Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
Speaker 1: Along with my co host Lisa Abramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg p m L
Speaker 1: Podcast on Apple Podcasts, SoundCloud and Bloomberg dot com. I
Speaker 1: want to turn out to David Garretty, the chief executive
Speaker 1: of g v A Research, to tell us about the
Speaker 1: world domination plans of Amazon. David, always a pleasure to
Speaker 1: have you. Thanks for being here. Um, I was just
Speaker 1: looking at the market cap of Amazon at nearly four
Speaker 1: hundred and eighty billion dollars, right, So four and eighty
Speaker 1: billion is the market cap for a company that did
Speaker 1: sales of about a hundred and forty billion, So we're
Speaker 1: talking about a four to one there net income two
Speaker 1: and a half billion. How does that work on an
Speaker 1: annual basis? You got a four d and eighty billion
Speaker 1: dollar valuation and yet your net is two and a
Speaker 1: half billion and people just love you well. Pim, thanks
Speaker 1: for the setup on world domination. But the issue it
Speaker 1: is it goes into the competitive dynamics that Amazon under
Speaker 1: founder and CEO Jeff Bezos, have followed since pretty much
Speaker 1: the beginning, which is the company is always focused on
Speaker 1: pricing as being the wedge that it is used to
Speaker 1: gain market share, and the company has always referred to
Speaker 1: the fact that they arguably have this flywheel which at
Speaker 1: some point in time, when things slow down and margins
Speaker 1: start to improve, should lead to meaningful expansion on the
Speaker 1: bottom line. So the profit margin that you highlight is
Speaker 1: raizor thin arguably has the potential to expand, and certainly,
Speaker 1: you know, here we are a week I'll expand. Even
Speaker 1: though some people have said that Amazon, you know, first
Speaker 1: built this business on the fact that they did not
Speaker 1: pay sales tax in the states to which they ship books,
Speaker 1: very true, and in some respects, you know, this continues
Speaker 1: to the present day. So yes, there's acts avoidance, and
Speaker 1: arguably the pricing on that can be worked into what
Speaker 1: price it is that the consumers have to pay. But
Speaker 1: one might argue that as we've seen this business model
Speaker 1: develop and evolve, and following the acquisition announcement a week
Speaker 1: ago of the thirteen point four billion dollars being spent
Speaker 1: to acquire whole Foods. I would really say Amazon's growth
Speaker 1: prospects boiled down to two words right now, Alexa listens.
Speaker 1: And if we look at the Amazon Echo being implanted
Speaker 1: in the homes of a wider range of higher income households.
Speaker 1: While people may think, gosh, the echo was wonderful, you know,
Speaker 1: I give a request, I get an answer. Well, it's
Speaker 1: not just a matter of depending upon interaction, it's the
Speaker 1: matter of listening and gathering further data. And so how
Speaker 1: can Amazon monetize that? Amazon argument is going to monetize
Speaker 1: that if we looked at Whole Foods. Whereas Whole Foods located,
Speaker 1: Whole Foods is located in situations where it caters to
Speaker 1: high income households, so it has to be in fairly
Speaker 1: close proximity to where these households are located. So not
Speaker 1: only has Amazon now just gotten a wider number of
Speaker 1: distribution points that are closer to their customers, they arguably
Speaker 1: at the same time have gathered a source of data
Speaker 1: which gives them greater depth in terms of understanding the
Speaker 1: range of products that consumers are buying. Complement that with
Speaker 1: the fact that you know, if we go back over
Speaker 1: last six or twelve months, Amazon had been rolling out
Speaker 1: the Echo and we've had people have responded to this
Speaker 1: product favorably. But there are implications longer term where this
Speaker 1: integration on the part of Amazon is getting far closer
Speaker 1: to consumers such that it's now within the consumers home
Speaker 1: passively gathering data. So I'm trying to understand, going back
Speaker 1: to something that you said earlier, Amazon has proven really
Speaker 1: good at disintermediating some of the big behemoth retailers and
Speaker 1: having more efficient systems also by squeezing out prices by
Speaker 1: by getting prices as low as possible. At what point
Speaker 1: will they be able to meaningfully increase prices to improve
Speaker 1: their margins. Well, you're starting to see some of that
Speaker 1: happen already. Um. You know, Amazon over time has started
Speaker 1: to introduce more of their own brand products and have
Speaker 1: been providing those two consumers and consumers have appreciated Amazon
Speaker 1: very much because Amazon was convenient. You could shop on
Speaker 1: Amazon anytime you want, wherever you want it, and Amazon
Speaker 1: would deliver. But in the process of the trade off
Speaker 1: of this convenience, consumers aren't necessarily being perhaps as mindful,
Speaker 1: and it may not matter so much at the higher
Speaker 1: end income end of the distribution. Curve. Consumers are making
Speaker 1: a trade off. They're not necessarily looking at the price
Speaker 1: that they're paying. They're not looking at the value because
Speaker 1: they're putting greater value in the convenience that Amazon can deliver.
Speaker 1: And there is documentation out there that says Amazon, with
Speaker 1: respect of their own brand products, changes the prices on
Speaker 1: a fairly rapid basis, and more often than not, you
Speaker 1: actually end up paying more for the Amazon owned brand
Speaker 1: product then you do for a branded name product being
Speaker 1: provided by another vendor through the Amazon site. That's kind
Speaker 1: of an amazing situation, isn't it. This is yield management,
Speaker 1: which people have been accustomed to thinking of in the
Speaker 1: context of the airline industry, where you look at the
Speaker 1: manipulation around per seat pricing. This is yield management going
Speaker 1: online and then with Alexa coming into your home. Talking
Speaker 1: about Alexa, maybe you can expand on this because if
Speaker 1: you go to the Alexa site, it is targeted towards businesses,
Speaker 1: not to individuals necessarily, and it's designed to give businesses
Speaker 1: what they call competitive analysis tools. And one if you
Speaker 1: could speak about that in the context of what Alexa
Speaker 1: is doing, because boy, if you're offering web website traffic
Speaker 1: statistics plus an audience overlap. That's kind of a sophisticated
Speaker 1: piece of information for companies that don't have to host
Speaker 1: the technology. Well, it's really a byproduct of what it
Speaker 1: is that Amazon is doing, and and Amazon, in the
Speaker 1: process of doing that, is obviously trying to monetize what
Speaker 1: it's already gathering for itself. Some people have been making
Speaker 1: a case, you know, in fairly significant publications, um that
Speaker 1: Amazon is now acquiring the role that railroads used to
Speaker 1: play back in the late nineteenth century, when railroads essentially
Speaker 1: determined what traffic crossed the rails and what was the
Speaker 1: price at which this traffic crossed its rails. So one
Speaker 1: might argue that it is Historically we looked at Amazon
Speaker 1: as being a disruptor. You know, Amazon now as the intermediary,
Speaker 1: is gaining substantial economic power, and the question here might
Speaker 1: have to be argued as we look at the Whole
Speaker 1: Foods acquisition, you know, will the regulators decide to intervene
Speaker 1: because of this greater influence that Amazon has. And the
Speaker 1: other question is will read later start to be concerned
Speaker 1: about some of the privacy issues that may be raised
Speaker 1: around the prospect of having Alexa, sitting in the home,
Speaker 1: listening to what people are saying and then anticipating what
Speaker 1: people want before they actually themselves consciously know that are
Speaker 1: consumers willing to give that much away of themselves to
Speaker 1: get this convenience that Amazon has historically provided. This is fascinating,
Speaker 1: you know, I hadn't realized that Amazon branded products were
Speaker 1: actually charging more than what you could get for other
Speaker 1: brands that are sold through Amazon's network. Fascinating, fascinating talk.
Speaker 1: David Garretty, chief executive officer of g v A Research.
Speaker 1: Also he's a columnist at Investor PDA, and he joins
Speaker 1: us here in our Bloomberg eleven three oh studios. Looking
Speaker 1: very summary. Always wonderful to see you, David. Well, there
Speaker 1: was a leg Mason survey that came out earlier today
Speaker 1: that showed that in come investors are seeking an overall
Speaker 1: rate of return of about eight point six four per cent,
Speaker 1: which seems difficult to get at a time when junk
Speaker 1: bond yields are a little over five percent. Here to
Speaker 1: put some perspective on that, I want to bring in
Speaker 1: Alan McKnight, chief investment officer in the wealth management division
Speaker 1: of Regent's Bank, which oversees about eighty one billion dollars.
Speaker 1: Alan joins us here in our Bloomberg eleven three oh studios.
Speaker 1: Thank you so much for joining us. Uh have you
Speaker 1: found when you're talking with fund managers and clients that
Speaker 1: people have unrealistic expectations of what kinds of returns they
Speaker 1: could possibly get? We think so when we think the
Speaker 1: biggest issue is that people want to look on a
Speaker 1: historical basis as to what they should expect in the future.
Speaker 1: And if you look at the long term returns and
Speaker 1: use a very simplified ten percent for stocks, five percent
Speaker 1: for bonds, you get to this magic equilibrium of eight percent. Well,
Speaker 1: the reality is if we believe that expect returns and
Speaker 1: stocks will be closer to seven and bonds will be
Speaker 1: closer to two, suddenly you're looking at closer to five
Speaker 1: five and a half percent versus this magic eight. Well,
Speaker 1: on a second to you're talking about a blended UH
Speaker 1: group of fixed income that includes corporate and government dead
Speaker 1: Is that right exactly? And we just think, given where
Speaker 1: we are on the curve and what we've already seen
Speaker 1: with the benefits to high yield investment grade corporate bonds,
Speaker 1: that it seems less likely to us that will generate
Speaker 1: the types of returns and fixed income as we have.
Speaker 1: So a total return kind of bond return of about
Speaker 1: two percent by year end, that means that we see
Speaker 1: some losses before your end. That probably includes some increases
Speaker 1: in bunchmark yields. Correct, that's that's correct. So where do
Speaker 1: you see it going the benchmark tenure for example, Yeah,
Speaker 1: so we think the tenure will continue to go higher.
Speaker 1: But what we've seen so far is what we think
Speaker 1: is indicative of the future, which is one of we're
Speaker 1: seeing the back end of the curve come down, We're
Speaker 1: seeing the short end of the curve go up. We've
Speaker 1: seen this flattening effect until such time that we see
Speaker 1: some implemental ideas from Washington and some real change associated.
Speaker 1: It's hard for us to envision a scenario where the
Speaker 1: entire curve shifts up dramatically in the ten makes any
Speaker 1: greater move than say to two six or two seven
Speaker 1: by year end. At what point do asset prices, whether
Speaker 1: they be bonds or equities, get to the point where
Speaker 1: you say, let's keep something in cash, let's deploy capital
Speaker 1: in a neutral position, because we feel that well, we've
Speaker 1: made enough money. Looking at the SMP five, it's up
Speaker 1: nine percent this year. So our thought on that is
Speaker 1: that you have to continue to rebalance the portfolio and
Speaker 1: rebalance to the underperforming asset classes and rather than going
Speaker 1: solely to cash, we think that there are better uses
Speaker 1: of funds. And certainly if you look over the long term,
Speaker 1: there should be a correction of about ten percent every
Speaker 1: year if you go back to nineteen hundred and approximately
Speaker 1: every three years, just looking at the statistical data. So
Speaker 1: our perspective is, if you can be a long term investor,
Speaker 1: you shouldn't try to get in and out just as
Speaker 1: that's about to occur. Instead ride through it and rebalance
Speaker 1: to find those underperforming asset classes and opportunities such as
Speaker 1: what we've seen last year in international developed markets as
Speaker 1: well as emerging markets, rather than going to reallocate that
Speaker 1: capital out to some some cheaper assets, if you will.
Speaker 1: So when you talk to clients and you say, you know,
Speaker 1: you guys may be expecting eight point six percent hold
Speaker 1: or returns for this year, that's not gonna happen. You're
Speaker 1: gonna get five and a half percent. Do they just
Speaker 1: say okay, or do they say can you make that happen. Please.
Speaker 1: It's a great question and it's a real challenge because
Speaker 1: I think most investors would say that's what I need.
Speaker 1: So when you think about what's what's required versus what's possible,
Speaker 1: we would say what's possible as closer to the seven
Speaker 1: percent range, but what's required is much higher. But with
Speaker 1: what's possible is not possible without taking a lot of
Speaker 1: risk and being lucky, right, I mean, how is it
Speaker 1: possible to get seven percent risk without potentially losing your shirt? Well,
Speaker 1: that's that's exactly I mean the differences around long term
Speaker 1: versus short term and the very short term. We don't
Speaker 1: believe that you're going to get seven percent let's say
Speaker 1: through the end of the year. What we believe is
Speaker 1: of the next five to ten years you should be
Speaker 1: able to deliver that. And more importantly, if you talk
Speaker 1: to clients, it should be about what is your timeline,
Speaker 1: what are your liquidity needs, and how much risk are
Speaker 1: you willing to take to to go down that path?
Speaker 1: And that's where we see the greatest disconnect for clients
Speaker 1: who want something, they want to be able to do
Speaker 1: certain things. But then when you start to back into
Speaker 1: the data around it, in the numbers. It's this aha
Speaker 1: moment of well, I neither save more, I need to
Speaker 1: allocate more capital of this, or if I'm reaching for
Speaker 1: risk or yield, then I should assume I'm gonna have
Speaker 1: more volatility. And that's a difficult concept for many folks
Speaker 1: to think that they just want the return without all
Speaker 1: the risk. What are you hearing from your your base
Speaker 1: of of salespeople and and managers. What of those, let's say,
Speaker 1: reactions that you hear from investors, what's the most common one.
Speaker 1: Do they readjust their risk profile? Do they kid themselves
Speaker 1: into thinking, no, I'll worry about it later. Do they
Speaker 1: add more to savings? What's normally what they do? Well,
Speaker 1: we've seen as far is that most want to wait. Unfortunately,
Speaker 1: most folks don't really want to have that difficult conversation
Speaker 1: and in some case, if it's in an institutional investor,
Speaker 1: they don't have the luxury of that because it's set
Speaker 1: for them rather than them being able to actually discern
Speaker 1: what that true target rate might be. So denial, you're saying, exactly, okay, so,
Speaker 1: but it's always a good strategy, right to just deny
Speaker 1: that the issue exists, Right, it's good, good, I try
Speaker 1: to do that on a regular basis. But I'm just
Speaker 1: trying to think though, you know, to get to that
Speaker 1: seven percent, what would the allocation have to be? Uh,
Speaker 1: you know, given some degree of volatility, perhaps more than
Speaker 1: some people are willing to stomach. What are people what
Speaker 1: are you recommending people allocate to an aggressive strategy for
Speaker 1: a longer term horizon with uh, some ability to have
Speaker 1: a liquid investments right, So we're allocating more to equities
Speaker 1: and more broadly to emerging markets, international developed where we
Speaker 1: think there's opportunity right now, we also allocate to small
Speaker 1: and MidCap stocks because we think there's a higher return
Speaker 1: premium there. I'll be it. There's a little bit more volatility,
Speaker 1: and it's decreasing our exposure to fixed income. Now, the
Speaker 1: tradeoff of that is there's going to be more volatility
Speaker 1: in the portfolio. But we don't view volatility solely in
Speaker 1: a standard deviation. Okay, this is what the statistic means.
Speaker 1: It's how much can you stop it? From an absolute
Speaker 1: value perspective and what that may mean for your portfolio.
Speaker 1: Does at mean that you're not pricing in any chance
Speaker 1: of a recession in the next few years. We don't
Speaker 1: anticipated recession. Right now, we think that we're going to
Speaker 1: hover around two to two point two percent growth, but
Speaker 1: we need some implementation in DC to help that along.
Speaker 1: So right now, you're still betting on the Trump up
Speaker 1: we are. I want to press you just a little
Speaker 1: bit on this seven percent idea, because you know, when
Speaker 1: someone says seven percent, I go looking on my Bloomberg
Speaker 1: and I call up Royal Dutch Shell. All right, this
Speaker 1: is a global or soup him. Well, but I mean
Speaker 1: it's okay, well it's not Royal. Well, okay, Royal Dutch Shell,
Speaker 1: and it's got a yield of over seven percent, albeit
Speaker 1: the stock is down nearly eight percent this year. But
Speaker 1: if you're telling me that this is a long term
Speaker 1: bet for whomever is the customer, then they're not going
Speaker 1: to necessarily worry about the capital appreciation or are they.
Speaker 1: At what point does that become a denial conversation as well? Well?
Speaker 1: I think the big question for investors around do I
Speaker 1: chase yield in that case where you have an underperforming asset,
Speaker 1: because the energy businesses has been hit over the last
Speaker 1: really eighteen months, but more um recently in the last
Speaker 1: couple of months, and when you chase just absolute levels
Speaker 1: of yield, you're gonna get hurt. What we would say is,
Speaker 1: build a portfolio around equity income and what's more important
Speaker 1: is the actual growth of yield rather than the absolute
Speaker 1: dollar value, because if you go chasing that dollar value
Speaker 1: of yield, inevitably you're going to get hurt because it's
Speaker 1: the names that have already sold off, and unless you
Speaker 1: have a very long term time perspective and you have
Speaker 1: a very clear indication of default risk and cash flow
Speaker 1: needs of that company, it can be a more challenging situation.
Speaker 1: Real quick. What's the most overvalued aspect of markets right now?
Speaker 1: We would say that probably the most overvalued would be
Speaker 1: marginally in the high yield space, just as it relates
Speaker 1: to where spreads are. They're so tight, um, we haven't
Speaker 1: seen them this tight and quite a while, so that
Speaker 1: would be the place where we're still allocating to them,
Speaker 1: but we want to be on a conservative side and
Speaker 1: high quality within the high yield space. Well you can't
Speaker 1: see it, but Lisa is shaking her head because this
Speaker 1: is something you've been noting for any any little bit.
Speaker 1: Alan McKnight, thanks very much, Chief Investment Officer, Wealth Management,
Speaker 1: Regents Bank eighty one billion dollars under management. They're based
Speaker 1: in New Orleans. But we did get the healthcare bill
Speaker 1: out of the Senate yesterday. We at least saw a
Speaker 1: version of it coming out of the GOP and there
Speaker 1: were some scathing responses to it, including from Dr Jonathan
Speaker 1: Gruber and m I t Professor of economics, who said
Speaker 1: that the deal was quote amazingly bad. Dr Gruber was
Speaker 1: also a key architect of Obamacare, and he joins us now.
Speaker 1: Dr Gruber, thank you so much for taking the time.
Speaker 1: We have a sense of where you may be coming
Speaker 1: from with respect to your view on this proposal. I
Speaker 1: would love to get your sense of which provisions in
Speaker 1: the Senate bill are most important to watch and have
Speaker 1: the most potential impact going forward. Yeah, thanks for having me.
Speaker 1: And look, I think it's very important to recognize we
Speaker 1: all come in this of the view, but the facts
Speaker 1: be clearly, which is literally, if you ask Republican senators
Speaker 1: what this bill accomplishes, they don't have an answer for
Speaker 1: you other than what repeals Obamacare, which it doesn't do.
Speaker 1: I mean, this is literally taking Obamacare and just making
Speaker 1: it worse. Well, hold on a second, wait, hold on second,
Speaker 1: because I think that somebody might say, well, honestly, it
Speaker 1: lowers the cost. And if it lowers the cost, but
Speaker 1: that goes forward and helps the overall budget of the US. Okay, well,
Speaker 1: let's be clear, so let's separate key terms. It does
Speaker 1: not lower the cost of healthcare. It does not lower
Speaker 1: health premiums. It so it does lower government spending on healthcare,
Speaker 1: but it doesn't lower the deficit. It just goes into
Speaker 1: tax cuts for the rich. So we're talking about the
Speaker 1: largest social insurance rollback in our nation's history, and the
Speaker 1: torre diduction. The deficit will be maybe ten billion a year,
Speaker 1: which is like, okay, so or two or three percent,
Speaker 1: so like who cares. So basically my point is I
Speaker 1: don't understand the point of this whole bill. And this
Speaker 1: isn't about the fact that, like Obamacare. This is literally
Speaker 1: a question what does this bill accomplish. It doesn't lower
Speaker 1: the deficit, it doesn't lower premiums, it doesn't lower healthcare spending.
Speaker 1: It does create more uninsured. It does mean that the
Speaker 1: sick and loving come out to pay much more further healthcare.
Speaker 1: I just don't know what the point of it is,
Speaker 1: all right. Having said that, Dr Kruber, as someone that
Speaker 1: I'm sure is well steeped in the political world now
Speaker 1: as you are in the world of economics and healthcare,
Speaker 1: because you have a pedigree that you know, you're director
Speaker 1: of healthcare program at the National View of Economic Research
Speaker 1: and so on. You know, very distinguished. Can you be
Speaker 1: a little bit perhaps more political and explain to everybody
Speaker 1: what do you really believe is going on and what
Speaker 1: is the ultimate purpose? So basically, honestly, from a standard
Speaker 1: politically con perspective, I can't explain what's going on. Because
Speaker 1: if you said to me, will the will an administration
Speaker 1: and Congress passive bill which literally makes ninety seven percent
Speaker 1: of Americans, you know, makes two percent Americans better off
Speaker 1: and probably Americans worse off, I would have said, you
Speaker 1: can't do that, because that's just politically impossible. So honestly,
Speaker 1: I can't explain the politics of this other than Republicans
Speaker 1: just feel that they need to please their base, that
Speaker 1: they promise their base they do something about Obamacare. They're
Speaker 1: gonna label us a repeal of Obamacare, although as I
Speaker 1: said yesterday, it's sort of half repeal of Obamacare plus
Speaker 1: a massive Medicaid cut, So it's really it's a weird
Speaker 1: bill because it's not a repeal of Obamacare. Okay, it
Speaker 1: is Obamacare light. It's literally just a scaling back of Obamacare.
Speaker 1: You don't like Obamacare tax credits, while we do is
Speaker 1: make them smaller. You don't like Obamacare regulations, They make
Speaker 1: them a little bit weaker. You don't like Obamacare pieces,
Speaker 1: They just make them smaller. Well, plus they add a
Speaker 1: massive cut in Medicaid above and beyond what Obama did
Speaker 1: to expand Medicaid, and they used to pay for a
Speaker 1: tax cut for the rich. Well, honestly, I don't understand
Speaker 1: the politics, So Dr Gruber, one of one thing that
Speaker 1: a lot of Republicans are saying is, look, Obamacare, the costs,
Speaker 1: the premiums are poised to go up rapidly in the
Speaker 1: upcoming years. You know, to quote President Trump that Obamacare
Speaker 1: is quote broken. So clearly there is a lot of
Speaker 1: concern going forward about the potential for Obamacare to continue
Speaker 1: providing some of the care that it already has. So,
Speaker 1: I mean, how would you respond to to that to
Speaker 1: basically say, this is an attempt to at least lower
Speaker 1: costs and ameliorate some of the uh, some of the
Speaker 1: aspects of Obamacare that haven't yet even been observed. So
Speaker 1: the way I would respond to that is to is
Speaker 1: to explain the facts. First of all, we're not talking
Speaker 1: about the vastment already of Americans. Neither Obamacare nor this
Speaker 1: law affects you. If you have employer responsive insurance. This
Speaker 1: law makes your life a little bit worse because it
Speaker 1: allows employers to put lifetime limits back. So it's sort
Speaker 1: of violence that Jimmy kim erule, if you will. But
Speaker 1: other than that, it doesn't much affect you employer sponsored insurance.
Speaker 1: We're talking about the minority of people who buy insurance
Speaker 1: in the individual market. All this law will do is
Speaker 1: destroy that market. Now, it's true that market doesn't work
Speaker 1: that well for many people. Um, and that's a shame,
Speaker 1: and we should address that. And we could address that.
Speaker 1: But it's sort of like saying, we've got a market
Speaker 1: that Obamacare created that's not working as we would have liked,
Speaker 1: so let's just destroy it. But it doesn't replace it,
Speaker 1: it doesn't fix it. Nothing still makes it better. Now,
Speaker 1: if you say you don't like Obamacare, that's fine, let's
Speaker 1: fix it. I disagree. I think Obamacare is working better
Speaker 1: than people say. I'm have to get into that. But
Speaker 1: you know, I know listeners might not agree with me
Speaker 1: on that. That's fine. Want listeners to ask is what
Speaker 1: does this law do to make it better? Absolutely nothing,
Speaker 1: And that's the key thing. It's basically a range previous said,
Speaker 1: we have a we have a bipolar choice either Obamacare
Speaker 1: this law. That's just wrong. They're using the political hate
Speaker 1: Obamacare to cover up something which is a fundamental attack
Speaker 1: on the U. S healthcare system. It doesn't make anything better.
Speaker 1: We're gonna leave it there, thank you very much. Dr
Speaker 1: Jonathan Gruber is economic Professor of m i T. Massachusetts
Speaker 1: Institute of Technology, and he was previously the director of
Speaker 1: Healthcare Program at the National Bureau of Economic Research. And
Speaker 1: also he was a key architect of both the twenty
Speaker 1: two thousand six rather Massachusetts healthcare reform bill that was
Speaker 1: sometimes referred to as Romney Care. Well, you know, the
Speaker 1: railroad industry has been beset by technological as well as
Speaker 1: economic challenges, and Thomas Black are industrial and aerospace reporter
Speaker 1: for Bloomberg News, joins us now from our Dallas bureau
Speaker 1: to help us understand about the ongoing revolution in the
Speaker 1: railroad industry. And Thomas, first of all, thank you for
Speaker 1: being with us, and maybe you could introduce who is
Speaker 1: Hunter Harrison and why is it that if I go
Speaker 1: to Amazon, I find that the book that he wrote
Speaker 1: is out of print and no longer available, but everybody
Speaker 1: wants it. Thanks to them, Lisa for having me on.
Speaker 1: Hunter Harrison is a railroading legend. He's uh. He would
Speaker 1: be in the Hall of Fame if they had one
Speaker 1: for for the industry. He's turned around three railroads and
Speaker 1: he's on his fourth and it looks like he's um.
Speaker 1: He's gonna come out a winner on this one as well.
Speaker 1: The early indication show in his book that he wrote
Speaker 1: while he was at Canadian National is um is something
Speaker 1: that most railroad folks have read. It's hard to it
Speaker 1: because it was it was an in house print of
Speaker 1: a book he wrote well as at c N, so
Speaker 1: it's it's hard to find and um, it's certainly people
Speaker 1: in the industry know all about it and most have
Speaker 1: read it. How we work and why running a precision
Speaker 1: Railroad that's the title. Tell us how he's running CSX.
Speaker 1: Now it's all about moving cars faster and he tends
Speaker 1: to go in and shake things up to do that,
Speaker 1: and sometimes turning logic perhaps on his head. And one
Speaker 1: of those examples is the hump yard that we talked
Speaker 1: about in the In the story, it's a it's an
Speaker 1: operation that's super efficient if you have large volume of
Speaker 1: railroad cars. You've got to tell people what is a
Speaker 1: hump yard? How is it used? And just give us
Speaker 1: that background. It's called a hump yard because they actually
Speaker 1: build a little hill where they push a train up
Speaker 1: the hill and as just crests at the top, there's
Speaker 1: a worker unhooked the car and then gravity pulls it
Speaker 1: down the hill and it's automatically switched among about forty
Speaker 1: rail lines um and it builds trains that way for
Speaker 1: a common destination. And so they there there's basically switching
Speaker 1: rail cars one by one through this mechanism, and it's
Speaker 1: again very efficient if you have a thousand or fred
Speaker 1: cars being switched every day. Uh. The key is that
Speaker 1: they they're switching him one by one. So what Hunter
Speaker 1: does is he says, why do we have to have
Speaker 1: all that volume go into this hump yard at the
Speaker 1: at the beginning when we're forming the train back up
Speaker 1: the line. Let's put these cars together in a common
Speaker 1: destination in blocks and that way, we don't have to
Speaker 1: go through these yards and switch them again one by one.
Speaker 1: We'll just use the locomotives themselves to push these blocks
Speaker 1: around and create trains that way. And so what they
Speaker 1: found is that they can just skip this this operation,
Speaker 1: which is highly efficient by not sending so much volumes there.
Speaker 1: So he's been able to shut down half of their
Speaker 1: hump yards and it creates um efficiencies not only from
Speaker 1: the workers and all the expenses operating hump yard, but
Speaker 1: also by not jamming cars into these different rail yards
Speaker 1: and slowing down the process. He's bypassing these railroads yards
Speaker 1: all together, you know, Thomas. Just to put this into perspective,
Speaker 1: So Hunter Harris took the helm of CSX in January
Speaker 1: and since then the shares have risen forty three percent.
Speaker 1: Kind of shocking, uh, as far as a gain for
Speaker 1: a company that is not Amazon or Facebook or one
Speaker 1: of the fangs. Just to put this into perspective, the
Speaker 1: US freight rail network is a sixty billion dollar industry,
Speaker 1: including a hundred and forty thou rail miles. And you know,
Speaker 1: at a time when there's so much focus on autonomous
Speaker 1: truck driving and infrastructure spending, I'm just wondering, what's the
Speaker 1: what's the road forward just generally for rail companies that
Speaker 1: are looking to modernize their you know, thought of as
Speaker 1: a pretty pretty old technology. What sort of the future
Speaker 1: here the Well, it's interesting that the railroads actually have
Speaker 1: a lot of technology. They're using pretty sophisticated computer models
Speaker 1: to manage their networks. Now they have sensors throughout their uh,
Speaker 1: their tracks to monitor the track health, the health of
Speaker 1: the cars themselves. Some railroads are expanding experimenting with the
Speaker 1: large X ray type machines that the that would be
Speaker 1: basically over the tracks and cars would go through there
Speaker 1: and they'd be able to check their their rail cars
Speaker 1: automatically to see if maybe an axle needs to be replaced,
Speaker 1: or wheel or brake needs to be replaced. So they
Speaker 1: are using new technology. Um, but it's it's it's hard
Speaker 1: to see because it is an industry that, like you said,
Speaker 1: that is fairly old and in the concept hasn't changed, right,
Speaker 1: you still have locomotives and you have cars that they're pulling.
Speaker 1: Last point to you, Thomas, you know when you look
Speaker 1: at all this the movement of all this good, how's
Speaker 1: the railroad industry doing in the United States, particularly CSS
Speaker 1: give you about twenty seconds. The railroad industry. It's it's
Speaker 1: doing well there. They've had difficulties because coal has uh cold,
Speaker 1: demand has dropped, but they're coming to terms with that
Speaker 1: and they're strut to see volume growth and that they're
Speaker 1: much more efficient than they ever have been. And in fact,
Speaker 1: all the capital that they've spent on the rails since
Speaker 1: they have been deregulated in nineteen has put the rail
Speaker 1: system really and it's probably the it's it's best condition ever,
Speaker 1: is what I'm being told. Thomas Black, thank you so
Speaker 1: much for joining us a truly fascinating story. Thomas Back
Speaker 1: is the industrial and aerospace reporter for Bloomberg News, coming
Speaker 1: to us from our Dallas bureau talking about c s X. Honestly,
Speaker 1: I am just shocked PIM gain in one year for
Speaker 1: a relatively old technology fascinating times. I'm Lisa abram Woods,
Speaker 1: PIM Fox, and this is Bloomberg. Thanks for listening to
Speaker 1: the Bloomberg P and L podcast. You can subscribe and
Speaker 1: listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast
Speaker 1: platform you prefer. I'm PIM Fox. I'm on Twitter at
Speaker 1: pim Fox. I'm on Twitter at Lisa abramowits one before
Speaker 1: the podcast. You can always catch us worldwide on Bloomberg
Speaker 1: Radio