US May Have To Target Korea's Nuclear Infrastructure: General McPeak

There will never be a friendly solution to the North Korea problem if this continues to happen. Exclamation point. Here to tell us a little bit more about North Korea and the strategic options that the United States has is a General Meryl mcpeaky's a retired four star general Formula Air Force Chief of Staff. He can be followed on Twitter at General McPeak He basically is currently in Lake Oswego, Oregon.

Thank you very much for being with us, sir, and he is also the author of the recently completed The Aerial View Trilogy. It is a three volume memoir that takes the reader throughout his career. General mcpeaque, thank you for your service as we honor all of our servicemen and women. Your comments on North Korea, your thoughts and reactions to the President's handling of the situation. Good morning,

dam Well. I think the North Korea problem is the most important one facing our country, most important national security problem. And uh, it's visible to on the horizon. Everybody can see it. Even those who don't want to do anything about it, understand that it constitutes a real threat to the United States. Uh, probably now and certainly in the next six months to a year. So I do believe we ought to do something about it, to take vigorous action. I'm not sure the President has gone about it in

the right way. I would have done it perhaps differently, but he's right in saying that we probably have to do something here, and it may end up being a military action that's required. Now. You previously served as the chief of staff of the Air Force. You served in Vietnam over two d and sixty missions. There a variety of awards, a Silver Star, Legion of Merit, Distinguished Flying Cross.

If the President or someone on his staff called General McPeak and said, Tony, I know they're the only ones that get to call you that if they said, Tony, lay out for us, what would be some of my options, What would be some of the options that wouldn't blow us all but would really try to solve this problem. Well, blowing us all up as a real life possibility here, especially if we do nothing so UH. First of all, I would favor any kind of action that we could

take short of military intervention. You want diplomacy, sign me up. You want to try to get China to lean on them Great Russia, economic sanctions, I'm all for all these steps, but so far we've tried them all, it seems to me, and nothing's really worked. My opinion is that we'll probably have to intervene and help the North dismantle UH their nuclear capability, and that means we would have to do some very specific targeting against nuclear infrastructure in the North

and command and control UH. And of course, at the same time, we'd have to go to work on those guns that are dug and in the reverse slopes of the hills north of the demilitarized zone which range Soul. So Soul will be badly damaged in the opening moments of any military action there, and we simply have to start work immediately trying to dig those guns out of the caves that they're in north of the d MZ.

So this target set PIM is rich. I mean, there's a very very large number of aiming points that we have to go after immediately. And uh and it will be a tough campaign, no doubt about it. Especially Soul will take a lot of damage. But our alternative is to allow this crazy, uh perhaps non deterable regime in the North to have the capability to wipe out Washington and New York City in Chicago. Uh, you know, with minutes notice. And that's unacceptable in general? Is it? Is

there any tempt? Is there any way we can look at, for example, our relationship with Pakistan, which is a nuclear power. Is it possible to leave North Korea with a with nuclear weapons and still reach some kind of accommodation that would leave them in place? But without these threats, I don't see it. I mean, look, the Pakistani's have nuclear weapons to give them a deterrence capability against India. I'm not happy about that. I'd be much happier if nobody

had nuclear weapons. I think we'd be much more secure in the United States because our conventional military capabilities are far greater than anybody else's. So if all nuclear weapons disappeared,

we'd all be better off for it. But in the case of judging, you know, from the more extreme to the less extreme, UH, this government North Korea is perhaps the worst in the world that we should want to see have nuclear weapons, and there's the risk is simply too great to let them hold large American cities at hostage.

We simply, in my opinion, we simply have to dismantle their nuclear capability and put them under International instruction UH inspection for years to make sure that that doesn't rebuild. I want to turn your attention now to the Middle East and Iran, which, of course UH then begs the

question of potential nuclear weapons. Your thoughts on what is going on currently in the Middle East with the potential confrontation between Iran and Saudi Arabia, And just as a note, you know you've taken a lot of flak over the course of your career for some of your thoughts about the Middle East. Give us your ideas well. I think the Middle East is a chronic problem, you know, that's been with us forever, UH, and there's no sign that we can sort out the issues that are involved there.

I do think that the treaty or the agreement with the Iranians to put a pause on their nuclear program for a decade or so was a very good one and one one we should support UH and perhaps gives us time to work out some longer term relationship with the Iranians. At the end of the day, it's just gonna be hard for us to pick the course that makes sense in the Middle East. I mean, every everything we try to do seems to have awful consequences, including

what we're doing today. I mean, we spent what a trillion dollars in Iraq with the Second Iraq War, maybe more than that before we're done, and lost thousands of people, and it's not obvious to me that Iraq is better off to day than it was before we intervene to remove Sadamus. So I don't have any brilliant ideas about what to do there. It's kind of like having cancer. You just sort of earned to live with it and

hope you can die of something else. Well. I think, thank you very much for your time and just want to mention once again, UH, you're the Aerial View trilogy, the three volume memoir. Just quickly, General, can you tell what was the favorite single seat aircraft that you flew? Because I know you flew F one Super Sabers and F one of four Starfighters. What was your favorite aircraft? My all time favorite was the F sixteen. Wonderful airplane. Uh,

you know, a lot of innovation there. But the thing is, when you climb up the ladder and strap the thing on, you feel small. It's really good to feel small when you're entering a fight. Thanks. General Merrow McPeak, retired four star general, former Air Force Chief of Staff, his book The air View Trilogy. Delinquencies auto loan delinquencies they arise in credit card charge offs have increased. Is this a

problem for US banks? Let's ask David Fanger. He is senior analyst at Moody's Investors Services and he joins us in our eleven three oh studios. David, thank you for being here. So are these problems for banks or have they figured out a way around this? Well, certainly what you cited on in terms of auto loan delinquacies credit card delinquencies is um. I would say both of those markets are in a little bit of a different position

in terms of where they are post crisis. UH no bank has Most banks do not have significant exposures to either of those businesses. They're one of many businesses that US banks are engaged in. So what we are expect think those delinquencies UM could rise further UM as long as the employment picture is healthy and it is are

unlikely to to significantly rock the boat. Of what we've seen in both cases is, you know, graduate deturation underwriting standards, particularly an on a lending where we've seen for the past several years weaker underwriting standards, which is now leading to higher delinquencies. Weaker underwriting standards and longer duration of the actual loan. Correct that's correct, Yes, would that also

have an effect on people's ability to pay well? Actually, the longer duration loan should be helped, intended intended to help them. So so when auto buyer is looking at their payment the amount of the payment UM, a longer live loan makes it easier to meet your monthly payments. The challenge for longer tenored loans is UM really again in in a weaker economic environment, UM, the the the ability to pay back the remainder of that loan may be more challenged. Uh. And what we see, indeed is

increasing willingness in the part of lenders. When a buyer wants to auto owner wants to buy a new car, they have a significant remaining balance on their existing loan, and lenders have been increasingly going to roll those into the new loan, which creates an even larger problem potentially down the road. Okay, but before we get to that road, I have a feeling that banks have a way to

become profitable despite all this. And you've issued a recent report, what about the health of the US banking system right now? Over capitalized? Um? Well, again, so Moody's rates banks. We focus on the interest of bondholders, and we would not view banks as being over capitalized. We certainly think the improvements to capital at banks have been positive for creditors

and bondholders. UM in the aftermath of financial crisis. UM. The trajectory we think over the next year UM, particularly for the largest US banks, the global investment banks, is positive because we are looking at a gradual broadening of growth across the global economy. We're looking at higher interesting than the US, and so particularly for those banks that are core funded that is as significant reliance on deposits

for funding UM. Higher interest rates have been positive and are likely to continue to be positive for US banks. So expanding net interest margins exactly the loans that the banks make, have they at all been crowded out by non bank financial lenders because you keep hearing that banks can't hold certain assets, don't hold certain assets, and that the place has been taken by non bank financials. Well

to some extent, that's by choice. UM. Certainly, for example, in auto ending, there's a significant portion of the auto ending business is conducted through by non bank financials. UM. I think the bank always represent about the total auto loan market. UM. And there where we've seen weaker underwriting,

deteriorating underwriting standards. UM. Now there's there's paper that banks don't want to hold their loans, banks don't want to make that the non bank financial sector is more willing to make and and and frankly that's positive for banks in terms of credit risk. Talk about real estate. Let's start with commercial real estate and bank exposure to see ANIE loans for example, UM. So we had been concerned about the rate of growth of CNI loans UM over

the past couple of years. UH. Normally we look at CNI loan growth as as you know, a healthy rate of growth for SEENI loans should not deviate that much from the rate of nominal GDP growth. Think about the rate of growth of the economy is rate at which loan should go out exither growing much faster than corporations are leveraging up um, which ultimately can be negative for credit risk UM. We saw a rate of growth for

SEINGI landing in excessive nominal GDP growth for several years. However, over the most recent year that rad of growth has slowed some extent as well, and nominal GDP growth has accelerated, So we're we're a little bit more comfortable, if you will, with the current rate of growth for seeing is landing.

Are there any specific geographical issues that we need to pay attention to, because many of the problems that created the two thousand seven two thousand eight financial crisis were centered in areas where mortgages were made very inexpensive for people that probably should not have been able to access them.

But some were exceptions, like for example, in Texas. You didn't see this happen um at this point, I'm not sure I can in the US at any rate can highlight specific geographic regions UM that are are are performing better or worse off than initiarily affecting the banks UH credit profile. I think it's we we focus on the larger banks. Of those banks typically tend to have fairly broad footprints UM and so they're for are a little bit less exposed or vulnerable to a specific to an

energy market or to a housing market. Precisely, and certainly the energy markets have had some challenges of the last couple of years, and and but the but the banks have been able to Although they have did suffer a period of higher loss rates on some energy loans, the overall impact on bank earnings and risk profile was relatively modest. Thank you very much for coming in and spending time with us. David Fanger is senior analyst for Moody's Investors Services,

giving us an outlook for the US banking industry. Joining me now is Brian Schappatta. He is our US Treasury as reporter for Bloomberg News, and Bryan can be followed on Twitter at beach Chapatta. That's h A double P A double T A alright, double P a T T. A great story today where you go through with the experts like black Rock and Goldman Sacks are saying about the bond market and their calls for eighteen. Let's go

through and let's begin with black Rock. What are they suggesting if you are in the world of fixed income, Well, I was going to alphabetical order these big money managers. So the thing about black Rock is that you go through their twenty you're not looking. What's interesting is they have no overweight recommendations in the entire fixed income landscape. UM. You know, whether it's you know, their neutral communities, US credit, emerging markets, things like that, don't like treasuries much or

European sovereigns um. But there their chief fixed income start as Jeff Rosenberg basically said, you know, it's all well and good when everyone's buying and you can flip bonds and make a profit everyone everyone gets a trophy essentially, But the risk is that once that stops and the selling begins, everyone's left with all these liquid securities you

can't sell and you have to take big losses. So, you know, and he wants to be on that side of the would rather be on that side of sha he says, go up in credit quality and you know, be content with you know, maybe a little bit lower returns in return for being able to get out of your position if you absolutely need to. Was the black rock was his position an outlier when it came to some of the others that you interviewed, for example at

Fidelity Investments or Goldmen Sacks. You know, uh, there's a lot of caution I think underlying a lot of these Yeah they are so they're they're yeah, they're pessimists by uh by trade now. Um. But you know Ford O'Neil at Fidelity Investments, he was morning Stars Fixed Income Fund Manager of the Year this year. Uh and basically sorry in sixteen and he basically said, you know, I really want to protect all the gains I made over the last two years next year. Um, trying not to do

anything too uh too exotic. Uh, you know, add some inflation protection uh chips. He likes those inflation Treasury inflation for protected security. He says, inflation is going to accelerate in YEP. I mean people said I was going to accelerate this year. So you do have to take it with a little bit with a grain of salt. Um. But again, like the reflation trade this year. I mean that was like the buzzword going into the start of UM didn't exactly materialize, but we'll see what happens this year.

He also likes, uh, some floating rate securities which will reset higher with FED rate hikes, so you know, protecting yourself both on a long end if inflation starts to accelerate, also on the short end if the FED continues hiking rates. And he also mentioned Brazil and Mexico. Yeah, Brazil's a fan favorite among these among all these folks. UM. You know, obviously they offer you know, much higher yields that you can get anywhere and sort of the you know, typical

developed markets. So if you're looking for some yield pick up, that's a place to be along with Mexico. UM, I know that. Goldman Sachs also mentioned places like Hungary, Poland, Columbia to stay in South America and Czech Republic. Yeah, this is Mike Swell right over at the Goldman Sex Asset Management. He also says volatility, so let's just go to just we understand this black rock. They're basically not that excited. Be careful. Increased credit quality, fidelity inflation may

be accelerating so be mindful there. But we like Brazilian Mexico, Goldman Sex also Brazilian Mexico. But volatility, right, volatility, I mean it's so low. I mean well, I mean I'm sure you know with the VIX, whether what you okay at the VIX or whether you're looking at UM measures of bond market volatility like the move Index from Merrill Lynch. I mean, they're all they set record lows this year,

just kept grinding lower. Um. It's just been a study march higher in equities and sort of a range bound treasury market. So the idea that volatility will pick up, UM, it's sort of something that's you know, I mean, it might happen, but also it's like everyone wants that to happen, so they're hoping that it happens. UM in a lot of ways, because you know, if you have active fixed income, which all these all these people are basically with the exception I guess of a vanguard who I also spoke

with UM. I mean, you wanted to pick up, you want opportunities. Everything is being bought right now, so there's not a lot of opportunities to sort of find things on the cheap. What is JP Morgan Asset Managements as a good strategy for so. Bob Michelle at JP Morgan Asset Management UH is probably one of the more aggressive folks that I that I talked with. UM. He likes a European additional tier one securities UH Coco bonds. I believe they're also referred to as UH and high yield

within Europe. He just thinks of Europe looks healthy UH and its economy is you know, maybe a year or so behind the US as far as picking up so UH more good things to come from there. Also likes the steeper yield curve, which is kind of interesting. UM. Other people are saying that as well. If PIMCO also thinks the yield curve uh uh will steep in as well.

So that would be a departure, obviously from this year where the big trend has been, especially in the last few months of the year, this relentless flattening as short term meelds rise with a long term meals hold study. I like the point from a JP work and asset management. What don't they like anything? The Central Bank in Europe, the European Central Bank has purchased t c W Let's tell us. What did Ted Revella TCW say, Yeah, I mean he is sort of in the camp of black rock.

I would say, um, just sort of protecting yourself against uh potential swing in the other direction where there's a big sell off in bonds or stocks or both just markets in general. Uh, he's just saying, be happy with the two and a half to three and a half percent return um. You know, obviously in an era where you know, the SMP five hundred games, you know, six

and a half percent and a quarter. Uh. You know, maybe people might not be too pleased with that, but it's something that you know, if you want to diversify and you know, not be too exposed if you feel markets are a little frothy. Um, you know, going up in credit quality, high quality corporate bonds, agency mortgages. You know, take that clip that coupon essentially, and I have less price volatility than some of the other more risky securities.

Thanks for being with us, Always a pleasure. Brian Sappada. He is a US Treasurer supporter for Bloomberg News and Yes. He can be followed on Twitter at b Shapata c H A double P, A double T A Ford's luxury brand Lincoln, what is the future for the brand? Well, here to help us understand it is Jamie Butters. He's our US auto supporter for Bloomberg and Jamie always a pleasure. You can be followed on Twitter at mid in Hawk M I T T E N and then just Hawk H A W K all right, mitten Hawk. Tell us

what is the deal with the Lincoln brand? For tell us? How many they sell and what are they trying to accomplish? You know, Lincoln is a is a challenge brand here in the US. It's uh, you know, the big brands, the leaders in the luxury market, the volume luxury market are Mercedes, BMW and Lexus and they all sell three thousand or more a year and Lincoln, you know, barely cracks a hundred thousand, so it's not really getting enough volume to justify you know, the cost of product development

and and advertising support and all that. But it's not a simple decision at all. You've got you've got these contracts with dealers out there, and you've got a lot of growth coming for Lincoln in China. And it's kind of like with GM and Buick. Buick is not a great brand in the US either, but it I think there's a sense that in order for an American brand to have credibility in China, it needs to continue to be sold in the US. So it's a it's a tough tough call for Jim Hackett at the CEO of Ford.

So you mean that Matthew McConaughey is not really going to be able to move these Lincolns off the off the lot. I understand he's going to be starring in a couple of new Lincoln commercials and you get to watch them during college football playoffs on New Year's Day. That'll be fun. The commercials have been entertaining at times. They've certainly inspired some other entertainment. A lot of comedians

have had fun riffing on spoofing on him. But no, you know, I think he brings some uh some fun to the brand and gets some attention and maybe hits at some of the the cool factor that they're trying to capture. But but the way it plays out, they just they don't have enough volume, they have enough demand, and they're not selling it a high enough high enough prices and profit margins. You know, you can get by

on a hundred thousand a year. If you're Porsche, if you're Lamborghini, if you're Ferrari, you can sell a lot fewer than that. But that Lincoln, you know, it needs, it needs bigger volumes. Well, doesn't it start at around thirty five to forty dollars or am I misreading that? Yeah, that that's probably about right for for Lincoln MK Z Sedan. I mean those are, but you're competing with a lot of other vehicles in that size and price category. And okay,

so that's but the good ones. So the hot ones for them are that they've got the new Continental, which is kind of an exciting throwback design, and the combined sales of the Continental and the vehicles replacing the Mk S Sedan, you know, they're up about three thousand thirty six vehicles this year. You take that out, and Lincoln sales would be down in line with the rest of

the market. The other hot Lincoln or potentially hotly other good name they have is Navigator UM, which is you know, was one of the original big, you know, sort of hip hop, very sleek luxury type SUVs and it has just been really left in the dust by the Escalade and Mercedes and everyone else that wants to get in that space. You mean that the dollar black label navigator in baby blue is not going to just sell itself.

It sure doesn't, It sure doesn't. Maybe if they'd done the goal wing doors like they showed it the New York Auto Show a couple of years ago, they could have could have captured Why didn't do that? Because it's really ridiculously hard to manufacture, uh, the same reason. You know, Tesla has had trouble with it. Uh, And that was really a signature thing for for Elon Musk and Tesla. But it's really hard to do, especially in a reliable way.

And I don't know if I saw some stuff, you know at the show where they just they were really reluctant to demonstrate it any more than they had to. It worked perfectly at the press conference, but it was the rest of the time. Is a little um, you know, a little bulky, a little clusi as it would kind of uh chunk its way open and closed. How are these the service pilots working that You've got a customer service pilot program, you've got a concierge program, chauffeurs service,

and also a planned subscription service in some markets. What's that doing in the brand? Yeah, it's some they're getting some mixed results. I think they're getting you know, they're getting to run some pilots and see what what will take uh, kind of like we're seeing with some of the other brands, some others that are maybe pushing a little harder on it, like Volvo and Lexus. But Lincoln is definitely trying to do some learning out there, trying

to catch lightning in a bottle. Again. The key for them, or what it seems to be, is seeing what they can learn and do some experiments in the US where they know the market pretty well, and then figure out what they need to bring to China to really accelerate their growth there. Right, because that that seems to write that high end trim, that seems like that could be pretty attractive to those purchasers. Right. They're trying to figure

out so one of the things they do. I asked, you know, one of the Lincoln marketing directors out in at the l A Auto Show, he had just come back from three years in China and they're talking about expanding the the driver service that they would offer, and I said, you know, do you ever try that in in China or is it redundant because so many people already have drivers And he said, you know, they they tried it during the New Year's times when people tend

to get festive, and they got some interesting response to it. But it's it's a real it's really challenging to trans to try to translate always what you can offer UH in services across the globe because different markets are so are so different. Thanks very much. Jamie Butter is better known as mitten Hawk on Twitter. He's our US autos reporter for Bloomberg News. 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 wits one. Before the podcast, you can always catch us worldwide on Bloomberg Radio.