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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day

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Speaker 2: for insight from the best in markets, economics, and geopolitics

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Speaker 2: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business app.

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Speaker 3: Stocks hovering around those record at high levels. Paul Christopher

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Speaker 3: of olds Vargo writing this, based on our expectations for

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Speaker 3: accelerating earnings, we believe the next twelve to fifteen months

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Speaker 3: will favor US equities. Paul joins us. Now, Paul, let's

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Speaker 3: start there the idea that people don't like buying into

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Speaker 3: valuations like this, They don't like buying into consensus. They

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Speaker 3: don't like doing it in a vacuum that is just

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Speaker 3: because of government dysfunction. And yet it seems like that's

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Speaker 3: the only place to go. Can you explain how that

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Speaker 3: is somewhat of a difficult trade yet and obvious one

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Speaker 3: to many people, including yourself.

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Speaker 4: Yeah, I mean, surely it is uncomfortable for all the

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Speaker 4: reasons that you mentioned, But you know, you have to

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Speaker 4: sort of focus here on what i'd call the big rocks.

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Speaker 4: The big rocks are that artificial intelligence is a trend,

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Speaker 4: it has some momentum behind it, it's investable, and we

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Speaker 4: need to take advantage of it. Now, there's smart ways

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Speaker 4: to do that and not smart ways to do that,

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Speaker 4: and we're going to try to stick with the smart ways,

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Speaker 4: and I'm happy to talk about those.

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Speaker 3: Okay, so let's talk about them. The smart ways to

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Speaker 3: do it. Is it investing in the hyperscalers or is

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Speaker 3: it investing in energy companies that they are going to

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Speaker 3: have to fuel this over the longer term.

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Speaker 4: The answer is yes. But look, you've got hyperscalers in

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Speaker 4: comm services, communication services, and in information technology. All right,

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Speaker 4: So you've got two sectors there. Do you want to

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Speaker 4: buy them both or do you just want to buy

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Speaker 4: one right now by the one that looks the least overpriced.

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Speaker 4: And then let's sit there for a while. And then

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Speaker 4: at the same time, let's try to diversify that AI

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Speaker 4: exposure by going with what I would call adjunct trends

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Speaker 4: like the data centers. You know, you've got some of

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Speaker 4: these two and three ton computers right now around the

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Speaker 4: country sitting under tents, So they're going to have to

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Speaker 4: build places for those computers to live, and they're going

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Speaker 4: to have to build out the energy infrastructure not just

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Speaker 4: to power them, but to cool them. Going computers off

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Speaker 4: and have cooling below the floor. So utilities and industrials

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Speaker 4: look like two sectors US that are not as overpriced

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Speaker 4: as in fact even abtractively priced compared to information technology

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Speaker 4: and common services. And then a third way to diversify,

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Speaker 4: or let's call it a second way to diversify, is

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Speaker 4: to look for trends that aren't necessarily directly related to AI,

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Speaker 4: but that play another big rock in the economy. And

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Speaker 4: that's the fact that we think that the FED is

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Speaker 4: we believe is going to cut two more times this

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Speaker 4: year and another two more times next year. That's going

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Speaker 4: to take the short end of the yield curve lower.

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Speaker 4: And with long rates we think hovering near where they

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Speaker 4: are right now, that's a pretty good looking environment for banks.

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Speaker 4: Right They're going to pay short term deposit rates which

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Speaker 4: are going down, so their cost fall. At the same time,

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Speaker 4: longer rates stay high and that's what they're going to

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Speaker 4: earn on their lending. So we can play different trends

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Speaker 4: here in different ways that aren't as overpriced as the

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Speaker 4: overall market. Over the hypers you know, the individual hyper

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Speaker 4: six scalers, the mag seven. So I think that's the

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Speaker 4: way to go here. You want to try to be

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Speaker 4: as effective with your capital as possible. And look, there

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Speaker 4: are going to be pullbacks, so we're going to get

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Speaker 4: to earning season, They're going are going to be some

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Speaker 4: disappointments and those firms will be punished. Those could be

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Speaker 4: buying opportunities. We'll have to see what transpires.

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Speaker 5: Well, I'm glad you.

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Speaker 6: Brought up the energy demand that it's going to be

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Speaker 6: for this entire AI boom electricity demand. Do you think

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Speaker 6: that could end up slowing this momentum because it might

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Speaker 6: not keep pace with what these hyperscalers are trying to do.

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Speaker 5: Yeah, that's a good point.

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Speaker 4: I mean, look, there are always going to be constraints

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Speaker 4: when you're going through a growing trend, a growing pains

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Speaker 4: trend like this one. This is a very disruptive economic trend.

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Speaker 4: We saw the same thing. If you go back to

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Speaker 4: the nineties, right, there were shortages of things. If you

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Speaker 4: go back to the forties and the fifties and the sixties,

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Speaker 4: we were developing automobile, ship and air transport and there

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Speaker 4: were constraints there. We eventually broke through those constraints, and

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Speaker 4: for investors, those constraints really represent opportunities. Right, So as

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Speaker 4: long as you see electricity production and transmission being constrained,

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Speaker 4: that means there's opportunities and utilities, there's opportunities in midstream energy.

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Speaker 4: There's no opportunities in natural gas. For a long term investor,

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Speaker 4: those constraints have to be worked through, and we believe

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Speaker 4: they will.

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Speaker 6: Well, I want to know what you think of, basically,

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Speaker 6: what you're doing in absence of US economic data. Christian

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Speaker 6: Nolting from Deutsche Bank. Earlier the program was talking about

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Speaker 6: how actually it's been easier without having the US economic data.

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Speaker 6: What have you been relying on?

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Speaker 4: Yeah, it is easier in a sense you don't have

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Speaker 4: the reports coming out every day. But look, let's go

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Speaker 4: back to the idea of the big rocks. For a

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Speaker 4: long term investor, what matters right here, right now is

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Speaker 4: that the economy is still growing. I don't think anybody

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Speaker 4: doubts that, and that inflation is still moderate. I don't

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Speaker 4: think anybody doubts that really, And those that combination, along

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Speaker 4: with a labor market that's continuing to soften but is

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Speaker 4: not generating a lot of new unemployment, that also tells

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Speaker 4: us the FED is likely to cut, the economy is

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Speaker 4: likely to grow. We think earnings come up to three

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Speaker 4: hundred dollars per share next year on the S and

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Speaker 4: P five hundred. Those are the big rocks that investors

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Speaker 4: really need to know about. The government shutdown. That's noise,

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Speaker 4: it's distraction. Let's look through it.

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Speaker 5: Yeah, at this time.

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Speaker 3: At this point, though, you have to wonder whether the

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Speaker 3: strength that we're seeing in corporate earnings pairs with this

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Speaker 3: idea of a FED easing. We were talking earlier with

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Speaker 3: Kadi Kaminski about this simplex and she said it is

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Speaker 3: confusing to her that we're not seeing some sort of

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Speaker 3: sell off in long term bonds as a result of

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Speaker 3: the FED presumably cutting two more times this year in

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Speaker 3: the face of real strength in the US economy.

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Speaker 5: How do you manage that risk?

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Speaker 3: Considering that we really haven't seen much of anything in

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Speaker 3: the bond space in terms of volatility.

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Speaker 4: Well, that is one risk on the long end of

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Speaker 4: the yield curve, the maturity spectrum, and we would agree

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Speaker 4: that that's a risk. We would see other risks as well.

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Speaker 4: Potentially the tariff revenue will not generate as much as

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Speaker 4: many dollars as Congress thinks, and so you could end

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Speaker 4: up with wider deficits going forward. So there is risk,

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Speaker 4: we think on the long end of the maturity spectrum,

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Speaker 4: and that's why we've been underweight there for some time.

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Speaker 5: For some months.

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Speaker 4: We're also underweight on the short end, expecting the FED

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Speaker 4: to cut. So that really leaves us with a bullet

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Speaker 4: strategy where what we really like is that intermediate portion

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Speaker 4: of the maturity spectrum, the yield curve, those that three

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Speaker 4: to seven year range, investment grade, investment grade munis and corporates,

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Speaker 4: that's where we would target. Look, you're going to get

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Speaker 4: a yield in that three to seven year range that's

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Speaker 4: not far off of what it is in the ten

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Speaker 4: ten year but you're going to get a lot less

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Speaker 4: duration risk, a lot less risk from fluctuating long term yield.

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Speaker 4: So whatever the reasons are, yeah, well, we would agree

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Speaker 4: that we want to be underweight long term debt at

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Speaker 4: this point.

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Speaker 3: Are bonds still the diversifier that they have been traditionally?

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Speaker 4: Yes, over time they have been, And I mean we've

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Speaker 4: done the work behind this to show the whether it's

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Speaker 4: short term or long term. If in terms of the

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Speaker 4: number of years you look at, bonds are consistently the

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Speaker 4: best diversifier for equities, you.

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Speaker 5: Know, on a regular, on a regular and ongoing basis.

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Speaker 4: At the moment, there's lots of trends that are churning

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Speaker 4: around fixed income. So there's you know, some buying in

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Speaker 4: the in the fixed income space pushing yields down a

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Speaker 4: little bit. That's also tending to push more money into stocks,

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Speaker 4: but that that's just part of the normal give and

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Speaker 4: take between those two markets. We would want people to

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Speaker 4: hold both bonds and stocks because we don't want to

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Speaker 4: try to predict when one is going to peak and

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Speaker 4: the other one's going to troll.

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Speaker 2: Stay with us Mobile intex Savanna's coming up after this.

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Speaker 3: I want to rip up the script and go right

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Speaker 3: to our next guy, Rajadaksha of Markley's, to talk about

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Speaker 3: what we're seeing with respect to the international picture, how

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Speaker 3: much that's edifying what we're seeing in the gold trade.

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Speaker 3: But also how difficult it's been to really make some

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Speaker 3: sort of international call when you take a look like Argentina.

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Speaker 3: How much does that complicate the emerging market bet, I mean,

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Speaker 3: how much does that complicate understanding what the calculus is there?

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Speaker 7: It does, but it depends on the asset class you're

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Speaker 7: talking about, So on the bond side it does matter hugely.

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Speaker 7: But on the equity side, remembered Lisa, you're talking about

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Speaker 7: anamaquity asset class that is primarily dependent on what China does.

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Speaker 7: You know, not so much, not so much, but not

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Speaker 7: even at this point India. You know, Indian equities are

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Speaker 7: basically treaded water for a while, but the Chinese equity

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Speaker 7: market has been on a tear and that I think

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Speaker 7: is the is the wind beneath EM's wings for the

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Speaker 7: forciful future. So there's noise, yes, but this is not

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Speaker 7: going to upset the em equity rally.

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Speaker 3: This is fascinating because how much is China the wind

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Speaker 3: beneath the sales of gold? We've been talking all about

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Speaker 3: gold as being this debasement trade, but you're not seeing

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Speaker 3: it necessarily in treasure healds because you are seeing some

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Speaker 3: kind of demand at the auctions.

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Speaker 5: Is it really just central.

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Speaker 3: Bank buying led by China that's fueling in a narrative

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Speaker 3: that's taking on a life of its own.

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Speaker 7: It is partly central bank buying, and it started in

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Speaker 7: twenty twenty two and the West froze Russia's affects reserves.

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Speaker 7: We saw an immediate pickup, you know, almost double the

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Speaker 7: amount of buying in twenty twenty two from central banks

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Speaker 7: loyalty to twenty twenty one, and it has not let

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Speaker 7: up since. Central banks have bought over a thousand tons

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Speaker 7: of gold each year starting in twenty twenty two. They

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Speaker 7: used to be at barely three hundred to four hundred tons.

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Speaker 7: Part of it is also the lack of supply. Weirdly enough,

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Speaker 7: despite gold prices basically tripling in the last five to

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Speaker 7: six years, the amount of supply, you know, college geopolitical

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Speaker 7: issues calledge geological issues, but the amount of supply really

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Speaker 7: hasn't picked up anyone near as much as you expect.

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Speaker 7: And then that is the third thing what I think

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Speaker 7: you're referring to, which is just uneasiness about the global

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Speaker 7: financial and montre order.

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Speaker 6: When it comes to that uneasiness and the central bank buying,

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Speaker 6: what's the impact of that, because that means then they're

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Speaker 6: not buying as many US treasuries.

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Speaker 7: That is actually a very clear impact. So for a

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Speaker 7: first time, late last year, by our estimates, the amount

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Speaker 7: of effects reserves globally held moved to a majority, not

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Speaker 7: a majority, but more effects reserves were held in gold

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Speaker 7: and US treasuries, which is not something that has happened

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Speaker 7: for a long, long long time. Like you guys just said,

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Speaker 7: it is true that it's not shown up in a

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Speaker 7: lack of auction demand, for example, but if you look

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Speaker 7: at swap spreads and where they are right now, they

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Speaker 7: still seem to be screaming that on a relative basis,

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Speaker 7: you know, sovereign debt is still not as much in

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Speaker 7: favor as all in yield levels would suggest.

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Speaker 6: Do you call this the world de dollarizing?

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Speaker 7: No, I think the world it's not so much one

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Speaker 7: currency versus another, you know, because let's face it, that

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Speaker 7: is not an alternative to the dollar. That nib is

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Speaker 7: not an alternative. The euro has its own problems. The

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Speaker 7: yen used to be a safe haven but has struggled

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Speaker 7: in the last clear for the Swiss frank you know,

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Speaker 7: quite frankly is very expensive too small, so it's not

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Speaker 7: ded aularizing as in the world moving to other currencies.

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Speaker 7: But the world absolutely is worried about how much we

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Speaker 7: are awash, both in fiat currencies as well as in

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Speaker 7: the trillions of dollars of sovereign debt with the promise

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Speaker 7: of trillions more to come. That that is the uneasiness

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Speaker 7: that I think investors are turning to gold for.

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Speaker 3: You know, I wonder if we're just trying to create

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Speaker 3: daves around a liquidity picture that people don't fully understand.

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Speaker 3: And as the head of research at Barclay's, I'm sure

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Speaker 3: you track the liquidity pictures and the idea that you're

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Speaker 3: having the fiscal and the monetary engines kind of firing

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Speaker 3: at the same time. How much do all assets end

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Speaker 3: up trading in tandem? And I know I shouldn't make

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Speaker 3: too much about this, but the fact that stocks, pods

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Speaker 3: and gold also sold off yesterday sort of hinted at

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Speaker 3: this question around liquidity almost as much as some of

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Speaker 3: the narratives that were trying to put around them.

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Speaker 7: So I'm less switted about, Oh, you're talking about too

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Speaker 7: much liquidity in the system or.

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Speaker 3: And then being withdrawn and how much that ends up

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Speaker 3: really kind of creating the dynamic and markets well beyond

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Speaker 3: any question around geopolitics or loss in US exceptionalism, waket

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Speaker 3: in growth beyond.

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Speaker 7: So I think yesterday just to address that, you know,

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Speaker 7: small question first was not about the liquidity, partly because

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Speaker 7: like you said, gold was so overbought. That is I've

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Speaker 7: just never seen it. You know, something goes of fifty percent,

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Speaker 7: it's not you know, easy for it to take a

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Speaker 7: little bit of a breather. In equities, I would say

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Speaker 7: the same thing. Bonds. We are running, according to the

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Speaker 7: Atlanta FARED at a three point eight percent quarter on

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Speaker 7: quarter growth number annualized for the third quarter. That is

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Speaker 7: a nominal GDP print of over six percent. At some

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Speaker 7: point bonds are supposed to start to reflect that, and

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Speaker 7: I think that is what they were doing. But I

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Speaker 7: do think that the FED is laser focused on the

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Speaker 7: amount of bank reserves it starts to take out of

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Speaker 7: the system as it continues with QT. Now, the problem

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Speaker 7: that they have is the way that you know there

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Speaker 7: is a problem is when there is a problem, you know,

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Speaker 7: we're all guessing at what is the correct level of

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Speaker 7: bank reserves. But if I had to guess I think

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Speaker 7: they would err on the side of caution, meaning leave

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Speaker 7: too many reserves are then too few, And that again

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Speaker 7: is gold, bitcoin, silver positive.

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Speaker 3: So is it very difficult to be purish in anything

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Speaker 3: right now? Considering that that's the backdrop of liquidity.

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Speaker 7: It's hard to be verished given the economic outlook. You know,

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Speaker 7: we've turned you know, neither of you guys have asked

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Speaker 7: me a single question on tarts. And there's a reason

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Speaker 7: for that. You know, we've turned the page on what

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Speaker 7: used to matter. There's this massive aye boom, which even

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Speaker 7: if it ends up with you know, some problems along

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Speaker 7: the way. This amount of spending is there's names, Lisa

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Speaker 7: that I never knew, Colossus, Rainiers, Target, these are all

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Speaker 7: fantastical names, except that they are all gigantic data centers.

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Speaker 7: Each one of them have the size of Manhattan. And

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Speaker 7: that spending is not going to go away. And while

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Speaker 7: that is going on, I just see no reason for

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Speaker 7: a big pullback in most ACID classes.

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Speaker 2: Stay with US Moblin TEX Surviance coming up after this.

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Speaker 3: The partisans stalemate is dragging on in Washington, d C.

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Speaker 3: With President Trump threatening cuts to democratic programs. Some federal

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Speaker 3: workers are preparing for missed paychecks today as a shutdown

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Speaker 3: continues for a Arkansas Congressman Frenchhill joins us Now, Congressman,

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Speaker 3: thank you so much for being with us. Is there

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Speaker 3: any progress being made, Is there a good faith effort

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Speaker 3: to be getting in the room and talking about some

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Speaker 3: of the details.

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Speaker 5: Well, good morning, it's nice to be with you.

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Speaker 8: I think senators are certainly having conversations about what they'd

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Speaker 8: be willing to do in the appropriations process after the

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Speaker 8: government reopens.

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Speaker 5: This is the issue.

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Speaker 8: The House passed a clean, bipartisan a continuing resolution to

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Speaker 8: have all of government open, and just yesterday Chuck Schumer

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Speaker 8: put a sign up saying We're getting stronger every day.

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Speaker 5: Well, you know who's not getting stronger.

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Speaker 8: People depended on the flood insurance program who are concerned.

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Speaker 5: About storms or floods.

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Speaker 8: People who are working in the military who know next

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Speaker 8: week they get their last paycheck. People who are dependent

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Speaker 8: on grant programs from the federal government to keep state

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Speaker 8: child care programs open. That's who's not getting stronger every day.

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Speaker 8: So I would just simply say, all the Senator has

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Speaker 8: to do is pass the continuing resolution and keep the

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Speaker 8: appropriations process going. So the answer question is Yes, Senators

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Speaker 8: are having conversations about what they want to do in

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Speaker 8: fiscal twenty six spending, including on healthcare.

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Speaker 6: Cherman Hill, you just said the active service duty service members,

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Speaker 6: the military members will get their last paycheck next week.

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Speaker 6: Isn't your understanding they will get paid next week, because

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Speaker 6: I think there's still been a question mark about that.

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Speaker 8: Well, I think that's the last paycheck that I'm aware

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Speaker 8: of is the fifteenth, and.

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Speaker 5: Maybe that's maybe it's not.

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Speaker 8: But either way, this is why I decline my pay

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Speaker 8: during this whole period, as I have in previous shutdowns.

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Speaker 8: I don't think members of Congress, particularly the Senate, should

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Speaker 8: be paid while federal workers are furloughed, and some federal

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Speaker 8: workers may well lose their job when the simplest thing

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Speaker 8: to do, Anne Marie, is to get this government back open.

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Speaker 8: We were in the middle of discussing all of the

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Speaker 8: spending for fiscal twenty six. The Senate had passed three

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Speaker 8: bills across the Senate floor. We had passed four bills

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Speaker 8: across the House floor, and Susan Collins and Tom Cole

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Speaker 8: have that process underway, and Schumer, I think, for internal

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Speaker 8: democratic political purposes, chose to pick a fight with Trump

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Speaker 8: and try to make a name for himself once again.

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Speaker 8: So the Schumer shutdown starts.

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Speaker 5: In his office.

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Speaker 6: Meanwhile, we do see the executive branch continuing along on

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Speaker 6: a number of foreign policy issues, including Argentina. I'd love

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Speaker 6: to get your thoughts on this twenty billion dollar swap line.

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Speaker 6: If they are using the ESF, isn't that taxpayer dollars

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Speaker 6: going to Buenos Aires?

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Speaker 8: Over many many years, since the nineteen thirties, the US

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Speaker 8: Treasury has used the Exchange Stabilization Fund when they think

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Speaker 8: it's in American interest for geopolitical reasons, for global international

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Speaker 8: finance stability reasons by both political parties. Treasury Secretary of

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Speaker 8: Bessin's first trip as Treasury Secretary was to meet the

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Speaker 8: leadership at the Malay government in Buenos Aires. I visited

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Speaker 8: Argentina in August to assess the IMF program, assess their

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Speaker 8: progress for the first time of trying to return Argentina

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Speaker 8: back to a market economy that people can be benefited

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Speaker 8: from by low inflation, lifting kids out of poverty, created

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Speaker 8: a private sector, dropping currency controls. So I think the

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Speaker 8: Melee government is on the right track, and I think

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Speaker 8: Secretary Besset is trying to carefully and prudently see how

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Speaker 8: they can encourage that success. If they're successful, they will

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Speaker 8: rival the stories in Taiwan or Singapore or the Asian Tigers,

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Speaker 8: and they will reverse the curse of one hundred and

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Speaker 8: fifty years of mismanagement and finance in Buenos Aires.

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Speaker 6: But jare Hill I was with the traasch secretary when

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Speaker 6: he went to Argentina in April, his first international trip.

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Speaker 6: This is because of the midterm elections coming up, not

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Speaker 6: some geopolitical issue.

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Speaker 5: I disagree completely with you.

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Speaker 8: I understand that President Melee is having national elections in

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Speaker 8: Buenos Aires on October twenty six. That's true, and it's

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Speaker 8: important that he keep the momentum going because they need

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Speaker 8: legislative support for the reforms that they've made. But just

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Speaker 8: in the first few months of his leadership, he's made

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Speaker 8: substantial macroeconomic reforms that have improved the outcome and individual

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Speaker 8: citizens have been improved.

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Speaker 5: So it's more than that.

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Speaker 8: Argentina is an important strategic partner to the United States

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Speaker 8: in the Southern hemisphere, for national security purposes, for shipping purposes,

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Speaker 8: for global open navigation purposes. So it's a much bigger

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Speaker 8: issue than just the fact that they have domestic elections

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Speaker 8: coming up.

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Speaker 3: Congressman, the market is shrugging off all of what's going on,

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Speaker 3: whether it's geopolitically or whether it's the government shut down,

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Speaker 3: and they're actually looking more to measures that you put

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Speaker 3: forward in including some of the deregulation of banks, including

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Speaker 3: some of what we've seen with respect to easing some

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Speaker 3: of the ability for tie ups in the financial sector.

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Speaker 3: As someone who has been a part of the financial

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Speaker 3: sector in the small banking area as well as who's

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Speaker 3: been really a leader in this particular space, how much

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Speaker 3: more do you see this continuing? Are you encouraged by

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Speaker 3: what you're seeing? What kind of consolidation are you hoping for?

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Speaker 8: Well, it's not about consolidation. It's about right sizing the

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Speaker 8: role of government supervision and tailoring bank regulations. This began

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Speaker 8: under the first Trump administration when we passed a bipartisan

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Speaker 8: bill that was signed into law by President Trump back

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Speaker 8: in twenty eighteen, and in that effort, we wanted to

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Speaker 8: tailor regulation and supervision of our financial institutions based on

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Speaker 8: their complexity, not just simply based on size. And that's

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Speaker 8: been a theme that we've had for my first nine

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Speaker 8: months of leading the Financial Services Committees, we want tailoring

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Speaker 8: both in capital markets and in commercial banking, encourage banks

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Speaker 8: to be able to stay successful, have the capital they

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Speaker 8: need to lend to customers, whether they're building new homes

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Speaker 8: or starting new businesses. And that had gotten atropheed under

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Speaker 8: the leadership by the Joe Biden FED who was too

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Speaker 8: bureaucratic two paper intensive, and that's the focus that we've taken.

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Speaker 3: How much are you watching what's going on in financial markets?

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Speaker 3: The unprecedented run in things like bitcoin, the mergers and acquisitions,

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Speaker 3: the leverage buyouts that are starting to come back. Is

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Speaker 3: starting to worry that maybe things will begin to get

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Speaker 3: a little too far. Is that something that is in

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Speaker 3: your purview in any way?

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Speaker 8: Well, I do think there is a return of animal

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Speaker 8: spirits in the market. You see that in the equity

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Speaker 8: and bond market spreads. You certainly see it in the

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Speaker 8: number of initial public offerings that we've had, the largest

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Speaker 8: in probably about five years. And so there are elements

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Speaker 8: of that, and you've seen overturned to some merger and

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Speaker 8: acquisition activity in some industries. All that is true, It's

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Speaker 8: not something that I worry about instinctively. That it's happening,

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Speaker 8: but can it be overdone? Certainly, and that's the nature

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Speaker 8: of markets. We want a regulatory and supervisory system both

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Speaker 8: at the Securities and Exchange Commission and in the bank

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Speaker 8: supervisors that make sense, that's focused on material financial risk,

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Speaker 8: focused on information that investors need, Focus our CEOs and

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Speaker 8: boards of directors at banks on material safety and soundness issues, and.

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Speaker 5: Not be distracted by.

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Speaker 8: Tertiary topics like is making this loan going to have

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Speaker 8: an impact on climate risk?

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Speaker 2: Stay with US multile IMPEG Savannahs coming up.

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Speaker 3: Off to this, Sheila Coyelo of Jeffries joins US now

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Speaker 3: and Sheila as somebody who might or might not be

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Speaker 3: interested for personal reasons as well as otherwise. How much

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Speaker 3: are we seeing delays really trickle through the airline industry.

436
00:23:02,440 --> 00:23:05,600
Speaker 1: We're seeing some delays, but you know, some select airports

437
00:23:05,600 --> 00:23:08,959
Speaker 1: were closed yesterday for several hours, like Burbank. But in general,

438
00:23:09,080 --> 00:23:10,720
Speaker 1: the airlines are telling us this is not going to

439
00:23:10,720 --> 00:23:13,680
Speaker 1: impede travel demand and we're going to continue to see

440
00:23:13,720 --> 00:23:17,600
Speaker 1: momentum in the airlines. So it's unfortunate for the consumer,

441
00:23:17,840 --> 00:23:20,199
Speaker 1: not so much for the airlines and the workers who

442
00:23:20,200 --> 00:23:20,960
Speaker 1: aren't getting paid.

443
00:23:21,040 --> 00:23:24,200
Speaker 3: Essentially, people have to get places, regardless of how much

444
00:23:24,240 --> 00:23:26,000
Speaker 3: of a pain in the neck it is to get places,

445
00:23:26,359 --> 00:23:30,600
Speaker 3: So it's not necessarily going to affect revenues for now. Nonetheless,

446
00:23:30,960 --> 00:23:32,879
Speaker 3: does this kind of put a hitch in some of

447
00:23:32,920 --> 00:23:35,960
Speaker 3: the airline's plans, particularly I'm thinking United that's from trying

448
00:23:36,000 --> 00:23:38,960
Speaker 3: to really fight and counter some of the reputational risks

449
00:23:39,000 --> 00:23:40,119
Speaker 3: around the likes of Newark.

450
00:23:40,560 --> 00:23:42,600
Speaker 1: Delta reporting yesterday and they gave us a range for

451
00:23:42,680 --> 00:23:45,080
Speaker 1: Q four of up two to four percent, and I

452
00:23:45,080 --> 00:23:48,000
Speaker 1: think that range puts into account how long the shutdown lasts.

453
00:23:48,320 --> 00:23:50,480
Speaker 1: Last time it was only about a million dollars a day.

454
00:23:50,720 --> 00:23:52,159
Speaker 1: This time, I think it's going to be less than

455
00:23:52,160 --> 00:23:54,439
Speaker 1: that for the last nine days that they've seen. So

456
00:23:55,000 --> 00:23:57,600
Speaker 1: Newark is always a highlight and a poster child for

457
00:23:57,720 --> 00:24:01,159
Speaker 1: air traffic delays. So we'll see how United Southwest has

458
00:24:01,320 --> 00:24:04,520
Speaker 1: slightly more exposure to government employees as well. But for now,

459
00:24:04,840 --> 00:24:06,880
Speaker 1: we don't think it's going to stop travel demands. I'm

460
00:24:06,880 --> 00:24:09,000
Speaker 1: out all week next week traveling. I don't think I'm

461
00:24:09,040 --> 00:24:10,160
Speaker 1: canceling my plans, So.

462
00:24:10,119 --> 00:24:11,760
Speaker 6: You can give us a personal update on next So

463
00:24:11,880 --> 00:24:14,080
Speaker 6: if you're seeing delays, but we are seeing delays, and

464
00:24:14,080 --> 00:24:18,880
Speaker 6: we're seeing staffing shortages across air traffic control towers around

465
00:24:18,880 --> 00:24:21,439
Speaker 6: the United States, and we're ten days in. What happens

466
00:24:21,480 --> 00:24:24,200
Speaker 6: when we're twenty thirty potentially days into this shutdown.

467
00:24:24,400 --> 00:24:26,840
Speaker 1: Yeah, we'll see more and more delays, but unfortunately, you know,

468
00:24:26,880 --> 00:24:30,520
Speaker 1: we see one to two percent cancelations usually and about

469
00:24:30,600 --> 00:24:33,359
Speaker 1: twenty percent delays. So it'll just have people stay at

470
00:24:33,359 --> 00:24:35,520
Speaker 1: the airport a bit longer. But that's all we have

471
00:24:35,600 --> 00:24:36,000
Speaker 1: for now.

472
00:24:36,080 --> 00:24:38,440
Speaker 6: Do you think this is a pressure point for Washington, DC?

473
00:24:38,680 --> 00:24:41,879
Speaker 6: Because twenty nineteen, when we saw massive delays and big

474
00:24:41,920 --> 00:24:45,600
Speaker 6: airports like Orlando and New York that day President Trump

475
00:24:45,640 --> 00:24:49,000
Speaker 6: caved and then the government reopened. Could it come down

476
00:24:49,160 --> 00:24:52,000
Speaker 6: to just you know, airlines and delays.

477
00:24:53,040 --> 00:24:54,320
Speaker 1: I think it's a lot more than that. I mean,

478
00:24:54,359 --> 00:24:56,480
Speaker 1: if you look at the defense side of the business,

479
00:24:56,520 --> 00:24:59,600
Speaker 1: a Secretary hexcep is talking about awarding the six gen

480
00:25:00,119 --> 00:25:03,240
Speaker 1: Navy fighter. This is during a shutdown. So I think

481
00:25:03,280 --> 00:25:06,280
Speaker 1: the government's trying, the administration's try to move forward. But

482
00:25:06,680 --> 00:25:08,760
Speaker 1: we'll see what happens with the shutdown and how badly

483
00:25:08,800 --> 00:25:09,800
Speaker 1: consumers are affected.

484
00:25:09,840 --> 00:25:11,800
Speaker 3: One thing that we've seen consistently through all the earnings

485
00:25:11,840 --> 00:25:13,920
Speaker 3: reports has been and I'm just moving to what we

486
00:25:14,080 --> 00:25:17,679
Speaker 3: got from Delta yesterday, aside from the government shutdown, is

487
00:25:17,840 --> 00:25:19,280
Speaker 3: that the front of the cabin has been the real

488
00:25:19,320 --> 00:25:21,040
Speaker 3: money driver, in the back of the cabin has been

489
00:25:21,040 --> 00:25:23,040
Speaker 3: a laggard. And it sort of is a story, a

490
00:25:23,080 --> 00:25:25,280
Speaker 3: tale of two airlines, the ones that are able to

491
00:25:25,320 --> 00:25:27,959
Speaker 3: cater to the business class side of things, the ones

492
00:25:28,240 --> 00:25:30,960
Speaker 3: that are faring with the budget customers. Did we see

493
00:25:30,960 --> 00:25:34,680
Speaker 3: a shift in tone yesterday from ed bastion of Delta.

494
00:25:34,840 --> 00:25:36,800
Speaker 1: I think on a number of fronts, not only the

495
00:25:36,880 --> 00:25:41,560
Speaker 1: discrepancy between main cabin and premium, that pricing Delta gap

496
00:25:41,640 --> 00:25:44,480
Speaker 1: even wider. That was the first corporate was up eight

497
00:25:44,520 --> 00:25:47,240
Speaker 1: percent year over year. That was really solid. Cargo was

498
00:25:47,359 --> 00:25:50,880
Speaker 1: up sixteen percent or so year over year. Their MRO

499
00:25:51,040 --> 00:25:54,359
Speaker 1: business was up sixty percent. All these stats were pretty

500
00:25:54,359 --> 00:25:57,639
Speaker 1: positive economically if you ask me. Some of it is

501
00:25:57,680 --> 00:26:00,600
Speaker 1: market share gains on MRO and car Go, but still

502
00:26:00,640 --> 00:26:02,199
Speaker 1: those were pretty high percentages.

503
00:26:02,359 --> 00:26:03,840
Speaker 3: That's where I wanted to go. Is this a read

504
00:26:03,880 --> 00:26:06,119
Speaker 3: through to the entire industry or is what we're seeing

505
00:26:06,119 --> 00:26:08,879
Speaker 3: a consolidation of market share and the likes of Delta

506
00:26:09,000 --> 00:26:11,359
Speaker 3: United and American at the behest of some of the

507
00:26:11,359 --> 00:26:12,200
Speaker 3: budget carriers.

508
00:26:12,320 --> 00:26:15,560
Speaker 1: I think both fronts, you're seeing United and Delta really outperform.

509
00:26:15,760 --> 00:26:19,200
Speaker 1: They've picked the right strategy. We saw United add more

510
00:26:19,320 --> 00:26:22,920
Speaker 1: routes to Europe yesterday. Europe would be the one area

511
00:26:22,960 --> 00:26:25,040
Speaker 1: in Delta's report I would call out that was negative.

512
00:26:25,480 --> 00:26:28,639
Speaker 1: The read through on pricing in Atlantic revenues were down

513
00:26:29,200 --> 00:26:31,400
Speaker 1: in Q three. That means there was either too much

514
00:26:31,400 --> 00:26:35,720
Speaker 1: capacity or there was tariff impacted bookings. So people that

515
00:26:35,760 --> 00:26:38,320
Speaker 1: were going to book summer travel in March decided not

516
00:26:38,400 --> 00:26:40,840
Speaker 1: to travel into the US, So that would be the

517
00:26:40,840 --> 00:26:43,199
Speaker 1: one data point I would call it as week. But

518
00:26:43,359 --> 00:26:45,919
Speaker 1: going back to the airlines, it's the story of United

519
00:26:45,920 --> 00:26:49,080
Speaker 1: and Delta winning the strategies of Southwest and American and

520
00:26:49,160 --> 00:26:52,919
Speaker 1: Jeff Blue needing to refocus their areas.

521
00:26:52,960 --> 00:26:56,320
Speaker 3: Did you see any evidence the rest of the cabin

522
00:26:56,520 --> 00:26:59,879
Speaker 3: the people who are sandwiched into economy are coming back

523
00:27:00,080 --> 00:27:02,560
Speaker 3: that the recovery that you're seeing in demand is also

524
00:27:02,600 --> 00:27:05,840
Speaker 3: coming from people at the middle income the lower income

525
00:27:05,920 --> 00:27:09,679
Speaker 3: spheres of the population, rather than trust the people at

526
00:27:09,680 --> 00:27:10,040
Speaker 3: the front.

527
00:27:10,480 --> 00:27:12,439
Speaker 1: You saw that a bit in the first half. We

528
00:27:12,480 --> 00:27:15,679
Speaker 1: saw pricing for airfares down in Q three Delta's report

529
00:27:15,760 --> 00:27:18,399
Speaker 1: was a turn positive and they're forecasting an improvement in

530
00:27:18,440 --> 00:27:21,399
Speaker 1: Q four. So we really needed to see that positive

531
00:27:21,520 --> 00:27:24,119
Speaker 1: inflection in the main cabin in Q three and we

532
00:27:24,160 --> 00:27:25,960
Speaker 1: got that, and we're going to see more momentum into

533
00:27:26,040 --> 00:27:29,159
Speaker 1: Q four. Some of it is because airlines are cutting capacity,

534
00:27:29,400 --> 00:27:31,560
Speaker 1: so you're having less routes, and some of it is

535
00:27:31,600 --> 00:27:35,040
Speaker 1: because the consumer feels more confident, and that was evident

536
00:27:35,160 --> 00:27:37,560
Speaker 1: in their close in bookings they saw more and more

537
00:27:37,600 --> 00:27:38,240
Speaker 1: cash sales.

538
00:27:38,440 --> 00:27:40,840
Speaker 6: We're expecting from American and Jet blow based on what

539
00:27:40,880 --> 00:27:42,919
Speaker 6: we've learned from Delta.

540
00:27:43,240 --> 00:27:45,640
Speaker 1: I think the Atlantic data point for American is one

541
00:27:45,640 --> 00:27:48,680
Speaker 1: that we highlighted as potentially being weak. They're the third

542
00:27:48,720 --> 00:27:51,080
Speaker 1: carrier in the Atlantic. If you have too much capacity

543
00:27:51,400 --> 00:27:53,760
Speaker 1: not enough demand for multiple reasons, I think you'll see

544
00:27:53,760 --> 00:27:57,520
Speaker 1: a weak report there. We're more bullish into United, but

545
00:27:57,560 --> 00:28:00,679
Speaker 1: I think Delta put up a very clean and without

546
00:28:00,680 --> 00:28:04,679
Speaker 1: any news, you know, any other items to muddy the waters.

547
00:28:04,680 --> 00:28:07,000
Speaker 6: What about the budget carriers, given the fact that Delta

548
00:28:07,640 --> 00:28:10,520
Speaker 6: is saying, to Lisa's point, it's the entire airline, do

549
00:28:10,560 --> 00:28:12,720
Speaker 6: you think the budget carriers are going to do well

550
00:28:13,000 --> 00:28:16,800
Speaker 6: or those customers going straight to the big dogs.

551
00:28:17,800 --> 00:28:20,320
Speaker 1: You know, we lean into the network carriers. I think

552
00:28:20,440 --> 00:28:23,800
Speaker 1: Southwest adding routes into cities like Las Vegas isn't going

553
00:28:23,800 --> 00:28:27,040
Speaker 1: to necessarily help their pricing momentum. But United opening up

554
00:28:27,040 --> 00:28:29,600
Speaker 1: a route to Bury or Bilboa in Spain or Italy,

555
00:28:29,680 --> 00:28:33,000
Speaker 1: I think that, you know, that ignites demand that wasn't

556
00:28:33,040 --> 00:28:35,680
Speaker 1: necessarily there. That's a route that nobody buys directly from

557
00:28:35,680 --> 00:28:38,800
Speaker 1: the US, and it could, you know, instigate demand. Last

558
00:28:38,880 --> 00:28:40,760
Speaker 1: year they did Greenland, so this year they stuck a

559
00:28:40,800 --> 00:28:42,800
Speaker 1: little bit more conservative with their routes.

560
00:28:44,160 --> 00:28:47,720
Speaker 2: This is the Bloomberg Sevendics podcast, bringing you the best

561
00:28:47,720 --> 00:28:51,040
Speaker 2: in markets, economics, antient politics. You can watch the show

562
00:28:51,120 --> 00:28:54,040
Speaker 2: live on Bloomberg TV weekday mornings from six am to

563
00:28:54,160 --> 00:28:57,960
Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify,

564
00:28:58,080 --> 00:29:00,280
Speaker 2: or anywhere else you listen, and as all is on

565
00:29:00,280 --> 00:29:02,720
Speaker 2: the Bloomberg Terminal and the Bloomberg Business out

566
00:29:06,920 --> 00:29:07,400
Speaker 3: Mm hmm