US Trade Threats To China Are More Bark Than Bite: McDonough Samara Lenga

economist for financial Products at Bloomberg. Mike, I want to start with the news that the Trump administration is urging China to lower tariffs on cars and open its markets to you as financial services. This this comes as part of talks to resolve uh, the rise in trade tensions. What do you make of this? I mean, how much credence can we put in some of these measures coming to pass? Uh? You know, I think that there there is a willingness from China to um implement some of

these changes. But I think the timeline that may be President Trump has in mind and the timeline that China may have in line maybe where you have a difference. But that doesn't mean there can't be some sort of compromise in some of these areas. You know, it's an interesting Trade in China is an interesting topic because it's one area where a lot of leaders around the world

may actually agree with President Trump. Uh. And when you you look at this situation, the problem is it looks like President Trump really wants some sort of short term gain that he could show. Look, I did this victory victory, a very short term victory, which this is kind of the damaging aspect of it. Right, nobody's going to win from a trade war. The especially the US will get

hit especially hard if there were a trade war. But you know, we're missing this opportunity to have a sort of multilateral approach where we joined together with a lot of the other countries that China's trading with and and go through the w t O or more traditional mether um uh channels. Uh. And it's that that's someone unfortunate. But I do think there could be some short term

compromise on certain things. So, Mike, I'm looking at equity markets today, Dow Jones off its earlier highs, but still up about one and a half percent, and you could see a green across the screen throughout the US indices. UM. People could attribute various reasons for this, but one of them could be that these that the potential for a trade war has gone down, right, that that there has been a softening in the discussion around China and the US.

Our markets being too complacent in taking the words from Treasury Secretary Minution and the Chinese officials for saying that they're making some progress here. You know, I don't think so. I think when you look at really since President Trump was elected, there's a lot of reasons that markets have

been going up. But the two big macro ones. One is the expectation that the Feds going to be very gradual and normalization, and the second important input was that there wasn't going to be any major disruption to international trade. I think many times now we've seen Rehderick get really hot on a bunch of topics out of out of Washington, this now being trade, and then the action though had the follow through has been a fraction of what the original rhetoric indicated it might be. So I think we

could be seeing another case of that. So I think the market taking this, uh, this new input into consideration, and it might say that it overreacted. The market may have overreacted a bit last week, uh, and is now

kind of normalizing to the reality of the situation. Well, so that what do you have to see before you would bet on the idea of a trade war heating up materially more than what we've seen in the past, But you would you would need to see action, not just words, right, You would need to see actual tariffs being implemented on a wide swim off of goods, not you know, not very targeted, relatively small uh, tariffs that don't have that much of an impact on the US

or Chinese economy, like steel are aluminum tariffs don't have a major and they're not They're bad, and I don't think they're a good thing to have occur, but they're not going to have a major impact alone on either of the U s or the or the Chinese economy. So um, you know, just sort of shifting a little bit from China to Canada and Europe. The steel and aluminum tariffs that we talked about so extensively weeks ago, Uh, can we now write them off? Is largely non existent.

Since everybody's gotten an exception. Well, this is another this is another example of what I was talking about, where the rhetoric is really high, really hot. Uh, and then when you actually see the implementation, it's a fraction of what was originally indicated would happened. So I mean, I wouldn't write anything off yet we don't know what's going to happen. You know, you're one tweet away from the markets being very concerned. Again, well, but this is my point.

Are we or our markets going to learn to ignore those tweets as all bark and no bite. Uh hasn't happened so much yet. I think eventually the market could get desensitized to tweets. I guess it matters what the tweet says. Uh, it matters is it a new target, is it a new idea? Um? Is their indications of

a follow through? Does you know if if there is a tweet that targets another country, does that country then respond with their own not tweet necessarily, but their own communication that indicates that this could but could then escalate. So I think there's a lot of factors you need

to look at. Maybe a tweet in and of itself about steeler aluminum tariffs or um some of these Chinese tariffs might not have the same impact it had last week, but um, you know, you still got to be on the lookout for it and see what happens in the aftermath of that tweet. Mike mcdonna, thank you so much for being with us. Mike mcdonot, Chief economist for financial Products at Bloomberg. We've talked a lot about ETNA recently

in light of a CBS bid to buy Etna. But there's another side of Etna, the Etna Foundation, that has been studying what makes a community healthy, what impact the opioid epidemic has had on the nation, and going forward, what can make the nation in a better position health wise. Dr Garth Graham joins me now. He's president of the ETNA Foundation, which is based in Hartford, Connecticut. Uh. The

Etna Foundation just released its inaugural Healthiest Communities rankings. So who's healthy, who's healthiest in this in this kind of well so, you know, based on this ranking, we saw a lot of communities in Virginia and Colorado that trended to the top of the list. What's important to understand here with what we're publishing is that health you know, we only spend a couple of hours a year in

the doctor's office. At the most, health is defined by everything else, all the stuff that's happening in the community. You know, where you can get fresh fruits and VEGTA, bikeability, walkability, safe housing, making sure that um, you know, you can do all the things environment ere we breathe. So what we try to really define with this ranking is a common concept UM that your zip code defines your health

more than your genetic code UM. And really by looking at all of those factors within a zip code, that really influences how long people live. So I'm just wondering, when a community is determined to be healthy, does that mean that they can enjoy lower insurance premiums in uh in tandem with nicer lives. And conversely, if you live in an unhealthy community, are premiums higher. Well, you know, I'm not sure there's a wanton one connection with the premium.

I think there's if you're living in a community and that community lacks healthcare access and you are healthier unhealthier because of that community, you're going to spend a lot more in healthcare. And so remember there's a difference between health and healthcare. Health is when we are living a healthy I be able to do all the things we want to do. Health Care is when you're sick and you got to go to the doctor's office and get treated. But we want to emphasize is how do you make

people healthier in general? And how do you make sure that they can enjoy their lives, enjoy their aspiration, and enjoy their goals. And you know that's intrinsically linked to the strength of the community around them. So perhaps when you have to rely on the healthcare system, it's when you are sick. Although a number of people are believing or sort of having faith in the idea that they will never get sick. Because there was a story on the Bloomberg today looking at how a number of Americans

are dumping insurance because the premiums are going up. How much have you noticed this trend and can you can connect that to the healthy healthiness of community? So I think in general, UM, we tend to overestimate how healthy we are. UM And I think truth be told again, we have to understand what are the kinds of things

that goes into making us healthy. I mean, if we think about the day that we spend, we spend the day interacting with family, with friends, and going out into the environment, and those components of how we build that social and community infrastructure really defines what makes us healthy. And again understanding just how much time you know, I'm a I'm a physician by training, by practice, and you know, all the vast majority of health occurs outside of the

doctor's office, and a lot of that health is local. So, like politics, all health is local. And so understanding what are the components of local health UM that are making communities healthier? Dr Graham, what's the responsibility of the healthcare community with respect to the opioid epidemics and so a lot of people think that it started with prescriptions of oxycodone and other types of hard pain killing medications. Yeah, so the health the opera emidemic is multi factorial. We

see challenges across the economic spectrum. There's no doubt though that communities that are hardested are those communities where folks of labs, jobs and infrastructure and issues around mental health and addictions start to take more of um compounded tone.

And so you know, understanding just how we treat that entire community and also understanding that the line to recover for addiction is giving people hope, an opportunity, and so understanding that when we build that community infrastructure that makes that community stronger, we then have people if they survive on the locks an operiod overdose and they get a locks own or an operiod reversing treatment, they go back

into a healthier community and healthy infrastructure. So again, all health is still defined as those components of local activity that make both a family and a community is stronger.

As a practicing doctor, what have you learned about people who use opioids, perhaps even patients of your own, that perhaps might challenge some of the conceptions that people have about Yeah, you know, one of the things that I learned is it really does cross all lines, all geographic lines, alsocio economic lines, um, all different kinds of different mean is that you would not have expected to be impacted.

One of the most troubling things that many of us have seen in both clinical and public health, and you see reflected in the CDC data, is that the impact that is happening on the youngest and most vibrant folks within our community. And understanding that what we're doing is what's happening here, is that it's not just you know, um, folks who are in their twenties and thirties, but even

filtering down into younger folks within teenage years. And so the recent CDC data points to the fact that the decrease in life expectance in national that we're nationally that we're seeing has a lot to do with the impact that opiates are having on our youngest and most vibrant And that's why you know, through efforts that we're doing in the end a foundation tackling opiated epidemic, investing in local communities, but also others across the board, we really

have to understand about the future of our country. Is there any crossover between the ETNA Foundation and the healthcare provider? Yeah? So you know, ETNA Foundation is a philanthropic arm of Enna. So we invest again the local community and we invest in We have a Healthy Cities and Counties Initiative where we work. We work with fifty cities and counties across the board to deal with local issues impact in those communities. So we we are the arm that helps expand the

reach of our organization into local communities. Do you share the data that you collect with the healthcare community? No, So most of our funding are with partners and grantees um So they may be state based organizations or even local nonprofits and their data is their data. We just help support them do work in the community. I mean, does sort of look to your work to determine how to sort of set pricing and determine how to sort

of view American health. No, we're a separate entity and not a part of the business arm in terms of um UH, that intersection between pricing and economics. That being said, as part of the foundation as broad an enterprise, I think we're all committed to this issue of building local, healthy communities and trying to invest in communities, go as local as we can, and find those partners who can impact change. Dr Graham, just real quick, where are we

in the opioid epidemic? So, you know, for the past couple of years as a country, as a nation, we've seen our life expectancy decline, primarily driven by the impact of the opioid epidemic on the younger population. I think many folks have said that, you know, over the next couple of years, is this continues to have that impact, it will no longer be a bullet, it will be a trend. So I think right now we're seeing we're

in the midst of the epidemic. I think we are as a country, as a community, UM, I think fighting for the lives of our youngest and most vulnerable. And so I think the next couple of years, depending on how we can come together, whether it be government or public government, privac sector, I think we'll define where we go. Dr Garth Graham, President of the ETNA Foundation, which is based in Hartford, Connecticut, thank you so much for being

with us. The high old bond market is often thought of as the canary in the coal mine for distress in financial markets. Right now, it is not signaling any distress. Joining me right now. Ken Monahan, co director of high

Yield at a MOONDI pioneer overseeing more than fifty billion dollars. Uh. You know, can I want to focus a little bit not on high yields, but on investment grade because there's a question, as we see all of these mergers and acquisitions going on in investment grade UH, Corporate America, how many of these deals will end up in the high old bond market. Well, it at least it's something we're

concerned about, are thinking about going forward. If we look at the uh M and A activity in the bond market right now, there's about two d and fifty billion dollars of transactions to be financed this year, and that's off of a number last year that was about a hundred and seventy five billion. So you think about headline names, We've got the Courier acquisition of Dr Pepper, We've got the Signat acquisition of express Scripts, We've got the General

Mills acquisition of Blue Buffalo. There's a lot of transactions going on a lot of these companies if you look at them post the acquisition or sporting leverage ratios which look much more like a high yield company than an investment grade company. And I think the rating agencies thus far have been giving uh these companies a little bit of leeway to get their houses in order through synergies and assets sales post acquisitions before they make any final

pronouncements on ultimate rating action. Well, yeah, you can see that. Fitch, for example, has Etna on a rating watch negative after CVS agreed to acquire the company. I'm just wondering, as a high yield debt investor, how do you play in debt that gets downgraded from investment grade to high yield after an acquisition, do you buy? Do you sell? I mean,

what's what's your move? Well, you know, we certainly look at it, you know, and there's a lot of investors in the high yeld space that would say, okay, well it's now entered my index or my benchmark, I need to be invested in it, and we don't happen to look at it that way. We'll be much more selective there that there things that we will buy that happened to be now or what we call fallen angels formally investment grade companies that fall into the hig yield space,

and there's a lot we ignore. We just don't think that they were inappropriately valued. I guess another question is you have at one point three trillion dollar US high old bond market. Let's say some of the record volume of triple B companies corporate debt, some of it gets downgraded all of a sudden. You could see this universe of high yeld debt expand dramatically with a limited number of investors. Could you see spreads? Could you see yields

blowout in response in the high led bond market? Well, we certainly did. When General Motors and Ford enter the High Yield Index a number of years ago. Is a matter of fact, a number of the designers of benchmarks reacted as a result. They went from having benchmarks that were we called unconstrained constraints, so they limited the amount of that anyone issuer could represented the index to two percent because Ford and General Motors, because they were such

large issuers, actually overwhelmed the hih yield marketplace. Now, I don't think any of the transactions we mentioned, like Dr Pepper, not that we're suggesting that's going to get into high yield necessarily, that any of these transactions themselves would overwhelm the marketplace or the indices to the degree that it did with Foreign General Motors. But it certainly would be if if if a number of these companies were ultimately downgraded, it would be a significant shift in the market. Let's

talk about the supply demand dynamic. In another way, There's been a lot of talk about foreign investors, who are one of the major buyers of US credit stepping away. I'm wondering, from your vantage point, how significantly is this the case. Yeah, well, um, you know a Mundi Pioneers, a global firm UH, and we have global clients, and we certainly had seen a lot of inflows UH from UH non US investors into the corporate credit market, both

investment grade and high yield UM. So whether we're looking at Asian investors and European investors, we seem to have seen that slow somewhat this year. UM. Whether that changes or not, it's unclear, but clearly the hedging costs, the cost of hedging back to one's native currency, have increased over the course of two thousand and seventeen and into two thousand and eighteen, and we think that's at least one factor UH that's impacting investors overseas investors willingness to

buy corporate credit in the United States. So the risks are clearly rising, whether it's the risk of downgrades from mergens and acquisitions, whether it's the foreign bid declining for US corporate credit. And yet a lot of high yield debt has gotten sold, including from Tesla and Uber companies

that are burning through cash. What do you make of that? Well, historically, if you look at the high yield marketplace, it has financed technology companies, but most technology companies that have had has financed have been companies that have been much further along in their business cycle UM, where there was let's say a software company, where there was a certainty or a consistency with cash flows. The problem with uh Tesla's

or the Ubers of the world. These are companies that are still very much of the building portion of their business cycle, and therefore they've got large negative cash flows. UM. That makes them much more difficult to finance in the credit markets, and that's why historically those businesses have been financed with equity and sometimes that they've gone to the debt markets, they've used convertible bonds rather than high yield bonds.

So have you been buying their loans? Um? We generally don't like to comment on specific companies, but we've been much more cautious about the technology sector. Why don't we be very very diplomatic. Is there any any sector that you're particularly bullish on. Well, we've been more bullish on the housing market. UM continue to be that we think

that there is still some value there. We've been bullish on the steel industry and we've been bullish on it prior to what's gone on with regards to some of the trade barriers that were put up recently by the White House. Uh, and we think that those are two sectors that will continue to benefit given the current state of the economy. As you pointed out early in our conversation, UM, the high yield market, which has often thought of as

the canary in the coal mine, hasn't been singing this time. UM. We don't think that the that the fundamentals are actually pretty strong still. So what'll you have to see to change that too? You know? Uh. Business cycles, as we know, generally don't end because they get they die of old age. They die because companies start doing more foolish things. So you worry about the M and A side, which we just talked about, UM, and then you worry about how

aggressive that the central Bank will be. And the FEDS obviously is beginning to not necessarily take away the punch bowl, but maybe they put a drain on the bottom of it and they're beginning to take some of the liquid out. Um. If the e c B moves as well, maybe that becomes more more troublesome, but we don't think that happens

this year. FED is dimming the lights in the bar Ken Monahan, thank you so much for being with us co director of High Yield at a Moundi Pioneer, which oversees more than fifty billion dollars of assets from Durham, North Carolina. Definitely an interesting time, especially with the proportion of triple B rated debt in the investment grade market being the highest it's ever been, raising the issue of

what happens if some of this gets downgraded. As part of the spending bill that was passed last week in Congress, a particular type of fund, business development funds, were allowed to incur more leverage to boost returns. Here joining us now to talk about that and other things affecting the middle market space. David Dulham, President of Gladstone Investment Corporation based in McLean, Virginia. David, thank you so much for being here. First, can you lay out what the change

was that was made? And it was sort of slipped in to the bill that was passed last week. Surely said thank you for having me on UM. Basically, BBC's business development companies have been limited, if you will, to a leverage ratio of one layer of debt to one layer of equity. It's been that way since BBCs were created. So what this bill basically allows is that we can now go from one to one leverage, if you will,

to a two to one leverage. So for each dollar of equity that any fund has, theoretically they can increase

it by another one to two to one. There are those some requirements, and as as most things, the details are important, and in this case, each BDC will have to get shareholder approval by at least fifty percent of shareholders to be able to increase from the one to one to two to one, and it may be affected somewhat by other restrictions in their capital structures, such as any lines of credit or preferred shaw instiences that they have, where there are some restrictions in there which will have

to be worked through, if you will. But having said that, it definitely will be a positive. I believe in that two to one leverage is not huge leverage, certainly relative to other financial institutions, and it will give an opportunity for a higher return on equity for those funds that are able to employ it. So, just taking a step back, business development companies typically invest in smaller and mid sized US companies through debt and equity UH and they get

some tax benefits as a result. Uh, and they are typically the I P of they have initial public offerings and there raise a certain amount of capital that they can then invest in these smaller companies. Right correct. Okay, So I'm wondering, since you run a b DC, a business development company Gladstone Investment Corporation, are you planning to increase the leverage in response to this new rule that

was allowed. Yes, we certainly are looking into it to determine how we go about getting that done, including, as I mentioned, our shareholder reproval. Absolutely, I think it's a very positive thing. The industry has been working on this for a while and it's good to see it happen. How much do you think that you could increase returns as a result of this, Well, you know, it's it's

hard to tell. Obviously, depends how much leverage anyone fund would would access, but you know most of us have returns on equity if you will, are we, depending on how you count it, that are in the say anywhere In our case, we're over because we are differentiated business development company gain meaning glass own investment because we actually when we buy a business, we are we're using both our own debt and our equity, so we are differentiated

from most BDCs that are lenders. So my anticipation is with the ability to access at least another say half of our of another layer of debt, we'll be able to have a lower cost of capital, and therefore I would expect our returns could be increased. I don't know

ten perhaps just because of incremental leverage. David, It's interesting the timing of this because there's a lot of money chasing yield right now, and there's a lot of money looking in the small and MidCap space with an increasing number of private credit funds raised by number of private equity firms and even hedge funds. And I'm wondering, are you concerned that valuations are getting too heady h and that the and is so great that the investment opportunities

really just aren't there, right, It's a great question. UM, I would say this we have. It's not new necessarily, I would say the last number of years we've certainly been in this environment where I would call it challenging, UH in terms of finding and investing in these new biout opportunities. UM. As far as the traditional b dcs and lending b dcs, I think clearly this This is going to help because it will have a tendency to

lower the cost of capital for those b dcs. For farns like my own Glass own investment, where we are a biot oriented BDC. Our challenge is really competing with, as you said, the other private equity firms that have a fair amount of capital. This is going to help us because our cost of capital will also be a

bit lower. So where perhaps we might have been challenged, let's say in a buyout where you know, seven or eight times even d A was a problem, we might be able to raise all our valuations a little bit

and therefore actually be a bit more competitive. But overall, let's say it's challenging in finding good new opportunities, and indeed it is a bit frothy, but it's been that way for the last couple of years, and I'm not sure I see it changing dramatically going forward in the next few years, as long as the economy continues as it is. So it doesn't concern you to add a little more leverage at this point because we still have

some some time left. Yeah, not really, And as I say, it will help us in terms of I think being even more competitive and certainly a potential for greater return on equity, which of course benefits our public shareholders. David Dulham, thank you so much for joining me. David Dulham, President

of Gladstone Investment Corporation. It trades in the NASDACK as gain G a I N. It is based in McLean, Virginia, and this particular shift in the leverage allowance for business development companies was tucked into the one point three trillion dollar spending bill that was passed by US Congress last week. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm

on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.