Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim
Speaker 1: Fox along with my co host Lisa A. Brahmowitz. Each
Speaker 1: day we bring you the most important, noteworthy and useful
Speaker 1: interviews for you and your money, whether you're at the
Speaker 1: grocery store or the trading floor. Find the Bloomberg P
Speaker 1: and L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well,
Speaker 1: wine has been the topic of a presidential tweet. It
Speaker 1: is also a topic of discussion among those who look
Speaker 1: for alternative investments. Tom Gearing is managing director and co
Speaker 1: founder of Cult Wines based in London, but he joins
Speaker 1: us here in our Bloomberg Interactor Broker Studios. Tom, thank
Speaker 1: you very much for being here. What is Cult Wines?
Speaker 1: What is your business? Psycholt Wines is a wine investment company,
Speaker 1: specifically so with different traditional merchant or a wine breaker
Speaker 1: on a wine auction house. All we all sets up
Speaker 1: completely to deal with private clients all over the world
Speaker 1: and to build up fine wine collections for the sole
Speaker 1: purpose of capital appreciations, so buying physical cases of wine,
Speaker 1: bottles of wine, storing those wines, ensuring them, managing them
Speaker 1: on behalf of the clients providing daily valuations for online
Speaker 1: platform and then reselling the wines and advising them throughout
Speaker 1: that life cycle for investment purposes. It is not to
Speaker 1: be drunk in the future. This is to be purchased
Speaker 1: and resold as a profit for our clients to benefit
Speaker 1: their over investment portfolio. Now I understand that you got
Speaker 1: involved in this in a big way before you could
Speaker 1: legally consume any wine. At the age of thirteen, you
Speaker 1: started a twelve bottle case of Domain Romani Romani CONTI right,
Speaker 1: this is a very worthwhile and prestigious wine. What did
Speaker 1: you discover about it? So? I was very fortunate when
Speaker 1: I was growing up. My father was actually an investment
Speaker 1: banking but it was a massive wine collective, very about wine,
Speaker 1: So I grew up around wine. I think the first
Speaker 1: time I even tasted wine was about eleven when I
Speaker 1: was taken to Burgundy with my father. UM. So he
Speaker 1: bought a lot of wine at auction. This is actually
Speaker 1: a really salient point in terms of what we do
Speaker 1: as a business. Um and he bought a case of
Speaker 1: the main Romny County Romani qunt original wooden casing. Now,
Speaker 1: if anyone knows a lot about wine, these particular bottles.
Speaker 1: They're producing very small quantity, but they come with almost
Speaker 1: like a serial number, So they have numbers on the front,
Speaker 1: which obviously detailed which bottle number it is. Um So
Speaker 1: if you're buying an original case of six bottles, if
Speaker 1: it had never been tampered with, never been open, it
Speaker 1: was the original six bottles, they should be the same
Speaker 1: consecutive numbers. So whatever they number, they are in a series,
Speaker 1: they should be consecutive. So one, two, three, four, five six.
Speaker 1: When we got the case home, I opened it up.
Speaker 1: We were inspecting the bottles, taking photos, condition checking the wines,
Speaker 1: and we found out that the bottom layer of the case,
Speaker 1: to the bottom six bottles, when we looked at it,
Speaker 1: the numbers were not consecutives. They were inconsequential. So what
Speaker 1: that means is at some point in time, someone had
Speaker 1: opened that case and replaced them. So immediately you think
Speaker 1: to yourself, are these wines Counterfeit is their potential some
Speaker 1: forgent activity going on, because there's no way that these
Speaker 1: wines shouldn't be in that order. And the reason I
Speaker 1: say that's a salient point for what we do now
Speaker 1: as a company is that we now manage over a
Speaker 1: hundred twenty million dollars of wine on behalf our clients
Speaker 1: and actually making sure that our clients are protected from
Speaker 1: any potential for forging activity counterfeit bottling is essential because
Speaker 1: if you're buying wine for the purpose of reselling to
Speaker 1: make a profit, you need to make sure that you're
Speaker 1: selling wines that are authentic. And this has been a
Speaker 1: big problem in the wine and she over the last
Speaker 1: ten to fifteen years. So that was obviously a very
Speaker 1: early experience in my in my career, and I wouldn't
Speaker 1: even say it was a career at that time. I
Speaker 1: was just thirteen years of age, but it really has
Speaker 1: stayed with me and it's something that we hold very
Speaker 1: dear to ourselves now being a professional wine investment company
Speaker 1: advising private clients all over the world. All right, now,
Speaker 1: I'm going to put you on the Twitter spot because
Speaker 1: earlier today President Donald Trump said, quote, France makes excellent wine,
Speaker 1: but so does the United States. The problem is that
Speaker 1: France makes it very hard for the US to sell
Speaker 1: its wines into France and charges big tariffs, whereas the
Speaker 1: US makes it easy for French wines and charges very
Speaker 1: small tariffs. Not fair. Must change is that accurate. Well,
Speaker 1: let's let's start the accuracy, because often there's not a
Speaker 1: lot of them with Donald Trump. So they actually are
Speaker 1: that French wine and US wines are excellent. So he's
Speaker 1: correct with that point. What he's inaccurate about is the
Speaker 1: fact that in France the domestic French mark, but the
Speaker 1: domestic market in France for consumption wine is almost entirely French.
Speaker 1: I mean, if you're Italian wine producer, Australian New Zealand,
Speaker 1: they sell very little wine in the domestic market. In fact,
Speaker 1: I travel extensively in France. When I'm in Bordeaux, trying
Speaker 1: to get someone in Bordeaux to drink of Burgundy is impossible.
Speaker 1: You know, if you go to Bordeaux, all the wine
Speaker 1: shops have a hundred percent Bordeaux. So in France it's
Speaker 1: difficult to people get to get people to drink outside
Speaker 1: their own region, let alone their own country. So the
Speaker 1: terrorists that he's talking about is absolute nonsense in my opinion.
Speaker 1: I mean having you know, if Californian wine had zero
Speaker 1: import taxes to ship to export into France, it would
Speaker 1: make zero difference to whether someone in France would buy
Speaker 1: and consume Californian lines. And also the other thing to
Speaker 1: imagine is, you know, you go to a lot of
Speaker 1: these rural agricultural areas of France and outside the more
Speaker 1: prestigious border Burgundy, but paces um, you know, in the
Speaker 1: land without province, whatever it might be, people can go
Speaker 1: to the local cooperative, the local cooperative and they can
Speaker 1: get a gallon of wine for like two euros. So
Speaker 1: those type of individuals are never going to suddenly start
Speaker 1: buying American wine just because there's no tariffs on it.
Speaker 1: So it's really an economies of scale. So for me,
Speaker 1: I would look at this tweet and say, it's put
Speaker 1: political posturing. You know, this is nothing more than obviously
Speaker 1: something that's come up between Trump and Macron, and he's
Speaker 1: using it as a way to you know, you know,
Speaker 1: negotiate or bargain with with the French president. But I
Speaker 1: think in the actual real economy of wine, it would
Speaker 1: make zero difference in my opinion. It also seems as
Speaker 1: though there are a lot of idiosyncrasies when it comes
Speaker 1: to the wine and alcohol trade because of course, in
Speaker 1: the United States you have state boundaries that limit what
Speaker 1: cannon cannot be sold and transported across state lines the
Speaker 1: when you gave the idea it all right in France,
Speaker 1: the domestic market is so domestic that it would be
Speaker 1: like an American saying I will not drink a wine
Speaker 1: that comes from the state of Oregon. I will only
Speaker 1: drink wine that comes from Nappa. Right. That's the kind
Speaker 1: of connection it is there, really is like that. Are
Speaker 1: there a preponderance of French wines when it comes to
Speaker 1: this cult wine business or is it's starting to expand
Speaker 1: to include American labels for example? Very very good question.
Speaker 1: If you're looking at the investment market for fine wine,
Speaker 1: you know, you're very You're talking about probably one percent
Speaker 1: of all wine produced would be categorized to say investment grade,
Speaker 1: and that markets worth about five billion dollars a year. Now,
Speaker 1: if you look at say our assets under management, our
Speaker 1: hundred twenty million dollars around it is in Bordeaux, about
Speaker 1: in Burgundy, so really France and then obvious you've got
Speaker 1: paces like Champagne, etcetera. So France is probably around of
Speaker 1: our total a u M. Outside of that we have
Speaker 1: US is our next biggest regional you know, breakdown within
Speaker 1: our portfolio Italian wines and then New World regions like Australia,
Speaker 1: New Zealand and and and even South America, but Californian
Speaker 1: wines in particular, some of the NAPPA producers have been
Speaker 1: excellent for investment purposes. You know, some of the top
Speaker 1: wines have made fantastic returns for clients over thinking of
Speaker 1: Screaming for example, absolutely, I mean Screaming. It was a
Speaker 1: very tough wine to to source and acquire. Obviously it's
Speaker 1: producing very small quanties. But you're right, you know, if
Speaker 1: you were on that waiting list and you get those
Speaker 1: wines allocated to you, you're almost guaranteed to make a
Speaker 1: profit if you resell those wines, because you're getting them
Speaker 1: as such a great price. There's such little quantity available
Speaker 1: that when you resell, you're almost guaranteed to make a
Speaker 1: good return. But if you're looking outside of that, you've
Speaker 1: got some up and coming producers. Obviously some more well
Speaker 1: known ones that opuswan Dominus that have done very well.
Speaker 1: So I think the Californian wine wine market from an
Speaker 1: investment perspective is is very strong and growing. Should I
Speaker 1: give you twenty seconds, Should I be concerned that I
Speaker 1: like screwed up bottles? Not? Not at all I mean,
Speaker 1: I think, I think in the next twenty years we
Speaker 1: might see a change in the industry. But it's just
Speaker 1: not enough scientific and back vintages of wines that are
Speaker 1: being produced in screwcaps and really show whether they all
Speaker 1: have any real differences to to to cool closures. Well done,
Speaker 1: Thanks very much for being with us. Tom Gearing, he
Speaker 1: is managing director co founder of Cult Wines. Cheers to
Speaker 1: you and many thanks for being here. A bucket of salt,
Speaker 1: A bucket of salt. Those are the words used by
Speaker 1: a witness to the EU negotiator Chief Brexit negotiator Michelle Barnyer.
Speaker 1: He was speaking to European ministers. One witness said that
Speaker 1: Barnyer said the parameters of a possible Brexit agreement are
Speaker 1: very largely defined, but the witness then said it was
Speaker 1: should all be taken with a bucket of salt. Well,
Speaker 1: maybe he's got his own bucket of salt. David Danny Blancheflower,
Speaker 1: Professor of Economics, Dartmouth College, Hanover, New Hampshire, can be
Speaker 1: followed on Twitter at d underscore blanch Flower joins us Now,
Speaker 1: Danny blanch Flower, how big is your bucket of salt? Well?
Speaker 1: A pinch of salt seems obviously seems an exaggeration. We're
Speaker 1: two years in when the UK government needs to get
Speaker 1: some kind of deal done, particularly before a European Council
Speaker 1: meeting of November twenty five. Um, and Brexit supposedly is
Speaker 1: going to happen March next year, certainly doesn't look like it.
Speaker 1: The bucket of salt suggests that, um, there's nowhere near
Speaker 1: to doing that. And you and I have talked about
Speaker 1: this several times. The Northern Ireland problem seems to be
Speaker 1: a large one. And I was in the UK last
Speaker 1: week and great fund was being made of a speech
Speaker 1: made by Dominick Rabb, the Brexit secretary, who appeared to
Speaker 1: have just realized that Britain was an island, which which
Speaker 1: which meant that trade deals and over the ports were
Speaker 1: really important. So I think we're a long way away
Speaker 1: from any kind of deal. May is in trouble, but
Speaker 1: it doesn't really look like within the party there are
Speaker 1: alternatives and outside the party. So this is buckets assault
Speaker 1: being rubbed in the wound. Um, and we're nowhere near
Speaker 1: a deal and maybe no deal at all is what
Speaker 1: will happen. Well done, Danny Blanche Flower. I like the
Speaker 1: connections there. I mean I think maybe Mr Rabs should
Speaker 1: probably Minister Rabs should probably read a little Wadsworth. Maybe
Speaker 1: that will help him understand the disposition of the United Kingdom. No, no, exactly,
Speaker 1: We're two years in and I mean literally it was
Speaker 1: all over the TV and the newspapers. He made a
Speaker 1: speech say he don'tly just really realize how important UM
Speaker 1: the port of Dover was and kind of having these
Speaker 1: deals done, and preparations are being made by the UK
Speaker 1: government for no deal, including stockpiling medicines and food, and
Speaker 1: there was even talk that the huge traffic jam which
Speaker 1: was likely to occur at Dover with lots of lorries,
Speaker 1: they would have to buy porter parties because a thirty
Speaker 1: mile jam would mean that, you know, some you have
Speaker 1: to deal with all eventuality. So this obviously looks disastrous.
Speaker 1: But what's interesting I was looking in the ft today
Speaker 1: it doesn't appear that UM polling has actually moved as
Speaker 1: far against the bricks that as you might think. It's
Speaker 1: still pretty close in the polls, and there's big talk
Speaker 1: about having a second referendum, and the reality is that
Speaker 1: the markets are sort of clear on this. The reality
Speaker 1: is it's not absolutely clear, Danny, Well, not to be
Speaker 1: two pros poetic about it. But you know King Richard
Speaker 1: the second Shakespeare Sceptred Aisle and all that. Are the
Speaker 1: British just going to model through or is there a
Speaker 1: real feeling and you were just there, Is there a
Speaker 1: real feeling that things are going to be very different
Speaker 1: a year from now? Well, I certainly think that, um,
Speaker 1: in some sense, people are as he rightly say that
Speaker 1: they're muddling through. But I talked to a number of people,
Speaker 1: including a variety of academics from Europe, who were very
Speaker 1: concerned that sort of racial attacks on them, the sense
Speaker 1: that foreigners shouldn't be there had risen, so that there
Speaker 1: was certainly a sense of that having conversations with people.
Speaker 1: But the Brits will eventually muddel through. But I think
Speaker 1: he is he was saying that in the past that's happened.
Speaker 1: They're just not clear where we are. But I think,
Speaker 1: honestly it's a lack of political alternatives. Um, No one's
Speaker 1: really told an alternative to trying to find some model
Speaker 1: through um outcome. I mean, I guess the classic would
Speaker 1: be whatever happens, declare victory, withdraw and pretty much go
Speaker 1: back to a to a situation pretty much like now,
Speaker 1: and and the basically the transition period will be a
Speaker 1: really long time and a new government that comes in
Speaker 1: can actually change all of that and go back to
Speaker 1: where we were. So I think buying time pushing you.
Speaker 1: And I've talked about the famous phrase kick the can
Speaker 1: down the road. Well, this is a giant canful assault
Speaker 1: and that's gonna kept pushed down the road. So I
Speaker 1: think I've think people are muddeling through, but there are
Speaker 1: great concerns that things have changed, and particularly that I
Speaker 1: mean in the UK that the views about foreigners of
Speaker 1: something that you know, are you Polish, that kind of
Speaker 1: stuff has changed a bit. All right, well, let's move
Speaker 1: from salted beef to pasta because I want to get
Speaker 1: your thoughts about what's going on in it's the International
Speaker 1: Monetary Fund coming out and warning that Italy's plan to
Speaker 1: increase spending carries quote substantial risks and would leave the
Speaker 1: country vulnerable to market turmoil. Well there's an understatement, right, well,
Speaker 1: and the European Commission has said this, but in a
Speaker 1: sense this is hardly surprising. You see the move to populism,
Speaker 1: you see the move of these political parties against against them. Um,
Speaker 1: mosterity that hang on, Danny. But I mean there's there's populism,
Speaker 1: and then there's just then inability to do simple math.
Speaker 1: No I agree with that, of course, the inability to
Speaker 1: do simple math. But that I mean, in some sense
Speaker 1: that's what's exactly been true in the Brexit conversation we've
Speaker 1: just had. Um, simple math is kind of what's got
Speaker 1: us here in the first place. I'm not suggesting I
Speaker 1: agree with it, but I think you're completely right. I
Speaker 1: think it's a surprise. Um. So now you have these
Speaker 1: parties like Five Star who got elected on we're going
Speaker 1: to help the workers and so on. So they're going
Speaker 1: to start to push for this, and obviously the I
Speaker 1: m F and the Youth Commission and others are going
Speaker 1: to push back. But in a sense, these groups have
Speaker 1: a point, which is that austerity has had a really
Speaker 1: large impact on people. And you might think that that
Speaker 1: explains a lot of the populism. But you're right, simple
Speaker 1: math and facts don't seem to be the order of
Speaker 1: the day around the world right now, and that's where
Speaker 1: we are, all right, So I'm going to untether you
Speaker 1: from simple math and facts give us your worst case
Speaker 1: scenario for what happens to Italy. Give you about half
Speaker 1: a minute. Well, I mean, obviously the talk talk about UM,
Speaker 1: not just Brexit, but I I text it is obviously
Speaker 1: going to be on the table and we're going to
Speaker 1: see a major confrontation. I mean, PYM, let's go back,
Speaker 1: these are double these Italy has double digit unemployment still
Speaker 1: UM and so there's going to be a battle, a
Speaker 1: battle between the Commission, the i m F and others
Speaker 1: to try and helpful and it's probably going to be
Speaker 1: a major battle in the worry would be that we
Speaker 1: won't just be talking about Brexit, will be talking down
Speaker 1: the road about Italy staying enough enough, not least because
Speaker 1: what is the EU done essentially for those at the
Speaker 1: bottom end in Italy. Same argument was made with them
Speaker 1: in France with the election. So I think it's going
Speaker 1: to be a mess. The ability to keep a government
Speaker 1: in place as a mess um and this is going
Speaker 1: to have a great more term all in the markets
Speaker 1: because people are hurting. It sounds like a messy recipe,
Speaker 1: Thank you very much. Danny blanch Flower, Professor of Economics,
Speaker 1: Dartmouth College, Hanover, New Hampshire, follow him on Twitter. As
Speaker 1: we all do a d underscore blanch flower. You're listening
Speaker 1: to Bloomberg Market. I'm pim fox all natural ingredients, getting
Speaker 1: rid of artificial colors, of flavors and preservatives, not for humans,
Speaker 1: but for dogs, cats and your other pets. Here to
Speaker 1: tell us more more about the change in the world
Speaker 1: of pet nutrition and pet health and all things having
Speaker 1: to do with pets is Ron Coglin. He is the
Speaker 1: chief executive of Petco and they are based in San Diego.
Speaker 1: He joins us here in our Bloomberg Interact or Broker's studios. Ron,
Speaker 1: thank you very much for being here. Appreciated. Give people
Speaker 1: just the overview first of all of the pet and
Speaker 1: the pet business and then we'll get into natural ingredients.
Speaker 1: Sounds good. Great to be here. So the pet business
Speaker 1: is a wonderful business. I've been the CEO at Petco
Speaker 1: now for five months and the thing that is most
Speaker 1: impressive is just the love that pet owners have for
Speaker 1: their pets. As a business, this it's a rapidly growing business,
Speaker 1: growing six percent across and food business is a billion
Speaker 1: dollar business, so it is a big business. I was
Speaker 1: going to say, the love that they have for their
Speaker 1: pets and the bottomless pocket of money that they spend.
Speaker 1: Some of that's of course going to be spent on food.
Speaker 1: And you've taken a particular position at pet Co. Tell
Speaker 1: us what you decided to do that's right. So one
Speaker 1: of the things that's clear is pet owners want to
Speaker 1: do the right thing for their pets, and that includes
Speaker 1: feeding them the right food and a pet go For
Speaker 1: fifty years, we've sought to do the right thing for
Speaker 1: pet parents and pet the pets that they love. So
Speaker 1: we decided to take a stand against artificial flavors, artificial colors,
Speaker 1: and artificial preservatives, and will we announcing that will be
Speaker 1: eliminating products that have those ingredients starting in two thousand
Speaker 1: and nineteen, things like ethanol, things like sulfur dioxide, things
Speaker 1: like high H. I can't even I can't even pronounce
Speaker 1: half these chemicals that UH ethanol, F D n C,
Speaker 1: yellow glycerol. We don't think that they belong in our pets.
Speaker 1: So we're eliminating them and we're the first company, major
Speaker 1: pet food company that will eliminate them. Okay, when you
Speaker 1: mentioned pet food company, that's got me thinking that there's
Speaker 1: a whole supply chain out there that either has to
Speaker 1: adapt or they're not going to get into the Pet
Speaker 1: Coast store. Tell us what the reaction has been and
Speaker 1: how that might change your mix of vendors. So there's
Speaker 1: really a continuum of three different types of pet food companies.
Speaker 1: Um one is those that are already all natural, and
Speaker 1: we sell a lot of products from companies like Merrick
Speaker 1: companies like Taste of the Wild as an example. Then
Speaker 1: there are others who said, great idea, we're going to
Speaker 1: reformulate or we're gonna launch natural versions of our line
Speaker 1: and we're gonna work really hard to make sure that
Speaker 1: that's successful. Then there are others that say, you know what,
Speaker 1: we're not going to make the changes with the artificial ingredients,
Speaker 1: and those uh, those companies won't be on our shelves
Speaker 1: anymore because we don't think they're doing the right thing
Speaker 1: for our customers. What about the brands that are attached
Speaker 1: to various types of pet food and we were talking
Speaker 1: just before you came on. You know, many people remember
Speaker 1: pet food as outpo, that was all there was. Are
Speaker 1: those brands catching up to this preservative artificial free food
Speaker 1: or are they sort of slow walking the change? Some
Speaker 1: of them are far behind like the ones that you mentioned.
Speaker 1: Others are making the change and will actually have their
Speaker 1: natural lines in our stores when we start in January,
Speaker 1: and then others are far ahead on already organic foods,
Speaker 1: on natural foods and lacking artificials. What about the price
Speaker 1: point of these kinds of foods, Are they higher? Yeah,
Speaker 1: that's a that's a misnomer that people think because you're
Speaker 1: going eliminating artific show that necessary things are much more expensive.
Speaker 1: We pride ourselves and having an array of price points,
Speaker 1: so we'll have foods without artificials, and the opening price points,
Speaker 1: will have a product like our wholehearted own brand that
Speaker 1: is uh that doesn't have those artificials in the mid
Speaker 1: price points, and then we'll have you know, wonderful high
Speaker 1: end products like the merricks in the Taste of the
Speaker 1: Wilds or candidates that I mentioned earlier. Now, of course,
Speaker 1: pet Co much more than just pet food. You've got operations, grooming,
Speaker 1: I've got training, You've got a variety of things. You
Speaker 1: also have partnerships with non pet Co outlets, for example
Speaker 1: in Canada, I believe we sell products through a third party.
Speaker 1: That's right. So the future of PETC, the new pet
Speaker 1: Co as you will, is about it being a nutrition
Speaker 1: powerhouse but also being a services powerhouse. Our groomers do
Speaker 1: a wonderful job. I visited over a hundred grooming salons
Speaker 1: in my first five months. And the passion that they
Speaker 1: have for the pets. Sometimes I wonder where they like
Speaker 1: the pets more than they like human beings. If you
Speaker 1: if you ever wonder, Actually it's obvious most of the time.
Speaker 1: If you have a new pet, you want to come
Speaker 1: to a pet go to get them trained, And increasingly,
Speaker 1: if you want vet services, you can come to a
Speaker 1: petc and that's something will be scaling out. So the
Speaker 1: whole idea is a nutrition powerhouse and his services powers
Speaker 1: and at the end of the day, we want to
Speaker 1: be the pet parents partner. I'm making sure we're taking
Speaker 1: great care of those pets. Did you have to learn
Speaker 1: a whole new vocabulary? I mean, because your previous role
Speaker 1: was at Hewlett Packard, UH and PepsiCo. Do you have
Speaker 1: to learn a whole new group of you know, vocabulary
Speaker 1: in order to talk about pets and their owners? The
Speaker 1: first step was opening up your heart. People have a
Speaker 1: lot more passion for the pets than they do have
Speaker 1: The PCs even though they loved our PCs UM, they
Speaker 1: have a lot more passion. But there is a lot
Speaker 1: of vocabulary. But at the end of the day, it's
Speaker 1: taking care of something that's precious to people, and we
Speaker 1: take that very seriously. And you're doing about four billion
Speaker 1: dollars worth the business a year right uh, your own
Speaker 1: by Capital Partners, CBC, CVC and the Canadian Pension Plan
Speaker 1: Investment Board. Is it easier in a way to work
Speaker 1: for privately held company? You know, I've been in public
Speaker 1: companies my whole career pretty much, and there's a wariness
Speaker 1: about PE and I will tell you that it has
Speaker 1: been wonderful the support you get, the contacts, the insight,
Speaker 1: but also you know, they give me a rope to
Speaker 1: it to run as well. So it's been a wonderful experience,
Speaker 1: and given what's going on with the markets, it's been
Speaker 1: nice not to be public. Thanks very much for being
Speaker 1: with us. Ron Coglin he is the chief executive of
Speaker 1: pet Co, sending out non preservative, artificial ingredient free food
Speaker 1: for your pets. And the topic now is deficits budget
Speaker 1: deficits when it comes to the federal government. Here to
Speaker 1: tell us more as IRA Jersey. He is chief US
Speaker 1: interest rate Strategists for Bloomberg Intelligence. Ira, you have dubbed
Speaker 1: this deficit Day. Yeah. So, so both myself and our
Speaker 1: colleagues at Bloomberg Economics focused on the deficit today and
Speaker 1: some reports we put out and and you know, we
Speaker 1: took two different angles. So, um, my colleagues and Bloomberg
Speaker 1: Economics think that maybe the government's own estimates of what
Speaker 1: the deficits going to be UH could be as wrong
Speaker 1: as a hundred and sixty billion dollars in UH the year.
Speaker 1: And I think that, you know, that's meaningful obviously for
Speaker 1: what I do, because that means that the Treasury Department
Speaker 1: might have to issue um, you know, and an extra
Speaker 1: call it fifteen billion dollars a month of debt that
Speaker 1: maybe we um. You know, some people don't have in
Speaker 1: their forecasts right now. Okay, if they don't have it
Speaker 1: in their forecast, do they have the money in their
Speaker 1: piggy bank in order to buy all that debt? Yeah? Well,
Speaker 1: that's one of the questions is at what point do
Speaker 1: people book and say, you know, deficits are too big.
Speaker 1: So normally it's you know, when you have growing deficits
Speaker 1: as long as the deficit is growing somewhere around the
Speaker 1: um the level of nominal GDP growth, it's not really
Speaker 1: that much of an issue because that means that the
Speaker 1: you know, the entire economy is growing. You can fund
Speaker 1: the deficits because you have higher income, you have part
Speaker 1: of that income is going to be saved, and and
Speaker 1: corporations even need um you know, the fun pensions and
Speaker 1: other things like that. So there's money coming in. But
Speaker 1: the thing is is that at this point, at least
Speaker 1: for the next several years, you're not likely to see
Speaker 1: that you're likely to see deficits growing faster than the
Speaker 1: level of nominal GDP growth. And that's where you can
Speaker 1: get challenge. And that's why you need foreign investors, for example,
Speaker 1: to at least make up a little bit of the
Speaker 1: shortfall from domestic investors. And you haven't seen that the
Speaker 1: last five years. Foreign investors have not been uh not
Speaker 1: been buying US debt on a net basis. So they're
Speaker 1: still very large holders, but they haven't been buying more
Speaker 1: debt than than they had say in two thousand nine
Speaker 1: ten Jersey, I want to get you in trouble right now.
Speaker 1: Is any of this linked to the tax cuts that
Speaker 1: have decreased revenue for the US treasury. Uh yeah, well
Speaker 1: not not not all of it. I can't say percent,
Speaker 1: but a large portion of this has to do with
Speaker 1: with lower spending than was anticipated, say three years ago,
Speaker 1: when we were UM making budget deficit forecast. UM. The
Speaker 1: the the unrealistic thing that the government has and this
Speaker 1: is what my Bloomberg Economics team did a did a
Speaker 1: very good job pointing out, is that the there's this
Speaker 1: expectation that you're going to have significantly higher revenue in
Speaker 1: two thousand two UM, but that's predicated on growth being faster.
Speaker 1: There's that's just a little bit unrealistic in their view,
Speaker 1: and that's one reason why a lot of these forecasts
Speaker 1: have missed over the past several years. And again by
Speaker 1: by not by by pretty large amounts, I mean, a
Speaker 1: hundred and sixty billion dollars in the grand scheme of
Speaker 1: things might not seem like a lot, you know, when
Speaker 1: when the government has to issue um, you know, a
Speaker 1: trillion dollars, but you know it's a ten or fift
Speaker 1: increase in the deficit above and beyond what we thought
Speaker 1: it was going to be, so that that's very meaningful. Now,
Speaker 1: Ira isn't there a push pull when it comes to
Speaker 1: investors because there are groups of investors that have to
Speaker 1: own what is described as the most risk less asset,
Speaker 1: which would be US Treasury. Yet on the other hand,
Speaker 1: they all have benchmarks, and in order to attract investors,
Speaker 1: will the Treasury have to let interest rates increase? Well,
Speaker 1: the Treasury Department um, you know, they have to fund
Speaker 1: the government, right and so so they don't have a
Speaker 1: choice about the issue. Their decision is where to issue
Speaker 1: and how much of each maturity to issue? So how
Speaker 1: many tea bills are there going to be short term
Speaker 1: versus long term? And what they've done is they've been
Speaker 1: trying to keep the portfolio the weighted average maturity of
Speaker 1: Treasury debt reasonably long. Our estimate is is that it
Speaker 1: will it will fall a little bit over the next
Speaker 1: four years, primarily because they're going to have to issue
Speaker 1: a little bit more in terms of T bills. That Now,
Speaker 1: the good thing about that is that and you know,
Speaker 1: we view our view is that the Fed is probably
Speaker 1: gonna hike interest rates another three or four times before
Speaker 1: they stop um and then the next move is likely
Speaker 1: to be for lower interest rates. So the fact that
Speaker 1: they're issuing more short term debt, means that interest costs
Speaker 1: in aggregate would be lower um than they would be
Speaker 1: if say, interest rate state stayed relatively high um for
Speaker 1: for the next three or four years. Um. Yeah, exactly so.
Speaker 1: But at the same time, you know a lot of
Speaker 1: people are you know, you look at money market flows,
Speaker 1: and money market flows are actually getting bigger now. And
Speaker 1: a big reason for that is the fact that there's
Speaker 1: interest rates that are well above zero. Right. It was
Speaker 1: hard to invest in a money market fund when you're
Speaker 1: making maybe three basis points in that money market fund.
Speaker 1: Now you're making you know, two ish percent plus or minus,
Speaker 1: depending on on what fund and how much risk you're taking.
Speaker 1: That's a bit more attractive to a lot of people.
Speaker 1: So you do see at least some inflows um. And
Speaker 1: and that's increasing demand for things like treasury bills, which
Speaker 1: obviously the government's issuing more of. I read Jersey, give
Speaker 1: you fifteen seconds. Does it make sense at a four
Speaker 1: week bill at two point two percent versus a one
Speaker 1: year at two point seven two percent? Does that make sense? Yeah? So,
Speaker 1: so that's all about the expectations of the feed. The
Speaker 1: reason why you know, you wind up having you know,
Speaker 1: basis points there in that nine months part of the
Speaker 1: curve is just it all has to do with expectations
Speaker 1: that the Fed is going to hike a couple of
Speaker 1: times in between those maturities. Got it, Thank you very much.
Speaker 1: As always, I read Jersey chief US interest rate strategist
Speaker 1: for Bloomberg Intelligence. I mean, you've got a little buying
Speaker 1: at the end of the curve. The thirty year yield
Speaker 1: of three point three six percent, the thirty year bond
Speaker 1: it is up ten thirty seconds. You're listening to Bloomberg Markets.
Speaker 1: Thanks for listening to the Bloomberg p m L podcast.
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