Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
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Speaker 3: John Talker sitting in for Alex Deal and Paul Sweeney.
Speaker 4: You're live here in our Bloomberg Interactive Broker Studio streaming
Speaker 4: live on YouTube as well. John, look at that you
Speaker 4: missed data a little bit better and expected. And what's
Speaker 4: also interesting to me is the one year inflation outlook.
Speaker 4: The consensus was two point nine percent, came in two
Speaker 4: point seven, so maybe people feel a little bit better
Speaker 4: about inflation.
Speaker 1: And of course this is the pulse that we take
Speaker 1: just before the election.
Speaker 3: The last one.
Speaker 1: Oh that's right, So uh, we're gonna have to put
Speaker 1: on our politics.
Speaker 3: Hasty as well. Yeah, exactly.
Speaker 4: Let's break this data down with Joan shut She is
Speaker 4: Surveys of Consumers Director at the University of Michigan. Joanna,
Speaker 4: it seems like some pretty solid numbers here.
Speaker 3: What is your takeaway Over.
Speaker 5: The last few months, consumers have been inching up in
Speaker 5: their level of confidence in the economy. They haven't really
Speaker 5: been seeing major swings up or down. A lot of
Speaker 5: people are kind of reserving judgment until the election because
Speaker 5: for a lot of people, the trajectory of the economy
Speaker 5: depends on which candidate wins the presidential race.
Speaker 1: But what does it say about their feelings about which
Speaker 1: way they're going to vote, Because the economy, we're told
Speaker 1: time and time again, is the number one issue.
Speaker 5: You know, consumers overall are feeling much better about the
Speaker 5: economy than they were two years ago. Business conditions, expectations
Speaker 5: are near their historical or at their historical average, so
Speaker 5: people are not feeling as dismal about the economy as
Speaker 5: they did a year ago two years ago. At the
Speaker 5: same time, they continue to tell us how much high
Speaker 5: prices are weighing on their personal finances.
Speaker 6: So people don't necessarily feel.
Speaker 5: Like they're thriving now, but they really have seen quite
Speaker 5: a bit of amp since since the peak of inflation
Speaker 5: a couple of years.
Speaker 4: Ago, Joanne, how much, if any, is the recent FED
Speaker 4: rate cut factor into these results for consumers?
Speaker 6: They are, they're they're absolutely expecting.
Speaker 5: They welcomed the rate cuts, and when we ask people
Speaker 5: about buying conditions for large purchases like cars or homes
Speaker 5: or durable goods, those those have all improved on the
Speaker 5: wake of these rate cuts and and continue consumers expect
Speaker 5: that to continue going forward. We have over half of
Speaker 5: consumers expecting rake further rate cuts in the year ahead.
Speaker 6: So it is helping a little bit. It's not helping dramatically.
Speaker 5: Home buying conditions still near historic lows, but consumers absolutely
Speaker 5: welcome these rate cuts.
Speaker 1: Before you go, who are the people that you survey?
Speaker 1: Are they whacked out lefties or hardcore right wingers.
Speaker 6: All of the above.
Speaker 5: We get a random sample of American consumers. We get
Speaker 5: all ages, all political stripes, all educational payment levels, and
Speaker 5: it absolutely comes through in our data.
Speaker 4: All right, Joyanne, thank you so much for joining us.
Speaker 4: We appreciate checking in with you on these you miss days.
Speaker 4: Joan Shoe, She's Surveys of Consumers Director at the University
Speaker 4: of Michigan.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 2: Just say Alexa playing Bloomberg eleven thirty.
Speaker 3: It's all about the election, John, It's all about DC.
Speaker 4: The good news for us is we got Bloomberg intelligence
Speaker 4: people down in DC and their job is to figure
Speaker 4: out what's going to happen in DC in Congress and
Speaker 4: how's it going to impact various industries and various markets.
Speaker 4: We actually pay them to do this stuff and they're
Speaker 4: really really good at it. Nathan Dean is our go
Speaker 4: to person and all things Washington, and he makes sense
Speaker 4: out of it all. Nathan Dean, Bloomberg Intelligence Senior policy analyst,
Speaker 4: joined here. Hey, Nathan, I'm sure you're getting this question
Speaker 4: one thousand times a day. What will a Harris administration
Speaker 4: look like? And what will a Trump administration look like
Speaker 4: across basically everything? And how will impact the markets? How
Speaker 4: do you kind of synthesize that question to our clients?
Speaker 7: Yeah, So I think we're saying that there's four, maybe
Speaker 7: five key themes. Let's go with five for next year
Speaker 7: in terms of a Harris or a Trump presidency, and
Speaker 7: you can see where both presidencies are going to have
Speaker 7: to play out in these themes. The first is, like
Speaker 7: you just mentioned tariffs, Now we have a seventy percent
Speaker 7: chance of tariff's coming no matter what next year. It's
Speaker 7: just whether or not they are broad tariff like sixty
Speaker 7: percent on all goods coming from China, or a subsector
Speaker 7: of tariff like what we've seen in the Biden administration
Speaker 7: with on automobiles, for example. Tariffs are somewhat popular, so
Speaker 7: tariffs are coming. The second is tax. The Trump era
Speaker 7: tax cuts expires at the end of twenty twenty five
Speaker 7: for individuals, so we're going to see a robust tax debate,
Speaker 7: and specifically you're going to see a debate on whether
Speaker 7: or not that corporate tax rate changes from twenty one
Speaker 7: percent to something else to help pay for these tax cuts.
Speaker 7: You're going to see a regulation effort or a deregulation effort,
Speaker 7: depending on who you are. This is certainly important to
Speaker 7: the investment banks. You're going to see the debt sealing
Speaker 7: return probably in the second to third quarter next year.
Speaker 7: You're going to see a debt ceiling fight if Kamala
Speaker 7: Harris wins the presidency. And finally, a lot of people
Speaker 7: have questions on the Inflation Reduction Act because there's a
Speaker 7: lot of capex coming into the United States on renewable industry.
Speaker 7: For example, will the IRA either be cemented under Harris
Speaker 7: presidency or tweaked or altered to help pay for those
Speaker 7: tax cuts under a Trump presidency.
Speaker 1: For banks, I go right to the capital requirements under
Speaker 1: Bozel three. How do the candidate stand on that and
Speaker 1: how would that impact the sector?
Speaker 7: Yeah, so you're talking about the Basle three endgame. It's
Speaker 7: a proposed rule which, if outlined as by the FED,
Speaker 7: would increase capital requirements for the American gesips. So think
Speaker 7: of the Bank of America as the JP Morgans and
Speaker 7: the city groups around nine percent. You're looking around a
Speaker 7: three to four percent increase in terms of the mid
Speaker 7: sized regionals like P and C. Tryst If Kamlin Harrison
Speaker 7: wins the presidency, we think this proposal will be reproposed
Speaker 7: in the early part of next year, and they'll try
Speaker 7: and finalize it towards the end of twenty twenty five,
Speaker 7: maybe the beginning of twenty twenty six, and then implementation
Speaker 7: would begin the next three years after that or over
Speaker 7: the next three years. If President Trump wins, I think
Speaker 7: you're going to see the work on this just stop.
Speaker 7: And I don't think these capital requirements are ever going
Speaker 7: to be implemented, at least not within the next few years.
Speaker 7: And this is where it could actually turn global in
Speaker 7: terms of its impact. The European regulators have already implemented this,
Speaker 7: they call it Basil four. It's already been implemented, and
Speaker 7: we've seen steps, for example, in the UK for the
Speaker 7: UK regulators to delay the implementation because they're concerned the
Speaker 7: Americans are never going to fallow suit. So if the
Speaker 7: American regulators say no, we're not going to move forward
Speaker 7: with the Bass of three endgame under the Trump presidency,
Speaker 7: you could see but the potential start of a global
Speaker 7: race to the bottom in terms of capital as Europe
Speaker 7: begins to actually pull back some of their stuff as well.
Speaker 3: Nathan, you're down there in DC.
Speaker 4: You're knee deep in this stuff, and I know you've
Speaker 4: got great sources down there. Is there any consensus to
Speaker 4: how Congress may play out in this election or houses flipping?
Speaker 4: Are they staying the same or we can have a
Speaker 4: split type of thing? Is there any consensus?
Speaker 8: Yeah?
Speaker 7: So, I think most Washingtonians think that the Republicans have
Speaker 7: a really good shot of taking the Senate. And the
Speaker 7: reason being is is that this is not a good
Speaker 7: race for the Democrats. They're playing. They're defending twenty three
Speaker 7: against thirty four in states in total, and with Senator
Speaker 7: Joe Manchin retiring in West Virginia most likely going to
Speaker 7: replace him with a Republican. You know, the Democrats are
Speaker 7: essentially going to have to run the gauntlet and have
Speaker 7: a really good night in order to keep the Senate.
Speaker 7: Now why do we care about this, Because the Senate
Speaker 7: is there's a filibuster in the Senate for legislation. There's
Speaker 7: no filibuster for nominations. So if Kamala Harris wins and
Speaker 7: the Senate Republicans take the Senate, they'll effectively be able
Speaker 7: to jam a lot of her nominees, a lot of
Speaker 7: her regulatory leadership in place for the first half of
Speaker 7: the year. If President Trump wins, he's going to be
Speaker 7: able to get a lot of his nominees in place
Speaker 7: and be able to move much quicker on a deregulatory
Speaker 7: after Now, when it comes to the House, pulling is
Speaker 7: a little bit more difficult. You know, it's extremely tight.
Speaker 7: Our general thought is is that whoever wins the presidency
Speaker 7: most likely win the House. And the reason why investors
Speaker 7: should care about who wins the House is because of
Speaker 7: the tax debate that I mentioned next year. Tax policy
Speaker 7: historically starts in the House, So whoever controls the House
Speaker 7: controls the House of Ways and Means Committee, and therefore
Speaker 7: controls a very important person in Washington who's going to
Speaker 7: decide what those tax negotiations will look like next year.
Speaker 9: Ah.
Speaker 1: Can I just jump back to some of the sectors,
Speaker 1: specifically with electric vehicles, Harris, They would support subsidies for
Speaker 1: electric vehicles or tax breaks, which I find curious because
Speaker 1: Elon Musk is the guy stumping for Donald Trump at
Speaker 1: this point, then he stands to be well, Tesla stands
Speaker 1: to be impacted quite a bit by this.
Speaker 7: Yeah, you know, we've heard anecdotally that, you know, because Tesla,
Speaker 7: you know, the Tesla vehicle is pretty expensive, and so
Speaker 7: whether or not a seventy five hundred dollars tax credit
Speaker 7: would change the buying habits over Tesla. You know, I've
Speaker 7: been talking to our auto's Annal Steve Man about this
Speaker 7: quite a bit. So there's some thought out there that
Speaker 7: Tesla's somewhat protected. We've also seen through Steve's work that
Speaker 7: some of the other automakers are looking to try and
Speaker 7: put out low cost evs as a way to combat that.
Speaker 7: But the reason why the EV tax credit is so
Speaker 7: important is because it's part of the Inflation Reduction Act.
Speaker 7: And if you're going to try and figure out how
Speaker 7: to pay for three and a half four trillion dollars
Speaker 7: worth of tax cuts to extend those, you know, the
Speaker 7: IRA is certainly something they're going to be looking at.
Speaker 9: Now.
Speaker 7: I think the IRA, for most part is going to
Speaker 7: be cemented. It's really popular in Republican states in terms
Speaker 7: of that capex that's coming in and building plants. But
Speaker 7: that EV tax credit is one of those provisions that
Speaker 7: could potentially be on the chopping block to help pay
Speaker 7: for those tax cuts.
Speaker 4: John John, If I were elected president, my first phone
Speaker 4: call would be get this Nathan Dean guy in my
Speaker 4: White House, just to get stuff done. He knows everything,
Speaker 4: and I feel like he knows everybody, and he just
Speaker 4: explains stuff so well, and just get stuff done.
Speaker 1: Why isn't anybody talking about the fiscal deficits at this point?
Speaker 1: I guess I guess it's just, you know, it's just.
Speaker 3: It's not good, not popular, it's not good politics.
Speaker 2: You're listening to the Bloomberg Intelligence podcast. Catch us live
Speaker 2: weekdays at ten am Eastern on Apple car Playing and
Speaker 2: Broud Auto with the Bloomberg Business App. Listen on demand
Speaker 2: wherever you get your podcasts, or watch us live on YouTube.
Speaker 4: Let's step back and take a look at these broader
Speaker 4: markets share. We do have, you know, some green on
Speaker 4: the screen here today, we've got the SMP of fifty points.
Speaker 4: That's nine tens to one percent. The tech heavy NASDAC
Speaker 4: up about one and a half percent here, So that's
Speaker 4: good news there.
Speaker 3: Victoria Fernandez joins us.
Speaker 4: He's a chief market strategist at cross Mark Global Investments. Victoria,
Speaker 4: we had some pretty good economic data today. I know,
Speaker 4: durable goods orders came in better than expected. We had
Speaker 4: the You Mission Sentiment survey come in better than expected.
Speaker 4: If I'm the Federal Reserve, I can actually think about
Speaker 4: maybe I don't have to cut come November.
Speaker 3: How do you guys think about it over their cross Mark?
Speaker 8: It's really been our thought process all along that we
Speaker 8: would only get two cuts from the September through the
Speaker 8: December meetings. We thought we would get a twenty five
Speaker 8: basis point cut in September, they would skip November, and
Speaker 8: then we would get another twenty five in December. For
Speaker 8: the exact reasons that you're talking about. We've seen some
Speaker 8: of the growth components of the economy continue to do
Speaker 8: pretty well. I mean, you look back at the end
Speaker 8: of August, the City Economic Surprise Index was one of
Speaker 8: the worst levels it's been in years, but it has
Speaker 8: come up significantly since then. It's one of the reasons
Speaker 8: we've seen ten your treasury yields come up because they
Speaker 8: have a pretty high correlation. So I think it does
Speaker 8: give the FED a little bit of wiggle room if
Speaker 8: they don't want to do anything the week of the election,
Speaker 8: because I have a feeling we probably won't know who
Speaker 8: the president is come Fed day when they're ready to
Speaker 8: have their press conference. It gives them a little bit
Speaker 8: of cover to hold off and then maybe do another
Speaker 8: cut in December.
Speaker 1: We get ahead of ourselves by the markets by pricing
Speaker 1: FED cuts.
Speaker 8: I think we absolutely did. It's no different than at
Speaker 8: the end of last year, or when the market was
Speaker 8: pricing in what was it, six seven rate cuts by March,
Speaker 8: and we were having the conversation with clients going there's
Speaker 8: no way that we're going to do that. The FED
Speaker 8: has worked too hard and too long to get us
Speaker 8: to the point where we are. They're not going to
Speaker 8: start cutting that quickly, and we saw the market reprice
Speaker 8: at that point in time. They did the same thing here.
Speaker 8: I think they thought, okay, we're going to hit September.
Speaker 8: Labor market is weakening. We had that one payroll report,
Speaker 8: was it July that really kind of unnerved the market
Speaker 8: a little bit, and the markets just ran with that.
Speaker 8: And again here we are pricing some of those cuts out.
Speaker 8: You look at where the neutral rate is priced. A
Speaker 8: couple months ago, that neutral rate was around two and
Speaker 8: three quarters two and a half. Now we're back up
Speaker 8: over three. We're closer to like a three point six.
Speaker 8: So they basically cut in half the number of cuts
Speaker 8: that they're expecting over the next twelve eighteen months. So yes,
Speaker 8: I think the market got a little bit ahead of itself.
Speaker 8: It's correcting itself now, which again plays into the Fed's
Speaker 8: hand of being able to be a little more cautious Victoria.
Speaker 4: We're kind of in the teeth of the earning season
Speaker 4: right now. We've had obviously the big banks put us
Speaker 4: some really good numbers lot last week, and we're starting
Speaker 4: to see some more What do you make of this
Speaker 4: earnings season here so far, and what do you think
Speaker 4: the market needs from earnings this period.
Speaker 8: So we saw expectations get really lowered right coming in
Speaker 8: to this earning season. It's really the lowest earnings growth
Speaker 8: season that we've had since the second quarter of twenty three,
Speaker 8: so a little bit over a year, and it was
Speaker 8: negative back then. We're not expecting anything negative here. But
Speaker 8: you're looking at maybe three to four percent earnings growth
Speaker 8: for the third quarter, and you might say, Okay, we're
Speaker 8: starting to see things come through from a weakening labor market.
Speaker 8: Maybe we start to see less hiring wages, or off
Speaker 8: margins are being compressed. All of that would make sense
Speaker 8: to see a lower earnings bar being set right going
Speaker 8: into next quarter and into the four quarters of next year,
Speaker 8: expectations are right back for double digits. So it seems
Speaker 8: like the market thinks earnings are continuing to be strong. Obviously,
Speaker 8: I don't have a crystal ball to tell us whether they.
Speaker 6: Will or not.
Speaker 8: But if they don't, then I don't know how we
Speaker 8: support a twenty two times evaluation on the equity market.
Speaker 8: So earnings better pull through if we want to see
Speaker 8: the stock market continue on the trend that it's been
Speaker 8: on all.
Speaker 1: Right, So how do we what should I buy? How
Speaker 1: do we position ourselves?
Speaker 8: So the one thing we don't want to do is
Speaker 8: get in the way of the momentum of the market.
Speaker 8: And we know we have this kind of momentum play
Speaker 8: going right now because you're seeing yields and stocks. Except
Speaker 8: for the last couple of days, yields and stocks have
Speaker 8: been trending higher together. But we do think you need
Speaker 8: to be a little bit guarded because there are yellow
Speaker 8: flags that are out there, whether it's you know, Jolt's report,
Speaker 8: whether it's temporary hiring declining, whether it's hiring rates across
Speaker 8: the board declining, all of these different kind of yellow
Speaker 8: flags we've been seeing in the economy. So we want
Speaker 8: to have a pretty balanced portfolio. We like financials because
Speaker 8: of the yield curve we think will be resteepening. They've
Speaker 8: gone as you've mentioned, they had really good earnings, so
Speaker 8: they've gone up. Maybe wait for a little pullback industrials
Speaker 8: or showing leadership right now versus the rest of the market.
Speaker 8: But find some of those areas that have pulled back
Speaker 8: as of late, healthcare, staples, even some of the tech names.
Speaker 8: That's where I think you need to go in and
Speaker 8: start looking. You look at a name like Signa that
Speaker 8: we own, doesn't have exposure to Medicare and Medicaid like
Speaker 8: some of the other HMOs and has been holding its
Speaker 8: own but it's had a pullback. You can go in
Speaker 8: there and even a name like Qualcom. I think within
Speaker 8: the tech industry. We know we've got the mag seven
Speaker 8: reporting next week. You can find some other areas within
Speaker 8: tech to add some exposure. So make sure you're diversified.
Speaker 8: And we would add a little bit of fixed income
Speaker 8: to have steady cash flow with yields as high as
Speaker 8: they are right now.
Speaker 4: All right, Victoria, thank you so much for joining us.
Speaker 4: Victoria Fernandez Folks. She's chief market strategist at cross Mark
Speaker 4: Global Investments, joining us via zoom from Houston, Texas. She's
Speaker 4: a Houston native born and raised in Houston. When undergraduate
Speaker 4: school at Rice, which is one of the great universities
Speaker 4: in this country.
Speaker 3: Wish I looked at Rice back. I don't even think
Speaker 3: about that.
Speaker 4: That would have been such a cool thing to be
Speaker 4: in Houston, Texas. At Rice didn't even think about it.
Speaker 2: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 2: Just Say Alexa playing Bloomberg eleven thirty.
Speaker 3: All right, John.
Speaker 4: One of the new stories today was a deal that's
Speaker 4: not going to happen, Tapestries eight point five billion dollars
Speaker 4: deal for Capri that's halted by a judge. In a
Speaker 4: big win for the Federal Trade Commission, not such a
Speaker 4: big win for the shareholders of Capriga. I might add
Speaker 4: deb Acon, she is our go to person for everything
Speaker 4: Luxury Debate and Bloomberg Intelligence Luxury goods analyst deb I
Speaker 4: have to admit I'm kind of surprised by this ruling
Speaker 4: by the judge. I think the market is too judging
Speaker 4: by the big decline and cappreciares what's going on there
Speaker 4: with this deal?
Speaker 9: I think so too, Hi, So yeah. I would say
Speaker 9: there was a sixty to seventy percent swing of expectation
Speaker 9: of this deal going ahead, and it's all about the
Speaker 9: coming together taps use eight and a half billion bid
Speaker 9: four Capri could have brought together two very big brands
Speaker 9: in aspirational luxury, aspirational fashion, entry level luxury, however you
Speaker 9: like to name with Coach under Tapestry and Michael Cars
Speaker 9: under Capri as well as their four of the brands combined,
Speaker 9: and the idea, you know what was found by the
Speaker 9: judges that actually there would be too much of an
Speaker 9: overlap and that there was a commission clash. So there's
Speaker 9: been a rule against the expectation when we looked at
Speaker 9: all the data sets as well as many of us
Speaker 9: who've done the due diligence, and there are reams and
Speaker 9: reams of data taken to court where that actually there's
Speaker 9: so much fragmentation across the space, particularly in the US,
Speaker 9: which is the biggest market for both brands, across so
Speaker 9: many price points online and offline, in department stores, in
Speaker 9: owned stores, that this was seen as possibly a deal
Speaker 9: that could have gone ahead.
Speaker 1: Yeah, it's what were the regulators afraid of, Like handbag prices.
Speaker 1: Would you know there'd be a monopoly and price go
Speaker 1: up so I couldn't afford Yeah.
Speaker 9: Absolutely, the expectation, the expectation that over time price rises
Speaker 9: would be seen to be taking place in the industry.
Speaker 9: Once the two brands were together and it was seen
Speaker 9: that they could have fifty nine percent of that aspirational marketplace,
Speaker 9: which I find difficult to understand and as does know
Speaker 9: much of the market, given that we did a lot
Speaker 9: of work on that and there is the deadline on
Speaker 9: this deal was actually the tenth of feb Speaking to
Speaker 9: one of our specialists last night, there's an understanding of
Speaker 9: course that Tapestry will appeal, that Capri will follow and
Speaker 9: go along with that appeal, but that actually to get
Speaker 9: the FTC to come up with their findings by the
Speaker 9: tenth of February would be difficult, and then an extension
Speaker 9: beyond which would be difficult. And at that point, if
Speaker 9: the tenth of feb it could be that the deal
Speaker 9: would break up. So you know, there are still cogs
Speaker 9: in motion taking place. But the view in the market
Speaker 9: today is that Tapestry a little bit is safe because
Speaker 9: the market versus when they put the offer in two
Speaker 9: years ago coming up by the time it would complete
Speaker 9: it was actually a mid twenty twenty three. It's probably
Speaker 9: down for aspiration luxury. In terms of growth, we're actually
Speaker 9: in slight decline. Difficult US market, very difficult, China market
Speaker 9: are particularly difficult Q two and we haven't seen any
Speaker 9: changing Q three and that's moved into October. You know,
Speaker 9: for China, we're probably seeing that market down twenty five
Speaker 9: percent plus after a difficult couple of years. And then
Speaker 9: for the US, very very slow growth, and you really
Speaker 9: have to have your brand out there, visible, new design,
Speaker 9: new innovations, coaches doing it well under Tapestry. We're just
Speaker 9: we're looking at some data from lists to show that
Speaker 9: they're in the doing very well and they're brand to eat,
Speaker 9: you know, but there is a long way to go,
Speaker 9: all right.
Speaker 3: Deb thanks so much for joining us getting up to
Speaker 3: date there.
Speaker 4: They're making luxury goodzanas for Bloomberg Intelligence, John, I think
Speaker 4: I would just walk members of the Federal Trade Commission.
Speaker 3: Down like Canal Street. I mean, there's like a billion
Speaker 3: of these knockoff bags all over the place. I mean,
Speaker 3: you know, I meant.
Speaker 1: I was tired of my belt that I bought at
Speaker 1: Cole's falling apart. After a couple of mong steps back,
Speaker 1: I was going to step up, go to coach. I
Speaker 1: was told by one of the retail experts, no massimo data,
Speaker 1: oh and a lot cheaper. And so far it hasn't
Speaker 1: fallen apart.
Speaker 3: You get a little belt. Correspondent John Tucker, very good.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 2: Just Say Alexa playing Bloomberg eleven thirty.
Speaker 4: John Tucker sitting in for Alex Steel and Paul Sweeney
Speaker 4: were live here on our Bloomberg Interactive Brober Studio on
Speaker 4: our streaming live on YouTube as well, so check us
Speaker 4: out there as well.
Speaker 3: Big Take Stories we love them here. These are really
Speaker 3: really deeply sourced stories.
Speaker 4: They go really deep dives and some some really interesting topics.
Speaker 4: And this one's about kind of the wealthy and some
Speaker 4: of the advantages they have in terms of shielding of
Speaker 4: their taxes. Justina Lee joins us here cross Asset Markets
Speaker 4: reporter for Bloomberg News. She's based in London, joining us
Speaker 4: there via zoom. Wealthy investors are using tax aware long
Speaker 4: short strategies to generate losses that can be used to
Speaker 4: offset capital gains taxes, allowing them to minimize their tax bills.
Speaker 4: I had not heard of this before, so I learned
Speaker 4: a lot reading this article. Justina, thanks for joining us here.
Speaker 4: Can you tell us what a tax aware long short
Speaker 4: strategy is?
Speaker 10: Yeah? Sure, I think most people, probably if you're familiar
Speaker 10: with the wealth management space, might have heard of tax
Speaker 10: loss harvesting, and that's where you sell your losing investment
Speaker 10: so that you have a capital loss to offset some
Speaker 10: of your capital gains tax bill. So taxbi long short
Speaker 10: essentially takes advantage of that same idea, except that because
Speaker 10: you have longs and shorts, it means that at any
Speaker 10: given time, even if the market is going up, you
Speaker 10: can still generate quite a lot of losses to upset
Speaker 10: kind of your capital gains tax bill. You know, maybe
Speaker 10: you want to sell your apple stock, or you want
Speaker 10: to sell your house, or you kind of you want
Speaker 10: to sell your business, and so the whole idea here
Speaker 10: is it kind of gets you more losses faster.
Speaker 1: When you don't necessarily have losses.
Speaker 10: Is the way I think I see this is that
Speaker 10: right right exactly? And it sounds kind of funny because
Speaker 10: obviously you want to make money overall, But the magic
Speaker 10: of these strategies is they're still trying to make you
Speaker 10: money on the whole, but usually kind of in a
Speaker 10: whole portfolio, even if the portfolio is making money, there
Speaker 10: will be some losing positions there because you're holding hundreds
Speaker 10: of stocks usually in these strategies, and so the idea
Speaker 10: is like, well, you know, you make the best out
Speaker 10: of those losing investments, and in the meantime, you're also
Speaker 10: like getting richer, and because you're saving money from not
Speaker 10: paying taxes, you can also be invested for longer.
Speaker 3: So and this is.
Speaker 4: Different from just regular tax laws selling, because I'm buying
Speaker 4: a huge basket of stocks knowing that overall I'll probably
Speaker 4: make money, but there will be individual losers, even if
Speaker 4: those are names I didn't necessarily want to own.
Speaker 10: Right, So, in regular tax loss harvesting, usually you just
Speaker 10: have a portfolio of stocks that you own. But the
Speaker 10: problem with that is that over time the market goes
Speaker 10: up and so you run out of losses to harvest.
Speaker 10: I mean a lot of estimates say this can happen
Speaker 10: even just after a few years. And so with long shorts,
Speaker 10: because you have those shorts, that's betting against some stocks. Actually,
Speaker 10: the idea is you will always have some positions to sell.
Speaker 1: Okay, So election days coming up, and this does kind
Speaker 1: of sort of figure into the elections because the Biden
Speaker 1: administration has proposed a taxing unrealized profits. How does this
Speaker 1: all I haven't I'm not sure what Kamala Harris's position is,
Speaker 1: but how does this tie in?
Speaker 10: Yeah, because I guess the whole reason tax loss harvesting
Speaker 10: works is that you, as the investor, you can choose
Speaker 10: when to sell your investments, and so most people you know,
Speaker 10: just just never sell, especially because you can just you know,
Speaker 10: pass them on to your you know, your kin and
Speaker 10: then you get the step of a basis as well.
Speaker 10: And so in order to tackle that, I mean, President
Speaker 10: Biden proposed in his budget earlier this year that he
Speaker 10: would impose a minimum tax on billionaire so I would
Speaker 10: cover unrealized capital gains. And initially Kamala Harris did say
Speaker 10: she supports that proposal in general, but more recently I
Speaker 10: think her campaign has been kind of a little bit
Speaker 10: more vague about whether they would support, you know, taxing
Speaker 10: unrealized gains in particular.
Speaker 4: All Right, so critics of I guess they argue that
Speaker 4: these strategies, which are generally only accessible to the very wealthy,
Speaker 4: exacerbate wealth inequality and encourage complex tax avoiding schemes rather
Speaker 4: than encouraging investment and economic growth. How does the financial
Speaker 4: services industry respond to those critics. I mean it's all legal, right,
Speaker 4: right exactly.
Speaker 10: I mean there are a few restrictions, you know, like
Speaker 10: you cannot sell a security for the tax loss and
Speaker 10: then buy it back tomorrow. But yeah, I mean generally
Speaker 10: it's entirely legally above board. I think for a lot
Speaker 10: of critics, I mean, it just shows the problem with
Speaker 10: only taxical taxing capital gains upon realization. But the problem is,
Speaker 10: and we've kind of seen this debate, you know, unfolding
Speaker 10: over you know, Biden's proposal as well, that the problem
Speaker 10: is if you're taxing unrealized gains, that's kind of very
Speaker 10: hard to administer. And also some people say it will
Speaker 10: discourage investments, and so that would be a massive overhaul,
Speaker 10: and I don't think anyone's expecting that to change anytime soon.
Speaker 10: And so I think that's also why these strategies have
Speaker 10: been booming.
Speaker 1: Uh is the iron rams going to swoop in at
Speaker 1: some point the Congress going to take hold of this
Speaker 1: and make changes. What's what's happening on that front?
Speaker 10: There has been kind of a few bills in Congress
Speaker 10: over the years from Democrats to tax unrealized gains. And
Speaker 10: of course you could say you could change kind of
Speaker 10: smaller things, you know, such as ending the step of
Speaker 10: the basis or maybe changing the wash sale rule so
Speaker 10: that you can't that's the rule that kind of restricts
Speaker 10: you from buying back the stock immediately after you sell it.
Speaker 10: But I think at the end of the day, I mean,
Speaker 10: a lot of you know, people I spoke to for
Speaker 10: the story say, I mean, they know that it takes
Speaker 10: a long time for these changes to go through Congress,
Speaker 10: So I think most people seem pretty confident that there
Speaker 10: won't be any material changes that will affect these strategies
Speaker 10: anytime soon.
Speaker 4: Any sense of how many people actually employ these strategies.
Speaker 10: It's hard to say, but it's it's interesting that they've
Speaker 10: actually been around for a few years now, but they've
Speaker 10: really only grown quite a bit in the last year
Speaker 10: or so. So AQR, which is sort of a pioneer here,
Speaker 10: I mean, their AUM and the strategy has almost doubled
Speaker 10: in just half a year. And like Quantina, which kind
Speaker 10: of shares some DNA with AQR, I mean that's the
Speaker 10: only thing they do, and their AUM has more than
Speaker 10: doubled this year. This strategy does have higher minimum thresholds,
Speaker 10: so you do need to kind of put in at
Speaker 10: least a million dollars, and of course for this to
Speaker 10: be helpful at all, you need to have quite a
Speaker 10: lot of capital gain somewhere in your portfolio. So it's
Speaker 10: quite it's for the it's for the elite.
Speaker 4: Yeah, all right, Justina, thank you so much for this
Speaker 4: great story. Justin and Lee Cross asset markets reporter for
Speaker 4: Bloomberg News, great Big Take story. You can read more
Speaker 4: of this story on the Bloomberg and at Bloomberg dot
Speaker 4: com Slash Big Take.
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