Global Default Rate Hit Could Hit 10% By Year-End: TwentyFour Asset

income markets in particular. Here to get a sense of kind of how we should be thinking about investing in fixed income markets over the next several quarters, we welcome Mark Holman, CEO of twenty four Asset Management with about twenty three billion dollars under management. We appreciate Mark joining us. Mark, thanks so much for joining us here. So as we think about these markets here, I want to start with kind of what your backdrop is, what your construct is

for the economy going forward. Is this a a kind of a a V shaped recovery here or should we be preparing for lower for longer in terms of economic activity? Yeah, I think undoubtedly I'd be going for lower for longer in terms of economic activity. I think the the end of the last cycle ending with a surprise, as they

often do, but this surprise was global. When you've got a global surprise that h's every part of the globe at the same time, I think it the impact is just that much more significant, and it's going to hit the both the supply side and the demand side, and I think it just takes a lot longer to recover.

These incredible aid programs that we've got around the world, whilst enormous in spise, logistically just won't reach everybody, but there's there's some long term damage to them on which in my view means we're going to be spending probably the best part of two years to get ourselves back

towards a QUE for nineteen type production level. Mark I'm struck it and saw a lot of people about the disconnect in the slow recovery that a lot of economists and analysts are seeing and stock markets, which seem relatively unfazed by this whole issue, at least based on the rally that we have seen over the past month. This morning we have Goldman Sachs coming out and saying that at one point these realities are going to converge and that stocks are poised to drop about over the next

three months. Do you agree. I think when you look at fundamental you have to agree that the market has really really raised ahead and then it's really pricing in. It's actually described a somewhat of a V shaped recovery. Um So I think you're fundamentally probably quite hard to justify where we are here. However, technically I don't think

we're getting a full picture. The full picture does include the incredible amounts of money poured in by the FED and other institutions around the world, and we know they find these volumes of cash find their way into financial markets, and that these volumes of cash are going to be there for the foreseeable I think investors are saying, well, the FAD behind us, or the ECBs behind us, sort of Bank of Englands behind us, and if it's going to be action done in the in the US has

been has been very very broad. So I think that as I've got confidence from that, and I think that liquidity in the market is making it a very very painful rally. Indeed, it's it's a squeeze so market, you know, in terms of the credit markets. Here, we're starting to see some bankruptcies and defaults kind of start trickling in across the tape here. How do you think this is

going to play out? As you take a look at the credit quality out there in the markets that you look at, I mean, credit quality is no doubt going to deteriorate pretty much across the board. There'll be very very few businesses that will improve their credit quality. And while this is going on and now over the last decade or so, we've been somewhat immunized from them deteriorating credit quality by the by the actions from UH in cential banks and government. This h it is just too big.

I think we're going to see a material spike in the default rate. It's very very hard to predict exactly what it's going to be in the in the in the world of rated securities, we well, we know that the individual consumers are going to have problems because they won't reach them. Sm evil that problems because they won't reach them. And in the end, this does affect the larger companies too. It's been quite remarkable how quickly some

of those companies have run out of money. I mean, you know, I'm gonna stick my neck out and say I wouldn't be surprised to see at global for thult rate by the end of this year approaching ten totally two and a half of the end of last year. So it's a really quite a big move. Where are you hiding mark, where are you investing? Well, it's it's

tricky in the corporate world. Really, there's a long list of sectors I think you really need to try to avoid, and you know, whether it be metals, mining, energy, which are sort of late cycle names that you don't want to on late cycle sectors um. And then there's the ones which perhaps more impacted by the current situation, where

you travel, leisure, retail, of course, an automotive. I think that those are the kind of areas to avoid and where you can, I think you focus on sectors that are more resilient obviously, but you know where the balance sheets to the companies are more resilient or regulated, there's more visible learning. So I would say, contrary perhaps to the to the last recession, let's look at banking, Let's look at financial insurance as an incredible way of repricing itself.

The banks have got very resilient balance sheets thanks to the terrific work work done by the authorities or and utility you generally regulated much more solid balance sheet in each of these industries are all open for business today. We're all still paying the bank interest, we're all still taking our insurances that we're all still using these utilities. So they've they've got the resilient balance sheets and then

they've got more visible learning. So I think that that the list of sex is pretty small, but there's they're quite broad. There's quite a few companies that you can still invest with there with a lot of confidence. Mark Holeman, thank you so much for being with us. Mark Coleman, chief executive officer of twenty four Asset Management based in London, with twenty three billion dollars of assets under management. And I'm struck by the idea that insurance companies and banks

will be behavens this time around. It just sort of highlights how different this particular crisis is than the last one. Paul, Yeah, exactly. When you're thinking about the you know, the big money center banks and being bailed out and the A I. G. S of the world, and so as we've heard, you know, time and time again, this is very, very different. This is an external shock of pandemic medical issue, healthcare issue,

not something endemic to the financial system per se. We've been talking a lot about the pain in the developing world as that area sees a disproportionate hit from the removal of financing from the likes of the United States and Europe. Here to speak with us, we are so pleased to say, is the seminal expert on this area.

Bill Rhodes, President and chief executive officer of the William Our Rhodes Global Advisors, former City Bank chairman, also one of the key architects of the restructuring efforts in Latin America during the ninth nineties, and the author of the book Banker to the World. Bill, thank you so much for being back with us. I know that you see potentially a crisis in emerging markets that exceeds what we

have seen in recent history. I want to sort of focus in on some of the hotspots, starting with Argentina. Argentina on the brink of defaulting once again. Is there a threshold for how many times a country kind default and what the consequences will be? Anyway, First of all, it's great to be on with you, Lisa. Well, Uh, I would say in a case of Argentina, they they've defaulted eight times in their history. I was structured them five times, and they're on the brink of our ninth default.

They were going to declare default today and they moved it off to the two for further discussions with the creditors. But they need to make a five million dollar payment on their eight six million billion dollars of debt that they have in addition to the eighties six billion dollars of of of of normal debt in the sense of

sovereign debt UH two creditors. They also have an outstanding of somewhere depending on how you look at the disbursements between forty seven and fifty billion with the International Monetary Fund. So they are they are basically UH the case that's UH, I think right at the lands point of what's going on in the American emerging markets. So, Bill, I know you've you've educated us UH in the past about how this is a little bit different this time in that

the private sector owns a lot of this debt. Here is there any indication that the private sector that I mean the public sector will hold off on debt collection. Here some of these hedge funds and and and investors, I think the only ones who've agreed to hold off of a sovereign which in the in the Group of twenties said they would hold off to the poorest countries until the end of the year, but of course it's not even clear uh what that'll be after the end

of the year. They haven't come up with a plan. And on the private sector, there are all sorts of discussions going on how the private sector and the public sector can work together, but at the up up to now, there's been nothing on the on the private sector. And as you point out, there's a lot of private sector debt out there, uh, not only to the sovereign, but two companies uh in uh in these various countries. So

it's it's sort of a perfect storm type situation. It's the worst, I would say that situation I've ever seen in my lifetime. And everyone's grappling with how to handle it because you have this COVID nineteen problem which even the experts are not sure how to resolve it other than getting a vaccine, which it doesn't look like we're going to have until next year. Just to give you some perspective as to how deep the pain is. Just to give you a sense of the nations that have

dollar bonds UH that are trading at distress levels. It includes Venezuela, Argentina, Lebanon, Ecuador, Zambia, Zambia, Surinam, going all the way through it to Nigeria and El Salvador and and a host of others. I'm just wondering what you think, bill, based on your experience, should be done for this at a time when some of these emerging markets are actually trying what developed markets are doing and printing money, they're

just doing quewie, risking more inflation and further capital flight. Right, and you're talking about just dollar denominated debt, because you have two other phenomena out there. None of these countries, particularly Eastern Europe and elsewhere, and some in Africa have your dead also so um and a lot of people

tend not to factor that in. And then of course you have a one belt, one road UH Chinese lending policies that are outstandings of anywhere, because they're you know, it's very obscure as to how the outstanding, what the outstandings are, and what the collection arrangements are the credit arrangements any the estimate there is anywhere from two hundred

and forty billion to to five billion. And so I think what needs to be done here is the I m F and the World Bank have to sit down with a group of twenty and try and work out some sort of a plan UH, starting on the sovereign side, but also try and see if you can get an inner link with the private sector, as we did with the Brady bonds in the late nineteen eighties in the

early nineties UH. And the situation here is much much worse because there it was an economic debt crisis, but you didn't have a health crisis, and so many of these countries in the emerging markets don't have decent health systems. And then in Latin America exacerbated, you have five million Venezuelan refugees UH in Latin America, and that puts at risk countries like Colombia, Ecuador, through some of the islands in the Caribbean and UH and also northern Brazil UH.

And I would just say on Brazil is going through probably one of the worst periods it's had because they just got out of recession. And now they're going to go back into recession with five percent negative growth this year with the president who doesn't want to recognize that COVID nineteen is a problem. So, Bill, you mentioned that China a little bit. In China, I know that during the last financial crisis two thousand eight, two thousand nine, China was there, uh pumped a bunch of money into

the world economy. Is that still the case now? Can some of these emerging markets depend upon liquidity coming from China? Well, the reason I mentioned China was you have a phenomenon that didn't exist in OH eight and O nine, which is one Belt, one road, and all of those outstandings are already there. So uh, I think China is in

a much more difficult position. Plus, their debt has been allowed as a starting with their bailout, I would say of the world in two thousand and eight two thousand nine, where they put into infrastructure and brought commodities from a lot of these developing countries to the tune of eight hundred billion dollars almost a trillion dollars. And they are not going to be a factor today because their own

as they were then, because of their own Uh. You know debt load that they have, and they're going to be fighting just to keep the Chinese economy in a positive growth mode this year. So the answer to your question is they will be important, but they are not going to bail us out this time, and they have their own problems with the emerging markets, which raises a question who's going to take leadership in helping the developing

world get out of this mess? Well, suppose of league people think that the G twenty will get their act together, But as you know, they're very fractured. And one of the things I give credit to my old friend Gordon Brown was when he put everyone together at the London conference at the time in two thousand nine, at the time of the Great Financial Crisis, everyone agreed to work together. We don't even have an arrangement where these G twenty countries have agreed to work together on trying to find

anti virals in a vaccine. So, unfortunately, we're going into a period with a very fractured leadership situation in the so called developed world and real problems with leadership in the developing world. We're speaking with Bill Rhodes, President and CEO of William R. Rhodes Global Advisors, former City Bank chairman Bill. You know, as we think about you know kind of how the the arc of how this virus has spread from China to Europe to the US. Um

you know, there's varying levels of healthcare systems there. But me think about in American emerging markets in general, the health care systems in most places are just not as robust as we've seen in kind of some of the Western economies. How bad do you think it's really going to get in and just just take Latin America for example, I think it could get very bad. I think Brazil is an example because they haven't put the money in the health system. Argentina is better off in that sense.

In Chile, Prue is all right to a certain point. But what's added to all of this is he's Venezuelan refugees that have been forced out of their country. So it's it's really the perfect storm that we're looking at here, and I think it's going to be very, very difficult. And then when you want to look at the COVID situation, as you already have mentioned, I think on a prior segment here is that you're starting to see new cases again in places like South Korea, which thought they had

gotten rid of it, Singapore. Uh, even some case is now reappearing in China. And this is not even taking to account the so called famous second wave, which is supposed to hit us in the fall, because we won't have a vaccine by then, and it will be it's not clear if we'll have an anti viral either by then. Uh and so uh. If you want to pattern this somewhat on the Spanish flu, it was the second wave that was the most destructive, more so than the first wave.

And I think that's part of the problem, the fractured leadership, even on an issue like COVID nineteen bill. We've talked a lot about how the amount of emerging market debt has tripled by some counts in the past decade or so, and I'm just wondering who's going to bear the brunt of the losses if there is a mass for structuring like the one that you're calling for an order to

remedy the situation. Well, I think for governments who have lent, uh, it's much easier to a SOB, But for the private sectors, lent is going to be very, very difficult. You're gonna

have a lot of bankruptcies. I think there would be some real hits uh to various institutions that have taken on all this that and you too remember, well, I've been on your show for years wondering, you know, wondering when this was going to hit because of the reach and search for yield that we've seen, and so there's so much exposure out there, uh, and a lot of this is going to come home to roots. So I

think it's we're in a very difficult period. So my hope is that the G twenty can get its act together, both on a financial basis and on a health basis. Uh. And that's what I think we desperately need, or we're going to go through a very very difficult period over the next two years. Bill, thanks so much for joining us.

We really appreciate your perspective. As always, when we talk about the emerging markets and some of the credit challenges arising, there's no one better to speak to than Bill Rhodes, President CE of William R. Rhodes Global Advisors, former chairman of City Bank, with tons of X variance years of experience dealing with emerging markets Latin America in particular and

some of their fiscal challenges over the years. So at leasta, it just sounds like there's much more pain for the emerging markets, the company, the countries themselves, the people as well as the investors in those markets. Yeah, and just to sort of highlight how much debt these companies, companies and countries have, you know, hundreds of billions of dollars that they have incurred over recent years, and there's a

question who's going to bear the losses? And some people saying, well, you know, it's time to reinvest in some of these areas because of the yields being offered. Yet you have to wonder what the capital flight will be like as the defaults really pick up lesa. You know, I grew up within a household where my parents were children of the depression, and it really impacted even you know, all through my childhood kind of how they viewed life in terms of money and you know, food security and all

these things. And I think, you know, it was such a such a significant impact on their lives that really, I think impact of them their entire lives. And some folks are questioning whether this pandemic will have a similar effect on some of the young folks today and what it means for consumer behavior and will the consumer actually come back and and spend an act uh, coming out of the pandemic as they did going into the pandemic.

Christopher Condent, he's a Federal Reserve reporter for Bloomberg News joining US Washington, d C. Christopher, thanks so much. I know you kind of had a really interesting story Scarred and Scared the reshaping of American consumer begins. This is really, uh,

I think fascinating story. What did you find out? Thank you, Paul. Yeah, you know, um, I think we're compared to any expectations for a quick return of the American consumer, there's not a lot of evidence to support that that would be the case, simply because the consumer is getting hit on

really multiple levels. This story that I wrote about addresses three levels, where first of all, the most obvious is that a lot of people are losing their income, so it's not about their willingness to spend, but their ability to spend, and that's going to be severely damaged and probably in many cases for quite a while. But then moving even beyond that, we know from past experience, and you brought up the great depression, which I also talked

about in that story. Um, there is a knock on effect. It's not just for those people that lose their job and lose income, but when you see neighbors and friends and family members affected. It also we know from the past experience can affect people's spending habits. They get a little bit more cautious. Uh. And and you know what

I thought was really interesting. The economists that I spoke to brought up again and again that this is the second time in the space of about twelve years where we're hearing this is the worst the session since the Great Depression, and that really can begin We don't know. This is a bit speculative, but that can really affect the psyche of people as workers, as consumers for a very long time, just as you talked about your parents.

And then finally, just the other obvious thing about this, it's not just about economics for the consumer, it's about their own health. This contagion can affect you. Obviously, it can kill people, so that adds another elements of fear. Um, again we're being speculative here. We don't know how long it's gonna last. But when you talk about risks like this. It brings in the emotional side of decision making for consumers, and economists that have studied that say it's very difficult

to overcome. It doesn't mean everybody's gonna stop shopping, but even at the margin, if many millions of people are affected by the US for a long period of time, that will have a great drag on our economy, Chris. Some people say that the consumer is in much better situation now than it was getting into the two thousand and eight crisis, and that the US government has supplied a big enough stimulus to offset a good deal of the mispay for a larger proportion of the US population.

They point to that as one of the reasons why consumer spending may be more resilient. On the other side of this, did any of the economists you spoke with address that, Yeah, well, there's a couple of things to say there, I think, Lisa Um, it's true that on aggregate the if you look at household debt two income, it's in a much better place. But those numbers are really skewed by the upper end, the top ten percent, the top one. If you look at the middle deciles

across the you know, the distribution of this data. People in the middle and even the upper to middle range. We're not in a very good position in terms of debt income before this, so those numbers are slightly misleading. I think. Second is that it's true there has been a huge amount of support being brought up by the federal government. Um, now the question is how long does

that is that a sufficient enough bridge. It may help for a while, but you know, unemployment benefits even with the extension in the care Is Act going out to say thirty nine weeks for a lot of state that's gonna help a lot of people, but it won't bridge the full gap for many people who will lose their jobs for longer than that. And the six hundred supplemental amount per week that the federal government kicked in as well, that's super, but it only lasts until July one, So again,

how will it really bridge the gap? And and and even then, you know, we talk about already the psychological scarring effect. If you are able to bridge the gap in your income and then you have work again, you know, we can still ask are you going to be as aggressive in your spending as you wouldn't before? So we don't really know the answers to all these questions, but it is quite worrying. Chris Condon, thank you so much

for being with us. Chris Condon, us economy reporter for Bloomberg News, joining us on the consumer confidence hit from

the coronavirus. And I will just say, Paul, it's really interesting to see the response to articles about the spread of the virus, with some people saying it's fear mongering and that the virus has a pretty low fatality rate and that the shutdowns also have a high fatality rate, and other people saying, well, the reason why it's not a lot higher and why we're not seeing many more deaths is because of the shutdowns and this sort of push pull in public sentiment ongoing as the US and

the rest of the world considers how to reopen. Yeah. Absolutely, and I think it has a little bit to do with the kind of where in the country you reside. If you're kind of in that New York metro area, you probably have a different view than if in Middle America where you really haven't been that impacted by it. Let's gift to another one that's suffering dramatically, and that

is the hospitality and lodging sector. We're looking at Marriott International, which saw its REVENU revenue per available room plunge ninety percent in April. The question is how do you batten down the hatches and gird for the future. There, Brian Ecker joining us now senior Gaming and Lodging analyst for Bloombrick Intelligence. Can you give us a sense, Brian, of just how bad the carnage is and has been this

earning season versus expectations in this sector, the lodging sector. Sure, so we entered a situation where most of the major lodging companies are already effectively pre announced results and you know declines are certainly severe. If you look at revenue prevailable room, the key metric that was down about uh in the first quarter for both March, for both Mary and Hilton, but more notably in April that metric was down percent. So you still have a lot of hotels

that are currently closed. There is some pace of reopening, but it's going to be gradual and mixed and phased across the world, depending upon the type of hotel. So, Brian, there, I guess the question for a lot of industries, a lot of companies is kind of consumer behavior. How is it going to be affected as we come out on the other side of this, what we see material and

maybe even permanent changes in consumer behavior. I know, you do some a lot of work following them, the casinos and Macau and as Asia it starts to open up. What are some of the early feedback from the hotel's and the casino and the other consumer facing businesses there in Asia? So it's coming back slowly. I mean early indications are is the most recent monthster and we've had eighty nine to clients and at least gaming revenue in Asia.

You know, the hotels also coming back slowly, but because they entered this pandemic earlier, arguably they have the potential

to start to recover um somewhat sooner. I think what you're seeing within the US is again it's going to be mixed by region, where drive to limited service hotels UH in local locations probably can come back a little bit quicker, but group hotels that depend on conventions, large resorts, major gateway cities are likely to come back somewhat slower, and likewise it will be very you know, across the

world in terms of US versus Europe, etcetera. So we were just talking Brian to George about the airline companies and saying he was saying that without another government bailout, it's unlikely that all of the companies will survive in the way that they are currently. What's the consolidation wave going to look like in the lodging space if things continue the way that they're expected to. Sure, so we've already had a tremendous amount of consolidation the lodging sector,

just to point that out. Um, you know, there are many small independent hotels, but certainly the large chains like Marriott Hilton benefited from ample consolidation. And then you look at companies like Marriott. They just report today, you know, they do have four point three billion dollars in liquidity.

So given the amount of the cash burn rate, if you will, that they face during this period of downturn, that provides them with quite a long runway for them to be able to sustain even very draconian red partic clients as large as doesn't mean there could have made some combination consolidation or even independent hotels that might try to convert their brand flag and convert to uh let's

say a Marryott brand or something else. But you know, it's certainly in terms of consolidation because we've seen so much of it already. I think in terms of major chains, uh, they are at least for their part, fairly well positioned to kind of weather this downturn and come back slowly. Brian, where are we in terms of supply of rooms in the marketplace? It just feels like there's been a lot of hotels, a lot of new construction, a lot of

supply added to the market. Is that are we oversupplied here? Or you think you know, given the pullbacks and demand, that the supply and demand er in decent shape. So we had seen kind of a low, single legit pace of new supply, and there were some concerns that maybe supply is growing more quickly and let's say the limited or select service segments. The reality is, because of the pandemic,

you may see some openings delayed. Uh. You know what Mary at It said in their calls in terms of scheduled or plan hotel openings, they don't know if that will be down by or but it certainly will be affected. Um. But but again I think in terms of supply, it really um, at least some of the slower level of construction, they actually worked at the benefit of hotels, and you've got a decent number of hotels of construction. Those that were fair fairly well along and being built continue to

work through that construction process. But UM, I think the biggers, who's how how long does it take for demand itself to recover? And then there's a question Brian, of additional spending to try to ensure that people feel confident that they are going to get sick or that these hotel rooms are clean. I mean, we've heard about some types of ventilation that are changing and different cleaning standards that can be maintained to sort of show potential clients that

they are safe. What are you hearing in terms of spending on that side? So, UM, I don't know if it's a question of spending as much as protocols and practices.

You know, the way that companies have approached this as they think about the process of reopening, is the likely to having um some food and beverage outlets closed or operating a limited service with a lot of pick up and take out of having in some cases of hotels are running in very lock and see a limited utilization of certain floors, having a lot of safety and queaning

protocols in place for housekeeping. But the reality is because of hotels might find it practical or lose less money by opening a temperson often see rather than staying closed because they're opening with such limited occupancy in some cases in order to mitigate losses. The reality is that accommodating UH social distancing might be somewhat easier to execute given the fact that the level of ocupancy is so slow to begin with, at least during the initial stages of recovery.

Brian Igger, thanks so much for joining us. We appreciate that Brian Egger covers all things hospitality, UH, end gaming for Bloomberg Intelligence. Marriott reporting some numbers today in the rev bar and the occupancy levels UH you know, obviously down significantly, Lisa, And you know, it just kind of comes back to the question we're talking with Brian Egger on the hospitality and George Ferguson on the airlines. It's

kind of about consumer behavior. How will consumers come out of this on the back half of this pandemic in terms of behavior, in terms of going on planes, going to hotels, going to conferences and casinos and things like that. Yeah, at the same time, we're getting to summer, and I will say a lot of my friends and I have been talking about the fact that our kids are not going to be going to camp and there is no sign of vacation on the forefront. What do you do?

Do you just stay in your home indefinitely? Do you try to get out? How do you get out? Do you stay at hotels? I mean, these are all the considerations as people start to face a very bleak number of indefinite months ahead, and it just raises a question how can hotels entice people back and what sort of the confidence level they have to get Yeah, I think and and there's a sizeable part of the population, and I think it's a growing percentage that says we need

to get back out there. We need to get this economy going, we need to get out of the house and start moving again. You know, we've we've bent the curve and maybe we're at the point where it's able, we're able to get out there. So I'll have to see how that plays out. 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 Woids. I'm on Twitter at Lisa abram Woids. One before the podcast, you can always catch us World wid I'm Bloomberg Radio m