Chile’s Popular Unrest Is a Lesson for the World

countries and continents. What does that mean for markets? We'll also talk credit, and we'll discuss whether or not some cracks are actually starting to emerge, and of course, speaking of cracks, will talk about the craziest things we saw in markets this week. You see what I did there? Go? Okay, I'm glad someone sorry, But as you said, we're gonna

take a look abroad for much of today's program. I also do want to get sort of a temperature check on the U S Stock market, And luckily for us, our first guest is a guy who can speak with authority on all of these uh subjects as a expatriate brit As a expert of Latin markets from spending some time in Mexico City for the Financial Times. The only thing missing this week is a Red Sox appearance in the World series to make him aboutely perfect guests for this week, and I hate to rub that in, but

John authors, welcome to the show. We can live with it. It's we'll not let Yankee fans who needs, you know, who needs the championship every year to justify their existence. I'm very happy to live in the the aura of last year as a Phillies fan. I'll take once that was John's way of rubbing the rough Yankees loss. And yes, that's right. And she catches everything. You can't get anything. Sarah also joining us this week. Now, Sarah, let me introduce this guest by saying, I'm thinking back to two

thousand and sixteen. There's a lot of concern about the so called turn in the credit cycle. And as a guy who's covered stock markets for way too long, I can tell you stock market people get very nervous when they hear about a potential turn in the credit market. I think the thinking is that fixed income investors are a little bit smarter than your average stock trader. They see things coming down the pike. But anyway, Lisa Brahmowitz and I at the time wrote a calm for what

was Gadfly then it's now part of Bloomberg Opinion. But we made the quip in the beginning that maybe we'll both be in retirement homes when this credit cycle finally turns. I gotta say it might be time to call the retirement home, get me some some slacks with the elastic waste band, and uh, I don't know a nice easy boy because I read something there it's drama. I read something this week that makes me once again wonder is

the credit cycle turning? Dun Hunt Hunt? But to help us get through that, we're happy to have a first time we're on the show. Long time listener, I hope Molly Smith from the Credit team, welcome to what goes up. Don't get those pants just yet. You're good. The credit cycle is a you know those baseball fans out there want to say, is in its ninth, tenth, whatever inning we're talking about. So we're just gonna keep on rolling streak,

is it okay? But John, before we go abroad, I do want to start with you and just sort of get your sort of thirty thousand foot view of the US stock market right now. I know you were a little bearish uh this year based on valuations. Uh, but I feel like you're sort of coming around to the bowl case a little bit. Walk us through how you're looking at this. That's that's questionable. I've been I've been too. I've been too incorrectly bearish for too long on uk

US stocks too. To compitulate totally, because I know that if I truly capitulate, that will be the moment when we make the peak. You this is something that all market reporters sort of the prayer that you start with

a Lord, do not make me into a contrarian. INDI so um no, I can I continue to think that in the in the very long term, if you're talking about the kind of people who read US are most interested in long term asset allocation, it's very, very hard to be excited about US stocks because any sensible measurement, they are historically expensive and the only reason they look like a decent buy is that they are relatively cheap

compared to so that continues to be the case. What I think it probably is fair to suggest is that there is just so much negativity, so many genuinely really good reasons, excuses, but also reasons to get the heck out of the stock markets, and instead we are still very close to this sort of invisible, invisible lid of about three thousands on the SMP that that does suggest that once a few good pieces of news came in short term, that's got to be a good reason to

think that the pain trade will be particularly for people like me. You've been telling you to give market that the pain trade will be will be up on the stock market. So tactically, no, I don't think there is good reason with what we know now to be hugely,

hugely bearish long term. If you've got a choice between if you've got a choice between haven assets, or if you've got a choice of other equity markets around the world in which to invest for the next ten years or longer, I'm still bearish about the U S stock market. John one investor over at UBS, said something to me that really struck me this week, and he said, the pain trade won't just be stocks going up. The pain

trade will be a potential rotation. And we've been hearing about this now for a couple of weeks, and we've started to see some strong performance and the likes of banks and the like of likes of energy shares. Do you get the sense that this is something that will actually be sticky and we might actually see this takeover as there it's is, it's still just way too soon

to tell. It's well, it's too soon so but but we did have about a month or so ago now, we had the quant apocalypse or whatever you want to call it. When momentum, the momentum strategy, the momentum factor really did have quite a severe crash. That's the whole point of momentum. It works most of the time and very occasionally really crashes um. But the fact that that happens is an indicative that something may be ready there for the turn um. Value stocks is another one of

those things. I consider myself a value guy. Uh. The number of times it's looked as though value is ready to turn and take over again in the last decade is enough to make a grown man weep. Um. It's like waiting for God. Oh I would I mean everything. I suppose it's fair to say that with the past sing of time UM, we must be getting closer to a point of value out performance. I guess that's fair

to say. And when you think about it, Um, there's a school of thought, and I admit I might be the only pupil in the school of thought, but that stock market corrections can occur on both accesses of the graph, you know, not just price, but time, and if the market is basically not that far above where it was in January of two thousand and eighteen, that's a very very good point, and I think that it should be made more often that basically you can make a very

good case for for the vol apocalypse, as I think that that was the volpocalypse that might not round. The quanto pocalypse at the beginning of February of last year really was something of a turning point. That we had a brief melt up after the tax reform, and in many ways, depending on how you measure it, nothing has

happened since then. You can also make an argument if you're looking at bonds versus stocks, the classic acid allocator way of looking at it, sort of last fall, when if you if you remember, we were all worried about yields going up, right, yes, and and so there was there's another turning point that has not been returned to when you look at stocks relative to bonds later last year. So you, I do agree with you. You corrections don't have to be violent and over the passing of time.

You could say we are in a correcting phase. Yes, all right, so Molly, let's switch over to you. I gotta say I was kind of looking forward to shopping for retirement homes. I my time come and the elastic wastman pants you can still wear, can have some suspenders on, taking my my hopes and dreams here. My dad used to do the rest in peace, Joe Reagan. My dad used to do the sweatpants with suspenders. That is the power or a retiree. That's what I exactly I'm looking for.

But let me just read something that came out from your colleagues on the credit team this week and the headline it's beginning to look a lot like two thousand and nine. But let me read the lead. Lead. Investors beware, key indicators of a turn in the credit cycle are starting to emerge, reaching levels not seen since the last recession.

Upgrades of US companies in high yield markets are trailing down grades by the most since two thousand and nine, and according to SMP level ratings, so it's focusing on the upgrade to downgrade ratio um well, obviously, yield spreads are still not screaming anything, any alarm bells um to the market at all. But what's your sort of overview from sort of the macro perspective of the credit markets

right now? Yeah, I think when you want to talk about it from a macro perspective, that the more leading indicator would be what are yield telling you? What are spread selling you? What are market participants who are investing in these products that would then give you these yields and spreads? What are they telling you? Um? And that's not just at all to the rating agencies, but they're not putting any of the money into the markets right now, so it's a bit a bit harder to gauge the

pulse from that audience alone. So when we're looking at just talking about how does credit feel right now? Is this two thousand nine is the cycle turning? It's really hard to say that. Right now. Credit is having a remarkable year in both investment grade and high yield. On the corporate bond side, we're up double digits in both asset classes. And if you've held either of those from the beginning of the year, I mean you really haven't had to touch either. You've made a remarkable return from

just holding the index in either one. Obviously, there are different exceptions to that, like when you look at leverage

loans that's been a source pat this year. Obviously big part of that stemming from when the FED has has reverse course from the end of last year, going from hiking rights to now in a cutting cycle or or a pause at least, and as J. Powe would describe it, So it's definitely hard to say that this is the turn right now when a lot of deals are getting done, issuance is still strong, and the flows are looking strong too,

so people are still buying these products. Like you said, double digit gains in i G, double digit gains in high yield. We've seen double digit gains and stocks if you only use the year to date period. However, we are at a point now where investors seem to be getting testy. For a lot of the credit investors that you speak with, do they seem to be as nervous

or jittery? Are they still feeling pretty good? It would definitely feel like they are are definitely feeling pretty good, especially because of when you look at primary market performance, which is the most recent indicator of what the pulse would be telling you. That's the most accurate UH price gauge out there for where assets should be trading at.

And we're looking at really really strong performance across the board, and that deals are getting done in both investment grade and how yields granted and how yield These are mostly higher quality names, so we haven't seen a ton of issuance from that triple Sea bucket, the lowest ratings to here. But even triple ces right now are having the best run they've had in a year performance wise, and that is hard to rationalize that against what maybe feels like

two thousand nine from a raider's perspective. It's part of it, just this giant ball of money. I think that's how Tracy Allaway would call the giant ball of money that's gotta roll somewhere. And and it makes me bring up another piece she wrote this week, uh uh, the headline being with little yield in sight, bond buyers turned to a liquid debt And it's basically talking about how an investment grade um there is a demand for bonds that don't trade very awesome, very often highly a liquid and

how big of a risk is that? I mean, I'm thinking, if if the payments are coming in if the coupons are being paid, how much do I have to worry about liquidity in as a credit investorent. If that's all you want, then you don't have to worry. And there are plenty of buyers out there that that is their mandate. That's the pension funds and the insurance companies of the world that they're the typical buy and hold community copound clipping, not looking to get any kind of price appreciation. And

these are very high dollar price bonds. One like traded around like the forty range on cents on the dollars. So if you're looking to buy at that range in the one sixty area, there's not going to be a whole lot of capital appreciation, right because at the end of the day, you're getting paid back at a hundred cents on the dollars. So clearly this is not where you're going to get the big gains of the bond market, and that's where it really becomes like an individual credit

pickers market. But yeah, if you just want to buy and hold, go for that all day long. It's great strategy. Welly, you also get very involved with the earning season and I feel like on the show Whenever we talk about earnings, we always think about the stock side. But you've been very involved in the coverage of Tesla, which did post a surprise profit gain for the last quarter, also for which lowered its full your forecast, what have really been

the standouts and from the credit side, what have learned? Yeah, so those are the big ones, especially auto earnings this week. That it's uh. I think we focus on Tesla a lot for pretty obvious reasons. Right, It's a pretty flashy company in every sense of the word, has a pretty flashy guy running it. So when the thing is from a bond perspective, it's I feel like it's getting increasingly

less of a credit story. It's Tesla is not at all like a massive name in the high yield index, and it's hardly a bell weather of where to sense like how high how people feel about the high yield market. Um. But granted, even saying all that, like looking at Tesla specifically, this really is a great sign for the company, and that this is UH to see that they're posting now more quarters of positive free cash flow. We're wondering when are they going to finally get to being sustainably profitable.

I hold my breath in saying we could be there, because certainly we felt this way a year ago and that didn't turn out to be the case. But it's looking better this time around. And for Ford, unfortunately, um, the this is where you might say to start to say, is this two thousand five all over again when the automakers proceeded the ultimate the financial crisis and a few years later. So with Ford, it's a very different story.

And GM could tell you the same thing that the growth overseas is certainly challenging, and I'm sure we talked about this on the show all the time, about the macro challenges in China and Europe in those markets, and it's not the best time to be buying a car right now. And that's where Ford is struggling. Has been going on this multi year restructuring plan and is increasingly looking like they're going to get another downgrade. Don't cancel

my sweatpant order just yet. Yeah, let's let's do a tour of the world here, because I really wanted to talk about Chili. Uh, you know, obviously we came in on Monday to these alarming headlines. I guess if you're paying attention over the weekend. Unlike me, you saw the news over the weekend about these alarming protests and Chili

really turning violent. Uh, several deaths. I don't know what the count is now, but um a lot of it being uh pinned on, of all things, the increase of a subway fair um and your headline UH really stuck with me. You wrote, the Chili unrest has a worrisome message for the rest of the world, and then in your commune, right, if it can happen in Santiago, it can happen anywhere. So walk us through. You know, how

alarming should we be? And you know, one thing to look at this from a sociologist perspective, but obviously our audiences markets perspective. So so how worried should investors be about this type of thing? I mean, if, first of all, if you're an investors, increasingly the sociological things that I'll beginning to are you it's is civil order going to break down in some countries, and that even includes my own home country, which justiness can probably guess is Britain

where things are getting very alarming. Indeed, is the country still can't work out how to how to resolve brexits now in the case of Chile, it is by an order of magnitude traditionally the calmest, stablest country in the region. It did have a very unpleasant dictatorship for a while, that was a stable dictatorship. It had had the longest continuous democracy before Pinochet took over, and it has had a stable democracy without pause since Pinochet fell peacefully. So

it is the stablest country in the region. It is by any sensible measure, the wealthiest country in the region. And one of the critical points, which is why this is alarming for a lot of the markets type, capitalist type of people that we talked to at Bloomberg, is that it's the country in Latin America which is has done things exactly the way your average markets person, your average Washington d C. Policy wonk, would think they had

to do them. Under Pinochet, you did have then known as the Chicago Boys, a group of people largely trained under Milton Freedom of the University of Chicago, established away for chill later work, and that plainly does have a lot to do with why Chile has performed better than most of the rest of the region for a long time.

The pension program that they basically many people would say a better version of the four oh one K and better thought through version of the four oh one K which they established in the late seventies or early eighties. And that's one of the biggest things that people are now protesting about that that we're having the first wave of people who have really been on one of these

pension plans throughout their working lives. And I've had plenty of emails from chileans two hundred dollars month mentions for people who have worked as engineers for thirty forty years. What is also very interesting, just just throw the other final point, which is which is concerning, is that yes, it's transport fairs which were aimed at making it helping

ease the transition away from carbon fuels. And also there's a fuel price increase, a general electricity price increase all over the world that tends to be the catalyst when people are angry, including the Hill Jane in in France. To make it clear that this isn't just a Latin American story. You've got to be very careful indeed, when you make people pay more for fuel for energy for transport.

You had a follow up column as well, and the title was the big issue confronting the stock market, and you mentioned Chile, you mentioned Spain, Braxit, and really what it comes down to is what you say is inequality. As for companies too, when you talk about mode that companies build around themselves competition wise, when they can keep building themselves up to be larger and larger, how does

this actually affect the process of investing and thinking about markets. Well, the moats phrase is a beautifully folksy phrase that it comes from Warren Buffett himself. He looks for companies with a wide economic moats and coming from Warren Buffetts, who manages to make being a plutocratic billionaire so charming and

folksy in Midwestern and it sounds really cool. But when you think about it's actually when you when you say you're building an economic motor around your company, what you mean is you're ruthlessly exploiting it's whatever monopoly power it has since entrenching it in a way that you can rip off people for more than you otherwise would be able to rip them off. Um and uh, that has been a process that has been rewarded. This comes back to the long term beer case for the US stock market.

If you look at um, the priced book multiples that people will pay on the biggest five companies in each sector compared to the rest of the market. I don't have the numbers in front of me, but it's like double um. And if you look at the profitability of the biggest companies compared to all the rest, again it's quite startling. The big get bigger, get more profitable, and the rest are left nowhere or very very little to do.

The other interesting thing, which might come back to some of the points that that Molly was making there there is an interesting debate whether this is about exploiting monopoly power or whether it's about exploiting the ability to leverage yourself up seriously to the hilt. Because the leverage by all the nor sensible measures, debtory bits are or whatever is of the biggest companies in each sector is again off the top of my head, of an order of

double the typical leverage for every body else. That's the leverage we're seeing in the economy is largely these huge, well protected companies. And that then needs policy question, which you don't need to be Elizabeth Warrant to think there might be a very good case for splitting some of

these companies up. But does that then begin to become the moment when actually the amount of credit we've extended gets very nervous because we've extended them to these companies that we've allowed to get so big they rip us off, and once we no longer let them rip us off, they might also not be able to repay their debt, but we're still extending to them. So it's it seems that like that that that we haven't reached. So maybe we'd better let them keep ripping us off or otherwise

keep on doing it. Yeah, sure, let's keep giving the money. It's so cheap. Why not everybody is so happy? I mean exactly what Mike had said before. There's just this giant pile of money. Where is it going to go? And you have I'm sure we have where ever we

hammered this all the time. It's the negative yields in Europe and in Asia, and where else are you going to park your money and expect to generate some sort of a reliable turn And right now that's us fixed income and particularly credit that is that is really proving to be that place. Molly said, the magic word which allows us to transition into the craziest things we've ever seen.

This week, she said it fixed income, and we got a call into the Bloomberg What Goes Up podcast hotline from our own fleece mirans Uh with a very interesting, craziest thing regarding fixed income. Let's give a listen. Almost nobody knows what fixed income is. That's according to a Bank of New York Mellon survey of about two thousand people. It turns out that only eight percent of those people

could define the term fixed income. It's even crazier if you think about a broader group of people, say people who were unwilling to fill out an online survey about investing, maybe the percentage of people who know what fixed income is it's actually a lot lower. My only question I wonder if the people who answered fixed income is an investment that pays you a positive yield, if they were ruled in incorrect, Maybe that's maybe that's people really just confused.

You're truly positive at least had sent me this survey, and you know it kind of honestly, I'm embarrassed to say this now that I am a fixed income reporter and I took a fixed income class in college and left that class not really knowing what fixed income on. That's a really that's hard on on the part of the teacher. Then the guy actually was a Moody's officer during the financial crisis, So maybe that's as I've been into, but I have thankfully learned since what fixed income is

to know. Yeah, it feels good to know what it is. And as a reminder, if you want to call in and let us know the craziest things that you guys have seen in markets, or ask us any questions, let us know what you're up to, what you're thinking about markets, feel free to give us a call. That number is six or six three to four three four nine zero, and we may even play your message on the show. All right, I guess I'll I'll try to top that.

I don't know if I can top that. That's pretty good. Uh. But on Thursday, the so many people in the markets suddenly became fixated on a speech by Vice President Mike Pence about China because there there was concerns that he would say something offensive and blow up the whole trade discussion. Um, So, my craziest thing of the week is that people in markets actually paid attention to a speech by the vice president any vice president, John, do you ever remember traders

watching a speech by a vice president? The last time Mike Pence gave a speech? Oh okay, what was that? When was that? Or he was supposed to give a speech and it was highly critical of China where he was supposed to That's yeah, he got canceled and then it postponed to this So same speech was paying attention to the vice president not giving a speech. That's even crazy.

I think I got one. Ok so uh. Speaking after the Tesla earning this week, I was looking to a convertible bomb matreaty they have due next week, and in the past this has been I don't want to say, one of the highlights of my year, but certainly something that we look forward to to see, Like will Tesla be able to make this? It's always a question. There's always a bit of skepticism leading up to these end.

I looked at it this week and like, man, like, they've got a record amount of cash on the balance sheet. I almost started to write the headline, Tesla's convertible bond to drop in the bucket compared to record cash pile. Wow. I never thought I'd see myself right that it didn't make it to the print, but I thought it. I definitely thought it for a minute there. That's pretty crazy. Sorry, yes, coming, okay, John, how about you? You You have a maddest thing of the week.

I guess the best example I can I have a few coming on from the discussion of the big getting bigger is that this is a factory that I found out from Bespoke Investments. If you take what you might call the NASDAC too, the eternal rivals Microsoft and Apple, their market their combined market cap is now virtually identical to the market cap of the entire Russell two thousands. Unbelievable. So just these two companies are now basically the same size as what most investors take to be the entire

small cap sector in this country. That is amazing, and that sort of brings to mind your point about anti trust. I don't think that's an issue that's going to go does It's well? Anti trust. The fascinating thing is that it's one of these issues which unites people at the

ends of politics against the middle. It's a perfectly respectable left wing Elizabeth Warren or right wing libertarian argument for really aggressive anti trust, and I think it probably will happen at some point, and a lot depends on whether it's actually done well. Alright, Sora, how about you? All Right?

So what I have today isn't so crazy, but I think some people will find it pretty surprising, just because when we think about value and growth, people always talk about the demise of value is value in a crisis, and people typically think about value in a long short way, which has not done very well over the last many years.

You could say, but if you look at a long only version, if you look at the SMP five hundred value index that actually hit a record high this week, which many people might look at and say, how in the world is that possible? But the fact of the matter is that if you look at that index, it's up about four percent since the bottom of the bull market.

Growth stocks are just up even more. And it really just brings you back to the idea that it's really really hard to find anything that just hasn't done well in this bull market, right and to go to your long short uh point, it's hard to find a long short strategy that's done well. Absolute that's pretty good. I think I got to give it to our Powerfullice brands with the survey on no one knowing what fixed income is. That's uh, that was pretty startling. She beat me to it.

It's sad. Get out there and tell the people, Molly, they should subscribe to the Credit Daybook by yours truly spread the word shameless plug in there for Molly Smith. That's good. That's another Bloomberg plug. We're all the same team with the plug bote Molly Smith, John Authors. Thank you so much for joining us on the show today, What Goes Up. We'll be back next week. Until then, you can find us on the Bloomberg Terminal website and app,

or wherever you get your podcasts. We'd love it if you took the time to rate and review the show on Apple Podcasts so more listeners can find us. And you can find us on Twitter. Follow me at at Sarah pont Sech, Mike is at Reaganonymous, our guest on Authors is at John Authors, and Molly Smith is at Molly Smith News. You can also follow Bloomberg Podcasts at podcasts. What Goes Up is produced by tober Foreheads. The head

of Bloomberg podcast is Francesco Levie. Thanks for listening See you next time.