1 00:00:05,800 --> 00:00:08,720 Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim Fox. 2 00:00:08,760 --> 00:00:11,560 Speaker 1: Along with my co host Lisa Abramowitz. 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 --> 00:00:32,200 Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well, 7 00:00:32,240 --> 00:00:34,519 Speaker 1: I want to turn our attention now to the airline industry, 8 00:00:34,520 --> 00:00:38,680 Speaker 1: and specifically to Hawaiian Airlines. The president and chief executive 9 00:00:38,720 --> 00:00:41,800 Speaker 1: of Hawaiian Holdings joins us now, Mark Dunkley. Mark, always 10 00:00:41,800 --> 00:00:43,879 Speaker 1: a pleasure to speak with you. UM. I want to 11 00:00:43,880 --> 00:00:47,360 Speaker 1: set this stage back in July during the the earnings 12 00:00:47,360 --> 00:00:49,839 Speaker 1: conference call, and I just want to parenthetically say, I 13 00:00:49,880 --> 00:00:53,040 Speaker 1: know that you're going to be releasing your results next Thursday, 14 00:00:53,080 --> 00:00:55,960 Speaker 1: so you're a priet period, so UM, you know you 15 00:00:56,000 --> 00:00:57,800 Speaker 1: can kind of do the air quotes and we'll make 16 00:00:57,840 --> 00:01:01,560 Speaker 1: believe we understand what you're saying. But on the conference 17 00:01:01,600 --> 00:01:05,839 Speaker 1: call last quarter, you talked about things like the extra 18 00:01:05,920 --> 00:01:11,400 Speaker 1: comfort seats UH, the new A three NEOs from air Bush, 19 00:01:11,480 --> 00:01:14,640 Speaker 1: the relocation at the loss at the at L a X, 20 00:01:14,959 --> 00:01:20,160 Speaker 1: also first route expansion, because of the new aircraft. Now 21 00:01:20,200 --> 00:01:22,080 Speaker 1: I'm an invest not me, but i'm you know, an 22 00:01:22,080 --> 00:01:25,400 Speaker 1: investor comes to the call next Thursday and says, yeah, 23 00:01:25,400 --> 00:01:28,480 Speaker 1: but wait, the stock is down thirty this year. What 24 00:01:28,680 --> 00:01:33,319 Speaker 1: is happening? How? What can you say given the quiet period, 25 00:01:33,600 --> 00:01:36,480 Speaker 1: in order to at least make people not go bananas 26 00:01:36,480 --> 00:01:39,479 Speaker 1: when they when they get on the call. Yeah, well, 27 00:01:39,520 --> 00:01:41,399 Speaker 1: I think you know, when you look at our share 28 00:01:41,440 --> 00:01:44,040 Speaker 1: price performance over last several years, we were this sort 29 00:01:44,040 --> 00:01:49,000 Speaker 1: of bell of the industry. UM, seeing our stock appreciate. Uh. 30 00:01:49,040 --> 00:01:51,760 Speaker 1: In the last couple of months, there have been too 31 00:01:52,600 --> 00:01:56,840 Speaker 1: prominent announcements by competitors that they're going to add capacity 32 00:01:56,840 --> 00:02:00,000 Speaker 1: in our market. And that's clearly weighing Southwest for example, 33 00:02:00,560 --> 00:02:03,440 Speaker 1: Southwest has one and united with the other a couple 34 00:02:03,440 --> 00:02:06,120 Speaker 1: of months ago. UM. I think the things to to 35 00:02:06,200 --> 00:02:09,480 Speaker 1: look to though, are a couple of factors. One is 36 00:02:09,520 --> 00:02:12,960 Speaker 1: that we continue to talk with great confidence about the 37 00:02:13,000 --> 00:02:16,360 Speaker 1: superior superiority of our product. The fact that you know, 38 00:02:16,400 --> 00:02:19,480 Speaker 1: for for what we do, which is uh, flying to 39 00:02:19,520 --> 00:02:23,360 Speaker 1: Hawaiian selling, Hawaii's a destination around the world. Uh, nobody's 40 00:02:23,400 --> 00:02:25,240 Speaker 1: got a better formula than we do. And we we 41 00:02:25,320 --> 00:02:28,480 Speaker 1: frankly wouldn't trade places with with any of our competitors, 42 00:02:28,960 --> 00:02:31,400 Speaker 1: and you know, we're sort of backing up that confidence 43 00:02:31,440 --> 00:02:33,639 Speaker 1: as recently as a couple of days ago, we announced 44 00:02:33,800 --> 00:02:37,119 Speaker 1: a quarterly dividend that we're going to pay um and that's, 45 00:02:37,200 --> 00:02:40,160 Speaker 1: you know, very deliberately to to send a signal to 46 00:02:40,200 --> 00:02:43,280 Speaker 1: say that, you know, at least looking into the long term, 47 00:02:43,919 --> 00:02:48,000 Speaker 1: looking beyond what may happen with additional capacity coming in 48 00:02:48,040 --> 00:02:50,720 Speaker 1: next year, looking to the long term. We're in the 49 00:02:50,720 --> 00:02:53,760 Speaker 1: management team and the board of directors have great confidence 50 00:02:53,760 --> 00:02:57,120 Speaker 1: in our franchise. Okay, So, and the dividend what the 51 00:02:57,200 --> 00:02:59,200 Speaker 1: twelve centsers share, So that's like one in a quarter 52 00:02:59,280 --> 00:03:02,560 Speaker 1: percent based on today's a stock price of thirty eight dollars. 53 00:03:03,480 --> 00:03:06,840 Speaker 1: Can you maybe just describe to people the franchise that 54 00:03:06,960 --> 00:03:11,200 Speaker 1: you have inter Island and how perhaps the revenue from 55 00:03:11,280 --> 00:03:15,080 Speaker 1: that franchise almost offers a kind of annuity to the 56 00:03:15,160 --> 00:03:19,840 Speaker 1: business that other airlines may not have. Uh yeah, we 57 00:03:20,000 --> 00:03:22,640 Speaker 1: we we account for about eighty five of all the 58 00:03:22,680 --> 00:03:25,440 Speaker 1: travel between the islands of the state of Hawaii. And 59 00:03:25,480 --> 00:03:27,680 Speaker 1: for the for your listeners who may not be as 60 00:03:27,720 --> 00:03:30,680 Speaker 1: familiar with Hawaii, is that certainly like to be Um, 61 00:03:31,080 --> 00:03:33,200 Speaker 1: what I can say is it's a bigger business than 62 00:03:33,440 --> 00:03:36,920 Speaker 1: than people perhaps have in mind. I mean, we we 63 00:03:37,040 --> 00:03:40,520 Speaker 1: fly thirty two times a day in each direction between 64 00:03:40,560 --> 00:03:42,760 Speaker 1: Honolulu and Maui. Just to give you a sense of 65 00:03:42,760 --> 00:03:46,400 Speaker 1: the scale. We carry more passengers between Honolulu and can 66 00:03:46,640 --> 00:03:52,080 Speaker 1: Louis than all airlines combined fly between Washington National U 67 00:03:52,360 --> 00:03:56,040 Speaker 1: and LaGuardia Airports in New York. So it's a pretty 68 00:03:56,080 --> 00:04:01,400 Speaker 1: big business. We have eighty five or thereabouts of that market. 69 00:04:01,560 --> 00:04:04,800 Speaker 1: And it's a business that that sort of carries everyday 70 00:04:04,800 --> 00:04:09,600 Speaker 1: life here, school groups, people going to see their the doctors, 71 00:04:10,400 --> 00:04:13,160 Speaker 1: things like that. So it tends to have pretty low 72 00:04:13,640 --> 00:04:16,680 Speaker 1: price elastics you've demand and pretty low income elastics. You've 73 00:04:16,760 --> 00:04:21,520 Speaker 1: demat tell us a little bit about Japan Airlines alliances 74 00:04:21,560 --> 00:04:26,000 Speaker 1: and the new routes from Haneda and Narita. Well, you know, 75 00:04:26,040 --> 00:04:28,880 Speaker 1: you've followed our story for for a long time, and 76 00:04:29,800 --> 00:04:33,560 Speaker 1: as your listeners may perhaps again not appreciate fully, Um, 77 00:04:34,000 --> 00:04:36,400 Speaker 1: the bulk of our expansion over the last seven years, 78 00:04:36,440 --> 00:04:38,920 Speaker 1: and we've could roupled in size during that period of time. 79 00:04:38,960 --> 00:04:43,279 Speaker 1: That the bulk of that has come from expanding around 80 00:04:43,320 --> 00:04:48,480 Speaker 1: the Pacific room most prominently to Japan. And three three 81 00:04:48,600 --> 00:04:53,240 Speaker 1: or so weeks ago, we announced a relationship with Japan Airlines, 82 00:04:53,320 --> 00:04:56,160 Speaker 1: which is one of the world's absolute best airlines and 83 00:04:56,200 --> 00:05:01,200 Speaker 1: means a quality, quality company. Uh. And together we're going 84 00:05:01,240 --> 00:05:04,560 Speaker 1: to in the first instance, be code sharing and um 85 00:05:05,200 --> 00:05:09,599 Speaker 1: uh you know, doing those kinds of cooperative activities. But 86 00:05:09,600 --> 00:05:12,920 Speaker 1: but we're also both committed to seeking to enter into 87 00:05:12,920 --> 00:05:17,680 Speaker 1: a joint venture which we believe will it improve choices 88 00:05:17,720 --> 00:05:21,640 Speaker 1: to customers and also make us better able to compete 89 00:05:21,640 --> 00:05:25,000 Speaker 1: in the market and better for our company. If not 90 00:05:25,160 --> 00:05:27,440 Speaker 1: that you get to choose between seven eight sevens and 91 00:05:27,600 --> 00:05:30,960 Speaker 1: are NEOs. I know that that's been an issue, but 92 00:05:31,000 --> 00:05:34,880 Speaker 1: the trend is what to have aircraft that are more economical, 93 00:05:34,960 --> 00:05:38,120 Speaker 1: that can fly longer, such as even you know, the 94 00:05:38,480 --> 00:05:42,719 Speaker 1: the new seven three seven Max. Right. Yeah, we're taking 95 00:05:42,760 --> 00:05:45,120 Speaker 1: delivery in a couple of weeks time of our first 96 00:05:45,240 --> 00:05:49,000 Speaker 1: A three twenty one near which is a narrow body 97 00:05:49,360 --> 00:05:52,480 Speaker 1: UM in its class. It is the most fuel efficient 98 00:05:52,640 --> 00:05:55,440 Speaker 1: narrow body best suited for the markets that we're going 99 00:05:55,480 --> 00:05:59,080 Speaker 1: to fly with it, which is the small markets between 100 00:05:59,080 --> 00:06:03,640 Speaker 1: the US West Post and Hawaii. Uh. It is it's 101 00:06:03,640 --> 00:06:07,440 Speaker 1: a new breed of airplane and both Boeing and airbus 102 00:06:08,000 --> 00:06:10,920 Speaker 1: have airplanes a fit in that category, this particular one 103 00:06:11,240 --> 00:06:16,200 Speaker 1: for this particular mission. Uh, the near by airbus is 104 00:06:16,800 --> 00:06:19,160 Speaker 1: head and shoulders the superior airplane for the route. So 105 00:06:19,200 --> 00:06:21,320 Speaker 1: maybe just step back for a second and as someone 106 00:06:21,400 --> 00:06:24,600 Speaker 1: that's a veteran in the industry, what does an aircraft 107 00:06:24,800 --> 00:06:29,719 Speaker 1: like that and even the Boeing Max what does that 108 00:06:29,839 --> 00:06:32,440 Speaker 1: Due to the sort of whole strategy of where you fly, 109 00:06:32,680 --> 00:06:37,240 Speaker 1: how you fly, and how you allocate the fleet. We 110 00:06:37,279 --> 00:06:40,200 Speaker 1: spent a lot of time on that on that very question. 111 00:06:40,240 --> 00:06:42,599 Speaker 1: I mean, you know, costs are sort of everything in 112 00:06:42,600 --> 00:06:44,719 Speaker 1: the airline business, and finding the right aircraft of the 113 00:06:44,800 --> 00:06:49,360 Speaker 1: right roots and the right size is a paramount importance. Um. 114 00:06:49,800 --> 00:06:53,560 Speaker 1: You know for for many airlines, uh, they're blending their needs. 115 00:06:53,640 --> 00:06:57,360 Speaker 1: You know, they fly roots that are two hundred miles, 116 00:06:57,360 --> 00:07:01,400 Speaker 1: five hundred miles, thousand and three thousand miles and they 117 00:07:01,400 --> 00:07:04,839 Speaker 1: have to find aircraft that are sort of the ideal 118 00:07:04,880 --> 00:07:07,719 Speaker 1: compromised for all of those routes. What's I think pretty 119 00:07:07,760 --> 00:07:11,200 Speaker 1: unique about Hawaiian uh is that we have a very 120 00:07:11,200 --> 00:07:13,840 Speaker 1: shorthaul business between the islands, just one or two hundred 121 00:07:13,960 --> 00:07:18,640 Speaker 1: uticle miles. Then we have nothing until auticle miles where 122 00:07:18,680 --> 00:07:22,920 Speaker 1: we have almost half of our business is between the 123 00:07:23,000 --> 00:07:27,200 Speaker 1: US West Coast and Hawaii. UH, and then beyond that 124 00:07:27,280 --> 00:07:30,160 Speaker 1: we go to eight to ten hour up to almost 125 00:07:30,280 --> 00:07:35,320 Speaker 1: twelve flights. So we have these very specific needs, UM, 126 00:07:35,400 --> 00:07:38,239 Speaker 1: and a lot of time and attention goes into choosing 127 00:07:38,240 --> 00:07:40,840 Speaker 1: the aircraft that's right for the needs. And both air 128 00:07:40,880 --> 00:07:44,480 Speaker 1: framers a bus and going make terrific airplanes, as do 129 00:07:44,600 --> 00:07:48,160 Speaker 1: the engine manufacturers who power them. I want to thank 130 00:07:48,160 --> 00:07:50,600 Speaker 1: you very much for spending time with us. Mark Dunkley 131 00:07:50,760 --> 00:07:53,320 Speaker 1: is the president and the chief executive of Hawaiian Holdings 132 00:07:53,840 --> 00:07:58,400 Speaker 1: that is the ut parent company of Hawaiian Airlines, and 133 00:07:58,600 --> 00:08:12,840 Speaker 1: they will be releasing their results next Thursday. Our next 134 00:08:12,880 --> 00:08:15,600 Speaker 1: guest is Rick Lazio. He is the senior vice president 135 00:08:15,680 --> 00:08:18,360 Speaker 1: of Aliant Group. He's the former US representative from the 136 00:08:18,440 --> 00:08:22,600 Speaker 1: York serving in Congress from to two thousand and one. 137 00:08:22,960 --> 00:08:26,400 Speaker 1: Representative Lazio, thank you very much for being with us. UM. 138 00:08:26,400 --> 00:08:28,600 Speaker 1: I wonder if you can just get your response to 139 00:08:28,960 --> 00:08:32,640 Speaker 1: UH comments made earlier today on Bloomberg Television. Larry Summers, 140 00:08:32,760 --> 00:08:36,240 Speaker 1: former Treasury Secretary, was speaking with David Weston and Alex Steel, 141 00:08:36,320 --> 00:08:38,760 Speaker 1: and he said, I believe that when you put something 142 00:08:38,840 --> 00:08:41,400 Speaker 1: forth called tax plan, it has to be described in 143 00:08:41,440 --> 00:08:44,160 Speaker 1: a way where people can figure out what their taxes 144 00:08:44,160 --> 00:08:47,880 Speaker 1: would be under it. You need some data, and he says, 145 00:08:48,040 --> 00:08:52,599 Speaker 1: we're operating outside of those parameters. What's your response. My 146 00:08:52,720 --> 00:08:55,320 Speaker 1: response is that the bill hasn't been drafted yet, and 147 00:08:55,360 --> 00:08:58,760 Speaker 1: it will run through committee and those numbers will be 148 00:08:58,800 --> 00:09:02,720 Speaker 1: provided by what's called the Joint Tax Committee in Congress, 149 00:09:03,400 --> 00:09:07,800 Speaker 1: and UH Secretary Summons will have all the data that 150 00:09:07,840 --> 00:09:11,000 Speaker 1: he'd like. I'm sure he's going to have an issue 151 00:09:11,080 --> 00:09:15,280 Speaker 1: with with with the assumptions that are made, but they 152 00:09:15,320 --> 00:09:17,880 Speaker 1: will be plenty of dat it before the bill is 153 00:09:17,920 --> 00:09:21,160 Speaker 1: actually voted on and sent to the President's desk. Okay, 154 00:09:21,200 --> 00:09:24,239 Speaker 1: so understanding that we're going to get more details representative 155 00:09:24,320 --> 00:09:26,640 Speaker 1: Lawso so far the details that we have gotten have 156 00:09:26,800 --> 00:09:30,359 Speaker 1: led to a number of different think tanks to say 157 00:09:30,400 --> 00:09:33,800 Speaker 1: that it could potentially raise taxes on certain middle class 158 00:09:34,400 --> 00:09:38,239 Speaker 1: workers in the United States, and it could potentially provide 159 00:09:38,360 --> 00:09:43,160 Speaker 1: a boon to say hedge funds or independent contractors who 160 00:09:43,200 --> 00:09:45,720 Speaker 1: could claim to be passed through entities. What's your response 161 00:09:45,760 --> 00:09:48,280 Speaker 1: to that. My response to that, again is that we 162 00:09:48,320 --> 00:09:50,440 Speaker 1: have to sort of look at wait for the details 163 00:09:50,440 --> 00:09:53,079 Speaker 1: and see overall how this affects the general economy. The 164 00:09:53,160 --> 00:09:55,720 Speaker 1: name I think the challenge here is how do you 165 00:09:55,760 --> 00:10:00,840 Speaker 1: get growth rates back up to a consistent three cent rate? 166 00:10:01,120 --> 00:10:05,600 Speaker 1: And that is where we've been in past expansions. We've 167 00:10:05,640 --> 00:10:09,240 Speaker 1: been running at to to two since the beginning of 168 00:10:09,280 --> 00:10:13,360 Speaker 1: this expansion, so it's it's suboptimal. The major culprit, and 169 00:10:13,480 --> 00:10:16,920 Speaker 1: my sense of my belief, is a business investment that 170 00:10:16,960 --> 00:10:20,760 Speaker 1: has been holding down both productivity and overall GDP growth, 171 00:10:20,800 --> 00:10:22,320 Speaker 1: And the best way to get at that is to 172 00:10:22,360 --> 00:10:25,320 Speaker 1: incentivize more business investment. And that's partly through things like 173 00:10:25,360 --> 00:10:28,720 Speaker 1: the research and development tax credit and other business incentives, 174 00:10:28,880 --> 00:10:34,000 Speaker 1: as as well as expensing equipment and um and factories 175 00:10:34,000 --> 00:10:36,840 Speaker 1: and the kinds of things that we want businesses to 176 00:10:36,880 --> 00:10:40,120 Speaker 1: invest in. It ultimately to hiring more people and paying 177 00:10:40,120 --> 00:10:43,120 Speaker 1: their workers more more in salary. Understood, So this sort 178 00:10:43,120 --> 00:10:46,720 Speaker 1: of virtuous cycle. But representative laws, how are we able 179 00:10:46,760 --> 00:10:51,320 Speaker 1: to even uh negotiate or discuss a plan that, as 180 00:10:51,320 --> 00:10:54,520 Speaker 1: you say, is missing so many details? And you know, 181 00:10:54,679 --> 00:10:58,320 Speaker 1: is it unusual or unwise to not open it up 182 00:10:58,440 --> 00:11:02,640 Speaker 1: and be more forthcoming during the negotiation phases because normally 183 00:11:03,080 --> 00:11:06,640 Speaker 1: there are more details at this point in the process. Well, 184 00:11:06,679 --> 00:11:09,560 Speaker 1: I think we can talk about what we know so far. 185 00:11:09,679 --> 00:11:12,480 Speaker 1: We know that there is general consensus among Republicans in 186 00:11:12,520 --> 00:11:15,960 Speaker 1: the House and the Senate to collapse rates from seven 187 00:11:16,040 --> 00:11:18,040 Speaker 1: rates down to three and would probably will end up 188 00:11:18,080 --> 00:11:19,920 Speaker 1: being four before all is said and done. We know 189 00:11:20,000 --> 00:11:22,760 Speaker 1: that there is an effort to move towards an extra 190 00:11:22,840 --> 00:11:26,319 Speaker 1: territorial tax system and try and repatriate two and a 191 00:11:26,320 --> 00:11:29,920 Speaker 1: half or three trillion dollars of money that's trapped overseas. 192 00:11:29,960 --> 00:11:33,760 Speaker 1: We know that there's general agreement on reducing the c 193 00:11:34,000 --> 00:11:36,840 Speaker 1: corporate corporate tax rates, and we know that there's going 194 00:11:36,880 --> 00:11:39,920 Speaker 1: to be a extraordinary effort to try and make sure 195 00:11:39,960 --> 00:11:42,600 Speaker 1: that there is some rough parody with pass through entities 196 00:11:43,000 --> 00:11:46,080 Speaker 1: and the small businesses that employ about half of all 197 00:11:46,120 --> 00:11:51,199 Speaker 1: American workers will also see relief. So there are a 198 00:11:52,200 --> 00:11:56,680 Speaker 1: number of very critical pillars to the reform that's being 199 00:11:56,679 --> 00:11:59,760 Speaker 1: put forward that we do know a lot about. Do 200 00:11:59,800 --> 00:12:02,280 Speaker 1: we know exactly what the languages know? Will have to 201 00:12:02,280 --> 00:12:05,400 Speaker 1: wait until that bill is drafted, and it obviously won't 202 00:12:05,400 --> 00:12:07,800 Speaker 1: be voted on until it's drafted. Do you believe it 203 00:12:07,840 --> 00:12:12,240 Speaker 1: whatever bill is drafted and passed should be revenue neutral. Well, 204 00:12:12,280 --> 00:12:15,240 Speaker 1: I believe that they that that Congress and the President 205 00:12:15,480 --> 00:12:18,640 Speaker 1: need to be mindful and realistic about the budget deficite. 206 00:12:18,640 --> 00:12:21,200 Speaker 1: I think that the size of the deficit is a 207 00:12:21,280 --> 00:12:25,240 Speaker 1: threat to future growth, so that yes, that's a that's 208 00:12:25,280 --> 00:12:27,640 Speaker 1: a that's what do I think it needs to be 209 00:12:27,960 --> 00:12:31,040 Speaker 1: revenue neutral? I think they need to look at it 210 00:12:31,040 --> 00:12:33,319 Speaker 1: in terms should we be all able to understand how 211 00:12:33,360 --> 00:12:36,520 Speaker 1: it's going to be paid for? Yes? Of course. Okay, 212 00:12:36,640 --> 00:12:39,679 Speaker 1: then do you believe that threatening sitting senators like the 213 00:12:39,760 --> 00:12:45,679 Speaker 1: Democrat Joe Donnelly from Indiana who is on the committee, UH, 214 00:12:45,800 --> 00:12:47,960 Speaker 1: that the president is going to work for his defeat 215 00:12:48,000 --> 00:12:50,880 Speaker 1: unless he falls into line with the tax plan and 216 00:12:50,960 --> 00:12:54,480 Speaker 1: he's been asking for information about what exactly this is 217 00:12:54,520 --> 00:12:57,920 Speaker 1: going to do to the budget? Does that make any sense? 218 00:13:00,000 --> 00:13:04,200 Speaker 1: I always think that you are better off in the 219 00:13:04,280 --> 00:13:09,199 Speaker 1: long run appealing to somebody's better angels and to persuading 220 00:13:09,280 --> 00:13:15,319 Speaker 1: through positive UH, data and arguments. So you know this 221 00:13:16,000 --> 00:13:19,280 Speaker 1: part of the body politics these days, on both sides, 222 00:13:19,320 --> 00:13:21,640 Speaker 1: they are, of course it is. Do I think it's 223 00:13:21,679 --> 00:13:25,720 Speaker 1: what the way approach I would take. Now, it's not representative. Lazio, 224 00:13:25,960 --> 00:13:30,560 Speaker 1: you represented New York and New York could potentially be 225 00:13:30,679 --> 00:13:34,120 Speaker 1: the one of the bigger losers from this whole plan, 226 00:13:34,400 --> 00:13:38,839 Speaker 1: since the local deductions would be eliminated. What's your view 227 00:13:38,840 --> 00:13:42,080 Speaker 1: on that, Well, it's very difficult to get rates down, 228 00:13:42,160 --> 00:13:45,240 Speaker 1: marginal rates down if you don't address deductions, and then 229 00:13:45,320 --> 00:13:48,559 Speaker 1: one of the largest deductions of state local taxes about 230 00:13:48,559 --> 00:13:53,280 Speaker 1: one point three trillion dollars in revenues revenue lost through that. UM, 231 00:13:53,320 --> 00:13:55,760 Speaker 1: I think if you're from New York, or you're from California, 232 00:13:55,840 --> 00:13:58,760 Speaker 1: from New Jersey, and by the way, those states are 233 00:13:59,120 --> 00:14:03,280 Speaker 1: the are are major consumers of the state and local deduction, 234 00:14:03,760 --> 00:14:09,120 Speaker 1: especially upper income people. I mean about about for example, 235 00:14:09,520 --> 00:14:14,960 Speaker 1: of UM, the benefit for state income taxes and sales 236 00:14:14,960 --> 00:14:19,160 Speaker 1: taxes float for people making over two hundred thousand dollars, 237 00:14:19,200 --> 00:14:24,080 Speaker 1: So this is this would affect mostly upper income people 238 00:14:24,360 --> 00:14:27,040 Speaker 1: in high tax states, and of course California, New York, 239 00:14:27,040 --> 00:14:30,520 Speaker 1: New Jersey are are three of them. UM. If I'm 240 00:14:30,600 --> 00:14:33,080 Speaker 1: in a town hall meeting and I'm talking to a constituent, 241 00:14:33,280 --> 00:14:35,560 Speaker 1: I'm gonna be consistuents going to raise their hand and 242 00:14:35,640 --> 00:14:38,760 Speaker 1: about my state and local taxes, I'd say, well, number one, 243 00:14:38,920 --> 00:14:41,600 Speaker 1: let's see how you do overall. The standard deduction is 244 00:14:41,600 --> 00:14:46,200 Speaker 1: proposed to be doubled um Right now, most Americans don't 245 00:14:46,240 --> 00:14:51,000 Speaker 1: file itemized returns because they get a standard deduction. Even 246 00:14:51,120 --> 00:14:55,600 Speaker 1: fewer Americans will will file itemized returns if the standard 247 00:14:55,600 --> 00:15:03,040 Speaker 1: deduction is doubled to thousands. So it could potentially be 248 00:15:03,160 --> 00:15:05,600 Speaker 1: lesson than people are expected, or it might affect the 249 00:15:05,680 --> 00:15:08,600 Speaker 1: only the wealthiest people. Rick Lazio, I would love to 250 00:15:08,640 --> 00:15:10,560 Speaker 1: continue the conversation. We have to. We have to run 251 00:15:10,640 --> 00:15:13,960 Speaker 1: Rick Lazio as senior vice president for Alliant Group. He 252 00:15:14,000 --> 00:15:16,520 Speaker 1: also was a former US Representative from New York, serving 253 00:15:16,560 --> 00:15:31,880 Speaker 1: Congress from nWo one. Well, the hottest spot in credit 254 00:15:31,920 --> 00:15:35,880 Speaker 1: markets this year is arguably emerging markets credit credit and 255 00:15:35,880 --> 00:15:39,600 Speaker 1: the riskier the better. In fact, Aviva investors just came 256 00:15:39,640 --> 00:15:43,040 Speaker 1: out and so that they view local currency emerging markets 257 00:15:43,160 --> 00:15:46,400 Speaker 1: debt as safer than US treasuries. Here to weigh in 258 00:15:46,560 --> 00:15:49,680 Speaker 1: on what we've been seeing in the emerging market spaces. 259 00:15:49,720 --> 00:15:53,680 Speaker 1: Damian Sasaur fixing come strategist focused on developing markets for 260 00:15:53,760 --> 00:15:56,120 Speaker 1: Bloomberg Intelligence, and he joins us here in our Bloomberg 261 00:15:56,320 --> 00:16:02,480 Speaker 1: eleven three oh studios. Damien does it um Well, I 262 00:16:02,520 --> 00:16:04,360 Speaker 1: don't think it scares me. Per se. I mean, I 263 00:16:04,400 --> 00:16:07,080 Speaker 1: just think it speaks to the state of liquidity and 264 00:16:07,400 --> 00:16:11,000 Speaker 1: developed markets right now and tight spreads, low yields broadly 265 00:16:11,040 --> 00:16:14,440 Speaker 1: speaking across the whole of you know, fixed income. So 266 00:16:14,480 --> 00:16:16,320 Speaker 1: I think there's a lot of cash out there and 267 00:16:16,360 --> 00:16:17,920 Speaker 1: there aren't a lot of places to put it, and 268 00:16:17,920 --> 00:16:20,520 Speaker 1: that's what's driving y AM here. Well, one of the 269 00:16:20,560 --> 00:16:23,000 Speaker 1: places that people are putting it is in the e 270 00:16:23,200 --> 00:16:25,840 Speaker 1: t F e m B. This is the I Shares 271 00:16:26,280 --> 00:16:30,200 Speaker 1: Emerging Markets Debt Fund right this is uh the one 272 00:16:30,240 --> 00:16:33,720 Speaker 1: that JP Morgan has put together, and the fund is 273 00:16:33,800 --> 00:16:36,160 Speaker 1: up more than nine percent so far this year. But here, 274 00:16:36,200 --> 00:16:37,760 Speaker 1: this is what I want you to explain if you 275 00:16:37,840 --> 00:16:44,000 Speaker 1: can um Egypt, El Salvador, Argentina, Hungary, Uh, can you 276 00:16:44,120 --> 00:16:48,960 Speaker 1: explain what it is about these other than the yield? Peru, Poland, 277 00:16:49,000 --> 00:16:52,440 Speaker 1: I could go on Panama. You really, does anybody really 278 00:16:52,480 --> 00:16:55,320 Speaker 1: believe that these are better credits? These are governments now, 279 00:16:55,400 --> 00:16:58,760 Speaker 1: that these are better sovereign credits than the U. S. Treasury? Well, now, 280 00:16:58,800 --> 00:17:00,360 Speaker 1: I mean, I think what you have to get when 281 00:17:00,400 --> 00:17:03,120 Speaker 1: you're evaluating any sovereign issuers, you have to look at 282 00:17:03,240 --> 00:17:05,920 Speaker 1: their current account, their balance sheet, their current account balances. 283 00:17:05,920 --> 00:17:07,919 Speaker 1: You have to look at their external debt exposure, right, 284 00:17:07,920 --> 00:17:10,240 Speaker 1: because when we get into times where, for example, in 285 00:17:10,240 --> 00:17:13,720 Speaker 1: September twenty the Federal Reserve announced that, hey, they're not 286 00:17:13,760 --> 00:17:16,320 Speaker 1: going to be data dependent any longer, they're gonna be hiking. 287 00:17:16,320 --> 00:17:18,159 Speaker 1: And regardless, you know, you have to look at what 288 00:17:18,240 --> 00:17:21,080 Speaker 1: that means for local currencies, and and that means if 289 00:17:21,119 --> 00:17:23,119 Speaker 1: you have a lot of external debt exposure, i e. 290 00:17:23,359 --> 00:17:25,760 Speaker 1: You're hungry and you've issued a lot of US dollar debt, 291 00:17:26,280 --> 00:17:28,840 Speaker 1: you might be in for a little asset liability mismatch 292 00:17:28,880 --> 00:17:31,120 Speaker 1: if things go south on you. And then there's effects reserves, 293 00:17:31,119 --> 00:17:33,240 Speaker 1: there's real effective exchange rates. There's a lot of metrics 294 00:17:33,280 --> 00:17:35,760 Speaker 1: you can look at when you're evaluating sovereign risk exposure, 295 00:17:36,240 --> 00:17:39,760 Speaker 1: but by and large, that is um you know, that 296 00:17:39,920 --> 00:17:41,600 Speaker 1: is basically what investors are looking at, and that's what 297 00:17:41,760 --> 00:17:46,280 Speaker 1: driving returns. I'm struck by the flood of money into 298 00:17:46,440 --> 00:17:49,560 Speaker 1: local currency emerging market step because you're talking about the 299 00:17:49,560 --> 00:17:53,080 Speaker 1: currency exposure, and actually if you look at the flows 300 00:17:53,200 --> 00:17:55,800 Speaker 1: into e m B, which is the US dollar Emerging 301 00:17:55,840 --> 00:17:59,200 Speaker 1: market study t F versus e M l C, which 302 00:17:59,359 --> 00:18:01,680 Speaker 1: is the local currency e M debt, it's the money 303 00:18:01,720 --> 00:18:04,600 Speaker 1: has gone disproportionately to the local currency debt. And I'm 304 00:18:04,640 --> 00:18:08,639 Speaker 1: wondering how much is this completely a wager on the 305 00:18:08,720 --> 00:18:12,600 Speaker 1: dollar staying week and possibly weakening further. Oh, that's exactly 306 00:18:12,680 --> 00:18:15,640 Speaker 1: what it is. I mean, currency attribution for local currency 307 00:18:15,880 --> 00:18:18,720 Speaker 1: government debt from eroaching markets is roughly eight percent of 308 00:18:18,760 --> 00:18:21,640 Speaker 1: the equation, right, So you're absolutely right, it's a play 309 00:18:21,640 --> 00:18:24,359 Speaker 1: on currencies. But this is a more recent occurrence. I 310 00:18:24,359 --> 00:18:27,560 Speaker 1: mean the flows into em into local em rates. Uh, 311 00:18:27,680 --> 00:18:30,919 Speaker 1: that's really only been the last call it six months, 312 00:18:31,200 --> 00:18:32,440 Speaker 1: But for the better part of the last two and 313 00:18:32,440 --> 00:18:34,640 Speaker 1: a half years, you've been seeing flows into hard currency 314 00:18:34,640 --> 00:18:36,640 Speaker 1: e M debt and it's been off the charts. So 315 00:18:36,800 --> 00:18:40,760 Speaker 1: how much would the dollar have to strengthen to cause 316 00:18:40,800 --> 00:18:44,280 Speaker 1: some serious pain? That's a that's a tricky question. I 317 00:18:44,320 --> 00:18:46,359 Speaker 1: mean I can't really say. I know, our our friends 318 00:18:46,359 --> 00:18:49,920 Speaker 1: over in bi economics have basically called for a stronger 319 00:18:49,960 --> 00:18:52,480 Speaker 1: dollar over the better part of you know, well, really 320 00:18:52,480 --> 00:18:55,520 Speaker 1: when the FED starts, you know, uh, you know, rolling off, 321 00:18:56,040 --> 00:18:58,760 Speaker 1: you know, the excess, it's basically tapering, it's it's pulling 322 00:18:58,760 --> 00:19:01,880 Speaker 1: back the balanty, etcetera. I think I think it would 323 00:19:01,920 --> 00:19:03,800 Speaker 1: take quite a bit for you to see things start 324 00:19:03,880 --> 00:19:05,240 Speaker 1: to go, but when they go, that can go in 325 00:19:05,240 --> 00:19:08,000 Speaker 1: a hurry. I'm just looking at the difference in the 326 00:19:08,080 --> 00:19:11,960 Speaker 1: yield between the funds that invest in the local currency 327 00:19:12,080 --> 00:19:16,280 Speaker 1: debt and the hard currency debt of the same nations, 328 00:19:16,640 --> 00:19:18,840 Speaker 1: and you're talking about a spread of anywhere from four 329 00:19:18,880 --> 00:19:22,119 Speaker 1: and a half percent for the hard currency to getting 330 00:19:22,119 --> 00:19:24,439 Speaker 1: maybe a little bit more five and a quarter percent 331 00:19:24,640 --> 00:19:30,080 Speaker 1: for the local currency. UH funds, Is that really are 332 00:19:30,119 --> 00:19:32,480 Speaker 1: you taking more risk when you come when you think 333 00:19:32,520 --> 00:19:35,040 Speaker 1: about the reward? I mean, is seventy five basis points 334 00:19:35,160 --> 00:19:38,639 Speaker 1: really that much in the overall scheme of things that 335 00:19:38,760 --> 00:19:41,399 Speaker 1: you're gonna take that that risk not at all? And 336 00:19:41,440 --> 00:19:42,879 Speaker 1: I think you have to be clear about who the 337 00:19:42,880 --> 00:19:45,879 Speaker 1: constituents of those two industries are, right and eating hard currency, 338 00:19:45,920 --> 00:19:48,080 Speaker 1: You've got a lot of those, you know, single beast 339 00:19:48,080 --> 00:19:50,560 Speaker 1: sovereign names you had mentioned previously, kind of the Iraqs, 340 00:19:50,600 --> 00:19:53,480 Speaker 1: the Turk Medasin, I mean, Kajikistan. I mean like, there's 341 00:19:53,480 --> 00:19:55,399 Speaker 1: been a ton of single beast sovereigns that have come 342 00:19:55,440 --> 00:19:57,119 Speaker 1: to marketing hard currency debt of the better part of 343 00:19:57,119 --> 00:20:01,879 Speaker 1: the last few years. In local currency, UH investable local 344 00:20:01,920 --> 00:20:05,520 Speaker 1: currency government debt from emerging markets there's only a handful. 345 00:20:05,560 --> 00:20:07,520 Speaker 1: I would say, you know, twenty at the most, and 346 00:20:07,600 --> 00:20:10,760 Speaker 1: you're really talking about the majors there. I'm wondering how 347 00:20:10,880 --> 00:20:14,480 Speaker 1: much the investors who are pouring money into emerging markets 348 00:20:14,560 --> 00:20:17,560 Speaker 1: right now are looking at these specific countries and their 349 00:20:17,600 --> 00:20:21,200 Speaker 1: respective issues, and how much is coming in through broad 350 00:20:21,280 --> 00:20:23,679 Speaker 1: market index funds. The reason why I ask is because 351 00:20:23,880 --> 00:20:26,000 Speaker 1: it's sort of disingenuous for us to sort of lump 352 00:20:26,080 --> 00:20:28,959 Speaker 1: a whole vast swath of countries together as just emerging 353 00:20:28,960 --> 00:20:32,480 Speaker 1: markets and to view them completely unilaterally. I mean, do 354 00:20:32,520 --> 00:20:36,080 Speaker 1: you feel like people are delineating between better credits and 355 00:20:36,240 --> 00:20:38,640 Speaker 1: worst credits? No? I don't think they are at all. 356 00:20:38,680 --> 00:20:41,400 Speaker 1: I think it's as you said, I think it's passive investment. 357 00:20:41,440 --> 00:20:43,920 Speaker 1: I think it's UM. It's really just, you know, basically 358 00:20:43,960 --> 00:20:45,560 Speaker 1: people saying I want to own it all. I want 359 00:20:45,560 --> 00:20:47,119 Speaker 1: to own everything, and I want to own it in 360 00:20:47,320 --> 00:20:50,840 Speaker 1: whatever incremental side it's coming to marketing. UM. I will say, though, 361 00:20:50,960 --> 00:20:53,320 Speaker 1: just if you're looking at UMM, thank you the land 362 00:20:53,359 --> 00:20:56,000 Speaker 1: of ETF right, Well, I mean you don't get the 363 00:20:56,000 --> 00:20:57,719 Speaker 1: pick and shoes, right, I mean, you go into an 364 00:20:57,720 --> 00:20:59,439 Speaker 1: e t F like this, you don't get to say, oh, 365 00:20:59,480 --> 00:21:04,080 Speaker 1: I want rething, but debt from Uraguay. I just think 366 00:21:04,200 --> 00:21:07,119 Speaker 1: the risk that you're you're mentioning is structural, right. I 367 00:21:07,119 --> 00:21:10,400 Speaker 1: mean the fact that the underlying emerging market bonds, even 368 00:21:10,440 --> 00:21:13,639 Speaker 1: the hardcorency US dollar bonds, the fact that an e 369 00:21:13,760 --> 00:21:16,199 Speaker 1: t F is allowing you to provide daily liquidity in 370 00:21:16,240 --> 00:21:19,480 Speaker 1: and out of those positions when those bonds don't really 371 00:21:19,520 --> 00:21:23,040 Speaker 1: trade like that. That could be an area of concern 372 00:21:23,160 --> 00:21:26,159 Speaker 1: going forward, just that structural liquidity mismatch, so to speak. 373 00:21:26,200 --> 00:21:28,399 Speaker 1: And and so that is an area that I'm looking at. 374 00:21:28,440 --> 00:21:29,960 Speaker 1: It's an area that my peers, I know, I've looked 375 00:21:30,000 --> 00:21:32,480 Speaker 1: at very closely. But you know, we're not quite uh, 376 00:21:32,600 --> 00:21:34,280 Speaker 1: we're not quite sure what to makeup at this point. 377 00:21:34,320 --> 00:21:37,840 Speaker 1: And of course Chinese, the Chinese Congress meets next week, 378 00:21:38,000 --> 00:21:41,640 Speaker 1: and I could also throw some potential opotatoes. And it's 379 00:21:41,640 --> 00:21:46,359 Speaker 1: interesting how liquidity can dry up so quickly, uh, particularly 380 00:21:46,400 --> 00:21:51,680 Speaker 1: in the debt that is maybe not universally traded. I 381 00:21:51,800 --> 00:21:54,360 Speaker 1: have to watch this, and that's why we got Damian Sassar. 382 00:21:54,480 --> 00:22:09,240 Speaker 1: He is are fixed income strategist for Bloomberg Intelligence. Late 383 00:22:09,480 --> 00:22:13,359 Speaker 1: last night, the European Central Bank officials were said to 384 00:22:13,359 --> 00:22:16,720 Speaker 1: be considering cutting their monthly bond buying, but at least 385 00:22:16,920 --> 00:22:21,000 Speaker 1: half starting in January. This was reported by Bloomberg News, 386 00:22:21,240 --> 00:22:24,320 Speaker 1: and the reaction to this is sort of surprising because 387 00:22:24,359 --> 00:22:27,560 Speaker 1: you think, Okay, the e c B is tapering, it's stimulus. 388 00:22:27,800 --> 00:22:31,280 Speaker 1: People would sell their bonds, their German government bonds? What 389 00:22:31,320 --> 00:22:34,399 Speaker 1: do they do? They bought here to explain why and 390 00:22:34,480 --> 00:22:37,800 Speaker 1: what this means about the great Central Bank unwind, going 391 00:22:37,880 --> 00:22:40,840 Speaker 1: forward to Scott Kimball, portfolio manager of the b MO 392 00:22:41,080 --> 00:22:44,200 Speaker 1: at tc H Core Plus Bond Fund, which trades under 393 00:22:44,240 --> 00:22:47,240 Speaker 1: the ticker m c B i X, and he joins 394 00:22:47,320 --> 00:22:51,480 Speaker 1: us here in our eleven three oh studio, Scott, I 395 00:22:51,520 --> 00:22:54,880 Speaker 1: don't know. If this can't get people to sell their 396 00:22:54,960 --> 00:22:59,280 Speaker 1: government bonds, what will Well? That's first of all, thank 397 00:22:59,280 --> 00:23:01,280 Speaker 1: you for having me, and uh, just to chime in 398 00:23:01,320 --> 00:23:02,919 Speaker 1: on what you were talking about there with the e 399 00:23:03,000 --> 00:23:05,400 Speaker 1: c B. UH, you know Chairman grip Draggy coming out 400 00:23:05,440 --> 00:23:09,359 Speaker 1: and talking about reducing the quantitative easing program. Uh, it 401 00:23:09,720 --> 00:23:11,760 Speaker 1: comes with really two different lenses you have to look 402 00:23:11,800 --> 00:23:14,120 Speaker 1: through it. One is the view of what that means 403 00:23:14,160 --> 00:23:17,840 Speaker 1: inherently for the bond market, which is, UH, if people 404 00:23:17,880 --> 00:23:22,080 Speaker 1: are holding onto German bunds, Spanish debt, Italian debt at 405 00:23:22,200 --> 00:23:24,040 Speaker 1: and expecting that the ECB is going to come in 406 00:23:24,040 --> 00:23:27,480 Speaker 1: and purchase those securities from them over the near term. 407 00:23:27,640 --> 00:23:30,080 Speaker 1: Then they could be potentially disappointed in the fact that 408 00:23:30,119 --> 00:23:32,000 Speaker 1: they've come out and said, well, we're going to continue buying, 409 00:23:32,000 --> 00:23:34,600 Speaker 1: but not quite as much. What should, in theory put 410 00:23:34,600 --> 00:23:37,359 Speaker 1: pressure on the spreads between those two move higher in 411 00:23:37,440 --> 00:23:41,439 Speaker 1: rates to move higher accordingly, UH, what happened is that 412 00:23:41,480 --> 00:23:44,359 Speaker 1: we saw investors come in and actually begin purchasing bonds 413 00:23:44,400 --> 00:23:47,639 Speaker 1: again today very strongly at a faster pace, which we 414 00:23:47,720 --> 00:23:51,640 Speaker 1: interpret as meaning that while the ECB is reducing the 415 00:23:51,960 --> 00:23:55,320 Speaker 1: overall size of the program, UH, the investors are still 416 00:23:55,359 --> 00:23:57,760 Speaker 1: betting that it's going to continue further on into the future, 417 00:23:58,160 --> 00:23:59,840 Speaker 1: and that the e c B is rather just sort 418 00:23:59,880 --> 00:24:01,919 Speaker 1: of keeping pace with what the FED and other central 419 00:24:01,920 --> 00:24:04,920 Speaker 1: banks are doing, and that they're not taking away the 420 00:24:05,000 --> 00:24:07,600 Speaker 1: punch bowl entirely. There's still a lot of reasons why 421 00:24:07,640 --> 00:24:10,760 Speaker 1: liquidity needs to remain very high in these economies, but 422 00:24:11,000 --> 00:24:12,679 Speaker 1: they're just taking some of the sugar out of it. 423 00:24:12,920 --> 00:24:16,159 Speaker 1: We've seen a very strong recovery throughout certainly the US 424 00:24:16,520 --> 00:24:19,600 Speaker 1: from our cycle Japan, we've seen the equity market over 425 00:24:19,600 --> 00:24:21,960 Speaker 1: there come to life, and we're seeing that European data 426 00:24:22,000 --> 00:24:24,800 Speaker 1: has been strong. So, uh, this is probably a fairly 427 00:24:24,840 --> 00:24:27,560 Speaker 1: appropriate step from the ECB. But we don't anticipate that 428 00:24:27,600 --> 00:24:30,720 Speaker 1: they're going to be exiting this bond buying program in 429 00:24:30,760 --> 00:24:32,640 Speaker 1: the intermediate term, which is why we think you saw 430 00:24:32,640 --> 00:24:35,679 Speaker 1: investors come in and sort of reassert their position. Hey, Scott, 431 00:24:35,680 --> 00:24:39,360 Speaker 1: I'm just wondering maybe there's a third, a third possibility, 432 00:24:39,440 --> 00:24:41,600 Speaker 1: and this could then we get into some talk about 433 00:24:41,600 --> 00:24:44,800 Speaker 1: what's in the York portfolio. But um, all right, let's 434 00:24:44,800 --> 00:24:47,359 Speaker 1: say that rates do rise. If they ever do rise 435 00:24:47,359 --> 00:24:50,080 Speaker 1: in Europe, that's going to make the new bonds more expensive. 436 00:24:50,400 --> 00:24:52,680 Speaker 1: And if you are an investor rather than a speculator, 437 00:24:53,320 --> 00:24:56,159 Speaker 1: I mean, has anyone ever really gotten fired because you 438 00:24:56,200 --> 00:24:59,720 Speaker 1: know they missed twenty five basis points or fifty basis 439 00:24:59,720 --> 00:25:02,320 Speaker 1: points over a thirty year or twenty year period. I mean, 440 00:25:02,600 --> 00:25:04,040 Speaker 1: you know, what are you gonna do? You're gonna go 441 00:25:04,080 --> 00:25:06,919 Speaker 1: out and sell your whole insurance portfolio of government bonds 442 00:25:07,000 --> 00:25:10,040 Speaker 1: because you know, oh, I could get twenty five basis 443 00:25:10,080 --> 00:25:12,760 Speaker 1: points more. I think you bring up an important point, 444 00:25:12,800 --> 00:25:14,280 Speaker 1: and that's really something that's kind of been in the 445 00:25:14,280 --> 00:25:16,320 Speaker 1: heart of our positioning in the in the Core Plus Fund, 446 00:25:16,320 --> 00:25:18,479 Speaker 1: which is that when you look at what's going on 447 00:25:18,520 --> 00:25:20,960 Speaker 1: in the world and what these banks have engineered, it's 448 00:25:21,000 --> 00:25:23,840 Speaker 1: a world where there is a wash with cash. Insurance 449 00:25:23,880 --> 00:25:26,080 Speaker 1: companies in particular, you know, it's a very important name 450 00:25:26,080 --> 00:25:28,359 Speaker 1: that you brought up, is the insurance industry. They have 451 00:25:28,440 --> 00:25:31,880 Speaker 1: gigantic pools of cash and very long dated liabilities. There's 452 00:25:31,880 --> 00:25:34,800 Speaker 1: a bigger risk to them misstepping on liability management side 453 00:25:34,800 --> 00:25:37,280 Speaker 1: than missing twenty five or fifty basis points on interest rates. 454 00:25:37,320 --> 00:25:39,520 Speaker 1: So we would be complete agreement with that. Okay, So 455 00:25:39,560 --> 00:25:41,119 Speaker 1: then I want to want you to follow up on 456 00:25:41,280 --> 00:25:44,800 Speaker 1: what's in the portfolio and how you construct your portfolio 457 00:25:44,960 --> 00:25:46,919 Speaker 1: of the Core Plus Bond Fund, because one of the 458 00:25:46,920 --> 00:25:48,920 Speaker 1: things that I've note when I look at it, you've 459 00:25:48,920 --> 00:25:52,520 Speaker 1: got a lot of floating rate debt, absolutely, and that 460 00:25:52,600 --> 00:25:54,960 Speaker 1: floating rate debt is a strectural opportunity for us to 461 00:25:55,000 --> 00:25:57,359 Speaker 1: position Core Plus Fund and really any of our strategies 462 00:25:57,359 --> 00:26:00,000 Speaker 1: to take advantage of different segments of the bond market. 463 00:26:00,119 --> 00:26:02,639 Speaker 1: What we do is look for bottom up value across 464 00:26:02,680 --> 00:26:05,239 Speaker 1: the entire spectrum of fixed income and say where are 465 00:26:05,280 --> 00:26:08,760 Speaker 1: their structural and efficiencies. One inefficiency that we noticed that 466 00:26:08,840 --> 00:26:11,679 Speaker 1: went back really about twelve d eighteen months was that 467 00:26:11,840 --> 00:26:14,680 Speaker 1: libor and the FED funds rate, we're sort of behaving 468 00:26:15,040 --> 00:26:18,160 Speaker 1: uh counterintuitively to what you'd anticipate from a rising FED. 469 00:26:18,720 --> 00:26:21,000 Speaker 1: So that meant that floating rate notes were very cheap. 470 00:26:21,240 --> 00:26:23,919 Speaker 1: You could buy uh interest rate. These are interest rate 471 00:26:23,960 --> 00:26:26,119 Speaker 1: bond instruments just like any other corporate bond, and when 472 00:26:26,200 --> 00:26:29,080 Speaker 1: rates rise, their coupon rises, so there are sensitivity to 473 00:26:29,160 --> 00:26:31,879 Speaker 1: rates is not particularly strong, which we thought was very 474 00:26:31,920 --> 00:26:34,280 Speaker 1: important for protecting the dollars we had invested on the 475 00:26:34,280 --> 00:26:37,960 Speaker 1: front end. And we're talking about companies like Abbott Labs, eBay, 476 00:26:38,160 --> 00:26:42,280 Speaker 1: Daimler Finance, IBM, Craft, Hiens, Activision, Blizzard. I mean, those 477 00:26:42,280 --> 00:26:44,000 Speaker 1: are the kind of corporate names we're talking about with 478 00:26:44,080 --> 00:26:46,800 Speaker 1: some of this floating rate there absolutely so when we 479 00:26:46,880 --> 00:26:49,119 Speaker 1: use when we look at the core plus fund and 480 00:26:49,119 --> 00:26:50,679 Speaker 1: decide where we want to take risk and how we 481 00:26:50,680 --> 00:26:53,439 Speaker 1: want to budget risk, that is a pocket the floating 482 00:26:53,520 --> 00:26:55,480 Speaker 1: rate notes, the front end, the shorter day and securities 483 00:26:55,480 --> 00:26:58,040 Speaker 1: where we're looking for a lot of liquidity and we're 484 00:26:58,040 --> 00:27:00,199 Speaker 1: not looking for credit headaches, So we use a lot 485 00:27:00,240 --> 00:27:02,840 Speaker 1: of high quality companies whose equity prices have given their 486 00:27:02,840 --> 00:27:07,560 Speaker 1: balance shee's a tremendous cushion. Is there anything that you're avoiding? Certainly. 487 00:27:07,640 --> 00:27:09,280 Speaker 1: So when we look at where we are in the 488 00:27:09,280 --> 00:27:13,679 Speaker 1: credit cycle, we keep hearing that referenced by constituents, investors, UH, 489 00:27:13,880 --> 00:27:16,960 Speaker 1: fund managers, UH. The word credit cycle, the term credit 490 00:27:16,960 --> 00:27:19,639 Speaker 1: cycle keeps getting used. Our opinion is that we're in 491 00:27:19,680 --> 00:27:22,200 Speaker 1: the seventh inning stretch, UH and take me out to 492 00:27:22,240 --> 00:27:24,720 Speaker 1: the ball game keeps playing on repeat, and that's exactly 493 00:27:24,720 --> 00:27:27,520 Speaker 1: what central banks have engineered. So what we're looking at 494 00:27:27,600 --> 00:27:30,119 Speaker 1: is trying to balance the idea that risk probably still 495 00:27:30,320 --> 00:27:32,680 Speaker 1: does well for the next twelve months, but at the 496 00:27:32,720 --> 00:27:35,439 Speaker 1: same time keeping the powder dry to take advantage of 497 00:27:35,440 --> 00:27:37,679 Speaker 1: some opportunities that might be created. And that's say, for example, 498 00:27:37,760 --> 00:27:40,920 Speaker 1: high yield bonds. Our allocation to high yield bonds as 499 00:27:40,960 --> 00:27:43,920 Speaker 1: that's as that sector has outperformed, has been trimmed back 500 00:27:44,320 --> 00:27:46,199 Speaker 1: with the anticipation that is, we're not getting paid as 501 00:27:46,280 --> 00:27:48,480 Speaker 1: much to own it. Maybe we can raise some liquidity 502 00:27:48,480 --> 00:27:50,360 Speaker 1: and an event there's a market disruption, we could jump 503 00:27:50,400 --> 00:27:52,800 Speaker 1: in and buy some yields. What are you buying for yield? Then? 504 00:27:52,840 --> 00:27:56,160 Speaker 1: Are you buying emerging markets. We're not buying emerging market debt. 505 00:27:56,400 --> 00:27:58,520 Speaker 1: We've been focused primarily and moving a little further out 506 00:27:58,560 --> 00:28:01,159 Speaker 1: the yield curve and investment grade where we're willing to 507 00:28:01,160 --> 00:28:03,080 Speaker 1: take a little more duration. At this point, we think 508 00:28:03,080 --> 00:28:05,439 Speaker 1: that interest rates have been pretty subdued, and then we 509 00:28:05,480 --> 00:28:08,840 Speaker 1: look at the corporate bond market, we see dislocations occur 510 00:28:08,960 --> 00:28:10,760 Speaker 1: that don't make a lot of sense. So one example 511 00:28:10,760 --> 00:28:12,640 Speaker 1: I would give you is, you know, Amazon buys Whole 512 00:28:12,680 --> 00:28:15,800 Speaker 1: Foods and the debt of Kroger Corporation sells off. We 513 00:28:15,880 --> 00:28:18,159 Speaker 1: think that might be unjustified. We jump in and we 514 00:28:18,240 --> 00:28:20,040 Speaker 1: lock in the yields at higher rates than they were 515 00:28:20,040 --> 00:28:22,320 Speaker 1: over the day before. So it sounds like you're expecting 516 00:28:22,359 --> 00:28:25,719 Speaker 1: a flatter yield curve. I think that it's consistent with 517 00:28:25,880 --> 00:28:27,880 Speaker 1: the FED rhetoric and the FED action that the yield 518 00:28:27,880 --> 00:28:30,199 Speaker 1: curve continues to flatten some. But we do think that 519 00:28:30,240 --> 00:28:33,240 Speaker 1: the FED is very conscious of what the potential percursor 520 00:28:33,320 --> 00:28:35,119 Speaker 1: could be if the yel curve were to invert. So 521 00:28:35,160 --> 00:28:37,760 Speaker 1: we think that a flatter yel curve, but a very 522 00:28:37,760 --> 00:28:41,040 Speaker 1: incremental FED As it flattens, and you're to date, the 523 00:28:41,080 --> 00:28:43,280 Speaker 1: fund is up a little bit more than four percent, 524 00:28:43,480 --> 00:28:45,360 Speaker 1: and you're getting one of like a two point nine 525 00:28:45,440 --> 00:28:49,600 Speaker 1: to three the yield on the on the payoff. One 526 00:28:49,600 --> 00:28:51,560 Speaker 1: of the things I want to ask about has to 527 00:28:51,600 --> 00:28:54,240 Speaker 1: do with the way in which you construct your portfolio, 528 00:28:54,640 --> 00:28:58,000 Speaker 1: because I noticed, you know you're buying in very specific lots. 529 00:28:58,000 --> 00:29:00,360 Speaker 1: You know you're buying twenty thousand here, fifteen house and 530 00:29:00,440 --> 00:29:03,160 Speaker 1: there is how do you organize? I mean, you're gonna 531 00:29:03,200 --> 00:29:06,560 Speaker 1: buy the same amount of Fannie May paper as you 532 00:29:06,600 --> 00:29:09,280 Speaker 1: would eBay floating rate paper. How do you or is 533 00:29:09,320 --> 00:29:12,960 Speaker 1: it just inventory what's available? It really reflects what what 534 00:29:13,120 --> 00:29:16,040 Speaker 1: where we want the overall risk and return profile of 535 00:29:16,080 --> 00:29:18,320 Speaker 1: the fund to be. One thing you'll notice about the 536 00:29:18,320 --> 00:29:21,040 Speaker 1: Core Plus Fund relative to perhaps others, is that we 537 00:29:21,080 --> 00:29:25,080 Speaker 1: don't carry thousands of securities. We have two fifty individual 538 00:29:25,120 --> 00:29:27,760 Speaker 1: line items. So we really have a thorough understanding of 539 00:29:27,800 --> 00:29:31,080 Speaker 1: this bond adds value. There's a value proposition. We own 540 00:29:31,120 --> 00:29:33,800 Speaker 1: the security, and we own it an amount that reconciles 541 00:29:34,120 --> 00:29:37,160 Speaker 1: the way we expect the portfolio to perform in various scenarios. 542 00:29:37,520 --> 00:29:39,480 Speaker 1: Your ability to do that gets heavily deluded if you 543 00:29:39,520 --> 00:29:42,520 Speaker 1: have too many individual line items and just quickly give 544 00:29:42,560 --> 00:29:44,480 Speaker 1: you ten seconds. Cash, you got about four and a 545 00:29:44,520 --> 00:29:46,640 Speaker 1: half percent of cash going to just keep it there. 546 00:29:47,160 --> 00:29:49,320 Speaker 1: Cash is really residual of what we do, and that 547 00:29:49,360 --> 00:29:51,440 Speaker 1: reflects the fact that we do think, um, you know, 548 00:29:51,560 --> 00:29:54,720 Speaker 1: there's a lot of opportunities we have of our fund invested, 549 00:29:55,120 --> 00:29:56,640 Speaker 1: but we have a little bit there for those really 550 00:29:56,680 --> 00:29:58,960 Speaker 1: unique opportunities to come along, all right, just as you 551 00:29:58,960 --> 00:30:01,760 Speaker 1: said those floating right now about twelve to eighteen months ago. 552 00:30:01,840 --> 00:30:04,360 Speaker 1: Thanks very much for being here. Scott Kimball, always a pleasure. 553 00:30:04,560 --> 00:30:09,440 Speaker 1: Portfolio manager of the BEM t c H Core plus 554 00:30:09,760 --> 00:30:13,480 Speaker 1: bond fund symbol m c BIX m c b i X. 555 00:30:16,600 --> 00:30:19,160 Speaker 1: Thanks for listening to the Bloomberg P and L podcast. 556 00:30:19,480 --> 00:30:23,400 Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, 557 00:30:23,520 --> 00:30:26,960 Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm 558 00:30:27,000 --> 00:30:31,000 Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. 559 00:30:31,120 --> 00:30:33,719 Speaker 1: It's one before the podcast. You can always catch us 560 00:30:33,760 --> 00:30:35,360 Speaker 1: worldwide on Bloomberg Radio.