This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz. Join us each day for insight from the best an economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal and the Bloomberg Business App.
Great guest in the studio with us, Jenning and Manuel I've ever court didn't good to see. Good morning mate, good morning. Let's start here this week and video. Then we've got Chairman Powell throwing China into the mix as well. If you're coming back from the beach based and confused and you had to pick one right now, what should you be focused on?
Sorry, there is no pick one here. All of them matter, and to us, that is a large part of why we've seen the market drift gently lower, people taking risk off. This is not an end of bull market run. This is just a correction, normal seasonal. Again, I would say what's really important is less what we're gonna hear from Nvidia, less what we're gonna hear from chair Powell less what
we hear overnight. We obviously had some moves from China and more the price action in response to all of these things, and frankly, it's an open question as to what we're going to see in terms of the price of What everybody.
Wants to know is a dovetail Julian Emmanuel's equity work in with Ed Hyman's economics. Ed has been out front believing in the disinflationary trend. Is he still have that in place? And how do you dovetail that into an equity call?
Absolutely? Absolutely. Ed continues to think that inflation is going to come down much more rapidly than people believe, and of course part of that is we're likely to have a very mild downturn early next year. But when you pull back and you think about the implications for investing, there are actually three lessons from the nineties that we need to learn here. Number One, we understand the run up into technology with AI et cetera, et cetera. We
think that's real. But the other thing there is that there is a time such as we saw in the nineties, where markets do pull back. But the more important thing is we've been talking about yields already this morning. Is that you were able to make money in stocks in the nineties when yields we're five and six percent, and this same thing is going to happen in the next twenty four months.
Yeah, That's what we were talking about with Ediar Denny last week, which is we've seen this movie before and it's fine. We talk about China. Is there any silver lining in the disinflation that we see over there kind of creating more disinflation in the US in Europe? Or do not buy that with some people are putting out there.
Well, Chair Powell would love to be a to think that. I don't think he's going to discuss that on Friday. It's very marginal. If you look back at the episodes where China weakened incrementally, they had a volatility inducing effect in the US, very temporary. As we know, the US is very much its own engine.
We've seen some divergence. Do you sense that divergence can continue between what's developing here in the United States and what's developing in China.
So that there is a point to which it cannot, Okay, which is why again, what's so important is exactly are we going to have a whatever it takes moment in China. Or conversely, if we have what the market perceives to be a whatever it takes moment, is it going to be that famed Greenspan phrase pushing on a string. It's an open question.
I look at the equity market. I want to go back to what your Denny Lisa brought up the brilliant interview they did with your Danny last week, and what ed feels and what we all lived in ninety four ninety four had almost a Malays and then boom, ninety five moonshot. Can you call here a second leg of a bull market at some point out there? Given the emotion the Malays we're in right now, we.
Think it lies ahead, We think you have to go through. And again this is another lesson of the nineties, right, is that the technological revolution that we think we're undergoing right now with generative AI, it didn't negate the idea of a recession. It postponed it. And I think that's part of the narrative. We are going to have a recession at some point. Business cycles are not canceled from things like this.
So where are you looking to really see the ramifications of a new higher rate world. You were talking about how we've seen five percent yields before in stocks keep rallying, but some areas fell out of bed. Are you looking for there to be similar carnage and small pockets that cannot survive at rates that are as high as they are after growing up during an era of zero rates.
Well profitless tech that's going to have to refinance over the next several years will certainly be under stress. But think about it in an environment where rates are high, inflation is still high, and economic growth I mean GDP now is pushing six percent this quarter. That's an unfathomable number. That's where value largely forgotten energy and healthcare looks interesting
to us. And if you're a hedger, the fact that interest rates are over five percent is very very good math for optional strategy.
And Hymen has no clients who are under seventy years old. We all know that. But for the ute of evercore ISI like yourself, how do you and Hymen and arrest, how do you explain to people who have never enjoyed high interest rates a legitimate, a real yield, a legitimate risk free rate. How do you explain to them that we didn't all die and roll over in the nineties.
So what's fascinating about it is if you remember, for much of the post financial crisis world, there was an angst every time the market started rallying and there was a feeling like it was going to run away. Why because you couldn't make anything on your cash. Okay, this time people are like, okay, I'm good, I'm still getting five percent on my cash, which, actually, if you think about it, is the thing that feeds the longevity, multi year longevity of a bull market.
The demo goes beyond the seventy plus demo, doesn't it. For research over evicre, what's he talking about? What's he talking about?
I'll tell you what. Given the work that we've done on Generative AI to have the twenties and the thirties people and interact, we've got it. We've got it all covered.
EA ten of Jon.
Always watching as Amanda Lina, who was brilliant the last time she was on. She's had a macro credit research. This is withour Q question in our fixed Income Interview of the day. Amanda, thank you so much. I want
to go to the Nittegrita of what you do. You have depth that is fixed fixed coupon dynamics floating like John's really familiar with in Europe and England, which is where the yield floats around given the movement, and then you've got CIRI commercial real estate and all the tobacco there. How unstable or potentially unstable. Is a fixed income world right now?
Good morning, Thank you all for having me. I think they're all impacted by this higher cost of capital environment that we're expecting, and Lisa, you alluded at the start of the program, is this the new normal? And I think the key difference between what you highlighted, Tom is that for the fixed income fixed rate part of the market, they're getting impacted on a different timeline than the floating
rate part of the market. And in that floating rate part of the market, specifically the broadly syndicated leverage loan market, you are seeing an uptick in defaults and this is something that's been happening for the past few months, but the magnitude of the pace of leverage loan defaults outpacing the fixed rate hiled bond space has been notable. It's the widest margin since the Moodies data began in nineteen
ninety six. We see scope for that to continue even though it is unusual, and that's because we are expecting this higher for longer cost of capital environment. The other two things I would point to is that the fixed rate investment grade universe is much better positioned to manage through that higher cost of capital environment because they just
have more optionality in terms of refinancing. So we don't always rely on ratings as a barometer for performance, but I think in this instance, being investment grade, having the ability to replace maturities at a later date instead of
refinance them is going to be helpful. And then on the point on cire Tom, I think really nothing in the news flow over the past few weeks has changed our view that were in the early stages of the distress cycle in CRE, and I think, in fact the newsflow recently has reinforced that view, and it's it's a combination of refinancings.
Save us John Hiyold spread is still super tight and for the year, and this is happening even with a high for longer conversation around the Federal Reserve. You know where that maturity wall is, so walk us through it. Why I spreads, this tie when we face the risk of that maturity will kicking in lights next year.
Right.
So two things. One, as it relates to the timing of the refinancing, the maturity, while we know begins in twenty twenty five, high old corporates will want to address that twelve months or more beforehand so that the debt doesn't become current. That has implications for the audit. So
we still have some time. And as we've noted, high old corporates in particular have the luxury of being patient because they've been so proactive about liquidity raising in twenty twenty and twenty twenty one, and it was not unusual during that kind of period right after COVID the onset of it, where corporates were pre funding three four years
in advance. So we've got some time. The second point that I would note on the spreads, and this is a conversation we've been having or with clients, there's this relative value tug of war happening in the credit market where spreads in isolation are quite tight, but for yield based buyers, the elevated risk free rate, which has intensified most recently as you've all been discussing is giving them some cushion to deploy capital at still relatively attractive all
in yields from a historical perspective, and so ironically even those spreads are quite snug. The overall value that's provided by corporate credit, because it's boosted by the risk free rate, has insulated that to some degree.
How transformed is high yield as an asset class, because in some ways it's the new investment grade and private credit is the new high yield. We're looking at an entire spectrum of lending below the covers that's taking over and buffering some of the financial pain that would otherwise might be seeing in some of the high yield names.
That's right, So the high yield universe in particular has had much more overlap in recent years with the investment grade landscape because there's been this fallen angel rising star dynamic that has really intensified. So you've seen names move I think a little more seamlessly than we would have guessed in twenty eighteen and twenty nineteen between the two markets, and the highield market has shown its ability to absorb
those capital structures. There have also been some really meaningful shifts in sector composition, the high old market serving a larger and larger borrower, you know, changes in maturity and duration and sector skews. Energy is not as problematic in this cycle as it has been in the past. Those are all those are all probably contributing to this tight
spread environment and high yield in private credit. We have a very favorable view of it as an asset class, specifically in an environment like this where you can introduce
some granularity and some selectivity to deploying. But to your point, the one and a half trillion dollar asset class is a relatively post financial crisis phenomenon, and so it makes things like we've looked data and prior cycles like the Senior Loan Officer Survey perhaps less directionally correlated into the broader state of the market, because you now have this asset class that's allowing corporates to diversify their funding away from the banking channel that wasn't in place to as
much of a degree pre financial crisis. And so when you think about bank lending contraction and that automatically leading to a recession, that may not be the case as much directly this time around, because you've got this other source of funding. But as it relates to private credit, I think if you're in an environment where you really need to be granular about company's ability to absorb higher costs manage through a higher cost of capital environment, you
want to be more selective and granular. And I think parts of private credit, specifically senior direct lending, allow you to do that in a higher cost of capital environment.
The Clinic has always Amanda just wonderfully.
Joining us right now on China the definitive conversation of the day. William Lee joins us with all of his work at the International Monetary Fund, chief economist at Milkin Institute. Anybody that watches surveillance knows he is beyond pression. I want you to peel back the curtain, doctor Lee, right now, particularly on the three cities. What's the level of sweat, what's the level of panic in Beijing?
It is huge, John and Tom. When you were asking who's the policy maker in China when you talk about state capitalism, there's only one policy maker. That's Shijinping. And when you have once policymaker who is interested in not only preserving the economy, but also preserving his own position
and consolidating power. There's only one set of solutions, which is you gotta get the private sector under control, and that, unfortunately is their achilles heel because right now, to restore Chinese economy, to get youth unemployment down, to get growth going again, you need the private sector. But who in the private sector is going to trust the policies of the CCP.
What is the importance of the dry up of investment from America, investment from the Western world. Within all the great work I've seen, doctor Lee, the number one thing I'm focused on is we've lost our trust with investment in China. How important is that? Oh?
That that is absolutely critical. The discussion at most of the meetings here at Milkin among our sponsors, who are some of the biggest investors in the world, they all asking how do we do due diligence in China when the information is controlled by the policy maker? The policy maker Chijinping private sources of information that they normally relied on to do due diligence, even on the company level,
are now restricted. So when you restrict information flow and when we direct common prosperity themes that essentially say to people you can be successful, but not too successful, it's certainly not too powerful. Those are the kind of vulnerabilities and risks that Western investors are now facing, and they're asking the question, do we really need to go to China? Are there other places that you go?
Which raised us a question. Is Jijiping and his party not stimulating the economy as much as people expected because they don't want to or because they can't well.
Lisa, as you know, I've come on so many times talking about the fiscal policy tools they have, the fiscal space, they have, The degree to which they can increase fiscal spending depends on a lot of the health of the local governments, and local governments are now so indebted they can't sell more land to finance more infrastructure spending, which has been their main fiscal tool, and so right now
I think they're pretty constrained. And when the rem and bee is dropping like a rock, it's very hard for the central bank to be dropping interest rates. And so we have these five to ten basis point moves that I mean, this is truly a situation where mantre policy is pushing on the stream. When everyone who has lost confidence the private sector can be survivable. We are asking them to go borrow money at even five or ten basis points, that's not going to make any difference at all.
When I talk with different investors, some of them say, maybe this is actually a positive fit thing for the rest of the economy globally because this will import disinflation.
To the rest of the world.
Do you buy this argument.
I think it's positive for the rest of the economy because Xi Jinping's plan is to make China into a domestic economy and high value out of production. That means low value out of production is moving out to the rest of Asia and other locations. And that's where I think the capital flows are helping the rest of the world.
But in terms of the Chinese economy, it's going to be a real hat trick to be able to revive the private sector, redirect an innovation in the direction of these high tech and high value added industries, and to pull it off successfully right now with such low credibility.
So what is the to do list for Beijing? Do they use the formulas that have been proven beyond MAO. Do they as the consensuses, stay with MAO formulas it didn't work. What's their almost their here on on a day to day basis, what do you expect to see, doctor Lee?
They didn't. They need to make structural policy into countercyclical policy. For example, if they put in a social safety net, that would immediately cut out the need for privacy built.
So I'm going to interrupt you there. We've looked for a social safety net since you and I were in our youth. You were back at the IMF running into me in a hallway. There's no social safety net, there's no dominant consumer. It's the same old, same old for Beijing. Do they stay with that script or can they actually do something.
If they don't change the script, then you're going to have these rising inequalities generate social unrest, and that's the last thing they are able to tolerate. So, yes, you and I have talked about social When I was mission chief at Singapore, I suggested social safety net for Singapore and then two years later they actually put one in.
So maybe if we talked about it long enough and they'll realize that it's either social safety net and allow people to feel safe and they don't need to save as much for themselves, which means they consume more, or you get social unrests and if those are the trade offs I think will go towards safety nets, and this.
Is one that youth unemployment number is just so important at the moment. Bill, Thank you, sir, Bill. Leader of the Milk and Institute, Wendy sh of Brown University joined us right now. Wendy, wonderful to start a political converage this week with you going get into that debate on Wednesday. What is the argument for the former president showing up with posts like this one?
Well, I mean, you know, it's a rose garden strategy as an incumbent quote unquote in the Republican Party, so it's hard to argue he should show up with such a big lead. But you don't want to, you know, not be there to volley off your criticisms and presuming Chris Christy is going to show up ready to fight and sort of make the argument that Trump is not the guy, then you know, that's just criticisms that can stick. The other question is, well, any of the other candidates
actually criticized Donald Trump on that stage. It's like criticizing a ghost. Remember, you know Eastwood sort of stunt in twenty twelve for the Republicans at the convention with an empty chair that didn't work very well. So I think Trump knows that he knows television, he knows how things resonate, and he figures much harder to attack him if he's not physically there.
Wendy a pregnant question if I may ender this debate in the start of the political season, William Jennings Bryan. There's a lot of parallels here, and it was Gold and Silver eighteen ninety six and all that. But the answer is, after William Jennings Brian, the Republican Party retook the high ground the East Coast business oriented agricultural Party, if you will, what happens after Trump? I mean, with this dominance that he has, what's the next.
Well, I mean I think that there are people waiting in the wings. I think Tim Scott, for example, from South Carolina, is trying to correct a message that builds on this evangelical base, that builds on the sort of conservative voters, particularly in the South, that seem to really love Donald Trump. So I think there are people who can then take the mantle of all So got Chris Nunu of New Hampshire. We've got Brian Camp of Georgia that I'm keeping an eye on for twenty twenty eight.
If Trump doesn't, you know, we can't run again, presumably if the constitution holds so if he wins. But twenty twenty eight, You've got some Republicans now that are in line, that are lining up, and they seem frankly more compelling in a lot of ways than the current lineup of challenges Donald.
Trump, which raises a question of who really is the number two? If Ron DeSantis is increasingly getting pushed out over the weekend, he made this oblique reference to Trump followers as listless vessels, and it's sort of getting compared to the whole concept of deplorables. Is it looking more and more likely that he is not really the number two? He is not one of the main contenders when we actually had to get closer to the actual presidential election.
I think Ron Desantas has the most to gain and the most to lose from Wednesday's debate. You know, Kenny, get out there and you know, project a coherent message for the Republican Party saying I'm the future. You know, Trump's the past on the future. I can win. I know what I'm doing. I'm quite popular in Florida. Can he actually make that argument. If he does it well, then I think he you know, keeps his post as
the second in line. But if he doesn't, and someone like Tim Scott emerges an attractive candidate, you might even see Donald Trump offer Tim Scott the vice presidency in the month. I mean, you know, Donald Trump doesn't play by the traditional nominated rules, right So, and that's a tough ticket.
That is a very tough ticket, Wendy, this field is already deep, and yet already we're asking who's next, who's going to join him. There was a report over the weekend that maybe mister Murdock had a conversation with a certain Glenn young Kid when he was the prospect of that governor again into this race.
I just, you know, Glenn Youngkin is a perfectly reasonable politician who won against you know, a person who had been governor already, who wasn't super popular in Virginia. Kind of a little bit of a fluke. And he's also made parental rights one of his big messaging. And you can see it's starting to back by a little bit on DeSantis because people are focused on the economy. So
what is Youngkin done to the economy in Virginia. I just don't see on a charismal level that he can go anywhere close Toto Trump well.
To the other side. What should be the to do list for the president and the people surrounding the president. Basically what I see is silence. What should they be doing?
I do think that president byen emphasizing the economy and understanding that the election is what fourteen months away, that's a long time. We can all go back to George Herbert Walker. Bush was pretty popular in nineteen ninety one and lost in ninety two for all sorts of reasons. So I think that's one thing the long view, But the second he's got to engage. He's got to engage Trump. He's got to remind people what life is like under
Trump and the chaos that ensued. And he's got to appeal to independent voters today now going forward, not just the party base, but independent voters as well, and just hammer home and engage and not ignore. I don't think you win when somebody's out there getting a lot of press, very well known person who has a loyal base, You've got to go after him, just like the people in the Republican Party have to go after him.
Do you think that Kamala Harris has solidified herself enough it's to really gain the traction, perhaps a younger way that many people said was necessary to give Biden's campaign a little bit more attraction.
It's a very complicated situation with Kalmala Harris. African American voters are loyal and a huge supermajority of African American voters vote for the Democrat Party. They also are key in places like Georgia and Wisconsin and Pennsylvania and Michigan to winning the presidency of the Democrat Party. So I can't see by making a change per se, unless it was to another African American politician, like let's say Rafael Warnock.
You know, do you trade the Senate for perhaps you know, a guaranteed victory in Georgia and then find something else for Kamala Harris to do. That's a tough proposition. And remember the House has to approve another vice president. You know, she can't step down because Kevin McCarthy won't approve another vice president. He's third in line to the presidency. So it gets very complicated in an age where the typical norms, you know.
Doula bla by Wendy. Thank you, good stance at the week our political conference. Continuing going get into that first debate on Wednesday, Wendy Shila there unsty.
Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg dot Com, the iHeartRadio app tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keen, and this is Bloomberg