Speaker 1: Brunt You by Bank of America Mary Lynch with virtual reality,
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Speaker 1: be of a, mL dot Com, slash VR, Mary Lynch,
Speaker 1: Pierced Fenner and Smith Incorporated. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
Speaker 1: insight from the best of economics, finance, investment and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot Com,
Speaker 1: and of course, on the Bloomberg Nicholas Burns with us.
Speaker 1: Who needs no introduction on the program, David, Why don't
Speaker 1: you bring him Mr Burns? Since we spent the entire
Speaker 1: break talking about how the Red Sox did assigned Aaron
Speaker 1: Judge Ruthian. Are we talking about the election last week
Speaker 1: in the UK and in economic context a few minutes ago?
Speaker 1: Help us understand it in a in a political one.
Speaker 1: How does this change the amount of capital that the
Speaker 1: Prime Minister has? How optimistic are you? How likely is
Speaker 1: it do you think that she's going to be able
Speaker 1: to hold onto the to the job well, David, Prime
Speaker 1: Minister tourism is significantly weakened by this this now, she
Speaker 1: she didn't lose the election. Technically the Conservatives are still
Speaker 1: in power, probably with a minority party from Northern Ireland
Speaker 1: Democratic Union Party. But she didn't exceed, she didn't meet
Speaker 1: the expectations. Labor won many, many more seats, and so
Speaker 1: you have to ask is she going to be prime
Speaker 1: minister a year from now? Next week the United Kingdom
Speaker 1: begins it's Brexit negotiations with the European Union. This is
Speaker 1: gonna be very tough because now all the weight, the
Speaker 1: leverage has shifted over to the EU, and there's widespread
Speaker 1: speculation that at some point the next several months she
Speaker 1: could be out of power. Someone like Boris Johnson, the
Speaker 1: Foreign Secretary could be in power. Um and the country
Speaker 1: is still very much divided by Brexit. Need a clinic
Speaker 1: right now. This is a mystery to me. Through the
Speaker 1: weekend of a lot of different reading, and I understand
Speaker 1: the UK newspaper cadence is very different from what I
Speaker 1: see out of America. Ce E J. Dion's wonderful column
Speaker 1: today in the Washington Post Boris Johnson is prime Minister?
Speaker 1: How unimaginable is that to the British people? Well, you know,
Speaker 1: as inimaginable as it was that Donald Trump would be
Speaker 1: President of the United States. For the American people. Boris
Speaker 1: Johnson is um unique in British politics to say the
Speaker 1: least his personality. But he's experienced, highly intelligent, sophisticated about
Speaker 1: the world. I think it's not unimaginable. I take your
Speaker 1: point on he's highly intelligent. I get all that Gordon
Speaker 1: Brown off the chart ete side and someone like you, Ambassador,
Speaker 1: why why does he play the part? If he playss
Speaker 1: if he has the cut of hot cloth to be
Speaker 1: someone more conservative, right, it brings in votes and votes
Speaker 1: as part of his political identity. Um. But Britain is
Speaker 1: in I think trouble right now because you don't have
Speaker 1: any kind of unified direction on the part of the
Speaker 1: political class or the politicians as to what they should
Speaker 1: be doing in these Brexit negotiations. And correspondingly, we were
Speaker 1: talking um earlier on Bloomberg. If you had said a
Speaker 1: month and a half ago that France would be stable,
Speaker 1: that France would be strengthening, that France and Germany would
Speaker 1: be re emerging as the twin engines of the EU.
Speaker 1: Mat Kroll one another victory yesterday in the first round
Speaker 1: of the French legislative parliamentary elections. He's set up to
Speaker 1: win a complete victory next week. In the second round.
Speaker 1: He'll go for a pension and labor and tax reform.
Speaker 1: It'll be difficult, but you can see France and much
Speaker 1: better ship in David. To give you perspective on that,
Speaker 1: I was in France running up my m X and
Speaker 1: it was really questionable what McCrow would do. Those expenses
Speaker 1: haven't even cleared yet and mcross got the big victory.
Speaker 1: I'm looking for the big victory to what does all
Speaker 1: of that say about party what we've seen here in
Speaker 1: the UK, what we're seeing in France as well. Of course,
Speaker 1: he had his victory and there was uh interested enthusiasm
Speaker 1: about that from from many corners. But there was also
Speaker 1: a lot of doubt that he would be able to
Speaker 1: field candidates in every district and he would be able
Speaker 1: to assemble anything close to to a majority. How did
Speaker 1: that happen and what does that say about parties generally? Well,
Speaker 1: he's a uniquely gifted politician, much in the way that
Speaker 1: Barack Obama took America by storm in the two thousand
Speaker 1: and eight election. He has all the great skills and
Speaker 1: the charisma to succeed publicly. I think the French are
Speaker 1: also reacting to the prospect of Marine le Pen victory
Speaker 1: the populist right wing leader to the dissolution of the
Speaker 1: European Union. I think Americans don't fully understand the depth
Speaker 1: of support among many Europeans for this European project that
Speaker 1: they began just after the Second World War. And now
Speaker 1: France strengthening, Germany strengthening this could be very good news
Speaker 1: for the EU, in part fueled by insecurity about the
Speaker 1: United States. For the first time in three narrations, there's
Speaker 1: an American president who does not look upon Europe primarily
Speaker 1: as a strategic partner. He looks upon Germany as an
Speaker 1: economic competitor. He had a disastrous visit to Brussels three
Speaker 1: weeks ago, and I think that is fueling in part
Speaker 1: this belief in Europe. We've got to get our act together.
Speaker 1: We have to strengthen the European Union. These are the
Speaker 1: two countries France and Germany to do it. The great
Speaker 1: tragedy is that their second leading economy, their largest military,
Speaker 1: will soon be out Britain, and Britain itself is searching
Speaker 1: for an identity as it leads the European Union. Do
Speaker 1: you think that he thinks that he had a disastrous
Speaker 1: visit to Brussels? And then how do you you remedy
Speaker 1: that you look ahead to the G twenty in Hamburg,
Speaker 1: And we've read all of the reporting about what transpired
Speaker 1: in the dinner with leaders following the speech that he
Speaker 1: gave in Brussels. If if we have a leader who
Speaker 1: is convinced that the way that he spoke, what he
Speaker 1: addressed in Brussels was better than fine, how does that
Speaker 1: how does that change the political geopolitical landscape. Well, here's
Speaker 1: the I think here's the problem of the effectiveness and
Speaker 1: unity of the Trump administration. I think the President probably
Speaker 1: feels he had a good visit because he said what
Speaker 1: he's been saying as a politician for the last two
Speaker 1: years about the EU. They're freeloaders, they don't pay their dues, etcetera.
Speaker 1: The White House staff, the cabinet know what a disaster
Speaker 1: it was. This is our principal defense alliance in the world, NATO,
Speaker 1: and the core of it is an attack on one
Speaker 1: of us is an attack on all of us. The
Speaker 1: President's refusal to say those words, although he now said
Speaker 1: them Friday Um shocked the American political establishment, shocked his
Speaker 1: own administration because Secretary Teller student Secretary Maddis had every
Speaker 1: reason to believe that those words were in the speech
Speaker 1: until an hour before he gave it. And and the
Speaker 1: fact that Donald Trump, in addition, is not standing up
Speaker 1: to Russian interference in our election. It's got a lot
Speaker 1: of people worried about how he views his job of
Speaker 1: protecting this country. On that note, that was a through
Speaker 1: line throughout James Combe's testimony last Thursday. Essentially he said,
Speaker 1: we can't lose sight of the bigger picture here. Yes,
Speaker 1: there's a there's a debate over two principles in a
Speaker 1: room and what they said to each other, but there
Speaker 1: there is the threat of further intervention and elections and
Speaker 1: other events by the Russians. How do we How seriously
Speaker 1: are we taking that? Do you think as a country?
Speaker 1: You know, it's interesting. I thought that was the most
Speaker 1: effective part of Director Comy's testimony, when he said, with
Speaker 1: great confidence that they intervened in our election. Russia, they
Speaker 1: intervened in a massive way. We've got to guard against
Speaker 1: it. It It was a patriotic message, I thought, and you're
Speaker 1: seeing this week a sanctions bill against Russia. You will
Speaker 1: be debated on the Senate floor today led by by
Speaker 1: by John McCain and others. This is the right response.
Speaker 1: The Russians are a threat to us. The fact that
Speaker 1: the President never asked James Comey about the nature of
Speaker 1: the Russian intervention, never asked him what do we do
Speaker 1: about this? All the questions and the President James Comey
Speaker 1: were how does this affect me? Donald Trump? And I
Speaker 1: think you're seeing a reaction in the Republican Party, Republican
Speaker 1: leaders standing up to say we've got to do something
Speaker 1: to hit back against the Russians with sanctions and to
Speaker 1: prepare ourselves to defend ourselves the next time we have
Speaker 1: an election. Ambassador, what is your tool list to do
Speaker 1: list for the Secretary who state he is a chief
Speaker 1: executive officer? Are the true multinational one of our great companies?
Speaker 1: Whatever anybody thinks about it, all, etcetera, etcetera. What is
Speaker 1: your prescription for Secretary Tillers? And you know, I think
Speaker 1: he's got he needs to rebind our alliance with NATO
Speaker 1: and and and knitted up again. After after all the
Speaker 1: uncontaty about Article five number one. Number two, there's an
Speaker 1: assault on Roca now by American and Syrian forces. There's
Speaker 1: an assault on Mosul. This is a big movement to
Speaker 1: to move to force the Islamic State out of both
Speaker 1: Syria and Iraq. And he's the one who has to
Speaker 1: keep that coalition together. And you see him trying to
Speaker 1: do that in settling and diminishing the tensions between Gutter
Speaker 1: and Saudi Arabia. He also has to balance the fact
Speaker 1: that we're a partner with China economically in some respects,
Speaker 1: but we're a competitor and the Chinese are running amuck
Speaker 1: in the South China. See, this is a tough job.
Speaker 1: I hope that's kept us be happy with that. Yeah,
Speaker 1: but come on, isn't the toughest job. He's got to
Speaker 1: have a cup of coffee at the White House. The
Speaker 1: toughest problem is that he is not being backed up
Speaker 1: by the President of the United States a key moments.
Speaker 1: That's the toughest part of his job, the greatest. Thank
Speaker 1: you very much for Nicholas Burns, a professor to practice
Speaker 1: that come back when the Yankees lose, I surely will
Speaker 1: always Yes, David, it was extraordinary. I actually watched the
Speaker 1: entire Saturday game, just by chance. I haven't done in years.
Speaker 1: Actually watched it like a fan at the park, except
Speaker 1: I watched on the famous TV. And it's just it's
Speaker 1: just funny. You could be the greatest Yankee hater of
Speaker 1: all time. That would be me. And they're just glorious
Speaker 1: to watch. I imagine you were up late last night
Speaker 1: as well. Hoy, No, it's no foregone. I have trouble
Speaker 1: with the modern game. It's great, it's exciting. I'm glad
Speaker 1: they play. I just make gold like you gotta write
Speaker 1: a column, Bloomberge column on the MO. I just I'm
Speaker 1: all judge. I got my ninety nine jersey on underneath.
Speaker 1: That's true. I can verify the judge worldwide. This is
Speaker 1: Bloomberg Robert Sinch, who's good to have on because he's
Speaker 1: been so right about Sterling. It was weak. He said,
Speaker 1: get along. He was right a while back, he said,
Speaker 1: get short. Here we are on, Bob. I need to
Speaker 1: make some money off the weekend. I lost a lot
Speaker 1: of money betting against the Yankees. Uh, what do I
Speaker 1: do with Sterling? You know, I think there's still some
Speaker 1: downside for Sterling um in the short run. I think
Speaker 1: we're probably in a trading range. We're moving to the
Speaker 1: lower end of that range, as you suggested, and I
Speaker 1: think the next leg will have to be a stronger dollar,
Speaker 1: and we do think we're going to get that as
Speaker 1: the year progresses, as as markets are probably underestimating what
Speaker 1: the Fed is going to do. By your end, where
Speaker 1: do you stand on this whole argument about Briggs that
Speaker 1: a lot of people who were proponents of it say, look,
Speaker 1: we had it and the economy hasn't suffered that dramatically
Speaker 1: sterling sterling aside, there were those who were against it
Speaker 1: who are worried about what's going to happen here as
Speaker 1: we inch closer to June nineteen and still closer still
Speaker 1: to to that deadline two years from now. Are you
Speaker 1: sympathetic to that argument? You know? I think that that
Speaker 1: this is one that's um getting a little beaten to
Speaker 1: death UM excessive focus on something that goes into effect
Speaker 1: two years from now. UM. But certainly it keeps the
Speaker 1: dialogue going. Look, this is a long, UM, probably arduous negotiation. UM.
Speaker 1: When when we when we reached the conclusion, my view
Speaker 1: continues to be that the Europeans have as much to
Speaker 1: lose as the bridge to do in this Brexit process.
Speaker 1: If you look at Eurozone exports, UM, the US and
Speaker 1: the UK are right up there at the top, almost
Speaker 1: equal in terms of the amount of exports from the
Speaker 1: from the EU. So they don't really want to see
Speaker 1: a hard Brexit and a lack of trade going forward.
Speaker 1: So I think the rhetoric will be tough, but these
Speaker 1: are negotiations. They'll be long negotiations, um. And I don't
Speaker 1: think we're going to learn very much over the next month,
Speaker 1: three months, six months, except the fact that that that
Speaker 1: Prime Minister make kind of overstepped, overreached, and uh, I
Speaker 1: think this this moves us towards um, you know, sort
Speaker 1: of more of more balanced negotiations going forward. We're in
Speaker 1: a six percent dollar bear market off the Bloomberg Dollar Index.
Speaker 1: That's since the beginning of the year. We're in a
Speaker 1: four percent four point seven dollar beer market going back
Speaker 1: to the beginning of the year prior. There's a theme here,
Speaker 1: Bob sin Well, we'll turn dollar around. It just simply
Speaker 1: underestimating Janet yellow and rating increases. Yeah, I think that's
Speaker 1: a significant part of it. I also think that you know,
Speaker 1: we came into this year with the market very build
Speaker 1: up on the dollar, and we had long positions in
Speaker 1: the dollar against the whole variety of currencies based on
Speaker 1: expectations of what the FED would do this year UM
Speaker 1: and of course markets tend to sense out those those
Speaker 1: positions that are most extreme, and certainly if you look
Speaker 1: at some of the hedge fund returns this year, they
Speaker 1: would suggest that, in fact, a lot of funds got
Speaker 1: this dollar position wrong. However, we've now against a number
Speaker 1: of currencies shifted the opposite way, and we're seeing very
Speaker 1: large long positions in the in the Euro reported by
Speaker 1: the CFTC. I would also note big long positions now
Speaker 1: in the Mexican Paco of all currencies. So I think
Speaker 1: what we had was excessive long positions. The economy gave
Speaker 1: us another soft first quarter. UM Uncertainties have developed about
Speaker 1: what the FED is going to do after this June meeting,
Speaker 1: and so we've unwound a lot of those positions, and
Speaker 1: that that has brought the dollar lower. I think from
Speaker 1: this from these levels, we now have the market pretty
Speaker 1: negative on the dollar, positioning built up short the dollar,
Speaker 1: and I think, you know, another FED rate hike by
Speaker 1: the end of the year without much action in the
Speaker 1: rest of the world. I think we're going to see
Speaker 1: the dollar higher, David, I note that robertson just driving
Speaker 1: sterling lower one getting right near the weakness of June ninth, Friday.
Speaker 1: We'll come back with Bob, since you're in just a
Speaker 1: moment to talk a bit about dollar Mexico. Let me
Speaker 1: ask you quickly before we go to break here, though, Bob,
Speaker 1: about the yen. In light of the b o J
Speaker 1: meeting later this week. We got the FED first and
Speaker 1: then the BOJ meeting on the fifteen six. Are you
Speaker 1: expecting any sort of surprise out of that meeting this week? No,
Speaker 1: I don't think so. I mean, I think the the
Speaker 1: the only surprise you might see out of the b
Speaker 1: o J is them beginning to admit that this annotative
Speaker 1: easing thing, um, it just can't continue forever um. But
Speaker 1: I don't think that the yen is going to allow
Speaker 1: them that flexibility right now. I think they'd like to
Speaker 1: back away a little bit uh from continuing to add
Speaker 1: to their balance sheet and liquidity, But unfortunately, with the
Speaker 1: end strengthening, it's not a good time to do that.
Speaker 1: Robert Sinch with us, the Amber's Pierrepont too many things
Speaker 1: to speak about with Bob Sinch. Bob, what is the
Speaker 1: decision tree for chair yelling at the press conference to
Speaker 1: indicate what she's gonna do in the future. Is she
Speaker 1: gonna say, well, there's slack in the economy which was
Speaker 1: three years ago, or is it looking for Vice Chairman
Speaker 1: Fisher's alter accommodative shift. What's what's gonna be the buzz
Speaker 1: if you will, that she's gonna frame at the press
Speaker 1: conference to describe the next year. Well, I think the
Speaker 1: biggest difficulty she faces is reconciling the labor market data,
Speaker 1: which the FED even admits, even even the most dubbish
Speaker 1: members of the board, I admit the labor market is
Speaker 1: probably operating at at at full employment with still soft wages,
Speaker 1: and now this recent weakening of the inflation rate, which
Speaker 1: really kind of upsets I think the Fed's plan about
Speaker 1: where they're headed. Um, we've had some some funky numbers
Speaker 1: and a couple of categories in the technology area that
Speaker 1: have kind of messed up the readings that all of
Speaker 1: a sudden popped up out of nowhere. But I think
Speaker 1: that's the that's the the issues that that Mike McKee
Speaker 1: is going to bring up to her is is how
Speaker 1: do you reconcile the reported inflation and wage numbers with
Speaker 1: this very strong growth and employment. Now, I think the
Speaker 1: way to reconcile it is the growth and employment has
Speaker 1: been for the most part in some some lower wage industries,
Speaker 1: and so the way are our wage data works, it's
Speaker 1: a it's a weighted average of who's working in what
Speaker 1: jobs and what they get paid. And I think that's
Speaker 1: been biasing down a little bit um wage pressures, but nonetheless,
Speaker 1: um the inflation numbers themselves really create a difficult environment
Speaker 1: for the Fed, and I think she'll fall back on normalization.
Speaker 1: We need to normalize policy. Something that that Steve Stanley
Speaker 1: and I've been talking about a long a long time ago,
Speaker 1: is that what this kind of labor market and this
Speaker 1: kind of growth in the economy, why should the Fed
Speaker 1: funds the real Fed funds rate still be negative. And
Speaker 1: I think that's, uh, that's kind of the thought process
Speaker 1: as to why they want to bring the real Fed
Speaker 1: funds rate to neutral, which I think probably gets them
Speaker 1: to to somewhere around one and a half percent at
Speaker 1: this point. What stands in the way of her doing that?
Speaker 1: What could derail that that plan inflation inflation inflation? You know,
Speaker 1: I mean, I think there's sort of there are two
Speaker 1: schools of thought and thinking about what the Fed needs
Speaker 1: to do. Um, there's the school that I belong to,
Speaker 1: which is we need to normalize policies. I said, bring
Speaker 1: the real Fed funds rate back to neutral, and you know,
Speaker 1: I'd say that we would have to argue that whatever
Speaker 1: measure of inflation you're looking at, it's at least one
Speaker 1: and a half percent. Uh. And those who are arguing,
Speaker 1: why do you hike rades? Why do you tighten policy?
Speaker 1: What inflation is so low and not showing signs of acceleration,
Speaker 1: And one of them is an argument based on sort
Speaker 1: of the rate of change, what do we need to
Speaker 1: do to change policy because of inflation? And the other
Speaker 1: one is to say, let's get policy back to a
Speaker 1: normalized level after this ten years of crisis, and that
Speaker 1: does require having a different level of the Fed funds rates,
Speaker 1: So it's kind of a rate of change argument versus
Speaker 1: a level argument. Let's talk a bit about dollar Mexico here.
Speaker 1: You've written about that in a in a recent note, Bob,
Speaker 1: and I'm looking at it here and where at levels
Speaker 1: we haven't been out since the election. Uh what what
Speaker 1: accounts for that? How worried are you here about where
Speaker 1: where dollar Mexico might be heading? Boy, you talk about
Speaker 1: round trips post election and and and recently. Um, that
Speaker 1: is one of the biggest round trips. Mexico was in
Speaker 1: the in the Blueberg rankings of extended major currencies thirty
Speaker 1: one currencies. The Mexican peso was ranked thirty at thirty
Speaker 1: one in the second half of last year and first
Speaker 1: year to date this year, complete round trip. Um. Look,
Speaker 1: I think it's a it's it's a microcosm of the
Speaker 1: dollar story in general. Uh. We we had a very
Speaker 1: large short position in the pace, so long position of
Speaker 1: the dollar versus the pace. So at the end of
Speaker 1: the year, after all, you're going to have fed tightening
Speaker 1: that's probably bad for the pace. So you're going to
Speaker 1: have a border wall, You're going to have renegotiation of NAFTA.
Speaker 1: A lot of reasons for the market to be very
Speaker 1: negative to pay. So we've heard a lot less rhetoric
Speaker 1: about things like the wall and disagreements about NAFTA. Obviously,
Speaker 1: a big adjustment in uh in expectations or some adjustment
Speaker 1: and expectations about what the Fed will do, and those
Speaker 1: big short positions in the pace SO have gotten squeezed.
Speaker 1: What's kind of amazing to me now is we've gone
Speaker 1: to the opposite extreme. We have a multi year high
Speaker 1: in the long positions in the in the pace SO
Speaker 1: and in the speculative community, at least according to the CFTC.
Speaker 1: We have oil prices lower, which would normally be a
Speaker 1: negative for the pay so. We have interest rate spreads.
Speaker 1: You look at five year interest rate differential between the
Speaker 1: US and Mexico, and the Mexican advantages started to come
Speaker 1: down in the last couple of weeks. So I think
Speaker 1: the market has gotten very complacent about dollar mex As
Speaker 1: I said, it's been the best performing currency. A lot
Speaker 1: of folks have probably lost a lot of money being
Speaker 1: short to pay so this year. Um, but right when
Speaker 1: the market gives up on a position like that, that's
Speaker 1: when I think it's time to go the other direction.
Speaker 1: And I think, I think as we look out over
Speaker 1: the next three months, Uh, my favorite long dollar position
Speaker 1: now is shifted from pound. At these levels, I still
Speaker 1: like the dollar versus the pound, but I think our
Speaker 1: favorite position would now be long the dollar versus the
Speaker 1: Mexican pays. I look bother at this and I guess
Speaker 1: I got to go back to Sterling with the news
Speaker 1: flow we've got, Now, what does Prime Minister Johnson mean
Speaker 1: for Sterling? Can you hazard to guess that? Or is
Speaker 1: that just so arbitrary and irresponsible I shouldn't even ask
Speaker 1: the question. No, I mean I think that that Look,
Speaker 1: you know, Boris Johnson has had a pretty um significant
Speaker 1: rebound in terms of his political fortunes over the last
Speaker 1: six to nine months, and you look around the world,
Speaker 1: particularly places close to us around the world, he doesn't
Speaker 1: seem that extreme anymore. So, Um, you know, I think
Speaker 1: that's a that's a that's a potential outcome. It would
Speaker 1: tilt the UK back towards more of a of a
Speaker 1: harder line on the whole breggsit process. Um, you know,
Speaker 1: I find I find this very interesting. Who would have
Speaker 1: thought two weeks ago we'd be sitting here saying or
Speaker 1: three weeks ago, oh, we're gonna have political certainty in
Speaker 1: France with a with a party that didn't even exist
Speaker 1: eighteen months ago, and we're going to have political uncertainty
Speaker 1: in the UK. I mean, it just tells you how
Speaker 1: how volatile these more these these politics fool environments are
Speaker 1: um and you know, sort of good news for France,
Speaker 1: I hope going forward, Bob, since thank you so much
Speaker 1: for Amazon pierpoint this morning, as we walked through that
Speaker 1: linkage of the Lippus paper, the global system of foreign
Speaker 1: exchange market into yields yields higher risk on curve is
Speaker 1: really not steep and all that much yet it has
Speaker 1: but it's just just a teen sweens. Let's see if
Speaker 1: a level four, David, but the two year yield one point.
Speaker 1: I dutifully trotted out the lollipop chart, and I was
Speaker 1: surprised I hadn't looked at it in a while. Day
Speaker 1: it's like five weeks ago, and give it out to
Speaker 1: select people. But anyways, the lollipop chart shows higher yields
Speaker 1: and one point three four seven zero on the two
Speaker 1: year is June is busting out all over And you
Speaker 1: go on to the other means one of the one
Speaker 1: of the let's let's before we do that on Bloomberg
Speaker 1: June July September twenty. That's a long distance from July
Speaker 1: to September twenty. So in that from June fourteen, there's
Speaker 1: three jobs reports before September. So that that's pretty cool,
Speaker 1: Brunt you by Bank of America Mary Lynch. With virtual reality,
Speaker 1: virtually everything will change. Discover opportunities in a transforming world
Speaker 1: VI of a mL dot Com slash VR, Mary Lynch,
Speaker 1: Pierced Fenner and Smith Incorporated. It was April fifteen, eighteen
Speaker 1: ninety two from Mr Edison and a host of others
Speaker 1: established a company called General Electric with the modest exception
Speaker 1: of when Nick came in. Jeffrey T. Spray is followed
Speaker 1: ge from most of those hundred in twenty five years.
Speaker 1: He's a legend and industrial research on Wall Street with
Speaker 1: his vertical research partners. We welcome the tank commander Jeff Spray. Jeff,
Speaker 1: good morning, Good morning, Tom, thank you very much. What
Speaker 1: happened with Mr mL? Did he just simply overstay his welcome? Yeah? Tom.
Speaker 1: I think the short answer here is, um, you know,
Speaker 1: there was a lot of trials and tribulations with capital deployment,
Speaker 1: and all of the Jeffs left, you know, a positive
Speaker 1: mark on the company in many ways. Obviously the stock
Speaker 1: has you know, lag very substantially over his tenure, and
Speaker 1: I think the pressure finally built in the in the
Speaker 1: board decided it was time to make a change. I
Speaker 1: did the recovery from O nine as part of the
Speaker 1: email tough times chair, what a great recovery. What's but
Speaker 1: in the last twelve eighteen months, why the almost bear
Speaker 1: market in GE shares, well, Thomas has been this increasing
Speaker 1: focus and I think rightly so on on ges cash
Speaker 1: flow over the last eighteen months or so. So we
Speaker 1: we got that very big bounce in the stock in
Speaker 1: when when Tryon got involved in that. You know, that
Speaker 1: sparked a lot of investor interest, but the actual uh,
Speaker 1: you know, uh, operating results have struggled somewhat over that
Speaker 1: time frame, and we've had this increasing disconnect between the
Speaker 1: cash flow and the earnings, and I think investors rightly
Speaker 1: have focused more on the cash flow metrics in terms
Speaker 1: of a proper valuation approaching David Garrow from three years
Speaker 1: ago twenty one billion free cash, thirteen billion free cash
Speaker 1: and then down to the recent challenges and acquisitions of
Speaker 1: actually negative free cash, modeling back to only eleven billion
Speaker 1: for fiscal year seventeen. That off the Bloomberg David Jeff,
Speaker 1: help us look ahead here at what you think this
Speaker 1: this company's thing to do? Obviously, there'll be a new
Speaker 1: leadership in place. We've seen GE spin off it's it's
Speaker 1: finance unit. Do you think we're going to see more
Speaker 1: spinoffs going forward? Well, it's a really interesting question, David,
Speaker 1: because if you look at John Flannery's background, although he's
Speaker 1: had some very successful operating experience recently in GE Healthcare,
Speaker 1: he also has a business development background and spent a
Speaker 1: lot of time in GE Capital, which always involves buying
Speaker 1: and selling things. So I think that does kind of
Speaker 1: spark the question of the debate about will he do
Speaker 1: something more dramatic. Clearly he'll want to put his mark
Speaker 1: on the company. That one thing I would note that currently,
Speaker 1: you know, my some of the parts value on the
Speaker 1: company is about twenty four dollars. So that makes it
Speaker 1: a little tricky to do wholesale dismantlement because you kind
Speaker 1: of lay bare that valuation disconnect and that that's twenty
Speaker 1: four dollars would be before we think about any disynergy
Speaker 1: from corporate or tax or other things. As you know,
Speaker 1: and you take a part a company like this, if
Speaker 1: you as as you watched him this play out with
Speaker 1: the with the activist investors, with Nelson Peltive trying partners.
Speaker 1: How well has he handled that that pressure? What lessons
Speaker 1: are to be learned by the way that that's been navigating.
Speaker 1: You're asking a questions from from a Jeff mmel stands, Yeah, exactly. Uh,
Speaker 1: you know, I think he you know, he addressed it
Speaker 1: pretty straight on. I think they they showed kind of,
Speaker 1: you know, an open attitude towards it. You know, they
Speaker 1: didn't they didn't dig in and fight, you know, so
Speaker 1: I think there was an acknowledgement that try and brought
Speaker 1: some good ideas to the table, and they were willing
Speaker 1: to kind of think about what they were saying and
Speaker 1: work with them to some degree. So from that standpoint,
Speaker 1: you know, I think they handled it the right way.
Speaker 1: I would just say, though, you know, just the gravitational
Speaker 1: pull of the valuation though, was just kind of worked
Speaker 1: against the company in the back of the envelope. Uh.
Speaker 1: Skill set here is to look at the margin down
Speaker 1: the income statement. You mentioned CASHALA earlier. Maybe it's ebadar
Speaker 1: earnings before interest taxes and the other stuff. I didn't
Speaker 1: pass on the see it. But but Jeff, there's a
Speaker 1: compare and contrast here to U t X and to
Speaker 1: Honeywell and GE is nowhere near that, even at sixteen
Speaker 1: cents on the dollar down to E, but U t
Speaker 1: X and Honeywell are generating a lot more. Is that
Speaker 1: easily fixable? I don't think it's easily fixable, Tom. Some
Speaker 1: of it is, you know, is the difference in the
Speaker 1: business um and so that you know, you don't fix
Speaker 1: that overnight. And one thing that I would say though,
Speaker 1: is that if you look at G's cash flow, UH
Speaker 1: cash flow margins, so free cash flow is a percentage
Speaker 1: of sales, it's actually very similar to U t X
Speaker 1: and companies like a BB and Siemens who would be there.
Speaker 1: They're close piers. So one of the conundrums that I
Speaker 1: think Mr Flannery has is that's cash flow is not
Speaker 1: poor per se, it's actually that the earnings construct that
Speaker 1: is a quote unquote operating construct and excludes a few things,
Speaker 1: has created this large disconnect between what the cash flow
Speaker 1: is and what the EPs is. Okay, over their data
Speaker 1: just too much. We're never ever Jeff Sprague on again. Jeff,
Speaker 1: thank you so much. Great really honored to have Jeff
Speaker 1: Sprague on with this with Vertical Research UH this morning.
Speaker 1: He's truly a legend, almost that I first met Jeff Sprague, Uh,
Speaker 1: David Garrow with his writings. What you meet analysts when
Speaker 1: they write, because writing is what matters. And he wrote
Speaker 1: these brilliant short essays for bear Stearns. This is a
Speaker 1: million years ago and and it was sensitivity analysis, and
Speaker 1: you know all this this typical stuff of industrials about
Speaker 1: what not to do. That was not a ringing endorsement.
Speaker 1: I don't I don't you know, we don't do buy
Speaker 1: old seller, folks. But we've given you a number of
Speaker 1: opinions this morning, uh particul Karen Earlhart from Bloomberg Intelligence
Speaker 1: on very short notice. Joy this as well. Great to
Speaker 1: hear from Jeff Fake. And we'll get Nicholas Hayman out
Speaker 1: among the others here in the coming days, Mr uh
Speaker 1: Mr Flannery's General Electric. This is what Bloomberg surveillance is
Speaker 1: all about, folks. We have honored to bring you our
Speaker 1: coverage this morning of General Electric. And we finished strong
Speaker 1: for calling us from O'Hare. Nicholas Hayman with William Blair. Nick,
Speaker 1: thank you so much for joining us as you wait
Speaker 1: for the plane. Nick, it is the changing of a guard.
Speaker 1: Is it a generational change? A g E. There's that
Speaker 1: new brooms syndrome. Will Mr Flannery move a lot of
Speaker 1: people in and out? Um? No, I don't expect a
Speaker 1: whole lot of change at all time. Actually, I would
Speaker 1: say at this juncture, you're more likely to see a
Speaker 1: lot of the changes that have really, you know, been
Speaker 1: structurally put in place since maybe April seem when they
Speaker 1: announced the Alpha energy. These are all going to comminate.
Speaker 1: And now if you do have as you saw on
Speaker 1: the first quarter, with the exception of free cash flow,
Speaker 1: much stronger fundamental performance, we think the free cash and
Speaker 1: the cash from operations will be much better, uh from
Speaker 1: the second quarter on out. And if that's the case,
Speaker 1: you actually have now a new CEO who's a pragmatic
Speaker 1: leader and who in turn gives an opportunity for that
Speaker 1: enhanced fundamental performance to actually benefit the share price. Under
Speaker 1: Jeff who was a very strong leader, but it was
Speaker 1: very tended to be a big optimists Okay, uh, coming
Speaker 1: from sales and marketing background, Um, that aspirational nature had
Speaker 1: basically uh warnt ben I guess the best way to say,
Speaker 1: a lot of the institutional investment community, and in turn,
Speaker 1: the traction from the improvement of all these changes to
Speaker 1: exit largely most majority of financial services, and then to
Speaker 1: really supersize your p our business. And now you're oil
Speaker 1: and gas. You're now a chance for this finally actually
Speaker 1: all all the improvements in the fundamentals to actually now
Speaker 1: benefit the place. Many would agree with you, and you
Speaker 1: see it from a share price from ten to thirty
Speaker 1: off of the onine bottom. Brian moynihan, among others, Mr
Speaker 1: corbetted City Group would kill for Jeff m l performance
Speaker 1: off the bottom. You and I talked twenty four months
Speaker 1: ago about Jeff m L arguably being CEO of the
Speaker 1: Year in the way he had to reinvent his generous
Speaker 1: electric Why is he being shown the door now? I mean,
Speaker 1: I get flannery. Maybe it's a generational change and that,
Speaker 1: But what exactly did Jeff m L do wrong? I
Speaker 1: don't think it was so much wrong per se. But
Speaker 1: when you know in late fifteen he laid out a
Speaker 1: vision for two dollars and earnings by the end of eighteen. Okay, um,
Speaker 1: the guy the stepping stone to get there, the dollars
Speaker 1: sixty dollars seventy this year, people are comfortable that that
Speaker 1: range could be hit um. I think it may be
Speaker 1: at the opera end of that range. We'll see. But
Speaker 1: now I think the biggest, in the hardest part was
Speaker 1: for investors to understand how you could go, say from
Speaker 1: the dollar sixty five to two dollars, without any external
Speaker 1: benefit of tax reform, of US infrastructure modernization, or any
Speaker 1: of the other initiatives that were, at you know, one time,
Speaker 1: widely expected to occur under the Trump administration this year.
Speaker 1: Jeffrey Emil sat down with a John Micklethwaite, editor in
Speaker 1: chief a couple of months ago, I think it was
Speaker 1: back in February and Boston, and he asked Mr Emil
Speaker 1: how he's changed the company, and he said, uh, it's
Speaker 1: more global, it's more focused on the customer. When I
Speaker 1: became CEO, he said, we were seventy percent inside the
Speaker 1: United States. Now we're seventy outside the United States. As
Speaker 1: we begin to to look at his legacy at G
Speaker 1: is that the biggest part of it. That's one of them.
Speaker 1: You know. The second will be that he's certainly at
Speaker 1: the very leading edge of figuring out how to convert
Speaker 1: into the digital organization that can create value um from
Speaker 1: from information and all of the insights and UM you know,
Speaker 1: continue to push with those analytic insites to a company
Speaker 1: that's masked customization in terms of what they produce UM.
Speaker 1: You know with additive metal manufacturing. So there's a lot
Speaker 1: of transformational nature of what how you buildings. But you're
Speaker 1: moving beyond the based products, beyond the long term service agreements,
Speaker 1: and even beyond the software to now you know, add
Speaker 1: as a fourth way to create value of customers information.
Speaker 1: Nicholas Shalman with US with William Blair, thrilled to have
Speaker 1: him on after talking to a number of other g
Speaker 1: E types this morning. Nick came in, how do they
Speaker 1: put three D basis points on the IBADA margin? You
Speaker 1: come down the income statement. I believe they're underperforming U
Speaker 1: t X, underperforming aneywell and on and on and on.
Speaker 1: How do they strap on a better IBADA margin? Well,
Speaker 1: you know, you're certainly taking these structural costs out right,
Speaker 1: a billion this year and a billion next year to
Speaker 1: get down to twenty two point three billion and total
Speaker 1: structural costs. I think you know, we were just out
Speaker 1: recently to see Bill Rout, who runs to Digital and UM.
Speaker 1: I would honestly tell you in our framework that there
Speaker 1: was the expectation that after investing aggressively to build out
Speaker 1: the partners for the Predicts alliance as well as UM
Speaker 1: several major M and A acquisitions and train about thirty
Speaker 1: thousand independent software programmers, that seventeen and eighteen were supposed
Speaker 1: to be the breakaway years for digital to contribute incremental
Speaker 1: sales and earning scrut to ge and clearly in my
Speaker 1: mind that will occur in eighteen and on not seventeen.
Speaker 1: So you know, UM, I think I think as you
Speaker 1: look forward, the things that are really going to be
Speaker 1: internally uh catalysts capable catalysts for g V will be
Speaker 1: the ability or to be digital to move from conceptual productivity,
Speaker 1: internal enhancer to actual strong third party sales. And I
Speaker 1: think the second thing will be pretty pretty timely transformational
Speaker 1: burger uh go on gas would maker use he take
Speaker 1: and move away on gas from ten percent of g
Speaker 1: and instead of North American upstream that's growing, it's now sixty.
Speaker 1: So in the second half of this year you're going
Speaker 1: to suddenly see really a drag racer acceleration in the
Speaker 1: performance of what is now going to the company. It's amazing.
Speaker 1: So you see the difference there David girl in Nick
Speaker 1: Cayman's tone versus what even earlier is optimism? David jumping
Speaker 1: with one Yeah, Nick, I think it was last month
Speaker 1: jeff Eymilt was saying that he has as much as
Speaker 1: twelve billion dollars in unallocated capital, ostensibly the use for
Speaker 1: for acquisitions. Do do you expect that to be deployed
Speaker 1: here under mr Mr Flannery or is there going to
Speaker 1: be a more wait and see approach here with this
Speaker 1: leadership changeover? I think that, um, you know, is anything. Uh,
Speaker 1: you have a couple more investors coming here. They'll consumer lighting, business,
Speaker 1: doustrial solutions. They closed at the end of this year
Speaker 1: imminently of your water. Um he made. Take a look
Speaker 1: at the medical portfolio. We just had seemens who are
Speaker 1: follow h four weeks ago get up and have their
Speaker 1: kind of webcast debutants party for their health plan years.
Speaker 1: And that is you know, they're gonna e merge that
Speaker 1: they're gonna I p o it, They're gonna spin it
Speaker 1: out and so much like they did with Lighting. Okay,
Speaker 1: as from a little ahead of gus decision to to
Speaker 1: to exit the lighting, so I think that there will
Speaker 1: be an evaluation of perhaps parts of the healthcare portfolio.
Speaker 1: Having you know, John's background in M and A and
Speaker 1: strategic planning prior to writing healthcare. He's as good at
Speaker 1: hand if that is any And that portfolio GEES is
Speaker 1: actually much more valuable than the one Healthlan years the
Speaker 1: seams because they have gone so much further into by
Speaker 1: a pharma and that's really where the growth and the
Speaker 1: returns are going forward. The other businesses are performing well,
Speaker 1: but they don't hold the same you know, uh future
Speaker 1: you know growth potential. Nick came in one final question
Speaker 1: by hold Cell. Please frame, uh, please frame where you
Speaker 1: are on bi hold Cell. We are you know, outperformed
Speaker 1: and um we uh we believe amongst the large camp
Speaker 1: stocks that we industrial stocks, that we found them all
Speaker 1: the industry. Second, this is hands down the number one.
Speaker 1: It's trailed and yet it's fundamental text you know, um,
Speaker 1: they cash flow. They have really started to rebound. We've
Speaker 1: seen tremendous orders here from Vietnam and from Saudi Arabia
Speaker 1: in the last couple of weeks. We don't think that
Speaker 1: there's any fundamental hiccup or even shortfall as many have
Speaker 1: alluded to for the cards to the dividend being able
Speaker 1: to be paid and sustained. But in fact what we
Speaker 1: do see is we now see an ability to take
Speaker 1: and convert what should be a lot stronger uh tast
Speaker 1: from operating activities over the next three quarter, second third
Speaker 1: and the next year to be to be aligned with
Speaker 1: you know, um much much better still this year price
Speaker 1: this year, price of them. You know, if you're all
Speaker 1: all even with everybody else, just moving along with everybody.
Speaker 1: And it hasn't been and the message has battle try
Speaker 1: has been were gonna cut the dividend and the Matthew
Speaker 1: isn't even remotely there. Okay, you wouldn't be buying back,
Speaker 1: you know. I think it's all gonna come out. Nick,
Speaker 1: Thank you, Thank you your troopers. William Blair from o'harrey
Speaker 1: International Airport today. Thanks for listening to the Bloomberg Surveillance podcast.
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