Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day, we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. A couple of my
Speaker 1: favorite people just walking the studio. No, I mean it's
Speaker 1: this is this is killer. I mean for Bloomberg Markets.
Speaker 1: I think this panel tops all panels that we've had
Speaker 1: in terms of I'm excited. We have Neil Grossman in
Speaker 1: the studio, one of my best friends, I'll say, and
Speaker 1: also the co founder and former c IO of t
Speaker 1: k n G Capital Markets. Um, we've been talking about
Speaker 1: the FED and rates for I don't know twenty years now. Um.
Speaker 1: Daniel D. Martino Booth just uh walked in the studio
Speaker 1: from Quill Investment Strategy. He also used to uh sorry,
Speaker 1: Quill Intelligence. She also used to advise the Federal Bank
Speaker 1: Federal Reserve Bank of Dallas, and her book on the
Speaker 1: FED is one of my favorite titles, called fed Up. Yes.
Speaker 1: So when you say we love the FED. We love
Speaker 1: talking about the FED. We might not love the FED.
Speaker 1: We're not telling you how we feel personally emotionally about
Speaker 1: the Federal Reserve. And Priamisra. She was a long time
Speaker 1: UH guest, a regular guest on Bloomberg Rewind, which I'm
Speaker 1: gonna say is probably one of the top three shows
Speaker 1: that Bloomberg has ever produced television shows, and it's great
Speaker 1: to have her here. She's the managing director and global
Speaker 1: head of rate strategy for t D Securities. All right, guys, um,
Speaker 1: what do we expect Danie? I'll start with you, what
Speaker 1: do we expect from j Powell today? Obviously fifty basis points?
Speaker 1: But what is he gonna say about the path forward,
Speaker 1: um after after the rate decision. So I think what's
Speaker 1: critical to focus on is if Powell UH sites year
Speaker 1: over year inflation as opposed to the dissipation in monthly
Speaker 1: increases in inflation, one of them is going to get
Speaker 1: him license to say, we've got to get rates higher,
Speaker 1: and we've got to keep and maintain them until we
Speaker 1: see this year over year pace come down. If he emphasizes,
Speaker 1: you know the fact that he's seen in his core
Speaker 1: services X shelter absolutely favorite inflation metric that that itself
Speaker 1: is coming down and coming down quickly over the last
Speaker 1: three months. I think markets will love him. I love it.
Speaker 1: You know, when you think about this Federal Reserve this year,
Speaker 1: you know, just been very aggressively raising rates. As you
Speaker 1: look back on this year, what's your view of the Fed?
Speaker 1: Have they gone far enough fast enough? Have they are
Speaker 1: they still behind? What have they done? What have they done?
Speaker 1: And when you talk to institutional clients, what do they
Speaker 1: tell you. I mean, there's a lot of frustration on
Speaker 1: the FED. I think the reaction function changed multiple times
Speaker 1: this year. I mean I think that you know, was
Speaker 1: that a credibility issue with the Fed at the start
Speaker 1: of the year, the start of the hiking cycle, and
Speaker 1: I know front looading was their favorite word for six months.
Speaker 1: I think it was a catch up trade um where
Speaker 1: they were, you know, really trying to catch up for
Speaker 1: the fact that they started late. I think the question
Speaker 1: now is the threshold. The threshold to slow down the
Speaker 1: pace of hikes is different from the threshold to stop hiking,
Speaker 1: and it's very different from the threshold to ease. And
Speaker 1: the market is trying to figure out what these thresholds
Speaker 1: are now to your question, have they gone too far?
Speaker 1: I think on rate hikes, our view is they may
Speaker 1: actually go more than what the markets pricing in at
Speaker 1: the end of the day, because I think inflation is
Speaker 1: going to be particularly cost services a little sticky on
Speaker 1: the way down. So I think they may have more
Speaker 1: to do. Where I think they've overdone it is on
Speaker 1: QT and they don't talk much about it, but it's
Speaker 1: you know, it's the reason why long and real rates
Speaker 1: have risen. I think that's slowing the economy down. We
Speaker 1: think a recession is almost a done deal at this
Speaker 1: point in twenty three, so they've done a lot um.
Speaker 1: I think they have a little bit more to do,
Speaker 1: and then it's going to be really tricky for them
Speaker 1: next year. So some of the frustration with the FAT
Speaker 1: I think remains next year because we're gonna look for
Speaker 1: the FAT two ease and I think they're going to
Speaker 1: struggling to ease with inflation still high. Next, speaking of
Speaker 1: frustration with the FED, let me bring a Neil Grossman here,
Speaker 1: and first let me say you've got to differentiate between
Speaker 1: how you feel about the FED, with the FED should
Speaker 1: be doing in your take, and what you expect the
Speaker 1: fed actually to do. Oh, you're right, I am very
Speaker 1: fed up. And then a couple of things. First of all,
Speaker 1: as you know, I don't think they've been hawkish. Um,
Speaker 1: they've barely done anything in the way they should have
Speaker 1: because I call it, as you know, infinitesimal incrementalism. They
Speaker 1: haven't even done one Vulcan yet, as far as I'm concerned.
Speaker 1: Paul Vulcan raised rates four inter meeting on a weekend.
Speaker 1: That would have been something. And I'm sorry for you,
Speaker 1: but they don't. Haven't done quantitative tightening either. Letting something
Speaker 1: slowly drip drip away after they bought a hundred and
Speaker 1: thirty billion a month for ten years is not tightening.
Speaker 1: So I mean, yes, there are effects, but to be
Speaker 1: honest with you, I would stop tightening now and announced
Speaker 1: this afternoon that I'm going to start selling bonds at
Speaker 1: a clip of fifty to a hundred billion a month.
Speaker 1: That would be effective per se. Now, what what are
Speaker 1: they going to do or not? I'm not going to
Speaker 1: disagree too much other than I think the thing you
Speaker 1: need to watch or consider is the liquidity. I think
Speaker 1: if he focuses on acknowledging financial liquidity is easier now
Speaker 1: that I believe it was in March or very close
Speaker 1: to it. Leaving aside the housing market, but interest rates,
Speaker 1: the dollars weeken ten percent, stocks have risen. I mean,
Speaker 1: the risk here to me is we don't know where
Speaker 1: all this is going to come out of the back end.
Speaker 1: Daniel last time we were on, said clearly, and I
Speaker 1: agree with her, that inflation is coming down. I thought
Speaker 1: it was gonna come a little slower. She's been very right.
Speaker 1: But at some point in the middle of next year,
Speaker 1: the comparisons are going to start to become very easy,
Speaker 1: and we will then settle into where the ambient inflation
Speaker 1: ray is. And if it's three to five, we have
Speaker 1: a problem in and reflating now only raises the possibility
Speaker 1: or likelihood down the road. So I think that's what
Speaker 1: I'd be focused. I'm going to push back as hard
Speaker 1: as I possibly can about quantitative tightening not taking place. Now.
Speaker 1: There's something called the Employee Retention Credit. In the nine
Speaker 1: months through November, it injected a plus billion dollars into
Speaker 1: the economy. So there's still stimulus money running around out
Speaker 1: there that can't take away from the feds H eight
Speaker 1: that's released every Friday, afternoon after the close. It shows
Speaker 1: you one of the broadest measures of money supply in
Speaker 1: a real time week to week on a real time
Speaker 1: week to week basis, because we don't get money supply
Speaker 1: indicators very often and they're lagged. And we've seen six
Speaker 1: consecutive weeks of year over year declines in what we
Speaker 1: call other deposits liabilities. Never, never in the history of
Speaker 1: the United States have we seen six consecutive weeks of
Speaker 1: year over year declines. Try pricing a commercial mortgage back
Speaker 1: secure a spot plus six forty. A lot of things
Speaker 1: are screeching to a halt in terms of financing that
Speaker 1: are beyond residential real estate, but there are other sources
Speaker 1: of liquidity that, of course make it appear that it's
Speaker 1: as abundant as it is. Quantitative tightening is working. I'm
Speaker 1: crossing fingers the second time I've said it public Adday
Speaker 1: Mike McKee asked him if he is going to increase
Speaker 1: treasury roll off to make up for the fact that
Speaker 1: they're so far behind schedule with mortgage backed securities. I
Speaker 1: do look at the FED balance sheet on the Bloomberg
Speaker 1: and it really hasn't come down that much. I know
Speaker 1: you're talking about uh F E D SPACE b A
Speaker 1: l GO, FED boal GO. I know you're talking about
Speaker 1: broader measures, but in terms of the balance sheet, they've
Speaker 1: gone from eight and a half trillion to eight point
Speaker 1: two trillion. It's not a lot, but if you think
Speaker 1: about they're only fifteen billion dollars ten years ago, we're
Speaker 1: going to be at eight more than eight trillion dollars.
Speaker 1: You would have said, no way, we just did that
Speaker 1: for the Great Financial Crisis. We're not gonna do that again. Right.
Speaker 1: We're looking at a stock versus flow thing here, and
Speaker 1: the fact is we're doing it at a much more
Speaker 1: aggressive pace then we've even attempted in two thousand eighteen.
Speaker 1: I'd love to hear thought on this pre you jump in,
Speaker 1: so you know, I think they are doing qt they
Speaker 1: you know, meaning that the balance sheet is slowing, it's
Speaker 1: declining slowly. I mean they've only ramped up in September
Speaker 1: to the full balance sheet gaps on treasuries. I agree
Speaker 1: mortgages are not running off as fast because they're not preeping,
Speaker 1: but look at the mortgage market, look at the housing market.
Speaker 1: I don't think they can sell mbs as a market
Speaker 1: functioning issue. I think there's a market functioning issue in treasuries,
Speaker 1: so extend increasing QT and treasuries will worsen the liquidity
Speaker 1: in the treasury market, which you know, we need this
Speaker 1: market to function if the fixed income market has to
Speaker 1: exist and and price and we have to find price discovery.
Speaker 1: So I think they're doing the max in terms of QT.
Speaker 1: I struggle a little bit in terms of how do
Speaker 1: they think of the two tools that they have to
Speaker 1: tighten policy between QT and rate hikes. We haven't heard
Speaker 1: much from the Fed on this front, like what is
Speaker 1: x billion in QT worth? And it's a nonlinear response,
Speaker 1: meaning the early part of QT I think is not
Speaker 1: a big deal because the liquidity was there was enough liquidity.
Speaker 1: Going down a live from very excess to excess is
Speaker 1: not a big deal. As you start getting to scarce
Speaker 1: level of reserves, which I think we're six months away from,
Speaker 1: but we're getting there, and as the supply starts to uh,
Speaker 1: you know, increase. There's no martial buyer of duration in
Speaker 1: the US, not with an inverted curve, not with the
Speaker 1: fact that may still have to keep raising rates. I
Speaker 1: think that's the issue on the supply front. And you know,
Speaker 1: we talked about the data is okay right now, but
Speaker 1: there are I mean, we've all talked about these long
Speaker 1: and variable lags. I just struggle, Like the middle of
Speaker 1: next year, the savings buffer goes down, and now QT
Speaker 1: is starting to have an impact. Level of rates is
Speaker 1: starting to have an impact when the economy slows down.
Speaker 1: How quickly can the FED turn? Do they stop QUT?
Speaker 1: I don't. I don't think they stop QUT until they
Speaker 1: start to cut rates and that inflation and if it
Speaker 1: starts to get to me, I'm a little nervous when
Speaker 1: I hear four or five percent. We were thinking three percent,
Speaker 1: even three is well north of you know that two
Speaker 1: percent target, and the FED respond and we've been used
Speaker 1: to Every market has been used to the FED responding
Speaker 1: to slow down, and I just think this time around
Speaker 1: the FED might have to be resolute in their words.
Speaker 1: And then how does the market respond to that we
Speaker 1: need no monetary help, but no fie still help by
Speaker 1: the pre Let me step in a couple of things.
Speaker 1: Of having traded an enormous amount of treasuries over generations. Um,
Speaker 1: the only reason liquidity is so bad is you have
Speaker 1: a central bank that destroyed the system at the end
Speaker 1: of the day and the curve and its representation is
Speaker 1: in large part due to the fact that they own everything.
Speaker 1: If you really want liquidity and markets, tell them to
Speaker 1: sell the entire balance sheet. You'll get a quick adjustment
Speaker 1: and then there will be plenty of bonds around to
Speaker 1: play with and do what you need to do. But
Speaker 1: if you're going to ask somebody to, as you said,
Speaker 1: you know, nobody wants to buy the ration. Nobody wants
Speaker 1: to buy ration because a three and a half percent
Speaker 1: long bond and seven or eight or eight percent inflation
Speaker 1: rate is, to be honest with you, stupidity. Long long bonds.
Speaker 1: If they were where they should have been relative to
Speaker 1: FED funds, everyone would be buying them. Let's wait. You
Speaker 1: know what did Daniel Mark did? Did you work with Priya?
Speaker 1: Did you guys? Were you freshmen together? Yeah? I was
Speaker 1: saying this during the break, Pria that when we were
Speaker 1: when we were both starting out in the industry, when
Speaker 1: we were teenagers and you were a Bank of America
Speaker 1: and I was at the FED, that you were one
Speaker 1: of my my closest contacts. So it could be on
Speaker 1: with you. I've enjoyed lots of FED conversations with Danielle.
Speaker 1: So let me Priya ask you about something that Danielle
Speaker 1: mentioned during the break which I wasn't really thinking about.
Speaker 1: But all of the big hawks on this FED are
Speaker 1: rotating out and they're gonna be replaced with either doves
Speaker 1: or cash kry and like who knows which way he's
Speaker 1: gonna go depending on the politics. But um, what do
Speaker 1: you think that means for February one? Are we gonna
Speaker 1: see another fifty basis point hike after this or are
Speaker 1: they gonna step down? A? Yeah? And the market I
Speaker 1: think was like it was about fift priced for it.
Speaker 1: I think it's actually fair because we've had two CPI misses.
Speaker 1: So if we get another week cp another point two
Speaker 1: or point three, I think they can step down. I
Speaker 1: do think then they can keep going at twenty five
Speaker 1: for a few more meetings. But it's interesting. I think
Speaker 1: the divisions at the FED will sound they will sound
Speaker 1: less unified. Um. And whether it's because of the rotating
Speaker 1: members to your point, or the fact that I think
Speaker 1: inflation and growth will point in different directions next year
Speaker 1: much more than this year. This year it was one
Speaker 1: trade high inflation, so they were all very unified. But
Speaker 1: next year as inflation goes down but not all the
Speaker 1: way to two percent, and growth starts to slow down
Speaker 1: and the labor market more importantly starts to weaken, I
Speaker 1: think you'll see the FED sounding a lot more divided,
Speaker 1: and the voting members won't help either. So yeah, I
Speaker 1: think it's going to become a odd harder to call
Speaker 1: the FED next year. When do they stop? When do
Speaker 1: the ease? What happens to QT? And the Fed will
Speaker 1: sound I think more divided on this, Daniel, We've got
Speaker 1: a function on the Bloomberg terminal d O t s
Speaker 1: the whole dot plot thing, Madging. I don't know what
Speaker 1: the heck it means, but um, it looks like it's
Speaker 1: going down starting in twenty three. Is that? Does that
Speaker 1: make sense to you? And and again as you raise
Speaker 1: the issue of the makeup of the FED, does that
Speaker 1: make sense to you? Hang on the dots median rises
Speaker 1: in twenty three, There are a lot of settings on
Speaker 1: your Oh yeah, after three then it goes down to yeah.
Speaker 1: And I think what you can actually see today in
Speaker 1: the dot plot is that some some of those dots
Speaker 1: might move down in twenty three, So you might see
Speaker 1: a shift onto the devas spectrum. In fact, what I'll
Speaker 1: be looking for today is maybe the widest disparity that
Speaker 1: we've ever seen to pre as point, it's going to
Speaker 1: be much more more contentious. I think that Powell is
Speaker 1: going to be facing multiple descents. One of the things
Speaker 1: that has been on his side, which has been surprising
Speaker 1: to me, given John Williams came from the San Francisco
Speaker 1: FED and has traditionally been adove, is that John Williams
Speaker 1: has been so loyal to Powell throughout this and I
Speaker 1: think that's gonna be critical next year because between between
Speaker 1: bar Bar being one of them, uh Williams, Powell, and Waller,
Speaker 1: He's not going to have that many more voters in
Speaker 1: his camp. We forget that Powell suffered full blown mutiny
Speaker 1: in the very end with not a single person until
Speaker 1: Wayne Angel changed his vote back years and years ago.
Speaker 1: But I think it's going to be a much more
Speaker 1: contentious FED, and I think the dot plots are going
Speaker 1: to widen out a lot. I think I'm looking at
Speaker 1: four sixty two right now on the dot plot, so
Speaker 1: basically four seventy five is the upper range, and I'm
Speaker 1: gonna take the other side of that that Danielle I
Speaker 1: think they're going to for eight or five. Well, I
Speaker 1: think that's possible. But I think the other interesting question
Speaker 1: is going to become again it's the lower the ultimate
Speaker 1: peak rate, the longer I think they're gonna end up
Speaker 1: having to maintain that level, because I think again it's
Speaker 1: going to become a question of of of sort of
Speaker 1: tug of war between the stimulative effects of not doing
Speaker 1: enough and the potential impact on prices and their ability
Speaker 1: to ultimately push prices down low enough. You know, again,
Speaker 1: one of the things you might ask yourself, as we
Speaker 1: just went through two years, well, as of next month
Speaker 1: will have gone through two years over seven percent inflation.
Speaker 1: So we've already started a you know, sort of a
Speaker 1: process of of of of of wave process of pushing
Speaker 1: the consequences out. And so if it's going to take you,
Speaker 1: for example, you're here're hearing people talking we'll get to
Speaker 1: two percent at the end of next year, I find
Speaker 1: that hard to believe. But if it takes five years
Speaker 1: or eight years to get you to two percent, it's
Speaker 1: very different than if you can get the two percent,
Speaker 1: say and two and a half years. And keep in mind,
Speaker 1: Mr Volker, even with rates it took it functionally took
Speaker 1: a generation to get to an ambient level has been done.
Speaker 1: I mean, I mean I put together a four and
Speaker 1: f one fifty and I'm looking at ninety dollars for
Speaker 1: an American pickup truck. That's just not that's the most
Speaker 1: repossessed vehicle in America. And it's the twenty one and
Speaker 1: twenty two models that they're repossessing the most quickly mats
Speaker 1: because everybody has big payments and they got a friend
Speaker 1: who goes to auction. If you're ever interested, yeah, I'm
Speaker 1: definitely interested, So I'll tag along. What do you think?
Speaker 1: I mean the terminal rate, I guess is important. And
Speaker 1: I think Neil brings up a great point. If they
Speaker 1: don't get higher quick enough, they're going to have to
Speaker 1: be stuck at their relatively lowly rate for longer, right.
Speaker 1: And I do think that next year, despite the market
Speaker 1: really begging for the fair two ease, I think they're
Speaker 1: going to sound very resolute and not ease or even
Speaker 1: pushback again some of the market pricing of cuts. And
Speaker 1: I wonder I hope Jepal was asked about that. If
Speaker 1: you can lobby in a question too to Mr McKee
Speaker 1: to ask about the rate cuts is the market in
Speaker 1: the last month has priced in a lot more rate
Speaker 1: cuts in late twenty three twenty four. And while I
Speaker 1: think they're going to have to cut in twenty four
Speaker 1: because the unemployment rate will rise a lot, I struggled
Speaker 1: with the cuts in twenty three. Now on the dots,
Speaker 1: I think the median is going to move up for
Speaker 1: twenty three. It's a fair point that, you know, I
Speaker 1: wish we had a mid twenty three dots because I
Speaker 1: would be a clear median or or clear estimate of terminal.
Speaker 1: But we don't have a mid twenty three. I don't
Speaker 1: think the FED wants to signal that they might get
Speaker 1: to terminal by the middle of the year and then
Speaker 1: cut rates. So I'm going to be looking at that
Speaker 1: end twenty three as their estimate of terminal, and importantly
Speaker 1: the distribution of those dots, because the medium might be
Speaker 1: at five, but if you have a bunch of FED
Speaker 1: officials at five and a quarter or five and a half,
Speaker 1: the market is not priced for that. And this risk
Speaker 1: rally that's pricing in the FED terminal around five or
Speaker 1: below and then the FED quickly cutting rates. I think
Speaker 1: that is at risk. If the distribution of dots in
Speaker 1: twenty three is high, and then twenty four. I think
Speaker 1: the market, the FED can keep saying that they're not
Speaker 1: going to cut too much, the market is going to
Speaker 1: all their bluff on it because the market is now
Speaker 1: increasingly pricing in a recession as the base case for
Speaker 1: the end of twenty three twenty four, and then if
Speaker 1: inflation comes down, the FED can justify some rate cuts.
Speaker 1: But we know if they got hundred, the next hundred
Speaker 1: it looks a lot easier, and if unemployment goes up,
Speaker 1: they're going to have to I mean, does any of
Speaker 1: us really feel that the FED is independent? Danielle, Who
Speaker 1: did you work with in Dallas? I worked with Richard
Speaker 1: Fisher and he was He was different than most works. Okay,
Speaker 1: but this fan was congenial and reluctant to descent. If
Speaker 1: we get five five and a half percent, if we
Speaker 1: get six percent unemployment, if we get people who can't
Speaker 1: put food on their families tables, I think this feed
Speaker 1: is really going to have resolved. And that's that's your question.
Speaker 1: We're seeing um small business closing. There's a website called
Speaker 1: daily job cuts dot com. At the fastest pace I
Speaker 1: spoke to the person who runs this website at the
Speaker 1: fastest pace since two thousand and nine. There's there's actual
Speaker 1: pain out there in the economy, and there's a reason
Speaker 1: that you're seeing such disparity between the establishment and the
Speaker 1: household surveys in the in the jobs data, and that's
Speaker 1: because one of them is not telling you the true
Speaker 1: state of unemployment in America. One's playing catch up to
Speaker 1: the other. The thing is, again going back, the FED
Speaker 1: has a dual mandate, which is price stability basically zero,
Speaker 1: and full employment. And it's a two factory zero, right,
Speaker 1: I mean, I guess they've decided it's two percent, and
Speaker 1: now some of them are thinking it could be three
Speaker 1: or four. But there's a reason for it. Well, now
Speaker 1: three for four a different issue, but the two percent,
Speaker 1: and I think it should they had it lower than
Speaker 1: that with low low unemployment. But the bottom line is
Speaker 1: it's a two factor optimization because as as as unemployment
Speaker 1: drops too low, price pressures rise. At five and a
Speaker 1: half to six percent, the optimization model will give them
Speaker 1: plenty of room if they really feel that they have
Speaker 1: to cut depending on inflation, but a three and a
Speaker 1: half percent inflation rate with six percent unemployments is going
Speaker 1: to give them room three and a six unemployment rate
Speaker 1: with six or seven percent on flip inflation, which is
Speaker 1: basically stagflation at that point. Now they have a problem.
Speaker 1: All right, guys, great stuff. Really appreciate it. Uh, this
Speaker 1: was a historic get together, some smart people kind of
Speaker 1: previewing what we might hear from our federal reserve today later.
Speaker 1: Dana Washington d C, Neil Grossman, former c I O
Speaker 1: at t k n G Capital, and Daniel D. Martimo Booth,
Speaker 1: a CEO and Chief Strategist at Quill Intelligence, joining us
Speaker 1: here in our Bloomberg Interactive Broker studio and on the phone,
Speaker 1: Priam Isra, global head of Rate Strategy Managing director with
Speaker 1: t D Security has given a sense of what we
Speaker 1: may hear later this afternoon. Of course, Michael McKee is
Speaker 1: Dana Washington d C. He'll have live reporting and the
Speaker 1: Bloomerk Surveillance team will have their show at one thirty
Speaker 1: Wall Street time. Million ways to go with our next
Speaker 1: guest here, George Ferguson. He's a senior aerospace, defense and
Speaker 1: airline analysts for Bloomberg Intelligence. UH Penn State graduate, former
Speaker 1: military intelligence officer in the U. S Army, So we
Speaker 1: thank them as always for his service. George, There's a
Speaker 1: lot of stuff going on in your space here today.
Speaker 1: We I want to start just with the airline's real quick,
Speaker 1: because just in the last couple of days, we had
Speaker 1: Delta take some numbers up that kind of surprised me. Uh.
Speaker 1: Number two, we had United saying they're gonna buy a
Speaker 1: bunch of Boeing jets. Uh, that sounds pretty positive to me.
Speaker 1: Just give us the state of the airline business today.
Speaker 1: Where are we? Kind of visa VI Yeah, so thanks
Speaker 1: for me on, thanks for kind words. Um, where are we?
Speaker 1: So we actually just published a report this morning on airfares,
Speaker 1: and I think where we are is that the markets
Speaker 1: that have been opened the longest, which are going to
Speaker 1: be domestic US I'm talking to US carriers, and uh,
Speaker 1: Latin America routes were starting to see fair start to
Speaker 1: tick over, meaning they're they're um, they're starting to fall,
Speaker 1: especially we compare them to levels. And the markets that
Speaker 1: are just reopening are still seeing this, uh you know,
Speaker 1: this increased demand and and fair increases and so Europe
Speaker 1: is in that is in that class, Canada and then
Speaker 1: and Asia, and so I think you know, I think
Speaker 1: Delta and United will obviously they have bigger international footprints
Speaker 1: and internationals what's opening. So I think that's gonna be
Speaker 1: a bit of a tail one for them into but
Speaker 1: you are going to see I think the domestic market
Speaker 1: cool off for the carriers. I think that's a little
Speaker 1: bit again behind United going for all these seven eight sevens.
Speaker 1: I think they probably got a really nice price from Boeing.
Speaker 1: Right now, Bowing really needs to rebuild some backlogs, and
Speaker 1: I think they're looking forward and seeing some of that
Speaker 1: strength in international markets. They have the old seven six
Speaker 1: D seven fleet out there forty five and then they're
Speaker 1: twenty plus years old. They gotta go anyways, and so
Speaker 1: I think they said, look a good time, we'll get
Speaker 1: some good prices on seven eight seven has been a
Speaker 1: really strong performer for Boeing. I should add that's a
Speaker 1: great airplane. By the way, love flight and that thing.
Speaker 1: I mean it's coming off, you know, being um waiting
Speaker 1: on f A approval for a fix on it, which meant,
Speaker 1: you know, deliveries have been stacking up and not going
Speaker 1: out to customers, and Boeing still printed this order. I'm
Speaker 1: sure they looked at the three fifty as well, So
Speaker 1: I think it was it was a nice endorsement for
Speaker 1: that seven. But again I think International will look better
Speaker 1: in but I think it will tap out two a
Speaker 1: little bit. And George, in terms of fairs, um, we've
Speaker 1: seen obviously a lot of fluctuation throughout the pandemic. What
Speaker 1: about when you look at fairs, you know, the averaged
Speaker 1: out I guess, you know, remove the pandemic outlier compared
Speaker 1: to ten years ago or twenty years ago, had they
Speaker 1: really been able to increase prices as much as they
Speaker 1: you know, have seen costs rise. So I'll tell you
Speaker 1: that's really really hard to do, right, because you always
Speaker 1: have to adjust fares by the underlying fuel prices. We
Speaker 1: built a model that looked at this for a while.
Speaker 1: You know, it's called we called it a pricing power model, right,
Speaker 1: And so you either want to be not giving back
Speaker 1: as much as lower fuel prices are giving you, or
Speaker 1: taking more than fuel prices are are taking from you. Uh,
Speaker 1: and and we find it really hard. And so that
Speaker 1: the fairs I was I was just quoting to you,
Speaker 1: we're based off at twenty nineteen levels, so we're watching
Speaker 1: twenty nineteen levels closely. And I think one of the
Speaker 1: interesting things. You know, Delta's talking their their performers today
Speaker 1: talking three today, UM telling telling us how strong the businesses.
Speaker 1: But if you can't give me twenty nineteen level margins
Speaker 1: and the best margins we saw in this business, we're
Speaker 1: probably actually you can't give me twenty nineteen level margins.
Speaker 1: I'm going to tell you the business isn't as strong
Speaker 1: as you're telling me it is, George we Earlier this morning,
Speaker 1: Tom Key and I were talking to Mary Schlangenstein. She
Speaker 1: she's an airlines reporter for Bloomberg News based in Dallas,
Speaker 1: and she was saying, the companies are still having real
Speaker 1: problems with getting pilots. I mean a baggage handlers. Yeah,
Speaker 1: that's that's an issue of gated tendants. Okay, but pilots
Speaker 1: is still an issue. Can you explain what's going on there?
Speaker 1: Why don't we have enough pilots? Yeah? I mean so,
Speaker 1: you know, for years, I think we've US airlines have
Speaker 1: enjoyed taking some of those pilots out of the U. S. Military.
Speaker 1: UM military is training less and less pilots and they're
Speaker 1: having a problem I think staffing reading rooms as well.
Speaker 1: So a little bit of that. I think it is,
Speaker 1: you know, less training there. Uh. What we've seen is
Speaker 1: during times of high oil prices, there's just less training,
Speaker 1: uh you know going on in the civilian side. Uh.
Speaker 1: And there was just a big bulge of pilots in
Speaker 1: the system that uh, you know, we're Vietnam War trained,
Speaker 1: military trained. They're aging out at six. But I'll tell
Speaker 1: you the noise. So the noise we're here and um,
Speaker 1: you know from like Southwest had investor day last week
Speaker 1: and Southwest said, look, we don't have a problem getting
Speaker 1: pilots right now, we have a problem getting them through training. Right.
Speaker 1: So training is a bottleneck. It's going to be the
Speaker 1: same for Delta American. The place where we're seeing pilots
Speaker 1: absolutely run away from uh A is gonna have a
Speaker 1: big problem next year is gonna be the regional airlines.
Speaker 1: But it's training, that's that's the choke point. But Southwest
Speaker 1: said they're having a problem getting employees across the board.
Speaker 1: They're finally feeling staff they're a bit overstaffed. Now they're
Speaker 1: get to get people trained because they're inefficient. Right, these
Speaker 1: are people new to the industry. UM, so I think
Speaker 1: training is going to be the biggest year across the board,
Speaker 1: and pilots again are gonna come in with a nice
Speaker 1: a increase. Right. We saw Delta pilots in the first year,
Speaker 1: I think it was five percent tem present right away
Speaker 1: gains and you know, salary in the first year, and
Speaker 1: then it got a four and a four. They're gonna
Speaker 1: have to build this into their cost structure. That's going
Speaker 1: to make margins. That's gonna pressure margins as well. A George,
Speaker 1: I want to switch gears because you also cover the
Speaker 1: defense space, and I haven't heard that much about it,
Speaker 1: but we've got a bunch of bills in front of
Speaker 1: Congress here. What's the foot view on some of the
Speaker 1: defense contractors you follow? Yeah, so, I mean, you know, defense,
Speaker 1: it sounds like there's a lot of support for higher
Speaker 1: defense spend right the threat environment, as we say, you know,
Speaker 1: it is heightened right now. So so you can see
Speaker 1: that there's some wrangling going on in Congress right now.
Speaker 1: Right we're still in a contending resolution that makes it
Speaker 1: really hard for the defense companies to get money rout
Speaker 1: into their newer programs um and so there's some wrangling
Speaker 1: going on now here. Year end as they look at
Speaker 1: lifting the government debt feeling and everything. Uh, they're talking
Speaker 1: about how much money we spend on the domestic side
Speaker 1: as well, and and there's always that, right, and so
Speaker 1: I think that's going to be a challenge going forward
Speaker 1: as we try to go to higher defense budgets. There's
Speaker 1: always gonna be that side of Congress is gonna want
Speaker 1: more money spent for domestic initiatives as well. Hey, as
Speaker 1: an aside, who makes the Patriot missile? Patriots think is
Speaker 1: gonna be a Lockheed and raceeon. I believe that's correct,
Speaker 1: because we're sending some of those over to Ukraine. So
Speaker 1: that's interesting, all right. George Ferguson the fourth, by the way,
Speaker 1: so there's three before him. He gets George Ferguson, senior Aerospace,
Speaker 1: Defense and Airline analyst for Bloomberg Intelligence. He falls that
Speaker 1: entire space there for Bloomberg Intelligence to be doing that
Speaker 1: for decades, and appreciate getting his thoughts here. And it
Speaker 1: seems like, I don't know, every plan I'm on is packed, Um,
Speaker 1: you know, so I don't know, But I guess the
Speaker 1: real question mat is like business travel, where are we there?
Speaker 1: You know? Is that coming back? I think people here traveling.
Speaker 1: I'm sure I think business travel is coming back. Um,
Speaker 1: it just took a little bit longer than leisure travel.
Speaker 1: But the question I always have is about fairs. You know,
Speaker 1: can they continue you to get pricing power? Yeah, and
Speaker 1: again George Ferguson had that research report on b I
Speaker 1: go out this morning saying and a lot of the U.
Speaker 1: S markets fairs are starting to come down. Uh. So
Speaker 1: that's good news for those of us looking to book.
Speaker 1: Some bad news for investors. You know, we got these
Speaker 1: Bloomberg's opinion column things beat then they think about with
Speaker 1: some really good stuff bo you know, Bloomberg Opinion O
Speaker 1: p I n go O p I n go and
Speaker 1: then Bloomberg dot com slash opinion on uh, you know,
Speaker 1: on that intraweb thing that works pretty well. So let's
Speaker 1: bring in editor in chief Emeritus Matt Winkler to talk
Speaker 1: about his latest column. Um, the headline companies thrive where
Speaker 1: abortion is protected and no offense. But I would say
Speaker 1: this is n I N S S. I mean, it
Speaker 1: makes perfect and that is what obvious sense. I can't
Speaker 1: give you the meaning of the acronym, but it's clear
Speaker 1: right that women are gonna want to work in states
Speaker 1: where they have uh the ability to make their own
Speaker 1: choices concerning their health. Always great to be with you,
Speaker 1: Matt and Paul Um. Yes, Uh. Intuition is a wonderful thing.
Speaker 1: But here at Bloomberg, it's always about the data. And
Speaker 1: this is a subject that is so if you will,
Speaker 1: clouded by opinion. UM. Interestingly enough people's opinion and very
Speaker 1: little about UM the data that relates to economic performance.
Speaker 1: And so what my colleague schinpay and I decided to do, say,
Speaker 1: all right, UH, let's try to see what the data
Speaker 1: shows us about companies that are based in states that
Speaker 1: have criminalized abortions. Now this is interesting because Texas is
Speaker 1: a big state and it's one of them. Uh and UH.
Speaker 1: It turns out that the states that since two thousand
Speaker 1: and twenty have UH guaranteed reproductive rights anticipating the repeal
Speaker 1: of Roe v. Wade have outperformed. The companies have outperformed
Speaker 1: in those states, not only the national average. And we're
Speaker 1: looking at the Russell three thousand group of companies, So
Speaker 1: this is big companies and small companies alike. They've outperformed
Speaker 1: in numerous ways. UH. If you like total return, profitability, UH,
Speaker 1: employee per sales, those kinds of measures of performance, they're
Speaker 1: obviously more diverse as you would expect, more women in
Speaker 1: these companies and management positions, more women employees. Um. And
Speaker 1: if you put it all together, it just says that
Speaker 1: economically speaking, we're better off. Companies are better off. Corporate
Speaker 1: America is better off where reproductive rights are guaranteed. Corporate
Speaker 1: corporate Rica has an inferior performance where reproductive rights are
Speaker 1: limited or negligent or non existent. Somebody, I know you, uh,
Speaker 1: you know some of this is you spoke with Common
Speaker 1: Secretary Gina Romundo. Uh, and that she knows that businesses
Speaker 1: are performing states where we put up to rights of preserve.
Speaker 1: Tell us how that when and what are some of
Speaker 1: her views? Well, she's glad to get a look at
Speaker 1: the data as well, right, she said she wishes she
Speaker 1: had it when she was governor. Well, I mean she
Speaker 1: actually is very well aware of this. Maybe she hasn't
Speaker 1: gone to compile it the way we have. But don't
Speaker 1: forget Gina Romundo, if you will, comes right out of
Speaker 1: corporate America in the sense that after being a Rhodes
Speaker 1: scholar and economist with degrees from Harvard, Yale and Oxford
Speaker 1: and a law degree from Yale University. Uh. She worked
Speaker 1: actually um in the inner city UM, and then became
Speaker 1: the first ventured capitalist in Rhode Island. And because of
Speaker 1: Rhode island failing fiscal outlook, she became treasurer, was elected
Speaker 1: treasure and did something nobody was able to do, which
Speaker 1: is fixed a broken pension system, and then did a
Speaker 1: lot of other things to fix the infrastructure of Rhode Island,
Speaker 1: but more important fix uh the well being of Rhode Island.
Speaker 1: And that meant doing things like pre k kindergarten uh,
Speaker 1: you know everywhere um and improving the outlook for young
Speaker 1: people by forgiving students in deadness. UM. So now she's
Speaker 1: the Secretary of Commerce, and she, by the way, took
Speaker 1: her state from being one of the laggards in the
Speaker 1: US economically to one of the better performers. Now she's
Speaker 1: Secretary of Commerce, she knows a thing or two about
Speaker 1: how economies work, what gets c e o s to
Speaker 1: do their best work. And so she knows c e
Speaker 1: o s in particular because she recruited something like thirty
Speaker 1: of them to Rhode Island. So when she sees this data,
Speaker 1: she isn't surprised at all. Actually, she says it may.
Speaker 1: It does make sense because she says, the best CEOs
Speaker 1: who recruit and developed talent are making all kinds of
Speaker 1: other decisions that are equally beneficial to their bottom line.
Speaker 1: UM well being is obviously front and center. If you
Speaker 1: have a workforce that is is liberated, UM, that workforce
Speaker 1: is probably going to do better. I imagine if you,
Speaker 1: I mean, you could extrapolated out to a number of
Speaker 1: other health issues, for example, maternity leave. If a company
Speaker 1: offers better maternity leave, aren't they likely to attract better
Speaker 1: talent if a company offers childcare or some kind of
Speaker 1: fixed to that very expensive. So here's your answer, Matt.
Speaker 1: You know, our profession has repeatedly belittled California for its
Speaker 1: high taxes and high regulation. California is precisely the state
Speaker 1: that does more for women and men. Are these then
Speaker 1: probably any other and corporate California over two years, five years,
Speaker 1: ten years, pick any period you like, crushes the performance
Speaker 1: of corporate Texas or any other state, because corporate California
Speaker 1: itself is more diverse and inclusive than anywhere else. So
Speaker 1: that's your answer. That's why you know we're seeing the
Speaker 1: data that we're seeing by the way on Texas. Um,
Speaker 1: it's interesting because Gina Amando talks about going to other
Speaker 1: states and like trying to recruit because she has this
Speaker 1: data now and um, clearly, states uh that offer choice
Speaker 1: also have better performance economically. Does it look like Texas though,
Speaker 1: could be one of those states that goes from red
Speaker 1: to blue? I mean, as more companies moved to Austin,
Speaker 1: Austin becomes a much more progressive city. Uh, well, it's
Speaker 1: too early to say. And Texas is jerrymandered. Um. If
Speaker 1: you like Democrats out of political position to gain any
Speaker 1: time soon in the legislature for one thing. Um, And uh,
Speaker 1: you know that's a that's a prevailing problem. Um. As
Speaker 1: for you know what the makeup of corporate Texas is,
Speaker 1: it's still something like two thirds in the ground. Um.
Speaker 1: What comes out of corporate Texas is two thirds in
Speaker 1: the ground. It's fossil fuel. They're making strides with alternative energy.
Speaker 1: But it's a very twentieth century or nineteenth century state
Speaker 1: in that respect. Corporate California, two thirds of corporate California
Speaker 1: is between your ears, So it's very much twenty one century.
Speaker 1: All right, Matt, good stuff as always Matt Winkler. He's
Speaker 1: an editor in chief emeritus uh founder of Bloomberg News
Speaker 1: back in the day. We appreciate getting to check in
Speaker 1: with him. You can find his columns and all the
Speaker 1: other good Bloomberg opinion stuff on the bloom Bloomberg terminal
Speaker 1: O p I n go is uh the ticker, and
Speaker 1: you can do it on that intra web thing Bloomberg
Speaker 1: dot com slash Opinion that they've got all that stuff
Speaker 1: up there as well, So we appreciate getting that from
Speaker 1: Matt Energy. You know, I'm looking at w T A
Speaker 1: crude oil. It's up a couple of bucks. It's still
Speaker 1: at seventy seven dollars. My gasoline prices three. That's crazy
Speaker 1: because w T I was trading for seventy dollars on
Speaker 1: Monday morning. I know it's moving all around. Because let's
Speaker 1: talk energy. Let's round table this thing. Jonathan Maxwell, CEO
Speaker 1: and co founder of Sustainable Development Capital and Jay Halfields,
Speaker 1: CEO of Infrastructure Capital Management. They joined us both here
Speaker 1: in a Bloomberg Interactive broker studio two for two. How
Speaker 1: good is that the world is coming back? Baby? Um So, John,
Speaker 1: let's start with you. I think first time talking to you, right, yes, okay,
Speaker 1: so tell us about what you guys are doing at
Speaker 1: your fund. Yeah, well thanks for having me on. So
Speaker 1: we um, we're in the middle of a global energy crisis.
Speaker 1: But for the last ten fifteen years, we we had
Speaker 1: st Seattle Sustainable Development Capital has been developing an investing
Speaker 1: institutions to save energy. UM the Lawrence Living More National Laboratory,
Speaker 1: famous as an institution, even more famous yesterday for I
Speaker 1: want to ask you about that stuff coming on, but
Speaker 1: actually going back to the seventies, have been calculating how
Speaker 1: much energy is wasted in the United States. About seventy
Speaker 1: gets lost through extraction, conversion, and generation and transmission and distributions.
Speaker 1: Just wonder why I see the flames burning out and
Speaker 1: the you know, the oil refineries and stuff like that
Speaker 1: isn't what's going on. It's one of the features. So
Speaker 1: we've we've designs and investment strategy that invests in solutions
Speaker 1: to that problem. And that's so effectively delivering energy, lower costs,
Speaker 1: more reliable, another carbon straight to the end user and
Speaker 1: also helping end users seventy of energies in buildings, industry,
Speaker 1: and transport, so helping those end users reduce the amount
Speaker 1: of energy that they need to do the same job.
Speaker 1: So you know, J J J. You're an investor, right,
Speaker 1: so what you do is focused on obviously making money,
Speaker 1: but you're also in the energy space and to some
Speaker 1: extent um interested in sustainability. Correct. Yes, so I was
Speaker 1: actually the first investment banker to do renewables, which doesn't
Speaker 1: really get you much because I was thirty years ago
Speaker 1: so at the head of my time. But um, so
Speaker 1: I've always been an environmentalist. But now we do have
Speaker 1: a pipeline fund, which I think is an environmental fund
Speaker 1: because we have natural gas which is the plant's coal,
Speaker 1: which is really the the near term way to reduce submissions.
Speaker 1: So we have a pipeline et F. So that's and
Speaker 1: also co founded an energy company and based in Oklahoma
Speaker 1: that my friend my Crumble runs. All right, So, Jonathan,
Speaker 1: you mentioned this fusion thing. Um, I kind of read
Speaker 1: about it a little bit over the last couple of days,
Speaker 1: but I'm still putting regular unleaded in my in my car,
Speaker 1: so I'm not really sure what happened that it's not
Speaker 1: a flux capacitator exactly what happened at the little More facility.
Speaker 1: So I'm for years, the idea of fusion has been
Speaker 1: a long way away. I think what happened yesterday was
Speaker 1: that you can get more energy out of fusion than
Speaker 1: it takes then you put into it. And this is
Speaker 1: a major, major breakthrough. The idea really is that at
Speaker 1: some point over the next ten thirty years, were able
Speaker 1: to generate energy, largely electricity, in much the same way frankly,
Speaker 1: that the Sun does. So this is the breakthrough, the
Speaker 1: technological breakthrough. I think the challenge with it and many
Speaker 1: other ways of adding new energy into the system is
Speaker 1: it takes a lot of time, and you know well,
Speaker 1: and also because we already have a Sun and we
Speaker 1: don't have to put any energy into it and it
Speaker 1: constantly gives us energy back, we just need to harness that. Yeah,
Speaker 1: there are ways of harnessing it today, and I think
Speaker 1: the two ways that we look at fundamentally is making
Speaker 1: sure that we don't waste most of the energy in
Speaker 1: the system in the first place, which is frankly how
Speaker 1: Europe and North America is operating today. And then second
Speaker 1: of all, exactly the point you just made, actually using
Speaker 1: technologies have made up absolutely today like solar solar power
Speaker 1: installed directly on your roof, on the ground, connected to buildings.
Speaker 1: These are the types of technologies that we can deploy
Speaker 1: today if you decide, if you decide to go ahead today,
Speaker 1: you could probably have it implemented within a year or so.
Speaker 1: And it's that speed of execution over the course of
Speaker 1: the twenties twenties which is going to be crucial for
Speaker 1: for three reasons, one of which is energy security, second
Speaker 1: of which is decobanization rapidly. We can't wait until until
Speaker 1: a lot of these new technologies are available at scale.
Speaker 1: And then the third is energy cost. Energy costs are
Speaker 1: incredibly high where I come from. They've gone up three,
Speaker 1: four or five times in the UK, in Europe, that's
Speaker 1: a feature of what's happening in the global commodities market. Russia,
Speaker 1: Ukraine hasn't helped that. But unfortunately the United States now
Speaker 1: energy independence since is still going to be subject to
Speaker 1: global markets and energy. So energy costs are high and
Speaker 1: are rising in the United States. So for those three
Speaker 1: reasons cost carbon and and and an energy secure getting
Speaker 1: this stuff done on site generation, stopping wasting so much
Speaker 1: energy in the system, being more productive, that's exactly what
Speaker 1: we need to be doing. That one kill a lot
Speaker 1: hour at tea time on Monday in London was two thousand,
Speaker 1: six hundred pounds. That is just nuts, um je, what
Speaker 1: do you think we need to be doing here now
Speaker 1: in order to make sure that doesn't happen to us? Well,
Speaker 1: electricity prices are driven almost directly by natural gas prices,
Speaker 1: and so natural gas can go to kind of infinity
Speaker 1: because there's an infinite demand for electricity in this modern economy.
Speaker 1: So the United in the United States, we kind of
Speaker 1: solved the problem just by being lucky because we have
Speaker 1: the most natural gas by far, and we can drill
Speaker 1: for way more than we're drilling right now. We do
Speaker 1: need pipelines, which the administration is apparently not in favor of.
Speaker 1: For instance, um gas in what's called Waha Hub, Western
Speaker 1: Texas is trading for zero, but while in California it's
Speaker 1: spiking to you know, to unsustainably high levels because there's
Speaker 1: no pipeline from Waha to California. So, um we do
Speaker 1: need to develop our infrastructure a little bit. But we
Speaker 1: have tremendous natural gas resources and that's why we have
Speaker 1: a cost advantage on natural gas. So our natural gas
Speaker 1: right now is is right around six dollars. In Europe,
Speaker 1: as you were indicating to let high electricity prices, it's
Speaker 1: forty dollars, you know, So it's whatever that multiple is
Speaker 1: about eight times and forty dollars, as we discussed before,
Speaker 1: is two fifty dollars equivalent of oil. So it's just
Speaker 1: uneconomic and terrible. So but in the US we have
Speaker 1: the natural resources. We can drill for it. We just
Speaker 1: have to make sure we can. But you see that
Speaker 1: you see natural gas as a stop gap solution, not
Speaker 1: six month stop gap solution, but maybe what a six
Speaker 1: year stop gas? So I think that's the tragedy of
Speaker 1: extreme environmentalist um policy is we've restricted natural gas and
Speaker 1: so we haven't have it. For instance, there's a shortage
Speaker 1: in Boston, so we burn fuel oil, which is dirty. Year.
Speaker 1: We should in the next five years get rid of
Speaker 1: all of our coal. We could subsidize people who need
Speaker 1: to be subsidized through carbon tax or other taxes, but
Speaker 1: we need to get rid of all the coal right away,
Speaker 1: not just for carbon. It's just an abomination. Coal plants
Speaker 1: are just horrendous if you ever been to one, And
Speaker 1: because it's not just carbon, it socks knocks, ash ash pits.
Speaker 1: It's just really and also we're breathing it in here
Speaker 1: because we're on the east coast, so we get them
Speaker 1: that comes to our way. So it's hugely economic to
Speaker 1: do that in the short run. And so really which
Speaker 1: you need is a carbon tax, which would really make
Speaker 1: coal have a huge disadvantage and natural gas would naturally
Speaker 1: take its place in the short run, and then in
Speaker 1: the long your term, you can get renewable as they're
Speaker 1: slow to be developed, as indicated by my thirty two
Speaker 1: years of experience of doing it, and still not that big. So, Jonathan,
Speaker 1: what do you think about I mean, in extreme environmentalist
Speaker 1: j says have made perfect the enemy of good. I
Speaker 1: think it's important not to make a sacrifice good on
Speaker 1: the altar of the perfect. But let's try. That's that's
Speaker 1: chart the journey at the molecule. This is what the
Speaker 1: Lawrence Live a more national poetry also does. Around ten
Speaker 1: percent of molecules that's gas or crude is lost in
Speaker 1: converting it once it's in. When it gets the generation
Speaker 1: systems typically large turbines, about of the primary energy, and
Speaker 1: that molecule is lost through heat. Another ten percent is
Speaker 1: lost through transmission and distribution. So if we're going to
Speaker 1: use natural gas, let's use it which we need to.
Speaker 1: Let's use it efficiently. Let's make sure that we capture
Speaker 1: the heat that means generating energy close or right at
Speaker 1: the point where you where you use it. You can
Speaker 1: use the rejected heat instead of dumping it, which is
Speaker 1: what happening by a large to day. You can use
Speaker 1: it for heating hot water steam. So this is the
Speaker 1: if you like the transition on the revolution that we
Speaker 1: need to see. It's actually about decentralization on the one hand,
Speaker 1: bringing energy close to the point of views, and the
Speaker 1: second point is making sure it's not wasted. Your beautiful building, Hey,
Speaker 1: I use LED lights, censors, heating, ventilation, air conditioning. Most buildings, industry,
Speaker 1: and transport systems waste of the energy that they use.
Speaker 1: The energy transition, it's not gonna be measured in months
Speaker 1: or even years, but many, many years probably. So we
Speaker 1: always like to get back to that story with our
Speaker 1: energy discussion. We did that today with Jonathan Maxwell, CEO
Speaker 1: and co found or Sustainable Development Capital and j Halfel's
Speaker 1: CEO of Infrastructure Capital Management managing the transition to a
Speaker 1: greener energy grid. We're gonna more on all of that.
Speaker 1: Let's hoplead the good idea, good idea. Why not Anthony Conniglio,
Speaker 1: he's the CEO of New Lake Capital Partners Are this
Speaker 1: thing is a read real estate investment trust. I didn't
Speaker 1: know there was a weed real estate investment trust thing
Speaker 1: out there. So Anthony, you got to give us the
Speaker 1: thirty foot level. Why am I doing a reat on
Speaker 1: the cannabis business? Well, thank you so much for having me. Um.
Speaker 1: Because cannabis is illegal at the federal level. It's a
Speaker 1: state regulated industry, and companies that operate in the cannabis
Speaker 1: industry need to replicate their infrastructure from state to state
Speaker 1: because you can't transport across state lines. Wow, I never
Speaker 1: thought of that. So, for instance, if you grow like
Speaker 1: the kindest bud in Humble County, you can't sell it
Speaker 1: in New York. No, you cannot, even though it's legal
Speaker 1: in California and New York. Correct federal law or restricts
Speaker 1: interstate commerce by weed in New York. It's got to
Speaker 1: be a New York grown correct New York weeds not
Speaker 1: as good as California. Not that I know anything about this,
Speaker 1: but is there are certain states by the WAUL doesn't
Speaker 1: know anything about this. Yeah, I don't so, um, but
Speaker 1: you put a t does in front of me, were
Speaker 1: in good shape? But so is there different quality and
Speaker 1: states whether there there's different quality in each state regulates
Speaker 1: the industry a little bit differently. So you will have
Speaker 1: some states that restrict the form factor, so they may
Speaker 1: say that no edibles are allowed, or they may say
Speaker 1: no flowers allowed. Some states restrict th HC content. Um,
Speaker 1: So this industry really does vary state by state and
Speaker 1: requires you to understand the dynamics that exists in each
Speaker 1: one of those states. But also, I mean when we
Speaker 1: were kids, um, it was all about the sun and
Speaker 1: the earth. Now I assume most big grow ups are
Speaker 1: hydroponic and you know, controlled in greenhouses, so you can
Speaker 1: easily replicate you know whatever tie stick or Maui gold
Speaker 1: in upstate New York. Dating you're you're absolutely right. And
Speaker 1: as you would think about it, Um, if you're selling
Speaker 1: in Michigan or you're selling in Pennsylvania, you wouldn't have
Speaker 1: the growing conditions you may have in California. And so
Speaker 1: if you look at our property is we own thirty
Speaker 1: two properties. Half of them are cultivation facilities and these
Speaker 1: are indoor facilities that are highly complex, often medical grade
Speaker 1: facilities with light, humidity control, temperature control that allow the
Speaker 1: operators to control the environment and grow high quality product,
Speaker 1: but also allows them to turn the crop quicker. So
Speaker 1: you can get six turns in an indoor facility, whereas
Speaker 1: in an outdoor you mainly get two turns a year.
Speaker 1: So this all sounds I've never even thought of. This
Speaker 1: all sounds great, But let me ask how hard it
Speaker 1: is to do business. I mean, you're not just a
Speaker 1: New York company just to California company, Right, You've got
Speaker 1: to do business across state lines. Um, You've got investors
Speaker 1: all over the country, probably all over the world. Um,
Speaker 1: how hard is that with the current federal legislation. Yeah,
Speaker 1: it's very difficult because of the current federal legislation. And
Speaker 1: we do own thirty two properties across twelve states with
Speaker 1: thirteen tenants, and so managing those state rules and making
Speaker 1: sure we understand everything that's going on in those particular states, um,
Speaker 1: requires a lot of focus. And from an investor perspective,
Speaker 1: the biggest issue for us where a public company at
Speaker 1: New Lake, and the biggest issue for US is custody
Speaker 1: because of the banking laws, and because of the federal classification,
Speaker 1: many of the prime brokers and custody agents won't custody
Speaker 1: the asset um and so that puts a chill on
Speaker 1: the ability for institutional investors to invest in the space.
Speaker 1: So how do you deal with that? And um, are
Speaker 1: you you know, banding together with others in the industry
Speaker 1: to send real funded lobbyists to Washington, d c. To
Speaker 1: buy us some legislation. So the drama going on right
Speaker 1: now in Washington is all around the Safe Banking Bill.
Speaker 1: This is legislation that has passed the House a couple
Speaker 1: of times and continuously stalls in the Senate. And so yes,
Speaker 1: there is a significant industry push to get the Safe
Speaker 1: Banking Bill passed so that we could ease the burden
Speaker 1: upon operators but also hopefully open up the ability for
Speaker 1: banks to custody um those that are public and custody
Speaker 1: investments in the stuff. So how do you handicap that?
Speaker 1: I mean, is it six chance that it passes? Um?
Speaker 1: You know, we've got a lame duck Congress where it
Speaker 1: could possibly go through, But it looks like time is
Speaker 1: ticking away. It certainly is. I'm an optimist By nature.
Speaker 1: But I'm a pessimist on safe being able to bank
Speaker 1: to pass in the lame duck. I just don't think
Speaker 1: that this is an important, important enough topic UM in
Speaker 1: the Senate for enough Senators to be able to get
Speaker 1: this across the finish line. I hope it passes. It
Speaker 1: would be terrific for the industry. UM, I'm just not
Speaker 1: optimistic it will. So where are we in terms of
Speaker 1: the number of states that have legalized of what's next
Speaker 1: up in terms of maybe some more states of note, Yeah,
Speaker 1: this is fascinating. Break it down into three segments. There
Speaker 1: are the states that don't have any real legalized program.
Speaker 1: Those are small, roughly handful of states don't have any
Speaker 1: medical or recreational segment. Two would be the medical states,
Speaker 1: those are buying large red states at this point in time.
Speaker 1: And the first category, which is the recreational states, which
Speaker 1: now number around twenty r I think New York, New Jersey, Connecticut,
Speaker 1: a lot of the East Coast states including California and Colorado,
Speaker 1: and so all of the recreational states tend to be
Speaker 1: more democratic leaning. So the easy stuff has happened, But
Speaker 1: we're pretty excited about what we're seeing in the red
Speaker 1: states to convert medical markets to recreational So what are
Speaker 1: your facilities primarily in those blue states where you can
Speaker 1: get on the recreational it's a mixture. In fact, we've
Speaker 1: got a property and two properties in Missouri with great tenants,
Speaker 1: and Missouri at the ballot box on November eight recently
Speaker 1: approved converting that medical market to an adult use market.
Speaker 1: So again that's a red state that UM just within
Speaker 1: the last month or two approved converting to a recreational market.
Speaker 1: And do you I mean as a recreational business better
Speaker 1: for you. I can imagine a medical grow up is
Speaker 1: a little bit different than a recreation I'll grow up
Speaker 1: because they've got to get things exactly right with the content. Yeah.
Speaker 1: Like like all things cannabis, it comes back to the state.
Speaker 1: As you've heard me say a couple of times, there
Speaker 1: are some recreational states that are not very good states
Speaker 1: from our perspective for for the operator. Too much competition,
Speaker 1: pricing compression, significant pricing compression, like a California or like
Speaker 1: a Michigan. UM. But the stare are some controlled states
Speaker 1: like uh, like a Pennsylvania or a Massachusetts where the
Speaker 1: licenses are more limited. And that's where we like to focus.
Speaker 1: It's a better operating environment for the operator. Um better
Speaker 1: origins and better cash flow means better credit quality because again,
Speaker 1: as a reap, it's good to do deals, but we
Speaker 1: need to be able to collect rent. How do you
Speaker 1: where do you get your I see your publicly traded companies.
Speaker 1: You have some publicly available equity and LCP is the
Speaker 1: ticker New Lake Capital Partners. Yes, and how about on
Speaker 1: the debt side, how do you access debt capital? We
Speaker 1: recently announced that we closed on a ninety million dollar
Speaker 1: credit facility with a couple and a few national banks UM,
Speaker 1: and so that's where we can go to source capital
Speaker 1: right now. Obviously, we can issue capital. We I p
Speaker 1: owed in auguste and raised a hundred million dollars. We've
Speaker 1: deployed that capital with the ninety million dollar credit facility
Speaker 1: and some generate internally generate cash, we have about a
Speaker 1: hundred million dollars to put to work, which we think
Speaker 1: will serve us well for the next six to twelve months,
Speaker 1: and then we'll look to evaluate if we raise more debt.
Speaker 1: We're unlevered today and so you know it's very unusual
Speaker 1: to have a read that's unlevered um like we are today,
Speaker 1: so we have a lot of runway to add some
Speaker 1: debt capacity. One of the next states, UM to go.
Speaker 1: I mean, do you like to try and find a
Speaker 1: property in a state just before it switches to legal um. Again,
Speaker 1: that's very state specific. Certainly, when we made our investments
Speaker 1: in Missouri, we were optimistic that it would pass and
Speaker 1: we spend a lot of time analyzing that legal construct
Speaker 1: ten Jack that yes, thank you for that, UM. But
Speaker 1: we also look to a lot of the states that
Speaker 1: are very, very large, that are fledgling, and maybe you
Speaker 1: could find a good operator in those states. I'll give
Speaker 1: you an example. Georgia would be an example as a
Speaker 1: state that we think has a bright future. Of Texas
Speaker 1: as a state that will have a bright future. User
Speaker 1: states where the market is really really small today. UM.
Speaker 1: We're also looking at Connecticut. Connecticut is expected to go
Speaker 1: recreation with their first sales in the next month or two,
Speaker 1: and there's a lot of opportunity with companies getting into
Speaker 1: that state and building up all right, great stuff. Really
Speaker 1: appreciate your stopping by Anthony Conniglio. He's the CEO of
Speaker 1: New Lake Capital Partners that is a reet in the
Speaker 1: facility side of the cannabis business as we find out
Speaker 1: more and more about this business that continues to grow
Speaker 1: across the US. Thanks for listening to the Bloomberg Markets podcast.
Speaker 1: You can subscribe and listen to interviews with Apple Podcasts
Speaker 1: or whatever podcast platform you prefer. I'm Matt Miller. I'm
Speaker 1: on Twitter at Matt Miller. P On Fall Sweeney I'm
Speaker 1: on Twitter at pt Sweeney. Before the podcast, you can
Speaker 1: always catch us worldwide at Bloomberg Radio.