Surveillance: The Foothills Of A Cold War With Baucus

to have you with us. You're just out with your year ahead, trimming the outlook, but seeing a much bigger problem potentially brewing for the decade ahead. Just walk us through what you're saying. So that's true. We've actually projecting both to remain stuck at two point nine for the next two years. And that's mostly due to all the uncertainty related to the trade tensions, but so to China economic slowdown and and much beyond that geo political and

political economy uncertainty. Lollis, how do you make a year ahead calls the base case around trade? How difficult as things this year? Well, you know, the difficulty with the trade tensions is that they're very focused on a few tariffs, which has which have a direct effect on the price of important goods, so consumers the higher forward the the buy.

But the biggest effect is the uncertainty that's creating because if you're affirmed today, you don't really know when you where you're going to launch your next investment, because these trange tensions jump from countries to countries to start and and then they're at heart there is a performed in satisfaction with the way that that a lot of support

to government subsidies, protection of inticule proterity technology transferred. All these mingled within this discussion and they are very deep rooted problems that will take a long time to address. Right although you are seeing a guarded optimism of heading into a lot of economists and investors seeing a resurgence in the global economy, and you square that with the deteriorating outlook from the O E c D. So I

think there are two things to distinguish. If you get an agreement on what's called the Phase one between the US and China, then yes, market will have some temporary relief and chap But as I was saying, the issue surrounding trade um much beyond what we are seeing here um and they have to do with the way that digital digitalization has changed trade and commercial exchanges. They have to see with all the subsidies and the form of government supports that out there which are undermining the level

playing field. And these issues we will take years to resolve, especially if we're just focusing on by little tariffs. It's like if you were focusing on the top of the iceberg when the iceberg below the sea level is growing. Laurent's your predecessor of those O E c D. Catherine man Now at City Group, as an o E c D was quite strident about the roll up that we're seeing in world business because of slow economic growth. She would speak of scale and the idea of monopsidy, the

idea of monopoly coming in to play. We're seeing that in America this morning with a merger in discount brokerage reported of Schwab and TD Ameritrade. Do you in Paris still believe that we will see a roll up of

global business because of slow economic growth. So they are things threatening globalization and that's the trade tension that we have discussed, and it's also the possible tax fugmentation that the O E c D is trying to address um and that relates really well to how our business is going to thrive in tomorrow's word, and for that we need more certainty, more prectability, and the better level playing field. And that means you know, ending this thought that tensions

and tariff. It also means concluding, as we expect, the international negotiation on the taxation of multinational enterprises. As you know, we've been working on this for a while now and we really think that we can conclude an agreement in twenty that would change this specimism of globalization. I mean, what what this comes down to? A Lawrencebourne. I'm gonna uh site here magdam desire. The London School of Economics,

which is all of economics, is about profitability. Given the O E. C D view, how you extend your timeline out to two thousand one, will there be a dearth of prop prop prop I'll get it out three to one. Will there be a earth of profitability? As we have slower economic growth? But that's what that's one of the

things we're really concerned about. If you stay with various sluggish growth for a long time, then there will not be enough revenues to to you know, there will be not enough growth to raise revenues, and that applies to

people as maternity applies to businesses. And also also if you want profits to be lifted, you need investment, which is why we're particularly invested in insisting on the need for governments to level up public investment because that's one of the main impediment to the implementation of private sector

investment plans. Lauren's point, thank you so much. We greatly approiciate of economics the O E. C. D. Here right now, Joe Quidlin, who's with us with decades of experience at Maryland Bank of America private bank, and out of course with investment perspective. But Joe, you and I are gonna wax philosophical here. Remember the first day discount brokerage showed up. You and I were like what, remember that, we can't do it ourselves, but it was super cheap and we

all know they're never gonna last. John, there is discount brokerage a big deal in London. Brokerage people have to try farn exchange very well. We don't do that. But it was Charles who remember that first open a whole new frontier for retail investor. People laughed for about six months until oh, so here we are with a mating here and it goes to your work on a broader investment strategy to slower economic growth, challenge profitability one one in doubt. You have to mate, that's all, It's all

it's about. You have to look for that growth organically is very tough given a democraphic slower growth, lack of productivity. So, I mean, what's surprises me? Time? Like ten years after the crisis, so to speak, we are starting to see some of the financial companies thinking about, you know, marrying or like at least observing each other. And well, I'm on this is TD a merritrade folks. Of course, Joe

Ricketts firm to be taken up by Schwab. It is presumed, it has not announced yet, CNBC reporting this and Fox Biz putting a twenty six billion dollar number on it. But it comes down to to bring it over to John's uh world of yield, lower nominal GDP, some form of disinflation and growth that just doesn't get it done right right, It doesn't get it done and goes back to what we talked about earlier time, like wanting and needing the scale. So if you don't have scale, you

can't drive productivity or have the margin expansion. So this is about scale and reaching for that type of not organic growth, but kind of emerge growth. I want to challenge the idea that this is simply a case of slowing growth and really raise a question of an existential crisis facing the asset management and brokerage businesses. People want stuff for free, and how long it can mating and

scale sustain businesses that ultimately are going to zero fee models. Well, I would push back a little bit of people want for free because we've got a massive transfer of wealth coming in this country, like nine trillion dollars, and in the private wealth face they still want that service. They still need tax strategy. So I think your average retail investor does want it free and it's expecting it free. But there's also part of the industry where I still

want to have access to UH specialty asset management. I still want access to credit, I want the full line of concier services. So I do think there is a segment that wants it free. But when you look at ten trillion dollars and inheritance being passed generationally, that's not going to be done on a retail wire. Do you see people went in to pipe for that? Oh, the sevin is that you just described, they they're willing to

pay for. But because of the competition, yes, the margins are coming down absolutely, which means we anyone like Bank of America or anyone in the industry has to be more productive, has to have the right products in place and drive that growth and up. In this really strange world where companies like schout Swab and tv amrit trade end up making money like little banks a little bit of candy for the deposits, they have taken a little bit more candy on doing other things with the money.

What do you think of that as a business model, that all of these companies just get bigger and start behaving like little banks, like a little bit. I mean, I mean I work for a big bank, so I mean I'll preface it with that. We'll see if it works or now. But yes, it's it's part. It's part of birth right, it's it's part it's part of that. Like I got my model isn't producing what I expected in terms of revenue or profits. What do I do next? And rarely does that. Is that sustainable and or is

it being being set up for more mergers? Got to talk about your brought a market strategy as well. I said at the top of the program. Investors at the moment seemed to be lost between courcious optimism total confusion of everything around China. How do you have any kind of optimism gun into next year without any real climency on some of these big issues. Well, I mean, look at earnings, their corder earnings weren't that bad. They're better and expected. You know, the economy is chugging along at

two percent. It's not great, but we're you know, an eleven twelfth year of the expansion. The Chinese economy is growing at five percent plus. Europe is looking slightly better. Let's put it this way, Europe is looking less bad. So globally we're bottoming out. The manufacturing numbers are getting better, but it's too early to jump with both feets. So you know, whether it's healthcare, technology, robotics, automa. Sure, there's places to put money to work. And are you sustaining

US dominant investment? Do you still believe US large camp will lead after Eno? I think will become more balanced next year between more developed Europe, Japan and then the emerging markets. But you know the emerging markets, we've been waiting and waiting for exactly what's the is it China trade clears? I think it's China trade cuder, But you know, the emerging markets. I would just not throw the term out of the vocabulary. Of course, specific it's say at sectors,

at countries technology versus consumption. That's issue. That's the key. This has been a wonderful Joe Quilin thanks us with a ton of breaking news, A potential time between challenge Schwab and Tedium matters right, and as far as then I tell them no comment from either company. I agree in this school that you state that this is a bit odd the way the flow is coming out. I know Fox Biz put a twenty six billion dollar statistic

on the deal about five times sales. A tie up would create a firm with roughly five trillion dollars and combined asset and serious Jim Cramer's shop. Really interestingly, I I didn't know this. Schwab's Commission trades, it's only eight percent of their business. We're td imrig trade. That's what you'd expect this on the program and leads away in it's the it's the banks, the little banks within these brokerages.

That's how they're making the money. It's the hope to bring in customers that they can actually pink and other layers of revenue streams. But it is a question how much are people willing to pay for that one of these sort of demand free services there too? How do you make money from it? That's a big question. Joining us in the studio, I'm really pleased to say, looking forward to this intoview lay too. Charlie joins us now jo h c M Senior fund Manager. Good morning to Larie,

good morning. We won't be talking about tdumrrige trade and charge SWAB. I can see embracing for potential question on that. Don't worry, you know what we will talk about Bill Dudley's peace out on Bloomberg Opinion in the last twenty four hours Bloomberg Opinion columnist, formally the New York Fed President, and of course he worked at government with you many many years ago. Larly, his comments on triple beats, That's

where I want to start. Whenever this conversation comes up anyone outside of the fixed income world says this is a problem. Everyone inside of the fixed income world that I get to speak to, Lisa and Tom have conversations with us, well, say, this isn't a problem. Walk me through the issues that play here. Sure. So. Well, first of all, I'm really excited because I'm in the same height as Tom, because usually I feel like a shrimp. That is this is this is exciting so much at

lunch yesterday A little bit wow. Um. So the facts are correct. The Triple Bees as a whole is about half of the US Investment Great Index. And I think when you look at the largest and actually came armed with data, if you look at the top thirteen issuers within that, the debt numbers are staggering, right, So the top issues would be something like A T and T hundred and ninety billion of that and you go down

the numbers. But if you look at these top thirteen, what's unique about them is with the exception of the auto an energy where perhaps you have a little bit more well if you have more exposure to external shocks that may not be in your control. Everybody else has a very steady revenue stream. So the de leveraging path is there. So I don't want to ignore the fact that there are a large component. I just don't think

it people should be as alarmed as that they should be. Okay, So, then is the risk of some sort of fallout from the corporate debt build up that Bill Dudley was flagging? Is that overstated or is that risk still there? Oh? I think the corporate over uh debt build out, I think the risk is in a different way. So to me, you may know these numbers, but I think it's a staggered number. The U, S I G and high yield number is about eight and a half trillion dollars. Now

it's too excess the financial crisis. And if you look at the debt in these credit assets that's in daily liquid mutual funds, it's a little it's about a little over a trillion, Okay. If you look at the US broker balance sheet, it's of daily inventory of how much they're willing to trade and sort of keep on the books. Twelve billion. So to me, the mismatches not necessarily these things are gonna get downgraded from triple B to double B in the high yield is going to be a

total utter disaster to me. The issue is how do you when the selling point comes, how does the plumbing works? Because I don't think that's been tested and I don't think people understand that. So what do you think will happen? How do you think things will function? Well, A, you're gonna it's gonna be a price discovery. So it's good in that. I don't know. I mean, I think you may test where your marks are not accurate. It has nothing to do in some cases with the company's health.

It's it's like selling your house, right your house is worth what somebody is willing to pay for it. You may think it's a million bucks. It depends where the bit comes in. So I spoke to Pimcom about these kind of issues earlier this year and they said, just in terms of their investment strategy, that why they want to play this and outside this quite simply, and you can add some new wants to it. We want to

be liquidity providers, not liquidity demanders. Wait for these kind of gappy moves in credit and then deploy capital like can you be that patient? Can you went around for those kind of things? You certainly can, But look, I mean this is another it's a pit peep of mind and nothing against PIMCO. It's people always says there's cash on the sidelines. There's no such thing as cash on the sidelines, right, Nobody has bags of cash sitting in.

It's sitting in something else, right, And usually Tom Keane actually has bags of cash and sitting on That's why you're my height today. You're sitting on under yours. The leverage cash continue. Oh boy, this conversation is getting dangerous. Um. It's when when big fallofs happened, big wall events happen. The markets are connected, right, everything kind of moves, so you have to sell something to fund something else. And that's where you know, it becomes a lot difficult. So yes,

in concept, can you buy hundred million two million? Sure? Can you be able to deploy billions and immediately be able to take advantage at that time? I don't know. The solution always is the extenduration and extend maturity. Is that the trap of next year when in doubt go from x to X plus one X plus two. Is that what's going to happen? I don't know. Duration. I

think it's a very tough call. Um. We we played around with it a little bit and we played around the context of Look, I think we're a little unsure whether the recovery is happening or not, so perhaps we're better off just literally buying ten year treasuries and just not taking the credit risk as opposed to on i g. Credit. There's also something that you're talking about before, which is

liquidity risk. You hear a lot of investors saying that they are going into less liquid credit for the extra premium embedded in what you're saying in terms of the structural issue plumbing issue in credit markets is I believe compared to what you said last time or here you are not taking liquidity risk and you'd rather go into stocks than risk here debt at this point based on liquidity, can you give us a sense of where you are on that now the same playbook, we run a daily

liquid mutual fund. Like I mean, I like the thing that I will never get a redemption, but that's just that's just not the real world. So credit funds investing in stocks, well, we run a commingled for the product, so it's not a pure credit, so it's credit and equity, but we will always run it liquid. And look, there have been numerous evidences of these liquidity issuing popping not

and funds unwinding over the last several years. We just treat them as their episodic and we just blame the manager. The underlying symptom is the same thing. You reach for yield and you went a liquid and frankly, I have a hard time when I buy a mutual fund to figure out what they own. You really think people sit there and go through the line items. Lonnie, thank you as always, thank you for joining us. Don't triple for

the leverage. I felt I'd cut the into off. Cloni can get away to television and run out of the studio. I didn't know that. Okay, Kathy Jones is with Charles Schwab, and the way the game has played, folks, is if you're on staff, and particularly if you're on research staff, you can't talk about the business. She's looking at her phone through something. You ask her about the business. We're

not gonna ask her about the business soon. Of course, it reports this morning of a mating between Schwab and the Merrior trade. We will move on to fixed income, and the host of the Real Yield will do I forward that conversation. Let's talk about it, Kathy, you have been a lot more conservative about your views and risk

assets and fixed income. How yield is getting back out to in and around four hundred basis points just looking at that spread, Kathy, your thoughts on the skipas of fixed income at the moment, Yeah, John, we haven't really changed our view that as you know, that spread has been widening, narrowing, widening, narrowing all year, back and forth, back and forth. And our concern is, you know, still

hasn't changed that we had deteriorating credit quality. UM much more leverage in the corporate bond space than I think is justified by the rate of growth. So corporate profits are growing much more slowly UM than corporate leverage, and all that sets us up for UM we think is some sort of a correction in the market. So we're underweight high yield and continue to think that that's just too risky an area to have a lot of exposure right now. Kathy, this has been scenario that people have

been hating on for a long time. Junk bonds not a loved asset class, even as they've rallied. Now, however, Goldman Sacces Asset Management, among others are starting to kind of tiptoe into even the triple ce rated debt, the lowest or of junk bonds. And I'm wondering, what are they getting wrong in your view? You know, I'm not really sure why, um, you would be crazy about triple ceas, except that they've underperformed the rest of the high old market.

So maybe they you know, maybe there's a view that they can take advantage of a convergence between triple seas and the rest of the high old market in a benign fed scenario, which is what we have. But it strikes me as the old, the old idea of picking up Nichols in front of the steam roller. You know, it's not probably a game that most people want to play. What's the trigger here to spur the sell off here? Well,

I think you could have a couple of things. One could be, um, that the leverage gets to be too much for some of the players and and we start to see some weakening there, uh, and the spreads blowout that way. UM, so more economically driven than anything else. And on my to be just sector based. You know, we've already seen underperformance by energy. If you had another

sector that suffered, um, that could be the case. Um or it could be the surprising, surprising strength in the economy which leans people towards viewing that reads might actually go up for safe assets. Now we don't think that's a real likely scenario, but um that could also cause high yield spreads to move. Kathy Jones A charm of what you do in Lizaran's understoods every day as you understand flows of retail like no one, what is what are people actually doing with their money in fixed income?

I'm fascinated by this they you know, you say, well I want you to buy a two year coupon. You're like, really, are they all out of twenty plus years trying to make total return? Well, you know, of course we have a wide variety. You know, a lot of jesters have been saying very short duration because frankly, the yields aren't that attractive to to take on duration risk. Some have been moving into risk ear assets, but I would say it's mostly a pretty much a short duration, high quality

story for many investors. I look at full faith and credit versus full faith UH and credit versus the credit market, and I guess you can pick up yield there. How much do I actually pick up if I go into the credit market versus government bonds in paper. So if you're an investment rage, you're going to pick up a hundred basis points or sell on change. Yeah, in a

higher quality um investment grade corporate bond. And you know the thing is, we have a lot of investors and municipal bonds and actually, after tax from many investors, bonds make more sense than Okay, great, but what's the movement in muni bonds has been extraordinary this year? I mean, can you state that muni bonds price up, yield down, or price to perfection? I wouldn't say price to perfection, but you know, clearly valuations, particularly at the short end

of the curve, has have moved this year. As you go out the curve, valuations have actually improved because we've gotten a little bit more fly. Let's bring some life to the investment grade part of the market. Kathy, we've had this big discussion over the last couple of days about triple b's. It's come up so many times over the last couple of years for anyone outside of fixed income tuning in and interested in the concept. If you look at the market, every security that comes to market

will have a credit rating. The line of the sound between investment grade and junk is triple B. And within the triple B complex and big well known companies like Ford, A, T and T, the likes of A B and A B and BED and the worrior is Cathy that in an economic downturn, these guys won't have done the hard work, the banush sheets won't look good and they will drop down to junk status. Cathy just weigh in to that broader debate at the moment, Well, it's certainly a risk.

We know that a lot of those companies have stated that they're focused on maintaining a triple B reading and not getting U downgraded into two junk status. But um, you know, good intentions are just bad good intentions. So if we were to hit it down tour and you would see some of these big companies down rated. The market for high yield is much smaller, the pool of buyers is much smaller than in the investment grade area.

And the worry is if you get one of these big companies that gets down grade, if you have a lot of securities hitting the high yield market, and inevitably there's a big price gap that the whole market would probably feel. I mean, this is to put this into English, and we could do this with Lisa Bramo. It's farm Girl. If Fargo North Dakota, I mean the twenty year piece out of Fargo North Dakota is a four percent coupon

price to one ten yield. The worst is three point three percent, and I'm joining a two percent coupon right now. Fargo is reliable. Actually that's probably less risky than other areas. But I'm just saying when I'm no. But but that's an example of where it's a four investment code. I'm

getting you. I'm not saying coupon. I stand listen. Before we let you go, and before we start talking about the farm journal, I do want to get your sense on liquidity risk because this is something that Lolly was just talking about that she's really concerned about a breach in the plumbing. Do you buy that? Is that still

a concern even though most people seem to have forgotten. Well, it's obviously still on the radar, but I think the FED has has made huge moves to address it right now, so I wouldn't be as concerned as we were a six months or a year ago. You know, it's funny because it all sort of came to ahead in September when we had the spike in the in the repo rate. But this is something people have been talking about since

the FED started online. It's balance sheet, so um. I think they've taken huge steps to to address it, and I'm much less concerned than I was a while back. Cathy johnest to catch how many cholnse wap chief Fixed Income strategistic We finished strong today so my morning. It has been spectacular to touch upon the Bloomberg New Economy Forum in Beijing, and of course the highlight of this,

without question was Neil Ferguson's conversation with Henry Kissinger. We are now almost fifty years on from what those of us of a certain vintage remember, is absolutely shocking. I can't begin to calculate the shock of that nineteen seventy one morning. In the nineteen seventy two is President Nixon went there. I've actually Paul had the honor of being at the Pace Hotel in Shanghai, in the room that Henry Kissinger was in literally the night before he flew

to Beijing to get this thing started. And we have the right guest now he is Ambassador Bacus. He's a gentleman from Montana. Of course you know him from his public service to the nation as a senator, uh and as our eleventh ambassador to China. We're just thrilled Max Bocus, you could be with us at today, Max Shuart Stanford and then on back to Montana's a politician. Do you have a recollection of that absolute shock when America woke up and in Nixon so changed that moment with China.

I do, I very much do, and remember the photographs of occurred there when Nixon went over. It's interesting to me too. This is not really directly on point, but Mike manstill forming bastard um. I came across the speech he wrote in nineteen sixty six, um explaining why the United States should spend more time with China and understand China. It was the best most effective statement I've ever read

by anybody on any subject. And I talked to him, to Kristenier about that just last week and he said, yes, Mike had a big influence on our going over to China, on President Nixon going to China. So yeah, I was. I was I do remember it, and this was so important, folks, because Senator Bacchus and Senator Mansfield and others in the House and in the dialogue, we're so isolated from a discussion that came out of all of World War Two

in the fractious fifties and sixties. Here is Henry Kissinger today with Bloomberg and Beijing Max Bacchus, looking at the foothills of a cold war? How close are we to? It's a beautiful phrase, How close are we to the foothills of a cold war? After what you've observed the US Chinese relationships in the last year or two. Well, we're slipping in that direction unfortunately, UM and I think it's it's a fridge. First of all, it's somewhat natural,

rising power, established power. People have talked about this so called considities trap, but we're kind of accelerating at The United States were helping. UM managed the relationship as well as we should. And in the same vain president she is the nationalistic He also is, I think contributing to the problem. We have two very strong willed people each side of the PA city and either one wants to really do a deal in the way one should do

a deal. So, Senator, there seems to be bipartisan support that there needs to be a real frank dialogue between the China and the US about trade. Um. So that seems to have some support. Where do you think this may be going wrong here? I think, Frankly, Um, I don't mean to sound particle a partisan political partisan. I think part of the problem is as President Trump's approach to this is a bit flawed. He is trying to shape shake China up by slapping these tariffs on and that, frankly,

is not working. I created that said now is much higer now was back when he took office. Second, it's not going to get the heart of the problem. Heart of the problem, clearly is is the structural problems in China for technology transfer subsidies and the like. But John, they solve it. It needed Frankly, somebody has sit down, a president understands this, a president who really wants to solve it, and and does so privately, not probably without all that is in Twitter, and starts to build up

trust and confidence with the Chinese. That hasn't happened, Senator bogg Is, because of news flow. We're gonna have to keep it shorter today and it's most regrettable, but I

must touch upon Hong Kong. Senator McConnell has provided leadership and with Senator Rubio of Florida in making a statement about Hong Kong by our legislative branch, he succeeded in that with the Senate of the House waiting for the President's signature and signature on a legislative effort to tell and send a message to Beijing for that matter, to carry lamb in Hong Kong. Is this appropriate foreign diplomacy by our legislative branch? Frankly, I have trouble whether, Um,

it's not going to help the protesters. Frankly, just more it will probably hurt the protesters, because if the United States is not to give a special status of Hong Kong, or if it thanks to certain people and on congret China over human rights, that's going to step back the protesters. Second is going to also put another nail in the buy bowler in in the coffin. That's driving the US and China apart from each other because very much upset China. And third is not going to help help us get

a trade deal. Frank. If I were in the Senate, I vote against it. This will hurt the protesters not helping Senator backs. Thank you so much. He's the eleventh Ambassador of China for the United States and we're thrilled thinking you join us today. 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 Key before the podcast. You can always catch us worldwide.

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