Speaker 1: This is Bloomberg Business Week. I'm Carol Masser and I'm
Speaker 1: Bloomberg Quick Takes Tim Stanovk. We're here every day bringing
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Speaker 1: YouTube search Bloomberg Global News. Okay, that's it. With Bank
Speaker 1: of America reporting this morning big bank earnings. They are
Speaker 1: done for the quarter. Shares hire by about three point
Speaker 1: nine percent in the wake of that report. The company,
Speaker 1: joining its Wall Street rivals and capitalizing on market volatility,
Speaker 1: will also benefiting from an increase in lending. Joining us
Speaker 1: now is Sally Bakewell, finance team leader at Bloomberg New
Speaker 1: She's with us in the Bloomberg Interactive Broker Studio. Sally,
Speaker 1: great to have you with us. Uh here we are.
Speaker 1: Your sort of busy season for the quarter is just
Speaker 1: wrapping up here, Uh, give us the highlights from Bank
Speaker 1: of America, and then we pulled back and talk about
Speaker 1: the quarter for big banks in justin MANA. Yeah, I
Speaker 1: think Bank of America was very much in line with
Speaker 1: what we saw from most of the bank's last last week. UM.
Speaker 1: We saw that it capitalized on the volatility or the
Speaker 1: volatility that's been exacerbated by the situation in Ukraine. And
Speaker 1: we saw that investment banking took a bit of a
Speaker 1: hit UM because we have this sort of spack regulation
Speaker 1: that has chilled a lot of the deals. UM. And
Speaker 1: then we also saw some glimpses of how the consumer
Speaker 1: is doing UM. And much like some of the other banks,
Speaker 1: we're seeing these trends where consumers are continuing or amping
Speaker 1: up a little bit. They're spending UM, and Bank of
Speaker 1: America gave us a pretty good picture here. UM. We
Speaker 1: know that consumers, for example, they opened one million credit
Speaker 1: cards in the first quarter. UM is spending increase. The
Speaker 1: bank is expecting that its net interest income, which is
Speaker 1: that key metric for banks, is going to grow by
Speaker 1: to sifty million in the second quarter. And that's on
Speaker 1: strong loan and strong deposit growth. So the words from
Speaker 1: the conference calls and the analysts and the media calls
Speaker 1: were very much about the consumers being in robust health. Um,
Speaker 1: they're sitting on a lot of liquidity UM. Delinquencies and
Speaker 1: charge offs are all low. So the picture is pretty strong.
Speaker 1: But I'm sure one of you is going to ask
Speaker 1: ask me now about what the actual you know, what
Speaker 1: the risks are and what the outlook might be. So
Speaker 1: I'll let you do that. Well, go ahead and answer.
Speaker 1: That was probably a better question than I was gonna
Speaker 1: actually have for you anyway, Sally. So, yeah, what did
Speaker 1: we learn about how things look? Well? I think so
Speaker 1: MONI hand today this the Bank of America chief executive officer.
Speaker 1: He did say that consumers are sitting on They're still
Speaker 1: sitting on a lot of the stimulus that they got,
Speaker 1: and that's kind of helping them, um keep current on
Speaker 1: their debt and enabling them to spend a little bit more.
Speaker 1: But I guess the questions remain about what happens when
Speaker 1: that stimulus, that liquidity they do have, starts to drain
Speaker 1: um and they are left just with high inflation UM
Speaker 1: gas prices being higher, and then we have, you know,
Speaker 1: the overall political uncertainty um interest rate hikes. So while
Speaker 1: the snapshot today looks pretty good, UM, it is not
Speaker 1: without some clouds on the horizon. Tell us a little
Speaker 1: bit about loan growth, because I think when the average
Speaker 1: perhaps listener, here's the word debt in a non financial
Speaker 1: market context, it's like that's a bad word, right, But
Speaker 1: if you hear loans or debt in a Bank of
Speaker 1: America has long growth, that's actually a really good sign
Speaker 1: Talk to us a little bit about what that signals. Yeah,
Speaker 1: and that's exactly the right perspective I think on it. Um,
Speaker 1: we we see the banks have said for a long
Speaker 1: time that they're waiting for loan growth to return. And
Speaker 1: again it's been stimulus has been cited as the reason
Speaker 1: that people aren't boring. Again, they've got enough cash in
Speaker 1: their pockets they don't need to. But loan growth is
Speaker 1: really important for the banks because that feeds into this
Speaker 1: net interest income met trick um that is their main
Speaker 1: source of revenue. So it really matters, UM, and if
Speaker 1: they aren't seeing that, they have to look for other
Speaker 1: places where they can get revenue, and it just complicates
Speaker 1: everything for banks. So we have started to see it
Speaker 1: come back. UM. In the first quarter is not completely
Speaker 1: clear easy picture m JP and and consumer loan growth
Speaker 1: is key UM of For example, last week we had
Speaker 1: JP Morgan reporting UM and while they had commercial and
Speaker 1: I think consumer loans up, I think consumer loans without
Speaker 1: credit cards were actually down. So it's not completely clear
Speaker 1: and positive picture. But banks are now finally after sort
Speaker 1: of two years, starting to see loan growth picking up again. UM.
Speaker 1: And that's also really important for them given that we're
Speaker 1: in a rising rate environment, because they'll obviously benefit from that.
Speaker 1: So if we take a step back and we think
Speaker 1: about what you and your team did last week when
Speaker 1: it comes to covering all the other companies that reported
Speaker 1: JP Morgan, Morgan Stanley and well far Agoing more, Uh,
Speaker 1: what's the takeaway for not just the most recent quarter,
Speaker 1: but but how the year looks even beyond looking at
Speaker 1: the consumer what about these companies businesses? UM, I think
Speaker 1: takeaways are pretty there was a pretty solid picture. I
Speaker 1: think there are some nuances to JP Morgan's earnings. UM
Speaker 1: In particular, UM, we saw that JP Morgan, for example,
Speaker 1: it's set aside one point nine billion and it's as
Speaker 1: a kind of reserve PRISIP provision for the bank to
Speaker 1: cover bad debt, and it's cited both the war in
Speaker 1: Ukraine and it also cited kind of recessionary headwinds. Now
Speaker 1: it played that down a lot and said that they
Speaker 1: have to do this under a particular accounting standard. But
Speaker 1: nonetheless it they they it indicates that they see the
Speaker 1: probability of a recession going from sort of very low
Speaker 1: to just low. So UM. I think perhaps one of
Speaker 1: the takeaways from all of the earnings is that there
Speaker 1: are concerns about future growth. Concerns about future growth go ahead, creaty.
Speaker 1: I was going to ask about the training revenue because
Speaker 1: I know you started off talking about volatility and how
Speaker 1: a lot of these companies are really taking advantage of it.
Speaker 1: But what happens when the volatility goes away? Ultimately the
Speaker 1: selling has to stop, right and we only have about
Speaker 1: forty got I mean, that's a great question. And we
Speaker 1: kept thinking that the volatility to volatility would end. UM.
Speaker 1: We had COVID and then as that receded, we thought
Speaker 1: it would end. We then had inflation. UM. We now
Speaker 1: have the Ukraine situation so that it can't be completely sustainable. UM.
Speaker 1: But we haven't had the absolute quiet calm period yet
Speaker 1: where we see them normalize. So you know, big questions
Speaker 1: remain about what actually normalizing means for these banks um
Speaker 1: and trading and their trading businesses which just had a
Speaker 1: bonanza of the quarter. This is why we love having
Speaker 1: you join us. Sally Bigwhell financed Team Lee for Bloomberg
Speaker 1: new Shares a Bank America by the way, now higher
Speaker 1: by four point two percent. Sally's with us in the
Speaker 1: Bloomberg Interactive Brooker Studio in New York. This is Bloomberg
Speaker 1: Business Week with Carol Messer and Bloomberg Quick Takes Tim
Speaker 1: Stenovic on Bloomberg Radio. Well, you all might remember last
Speaker 1: week somebody by the name of Elon Musk, the wealthiest
Speaker 1: person in the world according to the Bloomberg Billionaires Index,
Speaker 1: set down for an extended interview with Chris Anderson of
Speaker 1: TED in Vancouver, and there he talked about a quote
Speaker 1: unquote plan B if his Plan A for taking Tesla
Speaker 1: private doesn't work out. This is something that Max Chafkin,
Speaker 1: features editor at Bloomberg Business Week, writes about. You can
Speaker 1: read Max's story now on the Bloomberg Terminal. Also at
Speaker 1: Bloomberg dot com. Slash A Business Week joining us now
Speaker 1: is editor Joel Webber as well. He is the editor
Speaker 1: of Bloomberg business Week, and he joins us on the
Speaker 1: access line from Brooklyn along with Max. Joel, Uh, before
Speaker 1: we talk about Plan B, we really need to understand
Speaker 1: what's plan as. Yeah, that's a great question. So I
Speaker 1: think we're all still trying to figure that out. But um,
Speaker 1: you know, Ellen obviously has made uh this offer. Uh,
Speaker 1: we'll see if it actually comes to the deal actually
Speaker 1: comes to fruition. In the meantime, you know, the Twitter
Speaker 1: board is opted for a poison pill. So all of
Speaker 1: this very dramatic has played out online, uh since since
Speaker 1: the news broke on on Thursday morning. Um, and you know,
Speaker 1: Max in the middle of it, I'm sort of like, Max,
Speaker 1: what's your taking all of this? And he raises a
Speaker 1: good point, which is, you know, this guy's CEO of
Speaker 1: two publicly traded companies, and you know, like what would
Speaker 1: it be like to have him on a third company?
Speaker 1: You know, like we you know, we don't really know,
Speaker 1: and that that plan A what's it looked like? Max? Yeah, Well,
Speaker 1: as you say, Joel, I mean the previous uh chief
Speaker 1: executive of Twitter was constantly getting hammered by investors for
Speaker 1: having two jobs. Remember Jack Dorsey was the founder of
Speaker 1: co founder of Twitter. Also was uh CEO of Square
Speaker 1: which is now called Block and and and there was
Speaker 1: this whole drama with it with a bunch of activist
Speaker 1: investors over the fact that the two jobs that was
Speaker 1: too many as far as twitters investors are concerned. Elon Musk,
Speaker 1: you know, has something like, you know so many I've
Speaker 1: kind of lost count. Right, you have the two the
Speaker 1: two big ones, plus you have the tunnel thing, you
Speaker 1: have the you know, you have the AI thinks you
Speaker 1: have brain implants. And now he started proposing um to
Speaker 1: take on another job. And I think anyone who who
Speaker 1: watched Um that Ted interview that you that you bring
Speaker 1: up saw, you know, somebody who is very good at,
Speaker 1: you know, generating media attention and getting people to talk
Speaker 1: about him. But but there wasn't really there isn't as
Speaker 1: far as I can tell, any kind of plan um
Speaker 1: either for how Elon Musk will kind of go through
Speaker 1: with this proposed acquisition or what he would do with
Speaker 1: it once he acquires it. Maxie want us through. And
Speaker 1: this is just for the benefit of our listeners what
Speaker 1: a poison pill actually is, because this was referenced multiple
Speaker 1: time in your story. Uh so, yeah, have poison pill
Speaker 1: is basically a way for the Border directors to allow
Speaker 1: other shareholders to acquire shares and essentially dilute, uh, you know,
Speaker 1: dilute the stake of of whoever the attacker is in
Speaker 1: this case, be Elon Musk. And it's it's a way
Speaker 1: to to basically allow the board to keep control of
Speaker 1: the situation and and hopefully as far as they're sort
Speaker 1: of you don't negotiate with Musk and you know, or
Speaker 1: whoever get them to a higher price. UM. This is
Speaker 1: something that's commonly used in UM in these kind of situations.
Speaker 1: And it's also part of what's driving this is because
Speaker 1: Musk's offer, while while it's higher than it will than
Speaker 1: the stock price was when he first you know, started
Speaker 1: investing in Twitter back in March, it's actually quite a
Speaker 1: bit lower than than where the stock was, you know,
Speaker 1: even you know, as as as really as like last fall.
Speaker 1: So so from the Border director's point of view, Elon
Speaker 1: Musk has kind of made a low ball offer, UM,
Speaker 1: and and they want to negotiate, and Musk um it seems,
Speaker 1: you know, rather than trying to negotiate is you know,
Speaker 1: as he does taking this to Twitter and and and um,
Speaker 1: you know, tweeting about the possibility of a tender offer.
Speaker 1: All they didn't seem done anything. Um and and you know,
Speaker 1: suggesting or kind of implying that there might be other
Speaker 1: investors who might join him. But it's all extremely sort
Speaker 1: of theoretical, and it you know, makes for great content,
Speaker 1: but but it's not clear that any of this goes anywhere. Hey, Max,
Speaker 1: I know you did a lot of reporting about Elon
Speaker 1: Musk's early years for your book The con Trary and
Speaker 1: Peter Teal and Silicon Valleys Pursuit of Power. What do
Speaker 1: we know about the way that Elon Musk thinks about
Speaker 1: quote unquote free speech, the way that he perhaps would
Speaker 1: think about rules and regulations when it comes to Twitter
Speaker 1: if he were the person to actually take it over.
Speaker 1: Musk is um has some libertarian tendencies and um, and
Speaker 1: he's he's talked, he talked about them at times. You know.
Speaker 1: On the other hand, Um, he's also somebody who um,
Speaker 1: you know who his sort of main political belief in
Speaker 1: so Fur, you know, has has expressed political beliefs has
Speaker 1: been around climate change, and in particular, you know, government
Speaker 1: support for companies like Tesla that are you know, interested
Speaker 1: in doing something about that, so which is which is
Speaker 1: not very libertarian. I think it's fair to say his
Speaker 1: um political beliefs are are are pretty fuzzy or or
Speaker 1: or you know, this is maybe just not articulated in
Speaker 1: in any kind of like clear way. He's been somebody
Speaker 1: who's been sort of very in favor of helping himself
Speaker 1: and helping his companies and and and starting innovative businesses.
Speaker 1: But but hasn't you know, expressed you know, huge you
Speaker 1: know things on political issues, you know, on free speech.
Speaker 1: I think some of what's going on here with Musk,
Speaker 1: you know, I I think he probably agrees with that
Speaker 1: that general idea. I think he also realizes that there
Speaker 1: is a huge constituency of people out there for this message.
Speaker 1: You know, we're seeing especially on you know, sort of
Speaker 1: like right wing media, right wing talk radio itself and
Speaker 1: so on. There. You know, they're getting very very excited
Speaker 1: about the idea of Elon Musk coming and taking over
Speaker 1: Twitter and making it a free speech social network because
Speaker 1: of course, you know, the subtext is they would allow
Speaker 1: you know, Donald Trump back on the platform, and it
Speaker 1: becomes this kind of um, you know, almost like a
Speaker 1: dog whistle to to get um, you know, get enthusiasm
Speaker 1: from from conservatives. So I think some of that is
Speaker 1: Musk is sort of doing some of that, responding to
Speaker 1: some of that. Remember, he is, you know, an amazing marketer.
Speaker 1: He's somebody who did the impossible with Tesla, where where
Speaker 1: you know, when he started the when he got involved
Speaker 1: in the company, you know, electric cars were seen as
Speaker 1: this kind of wimpy thing that they were not capable,
Speaker 1: and he's you know, created this enormous automaker, you know,
Speaker 1: one of the best selling um cars in the world
Speaker 1: at this point and um, and he's done that by
Speaker 1: by with his amazing marketing. And I think we're seeing
Speaker 1: some of that playing out in real time where where
Speaker 1: Elon must have kind of found a new way to
Speaker 1: to to generate attention and you know, maybe it ends
Speaker 1: with him, um, you know, taking over Twitter or something,
Speaker 1: but it may also just end as another one of
Speaker 1: these you know, crazy uh episodes in the Elon reality show,
Speaker 1: which I guess Max, you know it raises I mean,
Speaker 1: you've you've so elegantly explained sort of master plan and
Speaker 1: there has always been this master plan, right like electrified vehicles, ads,
Speaker 1: solar like it all kind of made sense. How does
Speaker 1: Twitter fit into that? If at all, it doesn't fit
Speaker 1: into it. That's what's so strange about this. I mean,
Speaker 1: Musk has, as you say, Joel, you know, been super
Speaker 1: articulate on the on sort of the subject of of
Speaker 1: of SpaceX and Tesla, and he's he's he's he's been
Speaker 1: he's been very clear that what he's trying to do is,
Speaker 1: you know, accelerate the development of green technologies. That's with
Speaker 1: with Tesla, with SpaceX is rock company. It's um, create
Speaker 1: these capabilities that will help you know, our our civilization, uh,
Speaker 1: survive in the event of something something terrible happening. And
Speaker 1: and those goals you know, are are very lofty and
Speaker 1: and they've gotten you know, his fans very excited with Twitter.
Speaker 1: If you're paying attention to that interview at Ted, you know,
Speaker 1: he tried. He he said that you know, Twitter, if it,
Speaker 1: if it has free speech, it will be able to
Speaker 1: preserve global freedom or something like that. Um And so
Speaker 1: maybe he'll be able to kind of stitch it all together.
Speaker 1: But I think the main reason to be skeptical of Musks,
Speaker 1: ever bail, is that they don't really fit into this
Speaker 1: mass plan. Oh it is a great read, and check
Speaker 1: it out. It's online, It's on the Bloomberg terminal. Max Chafkin,
Speaker 1: Features editor for Bloomberg business Week. He's also the author
Speaker 1: of The Contrarian Peter Teel and Silicon Valley's Pursuit of Power.
Speaker 1: Also Joe Webber, editor at Bloomberg Business Week. You're listening
Speaker 1: to Bloomberg Radio. You're listening to Bloomberg Business Week with
Speaker 1: Carol Messer and Bloomberg Quick Takes. Tim Stinovic on Bloomberg Radio. Well,
Speaker 1: it's not just tax Day, but it's also Earth Month
Speaker 1: because Earth Day is coming up, and we think a
Speaker 1: lot about I think the products that we use, and
Speaker 1: increasingly consumers are thinking about the products that they use
Speaker 1: when it comes to their impact on the environment. And
Speaker 1: one company that was relatively early to the way the
Speaker 1: consumers think is Seventh Generation. They make household and personal
Speaker 1: care products companies. It was it was acquired by Uni
Speaker 1: Lever back in and we're pleased to have back with us.
Speaker 1: Allison Wrightner, she's CEO of Seventh Generation. She joins us
Speaker 1: via zoom from Burlington, Vermont. Alison, how are you hi?
Speaker 1: How are you. Thank you so much for having me back. Hey,
Speaker 1: it's good. Good to have you with us. I do
Speaker 1: want to just quickly say we did try to have
Speaker 1: you last week. There were some problems with the telephone.
Speaker 1: Maybe the cell service in Burlington wasn't so fantastic. So
Speaker 1: we apologize to our viewers and our listeners, and we
Speaker 1: are really glad to have you back with us. Um,
Speaker 1: give us an update on how things are going at
Speaker 1: seventh generation and what you're seeing, because we talk a
Speaker 1: lot about inflation. This is the probably the word that
Speaker 1: I say the most apart from Bloomberg, every single day.
Speaker 1: And I got to ask you, You've been at seventh
Speaker 1: generation for years now, more than a decade, and I'm
Speaker 1: wondering if you've ever seen the raw materials costs that
Speaker 1: go into seventh generation products rise like they are right now. Yeah,
Speaker 1: So if I could have a penny like you for
Speaker 1: every time I've said inflation over the course of the
Speaker 1: last year. It's a kind of a running joke these days.
Speaker 1: But what I will tell you is that we are
Speaker 1: not a mute I think like many companies right now,
Speaker 1: especially in the categories that we operate in, we are
Speaker 1: seeing a true on cost of materials and commodities that
Speaker 1: we've never seen before. UM. But I think for our
Speaker 1: business specifically, UM, we're moving along the same lines as
Speaker 1: our category and our counterparts. So I think we're all
Speaker 1: in this together and for seven times specifically, I think
Speaker 1: what this conversation around how we show up in market
Speaker 1: and the cost of doing business these days has really
Speaker 1: brought to the table an important question around what choices
Speaker 1: do we need to make in order to protect what
Speaker 1: we stand for. We invest significantly in materials like plant
Speaker 1: based ingredients and post consumer recycled materials, all of which
Speaker 1: is an on cost for us, especially in today's environment.
Speaker 1: So we're doing everything we can to make sure that
Speaker 1: our point of difference remains strong and true during these
Speaker 1: really volatile times. Talk to us a little bit about
Speaker 1: the costs of it, because I think when people think
Speaker 1: about green products or organic products, or just products that
Speaker 1: are prepaps mainly the United States and help the environment,
Speaker 1: a lot of people kind of associate that with Okay,
Speaker 1: well that's going to cost more. Talk to us about that.
Speaker 1: Are they wrong to think that? Sure? So I will
Speaker 1: say the strategy of our company is to make sure
Speaker 1: that everyday household materials made with better for you ingredients
Speaker 1: like plant based ingredients are at an accessible price. So
Speaker 1: it's our hope to dispel that myth that you know,
Speaker 1: to buy a natural product means you need to pay more.
Speaker 1: But well, what I will say is that the ingredients
Speaker 1: that we put into our products do cost more than
Speaker 1: the average materials, and the reason why is that they
Speaker 1: haven't scaled yet. Right, So, I think there's more virgin
Speaker 1: plastic available today than post consumer recycled plastic, and so
Speaker 1: our hope is that as these ingredients scale and more
Speaker 1: and more companies are using them, actually the cost would
Speaker 1: go down. Alison, I'm wondering about the equation that you
Speaker 1: and your team do when it comes to rising costs
Speaker 1: and consumer appetite for those rising costs. We talk about
Speaker 1: inflation hating consumers at the gas pump, at the restaurants
Speaker 1: they go to, at the grocery store, and certainly on
Speaker 1: the aisles when they're buying cleaning products. At what point
Speaker 1: do the does the premium that's put on a product
Speaker 1: like seventh generation cause a consumer to think twice and
Speaker 1: go to that one that's not necessarily made with plant
Speaker 1: based ingredients. What's the calculation there. Yeah, so it's it's
Speaker 1: a great question and one that we've spent again a
Speaker 1: lot of time really wrestling with here at seventh Generation
Speaker 1: over the year. And what I will say is our
Speaker 1: number one priority today is the quality of the product itself. Um.
Speaker 1: So when we look at the value equation about our investments,
Speaker 1: I think we look at the full funnel. And so
Speaker 1: for us to make sure that we are keeping our
Speaker 1: products at an approachable price point without sacrificing ingredients, it
Speaker 1: means we might spend a little less on marketing or
Speaker 1: advertising throughout the course of the year, but we know
Speaker 1: our product really stands um and works the way consumers
Speaker 1: expected to. There we go sorry about that else and
Speaker 1: talk to us a little bit about not just your business,
Speaker 1: but businesses broadly. How can they fight against climate change?
Speaker 1: Is there's something that kind of applies or rule thumb
Speaker 1: that applies to business broadly? How, yes, I mean, business
Speaker 1: is going to be what changes our future. I deeply
Speaker 1: believe in that. It's one of the key reasons that
Speaker 1: I came to seven Gen a decade ago is that
Speaker 1: I believe business is the force of good and really
Speaker 1: can drive that change. You know, I think two key
Speaker 1: things that I would that we are looking at right now. One,
Speaker 1: I think um really the call to action in our
Speaker 1: industry to drive concentrated products. And so what I mean
Speaker 1: by that is at home care specifically, there's a ton
Speaker 1: of waste. When you walk down the logic detergent aisle,
Speaker 1: I think you see these big plastic jugs filled with
Speaker 1: water and ingredients, and so we have a huge opportunity
Speaker 1: to really change how consumers behave and buy, and collectively,
Speaker 1: both myself and my competitors make sure that we're driving
Speaker 1: consumers towards much smaller, yet still performing products. And so
Speaker 1: that's really what we're focused on from an industry perspective.
Speaker 1: The other call to action right now is making sure
Speaker 1: that we are all doing our part to educate consumers.
Speaker 1: I think none of this is possible unless consumers are
Speaker 1: really making different choices at home. And also you think
Speaker 1: their voice and their vote to make sure that we
Speaker 1: are making a just transition to clean energy. We we
Speaker 1: only have like ten seconds for this last question, But
Speaker 1: how do you start shopping marketing team lead and become
Speaker 1: CEO in ten years ten seconds? You believe in what
Speaker 1: you stand for. I think what brought me here ten
Speaker 1: years ago with belief that business could be done differently
Speaker 1: in passion for this space, and that's given me tons
Speaker 1: of different experiences here over the last ten years. And
Speaker 1: so just keep believing in what you're doing, um and
Speaker 1: make sure you're learning along the way. Allison right in,
Speaker 1: their chief executive officer at Seventh Generation, joining us via
Speaker 1: zoom from Burlington, Vermont. Really great to have you on
Speaker 1: the program. Allison. You're listening to Bloomberg Business Week. This
Speaker 1: is Bloomberg Radio. Yeah, I'll bet you let me drive.
Speaker 1: Oh no, no, no no, no, honey, please, I want to drive.
Speaker 1: It's a good question. This is good Drive to the
Speaker 1: Clothes music on Bluebird Radio. Well, we've already made it
Speaker 1: to the Drive to the close just about ten minutes ago.
Speaker 1: In today's trade volume is still light. We are seeing
Speaker 1: some selling into the clothes on this April eighteenth. Let's
Speaker 1: get into it with Leo Kelly, founder and CEO at
Speaker 1: Verden's Capital Advisors. Leo joins us once again on the
Speaker 1: phone from Hunt Valley, Maryland. Leo, we haven't spoken since
Speaker 1: the end of last year. How are you all right? Well? Thanks,
Speaker 1: good to be on the show. Guys, it's good to
Speaker 1: have you back with us. Uh. The first quarter, as
Speaker 1: you write, thanks to our notes from our producer Paul Brennan, Well,
Speaker 1: it was miserable, but you say it shouldn't have been
Speaker 1: a surprise. You kind of called it to us back
Speaker 1: in December. Um, what about the second quarter. We're starting
Speaker 1: to hear from companies right now how they did in
Speaker 1: the first quarter, their outlook for the year, for the
Speaker 1: remainder of the quarter. How should investors be thinking, Well,
Speaker 1: I think investors need to start to come to grips
Speaker 1: with the fact that volatility is going to be back,
Speaker 1: and not the kind of volatility you see once every
Speaker 1: couple of years when we have a bear market, but
Speaker 1: sustain volatility, and that we are going to have a
Speaker 1: secular change in interest rates in front of us, and
Speaker 1: that's going to create a more violatle market environment. So
Speaker 1: it's gonna be this tug and pull between earnings UM
Speaker 1: and the strength of the consumer versus inflation and higher
Speaker 1: interest rates and higher energy prices. So I would say
Speaker 1: get ready for a voltal year. I feel like it's
Speaker 1: pretty consensus to say that inflation is going to stick around.
Speaker 1: It's going to be persistent, um at least uh. Even
Speaker 1: after peaks, it will remain quite elevated for years and years.
Speaker 1: I'm curious though, what happens afterwards. Are we looking at
Speaker 1: a steve drop in consumer prices? Are we looking at deflation?
Speaker 1: What do you see past the current status quo? Well, yeah,
Speaker 1: it's it's consensus now. I mean we we've been kind,
Speaker 1: we've been growing for about a couple of years. That
Speaker 1: inflation is here and it's not transitory. And I would
Speaker 1: say that that everyone's jumping on the bandwagon today. That said, again,
Speaker 1: we think this is more of a secular change. There
Speaker 1: is so much capital flooding the system that I think
Speaker 1: folks got lulled to sleep with this one to two
Speaker 1: percent inflation that went on for decades, and so with
Speaker 1: with the low supply and the high demand and the
Speaker 1: massive capital inflow, I think we could see inflation at
Speaker 1: higher elevated levels for a for the foreseeable future. Now
Speaker 1: that doesn't mean eight percent inflation. That may mean three
Speaker 1: to four when we're used to one to two, but
Speaker 1: that it is an insidious tax on the consumer, and
Speaker 1: that can have an impact over the long over the
Speaker 1: long haul. Now, all that said, that's not necessarily good
Speaker 1: or bad inflation if you can, if it's meeting expectations,
Speaker 1: you can invest in front of inflation and you can
Speaker 1: still make money. It's just when inflation surprises you, like
Speaker 1: it has in the last year with the level that
Speaker 1: it's reached, that becomes a problem. So what would you
Speaker 1: say to our audience right now, who is of course
Speaker 1: looking to make money. What's the recommendation that you have
Speaker 1: in this inflationary environment? How should they trade it? Well,
Speaker 1: I think the first thing you have to do if
Speaker 1: you're an investor today is you have to realize is
Speaker 1: that which has worked in the past doesn't necessarily work
Speaker 1: in the future. And if we're going to enter into
Speaker 1: a secular change in the market. Remember we've been in
Speaker 1: a bond bull market since forty year bull market, and
Speaker 1: so if interest rates start to climb and inflation remains persistent,
Speaker 1: then things are going to change dramatically over the next
Speaker 1: period and the next secular cycle. And that means just
Speaker 1: putting money blindly into growth stocks and they magically go up.
Speaker 1: Passive investing. Those are things that have worked. Well. We're
Speaker 1: going into a different time period. We're gonna need active investing.
Speaker 1: We're going to have to look for inflation sensitive investments
Speaker 1: like financials and commodities and energy and industrials, but also
Speaker 1: small verses, large and international. Over the US um you're
Speaker 1: gonna have to be very careful with your fixed income portfolios.
Speaker 1: You can't just you can't just go buy the highest
Speaker 1: shield anymore. You have to be aware of duration risk.
Speaker 1: There's a lot happening here as a result of this change,
Speaker 1: and given the current policy environment and temperature, I don't
Speaker 1: think that's going to change anytime soon. One of the
Speaker 1: pieces of commentary we got this morning was from Jon
Speaker 1: hat C. S Overck Coleman Sacks. He predicted odds of
Speaker 1: a recession in the next two years, and in the
Speaker 1: reasoning for his argument was that or one of the
Speaker 1: reasoning for his argument was and the last fourteen tightening
Speaker 1: cycles we've seen since the end of World War two,
Speaker 1: eleven have seen a recession in the last two years.
Speaker 1: What it doesn't take into account is the tightening cycle
Speaker 1: we saw post financial crisis and oh eight uh, and
Speaker 1: a lot of that takes into account. Quie talked to
Speaker 1: us a little bit about the precedent or we should
Speaker 1: follow when it comes to predicting what this next tightening
Speaker 1: cycle is going to look like in terms of risk assets,
Speaker 1: do we follow the nineteen model where stocks rallied or
Speaker 1: do we follow the historical trend, which is um a
Speaker 1: recession in the next two years, and of course markets
Speaker 1: pricing then in well, I think you hit it on
Speaker 1: the head. I don't. I don't think you can look
Speaker 1: at this in a vacuum and say, if the FED
Speaker 1: is tightening, then we're going into recession. You have to
Speaker 1: put it up against several other factors. At the end
Speaker 1: of the day, when the cost of capital exceeds the
Speaker 1: return on investment capital, you're gonna head into over session.
Speaker 1: And so when we look at cost of capital inputs today,
Speaker 1: interest rates are climbing quickly, I don't think. I don't
Speaker 1: think we fully appreciate we just went from the tenure
Speaker 1: at point five to almost three percent here in a
Speaker 1: reasonably short period of time. The FED is behind the curve,
Speaker 1: so they have to catch up to what is very
Speaker 1: quickly getting out of their hand inflation, and add to
Speaker 1: that high energy prices, higher interest rates, higher wage inflation.
Speaker 1: It's all in front of us. So I don't think
Speaker 1: it's just the one input of the FED. I think
Speaker 1: it's the FED catching up to a lot of other inputs. Now, again,
Speaker 1: you have to offset this against trillions of dollars of
Speaker 1: capital which was poured into the system, and it is
Speaker 1: in the consumers hands. The consumer's net worth is higher
Speaker 1: because their four wing k's are higher and their houses
Speaker 1: are worth more. So you have some positive news. We
Speaker 1: have to rebuild inventories, I should say, for so we
Speaker 1: have to catch up to demand. Right first, we have
Speaker 1: to get to a point where you're not waiting nine
Speaker 1: months for a washing machine or a bicycle. Once we
Speaker 1: hit there, then we have to rebuild inventories. So there's
Speaker 1: a demand strength and that wave is crashing against inflation
Speaker 1: and higher input costs. That's why we think there's volatility.
Speaker 1: And yes, that's why I think there's a legitimate chance
Speaker 1: of a recession. I kind of agree with that time frame.
Speaker 1: I don't. We're not calling for that, but it's something
Speaker 1: that we're looking at. So you just mentioned record liquidity,
Speaker 1: record stimulus pumped into American consumers, pumped into the market.
Speaker 1: Doesn't that arm the consumer with the ability to weather
Speaker 1: this inflation? Well, sure arms the arms the consumer, but
Speaker 1: they're also going into um a market with significantly higher
Speaker 1: prices and higher input costs. So you're exactly correct. That
Speaker 1: is the tug on one side, and and and the
Speaker 1: push on the other is that the consumer has capital.
Speaker 1: Now we are seeing consumer credit card debt rise. The
Speaker 1: consumer savings rate went from its peak in the twenties
Speaker 1: store and COVID down to about six which is normal,
Speaker 1: and it is falling. So the consumer is spending that money.
Speaker 1: And again we can't keep just keep pouring demand. If
Speaker 1: you think about it logically, we have a problem where
Speaker 1: we have too much money and too much demand chasing
Speaker 1: too few good slash too much supply because of the
Speaker 1: supply chain disruption and input costs. So so far the
Speaker 1: current policy, both fiscal and monetary, is to increase demand.
Speaker 1: You have too much demand and the current policies to
Speaker 1: increase demand. So we have to get that under control
Speaker 1: and we have to get our our supply, our supply
Speaker 1: demand current back into balance. Leo Kelly always great to
Speaker 1: chat with you. Thank you so much for joining us
Speaker 1: on Bloomberg Business Week and our countdown to the close.
Speaker 1: Leo Kelly's founder and CEO Adverdence Capital Advisors. He joins
Speaker 1: us on the Access line from Hunt Valley, Maryland. Thanks
Speaker 1: for listening to Bloomberg Business Week. Download the podcast on iTunes, SoundCloud,
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