WEBVTT - Amazon Is Now Competing For Advertising Dollars: Soper, Ovide 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.600 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.800 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:27.840 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Apple 0:00:27.920 --> 0:00:31.240 is bringing back a lot of money from overseas, and 0:00:31.480 --> 0:00:36.520 Amazon is choosing which city it wants to put its 0:00:36.520 --> 0:00:40.160 headquarters number two, and it has narrowed down the list 0:00:40.200 --> 0:00:44.720 from two d cities to twenty. Here to talk about 0:00:44.760 --> 0:00:48.519 all of this tech news is Spencer Soaper, tech reporter 0:00:48.600 --> 0:00:52.800 in Seattle, who has been writing on the Amazon Bachelorette 0:00:53.760 --> 0:00:56.639 show that we are currently admired in, as well as 0:00:56.640 --> 0:01:00.520 our own shira ov Day Bloomberg Gadfly columnist ring all 0:01:00.640 --> 0:01:06.240 things technology. Spencer, Let's start with you. Did Amazon give 0:01:06.280 --> 0:01:09.800 any color as to its selection process and this reality 0:01:09.840 --> 0:01:15.160 television show known as Headquarters to for Amazon? No? Not 0:01:15.160 --> 0:01:18.360 not really? Uh? And this really looks like administrative clean up. 0:01:18.480 --> 0:01:21.480 You know. They put out this bit for proposals and 0:01:21.520 --> 0:01:25.000 they got way more proposals than they anticipated more than 0:01:25.000 --> 0:01:27.960 two hundred and so it was simply matter. It was 0:01:27.959 --> 0:01:30.959 just getting on wieldy for them. Uh and inboxes were 0:01:30.959 --> 0:01:34.040 blowing up, you know, email boxes overflowing. So this is 0:01:34.120 --> 0:01:36.480 kind of like an administrative cleanup. We we don't. It's 0:01:36.480 --> 0:01:40.000 a huge, huge, very long shortlist, so it doesn't really 0:01:40.000 --> 0:01:42.920 give much indication of anything. You know, you've got West 0:01:42.920 --> 0:01:47.440 Coast cities, East Coast City's, Heartland cities, Southeast cities, Texas cities. Um. 0:01:48.400 --> 0:01:52.360 But basically it's it's it includes all of the the 0:01:52.400 --> 0:01:56.040 front runners that that people were anticipating, So it's largely 0:01:56.080 --> 0:01:57.960 administrative cleanup and getting rid of a lot of those 0:01:58.000 --> 0:02:00.800 smaller markets that that that likely never to the chance 0:02:01.480 --> 0:02:04.320 Spencer at just the point about perhaps it's not a 0:02:04.360 --> 0:02:08.480 clean up. Maybe it's a sort of an expenditure of 0:02:08.639 --> 0:02:11.360 energy on the part of Amazon because people, of course 0:02:11.400 --> 0:02:14.560 on the Internet, they don't get enough advertising. Um. Now 0:02:14.639 --> 0:02:18.519 Amazon will be offering advertising, as I guess, a form 0:02:18.560 --> 0:02:23.799 of entertainment on their website. Tell us about this move. Yeah, 0:02:23.840 --> 0:02:27.000 well so advertising is really emerging. Um. If if you 0:02:27.000 --> 0:02:30.000 think of Amazon and cycles right the core the core 0:02:30.040 --> 0:02:33.320 e commerce business has grown and wild investors with this 0:02:33.440 --> 0:02:35.880 with this tremendous top line growth and ability to steal 0:02:36.240 --> 0:02:39.200 steel market share from Big buckstores and department stores, but 0:02:39.280 --> 0:02:42.520 it's never been profitable. Then along came its cloud computing division, 0:02:42.639 --> 0:02:45.079 which was also growing quickly and adding a lot to 0:02:45.120 --> 0:02:47.880 the top line, but healthing helping profitability. And now the 0:02:47.960 --> 0:02:51.000 latest thing we have emerging is advertising. It's another fast 0:02:51.000 --> 0:02:54.480 growing business, but it's also extremely profitable. It doesn't require 0:02:54.480 --> 0:02:57.840 the big investments of warehouses around the country or data 0:02:57.840 --> 0:03:01.120 centers around the country that it's commerce business or it's 0:03:01.120 --> 0:03:05.120 cloud computing business requires. So so investors are excited about 0:03:05.160 --> 0:03:07.840 the revenue growth, but but more importantly excited about the 0:03:07.840 --> 0:03:11.360 potential profit margins of the of the advertising business. Shara, 0:03:11.560 --> 0:03:14.040 I mean, it's it's not as if some of these 0:03:14.080 --> 0:03:16.360 tech companies need more cash, but it seems like the 0:03:16.360 --> 0:03:19.560 cash is just flowing in, and the question now is 0:03:19.760 --> 0:03:25.160 really how they plan to spend it. And Apple said 0:03:25.200 --> 0:03:28.120 that it was going to be bringing back what thirty 0:03:28.240 --> 0:03:31.639 billion dollars of cash. What did they say exactly, Well, 0:03:31.639 --> 0:03:34.120 they didn't say exactly, but if there's they did say 0:03:34.240 --> 0:03:37.200 they're expecting to spend expected to pay a tax bill 0:03:37.200 --> 0:03:39.720 of thirty eight billion dollars on their overseas cash, which 0:03:39.760 --> 0:03:43.040 implies that they're going to bring back to the US 0:03:43.200 --> 0:03:47.440 something like two forty billion dollars of their overseas cash stockpile. 0:03:47.560 --> 0:03:48.840 And where is that going to go? Do you think? 0:03:49.080 --> 0:03:52.040 I don't know. That's a very good question. Um. So 0:03:52.080 --> 0:03:55.480 it's worth saying right that Apple, you know, patted itself 0:03:55.480 --> 0:03:58.440 on the back for paying the US Treasury thirty eight 0:03:58.440 --> 0:04:01.760 billion dollars. But the reasons paying that some now is 0:04:01.800 --> 0:04:06.960 that it's parked two billion dollars or so of cash 0:04:07.000 --> 0:04:10.680 that it considered permanently reinvested in its overseas operations because 0:04:10.720 --> 0:04:13.440 it didn't want to pay taxes on that money until now. 0:04:13.640 --> 0:04:17.280 I believe the tax rate was too high. So now 0:04:17.320 --> 0:04:20.599 with the new tax code changes, that tax rate goes 0:04:20.640 --> 0:04:23.080 down to fifteen and a half percent. So Apple thinks, well, 0:04:23.120 --> 0:04:25.760 this is a good opportunity to bring that cash home, 0:04:25.839 --> 0:04:29.320 and it's gonna owe that tax bill regardless of whether 0:04:29.400 --> 0:04:31.600 it brings the money back to the U S or not. 0:04:31.960 --> 0:04:34.880 So it's gonna have something like two hundred billion dollars 0:04:34.960 --> 0:04:38.799 remaining after it pays taxes um on that cash stockpile. 0:04:38.920 --> 0:04:41.200 And I think investors expect the company to spend it 0:04:41.240 --> 0:04:44.120 on things like stock buybacks, which is maybe not what 0:04:44.440 --> 0:04:47.520 Donald Trump and his crew had in mind when they 0:04:47.600 --> 0:04:51.799 passed these large tax code changes. But Apple has also 0:04:51.880 --> 0:04:54.520 said what that they will consider spending some of this 0:04:54.640 --> 0:04:58.159 to expand their real estate empire. They're gonna be adding 0:04:58.160 --> 0:05:01.400 maybe a new office. Uh of what could they be 0:05:01.480 --> 0:05:04.400 spending it on, at least domestically, right, so their Apple's 0:05:04.440 --> 0:05:09.719 announcement yesterday did include some disclosures about US investments and spending. 0:05:10.160 --> 0:05:11.760 I have to say, it's hard to know how much 0:05:11.800 --> 0:05:14.640 of that would have been done regardless of whether the 0:05:14.680 --> 0:05:18.840 tax code changed. So, yes, the company did announce that 0:05:18.839 --> 0:05:21.640 they're going to open a new location somewhere in the 0:05:21.720 --> 0:05:26.440 US specifics TBD that will house customer service kind of personnel, 0:05:26.480 --> 0:05:29.880 at least initially. Again, it's possible they may have done 0:05:29.880 --> 0:05:33.479 that anyway. They have a customer service location in near Austin, 0:05:33.520 --> 0:05:37.760 Texas already, And they made some disclosures about hiring twenty 0:05:38.160 --> 0:05:40.520 people in the US, although they already have eighty four 0:05:40.600 --> 0:05:43.279 thousand employees in the U S and it's likely that 0:05:43.640 --> 0:05:45.599 at the rate that they've been adding to that, the 0:05:45.640 --> 0:05:49.040 twenty people in five years is not a deviation from 0:05:49.080 --> 0:05:52.320 their current rate. So Spencer, come on in here, because 0:05:52.560 --> 0:05:55.360 Shia is talking about a ton of expansion here and 0:05:55.440 --> 0:05:59.520 hiring plans. Those hires have to go somewhere. And I'm wondering, 0:05:59.600 --> 0:06:01.840 you know, Amazon is getting all the attention, but are 0:06:01.839 --> 0:06:05.599 there other big tech companies that are also erecting new 0:06:05.640 --> 0:06:10.360 buildings and you know, hiring mass at workforces, and are 0:06:10.400 --> 0:06:15.120 these are these cities lobbying for for that activity as well? Well? 0:06:15.160 --> 0:06:17.560 I think that the Amazon is Q two just by 0:06:17.560 --> 0:06:19.560 the nature of its size, has kind of sucked all 0:06:19.600 --> 0:06:21.680 the oxygen out of the room. But yes, I mean 0:06:21.680 --> 0:06:25.960 cities are are always looking for any type of economic development, 0:06:25.960 --> 0:06:30.560 even even even uh small businesses maybe creating fifty or 0:06:30.560 --> 0:06:34.320 so jobs will get an audience and will get incentives 0:06:34.360 --> 0:06:37.560 depending on the market and the the attract The attraction 0:06:37.560 --> 0:06:39.760 of the tech jobs is this generally you know, clean 0:06:39.880 --> 0:06:44.520 office type setting um jobs that pay good wages. And 0:06:44.560 --> 0:06:49.119 that's always the uh, the problem or the detension around 0:06:49.200 --> 0:06:52.400 job creation tax credits is, Okay, we want job growth, 0:06:52.400 --> 0:06:54.880 but what kind of jobs are we investing in? And 0:06:54.920 --> 0:06:58.080 you know, good paying, high skilled tech jobs generally worth 0:06:58.080 --> 0:07:00.440 the investment in terms of that that ripple effect, people 0:07:00.440 --> 0:07:02.720 are enough to buy homes and and spend elsewhere in 0:07:02.720 --> 0:07:06.400 the economy. Sure, you heard the spencer, and we're talking 0:07:06.440 --> 0:07:09.640 about the advertising business that Amazon is looking for. Who 0:07:09.640 --> 0:07:14.000 gets hit by that? Facebook? Google? Probably not. I mean 0:07:14.040 --> 0:07:16.160 it's and I think Spencer did a good job in 0:07:16.240 --> 0:07:18.880 his story kind of talking about the potential losers there. 0:07:19.080 --> 0:07:22.720 It doesn't seem like the money that's being spent on 0:07:22.960 --> 0:07:25.680 advertisements on Amazon isn't necessarily money that would have been 0:07:25.720 --> 0:07:29.560 spent on Facebook, Um or Google anyway. But you know 0:07:29.640 --> 0:07:32.960 that's the kind of money that companies spend places like 0:07:33.160 --> 0:07:38.960 Walmart right to get better shelf placement at big box stores. Right, 0:07:38.960 --> 0:07:41.480 those are the kinds of budgets that are maybe instead 0:07:41.560 --> 0:07:44.040 shifting to Amazon, which is now getting the sort of 0:07:44.080 --> 0:07:47.800 equivalent of money to put tide at at on the 0:07:47.800 --> 0:07:52.840 shelves at eye level. I see. So that the button right, 0:07:52.920 --> 0:07:56.640 the tide buttons or what do they called, the Amazon 0:07:56.760 --> 0:08:00.880 sells you that, thank you, Spencer, that they're not doing 0:08:00.920 --> 0:08:05.000 their job. You've got to have advertising and addition, right Spencer. Yeah, 0:08:05.080 --> 0:08:08.000 and and what Sure just mentioned this. If you look 0:08:08.040 --> 0:08:13.480 at traditional marketing, especially big CpG brands, consumer package goods brands. 0:08:13.480 --> 0:08:15.600 These are the products that are lining the shelves of 0:08:15.600 --> 0:08:19.720 a supermarket. Uh. They've they've developed a program over years 0:08:19.760 --> 0:08:24.320 of a combination of TV commercials, radio commercials, display advertising 0:08:24.320 --> 0:08:28.080 in newspapers and magazines, coupons in your mailbox, and what 0:08:28.200 --> 0:08:30.440 Amazon brings is kind of a one stop solution for 0:08:30.480 --> 0:08:33.559 all of that UM and even even the in store placement. 0:08:33.600 --> 0:08:36.319 They call it like trade promotional, but basically they're paying 0:08:36.320 --> 0:08:38.720 for an end cap or they might even not necessarily 0:08:38.760 --> 0:08:41.440 be paying the retailer, but offering a discounted price that 0:08:41.480 --> 0:08:44.200 that retailer come promote to get an end cap placement 0:08:44.200 --> 0:08:47.920 in the store. UM that that's spending, all of that 0:08:47.960 --> 0:08:52.440 combined is like two billion dollars for consumer package for 0:08:52.440 --> 0:08:55.000 goods companies. So even if Amazon takes us takes the 0:08:55.040 --> 0:08:56.480 piece of that, there's a lot of room for a 0:08:56.559 --> 0:08:59.760 lot of ceiling there. Thanks very much, Spencer Soaper, Bloomberg 0:08:59.760 --> 0:09:02.240 News reporter, and our thanks also to share over Day, 0:09:02.360 --> 0:09:09.360 Bloomberg Gadfly columnist. We turn our attention now to the 0:09:09.360 --> 0:09:12.520 world of NAFTA and trade with Jacques Gordon he Is 0:09:12.600 --> 0:09:15.400 Kellogg School of Management, Real Estate professor and the global 0:09:15.440 --> 0:09:19.559 head of research and strategy for LaSalle Investment Management that 0:09:19.679 --> 0:09:22.400 helped to manage more than sixty billion dollars worth of 0:09:22.720 --> 0:09:25.320 real estate assets. Jacques, thank you very much for being 0:09:25.520 --> 0:09:28.360 with us. You know. President Donald Trump yesterday said that 0:09:28.520 --> 0:09:31.760 terminating the North American Free Trade Agreement would result in 0:09:32.000 --> 0:09:36.559 the quote best deal to fix the twenty four year 0:09:36.559 --> 0:09:40.760 old trade packed between Canada, Mexico and the United States. 0:09:41.320 --> 0:09:47.720 But lawmakers, industrial groups, agricultural proponents, they all say this 0:09:47.800 --> 0:09:51.280 is not a good idea. What do you glean from 0:09:51.280 --> 0:09:56.720 this back and forth? Well, it could be posturing. UM. 0:09:56.760 --> 0:10:02.320 Of course, the US President has um UH spoken on 0:10:02.400 --> 0:10:05.240 both sides of this issue at some point, saying that 0:10:05.280 --> 0:10:08.400 he was a little bit flexible about NAFTA last week 0:10:08.480 --> 0:10:12.080 and then this week. UH certainly heading into the sixth 0:10:12.160 --> 0:10:16.320 round of discussions UH scheduled up in Canada and Montreal 0:10:16.360 --> 0:10:19.000 and January twenty three. It could be it could be 0:10:19.080 --> 0:10:21.440 just being able to put a bit of fear of 0:10:21.440 --> 0:10:25.959 God into the other trade representatives from Mexico and Canada. 0:10:26.000 --> 0:10:30.080 Who knows, UM, But in the world of real estate, 0:10:30.200 --> 0:10:34.640 similar to other industries, we are watching, UH. The NAFTA 0:10:34.800 --> 0:10:39.200 negotiations with great interest. UM I think real estate is 0:10:39.240 --> 0:10:43.040 not UM in the direct line of path of the 0:10:43.520 --> 0:10:47.920 of the of the NAFTA negotiations. But but we're watching 0:10:48.000 --> 0:10:53.960 them carefully because of course the UM manufacturers, agriculture industries, 0:10:54.080 --> 0:10:57.440 financial services industries, well, those those folks are all tenants 0:10:57.440 --> 0:11:01.320 in our buildings, and so UM my firm and others 0:11:01.600 --> 0:11:05.719 have huge operations UM in in all three countries, and 0:11:05.800 --> 0:11:10.480 we'll be watching carefully for any UM any rollback that 0:11:10.640 --> 0:11:13.560 makes it harder for our tenants to do business. And 0:11:13.600 --> 0:11:17.320 that's that's really the focus that probably most real estate 0:11:17.360 --> 0:11:21.679 people are watching very careful. You have big firms like Brookfield, 0:11:21.880 --> 0:11:27.000 like LaSalle, um many firms who are are investing UH 0:11:27.000 --> 0:11:32.000 and and operating large portfolios of property across the borders 0:11:32.040 --> 0:11:35.320 of Canada, US and Mexico. So so we do care 0:11:35.320 --> 0:11:39.520 about this topic as well. Amazon, for example, released their 0:11:39.760 --> 0:11:45.360 shortlist can I put short in air quotes twenties cities 0:11:45.760 --> 0:11:49.640 for their potential headquartered to UH, and it basically is 0:11:49.640 --> 0:11:52.560 who's who of cities in North America. But it included Toronto, 0:11:52.600 --> 0:11:55.640 which I thought was very interesting and I'm just wondering, 0:11:55.679 --> 0:11:58.280 can you walk us through what the real estate effects 0:11:58.280 --> 0:12:01.800 would be on a city that one this golden ticket 0:12:01.880 --> 0:12:05.680 that Amazon is kind of hanging out there. Well, we said, 0:12:05.760 --> 0:12:10.640 the real estate world is is really watching this carefully because, UM, 0:12:11.280 --> 0:12:14.880 what's happening is is all of those um what was 0:12:14.920 --> 0:12:19.160 it two thirty cities UH not only said, uh, do 0:12:19.240 --> 0:12:22.720 we welcome Amazon, and we've got the workforce and we've 0:12:22.720 --> 0:12:25.920 got the tax abatements, but we have the locations, we 0:12:26.040 --> 0:12:29.920 have the buildings, we have the real estate development UH 0:12:29.960 --> 0:12:33.600 expertise to handle you. Now we're down to twenty and 0:12:33.760 --> 0:12:40.840 Toronto is very competitive on on all those fronts. And UM, 0:12:41.360 --> 0:12:44.400 just as a good example, Sidewalk Labs, which is part 0:12:44.440 --> 0:12:49.040 of Alphabet, part of that that enormous UH empire UM 0:12:49.080 --> 0:12:54.840 that UH is UM looking at doing more in cities, 0:12:55.200 --> 0:12:59.120 has chosen Toronto as a place where they will basically 0:12:59.160 --> 0:13:01.240 be working on de oping a city of the future. 0:13:01.440 --> 0:13:04.760 It wouldn't surprise me that that that whole effort and 0:13:04.920 --> 0:13:08.840 the Amazon bid that Toronto put forward was linked in 0:13:08.880 --> 0:13:11.800 some way. Uh. I think all these cities are trying 0:13:11.800 --> 0:13:14.720 to say, look, we're the place where knowledge industries are 0:13:14.840 --> 0:13:17.680 are going to be comfortable, and a firm like Amazon 0:13:17.760 --> 0:13:23.080 should consider Toronto very very seriously. I I it makes 0:13:23.120 --> 0:13:26.359 total sense to me that Toronto is on the list. Um. 0:13:26.440 --> 0:13:28.680 Of course they're gonna have a tough competition with the 0:13:28.760 --> 0:13:32.840 likes of Washington, d C. And Boston and Atlanta and Austin, 0:13:32.880 --> 0:13:35.640 who are all on the list as well. But um, 0:13:36.480 --> 0:13:41.720 luckily so I think. I think in terms of location, location, location, um, Vancouver, 0:13:42.400 --> 0:13:47.439 um uh, Toronto, um uh. These these cities compete right 0:13:47.480 --> 0:13:51.720 alongside American cities for jobs when things get expensive in 0:13:51.720 --> 0:13:56.000 incoding world in in San Francisco. Vancouver is a place 0:13:56.040 --> 0:13:58.760 that UM tech firms like to go as a way 0:13:58.800 --> 0:14:02.800 to diversify their operations. So there's a lot of just 0:14:03.200 --> 0:14:08.439 um integration of of the way that companies in technology 0:14:08.640 --> 0:14:11.120 as well as the ones I know Bloomberg's covering on 0:14:11.280 --> 0:14:15.440 industrial auto manufacturing, agriculture. Of course those supply chains are 0:14:15.440 --> 0:14:18.240 all integrated across three countries too, But there are a 0:14:18.320 --> 0:14:21.560 lot of other industries real estate being one, financial services 0:14:21.600 --> 0:14:25.880 being another, technology being another, that really operate pretty seamlessly 0:14:26.040 --> 0:14:30.200 across across all three borders. So um um, you know, 0:14:30.560 --> 0:14:34.240 it's it's very difficult to to read what uh Robert 0:14:34.520 --> 0:14:38.000 Leightheiser maybe thinking, and what what the White House may 0:14:38.000 --> 0:14:40.680 be thinking as they go into the Montreal talks. But 0:14:41.440 --> 0:14:45.240 we're all hoping that a complete rollback of NAFTA is 0:14:45.280 --> 0:14:49.120 just posturing and not really, not really, not really on 0:14:49.160 --> 0:14:51.880 the table. Jack Gordon, thank you so much for joining us. 0:14:51.840 --> 0:14:54.680 As Jacques Gordon is global head of Research and Strategy 0:14:54.760 --> 0:14:59.560 for LaSalle Investment Management, which oversees nearly sixty billion dollars 0:14:59.560 --> 0:15:02.480 in US. It's also professor of real estated Kellogg School 0:15:02.520 --> 0:15:09.920 of Management. Coming to us from Chicago, he says that 0:15:10.000 --> 0:15:14.160 the traditional approach to being a passive, intermediate maturity focused 0:15:14.200 --> 0:15:18.960 investors seeking income only is no longer suitable for municipal 0:15:19.040 --> 0:15:21.960 bond investors. Well, here to tell us why is Bob 0:15:22.080 --> 0:15:24.960 de Mella. He is the co head of Municipal Managers 0:15:24.960 --> 0:15:27.600 from McCay Shields, helping to manage more than twenty three 0:15:27.640 --> 0:15:31.160 billion dollars. He joins us in our eleven three oh studios. Bob, 0:15:31.200 --> 0:15:33.600 thank you very much for coming in. So why is 0:15:33.640 --> 0:15:38.120 that no longer a suitable perspective for investors? I think 0:15:38.120 --> 0:15:39.760 what has happened is, if you look at the shape 0:15:39.760 --> 0:15:42.240 of the municipal yield curve, your average investor in the 0:15:42.320 --> 0:15:46.200 high grade intermediate space no longer has a reasonable income 0:15:46.240 --> 0:15:48.560 stream anymore, and that's the primary goal for a bond 0:15:48.640 --> 0:15:51.280 or a bond strategy, right, but you also have a 0:15:51.360 --> 0:15:54.040 reasonable amount of duration risk in that space. And so 0:15:54.200 --> 0:15:57.840 we're advising clients to actually move away from either a 0:15:57.880 --> 0:16:00.360 little longer out the yield curve or a barbell st ategy, 0:16:00.400 --> 0:16:03.200 which is even better. That's going to make a big 0:16:03.240 --> 0:16:05.840 difference for them on an income stream and also potential 0:16:05.880 --> 0:16:08.960 total return. Especially give on our outlook with regards to 0:16:08.960 --> 0:16:10.600 the yield curve, What do you mean to mean? Because 0:16:10.640 --> 0:16:13.080 I'm looking, for example, at a tenure in New York State, 0:16:13.120 --> 0:16:18.040 you'll get about two correct, and so uh as an example, 0:16:18.080 --> 0:16:20.960 we have our our our flagship National fund, you can 0:16:20.960 --> 0:16:23.080 attain around a three and a quarter three and a 0:16:23.120 --> 0:16:26.840 half percent yield um if you're taking more of a 0:16:26.840 --> 0:16:29.400 barbell strategy, being a little more creative with regards to 0:16:29.440 --> 0:16:31.800 the yield curve. The problem with that bond that you 0:16:31.880 --> 0:16:34.480 just pointed out, right, it's it's a two percent yield, 0:16:34.760 --> 0:16:37.360 it's an eight year duration and so therefore it doesn't 0:16:37.360 --> 0:16:39.840 take much of a rise in rates and and then 0:16:39.920 --> 0:16:43.240 your net total return is negative and you're kind of 0:16:43.240 --> 0:16:45.520 playing catch up with that, and so we think income 0:16:45.600 --> 0:16:48.520 is really important, and so people should look at their 0:16:48.640 --> 0:16:51.680 overweight allocations that they have today with the high grade 0:16:51.720 --> 0:16:55.200 intermediate part of the municipal yield curve and and allocate 0:16:55.240 --> 0:16:58.160 away from that. Let's just seem out a little bit 0:16:58.440 --> 0:17:00.880 in just to take a look at the municipal bond 0:17:00.920 --> 0:17:04.359 category as an asset class. There was a three point 0:17:04.440 --> 0:17:09.119 one billion dollar in flow into municipal bond funds in 0:17:09.160 --> 0:17:12.480 the week end in January. This set an all time 0:17:12.560 --> 0:17:14.960 high record. This was from i c I, the Investment 0:17:15.280 --> 0:17:20.840 Company Institution for UH for investment managers, and I have 0:17:21.000 --> 0:17:24.200 to wonder, you know, this follows pretty steady flows, not 0:17:24.359 --> 0:17:27.040 this high. There's a lot of demand for this stuff 0:17:27.119 --> 0:17:29.240 right now that should be good for municipal bonds. Now. 0:17:30.119 --> 0:17:31.840 It is definitely good for bonds, and it's one of 0:17:31.840 --> 0:17:34.280 our main themes for two thousand eighteen. We believe the 0:17:34.320 --> 0:17:37.480 municipal marketplace. One of our insights at Mackay is that 0:17:37.560 --> 0:17:40.920 the ratios of one of the relative value ratios that's 0:17:40.920 --> 0:17:44.680 always used is muni triple a yields versus triple A treasuries. 0:17:45.320 --> 0:17:48.000 Historically on the long ends around eight percent. We believe 0:17:48.040 --> 0:17:50.760 you're going to test twenty year lows this year, in 0:17:50.800 --> 0:17:54.720 other words, that the yields on municipal bonds will fall 0:17:55.040 --> 0:17:58.359 much lower relative to treasuries than in the past has 0:17:58.400 --> 0:18:01.280 been sustainable. Correct, And a couple of different reasons for that. 0:18:01.320 --> 0:18:06.360 One is technicals, really strong demand, increasing demand, especially for 0:18:06.520 --> 0:18:09.560 high tax states like California, New York, New Jersey. In 0:18:09.640 --> 0:18:13.280 addition to a significant reduction in supply, tax reform has 0:18:13.320 --> 0:18:16.199 a big reduction in supply going into two thousand eighteen. 0:18:16.800 --> 0:18:19.600 So here's what I'm struggling with. Because we hear about 0:18:19.800 --> 0:18:23.320 the the infrastructure problems that a lot of states are having, 0:18:23.560 --> 0:18:26.040 not hearing a lot about how that's going to get financed. 0:18:26.080 --> 0:18:30.080 There's certainly some issues with high tax states. What's the 0:18:30.160 --> 0:18:34.480 revenue going to look like? Given potential exodus is on 0:18:34.520 --> 0:18:38.359 the heels of this tax plan? Um, how are you 0:18:38.400 --> 0:18:41.359 thinking about that? Does that concern you at all? Yeah? 0:18:41.359 --> 0:18:44.880 So you have to Yeah, absolutely, I mean you picked 0:18:44.920 --> 0:18:47.399 the you picked the problem. I'll give you you know. Yeah, No, 0:18:47.560 --> 0:18:51.520 there's there's absolutely, But the municipal marketplace is a very 0:18:51.560 --> 0:18:56.120 strong credit worthy marketplace and without issues, no but most 0:18:56.119 --> 0:18:59.040 states have done pension reform. The overall credit characteristics of 0:18:59.119 --> 0:19:02.560 the municipal marketplace is very positive. Infrastructure will definitely play 0:19:02.600 --> 0:19:04.440 out with it. As you know, Washington, d C. Is 0:19:04.440 --> 0:19:08.640 grappling with some kind of infrastructure solution. The infrastructure need 0:19:08.680 --> 0:19:11.800 in the in the United States will not be born 0:19:12.440 --> 0:19:14.919 municipal entities. As a matter of fact, you have seen it. 0:19:14.960 --> 0:19:17.520 They've pulled away from a lot of the projects. We've 0:19:17.600 --> 0:19:19.880 had an introduction of the P three structures to public 0:19:19.960 --> 0:19:23.840 private partnerships, which is part of the funding for um 0:19:25.040 --> 0:19:29.440 tapan Zee Bridge replacement, Gothel's Bridge and also LaGuardia terminal replacement. 0:19:29.760 --> 0:19:32.840 That brings private equity, private debt into the mix in 0:19:32.880 --> 0:19:36.680 addition to yes taxpayer municipal bonds. And so we actually 0:19:36.720 --> 0:19:39.240 think the supply of the municipal marketplace this year is 0:19:39.280 --> 0:19:42.440 going to shrink. The new issue volume is probably gonna drop. 0:19:43.600 --> 0:19:46.760 That's a big reduction, Bob. I'm just go back to 0:19:46.800 --> 0:19:50.359 this idea of having to change the way you view 0:19:50.560 --> 0:19:54.800 municipal bond investing because of the tax overhaul. If you 0:19:54.920 --> 0:19:58.040 hold whatever bonds you purchased and maturity and you're okay 0:19:58.080 --> 0:20:00.320 with the interest rate, that you're getting I assume that 0:20:00.440 --> 0:20:03.280 you should be smiling at the end of that particular term, correct. 0:20:03.800 --> 0:20:06.560 So I'm wondering about the alignment of interest because if 0:20:06.600 --> 0:20:11.359 you're a manager of municipal debt, your interest obviously is 0:20:11.400 --> 0:20:14.040 to make sure that you don't show any big capital losses. 0:20:14.320 --> 0:20:17.080 But if you're an actual investor, you don't really care 0:20:17.080 --> 0:20:19.760 in terms of the interim what happens to your capital. 0:20:19.800 --> 0:20:21.320 You just want to get paid and you know you're 0:20:21.320 --> 0:20:23.720 gonna get your money back at the end, So why 0:20:24.160 --> 0:20:26.520 go further out on the yield curve for that extra 0:20:26.560 --> 0:20:29.800 bit of yield? Um In in many cases it's not 0:20:29.880 --> 0:20:31.840 just a little extra bit of yield. And I'm not 0:20:31.880 --> 0:20:34.840 talking about increasing your interst rate risk again I throughout 0:20:34.840 --> 0:20:38.199 Barbell strategy. With a Barbel strategy, you're not increasing your 0:20:38.240 --> 0:20:42.440 duration risk, and you actually can actually something short term, 0:20:42.520 --> 0:20:44.719 you can match it with something short term exactly, and 0:20:44.760 --> 0:20:47.000 you can insulate yourself from the risk that what have 0:20:47.080 --> 0:20:49.840 happens if the shape of the municipal yield curve shifts. 0:20:49.880 --> 0:20:53.199 As an example, with tax reform, there's the potential for 0:20:53.920 --> 0:20:56.960 banks and property and casualty insurance company reducing their exposures 0:20:57.000 --> 0:20:59.480 in the municipal marketplace because their tax rates have come down. 0:21:00.040 --> 0:21:03.639 Banks and property casually insurance companies are own very large 0:21:03.680 --> 0:21:07.080 books of high grade intermediate municipal bonds. Now, I don't 0:21:07.080 --> 0:21:09.440 think they're gonna be net sellers per se, but they're 0:21:09.480 --> 0:21:11.960 certainly got not going to be marginal buyers in two 0:21:11.960 --> 0:21:14.320 thousand eighteen. So what's going to happen in that part 0:21:14.359 --> 0:21:17.040 of the yield curve versus the rest of the yield curve. 0:21:17.119 --> 0:21:20.920 So I'm an active municipal bond money manager. I can 0:21:20.960 --> 0:21:23.520 absolutely sit there in front of a client and say, listen, 0:21:24.000 --> 0:21:27.800 look and think actively in the municipal space. You're absolutely right, Pimp. 0:21:27.960 --> 0:21:30.880 Most clients don't think actively in the community book. They 0:21:30.880 --> 0:21:33.840 put it aside. It's low risk, low ball, and as 0:21:33.880 --> 0:21:36.960 long as it gives them a reasonable tax exempt income stream. 0:21:37.000 --> 0:21:39.040 Here at Mackay we're a little different. We say I'm 0:21:39.040 --> 0:21:41.640 gonna give you capital preservation. I'm also going to give 0:21:41.640 --> 0:21:44.480 you a slightly better than attractive income stream, but also 0:21:44.480 --> 0:21:46.879 I'm gonna look at the entire municipal marketplace from a 0:21:46.920 --> 0:21:49.960 total return lens. Because at the end of five or 0:21:50.000 --> 0:21:52.120 ten years, as you pointed out with your time horizon 0:21:52.560 --> 0:21:55.400 if I can be a little more opportunistic and make 0:21:55.440 --> 0:21:59.280 money for you in between. With some certain strategies you're after. 0:21:59.359 --> 0:22:03.960 Tax return is substantially better without a significant increase in risk. 0:22:04.600 --> 0:22:07.159 Real quick. To your clients, understand what you tell them 0:22:07.160 --> 0:22:09.600 when you explain this to them. Yeah, we have you 0:22:09.600 --> 0:22:11.720 know what, we have a great clientele base, not only 0:22:11.760 --> 0:22:14.040 in the in the pure retail space, but the ultrahan 0:22:14.119 --> 0:22:17.440 net worth family office client space. We are different, so 0:22:17.480 --> 0:22:20.960 I'm I'm a different participant, our team is different in 0:22:21.000 --> 0:22:24.000 the municipal marketplace. We absolutely look at it through a 0:22:24.040 --> 0:22:27.480 total return lens. There's opportunities out there as to how 0:22:27.560 --> 0:22:30.400 you you can make money UM, and there's other risks 0:22:30.440 --> 0:22:32.440 out there with it. Right. Our insights this year talk 0:22:32.480 --> 0:22:34.800 about it's a return and a risk profile in the 0:22:34.880 --> 0:22:37.119 current year. I think when you look at the different 0:22:37.119 --> 0:22:40.560 credit and yield curve UM issues with regards to not 0:22:40.600 --> 0:22:43.240 only tax reform, but everything else that's going on with 0:22:43.280 --> 0:22:46.280 regards to the federal Reserve. Yes, i am I will 0:22:46.440 --> 0:22:49.480 sound different than most money managers in the municipal space. 0:22:49.840 --> 0:22:51.720 Bob Damela, thank you so much for joining us. Bob 0:22:51.720 --> 0:22:58.159 Tamela as co head of the Mackay Municipal managers. Another 0:22:58.359 --> 0:23:01.240 story that we're keeping track of is Airbus, which seems 0:23:01.240 --> 0:23:04.159 to be getting a lifeline. I want to bring in 0:23:04.200 --> 0:23:08.680 George Ferguson's your aerospace defense airlines analyst for Bloomberg Intelligence 0:23:08.720 --> 0:23:12.400 who joins us. Now this seems like a pretty big deal. 0:23:12.440 --> 0:23:16.480