WEBVTT - Bloomberg Wall Street Week: Koch, Minaya, Summers 0:00:00.240 --> 0:00:04.160 This is Bloomberg Wall Street Week. Market shrug off higher 0:00:04.160 --> 0:00:07.080 consumer prizes. The economy is in the process of rebounding. 0:00:07.120 --> 0:00:09.440 Will the flutter reserve of its own digital currency? The 0:00:09.440 --> 0:00:12.440 financial stories that cheap our work. Many people think the 0:00:12.480 --> 0:00:14.320 eels are just going to keep marching up. We have 0:00:14.440 --> 0:00:16.640 more spending coming out of Congress. One of the big 0:00:16.760 --> 0:00:19.600 questions I think on investor's minds inflations through the eyes 0:00:19.640 --> 0:00:22.720 of the most influential voices. Larry Summer is the former 0:00:22.760 --> 0:00:26.160 Treasury Secretary Bryan Wynahan back of America, Will Smart CEO 0:00:26.360 --> 0:00:30.479 Charlie Sharp Bloomberg Wall Street Week with David Weston from 0:00:30.600 --> 0:00:35.440 Bloomberg Radio. The administration keeps its economic agenda alive, the 0:00:35.479 --> 0:00:39.640 inflation debate continues, and earnings Will they just keep shugging along? 0:00:40.200 --> 0:00:56.600 This is Bloomberg Wall Street Week. I'm David Weston. We 0:00:56.760 --> 0:01:00.800 had another week consumed negotiations back and four over President 0:01:00.800 --> 0:01:05.040 Biden's economic agenda, all within the Democratic Party, with President 0:01:05.080 --> 0:01:07.920 Biden announcing a framework just as he got out of 0:01:07.959 --> 0:01:10.520 town for his trip to Europe for the G twenty 0:01:10.720 --> 0:01:16.200 and the copy summits. These plans are fiscally responsible, They're 0:01:16.200 --> 0:01:20.200 fully paid for, they don't add a single penny to 0:01:20.240 --> 0:01:24.480 the deficit, and whatever ultimately gets passed into law for 0:01:24.600 --> 0:01:28.360 infrastructure and build back better. This week continued the debate 0:01:28.440 --> 0:01:32.279 over inflation, with two of those who should know best 0:01:32.560 --> 0:01:36.759 directly taking one another on when Treasury Secretary Janet yell 0:01:36.840 --> 0:01:39.840 And disagreed on CNN with what Larry Summers had said 0:01:39.959 --> 0:01:43.440 right here on Wall Street week about the problem of inflation. 0:01:44.040 --> 0:01:48.280 We are going through a period of inflation that's higher 0:01:48.320 --> 0:01:52.920 than Americans have seen in a long time, and it's 0:01:52.960 --> 0:01:57.360 something that's obviously a concern and worrying them. But we 0:01:57.400 --> 0:02:01.600 haven't lost control. And Larry came right back at Janet 0:02:01.640 --> 0:02:05.200 yelling on Twitter, saying until the Fed and Treasury fully 0:02:05.240 --> 0:02:09.200 recognize the inflation reality, they are unlikely to deal with 0:02:09.240 --> 0:02:12.720 it successfully. But for all the talk of more fiscal 0:02:12.760 --> 0:02:15.520 stimulus and inflation, the week on global All Street was 0:02:15.639 --> 0:02:19.040 really given over to earnings, particularly those from big tech. 0:02:19.120 --> 0:02:23.520 Here's Apple's Tim Cook. We are optimistic about the future, 0:02:23.919 --> 0:02:27.440 especially as we see strong demand for our new products, 0:02:28.120 --> 0:02:31.600 and also from the auto companies. Here's GM's Mary Bara. 0:02:32.720 --> 0:02:34.959 We're selling every vehicle we can make, and I think 0:02:35.000 --> 0:02:38.640 that along with UH, you know the overall environment is 0:02:38.760 --> 0:02:41.040 what allowed us to have a beat for the quarter, 0:02:41.480 --> 0:02:43.600 and when it came to Equiti as those earnings were 0:02:43.720 --> 0:02:46.160 enough to pull out a win, with the SMP five 0:02:46.680 --> 0:02:49.600 up six point nine from the month, making this October 0:02:49.840 --> 0:02:52.560 the best for the index in six years, while the 0:02:52.639 --> 0:02:55.120 Nasdaq was up two point four for the week and 0:02:55.160 --> 0:02:58.000 the bond yield curve flattened somewhat with the short end 0:02:58.040 --> 0:03:00.880 moving up and the ten year yield come down under 0:03:00.880 --> 0:03:03.280 one point six this week. To take us through what 0:03:03.320 --> 0:03:05.680 the markets had to teach us this week, welcome now 0:03:05.760 --> 0:03:09.560 Katie Cotch Goldman Sex Co had of Fundamental Equity Funds 0:03:09.760 --> 0:03:13.680 and Kate L. Hillo. She's Russell Investments Chief investment Officer. Kate, 0:03:13.840 --> 0:03:16.440 welcome to wall Stree Week. Congratulations on your promotion. By 0:03:16.480 --> 0:03:18.119 the way, give us a sense of what you saw 0:03:18.120 --> 0:03:19.960 on the market this week. As I say, the equities 0:03:20.000 --> 0:03:21.639 did really, really well despite the fact they had a 0:03:21.639 --> 0:03:24.320 little headwind from a couple of big tech companies. Yeah, David, 0:03:24.320 --> 0:03:27.120 thanks so much for having me and you. Earning season 0:03:27.200 --> 0:03:30.160 about fifty percent of the way through and it has 0:03:30.200 --> 0:03:32.400 been it's been good, I mean not great like we 0:03:32.440 --> 0:03:37.200 saw in Q one. And Q two but of the 0:03:37.200 --> 0:03:40.080 company's beating so it's still above you know, kind of 0:03:40.080 --> 0:03:43.160 the average. But I'd say the one big cave yet 0:03:43.440 --> 0:03:47.640 we would flag is around your company guidance and you know, 0:03:47.680 --> 0:03:49.480 a lot of that has been focused around a lot 0:03:49.480 --> 0:03:54.120 of supply team issues and other impacts that pricing power. 0:03:54.160 --> 0:03:57.040 Initially for the companies that can do it, should be 0:03:57.080 --> 0:04:00.240 able to work through um. But that is something to 0:04:00.360 --> 0:04:03.760 continue to look out for as we go into queue four. Uh. 0:04:04.000 --> 0:04:07.880 I think for companies that did miss, they have gotten 0:04:07.960 --> 0:04:11.000 hit reasonably hard. And so what we've seen the market 0:04:11.000 --> 0:04:15.120 react overall well to earnings on average four percent down 0:04:15.840 --> 0:04:19.719 for companies that you aren't meeting expectations, and so from 0:04:19.720 --> 0:04:22.560 our point of view, you have healthy spread between winners 0:04:22.560 --> 0:04:26.640 and losers. Is a really good opportunity for active management 0:04:27.000 --> 0:04:29.760 and really started to dig into some of the differentiation 0:04:29.800 --> 0:04:33.279 that we expect to see going forward. Is Okay, let's 0:04:33.279 --> 0:04:35.120 talk about a tech for a second, because we had 0:04:35.160 --> 0:04:37.200 so many big tech earnings out this week, a lot 0:04:37.240 --> 0:04:39.520 of them positive, but then we had the Amazon and Apple, 0:04:39.560 --> 0:04:41.680 which really a hiccup, one of which was really supply 0:04:41.760 --> 0:04:43.599 chain in the case of Apple. The other was really 0:04:43.640 --> 0:04:46.120 more labor In the case of Amazon, did it tell 0:04:46.200 --> 0:04:49.360 us anything in the longer term big tech driving this market, 0:04:49.360 --> 0:04:51.880 which is done for so long. You know, they did 0:04:51.920 --> 0:04:54.760 disappoint but I just put take Apple for a second. 0:04:54.839 --> 0:04:57.920 People are disappointed, but they should remember iPhone stales were 0:04:57.920 --> 0:05:00.320 still up forty six percent year over year, so there's 0:05:00.320 --> 0:05:02.800 still is good growth there. But expectations, of course, we're 0:05:02.839 --> 0:05:05.920 for fifty. I think what you've seen there is very 0:05:05.960 --> 0:05:07.600 specific to what you just said, and maybe we can 0:05:07.680 --> 0:05:10.200 unpack it later, which is supply chain issues and also 0:05:10.279 --> 0:05:12.760 labor UM and we don't think that that's going to 0:05:12.839 --> 0:05:14.599 that We think that's an issue that they can actually 0:05:14.600 --> 0:05:17.640 get over. UM. Other interesting trends that were focused on 0:05:17.720 --> 0:05:20.640 in tech earnings generally would be UM. I could maybe 0:05:20.880 --> 0:05:23.640 touch on payments as an example, and what's happening in 0:05:23.640 --> 0:05:26.279 the finance space. I'm really interested in the third quarter 0:05:26.800 --> 0:05:28.640 UM of this year as being kind of the first 0:05:28.680 --> 0:05:31.840 quarter that we've seen the potential for how much disruption 0:05:32.120 --> 0:05:35.120 we think is coming at the financial sector. Just for context, 0:05:35.440 --> 0:05:39.360 UM there's sixteen trillion dollars of market capitalization and financials 0:05:39.800 --> 0:05:42.719 UH compared to for example, fourteen trillion dollars of market 0:05:42.720 --> 0:05:45.560 capitalization and the Internet, and we are on the precipice 0:05:45.600 --> 0:05:48.640 of seeing major disruption across that whole sector. We saw 0:05:48.680 --> 0:05:52.360 some big losers get printed in the third quarter. So, UM, 0:05:52.400 --> 0:05:54.640 the merchant acquire sector, if you look at the earnings 0:05:54.640 --> 0:05:57.159 of those companies, they disappointed a lot because they're getting 0:05:57.440 --> 0:06:02.320 disintermediated by companies like Shopify or Toast for example, that 0:06:02.320 --> 0:06:06.280 are offering those services better product, better pricing. And then 0:06:06.279 --> 0:06:08.400 on the winning side and all and my comments there, 0:06:08.440 --> 0:06:11.279 but in terms of winners in this space, UM, you 0:06:11.279 --> 0:06:14.600 would look at buy now pay leader UM, which, as 0:06:14.640 --> 0:06:16.520 my husband says to me, isn't that just the same 0:06:16.560 --> 0:06:18.960 thing as a credit card? What's what's buy now p later? 0:06:19.240 --> 0:06:21.919 But effectively what it's great product for the millennial and 0:06:21.960 --> 0:06:25.760 Gen Z consumer. You basically pay on deferred payments. Um. 0:06:25.839 --> 0:06:29.360 There's no late fee and there's actually no interest charged either. 0:06:29.480 --> 0:06:32.000 And the reason it works is because they charge the 0:06:32.040 --> 0:06:36.560 merchants higher fee and those merchants tolerate that higher fee 0:06:36.560 --> 0:06:39.840 because they're getting a bigger addressable market and higher volume. Now, 0:06:39.880 --> 0:06:41.799 of course we need to go through a credit cycle 0:06:42.279 --> 0:06:44.160 to see if this is a durable business model, But 0:06:44.200 --> 0:06:47.800 they're taking tremendous market share from traditional banks. Okay, thank 0:06:47.839 --> 0:06:50.200 you so much for being with us. As Kate L. Hillo, 0:06:50.360 --> 0:06:53.720 she is Russell Investments ce io Katie Catchy Goldman. Sacks 0:06:53.720 --> 0:06:56.120 will be staying with us as we focus specifically on 0:06:56.200 --> 0:06:59.040 supply chains and how prominently they have figured this week 0:06:59.080 --> 0:07:01.520 and those earnings were born. This is Wall Street Week 0:07:01.720 --> 0:07:08.880 on Bloomberg. This is Bloomberg Wall Street Week with David 0:07:08.920 --> 0:07:12.880 Weston from Bloomberg Radio. If earnings were the big story 0:07:12.920 --> 0:07:16.640 this week, supply chain difficulties were the constant narrative through 0:07:16.720 --> 0:07:19.360 all of those reports. As we heard from the CEOs 0:07:19.400 --> 0:07:24.400 of Raytheon, GM and Carrier. We're not immune from the 0:07:24.480 --> 0:07:27.120 challenges of supply chain. In fact, we talked about this 0:07:27.200 --> 0:07:29.960 morning on our earnings called the fact is we'll probably 0:07:30.000 --> 0:07:33.320 see almost three hundred million dollars of lower revenues this 0:07:33.400 --> 0:07:37.000 year because we can't get material into our shops and 0:07:37.040 --> 0:07:39.160 we can't get the labor that we need. It will 0:07:39.240 --> 0:07:41.800 linger into next year and we're right now are our 0:07:41.840 --> 0:07:44.320 feeling is will be in a much better shape in 0:07:44.400 --> 0:07:48.440 the second half of two and we're also taking steps 0:07:48.840 --> 0:07:51.120 over the medium term to make sure We're never seeing 0:07:51.120 --> 0:07:53.360 this kind of constraint, not only with chips, but with 0:07:53.400 --> 0:07:56.160 other you know, whether it's critical materials or just the 0:07:56.280 --> 0:07:59.600 overall supply chain, because we have an aggressive growth strategy 0:07:59.640 --> 0:08:01.240 in front of us and we're going to make sure 0:08:01.280 --> 0:08:03.640 that we can execute it. So it's a very it's 0:08:03.640 --> 0:08:06.360 a near term problem that will work through. The supply 0:08:06.440 --> 0:08:08.720 demand is really out of whack. You see it in chips. 0:08:09.160 --> 0:08:11.760 Whenever you have to buy chips from on the brokerage market, 0:08:11.800 --> 0:08:14.440 it's always going to be painful and expensive. We see 0:08:14.440 --> 0:08:17.920 it on raw materials copper price, steel, aluminum. So we're 0:08:17.920 --> 0:08:21.400 seeing a lot of pressures on raw materials and tier one, 0:08:21.400 --> 0:08:24.680 tier two pricing, but we're managing it through price increases 0:08:24.720 --> 0:08:26.760 and we're having to be very aggressive on things like 0:08:26.840 --> 0:08:29.400 g and A, having to be very creative on how 0:08:29.400 --> 0:08:33.120 we manage logistics. Katie catch A Golden Sacks has remained 0:08:33.120 --> 0:08:35.120 with us so we can talk about supply chains. So 0:08:35.240 --> 0:08:37.120 I heard about it all week long from see you 0:08:37.160 --> 0:08:39.920 have to CEO tell us about supply chains. Where are we? 0:08:40.320 --> 0:08:43.160 So two main takeaways I think from this earning season. 0:08:43.360 --> 0:08:45.680 I've also been speaking to a lot of CEOs and 0:08:45.800 --> 0:08:48.480 the first is that it is very clear that unit 0:08:48.520 --> 0:08:51.280 growth has been constrained by supply chain issues. So we'll 0:08:51.280 --> 0:08:53.240 talk a lot about tech, but let me talk about 0:08:53.280 --> 0:08:55.640 something very different from tech. Let's talk about pools. We 0:08:55.720 --> 0:08:57.800 love pools, we've liked them for a while. They've been 0:08:57.840 --> 0:09:02.079 big pandemic beneficiaries. Are pool CEOs, the ones building the pools, 0:09:02.120 --> 0:09:04.880 and the supply that's the one supplying the pools. Believe 0:09:04.920 --> 0:09:07.480 that unit growth could have been fifty percent higher without 0:09:07.480 --> 0:09:10.920 the supply chain issues they're they're facing, UM, the supply 0:09:10.960 --> 0:09:14.680 itself and of materials, and also the labor because we're 0:09:14.720 --> 0:09:17.959 facing a great resignation in this country and we're currently 0:09:18.000 --> 0:09:21.559 have the lowest labor force participation rate since World War Two, 0:09:21.640 --> 0:09:23.800 so that's a big problem. So that all goes under 0:09:23.920 --> 0:09:27.240 unit growth is constrained UM. And then the second issue 0:09:27.280 --> 0:09:29.800 that the second thing that I would highlight UM is 0:09:29.840 --> 0:09:32.280 something that Mary said I think is really really important. 0:09:32.520 --> 0:09:35.200 What she said is that what I heard her say 0:09:35.240 --> 0:09:37.079 is that over the longer term, they're going to address 0:09:37.080 --> 0:09:39.319 this issue because they need to be positioned for growth. 0:09:39.559 --> 0:09:41.079 And I think what she means by that is that 0:09:41.120 --> 0:09:43.840 they're going to have to reshure some of this capacity 0:09:43.920 --> 0:09:46.840 and focus on supply chain resilience, and it is it 0:09:46.920 --> 0:09:49.480 is my view that actually Wall Street has probably put 0:09:49.520 --> 0:09:52.680 too much pressure on companies to optimize their supply chain, 0:09:53.040 --> 0:09:55.280 and we're going to get a very much better balance 0:09:55.360 --> 0:09:59.800 going forward between that supply chain optimization and the resilience 0:09:59.800 --> 0:10:02.080 that become very obvious that we need. So there are 0:10:02.080 --> 0:10:04.320 a couple of issues there. I think, what is where 0:10:04.320 --> 0:10:07.440 do you get the materials from? We relied upon some countries, 0:10:07.480 --> 0:10:09.600 perhaps too much. We have to diversify in that. The 0:10:09.679 --> 0:10:12.160 other is how much inventory we maintain just in time 0:10:12.280 --> 0:10:14.679 was very popular for a long time, very efficient for 0:10:14.720 --> 0:10:17.440 a lot of companies. Is this going to affect margins 0:10:17.440 --> 0:10:19.800 going forward? If we make those adjustments to supply chains, 0:10:19.960 --> 0:10:23.120 it may cost more money, it will, and it will 0:10:23.280 --> 0:10:25.720 impact margins most likely, and we're going to have to 0:10:25.800 --> 0:10:28.000 kind of get used to that um But of course 0:10:28.080 --> 0:10:29.960 we need the top line to come through too, and 0:10:29.960 --> 0:10:32.479 if people want to sell product, they need to have inventory. 0:10:32.640 --> 0:10:34.559 So again it's going to come back to the balance 0:10:34.559 --> 0:10:37.320 of these two things. I do think there's an incredible 0:10:37.520 --> 0:10:40.640 investment opportunity. In our team beliefs there's an incredible investment 0:10:40.640 --> 0:10:43.160 opportunity in investing in the companies that are going to 0:10:43.240 --> 0:10:46.880 help reshure um some of the manufacturing capacity of the 0:10:46.920 --> 0:10:49.200 United States of America. And so there I would point 0:10:49.240 --> 0:10:51.400 to you, Hurt, all those people are dependent on chips. 0:10:51.679 --> 0:10:55.120 Chips fuel the world. They're fueling the technological advancement that 0:10:55.120 --> 0:10:57.520 we're seeing across all sectors, and so we can't be 0:10:57.600 --> 0:10:59.719 dependent on that just from another corner of the world 0:10:59.800 --> 0:11:02.440 where and have to take some of that manufacturing capacity here. 0:11:02.480 --> 0:11:06.160 So we love chip manufacturing equipment. So back when I 0:11:06.200 --> 0:11:08.720 was running a budget cap cities in a Disney, one 0:11:08.720 --> 0:11:10.680 of the questions I ask every quarter if we were down, 0:11:10.840 --> 0:11:14.280 is this a timing issue or we permanently lost this revenue? 0:11:14.320 --> 0:11:16.040 For someone? Let me ask you that question about supply 0:11:16.160 --> 0:11:18.120 chains when you see it down, because the units, as 0:11:18.160 --> 0:11:21.319 you described, is that demand waiting for when the supply 0:11:21.440 --> 0:11:23.840 is there? Or could we lose some of the demand. Yeah, 0:11:23.880 --> 0:11:25.480 So in other words, are people still going to buy 0:11:25.480 --> 0:11:28.560 pools and iPhones exactly? And I believe they will um 0:11:28.880 --> 0:11:30.880 and they're just gonna have to wait a little bit longer. Now. 0:11:30.920 --> 0:11:34.000 Of course, that requires us to have a reasonable economic backdrop. 0:11:34.120 --> 0:11:36.200 So that with that caveat, but they will. And in 0:11:36.240 --> 0:11:38.800 the iPhone space, if you had to wait longer, you're 0:11:38.840 --> 0:11:40.760 not going to switch to another provider. You will go 0:11:40.800 --> 0:11:43.160 out and buy that iPhone. So in some ways we 0:11:43.320 --> 0:11:45.920 know that that demand has been kicked into next year. 0:11:46.160 --> 0:11:48.600 But again, these companies still have to position themselves for 0:11:48.640 --> 0:11:51.320 the long term runway of growth and they will invest 0:11:51.400 --> 0:11:53.559 in the restoring of their supply chains. Katie. With just 0:11:53.600 --> 0:11:56.120 about every CEO I talked to, the supply chain discussion 0:11:56.160 --> 0:11:59.040 came right up with cost increases YEA and inflation. It 0:11:59.120 --> 0:12:02.280 raises the question is this lasts well into two which 0:12:02.400 --> 0:12:04.439 seems clearly will some people say even to the late 0:12:05.600 --> 0:12:08.800 what possible effect might that have on inflation because a 0:12:08.800 --> 0:12:10.040 lot of the ceo as we've talked to you said 0:12:10.200 --> 0:12:12.920 we raised prices. Yeah, absolutely, and so of course you 0:12:12.960 --> 0:12:14.680 want to be with the companies that have the pricing 0:12:14.720 --> 0:12:17.880 power to pass that through. UM. I'd say three quick things. 0:12:18.000 --> 0:12:20.160 I am we are in the camp that these supply 0:12:20.240 --> 0:12:23.720 chain issues last throughout. There's not there's not an easy 0:12:23.920 --> 0:12:26.920 fix for them UM. And there's an investment opportunity on 0:12:26.920 --> 0:12:29.120 the back of that, which we which we talked about. UM. 0:12:29.160 --> 0:12:31.319 The second thing I would say is that the inflation 0:12:31.559 --> 0:12:34.839 in the labor space is real. Um, we've talked you 0:12:34.880 --> 0:12:36.760 and I've talked a little bit about this before, but 0:12:37.280 --> 0:12:39.679 we have failed to pass minimum wage in this country 0:12:39.679 --> 0:12:43.360 for many decades. We've now actually jumped over minimum wage 0:12:43.400 --> 0:12:46.520 because we've had to bid people back into the labor market. Now, 0:12:46.600 --> 0:12:48.480 the question that we have to really think about is 0:12:48.520 --> 0:12:51.000 has that been a one time reset in wages? Are 0:12:51.000 --> 0:12:53.880 we going to get upward continued upward pressure? And time 0:12:53.920 --> 0:12:55.960 will Time will tell on that. But both of those 0:12:55.960 --> 0:12:58.640 suggest a higher cost structure. And I wonder whether our 0:12:58.720 --> 0:13:01.360 wage increases actually allow pagging because if you look at 0:13:01.360 --> 0:13:04.920 the consumer price index, it is going up faster than 0:13:04.960 --> 0:13:06.920 the wages are. Wages are going up but not as fast. 0:13:07.040 --> 0:13:08.360 Does that mean we're gonna have to catch up at 0:13:08.360 --> 0:13:10.920 some point we're gonna have even more wage increases. Well, 0:13:10.960 --> 0:13:13.480 that's how you get inflation, right, But it's very it's 0:13:13.600 --> 0:13:17.160 very determinant on on get that sticky upward pressure of 0:13:17.280 --> 0:13:19.559 wages going up, which we'll put you know how that 0:13:20.000 --> 0:13:22.600 cycle works going forward. But does that affect which companies 0:13:22.640 --> 0:13:24.040 you want to invest in the sense that some are 0:13:24.080 --> 0:13:27.480 more sensitive to that that wage inflation than others are. Yeah, 0:13:27.520 --> 0:13:29.559 so I would say right now we see a very 0:13:29.600 --> 0:13:34.040 healthy consumer UM. They're benefiting from higher wages UM, and 0:13:34.080 --> 0:13:35.640 we're seeing that come out in the data. If you 0:13:35.679 --> 0:13:37.520 look at credit card data. Just to to show you 0:13:37.559 --> 0:13:39.120 the health of the consumer and why we like the 0:13:39.160 --> 0:13:43.600 consumer UM we have, American Express publishes spending trends. Spending 0:13:43.720 --> 0:13:47.560 is up thirty six percent versus two nineteen, so we've 0:13:47.559 --> 0:13:50.199 had a big big jump in spending UM. The other 0:13:50.240 --> 0:13:51.880 thing I just want to say about consumer in terms 0:13:51.920 --> 0:13:54.360 of where we're focused, it's the millennial and Gen Z 0:13:54.480 --> 0:13:56.680 consumer that are driving a lot of that increase because 0:13:56.679 --> 0:13:59.640 they like experiences over things, and it's safe now to 0:13:59.679 --> 0:14:02.240 go out and have experiences, and they also have a 0:14:02.320 --> 0:14:05.760 higher risk tolerance around experiences than baby boomers. Baby boomers 0:14:05.760 --> 0:14:08.640 spending according to American Express date is actually down six 0:14:08.679 --> 0:14:11.680 percent relative to two thousand nineteen. So we see health 0:14:11.679 --> 0:14:14.480 in the consumer that's repaired, their balance sheet has firepower, 0:14:14.760 --> 0:14:18.040 and we're very much leaning into those consumer companies that 0:14:18.080 --> 0:14:20.800 have pricing power and can benefit from a healthier consumer. Okay, 0:14:20.800 --> 0:14:22.600 thank you so much, Katie's always great to have you 0:14:22.640 --> 0:14:25.320 portunity in the studio. Now, that is Katie Coach in 0:14:25.320 --> 0:14:27.440 real life, in real life exactly, we're not in the 0:14:27.440 --> 0:14:30.640 metaverse right words, we're here together. That's Katie kaj from 0:14:30.680 --> 0:14:36.040 Golden Sachs coming up the inflation head. You may not 0:14:36.240 --> 0:14:40.040 have thought much about the beauty of owning land, especially 0:14:40.200 --> 0:14:44.040 when it's farmland. With New Vine's CEO Jose Mania. That's 0:14:44.080 --> 0:14:50.520 next on Wall Street Week on Bloomberg. This is Bloomberg 0:14:50.560 --> 0:14:57.520 Wall Street Week with David Weston from Bloomberg Radio. Inflation 0:14:57.840 --> 0:15:00.680 it's all the talk these days among investor because of 0:15:00.760 --> 0:15:03.920 what it could do to your portfolio. As Nancy Davis 0:15:03.920 --> 0:15:08.200 of Quadratic Capital explains, inflation is a risk to every 0:15:08.200 --> 0:15:12.760 investor portfolio because it reduces purchasing power and Treasure Secretary 0:15:12.840 --> 0:15:15.640 Janet Yellen took the airways on CNN to disagree with 0:15:15.680 --> 0:15:18.720 our own Larry Summers about how long it will last. 0:15:19.160 --> 0:15:21.880 But while people are debating the size of the problem, 0:15:22.120 --> 0:15:25.400 investors are left to make sure they're protected against the downside, 0:15:25.840 --> 0:15:30.120 looking for what Bob Prince calls inflation hedge assets. You 0:15:30.160 --> 0:15:34.520 want inflation hedge assets because it's very likely that the 0:15:34.720 --> 0:15:38.040 that the rise of interest rates will lag inflation and 0:15:38.120 --> 0:15:41.360 lag the economy. The FED doesn't really want to get 0:15:41.400 --> 0:15:44.440 ahead of it, ranging from things like gold to things 0:15:44.520 --> 0:15:49.840 like cryptocurrency. According to Larry Summers, bigcoin has had some 0:15:49.920 --> 0:15:54.280 emergence as digital gold. The thing you want to hold 0:15:54.400 --> 0:15:58.600 if you're worried about inflation. One asset that might get 0:15:58.600 --> 0:16:03.080 overlooked his farmland. Historically, farmland returns have outpaced inflation in 0:16:03.080 --> 0:16:06.920 a variety of market environments, providing returns more than double 0:16:07.080 --> 0:16:10.680 the inflation rate for decades. And right now the farming 0:16:10.720 --> 0:16:14.920 sector is booming. Is a really robust story. Right net 0:16:14.920 --> 0:16:17.600 farm income is projected by the Department of Agriculture to 0:16:17.640 --> 0:16:21.600 be up to a level of a D thirteen million dollars, 0:16:21.600 --> 0:16:25.280 which is a level we haven't seen since so in 0:16:25.400 --> 0:16:28.800 aggregate on average across the country, that's a really good story. 0:16:32.520 --> 0:16:35.080 We're welcome now to Wall Street Week. One of those 0:16:35.120 --> 0:16:38.000 who is focused on farm land investing is a sensible 0:16:38.040 --> 0:16:41.160 hedge against inflation. Jose and I is the CEO of Leuvene, 0:16:41.280 --> 0:16:44.800 which manages over one trillion dollars in assets. Welcome, Jose. 0:16:44.880 --> 0:16:46.520 It's great to have you here. Thank you for having me. 0:16:46.600 --> 0:16:48.800 David So so you really are introducing me to this 0:16:48.840 --> 0:16:51.720 whole idea about farm land is a hedge against inflation. 0:16:51.800 --> 0:16:53.520 Tell me how you came to it and how you 0:16:53.560 --> 0:16:55.640 think of it today. Yeah, we came through it through 0:16:55.640 --> 0:16:59.480 our traditional portfolio construction process. Right, we were looking for 0:16:59.520 --> 0:17:04.159 assets brought attractive correlation benefits to our portfolio. We're looking 0:17:04.160 --> 0:17:07.240 to smooth out volatility. We're looking to kind of find 0:17:07.240 --> 0:17:10.560 a good hedge against inflation and also looking at total 0:17:10.600 --> 0:17:14.800 returns and more were more skewed towards income income returns, 0:17:14.600 --> 0:17:17.280 and we found that in farmland. But what made farmland 0:17:17.320 --> 0:17:19.240 really attracted to us. I always say is one of 0:17:19.280 --> 0:17:22.199 the best investment thesis I've come across because it's as 0:17:22.240 --> 0:17:24.760 simple as people need to eat. Yet what we found 0:17:24.840 --> 0:17:27.160 was you have a any elastic demand supply it right, 0:17:27.240 --> 0:17:31.199 it's one that the populations are growing, middle classes, the 0:17:31.240 --> 0:17:33.639 middle classes growing. It takes ten pounds of grain to 0:17:33.680 --> 0:17:37.360 make one pound of protein, so as they're consuming more protein, 0:17:37.720 --> 0:17:41.160 that demand is continues to be pushed and it accelerates. 0:17:41.320 --> 0:17:43.720 You look at the supply side, it's also any elastic 0:17:43.760 --> 0:17:46.720 because they're not making any more land. If anything, production 0:17:46.840 --> 0:17:49.960 is being trained by environmental factors. So when you combine 0:17:50.000 --> 0:17:51.919 that it made for a perfect place where we can 0:17:51.960 --> 0:17:54.080 fit in our portfolio construction. So give us a sense 0:17:54.119 --> 0:17:56.280 of the return from the sort of investment over the 0:17:56.320 --> 0:17:59.520 longer term, because I've seen some pretty staggering numbers. And 0:17:59.680 --> 0:18:02.199 you know, obviously, like many, like many different investments, there 0:18:02.200 --> 0:18:05.240 are different risk return profiles. But for us, typically we're 0:18:05.480 --> 0:18:09.360 seeking called admit to high single digit returns. If it's 0:18:09.359 --> 0:18:11.680 say eight to ten eight to ten percent returns, half 0:18:11.720 --> 0:18:14.600 of that is coming from income, the other half is 0:18:14.640 --> 0:18:17.840 coming from from capital appreciation, and the lower return is 0:18:17.880 --> 0:18:20.600 because there's different risk profiles. Right, we we go to 0:18:20.640 --> 0:18:23.760 the areas that we're more protected against natural disaster issues 0:18:23.880 --> 0:18:27.280 or climate change. Water is a key factor in this 0:18:27.440 --> 0:18:30.399 asset class, and you can you can mitigate mitigate that 0:18:30.480 --> 0:18:32.440 risk by go to areas that have more a better 0:18:32.520 --> 0:18:34.919 source of water. They're going to be more expensive, your 0:18:34.960 --> 0:18:37.399 cap rates or returns are going to be lower. But again, 0:18:37.840 --> 0:18:41.040 we're not investing in farmland or really alternatives in general 0:18:41.160 --> 0:18:44.400 for an outsized return. We're really looking for where can 0:18:44.440 --> 0:18:47.959 we find some of that stable, stable income with with 0:18:48.040 --> 0:18:51.280 good protection of our principle. Right when I think about farmland, 0:18:51.960 --> 0:18:54.919 we're buying land that is producing an essential need for 0:18:55.000 --> 0:18:59.040 society into perpetuity um, so that gives me really strong 0:18:59.080 --> 0:19:01.800 intrinsic value. So it's almost like owning a triple A bond, 0:19:02.320 --> 0:19:04.880 yet I'm getting a four plus or so percent coupon 0:19:05.359 --> 0:19:08.680 on that particular asset that has really been stable through 0:19:08.720 --> 0:19:11.520 the years. From volatility perspective, was a compare and contrast 0:19:11.560 --> 0:19:14.480 a little bit this asset class from other alternatives on 0:19:14.600 --> 0:19:17.639 two different matrices. One of them is stability. You just 0:19:17.680 --> 0:19:20.880 said volatility, How is it compared in terms of volatility? 0:19:20.920 --> 0:19:23.000 And the other is we're all talking about inflation right 0:19:23.000 --> 0:19:25.600 now and how we're gonna protect against inflation. How does farmland? 0:19:25.640 --> 0:19:28.280 Do you know? Well? Farmland again, how it compares to 0:19:28.320 --> 0:19:31.080 other asset classes today is that it's it's not as 0:19:31.280 --> 0:19:34.399 further along in terms of its access to capital markets. 0:19:34.480 --> 0:19:37.400 Right when you look at sharp ratios, for example, farmland 0:19:37.440 --> 0:19:40.840 really pops relative to another real asset like real estate. 0:19:41.200 --> 0:19:43.199 That a lot of that has to do with liquidity 0:19:43.320 --> 0:19:45.680 and access to capital. If you look at farm have 0:19:45.800 --> 0:19:48.440 you looked at real estate fifties sixty plus years ago? 0:19:48.760 --> 0:19:51.040 It had around a similar profile in terms of who 0:19:51.080 --> 0:19:53.440 are the owners of those assets. Today you and I 0:19:53.480 --> 0:19:55.560 can go to talk to our an advice or broken 0:19:55.600 --> 0:19:57.879 and get exposure to real estate. You can't do that 0:19:57.960 --> 0:20:01.760 in farmland as much. So that again, that inefficiency kind 0:20:01.760 --> 0:20:04.679 of adds to the alpha in the excess returns that 0:20:04.720 --> 0:20:07.280 we can derive from from from that asset. And then 0:20:07.359 --> 0:20:10.760 ultimately it's a commodity. So from an inflation perspective, that 0:20:10.920 --> 0:20:15.480 dynamic of any elastic demand, any elastic supply, right as 0:20:15.520 --> 0:20:18.119 that as that stretches and commodity prices typically go up 0:20:18.119 --> 0:20:21.320 and follow inflation, it's proved to be a very very strong, 0:20:21.840 --> 0:20:24.520 uh you know, hedge against inflation. Rosimania, thank you so 0:20:24.640 --> 0:20:27.600 very much. She's new being CEO here on Wall Street Week. 0:20:29.920 --> 0:20:32.119 Coming up, we wrap up the week once again with 0:20:32.200 --> 0:20:35.600 our special contributor Larry Summers of Harvard. That's next on 0:20:35.640 --> 0:20:41.439