Europe, Equities, And Bonds (Podcast)

R fifty basis points. So no longer negative interest rates in Europe. That's big. Um boy, it's been a long long time exactly. I'm looking at the euro here trading up just a little bit. But let's dig into it a little bit. We can do that with me. Have a cousin Euro Area economists for Bloomberg Economics, Geneva Zerk somewhere over there in Switzerland. Um, pretty cool, Mayva. Thanks so much for joining us here. Busy, busy day for Christine Lagarde. What are your takeaways from what we've seen

and heard so far this uh today in Europe? Kay? Thanks? So yeah, it's a big thing. Indeed, this fifty basis points to bigger HIGs than we were expecting having plans because the judge that their TPI, their transmission protection instrument, was told enough to allow a bigger move to tame inflation, which is again surprised on the web side in June

after they published their latest forecast. So the big focus at the moment in the area and at East is really on current inflation and trying to get handled on

this regnant place inflation pressures. Now the big question is how good will be the anti fragmantation to these tp I uh, it's good that they've agreed on something, but of course it is all steel subject to really the discretion of the governing counties or some parts of it, in particular as taking the fiscal sustainability of the government or the country, the surf reign that would need to receive the support, and also deciding when to activate when

the increasing spread on warm kids which would be subject to discrestion. And we are not sure how and when they can be activated. And I would say that a political crisis in Italy probably doesn't think figure on the list of rational or rehaysms why they could activateing wait, why we we always maybe it's like a NonStop constant political crisis in Italy that should always figure into every

central bankers list. So, as Christine god said during the briefing, this is really to address unwarranted market fact notation that is not country specific, so some sort of his conversion mechanism, uh, which he said that they already have a mechanism. They already have a tool it's called OMT to adviss country specific predomination is So that's really if it's a political crisis in theory, it would be difficult for the governing country to activate the tool. So we see how that happens.

But they have defined the criteria. It's quite it's still a relative debate. As I said, a lot of discussion. We would you know, um pretty GUPTO was just in here talking about the possibility of another sovereign debt crisis because of the blo out and spreads. I think we're probably well, we're currently pretty pretty pretty safe in that respect, but we could get there. That's the trajectory. Is this ECB equipped to deal with that kind of thing? It's

it's one more tool than they didn't have before. It's just much more difficult than it was when they first launched to empty and when they first because at that time it was easy for them to buy a lot of government debt because it was serving at the same time the support like the monetary podity direction to increase in fation on the market fragmentation aspects. So it's much

more challenging now. It's good that they are in producing a new a new tool, but it will it will still be subject to a lot of debates on the government. But they could have raised rates much. They could have raised rates a long time ago. And I realized that, you know, um, the FED also out inflation to get ahead of it, and and so did um the Bank of England. You used to advise Her Majesty's Treasury there. Why why is the ECB, you know, the last to raise Why why didn't they act sooner? They had a

different inflation problems. They still have a different inflation problem. Uh, most of the inflation in et needs to due to energy and food crisis, so out of their control to a large extent. It's also that actually we've seen a lot of stating in market conditions at the market rates for your area, actually more so than in the US, at least initially, um, just without changing the rates. So

they have already. There has been already a lot of stating they didn't pace sooner because they had to exhibit the asset purchases. Um, they had to make sure actually they had the high schools in place. But it doesn't mean that they are. They don't need to do as much as the just said. All right, maybe thank you so much for joining us. May have a cousin euro Area economist for Bloomberg Economics. I want to bring our

good friend, Ed Price. He's a senior fellow, a former bidtish, a trade official, senior fellow at n y U. Lots going on in Europe. We've been covering it all day. Matt's been up since the before the crack of dawn. Lot's going on with the e c B. Let's start there. ECB raising their benchmarks, connected all connected, fifty basis points um. That's in the face of slowing European economic growth, energy crises. There are so many cross currents for our friends over

in Europe. I think that's right. And um, you know what does the ECB want to do? It kind of wants to do two things. It wants to kill inflation and it wants to not kill the European economy. Right, so if you if you say, well, look, you know, fifty is quite a lot. It's not enough if you want to stop inflation. And again we talked about this a lot, but I don't know what you do, like what is the answer to that? But fifty also can't kill an economy, right, they they're just fifty basis points.

That's now, Let's remember they're very very low. There's still below whatever our star it is, whatever you think it is, it's definitely more than fifty, right, it's definitely one fifty. I mean I would personally say there's no such thing as our star because you've got that m just our star the natural rate of interest right, So like yeah, right, so like this is this is one of the more

voodoo aspects of economy. But it's basically whatever your guess is, and it's probably better equipped to make a guess than you or I at a level of level of interest rates that is not enough to not high enough to slow the economy, but not low enough to spur it forward. So just neutral. Yeah, And you're like, you know, you're doing things like searching for what the output gap is, and you've got your army of economists, and it's a guess.

And I'd go further than let's say it probably doesn't exist, because if you want to look after financial markets, whatever our star is, it's probably quite low. And then if you want to look after inflation get rid of that problem, it's probably higher. Um. So there's probably no such thing as all start. I'm going to look at my Twitter later to see what happens to me after saying that. Um. Right, so here here in the States, fed trum of Powell

raises rates sevent five basis points. It's a New York, Kuai, California, doesn't really matter um vs VI those different states. But it's not the same thing in the East New York, Hawaii and California. I'll make a ton of money. Yes, how about our good friend. Maybe maybe it matters to the states that take all of our money all of our money. So let's bring that analogy to Europe and Italy.

So talk to us about how, you know how what it's the what Christine the Guard has to balance when she's in this rate moving scenario when you have different countries,

different economic development. So it's a really good point. So okay, so borrowing costs You're right, in the US don't matter as much as in the your area, and they don't matter as much because the spread in the area between you know, Tenia borring costs in Italy and Germany is as we've said before, essentially an indicator of whether the

Euro can exist. So the e CBS obviously sitting there thinking, we don't want to introduce a an X upper bound for Italy, at which point it won't be able to function as a government, won't be able to function as a state, and we'll have to leave the Euro Area because that would be extremely bad. So, by the way, you've also got this threat that Russia is going to cut off the gas, and you know, there's projections that Italy would have a five percent contraction and so on.

So I think the CBS thinking about these really deep structural currency related issues at the same time as in public and on the surface of things, talking in the normal language of macroeconomics, and it's so tough to deal with the gas issues at the same time as they're dealing with their persistent lack of a government. Again, they've had sixty seven governments and seventy five years. Is that

the number? Good Lord it's nuts. So but that's just how it is in Italy, and frankly, the ECB should be prepared for that, um, you know, because it happens so often. But it's a very difficult time to see spreads widen, and I wonder how far the spread could go before it causes, um, a sovereign debt crisis. The last one we saw was pretty difficult. That took Mario drag to get out of. He's kicking off this one. He's kicking off this one. That's very good. You need

that on a T shirt. Um, whatever, it doesn't take. Yeah, I mean, I think the problem is that we don't know. But we don't know what that level is. We've been obsessed for years as policy makers and economists with this thing called the lower bound, which apparently zero. It's not wink wink, but apparently zero. Right. Um, But then there's there's obviously to your point, that there's this upper bound somewhere at which at which point sovereigns and and presumably

corporates and others are going to hit the wall. So we don't know. Um, could be three hundred, fifty, could be four hundred, It could be But then of course the only way to find out is to get there, right,

So do you really want to get there? No? And that and that's something that's that's my question is if we have another crisis, or maybe I say, when we have another euro crisis, does that push the European Union towards a breakup as it looked like was going to happen in two thousand eleven, or does it bring the European Union closer together? Did they say enough of this? You are to what paulse when he said about how the USA hands it, Let's do it like that and

federalize everything. I think we are. I think you're absolutely right federalized. I think that right now we're in the articles of confederation stage. If you're making the analogy with the US, and my money is on the European Union in your area becoming the same thing, getting serious, getting that German money into some sort of fiscal mechanism whatever it is. Um And by the way, there are a lot of indicators that this is kind of happening due

to external pressures anyway. I mean, we said last time I was on the Germans are rearming. That's incredible. So my my suggestion to you is that within ten years we'll see the United States of Europe de facto, if not the jury, if they put together a bill of rights. They got to be careful when writing the Second Amendment.

You watch your punctuation, try and make yourself clear. What do you mean, right, A well regulated militia, Right, I mean, there's aspects of the Second Amendment that are pretty awesome. Come on, so maybe we should we should send them over a suggested draft with a fewer commas, maybe real quicked the UK? I know it's hot over there. I know the folks are you know, really dealing with that. But just from an economic perspective, how are things in

the UK these days? Well, I mean, if you if you look at some of the projections, three GDP growth goes down to zero, so you guys know about finance, zero is a bad number. So there's definitely some sort

of head winds going on there. But look, I'm hopeful that there's going to be a period of structural reform and that Britain will essentially do what it did in the eighties under Thatcher and go through some sort of self inflicted shock but then come out, you know, past the curve ahead of the curve on globalization as a result. Um so we'll have to see. I don't know, but the headline is bad, but medium term good, alright, good stuff.

I mean, lots of news coming out of Europe. We've been uh trying to stay on top of it today at Price senior fellow at n y U and a former British trade of Fisher. We love getting his thoughts on economics, particularly coming out of Europe, coming out of the UK and again today the e C B uh, you know, being a little bit surprised in the market a little bit clearly with a fifty point increase in

their base borrowing rate uh FED coming up July. That's kind of where all eyes are now as we think about these markets and where rates are going visa v this economy, this this Bloomberg. All right, we got rates rising. We've had a brutal first half of the year across the fixed income specter spectrum, and that includes high yield. And we talked high yield. We talk Ken Monahan, co director of high Yield at a munday US. He joins us in our Bloomberg Interact a broker studio. Ken, thanks

so much for joining us. Declining corporate bond index first half of the year. We've never seen that, have we. You know, it's been a miserable, miserable year thus far in ext income And it's not just how yield but how you'll certainly take it on the chin. So uh, If from an equities perspective, and obviously Paul and I have grown up kind of plain ventil equities, I would say that's time to go in there and buy. I mean, there is legit blood in the streets, to paraphrase possibly

Benjamin Graham. Um, is that not the case for everybody else? Well? I I think it is, and it's gonna be at some point. But I think right now what people are concerned about is is the FED gonna tip us over into a recession or we're gonna eke this through with the maybe modest growth that probably is subpar. And I think that that's the big question. If we go into recession, people are concerned that spreads will back out further and bond prizes will drop further. If we don't, then maybe

it's an attractive by right now. All right, So if we wanted to dip bar tow in the high yield space, I still have a specter that I might have a recession sometimes in my investment outlook of the next couple of years. So does that suggests that I really try to just focus on the highest quality or do I

still try to reach for some better yield. You know, it's interesting if you look, Paul, at the beginning of this year, when people's major concern with rates duration was driving the market, so double bees underperformed and single bees and triple c's outperformed. That shifted in May when it became clear that the concerns about inflation were more significant and the Fed really had to get its act together. Then we started to see double bees fade and single

bees and triple c is underperformed. And that's where we are right now. Single bees are a little under the double b sector. We would suggest you're probably pretty safe and most double bees right now. If you type in D I S go and then UM, you click the button historical charts instead of just the spaghetti of numbers that you see there UM number of distress bonds traded distress issuers. We've spiked up again, not as high as we were in March of UM. But where are we going?

Where are we going on? This chart. Well, I think from our perspective, the good news is if we have a recession, it's likely to be a pretty mild one. And and I'm not sure we're going to have a recession, but you know, there are some out there suggesting that defaults could hit ten percent by twenty four, which is

like a great financial crisis level. Correct. And I think that's a ridiculous number if you're looking at it from a bottom up basis, and you're looking at the individual sectors and trying to figure out what's going to hit the fan. It's kind of hard to get to that kind of number when you do look at uh, look at it from bottoms up and and and study the individual sectors. What do you like? Well, I think you know that there are sectors out there that are pretty safe.

Cable is largely safe. We would suggest that you've got sectors money, the healthcare sector is safe. Um, we would suggest that much of telecom is pretty safe. And energy, which has really been you know, a big bankruptcy candidate, and in previous years particularly, a lot of them got pulled down in each twenty that's obviously got the winded. It's back right now. Is a T T A high yield spiritus at investment grade. Well I noticed the A T. Yeah, hard,

but it's it's still investment grade. And they've been very protective of that investment grade rating because they've got a lot of financing to do, because I know they took their free cash flow down a couple of billion dollars their outlook and I'm just I'm just reaching out to some you know, bond and als saying how bad is this? Is this for A T T? But it certainly was unexpected. That's the type of thing when you think about telecommon cable.

They're good free cash flow stories until they're not because there's a lot of operating leverage there right there is. And I think but I think we've been we've been thinking that they're going to maintain that investment grade rating. I gotta talk with my colleagues post todays, obviously, but I think that our our our thought with that would remain the same. Yeah, boy, A T and T big big news out of their stocks down a big. Ken Monahan,

thanks so much for joining us. Ken Monahan's a co director of High Yield for a Mundi US and like me, a former UH player at Solomon Brothers. Where you are Solomon Brothers alumni along with some other guy. Yeah, yeah, is he's sitting right over there. I think he's sitting right over there in the good seats. So we appreciate it. All right, Let's check in with Barry red Holt's post of Masters in Business, uh Chairman and chief investment Officer

Red Holts Wealth Management. Barry, let's start with if you don't mind Europe, we've kind of had a European focused today, the ECB, Mario draggy stepping down. Um, we've got you know, gas coming back on or not so coming back on, lots of issues coming out of Europe today. As a fund manager here in the US, how do you kind of put that into perspective? Well, I'm excited. I'm excited about the euro parody and do some traveling overseas with

a very strong dollar. That's that's pretty uh impressive. But look, you know, Europe is following the United States and they're raising rates because we're raising rates. They have inflation of inflation. It's a global economy. It's very challenging to treat one part of the developed world very differently from another. Uh. So you know, we We've just finished a ten year or twelve year period of US out performance versus Europe. I'm waiting for that wheel, that cycle to change. So far,

we're seeing no signs it's gonna happen anytime soon. UM. As a US investor or, your clients, who are I assume mostly investors with US, how much how important is it to follow you know, the latest new government in Italy or Rischi Sunac versus liz Trust and the UK or UM, you know the Russian gas situation. How much does it matter to to U S investors? Well, if you want to be an informed individual, it certainly doesn't hurt to know what's going on in the con tent

in the continent. But generally speaking, as an investor, all that stuff is noise and meaningless. You're buying broad assets, so you have a diversified portfolio and you're really just not paying attention to the day to day stuff. How many governments has Italy had and since World War Two? I mean, it's a full time job tracking Italian politics. So why does does any US based investor, other than to be a well rounded, wealth informed individual have to

track the specifics of what's happening there. It's it's not crucial to them, all right. What I thought was interesting out of the earnings news flow today it was a T and T stuck getting crushed. Now they Barry called out some of their clients not paying their phone bill. Man, that says something about the consumer. I well, those kinds of things. We've seen some credit card delinquencies tick up. We've seen it always starts in the worst of the

automobile loans. So like housing, there's subprime loans and there's sub subprime loans. The differences. If you have the weakest credit, a car company is going to install literally a kill switch, and if you stop making payments, they shut the car and they go get it. They know exactly where it is. So around the edges we're seeing these things tick up. It's not significant yet. It's certainly not a weight oh nine.

But you pay attention to the ebbs and flows of these because you want to know is the household in good shape or are they dealing with financial pressures that could affect consumer spending, corporate revenues and profits. And the other question is, um how are companies deploying capital or are they starting to put up barriers as well. We've had a number of concerning uh job cut stories, starting with the kind of Apple may cut jobs in some units next year Scoop at the beginning of the week.

But now we've got Um, Microsoft, Google, Lift, even Ford plans to cut eight thousand jobs. I mean, I'm desperately trying to buy any car I see on the lot. Why are they cutting jobs now? So Ford is a different case and the technology companies. Ford specifically said they're going to reduce some headcount in order to be able to fund further expansion of their ev production and sales. So Ford is moving into the future as aggressively as

they can. When you look at Google, Apple, Microsoft, Amazon, go town the list six months ago, they were desperate to hire people, and arguably we're over hiring people. We're basically anybody who could father a Mira and and had the qualifications was offered a job at a certain point. Doesn't take a whole lot of economic slowing for these large corporations to look and say, all right, we're good

for now. Let's catch our breath, let's digest these these new hires, get people integrated into their jobs, and see if that solves the employee shortfall that everybody's been dealing with for the past couple of years. Alright, Baty all I know about the car businesses. Matt still waiting for Chevy Silverado. I think it's still stuck in Mexico. I think it's still stuck in Mexico. I can't get any updates on this except the chips then, exactly exactly. It's

missing chips, that's all I know. And it's sitting on a lot outside the factory with like thousands and thousands of other trucks. And that's on a first name basis with the CEO Afford. You'd think he could get this GM. I want to marry as well and Mark. I haven't called them on this issue. I might have to call him one half. All right, Barry, thanks so much for joining us. Barry rid Hilts, host of Masters in Business, chairman and chief investment officer Ridholt's Wealth Management. Thanks for

listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three on False Sweeney, I'm on Twitter at pt Sweeney before the podcast. You can always catch us worldwide at Bloomberg Radio