Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane,
Speaker 1: Jai Ley. We bring you inside from the best in economics, finance,
Speaker 1: investment and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com and of course on the Bloomberg alongside
Speaker 1: Tom Kane in the City of London. I'm Jonathan Faraoll.
Speaker 1: Good morning to you, Mr Kane, Good morning John Farrell.
Speaker 1: Just exciting last night Tottenham. I'm opening that gorgeous new stadium.
Speaker 1: Did you make it? I did not make it over,
Speaker 1: but we watched every moment. Did you did you enjoy
Speaker 1: every moment? Say? Mr Sun came down and put the
Speaker 1: ball on that and it was very exciting. You want
Speaker 1: be coming back, will you know? I was here with
Speaker 1: our editor in chief John Michael Thwaite, and he made
Speaker 1: clear that you know the idea of going from Liverpool
Speaker 1: and down to see the Todds play, it's a good thing.
Speaker 1: You could just do a football tool for the reason
Speaker 1: while there's Brexit and it's sort of it's a numbing day, John,
Speaker 1: that quiet day, but everybody's done. Roger Boodle was wonderful
Speaker 1: of brexiteer A leave guy writing for the Telegraph once
Speaker 1: a week of capital economics, and Roger was really ferocious
Speaker 1: about the crisis. This is so, where are we now
Speaker 1: and what is the next spring till I think the
Speaker 1: mystery is the support that Mr Corbin will have. I
Speaker 1: think there was pleasantries yesterday. Uh, clearly the Tories the
Speaker 1: Conservatives are very upset. But the next step is really
Speaker 1: to see what actually happens in discussions today. It looks
Speaker 1: like Parliament moving towards blocking a no deal Brexit. I
Speaker 1: imagine everybody else would come along with that, and then
Speaker 1: it's the one next. One of the solutions will be
Speaker 1: to have James Diamond come over and solve Brexit. Do
Speaker 1: you want Jamie Dimond to self Brexit? It was page
Speaker 1: twenty eight of his I think he's busy over at
Speaker 1: JP Morgan for the next five years. He's busy over
Speaker 1: at PEN Morgan. And of course, folks, Mr Diamond out
Speaker 1: where I'm going to guess twenty three pages of detail
Speaker 1: on the financial performance of JP Morgan, but also, as
Speaker 1: usual James Diamond on the American experiment political and economic experiment,
Speaker 1: and also on the view forward we have with us
Speaker 1: this morning, Yacum Fells of PIMCO just thrilled to have
Speaker 1: him for this extended time in our London studios today.
Speaker 1: And Yakom, I want to go to one clear financial
Speaker 1: headline punditry headline from Mr. Diamond. Yield curve in version
Speaker 1: not giving same signal as in past. You've addressed this.
Speaker 1: What do we do with yield curves UH day in
Speaker 1: and day out of this pending recession? Well, Tom, I
Speaker 1: think we have to take the yield curve very seriously. Right,
Speaker 1: there were a lot of voices around UH in the
Speaker 1: last time the yield curve inverted in the previous cycle
Speaker 1: that things were different than it was foreign buying that
Speaker 1: was depressing the long end. That's certainly true. But the
Speaker 1: issue is if the yield curve stay is inverted for longer,
Speaker 1: and you know, to be a reliable recession signal, that
Speaker 1: has to stay inverted for at least three months. But
Speaker 1: if that happens, then it becomes less and less attractive
Speaker 1: for banks to lend. Right, they borrow short, they lend long.
Speaker 1: So that's the reason why the yield curve not only
Speaker 1: predicts recessions but also causes recessions. One of the hallmarks
Speaker 1: of yaka Field's work is the acts as the timeline
Speaker 1: of all these things we speak about every day. And
Speaker 1: as you mentioned, the idea of a chronic inverted yield curve,
Speaker 1: the overlap now versus two thousand sixteen or other periods
Speaker 1: is we've also had chronic negative interest rates. How chronic
Speaker 1: are chronic negative interest rates? Well, they seem to be chronic.
Speaker 1: You know. We've got a huge part of the global
Speaker 1: bond universe trading at negative yields, and there are really
Speaker 1: two factors behind that. One is a fundamental factor, which
Speaker 1: is the global saving blot, and the demand for safe assets,
Speaker 1: which is partly caused by demographics, partly caused by the
Speaker 1: fact that more and more of the savers in this
Speaker 1: world sit in emerging market countries where people have rising
Speaker 1: incomes and they're looking for a safe asset. The other
Speaker 1: explanation for the negative interest is obviously what central banks
Speaker 1: are doing. So if you put the two things together,
Speaker 1: I think we better get used to an environment where
Speaker 1: we were looking at negative yields for a long time.
Speaker 1: Com Fels it's important we bring in John Ferroll because
Speaker 1: he's in tight preparation for the real yield Yakum you
Speaker 1: can see it Fridays. I'm Bloomberg is aware of what
Speaker 1: on what time it is, and privileged to speak to him.
Speaker 1: Let's talk about the distortions work him in fixed income
Speaker 1: globally right now, euro investment grade yields I think are
Speaker 1: about zero point eight percent at the moment. I think
Speaker 1: sixtent of the euro credit universe right now carries a
Speaker 1: negative yield. Yes, that's corporate debt with a negative yield.
Speaker 1: What does pimcotew clients about where you should tilt your
Speaker 1: portfolio in that environment? Well, look, in this environment is
Speaker 1: really really difficult to a find yield at a reasonable price.
Speaker 1: I think that's that's what we're trying to do for
Speaker 1: our clients. So we think the US fixed income universe
Speaker 1: is still attractive. The problem is for European and also
Speaker 1: for Japanese investors, the currency hedging costs are excessive um
Speaker 1: and this is because the short rate differential is so wide.
Speaker 1: So if you want as a European investor, if you
Speaker 1: invest in US fixed income and you want to hedge
Speaker 1: your currency exposure, then you're actually getting a very you know,
Speaker 1: after hedging, you're still getting a very low yield. So
Speaker 1: there's almost no escape from the low yields, and our
Speaker 1: focus is really on the safer parts of the credit spectrum.
Speaker 1: We do worry about the fact that leverage in large
Speaker 1: parts of the corporate universe, including investment grade, has gone
Speaker 1: up so much and the quality of the investment grade
Speaker 1: universe has deteriorated. So that's why we actually recommend to
Speaker 1: be underweight corporate credit in this environment. So just on
Speaker 1: the wholly, coming increasingly defensive, Yes, that's true. We've been
Speaker 1: going increasingly defensive. We are looking for other areas to
Speaker 1: pick up yields, so we're not sitting on hordes of cash.
Speaker 1: We think that, for example, agency and non agency mbs
Speaker 1: are attractive. We think there are some opportunities in emerging
Speaker 1: markets where the outlook has improved. We're just cautious on
Speaker 1: the on on corporate credit per se, which is a
Speaker 1: very crowded trait and where liquidity can ease up, where
Speaker 1: a couidity can tighten, excuse me, can tighten very strongly. Um,
Speaker 1: if you get a sell off, John, can I rip
Speaker 1: up the script? Of course you can. This is really important.
Speaker 1: I'm gonna make a joke, but it's deadly serious. Yet
Speaker 1: last night johnnah Tottenham Stadium, the Todd Stadium, it's a
Speaker 1: cashless stadium. I mean they've overtly said we're a cash
Speaker 1: less stadium. And Yakham Fell's this goes to Ken Rogo's
Speaker 1: magnificent book The Curse of Cash in the experiment in
Speaker 1: Sweden led by Sweden, I should say, of essentially cashless society,
Speaker 1: is that where we're heading? Are we all going to
Speaker 1: be like they are at the Tottenham Stadium. Well, I
Speaker 1: don't think cash will go away, Tom. Yes, Sweden has
Speaker 1: made big strides in that direction. But I think if
Speaker 1: you were to get in a situation where you know,
Speaker 1: interest rates would go even more negative, people would want
Speaker 1: to go back into cash. So rates are probably not
Speaker 1: negative enough yet to induce people to use more cash
Speaker 1: or to hold more cash. But I think that's the
Speaker 1: situation we would get back get get back into. It's
Speaker 1: an interesting experiment. Thank you so much, Jack and Fells
Speaker 1: with us with him, Cooin, just thank you so much
Speaker 1: for being with us today. I was wonderful John Farrell
Speaker 1: to see Roger Brute, Jakom Fells and sat in the
Speaker 1: key of this Brexit debate. Let's bring in Derek Halpenny.
Speaker 1: Shall we m U s G European head of Global
Speaker 1: Markets Research, Derek, let's talk about how price is responding
Speaker 1: to information. The euro is barely moving on week data
Speaker 1: coming out of the euro Zone. What's the signal you
Speaker 1: take from that? Well, I think definitely one of the
Speaker 1: signals is that technicals can be important, and that's one
Speaker 1: twelve level has been pretty important and has been indicated
Speaker 1: in the past as as showing good support. What's behind
Speaker 1: us It's difficult to kind of pinpoint, although I have
Speaker 1: just written a piece covering the i m F FX
Speaker 1: reserved data through to the end of last year, and
Speaker 1: what that shows you, once again for the third consecutive quarter,
Speaker 1: is that center banks appetite for euro is very, very significant.
Speaker 1: And there's only been one period of time going back
Speaker 1: covering the i m F data to when appetite for
Speaker 1: buying the euro has been this strong. Well, what's the why,
Speaker 1: what's the lot of support? Is? Is Santra banks and sorry,
Speaker 1: why why why is this there? Well? Well, you know
Speaker 1: his historically they've tended to purchase euros when they see
Speaker 1: long term value. So whenever you see these periods of
Speaker 1: heavy buying, it has tended to coincide with a period
Speaker 1: that has been where you've seen a fairly notable drop. Unusually,
Speaker 1: Santra banks have been very good at picking bottoms because
Speaker 1: what has transpired after these periods of strong buying is
Speaker 1: nearly always a period of euro appreciation. So Darry, let's
Speaker 1: talk about that. Because we had two guests on the
Speaker 1: program yesterday who were looking to break out of this
Speaker 1: training range on euro dollar very tight, very narrow after
Speaker 1: over the last few months. But they expect to break
Speaker 1: out of that training range to the downside. Why do
Speaker 1: you think we can break out bit to the outside Well,
Speaker 1: you know, well, first of all, I should mention I
Speaker 1: mentioned as the time earlier, I have cut my euro forecasts.
Speaker 1: We were expecting when we were forecasting one twenty for
Speaker 1: the end of this year, and I've had to acknowledge
Speaker 1: that the macro situation in Europe has been far weaker
Speaker 1: than I had anticipated, so I've cut I've cut our
Speaker 1: year end target to one sixteen. So I'm still expecting
Speaker 1: the euro to move a bit higher, but nothing like
Speaker 1: what I was anticipating before. And that is down to
Speaker 1: simply having to acknowledge that the macro situation is is
Speaker 1: is a lot weaker. But you know, I think we're
Speaker 1: in a situation now where when we talk about relative
Speaker 1: cyclical support, not just cyclical supports. From a cyclical support perspective,
Speaker 1: the dollar isn't a worse position than it was last year,
Speaker 1: because clearly we're seeing slower macroeconomic data. But when you
Speaker 1: say relative macro cyclical support, well, you know, nothing really
Speaker 1: has changed, because obviously the slowdown that we're getting is
Speaker 1: not just the United States, it's global, and it's I
Speaker 1: think in part related to Chin that now we're beginning
Speaker 1: to see some tensative evidence of at least demand stabilizing
Speaker 1: in China. And if we get this trade deal, if
Speaker 1: we move towards a softer Brexit, which I think is
Speaker 1: clearly the direction of travel, there's a couple of big
Speaker 1: picture assumptions that fit with some modest recovery and euro
Speaker 1: from from current levels. So, Derek, if the upside on
Speaker 1: euro dollar is somewhat limited because of what is happening
Speaker 1: in the United States, just in terms of the relative
Speaker 1: change for the US economy, where do I get upside
Speaker 1: in European markets right now? We talked a little bit
Speaker 1: earlier on the program about where investment grade euro credit
Speaker 1: was trading. It's actually pretty tight about any basis points
Speaker 1: on on eurodebt right now, that's the yield. I'm just
Speaker 1: wondering where I get my upside of. It's not through credit,
Speaker 1: if it's limited through the Euro, if it's not through equities,
Speaker 1: because we've already had a decent run. Where is it? Derek, Well, again,
Speaker 1: I'm not, I'm not an equities analyst or expert, but
Speaker 1: you know, I at track relative valuation and all I
Speaker 1: would say is that you know the period of out
Speaker 1: performance of US equity is relative to Europe. And further,
Speaker 1: afield tells me that the asset pricing is is priced
Speaker 1: for a kind of a doom gloom scenario across the
Speaker 1: world outside of the US. And I'm not, I'm not
Speaker 1: convinced i'd be that pessimistic. Now again, I go back
Speaker 1: to the data has been more disappointed than than than
Speaker 1: I anticipated. But if if China and we've had a
Speaker 1: lot of stimulus coming through, and if that starts to
Speaker 1: roll out in the economic data, I think the pessimism
Speaker 1: that's there at the moment should should receive somewhat I
Speaker 1: can't afford the next time Arsenal plays at the Tottenham's
Speaker 1: new stadium, the new Stadium. But dear company, um, you
Speaker 1: know I need to make a train in em where
Speaker 1: I actually makes some money. Is Brazil the mother of
Speaker 1: all opportunities right now? Well, again, there's there's doubts there
Speaker 1: in terms of the elocy to get reformed through. Before
Speaker 1: Baltion Arrow came to power, there was optimism that he
Speaker 1: would be able to implement pension reform and and there's
Speaker 1: some question marks over whether or not that can be achieved.
Speaker 1: So again, you look at where dollar Brazil is traded
Speaker 1: and if you have a correct view in terms of
Speaker 1: political progress, well down, Yeah, there's a there's a good
Speaker 1: trade there potentially, but it's still high risk. I mean, John,
Speaker 1: do you remember the romantic days where you'd like you
Speaker 1: actually trade for in exchange to buy the ferrari? Good times? Tim,
Speaker 1: I mean, it's just someone somewhere still doing that. Well
Speaker 1: I don't know, are they? And there's a lot of
Speaker 1: money can be made trade in the range, Derek. I
Speaker 1: mean the range has been narrow, tight and sending predictable
Speaker 1: over the last six months, hasn't it. Yes, And again
Speaker 1: if you look at if you look at volatility. We
Speaker 1: still have relatively high vault in in the pound. So
Speaker 1: if you track volatility for for euro pounds any of
Speaker 1: the other major currencies, pounds stands out. But I don't know.
Speaker 1: I'm beginning to come to the idea that I don't
Speaker 1: think we're going to get this kind of knee jerk
Speaker 1: jump in the pound. I just don't see a moment
Speaker 1: arriving where suddenly people go, ah, Brexit uncertainty, It's gone,
Speaker 1: let's buy the pound. We're just not going to get
Speaker 1: into that situation. So that the level, the elevated level
Speaker 1: of volatility, which I can understand at the moment, if
Speaker 1: we don't get that kind of big move, then you know,
Speaker 1: you could see evolves come back and move back towards
Speaker 1: the other major currencies. Derek, how do you fold the
Speaker 1: dollar analysis into an equity bull market? I mean, are
Speaker 1: they two separate worlds or could you actually take a
Speaker 1: dollar analysis and look at October in December of last
Speaker 1: year and this mother of all recoveries we've had. One
Speaker 1: of the reasons why I have a parish view for
Speaker 1: the U s dollar is I you know, generally I
Speaker 1: think US assets are expensive and the dollar is strong
Speaker 1: and going forward. If, as I mentioned earlier, we see
Speaker 1: some relative change in the extremes about outlooks for for
Speaker 1: US versus the rest of the world, I think that
Speaker 1: could readjust. But if you look at the monthly Treasury
Speaker 1: capital flow data into the US, it's not particularly positive
Speaker 1: and there's clearly evidence there foreign investors reluctance to go
Speaker 1: into the US. Again, an email from a US viewer
Speaker 1: and listener who's Derek like me? Clueless culturally, how is
Speaker 1: Arsenal different from Pattenham in London? Um? Well, the kind
Speaker 1: of the motto is victory through harmony. That's the Arsenal
Speaker 1: long term motto and I think that shows you know,
Speaker 1: we play attractive football. That's our in our genes and
Speaker 1: it's it's it's not to and one more sensible. Our
Speaker 1: our stadium cost three hundred and seventy million pounds, spurs
Speaker 1: cost a billion. There you go, careful analysis from from
Speaker 1: from from Derek Harputny. Thank you so much. I like that.
Speaker 1: What was that victory in the harmony? The North North
Speaker 1: London rivalry? You know there's a day called St. Totter
Speaker 1: Ringham's Day and it's the day when Arsenal fans celebrate
Speaker 1: the the idea, the fact that Spurs can't catch them
Speaker 1: in the league anymore, because typically in recent history at
Speaker 1: least Arsenal used to finish above Spurs. But Spurs have
Speaker 1: a better side now, So those two sides to sort
Speaker 1: of fighting for a for a different trophy at the
Speaker 1: end of the season. That's amazing how they have the same,
Speaker 1: nearlyly the same slogan as Bloomberg Surveillance. Our slogan, Folks
Speaker 1: is surviving through harmony. I'm surviving until eight thirty five
Speaker 1: Eastern when I leave this radio studio and go over
Speaker 1: to day begins right, quieter tape today. We'll see where
Speaker 1: we go tomorrow with jobs reports. Stay with us tomorrow
Speaker 1: for all of our coverage of the American labor economy.
Speaker 1: We're really beginning to focus on this given all the
Speaker 1: news slow as well. John farre will be in New
Speaker 1: York and I will be north of Milan, Italy at
Speaker 1: the meetings in Chernobio. Really looking forward to attend. I've
Speaker 1: literally spent Folks a decade finding excuses to not go
Speaker 1: in this year. Franci Laquise dragged me north of Milan.
Speaker 1: I need a preview, right now, so we do go
Speaker 1: to Milan and Christina Hooper of INDUSCO joining us from
Speaker 1: Northern Italy as well. Christina, what is your observation of
Speaker 1: the Italian economy parachuting into Milan? What do you see
Speaker 1: there as an economist? Well, certainly there is a slowdown underway,
Speaker 1: and we just saw forecast cut to just zero point one.
Speaker 1: But there's also good news coming from Italy, and that
Speaker 1: is that there is no longer talk about an ITHEL exit. Um.
Speaker 1: There is much more consensus around staying within the European Union.
Speaker 1: So that excludes one very big geopolitical risk and UH,
Speaker 1: and it's more now about growing the Italian economy going forward.
Speaker 1: As a market strategist, you've got a dovetail in all
Speaker 1: of this economics. Is there a Christina Hooper optimism about
Speaker 1: participating in markets given some of these real economic growth challenges? Well,
Speaker 1: there's certainly caution there, and caution just suggests selectivity and discernment.
Speaker 1: But there are opportunities, certainly valuation opportunities that are presented.
Speaker 1: I also think it's important to point out that typically, UH,
Speaker 1: the Eurozone's fortunes are correlated with a lag to China's fortunes,
Speaker 1: and one could argue that a lot of the disappointing
Speaker 1: data we've seen recently, certainly um, the German data that
Speaker 1: just came out today, can be at least partially attributed
Speaker 1: to the slowdown in China. Now that we're seeing economic
Speaker 1: data pick up in China could ultimately funnel through to
Speaker 1: the Eurozone. And as usual, its super totally nails the
Speaker 1: debate right now, folks, which is truly a debate of
Speaker 1: gloom versus your way wrong. We're out front of an
Speaker 1: economic recovery. Certainly. We saw that from James Diamond today
Speaker 1: Christina Hooper over at a large bank in New York.
Speaker 1: Mr Diamond with his annual note JP Morgan, he really
Speaker 1: pushed against the recession, Uh certitude that's out there? Help
Speaker 1: Mr Diamond with that? Why can we be more optimistic
Speaker 1: than a pending recession? Well, I think what he was
Speaker 1: was just very realistic. Um. You know, he was talking
Speaker 1: about certainly some challenges set on certainty German economic slowdown, Brexit,
Speaker 1: US China trade war, but there are opportunities in all
Speaker 1: those and quite frankly, Um, what we've seen from the
Speaker 1: set is not so much uncertainty. I would say, as
Speaker 1: just an about phase, and that's creating a much more
Speaker 1: accommodative environment, particularly since other central banks are coming along,
Speaker 1: including the Bank of Canada and the e c B.
Speaker 1: So this should create an environment that's much more supportive
Speaker 1: of risk assets going forward, and of course supportive of
Speaker 1: the economy as well. Why are equities going up? I mean,
Speaker 1: we do this macrobabble every day, but the fact is
Speaker 1: there's revenue dynamics, operating income dynamics. I guess there's an
Speaker 1: earnings gloom out there, but I'm not going to get
Speaker 1: elevated equities with earnings gloom. Is that the great miscall
Speaker 1: that we're actually going to generate profits? Well, certainly we're
Speaker 1: going to see something of an earning slowdown, but I
Speaker 1: think it's really very premature and completely um hyperbole to
Speaker 1: say we're going into an earnings recession. Um, there are challenges,
Speaker 1: but there are also profits still being created and so
Speaker 1: um with you know, with a different rerating, right, We've
Speaker 1: experienced reratings with yields going off that have caused us
Speaker 1: to scrutinize valuations, but the current rerating, which is lower rates,
Speaker 1: has actually made equities look more attractive she's just joining
Speaker 1: us Christina Hooper with Investco. She joins us in Milan, Italy.
Speaker 1: Uh this day, what are correlations in the market right now?
Speaker 1: I love to go equities, bonds, currencies, commodities, and they
Speaker 1: bounce around. How tightly are they coordinated now? Correlated? Well,
Speaker 1: it really depends on the day, UM, But certainly over
Speaker 1: the last few weeks what we've seen is really an
Speaker 1: interesting dichotomy in that equities went up UM, but also
Speaker 1: there was a flight to two treasuries government bonds and
Speaker 1: so yields came down UM. And I think that really
Speaker 1: suggests a lot of the confusion in markets right now. UM.
Speaker 1: There are reasons to be optimistic to me about risk assets,
Speaker 1: and we see that UM evidenced in the stock market.
Speaker 1: But then there's an underlying fear, especially about a potential
Speaker 1: global slow news and that's what we're seeing in Yale.
Speaker 1: This has been wonderful, Christina Hooper. Maybe I'll see in
Speaker 1: the airport here in the next twelve hours Christina Hooper.
Speaker 1: Of course, within Vasco, we hope to see her in
Speaker 1: hold as Tom Keane jets off to the Alps. I'm
Speaker 1: joined in our New York studio by Michael McKee. Michael,
Speaker 1: of course, covers all things economics for Bloomberg Television and Radio,
Speaker 1: and Michael, it's interesting. Asset manager giant black Rock recently
Speaker 1: published a report detailing the physical risk associated with climate
Speaker 1: change on municipal bonds, commercial real estate, and US utilities.
Speaker 1: To help us walk us through that story, we welcome
Speaker 1: Brian de se Bright as black Global Head of Sustainable Investing.
Speaker 1: He's also a former Obama Senior advisor on climate and
Speaker 1: energy policy. He joins us on our Bloomberg Interactive Broker studio. Brian,
Speaker 1: Welcome to Bloomberg. What are the key findings of this
Speaker 1: report that you guys recently published. Well, there's a couple
Speaker 1: of them. The first is that investors are under appreciating
Speaker 1: the physical risks in these three asset classes that are
Speaker 1: in the market today and we believe are not appropriately priced.
Speaker 1: So if we look at US utilities, for example, you
Speaker 1: see a pervasive impact um in the wake of these
Speaker 1: extreme weather events. That signals that investors are not fully
Speaker 1: understanding or fully appreciating these risks, and so that that
Speaker 1: that's that's point one. The second point is that it
Speaker 1: matters there's differences across these different, uh, these different asset classes.
Speaker 1: So with respect to municipalities, we want to look a
Speaker 1: lot at what's the local GDP impact in the municipality
Speaker 1: that affects their resilience to these types of risks. In
Speaker 1: commercial real estate, we want to look at the actual
Speaker 1: impact of inundation and wind share of extreme weather events
Speaker 1: on individual properties and that those those very a lot
Speaker 1: depending property by properties. So the second, the second implication
Speaker 1: is investors need to really drill down to the individual
Speaker 1: asset class level to really understand these risks in a
Speaker 1: more granular way. The two questions two part question here,
Speaker 1: One is, uh, is there something worse now about individual
Speaker 1: weather events winds or forest fires or something like that,
Speaker 1: because we've always had those and they have to be priced.
Speaker 1: But the other is I read that interesting story yet
Speaker 1: just last night about real estate in Miami and the
Speaker 1: people who buy the condos on the beaches that are
Speaker 1: going to be underwater, but they say they're gonna be
Speaker 1: underwater in thirty or fifty years now by and hold investing.
Speaker 1: It's one thing, but fifty years, Um, do I really
Speaker 1: need to be concerned right now? Yeah? Absolutely? So the
Speaker 1: first thing is what has changed? Uh? The the issue
Speaker 1: really is the frequency and the severity of these events.
Speaker 1: So we've always had extreme weather events, but what we've
Speaker 1: seen over the past several years is ah increase in
Speaker 1: both of the frequency of for example, Atlantic based hurricanes
Speaker 1: and the severity. Importantly that the share of hurricanes that
Speaker 1: are Category five, category four or five. We see the
Speaker 1: same with extreme rainfall events um and we've seen some
Speaker 1: recent instances of that, including in the in the Midwest.
Speaker 1: So from an investment standpoint, the challenges if you're using
Speaker 1: backward looking models that look back and say, what's the
Speaker 1: probability of this type of event happening over the last
Speaker 1: hundred years, you're missing this the recent increase in the
Speaker 1: in the frequency and severity of these events. The second
Speaker 1: point is really important one, which is what's the time
Speaker 1: frame of these impacts? And part of the what we
Speaker 1: found in this research is that, for example, while something
Speaker 1: like sea level rise is slow moving and really manifests
Speaker 1: itself over the next thirty to fifty years, if you
Speaker 1: own that commercial property on uh in South Florida, for example,
Speaker 1: the biggest risk in the over the next five to
Speaker 1: fifteen years is not c level rise, It is the
Speaker 1: inundation in the flooding that comes from one of these
Speaker 1: extreme weather events. So when a hurricane hits, the flooding
Speaker 1: that can occur um or the wind shear that could
Speaker 1: occur is a larger and more immediate risk to your
Speaker 1: investment than the longer tailed risks associated for example, with
Speaker 1: CELW rice. So, Brian, when you say that maybe the
Speaker 1: market is not properly pricing in these things, how do
Speaker 1: you measure that? How do you define that? Yeah? Well,
Speaker 1: this was one of the key parts of our research
Speaker 1: was to try to say, first can we actually look
Speaker 1: geo locate this physical risk data down to the asset level,
Speaker 1: and then two can we ask the question of is
Speaker 1: this are those risk priced or not? We do that
Speaker 1: differently for different asset classes. For example, with municipal bonds,
Speaker 1: we do We've done a like for like comparison, So
Speaker 1: looking at for example, at a place like Jupiter, Florida
Speaker 1: that UH and a place like Neptune, New Jersey, similar
Speaker 1: bond issuances, but very different physic core risks. And if
Speaker 1: you if they if these were priced, these risks were
Speaker 1: price into the market, you would expect to see that
Speaker 1: in terms of pricing differentials and yields on these bonds
Speaker 1: on a like for like comparison across municipalities, you really
Speaker 1: don't see a pricing differential in utilities. We look at
Speaker 1: we do an event study and we look at the
Speaker 1: the what happens to utility stocks in the wake of
Speaker 1: these extreme weather events, and we try to say, if
Speaker 1: these if these risks were fully priced into the market,
Speaker 1: then you would not necessarily see any pricing reaction in
Speaker 1: the wake of these events. What we see, in fact,
Speaker 1: is that you see a persistent pricing reaction and a
Speaker 1: sell off in the wake of these events, which then
Speaker 1: boomerangs after about forty days, which indicates that investors are
Speaker 1: selling off on the headline in part because they aren't
Speaker 1: fully understanding or able to price these risks uh into
Speaker 1: the market. Or could it be that they have priced
Speaker 1: the risks to a certain extent, a certain extent they
Speaker 1: figure they're not price able, and then after the hurricane
Speaker 1: is over, the hurricane is over, and they're not thinking
Speaker 1: it's going to happen to that asset immediately again, and
Speaker 1: their turnover is going to be such that why bother
Speaker 1: taking less because the odds are so small that your
Speaker 1: individual assets going to be hurt. Well, So one of
Speaker 1: the things that we're excited about about UM being able
Speaker 1: to use more granular downscale data to actually measure the
Speaker 1: physical risk at the asset level is that element that
Speaker 1: UM seems to the market hard to price or impossible
Speaker 1: the price is something that we believe better data can
Speaker 1: actually get us to a better place on. So to
Speaker 1: the degree that utilities investors are looking and saying there's
Speaker 1: an element to this risk that we just think we
Speaker 1: can't quantify, we think that bringing this type of geolocated
Speaker 1: downscale data at the asset level and then aggregating it
Speaker 1: up to the security level built creates an additional tool
Speaker 1: to try to differentiate and say, what is the exposure
Speaker 1: of uh, you know, a particular utility operating in the
Speaker 1: southwest of the United States, first utility in California. So, Brian,
Speaker 1: what's been about thirty seconds, what's been a response to
Speaker 1: your report? Have you been any pushback from say, I
Speaker 1: don't know, climate change deniers or whatever, because there is
Speaker 1: obviously questions in the marketplace. Sure, well it's UM, it's
Speaker 1: out today, and so so that the well, a lot
Speaker 1: of the well, we'll see a lot of the feedback
Speaker 1: coming in. I think one key thing for us though,
Speaker 1: is this is really about our investment process and about
Speaker 1: price and market pricing and risk. And so we use
Speaker 1: what we believe is the best data on weather patterns
Speaker 1: and frequency and severity of extreme weather events. But our
Speaker 1: focus is on trying to understand whether and how these
Speaker 1: issues are priced and how we can build that into
Speaker 1: our investment models. Bright these thank you so much. Bran
Speaker 1: is black Rock Global Head of Sustainable Investing and former
Speaker 1: Obama Senior Advisor of Climate and Energy Policy, joining us
Speaker 1: here in our New York studio. Thanks for listening to
Speaker 1: the Bloomberg Surveillance podcast. Subscribe and listen to interviews on
Speaker 1: Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm
Speaker 1: on Twitter at Tom Keane before the podcast. You can
Speaker 1: always catch us worldwide. I'm Bloomberg Radio