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Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim Fox.

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Speaker 1: Along with my co host Lisa Abramowitz. Each day we

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Speaker 1: bring you the most important, noteworthy, and useful interviews for

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Speaker 1: you and your money, whether you're at the grocery store

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Speaker 1: or the trading floor. Find the Bloomberg pm L podcast

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Speaker 1: on iTunes, SoundCloud and at Bloomberg dot com. You know,

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Speaker 1: Lisa Zara said to be part of the fast fashioned

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Speaker 1: part of the retail market that's kind of really figured

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Speaker 1: out how to give consumers exactly what they want with

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Speaker 1: a deep dive at what Zara is doing and why

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Speaker 1: they don't like that fast fashion description to what they're doing.

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Speaker 1: Stephanie Baker is senior writer at Bloomberg Markets and she

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Speaker 1: joins us from our London bureau. Stephanie Um the story

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Speaker 1: in Bloomberg Business Week, which is online and on newsstands.

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Speaker 1: Love the story, just say, I really love it. I

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Speaker 1: do too, because I think we all know about Zara

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Speaker 1: and we often hear about when we look at the

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Speaker 1: retail sector. Stephanie, this is one of the retailers fashion

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Speaker 1: retailers that seems to have figured out how to do it.

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Speaker 1: Talk to us about Um internally how it works. Yes,

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Speaker 1: I was really fascinated by Zara how they managed to

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Speaker 1: get it right time and time again UM in terms

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Speaker 1: of coming up with designs that people want UM And

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Speaker 1: I was curious when I started this, who is their

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Speaker 1: chief designer? And I asked around and apparently they don't

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Speaker 1: have one, which makes them quite unique in the retail space.

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Speaker 1: You know, the likes of Gap, Um, Prime, Mark H

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Speaker 1: and M they all have chief designers. Zara doesn't have one,

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Speaker 1: partly because they are pushing out new designs so quickly

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Speaker 1: that there's no way they could channel them up through

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Speaker 1: a hierarchy like that and turn around new fashions as

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Speaker 1: quickly as they do. Fashion democracy isn't it? It is?

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Speaker 1: And I saw it in action when I was there,

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Speaker 1: and I found it really impressive because it's kind of

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Speaker 1: designed by consensus. If if everyone likes it, and you know,

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Speaker 1: perhaps the top men's wear buyer women's wear buyer doesn't,

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Speaker 1: well he's outvoted. He or she is outvoted. And I

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Speaker 1: thought that was a really clever way of doing it.

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Speaker 1: They have a very flat management structure and they're very

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Speaker 1: much focused on process, on looking at data from the stores,

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Speaker 1: talking to store managers trying to figure out what is

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Speaker 1: the feedback, what are people wanting? And they don't just

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Speaker 1: churn out, you know, big sellers and just make more

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Speaker 1: of them, because they know we all don't want that.

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Speaker 1: We don't want to rock up to a party with

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Speaker 1: the same dress that someone else is wearing. There. They

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Speaker 1: then tweak the design, make it different, but you know,

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Speaker 1: kind of channel the same types of themes that are

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Speaker 1: working well well. Um. One thing that I thought was

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Speaker 1: so compelling in your story was that Zara's parent company

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Speaker 1: has virtually no ad budget apart from social media marketing.

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Speaker 1: Can you talk about how they make their social media

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Speaker 1: presence so effective? That's another surprise I had. I assumed

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Speaker 1: that they did, and then I looked at it and

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Speaker 1: I realized, No, they don't advertise in the fashion magazines

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Speaker 1: or in newspapers, or they don't do billboards any of that. Um.

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Speaker 1: They have they decided it's not worth the money that. Um.

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Speaker 1: What they're doing is, you know, pulling ideas from consumers

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Speaker 1: and as opposed to what traditional fashion retailers do is

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Speaker 1: they dream up a design, they dream up a fashion

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Speaker 1: campaign three months in advance, and then market it heavily

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Speaker 1: through um lots of advertising dollars to consumers. Um. You know,

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Speaker 1: they are clever about how they use social media, but

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Speaker 1: they don't spend on advertising. And it's interesting too that

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Speaker 1: you know, they don't have to write. I feel like

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Speaker 1: what an interesting error were living at. Donald Trump right

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Speaker 1: has been very smart using social media. He hasn't He

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Speaker 1: didn't really have to spend a lot on traditional ad

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Speaker 1: dollars with networks and so on and so forth. And similarly, Czar,

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Speaker 1: like some of the customers you know, create Twitter accounts

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Speaker 1: on on various items. You've got you writing your story about.

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Speaker 1: Is it a blue coat that got its own Twitter

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Speaker 1: account and everybody started just posting pictures of the coat? Well,

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Speaker 1: this isn't Why doesn't everyone copy them? Well, this is

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Speaker 1: the other question I had, which was they're not so

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Speaker 1: easily copied. Uh. This is a culture and a vertical

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Speaker 1: supply chain that has been built up over four decades UM.

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Speaker 1: Six of their production is at factories that are close

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Speaker 1: to their headquarters, so Spain, Portugal, Morocco, um. And you

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Speaker 1: know it's that's not an easy model to copy. If

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Speaker 1: you're an H and M or a GAP. I think

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Speaker 1: it's that that's probably why they have broken ahead of

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Speaker 1: the pack. Stephanie Baker, senior writer for Bloomberg Markets, talking

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Speaker 1: to us from the London bureau of Bloomberg LP. Fascinating

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Speaker 1: look at Zara and it's incredible democratic strategy for are

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Speaker 1: getting fashions out quickly and distributing them through social media.

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Speaker 1: At least a brown boys here with Carol Masser. This

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Speaker 1: is Blueberg. Chris Whalen, I'm so glad that you could

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Speaker 1: be with us today. Chris Whalen, Senior Managing Director at

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Speaker 1: the Kroll Bond Rating Agency. I hope you had a

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Speaker 1: wonderful Thanksgiving. Oh my gosh, congratulations. UM. I want you

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Speaker 1: to talk a little bit about your view on financials,

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Speaker 1: which is a little bit of a contrarian take to

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Speaker 1: the pretty tremendous rally that we've seen over the past

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Speaker 1: few weeks. Well, financials much neglected sector. You know, you

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Speaker 1: can recall back in the mid two thousand's when it

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Speaker 1: was the biggest sector in the SMP. I think it's

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Speaker 1: number three now and a lot of managers have been

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Speaker 1: dying to own these names for years. So as soon

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Speaker 1: as there's a hint of change in term, so as

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Speaker 1: you guys were just discussing that interest marchin things of

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Speaker 1: that nature, maybe different regulatory environment. Everybody cheered and they

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Speaker 1: rushed in, But you know, it takes a long time

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Speaker 1: to fix uh, seven eight years of very very low

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Speaker 1: interest rates, because your typical bank rolls anywhere from fifteen

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Speaker 1: of its balance sheet each year. So it's going to

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Speaker 1: take a long time to get the benefit of higher rates.

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Speaker 1: And I think we are going to see higher rates

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Speaker 1: over the next few years. How much higher? Like what's

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Speaker 1: the trajectory Chris, that you may be are you know,

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Speaker 1: kind of factoring into your models. Well, it's interesting. I'm

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Speaker 1: doing a mortgage piece for Monday. Um in this nice

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Speaker 1: quiet black Friday, and um, you know, the mortgage bankers

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Speaker 1: are looking at a five handle for a thirty year

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Speaker 1: mortgage two years out. Wow, that's that's up from what

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Speaker 1: three in a couple that's right. And just between the

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Speaker 1: end of October and kind of now, in the mortgage market,

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Speaker 1: we went from a three percent coupon for Fannie and

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Speaker 1: Freddie's that's kind of a reference point for where the

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Speaker 1: mortgage market is to a three and a half. So

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Speaker 1: that's a big move. You know, most mortgage bankers try

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Speaker 1: and hedge, you know, three quarters of a point maybe

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Speaker 1: a point in market move for a year, and we

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Speaker 1: saw that in three weeks. So rate risk is now

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Speaker 1: back on the table. And as I've been saying, you

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Speaker 1: know for the past couple of days, we put a

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Speaker 1: piece out about the banks last week. That's up on

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Speaker 1: our website. But you know, there could be some surprises

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Speaker 1: in the fourth quarter that are different from the surprises

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Speaker 1: we had back in the first quarter. You remember that

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Speaker 1: when the market was very quiet, but everybody was assuing

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Speaker 1: bound rates, and in fact, even with the Fed maybe

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Speaker 1: raising some of their benchmarks, we were still assuming market

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Speaker 1: rates would stay down with a flat yield curve. Now

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Speaker 1: we have a steepening curve. You know, things have changed

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Speaker 1: rather dramatically. Well, and one point in your note was

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Speaker 1: that you know, banks maybe more exposed duration or longer

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Speaker 1: term treasuries and mortgages that sell off in this period

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Speaker 1: of rising rates and could actually end up being a

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Speaker 1: liability for the banks in the short term. I mean,

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Speaker 1: isn't this sort of what the banks have gotten out

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Speaker 1: of the business of doing, is owning big piles of

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Speaker 1: risk your securities. And I understand the treasuries and agency

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Speaker 1: back mortgages aren't considered risky, but certainly the duration is. Well,

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Speaker 1: this is the thing. Yeah, you're right under the vocal rule,

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Speaker 1: which is kind of a halfway step back the glass

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Speaker 1: eagle if you think about it. They're not supposed to

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Speaker 1: trade for their own account, so all of their portfolio

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Speaker 1: is supposed to be hedged in terms of price, but

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Speaker 1: they still have a big investment books. They also have

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Speaker 1: a mortgage lending where you have to manage the incoming

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Speaker 1: cash each month versus the number of mortgages you have

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Speaker 1: to fund, and that rate lot desk is a very

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Speaker 1: important position, both for banks and non banks. So you know,

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Speaker 1: if you were sitting near mid October and you thought

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Speaker 1: you had a pretty good handle on your overall risk

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Speaker 1: and then the yield curve moves half a point, you

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Speaker 1: know you have a lot of people who may have

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Speaker 1: gotten hit really hard in terms of just managing their risk.

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Speaker 1: And remember, when you look at the projections from the

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Speaker 1: mortgage bankers for next year, they're assuming the prepayments of

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Speaker 1: mortgages are going to plummet. They're talking about refinancing volumes,

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Speaker 1: which are about half of the market this year. We're

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Speaker 1: going to do two trillion and mortgages this year. Half

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Speaker 1: of that was refinancings. They're talking about cutting that in

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Speaker 1: half next year. You know, you you talk about kind

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Speaker 1: of these tremendous moves that we've seen in the fixed

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Speaker 1: income market. Chris um And I think in your note

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Speaker 1: you include something about, like watch the fourth quarter that

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Speaker 1: how many financial firms, banks in particularly the Wall Street banks,

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Speaker 1: you know, got caught off guard by the volatility and

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Speaker 1: the moves up that we saw in treasuries following the election,

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Speaker 1: and that could have a financial impact on them. A

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Speaker 1: lot of these people are younger than I am, and

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Speaker 1: they may not remember the name nineties when we have

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Speaker 1: things like Kidderpabuddy and long term capital management, and that

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Speaker 1: whole notion of a mortgage bond because of changes in

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Speaker 1: refinancings and pre payments going from a two year average

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Speaker 1: life to an eat year average life, and when that happens,

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Speaker 1: the volatility of that bond increases dramatically, and also the

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Speaker 1: pricing because you're suddenly pricing it off the ten year

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Speaker 1: or the thirty year instead of off the two year

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Speaker 1: treasury note. And that duration risk, what we call option

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Speaker 1: adjusted duration is a big deal which people haven't had

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Speaker 1: to think about in a decade. Well, but so, Chris,

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Speaker 1: do you think that the financial stocks are poised for

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Speaker 1: some sort of correction. I think that we could have

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Speaker 1: some short term surprises before we see the medium term

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Speaker 1: benefits a higher race. How do we do that? How

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Speaker 1: serious would the surprises be? We don't know, because you know,

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Speaker 1: ultimately it comes down to how well the bank or

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Speaker 1: the non bank is managing their rate risk and how well.

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Speaker 1: And let put to you this way, if in the

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Speaker 1: middle of October you were assuming a flat curve and

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Speaker 1: stable market rates regardless of what the f O m

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Speaker 1: C did right, and suddenly you get the reverse. If

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Speaker 1: you were a little light on your hedge, if you

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Speaker 1: were kind of trying to get your margins up a

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Speaker 1: bit by not being fully hedged on your investment book,

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Speaker 1: you could have gotten hurt. Or to put it another way,

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Speaker 1: you know, a lot of mortgage shops got annihilated in

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Speaker 1: the first quarter in the second quarter because the value

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Speaker 1: of their mortgage business kept getting marked down by the accountants,

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Speaker 1: but they were making money on the hedge. Now you

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Speaker 1: have the opposite. Things like mortgage servicing rights are going

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Speaker 1: to go up in value this quarter because the duration

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Speaker 1: of these portfolios is going to extend. People are going

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Speaker 1: to be slower to prepay their mortgages, so those cash

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Speaker 1: flows are worth more, but you could lose it on

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Speaker 1: the hatch. So it's a dramatic reversal of what we

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Speaker 1: were dealing with in the first half of the year.

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Speaker 1: So Chris got about thirty seconds or forty seconds left here.

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Speaker 1: Your advice to investors at this point sit tight or what? Look?

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Speaker 1: I we we love the smaller banks. You know, we're

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Speaker 1: a credit shop. We don't do equities, but we have

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Speaker 1: been working with a lot of smaller institutions and they

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Speaker 1: generally have really attractive yields both on their debt and

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Speaker 1: their equity. So I would be patient, but I would

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Speaker 1: just you know, caution people who have been focused on

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Speaker 1: the equity markets. Don't underestimate the potential for surprises as

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Speaker 1: we go in the fourth quarter earnings. Chris Whale, and

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Speaker 1: thank you so much for being with us as you

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Speaker 1: marinate and the smells if you're wonderful home cooking for

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Speaker 1: this Thanksgiving Chris left over? Yeah good. Left Over is

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Speaker 1: Chris Whale and senior managing director at the Kroll Vond

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Speaker 1: Rating Agency. They'll throw a little bit of cold water

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Speaker 1: on the latest rally in financial smart thoughtful, right, because

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Speaker 1: we're just watching the big moves and I just thought

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Speaker 1: it was really thoughtful. I would agree. I think it's

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Speaker 1: an important thing to remember. Duration this is Blooper. We're

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Speaker 1: gonna turn our sights overseas because it's turning out to

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Speaker 1: be an interesting super election cycle if you look at

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Speaker 1: what's going on around the globe. Next up France on Sunday,

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Speaker 1: Francis Republican Party will choose its candidate for the presidential

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Speaker 1: election next spring. Let's find out what we need to know.

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Speaker 1: Joining us right now, government reported Greg Vescuzzi of Bloomberg News,

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Speaker 1: joining us on the phone from Paris. Greg, nice to

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Speaker 1: have you here with us. What do we need to

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Speaker 1: know right now about what's happening in France. Well that

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Speaker 1: there's the second round of the primary on Sunday. The

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Speaker 1: French Showays do elections in two rounds. The first round,

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Speaker 1: anyone runs. Anyone who can get on the ballot runs.

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Speaker 1: They were seven of them running last Sunday. The top

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Speaker 1: two people now face off on still on this Sunday,

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Speaker 1: and one was expected On Lingupe of the mayor, former

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Speaker 1: prime minister mayor of Bordeaux. Um, he'd been the front

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Speaker 1: runner most of the time, but everyone thought that he

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Speaker 1: would run off against Nicholas Sarkozy, who the former president

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Speaker 1: is said he got eliminated in the first round. Then

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Speaker 1: it's for another former prime minister of Francois Fillon will

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Speaker 1: be running, who were running against pay Um So Um,

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Speaker 1: it's Sunday, and it's it's fifth Sunday, and it's two

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Speaker 1: thousand and sixteen. So I won't make any predictions because

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Speaker 1: every other breation not very good. How much has the

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Speaker 1: the election of President Trump in the US on November eighth,

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Speaker 1: how much of that is trickling into the discourse in

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Speaker 1: France right now? Well interestingly and it's it has and

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Speaker 1: it's hard to say what the effect has been. M

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Speaker 1: Marine Lapin, A Marine Lapin, who's the leader of the

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Speaker 1: far right National Front. Um. You know, she's the one

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Speaker 1: that's most most compared to Trump in there not exactly

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Speaker 1: the same, but um, you know, populist, anti immigration, anti

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Speaker 1: free trade, the European Union, anti European Union exactly. Um,

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Speaker 1: she thought this is great news. I mean she she

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Speaker 1: she's been going on and on. This just shows that

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Speaker 1: the you know, the people are taking back control and

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Speaker 1: you know, what happened in America can happen here. It

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Speaker 1: happened in Britain. Um. On the other hand, something was

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Speaker 1: never very popular in France. It was a real shock

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Speaker 1: for most of for most of the population. I mean,

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Speaker 1: the polls show that when they pull people on it,

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Speaker 1: like people say that day they wish he hadn't won.

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Speaker 1: So you could almost say that it's caused sort of

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Speaker 1: a reaction amongst some centrists or center right voters who

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Speaker 1: maybe might have been tempted to to vote for Lapin.

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Speaker 1: So I mean, again, it's really hard to say. The

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Speaker 1: election is not till April, next April, the real election

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Speaker 1: is not till next April, so it's very hard to

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Speaker 1: say how it will turn out. We also don't know

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Speaker 1: how Donald Trump's going to turn out between now in April. UM.

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Speaker 1: So there's not it's it's it's it's gone both ways.

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Speaker 1: She certainly marine Lapin certainly sees it as a plus. Um.

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Speaker 1: I think the other parties would sort of see it

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Speaker 1: as a warning and that it works in their favor.

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Speaker 1: So we'll have to see how that turns out, Greg

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Speaker 1: you said what you initially said about you know, I

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Speaker 1: don't want to have to predict because we certainly feel

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Speaker 1: your pain about predicting anything at this point. Um, how

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Speaker 1: engaged is the French voter? Well, well, for general elections

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Speaker 1: quite a lot. I mean only about vote so, um,

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Speaker 1: you know it's it's a much higher rate in the US.

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Speaker 1: This is a primary and it's the first time that

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Speaker 1: the center right party, the Republicans, have held a primary,

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Speaker 1: and the big question has turned out. Many more people

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Speaker 1: voted last Sunday. They were expected. They were people thought

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Speaker 1: that maybe two to three million people would show up

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Speaker 1: and vote. In the end it was little over four million. Um,

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Speaker 1: there's not much. You only have to pay two euros,

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Speaker 1: which is equivalent about two dollars and sign a paper

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Speaker 1: saying that you share the values of the party, and

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Speaker 1: that was it in order to vote in it. So

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Speaker 1: it was open to anyone, which meant but there actually

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Speaker 1: was some tactical voting. There were some leftists who there

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Speaker 1: were some people who normally vote for the socialists, vote

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Speaker 1: for leftist parties who voted last Saturday, and they just

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Speaker 1: they they wanted to make sure that that Sarkozy did

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Speaker 1: not um was not the non there was not the

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Speaker 1: candidate because they were they were afraid of next April

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Speaker 1: or next May having to make a choice between Sarkoz

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Speaker 1: and le Pen, which is the choice that that anyone

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Speaker 1: on the center of the left did not want to

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Speaker 1: have to make, to have to sort of fairly right

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Speaker 1: wingers running ast each other. So we don't know if

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Speaker 1: those people are gonna go back this Sunday since Sarcuase

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Speaker 1: has now been eliminated, We really just don't know. I mean,

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Speaker 1: there were people who voted for fill last time because

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Speaker 1: they thought that that would be maybe the best way

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Speaker 1: to eliminate Sarquas. They may now vote for as you Pay,

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Speaker 1: I mean, you know, as you pay people since he

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Speaker 1: did rather badly in the first round, may be discouraged

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Speaker 1: and not come back to Sunday. We really don't know.

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Speaker 1: It all comes down to turn out, and that that's

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Speaker 1: one other reason why making predictions for this to this

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Speaker 1: Sunday is kind of fool Hardy, well, can you talk

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Speaker 1: a little bit about the breakdown in the French population

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Speaker 1: with respect to the right leaning Republicans and the other party?

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Speaker 1: I mean, is it pretty much no no, not at all,

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Speaker 1: because you've left the whole, You've left the whole left

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Speaker 1: wing to the problem is that is that is that

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Speaker 1: President Holland has been in office for five years now

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Speaker 1: and whether fairly or not, his his term in office

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Speaker 1: has generally been considered a failure. And he's at very

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Speaker 1: very low approval ratings. Is depending on how the depending

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Speaker 1: on the poster, his approval ratings are, they're they're they're

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Speaker 1: down in the teams and in some cases low teams. So,

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Speaker 1: as I said, in France, it's a two round elections.

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Speaker 1: Of two rounds. You always have a first round where

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Speaker 1: a bunch of candidates run and then the up to

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Speaker 1: run off. And did they run off in the second round? Um?

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Speaker 1: I mean generally Frances split sort of kind of fifty

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Speaker 1: fifty between left and right. But the problem is is

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Speaker 1: that a far right, the National Front, has suddenly emerged

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Speaker 1: and taken a lot of votes out of the more

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Speaker 1: traditional center right, let's say. Um. Meanwhile, support for the

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Speaker 1: left has tumbled um because of Halland and it's also

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Speaker 1: led to some some some renegade left is saying they're

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Speaker 1: gonna run against him. Um on the far left. So

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Speaker 1: I mean it's it's very very fragmented right now. I mean,

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Speaker 1: on the whole, I would say that the spectrum is

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Speaker 1: much wider than the US. It goes from much further

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Speaker 1: to the left and much further to the right. But

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Speaker 1: there's many more parties. It's not just two parties, you know,

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Speaker 1: playing Also parties come and go in this country. So

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Speaker 1: it's very hard to you know, it's not like the

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Speaker 1: U S. It's had to to two same parties that

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Speaker 1: that have been in there for over a hundred years.

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Speaker 1: And you know, I have sort of switched sides over

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Speaker 1: those hundred years. Um, in France, parties they're born, they die,

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Speaker 1: they they're reborn, new parties emerged, Greg, just real quickly

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Speaker 1: five seconds. Is there a number one issue? Is it immigration?

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Speaker 1: Is it's economy? Economy, It's economy. It's definitely the conny unemployment,

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Speaker 1: that's number one. All right, we gotta run. We'll be

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Speaker 1: watching though as really, as I mentioned, a super election

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Speaker 1: cycle around the world and certainly unpredictable on many levels.

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Speaker 1: Greg the Scoozy government reporter at Bloomberg News, joining us

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Speaker 1: on the phone from Paris on this Friday. If you're

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Speaker 1: listening to Bloomberg Markets Carol Masser, along with Lisa Bramwitz

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Speaker 1: and Mrs Bloomberg. Thanks for listening to the Bloomberg pen

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Speaker 1: L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud,

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Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm

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Speaker 1: out there on Twitter at pim Fox. I'm out there

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Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.

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Speaker 1: You can always catch us worldwide on Bloomberg Radio