WEBVTT - Hawaiian Air's Quality and Local Routes Will Offset Southwest, CEO Says 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg P and L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.560 Along with my co host Lisa Abramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg P M L 0:00:20.840 --> 0:00:32.200 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well, 0:00:32.240 --> 0:00:34.519 I want to turn our attention now to the airline industry, 0:00:34.520 --> 0:00:38.680 and specifically to Hawaiian Airlines. The president and chief executive 0:00:38.720 --> 0:00:41.800 of Hawaiian Holdings joins us now, Mark Dunkley. Mark, always 0:00:41.800 --> 0:00:43.879 a pleasure to speak with you. UM. I want to 0:00:43.880 --> 0:00:47.360 set this stage back in July during the the earnings 0:00:47.360 --> 0:00:49.839 conference call, and I just want to parenthetically say, I 0:00:49.880 --> 0:00:53.040 know that you're going to be releasing your results next Thursday, 0:00:53.080 --> 0:00:55.960 so you're a priet period, so UM, you know you 0:00:56.000 --> 0:00:57.800 can kind of do the air quotes and we'll make 0:00:57.840 --> 0:01:01.560 believe we understand what you're saying. But on the conference 0:01:01.600 --> 0:01:05.839 call last quarter, you talked about things like the extra 0:01:05.920 --> 0:01:11.400 comfort seats UH, the new A three NEOs from air Bush, 0:01:11.480 --> 0:01:14.640 the relocation at the loss at the at L a X, 0:01:14.959 --> 0:01:20.160 also first route expansion, because of the new aircraft. Now 0:01:20.200 --> 0:01:22.080 I'm an invest not me, but i'm you know, an 0:01:22.080 --> 0:01:25.400 investor comes to the call next Thursday and says, yeah, 0:01:25.400 --> 0:01:28.480 but wait, the stock is down thirty this year. What 0:01:28.680 --> 0:01:33.319 is happening? How? What can you say given the quiet period, 0:01:33.600 --> 0:01:36.480 in order to at least make people not go bananas 0:01:36.480 --> 0:01:39.479 when they when they get on the call. Yeah, well, 0:01:39.520 --> 0:01:41.399 I think you know, when you look at our share 0:01:41.440 --> 0:01:44.040 price performance over last several years, we were this sort 0:01:44.040 --> 0:01:49.000 of bell of the industry. UM, seeing our stock appreciate. Uh. 0:01:49.040 --> 0:01:51.760 In the last couple of months, there have been too 0:01:52.600 --> 0:01:56.840 prominent announcements by competitors that they're going to add capacity 0:01:56.840 --> 0:02:00.000 in our market. And that's clearly weighing Southwest for example, 0:02:00.560 --> 0:02:03.440 Southwest has one and united with the other a couple 0:02:03.440 --> 0:02:06.120 of months ago. UM. I think the things to to 0:02:06.200 --> 0:02:09.480 look to though, are a couple of factors. One is 0:02:09.520 --> 0:02:12.960 that we continue to talk with great confidence about the 0:02:13.000 --> 0:02:16.360 superior superiority of our product. The fact that you know, 0:02:16.400 --> 0:02:19.480 for for what we do, which is uh, flying to 0:02:19.520 --> 0:02:23.360 Hawaiian selling, Hawaii's a destination around the world. Uh, nobody's 0:02:23.400 --> 0:02:25.240 got a better formula than we do. And we we 0:02:25.320 --> 0:02:28.480 frankly wouldn't trade places with with any of our competitors, 0:02:28.960 --> 0:02:31.400 and you know, we're sort of backing up that confidence 0:02:31.440 --> 0:02:33.639 as recently as a couple of days ago, we announced 0:02:33.800 --> 0:02:37.119 a quarterly dividend that we're going to pay um and that's, 0:02:37.200 --> 0:02:40.160 you know, very deliberately to to send a signal to 0:02:40.200 --> 0:02:43.280 say that, you know, at least looking into the long term, 0:02:43.919 --> 0:02:48.000 looking beyond what may happen with additional capacity coming in 0:02:48.040 --> 0:02:50.720 next year, looking to the long term. We're in the 0:02:50.720 --> 0:02:53.760 management team and the board of directors have great confidence 0:02:53.760 --> 0:02:57.120 in our franchise. Okay, So, and the dividend what the 0:02:57.200 --> 0:02:59.200 twelve centsers share, So that's like one in a quarter 0:02:59.280 --> 0:03:02.560 percent based on today's a stock price of thirty eight dollars. 0:03:03.480 --> 0:03:06.840 Can you maybe just describe to people the franchise that 0:03:06.960 --> 0:03:11.200 you have inter Island and how perhaps the revenue from 0:03:11.280 --> 0:03:15.080 that franchise almost offers a kind of annuity to the 0:03:15.160 --> 0:03:19.840 business that other airlines may not have. Uh yeah, we 0:03:20.000 --> 0:03:22.640 we we account for about eighty five of all the 0:03:22.680 --> 0:03:25.440 travel between the islands of the state of Hawaii. And 0:03:25.480 --> 0:03:27.680 for the for your listeners who may not be as 0:03:27.720 --> 0:03:30.680 familiar with Hawaii, is that certainly like to be Um, 0:03:31.080 --> 0:03:33.200 what I can say is it's a bigger business than 0:03:33.440 --> 0:03:36.920 than people perhaps have in mind. I mean, we we 0:03:37.040 --> 0:03:40.520 fly thirty two times a day in each direction between 0:03:40.560 --> 0:03:42.760 Honolulu and Maui. Just to give you a sense of 0:03:42.760 --> 0:03:46.400 the scale. We carry more passengers between Honolulu and can 0:03:46.640 --> 0:03:52.080 Louis than all airlines combined fly between Washington National U 0:03:52.360 --> 0:03:56.040 and LaGuardia Airports in New York. So it's a pretty 0:03:56.080 --> 0:04:01.400 big business. We have eighty five or thereabouts of that market. 0:04:01.560 --> 0:04:04.800 And it's a business that that sort of carries everyday 0:04:04.800 --> 0:04:09.600 life here, school groups, people going to see their the doctors, 0:04:10.400 --> 0:04:13.160 things like that. So it tends to have pretty low 0:04:13.640 --> 0:04:16.680 price elastics you've demand and pretty low income elastics. You've 0:04:16.760 --> 0:04:21.520 demat tell us a little bit about Japan Airlines alliances 0:04:21.560 --> 0:04:26.000 and the new routes from Haneda and Narita. Well, you know, 0:04:26.040 --> 0:04:28.880 you've followed our story for for a long time, and 0:04:29.800 --> 0:04:33.560 as your listeners may perhaps again not appreciate fully, Um, 0:04:34.000 --> 0:04:36.400 the bulk of our expansion over the last seven years, 0:04:36.440 --> 0:04:38.920 and we've could roupled in size during that period of time. 0:04:38.960 --> 0:04:43.279 That the bulk of that has come from expanding around 0:04:43.320 --> 0:04:48.480 the Pacific room most prominently to Japan. And three three 0:04:48.600 --> 0:04:53.240 or so weeks ago, we announced a relationship with Japan Airlines, 0:04:53.320 --> 0:04:56.160 which is one of the world's absolute best airlines and 0:04:56.200 --> 0:05:01.200 means a quality, quality company. Uh. And together we're going 0:05:01.240 --> 0:05:04.560 to in the first instance, be code sharing and um 0:05:05.200 --> 0:05:09.599 uh you know, doing those kinds of cooperative activities. But 0:05:09.600 --> 0:05:12.920 but we're also both committed to seeking to enter into 0:05:12.920 --> 0:05:17.680 a joint venture which we believe will it improve choices 0:05:17.720 --> 0:05:21.640 to customers and also make us better able to compete 0:05:21.640 --> 0:05:25.000 in the market and better for our company. If not 0:05:25.160 --> 0:05:27.440 that you get to choose between seven eight sevens and 0:05:27.600 --> 0:05:30.960 are NEOs. I know that that's been an issue, but 0:05:31.000 --> 0:05:34.880 the trend is what to have aircraft that are more economical, 0:05:34.960 --> 0:05:38.120 that can fly longer, such as even you know, the 0:05:38.480 --> 0:05:42.719 the new seven three seven Max. Right. Yeah, we're taking 0:05:42.760 --> 0:05:45.120 delivery in a couple of weeks time of our first 0:05:45.240 --> 0:05:49.000 A three twenty one near which is a narrow body 0:05:49.360 --> 0:05:52.480 UM in its class. It is the most fuel efficient 0:05:52.640 --> 0:05:55.440 narrow body best suited for the markets that we're going 0:05:55.480 --> 0:05:59.080 to fly with it, which is the small markets between 0:05:59.080 --> 0:06:03.640 the US West Post and Hawaii. Uh. It is it's 0:06:03.640 --> 0:06:07.440 a new breed of airplane and both Boeing and airbus 0:06:08.000 --> 0:06:10.920 have airplanes a fit in that category, this particular one 0:06:11.240 --> 0:06:16.200 for this particular mission. Uh, the near by airbus is 0:06:16.800 --> 0:06:19.160 head and shoulders the superior airplane for the route. So 0:06:19.200 --> 0:06:21.320 maybe just step back for a second and as someone 0:06:21.400 --> 0:06:24.600 that's a veteran in the industry, what does an aircraft 0:06:24.800 --> 0:06:29.719 like that and even the Boeing Max what does that 0:06:29.839 --> 0:06:32.440 Due to the sort of whole strategy of where you fly, 0:06:32.680 --> 0:06:37.240 how you fly, and how you allocate the fleet. We 0:06:37.279 --> 0:06:40.200 spent a lot of time on that on that very question. 0:06:40.240 --> 0:06:42.599 I mean, you know, costs are sort of everything in 0:06:42.600 --> 0:06:44.719 the airline business, and finding the right aircraft of the 0:06:44.800 --> 0:06:49.360 right roots and the right size is a paramount importance. Um. 0:06:49.800 --> 0:06:53.560 You know for for many airlines, uh, they're blending their needs. 0:06:53.640 --> 0:06:57.360 You know, they fly roots that are two hundred miles, 0:06:57.360 --> 0:07:01.400 five hundred miles, thousand and three thousand miles and they 0:07:01.400 --> 0:07:04.839 have to find aircraft that are sort of the ideal 0:07:04.880 --> 0:07:07.719 compromised for all of those routes. What's I think pretty 0:07:07.760 --> 0:07:11.200 unique about Hawaiian uh is that we have a very 0:07:11.200 --> 0:07:13.840 shorthaul business between the islands, just one or two hundred 0:07:13.960 --> 0:07:18.640 uticle miles. Then we have nothing until auticle miles where 0:07:18.680 --> 0:07:22.920 we have almost half of our business is between the 0:07:23.000 --> 0:07:27.200 US West Coast and Hawaii. UH, and then beyond that 0:07:27.280 --> 0:07:30.160 we go to eight to ten hour up to almost 0:07:30.280 --> 0:07:35.320 twelve flights. So we have these very specific needs, UM, 0:07:35.400 --> 0:07:38.239 and a lot of time and attention goes into choosing 0:07:38.240 --> 0:07:40.840 the aircraft that's right for the needs. And both air 0:07:40.880 --> 0:07:44.480 framers a bus and going make terrific airplanes, as do 0:07:44.600 --> 0:07:48.160 the engine manufacturers who power them. I want to thank 0:07:48.160 --> 0:07:50.600 you very much for spending time with us. Mark Dunkley 0:07:50.760 --> 0:07:53.320 is the president and the chief executive of Hawaiian Holdings 0:07:53.840 --> 0:07:58.400 that is the ut parent company of Hawaiian Airlines, and 0:07:58.600 --> 0:08:12.840 they will be releasing their results next Thursday. Our next 0:08:12.880 --> 0:08:15.600 guest is Rick Lazio. He is the senior vice president 0:08:15.680 --> 0:08:18.360 of Aliant Group. He's the former US representative from the 0:08:18.440 --> 0:08:22.600 York serving in Congress from to two thousand and one. 0:08:22.960 --> 0:08:26.400 Representative Lazio, thank you very much for being with us. UM. 0:08:26.400 --> 0:08:28.600 I wonder if you can just get your response to 0:08:28.960 --> 0:08:32.640 UH comments made earlier today on Bloomberg Television. Larry Summers, 0:08:32.760 --> 0:08:36.240 former Treasury Secretary, was speaking with David Weston and Alex Steel, 0:08:36.320 --> 0:08:38.760 and he said, I believe that when you put something 0:08:38.840 --> 0:08:41.400 forth called tax plan, it has to be described in 0:08:41.440 --> 0:08:44.160 a way where people can figure out what their taxes 0:08:44.160 --> 0:08:47.880 would be under it. You need some data, and he says, 0:08:48.040 --> 0:08:52.599 we're operating outside of those parameters. What's your response. My 0:08:52.720 --> 0:08:55.320 response is that the bill hasn't been drafted yet, and 0:08:55.360 --> 0:08:58.760 it will run through committee and those numbers will be 0:08:58.800 --> 0:09:02.720 provided by what's called the Joint Tax Committee in Congress, 0:09:03.400 --> 0:09:07.800 and UH Secretary Summons will have all the data that 0:09:07.840 --> 0:09:11.000 he'd like. I'm sure he's going to have an issue 0:09:11.080 --> 0:09:15.280 with with with the assumptions that are made, but they 0:09:15.320 --> 0:09:17.880 will be plenty of dat it before the bill is 0:09:17.920 --> 0:09:21.160 actually voted on and sent to the President's desk. Okay, 0:09:21.200 --> 0:09:24.239 so understanding that we're going to get more details representative 0:09:24.320 --> 0:09:26.640 Lawso so far the details that we have gotten have 0:09:26.800 --> 0:09:30.359 led to a number of different think tanks to say 0:09:30.400 --> 0:09:33.800 that it could potentially raise taxes on certain middle class 0:09:34.400 --> 0:09:38.239 workers in the United States, and it could potentially provide 0:09:38.360 --> 0:09:43.160 a boon to say hedge funds or independent contractors who 0:09:43.200 --> 0:09:45.720 could claim to be passed through entities. What's your response 0:09:45.760 --> 0:09:48.280 to that. My response to that, again is that we 0:09:48.320 --> 0:09:50.440 have to sort of look at wait for the details 0:09:50.440 --> 0:09:53.079 and see overall how this affects the general economy. The 0:09:53.160 --> 0:09:55.720 name I think the challenge here is how do you 0:09:55.760 --> 0:10:00.840 get growth rates back up to a consistent three cent rate? 0:10:01.120 --> 0:10:05.600 And that is where we've been in past expansions. We've 0:10:05.640 --> 0:10:09.240 been running at to to two since the beginning of 0:10:09.280 --> 0:10:13.360 this expansion, so it's it's suboptimal. The major culprit, and 0:10:13.480 --> 0:10:16.920 my sense of my belief, is a business investment that 0:10:16.960 --> 0:10:20.760 has been holding down both productivity and overall GDP growth, 0:10:20.800 --> 0:10:22.320 And the best way to get at that is to 0:10:22.360 --> 0:10:25.320 incentivize more business investment. And that's partly through things like 0:10:25.360 --> 0:10:28.720 the research and development tax credit and other business incentives, 0:10:28.880 --> 0:10:34.000 as as well as expensing equipment and um and factories 0:10:34.000 --> 0:10:36.840 and the kinds of things that we want businesses to 0:10:36.880 --> 0:10:40.120 invest in. It ultimately to hiring more people and paying 0:10:40.120 --> 0:10:43.120 their workers more more in salary. Understood, So this sort 0:10:43.120 --> 0:10:46.720 of virtuous cycle. But representative laws, how are we able 0:10:46.760 --> 0:10:51.320 to even uh negotiate or discuss a plan that, as 0:10:51.320 --> 0:10:54.520 you say, is missing so many details? And you know, 0:10:54.679 --> 0:10:58.320 is it unusual or unwise to not open it up 0:10:58.440 --> 0:11:02.640 and be more forthcoming during the negotiation phases because normally 0:11:03.080 --> 0:11:06.640 there are more details at this point in the process. Well, 0:11:06.679 --> 0:11:09.560 I think we can talk about what we know so far. 0:11:09.679 --> 0:11:12.480 We know that there is general consensus among Republicans in 0:11:12.520 --> 0:11:15.960 the House and the Senate to collapse rates from seven 0:11:16.040 --> 0:11:18.040 rates down to three and would probably will end up 0:11:18.080 --> 0:11:19.920 being four before all is said and done. We know 0:11:20.000 --> 0:11:22.760 that there is an effort to move towards an extra 0:11:22.840 --> 0:11:26.319 territorial tax system and try and repatriate two and a 0:11:26.320 --> 0:11:29.920 half or three trillion dollars of money that's trapped overseas. 0:11:29.960 --> 0:11:33.760 We know that there's general agreement on reducing the c 0:11:34.000 --> 0:11:36.840 corporate corporate tax rates, and we know that there's going 0:11:36.880 --> 0:11:39.920 to be a extraordinary effort to try and make sure 0:11:39.960 --> 0:11:42.600 that there is some rough parody with pass through entities 0:11:43.000 --> 0:11:46.080 and the small businesses that employ about half of all 0:11:46.120 --> 0:11:51.199 American workers will also see relief. So there are a 0:11:52.200 --> 0:11:56.680 number of very critical pillars to the reform that's being 0:11:56.679 --> 0:11:59.760 put forward that we do know a lot about. Do 0:11:59.800 --> 0:12:02.280 we know exactly what the languages know? Will have to 0:12:02.280 --> 0:12:05.400 wait until that bill is drafted, and it obviously won't 0:12:05.400 --> 0:12:07.800 be voted on until it's drafted. Do you believe it 0:12:07.840 --> 0:12:12.240 whatever bill is drafted and passed should be revenue neutral. Well, 0:12:12.280 --> 0:12:15.240 I believe that they that that Congress and the President 0:12:15.480 --> 0:12:18.640 need to be mindful and realistic about the budget deficite. 0:12:18.640 --> 0:12:21.200 I think that the size of the deficit is a 0:12:21.280 --> 0:12:25.240 threat to future growth, so that yes, that's a that's 0:12:25.280 --> 0:12:27.640 a that's what do I think it needs to be 0:12:27.960 --> 0:12:31.040 revenue neutral? I think they need to look at it 0:12:31.040 --> 0:12:33.319 in terms should we be all able to understand how 0:12:33.360 --> 0:12:36.520 it's going to be paid for? Yes? Of course. Okay, 0:12:36.640 --> 0:12:39.679 then do you believe that threatening sitting senators like the 0:12:39.760 --> 0:12:45.679 Democrat Joe Donnelly from Indiana who is on the committee, UH, 0:12:45.800 --> 0:12:47.960 that the president is going to work for his defeat 0:12:48.000 --> 0:12:50.880 unless he falls into line with the tax plan and 0:12:50.960 --> 0:12:54.480 he's been asking for information about what exactly this is 0:12:54.520 --> 0:12:57.920 going to do to the budget? Does that make any sense? 0:13:00.000 --> 0:13:04.200 I always think that you are better off in the 0:13:04.280 --> 0:13:09.199 long run appealing to somebody's better angels and to persuading 0:13:09.280 --> 0:13:15.319 through positive UH, data and arguments. So you know this 0:13:16.000 --> 0:13:19.280 part of the body politics these days, on both sides, 0:13:19.320 --> 0:13:21.640 they are, of course it is. Do I think it's 0:13:21.679 --> 0:13:25.720 what the way approach I would take. Now, it's not representative. Lazio, 0:13:25.960 --> 0:13:30.560 you represented New York and New York could potentially be 0:13:30.679 --> 0:13:34.120 the one of the bigger losers from this whole plan, 0:13:34.400 --> 0:13:38.839 since the local deductions would be eliminated. What's your view 0:13:38.840 --> 0:13:42.080 on that, Well, it's very difficult to get rates down, 0:13:42.160 --> 0:13:45.240 marginal rates down if you don't address deductions, and then 0:13:45.320 --> 0:13:48.559 one of the largest deductions of state local taxes about 0:13:48.559 --> 0:13:53.280 one point three trillion dollars in revenues revenue lost through that. UM, 0:13:53.320 --> 0:13:55.760 I think if you're from New York, or you're from California, 0:13:55.840 --> 0:13:58.760 from New Jersey, and by the way, those states are 0:13:59.120 --> 0:14:03.280 the are are major consumers of the state and local deduction, 0:14:03.760 --> 0:14:09.120 especially upper income people. I mean about about for example, 0:14:09.520 --> 0:14:14.960 of UM, the benefit for state income taxes and sales 0:14:14.960 --> 0:14:19.160 taxes float for people making over two hundred thousand dollars, 0:14:19.200 --> 0:14:24.080 So this is this would affect mostly upper income people 0:14:24.360 --> 0:14:27.040 in high tax states, and of course California, New York, 0:14:27.040 --> 0:14:30.520 New Jersey are are three of them. UM. If I'm 0:14:30.600 --> 0:14:33.080 in a town hall meeting and I'm talking to a constituent, 0:14:33.280 --> 0:14:35.560 I'm gonna be consistuents going to raise their hand and 0:14:35.640 --> 0:14:38.760 about my state and local taxes, I'd say, well, number one, 0:14:38.920 --> 0:14:41.600 let's see how you do overall. The standard deduction is 0:14:41.600 --> 0:14:46.200 proposed to be doubled um Right now, most Americans don't 0:14:46.240 --> 0:14:51.000 file itemized returns because they get a standard deduction. Even 0:14:51.120 --> 0:14:55.600 fewer Americans will will file itemized returns if the standard 0:14:55.600 --> 0:15:03.040 deduction is doubled to thousands. So it could potentially be 0:15:03.160 --> 0:15:05.600 lesson than people are expected, or it might affect the 0:15:05.680 --> 0:15:08.600 only the wealthiest people. Rick Lazio, I would love to 0:15:08.640 --> 0:15:10.560 continue the conversation. We have to. We have to run 0:15:10.640 --> 0:15:13.960 Rick Lazio as senior vice president for Alliant Group. He 0:15:14.000 --> 0:15:16.520 also was a former US Representative from New York, serving 0:15:16.560 --> 0:15:31.880 Congress from nWo one. Well, the hottest spot in credit 0:15:31.920 --> 0:15:35.880 markets this year is arguably emerging markets credit credit and 0:15:35.880 --> 0:15:39.600 the riskier the better. In fact, Aviva investors just came 0:15:39.640 --> 0:15:43.040 out and so that they view local currency emerging markets 0:15:43.160 --> 0:15:46.400 debt as safer than US treasuries. Here to weigh in 0:15:46.560 --> 0:15:49.680 on what we've been seeing in the emerging market spaces. 0:15:49.720 --> 0:15:53.680 Damian Sasaur fixing come strategist focused on developing markets for 0:15:53.760 --> 0:15:56.120 Bloomberg Intelligence, and he joins us here in our Bloomberg 0:15:56.320 --> 0:16:02.480 eleven three oh studios. Damien does it um Well, I 0:16:02.520 --> 0:16:04.360 don't think it scares me. Per se. I mean, I 0:16:04.400 --> 0:16:07.080 just think it speaks to the state of liquidity and 0:16:07.400 --> 0:16:11.000 developed markets right now and tight spreads, low yields broadly 0:16:11.040 --> 0:16:14.440 speaking across the whole of you know, fixed income. So 0:16:14.480 --> 0:16:16.320 I think there's a lot of cash out there and 0:16:16.360 --> 0:16:17.920 there aren't a lot of places to put it, and 0:16:17.920 --> 0:16:20.520 that's what's driving y AM here. Well, one of the 0:16:20.560 --> 0:16:23.000 places that people are putting it is in the e 0:16:23.200 --> 0:16:25.840 t F e m B. This is the I Shares 0:16:26.280 --> 0:16:30.200 Emerging Markets Debt Fund right this is uh the one 0:16:30.240 --> 0:16:33.720 that JP Morgan has put together, and the fund is 0:16:33.800 --> 0:16:36.160 up more than nine percent so far this year. But here, 0:16:36.200 --> 0:16:37.760 this is what I want you to explain if you 0:16:37.840 --> 0:16:44.000 can um Egypt, El Salvador, Argentina, Hungary, Uh, can you 0:16:44.120 --> 0:16:48.960 explain what it is about these other than the yield? Peru, Poland, 0:16:49.000 --> 0:16:52.440 I could go on Panama. You really, does anybody really 0:16:52.480 --> 0:16:55.320 believe that these are better credits? These are governments now, 0:16:55.400 --> 0:16:58.760 that these are better sovereign credits than the U. S. Treasury? Well, now, 0:16:58.800 --> 0:17:00.360 I mean, I think what you have to get when 0:17:00.400 --> 0:17:03.120 you're evaluating any sovereign issuers, you have to look at 0:17:03.240 --> 0:17:05.920 their current account, their balance sheet, their current account balances. 0:17:05.920 --> 0:17:07.919 You have to look at their external debt exposure, right, 0:17:07.920 --> 0:17:10.240 because when we get into times where, for example, in 0:17:10.240 --> 0:17:13.720 September twenty the Federal Reserve announced that, hey, they're not 0:17:13.760 --> 0:17:16.320 going to be data dependent any longer, they're gonna be hiking. 0:17:16.320 --> 0:17:18.159 And regardless, you know, you have to look at what 0:17:18.240 --> 0:17:21.080 that means for local currencies, and and that means if 0:17:21.119 --> 0:17:23.119 you have a lot of external debt exposure, i e. 0:17:23.359 --> 0:17:25.760 You're hungry and you've issued a lot of US dollar debt, 0:17:26.280 --> 0:17:28.840 you might be in for a little asset liability mismatch 0:17:28.880 --> 0:17:31.120 if things go south on you. And then there's effects reserves, 0:17:31.119 --> 0:17:33.240 there's real effective exchange rates. There's a lot of metrics 0:17:33.280 --> 0:17:35.760 you can look at when you're evaluating sovereign risk exposure, 0:17:36.240 --> 0:17:39.760 but by and large, that is um you know, that 0:17:39.920 --> 0:17:41.600 is basically what investors are looking at, and that's what 0:17:41.760 --> 0:17:46.280 driving returns. I'm struck by the flood of money into 0:17:46.440 --> 0:17:49.560 local currency emerging market step because you're talking about the 0:17:49.560 --> 0:17:53.080 currency exposure, and actually if you look at the flows 0:17:53.200 --> 0:17:55.800 into e m B, which is the US dollar Emerging 0:17:55.840 --> 0:17:59.200 market study t F versus e M l C, which 0:17:59.359 --> 0:18:01.680 is the local currency e M debt, it's the money 0:18:01.720 --> 0:18:04.600 has gone disproportionately to the local currency debt. And I'm 0:18:04.640 --> 0:18:08.639 wondering how much is this completely a wager on the 0:18:08.720 --> 0:18:12.600 dollar staying week and possibly weakening further. Oh, that's exactly 0:18:12.680 --> 0:18:15.640 what it is. I mean, currency attribution for local currency 0:18:15.880 --> 0:18:18.720 government debt from eroaching markets is roughly eight percent of 0:18:18.760 --> 0:18:21.640 the equation, right, So you're absolutely right, it's a play 0:18:21.640 --> 0:18:24.359 on currencies. But this is a more recent occurrence. I 0:18:24.359 --> 0:18:27.560 mean the flows into em into local em rates. Uh, 0:18:27.680 --> 0:18:30.919 that's really only been the last call it six months, 0:18:31.200 --> 0:18:32.440 But for the better part of the last two and 0:18:32.440 --> 0:18:34.640 a half years, you've been seeing flows into hard currency 0:18:34.640 --> 0:18:36.640 e M debt and it's been off the charts. So 0:18:36.800 --> 0:18:40.760 how much would the dollar have to strengthen to cause 0:18:40.800 --> 0:18:44.280 some serious pain? That's a that's a tricky question. I 0:18:44.320 --> 0:18:46.359 mean I can't really say. I know, our our friends 0:18:46.359 --> 0:18:49.920 over in bi economics have basically called for a stronger 0:18:49.960 --> 0:18:52.480 dollar over the better part of you know, well, really 0:18:52.480 --> 0:18:55.520 when the FED starts, you know, uh, you know, rolling off, 0:18:56.040 --> 0:18:58.760 you know, the excess, it's basically tapering, it's it's pulling 0:18:58.760 --> 0:19:01.880 back the balanty, etcetera. I think I think it would 0:19:01.920 --> 0:19:03.800 take quite a bit for you to see things start 0:19:03.880 --> 0:19:05.240 to go, but when they go, that can go in 0:19:05.240 --> 0:19:08.000 a hurry. I'm just looking at the difference in the 0:19:08.080 --> 0:19:11.960 yield between the funds that invest in the local currency 0:19:12.080 --> 0:19:16.280 debt and the hard currency debt of the same nations, 0:19:16.640 --> 0:19:18.840 and you're talking about a spread of anywhere from four 0:19:18.880 --> 0:19:22.119 and a half percent for the hard currency to getting 0:19:22.119 --> 0:19:24.439 maybe a little bit more five and a quarter percent 0:19:24.640 --> 0:19:30.080 for the local currency. UH funds, Is that really are 0:19:30.119 --> 0:19:32.480 you taking more risk when you come when you think 0:19:32.520 --> 0:19:35.040 about the reward? I mean, is seventy five basis points 0:19:35.160 --> 0:19:38.639 really that much in the overall scheme of things that 0:19:38.760 --> 0:19:41.399 you're gonna take that that risk not at all? And 0:19:41.440 --> 0:19:42.879 I think you have to be clear about who the 0:19:42.880 --> 0:19:45.879 constituents of those two industries are, right and eating hard currency, 0:19:45.920 --> 0:19:48.080 You've got a lot of those, you know, single beast 0:19:48.080 --> 0:19:50.560 sovereign names you had mentioned previously, kind of the Iraqs, 0:19:50.600 --> 0:19:53.480 the Turk Medasin, I mean, Kajikistan. I mean like, there's 0:19:53.480 --> 0:19:55.399 been a ton of single beast sovereigns that have come 0:19:55.440 --> 0:19:57.119 to marketing hard currency debt of the better part of 0:19:57.119 --> 0:20:01.879 the last few years. In local currency, UH investable local 0:20:01.920 --> 0:20:05.520 currency government debt from emerging markets there's only a handful. 0:20:05.560 --> 0:20:07.520 I would say, you know, twenty at the most, and 0:20:07.600 --> 0:20:10.760 you're really talking about the majors there. I'm wondering how 0:20:10.880 --> 0:20:14.480 much the investors who are pouring money into emerging markets 0:20:14.560 --> 0:20:17.560 right now are looking at these specific countries and their 0:20:17.600 --> 0:20:21.200 respective issues, and how much is coming in through broad 0:20:21.280 --> 0:20:23.679 market index funds. The reason why I ask is because 0:20:23.880 --> 0:20:26.000 it's sort of disingenuous for us to sort of lump 0:20:26.080 --> 0:20:28.959 a whole vast swath of countries together as just emerging 0:20:28.960 --> 0:20:32.480 markets and to view them completely unilaterally. I mean, do 0:20:32.520 --> 0:20:36.080 you feel like people are delineating between better credits and 0:20:36.240 --> 0:20:38.640 worst credits? No? I don't think they are at all. 0:20:38.680 --> 0:20:41.400 I think it's as you said, I think it's passive investment. 0:20:41.440 --> 0:20:43.920 I think it's UM. It's really just, you know, basically 0:20:43.960 --> 0:20:45.560 people saying I want to own it all. I want 0:20:45.560 --> 0:20:47.119 to own everything, and I want to own it in 0:20:47.320 --> 0:20:50.840 whatever incremental side it's coming to marketing. UM. I will say, though, 0:20:50.960 --> 0:20:53.320 just if you're looking at UMM, thank you the land 0:20:53.359 --> 0:20:56.000 of ETF right, Well, I mean you don't get the 0:20:56.000 --> 0:20:57.719 pick and shoes, right, I mean, you go into an 0:20:57.720 --> 0:20:59.439 e t F like this, you don't get to say, oh, 0:20:59.480 --> 0:21:04.080 I want rething, but debt from Uraguay. I just think 0:21:04.200 --> 0:21:07.119 the risk that you're you're mentioning is structural, right. I 0:21:07.119 --> 0:21:10.400 mean the fact that the underlying emerging market bonds, even 0:21:10.440 --> 0:21:13.639 the hardcorency US dollar bonds, the fact that an e 0:21:13.760 --> 0:21:16.199 t F is allowing you to provide daily liquidity in 0:21:16.240 --> 0:21:19.480 and out of those positions when those bonds don't really 0:21:19.520 --> 0:21:23.040 trade like that. That could be an area of concern 0:21:23.160 --> 0:21:26.159 going forward, just that structural liquidity mismatch, so to speak. 0:21:26.200 --> 0:21:28.399 And and so that is an area that I'm looking at. 0:21:28.440 --> 0:21:29.960 It's an area that my peers, I know, I've looked 0:21:30.000 --> 0:21:32.480 at very closely. But you know, we're not quite uh, 0:21:32.600 --> 0:21:34.280 we're not quite sure what to makeup at this point. 0:21:34.320 --> 0:21:37.840 And of course Chinese, the Chinese Congress meets next week, 0:21:38.000 --> 0:21:41.640 and I could also throw some potential opotatoes. And it's 0:21:41.640 --> 0:21:46.359 interesting how liquidity can dry up so quickly, uh, particularly 0:21:46.400 --> 0:21:51.680 in the debt that is maybe not universally traded. I 0:21:51.800 --> 0:21:54.360 have to watch this, and that's why we got Damian Sassar. 0:21:54.480 --> 0:22:09.240 He is are fixed income strategist for Bloomberg Intelligence. Late 0:22:09.480 --> 0:22:13.359 last night, the European Central Bank officials were said to 0:22:13.359 --> 0:22:16.720 be considering cutting their monthly bond buying, but at least 0:22:16.920 --> 0:22:21.000 half starting in January. This was reported by Bloomberg News, 0:22:21.240 --> 0:22:24.320 and the reaction to this is sort of surprising because 0:22:24.359 --> 0:22:27.560 you think, Okay, the e c B is tapering, it's stimulus. 0:22:27.800 --> 0:22:31.280 People would sell their bonds, their German government bonds? What 0:22:31.320 --> 0:22:34.399 do they do? They bought here to explain why and 0:22:34.480 --> 0:22:37.800 what this means about the great Central Bank unwind, going 0:22:37.880 --> 0:22:40.840 forward to Scott Kimball, portfolio manager of the b MO 0:22:41.080 --> 0:22:44.200 at tc H Core Plus Bond Fund, which trades under 0:22:44.240 --> 0:22:47.240 the ticker m c B i X, and he joins 0:22:47.320 --> 0:22:51.480 us here in our eleven three oh studio, Scott, I 0:22:51.520 --> 0:22:54.880 don't know. If this can't get people to sell their 0:22:54.960 --> 0:22:59.280 government bonds, what will Well? That's first of all, thank 0:22:59.280 --> 0:23:01.280 you for having me, and uh, just to chime in 0:23:01.320 --> 0:23:02.919 on what you were talking about there with the e 0:23:03.000 --> 0:23:05.400 c B. UH, you know Chairman grip Draggy coming out 0:23:05.440 --> 0:23:09.359 and talking about reducing the quantitative easing program. Uh, it 0:23:09.720 --> 0:23:11.760