WEBVTT - Private Equity, EVs, And Rails (Podcast) 0:00:00.800 --> 0:00:04.040 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside 0:00:04.040 --> 0:00:06.920 my co host Matt Miller. Every business day we bring 0:00:06.960 --> 0:00:11.520 you interviews from CEOs, market pros, and Bloomberg experts, along 0:00:11.520 --> 0:00:15.520 with essential market moving news. Find the Bloomberg Markets Podcast 0:00:15.600 --> 0:00:18.439 on Apple Podcasts or wherever you listen to podcasts, and 0:00:18.480 --> 0:00:22.400 at Bloomberg dot com slash podcast. All right, we've got 0:00:22.800 --> 0:00:26.560 SMP off year today. Now that's that close to thirty pcent. 0:00:26.640 --> 0:00:29.360 You've got bonds down double digits. I mean, where do 0:00:29.680 --> 0:00:33.199 you go? How does your alternative investment portfolio looking. Let's 0:00:33.280 --> 0:00:35.640 check in with some folks on the private equity side. 0:00:35.640 --> 0:00:38.040 Andrea our Back, she's the head of private investments at 0:00:38.080 --> 0:00:43.200 Cambridge Associates. Andrea talk to us about the private equity markets. 0:00:43.640 --> 0:00:46.600 I mean, is it tough to get deals done? Do 0:00:46.640 --> 0:00:50.960 you have to mark down your existing portfolio? How's the 0:00:50.960 --> 0:00:55.080 private ecto market dealing with this volatility this year? Yeah, 0:00:55.400 --> 0:00:58.800 a great question. Good good morning to you both um. 0:00:58.880 --> 0:01:02.279 In terms of the private markets at the moment it 0:01:02.440 --> 0:01:05.440 is today, tough to get deals done is an interesting question. 0:01:05.600 --> 0:01:08.160 I think all parties have moved to the sidelines to 0:01:08.200 --> 0:01:10.360 try to see what exactly is going to happen as 0:01:10.440 --> 0:01:13.240 market conditions continue to infer in front of us. Right, 0:01:13.600 --> 0:01:17.080 So a lot of transaction activity is stalling at the 0:01:17.120 --> 0:01:20.920 moment um, and so folks are investors are waiting to see, 0:01:20.959 --> 0:01:23.559 how do I make adjustments to my projections, what price 0:01:23.600 --> 0:01:26.319 am I willing to pay, et cetera. In terms of 0:01:26.319 --> 0:01:30.679 the markdowns, though, great question. Private equity UM is a 0:01:30.720 --> 0:01:34.480 fairly a liquid asset class, right. You you invest, the 0:01:34.760 --> 0:01:39.120 group you invest with, buy something presumably works with that asset, 0:01:39.200 --> 0:01:42.120 and that company holds it for a number of years privately, 0:01:42.200 --> 0:01:44.360 and then sells it at some point in the future. Right, 0:01:44.720 --> 0:01:47.800 So things unfold over a multi year period rather than 0:01:47.840 --> 0:01:50.880 on a daily, monthly or quarterly period as you as 0:01:50.920 --> 0:01:53.680 you all obviously observe in the public markets. And so 0:01:53.720 --> 0:01:56.880 in terms of markdowns um. And the other element that 0:01:56.920 --> 0:01:59.040 I should note for you and your listeners is that 0:01:59.120 --> 0:02:01.920 private equity be because it's it's private, it's a little 0:02:02.200 --> 0:02:04.520 it's a liquid we often have a bit of a 0:02:04.600 --> 0:02:07.320 lag in the reporting. Right, So the quarterly marks, if 0:02:07.320 --> 0:02:10.239 you will, a bit of a reference point for one 0:02:10.320 --> 0:02:15.960 cube um private equity. The private equity benchmark that we 0:02:16.080 --> 0:02:19.240 track was down roughly thirty five basis points relative to 0:02:19.280 --> 0:02:21.800 what the public markets were down in one queue, just 0:02:21.880 --> 0:02:24.919 to give you a sense, so it will take it. 0:02:24.560 --> 0:02:26.919 What do you think it is right now? I mean, um, 0:02:27.160 --> 0:02:31.120 I had a friend who invests big sums in private 0:02:31.120 --> 0:02:35.280 equity and he said he's worried they're not marking the market. Well, 0:02:35.919 --> 0:02:38.680 it's a great question. And what happens is in private 0:02:38.680 --> 0:02:41.560 equity is you mark to market in different ways, right, 0:02:41.600 --> 0:02:44.200 instead of just taking what the public equity markets are 0:02:44.200 --> 0:02:48.000 telling you. There are multiple ways to value a private business, 0:02:48.040 --> 0:02:51.000 and most investors take a look at all the different 0:02:51.000 --> 0:02:53.880 ways you can you can value that private business and 0:02:53.919 --> 0:02:57.040 thread the needle through all of those valuations. So we 0:02:57.080 --> 0:03:00.400 don't involve precincts reporting, so Cambridge Associates track asists on 0:03:00.440 --> 0:03:03.359 a quarterly basis. We don't have all precincts in yet 0:03:03.400 --> 0:03:07.200 for two Q, but preliminary returns look like private equity 0:03:07.240 --> 0:03:10.400 will be down four hundred basis points from our benchmark. 0:03:10.480 --> 0:03:12.600 So our benchmark is looking like it's going to come 0:03:12.639 --> 0:03:16.040 down again about four hundred basis points. Still not in 0:03:16.120 --> 0:03:18.840 lock step with the public markets though for the reasons 0:03:18.880 --> 0:03:21.680 I just told you, all right, so, Andrea, I mean, 0:03:21.919 --> 0:03:24.440 I guess the theme over the last twenty years has 0:03:24.520 --> 0:03:27.840 just been, you know, in terms of asset allocation, a big, 0:03:27.880 --> 0:03:30.760 big move into alternative investments. I'm thinking about the average 0:03:31.320 --> 0:03:35.000 you know, UM university endowment for for example. So there's 0:03:35.000 --> 0:03:40.200 a tons of equity capital. Uh, there is this a 0:03:40.280 --> 0:03:45.080 buying opportunity of inordinate magnitude. And if so, can you 0:03:45.120 --> 0:03:47.760 get debt capital to fund the deals as well? M 0:03:48.760 --> 0:03:53.880 m yeah. The amount of dry powder, right, the amount 0:03:53.880 --> 0:03:59.640 of capital that's been committed by endowment foundations, pensions, UM families, right, 0:04:00.360 --> 0:04:02.839 every You know, there are many types of investors that 0:04:02.840 --> 0:04:05.480 that put capital into the private equity markets, the private 0:04:05.480 --> 0:04:08.360 investment markets. There is a lot of dry powder waiting 0:04:08.400 --> 0:04:11.280 to get in, right, hundreds of billions of dollars. I 0:04:11.320 --> 0:04:13.520 think in the US we are tracking it around seven 0:04:13.600 --> 0:04:16.040 hundred billions. To give you a sense of what there's 0:04:16.080 --> 0:04:17.640 always a lot of dr power. I mean I go 0:04:17.680 --> 0:04:19.640 to Superinturn every year and they're always like one point 0:04:19.640 --> 0:04:24.000 seven trillion dollars of dry powder. You know, Yes, the yardstick. 0:04:24.600 --> 0:04:26.560 What does Foxo Tony fail I'm going to say about 0:04:26.600 --> 0:04:29.560 it today, Yes, But I mean, is that dry is 0:04:29.600 --> 0:04:32.040 that just is that just always there is there always 0:04:32.040 --> 0:04:35.200 going to be a trillion plus of capital ready to go. 0:04:36.560 --> 0:04:39.640 I mean a bigger let me let me pan out 0:04:39.680 --> 0:04:42.560 to give a slightly bigger perspective, right, So, the institutional 0:04:42.560 --> 0:04:46.200 private markets are in their fourth decade, so it's it's 0:04:46.200 --> 0:04:50.200 a growing space that continues to attract capital regardless of 0:04:50.320 --> 0:04:53.560 prevailing market conditions because it is a productive place to 0:04:53.600 --> 0:04:56.520 earn a good return. So to your point, yes, I 0:04:56.560 --> 0:04:59.200 agree with you. I think every year that amount of 0:04:59.279 --> 0:05:01.520 dry powder is going to grow. Is it a good 0:05:01.520 --> 0:05:04.800 buying opportunity in front of us compared to what it 0:05:05.000 --> 0:05:08.600 was over the last two years? I would argue most likely. 0:05:09.080 --> 0:05:11.279 But you've got to pick your way through this market 0:05:11.680 --> 0:05:14.880 taking in all of this information that we that's continually 0:05:14.880 --> 0:05:19.200 getting updated every day. Inflation, interest rates, supply chain or 0:05:19.800 --> 0:05:22.960 all of these factors can drive the long term value 0:05:23.000 --> 0:05:25.640 of whatever company you're going to buy in the next year. 0:05:26.160 --> 0:05:29.000 So you've got to be careful, all right, Andrea, great stuff. 0:05:29.040 --> 0:05:31.920 I always appreciate getting your perspective on the private equity market. 0:05:32.120 --> 0:05:35.360 Andrea our back. She's head of private Investments at Cambridge 0:05:35.400 --> 0:05:38.799 Associates that's located up in Boston High Street. I believe 0:05:38.880 --> 0:05:43.800 if I recall, uh, lots of good pe up there Cambridge. 0:05:43.920 --> 0:05:46.640 She went to school there as well, so I understand, Yeah, 0:05:46.680 --> 0:05:53.040 exactly right, they got them smart folks up there. Now 0:05:53.040 --> 0:05:54.880 I'm very excited because I get talked to one of 0:05:54.880 --> 0:05:58.160 my favorite reporters that ever and about one of my 0:05:58.240 --> 0:06:03.400 favorite things. Um So Elizabeth Behrman covers runs the auto 0:06:03.440 --> 0:06:07.480 coverage for US in Germany, and she's covering the Volkswagen 0:06:07.600 --> 0:06:12.880 sale along with a team of really great journalists. Uh. 0:06:13.160 --> 0:06:16.320 This the I p O of Porsche. Um. She joins 0:06:16.400 --> 0:06:19.680 us now out of Munich. Elizabeth, thanks so much. Tell 0:06:19.760 --> 0:06:22.159 us what we what we know about, just the details, 0:06:22.200 --> 0:06:24.480 the sort of headline details. When is this ip A 0:06:24.560 --> 0:06:27.080 going to happen, how much are they gonna sell? And 0:06:28.000 --> 0:06:32.320 how popular is it right now? Well, it's one of 0:06:32.320 --> 0:06:36.280 the most exciting deals in Europe today and also for 0:06:36.360 --> 0:06:39.839 some years. UM. If Porter or v W Rad gets 0:06:39.880 --> 0:06:42.720 this away at the top of the target range, which 0:06:42.760 --> 0:06:45.840 we understand to be evaluation of as much as eighty 0:06:45.920 --> 0:06:49.800 five billion euros um, it will be Europe's biggest ever 0:06:50.279 --> 0:06:52.719 um I p O. And this is happening at the 0:06:52.760 --> 0:06:56.000 time of course, you were just talking about it. Markets 0:06:56.000 --> 0:06:59.359 at tanking conditions are really really difficult. But this is 0:06:59.360 --> 0:07:03.799 an iconic spotsmaker and known around the world, and obviously 0:07:04.400 --> 0:07:07.400 there is a unique opportunity to invest. Yeah, I'm gonna 0:07:07.400 --> 0:07:10.880 go ahead and say they make the single greatest sports 0:07:10.880 --> 0:07:15.440 car in the world. Well that's big and um, you know, 0:07:15.640 --> 0:07:19.840 almost at any price. And at one time I remember 0:07:19.880 --> 0:07:22.960 covering poor show when I first started at Bloomberg and Frankfurt, 0:07:23.000 --> 0:07:25.480 it was the most profitable car maker in the world. 0:07:25.560 --> 0:07:27.920 This is before the whole debacle where they tried to 0:07:28.520 --> 0:07:32.240 sort of behind the back of the market by Volkswagen 0:07:32.280 --> 0:07:35.080 and then backfired and then Volkswagen ended up buying them. 0:07:35.120 --> 0:07:38.760 But um, they still are. They still have to be, Elizabeth, 0:07:38.760 --> 0:07:42.560 one of the most profitable carmakers out there, right, they 0:07:42.600 --> 0:07:50.040 absolutely are. Usually their their returns around fifteen to eight um. 0:07:50.080 --> 0:07:55.000 That's still quite away below Ferrari obviously, and that's one 0:07:55.040 --> 0:07:58.320 of the car makers they're tasting as well. Um, probably 0:07:58.360 --> 0:08:01.520 they won't get to you know, Ferrari levels, but they 0:08:01.520 --> 0:08:05.360 have in terms of valuations. You mean, no, in terms 0:08:05.400 --> 0:08:08.720 of returns on some selling cars. Okay, okay, I was 0:08:08.760 --> 0:08:11.640 just thinking in terms of because everybody has used Ferrari 0:08:11.840 --> 0:08:16.600 is kind of a measuring stick. Um when comparing car makers. 0:08:17.480 --> 0:08:20.360 I think they are worth like twenty times earnings, and 0:08:20.680 --> 0:08:22.960 other car makers like in the US or worth like 0:08:23.040 --> 0:08:26.480 five to six um. And then you've got a company 0:08:26.520 --> 0:08:30.000 like Tesla that just comes and blows things away. Um, 0:08:30.000 --> 0:08:34.960 where are we excited to see Porsche? And we're not 0:08:35.040 --> 0:08:39.080 exactly sure yet, but they are certainly targeting that luxury 0:08:39.200 --> 0:08:42.880 premium where Ferrari is settled at. And that's also what 0:08:42.960 --> 0:08:46.480 they've been telling investors that they can add certain features 0:08:46.559 --> 0:08:49.560 that they can translate the excitement that obviously with you 0:08:49.679 --> 0:08:54.040 as well. These vehicles generate into a much bigger evaluation 0:08:54.480 --> 0:08:59.280 than where they currently are inside the v W stable, 0:09:00.040 --> 0:09:03.200 and if they get to that evaluation of eighty five billion, 0:09:03.480 --> 0:09:06.720 that would be roughly on par with the entire value 0:09:06.800 --> 0:09:09.880 of the W. So, Elizabeth, I understand that there's some 0:09:10.000 --> 0:09:13.520 weird shareholder structure thing here, the Porsche family and all 0:09:13.520 --> 0:09:15.720 that kind of stuff. You and some people think that 0:09:15.720 --> 0:09:17.120 that might be or could be a little bit of 0:09:17.120 --> 0:09:21.719 a drag on valuation. Can you explain that? Yeah, it's 0:09:21.720 --> 0:09:24.520 I mean, it's it's hellishly complex. You you would know 0:09:24.600 --> 0:09:27.000 about this because you were around at the time of 0:09:27.240 --> 0:09:31.760 the big takeover battle between Porsche and b W. But 0:09:31.960 --> 0:09:36.080 essentially m v W is a family run business and 0:09:36.280 --> 0:09:40.200 Porsche before the takeover was also a family run business. 0:09:40.240 --> 0:09:43.920 And this deal is very much driven also by the 0:09:44.040 --> 0:09:48.240 Porsche p a billionaire family clan trying to get back 0:09:48.320 --> 0:09:54.120 a medicum of influence on decision making um At Porsche. 0:09:54.880 --> 0:09:57.679 It's too complex to get into this in this radio 0:09:57.720 --> 0:10:02.000 and TV right now, but what the family will emerge 0:10:02.160 --> 0:10:06.319 with if the steel goes ahead is a blocking minority 0:10:06.400 --> 0:10:11.440 stake which will allow them to influence decisions on where 0:10:11.480 --> 0:10:14.360 to make cars, for instance, on on the key decisions 0:10:14.400 --> 0:10:17.840 in future, so they'll be they'll own it again. By 0:10:17.880 --> 0:10:20.400 the way, John Tucker was talking about Ferdinand Porsche earlier. 0:10:20.440 --> 0:10:24.080 He's the original family members designed the Volkswagen Bug and 0:10:24.120 --> 0:10:26.400 then the three fifty six and so on. Then he 0:10:26.480 --> 0:10:29.360 had a son, Fairy, who designed UM I think the 0:10:30.200 --> 0:10:33.120 which is what Tom Cruise drove in Risky business, and 0:10:33.120 --> 0:10:37.719 then Wolfgang Porsche as the grandson. But his cousin um 0:10:37.760 --> 0:10:41.520 what was Pisha's I'm blanking on Friedrich. What was PISA's 0:10:41.520 --> 0:10:45.559 first name? I'm blanking on Pisha's first name. Pe Okay, 0:10:45.600 --> 0:10:50.120 So Pieche was uh Wilkins cousin. He ran Volkswagen. He's 0:10:50.160 --> 0:10:52.200 the one who made all these huge takeovers. He bought 0:10:52.240 --> 0:10:56.480 all these marquis brands like Bugatti and Ducati. And it'll 0:10:56.480 --> 0:11:00.240 be interesting to see how Porsche um does. It won't 0:11:00.240 --> 0:11:02.439 be completely outside of the Volkswagen family. They're going to 0:11:02.520 --> 0:11:04.920 have the same CEO for Porsche and for Volkswagen, and 0:11:04.920 --> 0:11:09.439 they'll still be able to use the same resources. Yeah. Absolutely, 0:11:09.440 --> 0:11:11.439 And that your role. Just to come back to your 0:11:11.520 --> 0:11:16.360 earlier question as well. Um, that's also triggering governance concern 0:11:16.760 --> 0:11:19.920 because the question that is raised, of course that well, 0:11:19.960 --> 0:11:23.400 how independent is Porsche really ever going to be if 0:11:23.400 --> 0:11:27.120 you've got the same guy running the show? I know, 0:11:27.280 --> 0:11:30.800 the the economy in Europe in particular is rough. Is 0:11:30.840 --> 0:11:34.280 anybody buying these expensive cars? I mean, what's the forecast 0:11:34.280 --> 0:11:37.040 for who's not g T three right now? You'll be 0:11:37.040 --> 0:11:38.960 on a two year waiting list? Really let you on it? 0:11:39.080 --> 0:11:43.000 Yeah wow, um, I mean the less expensive cars are 0:11:43.000 --> 0:11:45.560 bigger set are you know, easier to get? But yeah, 0:11:45.640 --> 0:11:47.599 tell us about the sales right now, and we have 0:11:47.720 --> 0:11:49.880 some positive sales news out of in terms of cars 0:11:49.880 --> 0:11:53.199 out of Europe today, didn't we Yeah, exactly. I mean, 0:11:53.200 --> 0:11:55.040 on the face of it, it looked as though the 0:11:55.080 --> 0:11:58.920 market is getting better across Europe, but I mean it's 0:11:58.920 --> 0:12:04.079 been a year declines, mostly because there weren't enough A 0:12:04.200 --> 0:12:08.319 semiconductors to build cars. Um. But now what we're seeing 0:12:08.640 --> 0:12:12.160 is that the inflation concerns, the concerns about energy build 0:12:12.400 --> 0:12:15.960 are increasingly driving and consumer behavior. So while we had 0:12:15.600 --> 0:12:19.520 arise this month and last month, that's still way below 0:12:19.559 --> 0:12:22.480 what we had in twin And just to turn back 0:12:22.559 --> 0:12:26.000 to Porsche, I mean, this is what the bankers on 0:12:26.080 --> 0:12:28.719 the deal and what the Porsche exacts will have been 0:12:28.720 --> 0:12:33.000 telling investors as they've been road sharing this, which is 0:12:33.200 --> 0:12:36.240 they would have been telling them, well, we're Porter, we're 0:12:36.360 --> 0:12:39.600 Todd luxury car make and were an iconic brand. We're 0:12:39.679 --> 0:12:42.319 kind of exempt from all of that. And to an 0:12:42.360 --> 0:12:45.640 extent that's true as well. I would I suppose it's 0:12:46.320 --> 0:12:48.080 when is it still happen? When when can I buy 0:12:48.080 --> 0:12:52.400 my start? What day are we looking at? Elizabeth? Um? 0:12:52.640 --> 0:12:55.200 It's not completely officially yet, but it will be very 0:12:55.320 --> 0:12:59.040 very shortly at some point in this month. A good 0:12:59.080 --> 0:13:01.360 stuff gonna be really interesting. I think a lot of 0:13:01.400 --> 0:13:04.280 people are gonna just go nuts over this deal. All right, Elizabeth, 0:13:04.280 --> 0:13:06.720 thanks so much for joining us, Elizabeth Berman. I gotta 0:13:06.720 --> 0:13:09.839 tell you a team quality also of these cars, it's 0:13:09.880 --> 0:13:14.320 just it's another level, right because I got my uh 0:13:14.480 --> 0:13:19.319 nine eleven Carrera s in two thousand fourteen. Never had 0:13:19.360 --> 0:13:22.760 any kind of mechanical never have any mechanical issue or 0:13:22.800 --> 0:13:25.800 even electronics issues. Right. Meanwhile, a lot of people you 0:13:25.840 --> 0:13:27.640 go out and you buy a new truck and then 0:13:27.640 --> 0:13:31.360 two weeks later, your front collision warning light is on, 0:13:31.600 --> 0:13:35.120 your trus control isn't working, the lane split lane keep 0:13:35.120 --> 0:13:37.880 assist isn't working, and you know, two weeks into your 0:13:37.880 --> 0:13:41.840 purchase and you've got these kind of problems. We'll see 0:13:41.840 --> 0:13:44.640 about it, all right, Porsche, I p O. That's gonna 0:13:44.679 --> 0:13:50.080 be fun. All right. It looks like the railroad guys 0:13:50.080 --> 0:13:52.360 that got a deal done with their unions, so the 0:13:52.400 --> 0:13:55.439 freight will continue moving. That is good news for everybody 0:13:55.600 --> 0:13:57.959 depends on that kind of stuff, and good news for 0:13:57.960 --> 0:14:00.360 the US economy. Let's bring on Tony Hatch. Tony has 0:14:00.360 --> 0:14:03.720 been covering the railroad and trucking industry for decades on 0:14:03.800 --> 0:14:08.280 Wall Streets guy's own consulting company, ABH Consulting. Um, he's 0:14:08.320 --> 0:14:10.120 the guy to go to, Tony. Thanks much for joining 0:14:10.240 --> 0:14:13.760 us here. It seems like a pretty good deal. It 0:14:13.800 --> 0:14:15.600 seems like the workers got a lot of what they 0:14:15.600 --> 0:14:18.120 were looking for. And I guess it's good for the 0:14:18.160 --> 0:14:21.080 railroads because they continue to move stuff around. What do 0:14:21.120 --> 0:14:24.640 you think? So I never thought there would was going 0:14:24.720 --> 0:14:28.280 to be a strike? Um, you recall the process. This 0:14:28.400 --> 0:14:30.560 is just a part of the product. This is just 0:14:30.600 --> 0:14:34.400 the ongoing wage negotiations and how the process plays out 0:14:34.840 --> 0:14:36.560 with under the Rail and Labor Act, where it goes 0:14:36.600 --> 0:14:38.960 on forever and they're all these cooling off periods. What's 0:14:39.000 --> 0:14:41.520 different about it this time is that labor had a 0:14:41.520 --> 0:14:44.280 lot of cards to play. Labor shortages in general, supply 0:14:44.360 --> 0:14:48.960 chain issues, Democratic House, Democratic White House, rail service issues, 0:14:49.000 --> 0:14:52.760 making railroads already in the penalty box in Washington, right. 0:14:52.800 --> 0:14:55.880 So the the rail labor leaders did the smart thing, 0:14:55.880 --> 0:14:57.800 which is go to the very end of the of 0:14:57.840 --> 0:15:00.960 the story, why settle early? Every day you wait is 0:15:01.040 --> 0:15:04.680 pressure on them, and by waiting until almost the last minute, 0:15:05.560 --> 0:15:08.360 they were able to secure an additional eleven bonus and 0:15:08.440 --> 0:15:11.480 some changes in work rules about how attendance is kept 0:15:11.720 --> 0:15:14.600 literally and uh sick days. So they've got a pretty 0:15:14.640 --> 0:15:17.520 fine package. Hopefully they'll ratify it. From the From the 0:15:17.600 --> 0:15:19.760 rail point of view, all of their service issues and 0:15:19.800 --> 0:15:22.840 their lack of growth issues come down to labor shortage, 0:15:23.120 --> 0:15:28.000 high attrition, the great resignation, um, etcetera, etcetera. It takes 0:15:28.080 --> 0:15:30.760 nine months to two from hiring to putting somebody in 0:15:30.760 --> 0:15:33.960 the field. Uh, it's a network business. Or shortages and 0:15:34.080 --> 0:15:38.360 small regions can affect the entire continent. So the for railroads, 0:15:38.360 --> 0:15:40.760 if they get labor peace, that's a big victory. They 0:15:40.760 --> 0:15:43.000 need to get people into the field and pick up 0:15:43.000 --> 0:15:45.000 pent up demand. So, Tony, one of the things I 0:15:45.120 --> 0:15:46.880 learned about, you know, kind of reading all this stuff 0:15:46.920 --> 0:15:49.680 about you know, the conditions for the workers is this 0:15:49.720 --> 0:15:54.280 percision railroading has really been tough on rail workers. Explain 0:15:54.360 --> 0:15:57.400 that side of the story. What precision railroading is. So 0:15:58.040 --> 0:15:59.400 this is you know, I could take up the rest 0:15:59.400 --> 0:16:00.640 of your time, and I know you have the pown 0:16:00.720 --> 0:16:04.800 to talk about, but decision schedule railroading is um. You know, 0:16:05.040 --> 0:16:08.400 Hunter Harrison was a famous now a late rail CEO, 0:16:08.480 --> 0:16:10.480 and it's really a way of of doing more with 0:16:10.600 --> 0:16:13.320 less and trying to bring full schedule into a railroad. 0:16:13.360 --> 0:16:16.280 Railroads were only semi scheduled before you would hold a 0:16:16.280 --> 0:16:19.400 train to get more volume to justify moving the train 0:16:19.480 --> 0:16:21.880 because of the high costs of a train. Start and 0:16:21.920 --> 0:16:24.560 Hunter reversed that said, move the trains, that if we 0:16:24.560 --> 0:16:27.440 will them regularly, will get the volume eventually. Uh. And 0:16:27.440 --> 0:16:30.920 in so doing we need fewer of everything, including people. Uh. 0:16:30.960 --> 0:16:33.920 That process, which we worked so well in Canada, was 0:16:33.960 --> 0:16:39.320 brought to the US starting and I was just gonna 0:16:39.360 --> 0:16:41.840 say that it was mostly over with. It is being 0:16:42.000 --> 0:16:45.760 used as the as the boogeyman by labor and by 0:16:46.200 --> 0:16:49.760 Washington regulators and whatnot. It's not the cause really of 0:16:49.800 --> 0:16:53.680 this issue. The the the relads have really gone beyond 0:16:53.720 --> 0:16:56.400 the cost cutting phase by the beginning of the pandemic. 0:16:56.560 --> 0:16:59.680 The pandemic is the cause that when people didn't come back, 0:17:00.280 --> 0:17:02.360 the rail workers who had to deal with the recovery. 0:17:02.360 --> 0:17:05.080 If you remember in the second all the people are 0:17:05.080 --> 0:17:08.640 out there who were working, we're working doubly hard. Uh. 0:17:08.720 --> 0:17:12.200 It was they were just stressed. They were massively impacted 0:17:12.200 --> 0:17:15.399 by only Crown. You can line up rail, labor and 0:17:15.760 --> 0:17:18.600 vaccines in a in a complete opposite order, right, and 0:17:18.640 --> 0:17:22.320 you can they So all of this stress has been 0:17:22.320 --> 0:17:25.600 attributed to PSR PSR like any kind of just in 0:17:25.720 --> 0:17:27.960 time system. And this instead of by a just in 0:17:28.040 --> 0:17:30.560 time by a shipper, this is by a carrier. If 0:17:30.600 --> 0:17:33.600 you will that that makes the system a little more fragile. 0:17:33.600 --> 0:17:36.240 And I won't say it didn't contribute to the problems 0:17:36.320 --> 0:17:38.960 once they got a shock, but they aren't the cause 0:17:39.000 --> 0:17:41.879 of the problem. The shock was. Yeah, I want I 0:17:41.880 --> 0:17:45.200 wanted to ask you about the conditions because I suspected 0:17:45.280 --> 0:17:49.159 that the media to which I listened is mostly just 0:17:49.240 --> 0:17:51.480 super lefties. But I heard you know, they weren't getting 0:17:51.480 --> 0:17:54.359 any sick days. There's like one guy running a whole train, 0:17:55.040 --> 0:17:59.200 um and uh, they haven't gotten a raisin forever. It 0:17:59.359 --> 0:18:01.520 just seem like they were due for a for a 0:18:01.560 --> 0:18:04.200 good deal. Well, here's the deal under the rail labor actor. 0:18:04.280 --> 0:18:07.200 You know, they didn't get a raised because once your contract, 0:18:07.560 --> 0:18:10.200 the terms are out the contractors in perpetuity, the terms 0:18:10.240 --> 0:18:12.720 are up, it's ready to go. You're you're working under 0:18:12.760 --> 0:18:16.320 the old rules. They didn't get a raise every three years. 0:18:16.359 --> 0:18:18.560 They go through this process and it actually turns into 0:18:18.840 --> 0:18:21.320 a five year process where you get back pay. So 0:18:21.359 --> 0:18:23.880 they got back pay. That is a normal I mean 0:18:23.960 --> 0:18:26.800 for seventy years that's going on. They didn't not get 0:18:26.800 --> 0:18:30.080 a raised because they the rail managers were cheap. They 0:18:30.080 --> 0:18:31.879 couldn't give them a raise because they didn't have a 0:18:31.880 --> 0:18:35.000 new contract yet. Until they ratified this contract, they won't 0:18:35.040 --> 0:18:37.879 get the raise. That is, they wouldn't have accepted a 0:18:37.960 --> 0:18:40.160 raise when rail was tried to give them some in fact, 0:18:40.280 --> 0:18:42.080 in order to get people to go, because they didn't 0:18:42.080 --> 0:18:45.440 want that to impact this national round of negotiations. They 0:18:45.440 --> 0:18:48.040 were working harder, there is no doubt about it. They 0:18:48.080 --> 0:18:50.960 also were politically a student enough to see the railroads 0:18:51.000 --> 0:18:54.440 had become public issues as part of the supply chain crisis. 0:18:54.720 --> 0:18:56.959 You know that so dominated say the spring and summer, 0:18:57.160 --> 0:19:00.000 they were called in three separate hearings to be taken 0:19:00.040 --> 0:19:03.120 to the woodshed by their regulator, the STB. So rail 0:19:03.200 --> 0:19:06.240 labor has definitely been pounding the table about this because 0:19:06.280 --> 0:19:08.679 they know that if they had gone on stripe, the 0:19:08.760 --> 0:19:14.199 ultimate arbiter of their wages is Congress. Jeez, you know, 0:19:14.240 --> 0:19:17.040 publicly in all those lefty publications that I like to read. 0:19:17.400 --> 0:19:20.360 That's right, exactly, all right, Tony, thank you so much. 0:19:20.840 --> 0:19:22.399 Next time, we'll get you in the studio because we've 0:19:22.400 --> 0:19:24.720 got a whole supply chain thing we want to go down. 0:19:24.880 --> 0:19:27.240 Tony Hatch, consultant and analysts at a B H Consulting. 0:19:32.000 --> 0:19:35.879 Let's bring in Lee Classgow. He's the finally senior analysts 0:19:35.880 --> 0:19:38.639 covering all the transportation stuff for Bloomberg Intelligence. Lee, we 0:19:38.680 --> 0:19:40.560 got a million things to talk about. We spoke with 0:19:40.600 --> 0:19:43.760 your old buddy Tony Hatch earlier this morning about the 0:19:43.800 --> 0:19:46.719 trained stuff. Lee. Everybody, I gotta tell you, everyone for 0:19:46.800 --> 0:19:50.320 days has been like, get Lee Classo on the horn exactly. Well, 0:19:50.320 --> 0:19:52.760 he's probably on a beach somewhere knowing him. But Lee, 0:19:52.760 --> 0:19:54.880 thanks so much for joining us here. Let's start with FedEx. 0:19:55.400 --> 0:19:58.560 Man that stocks taken a beating today. Didn't people know 0:19:58.640 --> 0:20:01.360 there's kind of recession to She's out there supply chain 0:20:01.400 --> 0:20:04.320 issues out there. Yeah, but you know there are all 0:20:04.320 --> 0:20:06.080 those things. But you know what I would say about 0:20:06.119 --> 0:20:09.679 FedEx and the pre announcement, which was extremely disappointing to 0:20:09.720 --> 0:20:11.679 say the least, is that you know a lot of 0:20:11.680 --> 0:20:14.160 what FedEx is facing is not the macro it's really 0:20:14.200 --> 0:20:17.800 company specific. Their express business, which is a lot of 0:20:17.800 --> 0:20:21.639 their international stuff has really suffered because of an integration 0:20:21.680 --> 0:20:26.040 with TNT. It's an acquisition they bought six years ago, uh, 0:20:26.080 --> 0:20:29.879 and it's really having problems because they didn't mention specifically 0:20:29.960 --> 0:20:32.560 in their release that uh, you know, they were dealing 0:20:32.640 --> 0:20:36.040 with some service issues in Europe and we just you 0:20:36.040 --> 0:20:38.720 know read that as you know t n T and 0:20:38.840 --> 0:20:41.480 you know, uh, the fact that it's going to take 0:20:41.520 --> 0:20:44.679 even longer for this acquisition to pay off. And the 0:20:44.720 --> 0:20:47.679 whole you know, genesis of the acquisition back in sixteen 0:20:47.800 --> 0:20:51.040 was to put it on better footing against UPS and 0:20:51.359 --> 0:20:54.400 deutsch A Post and and just just on on those 0:20:54.440 --> 0:20:57.840 two other competitors. You know, Deutscha Post held a capital 0:20:57.840 --> 0:21:00.800 markets day in September eight and they didn't see anything 0:21:00.920 --> 0:21:03.959 as terrible as fed X as seeing, and UPS at 0:21:03.960 --> 0:21:06.880 a sell side event on September nine, and they maintain 0:21:06.920 --> 0:21:11.080 their two outlook. So a lot of this, you know, listen, 0:21:11.200 --> 0:21:13.240 I'm not going to say that everything is fantastic and 0:21:13.280 --> 0:21:16.000 the world is great. Well, you know, the world is great, 0:21:16.040 --> 0:21:19.520 but like demand, demand is moderating, the economy is moderating. 0:21:19.560 --> 0:21:22.760 Inflation is real. It's impacting demand, but you know it's 0:21:22.800 --> 0:21:25.199 not in a way that you know, we're seeing in 0:21:25.200 --> 0:21:27.520 the shares of fed X because we just think that 0:21:27.520 --> 0:21:30.320 that is really company specific. And you know, FedEx has 0:21:30.320 --> 0:21:34.639 had a long line of um of disappointing announcements. To 0:21:34.960 --> 0:21:38.680 be frank, uh, you know, they really need to focus 0:21:38.840 --> 0:21:41.920 on their operations. A lot of a lot of analysts 0:21:42.000 --> 0:21:46.399 kind of question the ground and Express separate models, uh 0:21:46.520 --> 0:21:51.040 networks being more like a UPS and more integrated provider. 0:21:51.359 --> 0:21:54.880 You know, the fact is that the Express margins from 0:21:54.880 --> 0:21:57.399 the release and in in the one the first quarter 0:21:57.720 --> 0:22:00.760 are about one point seven percent versus five point two 0:22:00.800 --> 0:22:04.040 percent last year. UM the ground, you know, their goals 0:22:04.080 --> 0:22:06.879 get double digit margins, it was only eight point five. 0:22:07.440 --> 0:22:09.239