Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim
Speaker 1: Fox along with my co host Lisa Bramowitz. Each day
Speaker 1: we bring you the most important, noteworthy, and useful interviews
Speaker 1: for you and your money, whether you're at the grocery
Speaker 1: store or the trading floor. Find the Bloomberg P M
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Speaker 1: I know that this one person has been following the
Speaker 1: healthcare negotiations so closely that it's affecting his health. Max
Speaker 1: Neeson is here in the Bloomberg eleven three oh studio
Speaker 1: with us. Max Neison is a Bloomberg Gadfly columnist covering healthcare,
Speaker 1: and he really has been following not only what we
Speaker 1: can expect from this healthcare bill, but some of the
Speaker 1: political machinations that went into arriving at this. So first, uh, Max,
Speaker 1: I want to start with a line that you wrote
Speaker 1: in in your column yesterday, where you are talking about
Speaker 1: how the entire medical establishment opposes the bill on moral
Speaker 1: and financial grounds. As a result, is this completely dead
Speaker 1: on arrival? And it does? Is it even a waste
Speaker 1: of time for us to focus on it? I think
Speaker 1: in its current form it's definitely dead on arrival in
Speaker 1: the Senate, and they've basically said as much. Rather than
Speaker 1: taking up the House version of the bill, um, you know,
Speaker 1: which would be something of an endorsement or at least
Speaker 1: a sign that they they think it's something they can
Speaker 1: pass or could potentially come law, they're gonna go ahead
Speaker 1: and start from scratching and write their own version of
Speaker 1: the legislation. And it's likely to be substantially different on
Speaker 1: a number of points than that what we saw past
Speaker 1: in the House. Max, can you just uh, just just
Speaker 1: backtracked just for a second, because I want to understand
Speaker 1: this idea that the a c A, the Affordable Care Act.
Speaker 1: We've heard a lot of criticism about it. What would
Speaker 1: save that or what would improve it? I'm just curious
Speaker 1: to see if what we've got is not great, what
Speaker 1: would we need to make it slightly better? Um. I mean,
Speaker 1: some of it would would require a time machine. But
Speaker 1: but as for what can be done now, a good
Speaker 1: start would be to keep funding and for the administration
Speaker 1: to commit to keep funding some cost sharing payments to
Speaker 1: insures and to low income people that help both insurers
Speaker 1: deal with unexpected losses and help lower income people actually
Speaker 1: afford um what are now some rising premiums. These were
Speaker 1: things that we're built into the law and help make
Speaker 1: it sustainable, but the fact that they've been kind of
Speaker 1: yanked around has made it very difficult for insures to
Speaker 1: stick around, and that kind of creates a bad cycle
Speaker 1: within individual markets like in Iowa right now. So, Max,
Speaker 1: one thing that you said earlier, you were talking about
Speaker 1: how the Senates not just sort of taking on the
Speaker 1: House bill in its own form and starting a fresh
Speaker 1: is kind of a pretty pretty big slam down, frankly
Speaker 1: of the House plan by say, and we're not even
Speaker 1: gonna endorse it by taking it at all? Um, what
Speaker 1: changes do you expect the Senate to make? How will
Speaker 1: the bill differ in the form that the Senate puts
Speaker 1: it out versus the House? So, Um, I think the
Speaker 1: first thing that they're gonna want to wait to see
Speaker 1: is the Congressional Budget Office score of this bill, which
Speaker 1: will give them a sense of where we are. The
Speaker 1: fact that the House didn't wait for that was pretty unusual.
Speaker 1: When does that come out, We we don't know, probably
Speaker 1: probably and probably next week. So we we don't know
Speaker 1: how much the House version of the bill will cost um,
Speaker 1: how much, how many people we left uninsured, how much
Speaker 1: it will affect Medicaid, how it will affect the overall
Speaker 1: insurance market. Those are all still unknown. So that's the
Speaker 1: place they're going to start with what needs to be fixed.
Speaker 1: But in terms of the kind of specific points that
Speaker 1: I think a new Senate bill will adjust or or
Speaker 1: kind of differ from the House bill, and it's going
Speaker 1: to be the degree of cuts to Medicaid and the
Speaker 1: degree of protection for those with pre existing conditions, both
Speaker 1: of which were cut substantially by the h c A. Well,
Speaker 1: you know, as Lisa introduced this idea that no one
Speaker 1: in the medical or healthcare community was consulted or participated
Speaker 1: in the creation of what passed the House yesterday. Is
Speaker 1: that accurate? Um, I imagined that, you know, people made calls.
Speaker 1: But considering the speed at which this bill was put
Speaker 1: together in a matter of weeks, as opposed to the
Speaker 1: more than a year than the Affordable Care up with hearings, consultations,
Speaker 1: multiple scoring, this kind of you know, got put together
Speaker 1: quickly then modified quickly. I don't think there was all
Speaker 1: that much input. And you can see that from the
Speaker 1: fact that, um, you know, several organizations of doctors hospitals, Um,
Speaker 1: you know, disease focused organizations. I'll kind of object to
Speaker 1: this bill. Well, that's why I wanted to go next,
Speaker 1: which is, uh, what do you think is going to
Speaker 1: happen to hospitals if this bill were to prevail, it
Speaker 1: would be uh, something of a blood bath, particularly for
Speaker 1: hospitals in more rural areas and in areas that have
Speaker 1: a lot of Medicaid beneficiaries. What would be likely to
Speaker 1: happen is that they would have a lot of people
Speaker 1: that would lose insurance coverage and it would be back
Speaker 1: to kind of the bad old days of having to
Speaker 1: provide a lot more financial assistance and uncompensated care. Well
Speaker 1: then why then, why not? Do you know what would
Speaker 1: take a page out of President Donald Trump's playbook, which
Speaker 1: at one point I believe he threatened to let Obamacare
Speaker 1: the A c A continue and fail. At least that's
Speaker 1: what he I believe said. Well, why not let the
Speaker 1: Democrats say, Okay, you want this bill, let it go,
Speaker 1: and then you'll end up with these hospitals that are
Speaker 1: closing and people that realize that the bill is not
Speaker 1: so great. Um, you know, I think it's just a
Speaker 1: question of what you're viewpoint of what is appropriate or
Speaker 1: in a policy or kind of moral standpoint, you need
Speaker 1: a lot of Democrats, you know, a lot of a
Speaker 1: lot of democrats, you understand my point. In other words,
Speaker 1: if this is the bill at the House Republicans want,
Speaker 1: then give it to them. And then okay, then you say,
Speaker 1: all right, these are the result. You know they already though,
Speaker 1: this is a different kind of story. So you can't,
Speaker 1: in good conscience if you think it's truly bad, can you,
Speaker 1: in good conscience let this kind of thing go? Yeah?
Speaker 1: And and it kind of and they already have. You know,
Speaker 1: these House members voted for the bill, so they get
Speaker 1: to run ads and go back to their constituents with
Speaker 1: the fact that they voted to take away potentially your
Speaker 1: health care um that of your family. Do you have
Speaker 1: a pre existing condition? You know, look at look at
Speaker 1: what just happened. So they already have that benefit. And
Speaker 1: we'll still, I think we want to fight against this
Speaker 1: actually becoming a law. Well, of course, this is going
Speaker 1: to be a conversation and a topic that is going
Speaker 1: to continue to keep on giving because, of course, as
Speaker 1: you just said, max Um, the Senate is pledging to
Speaker 1: write its own version of the bill. Thank you very much,
Speaker 1: Max and Neeson Bloomberg gad Fly columns when it comes
Speaker 1: to healthcare, pharmaceuticals, and just about everything that's important, much appreciated.
Speaker 1: As we were talking about earlier unemployment, the unemployment rate
Speaker 1: in the US felt the lowest levels since May two
Speaker 1: thousand and seven, according to numbers that came out this morning. Uh.
Speaker 1: This just shows that the job market continues to recover
Speaker 1: after the worst financial crisis, UH, since the Great Recession.
Speaker 1: I want to bring in John Cochrane, Senior Fellow at
Speaker 1: the Hoover Institution at Stanford University in California. John, you're
Speaker 1: going to be attending a monetary policy conference, the Structural
Speaker 1: Foundations of Monetary Policy. UH, that is ongoing right now,
Speaker 1: and I want to sort of get your take on
Speaker 1: whether this good Jobs report validates the feds unconventional methods
Speaker 1: of stimulating the economy after the two thousand and eight crisis. Ah. Well,
Speaker 1: there's a good question of because they're despite um. Certainly,
Speaker 1: I think pretty much everyone agrees that said a great
Speaker 1: job in two thousand eight of not screwing up in
Speaker 1: the way that they really did in the Great depression,
Speaker 1: and ben Burneki said we learned that lesson, we won't
Speaker 1: do it again, and they did. Now is is the
Speaker 1: resulting period of quiet due to it's it's big actions
Speaker 1: or or do we just naturally recover from the recession?
Speaker 1: That's the open question. That's why we have conferences to
Speaker 1: debate things like this. Well, all right, so which side
Speaker 1: are you going to come down on and what do
Speaker 1: you expect your your opponent or the contrary opinion to be. Oh,
Speaker 1: we don't, we don't have opponents, We have polite discussion.
Speaker 1: My own view is that the Kiwi operation didn't do
Speaker 1: a whole lot um. It perhaps signaled to markets that
Speaker 1: the interest rates are gonna be low for a long
Speaker 1: time and that was useful. But then contrarywise, that means
Speaker 1: that QUI isn't doing a whole lot of harm and
Speaker 1: that you don't need to be in a big rush
Speaker 1: to wind down the balance sheet. That's one of the
Speaker 1: big items on discussion at our conference is the big
Speaker 1: balance sheet, lots of reserves. Is it causing too much stimulus?
Speaker 1: Is it a problem to the said need to unwin
Speaker 1: ended quickly or is it just kind of sitting out
Speaker 1: there and not causing any particular problems and kind of
Speaker 1: nice to keep the economy very liquid. John, in your conversations,
Speaker 1: how important is wage growth? Well, wage growth is what
Speaker 1: we're here for. Um, all right. Then you're here for
Speaker 1: our raises, all right, So so tell us about why
Speaker 1: we're not seeing more of them. We're here for real
Speaker 1: wage growth. Um, we we want Uh, you know, just
Speaker 1: inflationary wage growth doesn't do anybody any good. But higher productivity,
Speaker 1: higher real wages, greater prosperity, and a job market that
Speaker 1: isn't just unemployment. Unemployment is people are looking for jobs,
Speaker 1: but there's still a big problem of people out there
Speaker 1: who aren't even looking anymore. The labor force participation rate
Speaker 1: is still low, the economy is growing much slower than
Speaker 1: it should be by at least my view, and and
Speaker 1: uh uh just about everyone else. The question is whether
Speaker 1: that has to do with money or not. In the
Speaker 1: long run, money can money can boost you a little
Speaker 1: bit for an afternoon, but there's no substitute it for
Speaker 1: a diet and exercise if you want long run growth.
Speaker 1: So is diet an exercise in this case some kind
Speaker 1: of fiscal stimulus or is it something else? And you
Speaker 1: talk about you know, we're here for you know, wage growth.
Speaker 1: That's that's the reason we're here. By that view, this
Speaker 1: Job's report wasn't that great. Um, well, we're here for
Speaker 1: a solid, long run real wage growth which in the end,
Speaker 1: uh and and more people working at those higher wages.
Speaker 1: In the end, that has to come from productivity growth. Um.
Speaker 1: You can fiscal stimulus, monetary stimulus, these things can help
Speaker 1: to get you out of a recession. But the foundations
Speaker 1: of long run growth they have to come from greater productivity,
Speaker 1: which in the end is tax reform, regulatory reform, more innovation,
Speaker 1: more businesses, more competition, all that great stuff that the
Speaker 1: Fed um, bless their hearts. Um, that's not their job.
Speaker 1: I'm gonna give you a softball, John, Why are so
Speaker 1: many people either not working, not studying for work, or
Speaker 1: even bothering to look for work? Maybe you can reference
Speaker 1: Nicholas ever stats column and commentary. Uh sorry, I didn't
Speaker 1: happen to read that one of this has to do
Speaker 1: with that he describes it. Well, you're on your blog
Speaker 1: you say that one of the answers to why people
Speaker 1: are not looking for work, not studying for work is
Speaker 1: the opioid epidemic. And that according to Alan Krueger, about
Speaker 1: seven million working age men are taking opioids pain killers. Yeah.
Speaker 1: Is Unfortunately, it's not a softball. It's not something that
Speaker 1: there's one big stimulus that will solve the problem. There's
Speaker 1: a lot of Middle America that is right taking open
Speaker 1: pain killers. Um, stuck in some ways in communities that
Speaker 1: aren't working. They might have bought a house that now
Speaker 1: is underwater. They can't move to where the better jobs are.
Speaker 1: They might be stuck in some government programs, which though
Speaker 1: those help them when they're in trouble, now uh, they
Speaker 1: if they get a job, they lose all the benefits,
Speaker 1: so um, they don't want to. That makes it much
Speaker 1: harder for them to move, get some training, get a job,
Speaker 1: move out. America is not as dynamic as it used
Speaker 1: to be. It used to be when things are in trouble,
Speaker 1: you get up, you move, you do something else. And
Speaker 1: that's just much harder these days for a lot of
Speaker 1: structural reasons, some of them having to do with government
Speaker 1: programs and some of them having to do with lots
Speaker 1: of big messages. Yeah, well, not monetary policy, but but
Speaker 1: so John, a lot of the issues that you're talking
Speaker 1: about that really are the next frontier for any recovery
Speaker 1: in the US are not things, as you said, bless
Speaker 1: the FEDS hards, not things that they can solve. So
Speaker 1: at a conference like the one that you're currently at,
Speaker 1: which you're talking about the structural foundations of monetary policy,
Speaker 1: I mean people basically just saying at this point, there's
Speaker 1: nothing left for them to do well. I think that's important. Um,
Speaker 1: you know, the FED would like to help, and there's
Speaker 1: a big temptation for an institution uh this large, to
Speaker 1: take on jobs that it's ill suited for, So repeating
Speaker 1: that message is important. I think a lot of what
Speaker 1: the discussion for monetary policy is is, Look, it's it's
Speaker 1: late summer, and late summer, winter comes. There will be
Speaker 1: another recession sometime soon or sometime later, who knows when
Speaker 1: it will come. There will be another crisis, something will
Speaker 1: blow up, And I think a lot of what's what
Speaker 1: the important thinking is is for the Fed's job, which
Speaker 1: is demand not supply, which is stimulus, which is fighting recessions,
Speaker 1: fighting crises. Uh, get get your powder dry, get ready
Speaker 1: to think about how were you gonna where the next
Speaker 1: one is coming from, and how you're going to solve
Speaker 1: that one. Speak if you can about corporate tax cuts
Speaker 1: that have been proposed by the administration and whether that
Speaker 1: will lead to an increase in wages for workers. Oh um, well,
Speaker 1: we'll see what comes out of there. Um, it should
Speaker 1: in the end, or better prices for consumers. We got
Speaker 1: to remember, every cent of corporate taxes does not paid
Speaker 1: by corporations. It's paid from higher prices to the you
Speaker 1: and I pay, or lower wages from workers. Um, some
Speaker 1: argument for lower profits, but in the end, profits go
Speaker 1: overseas if they don't got what they want. So all
Speaker 1: that money will eventually mean are either wages for workers
Speaker 1: or or lower prices for consumers. That's that's great stuff.
Speaker 1: I would hope they would also attack the complexity of
Speaker 1: the tax code and a lot of tax accountants and
Speaker 1: lawyers and lobbyists can go drive for uber and do
Speaker 1: something productive. How confident are you that the current administration
Speaker 1: can come up with a plan that will end up
Speaker 1: helping productivity to increase. Oh gosh, that don't ask me
Speaker 1: political questions. I'm economist, all right, Fine, I know it's
Speaker 1: much more fun and I have my opinions like anyone else.
Speaker 1: But let's let's stick the things I know something about.
Speaker 1: All right, I want to thank you very much for
Speaker 1: joining us. He's are you still the Grumpy Economist? Uh?
Speaker 1: That's my official title. As you may have noticed, that
Speaker 1: is not my personality. Yea, exactly, well unless we ask
Speaker 1: about politics, in which case, there there you show your
Speaker 1: your grumpy colors, no humility. All right, I encourage everyone
Speaker 1: to check out your blog, The Grumpy Economist. Thanks very much.
Speaker 1: John Cochrane is a senior fellow at the Hoover Institution,
Speaker 1: giving us his take on jobs and the economy. We
Speaker 1: want to take a moment to let you know about
Speaker 1: something new from Bloomberg. Starting right now, you can use
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Speaker 1: extension to scan any news story on any website, instantly
Speaker 1: revealing relevant news and market data from Bloomberg and other
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Speaker 1: So no matter where you're reading the news, you can
Speaker 1: bring the power of Bloomberg's news and data with you.
Speaker 1: It's pretty amazing. Download our io s app or search
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Speaker 1: it out. Learn more at Bloomberg dot com. Slash lens
Speaker 1: I am so excited to bring in the next guest
Speaker 1: because he now works at Boberg Intelligence. I were Jersey
Speaker 1: interest rate strategist and long time contact of mine. I'm
Speaker 1: so excited to have you. Uh he uh is coming
Speaker 1: to us on the phone from Princeton. You know. I
Speaker 1: want to touch base with you on a somewhat contrarian
Speaker 1: take that you unfailed today. Uh in some Bloomberg Intelligence
Speaker 1: where you were saying, look, everyone's expecting the Fed to
Speaker 1: start unwinding the balance sheet, but it might not have
Speaker 1: the effect on yields that people think. Can you explain that? Yeah?
Speaker 1: So so I think the conventionalism would tell you that
Speaker 1: when there's more supply of treasuries that um and and
Speaker 1: effectively with the Fed Reserve running off its balance sheet, Uh,
Speaker 1: that's what you're going to get UM is additional supply
Speaker 1: of treasuries. Normally, when that happens, people would say, oh, well,
Speaker 1: that means that treasury yields have to go higher, the
Speaker 1: price of bonds has to move lower, just because there's
Speaker 1: there's more supply into the market. But it's not obvious
Speaker 1: to me that that's what will happen, because it really
Speaker 1: all depends not on what the Fed does, but what
Speaker 1: the Treasury Department does. So how do they actually put
Speaker 1: those extra bonds back in the market, because they'll have
Speaker 1: to issue more bonds as these old bonds at the
Speaker 1: Federal Reserve holds matures and um. And the Federal Reserve
Speaker 1: has quite a lot of room in the front end
Speaker 1: in order to increase issues, so they can issue very
Speaker 1: short term tea bills. They can issue two year notes
Speaker 1: and three year notes and and those things don't have
Speaker 1: a lot of interest rate risks. So therefore the yields
Speaker 1: don't have to necessarily move higher just because the Fed
Speaker 1: lets its balance sheets start to run off. Well, I
Speaker 1: just want to get you to continue that thought ire
Speaker 1: about running off the balance sheet, because you also write
Speaker 1: that the Federal Reserve could run off its treasury holdings
Speaker 1: pretty quickly. In what do you mean by that? Well, well,
Speaker 1: that's something interesting. So when the Federal Reserve was doing
Speaker 1: all of its buying five five to ten years ago,
Speaker 1: um or you know, now it's hard to believe that
Speaker 1: it's been almost ten years since they started a quantitative easing,
Speaker 1: but you know, we're all getting older. Um. The fact
Speaker 1: is that two thousand eighteen is actually the most bonds
Speaker 1: that mature on their balance sheet next year, UM and
Speaker 1: that starts to tape slow down in UM. So the
Speaker 1: four hundred about four dred billion dollars runs off its portfolio.
Speaker 1: And if you recall, the Federal Reserve was was buying
Speaker 1: bonds on the order of fifteen billion dollars a month.
Speaker 1: So actually next year you could have more bonds run
Speaker 1: off its balance sheet than when they actually started to
Speaker 1: buy the bonds in their large scale asset purchases. So
Speaker 1: this would be the large scale asset run off I guess,
Speaker 1: and that would have well and just sort of walk
Speaker 1: us through with the effect of that is if they're
Speaker 1: not going to reinvest those proceeds, I mean, I'm just thinking,
Speaker 1: um allowed, I mean, as you said, it depends on
Speaker 1: whether the Treasury is going to replenish them. Although the
Speaker 1: baseline scenario that everyone seems to have is that the
Speaker 1: Treasury is going to be forced to increase longer term
Speaker 1: issuance in short order. Well, they're going to definitely need
Speaker 1: to increase um longer term issuance over time, primarily because
Speaker 1: the deficits are going to be moving higher. UM. So,
Speaker 1: imagine in a world today where the Federal Reserve hadn't
Speaker 1: done quantitative using now grant that the economic environment might
Speaker 1: be significantly different. But if if the Federal Reserve didn't
Speaker 1: own these and other investors would where would yields be?
Speaker 1: Um if they didn't believe it or not, you know,
Speaker 1: my opinion is that it probably wouldn't be significantly higher
Speaker 1: than than where yields are right now. Um So, So
Speaker 1: the thing is the fact that the Fed owns these
Speaker 1: instead of other people certainly has an impact. But um
Speaker 1: but what they own are very short term securities right now.
Speaker 1: Right these are all maturities that mature within the next
Speaker 1: eighteen eighteen months to two years, right so five almost
Speaker 1: five billion of them mature in the next couple of years.
Speaker 1: If the Federals, if if the Treasury Department then decides
Speaker 1: to issue these in in T bills and in two
Speaker 1: year notes, it's not going to change the amount of
Speaker 1: interest rate risk that's in the world today. It will
Speaker 1: be the exact same amount of interest rate risk that's
Speaker 1: in the world today now. If they do go out,
Speaker 1: and the Treasury Department has been talking about this and
Speaker 1: in fact, and Wednesday's um refunding statement they mentioned this um,
Speaker 1: and and they seem keen on wanting to do this.
Speaker 1: They might issue a fifty year bond and potentially increase
Speaker 1: other maturities, but not necessarily because of the said more
Speaker 1: because of the fact that you have a lot of
Speaker 1: baby boomers retiring and deficits are going to be higher
Speaker 1: over the next several years. Just um on any kind
Speaker 1: of base case scenario for for for the federal deficit.
Speaker 1: I'm glad you mentioned the deficit. How come that is
Speaker 1: not a dominant theme when it comes to appropriations in
Speaker 1: Washington or even thoughts about interest rates. Yeah, well, that's
Speaker 1: a good question. I think, you know, folks in Washington
Speaker 1: now maybe you're trying to think of, you know, house
Speaker 1: ways to stimulate the economy. I mean, the economy is
Speaker 1: not growing at a at a terrible pace, is just
Speaker 1: not growing at this fast space that we got used
Speaker 1: to in the eighties and nineties. So I think at
Speaker 1: this point, um, you know, they want some stimulative activities,
Speaker 1: and in order to do that, you kind of need
Speaker 1: to run some deficits. It just from a pure deficit standpoint,
Speaker 1: it's probably not the greatest time to be thinking about
Speaker 1: stimulative ativities when you're going to get UM. You know,
Speaker 1: like I mentioned, you're gonna have much higher UM costs
Speaker 1: for things like Social Security and medicare just because of UM,
Speaker 1: because of demographics, and that's going to swell the deficits anyway. Now,
Speaker 1: now these low interest rates, the Treasury Department can issue
Speaker 1: a lot of bonds. There's still a lot of demand
Speaker 1: for treasuries because there's a lot of risks going on
Speaker 1: around the world. Um, but there probably is some tipping
Speaker 1: points somewhere. I don't think it's going to be in
Speaker 1: the next couple of years, but um, but there probably
Speaker 1: is a tipping point where you know, those bond vigilantees
Speaker 1: that have been you know, hanging out in caves somewhere
Speaker 1: are going to start coming out and selling bonds and droves. Yeah,
Speaker 1: those caves they really have. I think they've all retired
Speaker 1: at this point. They're pretty hot real estate, you know.
Speaker 1: I'm I'm wondering. I've seen this one idea floated. Why
Speaker 1: is the Treasury considering selling fifty year or one year
Speaker 1: treasuries when they could just sell a whole bunch more
Speaker 1: of thirty years. Well, Well they can, and I think
Speaker 1: that's that's the argument because one of the things and
Speaker 1: I put out a note on this on Wednesday that
Speaker 1: you can find on the Bloomer terminal is the um
Speaker 1: is the fact that there's not a lot more risk
Speaker 1: in the thirty year than there is in the fifty year.
Speaker 1: I think that the idea of the fifty year would
Speaker 1: be to to basically um to issue bonds that are
Speaker 1: longer than most retirees will will live, quite frankly, and
Speaker 1: basically get over the social security humps that's really coming
Speaker 1: over the next over the next several years. But in
Speaker 1: terms of interest rate exposure and in terms of pricing
Speaker 1: of these of these bonds, it creates a different point
Speaker 1: on the curve. But but you're absolutely right least it
Speaker 1: doesn't have a lot more risk. And in fact, the
Speaker 1: amount of interest rate risk from ten years to thirty
Speaker 1: years more than doubles. But from thirty to fifty years,
Speaker 1: and this is again a little counterintuitive and very this
Speaker 1: has to do with bond math, but the risk only
Speaker 1: goes up by about twenty instead of like I said,
Speaker 1: for the prior twenty years, So so you're not adding
Speaker 1: a lot of risk. So that's one reason why the
Speaker 1: Treasury Borrowing Advisory Committee these are dealers and investors and
Speaker 1: both by side sell side hedge funds um. This is
Speaker 1: one of the reasons why they're skeptical if there will
Speaker 1: be consistent demands for the fifty year bond um. But
Speaker 1: at the same time, it seems like the Trosury Department
Speaker 1: seems pretty keen on on, you know, testing it out
Speaker 1: and trying to issue some of these. Thank you very much.
Speaker 1: I read Jersey is interest rate strategist for Bloomberg talking
Speaker 1: about the outlook of course for interest rates. Thanks very much. Well,
Speaker 1: let's find out what the feeling is in Puerto Rico.
Speaker 1: Right now. We have Joe my Sack. He is our
Speaker 1: expert our editor for Bloomberg breefs Municipal Market. Joe, maybe
Speaker 1: just give us an update what has happened so far
Speaker 1: this week in Puerto Rico. Title three him. Title three
Speaker 1: sort of a version of bankruptcy that was set up
Speaker 1: just for the Commonwealth and now the creditors are going
Speaker 1: to have to slug it out. Right now, this is
Speaker 1: UH using Title three to restructure geos, but they are
Speaker 1: all general obligations general obligation bonds and they're also going
Speaker 1: to file a Title three to restructure the Cofina bonds,
Speaker 1: which are the sales tax backed bonds. You know, there's
Speaker 1: a there's a lot of emotion tied to this issue,
Speaker 1: both on the side of people living in Puerto Rico,
Speaker 1: but also some of the creditors and UH particular, I'm
Speaker 1: looking at the bond insures who are on the hook
Speaker 1: to compensate investors for any losses on the bonds should
Speaker 1: Puerto Rico write down the principle, UH substantially and sure
Speaker 1: enough assured guarantee. One of those insurs today had earnings. UH.
Speaker 1: They actually reported better than expected earnings since their shares
Speaker 1: are up more than five percent. But the CEO said
Speaker 1: on a call with investors that they wanted an adult
Speaker 1: in the room to resolve Puerto Rico debt issues, which
Speaker 1: it didn't get with either the oversight Board or the governor.
Speaker 1: That the fiscal plan that the oversight board came up
Speaker 1: with is a quote insult. Title three is quote in
Speaker 1: no one's best interest. It will only mean long and
Speaker 1: costly litigation. So you know, Joe, given this backdrop, can
Speaker 1: you give a sense that observe the mood of the
Speaker 1: people who you speak with our bond investors girding for
Speaker 1: much steeper losses than are already baked in. I think
Speaker 1: a lot of bond investors who are who are still
Speaker 1: creditors at this point because you know, let's face it,
Speaker 1: in the broader community market that I really care, um,
Speaker 1: but in the but the creditors, sure, they're very Uh,
Speaker 1: they're sort of stunned at this point. A lot of
Speaker 1: them are still in denial. I mean at assure. Dominic
Speaker 1: Is uh has always been a blunt speaker, Joe. One
Speaker 1: of the things that's coming up in June, June eleven
Speaker 1: is a plebiscite. It's a vote, and the people in
Speaker 1: Puerto Rica are going to be able to vote on
Speaker 1: their political status. Not the last time back in two
Speaker 1: thousand and twelve, they rejected continuing as a territory. And
Speaker 1: I believe it was something like six would vote or
Speaker 1: had voted in that plebiscite for statehood. The fact that
Speaker 1: Puerto Rico really is controlled by the federal government. Is
Speaker 1: it likely that this vote will change anything? Uh? Well,
Speaker 1: certainly not with the debt. And uh, you know, if
Speaker 1: I had to bet, I'd say they're probably gonna vote
Speaker 1: for the status quo. Really, even though you have this
Speaker 1: decline in the economic fortunes of the territory, because I mean,
Speaker 1: commonwealth doesn't really mean anything in the I mean it
Speaker 1: doesn't have any legal status, right, I mean, this is
Speaker 1: a territory and as a result, it's really run overseen
Speaker 1: by the Congress. I think they they you know, it
Speaker 1: strikes the balance between independence and UH and the requirements
Speaker 1: of statehood. So I just you know, that's my bet
Speaker 1: that they'll just go for the status quo. You know,
Speaker 1: there's been a lot of discussion about who's next. Does
Speaker 1: it said a bad precedent for say, the Virgin Isla,
Speaker 1: which is another territory of the US and has been
Speaker 1: building dead and has been facing some of the similar
Speaker 1: issues that have ravaged Puerto Rico. So we were talking offline,
Speaker 1: Joe that the Virgin Islands has about two billion dollars
Speaker 1: of debt compared to seventy four billion dollars at Puerto Rico.
Speaker 1: So this is not exactly an apple to apples comparison.
Speaker 1: But could the Virgin Islands end up taking a similar
Speaker 1: route to Puerto Rico? Oh? Sure? And again because it's
Speaker 1: you know, sort of how do you put it, an
Speaker 1: impoverished Caribbean. Many nation, I guess or state. Uh, and
Speaker 1: you know, the things that are in operation in Puerto
Speaker 1: Rico are sort of an operation in the Virgin Islands,
Speaker 1: but in a very very smaller way. Well, do you
Speaker 1: think that there is a precedent that's set for say, bondholders, uh,
Speaker 1: for Illinois or New Jersey or other ravage states that
Speaker 1: might not fall into the same title three provision? Contagion
Speaker 1: that's what you're talking. Yes, I'm talking contagion. Are we
Speaker 1: going to see contagion? I don't see contagion just because uh,
Speaker 1: these uh states that you mentioned really have to have
Speaker 1: regular access to the bond market, and there's still a
Speaker 1: lot of things they could do. On the other hand,
Speaker 1: just doesn't excuse the fact that they have a lot
Speaker 1: of difficulties. You know, when you say New Jersey and Illinois,
Speaker 1: Chicago public schools, these are places with very uh you know,
Speaker 1: they have a lot of distress there. But certainly I
Speaker 1: don't see any contagion spreading to states. The states have
Speaker 1: a lot of power, and they have have a lot
Speaker 1: of taxing power in particular. Well, then, having said that,
Speaker 1: I'm wondering, why wouldn't Puerto Rico become a state I mean,
Speaker 1: right now, it doesn't seem to be working in its
Speaker 1: present situation of being a territory. Why not change the
Speaker 1: status and fix this? Um? I think right now you're
Speaker 1: you're sort of at the end of the line, and
Speaker 1: that right now, this is probably how it's gonna work
Speaker 1: going forward. Attaining statehood wouldn't change anything for them right now.
Speaker 1: Just when you were talking earlier, real quick, can you
Speaker 1: give us a sense of who the creditors really are
Speaker 1: at this point? I mean, have the mutual funds and
Speaker 1: the mom and pop investors pretty much all gone away? Well? Yeah, because, uh,
Speaker 1: you know, Puerto Rico was downgraded several years ago, so
Speaker 1: the mom and the typical mom and pop investor that
Speaker 1: is off island. On the island, there are still small
Speaker 1: investors who owned Puerto Rico paper, but uh, you know,
Speaker 1: right now you have big hedge funds, you still have
Speaker 1: you know, some big mutual funds. Um. So it's really
Speaker 1: it's it's an institutional thing right now. There's still some
Speaker 1: individuals who are in Puerto Rico paper, sure, but for
Speaker 1: the most part it is institution versus Puerto Rico. Joe Meazac,
Speaker 1: editor for Bloomberg Brief focusing on the municipal market. Thank
Speaker 1: you so much for joining us. Truly a pleasure to
Speaker 1: speak with you. Thanks for listening to the Bloomberg P
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Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
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