Venezuela Debt Gets China Support, AllianceBernstein's Khan Says

There was a report late yesterday in the Wall Street Journal talking about how JP Morgan, which operates the main benchmark that is used to invest in emerging markets debt, the JP Morgan may be forced to remove Venezuelan debt from its benchmark index as a result of U S sanctions, details of which are expected to be announced today. They may have already been announced. They want to check that because that was supposed to come at eleven. I want

to bring in Shamila Khan. She is director of Emerging Market Debt and Alliance Bernstein in New York. And Shamila, I want to start by talking about the market response to some of the rumors. I have been very surprised to see no market response, and I would think that there would be a massive further decline in Venezuela bonds. Should there be a removal of this UH, this particular type of debt from benchmark indexes. What's going on here?

So what's going on really is a lot of uncertainty in terms of what kind of sanctions are going to be announced. To the extent that the U. S. Treasury sticks to the kind of sanctions they employed at the time of the Russian invasion of Ukraine UH and only limit the sanctions to newly issued debt in the future of Venezuelan entities, then the impact on the index is going to be fairly negligible, which is why you're not

saying as seeing a tremendous price response UM in the bonds. UH. In addition, there have been some humors, rumors in the last day or so off you know, Chinese involvement in helping the Venezuelan government make its Maartom payments UM, which are being negotiated in China by Venezuelan officials that have been further supportive of prices. Wow, that's really interesting. I just want to bring you some headlines related to this.

So President Trump has just as we were introducing you, Trump signed an executive order on new Venezuela sanctions that include UH some ban in dealing in new debt and equity from the state run oil company which is trades under the tick Peta VESA, as well as Venezuela Venezuela government issued debt and equity UM. We had been hearing that this could be potentially nuanced so that it wouldn't necessarily affect people in the US trading existing bonds between

each other. But we still need to parse through the details and we will bring them to you when we get them. But Shamila, what about from your perspective, does Alliance Bernstein own Venezuela and debt? Have you been selling your holdings of it? And now where do you expect to go from here with those holdings? So, Alliance Pornstein manages a number of funds that are benchmarked to emerging market solvereign in disease that include Venezuela debt. As such,

we are holders of Venezuela debt. But our stance in Venezuela has been very defensive for some time, and the way we think about Venezuela is really take a very strong fundamental stance with respect to these country's um future with respect to ability to pay back its debt um. There is no real reason Venezuela should be in the

economic situation it is in right now. Uh. It has a lot of resources and it definitely does not appear to us a solvency issue, but rather a liquidity issue and the fact that the country does not have a credible regime and has not been able to attract investment into the country. We do not see the current situation as a sustainable situation. We do believe that there will be a change in the future which will lead to

a better economic situation in Venezuela. And when we are putting together our exposures, we keep this fundamental view in mind, because our investments are always forward looking as far as fundamentals are concerned. Well, Shamala, I just want to give you the opportunity. I mean, if you're talking about the country's ability to repay it stead or potential ability, what about the potential ability of the country to restructure itself. I mean, that doesn't look like it's going to happen,

at least internally. And uh, have you had any pushback from investors who say, you know what, we really don't want our money being lent to any entity that is supported by such a repressive regime. That's absolutely true, and

that is something that we don't think is sustainable. We do not believe that the repressive regime is a sustainable regime in the near future, uh and in the medium term, as a result of which we believe that there will be a change to a more credible regime which will be able to put together policies um and that is what we are looking for in order to be less defensive in our positioning in when as Allah. The other thing to keep in mind is that prices are already

at very depressed levels. They are at all time lows and for many of the bonds, and they are treating below what has been historically the recovery rates on emerging market sovereigns. So to a great extent, this country is already pricing in a restructuring of its external debt, Shamila. So, given the fact that we are getting now new sanctions by the US on Venezuela debt and equity, do you have any sense of how this could affect your day to day? Does this change anything about the way you

approach investing in Venezuela well? We were expecting sanctions from the United States, so this is something that we have taken into consideration when constructing our own portfolios, and at this point as we are really seeing the headlines come out as we speak. From what I can understand based on what I'm reading right now, it is a ban on dealing in new debt, which is debt which will be issued in the future, which would not impact any

of the existing debt. There are some headlines about certain bonds possibly getting impacted. It's unclear to me which bonds those are, but what we have tried to do is limit our holdings to the Venezuelan bonds, which we believe will not be controversial with respect to payments and are generally accepted by the opposition as legal debt. Thank you

very much for being with us. Shamaila Khan is the director of Emerging Market Debt for Alliance Bernstein And once again, President Donald Trump has signed an order that imposes new U S sanctions on Venezuela and debt. This is new debt from the government as well as from the state oil company Petasa. Well, how about ordering your dinner from Amazon.

It doesn't seem too far of idea, and indeed, with the purchase of Whole Foods, it seems like something is going to happen at least next week and terms of prices here. To tell us more about the effect on the grocery store industry is Shira Overday are technology columnists are Bloomberg gad Fly. She follows all of this technology for our fast commentary section of Bloomberg and you can

follow her on Twitter at Shira Overday. And also whether us we have Sarah Halzac, our retail columnist for Bloomberg gad Fly. It's all coming together and you can follow Sarah at on Twitter at Sarah Halzack. Um. You know, Sarah, maybe we should just start with you, as uh, someone that's following retail. What effect do you believe the move by Amazon to acquire Whole Foods? What do you think it will make the other grocery stores do, because they're not going to just sit back and wait for someone

else to take their market share away. That's exactly right, and I think what it's gonna do is really put pressure on them to squeeze every bit of pricing they can out of what they're offering to customers. You know, Whole Foods for a long time now has had this reputation as whole paycheck. They really hadn't been competitive on

a price front. And so as consumer gets more health minded and they want these organics, there's been a lot of room for other grocers to take share their Kroger, Walmart, all the legal they're offering these kinds of products at better prices. Now that Amazon is going to make Whole Foods get serious about being competitive in that way, it really throws down the gauntlet to the rest of the sector. Shira, I want to bring you in here from the Amazon perspective.

It's not that novel of an idea. If you cut prices, people will be more interested in something, right, and this is sort of it's but it's business model. But I imagine that there are reasons that Whole Foods didn't have lower prices to begin with. In other words, that cuts into their margins and their profit margins. I mean, where is the long term goal here for Amazon and how

profitable is this model? It's a fair quiesh. I mean, it's it's worth noting that even a grocer like Whole Foods, albeit an expensive grocer like Whole Foods has significantly better operating margins than Amazon. Right You're talking five percent in the last quarter for Whole Foods, a five percent operating margins and two percent operating margins for Amason. So it's weird when you acquire a grocer and you're buying a

higher margin business than the what you already have. But look, you saw what Amazon did right away, which is really it just shows their ruthless genius, which is they set out on day one to change the perception of Whole Foods as this expensive place to buy fancy groceries that you know, they use the word savings and you know, organic foods for everyone, uh several times in their news

announcement yesterday. And it's really about changing the perception and getting more people in the door and starting to steal that market share from other grocers. Well, you know these uh, this idea that there's going to be let's say, a membership program that would morph from Amazon Prime over to let's say a point of sales system at Whole Foods, is that something shure that you believe is just gonna,

you know, normally going to happen. I mean they endicate I will say it's unclear exactly how that's gonna work, right. Amazon's said yesterday that they're going to essentially make Amazon Prime, their existing hundred dollar a year shopping club, into the sort of loyalty card program for Whole Foods, and we didn't get a lot of details, but you can sort of imagine that Amazon will try to make it worth Prime members time to shop at Whole Foods and not

at other places. And that's a clever idea. Well, and just to follow up the idea about point of sale is that maybe you will be in a situation in which you will not have to actually give your credit card or your cash in order to make a transit a purchase at Whole Foods because you're a Prime customer, you're logged in, you're done, it goes into your Amazon ACA. Maybe I don't. I don't think we're there yet. We will see exactly how they integrate the sort of cash

register system with Prime. But you can sort of imagine where you go to check out, if you're a Prime member, you get a better discount on those bananas or that jar of peanut butter than you would if you're not a Prime member. And again, it means that if your prime member, and a lot tens of millions of Americans are, that gives you an extra incentive to shop at Whole Foods and not at the Kroger or whatever down the street.

And I just want to point out that Amazon shares have actually been down for a third consecutive day, so even though yes, Kroger shares and other grocery store shares have gone down, although Kroger's bouncing back a little bit today, Uh, you know, Amazon's down too with the question of profit margins. But Sarah, I want to bring you back in here.

Amazon one in the retail war or is winning because not just on lowering prices, they also found a way to distribute goods efficiently and quickly as well as often cheap, more cheaply but not always. Um, I want to give you a chance to sort of argue the case for why this may not work in the grocery industry. In other words, does Amazon have to compete on a level that goes beyond just lowering prices? And what is the

barrier to entry there? Yeah, so put some plea. A perishable supply chain is just a whole different ball game than the kind of supply chain the Amazon has built already for selling US laundry detergent and selling US sweaters

and all that kind of stuff. Right, So, someone in the grocery business once told me, for example, when you're thinking about grocery delivery, you have to consider things like that when bananas ripen, they emit something that makes apples ripen at a different pace than if they were not next to that banana. Right. This is supply chain no how that the Walmarts and the Trader Joe's and Krogers of the world had been building for a really long time.

The Amazon simply doesn't have. And so Whole Food certainly has some of that know how, But it'll be interesting to see how Amazon is able to kind of leverage that and expand it more widely. Sarah, I beg your pardon. No, I was just gonna say that. I mean, Sarah makes a good point, which is that Amazon has been in

the grocery business for ten years. So they've had Amazon Fresh, which is their grocery delivery service, up and running starting in Seattle and in other market now to um for ten years and it really hasn't made much of a dent in the grocery industry, and that points to some of the issues that Sarah pointed out, that they haven't necessarily figured out the sort of logistical dynamics of the

grocery business quite yet. You know, they're smart people, they can figure it out, but you know, ten years of experience has shown that they haven't necessarily cracked it yet. Well, and to your point, I just want to apply that to whole foods, because, you know, Sarah, it looks as though what the sales are perishable foods at whole foods, right, nonperishable items they fare pretty poorly at whole foods, they do.

And I think that that sort of gets to this idea that you know, people are willing to spend a little bit more for the things they're putting inside their bodies for feeling like they're having grass fed beef and you know, chicken that's not treated with antibiotics. They're willing to plunk down more money for those kinds of things. The man for toilet paper, they're just not willing to pay a premium, and so that that's one challenging thing

they'll have to contend with. You know, I think it's really interesting to note that back in two thousand nine, when Whole Foods had only two d seventy three stores. Uh. Some research from canter Retail shows that seven percent of shoppers said during that time period they visited Whole Foods on a monthly basis. Now they have over four hundred stores. The sheriff shoppers that visit them on a monthly basis is virtually unchanged. So they're really having trouble growing the

base of customers who are interested in their product. And I think that that package dry goods uh price issue is a big one. Thank you so much for joining us great insight. Sarah how Zac and Shara over Day, both Godfly columnists, they don't jointly wrote a column on this issue that's fabulous. Check it out Bloomberg dot com slash god Fly, also on the Bloomberg at NI space

god Fly. The National Hurricane Center says that the storm Hurricane Harvey has maximum sustained winds of a hundred and ten miles per hour and it is just below the category three level four A storm. Forecasters say the storm is expected to reach that mark before making landfall late today and early Saturday in Texas. And here to tell us more about this is Shenando Bassu. He is a meteorologist and gas analyst for Bloomberg New Energy Finance, and

he joins us here in our studio. Shenando, thanks very much for being with us. Maybe just give everyone a detailed over you know, view of what what we can expect over the next let's says hey, Pam. Yeah, thanks so much for having me here. So of course we know that right now Hurricane Harvey is going to be strengthening up to a category three. But what's unusual about

the storm really is how quickly it has intensified. It's intensified so rapidly over the last forty eight hours UM as of this morning, the central pressure down to about nine and seendy millibars, and of course those wind speeds making it up there to about ten. And the other big piece of this is the duration and the amount

of rain that we're going to be getting. Um we're looking at up to thirty or even over thirty inches of rain in parts of the coastal part of Texas as a result of the storm and the trajectory it's expected to take, I mean even as late as next Monday or Tuesday, that storm, Hurricane Harvey just still kind of hovering over um the central and eastern part of coastal Texas there. Yeah, people have talked about how it's going to stall out over Texas and it's going to

be stalling out over populated areas of the state. What have the evacuation order has been like and what is the expected damage supposed to be? Yeah, I mean the damage of course is a big part of this, certainly

to coastal oil and gas infrastructure. We've already been seeing offshore platforms being evacuated on you know, all the major oil companies and all their smaller e nps as well evacuating their their oil platforms and UM as far as you know, the gas gas infrastructure is a little bit different though, because you know, we haven't seen that much of a price movement yet in gas, and that's because you know, ever since um, you know, two thousand and eight with Gustav and Ike, you know, a lot of

that infrastructure has been beefed up, and also the gas production environment has changed substantially, with a lot of that production shifting over to the northeast. So as a result, you know, we're not going to be seeing a whole lot of movement in the gas markets from the supply side. Now, going back to your point about the effects and the

demand is really the big story here. With um effects of course of the power markets with multiple power outages and that kind of thing, flooding impacting a lot of the power assets down there, and also the wind farms with the high winds that are expected tell us about how the demand will go down number one, because it's going to be a weekend and also you have the situation it's just gonna be less use of electricity, yeah, for sure, um. You know, with people evacuating the area,

and of course also industry shutting down. You know a lot of the plants and and factories and so on and so far in that area shutting down. You know, we're expecting uh, just industrial demand alone to account for about two to mc f of gas per day um. So that that piece of it shutting down. Also, we have a major nuclear plant, South Texas Nuclear that is probably going to be shutting down maybe today or early tomorrow, um.

And that going offline accounts for about two gig lots of power right there, so you know, and in the aftermath of the storm, you know, gas generation will have to fill in for that missing nuclear piece right there. You know, it's interesting we were talking about this right before the segment when we were talking about how gasoline prices have increased. That's probably where you've seen the biggest effect of this impending hurricane, with prices at one point

rising to the highest levels since November. Yet this will not translate to higher prices that people end up paying at the gas station simply because of the production. You sort of touched on this, but can you give us a sense of how much production has moved away, frankly from this region in Texas and more up north to say North Dakota and the shell production. Yeah, yeah, sure, So I think there are a couple of pieces to that.

So the first is, of course, with the number of refineries that have gone down just today, I think we're just in just around the eight mark that has gone offline, which is certainly higher than what you would see on a you know, on a day to day kind of basis. So that's what's taking a shot at the supply side of gasoline. That's why we're seeing a rise in the

price there. As far as natural gas, however, um, because now we're seeing so much more production in in in the Marcellus regions up in Pennsylvania, and you know, the northeastern general Gulf production has declined significantly over the last you know, five to eight years, and so that air yet that region as a you know, production region, the importance of that has gone down real quick. Almost the last time that we saw a storm of this magnitude actually hit landfall in the US, UM in the US

in Texas two thousand and eight. Was that was the last time we had a hurricane ike And was this Is this going to be more or is this gonna be weaker or stronger than I It's going to be about the same or a little bit stronger. Yeah, especially um with the precipitation in the rain. Yeah, definitely important to watch and anyone who's listening, who is in that area,

please be safe. I am very concerned. It sounds like it's going to be a lot of rain and a lot of flooding and certainly very messy at the best and uh and potentially life threatening it worse. Shenando Basso, thank you so much for joining us. He's meteorologist and gas analysts for Bloomberg New Energy Finance. Talking about Hurricane Harvey.

If you've noticed over the past couple of months, we've been talking a lot about range bound markets, sleepy markets, lack of volatility, lack of volumes, lack of impetus to sell, but bullish and here to explain whether we're gonna see anything that's going to break us out of this one way or another is David Ader. He's chief macro strategistic

inform of financial intelligence. He is also a writer for our Bloomberg Profits UH section that's part of Bloomberg View and he also was the number one ranked US government bonds strategist by Institutional Investor magazine for ten years. David, thank you so much for joining us. You know I'd love to get your sins Right now. We are seeing treasury yields dip lower yet again, even as we see UH markets rally, stock markets rally, I'm looking at a ten year treasury yield UH that is lower than two

point two percent. Where do you think we're headed with this treasury yield by the end of this year? Oh? I I think that there's a great chance we'll see two eleven. How's that for a traumatic call. I'm blown away, isn't it isn't it. I mean for the balance of the year, you know, I mean, I would like to think, um that we will get a little more activity other

than these sort of six basis point weekly ranges. And if I you know, with a bit of a bias, I think that you know, we are going to say I hate to say this term uncertainty is going into the end of the year, as we get around the dead ceiling, as we get around the possibility the likelihood of a new FED chairman. And I think we're going to continue with low inflation. So I think that there's a risk that we could actually um take tens a little bit below two percent. But I would not get

overly excited. I do not think the there's going to be a big directional play in in yields for for the balance of this year and and you know, very possibly into next year, which raises a whole new set of questions. Well, we've been getting a lot of warnings. I guess whatever things feel like they're getting stagnant, we start to get a lot of warnings of terrible things

to come. And we've gotten quite a few of them from some pretty big investment managers that you know, the end is ny and that markets are going to collapse and that you know we're going to have a real correction. Um, do you agree that there is something that's imminent and and sort of uh bad, that's percolating under the surface. And if so, where is where are we most at risk of seeing some kind of problem? Where? Oh, I think there is. I think that there's a big, huge

thing under the surface. I just don't know whether it's going to prove bullish or bearish for interest great, And I don't know what it is. I mean, um, the economy is, it doesn't seem to be accelerating, it doesn't seem to be decelerating. We're dealing with sort of this muddling that we've dealt with for a very long time. The maschinations out of Washington, the antics between the White House and the Congress, I mean, have have no I don't know if I want to use the term jump

the shark. But I think finally, the risk markets, the risk markets are are losing their patients. So whether it's about some physical stimulus or whether it's about tax reform, and we start putting that off into um into next year, with the potential of a default certainly over the debt ceiling I think likely to reside with us, you know, through October UM. And then the question about what is what is the balanty reduction going to look like? And I think all those things are going to put more

stressed on risk assets than on the treasury market. So I would say that's where, um, that's where the risk is. I mean valuations of course, are high credit spreads for example, are type buy backs have slowed down? So that is where I think we're going to we would feel it. Well, David, what are you recommending that clients do that? Oh? Do what? Cash under your mattress? Just you know, freeze, dride food for cash and hunker down. Wait wait, wait, wait, wait,

hold on a second. How much cash? And when did you start? How much? And how much free drive and cans or packages that you know, but are you have you been recommending over the past few weeks that people build their cash stashes or is it over the past year?

Or and and how much? No? And and and realistically I think that from a from a portfolio, from a fixed income now we're talking on the fixed income side, UM, I think I would you retain a fairly good front end cash position, and then I would have a barbelled portfolio with exposure at the long end. Again because I don't think that we're seeing any inflation problems. So the barbelled portfolio would allow me to if we, for example, were to see if that High court, if we were

to see opportunities I want to hunk. I want to have some cash on hand to take advantage of it um in other asset classes. So I think that the Barbel portfolio for now is the one I would like. And I think also, um, you know, I don't think the Fed's going to hike this year, and I'm you know, next year we'll get I think we'll get a new FED chairman. Presumably there will be umdabish Trump like slow interest rates and I but I do think that there

is still some risk at the front end. Is going to get UM a little bit nervous about the feed as we approached next year and we get past the debt ceiling situation. So I think the Barbel portfolio is the one that makes the most sense to me. And in terms of a duration exposure to a benchmark, I would be a little bit long duration. Now, well, David, when do you throw in the towel. I mean, I want to know because you know you'll be the last

bear standing when I throw in the towel. Um. You know, I think in these in these coming weeks, in these coming months, you know, we will get obviously more information on inflation. The FET has always talked about that that that there has been talking that ultimately they'll reach their targets. I do not care about the dot pots. I don't really care about their their own expectations. I want to see what the data is going to look like, you know, David,

I have to wonder. You know, people lament that this market has been newter, either by financial regulation or by so many years of Federal Reserve interference. But are we just seeing a market that's a normal, that's moving back to a model where people actually have to look at data and actually look at the companies and not just wait for what comes out of the lips of central bankers. You know, I know we always look at it, and if you're an economist or you're a strategist, you know

you historically and academically we rely on the data. But you know, we've we've had data up, we've had it down, and the treasury market. Generally, the yields are staying in arrange, so we will get back to it. We still need to look at those factors because it will impact central bank policy here and around the world. But um, the the the quantitative easy that's still going on elsewhere, the continuing reinvestment which the FED is doing, even if they're

going to be in tapering. I do think he's put um, you know, put restrictions on the volatility that you would otherwise be seeing in in in the fixed income markets that slowly, gradually, glacially is coming off. So I don't see drama, but I do think, you know, in a few years, will probably get ourselves back to a more

normal environment. Having said that, I still think that that there's a generational issue that interest rates are going to be lower than we might otherwise have seen, just because we are in a sort of a muddling growth mode. I want to thank you very much for joining us. David Adder is the chief macro strategist for Inform of

Financial Intelligence. He is also a Bloomberg profit. Bloomberg profits are professionals who offer actionable insights on markets, the economy, and monetary policy, and Bloomberg profits may actually have a steak in the areas in which they write about. 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 abramoids One before the podcast, you can always catch us worldwide on Bloomberg Radio.