WEBVTT - Government Should Be Borrowing As Much As They Can Now: Stern 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Abramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:33.199 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Government 0:00:33.240 --> 0:00:37.000 debt government refunding? Is the level of government debt and 0:00:37.120 --> 0:00:40.600 private debt? Is it endangering the growth of the US economy? 0:00:40.640 --> 0:00:42.960 Here to tell us More's Joel Stern. He's the chairman 0:00:43.000 --> 0:00:47.240 and the chief executive officer of Stern Value Management. Joel Stern, 0:00:47.280 --> 0:00:49.160 thank you very much for being in our eleven three 0:00:49.159 --> 0:00:51.239 oh studio. It's a pleasure to have you here. So 0:00:51.360 --> 0:00:53.800 answer this question for us. The level of government debt 0:00:53.880 --> 0:00:57.680 is causing a lot of people to opine about the 0:00:57.720 --> 0:01:00.760 future prospects for growth. What's your thought, Well, they are wrong, 0:01:01.520 --> 0:01:03.160 they are wrong. There are two ways you can tell. 0:01:03.760 --> 0:01:07.440 Take a look at real interest rates if the level 0:01:07.480 --> 0:01:09.880 of debt. Look if the bond rating of a company 0:01:09.880 --> 0:01:11.400 goes down, what do you think happens to the rate 0:01:11.440 --> 0:01:15.200 of interest they pay? It goes skyward. The thirty year 0:01:15.280 --> 0:01:20.880 government bonds, they're yielding three point one or something. So 0:01:20.959 --> 0:01:22.920 there's gotta be there's gotta be a retort to that, 0:01:22.959 --> 0:01:25.440 and I'll tell you what it is. You don't look 0:01:25.480 --> 0:01:29.200 at book value. You will look at market value. The 0:01:29.280 --> 0:01:32.240 market value of assets in the United States, not just 0:01:32.360 --> 0:01:37.959 the stock market, hey, real estate, gold, diamonds, all kinds 0:01:38.000 --> 0:01:40.880 of assets. They are very very high. If you take 0:01:40.920 --> 0:01:43.440 a look at the debt ratio, the amount of debt 0:01:43.440 --> 0:01:46.640 in relation to the market value of the assets we have, 0:01:47.120 --> 0:01:51.480 the debt ratio has actually gone down quite considerably. Okay, So, Joel, 0:01:51.560 --> 0:01:54.520 you're making an argument saying that it is perfectly fine 0:01:54.760 --> 0:01:57.440 for the U. S. Treasure Department to be selling a 0:01:57.520 --> 0:02:00.400 record amount of debt each quarter going forward. For right, 0:02:00.400 --> 0:02:02.720 so you've got new debt, right, new debt, Yes, new debt, 0:02:02.800 --> 0:02:06.080 additional issue in uh So, given that argument, we got 0:02:06.160 --> 0:02:09.480 the Treasury funding announcement earlier today, do you think they 0:02:09.480 --> 0:02:12.040 ought to be selling longer dated debt and more of 0:02:12.080 --> 0:02:14.040 that because they're focusing so much on the front end 0:02:14.080 --> 0:02:16.720 with a new two months two months a note as well. Well. 0:02:16.800 --> 0:02:19.640 Keep in mind that government debt, as I understand it, 0:02:19.680 --> 0:02:22.960 has no call protection. Whatever rate of interest, for whatever 0:02:23.040 --> 0:02:25.560 period of time, you're stuck with it in the government. 0:02:25.560 --> 0:02:28.480 Well were we as citizens are stuck with it? Okay, 0:02:28.639 --> 0:02:31.480 we can't call the debt and retire it early. Okay, 0:02:31.600 --> 0:02:33.360 we can buy it up in the market place, but 0:02:33.400 --> 0:02:36.320 there's no call protection. I remember back in the early 0:02:36.360 --> 0:02:39.280 eighties when the Gut when the inflation rate was very, 0:02:39.360 --> 0:02:43.560 very high Underaggan, he inherited that was something like twelve percent. Well, 0:02:43.600 --> 0:02:46.840 would you believe thirty year government bonds was suddenly being 0:02:46.880 --> 0:02:51.200 offered at fifteen point two percent? Okay, fifteen percent? Well, 0:02:51.200 --> 0:02:53.920 what does that mean? It means that the government officials, 0:02:54.000 --> 0:02:57.480 the economists, they believe that the high inflation was going 0:02:57.520 --> 0:03:01.520 to continue for the next thirty years. Okay. A Beryl Sprinkle, 0:03:01.560 --> 0:03:03.399 who was the under Secretary of the Treasury, I called 0:03:03.440 --> 0:03:05.160 him at that time and I said, hey, Beryl, what 0:03:05.160 --> 0:03:07.280 do you think? He said, I'm not I'm not a 0:03:07.360 --> 0:03:09.760 risk taker on this. I'm just a government official. I 0:03:09.800 --> 0:03:12.240 don't have any bonuses paid to me based on whether 0:03:12.320 --> 0:03:14.679 or not my guesses are right. Whatever the market wants, 0:03:14.960 --> 0:03:16.720 that's what I'm gonna do, all right. It's one thing. 0:03:16.720 --> 0:03:19.280 If it's fifteen and a half percent. I'm looking at 0:03:19.360 --> 0:03:23.160 three point one percent for thirty years in US yields. 0:03:23.240 --> 0:03:28.120 Right now, you're suggesting that the US not necessarily issue 0:03:28.360 --> 0:03:31.720 thirty year debt at these types of yields because they 0:03:31.760 --> 0:03:34.119 could go lower. Is that correct? No, I would say 0:03:34.160 --> 0:03:36.440 that I would not be a betting person that for 0:03:36.480 --> 0:03:38.760 the next thirty years we're not going to have any 0:03:38.800 --> 0:03:42.360 significant inflation and therefore I'll get paid back in cheaper dollars. 0:03:42.680 --> 0:03:44.640 If I were the US government, I would never have 0:03:44.680 --> 0:03:47.160 gone to the route of the ten year. I would 0:03:47.160 --> 0:03:49.840 have stayed with the thirty year because the difference right now, 0:03:49.880 --> 0:03:52.200 for example, between the ten year and the thirty year 0:03:52.680 --> 0:03:54.800 is a drop in the bucket. It's about fifteen basis 0:03:54.800 --> 0:03:57.880 points well at that rate. For goodness sake, they should 0:03:57.920 --> 0:03:59.800 be borrowing as much thirty year money as they can, 0:04:00.320 --> 0:04:03.400 and they should be refinancing short term money into that. 0:04:03.480 --> 0:04:06.280 Because I believe that the economy, as you know, is 0:04:06.280 --> 0:04:08.560 going to be stronger going forward. I think we could 0:04:08.560 --> 0:04:11.120 have growth rates in between three and three quarters and 0:04:11.160 --> 0:04:13.600 four and a quarter percent, and if we do, interest 0:04:13.680 --> 0:04:15.760 rates are going to be higher. And if they are higher, 0:04:16.360 --> 0:04:18.600 take a look at the budget. I mean, the interest 0:04:18.680 --> 0:04:22.120 is something like seven percent of the entire federal budget, 0:04:22.200 --> 0:04:24.320 so we don't want it to become twelve percent or 0:04:24.360 --> 0:04:27.120 fift in percent simply because the rates go up. Let's 0:04:27.120 --> 0:04:29.880 lock the rates and now, well the Federal Reserve phrase 0:04:29.960 --> 0:04:34.480 interest rates consistent to what economists are predicting three maybe 0:04:34.480 --> 0:04:36.960 four times. Yes, I think so. But the keep in 0:04:37.000 --> 0:04:40.800 mind that right now, because short term rates have already 0:04:40.800 --> 0:04:44.480 been increasing, the Fed has to raise the interest rate 0:04:44.560 --> 0:04:48.560 they charge banks. Otherwise the banks are going to get 0:04:48.600 --> 0:04:51.719 at another subsidy. They don't deserve it. In other words, 0:04:51.760 --> 0:04:54.120 that they can borrow at the discount window. They have 0:04:54.200 --> 0:04:57.000 to raise the discount rate just to keep it competitive 0:04:57.040 --> 0:05:00.000 with treasury rates. Otherwise the banks have an unfair advantag 0:05:01.320 --> 0:05:05.000 So I'm trying to understand if you're saying, and you've 0:05:05.000 --> 0:05:07.120 been consisted in this, and frankly you've been right that 0:05:07.160 --> 0:05:10.520 the U. S economy will continue to accelerate. Um, what 0:05:10.560 --> 0:05:12.920 do you make of the earnings we've gotten so far, 0:05:13.000 --> 0:05:17.400 particularly Caterpillar, which sort of was the key moment in 0:05:17.400 --> 0:05:19.600 this earning season, coming out and saying this may be 0:05:19.720 --> 0:05:22.120 as good as it gets. I am not one for 0:05:22.240 --> 0:05:24.880 taking a look at one quarter. Okay, you've got to 0:05:24.880 --> 0:05:26.520 take a look at this thing over a period of 0:05:26.600 --> 0:05:29.760 quarters and see what's really happening. Keep in mind, too, 0:05:30.040 --> 0:05:32.520 the slashing of the tax rate is one big effect. 0:05:32.880 --> 0:05:36.200 There's a slight offset though. Remember what did what did 0:05:37.160 --> 0:05:40.480 Trump do with regard to capital expenditures? You right off 0:05:40.480 --> 0:05:43.560 the capital expenditures all in the current year. Remember we 0:05:43.680 --> 0:05:46.120 would normally depreciate them over time. Well, one of the 0:05:46.160 --> 0:05:48.600 ways they thought to stimulate the economy would be an 0:05:48.600 --> 0:05:51.440 immediate right off, and it would be. But the question is, then, 0:05:52.000 --> 0:05:55.719 what happens to comparability on accounting information if you're measuring 0:05:55.760 --> 0:05:58.760 return on investment or whatever. Now the investment is lower 0:05:58.960 --> 0:06:01.440 because it's been written off immediately, and the profits are 0:06:01.440 --> 0:06:04.000 lower because it's been written off against the profits. So 0:06:04.120 --> 0:06:06.440 it's gonna be we're gonna go through a period when 0:06:06.480 --> 0:06:10.320 we're gonna have comparables against the prior year for cooperations 0:06:10.520 --> 0:06:12.520 that are not going to be very meaningful. I would 0:06:12.520 --> 0:06:15.000 like to ask the people at Caterpillar to what extent 0:06:15.440 --> 0:06:17.359 was the new tax law, if it had any effect 0:06:17.400 --> 0:06:19.719 at all, And to what extent the tax law is 0:06:19.720 --> 0:06:21.680 going to have an effect in the future, and that's 0:06:21.720 --> 0:06:25.400 true for all capital intensive companies. I want your thoughts 0:06:25.440 --> 0:06:28.719 on inflation and why we seem to be at maybe 0:06:28.720 --> 0:06:32.600 two percent inflation officially, and yet you talk to anybody, 0:06:33.040 --> 0:06:36.120 their perception is inflation is much higher. Know that you 0:06:36.160 --> 0:06:38.600 have to talk to me. Inflation is much lower. Can 0:06:38.640 --> 0:06:41.400 I tell you why? Very interesting. Let's assume the price 0:06:41.400 --> 0:06:44.520 of peace goes up and you switched to string beans, 0:06:44.960 --> 0:06:47.400 and say string beans have not yet gone up, then 0:06:47.440 --> 0:06:49.159 the average price you pay is not as high as 0:06:49.160 --> 0:06:52.920 the index indicates. In other words, the the index assumes 0:06:53.240 --> 0:06:55.640 that the market basket of goods and services that people 0:06:55.720 --> 0:06:59.960 buy is unchanged. There's another reason. I remember I was 0:07:00.040 --> 0:07:02.800 on the board of a company called Vivatar. We made lenses, 0:07:02.839 --> 0:07:06.080 flash equipment, thirty five millimeter cameras, and one of our 0:07:06.120 --> 0:07:09.080 board members walked in and said, look at this, and 0:07:09.120 --> 0:07:12.280 he showed us the new Sony camera that had no 0:07:12.400 --> 0:07:15.200 film in it. Okay, and he goes click, click, click, 0:07:15.440 --> 0:07:17.920 He takes a few photographs, and I said, where is 0:07:17.960 --> 0:07:20.960 the film in there? Oh, no, no film, just a microprocessor. 0:07:21.640 --> 0:07:24.120 I said, how much does that camera cost? Two thousand 0:07:24.160 --> 0:07:26.760 four D? I see, and when do you think it 0:07:26.760 --> 0:07:29.160 will come down to a decent price. Oh, it'll get 0:07:29.160 --> 0:07:31.320 down to eight hundred within a year, and maybe it'll 0:07:31.320 --> 0:07:33.480 be down to three hundred in a few years. But 0:07:33.600 --> 0:07:37.040 here's the problem. People start then buying it big time, 0:07:37.600 --> 0:07:40.600 and guess what happens. It's not yet in the market basket. 0:07:41.120 --> 0:07:43.320 And by the time they put it in the market basket, 0:07:43.400 --> 0:07:46.960 all those price declines that take place from down to 0:07:46.960 --> 0:07:50.280 the three hundred, they never show up anywhere. Keep in mind, too, 0:07:50.320 --> 0:07:54.240 we're getting improvements in the iPhone or in the other phones, 0:07:54.600 --> 0:07:58.080 and the result is we're not it's not being priced 0:07:58.120 --> 0:08:01.360 in to the consumer price index I'm suggesting, and it's 0:08:01.400 --> 0:08:03.560 difficult to do it. Don't get me wrong. I feel 0:08:03.600 --> 0:08:07.080 badly for the Commerce Department and the Bureau Labor Statistics 0:08:07.120 --> 0:08:10.360 because it's difficult to do these calculations. And at the 0:08:10.360 --> 0:08:13.600 same time we have to realize that the inflation rate 0:08:13.640 --> 0:08:17.920 is almost permanently overstated. Joel Stern, we love having you on. 0:08:17.960 --> 0:08:19.520 Thank you so much for being with us and sharing 0:08:19.520 --> 0:08:23.080 your thoughts. Joel Stern, Chairman and chief executive of Stern 0:08:23.360 --> 0:08:28.800 Value Management, very respected person in the market, long term 0:08:28.960 --> 0:08:32.120 voice who is uh sounding a note of optimism on 0:08:32.320 --> 0:08:35.400 all this caution and concerns that the best is behind 0:08:35.559 --> 0:08:39.720 us and woe upon this credit cycle. And Lisa Brom 0:08:39.760 --> 0:08:41.880 what's along with my co host Pim Fox, And this 0:08:42.080 --> 0:09:00.640 is Bloomberg Radio. Oh Apple, the gift that ends up 0:09:00.679 --> 0:09:05.280 giving despite people's doubt about whether or not it could deliver. 0:09:05.400 --> 0:09:07.440 Here to talk about the earnings and what's to come. 0:09:07.720 --> 0:09:12.120 John Butler, senior Telecom Services and Equipment analyst with Bloomberg Intelligence, 0:09:12.360 --> 0:09:15.800 joining us in our eleven three Oh studios. John, is 0:09:15.840 --> 0:09:18.240 there anything negative here or was this just an all 0:09:18.360 --> 0:09:21.760 out and out amazing, wonderful blockbuster that shows that even 0:09:21.800 --> 0:09:24.400 though Apple is tied to the smartphone, it doesn't matter. 0:09:24.520 --> 0:09:26.360 They can still blow it out of the water. There 0:09:26.480 --> 0:09:28.680 was not a lot to worry about this. Come on, 0:09:29.600 --> 0:09:34.680 they defied the skeptics, um, you know. Rolling into the quarter, 0:09:34.800 --> 0:09:37.520 there were all these reports coming out of the supplier 0:09:37.600 --> 0:09:41.440 community that Apple was cutting orders for the iPhone X 0:09:41.760 --> 0:09:45.000 iPhone ten, I should say, and there was a lot 0:09:45.000 --> 0:09:48.720 of the concern was at that iPhone ten is helping 0:09:48.760 --> 0:09:51.719 Apple bring up the average selling price of the iPhone, 0:09:51.800 --> 0:09:55.760 so as unit chip and slow. If your average prices 0:09:55.800 --> 0:09:59.760 going up, you're gonna get nice revenue gains, and we 0:10:00.000 --> 0:10:03.400 saw that this past quarter, right, iPhone shipments were up 0:10:03.440 --> 0:10:08.440 around three percent, but the revenue group four. And I 0:10:08.480 --> 0:10:12.719 think what really encouraged people was Cook's commentary that the 0:10:12.800 --> 0:10:15.959 iPhone TM has been the best selling iPhone in every 0:10:16.000 --> 0:10:18.920 week since its launch, and that has never been the 0:10:18.960 --> 0:10:21.200 case in the past with a new phone. That that 0:10:21.360 --> 0:10:24.120 really is a record for them. And I hate to 0:10:24.280 --> 0:10:28.000 use the word record because every company has record quarters 0:10:28.000 --> 0:10:32.680 and record this and record that. It gets overused and overblown, 0:10:32.760 --> 0:10:35.320 but I think it's really fair to take note to that. 0:10:35.440 --> 0:10:38.280 I think that's an important trend here because it lends 0:10:38.360 --> 0:10:42.120 confidence in the fact that there is a market for 0:10:42.240 --> 0:10:45.680 a thousand dollar plus phone. And I think the iPhone 0:10:45.720 --> 0:10:48.600 ten is proving that it's pims, it's Pins family. Right. 0:10:51.920 --> 0:10:55.520 Can you tell me about margins? So the margins were 0:10:55.880 --> 0:10:59.040 flat if you look behind the curtain. What's going on 0:10:59.120 --> 0:11:01.560 with Apple and a lot of other companies, as you've 0:11:01.559 --> 0:11:06.439 had memory costs rising pretty considerably, and they were asked 0:11:06.440 --> 0:11:08.520 about it on the call and the answer was, we 0:11:08.600 --> 0:11:11.880 really believe we've sort of seen the peak in in 0:11:12.000 --> 0:11:15.720 nand and de ram prices, which are the memory chips 0:11:15.800 --> 0:11:20.000 and so margins should improve going forward. The one thing 0:11:20.240 --> 0:11:23.320 I looked at in particular is I'm very focused on 0:11:23.360 --> 0:11:27.280 that Apple margins where i'm services revenue, pardon me, and 0:11:27.320 --> 0:11:32.280 there are potential to expand margins because they're very Those 0:11:32.280 --> 0:11:36.600 sales are very acreative to Apple's margins. So as services 0:11:36.640 --> 0:11:39.079 increases a percent of revenue, I think it's going to 0:11:39.160 --> 0:11:43.760 bring the margin up. How about the inventory levels. The 0:11:43.840 --> 0:11:49.959 inventory levels, according to the CFO were higher, by the way, uh, 0:11:50.160 --> 0:11:53.800 five to seven weeks versus normal channel inventories of four 0:11:53.880 --> 0:11:58.520 to six And the answer was, we did some buying 0:11:58.640 --> 0:12:04.600 to take advantage of some component costs, so they were 0:12:04.640 --> 0:12:08.640 stockpiling at moments during the quarter. I think when they 0:12:08.640 --> 0:12:14.000 thought they had an advantage on chip prices, spot market 0:12:14.200 --> 0:12:16.880 was as you know, PIM was spot market prices. They 0:12:16.920 --> 0:12:20.079 move all over the place. They sort of chose their 0:12:20.120 --> 0:12:23.920 points and bought components and and built to those um 0:12:24.480 --> 0:12:27.800 those purchases. So I want to talk about share buybacks 0:12:27.880 --> 0:12:29.760 because the numbers kind of blew me out of the water. 0:12:29.840 --> 0:12:33.480 This morning. Uh, they announced one hundred billion dollars of 0:12:33.520 --> 0:12:39.120 additional share repurchases, but they also showed that the amount 0:12:39.160 --> 0:12:41.840 of money that they spent on their own shares in 0:12:41.880 --> 0:12:45.400 the first quarter was equal to all of the shares 0:12:45.440 --> 0:12:48.760 of any one of two hundred and seventy five members 0:12:48.760 --> 0:12:52.000 of the SMP five hundred. At what point is this 0:12:52.400 --> 0:12:56.560 counterproductive in the sense that, yes, the returning shareholder of money, 0:12:56.600 --> 0:12:59.840 but they're not investing in anything new or acquiring any 0:12:59.880 --> 0:13:03.280 of a companies that could potentially diversify their business away 0:13:03.280 --> 0:13:06.800 from the smartphone. I share that concern. That's really my 0:13:06.960 --> 0:13:09.600 only answer there is I saw the size of the 0:13:09.640 --> 0:13:14.400 buy back and I thought, you know, I realized to them, 0:13:14.600 --> 0:13:18.840 Apple shares are attractive, but there have to be higher 0:13:18.880 --> 0:13:25.360 return projects out their higher return potential acquisitions, particularly Sinceri 0:13:25.679 --> 0:13:29.679 in particular has sort of lagged its its rivals Google Assistant, 0:13:29.720 --> 0:13:33.360 for example. Why aren't they out buying companies that are 0:13:33.480 --> 0:13:40.679 doing natural language processing better than they are or A. I. Um, 0:13:40.720 --> 0:13:43.480 you know, a lot of the companies in those areas 0:13:43.480 --> 0:13:45.920 are very small, so it doesn't take a lot to 0:13:45.960 --> 0:13:48.800 buy them. But I'm with you. I think they should 0:13:48.800 --> 0:13:53.040 have kept some dry powder for M and A. Well. 0:13:53.080 --> 0:13:55.760 I just I think it was up from seventon that 0:13:55.800 --> 0:13:57.600 most people thought it was going to be the announced 0:13:57.760 --> 0:14:00.320 share buy back, so they actually increase they would over 0:14:00.360 --> 0:14:02.679 what people were expecting with capital returns. Just to put 0:14:02.720 --> 0:14:05.080 it into perspective, it's not just that they were returning 0:14:05.120 --> 0:14:08.640 capital to shareholders as people expected. They blew the estimates 0:14:08.679 --> 0:14:12.880 out of the water, right, I don't right, So again 0:14:13.120 --> 0:14:16.439 I was a little bit concerned about that in the 0:14:16.520 --> 0:14:19.800 for the same reason you are, which is you know, 0:14:19.880 --> 0:14:23.280 they could do a transformative acquisition here. Not that they 0:14:23.320 --> 0:14:28.320 need to transform, but they could diversify more. In the 0:14:28.400 --> 0:14:32.520 latest quarter, for example, iPhone sales were sixty of the 0:14:32.560 --> 0:14:36.840 total and probably a much higher percent of profits. So 0:14:36.880 --> 0:14:42.480 they're still highly dependent on a single consumer electronics product line. 0:14:43.040 --> 0:14:46.760 So I'd love to see more diversification there, particularly in 0:14:46.880 --> 0:14:49.480 services to I didn't mention that they could make some 0:14:49.680 --> 0:14:53.720 key acquisitions there. Content. Perhaps I've got to have you back. 0:14:53.960 --> 0:14:56.840 We've got much more to talk about. What Thanks very much, 0:14:56.920 --> 0:14:59.960 John Butler. We found something to worry about. There's always 0:15:00.000 --> 0:15:03.320 something to worry about. John Butler, senior Telecom services analyst 0:15:03.400 --> 0:15:22.320 for Bloomberg Intelligence, much appreciated the fund that our next 0:15:22.360 --> 0:15:25.360 guest manages is up more than six percent so far 0:15:25.480 --> 0:15:27.440 this year. I want to introduce will prove it. He 0:15:27.480 --> 0:15:31.000 is portfolio manager of the Fidelity Latin America Fund. The 0:15:31.120 --> 0:15:34.080 symbol there is flat X, that's f l A t 0:15:34.680 --> 0:15:37.600 X and it has about six hundred and fifty million 0:15:37.640 --> 0:15:40.680 dollars of assets. And he is based in Boston, but 0:15:40.800 --> 0:15:43.480 joins us here in our eleven three oh studios. Will 0:15:43.560 --> 0:15:46.280 thanks very much for coming in. Maybe just give people 0:15:46.280 --> 0:15:48.160 a little bit of your background as to how you 0:15:48.240 --> 0:15:51.560 came to manage this particular fund. Sure, thanks for having me, 0:15:51.720 --> 0:15:54.760 guys really appreciate it. Um So, I joined Fidelity ten 0:15:54.840 --> 0:15:58.760 years ago. UM, you know, spent the first eight years 0:15:58.840 --> 0:16:01.440 looking at various sector so did a couple of years 0:16:01.440 --> 0:16:04.760 in global consumer, looked at the beverage and tobacco stocks, 0:16:05.000 --> 0:16:08.560 luxury goods companies, um CAN. Spent a few years looking 0:16:08.560 --> 0:16:11.560 at the commodity space, so the medals and miners UM, 0:16:11.600 --> 0:16:14.520 and then another couple of years looking at emerging market financials. 0:16:14.520 --> 0:16:16.920 And then two years ago took over. Took over this fund. 0:16:17.640 --> 0:16:21.960 All right, so let's dig into Latin American equities. Obviously, 0:16:21.960 --> 0:16:24.720 emerging markets had been on a tear. I have seen 0:16:24.760 --> 0:16:27.080 a little bit more of a soft patch of late. 0:16:27.640 --> 0:16:30.640 I want to talk about a couple of countries in particular. 0:16:30.760 --> 0:16:33.640 Let's start with Mexico. A lot of question marks. Right now, 0:16:33.640 --> 0:16:36.760 we're heading into the election that is highly contentious. What's 0:16:36.760 --> 0:16:38.960 your outlook? Yeah, I mean, if you look at the 0:16:39.040 --> 0:16:42.520 recent polls, AM low so Locus obdor Um is in 0:16:42.600 --> 0:16:45.600 the lead by a lot um and you know, the 0:16:45.640 --> 0:16:48.200 elections in a couple of months. So you know, I 0:16:48.240 --> 0:16:50.960 think that the odds are increasing that um that that 0:16:51.120 --> 0:16:54.080 he's going to win that election. Um, you know, napt 0:16:54.120 --> 0:16:57.840 uncertainties continue. Um. You know, I don't really have a 0:16:57.840 --> 0:17:00.440 call on what's gonna happen with with NAFTA or with election. 0:17:00.560 --> 0:17:02.120 So how do you how do you actually bet on 0:17:02.160 --> 0:17:05.240 specific companies if you don't have a call on these 0:17:05.320 --> 0:17:08.040 massive macro issues. Yeah, good questions. So I look at 0:17:08.080 --> 0:17:10.679 good I'm looking for good quality businesses at cheap valuations. 0:17:11.000 --> 0:17:12.720 There are a lot of great companies in Mexico, and 0:17:12.720 --> 0:17:14.480 there are a lot of cheap companies in Mexico. But 0:17:14.520 --> 0:17:16.840 there are not a lot of great cheap companies in Mexico. 0:17:16.960 --> 0:17:20.120 So I'm underweight that market anyway, just given the lack 0:17:20.160 --> 0:17:22.240 of value that I see there. So I don't really 0:17:22.280 --> 0:17:24.520 need to make a call on these macro issues. UM. 0:17:24.680 --> 0:17:27.720 What I'm really hoping is, you know, if UM, if 0:17:27.720 --> 0:17:31.119 AMIL is elected, or if there's a negative resolution to NAFTA, 0:17:31.200 --> 0:17:33.440 that the market comes down, I get the opportunity to 0:17:33.440 --> 0:17:35.440 pick up some of these some of the local equities 0:17:35.600 --> 0:17:38.760 at cheap values. Just give an example of a couple 0:17:38.760 --> 0:17:42.639 of equities. You have a credit company, credit finance company 0:17:42.720 --> 0:17:46.119 in the portfolio from Mexico. Plus I believe also you 0:17:46.200 --> 0:17:50.000 have sort of a medical lab company as well. Yeah, 0:17:50.080 --> 0:17:53.080 I mean so UM in Mexico. The sector that I 0:17:53.160 --> 0:17:56.159 most overweight is financial services UM. So I'm not sure 0:17:56.200 --> 0:17:59.360 you're talking about critical reality is one. Yeah, So financial 0:17:59.400 --> 0:18:02.399 services in Mexico are very underpenetrated. It's one of the 0:18:02.440 --> 0:18:05.560 most underpenetrated markets in the world for for credit products. 0:18:05.920 --> 0:18:08.800 So that is a small cap company which does payroll 0:18:08.920 --> 0:18:13.359 lending to government employees, so very secure UM kind of lending. 0:18:13.840 --> 0:18:16.760 UM been able to grow quite quickly at very high 0:18:16.840 --> 0:18:21.320 returns historically. And that stock UM I think is either 0:18:21.400 --> 0:18:24.960 the most or or one of the least expensive maybe 0:18:25.320 --> 0:18:28.679 bottom two or three stocks within the within that market. 0:18:28.720 --> 0:18:31.000 And so I think it's good quality company, very very 0:18:31.080 --> 0:18:34.320 cheap UM with good growth prospects. Let's head south. Let's 0:18:34.320 --> 0:18:37.720 go to Brazil, because this is an economy that has 0:18:37.760 --> 0:18:41.960 been in turmoil and been into the deepest recession, uh forever. 0:18:42.800 --> 0:18:47.760 So what's your what's your approach to Brazil? Are you overweight? Underweight? 0:18:47.920 --> 0:18:51.119 And uh what can you illuminate? Yeah, so I'm overweight 0:18:51.119 --> 0:18:55.800 Brazil since end of so after Timor came in and 0:18:55.840 --> 0:18:58.480 they were able to pass the first fiscal reform um. 0:18:58.520 --> 0:19:00.960 So I've been overweight that market. So you look at Brazil. 0:19:01.040 --> 0:19:03.840 What's really interesting about Brazil is it's the only major 0:19:04.240 --> 0:19:07.920 economy in the world which is early cycle. So every 0:19:07.920 --> 0:19:10.560 other market in the world, at least significant one is 0:19:10.640 --> 0:19:13.840 mid or late cycle. Brazil, all the economic indicators are 0:19:13.840 --> 0:19:16.400 showing now is recovering from this recession. So you look 0:19:16.440 --> 0:19:20.520 at unemployment, inflation, interest rates. Him he's basically saying it 0:19:20.560 --> 0:19:25.879 can't get any worse. And I think that that's a 0:19:25.960 --> 0:19:30.359 relevant point because it is difficult for many people to 0:19:30.440 --> 0:19:33.880 recognize that you want to be purchasing quality assets when 0:19:33.920 --> 0:19:36.760 no one else believes they are quality assets. You don't 0:19:36.760 --> 0:19:40.120 want to buy them when everybody is already aboard. Absolutely, 0:19:40.200 --> 0:19:42.240 I mean paying top dollar. And this is why I 0:19:42.240 --> 0:19:44.080 think just being aware of where you are in the 0:19:44.119 --> 0:19:46.600 cycle matters. Like I'm not trying to call cycles, but 0:19:46.760 --> 0:19:49.760 if you are at an early cycle stage and you 0:19:49.760 --> 0:19:52.560 can find cheap assets or even mid cycle multiples on 0:19:52.560 --> 0:19:55.240 on assets at early cycle, that's a great place to fish. 0:19:55.400 --> 0:19:57.359 If you are a late cycle and you're playing top dollar, 0:19:57.720 --> 0:20:01.760 that's bad. Alright. So is Brazil where your most overweight 0:20:01.840 --> 0:20:04.480 right now? It is? It is so within Brazil, I 0:20:04.480 --> 0:20:06.960 mean the financial space I think is very interesting. The 0:20:06.960 --> 0:20:10.480 banks there are exceptional. Um, it's interesting, like you compare 0:20:10.480 --> 0:20:14.000 emerging markets versus developed markets. In developed markets, banks are 0:20:14.480 --> 0:20:18.119 now at least social businesses sometimes cover the cost of capital, 0:20:18.160 --> 0:20:22.120 sometimes they don't. Brazil consolidated market, high margins, great businesses. 0:20:22.480 --> 0:20:25.439 So I'm trying to get a sense, given the trade 0:20:25.440 --> 0:20:29.639 war concerns, where is Latin America as a bet And 0:20:29.680 --> 0:20:32.200 I know you're completely biased because you focus entirely on 0:20:32.359 --> 0:20:34.919 this region, but you know where in the cycle if 0:20:34.920 --> 0:20:37.080 you could say it is the region, I mean it's 0:20:37.160 --> 0:20:40.040 it's a more important issue from Mexico obviously compared with Brazil. 0:20:40.200 --> 0:20:44.280 So Brazil exports commodities for the most part, They're not 0:20:44.320 --> 0:20:48.040 a big finish good exporter and the commodities are metals, 0:20:48.359 --> 0:20:53.480 UM commodity, UM, soft bodies, so pulp and paper, soy corn, 0:20:53.600 --> 0:20:56.359 that kind of thing. The export everywhere. China is a 0:20:56.359 --> 0:20:58.240 big customer, but they also export to Europe in the 0:20:58.320 --> 0:21:01.119 US UM. So you don't think it's going to be 0:21:01.160 --> 0:21:02.800 that big of adition. I don't think so. I don't think. 0:21:02.840 --> 0:21:04.880 I mean you could argue that they would. They would 0:21:04.920 --> 0:21:07.400 benefit from the trades spat between the US and China, 0:21:07.520 --> 0:21:10.440 right because if China is putting tariffs on imported soy 0:21:10.480 --> 0:21:13.200 from the US, Brazil is actually the largest soy export 0:21:13.240 --> 0:21:15.040 in the world, is going to help them all right, 0:21:15.200 --> 0:21:17.280 Will Pruett, thank you so much for being with us 0:21:17.280 --> 0:21:20.639 and coming in from Boston. Portfolio manager for the Fidelity 0:21:20.760 --> 0:21:25.320 Latin American Fund uh managing about six hundred and fifty 0:21:25.440 --> 0:21:28.960 million dollars of assets, and he has headed to Chile 0:21:29.560 --> 0:21:47.360 in less than a week. Have a great flight. Welcome 0:21:47.400 --> 0:21:51.159 to the Megan economy. I'm talking about the marriage between 0:21:51.200 --> 0:21:55.359 Prince Harry and Megan Marco, which has the potential to 0:21:55.560 --> 0:22:00.159 transform the fashion industry, if not forever, perhaps for a 0:22:00.160 --> 0:22:03.480 few years. Joining us now, James Fallon editorial director for 0:22:03.680 --> 0:22:06.160 Women's Where Daily, joining us here in our eleven three 0:22:06.160 --> 0:22:08.640 our studios, James, thank you so much for being here. 0:22:08.760 --> 0:22:12.280 So tell us about the Megan economy and just how 0:22:12.320 --> 0:22:16.680 significant this marriage will be two retailers another in the 0:22:16.680 --> 0:22:19.120 fashion world. I think it will be very significant. The 0:22:19.160 --> 0:22:23.840 initial projections by UK Consultancy where that the marriage would 0:22:23.840 --> 0:22:27.440 inject five hundred million pounds so six hundred plus million 0:22:27.480 --> 0:22:30.879 dollars into the British economy. They immediately raise that and 0:22:30.920 --> 0:22:34.800 they're now expecting it to be almost a billion pounds um. 0:22:34.840 --> 0:22:39.080 And anything that Megan Marco wears more or less flies 0:22:39.160 --> 0:22:43.679 off the shelves or gets back ordered on online, etcetera. 0:22:43.920 --> 0:22:46.400 So okay, so let's put this into context. Prince Harry 0:22:46.520 --> 0:22:49.080