Speaker 1: This is Bloomberg Business Wait inside from the reporters and
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Speaker 1: global business finance and tech news. The Bloomberg Business Week
Speaker 1: podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Speaker 2: We are going to do an interview right now that
Speaker 2: I've really been looking forward to. Over the past couple
Speaker 2: of weeks. I've been getting a lot of well not
Speaker 2: a lot. I've been getting I guess, on a daily
Speaker 2: basis emails, usually holding a nugget or a chart that
Speaker 2: just really piques my interest. From Torson Slock. He's a
Speaker 2: chief economist and a partner over to Apollo Global Management,
Speaker 2: and I'm glad to welcome him to the show. Torson,
Speaker 2: Welcome to Bloomberg Business Week. I got to start by
Speaker 2: asking you about how worried you are. I see kind
Speaker 2: of a trend in the charts you send about rising
Speaker 2: credit card usage among consumers or rising, say, you know,
Speaker 2: car payment delinquencies, and I wonder if you're looking for
Speaker 2: this next recession to kick off.
Speaker 3: Yeah, no, thanks, Manni, thanks for having me on.
Speaker 4: I think that there's a number of indicators more recently
Speaker 4: that indeed are flashing a bit more yellow, and some
Speaker 4: of them.
Speaker 3: Actually even flashing some red.
Speaker 4: Specifically, as you just mentioned, if you look at the
Speaker 4: linguaity rates on credit cards across different age cohorts, you're
Speaker 4: seeing for younger generations that the level of delinquencies is
Speaker 4: now at the same level as we had in two
Speaker 4: thousand and eight.
Speaker 3: Likewise, if you look at the linguaity rates for.
Speaker 4: Auto loans, you're also seeing for younger cohorts and here
Speaker 4: meaning people who are twenties to thirty, thirty to forty,
Speaker 4: that we have also a level of delininguities that is
Speaker 4: close to what we had in two thousand and eight.
Speaker 4: Combining that with a fits Celrosa survey which tells us
Speaker 4: something about how tight are credit conditions, which both said
Speaker 4: is that demand for corporate loans is at two thousand
Speaker 4: and eight levels and also says that demand for cer
Speaker 4: re loans is at two thousand eight levels, and it
Speaker 4: also shows that credit conditions more broadly have tightened.
Speaker 3: I do get a bit worried that.
Speaker 4: Credit conditions are beginning to tighten so much that it
Speaker 4: ultimately is having that negative impact on the economy that
Speaker 4: the Fed quite frankly has been waiting for for now
Speaker 4: several quarters, Torstan.
Speaker 5: How do I chart this? How do I tight chart
Speaker 5: those tighter credit conditions? Because I look at things like
Speaker 5: financial conditions indexes and I don't know these accurse. Again,
Speaker 5: these are market based measures, and it shows that things
Speaker 5: are pretty easy. But then I listen to you and
Speaker 5: things sound pretty tight, and I want to know how
Speaker 5: to show this.
Speaker 3: Yeah, no, that's absolutely right, Katie.
Speaker 4: But if you wait together the market based measures of
Speaker 4: financial conditions, so that's the stock markets, that's the IG spread,
Speaker 4: the highyeer spread, the spread for loans, those are not
Speaker 4: flashing really any worries.
Speaker 3: If anything, they're still green on the recession worry front.
Speaker 4: So from that perspective, you're right that markets obviously have
Speaker 4: been waiting for the recession to arrive. A five type ECFC.
Speaker 4: Go on my Bloomberg screen and look at expectations to
Speaker 4: GDP growth. The consensus has expected a recession since October
Speaker 4: and the recession has still not arrived. So I think
Speaker 4: there's recession exhaustion in credit markets and equity markets, and
Speaker 4: people saying, well, where is this recession that these bond
Speaker 4: investsels have talked about for so long, and if there's
Speaker 4: no recession, maybe you should have equities trading higher and
Speaker 4: credits bressed trading tighter. So the only issue that I
Speaker 4: think is under appreciated in that debate is that behind
Speaker 4: all this is the FED trying to cool the economy down.
Speaker 4: And the number one domino break in this debate is
Speaker 4: that inflation today is in round numbers five percent, both
Speaker 4: if you look at call, if you look at headline,
Speaker 4: no matter what specific measure of inflation you look at,
Speaker 4: it is around five percent.
Speaker 3: And the Fed's target is that it should be two.
Speaker 4: And if inflation is five and it should be two,
Speaker 4: the FED is not going to ease anytime soon, and
Speaker 4: they may actually begin to race raise again in July.
Speaker 4: So if that's the case, the market is not appreciating
Speaker 4: enough that the FED is actually trying to cool the
Speaker 4: economy down. They're trying to slow down earnings growth, They're
Speaker 4: trying to lower the e in the pe ratio, and
Speaker 4: with that will of course come a slow down, and therefore, ultimately,
Speaker 4: in my view of recession, we have.
Speaker 2: A great story on the Bloomberg today, tourist and fedbacks
Speaker 2: away from wages focus, bolstering case for rate pause, And
Speaker 2: the idea here is that there's been more and more
Speaker 2: research showing that wage growth doesn't have a direct impact
Speaker 2: on inflation. Now, I can't understand how that could be,
Speaker 2: because to me, it makes sense if you pay people
Speaker 2: more money, they're going to have more money to buy
Speaker 2: more stuff or pay higher prices at least. But I've
Speaker 2: heard it from very smart people, including Danny Blanchflower from Dartmouth,
Speaker 2: that you know, the labor numbers we look at just
Speaker 2: really aren't effective in gauging whether or not we're going
Speaker 2: to have an inflation, whether or not the economy is
Speaker 2: slowing down enough to bring inflation down. What do you
Speaker 2: think about that connection?
Speaker 4: Yeah, so this is very important and I did see
Speaker 4: that story and it is a very good It's very
Speaker 4: well written and will very well laid out. You're right,
Speaker 4: this is a debate in FED working papers at the moment.
Speaker 4: There was a paper recently, and this is very controversial
Speaker 4: what you're highlighting, namely by the San Francisco FED, saying
Speaker 4: wage inflation is not important for consumer price inflation. And
Speaker 4: why is that controversial? Because that basically rips up page
Speaker 4: one in the economics textbook, which says that when you
Speaker 4: have higher cost of production through higher labor costs, then
Speaker 4: you should also see higher prices of the products that
Speaker 4: are produced. The issue with that paper, and the issue
Speaker 4: with that approach, is that that's a statistical correlation where
Speaker 4: the author basically finds that the correlation between wage inflation
Speaker 4: and consumer price inflation is basically very low, only.
Speaker 3: Zero point one.
Speaker 4: So now you can ask the question, Okay, does that
Speaker 4: mean that wages do not matify inflation? Well, if you
Speaker 4: doubled everyone's wages in the US economy, are you telling
Speaker 4: me that that would have no impact on inflation, on
Speaker 4: consumer price inflation?
Speaker 3: I think we can all agree that that would not
Speaker 3: be the case.
Speaker 4: So therefore it really becomes almost the statistical exercise of saying,
Speaker 4: maybe a statistical correlation is close to zero, but the
Speaker 4: economic connection is very obvious. Exactly as you said, Matt,
Speaker 4: that you would have expected if people high incomes, they
Speaker 4: go out and go more to restaurants, fly more on airplanes,
Speaker 4: day more hotels, and that all creates more inflation. So
Speaker 4: it is the case, in particular, given worth saving sign
Speaker 4: the economy is still being so strong that the amount
Speaker 4: of money that people spend on different things are still
Speaker 4: the key driver of.
Speaker 5: Inflation, right, Well, let's talk about some of the inflation
Speaker 5: figures that we're going to get tomorrow. For May, I
Speaker 5: want to zero in on what we're going to get
Speaker 5: on the year over year numbers. So headline CPI year
Speaker 5: over year is expected to come in at four point
Speaker 5: one percent. Core CPI year over year is expected at
Speaker 5: five point two percent. That seems like a really big
Speaker 5: gap to me over a percentage point. Does that have
Speaker 5: any bearing on what we might see from the fat
Speaker 5: How do they factor in that sort of divergence that
Speaker 5: we're seeing be between core and headline inflation.
Speaker 3: That's a very important question, Katie.
Speaker 4: So the reason for that difference, and that is also
Speaker 4: a bit unusual, is that when Russia invaded Ukraine, energy
Speaker 4: prices went not a lot. And of course, as you
Speaker 4: get through the episode, now we now are twelve months
Speaker 4: more away from that event in February twenty twenty two.
Speaker 4: So the result of that is that the year over
Speaker 4: year way of measuring inflation is that inflation is actually
Speaker 4: now beginning to decline in food and energy.
Speaker 3: So that means that the drag because.
Speaker 4: Of us getting to the other side of February twenty
Speaker 4: twenty three. The drag on headline inflation is bigger simply
Speaker 4: because food and energy can no longer quote unquote remember
Speaker 4: what happened in February twenty twenty zero. What the FED
Speaker 4: focuses on is coinflation. And as you highlighted, and I'm
Speaker 4: here on my Blueberg screen Tyving Ecoco, you can see
Speaker 4: as you say that coin inflation the spects to drop
Speaker 4: from five point five in the month of April to
Speaker 4: five point two in the month of May, and that,
Speaker 4: of course is.
Speaker 3: A decent decline. Again, the fit target is that inflationship
Speaker 3: be two.
Speaker 4: So all these numbers that we talk about here four, five,
Speaker 4: five and a half are way too high for the FAT.
Speaker 4: But that's why the Fed of course has this debate about, well,
Speaker 4: we need to have coin inflation in particular move down
Speaker 4: closer to two. And that's happening, but it's just happening
Speaker 4: very very slowly, and it does probably require interest rates
Speaker 4: at these elevated levels for at least well into next
Speaker 4: year before we begin to see a meaningful move down
Speaker 4: to two percent.
Speaker 2: All right, Tors and I have a ton of viewer
Speaker 2: slash listener questions, so I'm gonna fire off a couple
Speaker 2: of these here.
Speaker 5: And rapid fire around one.
Speaker 2: Especially that relates to a chart you sent recently that's
Speaker 2: stuck in my mind, which is the fact that there's
Speaker 2: still a lot of state excess savings in the economy
Speaker 2: or in bank accounts from the stimulus listener rites in,
Speaker 2: when do these elevation did prices start to hurt or
Speaker 2: pain in the consumer? You know, if you look like
Speaker 2: at the consumer like a monolith, then it's easier, I
Speaker 2: guess to answer this. Let's not get into the bifurcation
Speaker 2: that surveillance would start digging into. When is it going
Speaker 2: to really hit? You know, Joe Plumber.
Speaker 3: Yeah, So the FED actually also had a working paper.
Speaker 4: On that saying that households will basically run out of
Speaker 4: these excess savings by the end of this year. That's
Speaker 4: quite unusual for a FED working paper to spill that
Speaker 4: out so clearly.
Speaker 3: But that means that consumers.
Speaker 4: Still have more savings left even though prices have been
Speaker 4: going up. So from that question, we can basically exactly
Speaker 4: conclude that it still is at least a few quarters
Speaker 4: away before we get to the point when consumers will
Speaker 4: no longer have money to stay at hotels, go to restaurants,
Speaker 4: flying airplanes, go to sporting events and broadway shows. Because
Speaker 4: all that data continues to be reasonably strong, simply because
Speaker 4: savings are still so high.
Speaker 2: I just we never would have expected inflation to be
Speaker 2: this sticky, right. I remember watching Ben bernanke on sixty
Speaker 2: Minutes and he was like, we could crush inflation with
Speaker 2: a hammer, you know, but it's obviously more difficult. It's
Speaker 2: more easily said than done.
Speaker 4: Honestly, this whole episode of inflation going up and now
Speaker 4: down so slowly, it is a bit of an embarrassment
Speaker 4: for the economics profession. Nobody really predicted infistion would go up,
Speaker 4: and now everyone is so.
Speaker 3: Busy saying, oh, it will come down very quickly.
Speaker 4: And now there's more and more people, including myself, who
Speaker 4: are beginning to worry. Maybe it's not going to come
Speaker 4: down to it quickly. Maybe as an investor, I do
Speaker 4: need to take into account that the cost of capital
Speaker 4: will stay elevated for longer, that the fit is just
Speaker 4: not going to go at lower rates as quickly as
Speaker 4: markets currently uprising. So you're right, it is very surprising
Speaker 4: that the economics toolbox and the textbook that we all
Speaker 4: have been studying all these years.
Speaker 2: Well, well, Torson, don't be too embarrassed, because you absolutely rule.
Speaker 2: Thanks so much for joining us. Torson slock from Apollo Global.
Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us
Speaker 1: Lie weekday afternoons from three to six Eastern Listen on
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Speaker 2: We have on with us the first black female CEO
Speaker 2: of a major PR firm, Lisa Osborne Ross joins us
Speaker 2: the US CEO at Adelman, And it's I think especially
Speaker 2: important because we also have the results of Adelman's Trust Barometer,
Speaker 2: Business and Racial Justice Report at a time when you know,
Speaker 2: more Americans are concerned about racism but fewer are optimistic
Speaker 2: about progress being made. It reminds me of last week.
Speaker 2: I saw this story the Supreme Court back's extra black
Speaker 2: Alabama district and the GOP rebuff, and I just thought,
Speaker 2: what year is it that we're still dealing with this
Speaker 2: kind of thing? How come we haven't already solved issues
Speaker 2: like this? So Lisa joins us right now on Zoom
Speaker 2: from Washington, DC and Lisa, it's great to have you here.
Speaker 2: Thanks so much for coming on the program. I would
Speaker 2: love to know first, just an overview of the results
Speaker 2: of your survey. I feel like more and more people
Speaker 2: are concerned. We talk more and more about this issue,
Speaker 2: but there's just not being not enough progress actually being made.
Speaker 6: Look, the research is critical because this, whether it should
Speaker 6: be or not, is an emotional issue. And the reason
Speaker 6: we do it is because the data matters. There's a
Speaker 6: wide range of feelings on this. There's defeatism to defensiveness.
Speaker 6: There's in some cases even an outright disagreement on whether
Speaker 6: racism even exists or not. Now, I'm happy to report
Speaker 6: that less than fifteen percent of those polled believe that
Speaker 6: racism is not a problem. But the example that you
Speaker 6: just gave is, you know, we live in two different worlds.
Speaker 6: You were shocked by the Supreme Court's movement, but others
Speaker 6: lived that on a daily basis, and they're.
Speaker 7: Not shocked at all.
Speaker 6: I think it's even no, you go ahead, no, I
Speaker 6: don't know others.
Speaker 2: There was only one black congressional district in Alabama. That's
Speaker 2: what blew me away. I mean, you know, there needs
Speaker 2: to be more. I've been to Alabama. There needs to
Speaker 2: be more representation there, right, So how come the supremium
Speaker 2: to make this decision in the sixties, right?
Speaker 3: Right?
Speaker 6: You and I both know that there are enough black
Speaker 6: people in Alabama for that to not be the case.
Speaker 7: But that is a that is.
Speaker 6: It's related to this conversation, but it is part and
Speaker 6: parcel of the environment that many people still live in,
Speaker 6: and it is problematic. I was I was struck when
Speaker 6: we saw the results of this research because I think
Speaker 6: people had one of four reactions. One people were like,
Speaker 6: tell me something I didn't know. Racism exists, fully exist
Speaker 6: in corporate America. Other people were like, you know what,
Speaker 6: I knew it. I felt it, felt it, felt it,
Speaker 6: but I couldn't put my finger on it, and the
Speaker 6: data supported it. A third group of people were like,
Speaker 6: oh my god, this is shocking, this is terrible. I
Speaker 6: don't know where those people have been, but for some
Speaker 6: people it was still very surprising. And most unfortunately, there's
Speaker 6: a fourth group of people who have said, Okay, it
Speaker 6: simply doesn't matter because nothing is going to change.
Speaker 5: And I mean, looking through the results of this report,
Speaker 5: you talk about two different worlds. It seems like there's
Speaker 5: a real sort of divergence between what executives think their
Speaker 5: company is doing or the progress that they've made, and
Speaker 5: what non executives say when we talk about making progress
Speaker 5: and addressing racism, it seems like the executives have a
Speaker 5: much different view on that than maybe the people that
Speaker 5: report to them.
Speaker 6: Bingo, I fell into that second category of you know what,
Speaker 6: I thought that there was a problem inside the organizations
Speaker 6: that I work with and that I counsel, and then
Speaker 6: just everything that I see and what you say that
Speaker 6: is exactly it. The executives are feeling good about themselves.
Speaker 6: They're like, hey, I go to my DEI training a
Speaker 6: mentor people of color. I'm supportive, I'm anti racist. But
Speaker 6: the rank and file see things very very differently. And
Speaker 6: the reason that we're not making progress is that those
Speaker 6: executives who are in decision making roles, they think they're
Speaker 6: doing well and don't have a problem. But the rank
Speaker 6: and file sees every day that we have a significant problem.
Speaker 6: And that to me was the most shocking.
Speaker 2: So why do executives think that they're doing well?
Speaker 7: Then?
Speaker 2: I mean, is it just that they're checking boxes here
Speaker 2: and not actually moving the ball forward? I mean, I
Speaker 2: don't understand.
Speaker 6: Yes, there's a lot of box checking, but also if
Speaker 6: you look at it, we've been having this conversation about
Speaker 6: racism and particularly racism in the workplace for some time.
Speaker 6: After the murder of George Floyd, the nation had a reckoning.
Speaker 6: They had a reckoning, and for many people this was
Speaker 6: the first time that they really started to pay attention
Speaker 6: to the conversations. They started to look at their teams
Speaker 6: and realize and recognize that their teams were not representative.
Speaker 6: They started to look at their leadership, at their boards,
Speaker 6: and they saw that they were not representative. And you know,
Speaker 6: there's been all this conversation about like a retraction on
Speaker 6: ESG and particularly the S and ESG. I have seen
Speaker 6: and said that those companies that got it in the
Speaker 6: first place, who were about it, who were not running
Speaker 6: DEI programs, but looking at representation at all levels of
Speaker 6: their organization, they haven't stopped. In fact, they are even
Speaker 6: stronger those organizations who for whatever reason FOMO peer pressure,
Speaker 6: Oh everybody's doing it, so I guess I should too.
Speaker 6: Those are the organizations that have pulled back. But those
Speaker 6: that were in it in the first place, they're even
Speaker 6: stronger in this space.
Speaker 5: So, Lisa, how does this problem get fixed? I mean,
Speaker 5: is the obvious answer here that perhaps you know, those
Speaker 5: at the executive rank should maybe look like the people
Speaker 5: that they represent, that we need more diversity in management,
Speaker 5: or what do you think really needs to happen to
Speaker 5: propel this conversation forward.
Speaker 6: I think wanted some honest conversation. For example, when I
Speaker 6: am interviewing people and they tell me how much they
Speaker 6: value DEI and how important it is to them, the
Speaker 6: first question I ask is, I think that's lovely, that's important.
Speaker 6: How diverse is your senior team? How many people of
Speaker 6: color do you have on your senior team that are
Speaker 6: in decision making roles? And so I think moving it
Speaker 6: from the box checking to the narrative, and I think
Speaker 6: we change when two things are realized by business leaders.
Speaker 6: And I say this to my team at Edelman. You
Speaker 6: cannot credibly create content, you can't credibly create campaigns, You
Speaker 6: can't represent a point of view unless you have a
Speaker 6: representative team. In this current day, you've got forty of
Speaker 6: the population that is non white, non male, non straight,
Speaker 6: And so if you don't put together teams that represent
Speaker 6: the wide array of what America looks like right now,
Speaker 6: and I say America because I'm a US CEO.
Speaker 7: So when when.
Speaker 6: Leaders realize their their work is not credible unless it's
Speaker 6: created by representative teams.
Speaker 2: Alice Osborne Ross from Edelman. Great to have you.
Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us
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Speaker 1: Just Say Alexa playing Bloomberg eleven thirty.
Speaker 2: It's ams Amymsra. All Right, I do want to fly,
Speaker 2: but not in a narrow body seven thirty seven.
Speaker 3: Max.
Speaker 2: I'm still a little bit worried about flying on a
Speaker 2: seven thirty seven? Is it just me?
Speaker 7: No?
Speaker 5: I get that I don't know enough about planes to
Speaker 5: sort of suss out what aircraft.
Speaker 2: I know very little about planes, but I know this
Speaker 2: one tends to crash a lot.
Speaker 5: Those numbers seem bad.
Speaker 2: Yeah, And apparently the Chinese for a while they were
Speaker 2: cool with it until the plane started to crash. They
Speaker 2: were buying a ton of boeings. Trump's trade war and
Speaker 2: then COVID and all of a sudden, Boeing went from
Speaker 2: like the most beloved plane maker in China to the
Speaker 2: biggest loser to air Bus. This duopoly is something we're
Speaker 2: going to talk about with Bloomberg BusinessWeek editor in chief
Speaker 2: Joel Weber. He joins us here in the Interactive Broker studio,
Speaker 2: as well as Julie Johnson, the Aerospace reporter, and Joel
Speaker 2: I was telling Katie earlier, my love for this business
Speaker 2: has grown exponentially since I read Airframe by Michael Crichton.
Speaker 8: H Okay, you read have you read it? No?
Speaker 2: Man, I feel like this is one of the most
Speaker 2: novels he wrote. Jurassic Park. Yeah, and it's a great movie.
Speaker 2: It touches on China to.
Speaker 3: Everyone.
Speaker 2: So how did how did Julie whin you over this pitch?
Speaker 3: Then?
Speaker 8: Well, you know, we have this interest in airplanes and
Speaker 8: air lines and the people who are running those companies
Speaker 8: and also the people who manufacture them. There's this thing
Speaker 8: that happened in China where you know, they closed the
Speaker 8: borders for a really long time during COVID travel and
Speaker 8: demand went away, uh internally domestically in China, uh internationally,
Speaker 8: and that had all kinds of implications for the global economy.
Speaker 8: It also had implications for people who make and sell airplanes,
Speaker 8: and and that was sort of an interest of us,
Speaker 8: especially ahead of the Paris Air Show, which is just
Speaker 8: around the corner. And and so we circled back to
Speaker 8: Julie to talk more about Boeing. So, so, what what's
Speaker 8: happening with Boeing since China has been such a crucial
Speaker 8: market for the company for so long.
Speaker 7: Julie, pretty fascinating, I mean, for for the last three
Speaker 7: or four years. The story had been pretty much the
Speaker 7: same until very recently, and it was one of frustration
Speaker 7: for Boeing. They were locked out of their largest international market,
Speaker 7: frozen out, whatever you want to call it. And and
Speaker 7: the they very much seemed to be caught in the
Speaker 7: middle of this you know, trade war, and they were
Speaker 7: all kinds of other issues mixed in, including the fact
Speaker 7: that China was the first nation to ground the Max
Speaker 7: after those two crashes and one of the last to
Speaker 7: unground it.
Speaker 2: So it was only two were there only two?
Speaker 7: There were only two?
Speaker 8: Enough to get Ma's attention.
Speaker 7: Yeah, well it was. Yeah, it was a terrible, terrible tragedy.
Speaker 2: But and it was only one kind of version of
Speaker 2: the seven three seven, right, Julie, because there are so
Speaker 2: many of those planes out there. But this was just
Speaker 2: like the Max eight or the.
Speaker 7: No. The design flaw was in was baked into all
Speaker 7: the Max family and it's it's been addressed, I mean
Speaker 7: that was. But anyway, so what's going on here is
Speaker 7: that market dynamics have overtaken politics there because of COVID
Speaker 7: and the Max grounding. The global air mark market is
Speaker 7: thousands of planes short of demand, and so if you
Speaker 7: want a Boeing jet, you want a Max, you better
Speaker 7: get in line because they're sold out now into twenty
Speaker 7: twenty eight. We just saw Ryanair place this monster order
Speaker 7: that that goes into the twenty just to line up aircraft.
Speaker 7: So and Airbus is sold out almost to twenty thirty.
Speaker 7: So it's pretty pretty fascinating to see. Suddenly, you know,
Speaker 7: there's all this activity in China. They need their planes,
Speaker 7: and things are starting to look good for Boeing.
Speaker 2: The numbers are striking. I mean, I took from the
Speaker 2: story that Boeing was like a big was beloved in
Speaker 2: China and was selling more planes than anybody else there.
Speaker 2: And then the geopolitical tensions I think are key, right,
Speaker 2: the Trump trade war plus COVID plus the MAX crashes.
Speaker 2: Since twenty twenty, Airbus has sold three hundred or delivered
Speaker 2: three hundred and eighty four planes to China. Boeing has
Speaker 2: delivered four, why haven't bothered? And Ryanair has now put
Speaker 2: in an order for three hundred. United has ordered like
Speaker 2: two hundred, and the Indians have ordered another one hundred.
Speaker 2: So you know, everybody wants these things. And I guess
Speaker 2: Boeing is now optimistic? Is Dave Calhoun? The guy who
Speaker 2: Boeing now he's optimistic that what the Chinese are going
Speaker 2: to start ordering him again because he had a backlog
Speaker 2: of like ten billion dollars of the planes that he
Speaker 2: was supposed to sell to them but had started already
Speaker 2: giving to other clients.
Speaker 8: Surely you did it, that's firedough.
Speaker 7: Yeah, So so there's a lot of unpack here. Boeing
Speaker 7: has one hundred and forty planes that they built for China,
Speaker 7: most of them in twenty twenty nineteen, that have been
Speaker 7: in storage because China was closed to the MAX, and
Speaker 7: China has not resumed imports of the MAX yet, but
Speaker 7: apparently that could happen. It's basically all they need is
Speaker 7: a stamp from the government for that to happen. The
Speaker 7: airlines want their planes. So so yeah, that's the ten
Speaker 7: billion dollars that's tied up. That's been very frustrating to Boeing.
Speaker 7: But if China, you know, Boeing kind of ran out
Speaker 7: of patients last year as the market started to heat up,
Speaker 7: and Calhoun was not subtle at all in saying, you know,
Speaker 7: we're marketing these If you don't want these planes, they're
Speaker 7: gonna be other buyers. And that's that's right around the
Speaker 7: time that China started reopening and this this relationship flipped
Speaker 7: and by the way, I mean it could flip again,
Speaker 7: Like the politics are crazy here, I mean, but it's
Speaker 7: looking good for Boeing.
Speaker 8: So how did Airbus managed to to really just continue
Speaker 8: to you know, sell planes. There's so much more dramatically
Speaker 8: than Boeing.
Speaker 7: Well, their plane wasn't grounded. I mean, this is so
Speaker 7: the max. The global grounding was I think the longest
Speaker 7: in aviation history, certainly the longest for a really important aircraft,
Speaker 7: and Airbus Boeing had to shut down production during COVID.
Speaker 7: Airbus managed to keep factories going and running semi semi hot.
Speaker 7: And then Airbus has also done a lot of direct
Speaker 7: investment in China, and they've got they've you know, they're
Speaker 7: building their A three twenty NEOs in China that's the
Speaker 7: rival to the Max. So so they've managed they've got
Speaker 7: a really good relationship that they've you know, they've managed
Speaker 7: to foster through the trade tensions. And by the way,
Speaker 7: Washington's kind of irritated by some of the ordering that
Speaker 7: that's gone to Airbus's way.
Speaker 2: Well please, they've brought it upon themselves. I mean, you know,
Speaker 2: if you want to win a congressional campaign, dissing China
Speaker 2: is a great way to do that to get votes.
Speaker 2: And the Europeans have been courting the Chinese with the
Speaker 2: Belton Road initiative and letting him straight up in through Italy,
Speaker 2: right up into the heart of of Europe. That's got
Speaker 2: to help a lot as well, doesn't it.
Speaker 3: Yeah?
Speaker 7: Yeah, absolutely so.
Speaker 2: I wonder why does China not have its own I
Speaker 2: was talking about Airframe. I was talking about Airframe, the
Speaker 2: book by Michael Crichton. Julie, have you read it? Sorry, okay,
Speaker 2: I thought it was popular anyway. Part of the book
Speaker 2: talks about how the airplane ip like, for example, how
Speaker 2: you make a wing is so heavily guarded in this country,
Speaker 2: and I'm sure air Bus guards theirs as well. But
Speaker 2: they have to outsource some of this manufacturing to China.
Speaker 2: As you know, the global economy became too intertwined. China
Speaker 2: knows how to make planes, now, why don't they make
Speaker 2: an uncomfortable narrow body jet.
Speaker 7: They have China just to make things even more complicated.
Speaker 7: So China has its rival, homegrown rival to the Max
Speaker 7: and to the A three twenty neo, and it just
Speaker 7: entered service last month and more than ten years behind schedule,
Speaker 7: by the way, and about I've seen estimates that around
Speaker 7: eighty percent of the technology in that plane, basically everything
Speaker 7: that you need to keep it aloft is Western made,
Speaker 7: and so manufacturing commercial jets is really, really, really difficult,
Speaker 7: and to build them on scale even tougher. So it's
Speaker 7: one thing to get it into the air, but then
Speaker 7: the next challenge for China is to start churning these out,
Speaker 7: and it's you know, they put a lot of resources
Speaker 7: into it. I wouldn't count them out at all, but
Speaker 7: it's going to be probably decades before they're a threat
Speaker 7: to Boeing an air bus. And that also works in
Speaker 7: Boeing's favor right now.
Speaker 8: Okay, Well, if Matt is reluctant to get on the Max, Katie,
Speaker 8: I'm curious the seat nine to nineteen that's going to
Speaker 8: be China's answer to the Max. Matt, when you're gonna
Speaker 8: step on one of those?
Speaker 2: No, I mean no, it's like getting a Chinese COVID vaccine. No,
Speaker 2: thank you, ma'am. No, it could work. It could, yeah,
Speaker 2: it could.
Speaker 5: Okay, Julie, I have a question about the competitive landscape here,
Speaker 5: because again it seems like this dynamic maybe is shifting
Speaker 5: again in favor of Boeing. But I mean you also
Speaker 5: made the point that if you look at airbuses, waitless,
Speaker 5: I mean we're talking until the start of the next decade.
Speaker 5: So from a competitive standpoint, it still seems like when
Speaker 5: it comes to China, Boeing is far behind that of
Speaker 5: air Bus. Is that safe to say?
Speaker 7: Yeah, that's that's spot on. Yeah, that's exactly right on.
Speaker 7: The on air Bus is clearly in the driver's seat
Speaker 7: and on. Frankly, because they both Boeing and Airbus have
Speaker 7: struggled postc OVID to get their factories back up and
Speaker 7: running smoothly, and when You're coordinating hundreds of thousands of
Speaker 7: planes or parts that go into a plane, and they've
Speaker 7: got to arrive on schedule. You know, sometimes down time
Speaker 7: to the half hour. You can just see how quickly,
Speaker 7: you know, how difficult that is, and how quickly things
Speaker 7: things can go amiss. And so air Bus is inability to,
Speaker 7: you know, to make good on their their schedule has
Speaker 7: kind of left going back into the game a little bit.
Speaker 7: But air Bus right now dominates. I mean, there's just
Speaker 7: no question it's their market.
Speaker 8: Okay, Julia, I'm curious. Air show coming up soon Paris? Yeah,
Speaker 8: do you get to go? And if not, what are
Speaker 8: you going to be looking for from Afar?
Speaker 7: No, I'm I'm I'm gonna be there. I'm gonna be
Speaker 7: sleep deprived and you know, eating bread and cheese and
Speaker 7: sitting in traffic.
Speaker 3: Maybe just.
Speaker 2: Poor Julie, she's gonna be eating French cheese and drinking wine.
Speaker 8: What are you most looking forward to there, Julie?
Speaker 7: You know it's on it. The excitement is palpable. So
Speaker 7: it's it's very cool to have the whole industry, I mean,
Speaker 7: tens of thousands of people jammed into an airfield for
Speaker 7: a few days and you run into I mean, like,
Speaker 7: oh my gosh, there's a you know, four star general
Speaker 7: walking by. I mean, it's just it's really really cool
Speaker 7: just and and as a as a I love airplanes,
Speaker 7: and so just just to see them up close, to
Speaker 7: see the flying displays, to run into people, I know,
Speaker 7: it's it's like, it's very cool.
Speaker 8: Matt wants you to ask why Airframe wasn't a bigger hit.
Speaker 2: Now you guys read it. I'm excited to I'm excited
Speaker 2: to see what they have. And Julie, we're going to
Speaker 2: have you back on out of Paris Air Show because
Speaker 2: they always have the coolest new things, new products there
Speaker 2: and it'll be interesting to see.
Speaker 8: I always an open question overrated underrated The book air
Speaker 8: Frame by Michael Creton, just putting it out there.
Speaker 2: The book apparently is under red, all right, Julie Johnson
Speaker 2: there covers airlines for US or aerospace is more than
Speaker 2: just airlines, the makers of planes and defense stuff as well.
Speaker 2: Joel Eber, Editor and Chief at Bloomberg BusinessWeek.
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Speaker 2: All right, Matt Miller here and for Tim Stenevick, I've
Speaker 2: got Katie Greifeld by my side filling in for Carrol Master.
Speaker 2: Carrol's out for a couple of days today and tomorrow.
Speaker 2: Well deserved, R and R.
Speaker 5: Good for her.
Speaker 2: I guess I actually don't know what she's doing, but
Speaker 2: hopefully not listening anyway. Aaron Kennon joins us right now.
Speaker 2: He's a co founder and chief executive officer of Clean
Speaker 2: Harbor Asset Management. They have over a billion dollars of
Speaker 2: assets under management out of Stamford, Connecticut. Aaron, great to
Speaker 2: get you on the program right as we, you know,
Speaker 2: break into this bull market at the end of last
Speaker 2: week and today, it looks like investors are behind that
Speaker 2: they're on board with it. We've talked to a number
Speaker 2: of statisticians who tell us anytime we go up twenty
Speaker 2: percent from a bottom, or let's say ninety two percent
Speaker 2: of the time we continue up twelve months later.
Speaker 3: What do you think, Well, we'll have to wait and see.
Speaker 9: I mean, I think after a significant tightening cycle like
Speaker 9: the one we've just gone through, assuming we pause here,
Speaker 9: usually markets bottom after the FED starts cutting rates, not
Speaker 9: as the FED is pausing, and so we'll have to
Speaker 9: see on that front.
Speaker 3: Map.
Speaker 9: But I think the market is clearly optimistic that we're
Speaker 9: not going to experience a hard landing. Trading at the
Speaker 9: SMP trading at twenty times this year's anticipated earnings level
Speaker 9: is certainly in sort of the top deathcile over the
Speaker 9: last twenty five years of valuations, and so this notion
Speaker 9: of a hard landing certainly is not pricing of the
Speaker 9: equity market as we head into the FED meeting on Wednesday.
Speaker 5: Well, Aaron, how seriously do you you factor in valuations,
Speaker 5: because I mean, the number you just gave for the
Speaker 5: S and P five hundred, it's very high, as you mentioned,
Speaker 5: especially looking historically. But you know, you could have said
Speaker 5: the valuations were high last year or the year before
Speaker 5: the year before that, and it still seems like this
Speaker 5: index finds a way higher. So when you're looking in
Speaker 5: the totality of the market. I mean, how do you
Speaker 5: factor in valuations?
Speaker 9: Well, I think ultimately earnings drive the long term performance
Speaker 9: of the equity market. But the pe band, if you will,
Speaker 9: that you just referred to over the last several years
Speaker 9: is certainly worth exploring. Trading as low as let's say,
Speaker 9: fifteen times and as high as twenty one times, we
Speaker 9: may be in the upper end of that band, and
Speaker 9: so the notion that we go into a moderately hard
Speaker 9: or harder landing I certainly do not think is priced
Speaker 9: into the nearly forty four hundred s and P five
Speaker 9: hundred levels. That isn't to say that we don't believe
Speaker 9: in stocks for the long haul. We certainly do. We
Speaker 9: think that they're core to most client long term acid allocations.
Speaker 9: And that doesn't mean that we don't see opportunities within
Speaker 9: the equity market even today. But certainly a point of caution,
Speaker 9: we're training at the upper end of that band as
Speaker 9: growth is decelerating, is employment appears to be peaking at
Speaker 9: the moment, and other signs of economic deceleration are upon us.
Speaker 2: What is your what are the odds on a surprise
Speaker 2: at the FED meeting on Wednesday. I mean we got
Speaker 2: I think a surprise from the Bank of Canada. For sure.
Speaker 2: We were expecting a pause there as well, and they
Speaker 2: hiked rates. We've seen the Bank of Canada make moves
Speaker 2: before the FED. It's one of the few banks that
Speaker 2: seems to be able to do that. Everybody else follows.
Speaker 2: What are you expecting from J pallin Coo on Wednesday?
Speaker 9: Yeah, I think the surprise would have to emanate out
Speaker 9: of a really hot CPI number tomorrow. Otherwise, I think
Speaker 9: it's essentially cooked in the books that the FED pauses.
Speaker 9: The FED Q and A will be interesting. I think
Speaker 9: the talk about data dependency, and I think that's what
Speaker 9: the market anticipates too. You know, we've gone from nine
Speaker 9: percent headline inflation to four point nine percent on the
Speaker 9: heels of sort of a post COVID normalization of supply
Speaker 9: chains and the like, and now, you know, I think
Speaker 9: there's a conventional wisdom embedded in the market at Moving
Speaker 9: from nearly five percent headline back down towards the fed's
Speaker 9: two percent target's going to require some heavy lifting. But
Speaker 9: if inflation trends lower towards the FED in surprises to
Speaker 9: the degree that it accelerates towards the two percent level.
Speaker 3: It may be due to sort of the more traditional.
Speaker 9: Components of the economy, which is employment cracking, wages softening,
Speaker 9: and growth slowing. We didn't see that happen from nine
Speaker 9: to four point nine, but we may see it from
Speaker 9: four point nine to a two percent handle on inflation
Speaker 9: mm hmm.
Speaker 5: Yeah, all eyes on those numbers of course, coming at
Speaker 5: eight thirty am Eastern tomorrow morning.
Speaker 2: But we are expecting a east and drop yeah, number right,
Speaker 2: four point nine percent to four point one percent.
Speaker 5: Yeah, and also a drop in core.
Speaker 2: Inflation, but five and a half to five point two.
Speaker 5: But as we've talked about that divergence between core and headline,
Speaker 5: it's definitely growing. But Aaron, so far we've talked about equities,
Speaker 5: I want to bring bonds into these conversations because this
Speaker 5: year was supposed to be the year of the bond.
Speaker 5: I guess a did you buy into that? And where
Speaker 5: are we on that narrative now?
Speaker 9: Well, it's been an interesting year, right because we we
Speaker 9: we've experienced this the sort of banking crisis on the
Speaker 9: West Coast with Silicon Valley Bank really had you know,
Speaker 9: bond bonds trending, you know, lower on the heels of that,
Speaker 9: and now now we've seen a re emergence of higher
Speaker 9: bond yields. You know, yields haven't really moved much relatively
Speaker 9: speaking since the commencement of the year, even though inflations
Speaker 9: come off. So it's been a little bit of a
Speaker 9: head scratcher. And I think one would argue that if
Speaker 9: we were sitting here at the beginning of the year
Speaker 9: and someone said that rates are unchanged, where are equities,
Speaker 9: you'd probably say equities would be lower. But that hasn't
Speaker 9: been the case either, So you know, a lot occurring
Speaker 9: on that front. What I think going forward is that
Speaker 9: inflation will continue to trend downward, that maybe we avoid
Speaker 9: a hard landing, but we're certainly moving into a slower
Speaker 9: growth period, and that eventually we'll see the longer end
Speaker 9: of the curve in particular. But as the Fed normalizes rates,
Speaker 9: perhaps in twenty twenty four, we'll see rates trending downward
Speaker 9: across the board. Maybe the curve finally lose the inversion
Speaker 9: sometime in late twenty twenty four, but higher prices for bonds.
Speaker 9: I think this is another asset allocation opportunity for those
Speaker 9: who own balanced portfolios of equities and bonds where a
Speaker 9: slower economic growth picture augurs well for the over all
Speaker 9: bond market, particularly in a soft landing scenario where maybe
Speaker 9: credit doesn't widen so significantly, particularly high yield and even
Speaker 9: investment grade. It could set up well for balanced portfolios
Speaker 9: going forward.
Speaker 2: Aaron just got about thirty seconds left. My late grandmother
Speaker 2: always requested Pacific salmon for some reason. She was a stickler.
Speaker 2: And I note that you are on the board of
Speaker 2: the Atlantic Salmon Federation. Why is that? What is that?
Speaker 9: Well, it's a very important organization. We're trying to say
Speaker 9: wild runs of Atlantic salmon. It's an international challenge. It's
Speaker 9: faced by the United States, where we have a moratorm.
Speaker 9: We can't fish for Atlantic salmon because there are so
Speaker 9: few of them moving into the main waters. We have
Speaker 9: very few runs left. In the Canadian provinces have seen
Speaker 9: salmon runs collapse. It's more than about salmon. It's about
Speaker 9: how we treat our coastal areas, how we deal with
Speaker 9: the habitat that ultimately allow for salmon to return to
Speaker 9: their home waters.
Speaker 1: If it's the international.
Speaker 9: Relaynmark week away.
Speaker 2: All right, Hey, I got to cut you off there, Eric, Aaron,
Speaker 2: but I'm pleased if we guy you on. Aaron Kennan
Speaker 2: from Clear Harbor Asset Managements.
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