Why China's Economy Is Best Revealed Through Credit Markets

over the last week or so. Just today, White House trade advisor Peter Navarro expects to US and China to sign a Phase one trade deal and then quote next week or so, you've got that. Plus Bloomberg News reported uh, last week about China thinking about launching a carrier aircraft carrier sized investment bank to compete against Goldman sachs Uh and Morgan Stanley. Bloomberg News also reporting, uh, just yesterday that China is really thinking about dismantling it's great financial

wall allowing Western investment banks to come into China. So a lot to kind of unpack their as it relates to China. Let's start with the trade deal and we welcome, uh Shazad Kazi, he's a managing director China beige Book International. Just thanks so much for coming to our Bloomberg Gonna Act their broker studio. Thanks. Let's just go to trade first, kind of where do you think we are with trade and kind of what the next steps? Yeah, so you know what we've seen over here is you know, a

phase one trade deal. Uh seems like all but a done deal at this point. This is definitely a much smaller deal than was originally being discussed. Right. But when the President first tried to go for a larger deal, which would have from the U. S side involved um, far bigger tiref rollbacks and what we're seeing in this particular instance, Um, there really just wasn't much support for that.

So when as you know, people from the White House started calling up folks on Congress start to socialize the idea with other business uh unions, associations, etcetera, there really wasn't much appetite. So what we've ended up with is a much smaller deal. Um. The upside of course on on that is that a smaller deal is also a

little bit more stable. The chances of things falling apart um, for for this particular, you know, the mini mini deal, Um, are are fewer The things I think we want to watch for now is what happens in So we do think this is going to get signed, But then you know, what are the factors which may start to create problems? Um,

you know, especially as we get closer to elections. So, uh, if perhaps the Democratic contender criticizes the president for the fact that this deal really didn't do much for America much, you know, all the structural issues were left out, etcetera, how does the president react to that? Um? So those

are things and things to look out for. When I knew that you were coming in, I got very excited because I feel like this is sort of one of the key pieces of that is it is kind of still a conundrum, the question of how much a trade deal will offer a support to the Chinese economy and how much that tailwind will be offset by the over leveraged sectors. I'm thinking of the housing market in particular, it showing signs of weakness certain areas of the industrial

sector that are tied to the housing market. Uh, certainly some regional and small banks. How much is that going to play out in a negative way that will offset the benefit from a little more trade certainty. Yeah, so I mean on on the positive side. First, right, that this stiffs a Chinese some breathing room, which they've been wanting for a long time. The manufacturing sector, really the economy as a whole over the over over the course of two thousand and nineteen, UM has been receiving a

lot of credit support. A ton of it was really targeted towards the manufacturing sector, as we saw in our data repeatedly UM and and so this is much needed breathing room from them. But as you said, now we've got other issues. Domestic demand is still pretty weak, Domestic orders are are still not doing as well. The ordered order growth itself is actually uh somewhat slow in China right now. You've got a property market that hash showing signs of slowing down. Now, we ourselves saw the Chinese

property markets slowing down up until November. We saw it a bit of an upturn in December, but you know, one month is not a trend, right, So some of those factors remain. If you look at that commodities is struggling right now in China, which is which is not a very positive sign for the economy. Um. Yeah, so, so lots of other factors remain. The other problem. You know,

you brought up issues with being over leverage. One of the things that we're starting to pick up on is a major spike in firms which are delinquent and debt repayments. Right then, this is at a time when credit and borrowing is surging, So that really sets up to be somewhat difficult for some of these firms just struggling. They're not seeing the growth, they're not seeing the revenues, they're falling behind on debt repayments, cash flows tied in general. Um,

yet they're taking out more loans alright. So given that economic backdrop, is there a scenario from your perspective, that China would move forward meaningfully with a Phase two type of negotiation or maybe they just don't have the capacity right now? You know, I think the Phase to deal was supposed to be about larger structural issues, right and those really haven't been on the table all along as

it is. What we may end up seeing really is that Phase one egg it's done now, and then what we see a discussions towards perhaps Phase one B where their additional tariff rollbacks. Perhaps the Chinese made good on their purchases, you know, for agricultural purchases, services a person of other goods and services, which by the way, is going to be very difficult for them to pull off.

Those numbers are pretty high. Um So any type of phase two as we think about it in terms of talking about you know, larger structural issues, I don't first see there being any kind of meaningful progress from that in and I'm wondering, you know, one thing that Paul mentioned was the opening up of the financial sector in China. We saw that rate move overnight where they change the benchmark to a more market based kind of factor rather than a state operated benchmark rate. How much do you

expect that to really take hold next year? Do you expect you know a lot of foreign firms to really make bigger in roads on the rate stuff. There's just the one quick comment I'll make is you know who pays the rate? Right? Who pays these age rates that are set out their state firms have preference of borrowing access, you know, interest rates close to zero sometimes adds zero. So perhaps you have the smaller private firms who end

up being you know, charged. You know, high interest rates in John are ppressive to pay something closer to the benchmark. Um So, so some of those moves, uh, you know, might be more window dressing than anything else. As far as firms moving in, I think the proof proof is in the pudding. It's it's yet to be seen. I think it's way too early to tell. The financial sector is so strategically important for Beijing. Um that the idea there's going to be you know, uh, they're about to

take a major step back. It's it's a little bit difficult to buy. And just real quickly here, I'm wondering what you're seeing in terms of the credit expansion, the idea that you've talked about, how the PBSC has been pumping a lot of liquidity into the market. Has that been effective from the preliminary data that you're looking at in December in re accelerating the economy. I think what is done is staunch the bleeding a little bit for sure. You know, Q three was pretty weak. It was the

weakest data all year long. November was even November data was even worse on what we were observing over the Q three period. Um So, the decen b upturn tells you that has done something or the other to help staunch the bleeding a little bit. It has provided a little bit of relief, um, you know, But but has it Is it going to lead to a sort of necessarily a turnaround the economy? I don't. I don't think

so necessarily. Especially again, as I said, when we're looking at things like weakness and domestic demand, we're looking at corporate health uh, deteriorating pretty significantly. It doesn't make me very confident about a major economic rebound on the horizon. She's that, Kazi, thank you so much for being here, Thanks so much for having me. She's that. Cazi is managing director at China beige Book International in New York,

joining us here in our interactive Broger Studios. China kind of the key question mark when it comes to certainly commodity markets, which we're gonna be talking about coming up, uh, and the optimism in oil as the US and China are poised sign phase one A. I'm going to say of this trade deal because it is the beginning of a rolling series of agreements. I am sure. I'm so excited to talk about this. Paul Satellites, Yes, this is

very cool. It's very cool. Well, I mean this is like what we talk about when the SpaceX Falcon UH launches. This is the purpose, right to get these satellites in and Aridium Communications is a company that has satellites attached to UH, say the recent SpaceX Falcon nine reusable rocket that went up in order to deposit them into space.

And we luckily have the chief executive officer of the company, Matt Dash joining us from Washington, d C. Matt, I just want to start with how much you've seen your business grow as the emphasis on satellite, the emphasis on expanding the network infrastructure has has grown increasingly important. Well, we have a very unique network, and we've been in

operations now for almost twenty years. Now that we have a brand new net work, we've really sort of seen a and even increase in what has been really a very steady and strong growth rate for the last twenty years we've been in operation, especially since we moved from voice communications moving over to data transmission, say, to this thing called the Internet of Things where everything is getting connected,

We've been really growing on the basis of that. Give us a sense of what five G means for your business, if anything, Well, five G IS, you know, is the next iteration of applications that are coming to all of us around the world. And you know, one of the key areas that five G brings is connecting not just people to each other, but you know, every appliance and

car and vehicle and drone. And you know, despite the fact that five G IS is very exciting, it still only operates on about ten percent of the planet surface, maybe a little bit more so the other whether you're in the oceans and the skies, on a mountain, even a lot of places here in the US, you know, it doesn't have connection that they won't have five G connections. So we're the things that make the bridge to bring

those applications to the rest of the planet. I want to talk a little bit about your use of SpaceX rockets to get up to space. How important is the private sector in space exploration in your business? I mean, I just I'm wondering about what you would be using otherwise. Yeah, when we when we selected our launch program ten years ago, we were one of the first. We took a chance on SpaceX before they'd even had a successful launch. It wasn't as hard as you think, because my you know it.

You know, they for eight launches, they wanted to charge for me about a half a billion dollars, which seems like a lot of money. But when the next the next available rockets, save from the Russians or from the French or from someone else, was one point to one point three billion dollars, it was less than half the cost. So it really helped help make our business case clothes.

And I think they've really driven down the cost of launch for um for a lot of US satellite suppliers and have made it more possible for some of these business cases to close. So Matt Bloomberg News is reporting, I guess about ten days ago or something that Apple is said to be exploring satellites to beam data to its devices. What does that mean for your business in

your company, Well, it doesn't mean too much. It's a different sort of service that they want to provide, and many of these new new satellite companies really are supplying very different services than what Oridium provides. But you know, I think we've been a successful company, and I think we've inspired others to believe it's a lot easier to

have your own network in space. Uh, they'll they'll realize that it's very challenging and very expensive and takes a lot of time and effort, as as has many other billionaires and very large companies who are looking to launch their networks, whether the Amazon or SpaceX themselves and others are all looking to launch networks as well. So I wish them all well, it doesn't really mean much to us.

More than anything else, They're probably going to be partners of ours because you know, we can help um sort of bridge service, especially as they're getting their networks up. So a Ridium Communications. You mentioned how it has a twenty year operating history. It was the largest American bankruptcy prior to Enron. How have you recreated the company or how's the company recreated itself over the past decade to be the successful company that it is that provides uh,

you know, crucial satellite services. Yeah, it was. It was a challenging business case back in the nineties to spend six billion dollars in expect you know, to compete with cell phones right off the bat. Unfortunately, they put too much dabt on the company and couldn't service it. But over time we've just been able to generate more and more products more and more partners to take us the market and have steadily grown at ten on our subscribers over the last twenty years. So I often say we're

like a thirty year overnight success story. It takes. It takes some times sometimes in the satellite business because all the capital required to make a success, but we finally got there and really are a sort of an important financial transformation right now. I just hope, I hope all these new networks they're launching can go faster and turn to their own success. I'm just looking real quickly at

your stock chart mid two eighteen. Your stock just started a big ascension after being you know, kind of flatish for the prior several years. What was that big event there that turned investor sentiment around. Well, there were a number of things. One, you know, completing the three billion dollar new network and knowing that we weren't gonna have to spend that kind of money for another ten years. Uh, it meant that we could finally start generating significant cash.

In fact, we're deleveraging now and we'll you know, our investors are starting to see the light that you know, the dividends and and other things are possible. Really with all the cash that we're going to be generating over the next ten years. So I think it was just the patient of that that real financial transformation we've been through. Matt,

thanks so much. We appreciate your thoughts there. Matt Desh, CEO of a Ridium Communications stock symbols I R d M based in Washington, d C. It's had a long, long history, a little bit north of twenty years in the satellite business. Probably uh you know, went through that bankruptcy, as Matt said, uh you know, probably not the right capital structure for a company that needed to undergrow six billion dollars or capex just to get their network in

the sky. But the coming out of the bankruptcy, the company is doing much better again just by judging by the stock price, and the real future of satellite communications going forward in the country certainly seems bright. More competition SpaceX of course from Elon Musk, and again news that maybe Apple thinking about getting into the satellite business. We've

been talking about it all morning. There seems to be an increasing divergence between the bulls and the bears within the fixed income market heading into but some I'm thinking about PREAMSRA in particular, seeing lower yields ahead for the benchmark tenure, meaning lower yields, higher price given the fact that perhaps the consumer will disappoint and others coming out and saying we're gonna get fiscal stimulus that's gonna push

up yields, price down. Tad Ravel joining us now chief investment officer for fixed income at TCW with a hundred and seventy five billion dollars under management, joining from Los Angeles, had I'd love to get your view on this. Where

do you think this sort of balance lies. What's the bigger likelihood yields lower, yields higher in Well, I guess the starting point with that lead in is to confess that we're probably in the in the bear camp as it relates to returns in the bond market, opportunities in the bond market in terms of rates. It's our view that we're in a very late cycle type of environment.

The FEDS doing everything it can through the kitchen sink and five billion dollars behind that in order to stabilize the credit markets in the second half of this year, the repo market being part of that. If if, if, if you put a gun to our heads, we'd tell you that in time, you're probably going to be in a lower yield environment simply because economic growth isn't going to support the higher rate environment, and the FED probably is going to initially try to fight it with every

weapon it knows knows how to. So it's intering. Ted. What is your I guess, your fundamental economic backdrop as it relates kind of supporting your view, Well, there are many I mean, first of all, I think that if if you're looking for signs that you're in a late cycle type of environment, you could begin with manufacturing. That's uh. The data this morning from from Dallas and from Chicago is further confirmation that the manufacturing sector has been weak

for at least the last six to nine months. This is further refer in the data that reveals activity as it relates to movement in and out of ports, air transport type of activity as well. You can look at corporate profit margins that have been declining for several years. You can look at an equity market, which, notwithstanding the fact that it's got complete blinders on in terms of the reality that enterprise profits have actually been fairly flat

for the last couple of years. Nonetheless, stay has stayed very, very buoyant. I don't view that as a as a positive sign. I view that as a late cycle type of sign. You could throw the real estate market into it as well. The residential real estate market certainly there seems to be pushed back from the point of view of affordability. I think that's rather clear in markets as

diverse as Manhattan or some parts of southern California. But luxury markets generally speaking, I think have essentially run into that to the to that wall. You've pushed prices about as far as you're gonna take it. And if you want to put the cherry on top of all of this, you take a look at the credit markets, and you look at the excesses in the leverage loan market as it relates to covenants. This is a widely reported story.

It hardly bears worth going into. At this point. You're either deaf to the warnings that are out there with respect to the week underwriting in the corporate sector, or you just don't think it matters at the end of the day. So if you're deaf to it, that also means you probably did really well this year. Because the the sort of the riskiest assets. Within the credit world, particularly near the end of the year, we're outperforming. I'm thinking of even the triple cs starting to outperform UH

this month. I'm trying to figure out what's going to trigger this you know, potential late cycle mess and create some kind of opportunity at least, you know, repricing that people are dying to see. I mean, honestly, they've they've been talking about this for so long, they've been hating

on this rally. What's going to be the washout? Well, you never know for sure, but I think that if I were to put a couple of possible catalysts, I think one catalyst that could be put forward would be the China economy, which has been slowing for a long period of time, and while the data is always okay, so you can't really bring much in the way of precision or clarity to that type of a of a situation, I think that that's been one of the big drivers

of global growth over the course of this cycle. So any type of a slowdown there is going to ripple through the global economy. UM and China for what it's worth, as UM by g d P component is about of the emerging market, so China and the e M are there's a lot of overlap there. A second place I think that it could come from is the continuation of

loose fiscal policy in the US. I think those that view that as a as a good thing are not paying attention to the realities that you sooner or later run into affordability issues with respect to being able to finance trillion trillion and a half, and with any economic slowdown in the US, you would expect those those deficits

potentially to move past two trillion. You would be in terror incognito with that, and that would create an interesting push pull in the terms of longer term rates would want to rise, the FED would want to fight that

because of its impact on the housing market, etcetera. So uh, the the the um imprudence of fiscal policy, I think is a second and the third one is that it might just happen indogenously with respect to the continuing piling on of of leverage and credit in the corporate sector, with an awareness or at least an ultimate awareness that there isn't the ability to finance it. You alluded to triple CS. I think that was a good place to look.

Is that except for the big catch up, this incredible rally that we've seen in triple seas over the last month. The situation a month ago, if we had this conversation, what I would have said and would have been wrong, obviously, is the equity markets up. Triple sees are up four percent. Tell me what's wrong with this picture? And what's wrong with the picture, of course, is that the market is becoming more intelligent and more discriminating about the kind of

risk that it's sponsoring. So tad given the fact that you very well made be right, but it hasn't happened yet. What do you say to clients who come to you and say, God, come on you like, the triple c is totally killed it. You know, the hile bonds they crushed it. You can talk about liquidity crisis. It hasn't happened. What do you tell them, Well, I think first of all our clients generally speaking, I think understand where we're

coming from. But the basic organizing premise is essentially this is that rather than try to call the next rally or whether or not corporate spreads are going to move tighter over the course of the next six or twelve months, approach it this way is the way we have always approached it, which is that think of the economic cycle as really an asset price credit cycle, because those are essentially the key underpinnings of it. Um don't talk about

it like a conventional business cycle. If you think about it as an asset price credit cycle, then think about your game plan being this. In the first third of the cycle, you have a big bay to trade all risks basically gets lifted with a very low level of risk, and everybody tells you to stay away from risk, so you're supposed to be an enthusiastic risk taker, and let's say the first third of the cycle. In the next third of the cycle, you're not so much in a

beta type trade. You're in a more of an alpha trade that you still want to be risked on, but be more particular in the late stage of the cycle. So if you accepted the thesis that you're in the late stage of the cycle, you're really supposed to essentially preserve the gains that you've made in the early part and not worry about and not worry about the the incremental return because it comes with more than incremental risk. Hey, Tad, thanks so much for joining us. We appreciate your thoughts

on the credit markets. As always, Tad Raveled, chief investment officer for fixed income at TCW dred seventy five billion under management, so they've got a lot of experience in the credit markets fixed to coome. They're based in Los Angeles, and uh, you know, Tad has always been consistently since we've been chatting with them here, consistently cautious as it

relates to some of the fixed income markets here. Given where we are late in the stage right now, we're seeing the Bloomberg's Commodities Index rise to the highest levels since eighteen as people uh survey the land of the trade talks and come back with a positive read. But

has the positivity gotten ahead of itself? Mike mclogan, who covers all things commodities for us for Bloomberg Intelligence Choices here in our Interactive Broker Studios, we were talking earlier about how perhaps some of the optimism has gotten ahead of itself when it comes to certainly the agricultural sector. That's at least according to Karen you be heard, do you think broadly that's the feeling that perhaps people are

a little too sanguine about the risks on the horizon. Yes, I feel it's exact opposite of this time last year. Remember Christmas Eve, you were just supposed to break out the buy tickets and everything and take the risk. This year, I feel it's the opposite. Crude oil is kind of filing along industrial metals, coppers, following along the record breaking stock market, and we have this record trade weighting broad

dollar UM. That's that's the dollars a problem, push, a problem for commandities, but just following the stock market higher and being w t I crudeil near you know, above sixty versus last year this time is near forty is at risk. I'm fearful of memor version for next year. Alright. One of the things I'm just reading here you characterize h for crude oil and natural gas the lost decade trends. Why Why is that? What happened to oil and that gas over the last decade? The number one issue is

US production. Yes, so this is where I like to say, you know, the making America great is really not good for commodity prices because US is a net exporter of crude l beginning this year, first time since the essentially world War two almost and that's a pressure in prices. And the key thing to look forward to the next year and the next decade is is that going to change? And I don't see that happening. Then we see the carbon, and carbon is a shan't happening. So there's less demand.

Supplies quite strong. So that's why I see crude and also natural gas. There's just so much natural gas. I kept thinking demand's going to catch up, but it's not now. Right now, in the short term, natural guests positions are very short, so you might get a pop. But natural gas is trading around two twenty million b t u s and the low has been near two in the highst been near three. I think it's more likely continue

to gravitate towards two and lower. Interesting when you talk about futures positioning, I want to just go back to crude for a second, because futures positioning has gotten increasingly bullish, with the net longs out weighing the net shorts by the most I believe since March or April. I mean, basically, they've they've been climbing, and I'm wondering if you think that they are going to be right that we're going to see at least a near term pop in the

price of crude, even if it fizzles out eventually. I think we've had it. I look at that as a risk. For instance, last year around this time it was way too short and the market is way too bears, which is I look at it's okay by and manage money net positions being too long now at the upper end of the range, and we all know the fundamentals. You have to be betting on a substantial cut from OPEC and sustained cut, which we all know is kind of unlikely in the big pictures, so I don't see it. Also,

crude oils dependent on the stock market. We we're this year, I can do that again. Yeah great, but we know what that means. It typically doesn't continue that way. So I'm really worried about crude. I'm actually more bullish on the eggs at some point when when the dollar peaks, and that's a big if, and Paul and I've discussed that. It's just hard to ask the favorite question, pork bellies hawks. Don't we still have a problem in China? And aren't

they buying a bunch of our hogs? We do but if there's one commodity sector I have never been able to find, not being able to find good high correlations too, it's live stock. I just have not been able to pin down live stock, so I can it helps me determine the prices of corn, soy means, and wheat. There's so many metaphors. It's like I have a hard time, but I have to be kind of back off on live stock. And and it's live cattle. The hawk, I'm

long port bellies. I'm gonna one day bring in just a plateful of bacon freedom munch on for the rest of the rest of the show. I am curious though about the potential boost to the eggs sector from the trade deal. Do you expect China buying to actually give a true boost to some of the farms where we've seen the highest bankruptcy rates in years, particularly not for Midwest. Well, that's the key sign. It's it's about as bad as it can get. And I think eggs are in certainly

grains are in a classic case. And we always say in commodities is the cure for lower prices and low prices, so stocks to use globe we are really peaking heading lower we see that. The key issue. Yes, China starting to get priced back in, which is good. The problem is the dollar so high and so expensive. That's only so long that we can sustain US grain prices in the dollar at so such high levels until the dollar peak.

So we need the dollar to peak or else grains exported from US the world I used soy being South America, Argentina, a corn still will have a bit. We will have a problem in the US boosting these grain prices until the dollar peaks. Trade weighted broad dollar Bitcoin I'm looking at the year to date chart. Started the year about four thousand, peaked at above twelve thousand. Here we are at seventy two hundred. What's just the call for bitcoin

in if there is one higher? Okay, bottom line simply the simplistic weight I like to describe bitcoin is there's only one key thing that matters, and that's basically adoption. So supply demand price there's really supply is going is limited this year of supply increasing around four percent, next year three two percent, and it's going to coninue to go down to zero who knows when. So the supply is done and the adoption is kicking in so the only thing that's gonna Why is it done? Can I

just go to my computer and print more? No, because it's the cost of mining is greater than the cost of each bitcoin. Right, Well, that's part of it. But there's only gonna be twenty one million bitcoins ever produced based on the code now that subject, and there's only seven there's seventeen, almost eighteen, there's eighteen million now, so there's only gonna be any one. Where did that come from?

So Toshia Namo the god, I shouldn't have asked it. Yeah, Well, well that's the difference between bitcoin and the other cryptos. There's unlimited supply of cryptos, but bitcoin is becoming more and more like gold. Yeah. And there is also this mining issue that when it reaches a certain point, it's not profitable, and you've had China cracking down on some of the mining. Uh. Anyway, I'm in with the bitcoin knowledge there like well, and I will say that there's

another issue when you talk about cryptocurrencies. I was reading about how China is planning there they're sort of sovereign cryptocurrency, and how that could up end the entire structure. I'm gonna just stuff right, now because Paul is giving me this look like, oh my god, what do you do in your free time? Mike mclogan, thank you so much for being with us. Mike mclogan covers all things commodities plus bitcoin for us here at Bloomberg Intelligence. Uh and

he's a frequent contributor to Bloomberg Radio. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Abram wohit's I'm on Twitter at Lisa Abram whits one before the podcast, you can always catch us worldwide. I'm Bloomberg Radio.