Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene with
Speaker 1: David Gura. Daily we bring you insight from the best
Speaker 1: of economics, finance, investment, and international relations. Find Bloomberg Surveillance
Speaker 1: on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course
Speaker 1: on the Bloomberg. Good morning everyone, David Gurin, Tom Keene,
Speaker 1: Bloomberg Surveillance, Mr Gurrow off, Michael McKee and for Mr Gurrow,
Speaker 1: which is a good and beautiful thing. David Kotalk this
Speaker 1: morning mentioned a New Jersey bond and I got a
Speaker 1: lot of response negative response about New Jersey a good
Speaker 1: man to speak to on that. Peter Hayes a black
Speaker 1: rock Peter, let me rip up the script here, and
Speaker 1: that the tone of particularly New York, New Jersey, Connecticut
Speaker 1: listeners was hyper negative on the land of Chris Christie's
Speaker 1: New Jersey a good credit. Jersey has some structural problems,
Speaker 1: like some of the other states with big prinsion problems,
Speaker 1: and that's that's where they really revolve around. So this
Speaker 1: idea of tensions being able to pay the liabilities, it
Speaker 1: seems to be getting shorter and shorter that I think
Speaker 1: that they are reckoning if if you will, um, they
Speaker 1: have to be addressed. Some states have done better jobs
Speaker 1: in the states you mentioned have not done as good
Speaker 1: a job, and New Jersey is certainly one of those,
Speaker 1: and that's reflected in market spreads. They've spread it spread
Speaker 1: out dramatically wider. So I think the market sniffed that
Speaker 1: out and that will they default longer term? Unlikely? They
Speaker 1: are a state, they're a large economy, etcetera. But in
Speaker 1: the meantime you could see some volatility in the name.
Speaker 1: Do do the name the state? And let's not pick
Speaker 1: on New Jersey. There's X number of other states like that.
Speaker 1: Does a shop like black Rock avoid a given state
Speaker 1: or can you be choosy versus GEO general obligation and
Speaker 1: revenue paper can pick and choose? Or do you just
Speaker 1: walk away from some of these beleaguered states? Again, I
Speaker 1: think you have to believe in the long term efficacy
Speaker 1: of a of a state. Even Illinois, who has some
Speaker 1: pretty significant problems, actually taking some steps over the last
Speaker 1: couple of months to address the pension problem. They're a
Speaker 1: long way from from home. But you know, in the meantime,
Speaker 1: yields went up dramatically with prices going down and that's
Speaker 1: actually reversed now over the last couple of months. You
Speaker 1: can play it that way, but you're I think you're
Speaker 1: a question around g os and revenues that tosses is
Speaker 1: the bigger one revenue bond you can sort of identify
Speaker 1: a revenue stream to pay back the bond, and geos
Speaker 1: taking a bit of a political risk. Well, the Michael
Speaker 1: McKee's taking a huge risk because he's got those triple
Speaker 1: de rated ice rink bonds somewhere up by s part
Speaker 1: of New Jersey. What's your yield on that side? It's
Speaker 1: it's like tax free and you get New Jersey Devil
Speaker 1: tickets like. But is there it's sort of a psychological
Speaker 1: put in play here that uh yeah, Illinois or some
Speaker 1: of these other states are in a lot of trouble,
Speaker 1: but really they won't default, they won't go bankrupt, and
Speaker 1: so why not take the yield? I think there's definitely
Speaker 1: that mentality in the market, and it's a bit of
Speaker 1: a rating risk. You know, do you want to own
Speaker 1: the double D or the triple D name you get
Speaker 1: paid and compensated for it if that's what you're after,
Speaker 1: or other investors aren't comfortable with that. Type of risk,
Speaker 1: and they see a little bit more of a doomsday scenario.
Speaker 1: But states, states, first of all, don't have the ability
Speaker 1: to declare bankruptcy. So if you think about the state defaulting,
Speaker 1: I mean, that's just not in anybody's radar screen. So
Speaker 1: I think it's a matter of that you're willing to
Speaker 1: take the risk and see some volatility and your portfolio.
Speaker 1: There's plenty of people who want the yield and willing
Speaker 1: to take the rest. Mike, I want you ask the
Speaker 1: next question, but this is too important to pass up.
Speaker 1: Peter Haste. To be clear, a fifty states, they can't
Speaker 1: do a Puerto Rico. They're different, right, that's right, territory
Speaker 1: versus state. It's as a's part of the constitution. Now,
Speaker 1: can most portfolios or at least I mean, we'll talk
Speaker 1: black Rock, since we're talking to the man from black Rock,
Speaker 1: but can you hold triple teas or things like that?
Speaker 1: I mean, do your rules even allow you to have
Speaker 1: something that that is that close to default rating? They do, Obviously,
Speaker 1: reflating ratings are designed to reflect the fault risk of
Speaker 1: the long term ability of an issue to pay back
Speaker 1: their debt. But yes, we we can most institutional investors
Speaker 1: can hold everything on the credit spectrum from high yield
Speaker 1: to high quality and everything on the yield curve. SU's
Speaker 1: just a matter of where do you own those type
Speaker 1: of credits. I think you have to own them inappropriate
Speaker 1: mandates who are investors understand the risks. Let me switch
Speaker 1: from pension problems to hurricane problems. If you look at
Speaker 1: a place like Houston, or you look at a place
Speaker 1: like Miami, with the potential damage that we might see,
Speaker 1: is there a possibility, you know, do do you get
Speaker 1: a ratings change and impossibility that you might see either
Speaker 1: default or delayed payment on some bonds because the revenue
Speaker 1: is just not there if the economy is so badly damaged.
Speaker 1: I think that that could be in very small instances,
Speaker 1: with very small issuers, you could see an interruption of payments.
Speaker 1: We think they're very unlikely. In history tells us that
Speaker 1: you go back and look at some of the bigger
Speaker 1: hurricanes that have impacted in the Southwest Louisiana, etcetera, and
Speaker 1: you do see a bit of a downturn in economic
Speaker 1: activity for the short term, which obviously impacts revenues, but
Speaker 1: you don't see a big change in the market value
Speaker 1: of the bonds, you don't see a big change in ratings.
Speaker 1: If it's a single standalone project and for some reason,
Speaker 1: some catastrophic event um damages the property to the extent
Speaker 1: they can't continue to build it or build it out
Speaker 1: and can't collect revenues, then that might be a little
Speaker 1: bit differently different. But most of these revenue bonds have
Speaker 1: reserved funds they can draw on the pay debt service,
Speaker 1: and we we don't see a a big impact the bonds.
Speaker 1: That's what history has told us. Where are we positioning
Speaker 1: now on the relative yield and total return of a
Speaker 1: single double triple tax free state portfolio at Black Rock
Speaker 1: versus buying a national portfolio. That's always been a difficult
Speaker 1: concept for the public. Explain where we are now. Should
Speaker 1: I buy triple tax free whatever state or should I
Speaker 1: buy a broader national portfolio. It depends on your state.
Speaker 1: If you're in a state like California and New York
Speaker 1: where these state income tax local income tax rates are
Speaker 1: are very high, then the opportunity cost of going out
Speaker 1: of state are pretty high. You can also diversify your
Speaker 1: portfolio in those states. There's a lot of different issuers
Speaker 1: that you can mitigate the risk and fully diverse five
Speaker 1: portfolio into g O so particularly into revenue bonds, getting
Speaker 1: back to earlier question. But when you get down the
Speaker 1: spectrum a little bit into lower marginal tax brackets and
Speaker 1: you get into states like New Jersey getting back to that,
Speaker 1: if a little harder to fully diversify a portfolio and
Speaker 1: the opportunity cost of going national, So we advise some
Speaker 1: degree of diversification in the national and some of those
Speaker 1: other states. Vector Mike McKie, I don't know, Mike. If
Speaker 1: you see Greg Villiers note today, he devotes it entirely
Speaker 1: to Irma, Harvey and fiscal policy. UM. I guess, Peter
Speaker 1: is a question off of Luers note is if we
Speaker 1: go to four or five deficit to GDP, does that
Speaker 1: mean a lot more issuance of municipal bond paper? It could.
Speaker 1: I mean you might even see more issuance in the
Speaker 1: near term around Hurricane Harvey, and depending on how it
Speaker 1: happens with Hurricane Irma. But clearly, if you get more
Speaker 1: deficit tests, typically what we see is we see borrowing
Speaker 1: begins to ramp up in the last couple of years.
Speaker 1: I would say, for the last seven or eight years,
Speaker 1: we've actually seen less borrowing, less borrowing than they really
Speaker 1: should given how low rates are, but the fact that
Speaker 1: revenues are up, they've borrowed a bit less. So the
Speaker 1: the the inverse would hold true. When you look at
Speaker 1: the overall um uni market these days, how would you
Speaker 1: describe it as as as calm? I mean, it seems
Speaker 1: to be a calm portion of the market while everybody
Speaker 1: else is trying to figure out where we go from here. Yeah,
Speaker 1: it's it's it's a really interesting question, and it gets
Speaker 1: back a little bit to what Tom was touching on
Speaker 1: as well as the returns this year. It's kind of
Speaker 1: income versus price. And if you look at the breakdown
Speaker 1: so far returns, it's almost fifty fifty. You get a
Speaker 1: little bit more from income, a little less from price,
Speaker 1: but you get about forty five percent of the returns
Speaker 1: this year from price. And nobody was really expecting that
Speaker 1: rates have gone lower, and as a result, people have
Speaker 1: gotten more comfortable taking the race. You see a lot
Speaker 1: of money moving into long Duracian funds, a lot of
Speaker 1: money moving into high yield. People want more income when
Speaker 1: when yields are low, And I would say, yeah, the
Speaker 1: technical backdrop. We have very good demand issues remains. I
Speaker 1: would say on the low side, we're off on a
Speaker 1: year over year basis, so that dynamic does of the market.
Speaker 1: I don't want to say complacent, but certainly at least
Speaker 1: in a pretty good spot in near term and in
Speaker 1: the meantime tragy rates continue to move lower. We had
Speaker 1: a lowering two of six yesterday in the tenure to
Speaker 1: US seven right now, and that's a lower yel of
Speaker 1: the last tournament is Peter has a black rock driving
Speaker 1: the full faith and credit yield lower. We're gonna come
Speaker 1: back with. Peter has lots to talk about about taking
Speaker 1: advantage of tax free bounds, because I know Mike's got
Speaker 1: a lot of themes to talk about. Peter Hayes just
Speaker 1: quickly here the mechanics of a portfolio. Can you be
Speaker 1: too diversified in a municipal bond portfolio? I guess it
Speaker 1: depends what you're what your goals are. If they're total returns,
Speaker 1: there are income. I think our investment philosophy is the
Speaker 1: more diversification, the better take advantage of the you know,
Speaker 1: the audio syncrests syncratic nature of the market. That's how
Speaker 1: we find a lot of value finding that a rated
Speaker 1: hospital in the Midwest where we like the financials. So
Speaker 1: we think there's a huge benefit in diversification. And then
Speaker 1: sometimes you can get the is one off events that
Speaker 1: I can have a big impact in your portfolio if
Speaker 1: you're not diversified. So we we prefer diversification over not
Speaker 1: being diversified. You sort of went where I wanted to
Speaker 1: go there when you mentioned the hospital thing. I'm wondering
Speaker 1: how the whole Obama Care UH thing to describe it otherwise,
Speaker 1: uh is affects what you might want to invest in.
Speaker 1: I note that, um, the trend in hospitals has been
Speaker 1: to um, you know, to conglomerate and agglomerate whatever the
Speaker 1: word you want is roll up into one hospital. You
Speaker 1: said it exactly. That's the way that roll up. So
Speaker 1: I'm just wondering, you know, if if healthcare becomes something
Speaker 1: uh that is one way or the other more interesting. Yeah,
Speaker 1: that that's been the play really has been around consolidation.
Speaker 1: And we just saw in uh, we just saw in
Speaker 1: New Jersey merger announced yesterday between uh some health systems
Speaker 1: and going into these larger systems. Is the way that
Speaker 1: a lot of these hospitals are actually mitigating some of
Speaker 1: their risk. You know, these standalones that have a big
Speaker 1: dependence on Medicare and Medicaid obviously becomes very vulnerable, vulnerable
Speaker 1: to changes in what happens with with a c A
Speaker 1: or not happens with a c A. And a lot
Speaker 1: of it isn't only on the hospital level, it's also
Speaker 1: on the state levels. So for instance, for a state,
Speaker 1: they either opted in or opted out of a c A,
Speaker 1: depending on what they chose to do and what happens
Speaker 1: with ultimately with the health care law, that could mean
Speaker 1: that millions of unasured go back on their their roles
Speaker 1: and the question becomes what do they do with Then
Speaker 1: it usually puts additional budget pressure on the states, so
Speaker 1: there's sort of a double pronged impact. Potentially, you have
Speaker 1: to think about the impact to the hospital and healthcare
Speaker 1: sector and you think about the impact of the states
Speaker 1: as well. How do you get that knowledge? I mean,
Speaker 1: if there's u t X, Rockwellcollins, there's different government stuff
Speaker 1: and everybody has a lot of pre work. But in
Speaker 1: the Peter Hayes game of municipal bonds, how are you
Speaker 1: knowledgeable on a given hospital? Here, in a given hospital,
Speaker 1: forty miles away. It's the strength of our credit research staff,
Speaker 1: to be honest that we have a terrific team of analysts,
Speaker 1: uh that diversified by sectors. So we have healthcare analysts
Speaker 1: who's been doing it twenty plus years and and they
Speaker 1: know like four hundred hospitals. Like that healthcare analysts has
Speaker 1: tattooed to their brain the working knowledge of how many hospitals. Oh,
Speaker 1: I would say the good working knowledge of a hundred
Speaker 1: plus hospitals. And we have a staff you know that
Speaker 1: that works underneath them and helps give a lot of
Speaker 1: the financials and information so you can disseminate and make
Speaker 1: a informed decision. But we do that for each of
Speaker 1: our sectors, whether it be airports or tow orlds, or
Speaker 1: hospitals or higher ed universities, etcetera. And you know that's
Speaker 1: one of the strengths of our franchise. Michael, Should we
Speaker 1: ask about Legardi any day we're down like to a
Speaker 1: fifth World airport there right now while it's under construction,
Speaker 1: I would ask about with upside, with upside we're hoping
Speaker 1: so before tim and night before, but I would ask
Speaker 1: before we let you go about the impact of tax reform.
Speaker 1: You don't hear anything about UM changing the tax status
Speaker 1: of municipals for the most part, But I guess when
Speaker 1: you open the door, anything can happen. How concerned are
Speaker 1: you that this could impact one way or another, your uh,
Speaker 1: your portfolios. It's been radio silence. If you I'm just
Speaker 1: gonna go back a little bit. Post election, you think
Speaker 1: about the the reaction of the market, I me and
Speaker 1: you just sold off quite a bit, a lot of
Speaker 1: outflows because people thought, oh, you have a one party control,
Speaker 1: there's going to be tax re forming units could be impacted.
Speaker 1: Fast forward to now, and that seems very very unlikely.
Speaker 1: I mean when we've aside tax reformer tax cuts and
Speaker 1: that discussion for now. But when you think about the
Speaker 1: need to do infrastructure, and we've heard UM, we've heard
Speaker 1: the Secretary of Treasury UH and others, even the President
Speaker 1: himself talk about the need to push infrastructure to the
Speaker 1: states and cities actually in some respects to it more
Speaker 1: efficiently than the federal government. And what's the best place
Speaker 1: to do that the municipal bond market. So we feel
Speaker 1: very very strongly that tax retemption of municipals will not
Speaker 1: be harmed should there be any type of tax reform.
Speaker 1: Peter Harris, thank you so much of black Rock. Just
Speaker 1: a nice briefing there on that mun Buns. You know
Speaker 1: him from Kellogs, you know him as Secretary of Commerce.
Speaker 1: But what you don't know And I love how Wikipedia
Speaker 1: puts his secretary gaudierres quote, he and his family acquired
Speaker 1: United States citizenship? Could you acquire United States citizenship today?
Speaker 1: Given the move from Cuba to Mexico to the United States,
Speaker 1: could you get a could you become a US citizen?
Speaker 1: Today's secretary Goodier's? Uh? Well today, Actually with the new law,
Speaker 1: I suppose the right word should have been obtained. But
Speaker 1: with the new uh, the elimination of wet foot, dry
Speaker 1: foot uh, refugees from Cuba don't obtain instant UH rights
Speaker 1: to stay in the US. So no, I probably couldn't
Speaker 1: have come over. I mean the things that your thoughts.
Speaker 1: You and I had an historic interview X number of
Speaker 1: years ago when Ted Kennedy and Orange Hatch tried to
Speaker 1: do uh, tried to do something on immigration. Have we
Speaker 1: learned anything since Kennedy Hatch, boy, we you know, we've
Speaker 1: learned that there's nothing easy about this, that it is
Speaker 1: so easy to kill this bill. It is so Uh,
Speaker 1: it is so easy to make it more complex. Uh
Speaker 1: it is. You know, the bill we had in two
Speaker 1: thousand six was seven hundred pages long, and I was
Speaker 1: just hearing someone yesterday saying, look, you need a couple
Speaker 1: of sentences to put the DOCCA into law. No DOCCA
Speaker 1: will probably turn into, you know, a long document. So
Speaker 1: it is a complex process. I think we've learned a lot.
Speaker 1: I think one of the things we have learned is
Speaker 1: to focus, uh, not try to get everything done all
Speaker 1: at once. And that's why I'm optimistic about this process
Speaker 1: that immigration reform will be focused on one thing, and
Speaker 1: that's the Dream Act. Well, pushback against the argument that
Speaker 1: the administration makes that the United States is a nation
Speaker 1: of laws and you cannot make policy based on executive orders.
Speaker 1: You need Congress to pass the law. And certainly the
Speaker 1: right wing Republican argument that the Dreamers are breaking the
Speaker 1: law and letting them stay is amnesty. Yeah. I mean,
Speaker 1: I think that's a very very unfortunate point of view. Uh,
Speaker 1: you know, sort of time to step back and and
Speaker 1: look at the big picture. The reason we have so
Speaker 1: many undocumented people in the country is that our laws
Speaker 1: don't serve the economy. So our economy, our laws don't
Speaker 1: provide a legal way to bring in the workers we
Speaker 1: need to grow our businesses. So you have a couple
Speaker 1: of choices, go out of business or hire someone undocumented. Um.
Speaker 1: And that's very unfortunate that we put businesses in those
Speaker 1: in those positions. There are some some businesses that are
Speaker 1: actually farms that have gone to Mexico, and R and
Speaker 1: D centers that have gone to Canada. And that that's
Speaker 1: the one thing that is, that's the one insight that
Speaker 1: I don't hear enough of the problem with our immigration
Speaker 1: system is our laws. And until we fix them, until
Speaker 1: Congress does its job, we're going to continue to have
Speaker 1: this problem. No matter how tall and beautiful the wall is.
Speaker 1: It is the President in a way doing the right thing,
Speaker 1: demanding a vote from Congress. Well, you know, it's an
Speaker 1: interesting question because I think this is sort of the
Speaker 1: second best thing. Uh and and maybe this is the
Speaker 1: way to codify the Dream Act into law and uh
Speaker 1: and do it the right way. So actually the President
Speaker 1: has given this six months of life. Um and I
Speaker 1: think I think Congress can do it. You've got people
Speaker 1: like Lindsey Graham whore behind it. Paul Ryan. There are
Speaker 1: people who want this done. People want this done. Carlo's
Speaker 1: goodyear is if I go up to Battle Creek, Michigan,
Speaker 1: an important state in the election tally was Mr Trump
Speaker 1: Secretary Clinton. There's a lot of supporters of this president
Speaker 1: worried about the bad Carlos Goodiers instead of the good
Speaker 1: Carlos Goodiers that we all know. What do you say
Speaker 1: to the people of Battle Creek who genuinely there is
Speaker 1: a changed America and they don't like it. Yeah, you know,
Speaker 1: And I on the one hand, I understand that, and
Speaker 1: I think we need to understand each other's positions. But
Speaker 1: we have to realize that that that sense that people
Speaker 1: are coming in and they're changing the look of the country,
Speaker 1: and they're going to change our culture, and they're going
Speaker 1: to change our values. But we've been talking about that,
Speaker 1: uh for for centuries, and with each new immigrant group
Speaker 1: we get more and more nervous. We've had the N
Speaker 1: four we cut off immigration because it was you know,
Speaker 1: we were getting to or at least we reduced it dramatically.
Speaker 1: So what we're going through today we've gone through before.
Speaker 1: The one thing we have learned is that immigrants become Americans.
Speaker 1: America changes immigrants, it's not the opposite. That's why we're
Speaker 1: so great at this, and that's why we're the greatest
Speaker 1: country in the world. People come here and they become Americans.
Speaker 1: We shouldn't worry about that. We've had enough experience with it.
Speaker 1: What would you, uh, how would you want Congress to proceed?
Speaker 1: Should they just pass a law of say, the eight
Speaker 1: hundred people who are here can stay, we'll give them
Speaker 1: work permits and basically codify the Executive order. Or do
Speaker 1: we need a much broader reform of immigration laws? Well,
Speaker 1: eventually we do. Eventually we do need a much broader,
Speaker 1: broader reform. Um for right now, I would say focus
Speaker 1: on the Dream Act because the broader comprehensive reform is
Speaker 1: so complex and I'm not sure that can be done
Speaker 1: in six months. But the Dream Act, just that one
Speaker 1: piece of it I think can be done. So I
Speaker 1: would urge them to focus on Dream Act. But then
Speaker 1: eventually we've got to get to broader reform. If not,
Speaker 1: we're going to continue having illegal workers or we're going
Speaker 1: to have a declining economy. Let's do one question in business,
Speaker 1: if we could, Secretary Good of yours and this is
Speaker 1: the idea of Amazon with key News. They all established
Speaker 1: in Staten Island, New York, the first New York fulfillment
Speaker 1: center two thousand, two hundred and fifty quote Newcomma. Full
Speaker 1: time jobs for employees will be created. I guess Amazon's
Speaker 1: creative destruction. I guess I can buy corn flakes through Amazon.
Speaker 1: Where are we now in bricks and mortar America? Where
Speaker 1: are we in retail or conventional cereal eating America? It's
Speaker 1: all changing, isn't it. Yeah, they'll be retailing is going
Speaker 1: through a major transformation. Um. You know, speaking of Battle Creek,
Speaker 1: I was hearing about the mall and Battle Creek. It's
Speaker 1: just it's a very different place. Uh. You know for
Speaker 1: people that who are in the package goods industry, who
Speaker 1: are selling through grocery stores. Uh. This really comes down
Speaker 1: to the importance of the brand, because I would assume
Speaker 1: that whole Foods will be selling whole food cereal um.
Speaker 1: And then it comes down to brand versus brand. So
Speaker 1: if any thing, brands are more, uh are more important
Speaker 1: than ever. But you do have a totally new distribution
Speaker 1: um set up, and companies are going to have to
Speaker 1: adjust to that. There's there's no way around it, and
Speaker 1: I think every package food company in the country is
Speaker 1: looking at ways of digitizing their distribution and getting getting
Speaker 1: in line with where the trends are going. You have
Speaker 1: to go over in corn flax. Carlos Goodiers, thank you
Speaker 1: so much, particularly for your continued comments to us on
Speaker 1: America and immigration. He's a former Secretary of Commerce of
Speaker 1: the United States. Always good Michael to speak to Mr Goodyears.
Speaker 1: He clears the air. This is a joy. Keathy Fisher,
Speaker 1: is that a story career in Wall Street? Including that
Speaker 1: gonna have jobs doing security analysis on banks? She did
Speaker 1: that at Morgan Stanley a few years that aged you
Speaker 1: didn't it? Doing bank every every ninety days? Is uh?
Speaker 1: I mean Brad Hands at Bernstein knows that every ninety
Speaker 1: days is a miracle to see if you can even
Speaker 1: get close to right. Kathy, put the microphone somewhat nearer you.
Speaker 1: It's your first time on radio. I know. Um. I
Speaker 1: want to rip up the script here first. I want
Speaker 1: to talk about Bates College before Michael McKee dives into
Speaker 1: your work at Alliance bursting you are Bates, You bleed Bates.
Speaker 1: How are the little ivy's doing? It's back to school
Speaker 1: everybody listening to this with kids that are junior seniors
Speaker 1: in high school nationwide would kill to get into Bowden, Colby, AMers, Middlebury, Swathmore, Wesleyan, Williams,
Speaker 1: and Bates. How is Bates surviving? Is that oddest of
Speaker 1: non stem things liberal arts college? You know you've probably read.
Speaker 1: There's a lot of debate about this topic, and more
Speaker 1: and more or people are beginning to wonder if liberal
Speaker 1: arts colleges can survive in this environment. But many are
Speaker 1: also positing that liberal arts education actually creates the flexibility
Speaker 1: that will be needed for jobs in the future, i e.
Speaker 1: Not everyone can be an engineer, and as the world
Speaker 1: continues to change, that the tools that people learn in
Speaker 1: liberal arts education actually positioned them well for fluidity in
Speaker 1: the job market in the decades to come down. A
Speaker 1: lot of a lot of the smaller colleges that have
Speaker 1: been more local have been shutting down. That you're exactly right,
Speaker 1: but the national small liberal arts colleges continue to see
Speaker 1: record applications because the quality of the education is indeed
Speaker 1: so good, and let's face it, they are becoming more
Speaker 1: aware of the need to provide job direction, shall we
Speaker 1: say so. I think there's more and more of a
Speaker 1: focus driven by parental may to have a focus on
Speaker 1: what kids can do with their education when they come out. Mike,
Speaker 1: don't let Kathy know that someone from Bowden is on
Speaker 1: our teach Well, they're all excellent places and the same
Speaker 1: themes applied. Uh. Can you get a job as a
Speaker 1: liberal arts major? Uh? From Bates or Boden on Wall
Speaker 1: Street these days? Yeah? You know, I actually yes, Um.
Speaker 1: The demand for those skills is still there now. They
Speaker 1: may not be obviously they're not for the quad jobs,
Speaker 1: but for kids wanting to come in and get a
Speaker 1: sort of trainee position. Absolutely, we're still looking for those backgrounds. Okay,
Speaker 1: off the script here, let's get back to it with
Speaker 1: Alliance Bernstein and the work they're on value for years.
Speaker 1: It's not that value has been a value trapped, but
Speaker 1: it's been a value under performer. When does value see
Speaker 1: it's day. Value has underperformed significantly in the past several years.
Speaker 1: It's not surprising in that investors have been looking for
Speaker 1: growth in what seems to be a slow growth environment,
Speaker 1: and therefore growth stocks have really outperformed dramatically to the
Speaker 1: point where you know, there's no question it looks like
Speaker 1: a relatively expensive asset class at this point. UM lots
Speaker 1: of good companies. We still like a lot of them,
Speaker 1: but value has been quite mysterious, although if you step back,
Speaker 1: we would argue perhaps not so mysterious because think of
Speaker 1: what has happened in recent years. There's so much uncertainty
Speaker 1: about the future for so many industries because of disruption.
Speaker 1: Whether it's retailing, whether it's banking, you name it. There's
Speaker 1: lots of questions about what the new normal will look like.
Speaker 1: And value investing requires that you can look at today's
Speaker 1: controversies and get a sense of how the company gets
Speaker 1: from today's challenges to a future that's more normal, and
Speaker 1: therefore earnings improve. With that uncertainty we have today at
Speaker 1: what the future looks like, it's harder for investors to
Speaker 1: make that leap of faith and believe that reversion to
Speaker 1: the mean will occur the way it has in the past. Well,
Speaker 1: we're going to see, uh earnings continue to provide the
Speaker 1: lift to the market that they have or has it started.
Speaker 1: Has it sort of been priced in at this point? Yeah,
Speaker 1: great question. Earnings, as you know, have been quite robust
Speaker 1: in the past several quarters UM, and we expect that
Speaker 1: momentum to taper off because some of it was a
Speaker 1: lift off of the depressed energy prices in fourteen and fifteen.
Speaker 1: But what I think related to value stocks's interesting is
Speaker 1: if you start to see some of the cheap value
Speaker 1: companies have better than expected earnings, of course that will
Speaker 1: be a catalyst for them. It will be very idiosyncratic. Though.
Speaker 1: Has the FED raising rates uh and obviously changing the
Speaker 1: discount rate made a real impact in how you evaluate
Speaker 1: stocks are and it's still so little that it it
Speaker 1: doesn't matter over the long run at this stage, as
Speaker 1: you know, the increases and rates have been quite modest,
Speaker 1: and therefore it has not made a big impact. And
Speaker 1: in fact, we were what we're dealing with now is
Speaker 1: the fact that long rates have actually gone down since
Speaker 1: year end, which is not when anyone would have expected. Well,
Speaker 1: I look at that two point zero six nine as well.
Speaker 1: David Kotak was in earlier and his arch theme as
Speaker 1: someone who's enjoyed this bullmarket is I'm sure you have
Speaker 1: is the idea of lower for longer. What does that
Speaker 1: mean away from your value place? What does it mean
Speaker 1: for a growthiness story like Amazon? What does lower for
Speaker 1: longer mean for the high flyers, lower for longer is
Speaker 1: indeed something that catches the attention of all of us,
Speaker 1: because again, who would have guessed five years ago where
Speaker 1: race would be today? That low right and low around
Speaker 1: the globe, And and remember the we are a global
Speaker 1: economy and um, and it's unlikely that the ECB will
Speaker 1: move until the Fed moves, And so there's all kinds
Speaker 1: of connections here that we have to think about. But
Speaker 1: if you step back and say, if you have a
Speaker 1: growing global economy, which we do, if you have a
Speaker 1: low inflation which we do, and very low interest rates
Speaker 1: which we do, you couldn't ask for a better environment
Speaker 1: for stocks of all sorts. And it does indeed encourage
Speaker 1: the growthier stocks when people are looking for something that
Speaker 1: has that growth momentum to it in a relatively slow
Speaker 1: growth environment. What has anybody at this point? Um, does
Speaker 1: anyone stand out? Obviously you're looking at growth versus value,
Speaker 1: But within growth, is any size of company stand out
Speaker 1: at this point? That the big caps and the Dow
Speaker 1: get all the publicity, but what are we seeing below them? Well,
Speaker 1: again I would argue it's it's company by company. Uh.
Speaker 1: For example, we do own Facebook. We don't own Amazon,
Speaker 1: and you know, um, you know we we while the
Speaker 1: Amazon story is well understood, we prefer companies where we
Speaker 1: can really get a sense of where the earnings are
Speaker 1: going over time, and as we all know, Amazon as
Speaker 1: as far away from that. Um. The valuations, of course
Speaker 1: are quite high for Amazon, and we think there's other
Speaker 1: companies that give a much more clear connection between the
Speaker 1: valuation and the future earnings potential. If the FED moves
Speaker 1: very quickly here and we'll come back. If the FED
Speaker 1: makes strategic moves, how the market price that will be
Speaker 1: priced in a two minute space, and we'll get so
Speaker 1: called jump conditions, or can they actually manage the glide path?
Speaker 1: The expectations for the FED really cluster around a consensus
Speaker 1: that I think the FED is very aware of and
Speaker 1: therefore trying to manage to those expectations. The last hike
Speaker 1: we had was kind of a non event, and I
Speaker 1: think you're we're expecting very significant signaling of what the
Speaker 1: FED expects to do, So we wouldn't expect too much
Speaker 1: diggeriness unless something is much more rapid than expected or
Speaker 1: or or larger than expect. Okay, there we are, Kathy Fisher,
Speaker 1: were this with Alliance Burnstein. And what I would say, folks,
Speaker 1: is there are two groups of strategists, those that strategize
Speaker 1: and those that worked in the trenches. And I think
Speaker 1: a Tobias left city group, a guy named Gibelly. And
Speaker 1: there's just something about doing gut By Hold cell security
Speaker 1: research that makes you different. One s craw Chuck a
Speaker 1: few years ago at Bernstein. She'll admit to it every
Speaker 1: once in a while that she was an analyst, and
Speaker 1: so were you. You're a bank analyst banking today. Will
Speaker 1: we see a consolidation in US banking? Well, first of all,
Speaker 1: I was a bank analyst many many decades ago. But
Speaker 1: it is a fast This is Albert Gallatin and you
Speaker 1: know stopped continue it was. It's a fascinating sector. As
Speaker 1: you know. UM, there are prohibitions against the larger banks
Speaker 1: getting much larger. There's a deposit cap on what you
Speaker 1: can have in terms of the ownership of deposits around
Speaker 1: the country. We do think there will be consolidation on
Speaker 1: the small end. We think that small banks will buy
Speaker 1: even smaller banks. UM. But that's the way down in
Speaker 1: the micro cap space. UM. At the larger end of
Speaker 1: the market, it's it's It is a very interesting time
Speaker 1: because banks are really figuring out how to adapt to
Speaker 1: a very different world where technology plays a bigger role
Speaker 1: in what their clients want. As you know, there's everybody
Speaker 1: wants apps, they want immediate access to their banking services,
Speaker 1: and that's increasing costs for banks as they start to
Speaker 1: change that. But eventually it will become why is that?
Speaker 1: How can digital be an increasing cost? All they gotta
Speaker 1: do is starts closing down the five branches on every corner. Well, first,
Speaker 1: you've got to get it right for eventually, we do
Speaker 1: agree with you, there will be an interesting time when
Speaker 1: bank branches start to close, and what that does for
Speaker 1: real estate and places like New York City will be
Speaker 1: interesting to see. But in the interim, if you're sort
Speaker 1: of doing both right, you're building your technol technological platform
Speaker 1: while you still have the human touch. There will be
Speaker 1: a crossover point where that starts to change. But it
Speaker 1: does create interesting, uh challenges for banks as as they're
Speaker 1: dealing with both both low interest rates and the need
Speaker 1: to upgrade their technological interface with their clients. Do you
Speaker 1: buy banks at this point selectively? It's um, We we
Speaker 1: actually like some of the payments companies better some of
Speaker 1: the other financial kinds of companies. But yes, indeed we
Speaker 1: own some banks, and um they are cheap. Unfortunately they
Speaker 1: keep getting battered by the relatively flat Yeel curve and
Speaker 1: and rates not rising to the extent that the market
Speaker 1: has been waiting. Well, do you want to buy the
Speaker 1: big banks and little banks because of the merger possibility?
Speaker 1: I will say we have one fund that actually buys
Speaker 1: very small banks because of their merger opportunities. But in
Speaker 1: our large cap portfolios we have some of the large banks.
Speaker 1: As why you didn't mention the regionals to me the
Speaker 1: interesting story folks were guilty of this. I only talk
Speaker 1: about six banks, it seems, and you know, I get
Speaker 1: chestise for those there should be. The regionals are a
Speaker 1: huge story, aren't they. I mean they just I mean
Speaker 1: it's almost like an eighties Reducs we're waiting for Oh
Speaker 1: you know they are and they aren't. And that I
Speaker 1: would argue, these same themes are hitting them. That you know,
Speaker 1: doing the technological investment, making sure you're doing what your
Speaker 1: clients want is of great interest, because remember, young people
Speaker 1: don't love banks. They need banking services. But if you
Speaker 1: talk to anyone who's twenty five. They're doing all their
Speaker 1: payments on Venmo, and I think there's a need to
Speaker 1: figure out how to draw those millennials into a banking
Speaker 1: relationship where the bank really does for all the directions.
Speaker 1: He knows how the youngster walks in the room and
Speaker 1: she talks of Venmo. I have no clue what venmo
Speaker 1: is to me. It's an opportunity for you to have
Speaker 1: to have your financial information stolen by hackers. But Venmo,
Speaker 1: it's a new world. I read one survey that said
Speaker 1: that millennials would put going to a bank one notch
Speaker 1: below going to the dentist. Well, you don't have to
Speaker 1: get a shot when you go to the bank. What
Speaker 1: about healthcare? Then? If the dentist is as part of
Speaker 1: the Affordable Care Act and the follow on, here, is
Speaker 1: there a new opportunity in healthcare. Healthcare is a very
Speaker 1: interesting sex industry group with lots of subsectors. So we
Speaker 1: would argue that hospitals are actually very attractive because of
Speaker 1: both demographics and increased demand no matter what happens with
Speaker 1: changes to Obamacare. We would also argue that biotech, for
Speaker 1: very different reasons, is in some cases attractive because there
Speaker 1: are there is innovation? Um, there is. You might have
Speaker 1: seen the FDA approved a drug therapy for no artists
Speaker 1: that uses individual cells to attack cancer. And those kinds
Speaker 1: of therapies. Pick out one that is going to maintain
Speaker 1: its value because it's treatment actually works. Everybody rushes in
Speaker 1: the stage two tests. But you know we don't have
Speaker 1: a long run track record. Yeah, it is. It is tough,
Speaker 1: and that's why. Um, you know, you can't make big
Speaker 1: bets on one company, but rather I think look at
Speaker 1: the history and the management acumen in having a good
Speaker 1: track record over time and recognizing that there will be
Speaker 1: some volatility in these names. Uh. It was speaking of
Speaker 1: things that come out of Washington. Uh. In your about healthcare,
Speaker 1: there was a big push to buy into stocks that
Speaker 1: might be affected by infrastructure spending, which has sort of
Speaker 1: dropped off the radar. Did you buy any of those
Speaker 1: any sorry? Or do you think it will come around again.
Speaker 1: Most of the themes that were popular at the end
Speaker 1: of two thousand and sixteen post Trump election, of course,
Speaker 1: have dissipated this year as the likelihood of getting things
Speaker 1: past has waned. Um, everybody likes infrastructure and concept, but
Speaker 1: nobody really knows what it means, and the momentum for
Speaker 1: that has really come down a lot. What do you
Speaker 1: see in US A Cash? I mean, it's a great
Speaker 1: theme here, the driving forces and rising dividends, share buy backs, etcetera.
Speaker 1: We all love that at seventeen thousand or fifteen thousand,
Speaker 1: Can we love US A Cash or twenty two tho.
Speaker 1: You know, one thing that's been visible is that stocks
Speaker 1: doing buy backs are not rewarded the way they used
Speaker 1: to be, because I think investors recognized they'd like to
Speaker 1: see companies doing something with a hash that leads to
Speaker 1: greater profits for the company down the road, as opposed
Speaker 1: to just giving. There isn't a correlation of financial engineering
Speaker 1: to the idea of I mean, financial engineering was was
Speaker 1: very popular for quite some time, but I think there's
Speaker 1: a sense now that especially companies who might be levering
Speaker 1: up too much to do it, maybe it hit the
Speaker 1: end of the road. On that we see U t
Speaker 1: X c O L with fourteen times, which is a
Speaker 1: ginormous number. Anybody including U t X would say that
Speaker 1: is at this time? Is that another symbol of the
Speaker 1: silly season to come? You know, one thing that we
Speaker 1: have been watching is the gradual increase in net debt
Speaker 1: to ebit across US companies, some sectors more than others. Um,
Speaker 1: you're not seeing that overseas, we're seeing it here. It
Speaker 1: does indeed make us pay more attention to debt burdens.
Speaker 1: But it's sort of when you think about it, with
Speaker 1: low rates for so many years, perhaps not surprising that
Speaker 1: companies have done this. Mike, the D word slips in here.
Speaker 1: Instead of a creative, all of a sudden, we're starting
Speaker 1: to look at delutive, dilutive, deluded for we're getting that
Speaker 1: cubes the the cliche question. But when I feel compelled
Speaker 1: to ask, is um, does the good do the good
Speaker 1: times continue? Or have we peeked? Now? We seem to
Speaker 1: be on this sort of full crum point where people
Speaker 1: are trying to decide whether okay, it's time for a
Speaker 1: correction and we're just waiting for the trigger. Uh. And
Speaker 1: the other side says, we keep having triggers and they
Speaker 1: don't knock us down, So let's just keep dancing and
Speaker 1: check Prince's words. That's the question of the hour, because
Speaker 1: as you know, this is the what we're working on,
Speaker 1: one of the longest economic and stock market recoveries. In
Speaker 1: the US since the Great Crisis, and investors understandably are
Speaker 1: looking for a pullback to occur since numbers and you know,
Speaker 1: the data history applies, we're due. But um, when we
Speaker 1: look around the globe, we see this, you know, synchronous
Speaker 1: modest recovery that continues. Uh, and you know there's actually
Speaker 1: a bit of a real re acceleration and earnings as
Speaker 1: we've seen in recent quarters. So while we're looking very
Speaker 1: carefully for some significant imbalances and things to worry about,
Speaker 1: we simply don't see them. It will happen at some point,
Speaker 1: but we simply don't see the imbalances that at this
Speaker 1: point would cause a pullback of size. Any pulled back
Speaker 1: and happen any time, but modest should be expected as
Speaker 1: opposed to dramatic. Kathery Fisher, thanks so much for the lines.
Speaker 1: Bernstein and wealth and equity strategy is well really across
Speaker 1: all asset questions. Thanks for listening to the Bloomberg Surveillance podcast.
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