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Speaker 1: Welcome to the Bloomberg Penel podcast. I'm Paul swing you.

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Speaker 1: Along with my co host Lisa Brahma Waits. Each day

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Speaker 1: we bring you the most noteworthy and useful interviews for

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Speaker 1: you and your money. Whether at the grocery store or

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Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple

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Speaker 1: podcast or wherever you listen to podcasts, as well as

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Speaker 1: at Bloomberg dot com. Puerto Rico has been the focus

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Speaker 1: of a lot of attention from the United States, both

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Speaker 1: in terms of recovery from the devastating Hurricane Maria as

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Speaker 1: well as in its attempt to restructure it's dead. I

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Speaker 1: am very pleased to say that we have with US

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Speaker 1: Governor card Rosseo. He is the twelfth governor of Puerto

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Speaker 1: Rico and he joins us from our nitedal and studios

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Speaker 1: in Washington, d C. Governor, I'm just wondering whether you

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Speaker 1: have some particular item that you are hoping to hear

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Speaker 1: from President Trump to night at the State of the Union. Well,

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Speaker 1: there's uh, there's many items I would be very much

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Speaker 1: interested in hearing. But I would say that from our

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Speaker 1: vintage point, making sure that the recovery process in Puerto

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Speaker 1: ric and elsewhere in the nation. UH is one of

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Speaker 1: the priorities that we can focus on getting the funding

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Speaker 1: to the places that have a need to rebuild UH

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Speaker 1: and to recover. And I I think that is UH

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Speaker 1: important to state that that is a priority and funds

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Speaker 1: that are destined to those jurisdictions are not going to

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Speaker 1: be utilized to say, build a wall. I think it's

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Speaker 1: a it's an important outcome. So, Governor, how much has

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Speaker 1: Puerto Rico received in UH A recovery funding funder federal government?

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Speaker 1: And compare that to what you had hoped for at

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Speaker 1: this stage? Are you sure? I'm guess you're gonna say

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Speaker 1: you're short and there's a deficit. Just give us a

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Speaker 1: sense of the scale, yep. So, So to give you

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Speaker 1: a sense of the scale, we've been working with FEMA

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Speaker 1: and other stakeholders on what the transformation and rebuild plans

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Speaker 1: should be for Puerto Rico. The estimated cost at this

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Speaker 1: juncture is it's a hundred and thirty nine billion dollars UH.

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Speaker 1: Last year, UH, we've we've received probably from FEMA UH

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Speaker 1: anywhere from three to three and a half billion dollars.

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Speaker 1: And our expectation, of course is is to get that

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Speaker 1: pumped much higher. UM we UH. There there are some

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Speaker 1: reasons why this process has been slow, and it's because

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Speaker 1: it's different in Puerto Rico than in other jurisdictions in

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Speaker 1: the United States. For example, in Florida or Texas or

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Speaker 1: any other state, the state controls the disimbursement process, whereas

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Speaker 1: in Puerto Rico, FEMA controls it. And you might ask, well,

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Speaker 1: what would be that outcome? Well, a comparison should should

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Speaker 1: highlight what the order of magnitude differences. UH. Take Katrina

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Speaker 1: when uh it impacted Louisiana by the same time after

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Speaker 1: the hurricane UH that that we're measuring against Maria passing

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Speaker 1: through Puerto Rico, they had already UH nine thousand, five

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Speaker 1: hundred projects that were being moved forward, whereas in Puerto

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Speaker 1: Rico we only have forty four. So there you can

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Speaker 1: sort of sense a scale of the magnitude difference of

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Speaker 1: what where we should be now in the recovery and

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Speaker 1: UH our sense for petitioning that these restraints UH that

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Speaker 1: are pre placed in Puerto Rico should be should be

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Speaker 1: taken away. You you you started off saying that you

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Speaker 1: want to see what President Trump has planned with respect

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Speaker 1: to potentially diverting money away from Puerto Rico among other

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Speaker 1: places to pay for the wall. What recourse would you

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Speaker 1: potentially have if he goes ahead and does that, which

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Speaker 1: is what he's threatened to do. So, so this is interesting.

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Speaker 1: I've about four months ago. UH. You know, my job

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Speaker 1: as governors is not only to act but also to anticipate,

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Speaker 1: and UH I had a sense that this might be

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Speaker 1: a discussion where funding for recovery would be utilized to

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Speaker 1: build a wall. So we prepared our team, UH and

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Speaker 1: we started studying all of the legal avenues that we have,

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Speaker 1: and we have a very robust case. I mean some

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Speaker 1: of the moneys that are coming to Puerto Rico, UH,

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Speaker 1: the commu Unity Development blog rents that are used to

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Speaker 1: uh TO for disaster relief. Those were passed by Congress

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Speaker 1: and they were signed by the president. So UH, those

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Speaker 1: are statute right now and we feel very comfortably confident

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Speaker 1: that those moneys have to go to Puerto Rico. So

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Speaker 1: if there was any dipping there, um, we would certainly

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Speaker 1: battle it. So for most of the money's we have

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Speaker 1: a strategy forward and of course we hope we don't

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Speaker 1: have to get there. We hope that the president would

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Speaker 1: see that. You know, rebuilding U s citizens lives is

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Speaker 1: a priority. But if it gets to that point, we

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Speaker 1: are ready to battle. So covernor let's talk about the

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Speaker 1: rebuilding process in Puerto Rico. I'm sure you have a

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Speaker 1: priority list. Give us a sense of given where you

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Speaker 1: are right now, you know, a year plus removed from

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Speaker 1: the hurricane, you know what are the t one of

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Speaker 1: you know the one or two or three critical things

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Speaker 1: that Puerto Ricans need right now to be addressed. I

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Speaker 1: think in terms of projects, I would say the energy

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Speaker 1: grid UH is a top priority. We have a very

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Speaker 1: weak old energy grid that uses UH expensive fossil fuel,

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Speaker 1: and our objective is to use recovery funding and private

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Speaker 1: partners to leverage that and rebuild a modern energy grid

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Speaker 1: that's more cost effective and that it is better for

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Speaker 1: the environment and that frankly, can be a model towards

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Speaker 1: the future. I think we're building roads in Puerto Rico

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Speaker 1: and infrastructure is UH fundamental, fundamentally critical for our economy

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Speaker 1: moving forward. And the other part is addressing our our

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Speaker 1: labor force and the labor participation rate. UH. You know,

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Speaker 1: with these recovery funds that are coming to Puerto Rico,

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Speaker 1: with the incentives that are very competitive that we have

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Speaker 1: on the island, with the opportunity zones that will bring

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Speaker 1: about many investment opportunities to to the island, I think

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Speaker 1: we have a window of opportunity to enhance and grow

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Speaker 1: that labor participation rate. Governor I meanwhile made all of

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Speaker 1: the talk with President Trump. Meanwhile, Bankruptcy Court has approved

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Speaker 1: a planned restructure some of the seventy four billion dollars

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Speaker 1: of debt that the island has UH sales tax bonds

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Speaker 1: are rallying on this news. It has been this is

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Speaker 1: this accounts for about seventeen billion dollars of bonds and

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Speaker 1: basically they were on according to my understanding, the sales

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Speaker 1: tax collected by the state would be split between the

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Speaker 1: bond holders and the state. How can you be sure

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Speaker 1: that you'll get enough revenues to be able to engage

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Speaker 1: in some of these projects without just the benevolence of Washington,

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Speaker 1: d C. Right, So, so you know, the rebuild of

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Speaker 1: Puerto Rico has many UH many faces. One is on

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Speaker 1: the fiscal front, one is on the economic front, and

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Speaker 1: of course now the Humanian, Humanitarian and Structural Fund UH.

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Speaker 1: Once we devised. This is based on a fiscal plan

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Speaker 1: that has been devised where implementing certain structural changes would

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Speaker 1: allow us to get avings in government while at the

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Speaker 1: same time enhance our our revenues because our economy is

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Speaker 1: moving forward. We've implemented UH labor reform in Puerto Rico,

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Speaker 1: We've implemented permits reform in Puerto Rico, tax reform UH,

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Speaker 1: as well as other critical structural changes that we feel

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Speaker 1: are going to help us enhance and UH Puerto Rico

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Speaker 1: UH moving forward. So with with all of those components inline, UH,

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Speaker 1: we we see a path that once we clear away

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Speaker 1: restructuring of the debt, with the expected surplus or part

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Speaker 1: of the expected surplus that there is, we're gonna have

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Speaker 1: a nice runway forward to increase our economy and to

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Speaker 1: add significant value. Look, we're betting on nascent markets UM,

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Speaker 1: We're betting on medical cannabis in Puerto Rico. We're betting

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Speaker 1: on cryptocurrency and UM and blood chain in Puerto Rico.

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Speaker 1: We are betting on HEMP as a as an open

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Speaker 1: market E gaming, sports booking. All of those are markets

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Speaker 1: that are not readily available now in Puerto rican that

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Speaker 1: we're pushing forward. So combined with a lot of the

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Speaker 1: things that we have going on in our island, it's

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Speaker 1: gonna be an exciting time moving forward if we get

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Speaker 1: these debt process of governors. Thank you so much for

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Speaker 1: joining us and sharing your valuable time. Governor Ricardo ros Yo,

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Speaker 1: Governor of Puerto Rico, from the Bloomberg Studios in Washington,

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Speaker 1: d C, Puerto Rico. We were just talking to the

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Speaker 1: Governor Ricardo Rosseo about the situation on the island with

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Speaker 1: respect to its seventy four billion dollars in debt. We

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Speaker 1: do have an agreement with at least seventeen billion dollars

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Speaker 1: of sales tax bonds joining us here in our Bloomberg

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Speaker 1: Atta Active Brokers studios. Michelle Kaski, Puerto Rico, reporter for

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Speaker 1: Bloomberg News, as well as Dan Salander, partner and director.

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Speaker 1: I was also head of municipal bonds at Lord Abbott

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Speaker 1: UH normally in Jersey City, but he joins us here

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Speaker 1: in New York. Michell, I want to start with you.

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Speaker 1: There was an agreement reached and signed off on in

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Speaker 1: bankruptcy court. What was it yesterday? The bankruptcy judge she

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Speaker 1: approved this deal. It's it's the biggest deal so far

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Speaker 1: throughout this Puerto Rico bankruptcy process. And right now Puerto

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Speaker 1: Rico has about more than seventeen billion of sales tax bonds.

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Speaker 1: This deal will cut that down to about twelve billion,

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Speaker 1: and over the life of the debt, the government is

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Speaker 1: saying that they're going to save seventeen point five billion

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Speaker 1: in debt service savings. So, Dan, this is I guess

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Speaker 1: we could characterize this as a very good and very

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Speaker 1: welcome first step. Where do we go from here? Where

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Speaker 1: does the Puerto Rico credit market go from here? In

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Speaker 1: your opinion? Sure, Well, you know it's a very interesting stage.

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Speaker 1: You know, if you if you thought about where we

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Speaker 1: would be a couple of years ago. To reach the

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Speaker 1: stage is taking a lot to get here. It's a

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Speaker 1: very positive step that we have in agreement, um, but

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Speaker 1: there is a lot more to do from here. You know.

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Speaker 1: One of the big things in this whole process has

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Speaker 1: been to figure out who gets a sales tax money.

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Speaker 1: That's been the big first step. Now that that's been

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Speaker 1: agreed upon and we have a deal. Once we get

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Speaker 1: this finished, then the general Gation, shareholders and all the

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Speaker 1: difference constituents there need to figure out how to divide

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Speaker 1: up their sales tax and their money. So that's the

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Speaker 1: next step that we'll see soon. Well, but Dan, just

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Speaker 1: to follow up there, another question is how feasible will

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Speaker 1: Porto Rico's capital structure be once it emerges from bankruptcy,

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Speaker 1: and if it's splitting the sales tax revenue between bond

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Speaker 1: holders uh and itself and its operations, how feasible is

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Speaker 1: that with a shrinking population. Sure, the Portricos I was

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Speaker 1: not a booming economy, but they're doing much better than

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Speaker 1: people realize. Uh. You know that the revenue is this

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Speaker 1: year away hundreds of millions, six hundred millions, something ahead

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Speaker 1: of the forecast population drop and nowhere near what was expected.

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Speaker 1: So things are doing much better than people might have expected.

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Speaker 1: So there, and they're getting a lot of money from

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Speaker 1: the federal government, so this helps them. It reduces their debt.

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Speaker 1: Some of these bonds are zero coupons and don't want

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Speaker 1: to pay interest or press went for a long time,

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Speaker 1: so they're putting themselves in a good state to turn

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Speaker 1: things around and really move towards the future. So, Michelle,

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Speaker 1: how good is this agreement for bond holders? What do

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Speaker 1: you think the recoveries will be for them. Um. Some

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Speaker 1: people think that bond holders did very very well on

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Speaker 1: this deal. The there's two types of the Cofeinea bonds.

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Speaker 1: There's a senior tronch and a junior tron such subordinate.

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Speaker 1: The seniors will get cents on the dollar subordinate fifty

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Speaker 1: six cents on the dollar, and the bonds in the

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Speaker 1: secondary have been trading um close to that. They're getting

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Speaker 1: closer to that um and they've rallied in the past

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Speaker 1: couple of days. The m so cents on the dollar

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Speaker 1: is pretty good for seniors, all right, So Dan, would

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Speaker 1: you be buying more Puerto Rico debt here? It's it's

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Speaker 1: tough at this stage to say whether whether to buy

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Speaker 1: or so. I think we've all been through a lot

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Speaker 1: getting to this point. What's gonna be interesting is when

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Speaker 1: the sales Tex deal comes to gets to agreed upon

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Speaker 1: and issued, they're gonna be a lot of buyers out

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Speaker 1: there didn't known Puerto Rico through this, so they're gonna

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Speaker 1: have to make that decision. We would get the new

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Speaker 1: bonds of what to do, Yeah, well, is it a

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Speaker 1: net positive for you or not negative? That a lot

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Speaker 1: of traditional mutual fund holders have gotten back into Puerto

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Speaker 1: Rico debt, so we're at a traditional say through this time, UM,

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Speaker 1: and when they're getting back in right now, they're getting

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Speaker 1: back in through accrack and sewer bonds, things like that

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Speaker 1: that are paying and have never been in default. I

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Speaker 1: think it could be a big positive for us when

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Speaker 1: this deal comes gets restructure. We have new bonds they're

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Speaker 1: gonna want to buy and uh, you know, they're gonna

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Speaker 1: be interest paying bonds in Puerto Rico that they don't know,

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Speaker 1: and so it could be a good thing for us.

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Speaker 1: So Michelle, well, this has been a fairly long process.

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Speaker 1: I'm sure if you're a bond holder, a very long process.

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Speaker 1: What do you think our next steps here as this

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Speaker 1: as Puerto rican continues to try to get out from

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Speaker 1: this financial crisis. Yeah, it's definitely important. Like Dan was

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Speaker 1: mentioning earlier, it's important that Puerto Rico keeps on with

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Speaker 1: this and Rick structures the general obligation debt so there

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Speaker 1: can be some resolution to that, and then there will

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Speaker 1: be some smaller portions of debt that they'll still need

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Speaker 1: to work on. UM. And also the issue too of

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Speaker 1: their their unfunded pension liabilities as those are a big

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Speaker 1: issue for the island. Also the question of management, Dan,

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Speaker 1: what's your confidence right now in the management of the island.

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Speaker 1: The ability to take the money that they're receiving from

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Speaker 1: the federal government and use it in an efficient way. Well,

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Speaker 1: that's something they have to watch carefully. Obviously, the management

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Speaker 1: got them in this situation originally, and that's why we've

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Speaker 1: been working through this for so many years. The federal

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Speaker 1: r government has been giving them money. It's not all

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Speaker 1: been distributed to them yet, so we have to see

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Speaker 1: what they do with that money when they get it.

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Speaker 1: So much do you have a sense of how much.

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Speaker 1: I saw some number like maybe sixty seventy eight billion

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Speaker 1: dollars of potentially they can get from the government in

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Speaker 1: different ways. So there is a lot of money going

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Speaker 1: to them. And we had the governor on just earlier

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Speaker 1: and he said quite emphatically that he's going to get

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Speaker 1: that money. They they they've they've been granted it, so

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Speaker 1: a lot of it has been already given to them,

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Speaker 1: or at least the expectations been given to them, and

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Speaker 1: they've been planning for us. It would be very difficult

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Speaker 1: for them if they didn't get what was to they begetting.

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Speaker 1: So from the bond market perspective, how does the bond

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Speaker 1: market view Puerto Rico now? I mean, you know, at

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Speaker 1: some point they're gonna have to come back to the market.

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Speaker 1: At some point they're going to have to you know,

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Speaker 1: refinance and and continue to invest. How do you think

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Speaker 1: they're gonna be received? That's the big challenge. I mean,

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Speaker 1: coming out of this, they're gonna have to do much better.

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Speaker 1: I mean one of the issues we've had over time

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Speaker 1: as they have not had audited state financials on time,

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Speaker 1: they have not presented information shows they need to bottles

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Speaker 1: that need to provide. So coming out of this, they're

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Speaker 1: gonna be on watch. I mean, they're gonna have to

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Speaker 1: do things much better than they did before to get

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Speaker 1: the confidence in the market. And until they do, if

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Speaker 1: they want to borrow, the rates are going to be very,

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Speaker 1: very high compared to other similarly rated credits. So it's

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Speaker 1: something to watch. They it's hard. You know, everyone's gonna

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Speaker 1: remember this for a long period of time. We have

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Speaker 1: long memories. Dan Salinder, congratulations on being in the bonds

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Speaker 1: through this rocky period because the prices have way more

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Speaker 1: than double. Depending on what we're looking at, when you

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Speaker 1: look at the Cofinea bonds. Dan Salinder is partner and

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Speaker 1: director as well as head of Municipal Bonds at Lord

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Speaker 1: Abbott in Jersey City. Michelle Kaski's Puerto Rico reporter, dutifully

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Speaker 1: covering all things having to do with the saga as

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Speaker 1: it drags out over the years. Uh. For us here

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Speaker 1: at Bloomberg News, well, it's been a widely held story

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Speaker 1: and news that the newspaper business has been in a

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Speaker 1: secular decline for twenty to thirty years. No news, no

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Speaker 1: surprise there, but what we've seen over the last several

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Speaker 1: years as a growth of digital media companies, digital news

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Speaker 1: companies such as Vice and BuzzFeed and huff Posts. But

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Speaker 1: even it looks like they are facing their day of reckoning.

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Speaker 1: We'll dig in a little bit there. So help us

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Speaker 1: dive into those details is Build. Drewelry Bills, a founding

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Speaker 1: partner of Pursuit Advisory based here in New York City.

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Speaker 1: He joins us in our Bloomberg eleven three oh Studios

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Speaker 1: builds a longtime investment banker and research channels following the

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Speaker 1: media sector. So so build these companies the vices of

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Speaker 1: the world, these digital news companies. They were getting big valuations,

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Speaker 1: attracting a lot of money, and I think they were

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Speaker 1: perceived maybe as the future of news, maybe replace the newspapers.

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Speaker 1: What's going on on that space? Well, interesting, interesting times

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Speaker 1: for everybody in the media sector right now, Paul, I

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Speaker 1: think that you're correct. In the last five or six years,

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Speaker 1: there was a new sort of wave of of darling

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Speaker 1: companies Fist being one of them, BuzzFeed, Vox, etcetera, that

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Speaker 1: really rose up and and competed in the in the

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Speaker 1: digital arena in terms of news content and general entertainment content.

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Speaker 1: They were experiencing very rapid revenue growth and market share

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Speaker 1: and as a result were accorded major valuations with a

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Speaker 1: lot of investment from old line media strategics like NBC.

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Speaker 1: Universal invested in both BuzzFeed and Fox in the summer

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Speaker 1: at billion dollar valuations, and Disney invested in Vice twice

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Speaker 1: and at the last round that Disney invested it was

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Speaker 1: over four billion dollars. And they also formed a joint

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Speaker 1: venture with Ice uh taking one of their A and

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Speaker 1: E cable networks and converting it into Viceland. So it

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Speaker 1: was the new media entering the arena to the old

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Speaker 1: traditional media, but they were getting valuations that were based

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Speaker 1: on revenue multiples and not the traditional cash flow metrics.

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Speaker 1: And over the last two years, I think that what

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Speaker 1: we've seen is a lot of these companies now start

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Speaker 1: to see growth rates recede and and not being able

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Speaker 1: to reach profitability with you know, aggressive investment and not

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Speaker 1: a lot of cost management, and as a result, all

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Speaker 1: of a sudden, they're starting to hit the wall. Okay,

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Speaker 1: so how much is this bad management on the part

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Speaker 1: of these uh, these media companies, these digital media companies

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Speaker 1: or imprudent management And how much is this some sort

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Speaker 1: of shift in the news business towards say the facebooks

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Speaker 1: of the world and the apples of the world. Yeah,

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Speaker 1: well two questions there, and I think that on the

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Speaker 1: on the first one, you know, it's just a classic

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Speaker 1: case of of companies that are getting high valuations and

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Speaker 1: a lot of inflows of investment capital and then rapidly

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Speaker 1: deploying that to go after revenue growth with no real

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Speaker 1: fundamental cost management attached to it. We've seen this for

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Speaker 1: multiple cycles over the last twenty years with the rise

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Speaker 1: of digital. Every cycle has been marked by companies unable

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Speaker 1: to reach profitability and and the third time around it's

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Speaker 1: the same story. So I think that, you know, it's

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Speaker 1: it's very classic in that regard. On the other side,

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Speaker 1: I think that you know, you've seen this this this

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Speaker 1: rise of these new digital platforms up and they produce

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Speaker 1: excellent news content, but they can't monetize it because Google, Facebook,

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Speaker 1: and to some degree now Amazon have basically just sucked

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Speaker 1: all the oxygen out of the market. They are growing

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Speaker 1: and basically taking over a hundred percent share of incremental opportunity,

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Speaker 1: and there's nothing left for the next generation. It's unique

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Speaker 1: in that regard. So that sounds is like, you know,

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Speaker 1: if you think about the profit challenges that you talked about,

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Speaker 1: you think about the competitive landscape, this looks like an

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Speaker 1: environment that might be right for some consolidation. Do you

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Speaker 1: think that we will see some of these companies merged

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Speaker 1: to try to get some scale to compete against spoken

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Speaker 1: like a true banker, like a true banker opportunity. Absolutely,

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Speaker 1: I think that I think that it's it's going to

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Speaker 1: be inevitable, and probably sooner rather than later. Paul. Part

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Speaker 1: of the question is going to be how many of

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Speaker 1: these companies can even really survive just in the last

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Speaker 1: twelve to eighteen months, we've seen several companies go bankrupt.

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Speaker 1: DeFi Media is one good example, a company that had

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Speaker 1: over a hundred million of dollars of revenue just year

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Speaker 1: before last major investment from UM, large complexes like Wellington

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Speaker 1: and shareholders like Viacom, lions Gate and zell Nick Media,

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Speaker 1: and the company basically just went out of business in

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Speaker 1: the last six months exited UM and And we've also

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Speaker 1: seen several other smaller companies that had strategic shareholders sell

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Speaker 1: for valuations far less than where they last raised capital.

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Speaker 1: So it's inevitable that they have to consolidate. The question

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Speaker 1: is who can survive through that? So content is king,

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Speaker 1: but only if it's content on Apple, Amazon, or Google.

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Speaker 1: I think that I think that's a good point. It

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Speaker 1: is virtually impossible to build scale now in this market,

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Speaker 1: revenue scale with a real profit margin attached to it,

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Speaker 1: and compete against the three or four behemoths. Interesting times

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Speaker 1: it is I have to wonder it is. It is

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Speaker 1: fascinating because I have to wonder what the competition will

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Speaker 1: end up looking like, what conglomerate of some of these

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Speaker 1: online media sources will look like. Because they were successful.

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Speaker 1: It's not. You know, it's been of throwing the baby

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Speaker 1: out with about bathwaters and I'll tell you and builds

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Speaker 1: a long time new newspaper animals. I'll tell you where

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Speaker 1: the whole is that the digital world has not filled,

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Speaker 1: and that is local news. We've got national, global news,

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Speaker 1: but we have no local news and that is a problem.

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Speaker 1: And whoever can figure about that model, I think we'll

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Speaker 1: have a real opportunity. Bill Drewy, if you're listening, you

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Speaker 1: are listening. Paul is giving some We'll have to have

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Speaker 1: you back and you'll have to weigh in on the

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Speaker 1: local news. Bill Drewery, founding partner of Pursuit Advisors in

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Speaker 1: New York, joining us here in our Bloomberg Interactive Broker Studios.

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Speaker 1: The Fed is patient and investors you that is all

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Speaker 1: clear to dive back into risk, fueling one of the

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Speaker 1: best rallies on record for it certainly high old bonds

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Speaker 1: to start the year. Joining us now is Tom Kennedy,

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Speaker 1: had a fixed income strategy at JP Morgan Private Bank,

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Speaker 1: which has assets of more than five hundred billion dollars.

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Speaker 1: Tom worked at the New York Fed for nearly a decade.

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Speaker 1: Knows how the Fed thanks so Tom what does the

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Speaker 1: FED mean when they say they are going to be

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Speaker 1: patient with raising rates? Yeah, I think the I think

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Speaker 1: the markets interpreting it the right way. Least they're giving

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Speaker 1: the Feds giving us a runway for risk. We're are

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Speaker 1: gonna have to ask ourselves how long is that runway?

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Speaker 1: But that word patient means something to them. They've only

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Speaker 1: used it in the fform C statement a handful of

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Speaker 1: times in history. That's parsing language. Oh yeah, but that's

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Speaker 1: what watchers do. But so, so, how long is this runway?

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Speaker 1: I think the runway is at least three months. I

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Speaker 1: think the Fed is promising us that for at least

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Speaker 1: three months, we're not going to do anything. I think

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Speaker 1: that word patient actually does mean too, that they're going

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Speaker 1: to expect to hike again. But they're gonna see how

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Speaker 1: the world evolves over those coming three months to make

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Speaker 1: a decision what their next move is. And I took

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Speaker 1: those words very carefully. I want to see how the

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Speaker 1: world evolves. I think Powell has been telling us data

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Speaker 1: dependence is the most important piece. Financial conditions and how

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Speaker 1: those evolves are just as important. Alright, So a three

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Speaker 1: month runway is relatively short runway from my perspective, So

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Speaker 1: do I take that three months to not get too

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Speaker 1: far in my skis, but maybe to maybe improve the

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Speaker 1: quality of my portfolio. Is that should be preparing for

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Speaker 1: or what's beyond that runway? Yeah? I think that's the

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Speaker 1: right question, and I think that the answer to that

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Speaker 1: question is different for everyone. If you have been um

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Speaker 1: insulating your portfolio for the last six state months, adding

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Speaker 1: things that should perform well in a down economy, then

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Speaker 1: I think you should take advantage of this risk one

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Speaker 1: runway and add a little bit of of of beta

432
00:23:19,440 --> 00:23:21,879
Speaker 1: or risk back to a portfolio. However, if you have

433
00:23:22,040 --> 00:23:25,040
Speaker 1: not been insulating your portfolio, use some of this rally

434
00:23:25,119 --> 00:23:27,320
Speaker 1: to do so. Is it too late to get the

435
00:23:27,400 --> 00:23:29,879
Speaker 1: upside of this rally? No? I don't think so. I

436
00:23:30,000 --> 00:23:31,560
Speaker 1: think you what you need to do is look for

437
00:23:31,680 --> 00:23:35,200
Speaker 1: things that have lagged year to date, and those those

438
00:23:35,280 --> 00:23:38,879
Speaker 1: are maybe trades that have liquidity dynamics that are not

439
00:23:39,000 --> 00:23:42,000
Speaker 1: especially attractive, like what what are you talking about? Um,

440
00:23:42,200 --> 00:23:43,960
Speaker 1: we can find such things in high yield, we can

441
00:23:44,000 --> 00:23:46,840
Speaker 1: find things in the preferred space. Looking for things that

442
00:23:47,000 --> 00:23:50,679
Speaker 1: year to date have lagged the broader ind to see rallies.

443
00:23:50,680 --> 00:23:52,760
Speaker 1: That's what we're focusing right now because that's where we

444
00:23:52,800 --> 00:23:56,480
Speaker 1: should see price appreciation in this short quote unquote runway

445
00:23:56,520 --> 00:23:59,240
Speaker 1: for risk. Was there anything in the jobs report last

446
00:23:59,280 --> 00:24:01,760
Speaker 1: Friday that calls you are more importantly, calls the Fed

447
00:24:01,840 --> 00:24:05,240
Speaker 1: to maybe rethink their doublish view. I think they're They've

448
00:24:05,240 --> 00:24:08,600
Speaker 1: been telling us they're gonna follow inflation as closely as possible. UM.

449
00:24:08,880 --> 00:24:10,760
Speaker 1: In there, there's nothing that jumped out to me, and

450
00:24:10,800 --> 00:24:13,000
Speaker 1: inflation is going to run away from them. I think

451
00:24:13,000 --> 00:24:17,880
Speaker 1: we're still seeing the steady gradual increases in inflation. UM.

452
00:24:18,680 --> 00:24:23,359
Speaker 1: Powell's focusing very much on what the inflation universe is

453
00:24:23,359 --> 00:24:25,880
Speaker 1: going to tell him to do. I don't think that's

454
00:24:26,080 --> 00:24:28,520
Speaker 1: that's a myopic view of what the world will look

455
00:24:28,600 --> 00:24:31,359
Speaker 1: like for the Fed. The financial conditions component is going

456
00:24:31,400 --> 00:24:33,560
Speaker 1: to be just as important to decide what is next

457
00:24:34,160 --> 00:24:37,440
Speaker 1: rate hike, which I believe versus a rate cut. Basically,

458
00:24:37,680 --> 00:24:40,159
Speaker 1: if the markets rallied too much and people get too

459
00:24:40,240 --> 00:24:42,760
Speaker 1: excited about risk, the Fed hikes and puts an end

460
00:24:42,760 --> 00:24:45,200
Speaker 1: to the party here in the end, absolutely, I think

461
00:24:45,240 --> 00:24:49,479
Speaker 1: that's right, all right. So given that dynamic, how important

462
00:24:49,560 --> 00:24:53,280
Speaker 1: is liquidity at this point? Liquidity is um I think

463
00:24:53,320 --> 00:24:56,600
Speaker 1: in the investment universe is often only thought of as cash.

464
00:24:56,960 --> 00:25:01,240
Speaker 1: Cash provides you liquidity, but there is in the investment spectrum.

465
00:25:01,560 --> 00:25:03,440
Speaker 1: You can think of this as callously as on the

466
00:25:03,520 --> 00:25:05,320
Speaker 1: run or off the run bonds, things that are actively

467
00:25:05,359 --> 00:25:08,280
Speaker 1: traded or not. We're trying to find ways to actively

468
00:25:08,359 --> 00:25:11,399
Speaker 1: add liquidity beyond just cash, because if we think the

469
00:25:11,480 --> 00:25:13,720
Speaker 1: FED is closer to the end of the cycle and

470
00:25:13,800 --> 00:25:16,040
Speaker 1: cuts are coming, cash is going to be a quote

471
00:25:16,080 --> 00:25:18,800
Speaker 1: unquote underperformer. The return will go down. I want to

472
00:25:18,800 --> 00:25:21,520
Speaker 1: add liquidity so people have flexibility in a in a

473
00:25:21,560 --> 00:25:24,200
Speaker 1: down draft economy. So are you talking about e T

474
00:25:24,400 --> 00:25:27,439
Speaker 1: f s derivatives or just bonds that are traded very

475
00:25:27,520 --> 00:25:29,800
Speaker 1: frequently because of the e T rate? I mean we

476
00:25:29,840 --> 00:25:31,960
Speaker 1: can we can take this this conversation for an hour

477
00:25:32,040 --> 00:25:34,760
Speaker 1: and talk about market structure of what liquidity really is.

478
00:25:35,160 --> 00:25:37,000
Speaker 1: You can do that in single name bonds, you can

479
00:25:37,040 --> 00:25:41,199
Speaker 1: do that in in passive versus active investing strategies. Um,

480
00:25:41,359 --> 00:25:42,879
Speaker 1: the places where I think you're going to find the

481
00:25:42,920 --> 00:25:46,280
Speaker 1: most liquidity are in names that are actively traded by

482
00:25:46,320 --> 00:25:50,359
Speaker 1: primary dealers, and the passive investing universe is going to

483
00:25:50,440 --> 00:25:53,000
Speaker 1: see some mark to market moves that don't make a

484
00:25:53,040 --> 00:25:55,920
Speaker 1: lot of economic sense to them because you're seeing force

485
00:25:55,960 --> 00:25:58,440
Speaker 1: selling and force buying in those products. Just in this

486
00:25:58,560 --> 00:26:00,320
Speaker 1: is a little bit off the FED speak. You talk

487
00:26:00,359 --> 00:26:02,679
Speaker 1: about finding liquidity, that's a theme that LEAs and I've

488
00:26:02,720 --> 00:26:04,400
Speaker 1: been hearing about from you know a lot of market

489
00:26:04,440 --> 00:26:07,720
Speaker 1: participants saying it's hard to find liquidity in the marketplace.

490
00:26:08,640 --> 00:26:11,280
Speaker 1: How how did your clients trade, How did they feel

491
00:26:11,280 --> 00:26:12,920
Speaker 1: the trading market is and how do you where do

492
00:26:12,960 --> 00:26:14,760
Speaker 1: you tell them to go to find that liquidity and

493
00:26:14,840 --> 00:26:17,600
Speaker 1: yet still find some value that I think the reason

494
00:26:17,640 --> 00:26:19,639
Speaker 1: it's coming up so much now is because December was

495
00:26:19,680 --> 00:26:25,040
Speaker 1: a really challenging time for liquidity. The inability to offload

496
00:26:25,160 --> 00:26:28,480
Speaker 1: risk in some instances and in some products, whether it

497
00:26:28,600 --> 00:26:32,080
Speaker 1: be a floating rate product or in the preferred space,

498
00:26:32,160 --> 00:26:34,440
Speaker 1: it took days to offload risk. That is not a

499
00:26:34,520 --> 00:26:37,400
Speaker 1: normal dynamic that people have felt for the better part

500
00:26:37,440 --> 00:26:42,760
Speaker 1: of ten years. So that's regulatory changes at practice. And

501
00:26:42,840 --> 00:26:44,960
Speaker 1: when I look at what does the liquidity world look

502
00:26:44,960 --> 00:26:46,720
Speaker 1: like today versus what it looked like ten years ago,

503
00:26:47,000 --> 00:26:49,920
Speaker 1: I think it's about ten percent as liquid because of

504
00:26:50,480 --> 00:26:53,080
Speaker 1: the the amount of supply that primary deals are holding,

505
00:26:53,400 --> 00:26:55,520
Speaker 1: and it's only going to really feel that pain in

506
00:26:55,640 --> 00:26:58,040
Speaker 1: times of stress. December was an event study for that

507
00:26:58,359 --> 00:27:00,159
Speaker 1: that will be looking at for a long time. So

508
00:27:00,520 --> 00:27:03,320
Speaker 1: just real quick here about thirty seconds. Clear Channels selling

509
00:27:03,359 --> 00:27:05,760
Speaker 1: bonds today with triple C ratings to more than two

510
00:27:05,800 --> 00:27:08,720
Speaker 1: billion dollars of bonds. Would you be a buyer? Um,

511
00:27:08,960 --> 00:27:11,840
Speaker 1: we're not able to talk about listening those to our

512
00:27:11,880 --> 00:27:15,600
Speaker 1: clients whatsoever. Uh, triple ceas don't offer to me from

513
00:27:15,600 --> 00:27:18,960
Speaker 1: a strategic perspective much value at this level. Intering you

514
00:27:19,040 --> 00:27:21,480
Speaker 1: bring up Clear Channel. I've very intimately involved with clear Channe.

515
00:27:21,520 --> 00:27:23,200
Speaker 1: I was there during the founding of that company and

516
00:27:23,240 --> 00:27:25,199
Speaker 1: the growth of that company and when it was had

517
00:27:25,280 --> 00:27:28,800
Speaker 1: a very good capital structure. Unfortunately leveraged buy out in

518
00:27:28,880 --> 00:27:30,680
Speaker 1: the peak of the market in two thousand and six

519
00:27:30,760 --> 00:27:32,960
Speaker 1: and just put a capital structure on there and that

520
00:27:33,119 --> 00:27:35,680
Speaker 1: it couldn't stand so bankruptcy. And here we are trying

521
00:27:35,680 --> 00:27:40,240
Speaker 1: to bonds two billion dollars debt. So Tom Kennedy, thanks

522
00:27:40,280 --> 00:27:42,600
Speaker 1: so much. Tom Kennedy is ahead of fixed income strategy

523
00:27:42,600 --> 00:27:46,720
Speaker 1: at JP Morgan Private Banking. Having passed through all things FED.

524
00:27:46,840 --> 00:27:49,040
Speaker 1: He spent ten years of the Fed, five years with

525
00:27:49,440 --> 00:27:53,440
Speaker 1: the former Fed New York Fed chairman um Uh Bill dully.

526
00:27:53,480 --> 00:27:55,280
Speaker 1: Thank you me who just had a great article out

527
00:27:55,320 --> 00:27:58,080
Speaker 1: at least and I've been talking about. Thanks for listening

528
00:27:58,119 --> 00:28:00,520
Speaker 1: to the Bloomberg P and L podcast. You can subscribe

529
00:28:00,560 --> 00:28:03,320
Speaker 1: and listen to interviews at Apple Podcasts or whatever podcast

530
00:28:03,400 --> 00:28:06,119
Speaker 1: platform you prefer. I'm Paul Sweeney. I'm on Twitter at

531
00:28:06,160 --> 00:28:08,800
Speaker 1: pt Sweeney. I'm Lisa Abram Woyds. I'm on Twitter at

532
00:28:08,880 --> 00:28:11,639
Speaker 1: Lisa Abram woits one. Before the podcast, you can always

533
00:28:11,680 --> 00:28:13,720
Speaker 1: catch us worldwide. I'm Bloomberg Radio