WEBVTT - Markets, Gender Equality, Equities, and Hostess (Podcast) 0:00:00.760 --> 0:00:04.040 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside 0:00:04.040 --> 0:00:06.920 my co host Matt Miller. Every business day, we bring 0:00:06.960 --> 0:00:11.520 you interviews from CEOs, market pros, and Bloomberg experts, along 0:00:11.520 --> 0:00:15.560 with essential market moving news on the Bloomberg Markets Podcast, 0:00:15.600 --> 0:00:18.439 on Apple Podcasts or wherever you listen to podcasts, and 0:00:18.480 --> 0:00:21.800 at Bloomberg dot com slash podcast. A couple weeks ago, 0:00:21.800 --> 0:00:24.040 I'm sitting at the Veil airport, Matt, and there's this 0:00:24.120 --> 0:00:26.520 guy pounded away next to me on his laptop work. Wait, 0:00:26.560 --> 0:00:29.360 there's an airport in Vail. There is Eagle. It's not 0:00:29.480 --> 0:00:31.440 a half hour from Vail. So I see this guy 0:00:31.440 --> 0:00:33.480 next to me. He looks kind of familiar to say, hey, 0:00:33.760 --> 0:00:37.199 Matt Luzetti. He's's economist guy at Deutsche Bank. So I say, hey, 0:00:37.200 --> 0:00:39.960 how is your ski trip? He didn't ski. He was 0:00:39.960 --> 0:00:42.840 actually out there on a conference and he didn't ski. 0:00:42.960 --> 0:00:45.239 So I said, people do that. It's we're no. I mean, 0:00:45.600 --> 0:00:47.159 I said, we got to get you in studio here. 0:00:47.240 --> 0:00:49.040 We need to figure out what's going on. Matt Luzetti's 0:00:49.080 --> 0:00:51.720 in our studio today. He's from Deutsche Bank, chief US 0:00:51.800 --> 0:00:56.360 economist and not an Avid skier obviously, but I appreciate 0:00:56.400 --> 0:00:58.160 the work. He did actually ski for the first time 0:00:58.240 --> 0:01:02.000 this past weekend. Oh you did, Okay, you are We appreciate. 0:01:02.160 --> 0:01:04.480 I could tell Matt to clients he was at a vail, 0:01:04.640 --> 0:01:07.520 working hard, and that's what you want for your chief 0:01:07.640 --> 0:01:10.600 US economists. So, Matt, we had some ECO data today 0:01:10.640 --> 0:01:13.840 that just seem kind to kind of put a you know, 0:01:14.160 --> 0:01:16.840 I guess solidify the call that this FED can go 0:01:16.959 --> 0:01:19.080 higher for longer? Is that what you guys? A Deutsche 0:01:19.080 --> 0:01:21.400 banker thinking, yeah, absolutely, I think you got the data 0:01:21.440 --> 0:01:24.600 this morning. Obviously, the jobless claims data remain very low, 0:01:24.680 --> 0:01:27.160 consistent with a tight labor market with a lot of momentum. 0:01:27.520 --> 0:01:30.520 I'd also note the core PC inflation data were revised higher. 0:01:30.520 --> 0:01:32.760 We expected that a little bit because it's reflecting what 0:01:32.800 --> 0:01:35.720 we've already seen from the CPI data. I think tomorrow 0:01:35.720 --> 0:01:38.720 would get core PC. We're above consensus we expected to 0:01:38.720 --> 0:01:41.280 be point five month on month, and I really think 0:01:41.280 --> 0:01:43.679 the trend of the recent data is with upward revisions, 0:01:44.080 --> 0:01:45.800 a lot of momentum in the economy, a lot of 0:01:45.800 --> 0:01:48.080 resilience in the economy and the labor market, and less 0:01:48.120 --> 0:01:50.560 disinflation than the FED thought at the February meeting, So 0:01:50.760 --> 0:01:54.080 inflation looked like it was slowing down pretty quickly from 0:01:54.120 --> 0:01:58.280 the June headline CPI peak of nine point one percent, 0:01:58.680 --> 0:02:02.040 And what's the idea now that we've slowed at around 0:02:02.080 --> 0:02:05.120 six and we're not getting any lower. Yeah, I think 0:02:05.160 --> 0:02:07.840 I would focus on these three month changes because it 0:02:08.120 --> 0:02:10.880 strips out the very high prints that we saw early 0:02:10.960 --> 0:02:13.560 last year, and I think the revisions there have been 0:02:13.560 --> 0:02:16.600 really important. So course CPI looked like on a three 0:02:16.639 --> 0:02:19.080 month change it was decelerating down to three point one percent, 0:02:19.160 --> 0:02:21.880 getting closer to the level that's consistent with the FED 0:02:21.960 --> 0:02:24.280 subjective that was actually revised higher by more than a 0:02:24.320 --> 0:02:26.920 percentage point. And then with this latest data you have 0:02:26.919 --> 0:02:29.160 a three month annualized change for course CPI that's four 0:02:29.200 --> 0:02:31.200 and a half four point six percent, you know, very 0:02:31.240 --> 0:02:34.080 far away from the FED subjectives. I do think, you know, 0:02:34.080 --> 0:02:36.359 as we see corepc tomorrow, it'd be closer to four 0:02:36.400 --> 0:02:39.519 point four four and a half percent. You've seen some disinflation, 0:02:39.560 --> 0:02:42.040 we're off the peak, but the latest data tell us 0:02:42.040 --> 0:02:44.720 that the path here isn't easy. It's not just continued disinflation. 0:02:44.760 --> 0:02:46.680 We're likely to see somewhat higher in prints over the 0:02:46.680 --> 0:02:49.600 next few months. So, Matt, smart guys like you, are 0:02:49.639 --> 0:02:52.440 you taking the recession call off the table? I'm not 0:02:52.440 --> 0:02:54.040 sure if you had a recession call, but are the 0:02:54.160 --> 0:02:56.959 economists in general taking that recession call off the table? 0:02:57.000 --> 0:02:58.679 Do you think we've always had a recession call, but 0:02:58.680 --> 0:03:00.440 it's always been the back half of this year? Okay, 0:03:00.800 --> 0:03:02.760 it is in Q four for us right now. I 0:03:02.800 --> 0:03:05.680 think the latest flow the data fits well with that 0:03:05.720 --> 0:03:08.680 type of timeline. And it fits well with that because, look, 0:03:08.680 --> 0:03:11.400 the economy has good momentum. Now, the idea that's going 0:03:11.440 --> 0:03:13.240 to fall into recession in Q one or probably even 0:03:13.320 --> 0:03:16.840 Q two doesn't seem very likely given the momentum. At 0:03:16.880 --> 0:03:19.040 the same time, the repricing that we're seeing with the FED, 0:03:19.240 --> 0:03:21.480 the idea that the terminal rate needs to be higher. 0:03:21.639 --> 0:03:23.560 We're at five point six for the terminal rates, so 0:03:23.600 --> 0:03:25.840 we think they hike through through July. I think that 0:03:25.880 --> 0:03:30.160 will create tighter financial conditions consumers that that households are 0:03:30.560 --> 0:03:33.120 eating through their excess savings through the second half of 0:03:33.120 --> 0:03:36.240 this year. So we still have that timeline in place 0:03:36.280 --> 0:03:38.160 for our recession call. So how bad does it get? 0:03:38.200 --> 0:03:41.160 How bad to these long and variable lags hit us 0:03:41.720 --> 0:03:46.160 in Q four. We're already hearing news about huge price 0:03:46.200 --> 0:03:53.000 drops in housing, over a trillion dollars nationwide off five percent. 0:03:53.080 --> 0:03:56.480 We're hearing news about a slowdown in I just stuck 0:03:56.520 --> 0:03:58.880 to the CEO of Ducati in North America and he said, 0:03:58.920 --> 0:04:01.040 you know, the high rates are putting a crimp on 0:04:01.080 --> 0:04:03.880 motorcycle sales for example. Yeah, I think that's been you know, 0:04:04.040 --> 0:04:06.440 assessing that long and variable acts is always difficult. I 0:04:06.480 --> 0:04:10.040 think that there's been some quick transmission from the Fed's 0:04:10.240 --> 0:04:12.640 policies to financial conditions. We saw certainly what happened with 0:04:12.640 --> 0:04:16.719 the housing market mortgage rates spiking, but it's been I 0:04:16.800 --> 0:04:19.080 think a little bit slower to impact the consumer and 0:04:19.080 --> 0:04:21.479 a little bit slower to impact the labor market. I 0:04:21.480 --> 0:04:23.640 think in part that's because you've had this latent fiscal 0:04:23.640 --> 0:04:26.480 stimulus out there, with households still with one trillion of stimulus. 0:04:26.800 --> 0:04:29.640 And it's also because you have a structurally undersupplied labor market, 0:04:29.800 --> 0:04:33.440 so you have firms that need labor have had difficulty 0:04:33.440 --> 0:04:36.359 in finding labor and has led to this very resilient 0:04:36.440 --> 0:04:39.839 labor market. Knowing exactly when when that financial condition tightening 0:04:39.880 --> 0:04:41.760 hits the economy, I think is always always very difficult. 0:04:41.760 --> 0:04:44.159 How deep do you think the recession could be? Because 0:04:44.200 --> 0:04:47.160 two quarters of contraction, we've seen that already and it 0:04:47.279 --> 0:04:51.040 wasn't a recession apparently as far as we know, and 0:04:51.839 --> 0:04:55.039 we could see it again without feeling like we're in 0:04:55.080 --> 0:04:57.680 a deep recession. Is that what you expect? Shallow or 0:04:57.720 --> 0:04:59.720 do you think it could hit us hard and unemployment 0:04:59.760 --> 0:05:02.960 could eyes to five percent or more? Yeah? So I 0:05:02.960 --> 0:05:04.680 think it's all about the labor market. You know, whether 0:05:04.720 --> 0:05:06.560 or not we have a technical recession that has two 0:05:06.640 --> 0:05:09.400 quarters of negative growth I think is somewhat irrelevant to 0:05:09.400 --> 0:05:11.120 the market and the FED at this point. It's really 0:05:11.160 --> 0:05:13.920 about does the labor market begin to crack and does 0:05:13.960 --> 0:05:16.840 it begin to weaken. From a historic perspective, our recession 0:05:16.920 --> 0:05:19.839 looks kind of moderate. It looks like the early nineteen nineties. 0:05:20.160 --> 0:05:22.640 You have the unemployment rate rising by about two percentage 0:05:22.640 --> 0:05:25.560 points from from trough to peak. It's a big move 0:05:25.600 --> 0:05:28.359 from today's perspective, no doubt, But from a historic perspective, 0:05:28.520 --> 0:05:32.560 it's actually a relatively mild recession that we're expecting. What 0:05:32.760 --> 0:05:35.760 is your view on the labor market, it's just shocking 0:05:35.800 --> 0:05:39.400 to me that it is so strong, so vibrant, the 0:05:39.480 --> 0:05:42.760 jolts data, the unemployment day, everywhere you look. We don't 0:05:42.760 --> 0:05:45.600 see any cracks, do we No. I think you've seen 0:05:45.600 --> 0:05:48.039 it in some sectors. You know, obviously you have tech 0:05:48.120 --> 0:05:50.960 layoffs that are ongoing. You've seen it in the sectors 0:05:50.960 --> 0:05:53.520 that have employment well above the pre COVID trend. You know, 0:05:53.560 --> 0:05:56.240 all those sectors have slowed materially. Many of them are 0:05:56.240 --> 0:05:59.479 actually reducing their jobs in those sectors that have employment 0:05:59.520 --> 0:06:02.600 that are well below pre COVID trends. Leisure and hospitality 0:06:02.680 --> 0:06:05.600 is one, healthcare is another, the government sector is another. 0:06:05.640 --> 0:06:08.440 They've really been driving employment growth. They're really driving I 0:06:08.440 --> 0:06:10.119 think a lot of the tightness in the labor market, 0:06:10.680 --> 0:06:13.200 and really until that changes, it's unlikely that you're going 0:06:13.240 --> 0:06:16.320 to see negative payrolls prints. I don't think that that's 0:06:16.320 --> 0:06:18.440 happening over the next few months, just given the momentum. 0:06:18.680 --> 0:06:20.440 But the FED needs something to change here in the 0:06:20.480 --> 0:06:23.880 labor market, especially with what's happened with the inflation data recently. 0:06:24.080 --> 0:06:25.920 I think that we should have a lot less confidence 0:06:25.920 --> 0:06:28.599 than inflation is on this very clear downtrend back to target. 0:06:28.960 --> 0:06:31.880 So what about if we do have a recession. If 0:06:31.880 --> 0:06:36.480 we do have a weakening labor market, and you know 0:06:36.800 --> 0:06:39.320 that affects growth, do we see cuts? Do you expect 0:06:39.360 --> 0:06:41.600 the FED to cut rates at the end of this year, 0:06:41.640 --> 0:06:43.840 at the beginning of twenty twenty four, So we've pushed 0:06:43.880 --> 0:06:46.400 out our expectation for cuts. We do expect that they 0:06:46.440 --> 0:06:48.760 begin to cut rates in early twenty twenty four. But 0:06:48.800 --> 0:06:51.120 I think it's all about not only inflation, but what 0:06:51.120 --> 0:06:53.480 happens with the labor market. If we end this year 0:06:53.600 --> 0:06:55.240 and the labor market looks a lot like it does 0:06:55.279 --> 0:06:58.200 today and core inflation is three percent or above, the 0:06:58.240 --> 0:07:00.279 Fed's not going to be cutting rates. Yeah, and you 0:07:00.279 --> 0:07:03.039 know that that's close to what the FED has been forecasting. 0:07:03.080 --> 0:07:05.039 They have this rise in the unemployment rate. So I 0:07:05.040 --> 0:07:07.120 think it's if you get this weekending in the labor market, 0:07:07.160 --> 0:07:08.840 if you see that uemployment rate rising four and a 0:07:08.839 --> 0:07:12.240 half five percent, that's an environment where if inflation is 0:07:12.240 --> 0:07:14.040 closer to three percent, I do think the FED would 0:07:14.040 --> 0:07:17.720 be cutting rates. That's our baseline, But there's this risk 0:07:17.800 --> 0:07:20.880 of the labor market remaining more resilient, inflation remaining a 0:07:20.880 --> 0:07:25.880 bit closer to three percent inflation. Do they they say 0:07:25.920 --> 0:07:28.920 two percent, right, But do they really mean three? No? 0:07:29.040 --> 0:07:31.080 I think they're you know, they're adamant today, no doubt, 0:07:31.080 --> 0:07:32.600 and I think that they will stick to that. But 0:07:32.640 --> 0:07:34.400 the question is what does the labor market look like 0:07:34.440 --> 0:07:37.200 in that environment. If it's still very tight producing wage 0:07:37.200 --> 0:07:39.640 growth that's very elevated, they can't cut rates. If the 0:07:39.680 --> 0:07:42.640 labor market is looking very loose and disinflationary pressures are 0:07:42.640 --> 0:07:45.240 clear looking forward, then they can back off of a 0:07:45.320 --> 0:07:48.080 plus five percent fed funds rate, bring it back down, 0:07:48.080 --> 0:07:51.400 and track inflation lower to a more normal level. Got 0:07:51.400 --> 0:07:56.240 a PhD in UCLA? How good was that? UCLA? So 0:07:56.280 --> 0:07:57.880 it'd be a lot more fun if you weren't getting 0:07:57.880 --> 0:08:02.880 a PhD undergrad? CLA sounds awesome, Not so much, not 0:08:02.920 --> 0:08:04.800 as fun. You look out out of the library at 0:08:05.000 --> 0:08:06.720 the weather, and it's not as fun as you would expect. 0:08:06.720 --> 0:08:09.560 I guess, are you good? Matt Lozetti, proud graduate of 0:08:09.640 --> 0:08:13.280 Villanova undergrad got his PhD at UCLA. Pretty cool. They're 0:08:13.360 --> 0:08:16.880 great business school at UCLA, at the high school. Matt Louseettie, 0:08:16.920 --> 0:08:19.080 chief US economist Story Bank, joining us live in our 0:08:19.080 --> 0:08:22.200 Bloomberg Interactive Broker studio, And again I can attest to 0:08:22.240 --> 0:08:24.640 all Matt's institutional investor clients out there that he was 0:08:24.640 --> 0:08:27.200 in veil, but he was working. He wasn't skiing bumming 0:08:27.240 --> 0:08:33.640 off like I was so good stuff there. I'm gonna 0:08:33.640 --> 0:08:36.760 talk aboutferred stock. Their analysts don't know if from livestock 0:08:36.800 --> 0:08:41.199 and preferred stock and named that movie Wall Street. Yeah, okay. 0:08:41.440 --> 0:08:44.400 Doug Baker, portfolio manager and head of preferred securities at 0:08:44.480 --> 0:08:46.400 New Ven. He's based in Chicago, but we got him 0:08:46.440 --> 0:08:50.840 live in our Bloomberg Interactive broker studio. We don't talk enough, 0:08:51.040 --> 0:08:54.520 nearly enough, Doug about preferred stock, preferred securities. What's the 0:08:54.600 --> 0:09:00.199 pitch to own preferred securities? What's the advantage I think? 0:09:00.240 --> 0:09:02.719 I think for us it's an income solution that's that's 0:09:02.800 --> 0:09:05.880 high quality, okay. And you can generate this income without 0:09:05.880 --> 0:09:09.719 taking excessive credit risk. And if you choose your securities carefully, 0:09:10.120 --> 0:09:13.160 you can do it without taking significant duration risk or 0:09:13.160 --> 0:09:15.600 interest rate risk. And I think in this environment today, 0:09:15.720 --> 0:09:18.960 with rates as volatile as they are, finding a solution 0:09:19.000 --> 0:09:21.960 where you can generate and it's also tax efficient income 0:09:22.440 --> 0:09:25.600 in a lot of instances, doing that without having to 0:09:25.679 --> 0:09:28.120 make a significant call on interest rates, I think is 0:09:28.200 --> 0:09:31.000 appealing for a lot of folks, and then again for 0:09:31.040 --> 0:09:33.560 those folks that think, hey, there's a recession around the corner, 0:09:34.200 --> 0:09:36.920 not driving that income through taking a lot of credit 0:09:37.000 --> 0:09:38.800 risk at this point in time too, is also kind 0:09:38.800 --> 0:09:41.480 of compelling. So why are they called preferred? I mean, 0:09:41.600 --> 0:09:45.360 are you higher up on the credit list, creditors list 0:09:45.760 --> 0:09:48.560 if you if they go bankrupt, are you not broke 0:09:48.679 --> 0:09:51.640 as a preferred holder? Do you get better voting rights? 0:09:52.040 --> 0:09:55.560 That's yeah, so if you get special dividends, that's that's 0:09:55.559 --> 0:09:59.160 that's the So you're preferred, but not very preferred. If 0:09:59.160 --> 0:10:02.560 you're preferred to the common shareholder, and that's typically about it. 0:10:02.920 --> 0:10:05.320 So you're typically your payments, and for a lot of 0:10:05.320 --> 0:10:09.440 our securities, there will be a clause that will say, hey, 0:10:09.440 --> 0:10:12.600 if you're making a distribution to your common shareholder that 0:10:12.600 --> 0:10:15.760 common equity dividends going out, you have to pay your 0:10:15.800 --> 0:10:18.920 preferred security. So you do get some preference from that point. 0:10:18.960 --> 0:10:21.800 And then also if and we'll talk about why this 0:10:21.880 --> 0:10:24.480 is a low probability event, but if you did have 0:10:24.559 --> 0:10:28.080 one of our issuers say default or go bankrupt in 0:10:28.160 --> 0:10:31.640 our space, you would have a claim on assets above 0:10:31.640 --> 0:10:34.720 the common shareholder, So you do get a preferential treatment 0:10:34.720 --> 0:10:38.559 in that from that perspective, From the issuer's perspective, are 0:10:38.559 --> 0:10:42.120 there certain sectors that whether their financials or whatever, that 0:10:42.200 --> 0:10:45.480 typically our issuers or preferreds And if so, why so? 0:10:45.520 --> 0:10:49.280 It's heavily dominated by financial services and in particular banks. 0:10:49.679 --> 0:10:52.520 So banks are a big issue or preferreds roughly about 0:10:52.520 --> 0:10:55.640 sixty five percent of our issuer base. Banks, another ten 0:10:55.720 --> 0:10:59.160 or fifteen percent insurance companies. That's a plus and no minus. 0:10:59.160 --> 0:11:01.960 So we're going to have se concentration. But we think 0:11:01.960 --> 0:11:04.720 that that's a good thing in this environment because look, 0:11:04.800 --> 0:11:07.880 let's face it, banks today are incredibly strong and it's 0:11:07.920 --> 0:11:10.360 really a result of the financial crisis we had close 0:11:10.440 --> 0:11:13.520 to ten twelve years ago that they're in a great 0:11:13.559 --> 0:11:17.880 position today. But the outlook is also really constructive for banks. 0:11:18.240 --> 0:11:21.120 They're benefiting tremendously from this rise and interest rate environment, 0:11:21.360 --> 0:11:25.680 and so it's a it's a way, I think for 0:11:25.800 --> 0:11:29.240 us to also benefit from rise and interest rates from 0:11:29.320 --> 0:11:34.000 a fundamental perspective when you invest in prefers, so the 0:11:35.080 --> 0:11:36.960 story that gets lost a lot of times and preferred. 0:11:36.960 --> 0:11:39.320 So when people look at the securities, they're often rated 0:11:39.360 --> 0:11:42.280 triple B, sometimes double B, and people will say, oh, 0:11:42.280 --> 0:11:44.480 this is kind of a high yield type of investment. 0:11:45.000 --> 0:11:48.560 The reality is that the senior rating on average for 0:11:48.600 --> 0:11:51.960 the issuers is closer to single A. Our securities are 0:11:52.000 --> 0:11:55.079 rated lower because they're subordinate. And we use JP Morgan 0:11:55.120 --> 0:11:57.520 as an example all the time. JPMorgan at the senior 0:11:57.640 --> 0:11:59.880 level rated single A, single A, double A by the 0:12:00.040 --> 0:12:02.959 big three radiing agencies across the board, preferred A triple B. 0:12:03.559 --> 0:12:06.040 But if you own a JP Morgan preferred, you don't 0:12:06.080 --> 0:12:09.080 have exposure to a triple B company, right you're subordinate 0:12:09.120 --> 0:12:12.040 to JP Morgan, you really have that single A slash 0:12:12.080 --> 0:12:14.800 double A type of credit exposure. So so there's a 0:12:14.840 --> 0:12:18.000 lot of I think benefits to preferreds, But at the 0:12:18.080 --> 0:12:20.199 end of the day, when you have this much sector concentration, 0:12:20.440 --> 0:12:23.280 you need to be cognizant at in your overall portfolio. 0:12:23.320 --> 0:12:27.760 That's JP Morgan's your go to example. In the US, 0:12:27.800 --> 0:12:30.720 I just got back last year from living in Berlin 0:12:30.840 --> 0:12:34.040 for five years. I think of Volkswagen. I don't know 0:12:34.480 --> 0:12:38.840 if it's a different structure, but VAW three GI on 0:12:38.880 --> 0:12:42.080 the terminal is preferred and that's almost traded like they're common. 0:12:42.200 --> 0:12:44.280 Like if you buy Volkswagen shares, you're buying those. I 0:12:44.480 --> 0:12:48.600 don't get why. So there are sector there is sector 0:12:48.640 --> 0:12:53.000 exposure outside of financial services, and for US, we really 0:12:53.120 --> 0:12:56.280 still like to kind of even though it's it's concentrated 0:12:56.400 --> 0:12:59.400 in that space, that's where we like to hit the 0:12:59.440 --> 0:13:02.320 ball down the fairway, kind of like staying within the banks, 0:13:02.320 --> 0:13:05.640 the insurance utilities because the US in the US. But 0:13:05.679 --> 0:13:07.599 you know, do you stay in the US though, or 0:13:07.679 --> 0:13:10.080 do you also look overseas? When we go overseas, the 0:13:10.120 --> 0:13:13.640 market is still dominated by non I would say, non 0:13:13.800 --> 0:13:19.599 US financial institutions. The corporate hybrid corporate preferred universe is 0:13:20.240 --> 0:13:23.640 larger outside the US, but still the majority of the 0:13:23.679 --> 0:13:26.560 exposure is financial services. And so you know, just remember 0:13:26.600 --> 0:13:28.760 we're benefiting not just here in the US, but also 0:13:28.800 --> 0:13:34.240 globally from this higher regulatory environment that these banks are 0:13:34.280 --> 0:13:37.520 operating under today, and we benefit as investors from that 0:13:37.559 --> 0:13:40.960 added layer of security from that oversight. These banks are 0:13:41.000 --> 0:13:45.440 incredibly well capitalized, and the insurance space is incredibly strong too, 0:13:45.480 --> 0:13:49.600 I mean, sitting on record levels of statutory capital. The 0:13:49.640 --> 0:13:53.319 pricing environment for insurance has been incredibly strong. So so 0:13:53.720 --> 0:13:56.720 the one big takeaway that we want people to know 0:13:56.800 --> 0:14:00.160 and understand is that, look, the underlying fundamentals of the 0:14:00.360 --> 0:14:04.080 large sectors in the preferred space are incredibly compelling, and 0:14:04.160 --> 0:14:07.439 that this income which we you know, I only touched 0:14:07.480 --> 0:14:09.920 on briefly, which is why a lot of people will 0:14:09.920 --> 0:14:14.240 access our asset class oftentimes as tax advantage. For individual investors, 0:14:14.240 --> 0:14:16.880 a lot of times the distributions are treated as dividends, 0:14:17.360 --> 0:14:19.600 and so for folks that are in a high tax 0:14:19.640 --> 0:14:23.760 bracket that needs some income but they don't have any 0:14:23.800 --> 0:14:27.040 more room in a qualified account, the tax advantage of 0:14:27.360 --> 0:14:30.200 the distributions from a lot of preferred strategies puts the 0:14:30.240 --> 0:14:33.720 taxable equivalent yield much higher than even the stated yield. Now, 0:14:33.760 --> 0:14:36.040 when I buy a preferred am I getting a fixed 0:14:36.120 --> 0:14:39.200 rate a floating rate, How does that'll work? It just 0:14:39.240 --> 0:14:41.520 depends what you want you can find at all. And 0:14:41.600 --> 0:14:44.360 so this is where we think also active management comes 0:14:44.360 --> 0:14:47.360 into play, because an active manager can go out there 0:14:47.360 --> 0:14:50.640 and find those securities that have either a fixed rate 0:14:50.640 --> 0:14:53.520 coupon or something that's a floating rate, or something that's 0:14:53.520 --> 0:14:56.880 a hybrid affixed to a floating rate structure. And so 0:14:57.240 --> 0:14:59.720 when we look at the overall preferred universe, You're going 0:14:59.760 --> 0:15:02.840 to some securities that do have durations of seven, eight, 0:15:02.960 --> 0:15:08.600 nine plus years, others floating rate pretty much zero durations. 0:15:08.680 --> 0:15:13.120 So you can, depending on your appetite for interest rate risk, 0:15:13.640 --> 0:15:17.520 you know, really customize a portfolio preferreds to meet your needs. 0:15:17.920 --> 0:15:20.480 I would need an active manager like a seeing eye dog. 0:15:20.480 --> 0:15:23.800 And I'm blind here, but I mean, for example, I 0:15:23.840 --> 0:15:26.400 look at JP Morgan's preferred LA see seven. I don't 0:15:26.400 --> 0:15:29.120 know where I would go. I guess this dividends six 0:15:29.120 --> 0:15:33.000 percent dividend is a strong one. But are you worried 0:15:33.040 --> 0:15:36.200 your job gets replaced by AI soon? Or do you 0:15:36.320 --> 0:15:39.920 use AI? Can you use AI at your job? You? 0:15:40.440 --> 0:15:43.280 I think it's really really tough because there's such very 0:15:43.320 --> 0:15:47.320 little standardization across the preferred market, and a lot of 0:15:47.360 --> 0:15:51.440 the things that create value and help alleviate risk is 0:15:51.600 --> 0:15:54.840 how the prospectus is written. So could we get to 0:15:54.880 --> 0:15:57.520 a point where AI could go through a prospectus and 0:15:57.640 --> 0:16:01.600 really pull out those important data points, those minute details 0:16:01.640 --> 0:16:05.400 that make one security meaningfully different from another. Absolutely, are 0:16:05.400 --> 0:16:08.240 we there yet? You know, I think we're still a 0:16:08.320 --> 0:16:11.680 ways off. But you feel comfortable, you're secure in your job. 0:16:11.720 --> 0:16:13.720 I'm probably more likely to get replaced at home by 0:16:13.760 --> 0:16:18.560 aim in the workplace. Yeah, all right, City a thousand 0:16:18.600 --> 0:16:22.160 dollars par floating rate preferred. It's got a current coupon 0:16:22.240 --> 0:16:25.440 of nine point zero nine three five seven. I mean 0:16:25.480 --> 0:16:29.320 that's pretty good, right, And it's qdi qdi meaning it's 0:16:29.520 --> 0:16:33.200 tax advantage. It's tax advantaged, right. So so this was 0:16:33.240 --> 0:16:35.640 one of those structures that started off paying a fixed 0:16:35.720 --> 0:16:38.760 rate coupon. It was just shy of six percent, got 0:16:38.840 --> 0:16:41.400 up to its call date, and then for these types 0:16:41.440 --> 0:16:44.600 of structures, if if the issuer doesn't redeem the security, 0:16:44.680 --> 0:16:47.040 then the coupon starts to reset. This is one of 0:16:47.080 --> 0:16:51.120 those examples. Now, City right now, could they refinance this 0:16:51.200 --> 0:16:56.040 security at a lower coupon, absolutely, but if they do, 0:16:56.440 --> 0:16:58.320 they're going to be locked into a new preferred for 0:16:58.760 --> 0:17:02.480 probably at minimum five years. So what they're doing right now, 0:17:02.520 --> 0:17:05.880 in our opinion, is they're paying up now to maintain 0:17:05.960 --> 0:17:10.280 optionality to take this preferred exposure out if they don't 0:17:10.280 --> 0:17:12.679 need it down the road. And what we feel is 0:17:12.720 --> 0:17:14.399 and is some of the feedback we're getting from the 0:17:14.400 --> 0:17:17.280 banks is that they're expecting their balance sheets to shrink 0:17:17.359 --> 0:17:21.040 over time as the economy shrinks, and if that's the case, 0:17:21.280 --> 0:17:23.560 they won't need as much capital, and that's why they 0:17:23.560 --> 0:17:26.439 issue prefers. Preferreds count as capital, so as their balance 0:17:26.440 --> 0:17:31.359 sheet shrinks, this security now is really cullable quarterly, so 0:17:31.440 --> 0:17:33.320 it gives them a lot of optionality just to take 0:17:33.320 --> 0:17:36.560 it out at some point, whereas if they refinance it today, 0:17:36.680 --> 0:17:38.840 they'd lock themselves into a new preferred for a long 0:17:38.880 --> 0:17:41.679 period of time. All right, just real quick, thirty seconds. 0:17:41.760 --> 0:17:45.280 Aircraft lesser sector, Yeah, what's that all about it? Yeah, 0:17:45.359 --> 0:17:48.560 so this is important, right, We're just talking about sector concentration, 0:17:48.640 --> 0:17:50.760 so we try and come with some ideas, some thoughtful 0:17:50.800 --> 0:17:54.480 ideas outside of outside of that area. So the aircraft 0:17:54.560 --> 0:17:58.040 lesser space is a weight I think to really leverage 0:17:57.760 --> 0:18:03.199 the very strong story that's that's underlining and underpinning the 0:18:03.280 --> 0:18:08.439 airlines air travel today, this post COVID environment and the 0:18:08.520 --> 0:18:12.880 air lesser business model oversimplifying it as to provide financing 0:18:13.000 --> 0:18:15.879 to the airlines when they buy fifty sixty seventy aircraft. 0:18:16.680 --> 0:18:21.119 These guys today, I think offer us exposure to a 0:18:21.240 --> 0:18:26.879 unique opportunity. It's timely and you can still find securities 0:18:26.920 --> 0:18:29.840 here that our interest rate, you know, kind of moderate 0:18:29.880 --> 0:18:32.679 exposure interesting stuff, really interesting stuff. Glad we got some 0:18:32.680 --> 0:18:34.760 some of your time. Doug Baker, portfolio Management, head of 0:18:34.760 --> 0:18:39.400 Preferred Securities at Nouvene, talking about preferred securities. Really interesting 0:18:39.800 --> 0:18:42.560 discussion there. We'll get Doug back and we appreciate them 0:18:42.560 --> 0:18:50.320 coming into our Bloomberg Interactive Broker studio the Northern Line. 0:18:50.560 --> 0:18:52.920 I've been commuting to the City of London on this 0:18:53.200 --> 0:18:57.240 train for decades. Raised in the era of Margaret Thatcher 0:18:57.320 --> 0:19:00.760 and the city's big bang women thought that we'd be 0:19:00.800 --> 0:19:05.520 making the decisions by now and getting the rewards. But 0:19:05.880 --> 0:19:09.000 how wrong we were. The reality is that only twelve 0:19:09.080 --> 0:19:12.640 percent of UK fund managers are women. The person who's 0:19:12.680 --> 0:19:15.720 been at the vanguard of advancing women in the city 0:19:16.040 --> 0:19:21.040 is Helena Morrissey, Dame Helena, former CEO of Newton Investment Management, 0:19:21.200 --> 0:19:24.040 ex chair of aj Bell. She's advised the government and 0:19:24.080 --> 0:19:27.040 has a seat in the House of Lords. She's now 0:19:27.080 --> 0:19:31.520 putting her considerable contacts, book and profile to work to 0:19:31.560 --> 0:19:35.480 get more women managing money. I do think there's an 0:19:35.480 --> 0:19:38.919 image problem that people look and they think, oh, fund management, 0:19:38.920 --> 0:19:41.600 it's not for me. It would be very isolated to 0:19:41.640 --> 0:19:45.639 be a woman. It's kind of macho environment, and I 0:19:45.680 --> 0:19:47.360 think there is still though a bit of a sort 0:19:47.400 --> 0:19:51.720 of cultural impediment as well. I think many men now, 0:19:52.040 --> 0:19:55.359 especially in our industry, really are just as frustrated as 0:19:55.400 --> 0:19:57.919 the women that we're not seeing more progress. So is 0:19:58.000 --> 0:20:02.640 this Morrissey's more muscular approach to diversity. I love your expression, 0:20:02.800 --> 0:20:05.919 Karim muscular, because you know it should feel very robust. 0:20:05.960 --> 0:20:08.400 It should be like a you've got a business objective here, 0:20:08.760 --> 0:20:12.359 Let's improve diversity of talent. Let's make sure that people 0:20:12.400 --> 0:20:15.240 are included when they join if they're diverse, and let's 0:20:15.280 --> 0:20:18.879 achieve better results for our clients. Mentoring some sixty women 0:20:18.960 --> 0:20:22.000 over a year sounds modest, smaller than the intake at 0:20:22.040 --> 0:20:25.679 a big investment or law firm. There are around one thousand, 0:20:25.760 --> 0:20:30.400 six hundred UK fund managers but only about two hundred 0:20:30.440 --> 0:20:33.600 women in all. You could fit all of those women 0:20:33.760 --> 0:20:38.640 on a single London Underground tube train seated. So as 0:20:38.720 --> 0:20:41.879 Morrissey's legacy achievable. You know they used to go to 0:20:41.880 --> 0:20:44.720 be a veteran. Now, Lexie, I'm not beyond the grave 0:20:44.880 --> 0:20:46.600 next tithing my hope. This is not sort of you know, 0:20:46.640 --> 0:20:48.600 my parting shop. But I've always said you know, I 0:20:48.600 --> 0:20:51.840 really don't want to leave this industry until it looks 0:20:51.840 --> 0:20:54.199 and feels very different. And for me, that means that 0:20:54.240 --> 0:20:56.520 we have, you know, as many women in it as men, 0:20:56.720 --> 0:20:59.800