Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg p m L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. We're
Speaker 1: talking earlier about the jobs report came out today, highly
Speaker 1: distorted data, thirty three thousand jobs lost, but better than
Speaker 1: expected wage gains, So a kind of convoluted picture. You've got.
Speaker 1: Trader has taken the better information out of that and
Speaker 1: trading on that. Meanwhile, you have Jonathan Pharaoh of Bloomberg
Speaker 1: Television saying this is just confirmation bias that traders are
Speaker 1: trading off of. Here to weigh in on that and
Speaker 1: perhaps confirm that or perhaps debate that, Constance Hunter, chief
Speaker 1: economist at KP joining US. Now, Constance, do you think
Speaker 1: that it's totally ridiculous to try to trade around number
Speaker 1: that is so hard to decipher given the hurricane disruption? Well,
Speaker 1: I think that depends on how good you are trading,
Speaker 1: So for some people it might be worth it. While others,
Speaker 1: it might not be um. Certainly for a retail investor
Speaker 1: trading around this number is ridiculous. And and there's there's
Speaker 1: looking through the long term data, and I think I
Speaker 1: think what we're seeing here is not just the traders
Speaker 1: of trading on the wage games, but they're trading they're
Speaker 1: looking through this long term data. So if we look at,
Speaker 1: for example, comparing this to one of our last major
Speaker 1: her train hurricanes, Katrina. In Katrina, one point five percent
Speaker 1: of the workforce said they were either not at work
Speaker 1: or at work part time, but they usually work full time.
Speaker 1: Due to the hurricane, and with the combination of IRMA
Speaker 1: and Harvey, that number jumped to almost three percent of
Speaker 1: the workforce. So that is a lot of lost jobs.
Speaker 1: But you can also see that it's temporary, right that
Speaker 1: these people are going to come back to work. The
Speaker 1: biggest sector that lost jobs was leisure and hospitality a
Speaker 1: hundred and eleven thousand workers. And obviously those institutes, those
Speaker 1: establishments were closed, they're going to reopen, those people are
Speaker 1: going to go back to work. So if you look forward,
Speaker 1: you can see that the momentum in the economy is
Speaker 1: still there. What I tweeted out earlier this morning is
Speaker 1: the streak is broken, but the economy is not. I
Speaker 1: thought that was a great headline. By the way, Constance,
Speaker 1: I thought, yeah, once in a while there was really
Speaker 1: a commend you because it really captures exactly, you know,
Speaker 1: the perspective that you're offering. And in that context, I'm
Speaker 1: wondering if you can offer your thoughts that these one
Speaker 1: off events that are no longer seemingly one off, whether
Speaker 1: they are natural disasters, uh, like hurricanes or um you
Speaker 1: had of course, uh, I think back to Fukushima in Japan.
Speaker 1: You have these events which you know, you always hear
Speaker 1: those debates about whether they're more frequent or less frequent.
Speaker 1: But to put that aside, the fact that they exist
Speaker 1: on a semi regular basis, does that mean that you
Speaker 1: need to adjust your focus when when you're thinking about
Speaker 1: where to put your money? Well, I think certainly there's uh,
Speaker 1: there's a there's a perception that they're more frequent in
Speaker 1: the data would suggest that with the warmer water temperatures,
Speaker 1: they're going to continue to be more frequent. But in
Speaker 1: thinking about the economy overall, what you have to think
Speaker 1: about is is the economy strong enough to withstand the
Speaker 1: shock that such an event would prevent but would cause.
Speaker 1: Rather I'm sorry, or I was going to say, or
Speaker 1: big enough. I didn't want to give it any characterization,
Speaker 1: just that the U. S. Economy is so big and
Speaker 1: the country is so big that it can it accommodates
Speaker 1: these large shocks. Yes, it can. If we're if we're
Speaker 1: in a period of strong growth, if we're in a
Speaker 1: period of wheat growth, it could have a it could
Speaker 1: have a greater effect. And understand, we haven't seen the
Speaker 1: full effect of the hurricane, so you know, our estimate
Speaker 1: is that it could shave zero point eight two off
Speaker 1: of GDP in the third quarter, and a lot of
Speaker 1: that is going to be from this lost income that
Speaker 1: we've had UM, and a lot of it's going to
Speaker 1: be from the fact that a lot of these people
Speaker 1: that were hit, certainly in in Harvey, we're not in
Speaker 1: flood zones, so they were not appropriately insured. Uh So
Speaker 1: it is going to take a bite out of GDP.
Speaker 1: But um, overall, I think the economy is strong enough
Speaker 1: to withstand it. The big question mark is if you
Speaker 1: look at the pressure point in the economy in terms
Speaker 1: of employment, it really isn't that construction sector so we've
Speaker 1: seen wages grow up in that sector, we see scarcy
Speaker 1: of workers in that sector. And if people are deployed
Speaker 1: down into UH, Florida and Texas to take care of
Speaker 1: this rebuilding, it's going to put pressure on the rest
Speaker 1: of the economy and that sector throughout the entire economy,
Speaker 1: and you could see ripple effects that that do impact
Speaker 1: the entire economy. So constant, we're probably going to get
Speaker 1: this muddy data from the hurricane for another couple of months, uh,
Speaker 1: at the least. Frankly, I'm just wondering, from your perspective,
Speaker 1: what are you looking to in the meantime to already
Speaker 1: get a better read on the true economic progress being made. Well,
Speaker 1: let's let's just take this job report in general, right,
Speaker 1: So you have the household survey, where you saw big
Speaker 1: improvements in the labor force participation rate, you saw the
Speaker 1: unemployment down to four point um. You can look at
Speaker 1: a lot of real time data, so you you can
Speaker 1: look geographically around the rest of the country, not just
Speaker 1: in in Florida and Texas. But if you look at
Speaker 1: the rest of the economy and look at some of
Speaker 1: the regional data, you're able to see the strength of
Speaker 1: the economy overall constants. Earlier today, Martin Feldstein, who is
Speaker 1: President Emeritus at the National Bureau of Economic Research, he
Speaker 1: was speaking on Bloomberg Television and one thing that really
Speaker 1: just struck me was he said that the US needs
Speaker 1: a corporate tax overhaul. He said they need this overhaul
Speaker 1: and that it is crucial if the US that increases
Speaker 1: and that we have to bring our practice is in
Speaker 1: line with other industrialized countries. Do you agree with that
Speaker 1: and do you think it will happen? Uh? Well, um, So,
Speaker 1: Martin Balstein has been giving a series of talks. He
Speaker 1: um he gave a tract at the National Association for
Speaker 1: Business Economics last week in Cleveland which address this. And so,
Speaker 1: just to put in perspective, he's looking at a at
Speaker 1: a headline rate of about um is what he thinks
Speaker 1: is realistic and and of course keeps in mind the
Speaker 1: fact that we don't want to increase debt levels or
Speaker 1: increase our our budget deficits substantially, but we do want
Speaker 1: to bring our tax um policies more in line with
Speaker 1: the rest of the world. I have a little bit
Speaker 1: of a disagreement though on the worldwide income taxation. I
Speaker 1: think we should have a holiday. I think we should
Speaker 1: get that money back on shore. But we are also
Speaker 1: the only country in the world that is the reserve currency,
Speaker 1: and that is a privilege that costs money. Um it
Speaker 1: is a benefit to all US companies. They are able
Speaker 1: to transact in dollars, means they're they're exposure to currency
Speaker 1: risk is much more limited than other other countries companies,
Speaker 1: and and and this costs money. It costs money to
Speaker 1: maintain a military that that um it works all over
Speaker 1: the world and and guards the trade of those goods.
Speaker 1: And so I think something like a three or five
Speaker 1: percent permanent tax on offshore income would be reasonable. And
Speaker 1: there are a lot of other countries that do this.
Speaker 1: They give a much lower tax rate the money earned
Speaker 1: off shore. UM. So that that would I think would
Speaker 1: be one disagreement between me and Marty Felstine. But but
Speaker 1: he he is right that our code has become overly complex.
Speaker 1: It's overly comtelex for individuals, it's overly complex for firms,
Speaker 1: and so simplifying it would certainly free of resources to
Speaker 1: be used for other things of the economy. Yeah, I
Speaker 1: just want to just make a quick note that US
Speaker 1: Treasury yields are actually coming in, and there's a bit
Speaker 1: of a rally in treasuries, and one trade or noted
Speaker 1: that it's because of new reports coming out that UH Pyongyang,
Speaker 1: North Korea is preparing to test a missile capable of
Speaker 1: reach in the U. S. Coast. That is according to
Speaker 1: a Russian lawmaker, and so this is what people are
Speaker 1: attributing into. So well, we will certainly keep keep abreast
Speaker 1: to that and bring up any news headlines that are
Speaker 1: related to that. Of course, I want to thank you
Speaker 1: very much. Constance Hunter is the chief US economist at KPMG,
Speaker 1: giving us her views about the jobs report and the
Speaker 1: potential for any kind of corporate tax reform. Right now,
Speaker 1: I want to turn our attention to markets. We saw
Speaker 1: a real sort of gain in treasuries, yields come down
Speaker 1: after news was reported that a Russian lawmaker says that
Speaker 1: North Korea may test long range missiles that could potentially
Speaker 1: hit the West coast of the United States. The stock
Speaker 1: market unphased. Really nothing can shake this market. Really talk
Speaker 1: about that. I want to bring in Ernesto Ramo's head
Speaker 1: of Equities for BEMO Global Asset Management, portfolio manager of
Speaker 1: the BEMO Low Volatility Equity Fund, which trades under the
Speaker 1: ticker m l V e x um Ernesto. I'm struck
Speaker 1: by the fact that you're seeing a longer lasting effect
Speaker 1: from these sort of nuclear scares in the bond market
Speaker 1: then in stocks, and and in stocks just shrug everything off.
Speaker 1: What do you make of that? Well, that's one of
Speaker 1: the things that I've been personally surprised about how much
Speaker 1: the stock market has ignored the potential for geopolitical risks
Speaker 1: and conflagation. But what's driving the market is earnings to
Speaker 1: be to be honest with you, if you look at
Speaker 1: the SMP five under the earnings growth that consensus estimates
Speaker 1: for next year is strong double digits closer and for
Speaker 1: the following twelve months is another ten percent. So that
Speaker 1: kind of earnings growth, if it comes down to t
Speaker 1: to fruition, will continue to drive the market higher. Now,
Speaker 1: of course, if you actually get some kind of a
Speaker 1: war with North Korea, um that that that that scenario
Speaker 1: will will definitely not happen and and you're gonna get
Speaker 1: some some serious retrashment in the market. And that's why
Speaker 1: the Low Futility Fund would be a good way to
Speaker 1: stay exposed to the market, but with a fair amount
Speaker 1: of downside protection because that's the way we've designed it
Speaker 1: to to behave ter national Can you use the stock
Speaker 1: the company aligned technology as an example of the kind
Speaker 1: of company and investment that you look for for your fund.
Speaker 1: They make the Invisiligne UH dental product. Sure Invisiligne it's
Speaker 1: actually the as you said, They make the the the
Speaker 1: seamless braces without without wires, and the two things are
Speaker 1: driving their growth. Number One, they're starting to penetrate the
Speaker 1: team market. They had previously been focused on the adult
Speaker 1: market because adults on one wires in their mouth to show.
Speaker 1: But now UH teenagers are also becoming very very self
Speaker 1: conscious and aware that that the this technology can help
Speaker 1: them stay less less visible in terms of their braces,
Speaker 1: and they're embracing that. That's in the US, they're also
Speaker 1: beginning to tap into overseas markets. And as you are
Speaker 1: aware of you travel around the world, you are aware
Speaker 1: the United States has the best teeth in the world
Speaker 1: and everybody else not so much. So there's a huge
Speaker 1: market outside the US for better looking smiles, and that's
Speaker 1: what investil Ligne is starting to tap into and deriving
Speaker 1: a lot of growth from that, ernesto, is it possible
Speaker 1: to create a low volatility fund without using derivatives? Sure,
Speaker 1: we just focus on h First of all, there's two
Speaker 1: parts of our process. First of all, selecting the stocks
Speaker 1: and they're combining them in a way to reduce the risk.
Speaker 1: And UH we what we do is we have a
Speaker 1: lot of data and a lot of computing power to
Speaker 1: at our disposal. We look at the risk in five
Speaker 1: different ways and we're able to rank the stocks from
Speaker 1: highest to lowest risk and then also from highest to
Speaker 1: lowest in terms of a return potential. And what we
Speaker 1: do is we seek a good combination of very low
Speaker 1: risk stocks with attractive return potential. And that's what we
Speaker 1: deliver in a very well calculated and balanced UH portfolio,
Speaker 1: which is is what our fun turns at the end
Speaker 1: of the day to be. I'm sorry to just keep
Speaker 1: you in the weeds about invisile line, because I'm always
Speaker 1: interested in how much something costs, right, and so you're
Speaker 1: willing currently to pay fifteen billion for a company that
Speaker 1: does a billion two of sales and has net of
Speaker 1: about two hundred and forty million. That works for you.
Speaker 1: That math works for you. How fast they have to
Speaker 1: grow to justify that. So yeah, so our scoring system,
Speaker 1: I know it trades out about fifty times next your
Speaker 1: learnings and that it seems very expensive. But our scoring
Speaker 1: system for for return potential has three parts fundamentals, valuation,
Speaker 1: and sentiment. And they scored not so well in valuation,
Speaker 1: in fact, rather poorly, but well enough in terms of
Speaker 1: fundamentals and the sentiment part that the overall score is
Speaker 1: still attractive enough to make the grade in our fund.
Speaker 1: And we're very very disciplined about not trying to second
Speaker 1: guess our our scoring system and and and we will
Speaker 1: stick to that because that's how we've achieved that kind
Speaker 1: of performance that we've delivered so far. Well, we want
Speaker 1: to appreciate you coming in and shedding light on this. Uh,
Speaker 1: this is an interesting fund. M l uh c i
Speaker 1: X is the symbol for the fund. Thanks very much
Speaker 1: for being here. That is the BEMO Large Cap Growth Fund.
Speaker 1: And I want to thank Ernesto for being here. He
Speaker 1: always great pleasure. Ernesta Ramos. He is the manager of
Speaker 1: the funding co manager as well, okay co manager as well.
Speaker 1: He's the head of Equities at b MO Global Asset Management.
Speaker 1: We want to learn more about municipal bonds and that
Speaker 1: means we need to learn more about Puerto Rico. And
Speaker 1: joining us, of course, is Joe Maiasac. He is the
Speaker 1: editor in charge of our Muni Brief product, and Joe,
Speaker 1: I want to just read you the quote that from
Speaker 1: President Trump when he was in uh, Puerto Rico recently.
Speaker 1: He said, they owe a lot of money to your
Speaker 1: friends on Wall Street. We're going to have to wipe
Speaker 1: that out. That's going to have to be you know,
Speaker 1: you're gonna have to say goodbye to that. I don't
Speaker 1: know if it's Goldman Sachs, but whoever it is, you
Speaker 1: can wave goodbye to that. What was your reaction when
Speaker 1: you heard that? And then tell us is there a
Speaker 1: basis for using any of that in order to make
Speaker 1: the situation and the lives of the people in Puerto
Speaker 1: Rico better? Well, when I h I missed the first
Speaker 1: go round of that, and about three am, when I
Speaker 1: was looking to put together the brief, I saw that
Speaker 1: comment and I was dumb struck. I just said, this
Speaker 1: is historic. I've never heard of president sort of take
Speaker 1: out the whole entire municipal bond market, which is as
Speaker 1: you know, uh, sort of based on law, the rule
Speaker 1: of law. Um, would it make the people's lives on
Speaker 1: Puerto Rico would have improved there a lot. I you know,
Speaker 1: if you somehow thought that the president ruling by FIAT
Speaker 1: and taking away all the debt, I don't know who
Speaker 1: would lend to them? Well, okay, So, so stepping aside
Speaker 1: to sort of improbability and the unprecedented nature of the
Speaker 1: suggestion that President Trump threw out there, let's talk about
Speaker 1: the reaction right. Bond prices plunged on Puerto Eco's dept,
Speaker 1: particularly the general Obligation bond that matures in, which is
Speaker 1: sort of their benchmark issue. Uh, there is a big
Speaker 1: question as to why, given the fact that pretty universally
Speaker 1: it's totally understood that President Trump is does not necessarily
Speaker 1: have the power to throw out this debt, or does
Speaker 1: he have the inclination to do so. The administration walked
Speaker 1: back his comments subsequently, and yet prices are still depressed
Speaker 1: from where they were, and I'm wondering what we can
Speaker 1: make of this. Does this mean that all of a sudden,
Speaker 1: in some ways the bond market is actually getting more
Speaker 1: realistic with respect to what recoveries are going to be
Speaker 1: like with the Puerto Rico debt negotiations. All right, see
Speaker 1: now you've you've put your finger right on it. Um.
Speaker 1: You know, bonds trade thirty sixty or ninety above. Everything
Speaker 1: is fine, sixty, bonds are getting into stress. Thirty that's
Speaker 1: sort of the salvage value. People are speculating at the
Speaker 1: salvage level. And at forty four cents on the dollar,
Speaker 1: which was the the day previous, I guess was Tuesday,
Speaker 1: at forty four cents on the dollar, Puerto Rico was
Speaker 1: probably still too expensive. Those bonds had not dropped enough.
Speaker 1: Uh So perhaps that you know, perhaps it was the
Speaker 1: Trump comments. Perhaps it was also final realization that well,
Speaker 1: there's a lot of damage in Puerto Rico, and there's
Speaker 1: a lot of devastation, and people are leaving the island.
Speaker 1: And finally, you know, there was that break and it
Speaker 1: was a funny. It was not funny, it was it
Speaker 1: was a very interesting thing to watch because the thirty
Speaker 1: and a quarter price was uh that was you know,
Speaker 1: on a four hundred and seventy five dollar block of
Speaker 1: bonds tossed out at nine sixteen in the morning. You're
Speaker 1: talking about the low point that we saw in these
Speaker 1: general obligation bonds, which is one slice of the seventy
Speaker 1: four billion dollars of deat the Puerto Rico has, right,
Speaker 1: So thirty and a quarter some dealer throughout that, you know,
Speaker 1: and and the owners what kind of what kind of volume? Um,
Speaker 1: this was a four hundred and seventy five thousand dollar block.
Speaker 1: So that low price was was printed at nine sixteen
Speaker 1: in the morning. So a lot of the coverage you
Speaker 1: saw made you think that there was this horrific uh,
Speaker 1: you know, people are rushing for the gates, but the
Speaker 1: volumes were high. By the end of the day, I
Speaker 1: was about eighty five million dollars traded, which was a
Speaker 1: very large amount for that bond. Haven't seen that much
Speaker 1: volume in the eights and two thousand thirty five in
Speaker 1: you know, certainly weeks and weeks, probably months, um. But
Speaker 1: what really happened was that there wasn't this rush for
Speaker 1: the gates at the end. In fact, there were twice
Speaker 1: as many buyers as sellers of these bonds, and the
Speaker 1: prices started climbing, you know, after that thirty and a quarter. Basically,
Speaker 1: you know, they banged around a little bit, but it
Speaker 1: was very orderly and uh, you know, by the end
Speaker 1: of the day, I think we were up, but you know,
Speaker 1: around thirty nine cents. So what does that tell you?
Speaker 1: I really do not know why someone is buying Puerto
Speaker 1: Rico geos at this point, and yet they were buying
Speaker 1: and in all various sizes. Well, but somebody could argue
Speaker 1: that if the US federal government does give money to
Speaker 1: Puerto Rico to help restore its structure and keep people there, uh,
Speaker 1: that this will actually be a net benefit for the island.
Speaker 1: Down the road, there's still those clinging to the hope.
Speaker 1: What's the rebuttal to that. Well, the island did say
Speaker 1: the debt was not payable and entered into the Promisa
Speaker 1: and Title three bankruptcy, and they the island, you know,
Speaker 1: says we need some relief here, and uh, there will
Speaker 1: be negotiation. What are you gonna get? Obviously, the people
Speaker 1: who are buying at thirty three and thirty four and
Speaker 1: thirty eight cents are are betting on a higher recovery value,
Speaker 1: maybe fifty cents, maybe sixty cents. Who knows, um, but
Speaker 1: it's it's difficult to imagine. Uh, you know, for the
Speaker 1: longest time, the hedge fund guys were saying geo's at
Speaker 1: par and they really believed it. Well, not anymore, Joe
Speaker 1: Mi Sac, thank you so much for joining us. It's
Speaker 1: always a pleasure. Thanks for listening to the Bloomberg P
Speaker 1: and L podcast. You can subscribe and listen to interviews
Speaker 1: at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
Speaker 1: I'm Pim Fox. I'm on Twitter at pim Fox. I'm
Speaker 1: on Twitter at Lisa Abramo wits one. Before the podcast,
Speaker 1: you can always catch us worldwide on Bloomberg Radio.