Bloomberg Surveillance: Global Debt with Malpass

start here with just the real yield turning positive. Briefly, how much of the game change to risk that when it comes to big investments in say big tech. Uh? Well, I think one thing is shows you is maybe the FED maybe nearing a pause as far as the aggressive rate increases people were looking for. And I think that's why the market rallied yesterday saying well the economy looks

pretty good. But on the other hand, maybe the Fed isn't going to be as aggressive because the market, having moved up, has done a law of their work for them. I look, Margaine, where we are now, and we all have to readjust can you buy bills, notes and bonds now? As Bank of America suggests this morning, can you actually go in with confidence and acquire fixed income? Uh? Well, I think treasuries is more of a trading opportunity. But when you look at high yield, I think that actually

looks pretty attractive for the income only oriented investor. The average yields are between five and a half and seven percent, and prices are now at a discount about on the dollar, so you have room for capital appreciation if yield spread as a narrowed And also, most importantly, defaults are only going to be under one percent this year and next year according to the rating agencies, so that means you'll get to keep all that extra yield. So that looks

like a good risk reward bargain to me. Monkey, Based on what we've priced at the front end, do you sense things are fully priced? I think the longer part of the curve looks pretty appropriate. I think we can expect the FED to try to move up the short end. Again. I think they're going to be talking more aggressively than what they actually do. But I think the FED it isn't like the FED as a precision machine, and they know what's going to happen with each change of the dial.

And change in rate. So I think they'll be cautious and we'll see a small increase and it won't have a much of a negative effect on the markets. Okay, thank you, that's always market there of old sprint Global Investments. Jump to Steven Roach with us now of Yale University and the Jackson Institute of Global Affairs, and of course Accidental Conflict is a new effort out by Dr Roach.

Steve Roach, I want to celebrate right now. How you, more than anyone I know, was out front on a FED that looks at interest rates, a FED that looks at employment, and you said, this is a FED that has to look at the asset build up within the American economic experiment. I believe we're now where we're trying to shrink the asset build up. Do we have any history, model or theory that explains to us what quantitative tightening

in whatever formula is, will be. Well, Tom, you know, the FED is clearly in uncharted territory both in terms of providing stimulus at the zero bound for an interminably long period of time, and it's you know, promised to get us away from that. But so far we've seen basis points of that promise. UH, and the tapering you allude to is coming off again UH an extraordinarily high level.

And UH. You know, every time they've tried to do that in the past, the markets have had a tantrum or some other adverse reaction, and it sets the FED up for having a very difficult time UH in ween the U S economy and the financial off of frothy asset markets that they have created. And that's that's a

big challenge. You're right. The world economic all lookout yesterday really points out the history here of taper tantrum and the testing of yield dynamics, and that I want to go Steve to what you weaned at Morgan Stanley, which is, let's not forget the back end of the GDP equation, which is trade growth. I m F says trade growth is slowing for any number of reasons, including tourism, but twenty one three it is diminishing. Are we anywhere near

global recession? No, we're not there now. But you know the dynamic of a of a recession in the face of UH central bank normalization. UM, this inflation shock that everybody is convinced, I mean, Jonathan just uh decided some bank report that is absolutely convinced that inflation is and vanished into thin air. By the end of the year. Maybe it will, but the odds are probably won't. And then you add to that, you know the geo strategic shocks that are playing out on our screens real time.

You know, the world economy is facing some real serious challenges, and you know it comes in with a strong post COVID rebound cushion. But you know, as we're seeing in China, that cushion can disappear very quickly. Stephen, have you've been surprised by this dollar strength? Yeah, putting it mildly. I mean, you know, this is one of those great great lessons. I should have gathered this when I first ventured the idea that the dollar would fall, that you should never

make a currency forecast. Alan Greenspan advised me of that decades ago, and he was entirely right. So I'm prepared to as much crow as you guys want to feed me. Stephen. It wasn't the intent of the question. Really. The question that I'm having is how do you can come up

with a forecast? How does the FED even operate in an environment set by not only really unique circumstances on the fiscal side, but also these conflicts that you're writing about with this book that's coming up, this idea of how does a FED sort of arrange itself and its forecasts around conflicts that have unexpected impacts on inflation? Well, which it's a it's a classic risk management exercise for forecasters, you know, way the balance or risks UH, and UH,

assign some probabilities to it and then try to be objective. UH. And we reading through that, and remember what your mandate is. Your mandate is UH, you know, price stability and full employment. The FED does not have to worry about the labor market at this point in May at some point in the future. But it's behind the curve on inflation in

a way that it's never been before. And I've looked at the you know, the real Federal funds rate, which are just the benchmark policy rate for inflation or deeper in negative territory right now by conventional measures than ever at any point in history, including the early seventies, UH and the the early eighties, which of course bookend the Great Inflation. So you know, the FED has miles to go on. UH. Normalization let alone putting some restraint into its policy if it needs to do that to to

cool off inflation even more. Well, but seven, a lot of people are saying Bank of America included that if the FED is aggressive and they're getting more aggressive, that will end up in the same scenario before we started the pandemic. That basically the dynamic of the demographic getting older and not necessarily as much productivity will lead inflation to go back to where it was. Why do you push back on that and how high do you think

that rates really are going to go? If you do disagree with this call of Bank of Americas, it's Bank of America one of my favorite banks. UM. Look, I am. I think that the inflation dynamic right now is one that has far surpassed UH FED expectations, most market expectations UH and UH and and certainly mine, even though I was very negative on inflation a couple of years ago.

But the idea that UH, the forward looking FED can count on a return two pre COVID UH sub two percent inflation and the face of supply chain disruptions geostrategic uncertainty dynamic that has now afflicted UH wage and labor cause pressure. It's possible, but do you want to count on that is your best case? Steve, you invented fractious economics.

You literally invented it out of thin air. You're the first guy I know that ever used a PDF file to do economic So you and Dick Burner set up at the wonderful Galbraith and All and Morgan Stanley set up this raging debate. And there's no one you're raged more with than Stephen Yen in the dollar call. You have been calling for a week dollar. It hasn't happened. When does it happen? Well, it may never happen. Yeah, I mean, you know, Stephen jen my old currency strategist colleague,

had this great image of the dollar smile. And you know, I'm sure he's smiling at me right now and trying to weasel my way out of here. Steven, I don't mean to interrupt. This is really really important. We've had a resilient dollar. Most of the street has gotten this wrong. At some point the dollar breaks. What will be the events that we need to watch for where we will see dollar break? I personally tell him I think the dynamic is still there in terms of the current account

the domestic savings rate. They're all pointing the dollar weakness. They haven't played out in a period of geo strategic uncertainty. And my guess is, if we ever get through this war, uh, you know, once we're on the other side of geo strategic uncertainty, the dollars fundamentals will reassert themselves. It won't be the end of the world, not the demise of the dollars status of the reserve currency. But you know, the dollars had three major corrections since the early nineteen seventies,

and these are big ones. They average close to on a trade weighted basis, and each time they've been triggered by uh, you know, either inflation, geostrategic uncertainty, or the you know, some other type of financial event that uh afflicts the world. But the US a little bit worse than the rest of the world, and you know, there is that possibility, and I wouldn't rule it out. We're setting ourselves up for dollar weakness. They're that's set up.

Actually gets triggered remains to be seen. Stephen Grants to catch up to head from you as a white Stephen Rush University. For someone that writes a wonderful research. No, James Bianco joins us out. Jim Bianco, president of founder of Bianco Research. Jim, I love, love, love, love love your chart where you say, would everybody stand up, wake up and understand that weak Japanese yen matters to American investors. Why the Japanese are the largest owner of treasury, largest

country owner of treasury securities. They own more than China does right now one point three trillion dollars. As they try to hold the Japanese government bond yield at twenty five basis points when every other yield in the world is going up, they're increasing their spread to the rest of the world that they're making their currency unattractive. If they keep doing it and yen is twelve percent in a month, it's going to have big implications for their

financial markets and economy. And they're a major country and we're gonna gonna feel it. Jim, what's so important here? And this begins our coverage. I'm gonna say, ninety days ago, if David focus Landau at Deutsche Bank making real clear his number one concern is devaluation of currencies against an ever stronger resilient dollar. At what point does yen tip into some form of devaluation panic where Japan has to act.

They're very close to it right now. I mean, as I said, they've moved up twelve or lost twelve percent of their value in the last month. They approached one thirty on the yen overnight, and I guess the b f J has got a difficult question they got to answer. They can continue to hold their yield curve control PEG at twenty five basis points in the tenure yield or and let the currency go. Or they can let the PEG go and defend the currency. But they can't do

both at the same time. And I think we're getting close to the point where they're going to have to start thinking more about their currency than they are about their yield curve PEG. Jim, do you think that people ought to be paying more attention to the consequence of Japanese policy monetary policy on the US treasury market, considering the fact that the Japanese investor owns more treasuries and

even China more than any other external investor. Yeah, they should, because as their currency goes and as their interest rates go, that's gonna maintain its relative attractiveness of the U S treasury market. Should they let the PEG go and interest rates rise a lot in Japan? And we saw that last fall when Australia abandoned yield curve control and it

rose a lot. A lot of those investors that are buying treasury securities again one point three trillion might find detractive yields in Japan for the first time in a generation, and that will lessen the demand for treasuries at a time that the Fed is leading the market and other people that are saying that the treasury market or interest rates of the bond market are uninvestable because of the higher rates, you're gonna lose another major player and you're

just gonna compound the problems in the bond market. What does that translate into in terms of how much higher yields can go? You know, when you see yields do what they've done so far this year and on a total return basis, when you caf actor in the yield and the price, this has been the worst year in the history of statistics. The Bloomberg Global Aggregate Index goes back in mid seventies. It's down ten percent for the year. That is an extraordinarily large move for the bond market.

And it's only the middle of April. As we continue to see this happen, you have to start to worry. And I am that there's going to be knock on effects, are unintended consequences. The bond market, the banking system, the financial system is not really designed to have the entire bond market lose ten percent of its value in four months. Every other time we've seen this, it's always run We've always run into problems now that same we have problems

now and it might be a while off. And we've also seen when you see extraordinary moves like this, I hate to say it, but they continue to go until something breaks. That's what happened in That's what happened in That's what happened in eighty seven when you had huge rises in yield. They kept going and going, and everybody kept saying it's over, it's over, and it wasn't over until something broke. And that's what I'm afraid of now because this move is getting into that kind of territory. Him.

Conversations with you were always foundab always got about sixty seconds left when you say something might break. What have you got in mind? At the moment you all either that the stock market wakes up to higher interest rates

all eighty seven. I'm not talking about crash. I'm talking about that they just recognize that higher rates are bad, or that higher rates that translating the mortgages and borrowing costs really shut the economy down fast, or some kind of a plumbing problem like we saw in September of two thousand nineteen with the repall market. This stuff is very complicated, and when you see extraordinary moves like this, you never know what kind of impact they're gonna have

on it. Jim super smell as always that kind shops soon. Jim Bianco, that of Bianco Research. Brian Weezer is legendary for his courage on Facebook when it was launched years ago at Pivotal at the time. He's now a group president for Business Intelligence Group m where away from by Hold Cell. He really really thinks about the trends in the industry. A definitive and constructive note on Netflix this morning, Brian, thank you for joining. I'm gonna cut to the chase.

Can read Hastings do a Brian Roberts, can read Hastings move to a cash flow driven company? Ola what Comcast did years ago. I think it is already. I mean, if you look at the most mature market, the company is already very probable. This is one of the things I think many people, certainly in the industry ignored think about the company produces. A lot of guys were already well. The point here is the industry zeitgeist is he is no Brian Roberts, And you're saying, wait a minute, lose

the caution. Can you only shares here given the collapse and your enthusiasm over their development of free cash flow? Well, I would pretty this way. I think that the expectations for the company were way out of whack, way out of whack. I think that the company that the investors were trying to make up business mall they misled is too important, Brian stopped. Were they misled by Netflix? I think investors found a way to jumpify the stock price.

That's not uncommon, right, both momenting driving stocks. Do you see that with any stock will call over value? So that happens, So, Brian, how do you assess what the actual value is at a time? But we don't even know what the real problem was. I mean, you actually throw some cold water on this theory that consumers were cutting Netflix subscriptions because of the rising commodity costs and

the rising costs. More broadly, Yeah, exactly. I know that there's a narrative out there, a RAND in place of being issued, but you wouldn't CEP and G a ten percent organic growth or loreal with double digit organic growth that treats are spending with the problem here? Um, I think the issues. Think about it this way. Spending on streaming services in the United States and about thirty billion dollars last year. There's about a hundred billion dollars of

spending on traditional pay TV services, traditional cable. There is an awful lot of room to go in to echo Tim Nolan's points earlier, just bang on when he talked about competitive issue. That's the issue. There's just more streaming out there. So, Brian, who's going to be the winner? A lot of people thought that Netflix would be the clear winner. Can you come out now and say it's a lot less clear the Netflix will be one of

the winners of the streaming wars. I think there's a very direct relationship between share spend on content and share viewing. If you spend twenty billion dollars in the global industry with three billion dollars, let's say, of spending on content, you'll get about six percent share of total viewing. It's actually pretty simple. The algorithm isn't that complicated. If you spend thirty billion dollars in the three billion dollar industry,

you'll get more of doing. It's as simple as that. Brian, I got to talk about the new mating that we have of Warner Discovery, Hulu, Animal Planet, and forty seven other things including CNN. They have fifteen billion large of debt. I believe it's fifty of their balance sheet as well. Can Zev left pull this off? Can he actually do the entertainment and news artistry of it and the financial is well and bring synergies to that new shop. I

think it's absolutely possible, of course. I mean I think we're sometimes looking at this acquisition come back in the long way. This is really a Warner Brothers takeover of Discovery,

but inserting Discovery management on top of Warner. At least that's what it looks like based on the ecouagement started to announce so far to the extent that the company was really well position by Jason Kyler for a long future ahead to They said that David Gussa keeps focused on that and doesn't focus on a short term built think very well for themselves. I think the risk is that they start to focus more on short term metrics,

but they try to focus on making the quarter work. Um, I'll cultivate a shareholder base and they won't want that will lead to less optimoil comes. I think the course and he didn't work for Netflix, that's for sure. From ways to recruit fam thank you, sir, fantastic to catch up one. David Malpass joins as the President of the World Bank, truly in time of crisis. David, I want to cut to one of the quiet stories here, and it does have to do with Russia selling an awful

lot a fertilizer to the United States of America. Your shop has led on building the supply a fertilizer critical to this humanitarian crisis. How are you doing. I'm happy, happy to see more fertilizer is critical in this planting season. Countries are really at the moment where they need to get the cross in the ground and they need fertilizers. So that's good that Russia is doing that. I saw yesterday,

India was selling some wheat to Egypt. My view is that there really is a lot of supply in the world, if it can be guided or if it can be allowed to find the best use. What can your institution do to get us away from five six seven standard deviation jumps in agricultural products. We can help with data,

We can help with the supply change themselves. We can provide trade finance, which is important in moving goods around UH, and we can also encourage countries to find new sources to to realize that that they need to move quickly in order to increase supply. And importantly, tom we can encourage the advanced economies to do all they can to lease access stocks UH and to make more more products.

They have huge production capacity and I think if they communicate that that will help with the world pricing levels. David time has become incredibly important when we're talking about issues of hunger, especially for places where the averages half of the income of every household goes to spending for food. Sri Lanka stopped paying debt payments as a result of

their need to buy food and fuel. How much do you see this as becoming a routine issue with debt, with debt defaults at a time when Sri Lanka says the I m F eight is going to take six months, which is going to be tough for them, High Lisa. Different countries are in different positions. Sri Lanka had waited in order to begin to tackle its debt problem, and there they continued making payments on heavy debt burns, including

those to China, and so that drains resources. Other countries are have faced different bums, each one of a unique I was in Romania and Poland last week. They're facing the changes in the energy supplies within Europe. I'm sorry I miss Tom when he was in Washington, d C. Last week. But the point is that the world needs to have a resolution process for debt that's more robust than than we have right now and starts earlier. At a meeting this morning, there was a call for China

to convene a creditors committee for Zambia. I think that would be a very helpful step because Zambia, like Zambia, stopped paying its creditors more than a year ago and still doesn't have a pathway to a debt resolution. I think the world needs to work hard to provide that path, and that would be a good step forward. David, as we try to understand what the obligations are of some of the developing world, do we have a sense of how much is owed to China in terms of loans

and other types of debt. There's substantial data. It's not all transparent as far as what the amounts are, so we the World Bank puts out numbers on that. You know, there's different ways to cut it, and so you have to be careful. The official debt China is now some of the of the total creditor the amount owed to creditors of the official credits that means government to government UH credits. So that's a that's a type of data.

Another type is that the poorest countries are expected to pay out thirty five billion dollars of debt service this year alone, which is bigger than the than the foreign aid that comes in. And so there really needs to be a change. That was discussed heavily already this morning

at the at I MFC meetings. David, here's a distrust and by no means am I casting an aspersion to you or your great institution or Christopher Ansy and his team are really looking at the basic flows of a The World Bank is always first to write the check their acclaim for that. Are you writing a check to a given beleaguered nation and they're turning around and taking part or all of that check and rolling it right over FedExing it out to Beijing. We hope not, and

we're working to avoid that. But the system has been one where that you know, that has allowed transparency to to go down and down and so in in uh in many cases there are non disclosure clauses in the debt contracts that leave leave it unclear where, where, who, why, why the payments are being made to the creditor, oftentimes to China. I think there can be big improvements, and

it's also in China's interest to do that. And so because China is a big part of the world economy and can benefit from healthy countries and healthy development in the developing world. That's what I hope. Okay, you hope for the hope. So when we're gonna get us so far, Mr mel Pass, is there any indication China wants greater transparency? So the check you're writing is not going to Beijing? I mean, do they want transparency. Yes, they're fully participating.

The then the devil is in the details thom As you know, and they've they've been complained that they're willing to be more active in these debt resolutions if they can actually play a formal role the the and you know, people are discussing this concretely that the world was set up under the old debt composition in which China wasn't a big player, so that China is not a member of the Paris Club. It's been the central institution to restructure debts um there. The G twenty is trying to

broaden that, and I think they're making some programs. David mel Fest, thank you so much. The spring meetings of the World Bank and the International Monetary Funding as President of the World Bank. This is the Bloomberg Surveillance Podcast. Thanks for listening. George us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from

the best in economics, finance, investment, and international relations. And subscribe to the Surveillance Podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the Terminal. I'm Tom Keane, and this is Bloomberg