Surveillance: Recession Likelihood with Bandholz & Kiesel

nothing until the uncertainty clears. It's been a major topic in this market over the last week or so. Mark Keisel dropping by our studio here in New York, Pimco c IO of Credit Good monitor. Mark, Good morning, So let's talk about your big theme for the year ahead, the global economy sinking lower. Let's stop by having a discussion about how policy MICA is world wanted and to respond to that. So, I think we're setting up for

growth to slow. Um. We benefited significantly from the tax cuts in two thousand and eighteen US growth three real GDP. We think growth gonna slow to two to two and a half percent. It could be even be slower than that. With the U S. China trade uncertainty. But I think this is gonna allow the FED to to take a step back and go more data dependent going forward this year. So the date to dependence of the FED says they are and a market right now and market participants that says, no,

it's not about the data. It's about a market. It's in a market dependent FED or a data dependent FED. I think what the markets are sensing is a lot of what you said uncertainty. The global economy actually, we think is slowing at a slower rate than most people suspect, particularly China. Earnings expectations are too high. Earnings growth is slowing, and this uncertainty with the U S. China trade is

a big deal. It's starting to impact confidence. So I think the leading indicators out there suggests that growth isn't will infect slow and and that, combined with the fact that inflation is low under the fed's target, inflationary expectations have come down. This allows the FED to take a step back and wait, there's a big difference between recession risk and moving back towards what we did consider trend growth on the ten months ago mook. That's a good point.

I think the markets have in some cases, like oil and perhaps even equities and bonds, overestimated the likelihood of recession. If you look out over the next year, we think the chances of recession or maybe fifty. Yet the markets, you look at oil prices pricing in a much higher chance of recession. Bond market rally recently has been pretty significant, So we would not chase bonds here. Uh and in fact, we we actually think oil and owning some energy makes sense.

If you look at the bond market, now, are you clipping a coupon or you can? You actually, how do you clip a coupon with the yields where they are? Right? Well, I think you want to own given what how flat the yield curve is, and we were talking about this earlier, you're better off at the front end of the yield curve. Odds are the Fed will still raise rates and therefore we will start to get some some risk premium priced into the longer end. So all things equal, if you're

gonna own bonds, stay stay off front end. Okay, that's that's some streets. You see that jargon there, that's West Coast jargon. Is that premium and all that it's part of the real yield what you can see on yes, Mark, if you can come okay, so all the more reasons, Mark, thank you for joining us. Have an extra cross song, um. Mark. If if I look at bonds and I look at the coupon and I want to clip it, I'm just a small little guy. What maturity do I look at?

Is it? Don't tell me it's a T bill. Nobody's gonna be able to eat on a T bill, sir. And and most people when they refer to bonds are talking about ten thirty year bonds. Today the tenure U S Treasury who seventy the long bound at three UM. There are times when you want to hold more cash. If you look at last year cash outperform most asset classes, now is actually not a bad time to be sitting in more cash, wait four yields to go up and

and then deploy more money into bands. So I'm really interested to see what you think is going to happen at the long end, because over the last week we've had a massive improvement in risk appetite, and all we've seen happen with the treasury curve is money come out of short term dead instruments as risk aversion fates. What I don't see is real curve stepening. I don't see a treasury curve that captures a fundamentally positive story about

the economy in America. In flact, I think the treasury curve is flatter now than it was on Friday, and that kind of tells you where we're at in the treasury market. When am I going to start to see the back end pick up to reflect an economy that you say isn't as bad as people think it is. So I think if we do get a trade deal with China, I think that will start to get the economy going again, and you'll start to see that your

curve steepen. Um. These yields are very low right now, uh, and so as long as we do not have a recession, if we grow it too and two and a half percent, we think that tenure is probably gonna go back up to three percent. So you've got more I think yield upside right now given the base case scenario where growth UH growth goes to two two and a half. So

just think about your strategy. The year progresses, you sank sitting cash and his yield to pick up at the longer end at duration as the year progresses, It's not the strategy for you, guys. We we like bonds longer term. So we are still of the view that rates are not going to break out on the on the upside because inflation globally will still stay relatively low. At the same time, we think the market has near term brought yields down too low. Can I get a question in here?

Even though the real yield the party, there's other things besides full faith and credit. Where's the opportunity in better quality, high yield and actually quality corporate paper. So overall we're favoring securitized products, non agencies, which which are linked more to the housing market. We still have a constructive view on the consumer and housing, so we're going all Jenny May like we did thirty years ago. We like we like non agencies, We like agency mortgages. Within corporates, we

want to stay high quality and investment grade. But what the couple areas we like We like bank and financials, we like reats, We like the consumer, and we like energy. We think energy has has interesting self corrected too low. We would own pipelines here. Okay, what kind of yield do you get on a debt instrument in the pipeline and the beleaguered American energy So you can basically get

five percent on very high quality pipelines. Companies that are are generating free cash flow of five six percent annually benefiting from the sale revolution. The United States is the biggest producer of energy now in the world. It's a huge deal. But hey, what you're playing is the volume story of oil in America, not the price exactly. And midstream is the best sector and energy right now because as SENTE is benefiting from increased volume growth throughout the

shell regions. So does this mean that after the real old sponsored by Pimco, the barrel is that where this is you can drop buy for that program? Can I get the final question in on leverage lounge place MARP because there's been a massive discussion about it and a huge turnaround and then a huge turnaround again. Where is Pimco as a shop on leverage lines at the moment? So we we have been very cautious on credit risk overall. Um we have been for the most part avoiding a

lot of these leverage loans. I will tell you towards the second and third and fourth week of December. Uh, these loans were liquidated. There was four selling, there were hedge fun on wines. We saw selling in Asia. That was the first time really where we started to step in and take the other side. Where we're buying. We're being very selective. We're buying in companies that are non cyclical.

We're buying relatively unlovered credits. But we were literally getting at the end of the year six seven percent on some pretty decent credits. So there, you know. The strategy is to sit back, wait, there's gonna be more volatility, hold a lot of cash, and deploy that cash as you see bottom up opportunities which will will be coming. Mark Hazel, great to have Mark with us. It is Mark doesn't come enough. Anybody else joining next week, I don't know. I have credit. Seriously, thank you for your

support of what we're doing here. Thank you. Thank you day as well, John Farrowe and Tim came a terrific news flow across economics. Of course, FED speak today Chairman Paul speaking with David Rubinstein, the Economic Club of New York. And two items this morning before we bring in hard bundles of UNI credit, and that is capital economics over in London severely marking down their EU outlook john to

one percent like one point zero percent. And then we just heard Marquisol PIMCO, and within the wonderful jokes about their support of your product, the real yield is I'm sorry, he's got a pretty gloomy view on the American economy returning to try and growth and join a big distinction between that and recession red Where are we you know, with UniCredit, what have you done with your you are you marking down your g d P numbers for America? No?

And I'm afraid we are even more gloomy than than pim kois because as you just said and heard so PIMPO expect to return towards potential. We think we go below potential in the second half of this year and even further down in so that we that we could see in a recession there. So that that is saying, wait, wait when you say we'll see a recession there? Are you talking NB er recession? Sure? What's the cantalyst for that?

The catalyst is, well, I mean we have been hearing frequent enough that recoveries don't die of old age, most recently by Berninky on Friday but we gotta acknowledge that we are towards the later part of the cycle and we're seeing I think, closed output gaps. It's getting technical, but I know you like it here on this show. So we get seeing closed output gaps around the globe, we seem grows, slowing down, signs of fatigue in the

global business cycle. The only economy, well, the only meaningful economy, if I could say so, um that has the coupled so far was the US. But that's easily explained by this huge stimulus program. So that is just mask the underlying slowdown that we are going to see here as well. Once the impact of a stimulus fates, grows, slows down, and that then exposes the underlying weaknesses. And we think this time the underlying weakness is in the corporate sector.

We have too much that we have not good ratings. Now we have even lower oil prices, which is not good for investment spending. So the recession, we think will look similar to what we saw in two thousand one, not too bad in terms of real macro and it comes mostly from the investment side. Why can't productivity pick up? Why can't we have us apply side response in the

way this administration thinks we will get one. I think we do probably see a bit of a pickup in productivity just because the supply of labor is being depleted. You know, we're going where we are closer to full employment and we need actually a pick up in productivity

to sustain some some growth. But in in response to to what the administration has done, I don't think there is anything that translates from the lower taxes, less regulation to higher prouctivity because I don't think we have seen the investment that is the missing link there that would translate the politics to the real economy, and that hasn't been there. Well. Within capital deepening with the new technology, do we have any sense of what capital allocation is

within our society? No, that is a tricky part. I know they have been We're focused on labor, but I'm sorry, the capital deployment is a mystery, isn't it? It is? It is um So, I mean, to some extent, we can offset part of the of the lack of availability of labor through artificial intelligence machines. So there's a prouctivity increase that we see. But of course you always look at growth rates, so you know where we want to

see higher growth rates. That means that this substitution of labor by capital, if you want, is happening at an accelerating pace. Right, It's not enough if it continues to grow at the same pace because there is no pickup in the growth rate. The pick up in the growth rate only happens when we haven't we have a further acceleration, and I don't think this is going to happen. What are you looking for from the chairman like to tonight, Well, there's a lot of copy and paste, I think so.

I mean the tone has been said. I think the tone has been said. At the December meeting, markets didn't understand what the Fat was telling them. I think it was very obvious at that point already that the Fat got rattled. Markets didn't hear exactly the words they wanted to hear. That they threw a tantrum, and then we had John Williams and then lastly the chair coming out and saying, all right, guys, we got it. We will be very careful and do everything you want. So given

Shamman Pal a bit of a free pass. His perfor almost of the news conference was let's just say, disappointing relative to what he followed up with. It was totally inconsistent with what I saw in the minutes yesterday. Well, just in terms of the emphasis. The emphasis in the minutes is completely different to the emphasis that he delivered

in the news conference in December. Well, I mean I wrote a flash after the FOMC statement and said basically exactly what was in the in the minutes, that the FAT confidence was rattled, and they have a look at it. I mean, they just changed a few words in the statement, they changed the dots, and from that on it was very obvious how they thought and what the debate was. Yeah, Powe, he said, well, our plan is our baseline is that.

And the one thing that markets really hated was that he talked about the rundown of the balance sheet and he shouldn't have used the word autopilot or whatever when he didn't emphasize flexibility. But subsequently he has. But the FAT is always flexible, right, That's what I think. Richard Fisher said it a couple of days ago. When I

don't know what the market has. That is normal fat communication, and the FAT always takes changing developments into acoun They always do that, and I think it's a bit almost

a bit ery. Um if this goes out to people who would trust professionals in the sector, that professionals in the market do not know what FAT communication is, that they have a baseline, but they if if the circumstances change, the FAT changes, that then have to say, Um, if enough people don't understand, then the problem is with the messenger, not with the individuals receiving the message. There's a real question about chairman powers delivery over the last several months,

never mind just the last month alone. I could continue this conversational day harm BANDHLTS joining us from ARNI Credit great to catch up with you and China and really the attendant not kind of effects to China and they're not kind of effects back to us. Miranda car joins now from High Time. Miranda, one of our themes this morning is a lot of fancy people we talked to marking down their economic growth estimates. We all understand that's got to affect China directly. Do you and your team

have any gues estimate of china real GDP growth? Well, the real GDP growth is obviously slowed significantly in in Q four and particularly in December. UM, and hence why you've got all the You're we're not going to see UH the numbers come out next week. We're not going to see a real number reported. UM. But the but the real interesting thing about the UM the inflation numbers

out today is you've got UM. The market is reading that as a big drag on sort of economic big sign of an economic slowdown UM, Whereas they're missing one key part of the equation UM, which is that UM, the a lot of the price falls were due to the capacity that they didn't shut all capacity over the winter season, which is something they normally do ever since two thousand and fifteen. So you've had price falls owing to the slowdown, but also due to the due to

the lack of capacity closures. So it's not entirely reflective of a huge slump in in all of the upstream pricing. So you're saying the base effects of effectively been sort of distorted somewhat here. Miranda, Yeah, I mean, if you look at two thousands fifteen, when the last time you're

facing really big global deflationary pressures from China, UM. What China came out was with the supply fat reform where they cut capacity and prices then shot up, and then suddenly there was there was no longer a deflationary There was inflation rethreat from China into two thousands and sixteen. Now this time we're facing the same issue deflation respect coming out into global markets UM and so the question

is do they then start shutting capacity again. There's a lot less room to do that this time around UM and so the deflationary pressures could could become significant as we come into into each one. So what's your case right now, Miranda, Because it's pretty easy at the moment to paint a very barest picture of what is happening in terms of the deceleration of the Chinese economy. If you want to corporate, you can pick out Apple. If you want a data point, you can pick out many.

You can pick out a p m I that came out over the last couple of weeks. You can pick out the latest PPI data as well, And for that matter, you can go on and on and on for China at the moment, including the auto sales picture we got painted early earlier this week. For us, what is your base case? Is it as bad as some of those data points tell US. It is UM. Some of those data points have other factors involved, but yes, China is facing a significant slow down as we come into come

into January. But the key thing is the monetary shift has already happened. I mean, the monetary easing, sort of quite large scale Mountrey using already started in October and that's when you start seeing the sort of turnaround in China's economy. So you've had already several months and now they're talking about, you know, going back into sort of, if you like, some of the old school subsidies and tax cuts in order to try to stimulate the economy.

So this means although so janj February is always tricky because it's a spring festival, it's really hard to get

a good read across on the data UM. But as we come into Q two, a lot of the really sort of classic stimulus measures they're going to put, infrastructure investment, monetary easing, tax cuts, support for the auto market, support for consumer spending should start coming through and leveling things off, because, if you like, they've already taken the measures because they know how bad things are, Because things are, you know

that across the board have been very very weak. One thing that I've struggled with them are Andrew is understanding what is sort of marginal and what is substantial. So we're looking at the latest Finance Ministry proposal for a a bigger budget deficit, but only incrementally. It doesn't seem to me that China is firing everything call guns blazing at this slow down just yet. What is the magnitude of the policy shift at the moment? Is it incremental

or is it substantial enough? Well, the thing is that they've managed to create a special, a new class of debt which is going to fund a lot of the infrastructure projects. The fiscal deficit does not increase significantly, but what does increases. They have a new class of debt called special local government bonds. Now these don't sit on the fiscal balance sheet, they don't sit on the corporate

balance sheet. It's almost like a new, a new debt class that China is invented um And we're going to see about two trillion of that um of the bonds issues to support infrastructure investment in two thousand and nineteen, up from about one point three trillion last year. So the debt comes in but not in the not the

fiscal deficit still looks quite responsible. If we get IF IF if, if, if we get the capital economics Europe and one percent GDP growth sack Jen looking at America run rate of one point eight Pimco's two wish and even to the low side with China challenges. If the rest of the world slows down, what does China do? Yeah, well,

I mean China is is flowing as well. The I mean we expect that the growth target under the Central Economic Work Conference in December that everyone now expects the growth target for this year to be lowered to six to six point five rather than trying to keep up at the six point five level full of last year. Now, obviously that's still a a sort of government target which is not a reflection of what's going on at the moment um. So you're likely to see a much um

sharper slow down in in each one. But yeah, I mean, I think there's an exception expectation that China's growth will So the key question is obviously how much is the government can step into trying to you know, ease off some of the pain um and then you know, because because one of the question marks I think for this year is really how much they boost the property markets, because that, if you like, is the is a big

swing factor. If we go into another um sort of real estate boom, then suddenly instead of looking at a at a sort of China slow down deflation, new picture, you look at another sort of real estate sort of boom, which is not maybe helpful in the short term, but obviously then just creates much bigger problems in the longer term. It's really interesting to me that we've just had a conversation of about six seven minutes on China and hardly

ever at all touched on the trade discussion. Miranda. Some people assign a lot of importance to the trade negotiations as to what happens next with China and the Chinese economy, do you well, of course, yeah. I mean the stopping the escalation of the trade dispute and not taking all the production out of China and stopping the the export growth is a is a big factor that seems to be much more likely now the trade the escalation of the trade dispute seems to have stopped, but I think

it's going to shift. It's going to shift them into much more targeted, much more so the US will target some of China's technologies or China's companies, and so there's going to be continued escalation, not in not in the trade in general, but you know there's still going to be conflict between the two sides. Randa Carr, thank you so much. A briefing on China this morning, with high tongue securities. Greatly appreciate that as well. We are advantaged

in certain divisions to have outstanding ability. One of the heritage items for Bloomberg has been auto analysis. I think of Kevin Tynan and Bloomberg intelligence and over in the Bloomberg opinion aside for years at the Financial time. Christopher Bryant Chris Bryant joins us from Berlin this morning. I'm Ford and on a general auto industry as well, Chris, you have a stunning statistic from Credit Suites that eight percent of the bodies are going to go out the

door in the coming years. Is that global? Does that include America as well? Well? I mean, Thomas, I think that was a European figure. But to be honest, the exact same trends are affecting American car industry to affect the European car industry clearly in Europe probably you could say moving faster towards an electric future due to the much stronger emission rules that we have here, and so they have been I think more reflection on the kind

of job losses that we could see. But fundamentally, yes, electric vehicles are simpler to produce, a lot of the work can be outsourced too, so it is reasonable to assume that all the people are building combustion engines and related technology right now, we have to find something else to do in the future or lose their jobs. You use a beautiful British phrase, the pim fox, and I would never use leaden footed. Nah, they have been leaden footed.

How leaden footed his American automobile manufacturers been in Europe? Well, I would grade them to be honest. I mean General Motors was criticized for taking a long time to pull out of Europe, but it did eventually pull the plug, sold the operations to Perjoy, and now it looks compared to Forward relatively fleet footed. Uh Ford is sort of taking a bit more time obviously with the new CEO wanted to think about how exactly the should be done, and clearly a very sensitive thing to do as well.

If you're going to cut jobs in Europe, you're going to expect some political backlash and obviously pressure from the trade unions to Ford is not said how many jobs they planned to cut yet, but some bad news across the industry to day, with Jaggi landro Over saying as well that they would cut four and a half thousand jobs. Clearly,

neither company can tolerate making losses. Lots of different factors putting pressure on their their cash at the moment, and they filled it enough enough, Chris, Where are the biggest losses going to come? Because we've noted in the past, like about six years ago, I think Ford closed three of their factories in Europe. Two of them were in the United Kingdom and one was in Belgium. Where do the cuts come now? Well, I mean it's been quite a piecemeal approach from Ford so far. I mean they

have said they'll close a plant in Ford. They have said that there will be some jot losses in Germany, but no real detail today on on which plants could be affected. I mean, I think there is some nervousness around an engine plant in the UK. Clearly, the United Kingdom is much in focus. Brexit hasn't happened yet, but if it does, it's going to create huge problems for

the car industry there. So that's clearly not helping sentiment towards the economy and and of course selling cars in the UK these days is tough and if you sell cars and pounds, by the time you convert the revenue into dollars, well you're not left with very much. So that hasn't created a very appetising picture for Ford in the UK, which used to be, you know, one of

its stronger international operations. Right now, essentially Ford only makes money in the United States, so it's entire international operations are kind of in focus. China has been a disaster for the company over the last few months and obviously needs to be turned around too. Ford also has operations in Turkey. It's a joint venture. It makes those transit connect vans. How's the business outside of Europe for Ford

in the region? Well, um, you know, Ford said today that commercial vehicles were a source of strength for the company, so I think that's one thing that they would trying to protect. I'm not sure on the details in Turkey, but you know, all its international operations are going to be put under the microscope in South America, very very difficult sales in China, you know, plunging. Same problem for

Jaguar landro Over as well. By the way, uh they've exposed obviously to uh the shifting in taste away from saloon cars at Jaguar Cells towards SUVs uh. And so really, I mean the problems, the list of problems just keeps growing for both these companies. Well is it structural to adios mean, you know the team that we have a Bloomberg you know, I think about Jaguar this and for that and all that, But what's the total auto sales worldwide? And are those unit sales going to come down eight

like the Credit Swiss statistic. Well, I'm not sure about unit sales, but simply put, it will just become simpler to produce cars in the future. So yes, they may they may well sell few of them if we're going

to do more car sharing and right hailing. But the fundamental thing is the electric motor isn't very complicated to produce compared to a combustion engine, and in future, you know, it's much more straightforward for competitors to get the industry these days because you don't need the kind of expertise that you had in the past, or at least that etis is very different and batteries, for example, probably not

going to be produced in Europe. They'll be produced by Asian manufacturers, maybe with some local production, but it won't be value value added from from the German manufacturers. Chris Brian, thank you so much from Berlin's Morning, an important essay in a quick essay in Bloomberg Opinion on GM versus Ford in Europe. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or

whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.