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Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.

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Speaker 1: Along with my co host Lisa Bramowitz. Each day we

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

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Speaker 1: you and your money, whether you're at the grocery store

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Speaker 1: or the trading floor. Find the Bloomberg p m L

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Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Following

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Speaker 1: the latest school shooting in Florida, there has been a

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Speaker 1: spotlight on who owns the shares of the world's biggest gunmakers,

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Speaker 1: and it turns out, perhaps not surprisingly, it is the

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Speaker 1: largest asset managers that have a lot of passive funds,

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Speaker 1: or funds that seek only to track indexes that have

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Speaker 1: gained a ton of assets in the past few years.

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Speaker 1: Here to talk about the implications of this, Eric Beltunus,

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Speaker 1: who is an expert in everything and anything related to funds,

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Speaker 1: but he specializes in E t F Senior et F

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Speaker 1: analyst for Bloomberg Intelligence, and he happens to be here

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Speaker 1: in New York today in our leven three studios. Eric,

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Speaker 1: let's start with how significant is passive ownership of gun

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Speaker 1: related shares? Okay, so I crunched the numbers before coming

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Speaker 1: on air today and I will have a note coming

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Speaker 1: out thank you for the inspiration. Um. Yeah, we're looking

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Speaker 1: at passive ownership. Let's say if the SMP in general

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Speaker 1: is about right, that's the average passive ownership. It's about

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Speaker 1: double for some gunstocks. So r g R right, that's

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Speaker 1: owned by passive funds. AO b C, which is the

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Speaker 1: one everybody's really honing in on, is owned by passive funds.

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Speaker 1: VISTA vs. T O is the ticker that one is

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Speaker 1: owned by passive, and then half of that is ETF.

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Speaker 1: Remember passive is index funds and ETFs combined. So that's

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Speaker 1: where you get. So we're looking at a quarter to

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Speaker 1: a third of these big gun stocks are owned by

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Speaker 1: path of funds. Why why do they own Why do

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Speaker 1: passive funds own so much more of these gunstocks than

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Speaker 1: they do other stocks. Here's why these gunstocks aren't that big. Right,

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Speaker 1: when you're a mid cap, small cap sized stock, you

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Speaker 1: end up getting into a lot of e t s.

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Speaker 1: Those are the ones that usually have bigger passive ownership

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Speaker 1: than say like Apple. Here's why. So like black Rock,

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Speaker 1: for example, you look at American outdoor brands, that's the

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Speaker 1: one everybody seems to be focusing on. Black Rock owns

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Speaker 1: eleven percent of that company, It's by far the biggest owner.

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Speaker 1: Why half of that ownership comes from one tick or

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Speaker 1: I t A, which is the Aerospace and Defense ETF,

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Speaker 1: which is now a six billion dollar et F. Why Well,

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Speaker 1: because it's crushing the SNP. It's up like thirty five

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Speaker 1: in the past year, it's doubled in size, and term's

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Speaker 1: gotten flows and the asset prices have gone up, which

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Speaker 1: begs are really a question for black Rock. You have

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Speaker 1: an aerospace and defense ETF, people would buy that. I'm

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Speaker 1: assuming hoping you include those companies. Are you going to

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Speaker 1: kick out or try to get the index to kick

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Speaker 1: out a gunmaker from an aerospace and defense ETF. This

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Speaker 1: is a conundral them that Larry Fink will have to

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Speaker 1: figure out. I think that you connected that just perfectly

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Speaker 1: to where I'm going next to me, Because black Rock

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Speaker 1: is saying they're going to engage with gunmakers. What can

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Speaker 1: black Rock and other passive managers like Vanguard or you know, Fidelity,

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Speaker 1: what can they do if they really aren't going to

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Speaker 1: kick a name out of an e t F. They can't.

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Speaker 1: What can they do? Yeah, they are married they cannot

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Speaker 1: get divorced. It's like the old days. We're not getting divorced.

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Speaker 1: We're gonna stay married. Um, so look, you're gonna have

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Speaker 1: a black Rock. I'm a big fan of setting the tone.

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Speaker 1: Larry Fink's got a big megaphone, right, so just saying

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Speaker 1: things out loud, getting people like us to talk about it.

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Speaker 1: This helps move the needle in a public relations aspect.

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Speaker 1: Does it do anything to the ownership of the stocks

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Speaker 1: and the e T F s? No? Will it? Maybe

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Speaker 1: will these companies maybe look to imple implement some programs.

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Speaker 1: Maybe the bigger thing they can do and what they

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Speaker 1: have done in the past. There was a big issue

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Speaker 1: with dual class shares that where company basically once your

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Speaker 1: money but not your vote. Where they you know, the

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Speaker 1: tech companies do it. Black Rock and Vanguard got the

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Speaker 1: SMP SMP people to basically ban dual share classes going forward,

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Speaker 1: so Snap will never be in the SMP five hundred

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Speaker 1: because of that. That was a big win and that

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Speaker 1: directly affects a company like Snap and other companies moving forward.

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Speaker 1: If they were to want to exclude gunmakers from the

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Speaker 1: big indexes, they that would be the way to really

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Speaker 1: do it. However, then you've got Larry Fink making political

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Speaker 1: decisions for you, and that then is that right? Then

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Speaker 1: then you're gonna have that's you know, people worry about

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Speaker 1: passive so making the capital markets turn into like socialism.

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Speaker 1: This seems to be a slippery slope going that direction. Right. Well,

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Speaker 1: that's that's what I was going to ask. You know,

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Speaker 1: how political can they go? And and you know, do

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Speaker 1: we have any inclination of what investors really want? I mean,

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Speaker 1: do most investors care? Right? So? I think they care.

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Speaker 1: There are options for them, Like there's a host of

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Speaker 1: e s g ts that purposely have come along and

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Speaker 1: say we can either give stocks that are good for

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Speaker 1: E s G or will eliminate government. They need a

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Speaker 1: new acronym that that's part of the problem that they

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Speaker 1: haven't been a hit. I think the acronym is needs work. Well.

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Speaker 1: Impact investing is a big one. I just think they

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Speaker 1: should call liberal values because that's who they're appealing to anyway. Um,

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Speaker 1: you know there's an e t F that's um the

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Speaker 1: GOP stock track or et F that will that will

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Speaker 1: hold a bunch of gunstocks. You also have other types

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Speaker 1: of e t fs that purposely hold those like industrial

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Speaker 1: ct f s. That's fine, you go there for those.

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Speaker 1: You can go to E s G if you don't

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Speaker 1: want them. The question is this middle ground of like

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Speaker 1: the SMP five hundred, and that's where do you want

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Speaker 1: Vanguard and and black Rock to basically take up their issues.

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Speaker 1: My view on this personally is that when you hire

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Speaker 1: a passive manager, I think what you really want them

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Speaker 1: to do is just make sure that the uh sort

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Speaker 1: of the boundaries and the rules are really set. You

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Speaker 1: have an independent board, you're pushing for good E s

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Speaker 1: G policies, But do you do you take up an

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Speaker 1: issue that's important just to that person and force a

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Speaker 1: company out of an index. I probably, I don't know

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Speaker 1: if that will happen, but having his voice in there

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Speaker 1: definitely affects the public relation aspect of this entire issue.

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Speaker 1: Although he has to be careful because, as you said,

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Speaker 1: a lot of people are worried the E t F

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Speaker 1: so sort of a slippery slope to socialism. So if

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Speaker 1: he starts weighing in on big political and politically polarizing issues, uh,

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Speaker 1: then he risks some political interference. Thank you so much.

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Speaker 1: Eric Belchin is always enlightening. Eric Balcin a senior E

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Speaker 1: T F analyst for Bloomberg Intelligence, and black Rock is

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Speaker 1: saying that they will engage with gunmakers that they own

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Speaker 1: the shares for after the Florida shooting. So it is

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Speaker 1: that time we take a look at the municipal bond

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Speaker 1: market and it's a particularly interesting time to do so.

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Speaker 1: Borrowing costs are going up. What does this mean for

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Speaker 1: states and local governments that are looking to borrow money?

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Speaker 1: And Eric Kazatski is joining us right now, easy municipal

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Speaker 1: bond strategist for Bloomberg Intelligence. Thank you so much for

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Speaker 1: joining us. Eric, Can you just give us the big

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Speaker 1: picture so far this year? What have we seen a

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Speaker 1: municipal bond markets and what does it mean uh for

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Speaker 1: states and local governments? Sure, good morning, Thanks for having me.

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Speaker 1: So we put out a note a couple of weeks

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Speaker 1: ago and we equated the mini market this year to

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Speaker 1: the upside down from stranger things. You know, it's it's

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Speaker 1: almost been a confluence of events where nothing is behaving

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Speaker 1: as it really should from an intuitive standpoint. Um, we've

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Speaker 1: had consistent flows into the sector this year. We're almost

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Speaker 1: up nine nine and a half billion dollars um and

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Speaker 1: yet we're looking at losses UM across the board in

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Speaker 1: the indicase, and that's more a function of us just

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Speaker 1: following where treasuries have been on a rate basis. But

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Speaker 1: you know, your original question was what does it mean

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Speaker 1: for state and local governments? It means the cost of

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Speaker 1: borrowing is going up as rates are taking higher. So

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Speaker 1: it's I think that in your note you said about

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Speaker 1: half percent higher the yields are on a musable bonds

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Speaker 1: right now. And this is interesting because there has been

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Speaker 1: such a flood of cash into municipal bond funds. Um.

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Speaker 1: Is this enough to derail any financing plans by any

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Speaker 1: local governments? Not that we're hearing. I mean, pipelines as

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Speaker 1: far as public finance are are still pretty thin right now. UM.

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Speaker 1: But I think that borrowers they need to borrow, I

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Speaker 1: mean on a on a net basis. The barn and

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Speaker 1: cross are still low. When you look across historical rates

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Speaker 1: over the last twenty thirty years, UM, they just look

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Speaker 1: higher compared to the last let's say twenty four months. UM.

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Speaker 1: But you know that goes both ways. You know, for

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Speaker 1: people who have cash on the sidelines are looking to

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Speaker 1: enter the market. Um. You know there are some decent

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Speaker 1: entry points right now because they can take advantage of

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Speaker 1: higher rates. All right, So what are you focusing on

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Speaker 1: is a possible good entry point. I mean, we're looking

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Speaker 1: right now at ratios and double A and single A

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Speaker 1: rating classes compared to like graded corporates, and so you

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Speaker 1: get further out the YO curve in like ten thirty years, Um,

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Speaker 1: you can actually pick up some decent spread over those. Um.

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Speaker 1: We're seeing that in both revenue and geo bonds, um.

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Speaker 1: You know. And what we do is we compare the

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Speaker 1: ratios of the tax exemple rates to the actual corporate,

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Speaker 1: just like buyer would deal if they're evaluating tax exemptly

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Speaker 1: inssible to treasury um, you know, just to sort of

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Speaker 1: lease as a litmus test of you know, are they cheap?

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Speaker 1: Are they rich? And most of the ratios that we're

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Speaker 1: looking at her above their fifty two week averages. UM.

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Speaker 1: You know. One thing that I'm struck by as you

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Speaker 1: talk is that you're saying there is a flood of

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Speaker 1: money coming in from investors. There isn't that much issuance

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Speaker 1: from local governments, and yet still yields are rising. That

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Speaker 1: seems odd and it seems like a red flag. Can

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Speaker 1: you speak to that. Yeah, I mean yields are rising

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Speaker 1: to a much lesser degree than where treasury rates are going. UM.

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Speaker 1: And we've seen this particularly in the short end of

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Speaker 1: the curve. And you know, in my opinion, that's where

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Speaker 1: the investors are sort of be the rotating out of

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Speaker 1: long duration bonds or they're sort of finding out in

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Speaker 1: that short area of the curve. You know, just with

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Speaker 1: all this interest rate uncertainty. So you've seen rates you

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Speaker 1: really sort of take off in the two year treasury

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Speaker 1: and demand has been so high in the muni sector

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Speaker 1: that if you sort of look at where rates have

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Speaker 1: been in a two year space, they've been fairly flat.

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Speaker 1: Over the last let's say two three weeks, so UM,

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Speaker 1: the ratios have ticked down UM. And so you've seen

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Speaker 1: that reflective and spun flows as well as some of

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Speaker 1: the money market funds have seen a nice uptick in

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Speaker 1: cash coming in. You know, I'm struck by the end

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Speaker 1: of last year when people were talking about how are

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Speaker 1: actually the year before, the end of the year before,

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Speaker 1: and people are saying, well, you know, tax reform is

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Speaker 1: going to come and it's going to cut taxes on people,

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Speaker 1: and then they're not going to want to buy municipal

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Speaker 1: bonds because that a lot of people go into this

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Speaker 1: debt for the tax benefit. And I'm wondering what happened

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Speaker 1: to that narrative, because we did get a taxed, we

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Speaker 1: did get a tax overall. Yeah, I mean, I think

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Speaker 1: on the margin for individual and ushers, the tickdown in

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Speaker 1: top tax straight from thirty nine point six to thirty

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Speaker 1: seven percent UM. I don't want to say it was

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Speaker 1: in nothing burger, but you know, based on the cash

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Speaker 1: is coming in, it didn't really seem to deter the

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Speaker 1: investor appetite UM. And and there's still benefit there when

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Speaker 1: you look across some other asset classes and that you know,

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Speaker 1: coming in and buying meanings UM on a comparative basis.

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Speaker 1: So I think that the biggest change we've seen from

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Speaker 1: a tax reform basis is just the dearth of supply

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Speaker 1: that we have right now. We pulled so much supply

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Speaker 1: into seen based on the fear factor that we didn't

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Speaker 1: know what was going to happen with the final version

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Speaker 1: of tax reform, and now the market, which is a

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Speaker 1: supply drive, the market is sitting around looking for where

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Speaker 1: that supply is going to come from. Now, so, uh,

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Speaker 1: just a real quick do anyone care anymore about the

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Speaker 1: pension deficits? I do? Good, I just want to, I mean, honestly,

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Speaker 1: there is a tweet by a former Cowper's board member

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Speaker 1: basically saying that Cowper's is heading towards insolvency. CalPERS the

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Speaker 1: biggest public pension plan. You care about this? Of course

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Speaker 1: we do, UM and one of the things we look at, obviously,

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Speaker 1: when we looked at UM, the individual credit ratios of

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Speaker 1: a bar where is one of the things we look

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Speaker 1: at is obviously they're their leverage ratios and pensions are

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Speaker 1: one of the things that factors into that. UM. I

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Speaker 1: think California has some issues coming up as far as

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Speaker 1: some some court cases which UM, depending on the outcome,

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Speaker 1: and I'm certainly not a legal expert. UM, you know,

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Speaker 1: might have ratifications across pension plans, you know, across the US.

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Speaker 1: We are listening to President Trump. He is speaking at

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Speaker 1: the Conservative Political Action Conference in Maryland. His speech sounds

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Speaker 1: like it is sounding a lot of the notes that

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Speaker 1: he sounded during his campaign. Talked about coming through with

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Speaker 1: a lot of his campaign prom us. Is one of

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Speaker 1: his comments that drew the most applause was when he

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Speaker 1: asked the crowd, which would you rather, tax cuts or

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Speaker 1: the Second Amendment? Uh, And they seem to cheer for

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Speaker 1: the Second Amendment and say they take away the Second Amendment,

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Speaker 1: which we will not allow to happen again. A standing

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Speaker 1: ovation right now. I want to bring in to Lou Oloronipa,

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Speaker 1: our White House correspondent for Bloomberg, to Lou what stood

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Speaker 1: out to you the most so far with the speech? Well,

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Speaker 1: it's how much the president is comfortable and willing to

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Speaker 1: go off script when he's in a friendly environment. That

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Speaker 1: the president has very low poll numbers, but when he

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Speaker 1: gets in front of his most ardent supporters and the

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Speaker 1: conservative movement, he really lets loose and he talked about

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Speaker 1: a number of things that were red meat for the base.

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Speaker 1: Talked about the national anthem, talked about the Second Amendment

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Speaker 1: and how you know, beating Hillary Clinton and helped to

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Speaker 1: save the Second Amendment from being eliminated. The president is

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Speaker 1: really reverting to a lot of his old ways. You're

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Speaker 1: hearing a lot of the stories that he told on

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Speaker 1: the campaign trail and shortly after winning the presidency, even

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Speaker 1: talking about, uh, the Yellow Electoral College versus a popular vote.

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Speaker 1: So we're not really seeing a president that has changed

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Speaker 1: very much and really grown into the presidency. We're seeing, uh,

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Speaker 1: the vintage Donald Trump that we've long talked about and

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Speaker 1: and and seen on the on the on the you know,

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Speaker 1: on the world stage. He hasn't really changed very much.

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Speaker 1: It seems like he's very much doubling down on a

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Speaker 1: lot of the policies and strategies that he's used in

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Speaker 1: the past. Uh. And this gun debates, he's recently talking about,

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Speaker 1: you know, wanting to arm more teachers and get rid

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Speaker 1: of gun free zones. He's really talking about it in

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Speaker 1: a way that it's more plaudible to his base. He's

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Speaker 1: not talking about the gun control measures that he wants

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Speaker 1: to implement, including, you know, raising the age first, you know,

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Speaker 1: the purchase of some firearms from eighteen to twenty one,

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Speaker 1: expanding background checks and even taking on mental illnesses and

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Speaker 1: maybe making it harder for some people, uh to get

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Speaker 1: to get guns. Can you give us a sense of

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Speaker 1: who is at SPACK? I mean, who is the audience there?

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Speaker 1: These are very servatives, activists, members, a lot of young people, uh,

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Speaker 1: people who are from the right wing of the party.

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Speaker 1: So members of the House Freedom Caucus that would be

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Speaker 1: very at home among this crowd. These are people who

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Speaker 1: like the red meat that the president throws out. They're

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Speaker 1: very active on social media and and they want to

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Speaker 1: you know, sort of the Donald Trump from the campaign

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Speaker 1: trail who talked about building the wall and you heard

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Speaker 1: the pants of block her up during the speech. So

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Speaker 1: these are the President's that this is really the president's space,

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Speaker 1: the people that he's really been catering to for the

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Speaker 1: majority of his presidency. And you said that it is

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Speaker 1: interesting that he feels really comfortable able to go off script.

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Speaker 1: Even made a note that his scripted speech was too boring. Um,

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Speaker 1: I'm wondering from your perspective, did he say anything that

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Speaker 1: you think will be controversial among congressmen who are part

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Speaker 1: of the Republican Party. Yeah. One thing that we we

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Speaker 1: saw and this isn't too shocking for the President Trump,

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Speaker 1: but uh, he took a swipe at the Senator John McCain,

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Speaker 1: who is back in theres a fighting against brain cancer,

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Speaker 1: has been fighting for his life for the better part

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Speaker 1: of uh four or five months now, and President Trump

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Speaker 1: attacked him over his vote on Obamacare last year. Uh,

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Speaker 1: this is something that it really has rubbed a lot

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Speaker 1: of senators the wrong way, and we've become a little

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Speaker 1: bit desensitized to it. But the President really went after

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Speaker 1: Senator McCain, who is trusted and very revered member of

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Speaker 1: the Republican Party. Uh. He attacked him by not by name,

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Speaker 1: but everyone knew what he was talking about. And I

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Speaker 1: think that's something that Republicans UH are are are going

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Speaker 1: to really not be too happy about, because this is

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Speaker 1: someone who's really struggling and really going through a tough

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Speaker 1: time and there thinking about him and positive ways. And

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Speaker 1: here you have a president sort of getting up the

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Speaker 1: crowd to boo uh Senator McCain, who has long been

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Speaker 1: known as an American hero for his time in Vietnam

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Speaker 1: and for all of his time serving the public in

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Speaker 1: the Senate. So I think you'll hear more coverage of

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Speaker 1: that and the days to come, maybe even here some

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Speaker 1: senators UH talk nealy about the President's decision to go

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Speaker 1: against one of their own, and it'll be interesting to

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Speaker 1: see what the reaction is to that. Tolu laurinovall let

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Speaker 1: you go and listen to the render of the speech

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Speaker 1: to Lu Laarnova, White House correspondent for Bloomberg coming to

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Speaker 1: us from Washington, d C. Speaking about President Trump's comments

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Speaker 1: at the Conservative Political Action Conference. We will bring you

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Speaker 1: headlines if he says anything that you need to be

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Speaker 1: aware of. Thanks for listening to the Bloomberg P and

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Speaker 1: L podcast. You can subscribe and listen to interviews at

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Speaker 1: Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm

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Speaker 1: Pim Fox. I'm on Twitter at pim Fox. I'm on

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Speaker 1: Twitter at Lisa Abramo. It's one before the podcast. You

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Speaker 1: can always catch us worldwide on Bloomberg Radio