Poor Risk-Reward Ratio Now in High Yield, Maglan's Tawil Says

studios here at eleven three oh to tell us more. David, thank you very much for being here. I have to confess that, you know, I feel like I've laughed myself because in looking at the notes for your appearance, I noticed the words Covenant Light Loans And that just rings a bell, doesn't it? The Covenant Light Loans can Is there a historical connection between Covenant Light Loans today and

Covenant Light light loans maybe you know two thousand and eight. Uh, certainly, Uh, you know, we we seem to oscillate now in the world of risky error assets between extremes. Uh, there seems to be a very hard push when we go risk on to the absolute lightest of restrictions on issuers UH. And then when things collapse, the tightening happens almost overnight. UH. The liquidity drives up in seconds UH and pricing comes

down very very hard. What that means, I think for the investor is you need to be aware of that volatility that can exist. UM. To the downside, you need to be prepared for it and be able to weather it. Some of the best buying opportunities may come at those moments. UM. And then to the upside, do you need to appreciate uh something very simple like the supplied demand equation, which is UH. We live in a world that has UM legacy like thinking surrounding how we balance our portfolios visa

v fixed income versus equities UM. And at the same time, the fixed income world is radically different uh than historically it has been. UH. There is uh lowest of low interest rates. UH. We have extremely aggressive borrowers that are fueled by private equity firms and you know, pushing for as much leverage as they possibly can, and to the

extent that a certain investment doesn't work out well. They have a portfolio of other investments that are similarly levered, and they could probably go ahead and get a grand slam or a home run out of one of those in order to go ahead and compensate for a loss in their portfolio. You know, David, I really want to hate hild bonds right now because I'm looking at yields that are within a half percentage point from they're all time loads for US high yield bonds. They're not high yield.

They're about five percent, which is about half of what they've been over the past three decades of an average. I mean, it's a tremendous decline. And I'm looking at spreads that are also similarly depressed uh in uh in high yield bonds in particularly and in particular, and yet I don't see any reason for this market to reverse in the near term. I absolutely agree with you. I think, I'm sorry, please finish your thought. Well, no, I just it's sort of like you know, but at the same time,

it feels terrible. It's it's really annoying to look at this and say, you know, how do you find value here? Right? So, I think on relative basis, a lot of high yield managers will say what you said, which is we're doing good relative to the risk free rate, although we've never seen the risk premium this narrow. But at the same time, where am I going to go ahead and get real high yield UM? And I don't see a default cycle coming on anytime soon, even though we're in a rising

interest rate environment and so on. Weight I actually think that the worst point and and this is the broader point here about general portfolio management, not for specific high yield managers who have a mandate to invest in a high yield I'm talking about the overall investor, whether that be institutional or individual. UM. There is very bad risk

reward ratio right now in high yield. And what I what I mean by that is, yes, there isn't an apparent risk outstanding, but at the same time, we do have some lurking potential risks like geo political, whether they be in this country specifically or whether they be generally around the world with regimes that are unpredictable. UM. We're also dealing with the market that has has changed substantially

over the past five to ten years. There's a lot of ETF money in high yield that there wasn't once was. We do not know how that works in a bear market, in an extreme sell off. Uh, the liquidity um depth is much shallower than it once was. We all know that people have talked about it at nauseum throughout the broker dealer world. Um. And so at the end of the day, the downside risk is extreme and unpredictable, and the upside at this point is to your point, we're

reaching nosebleed levels. Happy Wednesday, David Towell, Thank you so much for joining us. It's definitely a harrowing market to cover, since we see gains every day and yet where is that value? David Towell is president and co founder of

Magdalen Capital, which is based in New York. And I'm looking right now at relative yields and hier bonds three and have percentage points above treasury Young Sid Vermo, market supporter for Bloomberg in London, joins us now and he wrote a story about how there are some remarkable similarities now to the lead up to the financial crisis, especially as it relates to these big rating agencies. Said, thank you so much for joining us. Can you just give

us a sense of what those similarities are? Yes, Um, I mean I think It's obviously a very well documented fact that the post crisis financial landscape for a lot of players such as banks, or insurance firms or brokers, couldn't be any more different. But the big three credit rating agencies maintain their market share, their business models remain intact,

and their profits are remaining extremely strong. UM. At the same time, the regulatory regime that governs credit rating agencies on all accounts remains remarkably soft relative to the fact that they were blamed as the villains UM for creating

a crisis in the first place. UM. The issue of pays model, which was really lamented UM and one of the reasons cited by US regulators for contributing to the crisis in the first place through creating conflicts of interest, remains intact and and many many people concerned that they crept.

The big three agencies UM have been loosening their standards just trying to win business, and that crisis era behavior has been noted by UM the sec and we've also seen UM some problems in the asset that security industry, in which UM a couple of the agencies have been faulted UM, but it's not clear how much has changed was really the numb of my piece. Well, you're being diplomatic about it, said, so we we appreciate that. I won't be because you know this thing about paying for

a rating. I'm wondering if you could explain that to

people how that works. And uh, you know, when businesses, not only when you're thinking of investing in a business, but I mean thinking of buying a business, particularly if it's a large business and it has lots of relations financial relationships, they're gonna go out and they're gonna get a rating, and they're gonna get a rating either from you know, maybe even an insurance company, and then they use that rating because that's part of the sale process.

Speak about how people pay for ratings. You've encapsulated the issue very well. UM. Basically, since the nineteen seventies, a model in which the bora UM buys a credit rating and then the credit agency itself does an assessment that's supposed to be independent about its credit wordiness UM uh kicks in and UM A lot of that has obviously

come under a lot of criticism. UM. What's interesting is there have been new credit rating agencies that have emerged on the scene which have tried to go on an investor pays model in which subscribers to the credit rating UM pay for the rating and the issuer itself doesn't pay for the rating to try and reduce perceived conflicts of interest. Interestingly, that hasn't really got off the ground UM.

A lot of investors UM. There is a free rider issue there, A lot of the rating agency information, rating information and rating itself can be consumed by third party who don't provide UM, you know, don't contribute financially to the cost of that rate thing UM. And so we've seen that model not take off. Same time, the credit

rating agencies argue themselves that UM. What we've seen is the fact that that's a very difficult model because actually by reducing information in the marketplace, you increase trading courts UM. And there's a reason why that model UM exists, and

there's a reason why it persists. You know. I have to say, just anecdotally, just to push back a little bit, I have heard from investors that in fact, UH, when they want a deal rated that is maybe smaller and a structured deals a securitization, they'll go to DBRs or CRULL simply because SMP and Moody's and Fitch will not rate it because they do not want to be accused of exactly what you are saying in your article. What's

your response to that. Yeah, I mean, certainly their market share has been reduced and you can see that in some of their numbers for the asset backed securitization market, and SMP has been fingered by the SEC for and was banned from a portion of that credit market for a UM. But a lot of the a lot of the issues of that market probably pertained to the fact that a lot of the rated issuance is pretty minuscule UM and we've not really seen it achieved to its

pre crisis peak. So yes, UM, a lot of the rating agencies and the Big three might be concerned about their reputational risks in that market, but it's not really from a kind of business perspective that problematic for them, because there's been this boom in corporate bond issuance and boom and emerging market bonding. So literally they made it up in volume completely right. They set revenues from the declining revenues and securitization. Yeah, yeah, well done, good good

to have you on. Thank you very much. Sid Verma is our markets reporter for a Bloomberg. He joins us from London. Well, Apple reported earnings yesterday after the bell, and they were great. The markets cheering stocks are up the highest to the highest levels they have ever been, dragging along a lot of other UH shares with them, and Shara Overday is here to cast some shade on

it all. Shara Ovida is our technology calumnist for Bloomberg, gad Fly and Shira I am just struck by the fact that our entire stock market is leveraged to an iPhone. Can you give us a sense of what your main takeaways were from this earnings report? Well, it was better than feared, I think, is the big top line headline right, And you're right that. I mean a large portion of Apple's share press right now is leveraged to a phone that no one has seen yet, which is the next

versions of the iPhone. Expe did to debut in September or so, and the stock has been running up for more than a year basically on expectations that this new phone is going to unleash what the the Wall Street smarties have called a supercycle of iPhone sales. Sure, just to move us to the numbers for just a moment, because I find this staggering. This is a company that, at least, as for the last twelve months, two hundred

and twenty three billion dollars in sales. So because my brain is small, I get rid of the billions and I just say, all right, imagine you had a business where you did two hundred and twenty three dollars in sales and you were able to put forty six of it in your pocket. Forty six billion dollars in profit out of that to twenty three. That is a staggering thing, no matter whether it's you know, you're selling phones or

or you know, I don't know, pocket protectors. But it is amazing that the scale of this business continues to grow. Do you think they can continue this this momentum? I mean, can they get the fifty in profits? Well? Certainly seems in rage and you're right that. I mean, the scale of Apple is nuts. I mean, this is its own category. Yes, it's own category. It's the most profitable company in the country by you know, a long shot um. But the big question is what is the natural growth rate in

the future for Apple? And I don't know the answer to that question, right, what what Apple had been before last year or so was a company that was huge, incredibly profitable and growing very quickly. And the growth part of that three legged stool kind of has fallen apart. And so what we don't know is, Okay, what is the natural growth rate of a company at Apple scale beyond the next year or so? And I don't think

anybody has a realistic answer to that question. Well, and Sira, in your latest god Like column, you talked about how sales in China have been following for six consecutive quarters and continued in this lot latest pay earning this period. Uh in other places also internationally, Apple has not gained the same kind of traction and it's certainly accelerating momentum as it has in the US. And I'm just wondering how much is priced into the shares already, right, because

we're talking about a relative game. We're not talking about Apple going out of business or becoming, you know, not a behemoth and an amazing performer. We're talking about, you know, is is the stock price pricing in astronomical growth that seems improbable at this point? What's your answer to that question? Probably is the answer to that question. I mean, the

stock has run up. UM. Apple has always been a little bit of a tricky company to value because it's a hardware company and typically those are valued lower than other kinds of high margin software companies. UM. But even relative to Apple's own history, it's stock valuation is higher than it has ever been, or certainly has ever been in the recent history of Apple. And there is a lot of expectation of growth and profitability baked into the

share price at this point. And obviously, you know the slucks now at a record today, so that's even pushing up the valuation even more. India and the next maybe frontier for Apple, because I know that Tim Cook, the chief executive, he's already said he's focused on India, and indeed production of the iPhone SE is going to begin

this quarter. That could be the next growth story. Yeah, India is a very interesting market, not only for Apple, but for lots of other tech companies, both domestic tech companies and India and foreign companies like Apple and Amazon, which is also investing heavily in India. UM. Tim Cook has said for a while now that he sees India on kind of a similar potent entual trajectory as China for them, which has been an enormous growth driver, although

India is lagging far behind. Really, in the last year, you've seen this huge surge of people with UM smartphone connections with There's been some moves by one of the domestic cell phone companies in India to basically make almost free fast Internet connection from people's phones, and that's going to be a big help to anybody that's selling smartphones in India. But there's a lot of hurdles. I mean there there's a lot of favoritism towards UM domestic companies

in India. Apple phones are very expensive relative to what people typically buy in India, so it's not an immediate growth story. Thanks very much for being here. Sure O. The day is Bloomberg Gadfly columnists covering technology for Bloomberg News. Let's turn our attention now to China. The Premier of China said yesterday that all states US states, including Michigan, are welcome to strength and exchanges with provinces and municipalities in China in order to deepen cooperation in fields such

as trade, investment, manufacturing, and innovations. Who was he speaking to the Governor of Michigan, Rick Snyder, who happens to be in China. Here to tell us about the U. S. China trade relation is Tom Orlick. Here's our chief Asia economist for Bloomberg Intelligence. Uh, Tom, maybe just come in on what is the current state of US China trade relations and what do you believe the President and the administration are going to propose. Um, I think the current

picture is actually extremely positive for China, PIM. If you remember, Donald Trump came into office promising to get extremely tough on China relations. He was talking about at tariff on Chinese imports, talking about naming China a currency manipulator. So far, we've had some aggressive tweets, we've had some um suggestive reports from the U. S. T R and others, but in terms of substance, we've basically had nothing. And that means that China's exports to the US are doing really

well up around so far this year. Well, Tom, there was a report today out of the New York Times saying the White House is preparing to open a broad investigation into China's trade practices. This is in part to possibly counter the country's effort to become a global leader in microchips, electric cars, and other crucial technologies of the future. Does that concern you in any way? China is a country which has an industrial strategy, so they're consciously and

deliberately attempting to catch up with the technology frontier. They see what the US, Europe, Japan has in terms of high technology and they want to get there, and they use policy together. UM. Now, so far, other countries have not really formulated a response to that. UM. It's been left to corporates to decide do we want to put on new high tech R and D facility in China

and risk that technology transfer or not. What this seems to suggest is perhaps the Trump administration is going to put a bit of US government strategy around a response. Oh that's fascinating I I when I see this, I start thinking to myself, Wow, China US relationship trade and then paired with North Korea and the fact that US is trying to uh strengthen its hand to force China into action with North Korea. But what you're saying makes

it sound like this is completely unrelated. I think the US administration are going to be taking a view on China relations in the round. If you remember, going back to the she Trump meeting at Mara Lago, Trump said, Okay, we can't go in too hard on trade. We can't go in too hard on the exchange rate because we need support on North Korea. UM. At the same time, clearly it's possible to snap these things apart and take

separate views on security, trade, intellectual property. Tom fox Can didn't the the president was touting this move by fox Can to place a new factory in the United States, right, maybe spend anywhere from ten to thirty billion dollars here. If you're going to praise them for doing that, how can you in the same what what's the reaction from the Chinese leaders if you if you praise that and then launch this trade investigation, what do you think Chinese

leaders and business leaders are thinking. So my first reaction to that fox Can news was ten billion dollars. That must be the most expensive factory ever built. UM. My second reaction was, do US politicians know what it's like working in a Chinese factory? Is this the kind of job which they really want to offer to their voters. Take a look at some of the news flow on what happens at some of Chinese electronics assembly plants. I understand in certain places, right, they put nets so that

people who jump aren't don't necessarily die. They have nets, and those nets and not being used to play soccer, that's right, Pim, Well, I just want to get a sense, so if you do, zoom back. And I am wondering as we hear more about North Korea, and there was a report on Bloomberg today talking about how perhaps North Korean nuclear technologies have gotten too far for sanctions to work.

I'm just wondering what's the state of the relationship between China and the US with respect to moving forward and some kind of diplomatic solution to that quagmire. I think for Beijing, there's going to be a certain amount of confusion in the new aggressive approach which the Trump administration is taking. Um Mara Largo. Trump passed she to help out with North Korea. UM and China has now actually gone further than it's ever gone in the past in

terms of putting the choke on North Korea's exports. China has basically embargoed North Korea's sales of coal, which cuts off a huge source of f X income from Pyongyang. Now, you would expect that that would be welcomed by the Trump administration as a kind of constructive show of good faith by the Chinese administration. In fact, the reverse has happened. Trump has been on Twitter saying China has done nothing,

China needs to do more. He's very disappointed. You've been studying China, but I think you've been in China for how long a decade? All rights a decade. Are there some things that you can describe, even anecdotally, to give people a quick version of what they would see if

they went to China they've never been. I think the striking thing which people miss a by China pim um is firstly, well, I think the thing which people miss about China when they read the coverage in some of the Western press is just the optimism you have on the grain there. I think if you read you know, Western commentary, you think the end is nigh, the credit bubble um, the stress in the financial system. That's just

not the feeling on the Chinese street. Tom more Like, thank you so much for joining us, Tom or Like as Chief Asia economist for Bloomberg Intelligence. Thanks for listening to the Bloomberg p M 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