Oil Could Revisit Lows of $42 on Supply Glut, Kilduff Says

who's a founding partner of Again Capital. I mean, there was once upon a time when oil prices would dictate the direction of stocks and bonds in a massive way. John, do you think that this move lower is sort of the end of this particular blip downward or do you think that there is much more downside ahead. I think

there's certainly some more downside to come. I think we're going to revisit belows from November at around forty two barrel um, and that's it's a result of just the pent up buying that came into this market on the back of the OPEQ and non OPEC production accord um being coming up short and and and being given back because the deal is proving ineffective. We're still heavily oversupplied UM with no real relief in sight. And that's what

you're seeing here. John. I'm wondering, if you know, all those books and reports about peak oil, I'm never going to get that time back having read them. Should I just throw them out now? Absolutely? And actually I would be the guy that Bloomberg would have me on to come and refute, uh that that theory at the time, So I kind of missed those gigs myself. But absolutely.

And you know, at the time when I was pushing back against the argument of peak oil, it was because of technology that I've figured would come into the oil patch just as it was coming in, you know, to every other aspect of our lives. You know, cell phones that were you know, bigger than your head you're coming

into to fit into your shirt pocket. You know, why couldn't some of that technology be transferred and brought to UM, not just tracking per se, which was really a reinvented old technology, but seismics, well, you know, being able to look into the ground, things like that. So that's that's why we're here. So John, you're saying that you think that oil is headed to forty two dollars barrel Dave.

If oil gets there within the next, say, couple of weeks, what do you expect the reaction to be on the stocks. I mean, we already are seeing a down downturn in the hya bond market. It's starting to track a little bit more with with oil. But what about what about stocks? Well, arguably more of the same. I mean you just look at what's going on with the S and P five Energy Index as a point of reference. Uh, that peak back in the middle of December, and since then it's

fallen four cent. So you know, we've seen sort of the air come out of the balloon to some extent already. And if you get you know, more the same, well, there's more reason for that particular move to keep going. And I just point out on a day like today, it's like pick your company that's out with results and people aren't liking what they're seeing. Uh. Two examples Pioneer Natural Resources, which has fallen three percent. They're lowering production

forecasts among other things. And Chesapeake Energy. You know, even though they had their first profit in a couple of years, that stocks down close to seven and a half percent, So you know, put it all together, and it's not like you're gonna get much on the ernie's front at this point. That's going to head off more of what we've been seeing lately. Hey John, just a quick note to wondering about the coverage ratio, you know, the ability

of these oil companies to continue to pay dividends. I was looking at a Royal Dutch Shell over seven percent exce on Mobile now three and three quarters of a percent. Are those the kind of things that people can invest in an expect the dividend or are they're just going to enjoy a wild ride and they're gonna enjoy a bit of a wild ride. I will say there's a there's two silver linings here for an investors. Just probably within the SMP five hundred, the energy sector is down

a lot. It's it's maybe only eighteen percent I think these days, right, Dave and UM as well. The oil companies have really gone through a wrenching reorganization and are a lot more profitable at lower oil prices. So to the extent we do dip down to the levels that that I see, there will be some short term hits

and the index has already taken a big hit. But to the extent there's any kind of an upturner industry reaction production wise, UM, the stocks will become goodbyes because you will see some good earnings as we are seeing relative to where prices are. I just point out looking among the eleven million industry groups in the SMP five hundred, energy is just about six percent, so it's really kind

of lost its sway over the stock market. Nonetheless, it's definitely an area that's been hurting the SMP five hundred, one of only two that's down this year, phone companies being the other. And you're really talking about five stocks there. Yeah,

I'm sure it's really overtaken energy, John. I wanted to get your take and if forty two dollars a barrel would be the new normal for oil prices for a longer period of time, or is that going to be the inflection point at which prices can then rise again. We're gonna have to see what the industry reaction is. Uh. When we got down to these these levels or lower

than that. UM, we saw the rigs D recount here in the US in particular really plummet since then, since we hear a low point about a year or so ago, it's doubled. So you know they've come racing back. And they've also hedged a lot of their productions. So even if prices fall, they're getting paid fifty dollars a barrel no matter where they go. So we're gonna have to see, uh,

where we're at that point. Um, it could be an interesting showdown with the OPEC and Saudi Arabia where they decide to flood the market and really break the back of prices again and um and potentially see a price war. Got we got to leave it there, John Kildeff, thanks very much, founding partner again the Capital our thanks also to Dave Wilson, Bloomberg Stocks Commus go ahead send him

an email at d Wilson at Bloomberg dot net. Right now, however, I want to discuss the ramifications from Puerto Rico's move to file for bankruptcy like protection, and I want to bring in David Hammer, head of the municipal bond portfolio management at Pacific Investment Management Company in New York. David, thank you so much for joining us. Uh. First, I just want to get your take on what the implications are for the holders of Puerto Rico seventy four billion

dollars of debt as a result of this Title three filing. Hi, thanks for having me. You know, I think the most important UH turn of events here is that the period for consensual restructuring between the Oversight Board and the Government of Puerto Rico and creditors appears to be coming to a close. And what looks more likely is that the Oversight Board will begin to use UH Title three of the recently established Premise of Bankruptcy Code, which allows the

Oversight Board to effectively dictate recovery to creditors. UM. So it opens up a door for UH. It's a potentially lower lower prices on bonds, steeper haircuts than what's implied in the market. And also importantly, you know this is gonna take a while, so well, well, David, do you say, Yeah, there's gonna be probably steepier, steeper implied prices, steeper declines

and prices that we're seeing currently in the market. One thing that we don't hear a lot about is a lot of the holders of these bonds are individual mom and pop investors, UH, particularly in Puerto Rico. And how much will that sort of political angle change the dynamic of how much debt will get written down because people think of like vulture hedge funds and that you know, who cares if they get they get some of the

principle written down. But what about these retail invests? You know what I'd say, for starters, we don't think that that true. Mom and pop retail investors still own a lot of this debt. Puerto Rico is downgraded to sub investment, creating two thousand thirteen. UH default has been widely anticipated and expected really for a number of years now. Bomb prizes have been trading at really steep discounts for a long period of time, so you know a lot of

risk transfers already occurred. And the primary holders of these bonds now are a few mutual funds in primarily hedge funds. David, Is there any possibility that this will just be the opening act in other municipal filings such as Illinois? Will they use the same route? Yeah? I don't think so for a couple of reasons. You know that the three point eight trillion dollar municipal market is where states and cities and schools and toll roads and airports go for

their their financing needs. Puerto Rico is really a distinct case. It's a territory and only territories are eligible to use this law premises, so it applied just the territories. And when you talk about other areas in the United States, you know, they've experienced decent growth UH post crisis, post financial crisis, UH, decent population trends. Puerto Rico's economy has been in a recession for about a decade UH, and they're experiencing out migration, so they're losing people every year.

What about the Virgin Islands, Yes, it's the Virgin Islands is one that in theory UH could use PROMISSA in the future. You know, I think it's a very different situation and that they are having fiscal stress, but they're really early in the process. They haven't done much to cut their budget. They haven't done anything on pension reform. Puerto Rico is very different. You know, they've already reformed one of the biggest pensions. UH. Their average pension is

only about fourteen thousand dollars. So while there was a lot of room to cut at one point in Puerto Rico, there isn't anymore, so a bit different from Virgin Islands as well. So what are you looking at? What do you think is the best opportunity in the three point eight trillion dollar US munsoot ball market. So we really like a lot of debt at the moment, I'd say, particularly in the low triple B too high double B range.

Municipal default rates continued to be really low. Despite these headlines on Detroit and Jefferson County and now Puerto Rico, municipal bonds continue to experience low default rates versus corporates. One thing we look at quite a bit is the default rate for triple B munies is currently less over the last ten years as calculated by mood He's actually less than double A corporate bonds, So we see a

lot of opportunity. The market has been I think a bit wary this year due to the backdrop of tax reform. So where we typically see pretty strong inflows into the asset class early in the year, that hasn't been the case this year. We've only seen about two billion dollars coming to the municipal market compared to about a hundred billion in the investment grade corporate market. David, we're just to let you know we're waiting for President Donald Trump.

He is expected to make remarks as part of the National Day of Prayer event from the Rose Garden at the White House. Will be bringing those to you when he appears. If someone were to call you, David on the phone and say, all right, so, what's We're going to give you the power to figure out what Puerto Rico should do? Do Do you have any recommendations what should happen next? If you were given that task? Yeah, so yeah, I think importantly the oversight board that Congress established has

already been given that task. So that is exactly what they're doing. And the you know, the first step in the process was to approve a fiscal plan that sets Puerto Rico on a sustainable path going forward. Uh, you know, requires burden sharing in terms of further pension cuts and they assume about a tem percent reduction and pensions uh increasing uh the budget through reducing expenses and increasing revenues,

so enforcing tax collections. But all that, but I mean, that's I mean I started to break into it, but you know, all that makes complete sense, But that's doesn't seem to be ruling the day at the moment, and I'm wondering whether there are things that can be enacted. I mean, you know, one of the things that always talked about in Puerto Rico was the triple tax free status was granted by the federal government, the tax breaks

to the pharmaceutical industry. Is there anything that can be tangibly done in the next six months that will help revive the Puerto Rican economy? So I think the Oversight Board is doing it. You know where I disagree with you. I think they are taking actions. They are taking steps, uh. And it's it's deeper haircuts for bond holders. Uh. And then we'd like to see some some pro growth reform. So I think one example, there is a Cofina sales tax bond uh and right now creditors are disputing is

that lean valid or not? Do I have a claim on those sales tax revenues? You know, we think could be beneficial the economy is actually reducing the sales tax in Puerto Rico. It's a regressive tax. You could bring more money into the economy. You know, it's not the greatest thing for bondholders, but we think that could help get the Puerto rico economy going. We want to take a moment to let you know about something new from Bloomberg.

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Chrome Store to try it out. Learn more at Bloomberg dot com slash lens. So we have been talking quite a bit about the increasing weakness that we've seen in consumer credit, and one story that was in the Wall Street Journal last night that did catch my attention was that, you know, some big banks have started to pull back pretty pretty sharply from auto loans as a result of the weakening credit quality, and this is sort of adding

to the weakness that we're seeing in sales. To make sense of this and try to paint this in the broader scheme of credit markets, I want to bring in Matthew miss he's global credit strategist at UBS Securities in New York. Matt, thank you so much for joining us. I want to start with what your take on the latest data at the latest results from Synchrony Capital one the automakers with the deterioration in their sales numbers. I mean, do you think that this points to some kind of

broader problem that is being underrated in markets today? Yeah, I think there's UM. I think there's there's two two stories. The more optimistic one is that aggregate consumer credit fundamentals look relatively strong. The backdrop from macroeconomic perspective is fairly resilient and stable, albeit at a lower base than I think many would like. UM. I think what we've argued to be clear is the rise in delinquencies. We think is uh certainly an undercovered story, and it's driven by

three things. I think. The first is you've certainly seen lenders, particularly non banks, go further down the credit spectrum to base we meet loan growth hurdles. UM. So you've seen, in particular, across a lot of different segments, not just consumer or retail, but also commercial credit, you've seen non banks be much more aggressive in terms of going down

the curve and lending to non primary subprime borrowers. But I think the second thing, and we use a proprietary survey from UBS Evidence Lab to uncover this, this dynamic I think in in detail um is we think that the underlying consumer population is pressured by essentially a lack of real wage growth. So when you look at nominal wage growth, it's been certainly positive, but in low to

mid single digits and fairly disappointing. But what we find is that expenditures are rising if you think about education costs, if you think about healthcare costs, and on balance, there doesn't seem to be a lot of velocity or growth and real incomes. And so you can you can rationalize a world where default rates are rising, uh in the

sense that a lending conditions have gotten too loose. But be ultimately, we think that credit quality is driven in many cases by the ability and the willingness to pay.

And if the ability to pay is constrained by cash flow, which we would say income is a good proxy for that, it makes sense to us six or seven years into the cycle again, when you started to lend down the curve that some of that income inequality and essentially a lack of real wage growth is really starting to come through UH and uh and and and and show some

you know, some cracks on the consumer side. So, Matt, if you can extrapolate out on the more barish view on what these numbers mean and sort of give us a sense of what the result would be if this credit weakness in the consumer does continue to increase the pace that we've seen recently, what what would be the

implications for say a credit investor, even an equity investor. Yes, so I think this cycle, we would argue that central bank policy has been very accommodative UM, and so some of the traditional measures we look at UM, such as financial condition indicators or lending standards, seem to look fairly benign. Again, I think a lot of that is the liquidity that's

been provided by central banks. So one of the things that we believe this cycle, UM is that delinquency and default rates may need to be severe UH and elevated enough to basically to scare out or to push back on all of the liquidity UH and the investment money that's basically reaching for yield. So I think the story this time may actually end up being default rates and delinquencies need to get high enough that essentially it shocks or scares UH the investor community, and it basically causes

a pullback in liquidity UM. So I think that you look for two things from our side, Either one very severe increase in delinquency or default rates in a specific market UM such as autos, or two, I think, more importantly, a more broad based increase in delinquency rates UM that again would affect lenders such as non banks and banks on a more widespread scale. Matthew, I want to pick ups on something having to do with these non bank lenders that you say are being pressured to meet their

loan growth goals. If non bank lenders create the credit and then sell on the loans to other people, they'll be long gone before any of this paper starts to stink. Is that accurate? Probably depends on the type of the loan that you are referencing. So I mean they're not going to hold it on their books, is my point. No other ways. We just spoke to Mark Stefanski of the of the Federal third Federal Savings and Loan they're

based in Cleveland. He said, no, no, when they make the loan let's say for a house, they keep the loan on their books, but most of these non bank lenders, are they really keeping the loans? I think it really depends. I mean again, I think you know, to be clear, it depends whether you're talking about a mortgage versus a student versus a credit card, or an auto loan. UM,

let's stick. But let's stick with auto and credit the revolving credit, because those are the two areas that that seemed to be at least in the crosshairs right now. Autos and credit cards. Yes, I believe anywhere from a quarter to let's say a little over a half of loans are securitized. UM. You know, I think the the the caveat there is not everything is securitized or not.

Everything is basically moved off balance sheet. UM. I think you know, if you take mortgages, for example, UM, you have residual rights in many cases on the servicing side, and you also have UM, I think risks around certainly if you're lending uh aggressively. We've seen with companies. UM. You know, earlier in the month, we've seen with companies on the mortgage side. Uh. You know that there's still reputational or other risks if they're not essentially underwriting to

proper appropriate standards. So I think it's it's a fair argument to say, well, isn't this just intermediated without any skin in the game. Um. But I would point out that a lot of the non banks, I think you need to keep in mind, are funded either by wholesale

funding or by the banks themselves. Um. And we've seen this issue with some of the Canadian mortgage companies in the last week, which is like home capital, Yeah, yeah, if the market confidence right, it pulls back that that funding ultimately is either wholesale in many cases wholesale based,

or it's it's supported in many cases by banks. Now, not speaking specifically to a given issue in Canada, but when we look at the non bank lenders across the US from any of the consumer loans, you know, the backstop essentially is the banks. Well, so let's put aside the armageddon or sort of systemic crisis type of scenario.

Under the current scenario scenario where we see delinquencies and charge offs increasing, do you think that the unsecured bonds of say Capital One or debt of Synchrony, or you know, some of these lenders do you think that that the risk is adequately priced in right now? I think what you've seen over the last few weeks is it's not um and I think structurally the view that we would

have is again two things. One is that a lot of the loan growth has occurred in the non banks sector, and too, to be clear, that those loans tend to be much higher risk. And I think lenders have been lulled into a sense of complacency. I you know, I think they're telling you in the last few weeks these loans and the loan losses that were expected, we're much lower than what's being realized. And in an environment I would say where we're not in a recession or from

our side, not close to a recession. You know, the concern that we have is if it's still a fairly stable or or or benign backdrop. And you know, I would use that term gently, but I do think that's the case. And structurally, as we look out two to three years, if the environment were to deteriorate, I think the pressure is going to intensify. We gotta leave it there.

Matthew miss Global Credit Strategies for UBS securities. This is Bloomberg for honor to bring in Ning Tang, chief executive officer and founder of Credit Ease, a Chinese lender that is funneling money into the United States from China and seeing really what the Chinese consumer was looking to buy in the US and the big wealthy investor is as well.

Thank you so much for joining us. So can you just give us UH an overview of credit ees which overseas almost fifteen billion dollars and pioneered a peer to peer lending model. Yes, and UH we are a leading wealth management company in China. We're also in a lending business and we've been around for eleven years now. One of the key things we are doing is to help high end, wealthy Chinese investors deployed their wealth globally and

the US is a great destination. And just this week one I'm here, so our fund of funds team H is here evaluating investment opportunities into funds like a KR black Stone. And also we have a fintech investment fund team here evaluating investment opportunities into financial technology companies. Well, so this this is really interesting. Are people going into properties or are they steering away from US property investments?

Actually the demand is huge for alternative assets such as real estate and the venture capital, private equity, and also credit solutions as well as hedge funds. So we are the leader in helping people do that. What if you could just give us a little detail on your partnership agreement with Tishman Spire that's taking place in Beijing. That may highlight some of the areas that you find investors

are attracted to. Yeah. So we've been working with Tischman for many years, investing in their global funds, European funds as well as China on a project and the incoming three years together we're going to do a ten billion an R and B projects and uh, some in China, some outside of China, like the springs in Shanghai. Is

that one of the in Shanghai and also in Beijing. Well, so you know, there's been a lot of discussion and a lot of fear frankly over in the US about China and the credit market in China and that people uh and that is it getting overheated? Are people still able to withdraw their money and bring it invest globally? What do you what do you say to some of this? Do you think the view of China's credit markets and

sort of the support from the government is overblown. Actually, we see tremendous opportunity as Chinese consumers, micro entrepreneurs and the small business owners as do a hungry for credit help. Chinese people are very entrepreneurial and the new economy is very vibrant looking for capital. But so do you find that your wealthy clients have more difficulty funneling their money out of China and into a place like the US given the capital controls that the government's put in place.

We are a leading wealth management company in China, and many of our clients have assets and currencies outside of China already. They are successful entrepreneurs globally. So this is not that you sue we have. You're also bringing this model to trade finance. I believe I wonder if you could expand a little bit about that because Trade Shift

is one of your businesses that you're partnering with. Yes, trade Shift is a very interesting company, one of the over ten investments that we've done through our Fintech investment fund in the US, and so we are a equity investor in Trade Shift. Also, we operationally and a strategically

work with it as a value adding partner. Is there any place in the in the world that the Chinese clients that you work with used to be interested in but no longer are not really because Chinese investors are going global big time, right, But as far as reducing their allocation to a certain country in favor of another, I mean, is there a place that Is there any shift in the way that the investors that you deal

with are looking to deploy their money? Well, I think the trend is that they now work one and more with professional organizations as opposed to doing things on their own or through their friends. So they used to be not so professional. So I think the trend is moving from not so professional way to professional way. You mean to go towards, for example, of venture capital form or a KKR, Carlyle or what of these. First of all

is through a wealth management organizations experts like us. Yes, your company is listed on the New York Stock Exchange, but that's our subsidiary. Come bunny, it is a small business of ours doing marketplace lending. This is why are the this is a year and die? Yes? Is that correct? Yes? Okay, I just want to understand this because there's a platform that has been launched right, which is supposed to give the companies an ability to get data from you as

well as anti fraud technology customer acquisition capabilities. Does that mean that you're going to be moving more deeply into advising the people that borrow money? Um, it's actually a platform working for both borrowers and lenders doing uh P online and it was listed the end of two thousand fifteen. But as a fintech leader, it has accumulated a lot of data that can work for other players in China for anti fraud so on. So it's kind of a

value adding service we offer to the whole industry. Well, and it seems like from my research on peer to peer lending in China there is a much bigger ground swell of support for this particular form of financing than in the US, where some of the peer to peer lenders are are less peer to peer and more kind of financed by bigger institutions uh and then they can make micro loans. I mean, what do you think the future of of the so called peer to peer in

the US really is? Yeah, Actually, a marketplace lending has been around for over ten years. We invented that model in China and the leading companies like uh Lending Club and so long have done uh yeah well in the US. And recently we invested invested in a company called upgrade Um that's uh founded by a lending club founder and x CEO renored, so we are great to be his investors. So you weren't scared off by the whole KRIF fluffle

with the Lending Club a couple of years ago. I believe the model is robust and the industry will be for the long haul. The robot advisor topic is certainly something that US investors have been grappling with. Do you have robo advisors in China and are they going to expand? Yes?

And uh so our wealth management business while covering high network ultra high net worth individuals the Mary Lynch and the ubs way, we also serve a middle class uh mass affluent investors, but we do that through utilizing technology through robo advisor. So we have a leading robot advisory service in China, so people can get their own customized

the solution through mobile phone. So based on your wealthy clients, you were saying that your view is that the economy is going well in China, are they at all concerned about some of the issues that people are talking about with respect of the slowing Chinese economy and whether or not the uh, whether or not it can head for

a software Yeah, that's very interesting phenomena. We see that, you know, many of our investors are successful entrepreneurs from the old economy, so they are in manufacturing, in trading, so on. But they realized that the new economy is coming, so they like to embrace the new economy. How to do that through fund of funds investment. So when you

say the new economy, you're talking services right, uh. And also like a cloud computing for example, like Internet Plus, like uh, you know, a mobile internet so on, all like enabling the old economy to do better. The regulations that exist in China over peer to peer lending, they've claimed a couple of victims like for example home facts. Uh no more, is there a regulatory regime that ensures

the stability and the safety of the system for investors. Yeah, And actually talking about the fintech innovation, two sectors have become relatively more mature, namely marketplace lending and payment. They are like a trillion dollar in size. And also there are regulatory regimes for them, but other sectors are still up and coming, like a robo advisor, like crowdfunding so on. All right, I want to thank you very much for

coming in and sharing all this with us. Tank is the chief executive and the founder of Credit Yes, thank you very much for being with us. 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