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Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.

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Speaker 1: Along with my co host Lisa Abramowitz. Each day we

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Speaker 1: bring you the most important, noteworthy, and useful interviews for

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Speaker 1: you and your money, whether you're at the grocery store

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Speaker 1: or the trading floor. Find the Bloomberg p m L

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Speaker 1: Podcast on Apple Podcasts, SoundCloud and Bloomberg dot com. I

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Speaker 1: want to turn out to David Garretty, the chief executive

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Speaker 1: of g v A Research, to tell us about the

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Speaker 1: world domination plans of Amazon. David, always a pleasure to

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Speaker 1: have you. Thanks for being here. Um, I was just

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Speaker 1: looking at the market cap of Amazon at nearly four

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Speaker 1: hundred and eighty billion dollars, right, So four and eighty

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Speaker 1: billion is the market cap for a company that did

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Speaker 1: sales of about a hundred and forty billion, So we're

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Speaker 1: talking about a four to one there net income two

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Speaker 1: and a half billion. How does that work on an

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Speaker 1: annual basis? You got a four d and eighty billion

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Speaker 1: dollar valuation and yet your net is two and a

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Speaker 1: half billion and people just love you well. Pim, thanks

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Speaker 1: for the setup on world domination. But the issue it

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Speaker 1: is it goes into the competitive dynamics that Amazon under

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Speaker 1: founder and CEO Jeff Bezos, have followed since pretty much

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Speaker 1: the beginning, which is the company is always focused on

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Speaker 1: pricing as being the wedge that it is used to

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Speaker 1: gain market share, and the company has always referred to

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Speaker 1: the fact that they arguably have this flywheel which at

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Speaker 1: some point in time, when things slow down and margins

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Speaker 1: start to improve, should lead to meaningful expansion on the

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Speaker 1: bottom line. So the profit margin that you highlight is

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Speaker 1: raizor thin arguably has the potential to expand, and certainly,

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Speaker 1: you know, here we are a week I'll expand. Even

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Speaker 1: though some people have said that Amazon, you know, first

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Speaker 1: built this business on the fact that they did not

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Speaker 1: pay sales tax in the states to which they ship books,

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Speaker 1: very true, and in some respects, you know, this continues

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Speaker 1: to the present day. So yes, there's acts avoidance, and

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Speaker 1: arguably the pricing on that can be worked into what

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Speaker 1: price it is that the consumers have to pay. But

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Speaker 1: one might argue that as we've seen this business model

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Speaker 1: develop and evolve, and following the acquisition announcement a week

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Speaker 1: ago of the thirteen point four billion dollars being spent

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Speaker 1: to acquire whole Foods. I would really say Amazon's growth

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Speaker 1: prospects boiled down to two words right now, Alexa listens.

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Speaker 1: And if we look at the Amazon Echo being implanted

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Speaker 1: in the homes of a wider range of higher income households.

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Speaker 1: While people may think, gosh, the echo was wonderful, you know,

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Speaker 1: I give a request, I get an answer. Well, it's

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Speaker 1: not just a matter of depending upon interaction, it's the

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Speaker 1: matter of listening and gathering further data. And so how

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Speaker 1: can Amazon monetize that? Amazon argument is going to monetize

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Speaker 1: that if we looked at Whole Foods. Whereas Whole Foods located,

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Speaker 1: Whole Foods is located in situations where it caters to

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Speaker 1: high income households, so it has to be in fairly

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Speaker 1: close proximity to where these households are located. So not

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Speaker 1: only has Amazon now just gotten a wider number of

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Speaker 1: distribution points that are closer to their customers, they arguably

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Speaker 1: at the same time have gathered a source of data

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Speaker 1: which gives them greater depth in terms of understanding the

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Speaker 1: range of products that consumers are buying. Complement that with

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Speaker 1: the fact that you know, if we go back over

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Speaker 1: last six or twelve months, Amazon had been rolling out

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Speaker 1: the Echo and we've had people have responded to this

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Speaker 1: product favorably. But there are implications longer term where this

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Speaker 1: integration on the part of Amazon is getting far closer

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Speaker 1: to consumers such that it's now within the consumers home

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Speaker 1: passively gathering data. So I'm trying to understand, going back

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Speaker 1: to something that you said earlier, Amazon has proven really

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Speaker 1: good at disintermediating some of the big behemoth retailers and

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Speaker 1: having more efficient systems also by squeezing out prices by

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Speaker 1: by getting prices as low as possible. At what point

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Speaker 1: will they be able to meaningfully increase prices to improve

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Speaker 1: their margins. Well, you're starting to see some of that

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Speaker 1: happen already. Um. You know, Amazon over time has started

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Speaker 1: to introduce more of their own brand products and have

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Speaker 1: been providing those two consumers and consumers have appreciated Amazon

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Speaker 1: very much because Amazon was convenient. You could shop on

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Speaker 1: Amazon anytime you want, wherever you want it, and Amazon

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Speaker 1: would deliver. But in the process of the trade off

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Speaker 1: of this convenience, consumers aren't necessarily being perhaps as mindful,

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Speaker 1: and it may not matter so much at the higher

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Speaker 1: end income end of the distribution. Curve. Consumers are making

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Speaker 1: a trade off. They're not necessarily looking at the price

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Speaker 1: that they're paying. They're not looking at the value because

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Speaker 1: they're putting greater value in the convenience that Amazon can deliver.

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Speaker 1: And there is documentation out there that says Amazon, with

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Speaker 1: respect of their own brand products, changes the prices on

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Speaker 1: a fairly rapid basis, and more often than not, you

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Speaker 1: actually end up paying more for the Amazon owned brand

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Speaker 1: product then you do for a branded name product being

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Speaker 1: provided by another vendor through the Amazon site. That's kind

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Speaker 1: of an amazing situation, isn't it. This is yield management,

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Speaker 1: which people have been accustomed to thinking of in the

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Speaker 1: context of the airline industry, where you look at the

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Speaker 1: manipulation around per seat pricing. This is yield management going

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Speaker 1: online and then with Alexa coming into your home. Talking

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Speaker 1: about Alexa, maybe you can expand on this because if

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Speaker 1: you go to the Alexa site, it is targeted towards businesses,

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Speaker 1: not to individuals necessarily, and it's designed to give businesses

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Speaker 1: what they call competitive analysis tools. And one if you

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Speaker 1: could speak about that in the context of what Alexa

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Speaker 1: is doing, because boy, if you're offering web website traffic

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Speaker 1: statistics plus an audience overlap. That's kind of a sophisticated

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Speaker 1: piece of information for companies that don't have to host

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Speaker 1: the technology. Well, it's really a byproduct of what it

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Speaker 1: is that Amazon is doing, and and Amazon, in the

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Speaker 1: process of doing that, is obviously trying to monetize what

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Speaker 1: it's already gathering for itself. Some people have been making

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Speaker 1: a case, you know, in fairly significant publications, um that

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Speaker 1: Amazon is now acquiring the role that railroads used to

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Speaker 1: play back in the late nineteenth century, when railroads essentially

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Speaker 1: determined what traffic crossed the rails and what was the

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Speaker 1: price at which this traffic crossed its rails. So one

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Speaker 1: might argue that it is Historically we looked at Amazon

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Speaker 1: as being a disruptor. You know, Amazon now as the intermediary,

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Speaker 1: is gaining substantial economic power, and the question here might

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Speaker 1: have to be argued as we look at the Whole

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Speaker 1: Foods acquisition, you know, will the regulators decide to intervene

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Speaker 1: because of this greater influence that Amazon has. And the

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Speaker 1: other question is will read later start to be concerned

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Speaker 1: about some of the privacy issues that may be raised

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Speaker 1: around the prospect of having Alexa, sitting in the home,

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Speaker 1: listening to what people are saying and then anticipating what

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Speaker 1: people want before they actually themselves consciously know that are

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Speaker 1: consumers willing to give that much away of themselves to

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Speaker 1: get this convenience that Amazon has historically provided. This is fascinating,

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Speaker 1: you know, I hadn't realized that Amazon branded products were

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Speaker 1: actually charging more than what you could get for other

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Speaker 1: brands that are sold through Amazon's network. Fascinating, fascinating talk.

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Speaker 1: David Garretty, chief executive officer of g v A Research.

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Speaker 1: Also he's a columnist at Investor PDA, and he joins

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Speaker 1: us here in our Bloomberg eleven three oh studios. Looking

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Speaker 1: very summary. Always wonderful to see you, David. Well, there

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Speaker 1: was a leg Mason survey that came out earlier today

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Speaker 1: that showed that in come investors are seeking an overall

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Speaker 1: rate of return of about eight point six four per cent,

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Speaker 1: which seems difficult to get at a time when junk

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Speaker 1: bond yields are a little over five percent. Here to

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Speaker 1: put some perspective on that, I want to bring in

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Speaker 1: Alan McKnight, chief investment officer in the wealth management division

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Speaker 1: of Regent's Bank, which oversees about eighty one billion dollars.

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Speaker 1: Alan joins us here in our Bloomberg eleven three oh studios.

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Speaker 1: Thank you so much for joining us. Uh have you

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Speaker 1: found when you're talking with fund managers and clients that

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Speaker 1: people have unrealistic expectations of what kinds of returns they

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Speaker 1: could possibly get? We think so when we think the

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Speaker 1: biggest issue is that people want to look on a

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Speaker 1: historical basis as to what they should expect in the future.

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Speaker 1: And if you look at the long term returns and

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Speaker 1: use a very simplified ten percent for stocks, five percent

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Speaker 1: for bonds, you get to this magic equilibrium of eight percent. Well,

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Speaker 1: the reality is if we believe that expect returns and

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Speaker 1: stocks will be closer to seven and bonds will be

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Speaker 1: closer to two, suddenly you're looking at closer to five

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Speaker 1: five and a half percent versus this magic eight. Well,

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Speaker 1: on a second to you're talking about a blended UH

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Speaker 1: group of fixed income that includes corporate and government dead

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Speaker 1: Is that right exactly? And we just think, given where

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Speaker 1: we are on the curve and what we've already seen

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Speaker 1: with the benefits to high yield investment grade corporate bonds,

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Speaker 1: that it seems less likely to us that will generate

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Speaker 1: the types of returns and fixed income as we have.

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Speaker 1: So a total return kind of bond return of about

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Speaker 1: two percent by year end, that means that we see

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Speaker 1: some losses before your end. That probably includes some increases

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Speaker 1: in bunchmark yields. Correct, that's that's correct. So where do

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Speaker 1: you see it going the benchmark tenure for example, Yeah,

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Speaker 1: so we think the tenure will continue to go higher.

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Speaker 1: But what we've seen so far is what we think

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Speaker 1: is indicative of the future, which is one of we're

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Speaker 1: seeing the back end of the curve come down, We're

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Speaker 1: seeing the short end of the curve go up. We've

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Speaker 1: seen this flattening effect until such time that we see

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Speaker 1: some implemental ideas from Washington and some real change associated.

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Speaker 1: It's hard for us to envision a scenario where the

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Speaker 1: entire curve shifts up dramatically in the ten makes any

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Speaker 1: greater move than say to two six or two seven

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Speaker 1: by year end. At what point do asset prices, whether

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Speaker 1: they be bonds or equities, get to the point where

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Speaker 1: you say, let's keep something in cash, let's deploy capital

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Speaker 1: in a neutral position, because we feel that well, we've

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Speaker 1: made enough money. Looking at the SMP five, it's up

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Speaker 1: nine percent this year. So our thought on that is

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Speaker 1: that you have to continue to rebalance the portfolio and

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Speaker 1: rebalance to the underperforming asset classes and rather than going

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Speaker 1: solely to cash, we think that there are better uses

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Speaker 1: of funds. And certainly if you look over the long term,

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Speaker 1: there should be a correction of about ten percent every

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Speaker 1: year if you go back to nineteen hundred and approximately

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Speaker 1: every three years, just looking at the statistical data. So

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Speaker 1: our perspective is, if you can be a long term investor,

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Speaker 1: you shouldn't try to get in and out just as

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Speaker 1: that's about to occur. Instead ride through it and rebalance

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Speaker 1: to find those underperforming asset classes and opportunities such as

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Speaker 1: what we've seen last year in international developed markets as

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Speaker 1: well as emerging markets, rather than going to reallocate that

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Speaker 1: capital out to some some cheaper assets, if you will.

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Speaker 1: So when you talk to clients and you say, you know,

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Speaker 1: you guys may be expecting eight point six percent hold

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Speaker 1: or returns for this year, that's not gonna happen. You're

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Speaker 1: gonna get five and a half percent. Do they just

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Speaker 1: say okay, or do they say can you make that happen. Please.

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Speaker 1: It's a great question and it's a real challenge because

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Speaker 1: I think most investors would say that's what I need.

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Speaker 1: So when you think about what's what's required versus what's possible,

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Speaker 1: we would say what's possible as closer to the seven

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Speaker 1: percent range, but what's required is much higher. But with

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Speaker 1: what's possible is not possible without taking a lot of

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Speaker 1: risk and being lucky, right, I mean, how is it

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Speaker 1: possible to get seven percent risk without potentially losing your shirt? Well,

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Speaker 1: that's that's exactly I mean the differences around long term

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Speaker 1: versus short term and the very short term. We don't

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Speaker 1: believe that you're going to get seven percent let's say

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Speaker 1: through the end of the year. What we believe is

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Speaker 1: of the next five to ten years you should be

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Speaker 1: able to deliver that. And more importantly, if you talk

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Speaker 1: to clients, it should be about what is your timeline,

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Speaker 1: what are your liquidity needs, and how much risk are

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Speaker 1: you willing to take to to go down that path?

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Speaker 1: And that's where we see the greatest disconnect for clients

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Speaker 1: who want something, they want to be able to do

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Speaker 1: certain things. But then when you start to back into

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Speaker 1: the data around it, in the numbers. It's this aha

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Speaker 1: moment of well, I neither save more, I need to

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Speaker 1: allocate more capital of this, or if I'm reaching for

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Speaker 1: risk or yield, then I should assume I'm gonna have

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Speaker 1: more volatility. And that's a difficult concept for many folks

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Speaker 1: to think that they just want the return without all

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Speaker 1: the risk. What are you hearing from your your base

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Speaker 1: of of salespeople and and managers. What of those, let's say,

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Speaker 1: reactions that you hear from investors, what's the most common one.

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Speaker 1: Do they readjust their risk profile? Do they kid themselves

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Speaker 1: into thinking, no, I'll worry about it later. Do they

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Speaker 1: add more to savings? What's normally what they do? Well,

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Speaker 1: we've seen as far is that most want to wait. Unfortunately,

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Speaker 1: most folks don't really want to have that difficult conversation

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Speaker 1: and in some case, if it's in an institutional investor,

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Speaker 1: they don't have the luxury of that because it's set

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Speaker 1: for them rather than them being able to actually discern

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Speaker 1: what that true target rate might be. So denial, you're saying, exactly, okay, so,

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Speaker 1: but it's always a good strategy, right to just deny

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Speaker 1: that the issue exists, Right, it's good, good, I try

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Speaker 1: to do that on a regular basis. But I'm just

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Speaker 1: trying to think though, you know, to get to that

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Speaker 1: seven percent, what would the allocation have to be? Uh,

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Speaker 1: you know, given some degree of volatility, perhaps more than

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Speaker 1: some people are willing to stomach. What are people what

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Speaker 1: are you recommending people allocate to an aggressive strategy for

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Speaker 1: a longer term horizon with uh, some ability to have

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Speaker 1: a liquid investments right, So we're allocating more to equities

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Speaker 1: and more broadly to emerging markets, international developed where we

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Speaker 1: think there's opportunity right now, we also allocate to small

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Speaker 1: and MidCap stocks because we think there's a higher return

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Speaker 1: premium there. I'll be it. There's a little bit more volatility,

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Speaker 1: and it's decreasing our exposure to fixed income. Now, the

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Speaker 1: tradeoff of that is there's going to be more volatility

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Speaker 1: in the portfolio. But we don't view volatility solely in

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Speaker 1: a standard deviation. Okay, this is what the statistic means.

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Speaker 1: It's how much can you stop it? From an absolute

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Speaker 1: value perspective and what that may mean for your portfolio.

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Speaker 1: Does at mean that you're not pricing in any chance

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Speaker 1: of a recession in the next few years. We don't

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Speaker 1: anticipated recession. Right now, we think that we're going to

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Speaker 1: hover around two to two point two percent growth, but

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Speaker 1: we need some implementation in DC to help that along.

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Speaker 1: So right now, you're still betting on the Trump up

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Speaker 1: we are. I want to press you just a little

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Speaker 1: bit on this seven percent idea, because you know, when

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Speaker 1: someone says seven percent, I go looking on my Bloomberg

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Speaker 1: and I call up Royal Dutch Shell. All right, this

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Speaker 1: is a global or soup him. Well, but I mean

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Speaker 1: it's okay, well it's not Royal. Well, okay, Royal Dutch Shell,

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Speaker 1: and it's got a yield of over seven percent, albeit

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Speaker 1: the stock is down nearly eight percent this year. But

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Speaker 1: if you're telling me that this is a long term

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Speaker 1: bet for whomever is the customer, then they're not going

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Speaker 1: to necessarily worry about the capital appreciation or are they.

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Speaker 1: At what point does that become a denial conversation as well? Well?

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Speaker 1: I think the big question for investors around do I

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Speaker 1: chase yield in that case where you have an underperforming asset,

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Speaker 1: because the energy businesses has been hit over the last

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Speaker 1: really eighteen months, but more um recently in the last

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Speaker 1: couple of months, and when you chase just absolute levels

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Speaker 1: of yield, you're gonna get hurt. What we would say is,

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Speaker 1: build a portfolio around equity income and what's more important

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Speaker 1: is the actual growth of yield rather than the absolute

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Speaker 1: dollar value, because if you go chasing that dollar value

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Speaker 1: of yield, inevitably you're going to get hurt because it's

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Speaker 1: the names that have already sold off, and unless you

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Speaker 1: have a very long term time perspective and you have

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Speaker 1: a very clear indication of default risk and cash flow

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Speaker 1: needs of that company, it can be a more challenging situation.

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Speaker 1: Real quick. What's the most overvalued aspect of markets right now?

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Speaker 1: We would say that probably the most overvalued would be

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Speaker 1: marginally in the high yield space, just as it relates

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Speaker 1: to where spreads are. They're so tight, um, we haven't

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Speaker 1: seen them this tight and quite a while, so that

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Speaker 1: would be the place where we're still allocating to them,

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Speaker 1: but we want to be on a conservative side and

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Speaker 1: high quality within the high yield space. Well you can't

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Speaker 1: see it, but Lisa is shaking her head because this

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Speaker 1: is something you've been noting for any any little bit.

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Speaker 1: Alan McKnight, thanks very much, Chief Investment Officer, Wealth Management,

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Speaker 1: Regents Bank eighty one billion dollars under management. They're based

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Speaker 1: in New Orleans. But we did get the healthcare bill

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Speaker 1: out of the Senate yesterday. We at least saw a

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Speaker 1: version of it coming out of the GOP and there

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Speaker 1: were some scathing responses to it, including from Dr Jonathan

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Speaker 1: Gruber and m I t Professor of economics, who said

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Speaker 1: that the deal was quote amazingly bad. Dr Gruber was

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Speaker 1: also a key architect of Obamacare, and he joins us now.

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Speaker 1: Dr Gruber, thank you so much for taking the time.

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Speaker 1: We have a sense of where you may be coming

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Speaker 1: from with respect to your view on this proposal. I

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Speaker 1: would love to get your sense of which provisions in

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Speaker 1: the Senate bill are most important to watch and have

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Speaker 1: the most potential impact going forward. Yeah, thanks for having me.

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Speaker 1: And look, I think it's very important to recognize we

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Speaker 1: all come in this of the view, but the facts

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Speaker 1: be clearly, which is literally, if you ask Republican senators

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Speaker 1: what this bill accomplishes, they don't have an answer for

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Speaker 1: you other than what repeals Obamacare, which it doesn't do.

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Speaker 1: I mean, this is literally taking Obamacare and just making

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Speaker 1: it worse. Well, hold on a second, wait, hold on second,

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Speaker 1: because I think that somebody might say, well, honestly, it

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Speaker 1: lowers the cost. And if it lowers the cost, but

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Speaker 1: that goes forward and helps the overall budget of the US. Okay, well,

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Speaker 1: let's be clear, so let's separate key terms. It does

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Speaker 1: not lower the cost of healthcare. It does not lower

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Speaker 1: health premiums. It so it does lower government spending on healthcare,

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Speaker 1: but it doesn't lower the deficit. It just goes into

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Speaker 1: tax cuts for the rich. So we're talking about the

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Speaker 1: largest social insurance rollback in our nation's history, and the

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Speaker 1: torre diduction. The deficit will be maybe ten billion a year,

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Speaker 1: which is like, okay, so or two or three percent,

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Speaker 1: so like who cares. So basically my point is I

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Speaker 1: don't understand the point of this whole bill. And this

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Speaker 1: isn't about the fact that, like Obamacare. This is literally

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Speaker 1: a question what does this bill accomplish. It doesn't lower

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Speaker 1: the deficit, it doesn't lower premiums, it doesn't lower healthcare spending.

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Speaker 1: It does create more uninsured. It does mean that the

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Speaker 1: sick and loving come out to pay much more further healthcare.

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Speaker 1: I just don't know what the point of it is,

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Speaker 1: all right. Having said that, Dr Kruber, as someone that

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Speaker 1: I'm sure is well steeped in the political world now

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Speaker 1: as you are in the world of economics and healthcare,

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Speaker 1: because you have a pedigree that you know, you're director

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Speaker 1: of healthcare program at the National View of Economic Research

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Speaker 1: and so on. You know, very distinguished. Can you be

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Speaker 1: a little bit perhaps more political and explain to everybody

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Speaker 1: what do you really believe is going on and what

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Speaker 1: is the ultimate purpose? So basically, honestly, from a standard

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Speaker 1: politically con perspective, I can't explain what's going on. Because

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Speaker 1: if you said to me, will the will an administration

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Speaker 1: and Congress passive bill which literally makes ninety seven percent

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Speaker 1: of Americans, you know, makes two percent Americans better off

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Speaker 1: and probably Americans worse off, I would have said, you

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Speaker 1: can't do that, because that's just politically impossible. So honestly,

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Speaker 1: I can't explain the politics of this other than Republicans

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Speaker 1: just feel that they need to please their base, that

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Speaker 1: they promise their base they do something about Obamacare. They're

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Speaker 1: gonna label us a repeal of Obamacare, although as I

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Speaker 1: said yesterday, it's sort of half repeal of Obamacare plus

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Speaker 1: a massive Medicaid cut, So it's really it's a weird

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Speaker 1: bill because it's not a repeal of Obamacare. Okay, it

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Speaker 1: is Obamacare light. It's literally just a scaling back of Obamacare.

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Speaker 1: You don't like Obamacare tax credits, while we do is

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Speaker 1: make them smaller. You don't like Obamacare regulations, They make

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Speaker 1: them a little bit weaker. You don't like Obamacare pieces,

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Speaker 1: They just make them smaller. Well, plus they add a

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Speaker 1: massive cut in Medicaid above and beyond what Obama did

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Speaker 1: to expand Medicaid, and they used to pay for a

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Speaker 1: tax cut for the rich. Well, honestly, I don't understand

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Speaker 1: the politics, So Dr Gruber, one of one thing that

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Speaker 1: a lot of Republicans are saying is, look, Obamacare, the costs,

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Speaker 1: the premiums are poised to go up rapidly in the

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Speaker 1: upcoming years. You know, to quote President Trump that Obamacare

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Speaker 1: is quote broken. So clearly there is a lot of

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Speaker 1: concern going forward about the potential for Obamacare to continue

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Speaker 1: providing some of the care that it already has. So,

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Speaker 1: I mean, how would you respond to to that to

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Speaker 1: basically say, this is an attempt to at least lower

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Speaker 1: costs and ameliorate some of the uh, some of the

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Speaker 1: aspects of Obamacare that haven't yet even been observed. So

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Speaker 1: the way I would respond to that is to is

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Speaker 1: to explain the facts. First of all, we're not talking

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Speaker 1: about the vastment already of Americans. Neither Obamacare nor this

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Speaker 1: law affects you. If you have employer responsive insurance. This

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Speaker 1: law makes your life a little bit worse because it

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Speaker 1: allows employers to put lifetime limits back. So it's sort

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Speaker 1: of violence that Jimmy kim erule, if you will. But

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Speaker 1: other than that, it doesn't much affect you employer sponsored insurance.

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Speaker 1: We're talking about the minority of people who buy insurance

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Speaker 1: in the individual market. All this law will do is

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Speaker 1: destroy that market. Now, it's true that market doesn't work

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Speaker 1: that well for many people. Um, and that's a shame,

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Speaker 1: and we should address that. And we could address that.

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Speaker 1: But it's sort of like saying, we've got a market

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Speaker 1: that Obamacare created that's not working as we would have liked,

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Speaker 1: so let's just destroy it. But it doesn't replace it,

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Speaker 1: it doesn't fix it. Nothing still makes it better. Now,

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Speaker 1: if you say you don't like Obamacare, that's fine, let's

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Speaker 1: fix it. I disagree. I think Obamacare is working better

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Speaker 1: than people say. I'm have to get into that. But

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Speaker 1: you know, I know listeners might not agree with me

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Speaker 1: on that. That's fine. Want listeners to ask is what

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Speaker 1: does this law do to make it better? Absolutely nothing,

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Speaker 1: And that's the key thing. It's basically a range previous said,

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Speaker 1: we have a we have a bipolar choice either Obamacare

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Speaker 1: this law. That's just wrong. They're using the political hate

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Speaker 1: Obamacare to cover up something which is a fundamental attack

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Speaker 1: on the U. S healthcare system. It doesn't make anything better.

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Speaker 1: We're gonna leave it there, thank you very much. Dr

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Speaker 1: Jonathan Gruber is economic Professor of m i T. Massachusetts

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Speaker 1: Institute of Technology, and he was previously the director of

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Speaker 1: Healthcare Program at the National Bureau of Economic Research. And

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Speaker 1: also he was a key architect of both the twenty

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Speaker 1: two thousand six rather Massachusetts healthcare reform bill that was

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Speaker 1: sometimes referred to as Romney Care. Well, you know, the

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Speaker 1: railroad industry has been beset by technological as well as

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Speaker 1: economic challenges, and Thomas Black are industrial and aerospace reporter

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Speaker 1: for Bloomberg News, joins us now from our Dallas bureau

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Speaker 1: to help us understand about the ongoing revolution in the

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Speaker 1: railroad industry. And Thomas, first of all, thank you for

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Speaker 1: being with us, and maybe you could introduce who is

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Speaker 1: Hunter Harrison and why is it that if I go

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Speaker 1: to Amazon, I find that the book that he wrote

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Speaker 1: is out of print and no longer available, but everybody

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Speaker 1: wants it. Thanks to them, Lisa for having me on.

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Speaker 1: Hunter Harrison is a railroading legend. He's uh. He would

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Speaker 1: be in the Hall of Fame if they had one

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Speaker 1: for for the industry. He's turned around three railroads and

432
00:23:42,600 --> 00:23:46,120
Speaker 1: he's on his fourth and it looks like he's um.

433
00:23:46,119 --> 00:23:48,520
Speaker 1: He's gonna come out a winner on this one as well.

434
00:23:48,640 --> 00:23:52,040
Speaker 1: The early indication show in his book that he wrote

435
00:23:52,080 --> 00:23:56,520
Speaker 1: while he was at Canadian National is um is something

436
00:23:56,520 --> 00:24:00,119
Speaker 1: that most railroad folks have read. It's hard to it

437
00:24:00,240 --> 00:24:04,480
Speaker 1: because it was it was an in house print of

438
00:24:04,520 --> 00:24:08,679
Speaker 1: a book he wrote well as at c N, so

439
00:24:08,920 --> 00:24:12,480
Speaker 1: it's it's hard to find and um, it's certainly people

440
00:24:13,200 --> 00:24:15,000
Speaker 1: in the industry know all about it and most have

441
00:24:15,080 --> 00:24:18,320
Speaker 1: read it. How we work and why running a precision

442
00:24:18,520 --> 00:24:22,280
Speaker 1: Railroad that's the title. Tell us how he's running CSX.

443
00:24:22,320 --> 00:24:28,720
Speaker 1: Now it's all about moving cars faster and he tends

444
00:24:28,840 --> 00:24:32,320
Speaker 1: to go in and shake things up to do that,

445
00:24:32,960 --> 00:24:37,080
Speaker 1: and sometimes turning logic perhaps on his head. And one

446
00:24:37,080 --> 00:24:40,120
Speaker 1: of those examples is the hump yard that we talked

447
00:24:40,119 --> 00:24:43,880
Speaker 1: about in the In the story, it's a it's an

448
00:24:43,920 --> 00:24:47,679
Speaker 1: operation that's super efficient if you have large volume of

449
00:24:47,760 --> 00:24:49,760
Speaker 1: railroad cars. You've got to tell people what is a

450
00:24:49,840 --> 00:24:52,239
Speaker 1: hump yard? How is it used? And just give us

451
00:24:52,240 --> 00:24:55,000
Speaker 1: that background. It's called a hump yard because they actually

452
00:24:55,040 --> 00:24:58,840
Speaker 1: build a little hill where they push a train up

453
00:24:58,840 --> 00:25:01,879
Speaker 1: the hill and as just crests at the top, there's

454
00:25:02,280 --> 00:25:07,560
Speaker 1: a worker unhooked the car and then gravity pulls it

455
00:25:07,760 --> 00:25:12,840
Speaker 1: down the hill and it's automatically switched among about forty

456
00:25:13,000 --> 00:25:17,359
Speaker 1: rail lines um and it builds trains that way for

457
00:25:17,400 --> 00:25:22,680
Speaker 1: a common destination. And so they there there's basically switching

458
00:25:24,080 --> 00:25:28,600
Speaker 1: rail cars one by one through this mechanism, and it's

459
00:25:28,640 --> 00:25:32,000
Speaker 1: again very efficient if you have a thousand or fred

460
00:25:32,080 --> 00:25:35,280
Speaker 1: cars being switched every day. Uh. The key is that

461
00:25:35,320 --> 00:25:37,760
Speaker 1: they they're switching him one by one. So what Hunter

462
00:25:38,720 --> 00:25:41,320
Speaker 1: does is he says, why do we have to have

463
00:25:41,359 --> 00:25:45,119
Speaker 1: all that volume go into this hump yard at the

464
00:25:45,560 --> 00:25:48,760
Speaker 1: at the beginning when we're forming the train back up

465
00:25:48,800 --> 00:25:52,399
Speaker 1: the line. Let's put these cars together in a common

466
00:25:52,400 --> 00:25:55,879
Speaker 1: destination in blocks and that way, we don't have to

467
00:25:55,920 --> 00:25:58,200
Speaker 1: go through these yards and switch them again one by one.

468
00:25:58,240 --> 00:26:01,520
Speaker 1: We'll just use the locomotives themselves to push these blocks

469
00:26:01,560 --> 00:26:04,879
Speaker 1: around and create trains that way. And so what they

470
00:26:04,920 --> 00:26:09,440
Speaker 1: found is that they can just skip this this operation,

471
00:26:09,480 --> 00:26:13,240
Speaker 1: which is highly efficient by not sending so much volumes there.

472
00:26:13,480 --> 00:26:17,000
Speaker 1: So he's been able to shut down half of their

473
00:26:17,080 --> 00:26:21,600
Speaker 1: hump yards and it creates um efficiencies not only from

474
00:26:21,680 --> 00:26:26,240
Speaker 1: the workers and all the expenses operating hump yard, but

475
00:26:26,440 --> 00:26:30,520
Speaker 1: also by not jamming cars into these different rail yards

476
00:26:30,520 --> 00:26:34,439
Speaker 1: and slowing down the process. He's bypassing these railroads yards

477
00:26:34,440 --> 00:26:36,760
Speaker 1: all together, you know, Thomas. Just to put this into perspective,

478
00:26:36,760 --> 00:26:40,080
Speaker 1: So Hunter Harris took the helm of CSX in January

479
00:26:40,080 --> 00:26:44,200
Speaker 1: and since then the shares have risen forty three percent.

480
00:26:44,480 --> 00:26:47,359
Speaker 1: Kind of shocking, uh, as far as a gain for

481
00:26:47,400 --> 00:26:50,480
Speaker 1: a company that is not Amazon or Facebook or one

482
00:26:50,480 --> 00:26:53,040
Speaker 1: of the fangs. Just to put this into perspective, the

483
00:26:53,119 --> 00:26:56,720
Speaker 1: US freight rail network is a sixty billion dollar industry,

484
00:26:56,760 --> 00:27:00,399
Speaker 1: including a hundred and forty thou rail miles. And you know,

485
00:27:00,440 --> 00:27:02,960
Speaker 1: at a time when there's so much focus on autonomous

486
00:27:03,040 --> 00:27:07,919
Speaker 1: truck driving and infrastructure spending, I'm just wondering, what's the

487
00:27:08,359 --> 00:27:12,080
Speaker 1: what's the road forward just generally for rail companies that

488
00:27:12,119 --> 00:27:14,439
Speaker 1: are looking to modernize their you know, thought of as

489
00:27:14,440 --> 00:27:17,240
Speaker 1: a pretty pretty old technology. What sort of the future

490
00:27:17,320 --> 00:27:22,720
Speaker 1: here the Well, it's interesting that the railroads actually have

491
00:27:22,760 --> 00:27:26,760
Speaker 1: a lot of technology. They're using pretty sophisticated computer models

492
00:27:26,880 --> 00:27:33,560
Speaker 1: to manage their networks. Now they have sensors throughout their uh,

493
00:27:33,680 --> 00:27:39,399
Speaker 1: their tracks to monitor the track health, the health of

494
00:27:39,440 --> 00:27:44,280
Speaker 1: the cars themselves. Some railroads are expanding experimenting with the

495
00:27:44,640 --> 00:27:48,560
Speaker 1: large X ray type machines that the that would be

496
00:27:49,400 --> 00:27:51,920
Speaker 1: basically over the tracks and cars would go through there

497
00:27:51,920 --> 00:27:55,359
Speaker 1: and they'd be able to check their their rail cars

498
00:27:55,359 --> 00:27:59,040
Speaker 1: automatically to see if maybe an axle needs to be replaced,

499
00:27:59,119 --> 00:28:01,800
Speaker 1: or wheel or brake needs to be replaced. So they

500
00:28:01,840 --> 00:28:06,320
Speaker 1: are using new technology. Um, but it's it's it's hard

501
00:28:06,359 --> 00:28:09,240
Speaker 1: to see because it is an industry that, like you said,

502
00:28:09,280 --> 00:28:12,800
Speaker 1: that is fairly old and in the concept hasn't changed, right,

503
00:28:12,840 --> 00:28:16,159
Speaker 1: you still have locomotives and you have cars that they're pulling.

504
00:28:17,480 --> 00:28:20,080
Speaker 1: Last point to you, Thomas, you know when you look

505
00:28:20,119 --> 00:28:23,520
Speaker 1: at all this the movement of all this good, how's

506
00:28:23,520 --> 00:28:26,240
Speaker 1: the railroad industry doing in the United States, particularly CSS

507
00:28:26,280 --> 00:28:29,320
Speaker 1: give you about twenty seconds. The railroad industry. It's it's

508
00:28:29,320 --> 00:28:34,560
Speaker 1: doing well there. They've had difficulties because coal has uh cold,

509
00:28:34,600 --> 00:28:37,359
Speaker 1: demand has dropped, but they're coming to terms with that

510
00:28:37,440 --> 00:28:40,560
Speaker 1: and they're strut to see volume growth and that they're

511
00:28:40,640 --> 00:28:43,480
Speaker 1: much more efficient than they ever have been. And in fact,

512
00:28:43,520 --> 00:28:47,120
Speaker 1: all the capital that they've spent on the rails since

513
00:28:47,480 --> 00:28:52,200
Speaker 1: they have been deregulated in nineteen has put the rail

514
00:28:52,280 --> 00:28:56,000
Speaker 1: system really and it's probably the it's it's best condition ever,

515
00:28:56,600 --> 00:28:59,680
Speaker 1: is what I'm being told. Thomas Black, thank you so

516
00:28:59,720 --> 00:29:02,200
Speaker 1: much for joining us a truly fascinating story. Thomas Back

517
00:29:02,360 --> 00:29:05,880
Speaker 1: is the industrial and aerospace reporter for Bloomberg News, coming

518
00:29:05,920 --> 00:29:10,120
Speaker 1: to us from our Dallas bureau talking about c s X. Honestly,

519
00:29:10,160 --> 00:29:14,120
Speaker 1: I am just shocked PIM gain in one year for

520
00:29:14,280 --> 00:29:18,200
Speaker 1: a relatively old technology fascinating times. I'm Lisa abram Woods,

521
00:29:18,240 --> 00:29:23,440
Speaker 1: PIM Fox, and this is Bloomberg. Thanks for listening to

522
00:29:23,440 --> 00:29:26,320
Speaker 1: the Bloomberg P and L podcast. You can subscribe and

523
00:29:26,400 --> 00:29:30,400
Speaker 1: listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast

524
00:29:30,400 --> 00:29:33,880
Speaker 1: platform you prefer. I'm PIM Fox. I'm on Twitter at

525
00:29:34,040 --> 00:29:37,960
Speaker 1: pim Fox. I'm on Twitter at Lisa abramowits one before

526
00:29:37,960 --> 00:29:40,880
Speaker 1: the podcast. You can always catch us worldwide on Bloomberg

527
00:29:40,960 --> 00:29:41,240
Speaker 1: Radio