Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and am Marie Hordern. Join us each
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Speaker 2: B and WY wilt saying, the administrations Let's make a
Speaker 2: deal show removes the worst case tariff scenario. The market
Speaker 2: can only inflect high with the policy response. There will
Speaker 2: be equity vole as long as there is policy uncertainty.
Speaker 2: Alisa joins us some more. Alisha kind Mornick, Good morning.
Speaker 2: There's certainly a lot of that going around. Yeah, are
Speaker 2: we addressing any of this?
Speaker 3: Look?
Speaker 4: I think you know, as I've said, like time is
Speaker 4: not on the mark get side, and time is not
Speaker 4: on the real economy side. The longer that this gets
Speaker 4: drawn out, you're doing real damage. As corporations and individuals
Speaker 4: are sort of frozen in place waiting for the actual
Speaker 4: policy is So.
Speaker 3: The interesting thing about the.
Speaker 4: Ninety day pause and the recategorization of some of the
Speaker 4: electronic tariffs is that it does remove some of the
Speaker 4: left tail risk in the market, but it doesn't really
Speaker 4: remove the left tail risk in the real economy, which
Speaker 4: is getting damaged every day. So at first we were
Speaker 4: optimistic on that ninety day pause like everybody else, and
Speaker 4: then when you start thinking about what this actually means,
Speaker 4: it means it's gonna go on for much longer. So
Speaker 4: Q one's gonna come and find you had pre buying
Speaker 4: before tariffs. And the hard data, as we've talked about,
Speaker 4: has held up fairly well.
Speaker 3: The soft data is rock bottom, and again, you.
Speaker 4: Know where can this go from rock bottom?
Speaker 2: Right?
Speaker 3: So you're there.
Speaker 4: In fact, we did a chart, we did a chart
Speaker 4: for our team about you know what happens when consumer
Speaker 4: sentiment hits rock bottom. Well, it turns out the SMP
Speaker 4: tends to rally right after that. And we went back
Speaker 4: about forty years with this. So you know, the soft
Speaker 4: data is not telling us anything that we don't know.
Speaker 3: But we're here and.
Speaker 4: You know, the concern really is that unless you start
Speaker 4: seeing the outlines of what a deal looks like with
Speaker 4: Japan with the broad outlines, yes, details can take six months,
Speaker 4: twelve months, but what does it look like that would
Speaker 4: further remove left tail risk on the market. And I
Speaker 4: think here you're fairly priced. You're fairly priced at about fifty
Speaker 4: four hundred for where earnings are going.
Speaker 2: He saut of Eastern Time US retail sales US retail sales
Speaker 2: for March. Is it too early to expect some weakness
Speaker 2: to show up in those.
Speaker 4: Figures given the fact that the sentiment data was already
Speaker 4: cratering in March. If there's some some read through, you
Speaker 4: should start to see something going on. I find what's
Speaker 4: fascinating actually is the fact that tariff is on everybody's lips.
Speaker 4: The American public, which tends to tune out a lot
Speaker 4: of political stuff, is talking about tariffs everywhere, and so
Speaker 4: everybody knows about it and concerned about it. And of
Speaker 4: course it's the inflationary piece that everybody's worried about, because
Speaker 4: we just lived through banded inflation two years ago, and
Speaker 4: so that's the biggest fear here. But sales probably represents
Speaker 4: some pre buying.
Speaker 1: What do you need to see to try to get
Speaker 1: more confidence in some sort of risk rally. And I
Speaker 1: say this at a time where we do have a
Speaker 1: number of earnings that are coming out pretty positive. UBS's
Speaker 1: CIO came out with a list of five reasons why
Speaker 1: they actually are getting pretty positive for US equities in
Speaker 1: a six to twelve months basis, and they include April
Speaker 1: tariff showers, may fiscal flowers. This is really fun the
Speaker 1: FED put and the data by US exceptionalism, especially when
Speaker 1: it's on sale. That last point, do you think that
Speaker 1: the divergence between the US and the rest of the
Speaker 1: world has been overplayed totally?
Speaker 4: I think it's been totally overplayed, meaning meaning the rest
Speaker 4: of the We are the buyer for the rest of
Speaker 4: the world. You know, we have the best consumer on
Speaker 4: earth two percent of US GDP. The consumer can be down,
Speaker 4: can take a break, but ultimately this is what drives
Speaker 4: the global economy. And if there is concern about where
Speaker 4: US policy is going, well, boy, the rest of the
Speaker 4: world really has an issue here. That doesn't mean rest
Speaker 4: of the world can't outperform this year and some sort
Speaker 4: of catch up trade as some of the heat from
Speaker 4: the tech sector comes out on the multiples and the
Speaker 4: s andp resets here that's perfectly reasonable. But if you
Speaker 4: look forward for the cycle where this is going, I
Speaker 4: struggle to accept the fact that the rest of the
Speaker 4: world will be growing faster than the US.
Speaker 1: At the same time, people talk about the response to
Speaker 1: tariffs from the US and it comes to fiscal spending.
Speaker 1: You've seen that in the You've seen that in Europe,
Speaker 1: You've seen that in Japan, you've seen that in China.
Speaker 1: Why can't you just follow the fiscal spending at a
Speaker 1: time when a lot of people are saying that tariffs
Speaker 1: will hurt the United States as much as some of
Speaker 1: these other trading partners.
Speaker 4: So the fiscal spend is a great story as a trade.
Speaker 4: In the end, we do long term wealth creation, we
Speaker 4: do long term wealth present so that for US would
Speaker 4: represent a nice trade for the next twelve months. That's
Speaker 4: probably the right framework to.
Speaker 3: Look at it.
Speaker 4: But if you look at how the markets are performed
Speaker 4: since Liberation Day, actually the US has outperformed rest of world.
Speaker 4: With the understanding that the US is actually in a
Speaker 4: better position here than the rest of the world, specifically
Speaker 4: on the trade issue.
Speaker 3: So fiscal can only get you so far.
Speaker 4: As we've seen in the US, you can prop up
Speaker 4: the economy for a couple of years and then you
Speaker 4: really have to deal with the underlying productivity and barriers
Speaker 4: to growth that you have, for instance in Europe, that
Speaker 4: you have to deal with. So they're going to put
Speaker 4: a trillion dollars into the economy, how productive will that
Speaker 4: capital be?
Speaker 3: So where are the regulations going?
Speaker 2: Trying to get some visibility on policy down in Washington,
Speaker 2: and now we've got legal issues. So if you're just
Speaker 2: joining us, I want to share this story with you again.
Speaker 2: The California coverity Gavin Newsom has set a state is
Speaker 2: suing to hold President Donald Trump's tariffs, citing home to
Speaker 2: consumers and businesses, Home to consumers and businesses. Now, this
Speaker 2: is something people have been talking about for a while.
Speaker 2: Is that enough to say you've got a legal footing
Speaker 2: to push forward and really start what's happening here?
Speaker 5: Well, I think given the fact that the United States
Speaker 5: the administration has come out and said that this is
Speaker 5: due to IEPA a national security concern.
Speaker 3: That likely that will be upheld in court.
Speaker 5: And I think this is one of the things that
Speaker 5: Jamison Greer, the USTR Trade Representative has been very focused
Speaker 5: on making sure that anything they come out with can
Speaker 5: legally be upheld in court. But the courts are going
Speaker 5: to fight it out, and certainly Governor Newsom, i think
Speaker 5: eyeing maybe a twenty twenty eight bid, is going to
Speaker 5: do whatever he can to try to make this point
Speaker 5: very clear.
Speaker 2: This is almost exactly what Libby Canssel and PIMCO said
Speaker 2: to you and I on Sunday evening. This is what
Speaker 2: she was anticipating these kind of things. And this is
Speaker 2: the first and I'm sure it won't be the last.
Speaker 1: And this is ultimately the real question with exemptions. How
Speaker 1: much does that open up the Trump administration to legal
Speaker 1: challenges based in the fact that is it a national
Speaker 1: emergency or not. There has been a lack of direction
Speaker 1: in terms of exactly why some of the tariffs have
Speaker 1: gone on, which might go to some of the legal fight.
Speaker 1: That said, even if they you get undermined, there are
Speaker 1: other provisions that this president can use to try to
Speaker 1: get these tariffs through.
Speaker 2: So again, the.
Speaker 1: Whack a mole of tariffs, it's not going to go away.
Speaker 1: It's just going to get dragged out in a court system.
Speaker 2: Alicia, Everyone's become an expert in trade relations, and now
Speaker 2: they need to become an expert in trained law. As
Speaker 2: an investor, how do you navigate this mess at the moment?
Speaker 3: Really difficult, really difficult.
Speaker 4: Look, I think with the VIX at sixty and the
Speaker 4: SMP hitting about forty eight hundred, that's typically a signal
Speaker 4: to close your eyes and buy because you're downside from
Speaker 4: forty eight hundred in the worst case scenario is probably
Speaker 4: a forty.
Speaker 3: Four one hundred or forty five.
Speaker 4: Worst case scenario like deep recession earnings get cut to
Speaker 4: two thirty or something like that, is probably a forty
Speaker 4: four to forty five hundred from forty eight hundred, and
Speaker 4: it's asymmetric risk to the upside there, particularly when vics
Speaker 4: hit sixty. So we're looking at technical analysis for that
Speaker 4: kind of thing. The two hundred week moving average on
Speaker 4: the SMP, which is held for about fifty years, is
Speaker 4: at forty six hundred, so forty eight hundred, you've essentially
Speaker 4: de risked it. The only time the s and P
Speaker 4: went below the two hundred week moving average was during
Speaker 4: the depths of the global financial crisis and then a
Speaker 4: pop right and every crisis you just hit it if
Speaker 4: it's bad enough, and you respond from there.
Speaker 3: So that's what we're looking at.
Speaker 4: Here are fifty four hundred again where we think earnings
Speaker 4: are going, which you know it'll come down over the street.
Speaker 4: You're probably fairly priced for now for the kinds of uncertainty, very.
Speaker 3: Difficult to model.
Speaker 4: I think it's really good to remember though, there's also
Speaker 4: a right tail risk.
Speaker 3: We all sit here and talk about the left tail risk.
Speaker 4: We can't model it. It's a terrible policy. It's inflationary,
Speaker 4: it's tagflationary, we're going to go into a deep recession.
Speaker 4: But there's also the right tail and I think in
Speaker 4: markets there's always a two way trade. And I think
Speaker 4: now you're starting to get the conversation about Okay, what
Speaker 4: could the upside look like?
Speaker 3: And I think we just need to remember it.
Speaker 5: I'm glad you mentioned the VIX because the Treasury Secretary
Speaker 5: mentioned the VIX in my interview on Monday and he
Speaker 5: said it's likely peaked and it's spiked. Do you agree
Speaker 5: with him it's past it or do you think we
Speaker 5: could see the VIC spike again.
Speaker 4: On a probability basis, we've probably spiked. There can't be
Speaker 4: any certainties here would I do know when the market's
Speaker 4: down about twenty percent and the VIX is at sixty,
Speaker 4: I have better odds than not in deploying capital at
Speaker 4: that point. And so that's what I would say, should something,
Speaker 4: I'd say the real risk here is there is there
Speaker 4: some kind of financial contagent? Right the bond market and
Speaker 4: the FX market have moved so quickly, acting like the
Speaker 4: equity market. Frankly, you know what's out there that.
Speaker 3: We're not seeing.
Speaker 4: That that's leverage that could create a broader financial risk.
Speaker 4: If this is a policy induced error and a policy
Speaker 4: induced sell off, those can be fairly quick. Maybe you
Speaker 4: have a bit of a U shape recovery, but more
Speaker 4: or less we're intact. The issue is if this becomes
Speaker 4: a financial contagent. So yes, VIX at sixty should be
Speaker 4: a buy signal. The SMP at forty eight hundred more
Speaker 4: risks you know, to the upside than downside. It's still
Speaker 4: downside risk, but you're asymmetric risk. It's really the financial
Speaker 4: contagent issue. We don't know, we don't know. That's what
Speaker 4: we have to think about.
Speaker 2: Let's get to this. If you don't know how long
Speaker 2: talks are going to last, what do you do in between.
Speaker 2: We keep hearing this phrase, wait and see what kind
Speaker 2: of CAPEX decisions can you make in the meantime.
Speaker 4: So we're very concerned about that because already intentions to
Speaker 4: invest and intentions for CAPEX have dropped. If you look
Speaker 4: at all the survey data, that's what we're seeing. So
Speaker 4: it's a pretty it's a pretty brutal policy in terms
Speaker 4: of forward investment. And that's really where the problem is coming.
Speaker 4: That each day that this goes on and time is
Speaker 4: just not on the side for the real economy. You know,
Speaker 4: just as a reminder of the market always bottoms before
Speaker 4: the real economy does.
Speaker 3: It happened in COVID, it happens all the time.
Speaker 4: Is just to remember that that's that's out there, but
Speaker 4: there is real damage happening today right now. It's great
Speaker 4: that China and the US are negotiating, but it's impossible
Speaker 4: to make a decision if you're a COO or a
Speaker 4: CFO where to put investment. It's impossible, And so I'm
Speaker 4: concerned that you might have a freezing in the real
Speaker 4: economy here. I think I think the risk is real,
Speaker 4: and I think it's happening right now. It's certainly the
Speaker 4: damages to small businesses are beyond right. So the interesting thing,
Speaker 4: the challenge from the governor in California is really the
Speaker 4: first major AEPA challenge that we've seen since policy was
Speaker 4: announced on April second. So it's actually amazing that there
Speaker 4: haven't been more, hasn't been immediate, But I think the
Speaker 4: administration knows that AIPA is a little bit more on
Speaker 4: shaky ground, which is why they're putting pharmaceuticals and semis
Speaker 4: under two three two.
Speaker 3: Right, there's this other question.
Speaker 1: It's not just how this trickles out into the actual economy.
Speaker 1: Is are there certain sectors that are going to be
Speaker 1: so exposed so as to be not really desirable for you.
Speaker 1: I'm thinking of auto manufacturers, retailers.
Speaker 3: Yeah, look for that.
Speaker 4: In terms of an investment thesis, you just really have
Speaker 4: to look at how far the stocks have fallen and
Speaker 4: where the multiples are, because there is the price at
Speaker 4: which you pay because it's been completely de risk So
Speaker 4: the auto sector looks like it's been completely de risked. Here,
Speaker 4: the market's very efficient in pricing it with the worst
Speaker 4: case scenarios.
Speaker 3: And I think we have it again.
Speaker 4: We have to remember the market's always bottom before the
Speaker 4: real economy does.
Speaker 6: So.
Speaker 4: Sentiment data has been rock bottom really for about five
Speaker 4: or six weeks now. Again, the American public knows the
Speaker 4: word tariff, which I find fascinating. Fascinating because sometimes I
Speaker 4: don't know who the Defense Secretary is, and so we've
Speaker 4: seen the sentiment data really be terrible. The issue is,
Speaker 4: can the hard data, at this point declining do more
Speaker 4: damage to markets than what we're already anticipating and its investors.
Speaker 3: That's where we have to live.
Speaker 4: We've gone neutral on equities, We've moved some of the
Speaker 4: allocations to short term fixed simply because we too are
Speaker 4: really uncertain. It's very hard to have conviction except on
Speaker 4: price and valuations.
Speaker 2: President Biden forgot who the Defense Secretary was once upon
Speaker 2: a time, to remember when we lost him for about
Speaker 2: a week he was lost.
Speaker 3: He was under anesthesia.
Speaker 5: Yeah, that's right, and he didn't call the White House
Speaker 5: to tell them he was.
Speaker 3: Going to be under anesthesia. So yeah, I think it
Speaker 3: was twenty four for eight hours. It's that How long
Speaker 3: is we lost a defense secretary?
Speaker 2: Got to find space for jokes here, brahma elis Lafina
Speaker 2: bm wi. Wow, the leader is going to see Rick
Speaker 2: reader of Black Rock Writing. Taking opportunistic positions in good
Speaker 2: quality companies in the equity market has and should continue
Speaker 2: to pay off for investors with longer time horizons. I'm
Speaker 2: pleased to say that, Rick johin US Now for more,
Speaker 2: Rick Reader, it's been too long, my friend. Let's go
Speaker 2: straight to it. I just want to understand what you've
Speaker 2: been seeing with the team over the last week or so.
Speaker 2: Have the foreign buyers of treasuries been pulling back?
Speaker 7: So? I mean, boy, it's been an incredible period.
Speaker 8: I mean, so you know, to start with, I mean
Speaker 8: the treasury market to move back in the treasure.
Speaker 7: Of Friday was extraordinary.
Speaker 8: This pressure on the treasury market, concern about international selling
Speaker 8: that there was pretty amazing. And then we bounced back
Speaker 8: pretty nicely as some calm has come back in and
Speaker 8: then you know, the volatile and the equity market of
Speaker 8: the daily volatile a little bit calmer. This week does
Speaker 8: present you know, it's similar to what I've said there before.
Speaker 8: It does present some opportunity in these markets.
Speaker 7: It is, I will tell you.
Speaker 8: The uncertainty though, has led to liquidity in these markets.
Speaker 7: That's pretty rough. Right now. When you go to execute,
Speaker 7: you've got.
Speaker 8: To be very thoughtful and very tactical about how you
Speaker 8: do it, because markets are very jumpy and very uncertain
Speaker 8: these days.
Speaker 2: And Rick, typically the place you go full liquidity is
Speaker 2: the treasury market, deep predictable. That's why people buy treasuries. Rick,
Speaker 2: can I get your view on what you think was
Speaker 2: happening last week? Do you believe that was foreigners pulling back?
Speaker 2: Is there a question mark over the US safe haven
Speaker 2: status or is that just certain traits and winding things
Speaker 2: blowing up.
Speaker 7: It's a great question.
Speaker 8: I mean, so, first of all, you know when you
Speaker 8: have this pressure on the currency market, and by the way,
Speaker 8: it's super acute when you think about equities going down
Speaker 8: the same time that the currency is going down.
Speaker 7: Usually the dollar appreciates when you're in this risk off mode.
Speaker 8: So you've unquestionably seen the pressure on equities and international disposition.
Speaker 7: Of the equity of a number of US equities.
Speaker 8: In the rates market, it's a bit more blurred, but
Speaker 8: there's no question about it. There is some concern we
Speaker 8: fund so much of our treasury debt internationally, there is
Speaker 8: some concern with the currency depreciating.
Speaker 7: And then quite frankly that the back end of the.
Speaker 8: Curve going through these periods of spasm where inflation is higher.
Speaker 8: You know, even if the FED cuts, what does it
Speaker 8: do for the back end. There's an argument that when
Speaker 8: you've been the FED cuts, the back end becomes less tethered,
Speaker 8: and in fact you get a steepening.
Speaker 7: Of the curve.
Speaker 8: So yes, I think there's some international disposition for sure,
Speaker 8: as the currency weakens. But I think broadly it's its uncertainty,
Speaker 8: and it's just hard.
Speaker 7: You see watch days like Friday.
Speaker 8: You know, it's just hard stepping in, particularly in the
Speaker 8: back end, with this uncertainty still out there.
Speaker 2: So Ray welt, what point would you step in?
Speaker 8: So so I like gowning the belly of the yield
Speaker 8: curve and I like gowing. And you know, the front
Speaker 8: end has gotten pretty well priced. I mean you've got
Speaker 8: to and I think the way you all described it,
Speaker 8: you know, the Fed, you're pricing an awful lot of
Speaker 8: cuts for the FED this year and you haven't seen
Speaker 8: that hard data deseration. I do think you'll see that
Speaker 8: in labor over the next two or three months. You'll
Speaker 8: see some pullback of probably some significance in place like
Speaker 8: healthcare and education, leisure and hospitality, but we've got.
Speaker 7: To see it. But the billy of the yield curve,
Speaker 7: there are some opportunities.
Speaker 8: And frantly, Europe is more interesting because you don't have
Speaker 8: the inflation impact in Europe.
Speaker 7: The ECB's got to cut more aggressively.
Speaker 8: So I actually think, you know, we've you know where
Speaker 8: we've seen some real opportunities.
Speaker 7: Actually European rates very different.
Speaker 8: And by the way, you don't you don't have the
Speaker 8: international disposition there. In fact, that's where you have probably
Speaker 8: international I'm sure have you have international buying. So European
Speaker 8: rates is a place recently we've liked quite a bit.
Speaker 3: Can we take this a step further?
Speaker 1: You talk about how US treasury markets tend to be
Speaker 1: the deepest, most liquid, and then you talk about how
Speaker 1: rocky liquidity has been and how execution risk has become
Speaker 1: an increasing consideration for you. Have we gone to the
Speaker 1: point where on some of these days the European rates
Speaker 1: market has actually been more liquid than the US rates market?
Speaker 7: Good question.
Speaker 8: So more liquid I don't know if certainly the back
Speaker 8: end of the yeld curve it takes price to get
Speaker 8: to get execution. I don't know if it's more liquid
Speaker 8: it certainly feels to me like you have this ballast
Speaker 8: of you've got an ECB moving, you've.
Speaker 7: Got a yield curve that's also that's already pretty steep
Speaker 7: in Europe.
Speaker 8: And by the way, if you're a dollar investor, you
Speaker 8: get a cross currency swap benefit. And because the curves
Speaker 8: so steep, you roll down. So you know, there are
Speaker 8: a lot of reasons why I'm sure others as well
Speaker 8: as ourselves have felt like it's a safer place to
Speaker 8: be even though you're going to get European funding of
Speaker 8: fiscal and issues of the next couple of years.
Speaker 7: That just takes some time.
Speaker 8: But I don't you know, I still say the truagery
Speaker 8: market generally is much deeper, but you know, you're up.
Speaker 7: You definitely see.
Speaker 8: More buyers coming in internationally as well as what we
Speaker 8: see in the States.
Speaker 1: It seems like the picture that you're painting is a
Speaker 1: regime change. The picture that you're painting is shifting away
Speaker 1: from the United States and following a real flood of
Speaker 1: money into some of the overseas markets, and frankly not
Speaker 1: betting that the long end of the yield curve will
Speaker 1: provide the ballast that it has in the past. Can
Speaker 1: you talk about what else has changed? Does this really
Speaker 1: undermine or reshape the way you look at sixty forty
Speaker 1: or the position of gold in your portfolio.
Speaker 7: That is a long it's a great discussion. That's a
Speaker 7: long discussion. A ton has changed.
Speaker 8: Like you say, we've added in the portfolios, on in
Speaker 8: our fixed income or other portfolios, we've added gold.
Speaker 7: We think gold is a is a is.
Speaker 8: A good hedge generally, you know, quite frankly, you have
Speaker 8: to do during periods like this, you tactically.
Speaker 7: Hold more cash in the portfolios.
Speaker 8: We've done that back end of the yield curve and
Speaker 8: interest rates and as a hedge when you've got inflation
Speaker 8: moving potentially signmiulantly higher, not really a big benefit to
Speaker 8: the portfolio.
Speaker 7: And then the other one, when you get rates backing up.
Speaker 8: You can get your yield much more attractively using high
Speaker 8: quality assets. So even though you know you're you know,
Speaker 8: some pressure on parts of the high yield market, pressure
Speaker 8: is in the left loan market, you can actually still
Speaker 8: create them. In one of our ETF is bing ETF,
Speaker 8: we're able to create over seven percent yield and actually
Speaker 8: improve the quality of portfolio. Run more cash that becomes
Speaker 8: super attractive. As long as you're not stretching go down
Speaker 8: the credit structure into the triple C rated high yield,
Speaker 8: you can actually create more yield today.
Speaker 7: So I like the idea, build some more.
Speaker 8: Cash, use some tools that are different than in the past,
Speaker 8: and then quite frankly, just get higher quality and more
Speaker 8: liquidity in the portfolio.
Speaker 5: Rick, do you think the rhetoric around the fact that
Speaker 5: some investors are saying they're dumping dollar, dumping treasuries, that
Speaker 5: the US is losing safe haven reserve asset level?
Speaker 3: Do you think that rhetoric is overblown?
Speaker 7: I'd say sentiment can change really quickly.
Speaker 8: I mean, we're in this period now where there's clearly
Speaker 8: a concern about the currency, and there's clearly a concern
Speaker 8: about how do we bring the debt down, how do
Speaker 8: we get how do we get interest rates down? So
Speaker 8: I'd say near term, you know, there is a question listen.
Speaker 8: I think reserve currency status status is something that is
Speaker 8: absolutely critical to the United States. We fund a lot
Speaker 8: of debt globally. The number of you know, the percentage
Speaker 8: of trades in the world that happen in dollars bills
Speaker 8: as a collateral for for many of the transactions in
Speaker 8: the world. I think reserve currency status is absolutely critical.
Speaker 8: Are you denting it? You're definitely denting it. And listen,
Speaker 8: I think that I think this.
Speaker 7: Year is going to change.
Speaker 8: I think we've got a couple of months here where
Speaker 8: there's a lot of uncertainty an economy that's probably in
Speaker 8: the recession today in terms of certainly where corporate spend
Speaker 8: will be.
Speaker 7: And then but I think as you get to the
Speaker 7: back half of the.
Speaker 8: Year, things can really evolve. So listen, I think you're
Speaker 8: chipping away at reserve currency, but I don't think there's
Speaker 8: a natural alternative. So and I you know, and I
Speaker 8: think I think things can change, hopefully they do.
Speaker 2: Rick hopefully they do. But that last point that I
Speaker 2: think is important. If we are in recession today, do
Speaker 2: you think risk assets are approprily priced for that scenario?
Speaker 8: So I would say, I would say today, listen, I
Speaker 8: think that I think the tail, the.
Speaker 7: Tail has the taist has gotten fatter.
Speaker 8: I think quality assets they are pretty reasonable. There's a
Speaker 8: lot of quality assets we've had to agency mortgages, et cetera. Listen,
Speaker 8: I think you've got to put a wider range on
Speaker 8: the equity market today than you've had before. You've got
Speaker 8: an economy that's pretty uncertain, and you've got to you know,
Speaker 8: I think you've got to keep your.
Speaker 7: Beta bit more restrained. Today.
Speaker 8: Quite frankly, one of the most interesting trades in the
Speaker 8: last couple of weeks has.
Speaker 7: Been to sell puts.
Speaker 8: You know, not to necessarily increase, but you know, the
Speaker 8: best time to sell insurance is after a hurricane, and
Speaker 8: they've been some great trades.
Speaker 7: Actually sell downside. We are gosh.
Speaker 8: You know, if we go down another ten fifteen twenty
Speaker 8: spending on single name go down ten fifteen twenty percent,
Speaker 8: you get paid handsomely for taking that. So keep your
Speaker 8: beta restrained, hunker down a bit in terms of risk,
Speaker 8: but then find someplace like Gosh. I would add if
Speaker 8: we came down, if we if markets went down significantly, So.
Speaker 7: Anyway, a bunch of things to do in this market,
Speaker 7: I think.
Speaker 8: But I just think you have to expand your the
Speaker 8: where you think your return objectives are going to be,
Speaker 8: in the probability around it.
Speaker 7: In an environment like this.
Speaker 2: Things have changed a lot. Rick is good to see
Speaker 2: you as always, Rick Raider of black Rock There, Rick,
Speaker 2: thank you sir. We're doing against sing Wall Street's biggest banks,
Speaker 2: looking for some clarity on policy. JP Morgan's Chamei time
Speaker 2: and urging Trump to start talks with China and telling
Speaker 2: the ft quote, we should be careful. I don't think
Speaker 2: anyone should assume they have a divine right to success
Speaker 2: and therefore don't worry about it. Joining us now to
Speaker 2: discuss the former Republican House Majority leader Eric Cancer. Eric,
Speaker 2: welcome to the program, So welcome back. It's good to
Speaker 2: see it recent. What do you make of the approach
Speaker 2: from the administration to trade over the last few weeks.
Speaker 9: Well, listen, I mean there are so many, uh, there's
Speaker 9: so much noise, so many signals coming from the White
Speaker 9: House right now.
Speaker 7: I think that market.
Speaker 9: Players are just, you know, sort of trying to take
Speaker 9: a step back and figure out if they have a
Speaker 9: portfolio of companies, you know, what it is that they
Speaker 9: look like, if they're imports sensitive. Obviously, there's now a
Speaker 9: little bit more focus on what's coming out every single
Speaker 9: day of the White House. I think the imperative for
Speaker 9: the President and his team today as they're meeting with
Speaker 9: Japan is to demonstrate success. I mean, this is where
Speaker 9: I think people are looking for some amount of clarity
Speaker 9: and that what does it mean when we're supposed to
Speaker 9: be enduring some pain and the president's been pretty clear
Speaker 9: said hey, we've got we're going to we're going to
Speaker 9: change sort of the trajectory of the country. We're going
Speaker 9: to strengthen the foundation. And if that's the case, what
Speaker 9: does it really look like when he's dealing with the
Speaker 9: counterparty and if it's Japan and I would say even India,
Speaker 9: because India is the one that is most protectionist, that
Speaker 9: comes to mind. If we can demonstrate there's an opening
Speaker 9: up of that markets, that this is what it's all about.
Speaker 9: I think that that would calm some nerves right now.
Speaker 2: Are you convinced that is the metric for success?
Speaker 6: Well, I think you know there is.
Speaker 9: At leasta you talked about sort of taking him literally,
Speaker 9: taking him seriously or hinted of that what you just said,
Speaker 9: And I look at this term of the Trump administration
Speaker 9: somewhat differently than the way we looked at the at
Speaker 9: the last one, and that almost you he is sticking
Speaker 9: to his literal word when we're talking about tariffs and
Speaker 9: trade here. So Jonathan, back to your question, if he's
Speaker 9: about trade deficits, because that's been one of the real
Speaker 9: metrics that he's put out there consistently.
Speaker 6: That's what it's about.
Speaker 9: So who are we going to see the Japanese buying
Speaker 9: more of our goods? Are we going to see that
Speaker 9: along with the opening up of their markets so that
Speaker 9: our exports can flow into these other countries.
Speaker 5: The President ran though, on hutting everyday goods down in prices,
Speaker 5: things like grocery, things like gas. A recent CBS poll
Speaker 5: says a majority of American sea tariffs adding to prices,
Speaker 5: adding to inflation.
Speaker 3: Can they wrap this up before the midterms?
Speaker 9: Well, this is the and then this brings up the
Speaker 9: last point. I think that's really important about today and
Speaker 9: when we look at Capitol Hill when Congress gets bad,
Speaker 9: I think the administration and the Republicans need to act
Speaker 9: with dispatch. It's important that there is some success under
Speaker 9: the belt, demonstrably, so the markets see that.
Speaker 6: In terms of dealing with countries.
Speaker 9: And I think from the Republican standpoint in Congress, they've
Speaker 9: got to get this reconciliation bill done. Simplicity is their
Speaker 9: friend right now. Adding additional taxes doing those kinds of
Speaker 9: things is going to take weeks, if not months to
Speaker 9: bring everyone on board. And I think if we can
Speaker 9: just extend what President trumpet said was the greatest tax
Speaker 9: bill ever twoudy seventeen, they should just go ahead and
Speaker 9: do that.
Speaker 5: If I had said to you, Congress right now is
Speaker 5: debating whether or not to raise taxes on people that
Speaker 5: make a million dollars a year, would you think that
Speaker 5: came from a Republican or a Democrat.
Speaker 9: It is an extraordinary concept coming out of what I
Speaker 9: believe is still a very pro growth party. And I think,
Speaker 9: as I think you've been discussing this morning, the three
Speaker 9: legs of the stool of the Trump Economic Plan. One
Speaker 9: of them is taxes, the other deregulation, along with the
Speaker 9: trade agenda, all that has to come together to help
Speaker 9: growth in this country, to see incomes rise, wages, growth, wealth, all.
Speaker 6: Of it opportunity.
Speaker 9: And to sit here and say that we are going
Speaker 9: to be increasing marginal rates on individuals that ends up
Speaker 9: hurting small businesses. I mean, that's the trick there. When
Speaker 9: they start talking about millionaires. Remember we've got a lot
Speaker 9: of people in this country that file taxes, that have
Speaker 9: subs or LPs that are taxed at the individual level,
Speaker 9: but actually run businesses and I don't think they're going
Speaker 9: to get too far with that concept.
Speaker 3: But what if they do.
Speaker 5: This is a pillar of conservative orthodoxy not to raise
Speaker 5: taxes period on anyone.
Speaker 3: What do you make of the.
Speaker 5: Party in the direction of travel if they were to
Speaker 5: go ahead with this, Well.
Speaker 9: Again, I'm not sure that they're going to go ahead
Speaker 9: with this. So they're discussing, Well, I'm not so sure
Speaker 9: how widespread that discussion is and what kind of enthusiasm
Speaker 9: there is. This is not a pro growth item, and
Speaker 9: I think more of the focus is going to be
Speaker 9: on how they come together on these pay fors because
Speaker 9: we saw again the important data point that occurred last
Speaker 9: week was the bond markets. You know, we saw the
Speaker 9: concern there about the fiscal health going forward, and I
Speaker 9: think it's really important they focus on that so they
Speaker 9: can act with dispatch and get these tax rates extended.
Speaker 1: Heading into this year, the belief was that President Trump
Speaker 1: was going to be a pro business president who is
Speaker 1: going to focus on fiscal responsibility as well as celebrating
Speaker 1: national champions. We have seen policies that have reaped the
Speaker 1: opposite consequences in markets. Do you think that this president
Speaker 1: is still pro growth?
Speaker 9: I do think He's a business guy. I mean, we
Speaker 9: all know he's a real estate developer from New York
Speaker 9: City that was very successful and had times here where
Speaker 9: just like any in the real estate business, there are
Speaker 9: ups and downs. But he has demonstrated the ability in
Speaker 9: business to create wealth and I think he wants to
Speaker 9: do that for America, And so yes, I think he
Speaker 9: is now what he's going about doing in reordering our
Speaker 9: economy and trying to sort of rebalance if you will,
Speaker 9: the balance of trade as well as the burden sharing
Speaker 9: that occurs with us and our allies, importantly in the
Speaker 9: financial realm as well as the defense realm.
Speaker 1: Although you have a unique position because you wear the
Speaker 1: hat of both being in government in a leadership position
Speaker 1: and also talking with tons of companies while being vice
Speaker 1: chair of molus.
Speaker 3: Do they have the confidence to invest?
Speaker 1: Do they feel like they can be expanding right now
Speaker 1: and have confidence and conviction that ultimately this whole mix
Speaker 1: will benefit where they're heading?
Speaker 9: Well, I mean I would say, first of all, we're
Speaker 9: still America, right, I mean, there is still this unbelievable
Speaker 9: country that we've got with and we can go through
Speaker 9: the various aspects of what draws capital and investors here,
Speaker 9: rule of law, transparency, you name it, innovation, the rest.
Speaker 9: We're still that the Trump administration understands. The President in
Speaker 9: particular has said the biggest asset we've got is this
Speaker 9: huge consumer market that the world now has tooled up
Speaker 9: to take advantage of, and he's trying to use that
Speaker 9: to go in and create a more stable trajectory longer term,
Speaker 9: both from a fiscal and economic standpoint.
Speaker 6: So I think listen.
Speaker 9: Right now, as we started, there's a lot of signals
Speaker 9: that are creating this sort of question on the minds
Speaker 9: of individuals, whether they are strategics, whether they are sponsors,
Speaker 9: and how to go about in terms of conducting their business.
Speaker 9: And that's why I say again, really really important that
Speaker 9: we see manifestation of success. You know, the President's really
Speaker 9: good at communicating. I hope we can see some communication
Speaker 9: of success and that people will begin to understand what
Speaker 9: the trade off here is.
Speaker 2: This is ambitious stuff. Let's finish on this. Governor Youngkin
Speaker 2: is in your seat yesterday and we asked him this question.
Speaker 2: I'll phrase it differently. At the moment, there are two
Speaker 2: very left wing politicians in this country filling stadiums, getting
Speaker 2: support at a time in the Democratic Party is an
Speaker 2: absolute mess and support is rock bottom. I get that,
Speaker 2: But do you worry that if the president isn't successful
Speaker 2: that a number of years time this pendulum could swing
Speaker 2: aggressively to the left. If the right can't provide the solutions,
Speaker 2: does this country seacunt solutions from the left?
Speaker 9: Look, all I know is the left is so in tatters,
Speaker 9: and the one pill or that they've got of any
Speaker 9: kind of unity is so extreme on the cultural side
Speaker 9: and the.
Speaker 6: Design of where they see the world.
Speaker 9: There is no way that the mass of this country,
Speaker 9: in terms of an electorate, is going to adhere to
Speaker 9: that extreme Bernie Sanders AOC agenda. There is just no
Speaker 9: way now not to say that there will be unhappiness
Speaker 9: if we don't see success again. Which is why I
Speaker 9: come back to the point it's important that we act
Speaker 9: with that we see some urgency and acting with dispatch
Speaker 9: in Washington.
Speaker 2: Because you understand the risk here to bring up the
Speaker 2: em example, but you swing between Bolsonnaro and Lula, Bolscenaro
Speaker 2: and Lula, and you start to resemble what we see
Speaker 2: in Latin America. Repeatedly, we are America, we are America.
Speaker 6: We are not Brazil, right.
Speaker 9: So we have a long tradition of continued institutional guardrails protections.
Speaker 7: We have the.
Speaker 9: Deepest, broadest capital markets there are. I still believe that
Speaker 9: we can get through this. Again, as you said, this
Speaker 9: is a very ambitious goal that the President has set
Speaker 9: out to sort of rebalance. It is where we can
Speaker 9: head and the fact that there have been some people
Speaker 9: left out, and when you talk about these stadiums that are.
Speaker 6: Filled by Bernie Sanders and.
Speaker 9: Aoc accolodes, it is those people that are looking for
Speaker 9: the answers and frankly a lot of sort of people
Speaker 9: who feel left out if there are those stadiums. They
Speaker 9: are looking to the president to deliver on the promises
Speaker 9: that he's made.
Speaker 2: It's an ambitious agenda. We've said it repeatedly on this program.
Speaker 2: For the good of the country. We hope he's successful.
Speaker 2: Eric is good to see it. Thanks for dropping by
Speaker 2: the former House majority leader there, Eric Hanson, the United
Speaker 2: and I see Scott Kirby. Scott, welcome back to the program.
Speaker 2: Sarah's going to catch up with you once again. Let
Speaker 2: me just understand maybe your approach to this earnings report,
Speaker 2: how you and the team decided you know what this time,
Speaker 2: I think we have to do something different and offered
Speaker 2: dual forecast. Where did that come from, Scott?
Speaker 6: Yeah, we did.
Speaker 10: We appropriate to do something different. It starts with, you know,
Speaker 10: the environment has gotten more difficult. But first, you know,
Speaker 10: we did have you know, as you said in the intro,
Speaker 10: the best margins we've had in five years. We grew
Speaker 10: margins every year, one up, only two airlines that are profitable.
Speaker 10: And as we kind of went through it, we still
Speaker 10: see a viable path to getting to our as long
Speaker 10: as bookings remain stable as they are today, to getting
Speaker 10: to our original guidance. But we also recognize that there's
Speaker 10: more macroeconomic uncertainty, that people are fearful of a recession
Speaker 10: hasn't happened yet, but that they're fearful of a recession,
Speaker 10: and so we wanted to also give investors some outlook
Speaker 10: on what we think of recesion could look like if
Speaker 10: it happens here at United. So really the goal was
Speaker 10: to just give investors more information.
Speaker 6: It's non traditional. We're the first ones that I ever
Speaker 6: know if.
Speaker 10: They have done something like this, and so far the
Speaker 10: feedback has been has been really positive, and I think
Speaker 10: investors and others appreciate that we try to give them
Speaker 10: a more fulsome range as we give guidance since time, Scott, can.
Speaker 1: You give us a sense if you are catering more
Speaker 1: to investor nervousness or whether you're responding to actual weakness
Speaker 1: you see in some of the forward bookings by clients.
Speaker 10: So as I'm guessing your re friend to our capacity
Speaker 10: changes and we're going to pull about four points of
Speaker 10: capacity from the second half of this year, that's really
Speaker 10: just a pure tactical economic decision. We do see weakness,
Speaker 10: and because we see weakness, it means we're starting to
Speaker 10: cancel some of the utilization flying that red eye flight
Speaker 10: that was barely profitable and really peak strong times becomes unprofitable.
Speaker 6: When the demand environment weekends a.
Speaker 10: Little bit, customers have more choice to fly better times
Speaker 10: a day, and so they do, and so we're all
Speaker 10: we're really doing tactically is pulling some of that marginal flying.
Speaker 10: Marginaling good times turns negative and bad times, so we're
Speaker 10: just pulling that out of the system.
Speaker 1: How much do you see going forward though, any kind
Speaker 1: of retrenchment from consumers whatsoever. A lot of people have
Speaker 1: been talking about how particularly international travel is going to
Speaker 1: come down with people from overseas now coming to the US.
Speaker 1: Are you seeing that forward bookings or has that kind
Speaker 1: of been more of a narrative than a reality, more.
Speaker 10: Of a nerrative than a reality. We saw weakness starting
Speaker 10: at the end of January. We saw a step down,
Speaker 10: but it is stabilized in March, and even the first
Speaker 10: two weeks of April.
Speaker 6: It has stabilized.
Speaker 10: And the weakest area we see is actually the low
Speaker 10: end domestic consumer. Here in the United States, international has
Speaker 10: remained quite strong. International for what it's worth is eighty
Speaker 10: two percent US point of sale, so it's much more
Speaker 10: dependent on the US economy than foreigners coming to the
Speaker 10: United States. It's also less corporate than it used to be.
Speaker 10: And because of that, you know, the leisure traveler is
Speaker 10: still going, The premium leisure is still there. Typically, even
Speaker 10: in times of economic weakness, the high end consumer outperforms,
Speaker 10: and that's what we thought would happen.
Speaker 6: That's what we've seen so far.
Speaker 10: We'll keep watching it, of course, but that's certainly what
Speaker 10: we've seen so far.
Speaker 1: How much does this really put you in a position
Speaker 1: to consolidate market share right now? We keep seeing that
Speaker 1: among a lot of the leaders in different industries that
Speaker 1: this is time for them to compete on price, to
Speaker 1: compete on some of the offerings, and frankly squeak some
Speaker 1: of the other weaker players in the markets that you
Speaker 1: emerge on the other side a lot stronger.
Speaker 3: Do you see that happening with United right now?
Speaker 10: Well, Unit, we've had a five year strategy to win
Speaker 10: brand loyal customers and we've done that, so really nothing
Speaker 10: is changing now. We're not doing anything incremental, anything different.
Speaker 10: We're continuing the path that we have been on because
Speaker 10: it's worked. It's led to the best margins in good times.
Speaker 10: I think that lead is going to expand in tough times,
Speaker 10: not because we're doing anything special, but just because we'll
Speaker 10: have more seats to sell available to those customers. And
Speaker 10: when you're the brand loyal airline, when times get tough
Speaker 10: and you have more seats to sell, more customers migrate
Speaker 10: to you. And so we'll wind up selling more seats
Speaker 10: at lower prices because that's the way our your management
Speaker 10: system works. But we'll sell just as many seats, but
Speaker 10: it's going to make it much harder at the bottom
Speaker 10: of the customer choice pyramid.
Speaker 2: Scot as you know, there's a lot of tension right
Speaker 2: now between the United States and China that's been expressed
Speaker 2: in several rounds of towers from either side. We hope
Speaker 2: they can come to the table and have some talks,
Speaker 2: but so far not great for the maintenance of your plane, sir,
Speaker 2: and the exposure you have to China to Hong Kong.
Speaker 2: How are you managing that situation at the moment?
Speaker 10: So United We actually we have more of our heavy
Speaker 10: maintenance work done here in the United States than any
Speaker 10: airline in the country.
Speaker 6: We've been growing here in the US.
Speaker 10: In fact, over a three year period, we're going to
Speaker 10: hire about five thousand technicians here in the United States,
Speaker 10: building huge new facilities in Houston and in Orlando.
Speaker 6: And most of our work.
Speaker 10: Is done in the Free Trade Zone outside of Hong
Speaker 10: Kong the work that has done in China.
Speaker 6: So we're monitoring it day by day.
Speaker 10: But you know, we have a high percentage here in
Speaker 10: the United States, more than anyone else, and feel good
Speaker 10: about our setup.
Speaker 2: Because some CEOs have been quite outspoken about what they'd
Speaker 2: like to see from the administration on policy. Are you
Speaker 2: willing to do that? Is there are a reason why
Speaker 2: maybe you'd be a little bit more hesitant away in.
Speaker 10: Well, I've spent a lot of time in DC this year,
Speaker 10: as I always do, but I've mostly been focused on
Speaker 10: listening instead of talking. And so I want to understand
Speaker 10: where the administration was coming from, what their goals were,
Speaker 10: how they were trying to get there. And I actually
Speaker 10: got by the end of March felt like I had
Speaker 10: a pretty good understanding of that. And if you have
Speaker 10: that kind of understanding and you can put everything that's
Speaker 10: happening into context, you know, it makes it a lot
Speaker 10: easier to run, manage the business, to not make panicky decisions.
Speaker 10: And you know what I think is happening here is
Speaker 10: you know, we're nowhere near the end of game. Yet
Speaker 10: you know, these are still the opening moves of the
Speaker 10: chess game.
Speaker 6: And I think I and most.
Speaker 10: People that I talk to, you know, or things have
Speaker 10: slowed down, but we're all in a kind of a
Speaker 10: take a breath mode and let's wait till we get
Speaker 10: to whatever the new normal is going to be before
Speaker 10: we start making big long term decision.
Speaker 2: We've all got to take a deep breath. Your stock
Speaker 2: is out this morning by about six and a half
Speaker 2: of percent. I wanted to talk about something with you
Speaker 2: that we've been talking about for a while on this program. Scott,
Speaker 2: As you know, one of the most disruptive parts of
Speaker 2: flying right now is the boarding process, and when you
Speaker 2: get on, everyone is wrestling to find space to put
Speaker 2: that bag over their seat. How do we address that situation,
Speaker 2: Scott co Sunny was a traanveler. It is the most
Speaker 2: annoying experience. And it's not inn eight United. It's something
Speaker 2: we're saying across the board.
Speaker 10: As a father of seven, I understand it trying to
Speaker 10: get out with a bunch of kids, and I'd say
Speaker 10: we're fixing that at United. The biggest thing we can
Speaker 10: do we had to put bigger bends on the airplane.
Speaker 10: We're about we're over fifty percent through the fleet at United,
Speaker 10: but we're putting bends on all the airplanes that are
Speaker 10: large enough that on one hundred percent full airplane, every
Speaker 10: single customer can bring a roller board on and put
Speaker 10: it in the overhead. And I think that at its
Speaker 10: core is how we're going to solve It'scott.
Speaker 1: How much more can you get people to pay for
Speaker 1: things that they used to know they could get. I
Speaker 1: know that Fronteriry used to do that with cans of
Speaker 1: soda and then they had to backtrack or checking bags.
Speaker 1: Are there other things that you can monetize or doesn't
Speaker 1: really come down to the credit took hard business, the
Speaker 1: loyalty program counting on the front of the cabin.
Speaker 6: You know, yeah, you know.
Speaker 10: I actually we're kind of going the opposite direction. If
Speaker 10: we haven't disaggregated the product, give customers.
Speaker 6: What they want. If you want the premium product, you
Speaker 6: can get it.
Speaker 10: You can go the regular economy product all the way
Speaker 10: down to basic economy.
Speaker 6: But you know, we got Starlink coming next year.
Speaker 10: We're going to have the best, the fastest WiFi in
Speaker 10: the sky and that's going to be free for our customer.
Speaker 10: So WiFi is going to be free, and it's going
Speaker 10: to be by far the best experience, the most bandwidth,
Speaker 10: the fastest speeds for any customers. And you know, in
Speaker 10: a lot of ways, increasingly, instead of being an airline
Speaker 10: that also has a loyalty business, we are becoming a
Speaker 10: loyalty business that runs an airline. I mean being able
Speaker 10: to get customers to Tahiti and Cape down. That's the cool,
Speaker 10: sexy reward that you get in.
Speaker 6: The loyalty program.
Speaker 10: But you know, the large airlines, particularly like United, you know,
Speaker 10: we really have the best, the deepest loyalty program. And
Speaker 10: I talked earlier about brand loyal customers, like customers that
Speaker 10: want to fly United Airlines, and that is the strength.
Speaker 10: That's what's given us the resilience to have strong earnings
Speaker 10: even in a tough macro environment. It's what's going to
Speaker 10: let us outperform even if the economy gets weaker from here.
Speaker 6: That loyalty of customers.
Speaker 10: Whether you call it the loyalty business or just having
Speaker 10: brand loyal customers, is the foundation that's letting an unined
Speaker 10: out perform.
Speaker 2: A masterclass in communications from the firm in the last
Speaker 2: twenty four hours, Scott, appreciate your time. Thank you, Scott Kirby,
Speaker 2: the United Airlines CEO. This is the Bloomberg Surveillance Podcast,
Speaker 2: bringing you the best in markets, economics, and geopolitics. You
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