Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene Jai Ley. We bring you insight from the best in economics, finance, investment, and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course on the Bloomberg. It is Wednesday, so we have trade talks and then we'll we have trade talks tomorrow at a higher level partial true talk. We've had low level trade talks through the week.
Why don't you bring in our partial guest, Drew Matis, MetLife Investment Management, Chief Market Strategies. Good morning to Drew. Good morning. We're back to square one, aren't we. It seems to be the United States takes a deal like that, like the one that's been reported in the Financial Times, an extra ten million tons of US soybeans and call it a truce. What would your take be that we
just lost? Uh? You know, I think you know. The alca with this trade story is going to be, do we have a long term sustainable solution for the US and for China in terms of our ability to trade with each other, and if we don't end up at a place where we think it's fair trade between both countries in perpetuity. Then this whole thing has been wasted, um and we should have just never done it in the first place. So I think, you know, I can't imagine that this is this is something that's going to
play well. And but you know, obviously though, markets are taking it positively, and you know, you kind of look at that and you think to yourself, you know, should you be taking this positively or should you be thinking, as you just said, we're back to square one. Well, they're taking it positively. People want to hear from dramatic is because you have a taking positive view of the economy.
Can you model a sub two percent GDP growth? Are you still nicely above two percent at some former run rate? We're still above two percent for this year and for next year. You know where where it gets tricky is you're beginning to see economy wide profit margins begin to dip a little bit. That could eventually lead to firms looking to cut back on things like investment and and and labor um. But we haven't seen the cut off
on the labor side yet. Uh And claims. You know, for me, claims is the most important data point around. It's not payrolls. I don't care how many jobs are created. I just need to know whether the consumer has to worry about being fired. And right now the answers no, claims are inching up just a little bit, just a little bit, Drew, Why is that data point so important? And why for you is that not a lagging indicator?
For many people, they might look at that situation and say, you know what, if we wait for hours work to drop away for claims to pick up, we're too late to the party. In fact, the party's over well because I think we've gone through such a tight labor market for such a long period of time that I think if you asked CEOs and hiring managers if things slow down or you're gonna pull job openings, are you not going to hire um? They might say, well, we're going
to be more cautious in our hiring. None of them, though, are at the point where they feel that things are weak enough where they think they can let someone go because they know someone else is waiting to hire that person. So once that person walks out the door, they are gone. And you've got to start this process of sifting through the labor market. What's left of the labor market or the part of the labor markets looking for work to try and replace that position. So, from a market perspective,
where is the opportunity right now? Last week we get punched in the face by a growth scare. The SMP five only drops a third of one percent. This week whip sword by trade headlines, we drop a couple of percentage points. What do you do in this environment right now? What are you suggesting people do to? Uh? You know, we've been looking for ways to take smart risk, UM know what risk you're taking first of all, because they're there. You know, you can take credit risk, you can take
duration risk so that you can lengthen your investments. UM, you can take liquidity risk UM and and so if you're worried about what things might do going forward. You know, one of the things that we've been looking at, you know, because of our our you know, what we're able to invest in, is we look a lot at private assets right now. And the reason we do that is because, UM, we're willing to give up some of the liquidity to
get the higher yield UM. And of course some of those some of those purchases also come with better protection. So you're taking potentially potentially less credit risk. Uh. And you're getting some liquidity risk, assuming that when you go to sell your public assets that those are actually as liquid as you thought they were in the first place the stock market. Can you go international in emerging markets? Are you all domestic all the time? With the two
relative that's like a relative ginormous economy, isn't it. Well, our investment management arm is really focused on fixed in coming. But give me an equity. Uh yeah, I mean you can, You certainly can. And and then the question is, well, you know where do you want to expose yourself too? And I tend to think of the world in as divided into two ways. You have the U S supply chain um, and then you have the China supply chain um.
And although the two are linked in many ways there are they are pretty distin to if you kind of dig down into the details. Yes, we all sourced from each other, but those two supply chains, you can usually see who's doing better by what the how those emerging market countries are affairing. I got to go back to your original work of more hears fed, one and done. We are one and done. Uh for this year? Um, we don't expect rate cuts next year. We don't think
they're going to be necessary. Um. And we think if you if you go more than one this year, then you're then you're really calling into question this whole idea that this is a mid cycle slowdown or that these are insurance cuts pre a miserable with us. And the reason you need to listen to this is John knows she adds value not only across all that John Frew and time can do, but really adds value on the real yield. You'll see it Friday here one p m.
Jean Bloomberg TV. And it really has come down John to the real and the nominal yield, a permanence there. She's fantastic and we're lucky to get some of her time this morning. Pree of these securities, think glob will Head of Right Strategy Pray. Let's start with the debate of the last twenty four hours. It's q A, it's not QA. Chairman Power says it isn't q A. Does
it matter whether it is or isn't. Prayer, what's the difference? Yes, So, hello, thanks for having me on, thank you for the kind words. So it does matter because you know, I think, um, what they're actually doing helps repo marketed. It brings reserves into the system. But a lot of the impact of QI was through the signaling channel. If you remember from oh nine to two fourteen, when they did QUEI, they were actually trying to push out the start of the
first higher of the first high. I thought that that signal through forward guidance was probably more powerful than the actual stock of buying. So I think what the FED is trying very hard to say is that this is not monetary policy. If they're buying treasuries and they're likely to buy bills, that this is not that we should not be taking any signal from monetary policy. So therefore it should not mean higher stocks. It shouldn't mean lower rates.
I think that signal value. It's it's important to distinguish. They really need another name for it. I don't love the organic QUI name. It makes it sound like what was the earlier QUEI, like toxic or you know, conventional queie. So I think we need a name like reserve management buying or liability driven buying. Sort of boring names, but liability liability driven buying just rolls right off the top.
The great unspoken yesterday at the International Monetary Fund as a percent of full faith and credit debt worldwide with a negative yield. This morning Greece, where their three month T bill a negative yield, grease is well. Is that a linear function or is there a kink or a tip point where there's too much negative debt? Yeah? So I think BUG and easy B are realizing this. I mean,
I think at some point negative rates become counterproductive. I would actually argue in the US, any negative rates is extremely counterproductive. It can potentially break the financial system because we've got you know, money market funds with fixed navs, we've got a fact reserve system. I actually think the US negative won't work. But even in Europe and Japan now they're trying theory, you know, they're trying other things
to try and reduce the counterproductiveness. I think essentially, you know, it's hard for a central banker to say this, but they have to say that at some point we're done. We really need the structural side, We need the fiscal side to come on, because at some point you can't keep lowering rates. I don't think, you know, even the other central banks will probably lower much more into negative territory.
But for the US I think actually Chapo has already said it's not on his list of things, but certainly among investors, I'm getting a lot of questions that is the US next for negative And you know that just creates more of the stitch field and people take risks that they're not they should not be takeing this confidence issue again, John, Yeah, Look, I think we all think the European fixed income market is totally nuts because it is there any surprise that the three months bill that
yield on it in grace is negative when you have a negative fifty basis point policy, right a CP I mean, that's what you've got a price off. Do you think Greece is money good for three months? Most people would assume they probably are for three months. Therefore, why shouldn't you would be down there and there's a currency calculation. Look, you'll get a ton of push back against that call.
I have no doubt pre that's where we're at. It's crazy talk in the bond market, and as you points out, given where Europe is priced right now, whether you're to go in the United States. One of the really interesting developments I think of the last couple of weeks was Japan and the b o J really really focusing on the front end and a focus that may drift towards the Federal Reserve. Chairman Powell talked about that yesterday, Prayer,
what are your thoughts about it? So, I think again, in the attempt to communicate that this ACCID buying is not jewey, I think they're going to try and focus on the front end. I'm actually not a big fan of that because we've seen massive influence into the front end. So the fan and it all depends on how they're going to do this. I hope it's over time, and I hope they actually had the report market through report operations until they bid that buffer. But they really should
not be eating a scarcity in the front end. So I was kind of hoping that they'll buy across the curve. But I think because of the communication challenge they have talked about the front end. I don't think it's an attempt to steepen the curve. I think it's just an attempt to say, look, we're not taking any duration risk out of the market, so don't go and take on, you know, credit risk. Correctly, that's not the intent of
this asset buying. Will there be a wave of new government paper and a wave of new issued corporate paper given permanence of low rates. So I think government paper absolutely. I mean I think depending on the election next day, I actually think this customerlus happens either way, it's the respective of the outcome. So I do think the deficit is going to keep rising. You know, corporate is interesting.
Financial conditions are extremely easy, you know, credit spreads are tight, and yet COPID supply seems to be declining, which I think reflects the dropping capex. So I actually would love from a macro standpoint if there is a pickup in corporations. But I think if capex is week, then the demand side for corporates to issue all these people, you know, do they have productive um you know avenues to it? No they don't, But that's yeah. I I totally take your point out, An John. I think this is a
huge deal. Is there a demand for all this money that's out there to go somewhere? And I'm not sure there is about access to capital across the capital the prayer right, um, you know, and if it's just financial engineering, you know, there's a there's some some limit to that, so I think this is the program if the FED is trying to resolve this uncertainty, you know, business investment, and all they do is cut treats. I'm not sure the seventified base points of insurance cuts say enough, do
we do? We need a government investment. This is an enduring theme yesterday with a managing director. You know, you're in Davos and there's a big ad on the side of a bush. Plus you need to have infrastructure and name your central Asian country. Are we at a point here where we've finally got to do infrastructure coast to coast and worldwide. Yes, I think politically that might be
harder in certain parts of the world. I think in the US, once we get the election out of the way, I think when policymakers are sort of looking at how do you stimulate, I think infrastructures the way out. It's just going to be up to details. Is it all fully government funded? I think all of that we have to figure out. But I'm kind of hoping that as we get into full on campaign season that both parties will sort of bring up this infrastructure idea as a
boost to aggregate demand. That's a bit far off. Thank you so much the security. John, A lot going on right now. I see Brazil. It's it's a piece of data here on an emerging market with some inflation there. But we knew that global growth are really ebbing in here in a lot of talk yesterday, John on food prices in China is a real domestic constraint within their debate. It's out well in access of two standard deviation on pork prices as well with j O. H. C. I'm
Funds the head of their credit there. Don't butcher this, okay, then you please go on. You've got to have a gun lyle Cho, did I do? Okay? Charlie to there we go. You set me up for this. You're in on this too, I'm not. Do you know the great Mark Crumpton. Mark Crumpton's in the News Hall of Fame in Washington. He keeps a list in his desk of all the names I miss pronounced. So you're on an August list right now. Trying to bring in our Stinard
guests this morning. To Lalie, to Charlie, He's going to get it right at some point, Larlie, I've promised you. It's great to see you, Thank you. Let's talk about this market. Last week it was recession on, recession off. This week's trade deal on, trade deal off. He must be really really frustrated at the moment as someone staring at this market, looking at how it's whip sword by one headlight to the next. What are your thoughts at the moment? You know, I wouldn't say it frustrated. Um,
I think I sometimes just put the blinders on. It's the same story that just repeats and repeats and repeats and repeats, and there's no need to do knee jerk reactions. If you sort of scratch the surface in the market, it's the same story. Defensives are expensive, both on the equity and the credit side. Um. And the credit overall just seems really expensive. It's actually one time and you know how opinionated I am, and pretty much everything, I
really just lack conviction. I don't know where we're gonna go from here. We haven't broken out of some key ranges in credit and high yield. For instance, for how you've spread really the range of twenty nineteen, the tights in and around through inchin a fifty basis points the wide through much of the year in and around four and fifty basis points. And right now where are we somewhere slap bang in the middle thirty five forties something
around that the upper end. But here's the thing though, So this is where the top down in the bottoms of really differs. If you look at it from top down, you will see moth to date, we're about color it, let's say forty BIPs wider. What's really fascinating is you know, if you look at the sector's energy, do you know year to date energy returns are actually negative one percent? High yield is up where people are hiding out, like in defenses. The cable sector is up sixteen and a
half percent. So and here's the other stat which I think people forget. Two thirds of the high yield index trades inside the index and the rest third is like cat and cats and dogs. It's really hard to find value. And I think this is where you know, I always do the advertisement for active management. You you need somebody to dig through the rubble to find you the value and where do you go because top down numbers can
be misleading? But what kind of signal do you take away from something like triple base, which is the bottom of the stack in investment grade and triple sees bottom of the stack in high yield. That spread thinks the widest in several years. What kind of signal do you take away from that, Lilly, The outperformance that you're getting in and around the border of investment grit in high yield and the underperformance that you're getting right at the bottom. Well, look,
the triple cs, majority of them struggle. They're either secular pressures or cyclical pressures. And some of them just as the restructor triple bees. You know, it's it's simple supply and demand. Look at the flows and are coming into credit. You just you just gotta buy. It's phenomenal flow. There's nothing you can do. I want to congratulate you and arguely the essay of the month on accounting it is a fabulous workout of what's called adjusted eb down. Now
we're not gonna on a Wednesday. We're not going to do this on a Friday. We go into this in detail, but the bottom line is something down the income statement that has taken as gospel by the street is is suspect. Why should I not be addicted to adjusted? But uh, like I'm addicted to the VIX because it's nonsense. It's made up. It is a calculation of the income statement pulling in depreciation from the balance sheet. Right, that is
made up, no question about that. It is. And I think ibida to a degree in certain industries can give you a clue. I'm not against ibada. What I'm against is adjusted ibada, where we start adding back things which internally we call them, you know, managements past, since like you open up more stores that you needed a retail um, those those should not be given the benefit you you messed up. You have we this is critical and I don't want to get you in trouble with your general counsel.
But with we work, we company and community adjusted ib are we finally at a point, not that we wander back to the romance of Graham, Dad and Coddle, but we finally at a point where we get away from some of this adjusted foolishness. No, because she answers single word questions. She's very very straight about how she answers questions. Um. No, because I mean I was glad that there was some rationality perhaps was coming back into the market as people
actually read through the prospectives. Perhaps in the first time, which which is a good start. Um, But look at you know, I'm looking at some of the high yield deals that really remind me of my leverage loan days back in two thousands six, two thousand six, two thousand seven, where we would start with like negative twenty nine a vibida, we would add back and it'll be two hundred million dollar vibida and that's what the deal is sold. And here is the catch. This is where people forget. That's
what runs That's where your covenants run off from. That's what determines how much leverage you put on on business. I want to make covenance is that Raiders have lost ARC in two thousand six. It's what got us into trouble. What do you think the consequences if this will be You've written extensively about it, and now you have I've read about it. But for the benefit of our listeners, like this covenant light era of the last especially the last few years, what do you think the consequence of
that will be? Well, it's gonna be a prolonged default cycle. It's going to be substantial lover recoveries. And I think you know, I joke and I said, the world is upside down, and you're actually seeing it more in the leverage lawan market now, where people are supposed to be secure and feeling good about it. It is estimated that the leverage lawan recovery this cycle is going to be around fifty five cents as opposed to seventy five historically,
and technically you're secured. I think people forget again. This is just the top down investing and running with our historical knowledge. The world is really upside down. Like you don't just talk the talk, you walk the walk. To a should congratulate you on the year so far, your j O h C M income funders up. I believe you at about through so far. So let's talk about security selection. What are you doing at the moment? What
are you focused on? Well, simplistically, trying to avoid the losers and and just focus on the winners, which is really hard to do. On credit. I mean, I don't think we've actually bought a single bond in the last three months. Really, there's nothing because of issuance. It's just a frenzy now where you just have to step aside. It's it's just the pricing does not price for what I would consider to be the risk premium. You don't get compensated for taking on what I would consider to
be a less liquid piece of paper. That's just a nature of the high yield market. And I think the covenants are poor and the leverage is misrepresented. Christ can't shup with you. Gotta let you go. We wish we had more time with Lano. We should have we account to do that tell Childhood J H. C. M. Johnny gets right here on bloom Black Surveillance. I want to stay in geopolitics right now because the news is literally breaking.
I'll read you the Chinese press release here. Just it's one of them with a couple of paragraphs to it. We bring in a link mark with us for the Brookings Institute. She has written wonderful books on the presidential history, presidential messaging, presidential structure and governance. And Elaine. I need to rip up the script and go right to Turkey.
This is the Chinese treatment from Genoa of Mr Aritawan announcing on Wednesday the Turkey launched operations Spring of Peace in the Northern Syria quote together with a Syrian National Army are Turkish armed forces launched the operations spring of peace towards a p P, kk YPG and DAISH, the Islamic state terrorist organizations, and and this goes folks. This is seven eight hours away from US four thirty in
the afternoon, Elaine. This takes in all history and apparatus of the United States of America to treat to divide intelligence to consider a set of responses. Is that apparatus remotely in place? Right now, the apparatus is fully in place. The commander in chief, however, operates without consultation of the people on the ground. The military is curious at this.
The general who was in charge of this until he retired in March has written in Defense One and It's an online military blog about how appalled he is at Trump's action. By pulling out American forces from the Kurdish um occupied territory, President Trump has put at risk ten thousand Isis fighters who have been guarded by the Kurds.
So if chaos erupts and the Kurdish guards are fighting the Turk as they appear to be doing at any moment, then ten thousand Isis fighters, most to whom are more than happy to build map is going the flight against the United States will be roaming around actually rearming, and want to try to paint the map here of quickly, Paul Sweeney, UH, and and that we know where Syria is on the eastern Mediterranean, call it north and northeast of Israel. And then you go up to that border
with Turkey four or five miles long. You're eight hundred miles away from Istanbul. You're four hundred miles UH northeast northeast, I should say, from Damascus. In all the maps show a presumed safe zone or border. Paul, I don't know how many miles that is. Is it a gaza strip with I don't know, but it seems the messaging is
a safe zone exactly. So, Elena, I think a lot of people are trying to, you know, get their hands around the news over the last couple of days of President Trump's UH policy shift as it relates to the Kurds. What do you think are the short term and long term implications of what the president just didn't well? This short term implications are clearly that the Republican senators whom he needs to defend him against impeachment are now criticizing him,
including two of the most powerful and strongest Allies. Majority Leader Mitch McConnell and Senator Lindsey Graham are appalled at this action, and I don't know if they can take any action to stop it or reverse it, but it may be too lated. So in the short term, this seems to be very tone deaf politics. In the long term, it clearly means that no one's going to trust the
United States of America in international affairs. No one has been a better ally to us in that region than the Curred and the Curds are also very good fighters, and they have fought with us and died with us. You can find a clip of Trump even commending the Curds for fighting with us in the fight against ISIS, and now he has advandoned them to SMA. Just for the second discussion, I'm going to take the tact of the president tweeting. I'm not going to go over the
tweets this morning. There's there's over a dozen of them. But bottom line, he says, the emotion of America is why are we in those distant wars? I mean it sounds like Jefferson and the you know, the Barbary pirates of another time. Tell me, Elaine, the history which you are expert on of our emotion of our men and
women in distant wars. Um. We have had men and women in distant wars since the end of the Second World War when we became a world our and we have intervened in very many places where we shouldn't have been. And then we have intervened in places where it made sense for our national security when you had an enemy like ISIS that was chopping off people's heads and taking kidnapping victims, been causing um havocs throughout the region. Um. Yeah, it made sense for the United States to come to
the aid of people who are trying to defeat ISIS. Um. Does this mean that every intervention has been correct, No, of course not. But sometimes the United States does the right thing in the world, and in this instance we did. And therefore a blanket foreign policy of withdrawing from the world is apt to cause more harm than good. So Lane, you mentioned you know the impact on the Republicans. How do you think this is going to go to impeachment?
And that's kind of where the president has been tweeting very aggressively. That's certainly top of mind. Not surprisingly, how do you think the impeachment thing is just going to play out. UM. I think what's going to happen is that we will see the House right articles of impeachment. And one of the first decisions they have to make are they will have to make, is what do they write articles on. For instance, it's clear that they can write an abuse of power article based on the conversation
with the Ukrainian president. It's clear that they can write an obstruction of justice UH articles based on actions during the Russian investigation, and based on yesterday's decision not to um not to respond to any of the House's inquiries for and request for information. So the question is what else?
And I think that one of the things that is throwing a sort of wrench into this is is this action he took with regard to the Kurds, is this in fact something that should be included in an article as impeachment because it is in fact dangerous to US national security. And I think that they're gonna have to They're gonna have to a noodle that one. And I don't have a sense of that. This has been a great for Thank you so much. A linkome our with us with breaking news and you're on Turkey a lot
of other news as well to look at. 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 Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio