit is okay in a Japan like environment, it's not extremely exciting. But actually in Europe you have yields which are you know, in dollar terms, close to high single digit sometimes double digit UM. You don't want to go in the lowest rated names in the you know, in the triple c's or lower rated smaller single bees. But overall the stimulus from this b will stay there,

and that's part that's been part of our view. Where we go for growth. Where there's upside risk is some other countries outside of Europe, in emerging markets or in the US UM. But I think Europe for now seems very much in a very stable, lower rate environment, good for fixing, good for corporate bonds, not so good for

equities in the medium term. So abrot to what extent is the ongoing Brexit uncertainty impacting the economies across your you know, we saw again that big down grade for German, Just wondering is that uncertainty still an issue a meaningful issue. I would say that in the investment world, in markets there has been a lot of fears. UM, there have been a lot of fears about Brexit and also European elections, so there's a lot of investors that are disengaged from Europe.

So on the one hand, yes, fundamentals are not great. Growth is very slow compared to em or or the US, But on the other hand, positioning is very very light. According to the Bank America's Fund Managers Survey, short in European equities the most crowded trade across global portfolio managers. So if you have a bit of positive news, you can you know, prices can rise relatively quickly, both in in in in bonds and in UM in corporate bonds and in an inequities. So you know, we do have

an unexciting fundamental view. We are stuck in a low growth f loor rate environment. But um there's also very little um lungs at the moment, so we sometimes like to be contrarian, we don't go into the warst areas. But there is still some value. And I think European elections are going to be a non event because the populace just may win a quarter of the European Parliament, but then all the other parties will we'll create a pro European coalition. In the end, you're in the European

Parliament and the pro Europeans are the majority. Brexit will have to see what happens, you know, towards the end of the extension period in the in the second half of the year, after the summer um. We do think that, you know, the base case remains either a longer extension or a Norway style deal. So a deal soft deal,

yea very good Alberto Gallo, thank you so much. Alberta, as a partner and portfolio manager for the Algebras Macro Credit Fund with about twelve point three billion pounds under management, is also a Bloomberg Opinion calumnist. Well, US and China trade negotiations are back on investors radar, that's for sure. Definitely a risk off day today after a very volatile day yesterday, driven in part by some of the tariff concerns.

To get the latest on what these may mean for the market, we welcome Matt Mally Matts, managing director and equity strategist at Miller tebec Um. Matt, thanks so much for joining us again taking a look at what's happened over the past couple of days following President Trump's tweets about the tariffs. Clearly the market is rightfully concerned about some of these issues. What is your call, Well, you know,

it's funny. I I think that you know, yes, I totally agree they should be at least a little bit concerned. And we also have to look at what was the market doing before this came Before this news came out. I mean, this is negative news. And even if you believe that you know, we're we're going to get a deal eventually, Uh, the odds of that, odds of having a being it pushed out further or you know, more

strains within that situation have bob the risen. And when you have a situation where the stock markets rally twenty five percent in just four months, had become quite overbought on a near term basis. Anyway, when you get negative news, it should pull back. And to be honest with you, yesterday's reaction where it rallied back so strongly, that made me a little worried about. But there's a little bit

too much complacency in the market. I think this is a natural and healthy things that that that the market is coming back down and we could fall a little bit further again after rally. Not the worst thing in the world. Yeah, and we should note that actually the losses are deepening near session lows negative one point four

percent on the NASDAC. I'm just wondering, uh, you know, you look at the technical underpinnings here and I'm wondering, if the trade talks were really fundamentally break down and put on ice for a while, how big of a down draft could we see. Well, I think it could be, you know, a fairly decent one. I mean, certainly in the uh uh, you know, kind of the five to

seven p sent pullback. Uh. And even you know, in today's markets where where the you know, mechanized tracing, the algal mechanized trading and the algales and things like that have a big impact on the market, it could take

even down towards correction territory. And the reason why I say that is it is it because a lot of the turnaround in or at least people literally looking for earnings to pick up on the second half, uh, And a lot of that has to do with with a you know, an agreement had being made sometime in the near future. So if that doesn't happen, some of those earnings forecasts are going to come down, and uh, I think that would put a little bit of a dent

in the market. So, Matt, you're just talking about earnings. What is your takeaway from the first quarter here? Seems to have come in better than expected? Um? What is your take? Well, that is true and and and the

one problem, of course, though is that they always beat expectations. Uh, this time a little bit more than expected and and and it's very good that it went from expectations of a negative earning season to one that is a positive one, which you know, takes an earnings recession off the table. And that's good. But the my my concern a little

bit here is that the guidance wasn't really raised. In fact, that it's come down a little bit for future quarters and we're really relying heavily on this, uh on a big fourth quarter where estimates are now at a plus eight and nine percent, where most of the other quarters are start of the second and third quarters are down in the one to three percent range. Uh So, Uh, yes, it's been a good earning season. Um, but I wouldn't like to see if much better, if we've been raising

expectations a little bit more. And Lori Kelvicina over at RBC Capital had a really interesting point today saying that UH earnings really weren't even as good as many people are putting them out as because you did see the earnings per share beats UH. Seventy six percent of companies that have reported so far as something about that have

beaten on the EPs side. On sales side, it's about half UH, and that's harder to engineer, whereas EPs were engineered by things like share buybacks, which were actually at the highest level post crisis in the first quarter. And I'm just wondering, from your perspective, how much of a sort of warning flag is that UH that companies pulled out all the stops in the first quarter and really cannot do a repeat of that when it comes to

engineering the EPs beats later in the year. Yeah, I mean, obviously, you know, the quote unquote quality of earnings UH has been something that people were worried about for a while now. And the thing is, the quality of earnings were quite good last year, UM, and I say that they were worried about it, you know before you know, in two thousand and fourteen fifteen sixteen, we were worried about that. Uh. Last year they were you know, they were quite good.

But now the quality again it seems to be more financial engineering. Now that the tax that has been pushed to the to the side, and now that will we get a problem again with this agreement on the tax side. It definitely lowers that, uh, not just the stated earnings,

but the quality of earnings. And and again when the market has moved as much as it has, it doesn't just you know, uh, it doesn't necessarily mean that we're gonna have a disaster here, you know, any kind of a repeat of two thousand eight or two thousand, but it does begin to get people to worry about, you know, that we could have another a down draft something like

we had in the fourth quarter. I'm not not calling for correction, but I wouldn't be surprised at all if we saw something in the five to seven percent range. Matt Malie, thank you so much for being with us. Matt Malie as chief equity strategist for Miller, Tabac and Co. Talking about market, it is time for a public service announcement. If you have a mother or a wife who has a children or a grandmother. This Sunday is Mother's Day. You might want to remember that. Paul Sweeney, what are

you doing for Mother's Day? Um, we are having brunch and there'll probably be some type of flower thing involved, some type of flower gifting going on, a lot of people giving flowers. We are so lucky to have Chris McGann, chief executive officer of one flowers dot Com. I'm here with us in our bloombergett to Active Broker's studios. So, Chris, how important is Mother's Day to your business? Well? How important is Mother's Day to you? In other words, how

many flowers am I hoping to get? I mean, you know, I'm one of those people. If my kids make a handmade card and they, you know, put some effort into it, I'll be happy. Well, we'll take it up a step. So some Mother's Days are very important holiday for our business. You know, if you really look at our business overall on an annual basis, because we're driven by such everyday occasions like birthdays, anniversaries, Mother's Day is only about six

percent of our business. But if you look at the floral side of our business for this quarter, Mother's Day can counsel for about about consumer floral business in this quarter about fiscal fourth quarter. So it's an important day and it's an important day to celebrate. Yeah, well I'm looking I like to celebrate the stock. The stock is of about sixty eight percent this year. Of let's get down to the you know, the dollarsand cents in the stock.

So I mean, even on a day when the markets down one and a half percent, your stock is up one and a half percent. So what's the story behind your company's great stock race performance this year? I think it's driven mostly by mothers investing in our stock right now, and take it back to the sentimental I don't think so. But really what's been happening and what we the investment community is recognizing that we're doing what we said we were going to do and we laid out for the

last couple of years. Actually, when we've been accelerating our growth. We took the growth rate from three percent two years ago to four percent. This year, we came out, we guided the five to seven percent growth. We raised our guidance after the holiday season to seven to eight percent. We just raised our guidance again two weeks ago to

the high end of that range. So our growth rate is accelerating as customers are becoming more and more aware of our family of brands and ordering from more than one brand. What's the highest margin aspect of your business? The food? The Flowers going may food side of our business, we're probably get in the mid to hire uh to up at range margin. The one in a hundred of Flowers business is usually around that thirty. That's where it's going to stay. But really the higher margin products are

goingmet food side for us. I'm looking at the p g O function on the Bloomberg terminal, which gives a breakdown of kind of where your revenue comes from, and I was shocked to see that the gourmet food and get baskets is over fifty percent of your business and Flowers are about forty of your business. Is a time to rename the company? Because you're more than Flowers, You're kind of all year round, lots of gifts and sat foods. Yeah, that's right, But we get that question all the time, Paul,

should we rename the company? As we've become really this company of celebrations. But when we look at it from a marketing perspective, we have such iconic brands, especially the two lead ones one in a hundred flowers dot com, Harry and David, and they bring in such great traffic. We'd only be renaming it really for the investment community. And I think one hundred Flowers and Harry and David both has such brand equity, will stay with this multi

brand strategy. I love the idea also though of calling it to order something is also an athema to people under a certain age. But just do it online. So it's not only is it also more food than than it is flowers, but also the concept of one hundred is probably going to be obsolete in about ten years. So I mean, from that perspective, how much of the

how much of the sales come online? Well, we're predominantly an e commerce driven company, and even if you look at one eight hundred of Flowers brand itself, of the businesses e commerce mobile commerce driven. So I think the brand has become so well known most younger people don't even realize it was named after a telephone number. So all right, I'll go back sentimental a little bit more. What are the most popular flowers for Mother's Day? That's

how sentimental? Yet that's impressive. So for Mother's Day, I think we see mix of vibrant colors. So it's roses, lilies, daisies, carnations, which have made a nice comeback, which are one of my favorites. They last forever, I love them. But really a mix of vibrant colors. And one of the great products that we sell is called Mother's Embrace and it's named after what's the most comforting thing you can get

from your mom but a hug. So we turn that around and one of our creative one of our creative florists and Stafford, Virginia, Devil and Reid, created this Mother's Embrace product and it's just a fantastic product, one of our top selling. What are you getting your wife? Flowers? Actually? This this this Mother's Day, I won't be because we'll be celebrating my daughter's graduation from William and Mary. So no, so I won't be able to have flowers there. Well,

well down Williamsburg, Virginia. What's the growth area for you? The growth area is both really right now, all three areas of our business are growing. The gourmet food side is growing nicely to consume, a floral business is growing. What's driving the gomet food side is the acquisition of Harry and David that we did a number of years ago. You take a business like Harry and David that went

through a bankruptcy, was stagnant for three years. Coming out of the bankruptcy, we we put it on our platform. We take out over twenty million dollars of operating costs doing so, and now we have the e commerce business Joe growing about eight right now. That's that shows the benefits of the platform for growth that we've created. Well, my favorite study here is about twenty million stems for

Mother's Day alone will be delivered. That's a lot, some of them to the Sweeney House hopefully yea Christmas can President CEO Flowers dot com does trade on the NaSTA act onto the symbol f LWS. Based in Long Island. Joining us here in our Bloomberg Interactive Broker studio, Chris,

thanks so much for joining us. Well. US markets are going lower led by the NAZAC down one point six percent, driven really by the increasing question around whether the US and China will come to a trade agreement after all. Joining US, I'm very pleased to say, is Dr Henry Wong. He is founder and president of the Center for China and Globalization based in Beijing, but joining us here in our boombergadda active broker studios in New York. Dr Wong,

thank you so much for being here. Just how much of a disagreement seems to be going on right now between the US and China that's impeding some sort of trade trade pact here. Thank you, thank you for having me. I actually I think that all along we have been seeing President Trump giving tweets and Secretary Lightheiser and the minutul talking about all positive news about negotiations. If according to the Secretary, that has been done well, I think

that's already very great achievement. So so so I think that there may be some finalizing when they put into the printing and put into the details, that could be a little I think still negotiation going on on the

final awarding of that. So I think that probably needs both and oak sides to really take the wisdom and leadership, you know, a role in finalize they Still I think it's it will be highly irresponsible to to to really uh to not having this do because not only the business community in China and the US wants days, but also the rest of the world and whole world is

highly watching on this. I don't think both countire can forward now that trade tiiff war going on, and I think this this, this final differences could be solved, you know, Cervier consultation and a friend that they discussion rather than really hostile and the maker, you know, force people to the corner, which I think with backfire maybe in the end. So dr One, you mentioned that both sides, certainly from the business community, would like to have a trade deal

done in China. From the Chinese perspective, Um, is that consistent with what the government wants? Is the government and business are they on the same page or is there just a fundamental problem from the government's perspective about some of the bigger issues about trade. I think it's it's finally clear enough in China, you know, after this Tradelo has already started for a year or not in its friction going on, and we all go through ups and

downs and uh and the rollercoaster of both economies. And I think particularly in China, I think we um, you know, I have our councilors for a lunchier time. I think the government actually foreign spokesperson said that, you know, we want the stability, We want to be responsible, We want to really finish this deal. We want to be reasonable to not until Chinese beings, but also US and the

rest of the war. So so I think the governors in the same wavelens with the business community, and I think that's not only for Chinese perspective, but also for

the US perspective as well. So Robert light Hazard, the chief negotiator for the US with China over some of these trade parameters, he came out and he confirmed that there is some sort of back peddling by the Chinese government on some agreements that they had made previously, including changing Chinese law having to do with intellectual property, among

other things. I'm just wondering if that's true. That seems like a more fundamental breach that perhaps everybody wants to deal in sis saying Kumbai yah, but it's going to be very hard to get beyond. Yes, you know, I'm not involving in the detail of this, but for what I heard, you know, what the secretary is said, Uh that you know, uh possible. But but there's also a culture issue there, you know, like if as Chinese law is already there then if you want to change that,

it takes you know, takes the process. I mean, the national paper's con has to go through that, and then that a lot of consens consensus building. So it's not acting absolute to say immediately it can be done. Not So I think if there's a macadium there to to walk towards that direction, let's give a little a patient on that, not really push you know, right away and you know, or interpret that is a refused. So I

think that's probably important. This is really an interesting point dr wrong and I think it's it's one that that that we really need to emphasize, which is uh, Robert Leitheiser, President Trump. They have not been talking with leh Is recently, right, so this has been over you know, through other people

or or not necessarily discussed. Could this just simply be a communication error where the Chinese government said, well, we can't change the law overnight, uh, you know, and then then they're saying, well, you guys are back peddling, and

that's the breaching communication. Absolutely, that's that's quite possible. I mean, from from my experience and talking with the people in the in the multinational past, there could be a culture misinterpretation sometimes taken only the process to do things in China, like I can give examples, you know, I mean the Foreign Investment law just passed in March. It takes quite a while to discuss that. So so they don't mention

China twenty five anymore. They are actually saying, you know, they got guaranteed the form right of and there's no force technology transfer and if IPR violation will be punished, would be persecuted. That'd been written into the law. So you see, Chinese law is also accommodating a lot of complaints that multinational West country complain us, particularly in the past. So I think, you know, the attigies of Chinese always,

you know, they are very a common y thing. As a matter of I think that to to black you know, to frankly say oh China is delying or restow, I don't think that that is two If they are ready grade in principle, let's find out detail how to implement that, rather than say, oh, China has been uh you know,

taking all the things back. So that may be for the political purpose, I mean, very very useful and generate a lot of hype on that, but but it's not I don't think it's a real situation, probably so dr wrong. Just be clear that the two big issues is I think the that we understand it our intellectual property, uh, forced transfer, technology trans transfer. That seems to be the area where there's either disagreement or there's no agreement. What is the stance of China on those two key issues.

Are you saying that they will be addressed? Well, actually, you know, China just passed the law and the last National People's Congress which in March, and that in no new investment law. China has a stupid In that law there will be normal forced time transferred and not allow any any government at any level. And also on the i PR to like the property protection and then there will be no violace. Cannot be a violation of that, cannot be forcetanking transfer if if anybody doing that to

be punished, to prosecute it. So that already written into Chinese law past in much this year. So you can see Chinese attitudes towards that. It is quite forescoming actually not avoiding those kind of you know challenges. One of the big other issues is enforcement of the agreement. And I'm wondering, you know, you're saying Dr Wong that this could be a communication error and law takes a while to change, But what's sort of the recourse if the law doesn't change in time? Yeah, No, I think that.

I I think that the government is now it's very serious. I read there's going to be a pub because a hundred people to come. It's very very very real. All the details going to be problely backed up, and you know, looking into the final really in the conclusion of this too, but very seriously. Is such a large delegation, and I think that to you know, let's put it there, we have we have not on the US, but those international

commitities to watch this. This is such a high profile trade fiction and we have a you know, World Intellectual Property Organization, we have you know WT. All those people are watching this. So so I don't think that if China deliberately saying something and then it said, oh, we need to take it back, I don't think China, you know, it's still of course honor its commitments and and so whatever. I think one, if finalizing is still there could be

a lot of discussion going on. And also there's a culture differences, uh, in terms of understanding of each other. But I think in the end um the world needs this, the Chinese needs, the US needs, and multinational needs. After all, you know, the U. S Company have a six or eight thousand of them in China making five billion revenue a year. I mean, both sides much larger than the than than the deficit. And China and US actually expert to US US Martina accounts half of that. So so

that's right, Dr Henry Wan. Thank you so much. Dr Wang as founder and president of the Center for China and Globalization giving us his thoughts on the ongoing trade negotiations between the United States and China. Trade delegation arrives later this week from China to Washington. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney.

I'm Lisa abram Woyit's I'm on Twitter at Lisa abram woits one before the podcast. You can always catch us worldwide on Bloomberg Radio.