TCW's Rivelle: Cautious on EM Debt This Late In Cycle

before US equities. If that is still true, there is no sign of weakness US hiled bonds of returned nearly seven percent in less than three months, of our markets overly complacent or they signaling that the good times can last a bit longer. Joining us here in our Bloomberg Interactive Broker Studios, Tad Ravel, chief investment Officer for fixed income at TCW, helping to oversee a hundred billion dollars under management normally based in Los Angeles. But you're grace

in our presence here. Thank you, So, Tad, what do you think I mean that this uh six point seven percent gain dramatic and indicating that there is not any concern about it turning the credit cycle, Well, the headline is very impressive, but actually when you look underneath the hood, you actually see something a little bit different. In particular, you will notice that the triple C category, so the lowest tier of junkraded issuers out there, actually hasn't participated.

So the spreads of triple cs are still I think about eight hundred and fifty plus basis points over treasuries plus or minus. So that's indicative that the fear level that investors experience in the fourth quarter of last year hasn't actually been completely dissipated. Must much of the rally actually has been The investors are in fact more discriminating in the current quarter than we've seen them in periods that were similar in terms of high returns, like two

thousand seventeen, for instance. So it tad given where we are in terms of the economic cycle, the credit cycle, Um, where are you on the risk curve here? Where do you think investors should be going in terms of return? Here? How much riot should they be taking? I think you're supposed to be defensive, You're supposed to be highgrading your your bond portfolio. You're supposed to be focusing on a

combination of traditional risk off instruments. That would be things like agency mortgages with some treasuries built into it, and then allocations to what we describe as bendable assets, so that would include Triple A rated commercial mortgage backed securities, Triple A rated asset backed securities, and UM investment grade credit.

Provided that you've done your your credit homework properly and are properly thinking through and controlling for the for the fallen angel risk, what you're not supposed to be doing is adopting what we would describe as an early cycle strategy. An early cycle strategy would be where you're essentially dipping into and making significant allocations two things like high yield, emerging markets down the capital structure, taking on a lot

of financial or operating leverage. You shouldn't be doing that, So emerging markets you're not. You're not a fan. Well, the the the emerging mark at asset class has many, many opportunities in it, obviously, but I think that as a as a general statement, it has many of the features that are similar to high yield. At the end of a cycle, you tend to experience significant downside volatility when there is a contraction and credited leveraging environment. So

how far away are we from a contraction or downturning credit? Well, it looks like we were heading there actually just a couple of months ago, and then UH Chairman Powell decided that, um, we were getting there too fast, and so he decided to do something about it. And of course that's the whole genesis behind the most recent FED flip flop and movement to being patient. So here's the question of the day and the question of the cycle, which is can

the FED ultimately direct the movement of the clouds? Um? Are they that skilled and that powerful that they can delay the end of the cycle forever um or have they simply delayed it for for now? I think we're in the camp that says they've delayed it for now. And when when does the market essentially decide to in effect veto the Fed's decision? Well? Who can say? So you talked about the FED flip flopping, and obviously today we're going to hear from FED Chairman Pal this afternoon.

What do you expect to hear that maybe the markets not discounting today? Do you expect anything unusual coming out of the FED today absolutely not, I think I think I think that the bravado with which the FED spoke of five months ago right, It was only I think in September where Powell said something to the effect we are a long way from being being neutral, and we got lots of rate rises. We're gonna shrink that balance sheet.

Look how quickly or how easily a whiff of cold winter risk blowing into the markets change the Fed's mind. I think that they are going to be very careful and measured in what they say today to keep investors on the on what day would view as the straight and narrow before we let you go. I want to get in the weeds a little bit with respect to energy high yield bonds because I think that there has been a really notable underperformance in this space and there

have been some huge potholes. I was looking yesterday for example, ep Energy, which has more than four billion dollars of debt bonds falling forty cents in two days after disappointing earnings. Do you think that there are more bankruptcies to come

in the show patch? Yes, is the short answer, And I think that I think that your example is an excellent one I think in terms of illustrating the asymmetry with which investors are approaching the market, which is that all you saw, as far as I know, was a disappointing earnings number coming out of the company, and that was enough basically to utterly reprice the capital structure of the business. So the complacency with which we saw investors operate a couple of years ago doesn't really seem to

be enforced any longer. So ted us or any just ten seconds, any area that you're just avoiding, like the plague. Uh well, yes, there there are areas to to avoid, like to play, but they tend to be they I don't want to give you a broad brush stroke. There are there are specific areas and subsectors that you should be very careful and thoughtful about. Okay, but you're generally risk off. That's kind on taking away from from TAT. TAT, thank thank you very much. Thank you. Cautious, cautious, It's

a better way. Tad Ravel, Chief Investment Officer for Fixing Comfort t c W. Joining us in our Bloomberg Interactive Broker's studio, we thought it'd be very interesting to get a sense of what local and regional banks, how they are dealing with the current interest rate, of environment, and how their customers are reacting. So we're very fortunate today to have Frank Sorrentino join us in our Bloomberg eleven

three oh studios. Frank's chairman and chief executive officer of connect One Bank, which trades on the nastack unto the symbol c n O B. Frank, thanks very much for joining us. Um. I know you have your finger on the pulse of kind of where rates are going. That's your business. What do you expect to hear from the FED today? Well, thanks for having me again, But I don't think anyone's expecting any big surprise today. I think the FED has done a great job of telegraphing what's

happening here over the last thirty or sixty days. Uh, it's pretty it's pretty clear to me that the FED is on pause for right now and and looking for some additional information. All right. I want some additional information about the housing market in particular, and I know that you have quite a long history of expertise in this area. You used to actually be a home builder, right, that

is correct? So what are you seeing right now? I'm really having a hard time getting a read on the US housing market, whether it's slowing down or whether there was just a pause when mortgage rades rose and that

it's now picking back up. You know, I'll tell you I I from what we see from our client Bay Ace, and it's really dependent on specific market areas, but certainly in the market that connect One represents in the New York metro market, we've never really fully recovered from the recession, and there's still a lack of available brand new housing that's I think is required, and so at various price points there is you would you wouldn't believe tremendous demand

for for that product, and with mortgage rates still close to four percent, it's a very compelling time to purchase a home. Um, builders just can't find enough property, can't put up the product fast enough in certain markets. Now. Of course, we keep reading the headlines about some of the very very high end real estate that's lagging on the marketplace today, but that's not really indicative of what's

going on across the rest of the country. So, Frank, your your your your bank, your institution is a Metro New York institution. UM, what are your local, regional, midsize customers telling you about just the overall economic community there there their willingness to invest in their in their companies. Look, people were very nervous as we came into the beginning of the year, thought that, uh, the interest rate cycle

was going to be a runaway train. Rates We're gonna go higher, and people started thinking very very hard about some of the transactions that they may have been contemplating, whether they were going to buy something, invest in their companies and additional staff, whatever, I think. But as the as the year has unfolded and we're starting to see that the Fed has backed up a little bit, and we believe now that we're more in a more neutral

environment relative to interest rates. Our clients are actually bullish about where things are today. And you know, this whole notion of of climbing a wall a worry, in my opinion, is a really good thing. It's making people be very thoughtful about every decision that they make. But at the end of the day, acquisitions are happening, investment is happening, Hiring is happening. The biggest complaint where we're hearing about is the availability of qualified staff today. That is hindering

certain people's growth plans. So so pretty bullish is what our clients are are reporting to us, notwithstanding what we're reading in the news right or what we're reading in the newspaper. So, Frank, you talked about consolidation. There has been consolidation in a number of different sectors, including in

the banking sector. And I know JP Morgan CEO Jamie Diamond came out and said he expected quite a bit more Bank of America reiterating that from your perspective, connect one has about six billion dollars in assets twenty nine locations. Are you seeing opportunities for acquisitions or do you think that there will be sort of ongoing consolidation that will affect you. So, as you know, we've taken advantage of

the merger and acquisition marketplace. We did a large merger of equals back in two thousand fourteen, and we just completed a merger at the at the beginning of this year, starting on January two, which increased our size. And and yes, there is I believe a build up in in the desire for smaller banks to want to get together, uh in order to share the expense base that's required to run a financial institution today. And when we look at

what the marketplace looks like today. You know, as I said before, twenty years ago there were some twenty thousand banks. There's five thousand banks today. I think we're headed very rapidly, too, closer to three. So, Frank, the news that Amazon was coming to Queens and then not coming to Queens As a New York metro lender, what do you take away from that as a as it relates to is New York open for business? So look, I think New York

is definitely open for business. I'm not sure. I don't want to get into the political discourse about what may or may not have happened or what was or wasn't said. But at the end of the day, um, every major company is investing here in New York. And whether it is Amazon, and notwithstanding what you know the the HQ two conversation, but they're investing in New York. Google's investing in New York, Facebook, all the technology companies, all the

financial institutions. Uh, there is a tremendous amount of investment coming into this area. We're feeling it, we're seeing it, and uh, I think it's a big positive for New York, and I would say today New York is definitely still open for business. Just lastly here, I'm curious about consumer confidence because this has sort of been an ongoing strength of of the market that consumers just continue to be confident. Are you seeing any potential headwinds to that at this point?

You know? Again, I think this wall of worry concept is is something that keeps coming up. And when rates started to run up quickly at the end of last year or by the end of last year, I think that really put a little ding in consumer confidence and what was coming down the pike, uh, you know later on. I think as we stand here today, though, I think the consumer feels pretty good and is out there spending. Frank Sorrentino, thank you so much for being with us.

Always wonderful having you on. Frank Sorrentino is chairman and chief executive officer of Connect One Bank based in Englewood Cliffs, New Jersey. He is joining us here today in our Bloomberg Bloomberg Interactive Broker studios in New York. Let's give you a sense of what is happening in markets ahead of that FED meeting. The answer nothing, not very much

at all. The markets are pretty much flat say that for quite some time, haven't we And and then this is sort of to me one of the big question marks in markets today, which is, uh, there has been such a reduction in volatility at this point that a growing number of analysts are saying that it does sort of foretell some kind of broader whiplash akin to Taper tantrum when we saw volatility shrink to the same kinds

of degree. Well, there certainly is a lot of news out of the auto industry today, including a bmwes profit warning which knock that stock down five and also news that a Ford Motor company where the company plans to spend about nine million dollars and higher about nine workers to build electric and self driving vehicles in Michigan while moving production of a small commercial van to Mexico from Europe. I mus stick through those issues, we bring in and

welcome David Welch. David is the Detroit bureau chief for Bloomberg News, joining us from the Detroit bureau. David, Welcome. Let's start with that Ford news. How big of a news item is that for Ford? How much teer is this? Because this is pretty big because all we've heard about recently from the car companies is cutting jobs, cutting back. Even the BMW news you mentioned is sort of kicking off a big austerity program for them to get their

profits in line. Everybody's just cutting jobs out, whether it be white Cower engineers or blue cour assemblers, uh, in the areas where they make conventional gasoline powered cars. Um. So you've got a couple of things going on with Ford. Not only is it interesting that the writing jobs, it's quite a few of them, a lot uh. Last week, Gentle Motors said they're going to hire a thousand people at its Cruise Automation subsidiary that makes self driving software

and technology. So Okay, the bottom line here is if you make electric cars, if you make self driving cars, that's a good place to be. If you're an engineer who releases brake calipers, or you're an assembler of gasoling power sudans is you're in trouble. And and that's what's really going on. But what Ford is saying hiring nine people for an under used plan near Detroit to make electric cars, that's a lot of people, said, tells us

they're going to be making a lot of evs. It also tells us that Ford is making quite an interesting public relations moves announcing this the same day that President Trump visits an Ohio tank plant after a sharp criticism of General Motors. How much is this sort of politically motivated as far as the timing goes, I would say the timing of the announcement absolutely. Now for GM, all the car makers, they don't just flick a switch on and say we're going to add jobs or do something

at a plant overnight. So this has been planned for some time because they had to engineer the vehicles. But on the eve of or i should say, them warning of an evening rally President Trump is having after he spent the weekend bashing General Motors overcutting jobs in Ohio. Yeah, you know, this is Ford's way of kind of sticking uh sticking it in, uh the knife into their crosstown rifle.

I think, and also look early in Trump's presidency, he really was beating up Forward for not producing enough in the US, and GM kind of got a free pass for a while, even though GM has more factories and and makes more vehicles in Mexico than Ford does. Now that that Ford is h is kind of you know, in good stead with the president over adding jobs, why not make hay out of it, especially when GM's the one getting the beating these days. But from a corporate perspective,

is Ford doing the right thing? Ford chairs down two point two percent right now, I'm wondering. This comes after BMW issued a profit warning saying that earnings will fault well below last year's level, siting, among other things, the cost of making electrical vehicles. I mean, how much is it not paying off yet? This is the problem that car companies have is you have to make electric cars because Tesla is driving this whole thing where governments and

increasingly consumers want evs. Now where they're going to write. Not every consumer does, but that's where the market is going, whether it's from a regulatory standpoint or eventually, uh from a consumer standpoint. Problems winner consumer is really going to be buying a lot of these? And when will these cars make money? GM says that it's next round of evs will make money starting in about They say they'll be profitable. Will they be as profitable as the current vehicles?

Investors are dubious? So in the cvous investments, they know that the car companies have to do this, but that doesn't really help them. It doesn't help investors because they're they're worried they can make any money on these vehicles, and if they do, it'll be lower margins, So why should they put their money elsewhere? Very easy for investors to say, hey, you know what, let's let these guys start making evs and see if it hurts or doesn't hurt,

or even helps the bottom line. We'll put our money somewhere else while that whole thing is playing out this interim period here when everybody is investing in self driving cars or electric cars waiting for those businesses to pay off. It's gonna be tough for them to deal with investors in this time because it's a lot of money being spent. You're not going to see return on maybe for several years,

maybe for a decade for some of this stuff. So, David, where is Ford Motor Company relative to its peers in terms of its electric and self driving vehicles from a competitive perspective? To look at what's on the market now, they really they have more hybrids than they have pe evs. It's really Tesla, General Motors, Oh Nissan to a certain degree, they have an EV out there. It's it's not a great one in terms of battery range, but they've been in that business for quite a while. Those are the

three main players. The German carmakers are coming out with a lot of electric vehicles in the next year or two. So you're going to see a wave from the what's called the Porsche of Volkswagen uh combine, you'll see how these Volkswagen's Porsche evs coming out there. They're already taking orders I think on the por should taken EV so uh words, kind of trailing behind those players right there.

But the fact that they're they're going to be staffing this plant Uptotia, that they're they're going to be racing and catching up pretty quickly, broadening out a little bit beyond electric vehicles. I'm wondering BMW's profit warning comes. It's sort of a tenuous time for the auto industry at large.

I'm wondering how concerning it is that they did say that earnings would fall so far below last year's level, at the same time as Nissan saying that it's it's not going to necessarily see as much of an expansion in China as it had previously thought, Yeah, there's a there's a kitchen sink aspect to what the BMW tourist. Right, everybody has to invest a lot of money in cars and in electric cars and our timmy right now, and

it's costing them and in the netting of return. So we we we, you know, we talked about that and that that was a big piece of what BMW said this morning, that that those costs are are really hurting their bottom line. So it a pretty big deal from that perspective. Now, I think they're doing this at a time when they know the markets are getting soft. China took a step back last year and it's still kind of uneasy. The US still very strong levels historically, but

still stepping backwards. And the other markets, the emerging markets where and sees growth, places like South America, Brazil, especially India and Russia. Just a lot of reasons that that things aren't growing. There are a lot of instability either with infrastructure in the case of India, politics with Russia. So no one's really seen a lot of growth in

their car business right now. So if you're going to tell investors that EVS and a vis uh, you know, that's industry parents for Autno vehicles are going to cost you a lot of money. Hit the bottom line, you might as well do it. When the markets are wusy in the big places where you've been seeing some growth, kind of kitchen sink everything at once. Take the hit on your share price, take the head on your profits.

Start leaning up. And then when things start to grow again, when the cycle turns back up, and you can start boasting about how your evs are on great and they're breaking even, are making money, and maybe you'll get some enthusiasm. But I get the sense of the car companies, they're just clouds all around them. The business isn't bad everyone. This isn't crazis time in terms of companies threatened with bankruptcy like we saw a decade ago. But it is

crass time for investor interests. But it that way, and I think you're going to see the stacks take a beating for a while. David Welch, thank you so much for being with us. David Welch, Detroit bureau chief for Bloomberg News, coming to us from Detroit. Well, I think both employers and employees agree that healthcare costs the inflation of healthcare costs is getting very much a challenge for

both parties. Recently, there's Senate hearings on drug pricing where senators challenged top executives of seven pharmaceutical companies on the spiraling costs of prescription drugs. To help us look at this complicated issue, we welcome Michael Ray. Michael's a founder and CEO of r X Saving Solutions based on overal in Park, Kansas. Michael joins us in our Bloomberg interact, the Broker's Studio. Michael, welcome. You know, everyone agrees here

that drug prices are too high. The inflation associated with bruck drug prices and drug therapies are you know, very much of an issue for both employers and employees. Is there what is the best way or is there any way to kind of manage these costs? Yeah? I think that excuse me, a transparent market where information flows freely

is the best way to manage it. I think that when consumers have access to information about pricing and therapy options, they can make decisions that are in both their best financial interest and also that of the health planner employer that ends up paying a lot of that cost of the drug. So Michael It's interesting because we are heading towards the election season. Joe Biden is expected to announce his his his throwing his hat into the ring to

become a candidate for the Democratic Party. I'm surprised we haven't heard more about reducing drug prices, are you? Um? I think that what has become evident is this is a difficult subject um and topic to really address and actually bring about meaningful change. Everyone agrees with the idea that you know, both bipartisan support that we want to lower drug prices, but how to actually do that has

stymied most efforts to do so thus far. It's, in other words, because it's complicated, and because it's not a very sexy topic. UH candidates are not going to necessarily make that a a sort of campaign issue in the way that perhaps otherwise they would. Is that well, I think I think it is a sexy topic that most people can identify with, and so, uh, you know you're

gonna see UH candidates talk about it more and more. UM. I think it hasn't probably been as much of a focal point recently, just given the lack of progress that's been made in the bills that have kind of come before the Senate and the House. UH, and you know thus far, but it's it's it's clear that big pharma, there's really very little leverage that can be placed upon big farmer to literally cut drug prices. Is that correct? Yeah, it's a free, open market. They can set the list

prices for the drugs they own. But if I'm a large corporation, let's let's if I'm a small to mid sized business, what are some of the ways that I can manage my healthcare costs and my employees for the benefit of my employees. Um, there's a few ways. And and most employ a pharmacy benefit manager that that brings about negotiation tactics to UH, to the market, tries to set up formularies that you know, get rid of the

expensive drugs and advantage the less expensive drugs. UM. Ultimately, though, that information does not get to consumers the way it needs to write. So you go into the doctor, they prescribe a medication, you take to the pharmacy and fill it. What if there was drug B that was ten dollars instead of a hundred. That information gets lost and so there's this missing component that that is not translated to

the consumer. That needs to be. So, Michael, what is the bill that you think is most promising, either currently going through Congress or that you've heard some candidates or current lawmakers discuss. I would say elimination of the rebates. Um, it's the most basic. It's easy for most parties to understand. Um. You know, I think there's bipartisans support for it, but the specifics of how it's crafted will make all the difference in whether or not it's effective and lowering costs.

Can you please just remind us what the rebates are and who would lose out if if they did remove these rebates? Yeah. So rebates are money flowing from a farmer, manufacturer to a third party entity. It could be a PBM, a health plan, a wholesaler, or an employer. Who who are the winners and losers is the question? And I think you'll see fights to keep them in place, most pronounced by the folks that are probably gonna lose lose debate, which is the third party intermediaries such as uh uh,

probably the PBMs and wholesalers. He doesn't want to say he's been a portfolio manentural So I mean, so, Michael, what is the sense of timing and that we can get anything meaningfully done here or the Congress can get anything meaningfully done here on on pricing. Is there is there enough bipartisan support to get something done in the next I don't know, twelve months. I don't think it's realistic. Yeah.

I would love to tell you something different, and I would support if they did do it, but I don't think it's realistic. What about on the corporate side, in the private sector, we did hear a little bit about JP Morgan and Berkshire Hathway teaming up to create some sort of in house healthcare plan to try to lower DRUB prices and negotiate directly. Has there been any movement

on that front? Maybe not even with necessarily JPMorgan and Berkekshire Hathway, but any other corporations that have really done a good job at this well. Um, there's a number of groups that have formed to try to address this issue, um, you know, in a kind of coop type way. I think some groups like the Health Transformation Alliance are probably further ahead, um, you know, in in kind of grouping

companies together to try to create buying power. Um. Yeah, I mean how much is that actually effectively lowering prices in other words, is that actually like a competitive aspect in markets? Now? Uh, these these teamed up corporations. I think it depends on how how it's positioned and how much it's utilized. So when you look at a medical cost, you've got a unit economic and you're trying to get

a discount. With drugs, we're actually saying there might be a different clinical therapy that is not two or three percent cheaper, it's you know, thirty forty cheaper um. And so that's where the power lies with drugs as compared to medical and hospitals. So, Michael, this seems the healthcare industry in general, it certainly the pharmaceutical part of it

seems like it is ripe for disruption. Where from a technological perspective, I'm why has this Silicon Valley come in here and looked at this big issue and done and Amazon dot com whatever meant when Amazon did through retail and consumer has there ever been is that you think that's a focus of Silicon Valley. This seems like such a huge mess that is right for a technological solution. Yeah, I think it is. And and you know we hear from them often from the folks the equity backers in

that area. There have been a number of companies that have come and gone with the promise that they can address this issue. I think what has occurred is most have flamed out because this is such a complex space. Um. When I look at what you know we do today, I mean we service five million people as we have market proof, not just a power point, and that piece will become more and more important for anybody who's trying to solve it. You gotta you gotta not just say it,

you gotta do it. You gotta do it, which has definitely been challenging when it comes to tackling drug prices in the in certainly in the United States. Michael Ry, thank you so much for being with us here in our Bloomberg Interactive Broker Studios. Michael Ray, founder and chief executive officer of our ex Saving Solutions based in Overland Park, Kansas. Thanks for listening to the Bloomberg pl podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever

podcast platform you prefer. I'm Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa abram Woyit's I'm on Twitter at Lisa Abram woits one before the podcast, you can always catch us worldwide on Bloomberg Radio