1 00:00:05,800 --> 00:00:08,720 Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox. 2 00:00:08,760 --> 00:00:11,520 Speaker 1: Along with my co host Lisa Bramowitz. Each day we 3 00:00:11,640 --> 00:00:15,120 Speaker 1: bring you the most important, noteworthy, and useful interviews for 4 00:00:15,200 --> 00:00:17,840 Speaker 1: you and your money, whether you're at the grocery store 5 00:00:17,960 --> 00:00:20,720 Speaker 1: or the trading floor. Find the Bloomberg p m L 6 00:00:20,840 --> 00:00:32,479 Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Right now, 7 00:00:32,520 --> 00:00:35,159 Speaker 1: we want to turn our attention to healthy dor Rito's 8 00:00:35,240 --> 00:00:38,080 Speaker 1: because it sounds so good and it's getting close to 9 00:00:38,159 --> 00:00:40,520 Speaker 1: that time of day when it is time for a snack. 10 00:00:40,600 --> 00:00:43,400 Speaker 1: Jenny Kaplan joins us right now. Jenny Kaplan is beverage, 11 00:00:43,440 --> 00:00:46,560 Speaker 1: tobacco and Cannabis reporter for Bloomberg News, and she joins 12 00:00:46,640 --> 00:00:49,440 Speaker 1: us in our eleven three oh studios. So, Jenny, you know, 13 00:00:49,440 --> 00:00:52,080 Speaker 1: I'd love to get your sense on, first of all, 14 00:00:52,400 --> 00:00:55,320 Speaker 1: why it's taken so long for some of these traditional 15 00:00:55,400 --> 00:00:59,440 Speaker 1: junk food purveyors to health if I some of these foods, 16 00:00:59,640 --> 00:01:03,440 Speaker 1: and whether there's really an appetite for that. Well, PepsiCo 17 00:01:03,600 --> 00:01:07,000 Speaker 1: generally and and Fridol specifically has been working for some 18 00:01:07,080 --> 00:01:11,039 Speaker 1: time to make healthier versions of their snacks. Both these 19 00:01:11,040 --> 00:01:15,319 Speaker 1: core brands like Doritos and Cheetos and tostitos, and also 20 00:01:15,440 --> 00:01:18,800 Speaker 1: create new products, new kinds of snacks that fit with 21 00:01:18,959 --> 00:01:22,360 Speaker 1: the consumer. What's really driving this is consumers want better 22 00:01:22,400 --> 00:01:24,680 Speaker 1: for you products, and that's in the snack part of 23 00:01:24,720 --> 00:01:28,000 Speaker 1: PepsiCo's portfolio and the beverage part of the portfolio, and 24 00:01:28,000 --> 00:01:31,560 Speaker 1: they're working towards that. But to get a dorrito to 25 00:01:31,920 --> 00:01:36,360 Speaker 1: qualifies organic isn't totally simple task. I mean, if you 26 00:01:36,400 --> 00:01:39,600 Speaker 1: think of a dorito, it has that bright orange cheese. 27 00:01:40,319 --> 00:01:44,640 Speaker 1: I mean, I think it's not not not generally, I 28 00:01:44,640 --> 00:01:47,920 Speaker 1: don't think. So it's definitely a challenge, and technology is 29 00:01:47,960 --> 00:01:50,120 Speaker 1: improved and they're trying to get more and more of 30 00:01:50,120 --> 00:01:53,800 Speaker 1: these products to qualify for these growing natural parts of 31 00:01:53,840 --> 00:01:57,680 Speaker 1: the supermarket. What about the purchase of whole foods by 32 00:01:57,720 --> 00:02:00,560 Speaker 1: Amazon that's got to feed into this conversation. And because 33 00:02:00,800 --> 00:02:02,920 Speaker 1: you know there's a gate, you're not getting into Amazon 34 00:02:03,080 --> 00:02:06,520 Speaker 1: if you're not the following all their rules and regulations 35 00:02:06,520 --> 00:02:08,320 Speaker 1: in terms of what the food contains or what it 36 00:02:08,360 --> 00:02:11,840 Speaker 1: doesn't contain. So there's some speculation by analysts that I've 37 00:02:11,840 --> 00:02:14,320 Speaker 1: spoken with that this is actually going to be helpful 38 00:02:14,400 --> 00:02:18,000 Speaker 1: for big companies like Freedo, Lay and getting some of 39 00:02:18,040 --> 00:02:22,320 Speaker 1: these healthier products into whole foods. So Amazon already carries 40 00:02:22,400 --> 00:02:27,800 Speaker 1: this line of chips called simply that are simply Doritos, 41 00:02:27,840 --> 00:02:32,000 Speaker 1: simply Cheetos, that that fit technically the whole Foods guidelines 42 00:02:32,040 --> 00:02:35,960 Speaker 1: but aren't actually in whole foods yet. Okay, So first 43 00:02:35,960 --> 00:02:38,760 Speaker 1: of all, you know, when you say healthier, I just 44 00:02:38,880 --> 00:02:41,560 Speaker 1: am seeing air quotes around all of that, because, first 45 00:02:41,560 --> 00:02:43,720 Speaker 1: of all, I can't imagine that the actual nutritional value 46 00:02:43,720 --> 00:02:46,600 Speaker 1: will change all that much. But I'm also wondering how 47 00:02:46,680 --> 00:02:48,840 Speaker 1: much more is the price tag going to be on 48 00:02:49,200 --> 00:02:52,799 Speaker 1: health if I junk food? It's a great question. The 49 00:02:52,840 --> 00:02:56,880 Speaker 1: healthier segment of the snack market is what's growing at 50 00:02:56,919 --> 00:02:59,440 Speaker 1: an accelerated pace, and part of that is because people 51 00:02:59,480 --> 00:03:01,600 Speaker 1: are willing to pay more for products that they think 52 00:03:01,600 --> 00:03:05,040 Speaker 1: are healthier or have cleaner labels, you know, don't have 53 00:03:05,120 --> 00:03:07,960 Speaker 1: those things that people are trying to avoid, like GMOs 54 00:03:08,360 --> 00:03:13,320 Speaker 1: or artificial colors or flavors or preservatives. So PepsiCo as 55 00:03:13,360 --> 00:03:16,240 Speaker 1: a whole is trying to push into this higher market, 56 00:03:16,440 --> 00:03:19,120 Speaker 1: higher margin market where they can charge more because the 57 00:03:19,120 --> 00:03:22,600 Speaker 1: consumers willing to pay for it. Well, didn't Pepsi already 58 00:03:22,720 --> 00:03:25,760 Speaker 1: buy into this uh, this business right. I mean, didn't 59 00:03:25,800 --> 00:03:28,120 Speaker 1: they make a purchase that would allow them to then 60 00:03:28,160 --> 00:03:31,560 Speaker 1: get in. I mean they bought Stacy's pita chips, right, correct. 61 00:03:31,720 --> 00:03:36,040 Speaker 1: Stacy's is already in whole foods UH, and they have 62 00:03:36,160 --> 00:03:39,680 Speaker 1: other products and their portfolio that are either in or qualified. 63 00:03:39,680 --> 00:03:42,680 Speaker 1: But what's really important to talk about here is that 64 00:03:42,760 --> 00:03:46,760 Speaker 1: these are the simply line is covering their core brands, 65 00:03:46,840 --> 00:03:49,640 Speaker 1: So it's things like Fritos and Dorrito's. These are the 66 00:03:49,640 --> 00:03:52,680 Speaker 1: big money makers for Freedo lay and for PepsiCo as 67 00:03:52,720 --> 00:03:55,320 Speaker 1: a whole. And if they don't figure out a way 68 00:03:55,360 --> 00:03:57,480 Speaker 1: to sort of push these big brands a little bit 69 00:03:57,520 --> 00:04:00,400 Speaker 1: towards premium, there they risk getting caught on the one 70 00:04:00,440 --> 00:04:02,440 Speaker 1: hand by value plays and on the other hand by 71 00:04:02,520 --> 00:04:04,800 Speaker 1: these healthier and more expensive snacks. Well, Jenny, can you 72 00:04:04,800 --> 00:04:08,680 Speaker 1: give us a sense of how these Doritos, Torito tostitos 73 00:04:08,720 --> 00:04:11,800 Speaker 1: and other ETOs that they sell, how they're actually doing. 74 00:04:11,840 --> 00:04:14,480 Speaker 1: I mean, have they actually seen some kind of cannibalization 75 00:04:14,680 --> 00:04:18,720 Speaker 1: in that whole uh line based on the increase in 76 00:04:18,760 --> 00:04:22,520 Speaker 1: desire for for healthier foods. So, based on my reporting, 77 00:04:22,800 --> 00:04:25,000 Speaker 1: all of these chip brands are still doing pretty well. 78 00:04:25,120 --> 00:04:28,919 Speaker 1: They've actually managed to avoid some of the trouble that Pepsi, 79 00:04:29,040 --> 00:04:31,960 Speaker 1: for example, has gotten in on the soda side of things, 80 00:04:32,360 --> 00:04:37,480 Speaker 1: because people are still snacking. But when they took steps 81 00:04:37,520 --> 00:04:41,920 Speaker 1: to make products more healthy, as in, for example, they 82 00:04:41,960 --> 00:04:46,000 Speaker 1: have reduced sodium Lays just regular lays, but with less salt, 83 00:04:46,080 --> 00:04:50,839 Speaker 1: and they've actually pushed growth, accelerated growth beyond what the 84 00:04:50,839 --> 00:04:53,760 Speaker 1: rest of the Lays portfolio is doing. So they've sort 85 00:04:53,760 --> 00:04:57,360 Speaker 1: of proven that healthier products work to drive sales. And 86 00:04:57,760 --> 00:05:00,520 Speaker 1: I think largely people who are buying the in the 87 00:05:00,640 --> 00:05:04,880 Speaker 1: natural aisle. It's not necessarily cannibalizing. Maybe those are customers 88 00:05:04,880 --> 00:05:07,320 Speaker 1: who've moved away from the products altogether and now they're 89 00:05:07,320 --> 00:05:09,880 Speaker 1: willing to do it. I will just say full disclosure. 90 00:05:09,960 --> 00:05:12,200 Speaker 1: My eight year old son absolutely loves lace, and when 91 00:05:12,200 --> 00:05:14,559 Speaker 1: I've tried to give him the baked not fried ones, 92 00:05:15,080 --> 00:05:18,720 Speaker 1: he has rejected them. It's like these aren't lace. So 93 00:05:18,800 --> 00:05:22,360 Speaker 1: I mean, there is also the gold Star gold star 94 00:05:22,480 --> 00:05:27,839 Speaker 1: for what least healthy aspect of food, but he definitely 95 00:05:28,200 --> 00:05:30,880 Speaker 1: distinguishes it. So I imagine others will too. I mean, 96 00:05:30,880 --> 00:05:32,560 Speaker 1: I don't know if you tried simply, but do they 97 00:05:32,600 --> 00:05:34,960 Speaker 1: really taste the same well, it's funny. A lot of 98 00:05:35,000 --> 00:05:36,920 Speaker 1: these chips. I mean, if you think about plain Lays 99 00:05:36,960 --> 00:05:40,359 Speaker 1: potato chips, they already pretty much fit into this category. 100 00:05:40,440 --> 00:05:43,120 Speaker 1: Like there aren't a lot of crazy ingredients in a 101 00:05:43,160 --> 00:05:46,400 Speaker 1: Plaine bag of lace. They're basically like potatoes with oil 102 00:05:46,440 --> 00:05:49,360 Speaker 1: and salt. So some things it's making me feel a 103 00:05:49,360 --> 00:05:51,680 Speaker 1: little better. Yeah, some things, it's pretty similar. And it 104 00:05:51,760 --> 00:05:54,679 Speaker 1: really is sort of the messaging that's changed. Other things 105 00:05:54,720 --> 00:05:56,880 Speaker 1: like Doritos and Cheetos. You have to imagine that the 106 00:05:57,000 --> 00:06:01,320 Speaker 1: ingredients are pretty different, So it's sort of depends on 107 00:06:01,360 --> 00:06:04,599 Speaker 1: which brand you're talking about. But I think the big 108 00:06:05,360 --> 00:06:07,960 Speaker 1: message here is that it's really in the marketing and 109 00:06:08,000 --> 00:06:10,799 Speaker 1: the messaging and trying to appeal to this different set 110 00:06:10,880 --> 00:06:13,880 Speaker 1: that isn't already picking up a bag of you know, 111 00:06:14,000 --> 00:06:16,640 Speaker 1: chips in their normal grocery shopping. All right, Well, like, 112 00:06:17,160 --> 00:06:19,640 Speaker 1: just talk briefly about something that we know is off 113 00:06:19,680 --> 00:06:23,040 Speaker 1: the healthy chart because it's not smoking and cigarettes and 114 00:06:23,440 --> 00:06:26,080 Speaker 1: the cost of a pack of cigarettes in the city 115 00:06:26,080 --> 00:06:29,000 Speaker 1: of New York. Tell us what's happening. So cigarettes in 116 00:06:29,000 --> 00:06:33,440 Speaker 1: New York have just been the bottom price has just 117 00:06:34,480 --> 00:06:37,480 Speaker 1: been raised by um. It's now going to cost at 118 00:06:37,560 --> 00:06:40,200 Speaker 1: least thirteen dollars a pack to buy cigarettes in New 119 00:06:40,240 --> 00:06:42,839 Speaker 1: York City. That's the highest in the country. New York 120 00:06:42,920 --> 00:06:45,240 Speaker 1: was already the most expensive place to buy cigarettes in 121 00:06:45,240 --> 00:06:49,440 Speaker 1: the country, but it's raised even higher, so it's tough 122 00:06:49,480 --> 00:06:52,680 Speaker 1: to get cigarettes here. Well, when New York originally rose 123 00:06:52,760 --> 00:06:56,880 Speaker 1: prices on cigarettes, was there a material decline in smoking rates. 124 00:06:57,400 --> 00:07:03,040 Speaker 1: There is evidence that raising prices leads to declines in 125 00:07:03,040 --> 00:07:06,520 Speaker 1: in purchasing volumes. That being said, New York is one 126 00:07:06,560 --> 00:07:11,000 Speaker 1: of the places in the country that has the highest um, 127 00:07:11,120 --> 00:07:14,920 Speaker 1: the highest amounts of people basically selling cigarettes that aren't 128 00:07:15,600 --> 00:07:18,880 Speaker 1: legally HU sees basically in other things. And people who 129 00:07:18,960 --> 00:07:22,000 Speaker 1: go to pick your state and then they come back 130 00:07:22,080 --> 00:07:24,840 Speaker 1: with these huge cartons of cigarettes and they sell them 131 00:07:24,840 --> 00:07:27,080 Speaker 1: out of their back trunks. I've seen that happen. Yeah, 132 00:07:27,120 --> 00:07:29,840 Speaker 1: I'm from North Carolina originally, and I will say that 133 00:07:29,880 --> 00:07:31,760 Speaker 1: when I first got to New York, just looking in 134 00:07:31,840 --> 00:07:35,000 Speaker 1: windows and seeing how much cigarettes cost, it's just insane 135 00:07:35,040 --> 00:07:37,560 Speaker 1: to think of the difference. I mean, it makes sense 136 00:07:37,600 --> 00:07:41,360 Speaker 1: that there are people who make a business off of 137 00:07:41,440 --> 00:07:43,880 Speaker 1: driving to other states and coming back here and selling 138 00:07:43,880 --> 00:07:46,600 Speaker 1: them for a higher price but still lower than that 139 00:07:46,640 --> 00:07:49,440 Speaker 1: thirteen dollars a pack. Well, and and also I believe 140 00:07:49,480 --> 00:07:52,000 Speaker 1: that they're gonna be a pro there's going to prohibition 141 00:07:52,200 --> 00:07:58,200 Speaker 1: on pharmacies selling tobacco products when their licenses come up 142 00:07:58,240 --> 00:08:03,280 Speaker 1: for renewal. We'll see the s has already stopped selling cigarettes. Um, 143 00:08:03,320 --> 00:08:06,440 Speaker 1: they made a push saying, you know, we're about trying 144 00:08:06,440 --> 00:08:10,520 Speaker 1: to CVS health exactly, We're trying to be a company 145 00:08:10,560 --> 00:08:12,360 Speaker 1: that promotes health. We're not going to do this, but 146 00:08:12,680 --> 00:08:14,720 Speaker 1: it's interesting, it's gonna it's gonna be a big deal. 147 00:08:14,720 --> 00:08:17,360 Speaker 1: It's gonna have a big impact on the industry. Um, 148 00:08:17,400 --> 00:08:20,120 Speaker 1: when there are fewer and fewer places you can buy cigarettes. 149 00:08:20,200 --> 00:08:24,160 Speaker 1: That being said, the consumers very loyal, I mean smokers 150 00:08:24,200 --> 00:08:26,760 Speaker 1: will buy have proven that they will continue to buy 151 00:08:26,800 --> 00:08:29,920 Speaker 1: cigarettes no matter what the prices. So it's it's sort 152 00:08:29,920 --> 00:08:32,200 Speaker 1: of we'll have to see whether this really has an 153 00:08:32,200 --> 00:08:35,080 Speaker 1: impact on smoking rates or not so loyal that some 154 00:08:35,160 --> 00:08:37,760 Speaker 1: could say that they're addicted. Jenny, sir, and thank you 155 00:08:37,760 --> 00:08:40,360 Speaker 1: so much for joining us. Uh, Jenny Kaplan and thank 156 00:08:40,360 --> 00:08:42,360 Speaker 1: you so much for joining us. Truly a pleasure having you. 157 00:08:42,440 --> 00:08:46,360 Speaker 1: Jenny Kaplan is Beverage, Tobacco and Cannabis reporter for Bloomberg News, 158 00:08:46,440 --> 00:09:00,120 Speaker 1: joining us in our eleven at three oh studios. All 159 00:09:00,200 --> 00:09:04,000 Speaker 1: Tropical Storm Harvey has now prompted at least fourteen US 160 00:09:04,080 --> 00:09:07,800 Speaker 1: refineries to shut or reduce production. This affects about four 161 00:09:07,840 --> 00:09:11,800 Speaker 1: million barrels a day of US processing capacity. That's around 162 00:09:12,720 --> 00:09:15,280 Speaker 1: of the nation's total. Here to tell us more about 163 00:09:15,400 --> 00:09:19,360 Speaker 1: commodities energy as well as agricultural is Mike mcgloane. He 164 00:09:19,480 --> 00:09:23,000 Speaker 1: is our commodity strategist for Bloomberg Intelligence. He joins us 165 00:09:23,040 --> 00:09:26,320 Speaker 1: here in our studio and Sal GILBERTI. He is the 166 00:09:26,320 --> 00:09:29,200 Speaker 1: president and the chief investment officer and co founder of 167 00:09:29,240 --> 00:09:32,760 Speaker 1: a two cream trading based in Brattleboro, Vermont. Sal, I 168 00:09:32,800 --> 00:09:34,360 Speaker 1: want to begin with you because I know we're gonna 169 00:09:34,360 --> 00:09:35,920 Speaker 1: talk a lot about energy, but I want to give 170 00:09:35,960 --> 00:09:38,600 Speaker 1: you the opportunity to just set the stage in terms 171 00:09:39,040 --> 00:09:45,040 Speaker 1: of what is the agricultural dynamic for farmers and for 172 00:09:45,800 --> 00:09:50,120 Speaker 1: end markets such as cotton. Sure, cotton is a big one. 173 00:09:50,160 --> 00:09:53,599 Speaker 1: Cotton has taken an enormous hit. Farmers were expecting a 174 00:09:53,679 --> 00:09:57,480 Speaker 1: bumper crop and cotton, particularly in Texas and um As 175 00:09:57,480 --> 00:10:00,040 Speaker 1: We've seen from articles and news reports and in the 176 00:10:00,080 --> 00:10:02,760 Speaker 1: street reports, a lot of the cotton even even cotton 177 00:10:02,800 --> 00:10:06,680 Speaker 1: that was harvested was damaged because the storm basically ravaged 178 00:10:06,840 --> 00:10:08,959 Speaker 1: cotton that was in storage, cotton that was sitting on 179 00:10:09,000 --> 00:10:11,800 Speaker 1: the docks, cotton that was harvested in on the sides 180 00:10:11,840 --> 00:10:14,280 Speaker 1: of the field. So content a big impact, and we've 181 00:10:14,320 --> 00:10:17,319 Speaker 1: seen a price rallying cotton the last two weeks in 182 00:10:17,360 --> 00:10:21,480 Speaker 1: anticipation of that. I think what people uh haven't yet 183 00:10:21,600 --> 00:10:24,080 Speaker 1: factored in and in fact the markets are making new 184 00:10:24,120 --> 00:10:26,960 Speaker 1: loads as we speak in corn and soybeans, is that 185 00:10:27,200 --> 00:10:30,280 Speaker 1: in the path of Harvey, the current path uh as 186 00:10:30,320 --> 00:10:35,480 Speaker 1: it's it's headed up into um Louisiana, Arkansas, Mississippi, Tennessee. 187 00:10:35,679 --> 00:10:39,520 Speaker 1: There are unharvested bushels of corn, They're unharvested bushels of 188 00:10:39,559 --> 00:10:43,320 Speaker 1: soybeans out there that represent roughly um of the corn 189 00:10:44,160 --> 00:10:47,360 Speaker 1: of the projected ending stocks for this year's crop, and 190 00:10:47,880 --> 00:10:50,880 Speaker 1: UM potentially threatened our the equivalent of about eighty three 191 00:10:51,360 --> 00:10:55,280 Speaker 1: of the potential soybean surplus. Now, those those things aren't 192 00:10:55,320 --> 00:10:57,520 Speaker 1: all going to be damaged, but I think you may 193 00:10:57,600 --> 00:11:00,360 Speaker 1: take the chains the balance sheet. There's a ential to 194 00:11:00,440 --> 00:11:03,760 Speaker 1: change the balance sheet here, which could potentially support prices. Well, yeah, 195 00:11:03,760 --> 00:11:07,679 Speaker 1: I was just about to say, of the soybeans surplus 196 00:11:08,240 --> 00:11:11,760 Speaker 1: could get affected and possibly even wiped out. I mean, 197 00:11:11,800 --> 00:11:15,360 Speaker 1: based on the trajectory of the storm, what's your projection 198 00:11:15,600 --> 00:11:17,920 Speaker 1: for how big the damage might be to some of 199 00:11:17,960 --> 00:11:21,760 Speaker 1: these unharvested crops. It's really a stunning number. I think 200 00:11:21,800 --> 00:11:24,800 Speaker 1: it entirely depends for corn on wind at this point. 201 00:11:24,800 --> 00:11:28,040 Speaker 1: If the crops get wet, it's okay. It may raise 202 00:11:28,160 --> 00:11:29,840 Speaker 1: the cost a bit, because you've got to dry your 203 00:11:29,880 --> 00:11:32,840 Speaker 1: corn once you harvested. Soybeans is another matter. If they're 204 00:11:32,880 --> 00:11:35,320 Speaker 1: if they're sitting in water for a while, they're they're 205 00:11:35,360 --> 00:11:38,439 Speaker 1: not quite as far along as corn in their maturity. Um, 206 00:11:38,520 --> 00:11:40,920 Speaker 1: there could be some significant damage. Now, you're not gonna 207 00:11:41,000 --> 00:11:43,320 Speaker 1: lose all those crops. Crops are used to being rained upon. 208 00:11:43,640 --> 00:11:47,520 Speaker 1: But because we're making such extreme price loads right now, 209 00:11:47,559 --> 00:11:51,800 Speaker 1: and because actually there's a seasonal A year ago today, cotton, corn, 210 00:11:51,840 --> 00:11:55,120 Speaker 1: and soybeans all price bommed and there's a seasonal strength 211 00:11:55,160 --> 00:11:58,160 Speaker 1: that comes in beginning in September for all of those crops. 212 00:11:58,160 --> 00:12:04,320 Speaker 1: So Harvey may actually support a seasonable season seasonality effect 213 00:12:04,360 --> 00:12:07,079 Speaker 1: of bottoming prices on those three crops. And again, cotton 214 00:12:07,080 --> 00:12:09,160 Speaker 1: has already rallied but corn and soybeans, no one, No 215 00:12:09,200 --> 00:12:10,840 Speaker 1: one seems to be looking at them right now. Well, 216 00:12:10,880 --> 00:12:13,280 Speaker 1: we're gonna look at them after you said so, of course. 217 00:12:13,360 --> 00:12:15,680 Speaker 1: But I want to bring Mike McGlone into this because 218 00:12:16,000 --> 00:12:19,520 Speaker 1: Mike uh I got the report that Motiva Enterprises Port 219 00:12:19,600 --> 00:12:22,320 Speaker 1: Arthur facility, which is the largest in the United States, 220 00:12:22,320 --> 00:12:24,960 Speaker 1: is said to be shutting because of severe flooding issues. 221 00:12:25,280 --> 00:12:28,560 Speaker 1: Tell us about the availability of refined product, because you know, 222 00:12:28,559 --> 00:12:31,839 Speaker 1: if you've got soybeans, if you have corn, you're gonna 223 00:12:31,840 --> 00:12:34,080 Speaker 1: need to get it to market. Yeah, that's been the 224 00:12:34,160 --> 00:12:37,240 Speaker 1: key factor in the energy market from the hurricane is 225 00:12:37,360 --> 00:12:40,839 Speaker 1: this reduction supply, most notably of distillate, which means number 226 00:12:40,840 --> 00:12:44,480 Speaker 1: one unleaded gas and diesel. So what's happened so far 227 00:12:44,520 --> 00:12:46,640 Speaker 1: as obviously unletting gas has taken off. It's now a 228 00:12:46,800 --> 00:12:49,560 Speaker 1: fourteen percent on the year versus w t I down 229 00:12:49,760 --> 00:12:52,079 Speaker 1: down fourteen percent, which is blown out the crack spread, 230 00:12:52,080 --> 00:12:54,319 Speaker 1: and the crack spread is the indication is when you 231 00:12:54,440 --> 00:12:57,200 Speaker 1: take crude a bear of crude oil and you converted 232 00:12:57,280 --> 00:13:00,840 Speaker 1: to unleaded gas, and when that moves out means refineries 233 00:13:00,840 --> 00:13:02,760 Speaker 1: are making money. But the key thing that's happening is 234 00:13:02,800 --> 00:13:06,640 Speaker 1: it's reducing this supply. Now that supply is going to 235 00:13:06,720 --> 00:13:09,360 Speaker 1: come back, it just doesn't be it's not replaced. It's 236 00:13:09,360 --> 00:13:12,760 Speaker 1: going to reduce inventories and gasoline inventories which are historically high. 237 00:13:12,760 --> 00:13:15,360 Speaker 1: But the key thing is before the hurricane, inventories are 238 00:13:15,280 --> 00:13:18,640 Speaker 1: already trending down, so should accelerate that. It's obviously accelerating 239 00:13:18,679 --> 00:13:22,040 Speaker 1: the increase in in um a lot of gas prices, 240 00:13:22,080 --> 00:13:25,199 Speaker 1: so it's helping rebalance the US energy market. One issue though, 241 00:13:25,200 --> 00:13:28,480 Speaker 1: it's reducing exports, which are on a bowl market trend, 242 00:13:28,559 --> 00:13:30,400 Speaker 1: so that's gonna hurt for a little while. Well, and 243 00:13:30,400 --> 00:13:33,160 Speaker 1: it's sort of interesting when you say rebalance that should 244 00:13:33,440 --> 00:13:36,720 Speaker 1: end up helping crude values, I would think, because if 245 00:13:36,760 --> 00:13:39,800 Speaker 1: there's a rebalancing and diminishing of the supplies eventually down 246 00:13:39,840 --> 00:13:43,199 Speaker 1: the line, you would guess that the demand for crude 247 00:13:43,240 --> 00:13:46,719 Speaker 1: would go up, and yet the values declining again. Yet 248 00:13:47,440 --> 00:13:49,600 Speaker 1: it again today. Yeah, Well that's part of it because 249 00:13:49,640 --> 00:13:52,920 Speaker 1: now that we were bringing down the refining of I mean, 250 00:13:52,920 --> 00:13:56,120 Speaker 1: all crude oils essentially really worthless until it's refined, So 251 00:13:56,160 --> 00:13:58,560 Speaker 1: once it's refined and has values, we're bringing down that 252 00:13:58,679 --> 00:14:02,200 Speaker 1: refinery demand which is obviously reducing demand for w t I. 253 00:14:02,240 --> 00:14:04,280 Speaker 1: So the key thing is what's happening is Brent. W 254 00:14:04,360 --> 00:14:06,400 Speaker 1: t I has moved out in Brent, which is global 255 00:14:06,480 --> 00:14:10,080 Speaker 1: sea Born is doing fine. That it's getting it's seen 256 00:14:10,200 --> 00:14:13,680 Speaker 1: reduced supply of w t I in the market, reduced prices, 257 00:14:13,960 --> 00:14:16,960 Speaker 1: and that's blowing that spread out. But overall this is 258 00:14:17,120 --> 00:14:19,720 Speaker 1: a bullish indication. It's just showing up in the distalates 259 00:14:19,760 --> 00:14:22,280 Speaker 1: more and unletting guess the key thing underlying this before 260 00:14:22,320 --> 00:14:24,840 Speaker 1: that people need to remembers these trends were already fabled 261 00:14:24,880 --> 00:14:27,280 Speaker 1: before the hurricane. In one bottom line is the declining 262 00:14:27,360 --> 00:14:29,640 Speaker 1: value of the dollar overall, that was a very fable 263 00:14:29,680 --> 00:14:33,200 Speaker 1: trend for all and all commodity prices, most note and 264 00:14:33,440 --> 00:14:37,160 Speaker 1: definitely medals. Yeah, that's continuing. Thank you so much, Mike mclown, 265 00:14:37,200 --> 00:14:40,160 Speaker 1: commodity strategist for Bloomberg Intelligence, and of course our thanks 266 00:14:40,360 --> 00:14:43,920 Speaker 1: to Sal GILBERTI. He's president and founder of two Creum 267 00:14:44,160 --> 00:14:48,320 Speaker 1: Trading and focusing on uh, those soybeans and that corn 268 00:14:48,360 --> 00:14:51,080 Speaker 1: that has yet to be harvests and what effect I 269 00:14:51,080 --> 00:15:06,680 Speaker 1: could have on the U. S economy and those particular commodities. Well, 270 00:15:06,720 --> 00:15:10,760 Speaker 1: there was a headline today on the Bloomberg from stocks 271 00:15:10,760 --> 00:15:14,360 Speaker 1: two bonds, the bear market signals are multiplying, to get 272 00:15:14,360 --> 00:15:17,160 Speaker 1: a sense of whether that's an accurate reflection of the 273 00:15:17,240 --> 00:15:20,760 Speaker 1: risks that Hugh Johnson, thanks, we're gonna get talk with you. Johnson. 274 00:15:20,760 --> 00:15:23,240 Speaker 1: He's chairman and chief investment officer of Hugh Johnson Advisors, 275 00:15:23,280 --> 00:15:26,640 Speaker 1: which oversees one point two billion dollars and is based 276 00:15:26,680 --> 00:15:29,720 Speaker 1: in Albany, New York. Hugh, thank you so much for 277 00:15:29,800 --> 00:15:32,600 Speaker 1: joining us. So do you agree with the assessment that 278 00:15:32,760 --> 00:15:36,560 Speaker 1: the warning signs of some kind of broader deterioration in 279 00:15:36,680 --> 00:15:41,360 Speaker 1: markets is imminent. There's certainly some some warning signs when 280 00:15:41,360 --> 00:15:44,680 Speaker 1: you start to look at the performance of sectors, for example, 281 00:15:44,720 --> 00:15:47,800 Speaker 1: and you see that utility stocks have been performing very well. 282 00:15:48,360 --> 00:15:51,320 Speaker 1: That's ordinarily a very defensive sector of the market and 283 00:15:51,360 --> 00:15:54,640 Speaker 1: actually the best performing sector of the market during bear markets. 284 00:15:55,320 --> 00:15:57,680 Speaker 1: You also see, of course, large cap stocks. I think 285 00:15:57,680 --> 00:15:59,920 Speaker 1: it can be explained away, but large cap stocks out 286 00:16:00,120 --> 00:16:02,560 Speaker 1: forming small and mid cap stocks. And you see a 287 00:16:02,600 --> 00:16:05,160 Speaker 1: number of things in the credit markets, such as quality 288 00:16:05,200 --> 00:16:08,080 Speaker 1: spreads opening up a little bit, uh not much, but 289 00:16:08,120 --> 00:16:10,120 Speaker 1: a little bit. So you do see some signs, but 290 00:16:10,200 --> 00:16:13,760 Speaker 1: I think overwhelmingly if you take a look further back 291 00:16:13,800 --> 00:16:15,720 Speaker 1: towards the election, if you take a look at the 292 00:16:16,400 --> 00:16:20,120 Speaker 1: complete picture, which includes not just the signals coming from 293 00:16:20,160 --> 00:16:25,280 Speaker 1: the markets, but also important economic and monetary numbers. For example, 294 00:16:25,360 --> 00:16:30,080 Speaker 1: bank lending, money, growth, liquidity, leading indicators for the economy, 295 00:16:30,120 --> 00:16:31,800 Speaker 1: they say that we are further to go go in the 296 00:16:31,840 --> 00:16:34,760 Speaker 1: current cycle. So, yeah, you can be worried. You always 297 00:16:34,800 --> 00:16:36,720 Speaker 1: can be a little bit worried, as you know, Lisa, 298 00:16:36,800 --> 00:16:40,120 Speaker 1: But I think that you'd be probably overstating the worrieds 299 00:16:40,240 --> 00:16:43,280 Speaker 1: by moving to too much towards cash or a very 300 00:16:43,320 --> 00:16:47,160 Speaker 1: defensive beer market position. Hugh, can you be bullish on 301 00:16:47,240 --> 00:16:50,440 Speaker 1: stocks and accept the possibility that there will be no 302 00:16:50,800 --> 00:16:54,040 Speaker 1: tax reform bill, that there will be no change in 303 00:16:54,520 --> 00:16:58,240 Speaker 1: financial regulations at least as far as approval from the 304 00:16:58,280 --> 00:17:01,120 Speaker 1: Congress is concerned. I'm not talking about executive actions here. 305 00:17:01,280 --> 00:17:03,880 Speaker 1: I can be very bullish on stocks PIM, but I 306 00:17:03,920 --> 00:17:08,680 Speaker 1: can be very concerned about valuation. Uh, they're really evaluation 307 00:17:08,720 --> 00:17:10,439 Speaker 1: when you know, you know, and I know, and I 308 00:17:10,480 --> 00:17:12,760 Speaker 1: think we all kind of know are since that the 309 00:17:12,760 --> 00:17:14,960 Speaker 1: economy is growing at a very slow pace, And when 310 00:17:14,960 --> 00:17:17,359 Speaker 1: you take that, it doesn't give you the kind of 311 00:17:17,400 --> 00:17:20,919 Speaker 1: earnings numbers that would really justify the current levels of stocks, 312 00:17:20,960 --> 00:17:24,359 Speaker 1: or might say we're fairly valued, but the upside potential 313 00:17:24,440 --> 00:17:27,480 Speaker 1: is fairly limited. So something has to happen to give 314 00:17:27,560 --> 00:17:29,600 Speaker 1: us the kind of earnings that we really need to 315 00:17:29,640 --> 00:17:32,240 Speaker 1: get the market to go on the upside. One of 316 00:17:32,240 --> 00:17:34,560 Speaker 1: the two things would be, of course, tax reform that 317 00:17:34,560 --> 00:17:36,440 Speaker 1: would give us a little bit of a lift to 318 00:17:36,600 --> 00:17:39,119 Speaker 1: corporate profits and U S and P five earnings. But 319 00:17:39,240 --> 00:17:42,120 Speaker 1: quite frankly, you know, if you reduce the corporate rate 320 00:17:42,200 --> 00:17:46,520 Speaker 1: to two to it gives you some upside from the 321 00:17:46,560 --> 00:17:49,640 Speaker 1: current level, and it gives you some better earnings eight 322 00:17:49,680 --> 00:17:52,840 Speaker 1: percent instead of six percent through two eighteen, but not 323 00:17:52,840 --> 00:17:56,000 Speaker 1: not quite, not a whole lot. Uh. The The real 324 00:17:56,080 --> 00:17:58,920 Speaker 1: thing that has to happen is that the consensus forecast 325 00:17:58,960 --> 00:18:02,080 Speaker 1: for earnings, which is much brighter than I think that 326 00:18:02,160 --> 00:18:07,720 Speaker 1: the economic forecast will allow. Statistically, the consensus forecast is 327 00:18:08,080 --> 00:18:11,040 Speaker 1: really optimistic. If you get that, you can make the 328 00:18:11,080 --> 00:18:14,359 Speaker 1: case for higher stock prices. So I'd be bullish, but 329 00:18:14,480 --> 00:18:18,040 Speaker 1: I'd be very concerned or worried or concerned about the valuations. 330 00:18:18,359 --> 00:18:21,120 Speaker 1: So what's your heads right now? Well, my heade right 331 00:18:21,119 --> 00:18:23,040 Speaker 1: now is I'm not buying to the real hedge is 332 00:18:23,080 --> 00:18:25,679 Speaker 1: not buying any stocks at current levels. I'm maintaining or 333 00:18:25,720 --> 00:18:29,520 Speaker 1: preserving my current you know, allocation to equities. For an 334 00:18:29,560 --> 00:18:32,680 Speaker 1: account or a portfolio that says, let me have fifty 335 00:18:33,080 --> 00:18:36,120 Speaker 1: and equities and the balance being in fixed income, I'm 336 00:18:36,200 --> 00:18:39,560 Speaker 1: about six. The question is what I add to that 337 00:18:39,680 --> 00:18:43,760 Speaker 1: portfolio at current levels. And given those concerns about valuation 338 00:18:44,000 --> 00:18:46,960 Speaker 1: uncertainty about valuation, I have to say that no. Look, 339 00:18:47,600 --> 00:18:49,600 Speaker 1: I look for a better entry point, and a better 340 00:18:49,720 --> 00:18:52,040 Speaker 1: entry point would be somewhere, be in the neighborhood of 341 00:18:52,480 --> 00:18:55,560 Speaker 1: four to seven percent below current levels. And I think 342 00:18:55,560 --> 00:18:57,600 Speaker 1: you know, with the volatility of the news that we're 343 00:18:57,600 --> 00:19:02,160 Speaker 1: getting the international news, particularly North Korea, things like that 344 00:19:02,480 --> 00:19:04,720 Speaker 1: could touch off a correction which would get us down 345 00:19:04,720 --> 00:19:06,560 Speaker 1: to levels that make much more sense. We've got to 346 00:19:06,600 --> 00:19:10,760 Speaker 1: have a better, better entry point, Lisa, what if you're 347 00:19:10,800 --> 00:19:13,400 Speaker 1: an investor who is willing to take on more risk? 348 00:19:13,560 --> 00:19:16,600 Speaker 1: What would you recommend if someone wants to put the 349 00:19:16,600 --> 00:19:18,639 Speaker 1: pedal to the metal and says, you know what, I 350 00:19:18,680 --> 00:19:22,080 Speaker 1: think this is going higher and I really want to participate. Well, 351 00:19:22,119 --> 00:19:24,239 Speaker 1: we've got plenty of clients that are just like that. 352 00:19:24,600 --> 00:19:26,480 Speaker 1: Most of them right now are a little bit cautious, 353 00:19:26,520 --> 00:19:29,639 Speaker 1: which is sort of surprises me given the performance of 354 00:19:29,680 --> 00:19:31,480 Speaker 1: the markets. But if they want pedal to the metal, 355 00:19:31,880 --> 00:19:34,119 Speaker 1: and the first thing I'd say is, look, you know, 356 00:19:34,240 --> 00:19:38,360 Speaker 1: don't don't don't have a your guidelines, say fifty stocks, 357 00:19:38,359 --> 00:19:41,240 Speaker 1: fifty percent bonds. You know, give give me a little 358 00:19:41,240 --> 00:19:44,360 Speaker 1: bit more room, say that, raise your target for equities, 359 00:19:45,560 --> 00:19:48,840 Speaker 1: in which case I'd probably be up around in stock. 360 00:19:48,920 --> 00:19:51,080 Speaker 1: So it's really up to the client to say, if 361 00:19:51,119 --> 00:19:53,080 Speaker 1: I want pedal to the metal, I want to raise 362 00:19:53,119 --> 00:19:55,879 Speaker 1: my allocation equities or my target, and I would be 363 00:19:55,920 --> 00:19:59,120 Speaker 1: raising it from fifty eight. And then if you want 364 00:19:59,119 --> 00:20:02,120 Speaker 1: to do something, oh about that. You buy the kinds 365 00:20:02,119 --> 00:20:04,439 Speaker 1: of things that really work in bowl markets. And of 366 00:20:04,440 --> 00:20:08,560 Speaker 1: course technology has been a great performer, great relative performance, 367 00:20:08,880 --> 00:20:11,840 Speaker 1: and there's a lot of companies in the technology sector, 368 00:20:12,600 --> 00:20:15,119 Speaker 1: well known names, which are the kinds of stocks that 369 00:20:15,200 --> 00:20:17,680 Speaker 1: you want to own in the portfolio. And you might 370 00:20:17,760 --> 00:20:19,840 Speaker 1: buy some small cap but believe me, that has not 371 00:20:19,920 --> 00:20:22,440 Speaker 1: been performing well. C Is there any asset that you're 372 00:20:22,440 --> 00:20:25,840 Speaker 1: selling right now? Uh? No, there's no asset that I'm 373 00:20:25,840 --> 00:20:28,639 Speaker 1: really selling other than the fact that I'm reducing my 374 00:20:28,720 --> 00:20:32,480 Speaker 1: exposure as best I can uh to fixed income because 375 00:20:32,560 --> 00:20:35,840 Speaker 1: my expectation is we've got higher rates. I don't think 376 00:20:35,880 --> 00:20:37,639 Speaker 1: I'm the first person to say that. In fact, I've 377 00:20:37,680 --> 00:20:39,440 Speaker 1: been saying it for four years and haven't really gotten 378 00:20:39,440 --> 00:20:42,080 Speaker 1: a whole lot of it. But nevertheless, I really think 379 00:20:42,080 --> 00:20:44,280 Speaker 1: that the handwritings on the wall of it's going to 380 00:20:44,320 --> 00:20:47,280 Speaker 1: move towards restraint in response to that short long rates 381 00:20:47,320 --> 00:20:49,240 Speaker 1: going up. So it's not so much that I'm bailing 382 00:20:49,280 --> 00:20:53,159 Speaker 1: out of fixed income, but I'm really reducing my duration 383 00:20:53,280 --> 00:20:56,160 Speaker 1: or maturities or however you want to say it. UM 384 00:20:56,720 --> 00:20:59,320 Speaker 1: in fixed income securities, I'm trying to avoid it, and 385 00:20:59,359 --> 00:21:03,040 Speaker 1: then I'm avoid things like um, you know, consumer staples. 386 00:21:03,400 --> 00:21:06,320 Speaker 1: I really don't like it as a defensive sector. Uh, 387 00:21:06,359 --> 00:21:10,800 Speaker 1: telecommunications avoiding it. It's a very defensive sector. You want 388 00:21:10,840 --> 00:21:13,000 Speaker 1: maybe on a little bit there, but you want to 389 00:21:13,080 --> 00:21:16,600 Speaker 1: underweight that those are defensive sectors. They don't work in ballmarkets. 390 00:21:16,600 --> 00:21:19,800 Speaker 1: Just it's that simple. You've heard a lot of shure 391 00:21:19,800 --> 00:21:22,760 Speaker 1: about the emerging markets, people trying to move money outside 392 00:21:22,800 --> 00:21:26,200 Speaker 1: the United States. You buy that trade, I do. I do. 393 00:21:26,359 --> 00:21:29,680 Speaker 1: We've done that recently, you know, for the longest time 394 00:21:29,880 --> 00:21:33,720 Speaker 1: of him. As you know, the international markets generally emerging 395 00:21:34,119 --> 00:21:38,280 Speaker 1: and developed just significantly underperformed US markets. And I mean 396 00:21:38,320 --> 00:21:42,280 Speaker 1: I'm talking about ten years so more recently, and I 397 00:21:42,320 --> 00:21:45,080 Speaker 1: really mean this year two thousand and seventeen, we've seen 398 00:21:45,119 --> 00:21:48,960 Speaker 1: positive relative performance in response to improving economic numbers and 399 00:21:49,000 --> 00:21:51,320 Speaker 1: earnings numbers coming from other parts of the world. So 400 00:21:51,800 --> 00:21:55,280 Speaker 1: we've raised our exposure to international We raised it from 401 00:21:55,280 --> 00:21:58,639 Speaker 1: a very low, almost non existent number, up to seven 402 00:21:58,640 --> 00:22:01,000 Speaker 1: to ten percent of a portolio that that of the 403 00:22:01,040 --> 00:22:03,600 Speaker 1: equities in a portfolio. That doesn't sound like a lot, 404 00:22:03,960 --> 00:22:06,720 Speaker 1: that sounds like a fairly low allocation, but it's pretty 405 00:22:06,960 --> 00:22:09,840 Speaker 1: pretty meaningful change for US. So yeah, I do buy it. 406 00:22:09,960 --> 00:22:14,320 Speaker 1: I buy I buy buying the emerging as well as developing, 407 00:22:14,359 --> 00:22:16,800 Speaker 1: and but be a little bit careful. I won't warn 408 00:22:16,880 --> 00:22:19,280 Speaker 1: everybody to be a little bit careful about China, where 409 00:22:19,280 --> 00:22:22,280 Speaker 1: we have debt levels that, as you know, are not 410 00:22:22,400 --> 00:22:24,200 Speaker 1: at all low. There's a lot of risk, a lot 411 00:22:24,200 --> 00:22:26,720 Speaker 1: of leverage, and a lot of risk in China. It 412 00:22:26,800 --> 00:22:29,399 Speaker 1: sounds like a little bit of treading water at this point, 413 00:22:29,440 --> 00:22:32,520 Speaker 1: waiting for something to happen. Yeah, yeah, it's something that happened. 414 00:22:32,520 --> 00:22:34,639 Speaker 1: At least, then I think what I'd love to see happen, 415 00:22:34,680 --> 00:22:36,480 Speaker 1: and I've been waiting a long time for this. We 416 00:22:36,520 --> 00:22:40,360 Speaker 1: haven't gotten it yet. Is really the decline in stocks 417 00:22:40,400 --> 00:22:44,000 Speaker 1: to levels that make a lot more sense. Valuation continues 418 00:22:44,040 --> 00:22:46,480 Speaker 1: to be a very big concern. And then you have 419 00:22:46,560 --> 00:22:49,280 Speaker 1: to say that primarily because you try to make the 420 00:22:49,320 --> 00:22:53,919 Speaker 1: case for better economy, better earning, stronger economy, stronger earnings, 421 00:22:54,000 --> 00:22:56,640 Speaker 1: and you can't do it. It's it's two to two 422 00:22:56,720 --> 00:22:59,679 Speaker 1: point three growth in the economy and under those conditions 423 00:23:00,320 --> 00:23:02,080 Speaker 1: you don't get the kind of earning. Such a really 424 00:23:02,080 --> 00:23:06,359 Speaker 1: neat Thank you, Hugh Johnson, well said Chairman, chief investment 425 00:23:06,400 --> 00:23:09,560 Speaker 1: officer Hugh Johnson Advisors, helping to manage more than one 426 00:23:09,600 --> 00:23:16,760 Speaker 1: point to billion dollars and joining us from Albany, New York. 427 00:23:25,720 --> 00:23:29,280 Speaker 1: US second quarter growth was revised upwards, suggesting there is 428 00:23:29,320 --> 00:23:32,320 Speaker 1: more momentum than some people have been expecting. Uh in 429 00:23:32,400 --> 00:23:35,720 Speaker 1: the US economy. Of course, there still is a huge 430 00:23:35,800 --> 00:23:39,080 Speaker 1: question of what the damages and the ongoing fallout from 431 00:23:39,160 --> 00:23:43,040 Speaker 1: Hurricane Harvey will do, as well as to turmoil in Washington, 432 00:23:43,119 --> 00:23:46,440 Speaker 1: and how much this will crimp future growth here. To 433 00:23:46,440 --> 00:23:48,240 Speaker 1: give us a better sense of that is Carla Kadonna 434 00:23:48,520 --> 00:23:52,600 Speaker 1: of course, our chief US economist for Bloomberg Intelligence, and 435 00:23:52,640 --> 00:23:55,399 Speaker 1: he joins us here in our eleven three oh studios, Carl. 436 00:23:56,320 --> 00:24:00,639 Speaker 1: How much of an effect will Hurricane Harvey have on 437 00:24:01,000 --> 00:24:04,119 Speaker 1: GDP in the US? Well, of course, there's a a 438 00:24:04,200 --> 00:24:10,200 Speaker 1: tremendous localized impact. Houston is the fourth largest metropolitan area, UH, 439 00:24:10,200 --> 00:24:16,160 Speaker 1: and we should see a range of economic data series impacted. However, 440 00:24:17,040 --> 00:24:20,200 Speaker 1: when we look at the national aggregate and look at 441 00:24:20,280 --> 00:24:25,280 Speaker 1: GDP UH impacts around the times of other major storms 442 00:24:25,680 --> 00:24:30,360 Speaker 1: via Katrina or Sandy or whatnot, UH, there's not likely 443 00:24:30,440 --> 00:24:33,400 Speaker 1: to be a huge national impact. And and here's part 444 00:24:33,400 --> 00:24:36,359 Speaker 1: of the reason why. Well, first of all, Houston is 445 00:24:36,400 --> 00:24:38,960 Speaker 1: only the fourth largest city, so the rest of you know, 446 00:24:39,280 --> 00:24:42,520 Speaker 1: much of the rest of the country can step in 447 00:24:43,040 --> 00:24:46,080 Speaker 1: uh to UH replace the production that may have been 448 00:24:46,119 --> 00:24:49,600 Speaker 1: taken off offline in Houston in some regards now, certainly 449 00:24:49,640 --> 00:24:52,080 Speaker 1: with you know, pipelines and oil refineries, that's not the case. 450 00:24:52,160 --> 00:24:55,560 Speaker 1: But in some other industries there can be some catch up. 451 00:24:56,080 --> 00:24:58,080 Speaker 1: But the other part of the story is here we 452 00:24:58,119 --> 00:25:01,840 Speaker 1: are in August, obviously, which means that there will be 453 00:25:01,880 --> 00:25:06,199 Speaker 1: a full month of rebuilding and reinvestment and repair and 454 00:25:06,280 --> 00:25:11,560 Speaker 1: replacement of the capital stock, which will actually lift economic activities. 455 00:25:11,560 --> 00:25:16,120 Speaker 1: So hurricanes have a tremendous negative impact on the capital stock, 456 00:25:16,840 --> 00:25:20,439 Speaker 1: but that stock not flow. GDP measures the flow of 457 00:25:20,480 --> 00:25:24,840 Speaker 1: production in the economy. Uh, and so GDP will actually 458 00:25:24,920 --> 00:25:30,119 Speaker 1: be partly boosted by the recovery efforts. One thing that 459 00:25:30,320 --> 00:25:32,680 Speaker 1: caught my eye this morning there was a report saying 460 00:25:32,720 --> 00:25:36,080 Speaker 1: that more than eight percent of the people who have 461 00:25:36,200 --> 00:25:39,640 Speaker 1: lost their homes to flooding in Houston do not have 462 00:25:39,880 --> 00:25:42,840 Speaker 1: flood insurance. And I have to wonder. I understand the 463 00:25:42,880 --> 00:25:47,720 Speaker 1: point that rebuilding creates some kind of economic growth, at 464 00:25:47,720 --> 00:25:51,120 Speaker 1: the same time, couldn't there potentially be a real hit 465 00:25:51,560 --> 00:25:55,560 Speaker 1: to the wealth of these individuals and their families. Absolutely, 466 00:25:55,560 --> 00:25:59,080 Speaker 1: there will be a wealth impact due to the unfortunate 467 00:25:59,119 --> 00:26:04,000 Speaker 1: circumstances of folks not being uh properly or adequately ensured, 468 00:26:04,000 --> 00:26:06,919 Speaker 1: whether it's their house or or other personal property like 469 00:26:06,960 --> 00:26:10,840 Speaker 1: autos and whatnot. However, those items will have to be 470 00:26:10,880 --> 00:26:13,879 Speaker 1: replaced as life goes on, and uh, you know, perhaps 471 00:26:13,880 --> 00:26:15,720 Speaker 1: they'll be renters for some time. But there will be 472 00:26:15,760 --> 00:26:19,399 Speaker 1: a big demand obviously for housing stock in and around 473 00:26:19,400 --> 00:26:21,680 Speaker 1: the Houston area, and there will be a big demand 474 00:26:21,720 --> 00:26:25,840 Speaker 1: for replacement of autos and those are UH, those will 475 00:26:25,880 --> 00:26:29,720 Speaker 1: lift the economic activity. So we have some period where 476 00:26:30,040 --> 00:26:32,199 Speaker 1: part of the economy is taken offline and that's a 477 00:26:32,240 --> 00:26:35,919 Speaker 1: negative for GDP, but then the restoration efforts tend to 478 00:26:36,480 --> 00:26:40,000 Speaker 1: largely offset that. And this is consistent with what we 479 00:26:40,040 --> 00:26:43,800 Speaker 1: have seen around other major natural disasters. Carl, I wonder 480 00:26:43,800 --> 00:26:46,640 Speaker 1: if you could just comment on the second quarter GDP 481 00:26:46,920 --> 00:26:51,679 Speaker 1: revisions that we've received and also what that might portend 482 00:26:51,800 --> 00:26:54,240 Speaker 1: for future performance of the economy for the rest of 483 00:26:54,240 --> 00:26:57,240 Speaker 1: the year. Absolutely, so when you say revisions, a lot 484 00:26:57,280 --> 00:27:01,679 Speaker 1: of folks immediately tune out or or turn turn the 485 00:27:01,720 --> 00:27:07,680 Speaker 1: volume down. However, UH, these revisions were relatively interesting. So 486 00:27:07,760 --> 00:27:11,600 Speaker 1: while we saw much stronger than expected performance in the 487 00:27:11,640 --> 00:27:13,919 Speaker 1: second quarter, so we went from two point six percent 488 00:27:13,960 --> 00:27:16,879 Speaker 1: all the way up to three percent growth, but it 489 00:27:16,920 --> 00:27:20,520 Speaker 1: wasn't all revisions. There was also new information on corporate 490 00:27:20,560 --> 00:27:24,680 Speaker 1: profits UH, and so we saw corporate profits increase one 491 00:27:24,720 --> 00:27:28,080 Speaker 1: point three percent UH in the second quarter. That was 492 00:27:28,119 --> 00:27:30,639 Speaker 1: after a negative reading in the first quarter. UH. And 493 00:27:30,640 --> 00:27:32,359 Speaker 1: it's even more impressive if we look at it in 494 00:27:32,480 --> 00:27:35,399 Speaker 1: year in year terms, and this tells us that corporate 495 00:27:35,480 --> 00:27:39,840 Speaker 1: profit gains are in fact the accelerating but this is 496 00:27:39,880 --> 00:27:42,840 Speaker 1: relevant because we were in a corporate profits recession for 497 00:27:42,920 --> 00:27:47,720 Speaker 1: much of sixteen. So the rebounding profits tells us that 498 00:27:47,800 --> 00:27:50,480 Speaker 1: the economy is on firmer footing UH. And this will 499 00:27:50,520 --> 00:27:55,280 Speaker 1: support hiring gains and also business investment decisions. UH. And 500 00:27:55,280 --> 00:27:58,760 Speaker 1: so we have an economy that's accelerating, you have corporate 501 00:27:58,760 --> 00:28:01,440 Speaker 1: profits as a backs up, and this creates a positive 502 00:28:01,480 --> 00:28:05,080 Speaker 1: feedback loop. And so for just a secondly, for this reason, 503 00:28:05,119 --> 00:28:08,240 Speaker 1: I think that a FED funds rate increase still is 504 00:28:08,359 --> 00:28:11,600 Speaker 1: very much a possibility for your end. And also this 505 00:28:11,680 --> 00:28:15,119 Speaker 1: is going to increase capacity constraints in the economy and 506 00:28:15,200 --> 00:28:21,280 Speaker 1: potentially drive this much awaited, UH sluggish period of productivity growth. 507 00:28:21,400 --> 00:28:24,639 Speaker 1: We may finally see the rebound. In response to this, Carl, 508 00:28:24,640 --> 00:28:27,320 Speaker 1: this shouldn't come as a surprise to anybody. Anyone who's 509 00:28:27,320 --> 00:28:29,760 Speaker 1: been following earnings and anybody who's seen with the stock 510 00:28:29,800 --> 00:28:32,639 Speaker 1: market has done in response shouldn't be surprised that corporate 511 00:28:32,680 --> 00:28:36,480 Speaker 1: profits are better. Does this change your view at all? Well, 512 00:28:36,560 --> 00:28:39,840 Speaker 1: this makes me a little bit more confident in our 513 00:28:39,880 --> 00:28:43,040 Speaker 1: above consensus forecast for economic growth in the back half 514 00:28:43,080 --> 00:28:44,960 Speaker 1: of the year. So the profit story is positive, but 515 00:28:45,000 --> 00:28:47,760 Speaker 1: also the main driver of the upward revision of g 516 00:28:47,880 --> 00:28:50,840 Speaker 1: DP was consumer spending. So a lot of times when 517 00:28:50,880 --> 00:28:54,760 Speaker 1: you get us stronger than expected revisions to GDP, uh, 518 00:28:54,840 --> 00:28:57,360 Speaker 1: you'll say, well, okay, that helped the current quarter, but 519 00:28:57,720 --> 00:29:00,360 Speaker 1: it's going to take away from future quarters. That was 520 00:29:00,400 --> 00:29:02,840 Speaker 1: not the case here. This show that there is more 521 00:29:03,000 --> 00:29:07,160 Speaker 1: underlying momentum for consumers, which have been the predominant driver 522 00:29:07,560 --> 00:29:10,920 Speaker 1: of economic growth. So uh, taking this into account, I 523 00:29:10,960 --> 00:29:15,800 Speaker 1: did not change my second half growth forecast appreciably, but 524 00:29:15,880 --> 00:29:18,440 Speaker 1: it does boost overall year on your growth just because 525 00:29:18,480 --> 00:29:20,360 Speaker 1: you had a stronger performance in the second quarter. So 526 00:29:20,400 --> 00:29:24,720 Speaker 1: we're now two point four percent for full year growth 527 00:29:24,960 --> 00:29:27,080 Speaker 1: two point four pc. And you think that the rate 528 00:29:27,120 --> 00:29:28,760 Speaker 1: increase is still on the table for the FED. I 529 00:29:28,760 --> 00:29:31,160 Speaker 1: think the rate increase is still on the table. So uh, 530 00:29:31,240 --> 00:29:33,320 Speaker 1: the FED and a number of FED speakers have said 531 00:29:33,320 --> 00:29:37,360 Speaker 1: they need to see inflation rebounding. If we're seeing a 532 00:29:37,560 --> 00:29:41,600 Speaker 1: material sustained upshift and economic growth, policy makers will have 533 00:29:41,640 --> 00:29:44,560 Speaker 1: the confidence that inflation is going to follow suit. Thank 534 00:29:44,600 --> 00:29:47,560 Speaker 1: you very much, Always a pleasure. Carl Rick Odonna joining 535 00:29:47,600 --> 00:29:51,320 Speaker 1: us as the chief US economist for Bloomberg Intelligence. You 536 00:29:51,360 --> 00:29:57,280 Speaker 1: can follow him on Twitter at riconomics, reckonomics. Well it 537 00:29:57,400 --> 00:30:00,280 Speaker 1: rolls off the tongue, doesn't it? All right? Thanks very much, comic, 538 00:30:00,480 --> 00:30:04,000 Speaker 1: well done, well done. Thanks for listening to the Bloomberg 539 00:30:04,080 --> 00:30:06,720 Speaker 1: P and L podcast. You can subscribe and listen to 540 00:30:06,760 --> 00:30:11,280 Speaker 1: interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. 541 00:30:11,680 --> 00:30:15,280 Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm 542 00:30:15,280 --> 00:30:18,600 Speaker 1: on Twitter at Lisa Abramo wits one. Before the podcast, 543 00:30:18,640 --> 00:30:21,240 Speaker 1: you can always catch us worldwide on Bloomberg Radio