Markets Must Support Treasuries as Fed Exits, Whalen Says

You know that you have. Treasury had issued a statement yesterday saying that if the Federal Reserve ceases to reinvest some or all of its maturing Treasury securities, Treasury would likely need to increase the amount of borrowing from the public, and under the planned officials would increase both Treasury bill and Treasury nominal coupon auction sizes. Here to tell us

more about this potential process is Chris Whalen. He is the chairman of Whalen Global Advisors, and he is the author of a new book entitled Ford Men From Inspiration to Enterprise. Chris Whalen, thank you for being with us. Maybe just comment on what the Treasury Secretary with the Treasury Department rather is putting out in a statement that they're just going to have to increase borrowing in order to make up for the runoff that or the lack

of buying from the federals arve. Well, of course, pim M, thank you for having me on. By the way, the government has been subsidized by the FED. That's been the primary you know, benefit of quantitative easing and all the rest of this. It hasn't really helped the private economy.

It's been mostly a subsidy program for indented governments. So absolutely, if the FED is no longer buying uh, treasuries, if they're no longer buying all of the agency issuance in the mortgage market, which they are today, Uh, then yeah, obviously the markets would have to support that issuance. You know, Chris, it seems like we don't hear that much about the relationship or discussions between the Treasury Department and the Federal Reserve,

I mean, how much they're coordinating or not. I mean, because as you were saying, the Fed's bomb buying program certainly acted as a support to valuations and suppress borrowing costs for the US government. Now though not only is the is the FED considering allowing its balance sheet to run off, but the Treasury came out today with a statement saying that they are seriously considering longer dated, ultralong dated treasuries, possibly selling fifty or one hundred year bonds.

I mean, do you think that there's an increasing tension between these two agencies? No, no, absolutely not, because the Fed is the alter ego of the Treasury. This is why it's not allowed to do business directly with the Treasury. When they buy and sell debt, they have to go through a dealer because otherwise it would be the snake eating its tail. Right, Um, the FED doesn't make money.

They only incur expenses. So whatever they earn off their portfolio in terms of interest, right, they subtract or operating expenses and they remit that back to the Treasury is essentially their forgiving that debt. So Congress pretends that this is income, but it's really not. It's it's simply another phase, like a Hindu god, of of our government, one being

the Treasury, the other being the Federal Reserve system. But they are back to back there one entity that the in economic terms, and you know who's written beautifully about this is a good friend Bobby's andvice than a Cumberland advisers, you know, he worked at the Atlanta FED. He knows this subject cold and when people talk about the FED making money, he just laughs because they clearly don't understand

the relationship. Chris, one of the things that I know that my colleague Lisa has Lisa Brahmas has been following has been the increase in charge in charge offs for subprime automobile loans and also the increase in provisions that such as Capital One have had to put aside in order to well with and that has to do also now with credit, with revolving credit or credit card loans. I'm wondering if you could speak to that issue. Do

you see this as part of a largest cycle trend. Yes, Credit costs generally bottomed out in two thousand fourteen or early two thousand fifteen, So both for bondholders PIM and for banks, the cost of credit is going up. We had again a FED induced boom in consumer credit UH and also another asset classes and so now we're going

to see the result of that. Whenever you have a period of really low rates, when the central banks are out trying to make things easy for debt ors, you hide the cost of credit, and when you pull back on that and you try to normalize the market, you start to see the costs in terms of the faults, and certainly in autos you're going to see that. So, Chris, when I talk to analysts about this particul uller increase in consumer charge offs, uh, they all say, this does

not appear to be a systemic risk at this point. Um, First, do you agree with that? But second, if it's not, are there specific companies that you're watching that could suffer disproportionately from this deterioration in consumer credit. Well, the companies who are really on the front lines with autos or the private less source. These are companies that would buy cars from the automakers and turn around at least them,

but they own the residual risk. In other words, if that car is not worth dollars when it comes back on the lease and they have to sell it for eight team, they lose to grant. So the smaller players who have done the below prime lending, they're pulling back. They saw the losses go up and they're starting to take less risk. This means that General Motors Forward all the rest of them can sell fewer cars because there's less credit in the system. That support the inventory. Right.

So the real issue to me is the banks are going to get more careful. Clearly, bond holders are also unnoticed now and they're going to demand better terms, higher coupons and you know, in consideration for the losses. But they're the non banks, I think, the smaller players who have predominated in the subprime sector. They're going to pull back a lot, the auto nations and the rest of them because they just can't sit there and take losses

every quarter. They're gonna try and adjust supply it demand and as you see the the retail pricing for used cars is reflecting this. It's you know, there's too much product out there. And as they say, you know, we got back to record levels over five years thanks to uh, you know, thanks to the FED, and they it helped save the automakers. If they don't run at least seventy utilization, they're not making money. You know, it's costing them cash.

So the whole system was driven by credit. And again, you know, there are many bubbles and this is just one of them. And the who's the Fed desperately trying to make something happen. But you know, the economy, population growth is half flat. Yeah. Chris Whalen, thank you so much for joining us. Chris Whale and as chairman of Whale Global Advisors in New York. He is also the

author of a new book Ford Men, From Inspiration to Enterprise. So, as we keep talking about Puerto Rico is moving to restructure it's seventy billion dollars of debt in a bankruptcy like proceeding that will happen in the US. To get more details on how this may proceed, let's bring in Michelle Caski, who covers all things Puerto Rico for us

here at Bloomberg News. And Michelle, can you give us a little bit of a sense of how expected or not this pretty rapid move to a Title three restructuring happened. It does seem very rapid, although um, they've been negotiating for a while with creditors, it wasn't getting anywhere, you know, some At some moments it looked like maybe, um, something would happen m or that they were actually making some progress. But unfortunately, um, they just they didn't reach that common ground.

And the governor to today announced that the Federal Control Board would file. He requested that they would file and we just have UM just a few moments ago, UM, it was filed in court. Well, and I'm looking at the letter that Governor Ricardo Rossello UH filed and he actually highlighted the stay, the fact that UH, Puerto Rico's immunity to lawsuits was lifted earlier this week and that that expiration was really what pushed them into having to

file for this forrastructure. Definitely, without that legal stay, UM, then Puerto Rico faces UM lawsuits from creditor seeking repayment considering that Puerto Rico has not been paying on its debts and UM there's also existing lawsuits out there that could move forward. So in order to get additional protection from UM new and existing lawsuits, Title three does offer

Puerto Rico. That what does Title three offer the people of Puerto Rico, Well, like you have mentioned, it does offer them a more orderly process to restructure the the seventy billion that they want to reduce and UM, and again, the the creditor lawsuits are suspended UM during a Title three. So let's talk about the legal bills because I know that you reported several years ago that the bills at that point for Puerto Rico were already in the excess

of sixty million dollars. That was just a beginning salvo, and I'm sure that they have only continued to mount. Does it mean that Puerto Rico will have to pay less in legal fees if there is a restructuring that's in a more orderly bankruptcy type of way, or is that not part of this picture? Well? I think either way with or without a title three, Um, Puerto Rico, UM, you know, needs to pay their lawyers, and they will be they will be um needing this outside legal help.

And it's going to be very costly. All right, it's gonna be we know this is gonna be very very costly. It already is very very costly. Will this allow the Puerto Rican I was trying to get it with the people. Will this allow the Puerto Rican commonwealth to focus on fixing the economy, which then will supposedly create revenue, tax revenue that will be able to support the commonwealth, because otherwise this is like a uh you know there, it's

like a double track reality. You've got one group over here and then you've got the people who are actually living the problems of Puerto Rico on the other side. No, definitely, I mean that is that that is their Their biggest challenge right now is to get economic activity going again on the island. They need that and hopefully the you know, the court will see that as well. And um, have

they enacted anything. I mean, for example, one of the reasons that Puerto Rico is in such dire straits as the federal government granted a triple tax free UH status for municipal bond investors. Plus they gave huge tax breaks to the pharmaceutical industry to manufacture their products there. Sure, I mean the new governor, I mean, his plan is he wants to increase tourism on the island. He wants to um have the private sector more involved in in hiring and and taking over some, um, some of the

programs that the central government has been doing. He definitely wants to increase job creation in the private sector and to reduce the government's pay payroll. Michelle, I'm not seeing much of reaction in Puerto Rico bonds. Why is that? Well, remember, the news just came out. The headlines first came out at about ten forty and so it's only been about an hour and we don't typically see as much active trading in municipal bonds as you would see in for instance,

the stock market. Um so, but we will see some some trading today and um in the past couple of days, actually, Puerto Rico bonds have been trading up in price. And what I've been hearing from people as they believe that's because of the medicaid money that the island did receive from from Congress. I just want to say, just breaking across the bloomberg that assured Guarantee and MBI a drop their legal cases against Puerto Rico after this latest filing.

So it seems like, uh, this is moving toward the direction a lot of people thought was inevitable. Right, the game of chicken maybe actually over by now. How long is this going to take? Michelle? Oh gosh, I mean today the governor was saying that it could take years. Um, you know it. It all depends on how in what a judge can do. Can you bring everybody together? Um? And he or she can can that pon that judge bring everyone together and and and strike a deal? Thank

you so much, Michelle Casky. Yeah, I was just gonna send following the news in Puerto Rico just to put it into perspective, the unemployment rate for Puerto Rico is over eleven and a half percent. Just to get that information out there a lot of problems. Yeah, Michelle Casky is our Puerto Rico reporter for can be doing this for a long time. It's not going to be over. But there's so much money at stake, and as you keep pointing out, and rightly so, Paim, there are a

lot of people at stake as well. Well. You have people at universities who wonder whether they're gonna be able to get a job when they graduate. We want to take a moment to let you know about something new from Bloomberg. Starting right now, you can use our iOS app or our new Google Chrome extension just can any news story on any website, instantly revealing relevant news and market data from Bloomberg and other sources related to companies

and people you're reading about. So no matter where you're reading the news, you can bring the power of Bloomberg's news and data with you. It's pretty amazing. Download our io s app or search for the Bloomberg extension on the Chrome Store to try it out. Learn more at Bloomberg dot com. Slash lens. What do Filipino President Rodrigo Dutarte have in common with egypt General Abdela l c C and Turkey's President Richie Urigon. Well, here to tell us is Eli Lake. Eli Lake is a columnist for

Bloomberg View. He can be followed on Twitter at Eli Lake and Eli Go ahead, tell us what do these three world leaders have in common? Well, they've all been courted by President Trump. Uh. In slightly over the top rhetoric for an American president. Um. You know, in the case of Duterte, you've got somebody who who's boasted about um an absolutely vicious campaign against his nation's drug dealers. Um, and has basically admitted that this sort of vigilante campaign

its results in the extradicial, extra judicial killings of drug dealers. Um. You know, he has widely seen as a sort of scoge from the world stage. And yet in the phone call over the weekend, Trump invited him to the White House. UM. You know. In in the case of Urdawan, the president of Turkey, you know, he has been driving Turkey into autocracy. Uh,

you know, over a period of several years now. But last month there was a referendum that consolidated his power and could keep him in office until, you know, for the next dozen years. Uh. This was widely condemned by people who care about Turkey's democracy, and Trump called up after the referendum results came in to congratulate him. Um, so all of this sort of an example of how he has buttered up these authoritarians. Yeah, Eli, you wrote a column. I love the title, Trump decides to make

it springtime for despots. Uh, you know, talking about all of these overtures too widely feared and frankly reviled, certainly by human rights organizations leaders but who have sort of autocratic rule. That said, in this column, you point out that it does not appear that there is necessarily a strategy behind these overtures by President Trump. And you know, can we just chalk this up to shock value and you know, headlines that are going to get a lot

of clicks. Well, there may be there may be strategies that say, um, you know, in the case of dot really bad guy, very repressive for danger to the Philippines. But somebody who under the last year of Obama really did threaten to come out of the US Alliance orbit and into China's embrace that would be very bad for US strategically. Um, you know, you could argue that Trump is trying to sort of woo him back in this

fairly unconventional way. What I would say is that you America is an accessible nation, and we don't need to basically forget our values and our principles as a as a as a liberal democracy in order to work practically with countries like the Philippines when they have less than ideal leaders. And it's Trump's style to sort of be over the top in both directions. When he really doesn't

like something, he uses hyperbolic rhetoric in one direction. When he decides he likes somebody, he used a hyperbolic language in the other direction. We're all kind of getting used to that, um you know, more than a hundred days in now. But at the same time, it is a troubling trend, and I thought it was important to sort of highlight it. Eli, would you have any idea why he castigates the allies of the United States, such as Canada, Mexico, Germany, even NATO. Well, you know, it's a little bit of

a mixed bag. I have also heard that Trump does talk a lot with justin Trudeau. He has a lot of communications with Theresa May of the United Kingdom, and even recently he's had, you know, a few phone calls with angel Angelo Merkel, who he showed up when she visited early in his presidency, wouldn't shake her hand. Um. But I think you know, this gets back to some

of his you know, longstanding uh campaign Radican worldview. Um. And this is something that he's been talking about for like twenty thirty years, which is that he deals with the United States kits uh screwed on trade fields. And so this is something that's really the top of his mind in a way that we haven't seen in recent modern presidents, where you know, the idea that we would have these free trade deals was not debated really between the two major parties, with the exception of maybe Ross

Perrot and NAFTA. But he was member an independent candidate. Well, Trump's the president now, and this is he he represents the world view we associate with guys like pack you cat and and others. Let's say, um, you know, um, the global economy hurts a lot of Americans and we just about that. Well, Eli, when you talk with people in Washington off the record, do you hear more support for alliances with some of these UH countries that have been otherwise shut out by virtue of their being good

trade partners regardless of their humanitarian policies. It depends. I mean, what's interesting here is that UM a lot of Democrats and liberals really jumped on the decarc comments in Urdawan UM from Trump. But you know, if you go back ten years, the major criticism of George W. Bush was that he was too much of an idealistic ideologue when it came to the U S. Roland spreading democracies, and this is one of the impulses that got us into

the Iraq War. So we've seen such a dramatic shift in the Republican Party in a decade on this that I think a lot of people do have whiplash. I would say that the Trump approach where it seems like, you know, it doesn't even factor in his public comments at times, although I was told by my gla On, the spokesman for the National Security Council, that he does bring up human rights issues in private with some of

these leaders, like the Egyptian General l cc um. But in that in that respect, I think that we're sort of still looking for a bit of a middle ground. And what we've seen is that even in the first hundred days, Trump has shown that he's willing to evolve his position. Just look at what he's done on China and Russia. Um, he's pretty much flip flop those countries in his mind in some ways. Um. So there is a chance, I think where you could sort of see

some of this rhetoric maybe calm down. But I think the other real prospect theories that we just have to adjust for the fact that we have a president who pops off, says what's on his mind doesn't always go here with our far with the rest of his government's foreign policy. But you know we're gonna have to adjust for that. Well, well, thanks for helping us adjust to it. Eli la is a Bloomberg View contributor. Remember to read his most recent column, Trump decides to make it springtime

for Despots. That's on Bloomberg View dot com. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio