Sell Credit On A Dovish Rally: PGIM's Mike Collins

this year? And how the markets react? We get some answers to those questions. We welcome our next guest, Michael Collins. Mike as a senior investment officer and senior portfolio manager for ke G. I AM fixed income based in Newark, New Jersey. Mike, thanks so much for joining us. What do you expect to hear from Chairman Pal today? Yeah,

good morning Paul and Alex. Yeah, this is like our our super Bowl, right, This is about as exciting as it gets for for pond geefs, Like we haven't had this much uncertainty for a FED meeting in a long time. I mean the way we could. There are four different things the FED could do. One is really not come across as being a dovish, right kind of moving the dots down a little bit. Remember their last out plot in March showed a median expectation for a hike uh

this year. So let's say they just lower that, so the medium expectation is for for no change this year. That would be viewed, I think as being rather rather hawkish by the market and probably resulting to sell off. The second probability is that they actually lower the dots, still don't cut, but show that they're probably gonna cut once or maybe even twice this year. I think that would probably be okay. Maybe the markets would do okay

in that environment. The third is that they actually cut beats and signal that they might cut another time this year. And of course fourth is that they do the fifty right and and there are people out there who think that that's possible. I would put the probabilities that those four different scenarios at like thirty ten, right, So, um, it's really evenly distributed. So that's leading to all this on certainty and handwringing today. Yeah, I like to look at the e I a data I don't know you

nerds look at but that's kind of my jam. Okay, but no, it's seriously so okay the dollar question, how are you positioned over the next three hours? Yeah, so so interestingly, right, if you look at FED funds futures, what's priced in through July, there's just about one cut priced in, and we think it's actually a pretty good chance that they do cut once or maybe even twice, meaning you know, if they don't do a fifty today,

maybe they do it in July. Um. So actually, that's something that looks like a pretty attractive way to play this right now, betting that they do cut at least once by the end of July. And you can actually make money in that trade right now on the credit side, which is really important here, right because there's been such a big rally in credit spread in anticipation of a dosh FED in aish E c B. We're actually looking at today's news if they sound dobsh and markets rally,

meaning spreads tighten and equities go up. I think you're supposed to take some profits on that trade, right, because ultimately it's going to be really tough for the FED, for the e c B for for Trump uh to to continue to provide positive surprises to the market. So, Mike, are you you one of those folks that are thinking about our discounting into your models a recession maybe sometime in mid you know, it feels like that probability has

gone up a lot. I know, if you look at all the you know, normal indicators, and if you look at the typical speculative excesses that build up later in the cycle that typically lead to a recession, we actually haven't had a lot of them, right, I mean, the banking system is in the best financial condition of our lives, um so, so that's kind of something to hang your hat on. So we actually think the probability of recession is pretty moderate. That being said, we're really bad. Everybody's

really bad. The FED is really bad at predicting recessions, right. They tend to become self fulfilling and kind of snowball into recession. So, you know, looking at the business confidence falling pretty hard, Looking at China, China data really falling off a cliff, and Europe arguably is kind of teetering on a recession. Now. It is not unlikely that in twelve or eighteen months, we have a pretty significant global slowdown, and maybe we're just starting to see that now. So

you have to position your portfolios for that scenario. So is that scenario worth twelve trillion dollars in negative yielding debt around the world. Yeah, it is. I think it's gonna that twelve is going to keep getting bigger. Right, does that mean the recession we see is going to

be terrible or does it? What does that mean? Well, um, I think there's the base cases that it's actually not a terrible recess and that it's just kind of more of the same, that global growth just continues to slow, right, driven by these big secular forces, driven by you know, confidence waning, maybe generally more trade friction, even if Trump and g you know, talk nice and next week in Japan, But notwithstanding it, I think we're in a world of

more trade friction, more geopolitical friction, rather than less. You look what's happening in Turkey this morning. You look at what's happening, and I ran, So that's the state of the world probably indefinitely. Uh So, it's just I think it's just a slow slog towards slower growth. Um. Not

necessarily a deep kind of V shaped recession. And in that world, you know, central banks continue to be really easy and rates just continue to stay low, and US rates obviously have the most scope to fall of all the big developed government bond markets. So Mike, I mean, you guys are predential are just massive. I mean, almost

eight hundred billion in fixed income under management. How are you allocating you know that between you know, maybe some of the safer investment grade UH securities versus perhaps pushing the risk out a little bit and high yield in some other riskier aspects in the credit markets. Yeah, I mean we're we're generally positioned in a in a barbell type of UM credits ructure, and that is you know, I always say, you want to you want to do well in the base case, and the base case isn't

isn't that horrible? But you don't want to, you know, really have a big draw down in in these tail risks, which would be the recession. So the barbell we have on is you know, there are opportunities in high yield or select opportunities in emerging markets. UM. You know, even in investment grade corporate European banks and US banks still look pretty cheap to us. So so you can add your yield and your coupon and your and your beta

and your best ideas in those areas. Uh. And then the other half or so of a lot of our portfolios are in very high quality responds, and a lot of that are in actually in asset back securities or different structured products like you know, triple A rated commercial mortgage backed securities or collateralized loan obligations or asset backs, things that have such a low probability of losing principle and they still have a pretty decent yield or or spread.

So to me that that's kind of the ballast in the portfolio if you do have a credit to this location. Like Collins, thanks so much for joining us. Mica Senior investment Officer and senior portfolio manager at p G. I

AM fixed income based in Newark, New Jersey. And it's interesting, uh, you know still, you know, I think still a lot of institutional investors, a lot of professional investors are still willing to put some risk on into their portfolio despite the fact where we are in the you know, the economic cycle, and where we are with potential economic slowdown,

and and it's just this lower rate environment. Yeah. What's also really puzzling to me, and I feel like this is gonna be the conversation after the FED too, is the interest rate differentials in particular, let's just call it US and Europe for example, like Germany, And then how it's not actually being reflected in the apex market, and how you're seeing just like weird trading happenings like what's leading what I think is also a little bit confusing.

And do the carry trades then in that environment still work? I don't know, yeah exactly. And we saw Mario drag I guess earlier this week, you know, talking about they will they have lots of tools and their toolbox to try to jump start the European economy. But you look at the you know, negative yielding rates in in Germany. You mentioned that, you know, the twelve and a half

billion dollars of negative yielding debt. It's just extraordinary and at some point, uh, you know, it has to reverse, one would think, one would think, But we didn't hear that Fromario Draga earlier. Normal man, slow rates forever, not for longer, but forever forever, I guess. And so we'll see what the FED does later today again, uh that coming up around to thirty with Chairman Powe with some of his commentary that will be covering that of course

at Bloomberg Radio. Facebook yesterday jumped into the cryptocurrency game in a pretty big way. They announced the launch of what they're calling Libra, which will launch as soon as next year and be what's known as a wait for it, stable coin, which is a digital currency that's supported by established government backed currencies and purities. To get the latest, we welcome our good friend Leonard Laurent, calumnists covering Brussels for Bloomberg Opinion. He is based in London today, Leonard,

thanks so much for joining us. What's the what's new about lie bro? There's other cryptocurrencies in the marketplace. What is Facebook bring to the table? In your opinion? So, I think that this is the first time that a company of Facebook sides that's almost three billion users they have, has essentially come out with the cryptocurrency or endorse the space in the way that it has. So that's that's new.

The second thing that's new is that they clearly do not want to be associated with bitcoin and the kind of crotocurrencies that have no intrinsic value, nothing to stop them being worth nine thousand dollars or a hundred dollars or fifteen thousand dollars, depending on which which day of the year it is. These this currency is gonna be backed by hard assets, so in theory it should never

be worth more than the reserve currencies backing it. And finally, I just think we should realize that this is the culmination of many years of experimentation from Facebook and trying to expand in payments. It has had several stabs at getting a payments business going. This to me is part of that. It's not just about crypto, so it's definitely new.

Whether it's succestful, whether it's really some bold new vision or a kind of incremental step in terms of Facebook's business that I think is the is the remaining question to me. You said the two magic words in theory, So on a technical basis, I'm kind of wondering how they wind up having Libra stay consistent if it's made up of a bunch of currencies that wind up moving a lot. Well, I think they basically want to be

their own central bank in a way. We have examples of currencies that are managed in this way that are pegged to currencies. Now we all know the dollar currency peg. This is not going to be a dollar currency peg. This is going to be a mix of currencies. There's a lot we don't know about what goes in there. There's a lot we don't know about how it's gonna

be managed. At the point being is that their their claim would always be that they have a one to one assets backing every piece of liber So again in theory, because markets can do funny things if you believe what they say, it should never fluctuate wildly in the way that nonpaid currencies do so le you know they when it made this annound me yesterday, I guess they announced they have twenties seven or so partners some of the

big credit card companies Visa, master Card, even PayPal. What did you make of the list of companies that are partnering with him? Was it the names you wanted to see? Was it as many names as you wanted to see? Do they have more work to do? How do you view that? Yeah? It was? I mean, look that there is It depends on what what the ambitions are. Um, it's pretty obvious that none of Facebook's big competitors were on the list. There was no Amazon, there was no Apple,

There were no banks on the list. Again, you might question whether Facebook again that's that's the right competition of Facebook. So there were no banks. There were a few services companies like Spotify, like Uber, so you can you can sort of try and piece together how in future this crepital currency might be used, because this is the big question with any kind of form of electronic money, what is the use case? If you're just going to fill an electronic wallet with with some money, do you have

stuff that you can do with it? I mean, we have PayPal already, so I think that they have a sort of predictable but pretty small list of partners. It is Facebook, after all. I'm not sure that many companies wants to kind of be in its orbits today. But I'm guessing or assuming their theory is that if it gains traction, more people will come. If you build it, they will come. I have no certainty that's true, though, Paul. Do you also know who comes if you built something

new and cool? When it comes to currencies, regulators they're like, hey, I mean what I what I found really interesting is that yesterday it felt like Congressman kind of came out in full force, being like unprecedented power, unprecedented experience, and then today you hear from shell Sandberg it can being like, yeah, yeah, we're talking to regulator. Is it the process? Do you kind of buy that? I buy that Facebook is totally

conscious of the scrutiny that it's under. And you know, companies do funny things when they are under huge regulatory scrutiny, when they're under potential antitrust investigation. This seems totally reckless at first glance, but on the other hand, you could easily see why a company that makes something like nineties six of its money from advertising and is looking exceptionally powerful and concentrated, you can see why they might go, well,

let's diversify, let's find other revenue streams. And as for the As for the regulation part, I haven't seen anyone say outrights that they would, you know, ban Libra or stop it or properly clamped down on it, because it is actually quite easy. If you wanted to stop Libra, you could just ban crypto currencies. You can you can do things. So I think that they are going to do everything in their power too, quite rightly, ask a more transparency. Let us get in there, let us access

the data, let us localize the data. Remember, this is going to be across many, many countries, and it's going to be an ongoing kind of fight and ongoing friction over the next year. Leonard Laurent Calmas, covering Brussels for Bloomberg Opinion, joining us on the phone from London. Thank you so much, leone. Well, over the past several weeks, we've had an inverted yield per from on several occasions, and that typically for many investors, suggests that a recession

maybe coming. Our next guest says, maybe not so fast. Our next guest, James Skank, president and CEO of Pentagon Federal based on Alexander, Virginia, joins us. James, thanks so much for joining us again. You wrote this article op ed opinion for the USA Today where you suggest that maybe investors shouldn't be too concerned about a recession following

an inverted your curve. Oh, I think you got exactly right. Um, again, we're just one data point, but we serve about one point eight million Americans, and so on any given day we're getting a really good um consumer data. That's demand for autos, mortgages, credit cards, and refinance student loans. And basically what we're seeing consumers spending is remaining extremely small strong. We had a really strong May, came out of a strong April. Wage rates are rising and that's having more

disposable income into the consumers pockets. Lots of people are working, Unemployment claims are very low, and there's low inflation. So you know, I think the most recent revision of the Bureau of Economic Analysis, in the first quarter, the economy grew three point one per cent. So we're not buying into naysayers. We're seeing incredibly strong demand for our products

and services. So the obviously the issue with the curve is at some point banks don't want to lend any money because they're not going to make any money off of it. That's the whole point, right, You're gonna borrow short and then lend Longum. Have you noticed any of that in your business anecdotally, And that's the one difference Alex with the with the credit union, so we can

really play the long game. Unfortunately, for a lot of the banks, if the FED does drop rates are flat yield curve, they're they're really constrained by the quarterly earning reports. They got to grow their earnings and continue to grow quarter to quarter without missing a beat, otherwise they get

slaughtered into public markets. As a credit union is about five thousand, four hundred credit unis in America can really play the long game because we're not We're owned by our members, unlike being owned by a shareholder, So we can continue to lend through the cycle, and we can

continue to give competitive rates. Uh. What I wrote at my article, what you see a lot of times what banks are gonna do is they're going to really tighten credit because they have to be concerned because they lend a lot deeper throughout the year that we do go into a recession, their delinquency is going to go up significantly,

which really impacts their earning. So they start tightening. Then they have to put their expenses across a much shorter number of new consumers, and so they start driving up rates and higher feed You don't have that in the credit union business, and we're very proud of that that we can really do what's right for the consumer for

the long haul. So, James, what I didn't really know about, uh, Pentagon Federal is how big you guys are You the second largest credit union in the US with over assets, So you obviously, as you mentioned earlier, have your finger on the pulse of kind of the consumer. Let's talk about credit quality right now. We're, you know, ten plus years into this economic cycle. UH, there's some concerns among some creditors that credit quality may become an issue. What

do you seeing. We're seeing still strong. We're not seeing a huge uptick in credit quality right now, and we think it was a combination of the tax cuts last year put additional income in the Americans pockets and also with the rising UH rates. As far as salaries, after a ten year expansionary cycle, it really has only been in the last twelve to eighteen months that we're starting to see sort of real wage growth, with you know, unemployed up blow four percent, you're starting to see more

income being paid to the consumer. And across the banks too, with their tax cuts, they've been able to pay for talent and UH take really good care of the customers. So we're not seeing the credit concerns right now at this time. You always have to be concerned with it. But if you continue to sort of you play for the long haul, make good credit decisions, UH, and don't stretch too deep. You can you can weather any cycle. So typically, where do you see the cracks first? Where

do you see the cracks first? You'll see it in UM some someone of the auto lending when you start seeing eighty four months and even longer financing periods as auto raids continue to rise. You'll see it in credit card receivables, the delinquency on credit card portfolios. So those were you were the first to. You know, usually mortgages

UM the consumer holds onto the mortgage the longest. But so we always look at a credit card delinquency and auto delinquency to start looking for any sort of cracks and credit quality. James Kank, thank you so much. James as president and CEO of Pentagon Federal Credit Union Alexander of Virginia dollars under management well more than a year ago, actually seems longer than that. T Mobile and Sprint announced

their merger. The deal would combine the number three and number four wireless carriers in the United States, and no surprise of regulators have been studying this deal very closely to get the latest on where we stand with this saga, we turned to our good friend Tara la Chapelle. She covers deals, telecom and media for Bloomberg Opinion. She joins us in our Bloomberg and Actor broker studio. Tara, thanks

so much for joining us. Boy. This seems to be the never ending deal, the deal that just can't get closed. What's the latest on this deal now? So, the latest in this saga is that it looks like T Mobile and Sprint may actually be inching closer to winning approval

from the US Justice Department for this deal. They already see to have gotten a nod from the Federal Communications Commission, So the Justice Department wants them to help sort of lay the groundwork for the formation of a viable fourth competitor that would sort of replace or fill the whole that Sprint is going to leave behind when they buy Sprint, which seems like it was sort of negate the whole

reason for doing this merger. But it sounds like, according to my Bloomberg News colleagues, they're hearing from sources that Dish Network, they satellite TV provider run by Charlie organ is in talks to buy about six billion dollars worth of assets from these companies, including Spectrum and the boost Mobile prepaid brand, in order to help smooth this along and appease the Justice Department, And I guess they're hoping

that this will be enough to get the deal through. Um, the spectrum is the jam, like, that's what everyone wants. It's the good stuff, right, So is it a good thing that T Mobile wants to sell it or not? And isn't it good if Dish buys it? So one of the reasons for T Mobile doing this deal is that Sprint has a lot of midband spectrum that would be really helpful for T Mobile and building out of five G next generation wireless network, which is something all

these carriers are focused on now. Um, so that will really help them. And where I think it's puzzling is T Mobile is the one that needs the spectrum Dish really doesn't. Dish isn't a wireless carrier as of yet. They're supposedly building a network and are working towards that, but they've basically been squatting on all this valuable spectrum, not really doing much with it for all these years. So it's puzzling to me that Dish wants more spectrum and T Mobile is the one willing to give some

up in order to get this deal through. It's it's a little bit puzzling given what we know about what both these companies actually need. So, Tara, are we getting to the point now if I'm Sprint t Mobile that the vestures that the regulators are asking me to make kind of make this deal in the first place not worth doing. Yeah, that's where I'm a little bit concerned.

I mean, a lot of deals when they go on this long and they have this many regulatory hangups, they kind of get to a point where you start to wonder, are is the desire to do this deal sort of clouding the company's judgment? And so many times we see mega mergers not really work out in the end, you know, they don't really pay off for shareholders because the executives maybe took it too far, either in price or what they were willing to concede in order to get their

deal done. So I'm worried in this case that you know, we don't know the details yet, we don't know what exactly dishes buying and what this is going to look like. But is Team Team Mobile giving up something and potentially creating a situation where the competitive market wouldn't really be more favorable to them if the steal goes through than it is now where they're just competing against Sprint, which

is a much weaker player at the moment. We'll do just make you miss your analyst days this deal it was a CMS vicom So what would Dish do? Like? Okay, so has all this spectrum is again that a good

thing are bad? I mean that's the big question. So if you ask, you know most analysts and investors, and in this tone is sort of changing at this point, but they would tell you that Charlie Organ's plan all along was to sell the spectrum, that it's worth so much and you know he's not really going to do anything with it, and that that was their goal, is

to eventually sell out and get a big exit. He and says that they are working towards building this Internet of Things network and it's going to be sort of a beginning stage of them getting to five G. So it sounds like they are dedicated to building a network, in which case, you know, maybe the spectrum is useful

to them. But I think it'll be interesting to see that if this deal comes together with Dish that whether the FCC puts in place some sort of provision that says Dish can't then turn around and sell this to somebody else, that they need to commit to doing something with these spectrum licenses. Yeah, and they I mean they have I guess he has a he has a FCC limit to build it with his existing spectrum, and I guess he's just barely meeting the terms of that of

those restrictions. So it's really unclear. As you mentioned, I know you spend a lot of time with Dish and Charlie Organ, it's really unclear what his strategy is. I think investors maybe might get it a little tired of waiting. It's super expensive, right, like that's the whole thing. Yeah, yeah, I mean it underpins the company's valuation. At this point, Dish has an eighteen billion dollar market cap, which is huge for mostly satellite TV business losing tons of subscribers

every quarter as people cut the cord. So, I mean a lot of people are really focused on the spectrum and what he's going to do with it, and I would I would believe that most investors aren't really looking forward to them spending years on a costly network build out as opposed to hoping that he sells it. Tara La Chapelle, thank you so much for joining us terror covers deals in the telecom media space, for Bloomberg Opinion, joining us on a Bloomberg Interactive broker studio. She's been

on top of the Sprint T Mobile deal. 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 Woods. I'm on Twitter at Lisa A. Bramw Woods. One before the podcast, you can always catch us worldwide on Bloomberg Radio