US and China Strike Framework to Ease Trade Tensions
15:36 Share

This is an iHeart Podcast.

Every business starts with an idea. How can you go from daydreamer to industry leader? Amazon Business accelerates your journey. With smart business buying, get everything you need to grow in one familiar place, from office supplies to IT essentials and maintenance tools. Amazon Business takes the buying experience you know and love from Amazon, plus tools that help you save costs and make insights-based decisions. Ready to bring your visions to life? Learn how at amazonbusiness.com.

AI is redefining what's possible for your business with more unique challenges to solve and higher stakes than ever. Microsoft helps you stay ahead.

Our trustworthy AI tools and guidance can empower leaders like you to drive greater impact. And with Azure's simplified platform management, we're helping businesses go further, faster, unlocking up to 150% improved output. Whatever challenge comes next, let Microsoft help you keep pushing forward. For more details, visit microsoft.com slash challengers. Bloomberg Audio Studios. Podcasts. Radio. News.

Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. The U.S. and China have agreed in principle to a framework for de-escalating the trade war. Now, this comes after two days of discussions in London, over nearly 20 hours. We heard today from Commerce Secretary Howard Lutnick. I think we have the two largest economies in the world have reached a handshake,

Right. For a framework. We're going to start to implement that framework upon the approval of President Trump. And the Chinese will get their President Xi's approval. And that's the process. So once the presidents approve it, we will then seek to implement it.

Now, Lutnick also said that export controls could come down if rare earths and magnet licenses are resolved with China. We also heard from U.S. Trade Rep. Jameson Greer. He said the goal now is to implement the framework speedily after it's been approved by both Presidents Trump and Xi.

In a moment, we'll get some perspective on the trade war from the Bloomberg Invest Summit in Hong Kong. We'll hear from Matthew Michelini, his partner and head of Asia Pacific at Apollo Global Management.

But we begin here in the States. Joining me now is George Schultze. He is the founder and CEO of Schultze Asset Management. George, thank you so much for making time to chat with us. Obviously, developments in the U.S.-China trade war will be captivating much of the market's attention going forward. I'm looking at the E-mini futures contracts right now. They seem to be a little subdued. Wouldn't you expect a more enthusiastic, positive response?

Well, the news so far, Doug, coming out of London is that you have an agreement to abide by the prior agreement to the Geneva Accord, as it were. So I guess it's good news because both sides are going to live up to what they agreed to do previously. What we're really looking for, I think what the markets are really looking for, more importantly, is a bigger trade deal that resolves all these bigger open issues, tariffs, back and forth, you know.

whether our market's going to be open with China and it'll be a huge deal when it is announced. I don't think that's part of this deal. This deal, as far as I can tell so far, is really just an agreement to agree and not breach the terms of the prior deal where

China was basically opening up to allow the export of rare earth minerals to the U.S. And in exchange, it won certain concessions from the U.S. So it was a dethawing of a big tariff war that had gotten started.

really out of hand. But it's good that the sides are both talking and it's good that they're both agreeing to agree. And I think what's going to happen next is most likely a broader trade deal. And the fact that you have news from Mexico as well is encouraging. And I think maybe the markets will absorb that and react a little bit more favorably tomorrow morning.

But certainly a nice thawing from where we were in the past, I would say, Doug. Now, we know there's been tremendous volatility driven largely by the uncertainty around tariff policy. We are in the middle of that 90-day truce before the reciprocal tariffs kick in, and that seems to be speeding up the process quite a bit. Would you be more comfortable taking risk now in the current environment?

I would say, you know, not just me, but I think investors around the world are excited about taking more risk as you get, you know, more of a thawing in these global trade wars. It's very interesting watching the negotiations. It's a multifaceted negotiation with so many different countries at once.

But this would be big if you get a big deal with China. And it's been back and forth. It's created a lot of volatility. Right now, the markets, the VIX is down, I guess, below 20. In the dark days of the early part of the tariff announcements, things really went the opposite direction. And now we've had a pretty good recovery. I think the worst of the trade

fears related to these tariff wars is really behind us. Going forward, you're going to have more deals announced and more progress going forward. I'm imagining that the Fed is going to breathe a big sigh of relief too, because this has been a dark cloud, I think, overhanging monetary policy.

It is, but there's this interesting dynamic between the Trump administration and Powell. So we shall see how it gets implemented. Right now, it doesn't look like any dramatic changes in Fed policy, although at least with regard to interest rates, but not many people are talking about the fact that quantitative tightening has been reduced somewhat under Powell. So the Fed is accommodating somewhat during this uncertain time.

Just not dropping interest rates so dramatically as Trump would like to see. So we get the CPI data on Wednesday for the month of May here in the U.S. If what we're talking about now is a little bit of relief in price pressure, I would think that tomorrow's inflation print aside, maybe we're going to begin to see more favorable news when it comes to inflation going forward. Safe bet or not?

Possibly so. But remember, inflation does tend to be sticky. I'm sure you remember, Doug, how long it took to increase inflation during the times when we had very record low interest rates. So these things don't seem to happen overnight. But sure, if you get a big thaw on these trade wars, most likely the path would be downward with regard to inflation and

you know, maybe that would slow the urgency, you know, or at least increase the urgency that the Fed can maybe reduce rates from here. One of the things that was popular during the Biden administration insofar as investing was concerned was the move into green energy.

The Trump administration right now, we are learning, intends to scrap some of those Biden-era climate measures. That may happen as soon as Wednesday, and they require power plants to kind of curb greenhouse gas emissions. If we see the EPA start to unwind a lot of the limits...

and perhaps provide a little bit more fuel, pun intended here, to conventional power generation. What does that do to your thinking when it comes to kind of the green energy trade? Or maybe you've already been dialing back from that. Yeah, I think there's some interesting opportunities to short sell companies that were really built up around the green energy trade.

Obviously, this is good for regular non-green energy, oil and natural gas. Remember, Trump ran on the drill baby drill platform. But I think it will happen, the dialing back of power plant emission restrictions. You're also seeing it in the big, beautiful bill with the proposal as drafted and passed by the House already.

will reduce a lot of the tax incentives for solar companies. And, you know, it's really a gutting of that industry. And, you know, no matter which side of the aisle you're on, it changes the dynamic tremendously for companies in those sectors.

So that'll be something worth definitely watching. At the minimum, it's going to dramatically change business plans. But more likely, some of these companies that have too much debt that operate in those sectors, like we saw Sanova earlier this week file for bankruptcy, there is risk of bankruptcy and distress for those companies that are over levered facing that kind of dramatic change.

So we're talking about power generation. Obviously, the demand from U.S. data centers has become a major component in this discussion. We've seen very robust building nationally of AI data centers. Are you a little concerned that perhaps this build-out has become a little too aggressive?

I do get a little concerned about it, Doug. I mean, to be fair, I got to admit, we had a big investment with Vistra Common Stock, and that company was really benefiting from the AI build out. But if you look at it, you step back and look at the whole picture, there's only a few companies that represent most of the demand for those new data centers.

And there is a concern. I don't think it's really been fully talked about yet, but there's a concern that maybe some of this is getting ahead of itself. And, you know, maybe we have more capacity than we need ultimately in these AI data centers. We saw a correction earlier this year when, you know, new technology was announced in Asia that would maybe reduce the demand for so much energy with, you know, with very rapid chip computing.

And maybe that's just a crack on the surface or a sign of worse things to potentially come. George, thank you for making time to chat. That is George Schultze, founder and CEO of Schultze Asset Management, joining us here on the Daybreak Asia podcast.

In business, they say you can have better, cheaper, or faster, but you only get to pick two. What if you could have all three at the same time? That's exactly what Cohere, Thomson Reuters, and Specialized Bikes have since they upgraded to the next generation of the cloud, Oracle Cloud Infrastructure. OCI is the blazing fast platform for your infrastructure, database, application development, and AI needs.

where you can run any workload in a high availability, consistently high performance environment, and spend less than you would with other clouds. How is it faster? OCI's block storage gives you more operations per second. Cheaper? OCI costs up to 50% less for computing, 70% less for storage, and 80% less for networking.

Better? In test after test, OCI customers report lower latency and higher bandwidth versus other clouds. This is the cloud built for AI and all your biggest workloads. Right now with zero commitment, try OCI for free. Head to oracle.com slash strategic. That's oracle.com slash strategic.

In today's changing job market, finding and retaining top talent is more challenging than ever. But with Express Employment Professionals, you can streamline your hiring process and save both time and money. Did you know that 92% of U.S. hiring decision makers expect to face challenges finding qualified candidates this year?

The costs of recruiting, advertising, interviewing, and onboarding can add up quickly. But Express has the solution. Go to ExpressPros.com today. Ready to hire differently? Whether you need contract workers or your next core team member, contact Express Employment Professionals. Express leverages advanced technology and a streamlined hiring process to reduce your recruitment costs.

From efficient job postings to customized candidate screening, Express makes hiring easier and more cost-effective. With more than 870 offices, you have a local team ready to help manage your workforce. Go to ExpressPros.com to find a location near you.

Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. Financial markets are closely watching to see if the world's largest economies can find a way to de-escalate the trade war. Now, economists are saying it's already tipped the global economy into a downturn. For more on today's top story, we cross over to the Bloomberg Invest Summit in Hong Kong. We heard earlier from Matthew Michelini. He is partner and head of Asia-Pacific,

At Apollo Global Management, he spoke with Bloomberg's Yvonne Mann. Let's talk about just overall what we're seeing in the macro outlook and the like.

It seems like public markets, at least, are really gripping themselves on over what's going on with trade. How much visibility is there in the private space right now, the companies that you own and the investors that you talk to? It's actually been the trade volatility has actually been a positive for private capital, private credit, at least out in Asia, for a couple of reasons. As I travel around the region and I go to Japan, I go to Korea, I go to Australia. If before the tariffs, they were going to invest $100 into the U.S.,

They're now doing $70 into the U.S., $30 somewhere else. Most of that somewhere else is Southeast Asia, it's India, it's Australia. Have you seen any signs of stress, at least? I mean, obviously tariffs, they don't weigh on borrowers in any way? There hasn't. A little bit on the cross-border for companies that are serving the U.S., but they're rethinking their supply chains. And that's actually created an opportunity for us to finance the supply chains, especially as they get...

overweight with product and they need to put factories in different countries. And so as everybody rethinks their supply chain strategy, it's actually been a big positive for private capital. What are the valuations then? Should I assume that things should be adjusted higher or lower in the region? It's hard to say on the equity side because most of our focus is on private credit or on senior equity.

But on private credit, we're still seeing good spreads and we're putting a lot of money to work in Australia. We're putting a lot of money to work in Southeast Asia at comparable spreads to what we're finding in the US and Europe.

There are some naysayers out there that say, you know, the glory days of private credit are over. You know, you're starting to see fundamental headwinds, you know, a global slowdown possibly here in the face of this trade war and coming at a time when public and private markets are seem to be converging in some ways where the pricing of direct loans is moving closer to public.

Are the glory days over, you think? No, I don't think the glory days are over. And I think what the trend you're talking about is direct lending or sponsored lending in the U.S., where it is going to be a cyclical business and it is a cyclical business. But the private capital trends out here are actually more structural factors benefiting our business. I was shocked when I came out here. I would have not guessed that we would have had a large partnership with the Japanese bank to buy assets off their balance sheet.

But we do because private capital out here is finding the right, the productive way to partner with banks, with companies and with sponsors. So it's actually a structural factor for private capitals filling a gap that the banks can't fill today. Do you need to subscribe a certain premium on private markets over public now in exchange for the loss of liquidity?

In Asia, there is less liquidity in the private markets than I think what you're seeing evolving in the US. You do earn a premium for being private versus public. Yeah. What is that gap right now? Anywhere between 150 and 200 basis points. Okay. What if it had a downturn? There's a lot of talk about this asset class that saw a rapid rise when global rates were essentially at zero. It hasn't been test-proof in a way when things slow down in the world economy.

What happens then to private credit? Well, I think you're already seeing it. There's some recent stats about amend and extends going up, the amount of PIC going up, or the amount of PIC is going up in underlying funds. I think you're going to see increased defaults and restructurings. But a lot of these private credit lenders are going to have to look at their book and see how they underwrote it. If you're a 2020, 2021 vintage loan and you underwrote a deal with low rates and low inflation,

You're going to have a much different terminal value and cash flow profile when you go to refinance that loan than some of the later vintage loans. Something that's also a trend that's happening in Asia is that, you know, some, I guess, asset managers are tapping into retail investors to get into the private credit space. I mean, this is, as you say, illiquid, not a whole lot of know-how, really. How does that change the dynamics of this market if there is a domestic or retail investor involved now? Yeah.

Yeah, you haven't seen, other than in Australia, you haven't seen private credit managers in Asia tap that retail market. It's really been for global product. And it really depends on the underlying manager. For us, where we buy everything onto our own balance sheet that we buy for retail or that we buy for institutions, our job is to protect that capital.

But what you saw out here in Asia is you saw a rotation from local equities and local real estate into private credit because you can get 10% yields, in theory, with low volatility and low default risk. And one of our flagship direct lending products has sold very well because of that. And they like the fact that we're buying these loans right alongside them. Matthew, I know you're spending a lot of time all over the world. You're going to be about to talk about Japan and the credit boom that we're seeing there.

In terms of geographies, where are the untapped opportunities now? So I was in Australia yesterday talking with some of the government officials and they have no idea where the long duration capital is going to come to support the industrial renaissance that we've talked about, which is a global theme. And same thing in Japan. You look at the average loan on a Japanese bank balance sheet, it's three years in duration and all in yield is about 175 basis points. So it's really, really high quality.

and really short term. And these countries are running with fiscal deficits and they're asking themselves, where does the private capital, where does the capital come to finance these longer term projects? And that's where private capital is going to step in. But I'd say right now, Japan, Australia and a bit of Southeast Asia. Matt, we got to leave it there. But thank you so much for joining us. Thanks, Lama. Matt, Michaelini there from Apollo here at Bloomberg Invest Hong Kong.

Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the stories shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Krisner, and this is Bloomberg. This is an iHeart Podcast.