Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along
Speaker 1: with Jonathan Ferrell and Lisa A. Brawmowitz Jailey. We bring
Speaker 1: you insight from the best and economics, finance, investment, and
Speaker 1: international relations. Find Bloomberg Surveillance on Apple podcast, SoundCloud, Bloomberg
Speaker 1: dot Com, and of course, on the Bloomberg Terminal. How
Speaker 1: do you prepare for how do you wrap up this year? Um,
Speaker 1: let's bring in Katherine Rooney Vera to talk about that.
Speaker 1: She is the head of Global macro research at Boltic,
Speaker 1: so she's one of those top down people. UM. Kathan,
Speaker 1: thanks so much for joining us, coming into the studio
Speaker 1: and cold, dark and wet New York. Are you from Miami?
Speaker 1: I'm from New Jersey, but I live in You live
Speaker 1: in Miami, which would probably rather be in Miami. I'd
Speaker 1: rather be there as well. So what do you think about? UM,
Speaker 1: you know this conundrum. We're at a point where it
Speaker 1: doesn't seem like a recession really is even priced in yet,
Speaker 1: and that's pretty crazy given that everyone expects a recession. Yeah,
Speaker 1: I think we're already beyond talking about recession and everyone's
Speaker 1: talking about recovery before recession. Has actually happened, and something
Speaker 1: Kayleie mentioned it's all about inflation. Yes, it's about inflation,
Speaker 1: but for me, it's all about the labor market because
Speaker 1: the labor market remains so strong and five six um
Speaker 1: increases in salaries are not commensurate with a two percent
Speaker 1: inflation target. So my view, and you and I have
Speaker 1: talked about this previously, Kaylee, is that the FED knows,
Speaker 1: in my view, that it has to get unemployment higher,
Speaker 1: and that it's horrible to say. Um. But by the way,
Speaker 1: we're gonna talk with Cloudy Asam a little bit later.
Speaker 1: She of the Psalm rule, and she thinks that's a
Speaker 1: mistake to to to think to argue that, you know,
Speaker 1: the Phillips curve um still alive and well, and you've
Speaker 1: got to push up unemployment in order to pull down inflations. Well,
Speaker 1: I'd like to hear her view on where the NEHRU
Speaker 1: is right now. Um, I think it's around four pot.
Speaker 1: You know, we're at three point seven. So so for
Speaker 1: the natural level of unemployment, if it is in fact
Speaker 1: four point nine percent, anything below that is in fact inflationary,
Speaker 1: So we're we're what's her view on wage price spiral? UM?
Speaker 1: You know, if we look at and I'm writing these questions,
Speaker 1: look at history UM and unemployment move of of that
Speaker 1: amount has never not coincided with an economy already in
Speaker 1: recession UM. So I think that's important to note. The
Speaker 1: yield curve is pricing in recession. We know that, but
Speaker 1: there could be a normalization next year. And my thing is,
Speaker 1: you know, everyone's talking about how the ft isn't gonna cut,
Speaker 1: But if you look also at history the past four
Speaker 1: team monetary cycles, the last hike versus the first cut,
Speaker 1: that timing is much shorter than you think. It's on
Speaker 1: average four months. Okay, so maybe historically that is true.
Speaker 1: But if you listen to the Federal Reserve and Chairman
Speaker 1: Pal now, they are saying we are not going to
Speaker 1: do that. We are talking higher for longer. We are
Speaker 1: not giving up until inflation is back to our target,
Speaker 1: which right now is two per cent. So even if
Speaker 1: inflation is cooling, we are still far far away from that.
Speaker 1: What gives you the conviction that the Fed is actually
Speaker 1: not going to tolerate the weakness in the labor market
Speaker 1: and in the broader economy as they say they will,
Speaker 1: and have to make that pivot well, I think it's
Speaker 1: going to have to come down to how far the
Speaker 1: labor market rules over. So I think unemployment goes to four.
Speaker 1: That's the neighru you know, it's hard to estimate, but
Speaker 1: thot seven in unemployment. So I do think the FED
Speaker 1: needs to force the labor markets roll over because their
Speaker 1: supply side forces and their demand side. We all talk
Speaker 1: about both of them. The supply side forces are improving.
Speaker 1: You know, used car lots are packed now, I've seen
Speaker 1: prices come down considerably. She knows us hearing what you'll
Speaker 1: respond to passively. I know you love um. So, so
Speaker 1: I do think supply side forces are improving. Um, you
Speaker 1: have China reopening, which you guys are talking all morning about,
Speaker 1: especially you've been up so early. Um. But demand side
Speaker 1: really hasn't taken that hit yet. By the way, we
Speaker 1: also got a one point seven trillion dollar omnibus in
Speaker 1: my notes to talk about as well. So we do
Speaker 1: have inflationary impulses, but that's going to aggravate the demand side,
Speaker 1: which hasn't yet rolled over. Consumption is still pretty good. Um,
Speaker 1: it's been very resilient. If you look at Conference Board
Speaker 1: that's been very resilient and that has a very strong
Speaker 1: correlation with the unemployment rate. So if unemployment moves higher,
Speaker 1: Conference board consumer confidence drops, you get a rollover in consumption. UM.
Speaker 1: People are still spending even though inflation is very high.
Speaker 1: It's because they have jobs well. And when people are
Speaker 1: still spending, and maybe they're doing it by leveraging up
Speaker 1: more So, now all that pandemic stimulus money and savings
Speaker 1: built up has evaporated it essentially. But what does that
Speaker 1: mean for corporate earnings? Because in theory, if people are
Speaker 1: still out there spending tolerating higher prices, you're going to
Speaker 1: be able to continue passing on your higher input costs.
Speaker 1: And in theory that would mean margins hold up and
Speaker 1: profits hold up, so you have nominal growth and inflation.
Speaker 1: So I I do think that next inflation is going
Speaker 1: to come down. I do believe in a recession. I've
Speaker 1: I've been out of consensus on that since virtually the
Speaker 1: beginning of this year. UM calling for recession is the
Speaker 1: next phase of the economic cycle. Stagflation to recession was
Speaker 1: my outlook piece for twenty two UM, and I do
Speaker 1: think that that that we could get earnings having to
Speaker 1: be revised lower UM and nominal growth in in my view, yeah,
Speaker 1: it's positive, but real growth. Next year I have at
Speaker 1: minus zero point four percent, so that's year every year,
Speaker 1: So I have three quarters baked in of negative sequential
Speaker 1: annualized growth in the US. I just want to make
Speaker 1: one point to the consumer, because savings rates have fallen substantially.
Speaker 1: I mean, we, you know, during the pandemic, shot up
Speaker 1: to you know, record highs for American savings rates and
Speaker 1: now we're you know, over twelve percent and now we're
Speaker 1: back down to about two percent on savings rates. But
Speaker 1: I was talking to Mike McKee about this and he
Speaker 1: pulled up bank balances. I've got the index in there
Speaker 1: if the controller wants to bring that. Bank balances are
Speaker 1: still holding pretty high right now. They started to roll
Speaker 1: over a little bit, but they're still pretty fat. So
Speaker 1: the US consumer shouldn't be counted out quite yet. There
Speaker 1: you see. And you can find this on your Bloomberg
Speaker 1: terminal for those listening on Yes, absolutely sorry if you're
Speaker 1: listening on radio. Let's just say they build up big
Speaker 1: time during the pandemic and we show this um and
Speaker 1: they have held their pretty well. However, Kayley points out,
Speaker 1: you know, credit card debt is starting to climb again,
Speaker 1: the consumers starting to leverage up. How do you take
Speaker 1: this all into account with and put it into your
Speaker 1: investment strategy? What are you doing right now? Are you
Speaker 1: still defensive? And when do we find an inflection point
Speaker 1: when you really can turn around start investing again. It's
Speaker 1: a good a good thought. I'm still defensive going into
Speaker 1: next year. I still like energy utility staples. I still
Speaker 1: I think you still have to remain defensive. But once
Speaker 1: you do get that change in UM in the labor market,
Speaker 1: I think that's where the market drops a bit further.
Speaker 1: I think we could go lower in the smp UM
Speaker 1: and then I think we start talking about the FEDS
Speaker 1: guidance turning a little more devilish. So I am in
Speaker 1: the camp where UM the labor market determines how quickly
Speaker 1: the FED could stop talking about higher for longer? And yes,
Speaker 1: the Feds all in now, but the policy mistake has
Speaker 1: already been made, all right. Katherine R. Nuvera of Baltic,
Speaker 1: thank you so much for joining us in studio. How
Speaker 1: are you getting back to Miami? What airline are you flying? Oh? Gosh,
Speaker 1: thank god, not Southwest? But I'm not not not far
Speaker 1: better spirit, oh Man for tall people like you and
Speaker 1: I that's very complicated. Yeah, it's difficult, and I don't
Speaker 1: envy you. That I want to bring in right now
Speaker 1: Cloudy Assam, founder of PSALM Consulting. She's a former Federal
Speaker 1: Reserve economist and one of my favorites because Cloudy, I
Speaker 1: can see, Uh, you care about people in your work,
Speaker 1: which is something that doesn't always come through an economist research.
Speaker 1: You also went to Dennis In University, but I feel
Speaker 1: more like you're an Oberlin person. So I want to
Speaker 1: talk about the recent column you wrote banned the Phillips
Speaker 1: curve and the idea or uh, is it banned the
Speaker 1: Phillips curve? Yes, the idea is that to get inflation down,
Speaker 1: the FED has to push unemployment up, which I guess
Speaker 1: makes sense because otherwise how else do they affect sticky
Speaker 1: services prices? How is that wrong? And what should the
Speaker 1: FED be doing differently in order to, you know, in
Speaker 1: order not to destroy the lives of working Americans. So
Speaker 1: I think what a big US two, which has been
Speaker 1: extremely disorientating. Right, We've had fifty year low unemployment, We've
Speaker 1: had forty year high inflation. It is time to put
Speaker 1: at least to scrutinize the rules of thumb like the
Speaker 1: Phillips curve that have been used by macro economists for
Speaker 1: a long time, to think about what's that trade off.
Speaker 1: The low unemployment just means that people have less money
Speaker 1: to spend. Most Americans, it's their paycheck, right, And low
Speaker 1: unemployment means that people all the way up and like
Speaker 1: working up into the middle class, they have money. That is,
Speaker 1: that's not a bad way to think, baby about the
Speaker 1: tradeoff when it's all demand driven, right, A lot of
Speaker 1: stimulus checks, a lot of money, big wage increases. But honestly,
Speaker 1: we have a pandemic, it is still affecting China other
Speaker 1: parts of the world, and we have a war in Europe,
Speaker 1: so that you really shouldn't use the Philip curve. It's
Speaker 1: a really nice rule of thumb. It would be great
Speaker 1: if it worked and helped the Fed calibrate everything. But
Speaker 1: come on, like this is a lesson. At this point,
Speaker 1: we are in uncharted territory and thus we gotta think
Speaker 1: we got to dig deeper in terms of what the
Speaker 1: Fed does. So how else, because inflation also is I mean,
Speaker 1: Ronald Reagan, I'm sure one of your favorite presidents Um
Speaker 1: described it as like an armed robber or you know,
Speaker 1: a boogeyman um that really steals from especially the working classes.
Speaker 1: And it's very high right now. And then if you
Speaker 1: look at the non accelery Inflation rate of Unemployment NEHRU UM,
Speaker 1: that shows that when unemployment is below a certain level,
Speaker 1: it's gonna be inflationary. Right We were talking with Katherine
Speaker 1: Rooney vera earlier who said that unless you get up
Speaker 1: to four point nine percent, these low levels of unemployment
Speaker 1: are inflationary. Do you disagree with that? The NEHRU is
Speaker 1: a made up number. I mean, it's with a lot
Speaker 1: of judgment and data. But running up until COVID started
Speaker 1: the Federal Reserve, most of the macroeconomics community was like,
Speaker 1: this thing is broken. In many ways, the Federal Reserve
Speaker 1: showed they have no idea what NEHRU is. Despite a
Speaker 1: lot of effort, it moved consistently downward after the Great
Speaker 1: Recession because unemployment kept going down and down and inflation
Speaker 1: did not spike. And we really don't know given all
Speaker 1: the disruptions in the labor market, particularly the massive drop
Speaker 1: in the labor force participation, it hasn't come back that
Speaker 1: affects the unemployment rate, the things that we have looked
Speaker 1: to as signals as a way to think about what
Speaker 1: what is this equaliberate like, what would normal and sustainable
Speaker 1: look like? It's really hard to know what that is
Speaker 1: at this point. Now you gotta do something, and I
Speaker 1: think this is where the FED has to get back.
Speaker 1: Leaning into the data. We have seen inflation coming down
Speaker 1: without wage growth really slowing, and so that tells you
Speaker 1: there is at least some relief that comes without the
Speaker 1: Fed pumping high interest rate increases, fast interest rate increases
Speaker 1: into the economy. It's time to be a little more
Speaker 1: action and really look at the early stages of the data.
Speaker 1: It takes a long time to get to consumer price inflation.
Speaker 1: On the subject of consumer price inflation or really just
Speaker 1: inflation generally, the FED looking obviously the PCs a flatter
Speaker 1: and the idea of made up numbers, or at least
Speaker 1: arbitrary numbers. Two percent it's what the FED said its
Speaker 1: target at. Granted it went moved to average inflation targeting,
Speaker 1: but still that's what they're striving for. Something like that
Speaker 1: two percent number. Is that no longer a number fitting
Speaker 1: of the new world in which we live. In post
Speaker 1: pandemic post or still ongoing more in Ukraine. If we're
Speaker 1: looking at structurally lower labor force participation, structurally higher energy costs,
Speaker 1: should they be rethinking two percent. It's far too early
Speaker 1: to have that discussion, and I think, honestly it it
Speaker 1: muddies the water, and it makes the FED fight even
Speaker 1: harder to get two percent. They are extremely concerned about
Speaker 1: a quote unquote credibility. I mean, I'm not sure who
Speaker 1: right now still questions the FED is going to fight inflation,
Speaker 1: but I guess they're out there, and there is still
Speaker 1: a path as we come out of the pandemic, as
Speaker 1: the supply change, as the rotation and the in the
Speaker 1: economy from goods back to services happens, we have a
Speaker 1: path back to two percent. It's far too early. That's
Speaker 1: a conversation for maybe this time next year, the middle
Speaker 1: of the year after. But it's I don't see any
Speaker 1: reason for the FED to be moving that two percent
Speaker 1: target if we get back to something that looks kind
Speaker 1: of sort of like normal. On the other end of this, well,
Speaker 1: they couldn't even get two percent before COVID showed up. Okay,
Speaker 1: fair enough, but it raises the question of especially as
Speaker 1: you mentioned China, how it's still been shut off from
Speaker 1: the world. It led to a lot of supply chain
Speaker 1: issues that were very inflationary. Now it's opening back up
Speaker 1: rather rapidly and the surgeons dealing with currently aside in
Speaker 1: the medium term, in theory, that's going to mean more
Speaker 1: demand for commodities, could be a few of inflation. How
Speaker 1: do you filter that back into your thinking about the
Speaker 1: trajectory inflation and how monetary policy has to respond to it.
Speaker 1: And that's not the only thing, right We've got a
Speaker 1: one point seven trillion dollar omnibus, you've got deglobalization, which
Speaker 1: has to lead to at least some inflation as well
Speaker 1: or at least less disinflation. M hm. So absolutely what's
Speaker 1: happening in China and reopening as a wild card. And
Speaker 1: we know that the FED has very limited tools to
Speaker 1: deal with commodity price inflation, the energy inflation. We still
Speaker 1: have a lot of food inflation and that is not
Speaker 1: something that interest rates are going to chip away at.
Speaker 1: And you know, what's happening in China is extremely um disruptive,
Speaker 1: tragic as they're trying to reopen, and every time COVID
Speaker 1: came back was in the United States or big waves globally.
Speaker 1: It set us back in terms of getting back to normal. Right,
Speaker 1: this has been very disruptive as things closed down open
Speaker 1: back up. So I totally agree on the commodity space
Speaker 1: that that could be a tough one and that that
Speaker 1: was a lot of the problems that FED had a
Speaker 1: lot of the inflation um concerns of the past year
Speaker 1: when we had the big spike in energy prices, particularly gasoline.
Speaker 1: So yeah, we are not out of this. There is
Speaker 1: a path back to something that looks like normal and
Speaker 1: the United States. On the globalization, I would be very
Speaker 1: careful about taking the last few years, which have been
Speaker 1: extraordinary with a pandemic and a war in Europe, to
Speaker 1: project big structural changes. That takes time, fair and it's
Speaker 1: very difficult to do. Claudia, you know, for years now,
Speaker 1: income inequality has been on policymakers radar, and you could
Speaker 1: argue that that's what drove the big populist forces that
Speaker 1: we've seen um globally. Has the pandemic made income inequality
Speaker 1: worse or have we made any progress in pushing back
Speaker 1: against that we during the pandemic. So in what we've
Speaker 1: seen so far, the fiscal Paul, let's see the labor
Speaker 1: market coming back strong. That made a big difference for
Speaker 1: you know, the bottom fifty, middle class on down because
Speaker 1: for the first time in many decades, we have had
Speaker 1: a job full recovery and that really makes a difference
Speaker 1: for the vast majority of people now that and and
Speaker 1: so you see in wealth inequality data that the increase
Speaker 1: in what you know, families bottom have in the bank,
Speaker 1: it is it is enormous relative particularly to after the
Speaker 1: Great Recession. So we have done some things to narrow
Speaker 1: that inequality now. I mean, the top is doing well
Speaker 1: right even with some correction right now in the stock prices,
Speaker 1: and our our billionaires out there, I mean they really
Speaker 1: got their recovery came fast as usual. And yet this
Speaker 1: is I think it opens up some big questions. It's like,
Speaker 1: can our economy handle a job full recovery? And we
Speaker 1: need to have those So there's a lot to figure
Speaker 1: out why this caused so much disruption, and yet we
Speaker 1: really did help people who haven't gotten a lot of help. Claudia,
Speaker 1: great having on the program. Thanks so much for joining us.
Speaker 1: Really love reading your research and your pieces. Cloudy Assam.
Speaker 1: There of some consulting talking to us about maybe UH,
Speaker 1: the FED should look at things a little bit differently
Speaker 1: than UM it typically has. I think, UH, for Tesla,
Speaker 1: for big tech, for crypto, it has been an annus horribilis,
Speaker 1: as the Queen would have put it. Well, you know what,
Speaker 1: I got that from Christina Hooper she joins US now
Speaker 1: chief Global Market Strategists at Investco UM and Christina, I
Speaker 1: guess you got that from her, Majesty, Queen Elizabeth, But
Speaker 1: she wasn't talking about stocks and bonds. What does three
Speaker 1: look like? If we've had, you know, the pandemic leading
Speaker 1: into incredible inflation, and the war in Ukraine making it worse,
Speaker 1: the FED hiking us UH into maybe a recession, how
Speaker 1: does look any better? Well? I think that after several
Speaker 1: extraordinary years, and when by by extraordinary, I mean extraordinarily
Speaker 1: bad and traumatic, UM, what we're getting to is a
Speaker 1: more normal environment UM where we're likely to see UM
Speaker 1: the FED ease what has been a dramatic level of tightening.
Speaker 1: So I don't mean ease per se, but UH certainly
Speaker 1: down shift its tightening and ultimately hit a pause button.
Speaker 1: In the first half, probably the first quarter of UM,
Speaker 1: we're likely to see inflation continue to moderate significantly in
Speaker 1: te so something of a return to normal. It's not
Speaker 1: going to be an easy transition UM, but I suspect
Speaker 1: that is going to be a lot more normal than
Speaker 1: the last three years, but normal of at least the
Speaker 1: last decade or so. Christina has been leadership by big
Speaker 1: tech and stocks being able to fly high because money
Speaker 1: was free and with low borrowing costs, it's okay to
Speaker 1: have a higher multiple. That is not really the world
Speaker 1: we have lived in two and in theory, that's not
Speaker 1: going to change incredibly quickly. So just using a stock
Speaker 1: like Tesla as an example, how much more do you
Speaker 1: think those stocks need to deflet? How much more devaluation
Speaker 1: could be coming for certain pockets of the equity market. Well,
Speaker 1: clearly tech is under pressure. UM, the high valuation areas
Speaker 1: of the stock market are under significant pressure, and that
Speaker 1: doesn't change overnight. In fact, when we get to more
Speaker 1: of a risk on environment, as global risk appetite grows,
Speaker 1: we're likely to see a movement towards UM, lower valuation
Speaker 1: names more cyclicals. I don't think this is going to
Speaker 1: be a time where we see tech rebound dramatically because
Speaker 1: raiths are so much higher. Now we will go through
Speaker 1: an adjustment period. Um, we've already started that process, and
Speaker 1: we could see more of that in But again it's
Speaker 1: going to be a more normal environment, which means we're
Speaker 1: unlikely to see outsized gains by tech. Um, we're really
Speaker 1: unlikely to see big gains by stocks in general. But
Speaker 1: I do hold that hope and I believe strongly that
Speaker 1: we're likely to see a positive, uh single digit return environment.
Speaker 1: For example, the SMP fire, you know, Christina Yester, we
Speaker 1: were talking with Matt Merlely and Miller tay Back and
Speaker 1: he pointed out, we're looking at I think seventeen point
Speaker 1: three times earnings forward earnings on the SMP five hundred
Speaker 1: now since World War Two. In any recession, if we
Speaker 1: do get a recession, valuations have dropped to fifteen before
Speaker 1: the bear market ended and turned around. Do you expect
Speaker 1: that we could fall that far, because that would put us,
Speaker 1: you know, at thirty or maybe even below before we
Speaker 1: can turn around and climb back up into the end
Speaker 1: of the year. Well, we have to keep in mind
Speaker 1: that this is a very compressed economic cycle, so things
Speaker 1: are moving a lot faster than they typically do. So
Speaker 1: I think We're going to see a number of different
Speaker 1: forces converge at the same time, so we will have
Speaker 1: that headwind of downward revisions to earnings. I mean, that's
Speaker 1: a given. We haven't seen that priced in yet. But
Speaker 1: having said that, UM, we also have a market looking
Speaker 1: ahead to the potential for the FED to cut rates
Speaker 1: by the end of the year, and certainly just hitting
Speaker 1: the pause button will take pressure off risk assets. So
Speaker 1: I think that we could actually see earnings downwardly revised
Speaker 1: at the same time, we could potentially see UM as
Speaker 1: the year progresses, UM some movement towards multiple expansion. Okay,
Speaker 1: so that's all on the equity side, Christina, But we
Speaker 1: know that, or at least we have heard that, there
Speaker 1: are now alternatives to equities. Those have emerged. Tara, right,
Speaker 1: Tara Tara? I think Tara Tara. I didn't never, I
Speaker 1: was never sure about, but I'll say Tara. Okay. So, however,
Speaker 1: you want to pronounce the acronym t A R A
Speaker 1: rather than Tina t I N A, which was there
Speaker 1: was no alternative for equities. It seems that that world
Speaker 1: has now changed. How are you viewing bonds into the
Speaker 1: new year, and how much you want to be allocated
Speaker 1: in that asked class rather than into equities. That's a
Speaker 1: great question. And of course fixed income had an annus
Speaker 1: horribilious in two as well. UM. That's part and parcel
Speaker 1: of of what we saw in terms of a dramatic
Speaker 1: um tightening cycle on the part of the FED and
Speaker 1: other central nights. So where we find ourselves is today
Speaker 1: UM is looking out on a year in which we're
Speaker 1: unlikely to see much more in the way of rate
Speaker 1: high certainly relative to what we saw in two. That
Speaker 1: gives some breathing room for fixed income. At the same time,
Speaker 1: we've seen yields go up significantly, UM, making as as
Speaker 1: you pointed out, many areas of fixed income quite attractive.
Speaker 1: I would focus on investment grade credit UM as we
Speaker 1: see this struggle between a risk on and risk off environment. UM.
Speaker 1: The the level of of the maturity wall is pretty
Speaker 1: low right now. UM. We don't see a lot of
Speaker 1: debt maturing in the next eighteen or so months. UM,
Speaker 1: so this is a good environment. Companies are fundamentally more
Speaker 1: sound in general than they were in the last significant
Speaker 1: procession we went through, the global financial crisis, So this
Speaker 1: is a very different environment. UM. Now, as we transition
Speaker 1: through the year. As as UM we get through a
Speaker 1: downturn in the economy and look forward to an economic recovery.
Speaker 1: That might be a time to increase a risk appetite
Speaker 1: and move towards high yield UM. But certainly right now,
Speaker 1: investment grade credit looks very attractive. Al right, Christina, thanks
Speaker 1: so much for joining us. Really appreciate your time this morning,
Speaker 1: especially during a holiday week. Christina Hooper, they're talking to
Speaker 1: us from invest go out of Connecticut. Let's go though
Speaker 1: and focus in on the airline. Helene Becker joins us
Speaker 1: right now, senior research analyst at Cow and Helene, thanks
Speaker 1: so much for coming on Bloomberg again. We just talked
Speaker 1: to you last week, but since then there have been
Speaker 1: thousands and thousands of cancelations. As as Madeline says, we're
Speaker 1: not close to getting back on track here. How is
Speaker 1: it right now, especially for Southwest? UM, good morning. Yes,
Speaker 1: we are not close. Southwest is not close. Everybody else
Speaker 1: is pretty much within what I would call their normal
Speaker 1: course of doing business. UM. The cancelations are relatively low.
Speaker 1: Southwest accounted for more than eighty percent of all cancels
Speaker 1: yesterday and UM for them, they're Um, They're just they're
Speaker 1: just behind the curve here and they probably won't get
Speaker 1: caught up until the weekend at the earliest. Well, and
Speaker 1: we have seen modeling from analysts over its city that
Speaker 1: talks about a three to five percent earnings hit for
Speaker 1: the fourth quarter. But I'm wondering what kind of signal
Speaker 1: this is on the longer term operational health of Southwest
Speaker 1: beyond just what is ongoing currently. If something like this
Speaker 1: could happen at this scale for this long, does that
Speaker 1: just mean they're ill equipped to handle weather events like this?
Speaker 1: I mean, what went wrong here that could go wrong again. Yeah,
Speaker 1: they had a confluence of a lot of events. So
Speaker 1: you had the weather and it moved across country, hitting
Speaker 1: Denver and Chicago particularly hard. UM United and Isn't Both
Speaker 1: of those locations didn't get hit quite as hard, but
Speaker 1: still impacted UM For Southwest though, I think in Midway
Speaker 1: there was a lack of the icing fluid. Then they
Speaker 1: had an issue in San Diego with fog, they had
Speaker 1: ice and Dallas, so so everywhere they were they had weather,
Speaker 1: and the worst of it is their systems are just
Speaker 1: not equipped to handle it. Historically, Southwest underinvested in I
Speaker 1: t in in technology and UM this is has come
Speaker 1: back in the past to hurt them. They were investing
Speaker 1: aggressively this year. That was one of the catalysts for
Speaker 1: we thought for the shares later this year is the
Speaker 1: new scheduling system for employees was coming up. But one
Speaker 1: of the issues UM we saw yesterday was UH an
Speaker 1: aircraft with a bunch of flight attendants dead heading to
Speaker 1: a city. UM. But the crew working the plane was
Speaker 1: short of flight attendant and according to the pilot on
Speaker 1: board UM, any one of those other flight attendants offered
Speaker 1: to work the flight, but they couldn't get through the
Speaker 1: scheduling to say, hey, we're here, we'll take it, and
Speaker 1: so Southwest canceled the flight. They're doing what should be
Speaker 1: automated by hand. UM. When you have six thousand flights
Speaker 1: a day, and and you probably shouldn't, you should probab
Speaker 1: they have two thirds of that. UM. It's not that
Speaker 1: I don't have enough people, it's that they don't know
Speaker 1: where their people are, so they have to reset the
Speaker 1: entire Essentially, it doesn't make much sense because I understand
Speaker 1: that the weather is very bad in some places. My
Speaker 1: buddy Kareem just showed me a picture of his parents
Speaker 1: house in Buffalo and it's completely snowed under. On the
Speaker 1: other hand, Helene, I'm forty nine years old. It's snowed
Speaker 1: most winters of my life. You know, this happens in
Speaker 1: the winter months, and an airline especially should be prepared
Speaker 1: for it. Has Southwest management learned any lessons? Will they invest?
Speaker 1: Will they you know, stock up at midway with some
Speaker 1: d icing fluid? Yeah, so sometimes they get caught out.
Speaker 1: But you're you're absolutely correct, And I think people have
Speaker 1: a right to be really angry and um and annoyed because,
Speaker 1: to your point, this is almost they should have invested
Speaker 1: years ago in the stems and they just didn't. Um. Well,
Speaker 1: do you change your opinion on the stock lane because
Speaker 1: you liked Southwest before this? Yeah? No, I don't think
Speaker 1: we do. Uh. I think that as the shares um
Speaker 1: will are reflecting the disaster that's befallen them. I think
Speaker 1: you'll see the impact you mentioned the three to five percent.
Speaker 1: We think it will be in the hundreds of millions
Speaker 1: of dollars range. They're doing everything they can, for example,
Speaker 1: refunds a hundred percent of your cash back. They're offering
Speaker 1: to buy tickets on other airlines if you can even
Speaker 1: find a seat. Um, So consumers should totally keep their
Speaker 1: receipts to submit them to the airline. And then I
Speaker 1: suspect in the first cutter will see them heavily discount
Speaker 1: tickets to encourage people to try them again and um.
Speaker 1: And then this investment, I suspect they'll do everything they
Speaker 1: can to speed it up. And you're right, there was
Speaker 1: a fuel shortage at one location, but we're seeing sporadic
Speaker 1: fuel shortages around the country, and airlines are tankering old
Speaker 1: where they where they need to. Um. But but I
Speaker 1: think the other part of what Southwest needs to do
Speaker 1: in the short term is cut back their ambition because
Speaker 1: even though they've hired enough people, um, not everybody is
Speaker 1: fully trained. So the school house is full as they
Speaker 1: work through this and and get back up to speed.
Speaker 1: Um that I just you know, Kaylee and Matt, I
Speaker 1: just don't see how they get by with another storm
Speaker 1: like this without super investment in in systems to to
Speaker 1: improve things. Yeah. Well, clearly something's got to give because
Speaker 1: there are a lot of people, including the Department of Transportation,
Speaker 1: who are not excelled by this episode. Laine Becker of
Speaker 1: Cowen Thank you so much as always for providing us
Speaker 1: for insight. Absolutely and this is the Bloomberg Surveillance Podcast.
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Speaker 1: keene In. This is Bloomberg