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Speaker 3: All right, now, let's get to those minutes from that
Speaker 3: last FED meeting, which was, of course March twentieth. We
Speaker 3: want to head over to Bloomberg News International Economics and
Speaker 3: Policy correspondent Michael McKee. Mike is live in Washington, DC
Speaker 3: at the Federal Reserve.
Speaker 4: Mike Well, recent data, including today's CPI reports, have eclipsed
Speaker 4: the value of the Minutes in terms of monetary policy.
Speaker 4: They show, as expected, great concern and uncertainty among officials
Speaker 4: about the path of inflation, the outlook for the labor
Speaker 4: market and growth. Participants generally noted their uncertainty about the
Speaker 4: persistence of high inflation the Minute say, and expressed the
Speaker 4: view that recent data did not increase their confidence that
Speaker 4: inflation was moving sustainably down to two percent. Of course,
Speaker 4: today's CPI reading will contribute to that. There was even
Speaker 4: some disagreement about rate cuts this year. Almost all participants
Speaker 4: judged that it would be appropriate to move policy to
Speaker 4: a less restrictive stance at some point this year. Almost
Speaker 4: all is fed speak for all but one or two,
Speaker 4: so at least a couple of people disagreed. The news
Speaker 4: in the minutes actually comes from the committee's discussion of
Speaker 4: the balance sheet. The staff presented a number of scenarios
Speaker 4: for reducing the six point nine trillion dollar level of holdings.
Speaker 4: The participants generally favored reducing the monthly pace of treasury
Speaker 4: holdings runoff by a roughly half of the sixty billion
Speaker 4: a month current cap. Because mortgage bound runoff runs well
Speaker 4: below the thirty five billion dollar monthly cap, the participants
Speaker 4: saw no need to trim that. The participants judged it
Speaker 4: would be prudent to begin slowing the pace of runoff
Speaker 4: fairly soon, because there was great concern about repeating the
Speaker 4: experience of twenty nineteen when runoff went too far disrupting
Speaker 4: money markets. A few participants indicated they preferred to continue
Speaker 4: with the current pace of balance sheet runoff until market
Speaker 4: indicators begin to show signs that reserves are approaching an
Speaker 4: ample level. Now no decisions were made, but it does
Speaker 4: sound a little bit like we might see the FED
Speaker 4: start to trim its reserve holdings and slow QT before
Speaker 4: we even get rate cuts.
Speaker 3: So Mike, we're going to give you a moment just
Speaker 3: to think about all those headlines. But just real quickly,
Speaker 3: let's update everybody on the market. You've got the S
Speaker 3: and P five hundred still down about fifty one points,
Speaker 3: so just shy of one percent. Here the Nasdaq one
Speaker 3: hundred a decline of one hundred and seventy six points,
Speaker 3: so it too is shy of a one percent decline,
Speaker 3: but definitely off some of the earlier levels that we
Speaker 3: saw today. And you still have what a ten year
Speaker 3: tim that's at four point fifty two, and looking at
Speaker 3: the shorter end of the yeld curve, most sensitive often
Speaker 3: to what the FED might do, and you're looking at
Speaker 3: a two year net with the yield of four at
Speaker 3: ninety three.
Speaker 5: Ye that's right, that two year yield up nineteen point
Speaker 5: seven basis points and the ten year yield up sixteen
Speaker 5: point eight basis points as we speak, Hey, Mike McKey,
Speaker 5: I want to talk a little bit about the data
Speaker 5: that we've gotten since the latest FED meeting. The hotter
Speaker 5: than expected jobs report, the hotter than expected CPI report,
Speaker 5: in your mind, does that change at all what these
Speaker 5: members of the Federal Reserve see as the path to
Speaker 5: cut rates moving forward.
Speaker 4: Well, it's a good question. We can look back three
Speaker 4: weeks and see what they saw then, and there was
Speaker 4: great uncertainty then, but they were leaning in the direction
Speaker 4: of still being able to cut rates this year and
Speaker 4: still thinking that disinflation would continue. Those lines are in
Speaker 4: the minutes, but now that may not be the case.
Speaker 4: They were looking then at January and February numbers that
Speaker 4: suggested to them that there might have been some seasonality problems,
Speaker 4: there might have been some problems with the way the
Speaker 4: data were put together. But today you have a third
Speaker 4: CPI reading that suggests that no, there is a stickiness
Speaker 4: to inflation that they hadn't counted on. We won't get
Speaker 4: a complete read at the May first meeting because they
Speaker 4: don't put out a new summary of economic projections and
Speaker 4: they don't do a new dot plot. But I'm fairly
Speaker 4: certain that between now and then, and of course between
Speaker 4: now and the June meeting, we will hear a lot
Speaker 4: from them about the possibility of holding back.
Speaker 3: All right, Mike, as you stated, and as we went
Speaker 3: through those headlines, those FOMC meeting minutes from that March nineteenth,
Speaker 3: twentieth meeting, I'm just looking to you at our right
Speaker 3: throw right through, if you will, showed almost all official
Speaker 3: judging it would be appropriate to begin lowering boring costs
Speaker 3: at some point this year. Again, that caveat inflation data
Speaker 3: since then has upended expectations for three interest rate cuts
Speaker 3: this year. Could those expectations in terms of rate cuts
Speaker 3: continue to be upended if the data continues to come
Speaker 3: in strong, particularly the inflation data.
Speaker 4: Oh certainly, I mean we've seen that in the markets
Speaker 4: today now. We at least when we went into the
Speaker 4: minutes lock up, the betting was that there would be
Speaker 4: no rate cuts until November. So we're starting to see
Speaker 4: this pushed out. And of course, before the FED began
Speaker 4: its meetings, we'd heard a number of people say that,
Speaker 4: or since they began, we've heard a number of members
Speaker 4: say that they might think we would do fewer rate cuts.
Speaker 4: Of course, off Albostic saying that he was in favorab
Speaker 4: only one Neil Cashkari saying there is a possibility they
Speaker 4: wouldn't do any So the markets are now going to
Speaker 4: be perhaps positioned for the idea of few or no
Speaker 4: rate cuts this year going forward.
Speaker 5: They were certainly seeing something that play out in the
Speaker 5: rates market. The front end of the yield curve two
Speaker 5: year higher by twenty basis points right now, the ten
Speaker 5: year higher by seventeen basis points. I want to bring
Speaker 5: in Ira Jersey, who's standing by in our Bloomberg Intelligence
Speaker 5: headquarters in Princeton, New Jersey. He's chief interest rates strategist
Speaker 5: here at Bloomberg Intelligence. Ira, when you see yields shoot
Speaker 5: up like this across the curve, what's the signal that
Speaker 5: it's sending you about the path of interest rate policy
Speaker 5: for the remainder of the year.
Speaker 6: Well, it's up because of the path of industry policy. Right,
Speaker 6: So when you look at the when you look at
Speaker 6: the short term interest rate markets, you know, we've been
Speaker 6: pricing out more and more of those six six or
Speaker 6: seven twenty five base point interest rate cuts that were
Speaker 6: priced in a couple of months ago. And when you
Speaker 6: keep on getting this relatively strong data, it's hard to
Speaker 6: kind of get in front of that. And you know
Speaker 6: think that the Federal Reserve is going to be able
Speaker 6: to cut rates, you know, you know, there's a whole
Speaker 6: group of investors who are concerned that the Federal Reserve
Speaker 6: may actually have to increase interest rates. That from some
Speaker 6: former policy officials as well. I personally am not in
Speaker 6: the camp that thinks that they necessarily have to increase
Speaker 6: interest rates in order to slow the economy. But but
Speaker 6: the idea because and one of the reasons is is
Speaker 6: that first you have to get rid of all these
Speaker 6: cuts that are being priced into the market, and doing that,
Speaker 6: you are effectively tightening monetary policy. Because the you know,
Speaker 6: longer term interest rates are now higher than they were
Speaker 6: just a couple of weeks ago. So you know, there's
Speaker 6: a lot of data and information that came out today
Speaker 6: and that including a pretty bad actually the worst tenure
Speaker 6: auction that we've had in about two years. So you
Speaker 6: know that that was a the astounding, you know, revelation
Speaker 6: that demand just isn't very strong.
Speaker 3: Could is that because investors assume that it's going to
Speaker 3: go even higher in terms of the rate the rate outlook?
Speaker 7: You think that's part of it.
Speaker 6: I think it was also Yet you know, you know,
Speaker 6: obviously you had Carol, you had the really you know,
Speaker 6: good inflation number. This more high inflation number this morning,
Speaker 6: which was bad for the market and keyed off the
Speaker 6: sell off. I think also, you know, it was an
Speaker 6: hour before we got the minutes that you I still
Speaker 6: am only about a quarter of the way he finished reading,
Speaker 6: so we have, you know, so it's hard to get
Speaker 6: in front of some of that news cycle. There was
Speaker 6: also a lot more market risk today. So yesterday's three
Speaker 6: year auction was okay, but today's tenure was absolutely bysmal.
Speaker 6: Tomorrow we have thirty year bonds. It'll be really interesting
Speaker 6: to see if people say, oh, look at these higher
Speaker 6: yields at four point six percent, four point seven percent
Speaker 6: wherever we end up at auction time tomorrow, is that
Speaker 6: going to draw in some buyers just thinking, hey, I
Speaker 6: want to get these yields while I can, Or are
Speaker 6: they going to stay away because they are worried that, hey,
Speaker 6: inflation is going to remain kind of at these reasonably
Speaker 6: high levels and the Fed's going to be on hold,
Speaker 6: so I can get even better returns later if I
Speaker 6: just wait a little bit.
Speaker 8: Well.
Speaker 3: One of the former officials Treasury, former Treasury Secretory Larry Summer,
Speaker 3: saying that hot US consumer price inflation report for March
Speaker 3: means that the risk case of the next FED move
Speaker 3: is to move to be an increase must be taken seriously.
Speaker 3: He also talked about the idea of a rate cut.
Speaker 3: Here's what he said earlier on Bloomberg.
Speaker 9: A rate cut in June. It seems to me would
Speaker 9: be a dangerous and egregious error, comparable to the errors
Speaker 9: the FED was making in the summer of twenty twenty
Speaker 9: one when it just didn't get the thread on inflation.
Speaker 3: Mike, I want to bring you in one last question
Speaker 3: from you. Would it be a dangerous and egregious era
Speaker 3: if the FED did any kind of rate cut in
Speaker 3: gum Based on what you're seeing.
Speaker 4: Well, dangerous and egregious might be a little strong words
Speaker 4: for it, but I don't think the FED is going
Speaker 4: to be rushing into anything like that. Remember, what we're
Speaker 4: seeing is the markets move, and commentators talking about what
Speaker 4: the markets are doing. They're not talking about what the
Speaker 4: Fed's doing, because the FED hasn't done anything. July twenty
Speaker 4: twenty three was the last time they moved interest rates,
Speaker 4: and while we've had speeches about what they may or
Speaker 4: may not do, they haven't done anything. I did want
Speaker 4: to point out one thing that might be important if
Speaker 4: you still have IRA there, and that is that they
Speaker 4: did have this discussion about the balance sheet and the
Speaker 4: idea of trimming starting to run off their balance sheet
Speaker 4: run down to about half thirty billion a month instead
Speaker 4: of sixty billion a month caps and leaving mortgages at
Speaker 4: thirty five because nobody is really prepaying at this point.
Speaker 3: Are you want to come in.
Speaker 6: On that, Yeah, that's that's almost one hundred percent of
Speaker 6: my concentration right now looking at the minutes, because it
Speaker 6: hasn't hasn't aged very well. Right, We've got a lot
Speaker 6: of information and data since that March meeting, so it's
Speaker 6: really how are they going to adjust a balance sheet? Basically,
Speaker 6: they've said that they're going to slow down the amount
Speaker 6: of treasuries that they're going to allow to run off.
Speaker 6: That's in line with what we were expecting, and I
Speaker 6: think that was more or less the consensus. There was
Speaker 6: some nuance around that, but that was broadly the consensus.
Speaker 6: You know, when they're going to start, it's still a
Speaker 6: little bit unclear, but it's probably going to be sooner
Speaker 6: rather than later. And the reason for this is that
Speaker 6: if you know bank reserves are starting to run off
Speaker 6: more quickly now that that we've seen to have found
Speaker 6: a floor for the reverse repo facility, and as reserves
Speaker 6: run off, at some point, they're going to be scarce
Speaker 6: and demand for bank reserve is going to be much
Speaker 6: higher that are out there, and that's what causes a
Speaker 6: lot of volatility like we had in September of twenty nineteen.
Speaker 6: The Fed ones to avoid that or at least be
Speaker 6: able to like, you know, turn off the you know,
Speaker 6: turn off the spickett very quickly and stop the runoff
Speaker 6: more quickly. And they don't want to go cold Turkey
Speaker 6: from sixty billion treasuries a month to zero, so they'll
Speaker 6: go from thirty to zero probably.
Speaker 3: IIRA, we have one more question for you, Mike. We
Speaker 3: know you've got a run, but we always appreciate all
Speaker 3: that you do for us in breaking this all down.
Speaker 3: Are Mike McKee there at the Federal Reserve in Washington, IRA,
Speaker 3: one more for you. I'm thinking, you know, we've got
Speaker 3: a really smart, sophisticated audience here at Bloomberg. There are
Speaker 3: those folks who are like, well, wait a minute, you know,
Speaker 3: are we getting into kind of the weeds when we
Speaker 3: talk about the balance sheet what's the significance when the
Speaker 3: FED comes out and says or that we got revealed
Speaker 3: in these minutes that the runoff they're going to start
Speaker 3: to slow it down. What's the significance of that.
Speaker 6: Yeah, I think there's an acknowledgment that the financial plumbing matters.
Speaker 6: And it's not something that prior to two thousand and
Speaker 6: seven anybody really cared about, but it's really what makes
Speaker 6: a world go round. So when you think about the
Speaker 6: repurchase agreement market, which is the market that helps fund
Speaker 6: treasury dealer desks and hedge funds and other traders in
Speaker 6: treasury securities, if that breaks, then the entire financial sector
Speaker 6: can just break down. And what underlies that kind of
Speaker 6: the grease that allows the wheels to continue turning within
Speaker 6: the short term funding markets ends up being bank reserves.
Speaker 6: So when bank reserves get down to a level that
Speaker 6: is less than what's demanded by banks, then banks suddenly
Speaker 6: have to find reserves from elsewhere, and that's what causes
Speaker 6: interest rates to spike and for the financial plumbing to
Speaker 6: start to seize up a little bit. Again, you saw
Speaker 6: that to some degree in twenty nineteen. Now the Fed's
Speaker 6: done some things to try to mitigate that, like creating
Speaker 6: the standing repurpurchase agreement facility that allows banks whenever they
Speaker 6: need it to inject reserves into the system, as opposed
Speaker 6: to the FED deciding when to do that. But this
Speaker 6: financial plumbing stuff, you cannot completely discount it. It's actually
Speaker 6: way more important than I think most people who get
Speaker 6: their MBA or you know, just study business in school
Speaker 6: or finance, they don't teach this stuff. And this is
Speaker 6: actually the stuff that really really matters to the overall
Speaker 6: market structure and functioning of markets.
Speaker 3: It's why we love having you here, all right, Ari Jersey,
Speaker 3: thank you for our Bloomberg Intelligence team and our think.
Speaker 3: Once again, to Mike McKee out there in Washington, guys,
Speaker 3: thank you.
Speaker 2: You're listening to the Bloomberg Business Week podcast. Catch us
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Speaker 5: The private markets, we know, private equity, private credit, They're
Speaker 5: one of the hot topics of investing, especially among the
Speaker 5: institutional set. Bloomberg News reporting just last week how each
Speaker 5: trio of academics says a bold take on the boom.
Speaker 5: I think one point seven trillion dollar private credit market,
Speaker 5: and that is after accounting for additional risks and fees,
Speaker 5: the asset class delivers virtually no extra return to investors.
Speaker 5: So really curious, Carol, what our next guest has to
Speaker 5: say about that.
Speaker 3: All right, we welcome in Hartley Rogers. He's executive co
Speaker 3: chairman at Hamilton Lane, a private markets investment management firm
Speaker 3: with nine hundred and three billion dollars in assets under
Speaker 3: management and supervision. Hartley is joining us from our Bloomberg
Speaker 3: News bureau in Toronto. Hartley, great to have you here
Speaker 3: on Bloomberg Business Week. Like most folks in your world,
Speaker 3: we'd like to start macro.
Speaker 1: When you look at.
Speaker 3: The global environment, where do you see the strengths? Where
Speaker 3: do you see the risks? You know?
Speaker 10: Carol and Tim, first of all, thanks for having me on.
Speaker 10: You know, I think we're pretty bullish in a way
Speaker 10: about private markets right now. I think the data and
Speaker 10: stats show continued out performance in all of the private
Speaker 10: markets segments, including private credit, Tim and and we feel
Speaker 10: pretty good about how things look. We feel like the
Speaker 10: risks of significant interest rate rises are low, and therefore
Speaker 10: there's more predictability as you look out at the world.
Speaker 10: It may be, especially given today's inflation print, that rates
Speaker 10: will be a little higher for longer. It may be
Speaker 10: that we'll see some softening in the US economy towards
Speaker 10: the end of the year. But we're pretty constructive about
Speaker 10: the opportunity set, especially in the buy out space. The
Speaker 10: buyout part of the private markets has been the kind
Speaker 10: of stalwarts, strong part of the markets for decades and
Speaker 10: it continues to be that today.
Speaker 5: Why aren't you concerned about rates going up significantly given
Speaker 5: the data that we got today.
Speaker 3: Especially as everybody seems to be pairing bets that the
Speaker 3: FED is going to do cuts. Traders also pairing ECB
Speaker 3: rate cuts after today's CPI print, So it just seem
Speaker 3: feels like the narrative has changed.
Speaker 10: I think that higher for longer certainly is part of
Speaker 10: the narrative today. But remember, if you look back at
Speaker 10: the private markets, private markets have been around for a
Speaker 10: long time, and if you go back twenty twenty five years,
Speaker 10: we were operating in rate environment very similar to the
Speaker 10: rates that we're in today, and private markets did just fine.
Speaker 10: And so I'm not a macroeconomist, but I think the
Speaker 10: As I said, our house view is that the chance
Speaker 10: of rates going up is very low. They may just
Speaker 10: stay where they are for a little bit longer, but
Speaker 10: we don't see that as a significant ahead wind in
Speaker 10: private markets.
Speaker 5: Interesting, I mean, what indication to you out there. I know,
Speaker 5: again you're not macro, but you have to think about
Speaker 5: this macro stuff when you're making investments, when you're raising money,
Speaker 5: is your what is your outlook for then for the
Speaker 5: remainder of the year, what is your outlook when it
Speaker 5: comes to not just the US economy but the global economy.
Speaker 10: Well, I think we feel like there's a chance of
Speaker 10: a soft landing. I think the US consumer has been
Speaker 10: very strong, US corporate profitability has been very strong. US
Speaker 10: productivity is very strong, and so our view is that
Speaker 10: the US remains a robust econom me but potentially with
Speaker 10: a bit of a downdraft towards the soft landing. I
Speaker 10: think globally speaking, there's plenty of opportunity out there. Remember
Speaker 10: I come at this from a private market standpoint. I'm
Speaker 10: not really a public market broad based person. Private markets
Speaker 10: are a growing and important part, but they are far
Speaker 10: from the largest part of the global capital markets, and
Speaker 10: we specialize. Our industry specializes in finding opportunities to invest
Speaker 10: in attractive, growing companies and in places where you can
Speaker 10: make operating improvements, as the industry has always done for
Speaker 10: years through our unique ability to control and influence and
Speaker 10: align the portfolio companies that we own.
Speaker 3: Well and we get it and hardly you know that
Speaker 3: what goes out in the public markets that can impact
Speaker 3: to the upside or to the downside what goes out
Speaker 3: in the private market. So, having said that, based on
Speaker 3: your outlook, where are the opportunities when it comes to
Speaker 3: the who's reaching out to you in terms of the
Speaker 3: private credit and who needs to tap the private credit markets?
Speaker 10: Increasingly well, the private credit market have become a replacement
Speaker 10: over time for the bank markets as you come in
Speaker 10: after the GFC, and they've done very, very well. They
Speaker 10: allow for a different style of investing, both from the
Speaker 10: investors standpoint and from the investee company standpoint. Many of
Speaker 10: our buyout funds that we invest in, and we're you
Speaker 10: know this, but we're one of the very largest investors
Speaker 10: in private equity funds in the world. Many of the
Speaker 10: buyout funds that we invest in tap the private credit
Speaker 10: markets and are happy to do it because they feel
Speaker 10: that they're dealing with people that they can have a
Speaker 10: relationship with, that they can negotiate with. It's more concentrated
Speaker 10: group of owners of private credit than when you have
Speaker 10: a more broadly based financing, and I think they feel
Speaker 10: that that can be very constructive as you're moving a
Speaker 10: company through its private equity ownership phase. On the investing side,
Speaker 10: there's a premium for private credit. There has been for
Speaker 10: a very long time and there continues to be in
Speaker 10: our data. And to remind you, we have a very
Speaker 10: large data set in this area, so we do not
Speaker 10: agree with what insited those professors are saying in terms
Speaker 10: of returns not being there in private credit.
Speaker 3: Well, that's what I wanted to do, And I understand
Speaker 3: there's just so much information maybe you can share or
Speaker 3: want to share, But what kinds of returns are you
Speaker 3: seeing on average when it comes to private credit and
Speaker 3: what is the right metric to compare private credit investments against?
Speaker 3: Right you buy a stock, you're either going to measure
Speaker 3: it against the S and P. You're going to measure
Speaker 3: it against a MidCap or small cap. Like there's so
Speaker 3: many different ways that are more apples to apples, but
Speaker 3: in as you know, in private credit or in private equity, right,
Speaker 3: there's a lot of investments that certainly fill those buckets.
Speaker 3: So what is the kind of returns that you are
Speaker 3: seeing and how do you measure it? What's the right
Speaker 3: metric or benchmark?
Speaker 10: So that's a great question, Carol, and very broad brush,
Speaker 10: we measure private credit against two things. One is the
Speaker 10: leverage loan index and the second is the high yield
Speaker 10: market index, because most of what we do is in
Speaker 10: situations involving some leverage, right, leverage buyouts or buildings that
Speaker 10: are leveraged, or infrastructure investments that are leveraged, things like that,
Speaker 10: and so we try to look depending on what we're
Speaker 10: looking at. Specifically, we'll find a finer tuned index if
Speaker 10: we need it, but broadly speaking, we look at private
Speaker 10: credit against those two things that I mentioned, and I
Speaker 10: would say in today's environment, obviously you've got interest rates
Speaker 10: that have gone up considerably and so you've got to
Speaker 10: have a premium to those. So depending on what you're
Speaker 10: looking at, seeing you're secured or not secured, you're looking
Speaker 10: at anything from high single digits to low double digits
Speaker 10: kind of all in yield.
Speaker 5: Hey Hartley, how do you grow private markets at least
Speaker 5: for you beyond institutional investors right now? I mean, do
Speaker 5: you think that these type of products should be available
Speaker 5: in four to one case, for example, in retirement products?
Speaker 10: We absolutely do. These are investments that have benefited sophisticated
Speaker 10: institutional investors for decades and there are reasons why some
Speaker 10: of the best known institutional investors have earned wonderful returns
Speaker 10: is because they have had significant allocations to illiquid investment
Speaker 10: private market type investments. We see no reason why those
Speaker 10: should not be made available to the broader public and
Speaker 10: particularly through the private wealth type channels. The critical thing
Speaker 10: to do is make sure you are educating the consumer
Speaker 10: and educating their advisors to understand how these investment works,
Speaker 10: how these investments work, and how you think about portfolio
Speaker 10: construction and exposures to them. But there is no reason
Speaker 10: why they shouldn't be broadly avaed.
Speaker 5: Hey, Harley, we're running up against the clock ten seconds left.
Speaker 5: You're in Canada because Hamilton lays in expanding its presence
Speaker 5: in Canada. Why are you so bullish on Canada right now?
Speaker 10: Well, Canada is a great market, It's very sophisticated financially.
Speaker 10: They have some of the strongest financial institutions in the
Speaker 10: world in terms of their investment reach and scope. So
Speaker 10: that's very important for us to be in dialogue with
Speaker 10: these people and to work with them. Plus, Canada represents
Speaker 10: a tremendous opportunity for investment things like infrastructure. So appreciate it.
Speaker 3: Thank you so much. Hartley Roger, Executive co chair Over
Speaker 3: at Hamilton Lane in our Toronto bureau. This is Bloomberg.
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Speaker 7: Bloomberg eleven thirty.
Speaker 5: Well Delta shares bouncing around today. They were upsize more
Speaker 5: than four percent, now down three point two percent after
Speaker 5: the company says it expects earnings to exceed Wall Street's
Speaker 5: projections for the second quarter. This is Delta benefits from
Speaker 5: a step up in corporate travel and steady leisure demand
Speaker 5: heading into summer. We got Mary Schlangenstein, Bloomberg News US
Speaker 5: Airlines reporter joining us right now from our Dallas Bureau
Speaker 5: and Mary, I got to tell you, Carolyn and I
Speaker 5: were talking. We're looking at the chart throughout the day.
Speaker 5: We're wondering why White A Swing shares were up four
Speaker 5: percent and then now they're down three percent. What's going
Speaker 5: on here?
Speaker 7: Right?
Speaker 8: So initially investors really favored their earnings report, and not
Speaker 8: only did Delta shares go up, but they pulled up
Speaker 8: some of the other airlines as well. But then when
Speaker 8: the federal the FED comments came out about you know,
Speaker 8: the rest of the year, and there was some federal
Speaker 8: data that showed that March airfares fell seven percent, and
Speaker 8: so we think that's what's driving down the shares this afternoon.
Speaker 3: Yeah, it's interesting here. Just inflation data released did show
Speaker 3: airfares dropping about seven percent in March for the prior year.
Speaker 5: Biggest I will say that was Carol's guest. I will
Speaker 5: I will give Carol full credit.
Speaker 3: That was your guest, just reading through, reading through on
Speaker 3: all of you guys are reporting, but it is interesting, Mary,
Speaker 3: you follow this sector so more broadly though, strong report
Speaker 3: from Delta.
Speaker 8: Yeah, and what Delta talked about primarily was one that
Speaker 8: their operations, their flight operations really improved this year, and
Speaker 8: they're not alone in doing that. There hasn't been a
Speaker 8: lot of bad weather, and a lot of the airlines
Speaker 8: are performing better operationally. But they're also talking about a
Speaker 8: big factor being the return of some of the corporate
Speaker 8: travel accounts that were lagging. The areas that were lagging
Speaker 8: like tech and financial services, they're finally seeing those companies
Speaker 8: come back, so that managed corporate travel revenue is back
Speaker 8: to twenty nineteen levels. Volumes are still lagging, but the
Speaker 8: revenue is returned to twenty nineteen.
Speaker 5: Remind us Mary about where Delta gets its revenue mix
Speaker 5: in terms of domestic versus international.
Speaker 8: Here, Yeah, they're still more heavily domestic, but the differentiator
Speaker 8: for Delta is so much of their revenue comes from
Speaker 8: premium products. So in the first quarter, their premium product
Speaker 8: revenue rows ten percent, main cabin only rows four percent,
Speaker 8: And that's been a pretty consistent thing for them. They
Speaker 8: really focus on that premium customer and their cells, you know,
Speaker 8: have been leaning more toward that area for some time.
Speaker 5: But since they're more heavily domestic, how much were they
Speaker 5: affected by a slowdown into potential slow down in domestic
Speaker 5: travel and an increase of late in international travel.
Speaker 8: So international travel has been really strong since last year,
Speaker 8: and Delta saying it continues to be really strong, even
Speaker 8: across the Atlantic, where there were concerns early on that
Speaker 8: there was too much capacity in that market this year,
Speaker 8: but Delta says there's plenty of demand. They see demand
Speaker 8: strong to the Pacific and Latin America. Domestically, they're saying
Speaker 8: demands picked up too. They're picking up some travel they
Speaker 8: think from the domestic focus carriers that are having toggle
Speaker 8: rejuggle their schedules and and redo their operating schedule because
Speaker 8: of some conditions specific to the domestic market.
Speaker 5: You're talking about Boeing or Spirit.
Speaker 8: We're talking about Spirit, Frontier, Allegiance. They're shifting some of
Speaker 8: their capacity. No, no, not United or Boeing, No no,
Speaker 8: We're talking about the domestic focus carriers like Spirit, Allegiant,
Speaker 8: even Jet Blue to some expensis.
Speaker 3: Okay, Hey, Mary, One thing I wanted to ask you,
Speaker 3: the CEO at Baston saying in your story that you
Speaker 3: noted is that while revenue acceleration has brought the carrier
Speaker 3: back fully to twenty nineteen levels, you just said that
Speaker 3: earlier volume remains eighty five to ninety percent of pre
Speaker 3: pandemic levels. Does that mean so yay, Delta has more
Speaker 3: of a runway to kind of grow that and grow
Speaker 3: the revenue line or is it? How are I don't know.
Speaker 3: How is the industry rethinking about the levels that were
Speaker 3: pre pandemic and where we are? Do we go back
Speaker 3: to those levels at some point?
Speaker 8: Yeah? Well, on business travel in particular, I think that
Speaker 8: they believe that there's some segment of that volume that's
Speaker 8: just not going to come back because they're still seeing,
Speaker 8: you know, a permanency to some of the changed travel
Speaker 8: patterns where people are taking you know, to blend leisure
Speaker 8: travel and business travel, so they're business strip may be longer,
Speaker 8: they maybe aren't traveling as frequently as they did before.
Speaker 8: So I think part of the volume is always going
Speaker 8: to be gone. I think the revenue even on non
Speaker 8: business travel has exceeded twenty nineteen levels already, and so
Speaker 8: as the volume for leisure travel.
Speaker 5: Mary my head is on the equipment providers Airbus, Bowing
Speaker 5: and Breier Bombardier, all of which provide aircraft to Delta.
Speaker 5: I'm wondering, since it does have a mixed fleet, was
Speaker 5: was there any commentary about Boeing on the.
Speaker 8: Call not a lot. You know, Delta does primarily fly
Speaker 8: Boeing aircraft. They don't currently fly the Max. They have
Speaker 8: the Max ten on order, but they don't expect to
Speaker 8: receive that for about three years yet. But what the
Speaker 8: CEO ed Bastian did say was that you know, safety
Speaker 8: is a top priority across the industry and that every day,
Speaker 8: you know, that's the top priority for every airline. So
Speaker 8: he didn't comment specifically on Boeing, and he didn't comment
Speaker 8: specifically on the safety incidents that have been occurring across
Speaker 8: the industry recently, but just said that's a top priority.
Speaker 8: He did say in an interview I had with him
Speaker 8: yesterday that he knows the new chairman at Boeing is
Speaker 8: familiar with him, and he expects that at some point
Speaker 8: he will talk to him about any concerns about Boeing itself.
Speaker 5: Has there been any chatter about them changing their order
Speaker 5: of those new Max planes that have not yet been
Speaker 5: delivered to Airbus if that isn't even a possibility given
Speaker 5: the Airbus supply constraints.
Speaker 8: They just placed that order recently, they haven't had it
Speaker 8: for very long, and I don't think there's any consideration
Speaker 8: at this point, the deliveries are due farther out. That
Speaker 8: gives plenty of time for the Max ten to be
Speaker 8: certified before their deliveries come up, and even for Delta
Speaker 8: for Boeing to catch up on some production. So I
Speaker 8: don't think that's being considered right now.
Speaker 3: Yeah, I'm looking at I just got to say the
Speaker 3: overall industry, as you said, S and P five hundred
Speaker 3: Supercomposite Airlines Index, which was up one point seven percent
Speaker 3: of its highs earlier today, it's not down about three
Speaker 3: and a half percent, so we're seeing pressure as you
Speaker 3: said from some of that commentary about airfares. Having said this, Mary,
Speaker 3: what does Delta maybe tell us, not every airline we
Speaker 3: know it's not apples to apples, but what does it
Speaker 3: say about some of the other ones that will report
Speaker 3: throughout the earning season if anything?
Speaker 8: You know, Delta is the only major US carrier that
Speaker 8: is expected to report a profit this quarter, So there
Speaker 8: are other factors affecting American you know, United Southwest has
Speaker 8: its own issues, but the Delta is the only one
Speaker 8: that's expected to report a profit. The others will have
Speaker 8: losses this quarter, and we'll see what their outlooks are
Speaker 8: going into the second quarter and maybe even the you know,
Speaker 8: later in the year.
Speaker 3: Really fascinating. All right, Mary, always appreciated and your insight. Uh,
Speaker 3: thank you so much for joining us. Mary Schlangenstein once again,
Speaker 3: she's our Bloomberg News US Airlines reporter joining us from Dallas.
Speaker 3: A brother, Marc, a journal How about you let me drive?
Speaker 9: No, no, no, honey, please, I'll do the gravel ECUs, mate,
Speaker 9: I want to dry it.
Speaker 5: It's a good question.
Speaker 2: This is the drive to the globe.
Speaker 9: Doing well.
Speaker 2: BYELDN on Bluebird Radio.
Speaker 3: All right, everybody, just about eighteen minutes left in today's
Speaker 3: trading session, getting ready to wrap up the Wednesday trade.
Speaker 3: This what's been another busy day, no doubt about it.
Speaker 3: But we did get a higher than expected forecast, if
Speaker 3: you will, hot inflation print. That was this morning that
Speaker 3: we got fed minutes Again the rethink tim in terms
Speaker 3: of what happens when it comes to the Fed cutting
Speaker 3: rates probably why don't these analysts just not much this year?
Speaker 5: Why don't these analysts just raise their expectations about what
Speaker 5: about what's going to happen when it comes to inflation?
Speaker 5: Like why don't they increase? Like Okay, looking at me expected, Yeah,
Speaker 5: well you gotta expect it that it's going to be hot.
Speaker 3: Let's ask our next guest about what it means when
Speaker 3: it comes to forecasting. Penning Pennington is in the house.
Speaker 3: She's CEO over at Edward Jones, joining us here in
Speaker 3: our interactive broker studio. It is interesting forecasting not a
Speaker 3: perfect sign. So you guys have to deal with it
Speaker 3: too in terms of what you think is going to
Speaker 3: happen with the markets. What do you feel like you
Speaker 3: can kind of securely hang your hats on when it
Speaker 3: comes to the investment environment this year.
Speaker 1: Well, what you can securely hang your head on is
Speaker 1: that we don't have a crystal ball. And so, as
Speaker 1: one financial advisor I talked to you this morning said,
Speaker 1: a good plan is better than a poor prediction. And
Speaker 1: so our financial advisors work with eight million clients. We
Speaker 1: engage with a half a million North Americans every week.
Speaker 1: So you're right to ask, what is the pulse of
Speaker 1: North America around what our clients are thinking?
Speaker 3: What a love that?
Speaker 1: Soective inflation is not exactly how they come at it.
Speaker 1: They come at it with questions like how am I
Speaker 1: going to be able to afford healthcare? In a long
Speaker 1: life when healthcare inflation has been going up for a
Speaker 1: long long time, And and and Matt the financial advisor
Speaker 1: I was talking to today, Matt, what I bought the
Speaker 1: grocery store three years ago that cost a hundre dollars
Speaker 1: now cost one hundred and thirty dollars. Is that in
Speaker 1: our plan?
Speaker 9: Well?
Speaker 1: Well, absolutely, it's in the plan. So what we talk
Speaker 1: with our clients about before we talk to them about
Speaker 1: what's going on in the stock market or what's going
Speaker 1: on inflation, we say what's important to you? What are
Speaker 1: you trying to accomplish and over what period of time
Speaker 1: and how much risk do you want to take doing that?
Speaker 1: And our clients are multi dimensional people and families. They've
Speaker 1: got lots of goals, short, medium, and long term. And
Speaker 1: so when we have a day like today, or a
Speaker 1: year like we've had, or the last five years like
Speaker 1: we've had, we work with our clients on their financial
Speaker 1: plan and we flex it. We say, what would happen
Speaker 1: if we saw a longer term downturn in the equity markets?
Speaker 1: What would that do to your investment plan? And more importantly,
Speaker 1: what would that do to your life and financial plan?
Speaker 5: You know, I'm hearing you say this, and it's interesting
Speaker 5: because you said that they're not coming at it with
Speaker 5: inflation being high. They're coming at it through the lens
Speaker 5: of Okay, well, we know the cost of medical care
Speaker 5: is going off, we know the cost of food is
Speaker 5: going up.
Speaker 1: That is inflation exactly. That's right. They talk about it
Speaker 1: in terms of what it costs to live the life
Speaker 1: that I want to live.
Speaker 5: And that's I think the way that it manifests for
Speaker 5: a lot of people, apart from gas prices, which are
Speaker 5: certainly volatile. I'm interested, Penny, in terms of the commonalities
Speaker 5: that run across your clients. I mean, eight million people
Speaker 5: around the United States who you work with. It's really
Speaker 5: runs the gam that I know. But what's the commonality there.
Speaker 1: The commonality is that our clients care about their health,
Speaker 1: their family, their purpose, like their reason for being on
Speaker 1: the planet, and how that manifests in their financial plan. So,
Speaker 1: strangely enough, what our clients want to talk with our
Speaker 1: financial advisors before we get to which stock or bond
Speaker 1: is I'm concerned about how long I'm going to live
Speaker 1: and planning for that. I'm also concerned about the next
Speaker 1: two generations of my family and by the way, there's
Speaker 1: an eighty four trillion dollar wealth transfer that's in motion
Speaker 1: right now. And so family and how you pass on
Speaker 1: your legacy and your assets to your family and then
Speaker 1: your purpose, like you know, what what do I want
Speaker 1: to do in retirement? Is retirement going to be different
Speaker 1: for me than it was for my parents? It certainly
Speaker 1: is going to be different for my thirty year olds
Speaker 1: than it will.
Speaker 10: Be for me.
Speaker 1: And so this is the common thread, the very real,
Speaker 1: multi dimensional ways that our clients express themselves. And the
Speaker 1: other thing that's common is that we want to get
Speaker 1: to know them, and every single one of them is different.
Speaker 3: I think if it's someone like you who you know
Speaker 3: are in it's a very important seat in terms of
Speaker 3: a financial firm. And when you talk about generational wealth
Speaker 3: and that transfer, okay, that's great in terms of CEO
Speaker 3: who runs a business that's based on people having money
Speaker 3: to invest or wanting to invest that you know, do
Speaker 3: you get more nervous about I don't know. Is it
Speaker 3: two generations from now that doesn't have We talk about
Speaker 3: this all the time. I think about my dad or
Speaker 3: maybe you know your dad. You know, pension investments, social security,
Speaker 3: several things you know bought a house in cash outright
Speaker 3: fifty years ago. I think it was a very different dynamic.
Speaker 3: And I have younger individuals in my life, nieces and nephews,
Speaker 3: and they're like, I'm never going to buy house. I
Speaker 3: just can't do it. These are well educated people who
Speaker 3: are making a decent living. But I mean, how do
Speaker 3: you guys think about what is the lifeblood of your
Speaker 3: business going forward? And I don't know, is it two
Speaker 3: or three generations that maybe it's a little bit different business.
Speaker 1: Well, we've worked with seven generations of clients in one
Speaker 1: hundred and two years, and that's backwards. That's backwards. But
Speaker 1: I have no doubt that each generation looked to the
Speaker 1: future generations and said, how are they going to do it?
Speaker 1: It's getting more complicated. That's why it's so important to
Speaker 1: get good financial advice. We start with financial literacy. We're
Speaker 1: teaching a million learners in North America over these five
Speaker 1: years about the basics of saving and investing and budgeting
Speaker 1: and credit card debt. And then we invite those investors.
Speaker 1: We invite the younger absolutely, they're younger, they're in high school,
Speaker 1: and then we work with investors across the generations we
Speaker 1: work with those who have money now and who are
Speaker 1: beginning the process of establishing wealth. It's not going to
Speaker 1: be easy, but it has always been the case. You know,
Speaker 1: the time value of money and compounding of interest is
Speaker 1: a magical thing. People who understand that earlier in their
Speaker 1: lives and get on that train, that's what we help our.
Speaker 5: T I mean, unfortunately they don't teach that in junior.
Speaker 1: High Well, interestingly, there are two parents. There are now
Speaker 1: twenty five states that mandate financial literacy education in the
Speaker 1: high schools. Really, and that we've been in five thousand
Speaker 1: high schools. We've taught three hundred thousand students just in
Speaker 1: the past three.
Speaker 6: Or four years.
Speaker 5: It's working.
Speaker 1: What we have learned from those students is that their
Speaker 1: confidence is fifty three percent higher, and they're over sixty
Speaker 1: percent more likely to start the process of investing. It's
Speaker 1: not magical to them at that point. It's become far
Speaker 1: less abstract and it's become something that they could imagine
Speaker 1: would be part of their lives.
Speaker 3: Do you think we'll need to get to a point
Speaker 3: and forgive me? I know we're kind of getting existential
Speaker 3: a little bit. Our bigger macro We've got about thirty
Speaker 3: forty seconds left here. But we get to a point
Speaker 3: where you're born in the government or something, or something
Speaker 3: is put aside for people just because we don't have
Speaker 3: the retirement plans like that companies used to do in
Speaker 3: terms of pensions and so and so forth. I understand
Speaker 3: four oh one K, but that's a little bit more
Speaker 3: active on an individual's part. Do we get to a
Speaker 3: point where there's government involvement just quickly?
Speaker 1: I thank you. There's to solve this problem. There's a
Speaker 1: really important partnership that needs to happen between employers, between
Speaker 1: financial advisor and wealth management firms like ours, and public policy.
Speaker 3: So appreciate it. I know we wanted to we were
Speaker 3: going to talk a lot more fed and stuff, but
Speaker 3: this was I think really smart because I just think
Speaker 3: about kind of what the future is in terms of
Speaker 3: the investment world. Thank you, really appreciate it. Petting Pettington,
Speaker 3: she's the chief executive officer of Edward Jones. She sees
Speaker 3: a lot, so does her team. Joining us here in
Speaker 3: our Bloomberg Interactive Broker Studio.
Speaker 2: This is the Bloomberg Business Week podcast, available on Apple,
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