ISM Non-Manufacturing Data, Markets, Argentina Debt

a specific sector that is suffering specific pain. Today we get data showing that a U S services gauge dropped to a three year low. A gauge of employment in the U S services sector fell into contraction for the first time since two thousand ten. This is beyond manufacturing. Joining us here, Lena Shilietieva in our senior US economist for Bloomberg Economics, Joining us in our Bloomberg Interactive Broker Studios.

How concerned should we be so? Uh? Today's numbers a clear sign that worries you know that we saw in the manufacturing sector are spreading beyond into a broader economic activity. However, I would question against you know, saying, Okay, this is a recession signal, it's not. You know, the sector is still expanding, expanding although slower pace. You know. I think this kind of number is comparable to what happened back

into thousands sixteen. Remember when we had China devaluation and a market route on the back of it, and that affected business sentiment to quite a significant degree. But we were not talking about recession. So we're not talking about the recession now. We think the probability still remains relatively low. Elena, when we saw the manufacturing side of the economy turned negative and actually into contraction, I think a lot of people felt like it was primarily driven by uncertainties associated

with the trade tensions. Is that you think that's also impacting the service society economy as well? Uh? Sure, So if you read some comments, you know, not only look at the numbers, but if you read the comments in the actual ism report, Uh, there's a lot of discussion all across the manufacturing and non manufacturing industries about how

tariffs are impacting the businesses. So, but what I found very interesting in today's report actually is that, uh, some some people are talking about how they are substituting how they are working to substitute some imports from China with UH imports from other countries. So I think eventually this will work and we will be just okay. But right now is just creating a lot of uncertainty. So how much of a concern just sort of raise ahead of

tomorrow's jobs number. I think it's a significant indicator, you know, along with other labor market indicators. I think it's telling us we will see another relatively weak number, but again not something that will be able to push the unemployment rate higher. In fact, we expect the unemployment rate to go down by attempts to three point six percent, so a one thirty five thousand number that we are forecasting

would be just enough to do that. So, given that we are starting to see a little bit of weakness creep into the consumer of the services side um and will certainly wait for the jobs data tomorrow, how do you think that the FED will react for the remainder of this year? Interesting you mentioned that because we already heard today after the week, same number, and you know

other indicators. We heard from UH Charlie Evans overnight he was speaking in Madrid and he actually said that he's still not convinced they need to act at the October meeting. He thinks that fundamentals remain solid, but I think if we continue to get weak data like we did today, especially the unemployment Rade report, this will push the fits And at the end of the months, let's say there are some optimists out there saying, let's buy this deep.

We think that the market is going to turn around and that either the feder will come in with stimulus or we'll see strength from somewhere else where in the economy. Could we see strength, well, you know it's it's the consumer. We've been talking about it for quite some time, right,

So that doesn't this directly feed into consumer spending? And it isn't consumer spending essentially a lagging indicator, and employment kind of procedes that it depends on how much wages grow, okay, and how much will consumers feel optimistic about the outlook and will they spend it. So we are heading into a holiday season pretty soon, so we'll see how that plays out. So that, like early indicators are saying that

the holiday season will be a good one. So, Lena, are you guys at Bloomberg Economics in the camp that UM, there could be a recession in or maybe just more like the new normal, which might be one and a half to two growth, and that might be kind of what we have. So we don't see a recession within the next twelve months. We think the probability is relatively low.

We just published some research. Actually our recession indicator is that for the next twelve months, and we think that we will see a significant slow down in the second half of the year uh to something like one percent on average from two point six percent in the first half of the year. But that by no means means recession is coming. I'm just trying to understand going forward. It seems like the market is saying the federal reserve or cut rates it will be insufficient to fuel economic

growth real quick. That accurate, I think it is. I think you know, the market is thinking the FIT might not have enough ammunition to act. They will obviously do what they can, but this might require some sort of a fiscal stimulus. The chances I don't know. I cannot talk about the chances of that, but it seems like that's what we need UM at this point. Elena Chila Tieva, thank you so much. Senior US economists for Bloomberg Economics,

joining us here on our Bloomberg Interactor broker studio. George Young, partner and portfolio manager at Villary Funds, joins us to talk about volatility and trading in this market. Villary Funds they are based in the great City of New Orleans, but George joins us here live in our Bloomberg Interact their broker studio. So, George, I was just talking about, you know, these past couple of days, this week has just been you know, a sell off on some weekending

economic news. How are you guys viewing the market right here. Well, we're long term investors and I think that's import and for people to keep in mind because this is not a short term event. It's not like going to the casino where you need to cash out at the end of the day. So if you can put on some blinders and look out into the future again, I'd like to think that our investors are investing for retirement, for specific goals, whether it's education for the kids, whatever it

may be. Uh, you need to look at the fact that the economy is basically healthy. Yeah, there's some ripples out there worried about the manufacturing index, But I think that is a short term indicator. Uh, when I say the economy is healthy, We've got good g d P numbers, we've got low unemployment, we've got not overly strong valuations in the stock market. So it's still attracted from a pe base, especially in the light of the fact that you've got one point six percent yields on the ten

year treasury. Got to keep all that in mind. So this is something people say, we're long term investors, buy and hold. The U S. Economy isn't going to collapse entirely. It's a good time to just stay invested and stay the course. What happened. And if someone is sixty four years old, they're going to retire in the next three years, and they want to know where should they be hiding

right now? You know, should they basically shift away from all their stocks and just go to cash because there is sort of an imminent crash being signaled by weakening services and on the heels of manufacturing and then talk of trade wars and forget about it. Well, I'll give you two answers on that one. If you're sixty four years old, that means that you're retiring possibly, but that doesn't mean you're going to die tomorrow. So you've got to think that you've got another twenty years to live.

And if that's going to happen on a statistical basis, you've got to buy stocks one point six percent and a government bond is not going to cut it. So you really need to be prepared to invest for a longer term. And that's not going to be fun. But again, it's very easy to look backwards and see what the cell signals were. Again, if you look back at the fourth quarter of last year, a lot of people are remembering, oh,

fourth quarter last year, that was a problem. We're entering the fourth quarter or now October, i'm told is a bad month. All those things are true, And I have no aversion to a sixty four year old having a certain amount in cash or certain amount in bonds. But I think they've still got to have a preponderance in stocks because that's what's going to keep them for the long term. I'd say a different answer if you were talking about an eighty year old. Life expectancy isn't as long.

Different needs, different reaction to volatility. Uh. And there's one of our old aphorism. Uh, no safe haven for capital or capitalists. So you've got to be a little cautious. But again, you you enter the stock market assuming there's gonna be a certain amount of risk, and you have to be willing to take that. So here we are, George, ten plus years into this economic cycle. We have signs of, you know, a weakening economy, still growing in the US,

but but weakening. What are the sectors that you think that you're recommending to your clients that they pay attention to. Well, I think you've got good opportunities in technology. And again technology dominates the S and P five. But one common characteristic technologies whatever software, for instance, that you buy, you as a user, tend to re up that same software,

and so they've got very visible cash flow streams. The other thing that's attractive as most technology companies have very little debt, and that's obvious the way that you get in trouble nowadays if you have too much debt, and as we all know with a lot of corporations, any debt that is on a company's books can be refinanced at these historically low rates. So I think technology is a good area to look at. I want to go back to the sort of age issues I'm having. My head,

of course went on succeed four. I'm not going to say it. I'm wondering, do you think then that, for no reason, should people change their allocations? In other words, let's just say, I mean, should they reduce their allocations to equities in a situation where they're needing to preserve cash and focus on the income level, or should they look to stocks as the new income providers. I think that people need to understan and the total return concept,

and I think most people do that. As you shift, and let's say we're talking about i RA, so for the argument's sake, you don't have to worry about taxes. You can make that shift, and you should as you move from let's say the sixty four year old to the eighty year old. The other thing to keep in mind is that if you do make an abrupt decision to liquidate your portfolio and go fifty into cash, what's going to be the sign that's going to tell you, Okay, now it's quote safe to get back in. It does

not ring a bell. You never know when that's going to happen. So I think it's much better to adopt a constant um uh investment policy statement for yourself. Endowment funds mutual funds have an investment policy statement and they

adhere to those with good reason. So if you think back about the fourth quarter of last year, think back to the first quarter of two thousand nine, when the market was hitting loads, it's good that you would have stuck to your investment policy statement to maintain the proper

asset allocation. Well, certainly people who stuck to their allocations today in equities are actually going to be pleasantly surprised because what looked like it was going to be a very down day has turned surprisingly positive with the nastac opp nearly six tenths of a percent. George Young, thank you so much for being with us. George Young, portfolio manager of the Villary Balanced Fund, which trades under the

ticker v I l l X, joining us now. We are so happy to have Damien Sassaur Fixing come Strategistic focused on the emerging markets for Bloomberg Intelligence and UH. I want to look first at Argentina because it's hundred year bonds that were sold just a couple of years ago, trading at forty three cents in the dollar trading a par not so long ago. What is the implication here, Well, I think you want to talk about Argentina, because I just returned from Buenos Ayres last week, So let's talk

about Argentina. Argentina, and I've met with quite a bunch of people on the ground, and it's certainly a deflating a sentiment down there. But three hundred fifty billion dollars of debt outstanding, of which two hundred sixty billion dollars is in hard currency, so they will have to undergo a major restructuring. I mean, this isn't just gonna be a reprofiling maturities such as they've led us to believe.

This is gonna be led by the I m F, which, by the way, forty four billion dollars of that hard currency debt is owed to the I m F. And so there's gonna be a lot of interplay there. I mean, certainly with the Guard moving to the e c B and now Krystalina Georgieva ascending to the head of the I m F. You know, she's a Bulgarian economist. The Bulgaria was bailed out by the I m F BA. But really, you have to look back to to know

why Argentina is in the current situation. It's in Lisa and the fact remains, you know, they've got a lot of debt outstanding. They need short term relief. It's going to be led by the I M F and how RGIVA and UM whoever is in office after the elections on the seven is. You know, however they play and

however those negotiations go. We can only hope from the back of an external U. S Dollar creditor that they go smoothly and then they go quite frankly, quite quickly, because in addition to you know, the bonds that are outstanding, there's also CDs twenty a billion notional of CDs outstanding, of which five billion is net not gross notional outstanding. So someone's gonna have to eat that loss if indeed money changes his hands and there's a CDs trigger which

is hit. So you know, there's a lot to look at. I mean, certainly, I mean, but you know, just looking back at what's in the best interest of Argentina. You know, if before my trip down there last week, I would have said, you know, most people would have thought that you know, a Fernandez Kirshner government would have been deemed um bad for the market. I don't think you can

make that claim anymore. I mean, certainly some of the capital controls, and not all capital controls are bad, but the Macaree administration, some of the capital controls they just put into place. I mean basically what they did was they they they basically um wouldn't let local paceol denominated money market funds which are holding the salaries for local

workers basically pay back that money. So you know, I mean corporates, local corporates who are using money markets to stash their cash couldn't access it to pay salaries last month because of a lot of these capital controls. So I mean McCree is not well loved locally on the ground, and certainly that was probably a very hasty and cumbersome move in my opinion. So what's what would be a quick resolution here? What kind of timing are we looking for? I mean, most I am a you know kind of

negotiations probably take about six months, um. So anything before that would be very very quick, because this is a very very complicated restructuring that needs to take place. I mean, you know, Paul, I mean we have marketable and non marketable debt. We have hard currency and local currency that we have different creditors. We have pars, we have discoes,

we have bonars, we have leleaks. I mean, we have so many different structures that form that debt stack that to kind of go through it all and kind of i mean different covenants, different um um, it's just so much stuff that you need to go through. But the good thing is you do have collective action clauses and most of the foreign law debt, so they should be able to kind of push things forward a little bit

more quickly than we've seen in the past. Just in a minute, I'm wondering how representative is Argentina of other potential potholes in emerging markets. Well, Argentina is very unique. I mean this has been going on for years. I mean they've defaulted twice in the last twenty years already. I mean again, a lot of us started with with with in ninety nine when Russia defaulted on its debt and basically that pushed a great recession into Latin America.

If you look at OTWO, Brazil emerged from that, and there was a similar politician that was actually um running under a very kind of populous platform in Braziliano two and that was Lula and so Lula, which was the market thought he would be very market unfriendly going into office, actually wound up being very friendly in terms of the market. And actually, you know, the economy, look at where it

is now relative to our to where it once was. Um, you can only hope that Alberta Fernandez might kind of fit into that category. I mean, the verdict is still out because he's not saying anything until he's elected, and we don't know what it was cabinet is going to be comprised of. But I think that's gonna be really key after the election. Who does he pick to be in his cabinet? From an economics perspective, that is the

most important thing that we're looking at right now. Paul, all right, well, have you back on to give us some colors. This plays out big, big numbers for Argentina. Hopefully sooner ra the later they get a resolution there. Damien sass Our, chief Emerging markets credit strategist, joining us in a Bloomberg Interactive broker's studio. People don't want to pay to trade stocks. That has been the resounding message behind the success of apps like robin Hood, which allows

people to do just that. Joining us down to talk about the shift to no fee trading is Bill Capuzzi. He's chief executive officer of APEX Clearing, joining us on the phone from Chicago. Bill, I want to talk a little bit about Charles Schwab's decision announcement earlier this week to abandon commissions for their brokers and move into a model that more closely resembles robin Hood. What was your reaction. Yeah, I'm not surprised. I'm not surprised at all that that happen,

and it's just a matter of time. Uh. You know, as you mentioned robin Hood, which we helped as a custodial uh partner to robin Hood back when we helped them launch of the free app. We also helped since then a couple of dozen others offer free trading solutions, and uh, there's there's demand right look at robin and they have, you know, close to seven million users today and and the reason for it is people are looking for yield, looking for opportunities and lowering barriers to investing.

So I'm not surprised at all, and I'm certainly not surprised that TV and the trade followed suit. And my expectation is somewhere in the next twenty four hours we'll hear from from Fidelity as well. So, Bill, we've seen in the asset management business, uh, you know, rates UM fees continuing to go lower. Where does just give us a sense of like the economic model for like a robin head for robin hood, for example, how did they

make money? Yeah, that's a great question. You know, there's there's lots of pressed out over the last twenty four hours around this and and the reality is there's there's a few different levers I'll say that are that are pulled in terms of how to monetize you know, a free uh you know from an explicit the perspective of free solution UM one is payment for order flow, right, so to they send people are trading actively in stocks

those orders. Retailers are routed to market makers UM, and there's spread in the name UM and there's an opportunity to make make money off of the trading UM. And what I would say is, uh, you know, for retail investor, the friction lists way of trading today, it's probably never been better as a matter of fact, I want to say, probably it's never been better than this today, and the

spreads are so tight. Uh you know, there's some opportunity there, but I think you know, in terms of the win win for an end investor, it's a it's a tremendous time in just in terms of trading friction. The second is interest, right, So you know, if you look at schwabing what they came out with, they said, hey, look, three to four percent of our top line revenue came from commissions. The vast majority of their uh you know there revenue today is either interest income or fee based revenue.

And then the last thing that's not talked about a lot is just traditional brokerage is um stock loan al Right, So every anytime someone is buying a stock, there's an opportunity on the street where someone wants to short the stock and is looking for the ability to loan the stock and has money made in terms of stock loan.

So despite all of those areas to possibly make money, we are looking at charl Schwab shares down an additional three point two today following a three three point three percent loss yesterday and a nine point seven percent loss the day that they made this announcement, So it does seem like people will view this in a negative light in terms of earning his profitability. There is a saying

there's no such thing as free lunch. For individual investors who are looking at potential brokers, what should they be looking for for truly a good deal and not perhaps some fees that are gonna be baked in on the back end. Yeah, that's a that's a great question. And I think that there are some things right. So, uh, you know the fine print you talked about the free launch, right, make the analogy to you know, the ads for Verizon

where it's a free you get a free iPhone? Right, it's not free, it's baked into a longer term contract, and the same those for brokerage. Like people made to look at things like is there a minimum balance that's required in the account? Is there a certain trade size that I have to do in order to to to get that quote unquote free? Um, what's the interest that I'm going to receive on the cash that's that's that's in these accounts? Um? What what my pain for options? Right?

If I'm going to trade an option, what's the cost of an option? And then the last one and kind of the last fontira is mutual funds. Um. You know, are are the fees for mutual funds free or is it close to free? Um um? I do think sort of. The one of the consequences of of this is that there's they're going to be further pressure on the mutual fund industry, right because ets look at Schwab's announcement, equities

and e t s are free. Well, mutual funds aren't, uh, And it's just gonna put more and more pressure on the mutual fund industry and you know, drive more into the etf world. Bill Capozzi, thanks so much for joining us. Really really appreciate your thoughts on this move. We're seeing an asset management business towards zero fees. Chief executive officer of APEX Clearing Bill joined us on the phone from Chicago. Again.

Just really amazing using change to the asset management business. UH. With Charles Schwab announcing going to zero costs for many of their equity trades, just a real change in the industry. 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 Woyd's I'm on

Twitter at Lisa Abram Woyds One. Before the podcast, you can always catch us worldwide on Bloomberg Radio