Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller. Every business day, we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news on the Bloomberg Markets Podcast,
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. A couple weeks ago,
Speaker 1: I'm sitting at the Veil airport, Matt, and there's this
Speaker 1: guy pounded away next to me on his laptop work. Wait,
Speaker 1: there's an airport in Vail. There is Eagle. It's not
Speaker 1: a half hour from Vail. So I see this guy
Speaker 1: next to me. He looks kind of familiar to say, hey,
Speaker 1: Matt Luzetti. He's's economist guy at Deutsche Bank. So I say, hey,
Speaker 1: how is your ski trip? He didn't ski. He was
Speaker 1: actually out there on a conference and he didn't ski.
Speaker 1: So I said, people do that. It's we're no. I mean,
Speaker 1: I said, we got to get you in studio here.
Speaker 1: We need to figure out what's going on. Matt Luzetti's
Speaker 1: in our studio today. He's from Deutsche Bank, chief US
Speaker 1: economist and not an Avid skier obviously, but I appreciate
Speaker 1: the work. He did actually ski for the first time
Speaker 1: this past weekend. Oh you did, Okay, you are We appreciate.
Speaker 1: I could tell Matt to clients he was at a vail,
Speaker 1: working hard, and that's what you want for your chief
Speaker 1: US economists. So, Matt, we had some ECO data today
Speaker 1: that just seem kind to kind of put a you know,
Speaker 1: I guess solidify the call that this FED can go
Speaker 1: higher for longer? Is that what you guys? A Deutsche
Speaker 1: banker thinking, yeah, absolutely, I think you got the data
Speaker 1: this morning. Obviously, the jobless claims data remain very low,
Speaker 1: consistent with a tight labor market with a lot of momentum.
Speaker 1: I'd also note the core PC inflation data were revised higher.
Speaker 1: We expected that a little bit because it's reflecting what
Speaker 1: we've already seen from the CPI data. I think tomorrow
Speaker 1: would get core PC. We're above consensus we expected to
Speaker 1: be point five month on month, and I really think
Speaker 1: the trend of the recent data is with upward revisions,
Speaker 1: a lot of momentum in the economy, a lot of
Speaker 1: resilience in the economy and the labor market, and less
Speaker 1: disinflation than the FED thought at the February meeting, So
Speaker 1: inflation looked like it was slowing down pretty quickly from
Speaker 1: the June headline CPI peak of nine point one percent,
Speaker 1: And what's the idea now that we've slowed at around
Speaker 1: six and we're not getting any lower. Yeah, I think
Speaker 1: I would focus on these three month changes because it
Speaker 1: strips out the very high prints that we saw early
Speaker 1: last year, and I think the revisions there have been
Speaker 1: really important. So course CPI looked like on a three
Speaker 1: month change it was decelerating down to three point one percent,
Speaker 1: getting closer to the level that's consistent with the FED
Speaker 1: subjective that was actually revised higher by more than a
Speaker 1: percentage point. And then with this latest data you have
Speaker 1: a three month annualized change for course CPI that's four
Speaker 1: and a half four point six percent, you know, very
Speaker 1: far away from the FED subjectives. I do think, you know,
Speaker 1: as we see corepc tomorrow, it'd be closer to four
Speaker 1: point four four and a half percent. You've seen some disinflation,
Speaker 1: we're off the peak, but the latest data tell us
Speaker 1: that the path here isn't easy. It's not just continued disinflation.
Speaker 1: We're likely to see somewhat higher in prints over the
Speaker 1: next few months. So, Matt, smart guys like you, are
Speaker 1: you taking the recession call off the table? I'm not
Speaker 1: sure if you had a recession call, but are the
Speaker 1: economists in general taking that recession call off the table?
Speaker 1: Do you think we've always had a recession call, but
Speaker 1: it's always been the back half of this year? Okay,
Speaker 1: it is in Q four for us right now. I
Speaker 1: think the latest flow the data fits well with that
Speaker 1: type of timeline. And it fits well with that because, look,
Speaker 1: the economy has good momentum. Now, the idea that's going
Speaker 1: to fall into recession in Q one or probably even
Speaker 1: Q two doesn't seem very likely given the momentum. At
Speaker 1: the same time, the repricing that we're seeing with the FED,
Speaker 1: the idea that the terminal rate needs to be higher.
Speaker 1: We're at five point six for the terminal rates, so
Speaker 1: we think they hike through through July. I think that
Speaker 1: will create tighter financial conditions consumers that that households are
Speaker 1: eating through their excess savings through the second half of
Speaker 1: this year. So we still have that timeline in place
Speaker 1: for our recession call. So how bad does it get?
Speaker 1: How bad to these long and variable lags hit us
Speaker 1: in Q four. We're already hearing news about huge price
Speaker 1: drops in housing, over a trillion dollars nationwide off five percent.
Speaker 1: We're hearing news about a slowdown in I just stuck
Speaker 1: to the CEO of Ducati in North America and he said,
Speaker 1: you know, the high rates are putting a crimp on
Speaker 1: motorcycle sales for example. Yeah, I think that's been you know,
Speaker 1: assessing that long and variable acts is always difficult. I
Speaker 1: think that there's been some quick transmission from the Fed's
Speaker 1: policies to financial conditions. We saw certainly what happened with
Speaker 1: the housing market mortgage rates spiking, but it's been I
Speaker 1: think a little bit slower to impact the consumer and
Speaker 1: a little bit slower to impact the labor market. I
Speaker 1: think in part that's because you've had this latent fiscal
Speaker 1: stimulus out there, with households still with one trillion of stimulus.
Speaker 1: And it's also because you have a structurally undersupplied labor market,
Speaker 1: so you have firms that need labor have had difficulty
Speaker 1: in finding labor and has led to this very resilient
Speaker 1: labor market. Knowing exactly when when that financial condition tightening
Speaker 1: hits the economy, I think is always always very difficult.
Speaker 1: How deep do you think the recession could be? Because
Speaker 1: two quarters of contraction, we've seen that already and it
Speaker 1: wasn't a recession apparently as far as we know, and
Speaker 1: we could see it again without feeling like we're in
Speaker 1: a deep recession. Is that what you expect? Shallow or
Speaker 1: do you think it could hit us hard and unemployment
Speaker 1: could eyes to five percent or more? Yeah? So I
Speaker 1: think it's all about the labor market. You know, whether
Speaker 1: or not we have a technical recession that has two
Speaker 1: quarters of negative growth I think is somewhat irrelevant to
Speaker 1: the market and the FED at this point. It's really
Speaker 1: about does the labor market begin to crack and does
Speaker 1: it begin to weaken. From a historic perspective, our recession
Speaker 1: looks kind of moderate. It looks like the early nineteen nineties.
Speaker 1: You have the unemployment rate rising by about two percentage
Speaker 1: points from from trough to peak. It's a big move
Speaker 1: from today's perspective, no doubt, But from a historic perspective,
Speaker 1: it's actually a relatively mild recession that we're expecting. What
Speaker 1: is your view on the labor market, it's just shocking
Speaker 1: to me that it is so strong, so vibrant, the
Speaker 1: jolts data, the unemployment day, everywhere you look. We don't
Speaker 1: see any cracks, do we No. I think you've seen
Speaker 1: it in some sectors. You know, obviously you have tech
Speaker 1: layoffs that are ongoing. You've seen it in the sectors
Speaker 1: that have employment well above the pre COVID trend. You know,
Speaker 1: all those sectors have slowed materially. Many of them are
Speaker 1: actually reducing their jobs in those sectors that have employment
Speaker 1: that are well below pre COVID trends. Leisure and hospitality
Speaker 1: is one, healthcare is another, the government sector is another.
Speaker 1: They've really been driving employment growth. They're really driving I
Speaker 1: think a lot of the tightness in the labor market,
Speaker 1: and really until that changes, it's unlikely that you're going
Speaker 1: to see negative payrolls prints. I don't think that that's
Speaker 1: happening over the next few months, just given the momentum.
Speaker 1: But the FED needs something to change here in the
Speaker 1: labor market, especially with what's happened with the inflation data recently.
Speaker 1: I think that we should have a lot less confidence
Speaker 1: than inflation is on this very clear downtrend back to target.
Speaker 1: So what about if we do have a recession. If
Speaker 1: we do have a weakening labor market, and you know
Speaker 1: that affects growth, do we see cuts? Do you expect
Speaker 1: the FED to cut rates at the end of this year,
Speaker 1: at the beginning of twenty twenty four, So we've pushed
Speaker 1: out our expectation for cuts. We do expect that they
Speaker 1: begin to cut rates in early twenty twenty four. But
Speaker 1: I think it's all about not only inflation, but what
Speaker 1: happens with the labor market. If we end this year
Speaker 1: and the labor market looks a lot like it does
Speaker 1: today and core inflation is three percent or above, the
Speaker 1: Fed's not going to be cutting rates. Yeah, and you
Speaker 1: know that that's close to what the FED has been forecasting.
Speaker 1: They have this rise in the unemployment rate. So I
Speaker 1: think it's if you get this weekending in the labor market,
Speaker 1: if you see that uemployment rate rising four and a
Speaker 1: half five percent, that's an environment where if inflation is
Speaker 1: closer to three percent, I do think the FED would
Speaker 1: be cutting rates. That's our baseline, But there's this risk
Speaker 1: of the labor market remaining more resilient, inflation remaining a
Speaker 1: bit closer to three percent inflation. Do they they say
Speaker 1: two percent, right, But do they really mean three? No?
Speaker 1: I think they're you know, they're adamant today, no doubt,
Speaker 1: and I think that they will stick to that. But
Speaker 1: the question is what does the labor market look like
Speaker 1: in that environment. If it's still very tight producing wage
Speaker 1: growth that's very elevated, they can't cut rates. If the
Speaker 1: labor market is looking very loose and disinflationary pressures are
Speaker 1: clear looking forward, then they can back off of a
Speaker 1: plus five percent fed funds rate, bring it back down,
Speaker 1: and track inflation lower to a more normal level. Got
Speaker 1: a PhD in UCLA? How good was that? UCLA? So
Speaker 1: it'd be a lot more fun if you weren't getting
Speaker 1: a PhD undergrad? CLA sounds awesome, Not so much, not
Speaker 1: as fun. You look out out of the library at
Speaker 1: the weather, and it's not as fun as you would expect.
Speaker 1: I guess, are you good? Matt Lozetti, proud graduate of
Speaker 1: Villanova undergrad got his PhD at UCLA. Pretty cool. They're
Speaker 1: great business school at UCLA, at the high school. Matt Louseettie,
Speaker 1: chief US economist Story Bank, joining us live in our
Speaker 1: Bloomberg Interactive Broker studio, And again I can attest to
Speaker 1: all Matt's institutional investor clients out there that he was
Speaker 1: in veil, but he was working. He wasn't skiing bumming
Speaker 1: off like I was so good stuff there. I'm gonna
Speaker 1: talk aboutferred stock. Their analysts don't know if from livestock
Speaker 1: and preferred stock and named that movie Wall Street. Yeah, okay.
Speaker 1: Doug Baker, portfolio manager and head of preferred securities at
Speaker 1: New Ven. He's based in Chicago, but we got him
Speaker 1: live in our Bloomberg Interactive broker studio. We don't talk enough,
Speaker 1: nearly enough, Doug about preferred stock, preferred securities. What's the
Speaker 1: pitch to own preferred securities? What's the advantage I think?
Speaker 1: I think for us it's an income solution that's that's
Speaker 1: high quality, okay. And you can generate this income without
Speaker 1: taking excessive credit risk. And if you choose your securities carefully,
Speaker 1: you can do it without taking significant duration risk or
Speaker 1: interest rate risk. And I think in this environment today,
Speaker 1: with rates as volatile as they are, finding a solution
Speaker 1: where you can generate and it's also tax efficient income
Speaker 1: in a lot of instances, doing that without having to
Speaker 1: make a significant call on interest rates, I think is
Speaker 1: appealing for a lot of folks, and then again for
Speaker 1: those folks that think, hey, there's a recession around the corner,
Speaker 1: not driving that income through taking a lot of credit
Speaker 1: risk at this point in time too, is also kind
Speaker 1: of compelling. So why are they called preferred? I mean,
Speaker 1: are you higher up on the credit list, creditors list
Speaker 1: if you if they go bankrupt, are you not broke
Speaker 1: as a preferred holder? Do you get better voting rights?
Speaker 1: That's yeah, so if you get special dividends, that's that's
Speaker 1: that's the So you're preferred, but not very preferred. If
Speaker 1: you're preferred to the common shareholder, and that's typically about it.
Speaker 1: So you're typically your payments, and for a lot of
Speaker 1: our securities, there will be a clause that will say, hey,
Speaker 1: if you're making a distribution to your common shareholder that
Speaker 1: common equity dividends going out, you have to pay your
Speaker 1: preferred security. So you do get some preference from that point.
Speaker 1: And then also if and we'll talk about why this
Speaker 1: is a low probability event, but if you did have
Speaker 1: one of our issuers say default or go bankrupt in
Speaker 1: our space, you would have a claim on assets above
Speaker 1: the common shareholder, So you do get a preferential treatment
Speaker 1: in that from that perspective, From the issuer's perspective, are
Speaker 1: there certain sectors that whether their financials or whatever, that
Speaker 1: typically our issuers or preferreds And if so, why so?
Speaker 1: It's heavily dominated by financial services and in particular banks.
Speaker 1: So banks are a big issue or preferreds roughly about
Speaker 1: sixty five percent of our issuer base. Banks, another ten
Speaker 1: or fifteen percent insurance companies. That's a plus and no minus.
Speaker 1: So we're going to have se concentration. But we think
Speaker 1: that that's a good thing in this environment because look,
Speaker 1: let's face it, banks today are incredibly strong and it's
Speaker 1: really a result of the financial crisis we had close
Speaker 1: to ten twelve years ago that they're in a great
Speaker 1: position today. But the outlook is also really constructive for banks.
Speaker 1: They're benefiting tremendously from this rise and interest rate environment,
Speaker 1: and so it's a it's a way, I think for
Speaker 1: us to also benefit from rise and interest rates from
Speaker 1: a fundamental perspective when you invest in prefers, so the
Speaker 1: story that gets lost a lot of times and preferred.
Speaker 1: So when people look at the securities, they're often rated
Speaker 1: triple B, sometimes double B, and people will say, oh,
Speaker 1: this is kind of a high yield type of investment.
Speaker 1: The reality is that the senior rating on average for
Speaker 1: the issuers is closer to single A. Our securities are
Speaker 1: rated lower because they're subordinate. And we use JP Morgan
Speaker 1: as an example all the time. JPMorgan at the senior
Speaker 1: level rated single A, single A, double A by the
Speaker 1: big three radiing agencies across the board, preferred A triple B.
Speaker 1: But if you own a JP Morgan preferred, you don't
Speaker 1: have exposure to a triple B company, right you're subordinate
Speaker 1: to JP Morgan, you really have that single A slash
Speaker 1: double A type of credit exposure. So so there's a
Speaker 1: lot of I think benefits to preferreds, But at the
Speaker 1: end of the day, when you have this much sector concentration,
Speaker 1: you need to be cognizant at in your overall portfolio.
Speaker 1: That's JP Morgan's your go to example. In the US,
Speaker 1: I just got back last year from living in Berlin
Speaker 1: for five years. I think of Volkswagen. I don't know
Speaker 1: if it's a different structure, but VAW three GI on
Speaker 1: the terminal is preferred and that's almost traded like they're common.
Speaker 1: Like if you buy Volkswagen shares, you're buying those. I
Speaker 1: don't get why. So there are sector there is sector
Speaker 1: exposure outside of financial services, and for US, we really
Speaker 1: still like to kind of even though it's it's concentrated
Speaker 1: in that space, that's where we like to hit the
Speaker 1: ball down the fairway, kind of like staying within the banks,
Speaker 1: the insurance utilities because the US in the US. But
Speaker 1: you know, do you stay in the US though, or
Speaker 1: do you also look overseas? When we go overseas, the
Speaker 1: market is still dominated by non I would say, non
Speaker 1: US financial institutions. The corporate hybrid corporate preferred universe is
Speaker 1: larger outside the US, but still the majority of the
Speaker 1: exposure is financial services. And so you know, just remember
Speaker 1: we're benefiting not just here in the US, but also
Speaker 1: globally from this higher regulatory environment that these banks are
Speaker 1: operating under today, and we benefit as investors from that
Speaker 1: added layer of security from that oversight. These banks are
Speaker 1: incredibly well capitalized, and the insurance space is incredibly strong too,
Speaker 1: I mean, sitting on record levels of statutory capital. The
Speaker 1: pricing environment for insurance has been incredibly strong. So so
Speaker 1: the one big takeaway that we want people to know
Speaker 1: and understand is that, look, the underlying fundamentals of the
Speaker 1: large sectors in the preferred space are incredibly compelling, and
Speaker 1: that this income which we you know, I only touched
Speaker 1: on briefly, which is why a lot of people will
Speaker 1: access our asset class oftentimes as tax advantage. For individual investors,
Speaker 1: a lot of times the distributions are treated as dividends,
Speaker 1: and so for folks that are in a high tax
Speaker 1: bracket that needs some income but they don't have any
Speaker 1: more room in a qualified account, the tax advantage of
Speaker 1: the distributions from a lot of preferred strategies puts the
Speaker 1: taxable equivalent yield much higher than even the stated yield. Now,
Speaker 1: when I buy a preferred am I getting a fixed
Speaker 1: rate a floating rate, How does that'll work? It just
Speaker 1: depends what you want you can find at all. And
Speaker 1: so this is where we think also active management comes
Speaker 1: into play, because an active manager can go out there
Speaker 1: and find those securities that have either a fixed rate
Speaker 1: coupon or something that's a floating rate, or something that's
Speaker 1: a hybrid affixed to a floating rate structure. And so
Speaker 1: when we look at the overall preferred universe, You're going
Speaker 1: to some securities that do have durations of seven, eight,
Speaker 1: nine plus years, others floating rate pretty much zero durations.
Speaker 1: So you can, depending on your appetite for interest rate risk,
Speaker 1: you know, really customize a portfolio preferreds to meet your needs.
Speaker 1: I would need an active manager like a seeing eye dog.
Speaker 1: And I'm blind here, but I mean, for example, I
Speaker 1: look at JP Morgan's preferred LA see seven. I don't
Speaker 1: know where I would go. I guess this dividends six
Speaker 1: percent dividend is a strong one. But are you worried
Speaker 1: your job gets replaced by AI soon? Or do you
Speaker 1: use AI? Can you use AI at your job? You?
Speaker 1: I think it's really really tough because there's such very
Speaker 1: little standardization across the preferred market, and a lot of
Speaker 1: the things that create value and help alleviate risk is
Speaker 1: how the prospectus is written. So could we get to
Speaker 1: a point where AI could go through a prospectus and
Speaker 1: really pull out those important data points, those minute details
Speaker 1: that make one security meaningfully different from another. Absolutely, are
Speaker 1: we there yet? You know, I think we're still a
Speaker 1: ways off. But you feel comfortable, you're secure in your job.
Speaker 1: I'm probably more likely to get replaced at home by
Speaker 1: aim in the workplace. Yeah, all right, City a thousand
Speaker 1: dollars par floating rate preferred. It's got a current coupon
Speaker 1: of nine point zero nine three five seven. I mean
Speaker 1: that's pretty good, right, And it's qdi qdi meaning it's
Speaker 1: tax advantage. It's tax advantaged, right. So so this was
Speaker 1: one of those structures that started off paying a fixed
Speaker 1: rate coupon. It was just shy of six percent, got
Speaker 1: up to its call date, and then for these types
Speaker 1: of structures, if if the issuer doesn't redeem the security,
Speaker 1: then the coupon starts to reset. This is one of
Speaker 1: those examples. Now, City right now, could they refinance this
Speaker 1: security at a lower coupon, absolutely, but if they do,
Speaker 1: they're going to be locked into a new preferred for
Speaker 1: probably at minimum five years. So what they're doing right now,
Speaker 1: in our opinion, is they're paying up now to maintain
Speaker 1: optionality to take this preferred exposure out if they don't
Speaker 1: need it down the road. And what we feel is
Speaker 1: and is some of the feedback we're getting from the
Speaker 1: banks is that they're expecting their balance sheets to shrink
Speaker 1: over time as the economy shrinks, and if that's the case,
Speaker 1: they won't need as much capital, and that's why they
Speaker 1: issue prefers. Preferreds count as capital, so as their balance
Speaker 1: sheet shrinks, this security now is really cullable quarterly, so
Speaker 1: it gives them a lot of optionality just to take
Speaker 1: it out at some point, whereas if they refinance it today,
Speaker 1: they'd lock themselves into a new preferred for a long
Speaker 1: period of time. All right, just real quick, thirty seconds.
Speaker 1: Aircraft lesser sector, Yeah, what's that all about it? Yeah,
Speaker 1: so this is important, right, We're just talking about sector concentration,
Speaker 1: so we try and come with some ideas, some thoughtful
Speaker 1: ideas outside of outside of that area. So the aircraft
Speaker 1: lesser space is a weight I think to really leverage
Speaker 1: the very strong story that's that's underlining and underpinning the
Speaker 1: airlines air travel today, this post COVID environment and the
Speaker 1: air lesser business model oversimplifying it as to provide financing
Speaker 1: to the airlines when they buy fifty sixty seventy aircraft.
Speaker 1: These guys today, I think offer us exposure to a
Speaker 1: unique opportunity. It's timely and you can still find securities
Speaker 1: here that our interest rate, you know, kind of moderate
Speaker 1: exposure interesting stuff, really interesting stuff. Glad we got some
Speaker 1: some of your time. Doug Baker, portfolio Management, head of
Speaker 1: Preferred Securities at Nouvene, talking about preferred securities. Really interesting
Speaker 1: discussion there. We'll get Doug back and we appreciate them
Speaker 1: coming into our Bloomberg Interactive Broker studio the Northern Line.
Speaker 1: I've been commuting to the City of London on this
Speaker 1: train for decades. Raised in the era of Margaret Thatcher
Speaker 1: and the city's big bang women thought that we'd be
Speaker 1: making the decisions by now and getting the rewards. But
Speaker 1: how wrong we were. The reality is that only twelve
Speaker 1: percent of UK fund managers are women. The person who's
Speaker 1: been at the vanguard of advancing women in the city
Speaker 1: is Helena Morrissey, Dame Helena, former CEO of Newton Investment Management,
Speaker 1: ex chair of aj Bell. She's advised the government and
Speaker 1: has a seat in the House of Lords. She's now
Speaker 1: putting her considerable contacts, book and profile to work to
Speaker 1: get more women managing money. I do think there's an
Speaker 1: image problem that people look and they think, oh, fund management,
Speaker 1: it's not for me. It would be very isolated to
Speaker 1: be a woman. It's kind of macho environment, and I
Speaker 1: think there is still though a bit of a sort
Speaker 1: of cultural impediment as well. I think many men now,
Speaker 1: especially in our industry, really are just as frustrated as
Speaker 1: the women that we're not seeing more progress. So is
Speaker 1: this Morrissey's more muscular approach to diversity. I love your expression,
Speaker 1: Karim muscular, because you know it should feel very robust.
Speaker 1: It should be like a you've got a business objective here,
Speaker 1: Let's improve diversity of talent. Let's make sure that people
Speaker 1: are included when they join if they're diverse, and let's
Speaker 1: achieve better results for our clients. Mentoring some sixty women
Speaker 1: over a year sounds modest, smaller than the intake at
Speaker 1: a big investment or law firm. There are around one thousand,
Speaker 1: six hundred UK fund managers but only about two hundred
Speaker 1: women in all. You could fit all of those women
Speaker 1: on a single London Underground tube train seated. So as
Speaker 1: Morrissey's legacy achievable. You know they used to go to
Speaker 1: be a veteran. Now, Lexie, I'm not beyond the grave
Speaker 1: next tithing my hope. This is not sort of you know,
Speaker 1: my parting shop. But I've always said you know, I
Speaker 1: really don't want to leave this industry until it looks
Speaker 1: and feels very different. And for me, that means that
Speaker 1: we have, you know, as many women in it as men,
Speaker 1: and so people expect if they have a fun manager
Speaker 1: to come visit them and their thorough client. They have
Speaker 1: just as much expectation that's going to be a woman
Speaker 1: as a man, and that's not the case. Now meet
Speaker 1: the mentors and what they hope to pass on. My
Speaker 1: name is Rosie McMillan. I work at Fidelity International, where
Speaker 1: I'm the director of portfolio Management. To say it's been
Speaker 1: an easy ride would be a lie. It's a case
Speaker 1: of changing mindset, changing habits, changing deeply in rooted beliefs,
Speaker 1: and opening people's eyes to possibility. If gender diversity has stalled,
Speaker 1: ethnic diversity is even worse. My name is I'm Jim
Speaker 1: day Lawal and I work at Bearings. I'm the head
Speaker 1: of Ian Corporate Debt at Bearings. I think there are
Speaker 1: certain circumstances in certain situations you find yourself in as
Speaker 1: a female portfolio manager, a female fund manager, and you
Speaker 1: feel you'ressuming against the tide. I've got the intersectionality of
Speaker 1: being an ethnic minority as well as a female, and
Speaker 1: I see that come through in my own journey. Ellen
Speaker 1: Man is a mentee. She's studying to become a chartered
Speaker 1: financial analyst at Cambridge Graduate in Japanese. She's working at
Speaker 1: Jupiter Asset Management. I'd started my career during lockdown, so
Speaker 1: I spent almost two years working pretty much by myself.
Speaker 1: So I just was really excited to honestly meet other
Speaker 1: people getting started and here from them. I've joined a
Speaker 1: team where my my line manager is someone very committed
Speaker 1: to the mentor role already. So you've got a mail mentor. Yes,
Speaker 1: the idea of having a mentor and the kind of
Speaker 1: check ins with them and providing some guidance on how
Speaker 1: do you support someone in those career goals. I think
Speaker 1: that's very valuable, especially from the kind of gender perspective.
Speaker 1: So cautious optimism then, because the numbers truly are embarrassing.
Speaker 1: Citywar totted up five hundred and sixty two new funds
Speaker 1: launched in the UK in twenty twenty two, but only
Speaker 1: ten percent are being managed by women. It's hard, though,
Speaker 1: not to be swept up by Helena Morrissey's determination. But
Speaker 1: in the twenty years that I've been covering finance, the
Speaker 1: sector has seen little change. Helena and others have a
Speaker 1: battle to move fund management forwards. I'll leave the final
Speaker 1: word though, to Ellen, I'm hopeful, but I think my
Speaker 1: hopefulness is very much in the context of being lucky
Speaker 1: enough to be around a team who are very supportive,
Speaker 1: and to have a kind of first boss who has
Speaker 1: been extremely supportive and wants me to flourish. Caroline joins
Speaker 1: us right now on the phone from Lunn. Caroline, what
Speaker 1: is your level of optimism about change here in the
Speaker 1: UK fund business? Well, great to be speaking to you. Look,
Speaker 1: I think it's it's very difficult. On the one hand,
Speaker 1: this is hugely ambitious, right Helena Morrissey. If she continues
Speaker 1: this program with the Diversity Project, in three years time,
Speaker 1: she could double the number of female fund managers. That
Speaker 1: is massively ambitious, even though it's only sixty women. So
Speaker 1: you could have sort of Morrissey's view and this whole
Speaker 1: program really amazingly influential in the space. On the other hand,
Speaker 1: we've had so many initiatives and the numbers have been
Speaker 1: so difficult to move. The UK's got gender pay reporting
Speaker 1: for the big financial institutions, big, big employers in the
Speaker 1: UK that hasn't moved the needle that much. You look
Speaker 1: at the Alison Rose review just this week. She's the
Speaker 1: CEO of nat West Bank here in the UK, and
Speaker 1: that review of entrepreneurship record numbers of women starting new businesses,
Speaker 1: but they still struggle to get funding. So that's the context,
Speaker 1: and I think it's reflected in some of the comments
Speaker 1: by the women that I spoke to. For me, it's
Speaker 1: great having on the program. I'll listen to your show
Speaker 1: every single morning as I drive to work and I
Speaker 1: can't think of any better way to prepare for my
Speaker 1: trading day, well, my reporting day. I wonder if this
Speaker 1: is specifically a UK problem or if you see it,
Speaker 1: you know any better or worse in New York? Is
Speaker 1: it any better or worse in Frankfurt? Look, the numbers
Speaker 1: speak for themselves, right Globally eighteen percent of fun managers
Speaker 1: are female, so it's not particularly better anywhere else in
Speaker 1: the world. But also I think that it's important not
Speaker 1: to think about this pathway program, which is accompanied by
Speaker 1: doing your CFA, your exams as well to be a
Speaker 1: fun manager in Britain. It is global isn't it, Because
Speaker 1: as one of the women told me, Rosie, these companies
Speaker 1: that are taking part thirty three firms, they're global investors,
Speaker 1: and so perhaps the optimism also is that there's a
Speaker 1: cascade effect and financial cities and centers around the world.
Speaker 1: We'll be looking at London maybe maybe take that example.
Speaker 1: All right, great stuff. I really appreciate you taking the time, Caroline,
Speaker 1: and a fascinating piece of reporting there Bloomberg Daybreak Europost
Speaker 1: Caroline Hepcker with the story about the I guess what
Speaker 1: is a stubborn problem on a global basis. It is
Speaker 1: the lack of diversity, gender and otherwise in the fund
Speaker 1: management business. Yeah. Absolutely, and again I'll encourage people four Am.
Speaker 1: Caroline Hepker and team act Tom Mackenzie on the radio
Speaker 1: deliver everything you need to get started. And uh, it's
Speaker 1: really don't miss programming. And they're assuming you're awake it
Speaker 1: for you, Assuming you're awake it for you. Let's talk
Speaker 1: stocks with an old friend, Callie Cox. She's in our
Speaker 1: Bloomberg in Actor Broker studio. She's US equity analyst with
Speaker 1: e Turo. And I think memory serves you went to
Speaker 1: that trade school in Chapel Hill is right if I remember, Yeah,
Speaker 1: that trade school that's not doing so hot with basketball. Yeah. Anyway, Callie,
Speaker 1: do you make of this market? I think the last
Speaker 1: time we talked to you a month or so ago,
Speaker 1: the narrative is very different. People were talking about the FED,
Speaker 1: this inflation things. It's it's in the past. The FED
Speaker 1: actually made pause and pivot sooner than we think. That
Speaker 1: was driving the markets in January. But the narts a
Speaker 1: little bit differently. Now, how are you thinking about it? Yeah, well,
Speaker 1: now people think the FED could go even higher, and
Speaker 1: FED officials are saying the same thing. We have FED
Speaker 1: speakers stepping out and saying, you know, maybe a fifty
Speaker 1: basis point hike is warranted. You know, maybe we should
Speaker 1: re accelerate, and markets are pricing that back in. From
Speaker 1: our side, you know, we didn't expect a rate cut
Speaker 1: anytime soon. We expected maybe a little bit of excitement
Speaker 1: around the fact that inflation is coming under control. But
Speaker 1: maybe it's not coming under control as quickly as people think.
Speaker 1: So I think that's just shifted the mindset of it.
Speaker 1: So what does that mean? I just saw Cliff Assess
Speaker 1: actually from AQR on Bloomberg TV and he was saying,
Speaker 1: this market has priced in inflation coming down pretty rapidly.
Speaker 1: So that to me says Cliff thinks we got a
Speaker 1: ways to go on the down side. What do you think?
Speaker 1: I agree with him. I think it's going to be
Speaker 1: a lot harder to take inflation from six percent to
Speaker 1: two percent than it was from nine percent to six percent.
Speaker 1: I'm talking about CPI when I say that, right headline, CPI,
Speaker 1: right right. And the reason why I say that is
Speaker 1: because services inflation is still fiery hot, and that's the
Speaker 1: strong part of the economy too. This is not a
Speaker 1: bad story if you step back and look at it,
Speaker 1: but it does make the Fed's job a lot harder
Speaker 1: because services inflation is more demand driven and more tied
Speaker 1: to the job market. And let's be honest, investors did
Speaker 1: get over their skis. It makes sense because bon yields fell,
Speaker 1: but now that bonn yields are rising again, there is
Speaker 1: a bit of a mismatch. So what do we do here?
Speaker 1: I mean, do we just wait for the Fed to
Speaker 1: signal that rates of peaked endor they would put a
Speaker 1: rate cut on the table, or is there some way
Speaker 1: to be active here and trying to get positioned for
Speaker 1: the remainder of this year. Well, I think it's important
Speaker 1: to sit down and figure out what your view is
Speaker 1: if you're looking for a short term opportunity, and I
Speaker 1: put it in three camps. I think of doomsday bears,
Speaker 1: I think of cautious bears, and I think of straight
Speaker 1: up bulls. We fall into the cautious bearers camp, where
Speaker 1: we think that prices are a little bit too high,
Speaker 1: sentiment has gone a little bit too far, but at
Speaker 1: the same time, we're still hopeful that the economy can
Speaker 1: avoid a recession, and that means markets may not take
Speaker 1: out the lows. So in that camp, you know, we
Speaker 1: really like looking for value. We like looking for quality,
Speaker 1: low valuations. Uh, you know, maybe looking at some cheap
Speaker 1: cyclical sectors. But I think depending on what camp you
Speaker 1: fall in, that could determine how you approach this market.
Speaker 1: I don't know if you have a view on crypto.
Speaker 1: I think of e toro and crypto together, just because
Speaker 1: so much of the great analysis I read, you know,
Speaker 1: I first started covering bitcoin was from e Toro. Um,
Speaker 1: I've been amazed by the fact that it's holding at
Speaker 1: let's check where bitcoin is right now see rypico on
Speaker 1: the twenty three thousand, So it's holding at twenty four
Speaker 1: thousand dollars, basically just about fifteen bucks under and at
Speaker 1: a time when the market has decided, oh darn it,
Speaker 1: we believe the FED narrative. Now they really are going
Speaker 1: to keep raising and holding. And so stocks, you know,
Speaker 1: tanked a couple days ago. Bitcoin did nothing. Why is
Speaker 1: it so resilient? So this is a really interesting story
Speaker 1: that I'm watching, and there are a bunch of different theories.
Speaker 1: But within crypto bitcoin is seen as the quality. It's
Speaker 1: seen like seen as the gold of the crypto space,
Speaker 1: and from a portfolio management perspective you look at it differently,
Speaker 1: but let's be honest, that's the brand that it has.
Speaker 1: So we're seeing the flight to quality within the crypto
Speaker 1: space out of alt coins, out of stable coins, into
Speaker 1: bitcoin and ethereum, just because they're so well known and
Speaker 1: because there is that institutional underpinning. It's a little weird
Speaker 1: to me, I'll be honest, because again, as from a
Speaker 1: portfolio management perspective, it's a risk asset, and risk assets
Speaker 1: tend to do worse in high rate environments, especially if
Speaker 1: they don't have underlying cash flows and profits. But it's
Speaker 1: it's a perspective thing. From what I've seen, there are
Speaker 1: just more flows going into bitcoin within the space, and
Speaker 1: that's kept the price afloat. How about fixed income? It
Speaker 1: was so so brutal performance in twenty twenty two. What
Speaker 1: are the you guys at eteral thinking about just broadly
Speaker 1: fixed income? So fixed income, You're right, it was a
Speaker 1: really weird year last year. I mean, stocks were down
Speaker 1: ten percent, bonds in general were down more than ten percent.
Speaker 1: It seems like they're rebounding at the same time. You know,
Speaker 1: we look at the ten year yield, we say, you know,
Speaker 1: it probably can't go much higher than four percent here.
Speaker 1: There seems to be a lot of technical push and
Speaker 1: pull around that point. Look at short term yields too.
Speaker 1: You know, the FETE is talking about re accelerating rate hikes,
Speaker 1: but again, let's be honest here, how much more are
Speaker 1: they going to re accelerate it? Because the FETE is
Speaker 1: trying to keep this balance and check of controlling inflation
Speaker 1: and you know, basically steering the economy and the job
Speaker 1: market through a slowdown. So, you know, we talk to
Speaker 1: more speculative short term traders, we remind them that. Of course,
Speaker 1: the recession is still a risk out there, and it
Speaker 1: may be smart to head your positions. Bonds are the
Speaker 1: obvious hedge there. But at the same time, you know,
Speaker 1: as a retail investor, you have to realize your time frame.
Speaker 1: So we're also saying if you're longer term, you know,
Speaker 1: maybe you have those short term goals that you want
Speaker 1: to meet, but longer term, let's look at more risk
Speaker 1: at these levels. Because stocks are ten to fifteen percent
Speaker 1: away from their highs. This is a buying opportunity if
Speaker 1: you have the time on your side. So tell me
Speaker 1: about ETRO. I don't know that much about it. Who's
Speaker 1: kind of your customer base talk to us about Yeah,
Speaker 1: so I love E Toro bias so I Toro is
Speaker 1: a retail brickrage. We have a lot of millennial and
Speaker 1: Gen X clients are kind of claim to fame is
Speaker 1: that we have a social investing feed and we offer
Speaker 1: a lot a lot globally in the US we offer
Speaker 1: stocial investing is not going to be enough for Paul.
Speaker 1: You got to tell them what that is, Paul. There's
Speaker 1: a social feed and you can post your trades and
Speaker 1: so you can then follow other people's trades. Right. So
Speaker 1: the idea is you can, if you you know, love
Speaker 1: Callie's portfolio management, you can follow her trades online. You
Speaker 1: can just copy her portfolio, okay, which is kind of
Speaker 1: a cool idea. I had never heard of it before that. Yeah,
Speaker 1: it's really cool, especially in this era of community when
Speaker 1: everybody's looking to everybody else on how to trade, how
Speaker 1: to invest, and more and more, how to speak. Yes
Speaker 1: for good and bad reasons, yes, but you know, being
Speaker 1: in that space and having that power to help investors
Speaker 1: find each other and find community is just such a
Speaker 1: cool offering. And I feel really honored that, you know,
Speaker 1: I'm I'm kind of the face of that in the
Speaker 1: US and helping helping, you know, connect this community along
Speaker 1: with the markets that we're all trying to understand alone.
Speaker 1: Gen Z. Millennials do they invest? Are the active investors? Yes?
Speaker 1: They invest? You're talking to a millennial Rod, Yeah, you
Speaker 1: are talking and she invests. Yeah. From data that we
Speaker 1: run and we keep a close pulse check on the
Speaker 1: retail investors through a bunch of different surveys we do.
Speaker 1: But retail investors, millennials and gens excuse me, gen X,
Speaker 1: We'll talk about all of them, gen X, gen Z.
Speaker 1: Millennials are investing at a more and more rapid clip.
Speaker 1: We're seeing a millennial coming of age basically in the economy,
Speaker 1: and when people have more money, they tend to invest it.
Speaker 1: So yeah, we're seeing a lot of those demographic shifts
Speaker 1: where these younger investors are feeling more empowered to invest.
Speaker 1: Great stuff. I love learning about the new ways to invest.
Speaker 1: Kelly Cox, she's a US investment analyst for e Turo.
Speaker 1: I think you guys are based in Hoboken, right, that's
Speaker 1: pretty cool. We are. We are, but we just got
Speaker 1: our New York bit license so we can move across
Speaker 1: the river. Now, Okay, I'm a big Hoboken fan, So
Speaker 1: that's good. There. Good stuff kind of Cox join us
Speaker 1: here in our Bloomberg Interactor Broker studio today in our
Speaker 1: c suite conversation, we'll talk about the snack food business.
Speaker 1: We'll be there with our good friends and Hostess Brands
Speaker 1: stock symbol. This is one of my faves. T w
Speaker 1: n K think Twinkie, Hostess Brands. It's a three point
Speaker 1: three billion market cap company. Stocks up nine percent. They
Speaker 1: report it's some better and expected results Tuesday, after the
Speaker 1: clothes stock traded up yesterday. We're joined by the CEO
Speaker 1: of Hostess Brands, Andy Callahan, joins us via the phone. Andy,
Speaker 1: thanks so much for joining us here. You had some
Speaker 1: pretty good numbers Tuesday after the close. What are some
Speaker 1: of the highlights from your quarterly results? Yeah, thanks for
Speaker 1: having me. We're coming off a great week in total earnings.
Speaker 1: As part of that, I mean, we're coming off our
Speaker 1: third consecutive year of double digit top line growth. We
Speaker 1: have double digit earnings growth and double digit EPs growth,
Speaker 1: so we're really we're really feel like we're in a
Speaker 1: good spot on our sustainable growth plan, and we reaffirmed
Speaker 1: our long term algorithm, gave guidance that was once again
Speaker 1: another profit guidance above our long term algorithm. And what's
Speaker 1: really driving our growth is our ability to be able
Speaker 1: to connect with consumers reimagine the snacking category for a
Speaker 1: new set of consumers, and a lot of that has
Speaker 1: driven by our innovation. We launched Bouncers back at the
Speaker 1: end of last year, and yesterday we just announced the
Speaker 1: launch of KS Bars, which is really bringing baking, which
Speaker 1: we do better than anybody else, into a new confectionery
Speaker 1: form and both our customers and consumers are really excited
Speaker 1: about it. So a big week overall. All right, I'll
Speaker 1: bite there you go. What are casbars? So? I love it?
Speaker 1: I love the so well consumers, So I love it.
Speaker 1: What are cas bars? Are? We? I mean as I
Speaker 1: know obviously, and everyone knows the twinkie. I'm a big
Speaker 1: fan of the Choco dial and the ding Dongs. I
Speaker 1: like the cupcakes, prefer the orange ones. But you don't
Speaker 1: drink soda. Uh well, I don't drink soda any right,
Speaker 1: we're not going out. I don't drink soda anymore. But anyway,
Speaker 1: I still do eat this stuff when I can. Um,
Speaker 1: it's because it's not an everyday thing, right, I'm not
Speaker 1: like living on twinkies. It's just occasionally in the gas station,
Speaker 1: I'll be like, damn, I need some cupcakes. Um. So,
Speaker 1: what is a casbar? Yeah? So a cas bar in
Speaker 1: a basic And then I'll give you the background because
Speaker 1: although your behaviors are terrific to you, what we find
Speaker 1: at a macro level is that snacking continues to grow.
Speaker 1: Snacking is growing greater than food and indulgence. Snacking is
Speaker 1: growing greater than a non indulgence, snacking by about twenty percent.
Speaker 1: And with all that being said, almost fifty percent of
Speaker 1: Americans snack more than three times a day, and so
Speaker 1: they take a balance sheet of prowth. Our Teeth chief
Speaker 1: growth officer talked about that and baking specifically. Consumers care
Speaker 1: about quality. We've invested in quality, and there's a lot
Speaker 1: of confections company the indulgence of confections that are trying
Speaker 1: to get into baking. Well, guess why we bring in
Speaker 1: baked goods to the confection category with a hostless strength
Speaker 1: of a baked good in a convenient package form. But
Speaker 1: you can discover a kazillion layers of delicious in our
Speaker 1: kaz bars. And that's gooey gooey cream, fluffy fluffy chocolate cake,
Speaker 1: pieces of sweet crunch, delightful drizzle. It is really an
Speaker 1: affection form with all the great goodness and quality that
Speaker 1: consumers wanted a bake goods, and we think it is
Speaker 1: really a big idea. Hey, Andy, When I think about
Speaker 1: the food business, whether it's a snack business or just
Speaker 1: overall food, I think of a GDP or GDP plus
Speaker 1: type type of top line growth story. But as you mentioned,
Speaker 1: the last three years, you guys put up low double digits.
Speaker 1: That also coincides with the pandemic. How did the pandemic
Speaker 1: impact your business? And will let have any residual effect
Speaker 1: going forward? Yeah, So the residual effects means will we
Speaker 1: continue to grow in the answer is a resounding yes.
Speaker 1: What the pandemic did for us. As consumers are in
Speaker 1: their home, around their home and traveling around their home,
Speaker 1: they snack more and snacking before COVID, during COVID, and
Speaker 1: after COVID had trends, especially indulgent snacking that were greater
Speaker 1: than total food. Consumers are changing the way they eat.
Speaker 1: They eat more with now with a balance sheet approach.
Speaker 1: My chief growth officer talked about that yesterday. So as
Speaker 1: they increase the total occasions or interactions food there, each
Speaker 1: of those occasions are more choiceful and they have a
Speaker 1: role in their life. And if they have an indulgence
Speaker 1: snack one time, they may then later in the day
Speaker 1: or earlier in the day have a more non indulgence
Speaker 1: snack to balance that all out. So that macro trend
Speaker 1: is unmistakable and we're living in that. So that what
Speaker 1: happened with COVID is we were able to given our
Speaker 1: investment in quality, the new innovation forms, we're able to
Speaker 1: reintroduce a new consumer to host this in a way
Speaker 1: that they hadn't seen before. And those investments during COVID,
Speaker 1: both innovation, reaching out to consumers, talking to them, our
Speaker 1: investment in quality, our ability to do that has been
Speaker 1: able to propel this business and that momentum has continued
Speaker 1: after COVID. You know, just a finer point on that,
Speaker 1: when we attract new consumers into our franchise, a lot
Speaker 1: of those are millennial parents. They then repeat at In
Speaker 1: other words, our addition of two times buyers is growing
Speaker 1: at more than twice the rate of anybody else that
Speaker 1: does bake goods. So we're really attracting consumers. But when
Speaker 1: we attract them, we really keep them. So those trends
Speaker 1: are really unmistakable the same consumer. It's not a it's
Speaker 1: not a binary choice of eating healthy or eating indulgence.
Speaker 1: It's really a balance sheet of how does it all
Speaker 1: fit within my life? And we're really capitalizing those trends
Speaker 1: with our innovation, our marketing outreaching, our investment in quality.
Speaker 1: I got to ask, but this is going to sound
Speaker 1: maybe flippant or but I'm wondering, really in states where
Speaker 1: marijuana is legal. Do you see a bump in sales?
Speaker 1: You know what? I don't know that specifically, but you know,
Speaker 1: consumers have choices, and that's what we provide. We want
Speaker 1: to provide them the best choice at the really accessible value.
Speaker 1: That's what we do and that's why we invest in
Speaker 1: our productivity. We want our operation to be really focused
Speaker 1: on what consumers care about, really focused on what customers
Speaker 1: care about. Growing the category by doing that and then
Speaker 1: running an operation and a team that unlocks the greatest
Speaker 1: potential of our terrific team and our culture to be
Speaker 1: able to provide that to our customers. And we're doing
Speaker 1: that in a real, real good way. So consumers have
Speaker 1: a breath of choices and uh, and I support all
Speaker 1: of those we want to give Andy, do you? I mean,
Speaker 1: but you seem very focused and I'm not sure if
Speaker 1: I know all of your brands, but they all seem
Speaker 1: like something that could add to my waistline. Do you
Speaker 1: also go after food categories, you know, in the fitness
Speaker 1: or our health food sector. Yeah, so I'm glad you
Speaker 1: brought that up because I was going to bring that
Speaker 1: up to you. Not only do we have an indulgent
Speaker 1: snacks We are the number one cookie brand with our
Speaker 1: Avoortment brand in the reduced sugar and sugar free segment
Speaker 1: and our Avoortment business that which we purchased three years ago,
Speaker 1: Integrate It and Grew, is one of the fastest brands
Speaker 1: in an eight billion dollar cookie segment. It's been growing
Speaker 1: at a rate last year of nearly twenty eight percent
Speaker 1: a point of sale, slightly above twenty eight percent point
Speaker 1: of sale, and we think we're well positioned to capitalize
Speaker 1: on consumers focus on reduced sugar as well. We have
Speaker 1: a leading position that subsegment of cookies is growing a
Speaker 1: greater than twice the rate of total cookies. So we
Speaker 1: have a portfolio of bait goods that provide for what
Speaker 1: consumers choices are. That's an important consumer segment, so we
Speaker 1: provide both of them. All right, Andy, great stuff. I
Speaker 1: really appreciate you taking the time to speak with us.
Speaker 1: Andy Callahan, he's the CEO of Hostess Brands, NASAC, Symbolt
Speaker 1: w n K think Twinkie again. The stock is up
Speaker 1: about nine percent year to date. Had a nice quarterly
Speaker 1: earnings reported after the closed Tuesday. Stock popped yesterday, so
Speaker 1: good to check in with the CEO. Thanks for listening
Speaker 1: to the Bloomberg Markets podcast. You can subscribe and listen
Speaker 1: to an interviews with Apple Podcasts or whatever podcast platform
Speaker 1: you prefer. I'm Matt Miller. I'm on Twitter at Matt
Speaker 1: Miller nineteen seventy three. And I'm Fall Sweeney. I'm on
Speaker 1: Twitter at pt Sweeney. Before the podcast, you can always
Speaker 1: catch us worldwide at Bloomberg Radio